** **

**UNITEDSTATES**

###### **SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

** **

x                                  **QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2007**

** **

**OR**

 

o                                    **TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition periodfrom                     to          **

** **

**Commission File No. 0-28582**

** **

**CHANNELLCOMMERCIAL CORPORATION**

(Exact name of Registrantas specified in its charter)

 

**DELAWARE**

(State or otherjurisdiction of incorporation or organization)

 

**95-2453261**

(I.R.S. EmployerIdentification No.)

 

**26040 Ynez Road, Temecula,California**

(Address of principalexecutive offices)

 

**92591**

(Zip Code)

 

**(951) 719-2600**

(Registrant’s telephonenumber, including area code)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

Yes** **x**   **No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): 
| Large Accelerated  Filer  o | Accelerated Filer  o | Non- accelerated  Filer  x |
|----------------------------------|---------------------------|---------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes  o**  **No  x

 

9,544,134 shares ofcommon stock of the registrant were outstanding at November 9, 2007.

 

 

 

----

 

**PART 1 - FINANCIAL INFORMATION**

**Item 1.****       ****Financial Statements.**

CHANNELL COMMERCIALCORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

*(amountsin thousands, except per share data)*

 

* *
| ** **                                                                        | ** ** | **Nine months ended September 30,** | ** ** | **Three months ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                            | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                              |       |                                |       |                                 |       |   |   |   |   |
| Net sales                                                                         |       | $                                   | 103,431    |                                 | $          | 84,476 |   | $ | 33,856 |   | $ | 29,376 |   |
| Cost of goods  sold                                                               |       | 71,382                              |       | 57,354                               |       | 23,708 |   | 20,179 |   |
| Gross profit                                                                      |       | 32,049                              |       | 27,122                               |       | 10,148 |   | 9,197 |   |
|                                                                              |       |                                |       |                                 |       |   |   |   |   |
| Operating  expenses                                                               |       |                                |       |                                 |       |   |   |   |   |
| Selling                                                                           |       | 16,859                              |       | 16,822                               |       | 5,389 |   | 5,748 |   |
| General and  administrative                                                       |       | 11,526                              |       | 9,034                                |       | 3,452 |   | 2,745 |   |
| Research and  development                                                         |       | 1,341                               |       | 1,700                                |       | 426 |   | 613 |   |
| Impairment of  goodwill                                                           |       | —                              |       | 4,829                                |       | — |   | — |   |
|                                                                              |       | 29,726                              |       | 32,385                               |       | 9,267 |   | 9,106 |   |
|                                                                              |       |                                |       |                                 |       |   |   |   |   |
| Income (loss)  from operations                                                    |       | 2,323                               |       | (5,263                               | )          | 881 |   | 91 |   |
| Interest income                                                                   |       | 29                                  |       | 47                                   |       | 8 |   | 14 |   |
| Interest expense                                                                  |       | (812                                | )          | (549                                 | )          | (329 | ) | (230 | ) |
| Income (loss)  before income tax expense                                          |       | 1,540                               |       | (5,765                               | )          | 560 |   | (125 | ) |
|                                                                              |       |                                |       |                                 |       |   |   |   |   |
| Income tax  expense (benefit)                                                     |       | 434                                 |       | (265                                 | )          | 414 |   | 13 |   |
| Net income  (loss) before minority interest                                       |       | 1,106                               |       | (5,500                               | )          | 146 |   | (138 | ) |
| Minority  interest in income (loss) of subsidiaries                               |       | 18                                  |       | (1,452                               | )          | 104 |   | (32 | ) |
| Net income  (loss)                                                                |       | $                                   | 1,088      |                                 | $          | (4,048 | ) | $ | 42 |   | $ | (106 | ) |
|                                                                              |       |                                |       |                                 |       |   |   |   |   |
| Net income  (loss) basic and diluted                                              |       | $                                   | 0.11       |                                 | $          | (0.42 | ) | $ | — |   | $ | (0.01 | ) |
|                                                                              |       |                                |       |                                 |       |   |   |   |   |
| Net income  (loss)                                                                |       | $                                   | 1,088      |                                 | $          | (4,048 | ) | $ | 42 |   | $ | (106 | ) |
| Other  comprehensive income, net of tax   Foreign currency translation adjustment |       | 1,682                               |       | 295                                  |       | 863 |   | 437 |   |
|                                                                              |       |                                |       |                                 |       |   |   |   |   |
| Comprehensive  income (loss)                                                      |       | $                                   | 2,770      |                                 | $          | (3,753 | ) | $ | 905 |   | $ | 331 |   |
|                                                                                   |            |                                     |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

 

The accompanying notesare an integral part of these financial statements.

 

2

----

 

 

CHANNELLCOMMERCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

*(amounts in thousands, except pershare data)*

* *
| ** **                                                                                                                                                                                                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                 | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| ASSETS                                                                                                                                                                                                                                     |       |              |       |             |       |
| Current assets                                                                                                                                                                                                                             |       |              |       |             |       |
| Cash and cash  equivalents                                                                                                                                                                                                                 |       | $                 | 1,641      |             | $          | 2,235 |   |
| Accounts  receivable, net of allowance for doubful accounts of $224 at September 30,  2007 and $220 at December 31, 2006                                                                                                                   |       | 16,422            |       | 11,673           |       |
| Inventories, net                                                                                                                                                                                                                           |       | 18,094            |       | 13,018           |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                 |       | 1,332             |       | 931              |       |
| Income taxes  receivable                                                                                                                                                                                                                   |       | —            |       | 881              |       |
| Deferred income  taxes, net                                                                                                                                                                                                                |       | 809               |       | 719              |       |
| Total current assets                                                                                                                                                                                                                       |       | 38,298            |       | 29,457           |       |
|                                                                                                                                                                                                                                       |       |              |       |             |       |
| Property and  equipment, net                                                                                                                                                                                                               |       | 18,889            |       | 18,799           |       |
| Deferred income  taxes, net                                                                                                                                                                                                                |       | 1,144             |       | 1,017            |       |
| Goodwill                                                                                                                                                                                                                                   |       | 11,117            |       | 9,848            |       |
| Intangible  assets, net                                                                                                                                                                                                                    |       | 2,206             |       | 2,097            |       |
| Other assets                                                                                                                                                                                                                               |       | 577               |       | 660              |       |
|                                                                                                                                                                                                                                       |       | $                 | 72,231     |             | $          | 61,878 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                  |       |              |       |             |       |
| Current  liabilities                                                                                                                                                                                                                       |       |              |       |             |       |
| Accounts payable                                                                                                                                                                                                                           |       | $                 | 14,028     |             | $          | 10,902 |   |
| Short-term debt  (including current maturities of long-term debt)                                                                                                                                                                          |       | 8,535             |       | 13,723           |       |
| Current  maturities of capital lease obligations                                                                                                                                                                                           |       | 396               |       | 138              |       |
| Income taxes  payable                                                                                                                                                                                                                      |       | 128               |       | —           |       |
| Accrued expenses                                                                                                                                                                                                                           |       | 5,268             |       | 4,371            |       |
| Total current liabilities                                                                                                                                                                                                                  |       | 28,355            |       | 29,134           |       |
|                                                                                                                                                                                                                                       |       |              |       |             |       |
| Long-term debt,  less current maturities                                                                                                                                                                                                   |       | 8,090             |       | —           |       |
| Capital lease  obligations, less current maturities                                                                                                                                                                                        |       | 575               |       | 384              |       |
| Other long-term  liabilities                                                                                                                                                                                                               |       | 1,195             |       | 1,332            |       |
| Commitments and  contingencies (Note 7)                                                                                                                                                                                                    |       | —            |       | —           |       |
| Total  liabilities                                                                                                                                                                                                                         |       | 38,215            |       | 30,850           |       |
| Minority  interest                                                                                                                                                                                                                         |       | 1,008             |       | 878              |       |
|                                                                                                                                                                                                                                       |       |              |       |             |       |
| 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 — 9,788 at  September 30, 2007 and 9,787 at December 31, 2006; outstanding - 9,544 shares  at September 30, 2007 and 9,543 shares at December 31, 2006 |       | 98                |       | 98               |       |
| Additional  paid-in capital                                                                                                                                                                                                                |       | 31,181            |       | 31,093           |       |
| Treasury stock —  244 shares in 2007 and 2006                                                                                                                                                                                         |       | (1,871            | )          | (1,871           | )          |
| Retained  earnings (accumulated deficit)                                                                                                                                                                                                   |       | 928               |       | (160             | )          |
| Accumulated  other comprehensive income — Foreign currency translation                                                                                                                                                                |       | 2,672             |       | 990              |       |
| Total stockholders’ equity                                                                                                                                                                                                            |       | 33,008            |       | 30,150           |       |
|                                                                                                                                                                                                                                       |       | $                 | 72,231     |             | $          | 61,878 |   |

 

 

The accompanying notesare an integral part of these financial statements.

