**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, DC  20549****FORM 10-K**

 

**(Mark One)**

** **

| **x**      | **Annual report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934 for the  fiscal year ended December 31, 2007; or** |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                |
| **o**      | **Transition report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934.**                                                  |

 

**                                                Forthe transition period from                        to**

 

**Commission File Number 0-28582**

 

**CHANNELL COMMERCIAL CORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **95-2453261**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (I.R.S. Employer Identification No.) |

 

**26040Ynez Road, Temecula, CA  92591**

(Address ofprincipal executive offices, including zip code)

 

Registrant’stelephone number, including area code: **(951) 719-2600**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of each class**       | ** ** | **Name of each exchange on which registered** |
|-------------------------------|------------|-----------------------------------------------|
| Common Stock, $0.01 Par Value |       | The NASDAQ Stock Market LLC                   |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**None**

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.  Yes  o**      **No  x

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Act.   Yes  o**      **No  x

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x**      **No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  Seedefinitions of “ large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   o                                                                                                     Acceleratedfiler o

Non- accelerated filer    o (Do not checkif a smaller reporting company)**                         **Smaller reporting company x

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  o**      **No  x

 

OnMarch 24, 2008, the registrant had 9,544,134 shares of Common Stockoutstanding.  The aggregate market valueof the shares held by non-affiliates of the registrant was $20,765,890 computedby reference to the price at which the shares were last sold, as of the lastbusiness day of the registrant’s most recently completed second fiscalquarter.  Shares of Common Stock held byeach officer and director and by each person who may be deemed to be anaffiliate have been excluded.

 

**DOCUMENTS INCORPORATED BYREFERENCE**

 

Part IIIof this Form 10-K incorporates by reference certain information from theregistrant’s definitive proxy statement for its 2008 annual meeting ofstockholders, which is anticipated to be filed with the Securities and ExchangeCommission within 120 days after the close of the registrant’s fiscal year.

 

 

 

**TABLE OF CONTENTS**

 
| **PART I**   | ** **                                                                                                              | **Page**   |
|-------------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| **Item 1.**       | **Business**                                                                                                            | **1**      |
| **Item 1A.**      | **Risk Factors**                                                                                                        | **7**      |
| **Item  1B.**     | **Unresolved  Staff Comments**                                                                                          | **11**     |
| **Item 2.**       | **Properties**                                                                                                          | **11**     |
| **Item  3.**      | **Legal  Proceedings**                                                                                                  | **11**     |
| **Item  4.**      | **Submission  of Matters to a Vote of Security Holders**                                                                | **11**     |
| ** **        | ** **                                                                                                              | ** ** |
| **PART II**  | ** **                                                                                                              | ** ** |
| **Item  5.**      | **Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities** | **11**     |
| **Item  6.**      | **Selected  Financial Data**                                                                                            | **13**     |
| **Item  7.**      | **Management’s  Discussion and Analysis of Financial Condition andResults of Operations**                          | **14**     |
| **Item  7A.**     | **Quantitative  and Qualitative Disclosures About Market Risk**                                                         | **22**     |
| **Item  8.**      | **Financial  Statements and Supplementary Data**                                                                        | **23**     |
| **Item  9.**      | **Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure**                               | **23**     |
| **Item  9A(T).**  | **Controls  and Procedures**                                                                                            | **23**     |
| **Item  9B.**     | **Other  Information**                                                                                                  | **24**     |
| ** **        | ** **                                                                                                              | ** ** |
| **PART III** | ** **                                                                                                              | ** ** |
| **Item  10.**     | **Directors,  Executive Officers and Corporate Governance**                                                             | **24**     |
| **Item  11.**     | **Executive  Compensation**                                                                                             | **24**     |
| **Item  12.**     | **Security  Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters**                      | **25**     |
| **Item  13.**     | **Certain  Relationships and Related Transactions, and Director Independence**                                          | **25**     |
| **Item  14.**     | **Principal  Accountant Fees and Services**                                                                             | **25**     |
| ** **        | ** **                                                                                                              | ** ** |
| **PART IV**  | ** **                                                                                                              | ** ** |
| **Item  15.**     | **Exhibits,  Financial Statement Schedules**                                                                            | **25**     |
| ** **        | ** **                                                                                                              | ** ** |
| ** **        | **FINANCIAL STATEMENTS**                                                                                                | **F-1**    |
| ** **        | ** **                                                                                                              | ** ** |
| ** **        | **GLOSSARY OF TERMS**                                                                                                   | **G-1**    |

** **

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** **

**PART I**

** **

**Item 1. Business.**

 

### **Background**

### ** **

ChannellCommercial Corporation (the “Company”) was incorporated in Delaware on April 23,1996, as the successor to Channell Commercial Corporation, a Californiacorporation.  The Company’s executiveoffices are located at 26040 Ynez Road, Temecula, California 92591, and itstelephone number at that address is (951) 719-2600.

