**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  June 30, 2005**                                                                                                                                                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                      |
| ** ** | ** ** | **OR**                                                                                                                                                                                                                                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                      |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                      |
| ** ** | ** ** | **For the  transition period from                           to                         ** |

 

**CommissionFile No. 0-28582**

 

**CHANNELL COMMERCIAL CORPORATION**

(Exact name ofRegistrant as specified in its charter)

 

**DELAWARE**

(State or otherjurisdiction of incorporation or organization)

 

**95-2453261**

(I.R.S. EmployerIdentification No.)

 

**26040Ynez Road, Temecula, California**

(Address ofprincipal executive offices)

 

**92591**

(Zip Code)

 

**(951)719-2600**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  ý    No o

 

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

 

Yes  o    No ý

 

9,476,916 sharesof common stock of the Registrant were outstanding at August 9, 2005.

 

 

----

 

**PART 1 –  FINANCIAL INFORMATION**

** **

**ITEM 1.**          FINANCIALSTATEMENTS

 

**CHANNELLCOMMERCIAL CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME**

**(UNAUDITED)**

*(amountsin thousands, except per share data)*

 
| ** **                               | ** ** | **Six months ended  June 30,** | ** ** | **Three months ended  June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------------|------------|---------------------------------------|------------|
| ** **                               | ** ** | **2005**                            | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Net sales                                |       | $                                   | 63,738     |                                  | $          | 39,023 |   | $ | 32,360 |   | $ | 21,303 |   |
| Cost of goods  sold                      |       | 43,776                              |       | 27,751                                |       | 21,632 |   | 15,375 |   |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Gross profit                             |       | 19,962                              |       | 11,272                                |       | 10,728 |   | 5,928 |   |
| Operating  expenses                      |       |                                |       |                                  |       |   |   |   |   |
| Selling                                  |       | 9,907                               |       | 5,299                                 |       | 5,064 |   | 2,696 |   |
| General and  administrative              |       | 5,564                               |       | 3,827                                 |       | 2,675 |   | 1,739 |   |
| Research and  development                |       | 1,506                               |       | 1,065                                 |       | 833 |   | 563 |   |
|                                     |       | 16,977                              |       | 10,191                                |       | 8,572 |   | 4,998 |   |
| Income from  operations                  |       | 2,985                               |       | 1,081                                 |       | 2,156 |   | 930 |   |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Interest  expense, net                   |       | 230                                 |       | 150                                   |       | 123 |   | 89 |   |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Income before  income taxes              |       | 2,755                               |       | 931                                   |       | 2,033 |   | 841 |   |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Income taxes  (benefit)                  |       | 926                                 |       | —                                |       | 711 |   | (76 | ) |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Net income  before minority interest     |       | 1,829                               |       | 931                                   |       | 1,322 |   | 917 |   |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Minority  interest                       |       | 126                                 |       | —                                |       | 45 |   | — |   |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Net income                               |       | $                                   | 1,703      |                                  | $          | 931 |   | $ | 1,277 |   | $ | 917 |   |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Net income per  share                    |       |                                |       |                                  |       |   |   |   |   |
| Basic                                    |       | $                                   | 0.18       |                                  | $          | 0.10 |   | $ | 0.13 |   | $ | 0.10 |   |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Diluted                                  |       | $                                   | 0.17       |                                  | $          | 0.10 |   | $ | 0.13 |   | $ | 0.10 |   |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Net income                               |       | $                                   | 1,703      |                                  | $          | 931 |   | $ | 1,277 |   | $ | 917 |   |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Other  comprehensive loss, net of tax    |       |                                |       |                                  |       |   |   |   |   |
| Foreign currency  translation adjustment |       | (473                                | )          | (581                                  | )          | (208 | ) | (630 | ) |
|                                     |       |                                |       |                                  |       |   |   |   |   |
| Comprehensive  income                    |       | $                                   | 1,230      |                                  | $          | 350 |   | $ | 1,069 |   | $ | 287 |   |

 

**The accompanying notes are anintegral part of these financial statements.**

 

1

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**(UNAUDITED)**

*(amountsin thousands)*

 
| ** **                                                                                                                                                                                                               | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
|                                                                                                                                                                                                                     |       |               |       |                   |       |
| **ASSETS**                                                                                                                                                                                                               |       |               |       |                   |       |
| **Current assets**                                                                                                                                                                                                       |       |               |       |                   |       |
| Cash  and cash equivalents                                                                                                                                                                                               |       | $                  | 3,604      |                   | $          | 5,453 |   |
| Accounts  receivable, net                                                                                                                                                                                                |       | 13,874             |       | 13,936                 |       |
| Inventories                                                                                                                                                                                                              |       | 13,844             |       | 14,164                 |       |
| Deferred  income taxes                                                                                                                                                                                                   |       | 1,839              |       | 1,951                  |       |
| Prepaid  expenses and misc. receivables                                                                                                                                                                                  |       | 1,043              |       | 859                    |       |
| Income  taxes receivable                                                                                                                                                                                                 |       | 1,491              |       | 1,323                  |       |
| Total  current assets                                                                                                                                                                                                    |       | 35,695             |       | 37,686                 |       |
|                                                                                                                                                                                                                     |       |               |       |                   |       |
| **Property and equipment at cost, net**                                                                                                                                                                                  |       | 19,337             |       | 19,301                 |       |
| **Deferred income taxes**                                                                                                                                                                                                |       | 3,711              |       | 4,460                  |       |
| **Goodwill**                                                                                                                                                                                                             |       | 14,382             |       | 14,724                 |       |
| **Intangible assets, net**                                                                                                                                                                                               |       | 1,634              |       | 1,763                  |       |
| **Other assets**                                                                                                                                                                                                         |       | 831                |       | 964                    |       |
|                                                                                                                                                                                                                     |       |               |       |                   |       |
|                                                                                                                                                                                                                     |       | $                  | 75,590     |                   | $          | 78,898 |   |
|                                                                                                                                                                                                                     |       |               |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                            |       |               |       |                   |       |
| **Current liabilities**                                                                                                                                                                                                  |       |               |       |                   |       |
| Accounts  payable                                                                                                                                                                                                        |       | $                  | 11,190     |                   | $          | 16,111 |   |
| Short  term debt (including current maturities of long term debt)                                                                                                                                                        |       | 4,608              |       | 4,332                  |       |
| Current  maturities of capital lease obligations                                                                                                                                                                         |       | 17                 |       | 36                     |       |
| Accrued  restructuring liability                                                                                                                                                                                         |       | 52                 |       | 150                    |       |
| Accrued  expenses                                                                                                                                                                                                        |       | 7,724              |       | 7,619                  |       |
| Total  current liabilities                                                                                                                                                                                               |       | 23,591             |       | 28,248                 |       |
|                                                                                                                                                                                                                     |       |               |       |                   |       |
| **Long term debt, less current maturities**                                                                                                                                                                              |       | 4,267              |       | 4,368                  |       |
| **Capital lease obligations, less current  maturities**                                                                                                                                                                  |       | 101                |       | 104                    |       |
| **Deferred gain on sale leaseback transaction**                                                                                                                                                                          |       | 423                |       | 453                    |       |
| **Commitments and contingencies**                                                                                                                                                                                        |       | —             |       | —                 |       |
| **Minority Interest**                                                                                                                                                                                                    |       | 2,892              |       | 2,824                  |       |
|                                                                                                                                                                                                                     |       |               |       |                   |       |
| **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 - 9,608  shares at December 31, 2004 and 9,661 at June 30, 2005; outstanding - 9,364  shares at December 31, 2004 and 9,417 at June 30, 2005 |       | 97                 |       | 96                     |       |
| Additional  paid-in capital                                                                                                                                                                                              |       | 29,855             |       | 29,671                 |       |
| Treasury  stock - 244 shares in 2004 and 2005                                                                                                                                                                            |       | (1,871             | )          | (1,871                 | )          |
| Retained  earnings                                                                                                                                                                                                       |       | 15,669             |       | 13,966                 |       |
| Accumulated  other comprehensive income - Foreign currency translation                                                                                                                                                   |       | 566                |       | 1,039                  |       |
|                                                                                                                                                                                                                     |       |               |       |                   |       |
| **Total stockholders’ equity**                                                                                                                                                                                      |       | 44,316             |       | 42,901                 |       |
|                                                                                                                                                                                                                     |       |               |       |                   |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                      |       | $                  | 75,590     |                   | $          | 78,898 |   |

 

**The accompanying notes are anintegral part of these financial statements.**

 