 

3

----

 

 

CHANNELL COMMERCIALCORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

*(amounts in thousands)*

* *
| ** **                                                                                           | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                           | ** ** | **2007**                            | ** ** | **2006** | ** ** |
|                                                                                                 |       |                                |       |   |   |
| Cash flows from  operating activities:                                                               |       |                                |       |   |   |
| Net income (loss)                                                                                    |       | $                                   | 1,088      |   | $ | (4,048 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                |       |   |   |
| Depreciation and  amortization                                                                       |       | 3,863                               |       | 3,454 |   |
| Stock-based  compensation                                                                            |       | 86                                  |       | 261 |   |
| Loss (gain) on  disposal of fixed assets                                                             |       | 65                                  |       | (2 | ) |
| Amortization of  deferred gain on sale leaseback                                                     |       | (45                                 | )          | (45 | ) |
| Impairment of  goodwill                                                                              |       | —                              |       | 4,829 |   |
| Deferred income  taxes                                                                               |       | —                              |       | 58 |   |
| Provision for  doubtful accounts                                                                     |       | 58                                  |       | (56 | ) |
| Provision for  inventory obsolescence                                                                |       | 271                                 |       | — |   |
| Minority interest  in loss of subsidiaries                                                           |       | 18                                  |       | (1,452 | ) |
| Changes in  operating assets and liabilities:                                                        |       |                                |       |   |   |
| Accounts  receivable                                                                                 |       | (3,858                              | )          | (3,350 | ) |
| Inventories                                                                                          |       | (4,458                              | )          | (573 | ) |
| Prepaid expenses  and other current assets                                                           |       | (360                                | )          | (559 | ) |
| Income taxes                                                                                         |       | 1,001                               |       | (1,278 | ) |
| Other assets                                                                                         |       | 89                                  |       | 111 |   |
| Accounts payable                                                                                     |       | 2,119                               |       | (312 | ) |
| Accrued expenses  and other liabilities                                                              |       | 465                                 |       | (441 | ) |
| Net cash  provided by (used in) operating activities                                                 |       | 402                                 |       | (3,403 | ) |
|                                                                                                 |       |                                |       |   |   |
| Cash flows from  investing activities:                                                               |       |                                |       |   |   |
| Purchase of property  and equipment                                                                  |       | (2,599                              | )          | (1,620 | ) |
| Proceeds from  the sales of property and equipment                                                   |       | 95                                  |       | 60 |   |
| Net cash used in  investing activities                                                               |       | (2,504                              | )          | (1,560 | ) |
|                                                                                                 |       |                                |       |   |   |
| Cash flows from  financing activities:                                                               |       |                                |       |   |   |
| Repayment of  debt                                                                                   |       | (4,217                              | )          | (1,517 | ) |
| Borrowings from  credit facilities                                                                   |       | 6,172                               |       | 6,954 |   |
| Repayment of  obligations under capital lease                                                        |       | (94                                 | )          | (80 | ) |
| Exercise of  employee stock options                                                                  |       | 2                                   |       | — |   |
| Net cash  provided by financing activities                                                           |       | 1,863                               |       | 5,357 |   |
|                                                                                                 |       |                                |       |   |   |
| Effect of  exchange rates on cash                                                                    |       | (355                                | )          | (173 | ) |
| Increase  (decrease) in cash and cash equivalents                                                    |       | (594                                | )          | 221 |   |
| Cash and cash  equivalents, beginning of period                                                      |       | 2,235                               |       | 3,148 |   |
| Cash and cash  equivalents, end of period                                                            |       | $                                   | 1,641      |   | $ | 3,369 |   |
| Cash paid during  the period for:                                                                    |       |                                |       |   |   |
| Interest                                                                                             |       | $                                   | 857        |   | $ | 605 |   |
| Income taxes                                                                                         |       | $                                   | 21         |   | $ | 567 |   |
| Non-cash  investing activities:                                                                      |       |                                |       |   |   |
| Purchases of  property and equipment which are included in:                                          |       |                                |       |   |   |
| Obligations  under capital leases                                                                    |       | $                                   | 455        |   | $ | — |   |
| Accounts payable                                                                                     |       | $                                   | 83         |   | $ | 57 |   |

 

 

The accompanying notesare an integral part of these financial statements.

 

4

----

 

 

CHANNELL COMMERCIALCORPORATION AND SUSBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY

Nine months ended September 30, 2007

(UNAUDITED)

*(amounts in thousands)*

* *
| ** **                          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **         | ** ** | ** **       | ** ** | ** **        | ** ** | **Retained**           | ** ** | **Accumulated** | ** ** | ****       | ** ** |
|-------------------------------------|------------|------------------|------------|-------------|------------|--------------------|------------|------------------|------------|-------------------|------------|------------------------|------------|-----------------|------------|------------|------------|
| ** **                          | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**     | ** ** | ** **       | ** ** | ** **        | ** ** | **earnings**           | ** ** | **other**       | ** ** | **Total**  | ** ** |
| ** **                          | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **Treasury stock** | ** ** | **(accumulated** | ** ** | **comprehensive** | ** ** | **stockholders’** | ** ** |
| ** **                          | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **capital**        | ** ** | **Shares**       | ** ** | **Amount**        | ** ** | **deficit)**           | ** ** | **income**      | ** ** | **equity** | ** ** |
|                                |       |             |       |        |       |               |       |             |       |              |       |                   |       |            |       |       |       |
| Balance, January  1, 2007           |       | 9,787            |       | $           | 98         |               | $          | 31,093           |       | 244               |       | $                      | (1,871     | )               | $          | (160       | )          | $ | 990 |   | $ | 30,150 |   |
|                                |       |             |       |        |       |               |       |             |       |              |       |                   |       |            |       |       |       |
| Stock-based  compensation           |       | —           |       | —      |       | 86                 |       | —           |       | —            |       | —                 |       | —          |       | 86         |       |
|                                |       |             |       |        |       |               |       |             |       |              |       |                   |       |            |       |       |       |
| Exercise of  employee stock options |       | 1                |       | —      |       | 2                  |       | —           |       | —            |       | —                 |       | —          |       | 2          |       |
|                                |       |             |       |        |       |               |       |             |       |              |       |                   |       |            |       |       |       |
| Foreign currency  translation       |       | —           |       | —      |       | —             |       | —           |       | —            |       | —                 |       | 1,682           |       | 1,682      |       |
|                                |       |             |       |        |       |               |       |             |       |              |       |                   |       |            |       |       |       |
| Net income for  the period          |       | —           |       | —      |       | —             |       | —           |       | —            |       | 1,088                  |       | —          |       | 1,088      |       |
|                                |       |             |       |        |       |               |       |             |       |              |       |                   |       |            |       |       |       |
| Balance,  September 30, 2007        |       | 9,788            |       | $           | 98         |               | $          | 31,181           |       | 244               |       | $                      | (1,871     | )               | $          | 928        |       | $ | 2,672 |   | $ | 33,008 |   |
|                                     |            |                  |            |             |            |                    |            |                  |            |                   |            |                        |            |                 |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

 

The accompanying notesare an integral part of these financial statements.

 

5

----

 

 

CHANNELL COMMERCIALCORPORATION AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

September 30, 2007 and2006

*(amounts in thousands, except pershare data)*

 

**1.****             *****Unaudited financialstatements.**** *In the opinion of management, the accompanyingunaudited condensed consolidated financial statements contain all adjustments(consisting only of normal, recurring adjustments) that are necessary topresent fairly the consolidated financial position of Channell Commercial Corporation(the “Company”) as of September 30, 2007 and the results of its operations forthe three months and nine months ended September 30, 2007 and 2006 and cashflows for the nine months ended September 30, 2007 and 2006.  The results of operations for the threemonths and nine months ended September 30, 2007 and cash flows for the ninemonths ended September 30, 2007 are not necessarily indicative of the resultsto be expected for any other interim period or the full year.  These condensed consolidated financialstatements should be read in combination with the Company’s auditedconsolidated financial statements and notes thereto for the year ended December31, 2006, included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2006.

***Recent Accounting Pronouncements*****. **InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157, *Fair Value Measurements*, which defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair valuemeasurements.  This Statement will beeffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  The Company is currently evaluating therequirements of this new standard and has not concluded its analysis on theimpact to the Company’s consolidated financial position or results ofoperations.

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities — including an amendment of SFAS No. 115,*which allows measurement at fair value of eligible financial assets andliabilities that are not otherwise measured at fair value. If the fair valueoption for an eligible item is elected, unrealized gains and losses for thatitem shall be reported in current earnings at each subsequent reporting date.SFAS No. 159 also establishes presentation and disclosure requirements designedto draw comparison between the different measurement attributes the companyelects for similar types of assets and liabilities. This statement is effectivefor fiscal years beginning after November 15, 2007. The Company is in theprocess of evaluating the application of the fair value option and its effecton the Company’s results of operations and financial condition.

***Reclassifications. ***In 2007, the Company reclassified thelong-term portion of accrued workers compensation from accrued expenses to otherlong-term liabilities, including the December 31, 2006 amount of $818 forcomparative purposes.  The Company hadpreviously classified such accrued expenses under current liabilities.  The Company’s current liabilities, and anyratio calculated therefrom, as used throughout this Quarterly Report for theperiod ended September 30, 2007 reflect the reclassification described above.

**2.****             *****Stock-BasedCompensation. ***Effective January 1, 2006 the Companyadopted SFAS No. 123R, *Share-Based Payment*,which requires that compensation expense be recognized over the requisiteservice period based on the fair value of the award at the date of grant.  At September 30, 2007, the Company had totalstock-based compensation on unvested options of $157.  The unvested stock options will vest atvarious intervals over the next 3 years. Total stock-based compensation expense, recognized in general andadministrative expenses, was $86 and $261 during the first nine months of 2007and 2006, respectively.  During the ninemonths ended September 30, 2007, the Company granted options under its 2003Incentive Stock Plan for the purchase of 14 shares of common stock at aweighted average exercise price of $4.07 per share and a weighted average fairvalue of $3.12 per share.

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

 

| ** **                        | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
|                              |       |                   |       |                  |       |
| Raw Materials                     |       | $                      | 7,803      |                  | $          | 6,043 |   |
| Work-in-Process                   |       | 5,184                  |       | 3,318                 |       |
| Finished Goods                    |       | 6,529                  |       | 4,891                 |       |
|                              |       | 19,516                 |       | 14,252                |       |
| Less inventory  valuation reserve |       | (1,422                 | )          | (1,234                | )          |
|                              |       | $                      | 18,094     |                  | $          | 13,018 |   |

 

6

----

 

 

**4.****             *****Income (loss) per share.*** Basic income (loss) per share excludes dilution and is computed bydividing net income (loss) available to common stockholders by the weightedaverage number of common shares outstanding for the three months and ninemonths ended September 30, 2007 and 2006*. *Diluted income (loss) per sharereflects the potential dilution that could occur if dilutive options to acquirecommon stock were exercised, the proceeds of which are then presumed to havebeen used to repurchase outstanding stock using the treasury stock method.  For the three months and nine months endedSeptember 30, 2006, there is no calculation of dilution since the Companyincurred a loss for the period, thereby resulting in the options becomingantidilutive.  The following is areconciliation of the number of shares (denominator) used in the basic anddiluted income (loss) per share computations for three months and nine monthsended September 30, 2007 and 2006:

 

| ** **                        | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| ** **                        | ** ** | ** **                          | ** ** | **Per Share** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                        | ** ** | **Shares**                          | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic income  (loss) per share    |       | 9,544                               |       | $ | 0.11 |   | 9,543 |   | $ | (0.42 | ) |
| Effect of  dilutive stock options |       | 4                                   |       | — |   | — |   | — |   |
| Diluted income  (loss) per share  |       | 9,548                               |       | $ | 0.11 |   | 9,543 |   | $ | (0.42 | ) |

 

 

| ** **                        | ** ** | **Three months ended September 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                        | ** ** | ** **                           | ** ** | **Per Share** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                        | ** ** | **Shares**                           | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic income  (loss) per share    |       | 9,544                                |       | $ | 0.00 |   | 9,543 |   | $ | (0.01 | ) |
| Effect of  dilutive stock options |       | 37                                   |       | — |   | — |   | — |   |
| Diluted income  (loss) per share  |       | 9,581                                |       | $ | 0.00 |   | 9,543 |   | $ | (0.01 | ) |

 

 

The following options were not included in the computationof diluted income (loss) per share due to their antidilutive effect.