 

### **General**

### ** **

The Company is adesigner and manufacturer of telecommunications equipment supplied to broadbandand telephone network providers worldwide. Major product lines include a complete line of thermoplastic and metalfabricated enclosures, advanced copper VoIP termination and connectorizationproducts, fiber optic cable management systems for fiber to the premises (“FTTP”)networks, and heat shrink products.  TheCompany’s enclosure products house, protect and provide access to advancedtelecommunications hardware, including both radio frequency (“RF”) electronicsand photonics, and transmission media, including coaxial cable, copper wire andoptical fibers, used in the delivery of voice, video and data services.  The enclosure products are deployed withinthe access portion of the local signal delivery network, commonly known as the “outsideplant,” “local loop” or “last mile” that connects the network provider’s signalorigination point or local office with its residential and businesscustomers.  The Company’s connectivityproducts provide critical network connection points between cables or networktransmission devices.

 

The Company alsodesigns, manufactures and markets polyethylene water harvesting systems forrural and residential markets in Australia and the United States.  The Company’s primary product line is waterharvesting systems, for which a rotationally molded tank is the majorcomponent, is principally used in the agricultural sector where water shortagesrequire storage of rain and ground water. The Company also markets a range of water harvesting systems for use inresidential and rural-residential markets. The Company’s Australian water harvesting business operates out of sixleased facilities in Australia.  Thefacilities are located in New South Wales (2), Queensland (2), Victoria andSouth Australia.  Water tanks for theNorth American market are manufactured in Temecula, California.

 

The Companyentered the Australian water harvesting market in August 2004 with theacquisition of Bushman Tanks.  BushmanTanks is one of Australia’s largest manufacturer and distributor of rotationalmolded polyethylene water storage tanks. In late 2007, the Company introduced products to serve its NorthAmerican water harvesting market.

 

The Company’senclosure product line accounted for 43%, 46%, and 44% of the Company’s netsales in 2007, 2006 and 2005, respectively. The Company diversified its business with the acquisition of BushmanTanks in 2004.  The Company’s waterrelated products product line accounted for 44%, 45%, and 48% of the Company’snet sales in 2007, 2006 and 2005, respectively. The Company had long-lived assets in Australia with a book value of $7.2million, $6.8 million, and $5.3 million at December 31, 2007, 2006 and2005, respectively.  For additionalfinancial segment and geographic information, see Note N to the Company’sConsolidated Financial Statements included herein.

 

### **Industry**

### ** **

TheCompany serves customers primarily in two industries, the globaltelecommunications industry and the water harvesting industry.

 

Inthe telecommunications industry, CATV/broadband and local telephone operatorsare building, rebuilding or upgrading signal delivery networks around theworld.  These networks are designed todeliver video, voice and/or data transmissions to individual residences andbusinesses.  Operators deploy a varietyof network technologies and architectures, such as HFC, VoIP, DLC, ADSL andFTTP (see “Glossary of Terms”) to carry broadband and narrowband signals.  These architectures are constructed ofelectronic hardware connected via coaxial cables, copper wires and/or opticalfibers, including various access devices, amplifiers, nodes, hubs and othersignal transmission and powering electronics. Nearly all of these devices in the outside plant require housing insecure, protective enclosures and cable management connectivity systems, suchas those manufactured by the Company.

 

Ascritical components of the outside plant, enclosure products provide (i) environmentaland vandalism protection, (ii) ready access for technicians who maintainand manage the outside plant and (iii) in some cases, dissipation of heatgenerated by the active electronic hardware. CATV/broadband and local telephone network operators place greatreliance on manufacturers of protective enclosures because any material damageto the distributed network elements is likely to disrupt communicationsservices.  Connectivity products providecritical broadband data-rated connection points that support cost effectiveservice deployment and ensure signal integrity is maintained throughout thenetwork.