2

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

*(amountsin thousands)*

 
| ** **                                                                           | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                            |       |                           |       |   |   |
| Net  income                                                                          |       | $                              | 1,703      |   | $ | 931 |   |
| *Adjustments to reconcile net income to net cash  provided by operating activities.* |       |                           |       |   |   |
| Depreciation  and amortization                                                       |       | 2,306                          |       | 2,297 |   |
| Deferred  income taxes                                                               |       | 849                            |       | 221 |   |
| Gain  on disposal of fixed asset                                                     |       | (6                             | )          | (20 | ) |
| Amortization  of deferred gain on sale leaseback                                     |       | (30                            | )          | (30 | ) |
| Minority  interest                                                                   |       | 126                            |       | — |   |
| Change  in assets and liabilities:                                                   |       |                           |       |   |   |
| (Increase)  decrease in assets:                                                      |       |                           |       |   |   |
| Accounts  receivable                                                                 |       | (148                           | )          | (252 | ) |
| Inventories                                                                          |       | 152                            |       | (200 | ) |
| Prepaid  expenses                                                                    |       | (193                           | )          | (50 | ) |
| Other  assets                                                                        |       | 179                            |       | (68 | ) |
| Income  taxes receivable                                                             |       | (158                           | )          | (640 | ) |
| Increase  (decrease) in liabilities:                                                 |       |                           |       |   |   |
| Accounts  payable                                                                    |       | (4,728                         | )          | 1,567 |   |
| Accrued  expenses                                                                    |       | 184                            |       | 715 |   |
| Restructuring  liability                                                             |       | (91                            | )          | (1,003 | ) |
|                                                                                 |       |                           |       |   |   |
| Net  cash provided by operating activities                                           |       | 145                            |       | 3,468 |   |
|                                                                                 |       |                           |       |   |   |
| **Cash flows from investing activities:**                                            |       |                           |       |   |   |
| Acquisition  of property and equipment                                               |       | (2,428                         | )          | (1,510 | ) |
| Proceeds  from the sales of property and equipment                                   |       | 24                             |       | 24 |   |
|                                                                                 |       |                           |       |   |   |
| Net  cash used in investing activities                                               |       | (2,404                         | )          | (1,486 | ) |
|                                                                                 |       |                           |       |   |   |
| **Cash flows from financing activities:**                                            |       |                           |       |   |   |
| Repayment  of debt                                                                   |       | (963                           | )          | (476 | ) |
| Borrowings  from credit facilities                                                   |       | 1,286                          |       | — |   |
| Borrowings  (Repayment) of obligations under capital lease                           |       | (18                            | )          | 27 |   |
| Exercise  of employee stock options                                                  |       | 185                            |       | — |   |
|                                                                                 |       |                           |       |   |   |
| Net  cash provided by (used in) financing activities                                 |       | 490                            |       | (449 | ) |
|                                                                                 |       |                           |       |   |   |
| Effect  of exchange rates on cash                                                    |       | (80                            | )          | (217 | ) |
|                                                                                 |       |                           |       |   |   |
| (Decrease)  increase in cash and cash equivalents                                    |       | (1,849                         | )          | 1,316 |   |
|                                                                                 |       |                           |       |   |   |
| Cash  and cash equivalents, beginning of period                                      |       | 5,453                          |       | 9,527 |   |
|                                                                                 |       |                           |       |   |   |
| Cash  and cash equivalents, end of period                                            |       | $                              | 3,604      |   | $ | 10,843 |   |
|                                                                                 |       |                           |       |   |   |
| **Cash paid during the period for:**                                                 |       |                           |       |   |   |
| Interest                                                                             |       | $                              | 261        |   | $ | 106 |   |
|                                                                                 |       |                           |       |   |   |
| Income  taxes                                                                        |       | $                              | 217        |   | $ | 601 |   |

 

**The accompanying notes are anintegral part of these financial statements.**

 

3

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**Sixmonths ended June 30, 2005**

**(UNAUDITED)**

(amounts in thousands)

 
| ** **                          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **         | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------------|------------|-------------|------------|--------------------|------------|--------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------|------------|
| ** **                          | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**     | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | **other**         | ** ** | **Total**  | ** ** |
| ** **                          | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **Treasury stock** | ** ** | **Retained** | ** ** | **comprehensive** | ** ** | **stockholders’** | ** ** |
| ** **                          | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **capital**        | ** ** | **Shares**   | ** ** | **Amount**        | ** ** | **earnings**           | ** ** | **Income (loss)** | ** ** | **equity** | ** ** |
|                                |       |             |       |        |       |               |       |         |       |              |       |                   |       |              |       |       |       |
| Balance,  January 1, 2005           |       | 9,608            |       | $           | 96         |               | $          | 29,671       |       | 244               |       | $                      | (1,871     | )                 | $          | 13,966     |       | $ | 1,039 |   | $ | 42,901 |   |
|                                |       |             |       |        |       |               |       |         |       |              |       |                   |       |              |       |       |       |
| Exercise  of employee stock options |       | 53               |       | 1           |       | 184                |       |         |       |              |       |                   |       |              |       | 185        |       |
| Foreign  currency translation       |       |             |       |        |       |               |       |         |       |              |       |                   |       | (473              | )          | (473       | )          |
| Net  income for the period          |       |             |       |        |       |               |       |         |       |              |       | 1,703                  |       |              |       | 1,703      |       |
|                                |       |             |       |        |       |               |       |         |       |              |       |                   |       |              |       |       |       |
| Balance,  June 30, 2005             |       | 9,661            |       | $           | 97         |               | $          | 29,855       |       | 244               |       | $                      | (1,871     | )                 | $          | 15,669     |       | $ | 566 |   | $ | 44,316 |   |

 

**The accompanying notes are anintegral part of these financial statements.**

 

4

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**June 30,2005 and 2004**

*(amountsin thousands, except per share data)*

 

1.           *Unaudited financial statements.*  In the opinion of management, the accompanyingunaudited consolidated financial statements contain all adjustments necessaryto present fairly the consolidated financial position of Channell CommercialCorporation (the “Company”) as of June 30, 2005 and the results of itsoperations for the three months and six months ended June 30, 2005 and 2004,and its cash flows for the six months ended June 30, 2005 and June 30,2004.  The results of operations and cashflows for the six months ended June 30, 2005 are not necessarily indicative ofthe results to be expected for any other interim period or the full year.  These consolidated financial statementsshould be read in combination with the audited consolidated financialstatements and notes thereto for the year ended December 31, 2004.

 

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

 
| ** **      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------|------------|------------------|------------|
| ** **      | ** ** | **2005**     | ** ** | **2004**         | ** ** |
|            |       |         |       |             |       |
| Raw  Materials  |       | $            | 7,289      |             | $          | 4,777 |   |
| Work-in-Process |       | 3,050        |       | 3,050            |       |
| Finished  Goods |       | 3,505        |       | 6,337            |       |
|            |       | $            | 13,844     |             | $          | 14,164 |   |

 

3.           *Income**per share.*  Basic income per share excludes dilution andis computed by dividing net income available to common stockholders by theweighted average number of common shares outstanding for the six month andthree month periods ended June 30, 2005 and 2004.  Diluted income per share reflects thepotential dilution that could occur if dilutive options to acquire common stockwere exercised.  The following is areconciliation of the number of shares (denominator) used in the basic anddiluted income per share computations for the six month and three month periodsended June 30, 2005 and 2004 (shares in thousands):

 
| ** **                        | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **Shares**                    | ** ** | **Per   Share  Amount** | ** ** | **Shares** | ** ** | **Per   Share  Amount** | ** ** |
| Basic  income per share           |       | 9,386                         |       | $ | 0.18 |   | 9,128 |   | $ | 0.10 |   |
| Effect  of dilutive stock options |       | 415                           |       | 0.01 |   | 14 |   | — |   |
| Diluted  income per share         |       | 9,801                         |       | $ | 0.17 |   | 9,142 |   | $ | 0.10 |   |

 
| ** **                        | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **Shares**                      | ** ** | **Per   Share  Amount** | ** ** | **Shares** | ** ** | **Per   Share  Amount** | ** ** |
| Basic  income per share           |       | 9,394                           |       | $ | 0.13 |   | 9,128 |   | $ | 0.10 |   |
| Effect  of dilutive stock options |       | 327                             |       | — |   | 6 |   | — |   |
| Diluted  income per share         |       | 9,721                           |       | $ | 0.13 |   | 9,134 |   | $ | 0.10 |   |

 

5

----

 

The following optionswere not included in the computation of diluted income per share due to theirantidilutive effect.

 
| ** **                                  | ** ** | **Six months ended June 30,**    | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                        |       |                             |       |   |   |
| Options  to purchase shares of common stock |       | 68                               |       | 1,413 |   |
| Exercise  prices                            |       | $10.06 - $13.75                  |       | $4.25 - $13.75 |   |
| Expiration  dates                           |       | July 2006 - July  2010           |       | July 2006 - May  2014 |   |
|                                        |       |                             |       |   |   |
| ** **                                  | ** ** | **Three  months ended June 30,** | ** ** |
| ** **                                  | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                        |       |                             |       |   |   |
| Options  to purchase shares of common stock |       | 71                               |       | 1,473 |   |
| Exercise  prices                            |       | $6.65 - $13.75                   |       | $4.25 - $13.75 |   |
| Expiration  dates                           |       | July 2006 - May  2015            |       | July 2006 - May  2014 |   |

 

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

 

      Hadcompensation cost for the plan been determined based on the fair value of theoptions at the grant dates based on the disclosure requirements of SFAS 123,the Company’s net income and income per share would have been:

 
| ** **                                                                            | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Reported  net income                                                                  |       | $                             | 1,703      |   | $ | 931 |   |
| Add  stock-based compensation expense reported in net income                          |       | —                        |       | — |   |
| Less  total stock-based compensation expense, determined under the fair value  method |       | (243                          | )          | (221 | ) |
| Proforma  net income                                                                  |       | $                             | 1,460      |   | $ | 710 |   |
|                                                                                  |       |                          |       |   |   |
| Reported  basic net income per share                                                  |       | $                             | 0.18       |   | $ | 0.10 |   |
| Add  stock-based compensation expense reported in net income                          |       | —                        |       | — |   |
| Less  total stock-based compensation expense, determined under the fair value  method |       | (0.02                         | )          | (0.02 | ) |
| Proforma  basic net income per share                                                  |       | $                             | 0.16       |   | $ | 0.08 |   |
|                                                                                  |       |                          |       |   |   |
| Reported  diluted net income per share                                                |       | $                             | 0.17       |   | $ | 0.10 |   |
| Add  stock-based compensation expense reported in net income                          |       | —                        |       | — |   |
| Less  total stock-based compensation expense, determined under the fair value  method |       | (0.02                         | )          | (0.02 | ) |
| Proforma  diluted net income per share                                                |       | $                             | 0.15       |   | $ | 0.08 |   |

 

6

----

 
| ** **                                                                            | ** ** | **Three months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Reported  net income                                                                  |       | $                               | 1,277      |   | $ | 917 |   |
| Add  stock-based compensation expense reported in net income                          |       | —                          |       | — |   |
| Less  total stock-based compensation expense, determined under the fair value  method |       | (132                            | )          | (111 | ) |
| Proforma  net income                                                                  |       | $                               | 1,145      |   | $ | 806 |   |
|                                                                                  |       |                            |       |   |   |
| Reported  basic net income per share                                                  |       | $                               | 0.13       |   | $ | 0.10 |   |
| Add  stock-based compensation expense reported in net income                          |       | —                          |       | — |   |
| Less  total stock-based compensation expense, determined under the fair value  method |       | (0.01                           | )          | (0.01 | ) |
| Proforma  basic net income per share                                                  |       | $                               | 0.12       |   | $ | 0.09 |   |
|                                                                                  |       |                            |       |   |   |
| Reported  diluted net income per share                                                |       | $                               | 0.13       |   | $ | 0.10 |   |
| Add  stock-based compensation expense reported in net income                          |       | —                          |       | — |   |
| Less  total stock-based compensation expense, determined under the fair value  method |       | (0.01                           | )          | (0.01 | ) |
| Proforma  diluted net income per share                                                |       | $                               | 0.12       |   | $ | 0.09 |   |