* *

| ** **                                  | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------|------------|
| ** **                                  | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| * *                                    | * *   | * *                            | * *   | * * | * * |
| Options to  purchase shares of common stock |       | 1,368                               |       | 1,757 |   |
| Exercise prices                             |       | $4.25 — $13.75                 |       | $3.25 — $13.75 |   |
| Expiration dates                            |       | July 2010 — May 2017           |       | July 2010 — June 2016 |   |

 

 

| ** **                                  | ** ** | **Three months ended September 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| * *                                    | * *   | * *                             | * *   | * * | * * |
| Options to  purchase shares of common stock |       | 1,351                                |       | 1,757 |   |
| Exercise prices                             |       | $4.65 — $13.75                  |       | $3.25 — $13.75 |   |
| Expiration dates                            |       | July 2010 — May 2017            |       | July 2010 — June 2016 |   |

 

 

**5.****             *****Segments.*** The operating segments of the Company have been aggregated into twogeographical reporting segments: Americas and International. Americas includes the United States, Central and South America and Canada.  International includes Europe, Africa, theMiddle East, Australia and Asia.  Thechief operating decision maker is William H. Channell, Jr., President and ChiefExecutive Officer of the Company.  TheCompany’s four product lines are sold in both segments.  The following tables summarize segmentinformation:

 

7

----

 

 

| ** **                             | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| Revenues from  external customers (1): |       |                                |       |   |   |
| Americas                               |       | $                                   | 57,245     |   | $ | 46,886 |   |
| International                          |       | 46,186                              |       | 37,590 |   |
|                                   |       | $                                   | 103,431    |   | $ | 84,476 |   |
| Income (loss)  from operations:        |       |                                |       |   |   |
| Americas                               |       | $                                   | 1,901      |   | $ | 735 |   |
| International                          |       | 422                                 |       | (5,998 | ) |
|                                   |       | $                                   | 2,323      |   | $ | (5,263 | ) |
| Interest  expense, net:                |       |                                |       |   |   |
| Americas                               |       | $                                   | 450        |   | $ | 303 |   |
| International                          |       | 333                                 |       | 199 |   |
|                                   |       | $                                   | 783        |   | $ | 502 |   |

----

(1) Note:**                         **Revenues from Australia exceeded 10% oftotal revenues for the nine months ended September 30, 2007 and 2006.  Revenues from Australia totaled $42,039 and$33,526 for the nine month periods in 2007 and 2006, respectively.

| ** **                             | ** ** | **Three months ended September 30,** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| Revenues from  external customers (1): |       |                                 |       |   |   |
| Americas                               |       | $                                    | 18,186     |   | $ | 15,710 |   |
| International                          |       | 15,670                               |       | 13,666 |   |
|                                   |       | $                                    | 33,856     |   | $ | 29,376 |   |
| Income (loss)  from operations:        |       |                                 |       |   |   |
| Americas                               |       | $                                    | 31         |   | $ | 355 |   |
| International                          |       | 850                                  |       | (264 | ) |
|                                   |       | $                                    | 881        |   | $ | 91 |   |
| Interest  expense, net:                |       |                                 |       |   |   |
| Americas                               |       | $                                    | 162        |   | $ | 126 |   |
| International                          |       | 159                                  |       | 90 |   |
|                                   |       | $                                    | 321        |   | $ | 216 |   |

----

(1) Note:**                         **Revenues from Australia exceeded 10% oftotal revenues for the three months ended September 30, 2007 and 2006.  Revenues from Australia totaled $14,195 and$12,151 for the three month periods in 2007 and 2006, respectively.

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

 

| ** **              | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------|------------|-------------------------------------|------------|
| ** **              | ** ** | **2007**                            | ** ** | **2006** | ** ** |
|                    |       |                                |       |   |   |
| Product lines:          |       |                                |       |   |   |
| Enclosures              |       | $                                   | 44,610     |   | $ | 40,101 |   |
| Water related  products |       | 46,253                              |       | 36,847 |   |
| Connectivity            |       | 8,546                               |       | 6,517 |   |
| Other                   |       | 4,022                               |       | 1,011 |   |
|                    |       | $                                   | 103,431    |   | $ | 84,476 |   |

 

8

----

 

 

| ** **              | ** ** | **Three months ended September 30,** | ** ** |
|-------------------------|------------|--------------------------------------|------------|
| ** **              | ** ** | **2007**                             | ** ** | **2006** | ** ** |
|                    |       |                                 |       |   |   |
| Product lines:          |       |                                 |       |   |   |
| Enclosures              |       | $                                    | 14,571     |   | $ | 13,402 |   |
| Water related  products |       | 14,561                               |       | 12,886 |   |
| Connectivity            |       | 3,282                                |       | 2,549 |   |
| Other                   |       | 1,442                                |       | 539 |   |
|                    |       | $                                    | 33,856     |   | $ | 29,376 |   |

 

** **

| ** **            | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|-----------------------|------------|------------------------|------------|-----------------------|------------|
|                  |       |                   |       |                  |       |
| Identifiable  assets: |       |                   |       |                  |       |
| Americas              |       | $                      | 30,708     |                  | $          | 28,682 |   |
| International         |       | 41,523                 |       | 33,196                |       |
|                  |       | $                      | 72,231     |                  | $          | 61,878 |   |

 

**6.****             *****Income Taxes.*** The effective tax rate is 28.2% for the nine months ended September 30,2007, compared to the statutory rate of 34%. The effective rate is based on the expected rate for the year. Theincome tax expense recorded for the nine months ended September 30, 2007 is aresult of the income from the foreign operations of the Company.  The Company has not recorded income taxes onthe income (loss) of the Company’s domestic operations because of the Company’sfederal net operating loss carryforward position and the full valuationallowance on the Company’s deferred tax assets.

Under SFAS No. 109, *Accounting for IncomeTaxes,* the Company is required to record a valuation allowance toreduce its net deferred tax asset to the amount that management believes ismore likely than not to be realized. Accounting guidance allows the Company to look to future earnings tosupport the realizability of net deferred assets.  However, since the Company has had cumulativelosses in recent years in its domestic operations, the Company is unable tosupport the realizability of domestic deferred tax assets based on forecastedfuture earnings.  As a result, managementhas concluded that a full valuation allowance against net domestic deferred taxassets is necessary.

The Company adopted the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(“FIN 48”), aninterpretation of SFAS No. 109*,* on January 1,2007.  FIN 48 prescribes a recognitionthreshold that a tax position is required to meet before being recognized inthe financial statements and provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transitions issues.  Theadoption of FIN 48 resulted in no impact to the Company’s consolidatedfinancial statements.  As of the date ofthe adoption, the Company had no unrecognized tax benefits. Based on theinformation currently available, no significant changes in unrecognized taxbenefits are expected in the next twelve months. As of the date of adoption,the Company files income tax returns in the U.S. federal jurisdiction andvarious state and foreign jurisdictions. The 2004 through 2006 tax years remain subject to examination by federaltax authorities while the 2003 through 2006 tax years remain subject toexamination by most state and foreign jurisdictions.

The Company recognizes interest and penalties related to uncertain taxpositions in income tax expense.  As ofthe date of the adoption of FIN 48 and September 30, 2007, the Company had noprovisions for interest or penalties related to uncertain tax positions.

**7.****             *****Commitments andContingencies*****.**  *EmploymentAgreements**—***In December, 2003 the Companyentered into an employment agreement with William H. Channell Jr., itspresident and chief executive officer. The employment agreement is for an initial five-year term and isautomatically renewed for additional five-year terms unless it is terminated bythe Company or by Mr. Channell, Jr. in accordance with the agreement.  Mr.Channell, Jr.’s salary (1) may be increased from time to time at the discretionof the Board of Directors and (2) will be increased annually, beginning July 1,2004, to reflect the most recently published annualized percentage increase inthe consumer price index for the Los Angeles, California area.  The agreement also provides that his base salarywill not be decreased below $718 (which was the base salary on the originaleffective date of the agreement).  Inaddition to base salary, Mr. Channell, Jr. is entitled to participate in cashand other bonus programs, including the 2003 Incentive Stock Plan, 401(k) planand the 2004 Incentive Bonus Plan. Pursuant to 

9

----

 

 

theagreement, the Company is also required to maintain certain insurance policiesfor Mr. Channell Jr.’s benefit and he is also entitled to certain otherbenefits, including an automobile allowance, health insurance, and vacation andsick leave, in accordance with customary practices for senior executiveofficers.  In the event that (1) theCompany terminates Mr. Channell, Jr.’s employment without “cause,” as definedin the agreement, or (2) Mr. Channell, Jr. terminates his employment with theCompany for “good reason,” which is also specifically defined in the agreement,Mr. Channell, Jr. would be entitled to a lump sum payment equal to three timeshis then current base salary, all health and life insurance benefits for threeyears, and accelerated vesting of any stock options or restricted stock grantedto him.  In addition, if the Companyterminates Mr. Channell, Jr.’s employment for any reason other than cause, itis required to maintain Mr. Channell, Jr.’s disability policy, at its expense,until the date on which Mr. Channell, Jr. is 65 years old.  The agreement also provides for certainbenefits to Mr. Channell, Jr. upon his death or disability.