 

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Theprimary drivers of demand for enclosures in the communications industry are theconstruction, rebuilding, upgrading and maintenance of signal delivery networksby CATV/broadband network operators and local telephone companies.  For example, broadband networks continue tobe upgraded and enhanced for advanced two-way services such as high-speedInternet access via cable modems, high-definition television (HDTV), video ondemand (VoD), voice-over-Internet Protocol (VoIP) telephony and xDSL transport.Local telephone service providers are employing advanced technologies, such asa variety of digital subscriber line (“DSL”) technologies, which utilizeinstalled copper wires for broadband services. These “local loop” copper wire systems often require significantupgrading and maintenance to provide the optimal throughput necessary to carryhigh-speed broadband signals, increasing the need for data-rated fully sealedoutside plant facilities in order to sustain network reliability and longevity.   Local telephone service providers are alsoemploying various FTTP technologies to deliver higher bandwidth services tocustomers.  FTTP utilizes outside plantenclosures to protect the networks, as well as fiber cable management devices,both of which are manufactured by the Company. Similar architectures that utilize multiple configurations of enclosureand connectivity products are deployed world-wide.

 

In the Australianwater harvesting industry, consumers utilize plastic, steel or concrete tanksfor the storage of water.  Australia hasan arid climate with limited water resources. The combination of a growing population, a movement of people away fromurban areas and generally limited rainfall has historically resulted in watershortages in most geographic areas.  Assuch, certain local, state and national governments have implementedregulations intended to conserve water. These include restrictions on the use of potable water and requirementsto install water storage systems or other conservancy products in newresidential dwellings in selected areas. Water storage systems are used to store rain and ground water on-site atboth residential and commercial properties. While the primary application for stored water has been for agriculturalpurposes and irrigation, increasingly stored water is being pumped intoresidences for non-potable uses such as washing machines and toilets and mayoften be used as a source of drinking water. The Company anticipates that in North America similar factors may, overtime, lead to water shortages and increased interest in water conservation andharvesting.

 

### **Business Strategy**

### ** **

The Company’sstrategy is to capitalize on its established customer relationships, knowledgeof communications networks and core capabilities in the design and manufactureof thermoplastic products, metal products and connectivity products.

 

The Companypursues opportunities in**the globalcommunications industry by providing enclosures, connectivity products andother complementary components to meet the evolving needs of its customers’communications networks.  The Company’swide range of products, manufacturing expertise, application-based sales andmarketing approach and reputation for high quality products address keyrequirements of its customers.

 

In addition to thecommunications industry, the Company seeks to leverage its expertise inplastics and metal manufacturing technologies to diversify into otherindustries.  Bushman Tanks utilizesplastic rotational molding technology to produce water tanks, a process similarto that used by the Company to manufacture thermoplastic enclosures for thecommunications industry.

 

Principal elementsof the Company’s strategy include the following:

 

***Focuson Core Telecommunications Business.**** *The Company will continue to seek tocapitalize on its position as a leading designer, manufacturer and marketer ofenclosures, grade level boxes, and copper wire connectors for thebroadband/CATV and local telephone industries in the North America, Europe,Middle East, Africa, Australia and Asia markets through direct marketing andnew product development.  The Companybelieves it currently supplies a substantial portion of the enclosure productrequirements of a number of major broadband network operators.

 

The Company hasinvested in the development of a broad range of products designed specificallyfor telecom applications. These include connectivity and enclosure products forxDSL and FTTP based networks.  TheCompany has successfully marketed its traditional broadband/CATV products tolocal telephone companies that have been designing and deploying broadbandnetworks to deliver competitive video and data services.  The Company will continue to target thismarket for growth, using its direct sales force as well as partnering withmajor system original equipment manufacturers (“OEMs”).

 

***ExpandInternational Presence in Communications Industry.*** Management believes international markets offer significantopportunities for increased sales to both broadband and telephone companies.The Company’s principal international markets currently include Canada, Mexico,South Asia, the Pacific Rim, the Middle East, Africa and Europe.  Trends expected to result in internationalgrowth opportunities include the on-going deregulation and privatization oftelecommunications in many nations around the world and the focus of numerouscountries on building, expanding and enhancing their communications systems todeliver broadband services in order to participate fully in the information-basedglobal economy.  The Company willconcentrate on expansion in international markets that are characterized byderegulation or privatization of telecommunications and by the availability ofcapital for the construction of signal delivery networks.

 

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***DevelopNew Products and Enter New Markets.**** *The Company continues to leverage itscore capabilities in developing innovative products that meet the evolvingneeds of its customers.  Innovativeproducts offered by the Company include its MAH SeriesTM free-breathingtelephony enclosures, GLBTM  grade levelbox sub-surface enclosures, the Mini-RockerTM insulation displacement copperconnectivity products, and a range of RhinoTM metal fabricated enclosures.  The Company continually invests in ongoingimprovement and enhancement projects for the existing products developed by theCompany, several of which have received U.S. and international patentprotection.  The Company’s products aredesigned to improve the performance of its customers’ outside plantsystems.  The Company has a proven recordin designing, developing and manufacturing “next generation” products thatprovide solutions for its customers and offer advantages over those offered byother suppliers to the industry.  TheCompany also believes its core capabilities are applicable to markets outsidethe telecommunications industry.