 

Thefair value of options at date of grant was estimated using the Black-Scholesmodel with the following weighted average assumptions:

 
| ** **               | ** ** | **Periods ended June 30,** | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| Expected  life (years)   |       | 5 years                    |       | 5 years |   |
| Risk-free  interest rate |       | 3.90                       | %          | 3.50 | % |
| Expected  volatility     |       | 50                         | %          | 40 | % |

 

5.     *     Segments*.  There are two segments:  Americas and International.  Americas includes the United States, Centraland South America and Canada. International includes Europe, Africa, Middle East, Australia andAsia.  The following table summarizessegment information for the six months and three months ended June 30, 2005 and2004:

 
| ** **                             | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Revenues from unrelated  entities (1): |       |                          |       |   |   |
| Americas                               |       | $                             | 38,376     |   | $ | 32,782 |   |
| International                          |       | 25,362                        |       | 6,241 |   |
|                                   |       | $                             | 63,738     |   | $ | 39,023 |   |
| Income  (loss) from operations:        |       |                          |       |   |   |
| Americas                               |       | $                             | 1,943      |   | $ | 2,295 |   |
| International                          |       | 1,042                         |       | (1,214 | ) |
|                                   |       | $                             | 2,985      |   | $ | 1,081 |   |
|                                   |       |                          |       |   |   |
| Interest  expense, net:                |       |                          |       |   |   |
| Americas                               |       | $                             | 102        |   | $ | 27 |   |
| International                          |       | 128                           |       | 123 |   |
|                                   |       | $                             | 230        |   | $ | 150 |   |

 

----

(1)  Note: Revenues from Australia exceeded 10% of total revenues for the six monthperiod ended June 30, 2005.  Revenuesfrom Australia totaled $21,170 for the six month period.  Revenues from individual foreign countriesdid not exceed 10% of total revenues during the corresponding period in2004.  (See Note 16).

 

7

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| ** **                             | ** ** | **Three months ended June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Revenues  from unrelated entities (1): |       |                            |       |   |   |
| Americas                               |       | $                               | 18,836     |   | $ | 17,772 |   |
| International                          |       | 13,524                          |       | 3,531 |   |
|                                   |       | $                               | 32,360     |   | $ | 21,303 |   |
| Income  (loss) from operations:        |       |                            |       |   |   |
| Americas                               |       | $                               | 1,554      |   | $ | 1,514 |   |
| International                          |       | 602                             |       | (584 | ) |
|                                   |       | $                               | 2,156      |   | $ | 930 |   |
|                                   |       |                            |       |   |   |
| Interest  expense, net:                |       |                            |       |   |   |
| Americas                               |       | $                               | 54         |   | $ | 30 |   |
| International                          |       | 69                              |       | 59 |   |
|                                   |       | $                               | 123        |   | $ | 89 |   |

 

----

(1)  Note: Revenues from Australia exceeded 10% of total revenues for the threemonth period ended June 30, 2005. Revenues from Australia totaled $11,326 for the three month period.  Revenues from individual foreign countriesdid not exceed 10% of total revenues during the corresponding period in2004.  (See Note 16).

 

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

 
| ** **              | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Product  lines          |       |                          |       |   |   |
| Enclosures              |       | $                             | 28,505     |   | $ | 31,166 |   |
| Water  related products |       | 30,395                        |       | 3,149 |   |
| Connectivity            |       | 4,565                         |       | 4,076 |   |
| Other                   |       | 273                           |       | 632 |   |
|                    |       | $                             | 63,738     |   | $ | 39,023 |   |

 
| ** **              | ** ** | **Three months ended June 30,** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Product  lines          |       |                            |       |   |   |
| Enclosures              |       | $                               | 14,769     |   | $ | 16,344 |   |
| Water  related products |       | 14,899                          |       | 2,093 |   |
| Connectivity            |       | 2,533                           |       | 2,444 |   |
| Other                   |       | 159                             |       | 422 |   |
|                    |       | $                               | 32,360     |   | $ | 21,303 |   |

 

The Company hasidentifiable assets in the following geographic regions:

 
| ** **            | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------|------------|--------------------|------------|------------------------|------------|
|                  |       |               |       |                   |       |
| Identifiable  Assets: |       |               |       |                   |       |
| Americas              |       | $                  | 40,662     |                   | $          | 43,335 |   |
| International         |       | 34,568             |       | 35,563                 |       |
|                  |       | $                  | 75,230     |                   | $          | 78,898 |   |

 

8

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6.***            ******    ****Recent Accounting Pronouncements. *OnMarch 3, 2005, the Financial Accounting Standards Board (“FASB”) issued FASBStaff Position (“FSP”)  FIN 46(R)-5,“Implicit Variable Interests under FASB Interpretation No. 46 (revised December2003), *Consolidation of Variable Interest Entities.”*  FSP FIN 46(R)-5 provides guidance on whethera reporting enterprise should consider if it holds an implicit variableinterest in a variable interest entity (“VIE”) or potential VIE.  FSP FIN 46(R)-5 requires that if an entityhas a controlling financial interest in a VIE, then the assets and liabilitiesand results of activities of the VIE should be included in the consolidatedfinancial statements of the entity.  FSPFIN 46(R)-5 is effective in the first reporting period beginning after March 3,2005****in accordance with the transition provisionsof FIN 46(R).  The provisions of FSP FIN46(R)-5 had no impact on the Company’s results of operations or financialposition.

* *

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs, an Amendment of ARB No. 43, Chapter 4.”  SFAS No. 151 retains the general principle ofARB No.43, Chapter 4, “Inventory Pricing,” that inventories are presumed to bestated at cost; however, it amends ARB No. 43 to clarify that abnormal amountsof idle facilities, freight, handling costs and spoilage should be recognizedas current period expenses.  Also, SFASNo. 151 requires fixed overhead costs be allocated to inventories based onnormal production capacity.  The guidancein SFAS No. 151 is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005.  TheCompany believes that implementing SFAS No. 151 will not have a material impacton its financial condition or results of operations.

 

In December 2004, the FASB issued SFAS 123 (revised2004), Share-Based Payment (SFAS 123(R)).  This Statement is a revision to SFAS 123,Accounting for Stock-Based Compensation, and supersedes Opinion 25, Accountingfor Stock Issued to Employees.  SFAS123(R) requires the measurement of the cost of employee services received inexchange for an award of equity instruments based on the grant-date fair valueof the award.  The cost will berecognized over the period during which an employee is required to provideservice in exchange for the award.  Nocompensation cost is recognized for equity instruments for which employees donot render service.  The Company willadopt SFAS 123(R) on January 1, 2006, requiring compensation cost to berecognized as expense for the portion of outstanding unvested awards, based on thegrant-date fair value of those awards calculated using the Black-Scholes optionpricing model under SFAS 123 for pro forma disclosures.  Management estimates a potential impact ofapproximately $500 net of tax for 2006.

 

7.*                  Restructuring Charges*.  In the fourth quarter of 2003, the Companyevaluated International operations to improve profitability.  A plan was developed to close a manufacturingfacility in International operations by June 2004.  As part of the plan, there was a reduction ofapproximately 39 employees in the International operations.  The restructuring charge totaled $1,565.  The principal components of the 2003restructuring charge involved the closure of facilities and a reduction in headcount.

 

The restructuring charges were determined based onformal plans approved by the Company’s management using the best informationavailable to it at the time.  The amountsthe Company may ultimately incur could differ materially as the restructuringinitiative is executed.  The Companyanticipates that the restructuring will be completed by December 31, 2005.  The changes in the accrual for restructuringcharges during the six month period ended June 30, 2005 are summarized in thetable below:

 
| ** **                                            | ** ** | ** **     | ** ** | **Workforce** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|----------------|------------|---------------|------------|------------|------------|
| ** **                                            | ** ** | **Facilities** | ** ** | **Reduction** | ** ** | **Total**  | ** ** |
|                                                  |       |           |       |          |       |       |       |
| Restructuring  accrual balance at December 31, 2004   |       | $              | 147        |          | $          | 3          |       | $ | 150 |   |
| Costs  incurred in the six months ended June 30, 2005 |       | 98             |       | —        |       | 98         |       |
| Restructuring  accrual balance at June 30, 2005       |       | $              | 49         |          | $          | 3          |       | $ | 52 |   |

 

 

8.             *     Sale Leaseback Agreement*.  In June, 2002, the Company entered into asale and leaseback agreement for a facility located in Temecula,California.  The proceeds from the saletotaled approximately $6,200 and resulted in a pretax deferred gain of $604.  The resulting lease is being accounted for asan operating lease.  The lease base termis ten years with two five-year options at rental amounts to be adjusted to thefair market rental value at the end of the base term.  A portion of the proceeds from the sale wasused to pay the outstanding mortgage balance on the facility of $4,036.  The unamortized balance of the deferred gainis being amortized over the ten-year lease base term, and as of June 30, 2005,such balance was $423.

 

9

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9.                  *Income Taxes.* The effective tax rate of 33.6% for the sixmonths ended June 30, 2005 differed from the combined federal and statestatutory rate of 39.8% primarily due to a larger percentage of consolidatedincome generated by an International segment with a tax rate lower than the statutoryrate.  In addition, another Internationalsegment generated $323 of income in the first six months with no related taxexpense due to existing operating loss carryforwards.