TheCompany was party to an employment agreement with William H. Channell, Sr., theCompany’s former chairman of the board of directors.  The agreement was terminated on April 8,2007, the date on which Mr. Channell, Sr. passed away.  In accordance with the agreement, the Companywill continue to provide Mrs. Jacqueline M. Channell with medical insurance (tothe same extent such insurance is provided to the Company’s senior executiveofficers) during her lifetime.  Mrs.Channell is currently being provided with medical insurance in connection withher employment by the Company.

***Taxes*****. **The Federal income taxes of the Company for the years ended December31, 2003 and 2004 are currently under examination by the Internal RevenueService (“IRS”).  As of September 30,2007, the Company and the IRS have resolved all outstanding issues except forthe ordinary worthless stock deduction. The amount of the benefit under dispute is approximately $3,000.  The net benefit recognized for this position was approximately$300 with the remaining benefit being offset by the valuation allowance thathas been established against the deferred tax asset.  The Company does notanticipate a material adverse impact on its financial statements for this item.

***Terminationof Transportation and Logistics Services by Primary Freight Provider forBushman Tanks Business. ***As of October 12, 2006, the primaryfreight provider for the Company’s Bushman Tanks water storage tankmanufacturing and distribution business unilaterally withdrew itstransportation and logistics services. Accordingly, the agreement with the freight provider has beenterminated, and Bushman Tanks has reserved its rights in relation to anydamages it suffers as a result of the termination of such services.  The freight provider claims that BushmanTanks has breached the agreement. Although the Company does not believe Bushman Tanks has breached theterms of the agreement, the Company has accrued for amounts in dispute.  If the dispute with the freight providercannot be resolved, either Bushman Tanks or the freight provider may pursuelegal action. Although no litigation has been initiated, the legal costassociated with potential litigation related to the termination of suchservices, and any settlements as a result of legal disputes related thereto,could negatively affect the Company’s working capital and results ofoperations.

***Legal Proceedings.**** *The Company is from time to timeinvolved in ordinary routine litigation incidental to the conduct of its business.  The Company regularly reviews all pendinglitigation matters in which it is involved and establishes reserves deemedappropriate for such litigation matters. Management believes that no presently pending litigation matters arelikely to have a material adverse effect on the Company’s financial statementsor results of operations, taken as a whole.

**8*.*****             *****Guarantees.*** In 1997, the Company guaranteed debt of the Channell Family Trust, oneof its principal stockholders, of approximately $754 incurred in connectionwith construction of the facilities leased to the Company, and such guaranteeddebt is collateralized by said facilities. The loan amount subject to the guarantee is expected to decline beforeexpiring in 2017.  The Company has notrecorded a liability for this guarantee. At September 30, 2007, the outstanding loan balance subject to theguarantee totaled approximately $495. The Channell Family Trust does notqualify as a “variable interest entity” subject to consolidation under FIN46(R), *Consolidation of Variable Interest Entities,*since (a) there are sufficient assets held by the Trust that the lender couldattach in the event of default on the loan, (b) the total equity investment atrisk in the Trust is sufficient to permit financing without additionalfinancial support from the Company and (c) William Channell, Jr., theadministrator of the Channell Family Trust, has the direct ability to makedecisions about the Trust’s activities.

**9.****             *****Goodwill and OtherIntangible Assets.***  The balance of goodwill andintangible assets on the Company’s balance sheet fluctuates from period toperiod due to the application of foreign currency translation to United Statesdollars in calculating the balance of goodwill and other intangible assets ofthe Company’s foreign subsidiaries.  SFASNo. 142, *Goodwill and Other Intangible Assets,*requires that goodwill and certain intangibles no longer be amortized, butinstead be reviewed at least annually for impairment.

 

10

----

 

 

The Company tests the value of goodwill for impairment annually atDecember 31 (prior to December 31, 2006 goodwill was tested for impairment atSeptember 30 for the Bushman Tanks reporting unit) or whenever events orchanges in circumstance indicate that a condition of impairment may exist.  The goodwill for the Bushman Tanks reportingunit was reassessed for impairment on December 31, 2006.  The test involves significant judgment inestimating projections of fair value generated through future performance ofthe operating segment.  In calculatingthe fair value, the Company relies on factors such as operating results,business plans, economic projections, and anticipated cash flows used in thediscounted cash flow analysis supporting the fair value determination.  Inherent uncertainties exist in determiningand applying such factors.

The changes in the carrying amount of goodwill, the non-competeagreement and the nonamortizable trademark intangible, are summarized below forthe nine months ended September 30, 2007:

 

| ** **                              | ** ** | ** **   | ** ** | **Non-Compete** | ** ** | **Trademark**  | ** ** |
|-----------------------------------------|------------|--------------|------------|-----------------|------------|----------------|------------|
| ** **                              | ** ** | **Goodwill** | ** ** | **Agreement**   | ** ** | **Intangible** | ** ** |
|                                    |       |         |       |            |       |           |       |
| Balance at  December 31, 2006           |       | $            | 9,848      |            | $          | 1,387          |       | $ | 710 |   |
| Amortization of  non-compete agreement  |       | —       |       | (143            | )          | —         |       |
| Effect of  foreign currency translation |       | 1,269        |       | 163             |       | 89             |       |
| Balance at  September 30, 2007          |       | $            | 11,117     |            | $          | 1,407          |       | $ | 799 |   |

 

 

As of September 30, 2007, the Company has recorded goodwill of $795 inits Canadian reporting unit, which is part of the Americas segment, and $10,322of goodwill in its Bushman Tanks reporting unit, which is part of theInternational segment.

The estimated amortization expense based on current intangible balancesand the September 30, 2007 foreign currency exchange rates is $206 per year forthe next five fiscal years, and $377 thereafter.

**10.****      *****Loan and SecurityAgreements.*** On July 30, 2007 the Company and ChannellCommercial Canada Inc. (“Channell Canada”), as borrowers, entered into anAmended and Restated Loan and Security Agreement (the “Amended and RestatedAgreement”) with Bank of America, N.A. and Bank of America, Canada Branch.  The Amended and Restated Agreement providesfor: (i) a term loan of $2,500; (ii) capital expenditure loans in an aggregateamount of up to $5,000; and (iii) a revolving credit facility with borrowingsof up to a maximum of $12,500, depending on the level of certain qualifyingassets.  The revolving facility alsoincludes availability for letters of credit. The term loan will be repaid over a five-year amortization schedule withthe balance due June 30, 2010.  TheAmended and Restated Agreement terminates on June 30, 2010 (unless earlierterminated pursuant to the terms thereof). Other than the borrowing limits, the terms of the Amended and RestatedAgreement are substantially similar to the prior loan and security agreementthe Company and Channell Canada had with the same lenders.

The loans under the Amended and RestatedAgreement are guaranteed by Channell Limited, Channell Commercial EuropeLimited and A.C. Egerton (Holdings) Limited, which are direct and indirectsubsidiaries of the Company (the “Subsidiary Guarantors”), and are secured bysubstantially all of the assets of the Company and the Subsidiary Guarantors.In addition, borrowings made by Channell Canada are secured by substantiallyall of the assets of Channell Canada. The Amended and Restated Agreement contains various financial andoperating covenants that impose limitations on the Company’s ability, amongother things, to incur additional indebtedness, merge or consolidate, sellassets except in the ordinary course of business, make certain investments,enter into leases and pay dividends.  TheAmended and Restated Agreement requires the Company to maintain a lockbox onthe revolving credit facility.  TheAmended and Restated Agreement also generally provides that if there exists anevent of default thereunder, the lenders or administrative agents would havethe option of accelerating the outstanding obligations and terminating allcommitments thereunder. The balance outstanding at September 30, 2007 under the revolving line of credit was $5,547 and under the termloan was $2,458.  As of September 30, 2007, outstanding letters of credit totaled $786.

As of September 30, 2007, Channell Pty Ltd, Channell Bushman Pty Ltd and controlledentities, collectively known as Channell Bushman Group, subsidiaries of theCompany, were party to a five-year Loan and Security Agreement with acommercial bank in Australia (the “Bank”) originally entered into in August2004 (the “Prior Australia Loan Agreement”).  As of September 30, 2007,the facilities under the Prior Australia Loan Agreement (denominated inAustralian dollars) included the following: a term loan expiring in July 2009;a revolving credit facility with maximum borrowings of $2,842 expiring in October2007; a facility to fund “earn 

 

11

----

 

 

out” payments to the sellers of Bushman Tanks expiring in July 2008; acapital expenditure facility expiring in July 2008; and a master asset financeagreement facility expiring in October 2007.The balanceoutstanding under the Prior Australia Loan Agreement at September 30, 2007 was$8,591, including $6,109 that is classified as long-term based on the repaymentterms of the borrowings under the Facility Agreement described below thatreplaced the debt under the Prior Australia Loan Agreement in October 2007.

On October 3, 2007, Channell Bushman Pty Limited (“Channell Bushman”), a majority-ownedsubsidiary of the Company, andBushmans Group Pty Limited, Australian Bushman Tanks Pty Limited, BushmansEngineering Pty Limited and Polyrib Tanks Pty Limited, each a wholly-ownedsubsidiary of Channell Bushman and an indirect subsidiary of the Company (eacha “Subsidiary” and together, the“Subsidiaries”), entered into aFacility Agreement (the “FacilityAgreement”) by and among Channell Bushman, as borrower, theSubsidiaries, as guarantors, and an Australian private debt fund (the “Lender”), as lender. In connectionwith the Facility Agreement, Channell Bushman and the Subsidiaries also enteredinto a Fixed and Floating Charge (Incorporating an Equitable Mortgage ofShares) (the “Security Agreement”),by and among Channell Bushman, the Subsidiaries and the Lender. Thetransactions contemplated by the Facility Agreement and the Security Agreementclosed on October 5, 2007.