 

The Company isexpanding its product offering of water storage products to include smallersystems designed primarily for the residential markets in Australia.  The Company’s principal customers arecurrently in rural areas.  However, dueto various water restrictions and government rebates, more industry growth isprojected for the urban markets.  TheCompany continues to develop innovative products to expand its presence in boththe residential and rural markets of Australia. In the second half of 2007, the Company launched a limited range ofwater harvesting systems targeting the residential market in North America.

 

***Concentrateon Core Capabilities to Diversify into Other Industries***. The Company believes its core competencies are in the design andmanufacture of plastic and metal enclosure products for industrialinfrastructure applications and copper wire connectivity.  The Company is pursuing a strategy to utilizethese core competencies to diversify into other industries to growprofitably.  Relevant industries that theCompany may pursue include water, irrigation, power utility and other outsideplant infrastructure products.  TheCompany continues to assess new market opportunities either through internalproduct development or acquisitions.

 

**Products**

 

The Companycurrently markets over 60 product families, with several thousand optionalproduct configurations.  The primaryfunctions of the Company’s products designed for the telecommunicationsindustry are cable routing and management, equipment access, heat dissipationand security.   The Company believes thatit offers one of the most complete lines of outside plant infrastructureproducts in the telecommunications industry. The primary functions of theCompany’s products designed for the water harvesting industry are thefiltration, storage and distribution of water for both outside and inside ruraland suburban residences.

 

***Enclosures. ***The Company manufactures precision-molded, highlyengineered and application-specific thermoplastic and metal fabricatedenclosures for the communications industry that are consideredstate-of-the-industry, having been field tested and received approvals andstandardization certifications from major broadband/CATV and telephone companyoperators.  Most of the Company’sproducts are designed for buried and underground network applications.  The Company’s enclosure products providetechnicians access to network equipment for maintenance, upgrades andinstallation of new services.  Buried andunderground networks and enclosures are generally preferred by broadband/CATVand telecommunications operators for increased network reliability, lowermaintenance, improved security, reduced utility right-of-way conflicts, andaesthetic appeal. The enclosure products, particularly the thermoplasticversions, must provide advanced heat dissipation characteristics increasinglyrequired for the protection of active electronics in many network installations.  The Company is also a designer andmanufacturer of metal fabricated enclosures that house advanced electronics,fiber optic cable and power systems for broadband/CATV and telecommunicationsnetworks (branded as “Rhino EnclosuresTM”). The Company designs and manufactures a series of termination blocks,brackets and cable management devices for mounting inside its enclosureproducts.  The Company is recognized inthe industry for its differentiated product designs and the functionality,field performance and service life of its products.

 

***CopperConnectivity. ***The Company is a designer andmanufacturer of innovative copper wire connectivity devices.  The Company’s Insulation DisplacementConnector (“IDC”) technology provides advanced “tool-less” termination systemsfor copper wires, the predominant medium used in the “Last Mile” andin-building premises distribution for telephone services worldwide.  These proprietary IDC productsenvironmentally seal network termination points with a high level of reliability.  The Company’s Mini-RockerTM line of copperconnectivity modules, blocks and accessories offer environmentally sealed andCat-5 data rated IDC tool-less circuit installation and have been accepted as auniversal connectivity platform for network applications worldwide, includingxDSL and VoIP services.

 

***WaterRelated Products - Grade Level Boxes.*** The Company isa designer and supplier of grade level boxes used for sub-surface networkaccess.  The Company’s line of gradelevel boxes are designed and configured for water distribution and irrigationapplications.  Applications includestorage of underground cables, irrigation valves, power and water utilitydistribution equipment.  Additionally, aseries of these products has also been designed specifically for, and such productsare widely deployed in, FTTP networks.

 

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***WaterRelated Products - Water Harvesting***.  The Companyoffers a range of water harvesting systems, which mainly consists of a largevolume polyethylene tank and accessory equipment (hoses, piping, divertervalves, filtration systems, electrical pumps, etc.), for the storage of potableand non-potable water.  These productstypically store rain water collected from the roofs of homes or other buildingsor water pumped from underground wells. These products are primarily used by residential homes, agriculturalproperties and commercial buildings.

 

***OEMPrograms.***  The Company has OEM marketing programsthrough which other manufacturers incorporate the Company’s products ascomponents of their telecommunications systems. These OEM programs generally include exchanges of technical informationthat the Company can use in developing new products and improvements andenhancements to existing designs.  TheCompany has established additional relationships with systems integrators andinnovative end users that provide valuable product improvement information.