 

The Federal income taxes of the Company for the yearsended December 31, 2000, 2001 and 2002 are currently under examination by theInternal Revenue Service (“IRS”). Included in the examination of the 2001 tax year is a credit forresearch and development (“R&D”). The IRS is also examining an R&D credit included in the December 31,2002 tax year.  The IRS has denied theR&D credit for both the 2001 and 2002 tax years.  The cumulative amount of R&D creditdenied by the IRS is $409.  The Companybelieves that it has meritorious defenses for the R&D credits and intendsto vigorously defend its position upon appeal. The Company has recorded an accrual in the amount of $328 for a portionof the R&D credit that is in dispute. Management believes that the ultimate outcome of IRS audits for theyears ended 2000, 2001 and 2002 will not have a material adverse impact on theCompany’s consolidated results of operations or financial position.

 

10.                *Commitments andContingencies. *In 2001, theState of Texas issued a report assessing the Company additional sales and usetax of $1,600, including interest for the period of January 1, 1996 throughDecember 31, 1999. The Company appealed the assessment and provided the Stateof Texas with documentation to support the Company’s contention that thetransactions did not require the Company to remit sales and use tax to theState of Texas. The State of Texas agreed to a reduction of the amount owed to$587 plus interest of $330. The Company has paid the State of Texas the entireamount of the assessment and interest owed of $917. The Company has accrued forthe remaining sales and use tax assessments, including interest, from the Stateof Georgia of $119 and the State of Massachusetts of $16. The ultimate outcomeof the tax assessments from the State of Georgia and the State of Massachusettswill not have a material impact on the Company’s consolidated results ofoperations or financial position.

 

For anumber of years, the Company has purchased grade level boxes from CarsonIndustries LLC (“Carson”) for resale to the Company’s customers.  In 2004, the Company’s customers began toreport failure of Carson boxes in the field. The Company has determined that certain boxes sold to the Company byCarson in 2004, and thereafter, did not conform to certain specificationsand/or did not perform properly in the field. On June 9, 2005, Carson filed a lawsuit against the Company (*Carson Industries LLC v. Channell Commercial Corporation (Calif.Superior Court Case No. BC334759)*, principally seeking approximately$360 for product sold to the Company but not yet paid for.  On July 26, 2005, the Companycross-complained against Carson for, among other things, breach of contract,breach of express and implied warranties, fraud and intentional interferencewith contractual relations.  The Companyhas not stated a specific dollar remedy that it is seeking from Carson.  The Company intends to vigorously defend theCarson lawsuit and prosecute its own claims against Carson.

 

As ofJune 30, 2005 the Company has placed purchase orders totaling $7,376 with itssuppliers for deliveries through June 30, 2006.

 

11.                *Related PartyTransactions. *In May 2002,the Company sold its RF line of passive electronic devices to RMSCommunications, Inc., which is owned by Gary Napolitano, a former officer ofthe 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 $675is payable in monthly installments through June 30, 2003, bearing interest at7% per annum.  The account is currentlyin arrears.  The amount due from RMSCommunications, Inc. included in accounts receivable at June 30, 2005 is$251.  The Company has a securityinterest in the inventory and a personal guarantee from Mr. Napolitano andbelieves the amount will be paid in full. No reserve has been recorded against the receivable at June 30,2005.  The Company purchases RF devicesfrom Mr. Napolitano and from other sources depending on price and supply ofproduct.  The RF devices purchased fromMr. Napolitano’s firm in 2004 approximated $87 and were used as components inthe Company’s product lines.  Thepurchases in 2004 did not result in a cash payment to Mr. Napolitano as theamounts owed were used to offset the account receivable.  There were no purchases from Mr. Napolitano’scompany in the six months ended June 30, 2005.

 

     The Companyhas two leases for approximately 261,000 square feet of manufacturing,warehouse and office space in Temecula, California, with the Channell FamilyTrust. The lease term of the lease for 108,000 square feet is through December 31,2015. The lease term of the lease for 153,000 square feet is through December 31,2005, with two five-year renewal options. Both leases provide for payments ofinsurance, repairs, maintenance and property taxes. Rent expense paid under theleases was $642 and $667 for the six months ended June 30, 2004, and 2005respectively. The Company believes that at the time the leases wereconsummated, the terms of these leases were no less favorable to the Companythan could have been obtained 

 

10

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from an independent third party. Under FIN 46 and FIN46(R), the Company and the Channell Family Trust do not qualify as “variableinterest entities” subject to consolidation since (a) the total equityinvestment at risk in the Trust is sufficient to permit financing withoutadditional financial support from the Company and (b) William Channell, Sr.,the administrator of the Channell Family Trust has the direct ability to makedecisions about the Trust’s activities.

 

The Company’s facilities in Orange, Dalby, Terang andAdelaide Australia are leased from shareholders of the Company.  These shareholders are former owners ofBushman Tanks.  The facilities comprise94,000 square feet of manufacturing, warehouse and office space.  The lease term on all four facilities isthrough February 28, 2010 with a five-year renewal option.  The rent expense paid under the leases in thesix months ended June 30, 2005 was $168. The Company hired an independent firm to appraise the market lease ratesfor these facilities and it was determined that the existing leases are inexcess of fair market value by approximately $27 per year.  Included in liabilities is $218 related tothese unfavorable leases.

 

12.           *     Concentrations.*  Sales to Verizon of $16,172 in the first sixmonths of 2005 represented 25.4% of the Company’s sales in the period.  Sales to Verizon of $5,400 in the first sixmonths of 2004 represented 13.7% of the Company’s sales.  The second largest customer in the first sixmonths of 2005 was Comcast with sales of $4,530, representing 7.1% of theCompany sales.  Sales to Comcast of$8,600 in the first six months of 2004 represented 22.1% of the Company’s salesfor the period.

 

Accountsreceivable from Verizon of $2,110 and from Comcast of $1,277 represented 15.2%and 9.2%, respectively, of Company accounts receivable at June 30, 2005.  Accounts receivable from Comcast of $1,931and from Verizon of $1,727 represented 19.0% and 17.0%, respectively, ofCompany accounts receivable at June 30, 2004.

 

13.                *Guarantees.*In1997, the Company guaranteed debt of the Channell Family Trust. The guaranteeddebt was incurred in connection with construction of the facilities leased tothe Company and is collateralized by said facilities. The loan amount subjectto the unsecured guarantee is expected to decline before expiring in 2017. Itis not practicable to estimate the fair value of the guarantee; however, theCompany does not anticipate that it will incur losses as a result of thisguarantee. The Company has not recorded a liability for this guarantee. If theChannell Family Trust were to default on the outstanding loan balance, theCompany might be required to repay the remaining principal balance. The maximumpotential amount the Company would be required to pay is equal to theoutstanding principal and interest balance of the loan to the Trust. At June 30,2005, the outstanding loan balance subject to the guarantee totaled $569. TheCompany and the Channell Family Trust do not qualify as “variable interestentities” subject to consolidation under FIN 46 or FIN 46(R) sincethere are sufficient assets held by the Trust that the lender could attach inthe event of default on the loan. Under FIN 46 and FIN 46 (R), the Company andthe Channell Family Trust do not qualify as “variable interest entities”subject to consolidation since (a) the total equity investment at risk inthe Trust is sufficient to permit financing without additional financialsupport from the Company and (b) William Channell, Sr., theadministrator of the Channell Family Trust has the direct ability to makedecisions about the Trust’s activities.

 

14.                *Goodwill and Other**Intangible Assets.*  The balance of the intangible assets on theCompany’s balance sheet fluctuates from period to period due to the applicationof foreign currency translation to United States dollars in calculating thebalance of goodwill and other intangible assets of the Company’s foreignsubsidiaries.  Effective January 1, 2002,the Company adopted SFAS No. 142, “Goodwill and Other IntangibleAssets”.  SFAS 142 requires that goodwilland certain intangibles no longer be amortized, but instead be reviewed atleast annually for impairment.  TheCompany tests the value of goodwill for impairment annually (December 31 forthe Canadian reporting unit and June 30 for the Bushman’s reporting unit) orwhenever events or changes in circumstance indicate that expected futurediscounted cash flows may be insufficient to support the carrying amount of theasset.  The test involves significantjudgment in estimating fair value determined through future performance of theoperating segment.  In calculating thefair value, the Company relies on factors such as operating results, businessplans, economic projections, and anticipated cash flows used in discounting thecash flows.  The Company has testedBushman’s goodwill at June 30, 2005, utilizing an independent appraiser.  The independent evaluation of Bushman’sgoodwill shows there was no impairment at June 30, 2005.  Inherent uncertainties exist in determiningand applying the aforementioned factors.

 

     In August 2004, the Company, througha majority-owned subsidiary, acquired a controlling interest in Bushman Tanks,a manufacturer and distributor of rotational molded plastic (polyethylene)water storage tanks. The Share and Asset Purchase Agreement provides for totalcontingent consideration of approximately $2,900 if the Bushman Tanks businessachieves certain sales and cost reduction targets. Any amounts paid ascontingent consideration will result in additional goodwill. If sales targetsin 2005 and 2006 are achieved, a total of $1,500 will be payable to the sellers.Management has assessed that an earn-out of approximately $750 has been earnedfor achieving the 2005 sales targets as of July 31, 2005. This amount willbe booked to goodwill when the Company reports its third quarter 2005 results. Ifcertain cost reduction targets are achieved in 2005 through 2009, the sellerswill receive one-half of the amounts of the cost reductions in the specifiedcost items. In the event that the costs incurred for these items exceeded apredetermined threshold, the seller would be liable to the Company for theamount of the costs exceeding the threshold.