The Facility Agreement (denominated in Australian dollars) provides forcredit facilities in the aggregate principal amount of $11,544, consisting of:(i) a term loan of $7,104 and (ii) a revolving facility with borrowings of upto $4,440, depending on the level of certain qualifying assets. The obligationsof Channell Bushman under the Facility Agreement are guaranteed by theSubsidiaries. In addition, under the Security Agreement, a first-rankingsecurity interest in all of the assets of Channell Bushman and the Subsidiariesis granted to, and all of the share capital of the Subsidiaries is pledged to,the Lender as security for Channell Bushman and the Subsidiaries’ obligationsunder the Facility Agreement. The Facility Agreement terminates on September30, 2010, unless earlier terminated pursuant to the terms thereof.

The initial borrowing under the Facility Agreement was used primarilyto repay various outstanding facilities under the Prior Australia Loan Agreement.  The Facility Agreement and Security Agreement contain various financialand operating covenants that impose limitations on Channell Bushman and theSubsidiaries’ ability to, among other things, incur or guarantee additionalindebtedness, merge or consolidate, sell assets except in the ordinary courseof business, make certain investments, issue or redeem shares, transferownership of the share capital of the Subsidiaries, grant further securityinterests, and pay dividends. The Facility Agreement and Security Agreementprovide that on the occurrence of an event of default, the Lender may declarethe outstanding obligations under the Facility Agreement immediately due andpayable, terminate its commitments under the Facility Agreement and enforce itsrights under its security interests, including taking possession of andotherwise acting as owner of the assets of Channell Bushman and theSubsidiaries, appointing a receiver over the assets of Channell Bushman and theSubsidiaries with the power to, among other things, sell the assets, andcausing 100% of the shares of each Subsidiary to be registered in its name. TheLender may also declare the outstanding obligations under the FacilityAgreement immediately due and payable should any change of control in ChannellBushman or any Subsidiary occur.

On October 8, 2007, Channell Pty Limited and Bushman Group Pty Limited,which are indirect subsidiaries of the Company, entered into a new loan andsecurity agreement (the “New Loan and Security Agreement”) with the Bank thatamended the Prior Australia Loan Agreement. The New Loan and Security Agreementextends the expiration date of all remaining facilities under the PriorAustralia Loan Agreement that were not repaid with the initial borrowing fromthe Facility Agreement to October 31, 2008.  The remaining facilitiesinclude performance guarantees, credit card facilities and payroll processingfacilities. The loans under the New Loan and Security Agreement are secured byall the assets of Channell Pty Limited and a term deposit.

The New Loan and Security Agreement contains variousoperating covenants that impose limitations on Channell Pty Limited and BushmanGroup Pty Limited’s ability, among other things, to merge or consolidate, sellassets except in the ordinary course of business, and pay dividends. Except as amended as described above, the remaining terms and conditions of theLoan and Security Agreement (as they relate to Channell Pty Limited and BushmanGroup Pty Limited) generally remain unchanged.

 

12

----

** **

** **

**Item 2.    Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

### ** **

### **Introduction and Overview**

Channell Commercial Corporation (the “Company”) is adesigner and manufacturer of telecommunications equipment supplied to communicationsnetwork operators worldwide and water storage tanks distributed in consumermarkets throughout Australia.  Major product lines include a complete lineof thermoplastic and metal fabricated enclosures, advanced copper terminationand connectorization products, fiber-optic cable management systems andpolyethylene water storage tanks.

During the last fiveyears, demand for communications infrastructure equipment has fluctuateddramatically.  At various times in the past there have been significantslowdowns in capital spending by both cable and telecom network operators dueto several factors including, but not limited to, service providerconsolidation, delays in outside plant upgrade/rebuild projects, andenhancement of free cash flow to strengthen their balance sheets and pay downdebt.  These changes had a significantnegative impact on overall demand for infrastructure products, and at varioustimes have directly reduced demand for the Company’s products and increasedprice competition within its industry, which has led to reductions in theCompany’s revenues and contributed to its recent operating losses.

Within the water storageportion of the Company’s business, demand continues to grow in Australia due tothe country’s generally arid climate and widespread water conservationefforts.  Demand for the Company’s water storage products is also drivenby regulatory factors at the local, state, and federal government levels. Recently, portions of Australia have experienced significant rainfall which, ifcontinued, could negatively affect the sales of the Company’s products.

Within both thecommunications infrastructure market and water storage market, the historicallyhigh price of petroleum commodities has had a negative impact on the Company’sgross margins.  The products manufactured in both of the markets in whichthe Company operates are primarily composed of polyethylene resins, which areprimarily derived from commodities such as oil and natural gas.  TheCompany is limited in its ability to pass on incremental price increases to itscustomers.  Continued commodity price increases would have a negativeimpact on the Company’s performance.

The Company continues toinvest in the development of new communications infrastructure products andwater storage tanks and believes that in both markets it has leading productportfolios in terms of performance and features.

The Company measures itssuccess by monitoring net sales and gross margins with a near-term goal ofmaintaining positive cash flows, while striving to achieve long-term operatingprofits.  The Company believes that there continues to be long-term growthopportunities within both the communications infrastructure equipment and watertank markets.

**Results of Operations**

**Comparison of the Nine Months Ended September 30,2007 with the Nine Months Ended September 30, 2006**

***NetSales*****.** Net sales in the first nine months of 2007 were $103.4 million, anincrease of $18.9 million or 22.4% compared to the first nine months of2006.  The increase is primarily due tohigher demand across all product lines within both of the Company’s reportingsegments.

Americas net sales were$57.2 million in the first nine months of 2007, an increase of $10.3 million or22.0% over the same period in 2006.  Theincrease was due primarily to a higher demand from the Company’s core telecomand cable customers that have been upgrading their networkinfrastructures.  Sales to large telecomand cable service providers fluctuate from period to period based on the statusof such customers’ infrastructure projects, and therefore are difficult topredict.

International net saleswere $46.2 million in the first nine months of 2007, an increase of $8.6million or 22.9% over the same period in 2006. The increase in sales was primarily a result of increased demand for theCompany’s products due to the ongoing drought and regulatory requirements andincentives in the urban markets of Australia.

***GrossProfit*****.**  Gross profit in the first nine months of 2007was $32.0 million, an increase of $4.9 million or 18.1% compared to the firstnine months of 2006.  The increase wasdue to higher gross profit dollars resulting from the higher revenues in bothsegments of the Company.  Gross profitdollars in the Americas segment increased $2.4 million from $15.2 million inthe first nine months of 2006 to $17.6 million in the first nine months of2007.  Gross profit of $14.4 million inthe first nine months of 2007 in the International segment was $2.5 millionhigher than in the 2006 period.

As a percentage of net sales, gross profit decreased from 32.1% in thefirst nine months of 2006 to 31.0% in the first nine months of 2007.  The decrease is primarily due to a decline inthe gross profit percentage in the Americas segment from 32.4% in the firstnine months of 2006 to 30.8% in the first nine months of 2007.  This decrease was

 

13

----

 

 

primarily due to higher raw material costs related to increasedcommodity prices and higher direct labor costs as a percentage of sales.  The gross profit percentage in theInternational segment decreased slightly from 31.7% in the first nine months of2006 to 31.2% in the first nine months of 2007.

 

***Selling*****.**  Sellingexpenses were $16.9 million in the first nine months of 2007, an increase of$0.1 million or 1.0% from the first nine months of 2006.

As a percentage of netsales, selling expenses decreased from 19.9% in the first nine months of 2006to16.3% in the first nine months of 2007. The decrease is primarily due to the small increase in total sellingexpenses compared to the increase in sales along with increased efficienciesassociated with the management and operation of the Company’s internationalshipping activities.

***Generaland Administrative*****.**  General and administrative expenses were$11.5 million in the first nine months of 2007, an increase of $2.5 million or27.8% from the first nine months of 2006. The increase is due primarily to higher compensation and benefitsexpense of $1.1 million due to increased head count, higher expenses related tothe upgrading of the Company’s Enterprise Resource Planning systems of $0.8million and start-up costs related to the development of the water storagebusiness in the Americas segment of $0.2 million.

As a percentage of net sales,general and administrative expense increased from 10.7% in the 2006 period to11.1% in the 2007 period.

***Researchand Development*****.** Research and development expenses were $1.3million in the first nine months of 2007, a decrease of $0.4 million or 23.5%from the first nine months of 2006.  Thedecrease is due to a higher level of capitalization of internal costs relatedto product development projects.

As a percentage of netsales, research and development expenses decreased from 2.0% in the first ninemonths of 2006 to 1.3% in the first nine months of 2007 as a result ofincreased sales and the decrease in research and development costs.

***Impairmentof Goodwill.***  There was no goodwill impairment expense inthe first nine months of 2007 compared to goodwill impairment expense of $4,829in the first nine months of 2006.  Theimpairment was related to the Company’s Bushman Tanks operations inAustralia.  The primary cause for thisimpairment of goodwill was the decrease in gross margins and operating incomein the Bushman Tanks business, which have been negatively impacted byincreasing prices in raw materials.  Theprimary raw materials used in the manufacture of Bushman Tanks products arepetroleum-based resins.  The price ofthese resins has been continually increasing as the price of oil increases.

As a percentage of sales,goodwill impairment was 5.7% in the first nine months of 2006.

***Income(Loss) from Operations*****.**  As a result of the items discussed above,income from operations was $2.3 million in the first nine months of 2007compared to a loss from operations of ($5.3) million in the first nine monthsof 2006.  Operating margin as a percentof sales was 2.2% in the 2007 period compared to (6.2%) in the 2006 period.

***InterestExpense, Net*****.**  Interest expense, net of interest income, was$0.8 million in the first nine months of 2007 and $0.5 million in the firstnine months of 2006.  The increase ininterest expense is due to the increased level of borrowing in 2007 compared tothe prior year.

***IncomeTaxes*****.** Income tax expense of $0.4 million in the first nine months of 2007compares to an income tax benefit of $0.3 million in the first nine months of2006.  The effective tax rate was 28.2%in the first nine months of 2007 and 4.6% for the same period in 2006.  Since the Company has a full valuationallowance on the realization of the domestic net deferred tax asset, no taxexpense or benefit is currently being recorded on the results of operations inthe U.S.  The tax expense recorded in thecurrent year was a result of the income in the Company’s foreign operations.The tax benefit recorded in 2006 was the result of the loss in the foreignoperations.  The low effective tax ratein 2006 was primarily related to the $4,829 charge for the impairment of goodwill,which is a non-deductible item for determining income taxes.

**Comparison of the Three Months Ended September 30,2007 with the Three Months Ended September 30, 2006**

***NetSales*****.** Net sales in the third quarter of 2007 were $33.9 million, an increaseof $4.5 million or 15. 3% compared to the third quarter of 2006.  The increase is primarily due to higherdemand across all product lines within both of the Company’s reportingsegments.

Americas net sales were $18.2 million in the third quarter of 2007, anincrease of $2.5 million or 15.9% over the same period in 2006.  The increase was due primarily to a higherdemand from the Company’s core telecom and cable customers that have beenupgrading their network infrastructures. Sales to large telecom and cable service 

 

14

----

 

 

providers fluctuate from period to period based on the status of suchcustomers’ infrastructure projects and therefore are difficult to predict.

 

International net saleswere $15.7 million in the third quarter of 2007, an increase of $2.0 million or14.6% over the same period in 2006.  Thehigher sales were a result of increased demand for the Company’s products inAustralia as well as increased selling prices.

***GrossProfit*****.**  Gross profit in the third quarter of 2007 was$10.1 million, an increase of $0.9 million or 9.8% compared to the thirdquarter of 2006.  The increase wasprimarily due to higher gross profit dollars in the International segment ofthe Company.  Gross profit dollars in theAmericas segment decreased $0.2 million from $5.0 million in the third quarterof 2006 to $4.8 million in the third quarter of 2007 due to a higher percentageincrease in sales of products with lower gross margins compared to thepercentage increase in sale of products with higher gross margins.  Gross profit of $5.3 million in the thirdquarter of 2007 in the International segment was $1.1 million higher than inthe 2006 period primarily due to a pricing and customer rationalization programinitiated during the second quarter that was in full effect for the thirdquarter.

As a percentage of netsales, gross profit decreased from 31.3% in the third quarter of 2006 to 30.0%in the third quarter of 2007 primarily due to the lower gross profit percentagein the Americas segment.  The grossprofit percentage in the Americas segment decreased from 31.7% in the thirdquarter of 2006 to 26.4% in the third quarter of 2007 due to higher rawmaterial costs and the unfavorable product mix described above.  The gross profit percentage in theInternational segment increased from 30.9% in the third quarter of 2006 to34.1% in the third quarter of 2007.  TheCompany was able to increase prices in the International segment to help offsetthe increase in the raw material costs.

***Selling*****.**  Sellingexpenses were $5.4 million in the third quarter of 2007, a decrease of $0.3million or 5.3% from the third quarter of 2006. The decrease was primarily due to the increased efficiencies associatedwith the management and operation of the Company’s international shippingactivities.

As a percentage of netsales, selling expenses decreased from 19.6% in the 2006 period to 15.9% in the2007 period.  The decrease is due to thedecrease in total selling expenses compared to higher sales.

***Generaland Administrative*****.**  General and administrative expenses were $3.5million in the third quarter of 2007, an increase of $0.8 million or 29.6% fromthe third quarter of 2006.  The increaseis due primarily to higher expenses related to upgraded information systems of$0.3 million and start-up costs related to the development of the water storagebusiness in the Americas segment of $0.1 million.

As a percentage of netsales, general and administrative expense increased from 9.3% in the 2006period to 10.2 % in the 2007 period.

***Researchand Development*****.**  Research and development expenses were $0.4million in the third quarter of 2007, a decrease of $0.2 million or 50.0% fromthe third quarter of 2006.  The decreaseis due to a higher level of capitalization of internal costs related to productdevelopment projects.

As a percentage of netsales, research and development expenses decreased from 2.1% in the thirdquarter of 2006 to 1.3% in the third quarter of 2007 as a result of increasedsales volume and the decrease in research and development costs.

***Incomefrom Operations*****.**  As a result of the items discussed above,income from operations was $0.9 million in the third quarter of 2007 comparedto income from operations of $0.1 million in the third quarter of 2006.  Operating margin as a percent of sales was2.6 % in the 2007 period compared to 0.3% in the 2006 period.

***InterestExpense, Net*****.**  Interest expense, net of interest income, was$0.3 million in the third quarter of 2007 and $0.2 million in the third quarterof 2006. The increase in interest expense is due to the increased level ofborrowing in the third quarter of 2007 compared to the prior year period.

***IncomeTaxes*****.** Income tax expense was $0.4 million in the third quarter of 2007compared to thirteen thousand dollars in the third quarter of 2006.  The effective tax rate was 73.9% in the thirdquarter of 2007 and (10.4%) for the same period in 2006.  Since the Company has a full valuationallowance on the realization of the domestic net deferred tax asset, no taxexpense or benefit is currently being recorded on the results of operations inthe U.S.  The tax expense recorded inboth years was a result of the income in the Company’s foreign operations.

**Liquidity and Capital Resources**

Net cash provided by (used in) operating activities was $0.4 millionfor the nine months ended September 30, 2007, compared to ($3.4) million in thesame period in 2006.  The cash providedby operating activities in 2007 is primarily due to an increase in accountspayable, accrued expenses and income taxes payable of $3.6 million.  The cash provided by operating activities in2007 was offset by an increase in accounts receivable and inventories which 

 

15

----

 

 

resulted in a use of cash of $8.3 million.  The respective reserves related to accountsreceivable and inventories did not increase at a commensurate level due toconsistent turnover in each area.  Thecash used in operating activities described above was offset by the net incomeof $1.1 million and the $4.3 million in non-cash deductions, most of which weredepreciation and amortization.

 

Net cash used ininvesting activities was $2.5 million for the nine months ended September 30,2007 and $1.6 million for the nine months ended September 30, 2006.  The increase in the 2007 period is due to ahigher level of acquisition of capital assets related to product developmentprojects.

Net cash provided byfinancing activities was $1.9 million for the nine months ended September 30,2007 compared to net cash provided by financing activities of $5.4 million inthe same period of 2006.  The additionalborrowing in both periods was required to fund the higher production activitiesexperienced in both years.

Cash and cash equivalentsat September 30, 2007 were $1.6 million, compared to $2.2 million at December31, 2006.

Net accounts receivableincreased to $16.4 million at September 30, 2007 from $11.7 million at December31, 2006 due to the significantly higher volume of sales resulting from the increaseddemand in the first nine months of 2007 and increased values of receivablesdenominated in currencies other than the U.S. dollar.  In terms of days sales outstanding, accountsreceivable was 44 days at September 30, 2007 and 43 days at December 31, 2006.

Inventories increased to$18.1 million at September 30, 2007 from $13.0 million at December 31, 2006 dueto the increase in inventories related to the higher volume of manufacturingactivity to support the higher sales in the first nine months of 2007 andincreased values of inventories denominated in currencies other than the U.S.dollar.  Days inventory on hand increasedto 69 days at September 30, 2007 from 63 days December 31, 2006.

Accounts payableincreased to $14.0 million at September 30, 2007 from $10.9 million at December31, 2006 due to the significantly higher volume of activity in the first ninemonths of 2007.  Days payables were 53days at September 30, 2007 and at December 31, 2006.

The Company is activelymanaging expenditures for capital assets and working capital requirements toreduce cash needs for 2007 and beyond. The Company focused expenditures for capital assets on purchases forprojects that it expects will provide positive long-term cash flow.  In addition, the Company is pursuing marketopportunities and designing products that will consume idle or slow movinginventory to further reduce the need for current and long-term cash flow.  The Company believes that cash flow fromoperations coupled with available borrowings under the credit facilitiesdescribed in Note 10 will be sufficient to fund the Company’s capitalexpenditure and working capital requirements for the next twelve months.  In particular, the Company expanded itsavailable borrowings through the Amended and Restated Agreement, which providesfor a $2,500 term loan and $5,000 capital expenditure facility.  The Company further increased its availableborrowings through the Facility Agreement.

As of September30, 2007 the Company’s Australian operations had received and accepted a firmcommitment to refinance their existing indebtedness.  Such refinancing was completed on October 5,2007.  Therefore, no covenant compliancewas required by the lender for the Company’s Australian operations at September30, 2007.

**Off-Balance Sheet Arrangements**

The Company’s off-balancesheet arrangements consist of operating leases, employment contracts andpurchase obligations.  In addition, theCompany guaranteed the debt of the Channell Family Trust of approximately $754in 1997.  The guaranteed debt wasincurred in connection with construction of the facilities leased to theCompany and is collateralized by said facilities.  The loan amount subject to the unsecuredguarantee is declining and will expire in 2017. The Company does not anticipate that it will incur losses as a result ofthis guarantee and has not recorded a liability.  If the Channell Family Trust were to defaulton the outstanding loan balance, the Company might be required to repay theremaining 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 Channell FamilyTrust.  At September 30, 2007, theoutstanding loan balance subject to the guarantee totaled $495.

**Critical Accounting 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 thesefinancial statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.

The Company believes that the estimates, assumptions and judgmentsinvolved in the accounting policies described in the “Management’s Discussionand Analysis of Financial Condition and Results of Operations” section of its 

 

16

----

 

 

most recent Annual Report on Form 10-K have the greatest potentialimpact on its financial statements, so it considers these to be its criticalaccounting 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 policiesaffect working capital account balances, including the policies for revenuerecognition, the reserve for uncollectible accounts receivable, inventoryreserves, and income taxes.  Thesepolicies require that the Company make estimates in the preparation of itsfinancial statements 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-LookingStatements**

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-lookingstatements include statements that are predictive in nature; that depend uponor refer to future events or conditions; or that include words such as “expects”,“anticipates”, “intends”, “plans”, “believes”, “estimates”, or variations ornegatives thereof or by similar or comparable words or phrases.  In addition, any statement concerning futurefinancial performance, ongoing business strategies or prospects, and possiblefuture Company actions that may be provided by management are alsoforward-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) any failureby the Company to anticipate or respond to technological developments orchanges 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 market pricesof the raw materials used in the Company’s manufacturing processes; (6) theCompany’s water-related sales could be materially affected by weatherconditions and government regulation; (7) the Company is subject to the risksof conducting 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.****                                  ****Quantitative and QualitativeDisclosures 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.