 

11

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     Management is unable to assess, as of June 30,2005, whether any additional contingent consideration will be payable. Thechanges in the net carrying amounts of goodwill for the six months ended June 30,2005 are as follows:

 
| ** **                               | ** ** | **Goodwill** | ** ** |
|------------------------------------------|------------|--------------|------------|
| Intangible  balance at December 31, 2004 |       | $            | 14,724     |   |
| Effect  of foreign currency translation  |       | (342         | )          |
|                                     |       |         |       |
| Intangible  balance at June 30, 2005     |       | $            | 14,382     |   |

 

     In the Share and Asset Purchase Agreement,the sellers of Bushman Tanks agreed to a “non-compete” clause whereby thesellers of Bushman Tanks would not directlyor indirectly carry on or be engaged or involved in any trade, business orundertaking that is in competition with the Bushman Tanks business.  The Company performed an evaluation of thenon-compete agreement and determined the fair value to be Australiandollars $1,600.  The non-compete agreement is recorded in thereporting unit of Bushman Tanks, which is part of the International segment, asa separately identifiable intangible asset and is being amortized overthe ten-year contractual term on a straight line basis.  As of June 30, 2005, the Company had thefollowing acquired intangible asset recorded:

* *
| ** **                              | ** ** | **Non-Compete  Agreement** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|
| Gross  carrying amount                  |       | $                          | 1,600      |   |
| Accumulated  amortization               |       | (133                       | )          |
| Net  carrying amount                    |       | 1,467                      |       |
|                                    |       |                       |       |
| Effect  on foreign currency translation |       | 167                        |       |
|                                    |       |                       |       |
| Intangible  balance at June 30, 2005    |       | $                          | 1,634      |   |

 

 

The following table summarizes the estimated annualpretax amortization expense for the non-compete intangible asset:

 
| **Fiscal  Year**                        | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2005  (remainder of year)               |       | $          | 80         |   |
| 2006                                    |       | 160        |       |
| 2007                                    |       | 160        |       |
| 2008                                    |       | 160        |       |
| 2009                                    |       | 160        |       |
| Thereafter                              |       | 747        |       |
| Total                                   |       | $          | 1,467      |   |
|                                    |       |       |       |
| Effect  on foreign currency translation |       | 167        |       |
|                                    |       |       |       |
| Intangible  balance at June 30, 2005    |       | $          | 1,634      |   |

 

15.                *Loan and SecurityAgreements*.  The Companyentered into a three-year Loan and Security Agreement with an asset-basedlender in the United States in September 2002. Maximum borrowings available under this facility total $25,000.  The Agreement has a $1,000 sub-limit forletters of credit.  As of June 30, 2005,outstanding letters of credit totaled $986. The Agreement contains various financial and operating covenants thatimpose limitations on the Company’s ability, among other things, to incuradditional indebtedness, merge or consolidate, sell assets except in theordinary course of business, make certain investments, enter into leases andpay dividends.  The Company is alsorequired to comply with a fixed charge coverage ratio and other financialcovenants.  The Agreement requires theCompany to maintain a lockbox on the revolving credit facility.  The lockbox receipts automatically reduce theoutstanding balance of the revolving credit balance, if any.  The Agreement also contains a subjectiveacceleration clause should the Company come into a default, which allows theasset-based lender to terminate the facility and require that any outstandingobligation to be repaid.  There was nobalance outstanding under the revolving line of credit at June 30, 2005.  The Loan and Security Agreement also containsa three-year term loan that is repayable in equal quarterly payments throughDecember 31, 2005, based on a five-year amortization schedule with a balloonpayment at maturity.  Amounts borrowedunder this facility bear interest at a variable rate based on either thelender’s Base Rate or LIBOR.  At June 30,2005, the outstanding balance of the term loan was $2.3 million.  The 

 

12

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weighted average interestrate under the term loan was 4.8% at June 30, 2005.  The Company was in compliance as of June 30,2005 with the covenants of the Loan and Security Agreement.

 

ChannellPty Ltd., a subsidiary of the Company, entered into a one-year Loan andSecurity Agreement with a commercial bank in Australia in July 2004.  The loan contains a revolving line of creditfor working capital needs with a maximum available borrowing of Australiandollars $1,200, which translated at June 30, 2005 exchange rates isapproximately $914 US dollars.  ChannellPty Ltd. is required to comply with an interest coverage ratio.  The Agreement contains various financial andoperating covenants that impose limitations on Channell Pty Ltd.’s ability,among other things, to incur additional indebtedness, merge or consolidate, andsell assets except in the ordinary course of business.  The Agreement is reviewed annually with thebank for renewals.  The Agreementcontractually obligates Channell Pty Ltd. to repay the revolving creditfacility as Channell Pty Ltd. receives payments from its customers.  The Agreement also contains a subjectiveacceleration clause should Channell Pty Ltd. come into a default, which allowsthe bank to terminate the facility and require any outstanding obligation to berepaid.  There was no balance outstandingunder the revolving line of credit at June 30, 2005.  Channell Pty Ltd. was in compliance as ofJune 30, 2005 with the covenants of the Loan and Security Agreement.

 

ChannellBushman Pty Ltd., a subsidiary of the Company, entered into a five-year Loanand Security Agreement with a commercial bank in Australia in August 2004.  The loan contains a five-year term loan withmaximum borrowings of Australian dollars $8,000 that expires in July 2009, arevolving credit facility with maximum borrowings of Australian dollars $2,000,a facility to fund future “earn-out” payments to the sellers of Bushman Tankswith maximum borrowings of Australian dollars $1,800, and a capital expenditurefacility with maximum borrowings of Australian dollars $6,000.  Translated into US dollars at June 30, 2005exchange rates, the maximum borrowings are approximately:  five-year term loan $6,100, revolving creditfacility $1,500, “earn-out” facility $1,400, and capital expenditure facility$4,600.  The Agreement contains variousfinancial and operating covenants that impose limitations on Channell BushmanPty Ltd.’s ability, among other things, to incur additional indebtedness, mergeor consolidate, sell assets except in the ordinary course of business, makecertain investments, enter into leases and pay dividends.  Channell Bushman Pty Ltd. is required tocomply with an interest coverage ratio, debt service ratio, Debt/EBIT ratio andcapital adequacy ratio.  The Agreementcontractually obligates Channell Bushman Pty Ltd. to repay the revolving creditfacility as Channell Bushman Pty Ltd. receives payments from its customers.  The Agreement also contains a subjectiveacceleration clause should the Company come into a default, which allows thebank to terminate the facility and require any outstanding obligation to berepaid.  Channell Bushman Pty Ltd. had anoutstanding balance of US $1,452 on the revolving credit facility at June 30,2005.  The weighted average interest ratewas 6.9%. There were no balances outstanding under the “earn-out” facility, orcapital expenditure facility as of June 30, 2005.  At June 30, 2005, the outstanding balance onthe term loan was US $5,067.  Theweighted average interest rate was 5.65%. Channell Bushman Pty Ltd. was in compliance as of June 30, 2005 with thecovenants of the Loan and Security Agreement.

 

16.                 *Acquisition.*  In August 2004, the Company, through amajority-owned subsidiary, acquired a controlling interest in Bushman Tanks, amanufacturer of rotational molded plastic (polyethylene) water storagetanks.  The following unaudited pro formafinancial information reflects the consolidated results of operations of theCompany as if the acquisition had taken place on January 1, 2004.  The pro forma information includes thehistorical operations of the Company and Bushman Tanks (translated at theaverage currency exchange rate for the applicable period) and gives effect tothe acquisition as if it had occurred at the beginning of the applicableperiod.  The pro forma financialinformation is based upon available information and assumptions and adjustmentsthat the Company believes are reasonable. The pro forma financial information does not purport to represent whatthe Company’s results of operations actually would have been had thetransaction been effect on the assumed date.

 

*Amountsin thousands, except per share data*

 
| ** **            | ** ** | **Six months ended** | ** ** | **Three months ended** | ** ** |
|-----------------------|------------|----------------------|------------|------------------------|------------|
| ** **            | ** ** | **June 30, 2004**    | ** ** | **June 30, 2004**      | ** ** |
| ** **            | ** ** | **Pro Forma**        | ** ** | **Pro Forma**          | ** ** |
|                  |       |                 |       |                   |       |
| Net  sales            |       | $                    | 53,640     |                   | $          | 28,364 |   |
| Net  income           |       | 524                  |       | 687                    |       |
|                  |       |                 |       |                   |       |
| Net  income per share |       |                 |       |                   |       |
| Basic                 |       | $                    | 0.06       |                   | $          | 0.08 |   |
| Diluted               |       | $                    | 0.06       |                   | $          | 0.08 |   |

 

13

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| **ITEM 2.** | ** ** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|------------|-------------------------------------------------------------------------------------------------|

 

### **Results of Operations**

### ** **

In August of 2004 theCompany acquired 75% of the Bushman Tanks business (the “acquiredcompany”).  Bushman Tanks is Australia’slargest manufacturer of plastic water storage tanks.  The Bushman Tanks’ financial results havebeen consolidated in the Company’s financial statements for the six monthsended June 30, 2005.  A minority interesthas been recorded for the 25% equity owned by ANZ Private Equity, a unit ofAustralia and New Zealand Banking Group Ltd.

 

**Comparison of the Six MonthsEnded June 30, 2005 with the Six Months Ended June 30, 2004**

 

*Net Sales*.  Net sales in the first half of 2005 were$63.7 million, an increase of $24.7 million or 63% compared to the first halfof 2004.  The increase is due to theaddition of the acquired company and growth in both the core Americas andInternational segments.

 

Americas net sales were$38.4 million in the first half of 2005, an increase of $5.6 million or 17%over the same period in 2004. The increase was due primarily to higher sales toVerizon.  During the first quarter offiscal year 2005, the major telephone customer purchased plastic enclosures fora construction project to install fiber communication lines to customerpremises.

 

International net saleswere $25.3 million, an increase of $19.1 million or 306%.  The increase is primarily due to sales of theacquired company.  In addition, highersales to telephone customers in the Asian market contributed to the salesgrowth.

 

Sales to Verizon of $16.2million in the first six months of 2005 represented 25.4% of the Company’ssales in the period.  Sales to Verizon of$5.4 million in the first six months of 2004 represented 13.7% of the Company’ssales.  The second largest customer inthe first six months of 2005 was Comcast, with sales of $4.5 millionrepresenting 7.1% of the Company sales. Sales to Comcast of $8.6 million in the first six months of 2004represented 22.1% of the Company’s sales for the period.

 

*GrossProfit*.  Gross profitin the first half of 2005 was $20.0 million, an increase of $8.7 million or 77%over the first half of 2004. The increase was primarily due to the addition ofgross profit earned by the acquired company. Gross profit dollars in the Americas segment was $10.5 million in thefirst half of 2005 and $10.4 million for the same period of 2004.  The product mix in the Americas segmentchanged in the 2005 period to include higher volumes of grade level boxes.  Gross profit of $9.5 million in theInternational segment, a $8.6 million increase over the 2004 period, was due tothe addition of the acquired company and the closure of a manufacturingfacility in the United Kingdom.  Theclosure of the United Kingdom facility lowered the overhead cost structure ofInternational operations primarily due to the elimination of facility leasecosts, middle management and indirect support costs.

 

As a percentage of netsales, gross profit increased from 28.9% in the first half of 2004 to 31.3% inthe first half of 2005.  The improvementis due primarily to increased volume and margins in the International segment.

 

*Selling*.  Selling expenses were $9.9 million in thefirst six months of 2005, an increase of $4.6 million or 87% from the first sixmonths of 2004.  The increase is dueprimarily to the addition of selling expenses of the acquired company.

 

As a percentage of netsales, selling expense increased from 13.6% in the 2004 period to 15.5% in the2005 period.  The higher percentage isprimarily due to the increase in freight costs and the addition of sellingexpenses for the acquired company.  Theacquired company has a higher percentage of selling expense to net sales thanthe other Channell businesses primarily due to freight costs incurred totransport water storage tanks to customers.

 

*Generaland Administrative*. General and administrative expenses were $5.6 million in the first halfof 2005, an increase of $1.7 million or 45%. The increase is due primarily to the addition of the general and administrativeexpenses of the acquired company as well as funding additional spending at theacquired company for the implementation of the Oracle information system.  In addition, the Company incurred costs ofapproximately $0.2 million associated with a project to review its internalcontrol structure in relation to the requirements of the Sarbanes Oxley Act.

 

As a percentage of netsales, general and administrative expense decreased from 9.8% in the 2004period to 8.7% in the 2005 period.  Thedecrease is due to the increased sales level without a proportional increase ingeneral and administrative costs.

 

14

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*Researchand Development*. Research and development expenses were $1.5 million in the first sixmonths of 2005, an increase of $0.4 million or 41.4% from the first six monthsof 2004.  The increase is due to spendingon new product development programs, primarily for telephone connectivityproducts and thermoplastic enclosures for cable customers.

 

As a percentage of netsales, research and development expenses decreased from 2.7% in the first halfof 2004 to 2.4% in the first half of 2005.

 

*Incomefrom Operations*.  As aresult of the items discussed above, income from operations increased $1.9million or 176% over the first half of 2004 to $3.0 million in the first halfof 2005.  Operating margin as a percentof sales increased from 2.8% to 4.7%.

 

*InterestExpense, Net*.  Netinterest expense was $0.2 million in the first half of 2004 and 2005.

 

*IncomeTaxes*.  Income taxexpense was $0.0 million in the first six months of 2004 and $0.9 million inthe first six months of 2005.  Theeffective tax rate was 33.6% in the first six months of 2005 and 0% for thesame period in 2004.  In 2004, theCompany reported a profit before tax on a consolidated basis, which consistedof a profit in the Americas segment and a loss in the Internationalsegment.  The 2005 rate and the 2004 ratebenefited from the use of net operating loss carryforwards.

 

**Comparison of the Three MonthsEnded June 30, 2005 with the Three Months Ended June 30, 2004**

 

*Net Sales*.  Net sales in the second quarter of 2005 were$32.3 million, an increase of $11.0 million or 51.9% compared to the secondquarter of 2004.  The increase is due tothe addition of the acquired company and growth in both the core Americas andInternational segments.

 

Americas net sales were$18.8 million in the second quarter of 2005, an increase of $1.0 million or6.0% over the same period in 2004. The increase was due primarily to highersales to Verizon of grade level boxes.

 

International net saleswere $13.5 million, an increase of $10.0 million or 283%.  The increase is primarily due to sales of theacquired company.  In addition, highersales to telephone customers in the Asian market contributed to the salesgrowth.

 

Sales to Verizon of $6.7million in the second quarter of 2005 represented 20.7% of Company sales in theperiod.  Sales to Verizon of $3.7 millionin the second quarter of 2004 represented 17.4% of the Company’s sales.  The second largest customer in the secondquarter of 2005 was Comcast with sales of $2.5 million, representing 7.9% ofthe Company’s sales.  Sales to Comcast of$5.0 million in the second quarter of 2004 represented 23.3% of the Company’ssales for the period.

 

*GrossProfit*.  Gross profitin the second quarter of 2005 was $10.8 million, an increase of $4.9 million or81.0% over the second quarter of 2004. The increase was primarily due to theaddition of gross profit earned by the acquired company.  Gross profit dollars in the Americas segmentincreased from $5.6 million in 2004 to $5.7 million in 2005.  The product mix in the Americas segmentchanged in the 2005 period to include higher volumes of grade level boxes.  Gross profit of $5.1 million in theInternational segment, a $ 4.7 million increase over the 2004 period, was dueto the addition of the acquired company and the closure of a manufacturingfacility in the United Kingdom.  Theclosure of the United Kingdom facility lowered the overhead cost structure ofInternational operations primarily due to the elimination of facility leasecosts, middle management and indirect support costs.

 

As a percentage of netsales, gross profit increased from 27.8% in the second quarter of 2004 to 33.2%in the second quarter of 2005.  Theimprovement is the result of higher margins in the International segment.

 

*Selling*.  Selling expenses were $5.1 million in thesecond quarter of 2005, an increase of $2.4 million or 87.8% from the secondquarter of 2004.  The increase is dueprimarily to the addition of selling expenses of the acquired company.

 

As a percentage of netsales, selling expense increased from 12.7% in the 2004 period to 15.6% in the2005 period.  The higher percentage isprimarily due to the increase in freight costs and the addition of sellingexpenses for the acquired company.  Theacquired company has a higher percentage of selling expense to net sales thanthe other Channell businesses primarily due to freight costs incurred totransport water storage tanks to customers.

 

*Generaland Administrative*. General and administrative expenses were $2.7 million in the secondquarter of 2005, an increase of $1.0 million or 53.8% from the second quarterof 2004.  The increase is due primarilyto the addition of the general and administrative expenses of the acquiredcompany.

 

15

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As a percentage of netsales, general and administrative expense increased from 8.2% in the 2004period to 8.3% in the 2005 period.

 

*Researchand Development*. Research and development expenses were $0.8 million in the secondquarter of 2005, an increase of $0.2 million or 48.0% from the second quarterof 2004.  The increase is due to spendingon new product development programs, primarily for telephone connectivityproducts and thermoplastic enclosures for cable customers.

 

As a percentage of netsales, research and development expenses remained unchanged at 2.6% in thesecond quarter of 2005 and 2004.

 

*Incomefrom Operations*.  As aresult of the items discussed above, income from operations increased $1.2million or 132% over the second quarter of 2004 to $2.1 million in the secondquarter of 2005.  Operating margin as apercent of sales increased from 4.4% to 6.7%.

 

*InterestExpense, Net*.  Netinterest expense was $0.1 million in the second quarter of 2004 and 2005.

 

*IncomeTaxes*.  Income taxexpense was ($0.1) million in the second quarter of 2004 and $0.7 million inthe second quarter of 2005.  Theeffective tax rate was 35.0% in the second quarter of 2005 and (9.0)% for thesame period in 2004.  In 2004, theCompany reported a profit before tax on a consolidated basis, which consistedof a profit in the Americas segment and a loss in the Internationalsegment.  The 2005 rate and the 2004 ratebenefited from the use of net operating loss carryforwards.  The effective tax rate increased from 29.8%in the first quarter of 2005 to 35.0% in the second quarter of 2005 as a resultof a change in the estimate for 2005 of the tax benefit attributable to foreignlosses taxed in the United States.

 

**Liquidity and Capital Resources**

 

Net cash provided byoperating activities was $0.1 million for the six months ended June 30, 2005,compared to $3.5 million in the same period in 2004, which is a decrease of$3.4 million.  The cash used in operatingactivities in 2005 is primarily due to the reduction in accounts payable of$4.7 million.  The Company had extendedvendor payment terms in the fourth quarter of 2004.  Cash used in the reduction in accounts payablein 2005 was partially offset by cash provided from earnings.

 

Net cash used ininvesting activities was ($2.4) million for the six months ended June 30, 2005,compared to ($1.5) million in the 2004 period. The increase in 2005 is due to an increase in acquisition of propertyand equipment.

 

Net cash provided byfinancing activities was $0.5 million for the six months ended June 30, 2005,compared to net cash used in financing activities of ($0.5) million in the sameperiod of 2004.  The increase was primarilydue to borrowings under the Company’s credit facilities.

 

Cash and cash equivalentson June 30, 2005 were $3.6 million, a decrease of $1.9 million from December31, 2004.  The decrease in cash was dueprimarily to the reduction in accounts payable noted above and the additionalinvestment in property and equipment.

 

Net accounts receivablewere $13.9 million at June 30, 2005 and December 31, 2004.  Days sales outstanding increased from 37 daysat December 31, 2004 to 39 days at June 30, 2005.

 

Inventories decreased to$13.8 million at June 30, 2005 from $14.2 million at December 31, 2004.  Days inventory increased from 52 days atDecember 31, 2004 to 58 days at June 30, 2005.

 

Accounts payabledecreased from $16.1 million at December 31, 2004 to $11.2 million at June 30,2005.  The decrease is due primarily tothe reduction of vendor payment terms from the fourth quarter of 2004.  Payment terms had been extended in the fourthquarter of 2004.  Days payables decreasedfrom 59 days at December 31, 2004 to 47 days at June 30, 2005.

 

The Company believes thatcash flow from operations coupled with available borrowings under the creditfacilities described in Note 15 will be sufficient to fund the Company’scapital expenditure and working capital requirements through 2005. TheCompany’s term loan under the three-year Loan and Security Agreement with anasset-based lender and originally due in September 2005, has been extended toDecember 2005.  The Company is currentlyconsidering various financing options.