**InterestRate Sensitivity**

The Company and itssubsidiaries have entered into three financing agreements.  In July 2007,the Company entered into a three-year Amended and Restated Loan and SecurityAgreement with an asset based lender in the United States and Canada thatexpires June 30, 2010.  This agreement contains a term loan, capitalexpenditure facility and a revolving line of credit. In October 2007 theCompany’s Bushman subsidiaries in Australia entered into the Facility Agreementwith a private debt fund in Australia that expires September 30, 2010.  The Facility Agreement contains a term loanand a revolving line of credit.  In October 2007 two of the Company’sAustralian subsidiaries entered into a loan and security agreement with anAustralian bank that expires October 31, 2008. This agreement includes performance guarantees, credit card facilitiesand payroll processing facilities.  Thefinancing agreements allow for the outstanding balance to bear interest at avariable rate based on the lender’s base rate.  The credit facilitiesexpose the Company to changes in short-term interest rates since the interestrates on the various credit facilities are variable.

Based upon the amount ofvariable rate debt outstanding at the end of the quarter, and holding thevariable rate debt balance constant, each one percentage point increase ininterest rates occurring on the second day of a quarterly period would resultin an increase in interest expense of approximately $0.04 million perquarter.  This analysis does not consider the effects of economic activityon the Company’s sales and profitability in such an environment.

**Exchange Rate Sensitivity**

The Company has assets and liabilities outside the United States thatare subject to fluctuations in foreign currency exchange rates.  Assets and liabilities outside the UnitedStates are primarily located in the United Kingdom, Australia, and Canada.  The Company’s investment in foreignsubsidiaries with a functional currency other than the U.S. dollar is generallyconsidered long-term.  Accordingly, theCompany does not hedge these investments. The 

 

17

----

 

 

Company also purchases a limited portion of its raw materials fromforeign countries.  These purchases aregenerally denominated in U.S. dollars and are accordingly not subject toexchange rate fluctuations.  The Companyhas minimal foreign currency transaction gains or losses.  The Company has not engaged in forwardpurchases of foreign currency and other similar contracts to reduce itseconomic exposure to changes in exchange rates because the associated risk isnot considered significant.

 

**Item 4.****                                  ****Controls and Procedures.**

**Evaluationof Disclosure Controls and Procedures**

The Company maintainsdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities and Exchange Act of 1934 (the “Exchange Act”)) thatare designed to ensure that information required to be disclosed in the Company’sExchange Act reports is recorded, processed, summarized, and reported withinthe time periods specified in the rules and forms of the Securities andExchange Commission regulations, and that such information is accumulated andcommunicated to the Company’s management, including its Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.  As of September 30, 2007, the managementof the Company carried out an assessment of the Company’s disclosure controlsand procedures and concluded that they were not effective, for the reasonsdescribed below, as of the end of the period covered by this report.

One of the Company’ssubsidiaries, Bushman Tanks, was previously a closely-held, family run businesswith mostly manual controls in place.  During the process of assessing thestatus of the internal control infrastructure, the Company previouslyidentified significant deficiencies in internal controls that rose to the levelof “material weaknesses” in financial closing, revenue and purchasing cycles.

As a result of theweaknesses identified in management’s evaluation, the Company had committed to:

•                  Implement the Company’s Oracleinformation system in the Bushman Tanks subsidiary to improve the processes inthe revenue and purchasing cycles.

•                  Design/implement and document controlprocedures adequate to support the Company’s day-to-day accounting and thefinancial closing and reporting process.

The Company is reviewingits remediation of the material weaknesses in financial closing, revenue andpurchasing cycles relative to the implementation of its Oracle informationsystem in the Bushman Tanks subsidiary.

**Changesin Internal Control Over Financial Reporting**

During the three monthsended September 30, 2007 the implementation of the Company’s Oracle informationsystem in the Bushman Tanks subsidiary was completed.

 

**PART II - OTHER INFORMATION**

**Item 1.****                                  ****Legal Proceedings.**

The Company is from timeto time involved in ordinary routine litigation incidental to the conduct ofits business.  The Company regularlyreviews all pending litigation matters in which it is involved and establishesreserves deemed appropriate for such litigation matters.  Management believes that no presently pendinglitigation matters are likely to have a material adverse effect on the Company’sfinancial statements or results of operations, taken as a whole.

**Item 1A.****                         ****Risk Factors.**

Not applicable.

**Item 2.****                                  ****Unregistered Sales of EquitySecurities and Use of Proceeds**.

Not applicable.

**Item 3.****                                  ****Defaults Upon Senior Securities.**

Not applicable.

**Item 4.****                                  ****Submission of Matters to a Voteof Security Holders.**

**                                                                       ****       **Not applicable.

**Item 5.****                                  ****Other Information.**

** **

Not applicable.

 

18

----

 

 

**Item 6.    Exhibits.**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                        |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Restated Certificate of Incorporation of the Company  (Exhibit 3.1)(1)                                                                                                                                                                                                                                                                                                                 |
| 3.2                 |       | Bylaws of the Company (Exhibit 3.2)(1)                                                                                                                                                                                                                                                                                                                                                 |
| 4                   |       | Form of Common Stock Certificate (Exhibit 4)(1)                                                                                                                                                                                                                                                                                                                                        |
| 10.1                |       | Tax Agreement between the Company and the Existing  Stockholders (Exhibit 10.1)(1)                                                                                                                                                                                                                                                                                                     |
| 10.2*               |       | Channell Commercial Corporation 1996 Incentive Stock  Plan (including forms of Stock Option Agreements and Restricted Stock  Agreement) (Exhibit 10.2)(1)                                                                                                                                                                                                                              |
| 10.3*               |       | Channell Commercial Corporation 2003 Incentive Stock  Plan (including forms of Stock Option Agreement and Restricted Stock  Agreement)(7)                                                                                                                                                                                                                                              |
| 10.4*               |       | Channell Commercial Corporation 2004 Incentive Bonus  Plan(9)                                                                                                                                                                                                                                                                                                                          |
| 10.5                |       | 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) (Exhibit 99)(6) |
| 10.6                |       | Loan and Security Agreement dated October 24, 2003  by and between Channell Pty Ltd and National Australia Bank Ltd (Exhibit  10.3.1)(11)                                                                                                                                                                                                                                              |
| 10.7                |       | Loan and Security Agreement dated August 2, 2004 by  and between Channell Bushman Pty Ltd and National Australia Bank Ltd (Exhibit  10.3.2)(11)                                                                                                                                                                                                                                        |
| 10.8                |       | Loan and Security Agreement dated August 2, 2004 by  and between Channell Pty Ltd and National Australia Bank Ltd (Exhibit  10.3.3)(11)                                                                                                                                                                                                                                                |
| 10.9                |       | Investment and Shareholders Agreement dated August  2, 2004 by and among Channell Bushman Pty Ltd and Australia and New Zealand  Banking Group Ltd.(Exhibit 10.3.4)(11)                                                                                                                                                                                                                |
| 10.10*              |       | Employment Agreement dated July 8, 1996 between the  Company and William H. Channell, Sr.  (Exhibit 10.8)(1)                                                                                                                                                                                                                                                                           |
| 10.11*              |       | Channell Commercial Corporation 1996  Performance-Based Annual Incentive Compensation Plan  (Exhibit 10.10)(1)                                                                                                                                                                                                                                                                         |
| 10.12               |       | Lease dated December 22, 1989 between the Company  and the Channell Family Trust (as successor in interest to William H. Channell,  Sr.), as amended (Exhibit 10.11)(1)                                                                                                                                                                                                                |
| 10.13               |       | Lease dated May 29, 1996 between the Company and the  Channell Family Trust (Exhibit 10.12)(1)                                                                                                                                                                                                                                                                                         |
| 10.14               |       | Lease dated October 26, 2000 between the Company and  Belston Developments Inc. (Exhibit 10.15)(4)                                                                                                                                                                                                                                                                                     |
| 10.15               |       | Third Amendment to Lease dated December 22, 1989  between the Company and the Channell Family Trust (as successor in interest  to William H. Channell, Sr.), effective as of June 1, 2005 (Exhibit 99.1)(12)                                                                                                                                                                           |
| 10.16               |       | Form of Indemnity Agreement (Exhibit 10.17)(1)                                                                                                                                                                                                                                                                                                                                         |
| 10.17               |       | Form of Agreement Regarding Intellectual Property  (Exhibit 10.18)(1)                                                                                                                                                                                                                                                                                                                  |
| 10.18               |       | 401(k) Plan of the Company (Exhibit 10.19)(3)                                                                                                                                                                                                                                                                                                                                          |
| 10.19               |       | A.C. Egerton (Holdings) PLC Share Purchase Agreement  (Exhibit 2)(2)                                                                                                                                                                                                                                                                                                                   |
| 10.20               |       | Lease dated June 27, 2002 between the Company and  Ynez Street, Ltd. (Exhibit 10.29)(5)                                                                                                                                                                                                                                                                                                |
| 10.21*              |       | Amendment to Employment Agreement dated December 9,  2003 between the Company and William H. Channell, Sr. (Exhibit 10.19)(8)                                                                                                                                                                                                                                                          |
| 10.22*              |       | Employment Agreement dated December 9, 2003 between  the Company and William H. Channell, Jr.(Exhibit 10.20)(8)                                                                                                                                                                                                                                                                        |

 

19

----

 

 
| 10.23  |   | 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 the Company and Channell Bushman Pty Limited, on the other hand (Exhibit  99.2)(10)                                                                                                                                                                                                           |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.24* |   | Employment Letter dated June 27, 2005 between the  Company and Jerry Collazo (Exhibit 99.2)(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.25* |   | Long-Term Incentive Plan for William H. Channell,  Jr. (Exhibit 10.1)(14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.26  |   | Waiver and Third Amendment to Loan and Security  Agreement dated as of November 18, 2005 by and among the Company, Channell  Commercial Canada Inc., Channell Limited, Channell Commercial Europe Limited,  Bank of America, N.A., BABC Global Finance Inc., Bank of America, N.A., and  the lenders party to the Loan and Security Agreement dated as of September  25, 2002 (as amended) (Exhibit 10.25)(15)                                                                                                                                                                                                                                                                                                                                           |
| 10.27  |   | Assignment and Assumption Agreement dated November  18, 2005 by and between Banc of America Leasing and Capital, LLC and Bank of  America, N.A. (relating to U.S. Loan and Security Agreement) (Exhibit  10.26)(15)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.28  |   | Waiver and Fourth Amendment to Loan and Security  Agreement dated as of February 28, 2006 by and among the Company, Bank of  America, N.A., BABC Global Finance Inc., Bank of America, N.A. and the  lenders party to the Loan and Security Agreement dated as of September 25,  2002 (as amended) (Exhibit 10.1)(18)                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.29  |   | Loan and Security Agreement dated as of December 1,  2005, by and among Channell Bushman Pty Ltd, Bushmans Group Pty Ltd, Channell  Pty Ltd, certain other subsidiaries of the Company and National Australia  Bank Ltd (Exhibit 10.30)(19)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.30  |   | Loan and Security Agreement dated April 26, 2006 and  effective May 10, 2006, by and among Channell Bushman Pty Ltd, Bushmans Group  Pty Ltd, certain other subsidiaries of the Company, and National Australia  Bank Ltd (Exhibit 10.31)(19)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.31  |   | Lease dated July 13, 2006 between Channell Pty Ltd  and Ing Management Ltd (Exhibit 10.32)(20)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.32* |   | Employment Letter dated August 31, 2006 between the  Company and Patrick E. McCready (Exhibit 10.1)(21)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.33  |   | Loan and Security Agreement dated August 11, 2006  and effective August 25, 2006, by and among Channell Bushman Pty Ltd,  Bushmans Group Pty Ltd, certain other subsidiaries of the Company, and  National Australia Bank Ltd (Exhibit 10.1)(21)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.34  |   | Loan and Security Agreement dated November 8, 2006  and effective November 15, 2006, by and among Channell Bushman Pty Ltd,  Bushmans Group Pty Ltd, certain other subsidiaries of the Company, and  National Australia Bank Ltd (Exhibit 10.1)(23)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.35  |   | Loan and Security Agreement dated February 2, 2007  and effective February 7, 2007 by and among Channell Bushman Pty Ltd, Bushmans  Group Pty Ltd, certain other subsidiaries of the Company, and National  Australia Bank Ltd (Exhibit 10.1) (24)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.36  |   | Waiver and Fifth Amendment to Loan and Security  Agreement dated as of February 12, 2007 by and among the Company and the  other borrowers thereunder, Bank of America, N.A., BABC Global Finance Inc.,  Bank of America, N.A. and the lenders party to the Loan and Security  Agreement dated as of September 25, 2002 (as amended) (Exhibit 10.1)(25)                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.37  |   | Sixth Amendment to Loan and Security Agreement dated  as of April 2, 2007 by and among the Company and the other borrowers  thereunder, Bank of America, N.A., BABC Global Finance Inc., Bank of America,  N.A. and the lenders party to the Loan and Security Agreement dated as of  September 25, 2002 (as amended) (Exhibit 10.37) (26)                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.38  |   | Loan and Security Agreement dated May 16, 2007, by  and among Channell Bushman Pty Ltd, Bushmans Group Pty Ltd, certain other  subsidiaries of the Company, and National Australia Bank Ltd (Exhibit  10.1)(27)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.39  |   | Seventh Amendment to Loan and Security Agreement,  dated as of June 26, 2007, by and among the Company, Channell Commercial  Canada Inc., Channell Limited, Channell Commercial Europe Limited, Bank of  America, N.A. (as assignee of Banc of America Leasing and Capital, LLC,  successor-in-interest to Fleet Capital Corporation), as administrative agent,  BABC Global Finance Inc. (as assignee of Fleet Capital Global Finance, Inc.,  as assignee of Fleet Capital Canada Corporation), as Canadian agent, Bank of  America, N.A. (as successor-in-interest to Fleet National Bank, London U.K.  Branch), as UK agent, and the lenders party to the Loan and Security  Agreement dated as of September 25, 2002 (as amended) (Exhibit 10.1)(28) |

 

20

----

 

 
| 10.40 |   | Amendment to  Loan and Security Agreement dated July 24, 2007, and effective July 25, 2007,  by and among Channell Bushman Pty Ltd, Bushmans Group Pty Ltd, certain other  subsidiaries of the Company, and National Australia Bank Ltd (29)                                                                                                                                                                          |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.41 |   | Amended and  Restated Loan and Security Agreement dated July 30, 2007, by and among Bank  of America, N.A., Bank of America Canada Branch, the Company and Channell  Commercial Canada Inc. (30)                                                                                                                                                                                                                      |
| 10.42 |   | Amendment to  Loan and Security Agreement dated August 27, 2007, and effective August 28,  2007, by and among Channell Bushman Pty Ltd, Bushmans Group Pty Ltd, certain  other subsidiaries of the Company, and National Australia Bank Ltd (31)                                                                                                                                                                      |
| 10.43 |   | Letter dated September 28, 2007 from National  Australia Bank Ltd to Channell Bushman Pty Ltd, Bushmans Group Pty Ltd and  certain other subsidiaries of the Company (Exhibit 10.1)(32)                                                                                                                                                                                                                               |
| 10.44 |   | Facility Agreement dated October 3, 2007, by and  among Channell Bushman Pty Limited, Bushmans Group Pty Limited, Australian  Bushman Tanks Pty Limited, Bushmans Engineering Pty Limited, Polyrib Tanks  Pty Limited and Australian Executor Trustees Limited as custodian for the  Causeway Australasian Private Debt Opportunities Fund (Exhibit 10.1)(33)                                                         |
| 10.45 |   | Fixed and Floating Charge (Incorporating an  Equitable Mortgage of Shares) dated October 3, 2007, by and among Channell  Bushman Pty Limited, Bushmans Group Pty Limited, Australian Bushman Tanks Pty  Limited, Bushmans Engineering Pty Limited, Polyrib Tanks Pty Limited and  Australian Executor Trustees Limited as custodian for the Causeway  Australasian Private Debt Opportunities Fund (Exhibit 10.2)(33) |
| 10.46 |   | Loan and Security Agreement dated October 8, 2007,  and effective October 9, 2007, by and among Channell Pty Limited, Bushmans  Group Pty Limited and National Australia Bank Limited (Exhibit 10.3)(33)                                                                                                                                                                                                              |
| 10.47 |   | Lease dated September 13, 2007 between the Company,  on the one hand, and William H. Channell, Jr. and Carolyn Channell, on the  other hand(34)                                                                                                                                                                                                                                                                       |
| 10.48 |   | Amendment No. 2 to Lease dated May 1996 between the  Company and the Channell Family Trust, dated as of November 12, 2007(34)                                                                                                                                                                                                                                                                                         |
| 14    |   | Channell Commercial Corporation Code of Business  Conduct and Ethics (Exhibit 14)(8)                                                                                                                                                                                                                                                                                                                                  |
| 21    |   | Subsidiaries of the Company (Exhibit 21)(16)                                                                                                                                                                                                                                                                                                                                                                          |
| 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(34)                                                                                                                                                                                                                                                                                |
| 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(34)                                                                                                                                                                                                                                                                                |
| 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 Patrick E. McCready, CFO(34)                                                                                                                                                                                                                            |

----

| *   |   | Management  contract or compensatory plan or arrangement.                                                                                                  |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Registration Statement on Form S-1 (File No. 333-03621). |
| (2) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on May 18, 1998.                                |
| (3) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 10-K on March 31, 1999.                             |
| (4) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 10-K on April 2, 2001.                              |
| (5) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 10-Q on August 12, 2002.                            |

 

21

----

 

 
| (6)  |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on October 1, 2002.      |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
| (7)  |   | Incorporated by  reference to Appendix B filed in connection with the Company’s Definitive  Proxy Statement on March 26, 2003. |
| (8)  |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 10-K on March 5, 2004.       |
| (9)  |   | Incorporated by  reference to Appendix B filed in connection with the Company’s Definitive  Proxy Statement on April 16, 2004. |
| (10) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on August 6, 2004.       |
| (11) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 10-Q on November 15, 2004.   |
| (12) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on June 15, 2005.        |
| (13) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on June 28, 2005.        |
| (14) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on September 9, 2005.    |
| (15) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 10-Q on November 21, 2005.   |
| (16) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 10-K/A on November 21, 2005. |
| (17) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on March 6, 2006.        |
| (18) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on March 29, 2006.       |
| (19) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 10-Q on May 15, 2006.        |
| (20) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 10-Q on August 17, 2006.     |
| (21) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on September 8, 2006.    |
| (22) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on September 21, 2006.   |
| (23) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on November 17, 2006.    |
| (24) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on February 8, 2007.     |
| (25) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on February 15, 2007.    |
| (26) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 10-Q on May 15, 2007         |
| (27) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on May 18, 2007          |
| (28) |   | Incorporated by  reference to the indicated exhibits filed in connection with the Company’s  Form 8-K on June 29, 2007         |

 

22

----

 

 
| (29) |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company's Form 8-K on July 31, 2007.        |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------|
| (30) |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company's Form 8-K on August 3, 2007.       |
| (31) |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company's Form 8-K on September 4, 2007.    |
| (32) |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on October 4, 2007  |
| (33) |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on October 10, 2007 |
| (34) |   | Filed herewith.                                                                                                               |

 

23

----

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
| Dated: November 14, 2007 |                                                                         |
|--------------------------|------------------------------------------------------------------------------|
|                     | CHANNELL COMMERCIAL CORPORATION                                              |
|                     | (Registrant)                                                                 |
|                     |                                                                         |
|                     |                                                                         |
|                     |                                                                         |
|                     |                                                                         |
| By                       | / s/ Patrick E. McCready                                                     |
|                     | Patrick E. McCready                                                          |
|                     | Chief Financial Officer                                                      |
|                     | (Duly authorized officer and principal financial  officer of the Registrant) |

 

24

----