 

16

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**ContractualObligations and Other Commitments**

 

The following tablesummarizes the Company’s contractual obligations and other commitments as ofJune 30, 2005:

 
| ** **                       | ** ** | **July 1, 2005 -** | ** ** | **July 1, 2006 -** | ** ** | **July 1, 2008 -** | ** ** | **July 1, 2010** | ** ** | ** ** | ** ** |
|----------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|------------------|------------|------------|------------|
| **(amounts  in thousands)**      | ** ** | **June 30, 2006**  | ** ** | **June 30, 2008**  | ** ** | **June 30, 2010**  | ** ** | **and Beyond**   | ** ** | **Total**  | ** ** |
| Contractual  Obligations         |       |               |       |               |       |               |       |             |       |       |       |
| Debt  (1)                        |       | $                  | 4,608      |               | $          | 2,727              |       | $                | 1,540      |       | $          | — |   | $ | 8,875 |   |
| Capital  Lease Obligations (2)   |       | 17                 |       | 101                |       | —             |       | —           |       | 118        |       |
| Operating  Lease  Obligations(3) |       | 2,218              |       | 2,140              |       | 2,094              |       | 1,667            |       | 8,119      |       |
| Employment  Contracts (4)        |       | 824                |       | 1,500              |       | 497                |       | —           |       | 2,821      |       |
| Purchase  Obligations (5)        |       | 7,376              |       | —             |       | —             |       | —           |       | 7,376      |       |
|                             |       | $                  | 15,043     |               | $          | 6,468              |       | $                | 4,131      |       | $          | 1,667 |   | $ | 27,309 |   |

 

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(1)   The Company entered into a three-year Loan andSecurity Agreement, which includes a term loan and revolving line of creditwith an asset-based lender in the United States on September 25, 2002.  A subsidiary of the Company entered into aone-year Loan and Security Agreement, which includes a revolving line of creditwith a commercial bank in Australia in July 2004.  Another subsidiary of the Company enteredinto a five-year Loan and Security Agreement, which includes a term loan,revolving line of credit, an “earn-out” facility, and a capital expenditurefacility with a commercial bank in Australia in August 2004.  The three financing agreements listed abovebear interest at variable rates.  Onlythe outstanding principal amounts are included in the Contractual Obligationtable.

(2)   Includes principal only.

(3)   The Company leases manufacturing and officespace and machinery & equipment under several operating leases expiringthrough 2012.

(4)   The Company has employment agreements with itsChairman of the Board expiring July 7, 2006 and its President and ChiefExecutive Officer expiring December 8, 2008. Both contracts are renewable every 5 years.  The Chairman of the Board’s salary is set at$50,000 per annum for the remainder of the term.  The President and Chief Executive Officer’sbase salary is $773,939 per year effective July 2005, and is subject to anannual cost of living increase based on the consumer price index.  Base salary may also be increased based onthe discretion of the Board of Directors. In the event the President and Chief Executive Officer is terminated theCompany will be obligated to make a lump sum severance payment equal to threetimes his then current base salary.

(5)   The Company believes it has adequate sourcesof supply for the raw materials used in its manufacturing processes and itattempts to develop and maintain multiple sources of supply in order to extendthe availability and encourage competitive pricing of these materials.  Most plastic resins are purchased underannual or multi-year pricing agreements to stabilize costs and improve supplierdelivery performance.  The Company is notcontractually obligated to purchase product over the life of these agreements.

 

**Off-BalanceSheet Arrangements**

 

The Company’s off-balancesheet arrangements consist of operating leases, employment contracts andpurchase obligations as described above. In addition, the Company guaranteed the debt of the Company’s principalstockholder and Chairman of the Board of approximately $754,000 in 1997.  The guaranteed debt was incurred inconnection with construction of the facilities leased to the Company and iscollateralized by said facilities.  Theloan amount subject to the unsecured guarantee is expected to decline beforeexpiring in 2017.  It is not practicableto estimate the fair value of the guarantee; however, the Company does notanticipate that it will incur losses as a result of this guarantee.  The Company has not recorded a liability forthis guarantee.  If the principalstockholder were to default on the outstanding loan balance, the Company mightbe required to repay the remaining principal balance.  The maximum potential amount the Companywould be required to pay is equal to the outstanding principal and interestbalance of the loan to the stockholder. At June 30, 2005, the outstanding loan balance subject to the guaranteetotaled $569,000.

 

**CriticalAccounting Policies**

 

The Company’s discussionand analysis of its financial condition and results of operations are basedupon its consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires the Companyto make estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.

 

The Company believes thatthe estimates, assumptions and judgments involved in the accounting policiesdescribed in the “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” section of its most recent Annual Report on Form10-K have the greatest potential impact on its financial statements, so itconsiders these to be its critical accounting policies. Because of theuncertainty inherent in these matters, actual results could differ from theestimates the Company uses in applying the critical accounting policies.Certain of these critical accounting policies affect working capital accountbalances, including the policies for revenue recognition, the reserve foruncollectible accounts receivable and inventory 

 

17

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reserves. These policiesrequire that the Company make estimates in the preparation of its financialstatements as of a given date.

 

Within the context ofthese critical accounting policies, the Company is not currently aware of anyreasonably likely events or circumstances that would result in materiallydifferent amounts being reported.

 

**Forward-Looking Statements**

 

Certain statementscontained herein are “forward-looking” statements within the meaning of thePrivate Securities Litigation Reform Act of 1995 (the “Act”), which providescertain “safe harbor” provisions for forward-looking statements.  All forward-looking statements made hereinare made pursuant to the Act. Forward-looking statements include statements which are predictive innature; which depend upon or refer to future events or conditions; or whichinclude words such as “expects”, “anticipates”, “intends”, “plans”, “believes”,“estimates”, or variations or negatives thereof or by similar or comparablewords or phrases.  In addition, anystatement concerning future financial performance, ongoing business strategiesor prospects, and possible future Company actions that may be provided bymanagement are also forward-looking statements as defined by the Act.  Forward-looking statements are based oncurrent expectations and projections about future events and are subject torisks, uncertainties, and assumptions about the Company; and economic andmarket factors in the countries in which the Company does business, among otherthings.  These statements are notguarantees of future performance, and the Company has no specific intentions toupdate these statements.  Actual eventsand results may differ materially from those expressed or forecasted inforward-looking statements due to a number of factors including, among others:(1) the communications industry is in a state of rapid technological change,which can render the Company’s products obsolete or unmarketable; (2) anyfailure by the Company to anticipate or respond to technological developmentsor changes in industry standards or customer requirements, or any significantdelays in product development or introduction, could have a material adverseeffect on the Company’s business, operating results and financial condition;(3) a relatively small number of telecommunications customers account for alarge percentage of the Company’s available market; (4) the Company expectsthat sales to the telecommunications industry will continue to represent asubstantial portion of its total sales, and the demand for products within thisindustry depends primarily on capital spending by service providers; (5) theCompany’s cost of sales may be materially affected by increases in the marketprices of the raw materials used in the Company’s manufacturing processes;  (6)  theCompany’s water related sales could be materially affected by weather conditionsand government regulation; (7) the Company is subject to the risks ofconducting business internationally; and (8) the industries in which theCompany operates are highly competitive. Additional risks and uncertainties are outlined in the Company’s filingswith the Securities and Exchange Commission, including its most recent AnnualReport on Form 10-K.

 

**ITEM 3.****          QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The risk inherent in theCompany’s market sensitive instruments is the potential loss arising fromadverse changes in interest rates and foreign currency exchange rates.  All financial instruments held by the Companydescribed below are held for purposes other than trading.

 

The Company and itssubsidiaries have entered into three financing agreements.  In September 2002, the Company entered into athree-year Loan and Security Agreement with an asset based lender in the UnitedStates.  The agreement contains a termloan and a revolving line of credit.  InJuly 2004, a subsidiary of the Company entered into a one-year Loan andSecurity Agreement, which contains a revolving line of credit with a commercialbank in Australia.  In August 2004,another subsidiary of the Company entered into a five-year Loan and SecurityAgreement which contains a term loan, revolving line of credit, an “earn-out”facility, and a capital expenditure facility with a commercial bank inAustralia.  The loan and securityagreements allow for the outstanding balance to bear interest at a variablerate based on the lender’s base rate. The credit facilities expose the Company to changes in short-terminterest rates since the interest rates on the credit facility are variable.

 

A hypothetical change of1% in the interest rate for these borrowings, assuming debt levels at June 30,2005 of approximately $8.9 million, would have changed interest expense byapproximately $0.02 million for the three months ended June 30, 2005.  This analysis does not consider the effectsof economic activity on the Company’s sales and profitability in such anenvironment.

 

The Company has assetsand liabilities outside the United States that are subject to fluctuations inforeign currency exchange rates.  Assetsand liabilities outside the United States are primarily located in the UnitedKingdom, Australia, and Canada.  TheCompany’s investment in foreign subsidiaries with a functional currency otherthan the U.S. dollar is generally considered long-term.  Accordingly, the Company does not hedge theseinvestments.  The Company also purchasesa limited portion of its raw materials from foreign countries.  These purchases are generally denominated inU.S. dollars and are accordingly not subject to exchange rate fluctuations.  The Company has minimal foreign currencytransaction gains or losses.  

 

18

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The Company has notengaged in forward purchases of foreign currency and other similar contracts toreduce its economic exposure to changes in exchange rates because theassociated risk is not considered significant.

 

**ITEM 4.****          CONTROLSAND PROCEDURES**

 

Based on their evaluationas of June 30, 2005 (the “Evaluation Date”), the Company’s principal executiveofficer and principal financial officer have concluded that, as of theEvaluation Date, the Company’s disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended) are effective to ensure that material information relating to theCompany and its consolidated subsidiaries is recorded, processed, summarized,reported and made known to the Company’s management, including the Company’sprincipal executive and financial officers, on a timely basis by others withinthe Company and its consolidated subsidiaries.

 

To satisfy theirresponsibility for financial reporting, the Company’s Chief Executive Officer“CEO” and Chief Financial Officer “CFO” have established internal controls forfinancial reporting which they believe are adequate to provide reasonableassurance that the Company’s assets are protected from loss. These internalcontrols are reviewed by the Company’s management in order to ensurecompliance.

 

The Company’s AuditCommittee meets regularly with management and the independent accountants toreview accounting, auditing, financial matters and internal controlstructure.  The Audit Committee and theindependent accountants have free access to each other, with or withoutmanagement being present.

 

There has been no changein the Company’s internal control over financial reporting during the threemonths ended June 30, 2005 that has materially affected, or is reasonablylikely to materially affect, internal control over financial reporting, exceptthat the Company is in the process of improving certain internal controls, asdescribed below.

 

The Company initiated aglobal project in December 2004 to review its internal control infrastructurein relation to the requirements of Section 404 of the Sarbanes Oxley Act of2002 (“SOX”).  The Company is requiredand expects to comply with the requirements of SOX in calendar year 2006.  The Company has engaged an independentconsulting firm experienced in these requirements to assist in itsefforts.  This effort includes thereview, documentation, and testing of internal control, under the direction ofsenior management.  Our assessment ofcompliance with SOX 404 is ongoing and is therefore incomplete.  During the course of these activities, theCompany has identified certain internal control issues, on a global basis,which senior management believes constitute significant deficiencies, asdefined by the Public Company Accounting Oversight Board’s Auditing StandardNo. 2.  These significant deficienciesrelate to internal controls over financial reporting, as well as to controlsover information technology.  Managementhas not assessed whether these significant deficiencies rise to the level of a“material weakness,” other than those described below.  During this process, management is evaluatingand implementing improvements to the Company’s internal controls and willcontinue to do so.  These improvementsinclude further formalization of policies and procedures, improved segregationof duties and improved information technology system controls.

 

Management has beenassessing the status of the internal control infrastructure at the Company’snewly acquired Australian subsidiary, Bushmans. Bushmans was previously a closely held, family run business with mostlymanual controls in place.  During thisprocess, the Company has identified significant deficiencies in internalcontrols that rise to the level of “material weaknesses,” in the revenue andpurchasing cycles.  Management does notbelieve that either of these weaknesses resulted in material errors in our June30, 2005 financial results, as reported in this filing.  Management has also identified othersignificant deficiencies in the payroll cycle, capital asset purchasing cycle,information technology, and governance. Management is still in the process of further evaluating internalcontrols at this subsidiary and has not yet determined whether thesesignificant deficiencies rise to the level of a material weakness.  During this process, the Company continues toimplement improvements to our internal controls at Bushmans.  These improvements include furtherformalization of policies and procedures, improved segregation of duties,improved information technology system controls, and additional monitoringcontrols.  During the current quarter,the Company made improvements in its accounting and Information Systems staff,as well as implemented new information technology software throughout theorganization.

 

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**PART II - OTHER INFORMATION**

 
| **ITEM 1.** | ** ** | **LEGAL  PROCEEDINGS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|        |       | *Carson Industries LLC v. Channell  Commercial Corporation (Calif. Superior Court Case No. BC334759)*.  For a number of years, the Company has purchased grade level boxes from  Carson Industries LLC (“Carson”) for resale to the Company’s customers. In  2004, the Company’s customers began to report failure of Carson boxes in the  field. The Company has determined that certain boxes sold to the Company by  Carson in 2004 and thereafter did not conform to certain specifications  and/or did not perform properly in the field. On June 9, 2005, Carson filed  the above-captioned lawsuit against the Company, principally seeking  approximately $360,000 for product sold to the Company but not yet paid for.  On July 26, 2005, the Company cross-complained against Carson for, among  other things, breach of contract, breach of express and implied warranties,  fraud and intentional interference with contractual relations. The Company  has not stated a specific dollar remedy that it is seeking from Carson. The  Company intends to vigorously defend the Carson lawsuit and prosecute its own  claims against Carson. |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|        |       | In addition, 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 are likely to have a material adverse  effect on the Company’s financial statements or results of operations, taken  as a whole.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **ITEM 2.** | ** ** | **UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|        |       | Not  applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **ITEM 3.** | ** ** | **DEFAULTS UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|        |       | Not  applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **ITEM 4.** | ** ** | **SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|        |       | At  the Annual Meeting of Shareholders of the Company held on May 12, 2005 in  Temecula, California, 9,393,942 shares of the Company’s stock were present  either in person or by proxies solicited by management pursuant to Regulation  14A under the Securities Exchange Act of 1934.  The Shareholders voted on the following matter:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

1.     To elect thefollowing two directors to serve on the Company’s Board of Directors:

 
| ** **                | ** ** | **Number of Shares For** | ** ** | **Number of Shares Withheld** | ** ** |
|---------------------------|------------|--------------------------|------------|-------------------------------|------------|
|                      |       |                     |       |                          |       |
| William  H. Channell, Sr. |       | 7,757,647                |       | 851,838                       |       |
|                      |       |                     |       |                          |       |
| Dana  Brenner             |       | 8,580,417                |       | 29,068                        |       |

 
| **ITEM 5.** |   | **OTHER  INFORMATION** |
|-------------|--------|------------------------|
|        |   | Not applicable.        |

 

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**ITEM 6.****          EXHIBITS**

 
| **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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2.1*             |       | Channell  Commercial Corporation 1996 Incentive Stock Plan (including forms of Stock  Option Agreements and Restricted Stock Agreement)(1)                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2.2*             |       | Channell  Commercial Corporation 2003 Incentive Stock Plan (including forms of Stock  Option Agreement and Restricted Stock Agreement)(8)                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3                |       | Loan  and Security Agreement dated as of September 25, 2002 by and among the  Company, Channell Commercial Canada Inc., Fleet Capital Corporation, Fleet  Capital Canada Corporation and, under the circumstances set forth therein,  Fleet National Bank, London U.K. Branch, trading as Fleet Boston Financial,  and the U.K. Borrowers (as defined therein, if any) (6)                                                                                                                                                                             |
| 10.3.1              |       | Loan  and Security Agreement dated October 24, 2003 by and among Channell Pty Ltd  and National Australia Bank Ltd (10)                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3.2              |       | Loan  and Security Agreement dated August 2, 2004 by and among Channell Bushman Pty  Ltd and National Australia Bank Ltd (10)                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.3.3              |       | Loan  and Security Agreement dated August 2, 2004 by and among Channell Pty Ltd and  National Australia Bank Ltd (10)                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3.4              |       | Investment  and Shareholders Agreement dated August 2, 2004 by and among Channell Bushman  Pty Ltd and Australia and New Zealand Banking Group Ltd (10)                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.4*               |       | Employment  Agreement between the Company and William H. Channell, Sr., dated July 8,  1996 (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6*               |       | Channell  Commercial Corporation 1996 Performance-Based Annual Incentive Compensation  Plan (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7                |       | Lease  dated December 22, 1989 between the Company and William H. Channell, Sr., as  amended (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.8                |       | Lease  dated May 29, 1996 between the Company and the Channell Family Trust (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.9                |       | Lease  dated October 26, 2000 between the Company and Belston Developments Inc. (4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.10               |       | Third  Amendment to Lease dated December 22, 1989 between the Company and William H.  Channell, Sr., effective as of June 1, 2005 (12)                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11               |       | Form  of Indemnity Agreement (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.12               |       | Form  of Agreement Regarding Intellectual Property (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13               |       | 401(k)  Plan of the Company (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14               |       | A.C.  Egerton (Holdings) PLC Share Purchase Agreement (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.17               |       | Lease  dated June 27, 2002 between the Company and Ynez Street, Ltd (5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.19*              |       | Amendment  to Employment Agreement between the Company and William H. Channell, Sr.,  dated December 9, 2003 (9)                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.20*              |       | Employment  Agreement between the Company and William H. Channell, Jr., dated December 9,  2003 (9)                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.21               |       | Share  and Asset Purchase Agreement dated as of July 14, 2004 by and among  Australia’s Bushman Tanks Pty Ltd., Douglas Robin Young, Richard James Young,  Lokan Nominees Pty Ltd and Lenbridge Grange Pty Ltd, Belsiasun Pty Ltd and  Elcarva Pty Ltd, the holders of all the outstanding shares of Bushmans Group  Pty Ltd, Hold-On Industries Australia Pty Ltd, Australian Bushman Tanks Pty  Ltd., and Polyrib Tanks Pty Ltd, on the one hand, and Channell Commercial  Corporation and Channell Bushman Pty Limited, on the other hand (11) |
| 10.22               |       | Employment  Letter between the Company and Jerry Collazo, dated June 27, 2005 (13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.23               |       | Employment  Letter between the Company and Greg Balla, dated June 30, 2005 (14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 14                  |       | Channell  Commercial Corporation Code of Business Conduct and Ethics (9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1                |       | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under  the Securities and Exchange Act of 1934 (14)                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2                |       | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under  the Securities and Exchange Act of 1934 (14)                                                                                                                                                                                                                                                                                                                                                                                                                |
| 32.1                |       | Certification  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the  Sarbanes- Oxley Act of 2002 by William H. Channell, Jr., CEO; and Jerry  Collazo, CFO. (14)                                                                                                                                                                                                                                                                                                                                                               |

 

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* Management contract or compensatory plan orarrangement.

 

(1)       Incorporated by reference to the indicated exhibits filed in connectionwith the Company’s Registration Statement on Form S-1 (File No. 333-3621).

(2)       Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on May 18, 1998.

(3)       Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-K on March 31, 1999.

(4)       Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-K on April 2, 2001.

(5)       Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on August 12, 2002.

(6)       Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on September 25, 2002.

(7)       Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on November 12, 2002.

(8)       Incorporated by reference to Appendix B filedin connection with the Company’s Definitive Proxy Statement on March 26, 2003.

(9)       Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-K on March 5, 2004.

(10)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on November 15, 2004.

(11)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on August 6, 2004.

(12)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on June 15, 2005.

(13)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on June 28, 2005.

(14)     Filed herewith.

 

21

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SIGNATURES

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

Dated:  August 15, 2005

 
|   |   |   | CHANNELL COMMERCIAL  CORPORATION                              |   |
|--------|--------|--------|---------------------------------------------------------------|--------|
|   |   |   | (Registrant)                                                  |   |
|   |   |   |                                                          |   |
|   |   |   |                                                          |   |
|   |   | By     | /s/ Jerry Collazo                                             |   |   |
|   |   |   |   Jerry Collazo                                     |   |
|   |   |   |   Chief  Financial Officer                          |   |
|   |   |   |   (Duly  authorized officer and principal financial |   |
|   |   |   |     officer  of the Registrant)           |   |
|        |        |        |                                                               |        |  |

 

####

 

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