 

**Marketingand Sales**

 

The Company markets itsproducts primarily through a direct sales force of technically trainedsalespeople. The Company employs an application-specific systems approach tomarketing its products, offering the customer a complete, cost-effective systemsolution to meet its outside plant requirements. All sales personnel havetechnical expertise in the products they market and are supported by theCompany’s engineering and technical marketing staff. Product marketingspecialists are assigned to provide technical support and commercial directionfor the Company’s strategic product groups.

 

Internal sales/customerservice departments schedule incoming orders, handle requests for productenhancements and service inquiries and support the Company’s direct salesforce. These departments maintain direct communications with customers and theCompany’s field sales and operations personnel.

 

By engaging in publicrelations activities, product literature development, market research andadvertising, the marketing department also promotes and positions the Companywithin both domestic and international markets. The Company regularly attends, participates and exhibits its products atindustry trade shows and conferences within domestic and international marketsthroughout the year.

 

Specific to the Company’swater harvesting products, the Company augments its direct sales force throughthe use of an extensive network of over 100 agents and distributors.  A key sales channel for the Company’s waterharvesting products are agricultural field days in Australia.  Agricultural field days are held in mostrural areas once or twice per year and are used by rural customers to purchasea variety of hardware products by attending a single event.  The Company also uses limited radio andtelevision advertising to promote its water harvesting products and maintainbrand recognition throughout Australia.

 

**ManufacturingOperations**

 

The Company’s verticallyintegrated manufacturing operations enable the Company to control each step inthe manufacturing process, including product design and engineering and designand production of many of its own dies, tools, molds and fixtures.  The vertically integrated manufacturingoperations apply to both the communications equipment and water product lines.

 

The Company’smanufacturing expertise enables it to modify its product lines to meet changingmarket demands, rapidly and efficiently produce large volumes of products,control expenses and ensure product quality. Management considers the Company’s manufacturing expertise a distinctand significant competitive advantage, providing it with the ability to satisfythe requirements of major customers with relatively short lead-times bypromptly booking and shipping orders.

 

The Company owns amajority of its manufacturing equipment. Manufacturing processes are performed by trained Company personnel.  These manufacturing processes includeinjection molding, structural foam molding, rotational molding, metalfabrication, rubber injection, transfer and compression molding, andtermination block fabrication.  TheCompany has implemented several comprehensive process and quality assuranceprograms, including continuous monitoring of key processes, regular productinspections and comprehensive testing.

 

The Company’smanufacturing, distribution and office facilities as of December 31, 2007,include approximately 371,000 square feet used in the Americas segment, net of53,000 square feet that the Company sub-leases to a third party, and 145,000square feet used by the International segment.

 

**ProductDevelopment and Engineering**

 

The Company’s product developmentand engineering staff designs and tests the Company’s products and continues tobuild on its core competencies and knowledge in telecommunications outsideplant and water harvesting products. As a direct result, the Company has beenable to develop a broad series of superior products designed to meet thespecific needs of customers. Distinguishing characteristics of the Company’s products include:

 

·                  Advanced mechanical innovations providing uniqueapplication-specific performance and feature sets;

·                  Sub-surface network access systems;

 

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·                  Modular metal fabricated enclosure product linecovering multiple applications;

·                  Effective heat dissipation qualities for enclosureproducts;

·                  Advanced copper IDC connectivity products;

·                  A superior environmental sealing and protection systemin enclosure products that, unlike many competitors’ products, does not requiregels, compounds or other methods to maintain the required seal;

·                  Product designs allowing communications equipmenttechnicians easy access through covers that can be removed to fully expose theenclosed electronics;

·                  Compatibility with a variety of communicationsequipment signal delivery network architectures;

·                  Versatility of design to accommodate communicationsnetwork growth through custom hardware and universal mounting systems thatadapt to a variety of new electronic hardware;

·                  Excellent protection and management of optical fibersand cables;

·                  Thermoplastic Epoxy Coating that bonds directly tometal hardware and protects against rust and deterioration;

·                  High strength and UV protected water storage products;

·                  Underground water storage products; and

·                  A complete line of water storage accessories products,including filtration, pumps and connection devices.

 

The Company’s productdevelopment approach is applications-based and customer driven.  A team comprised of engineering, marketing,manufacturing and direct sales personnel work together to define, develop anddeliver comprehensive systems solutions to customers, focusing on the completedesign cycle from product concept through tooling and high-volumemanufacturing.  The Company is equippedto conduct many of its own product testing requirements for performancequalification purposes, enabling it to accelerate the product developmentprocess.  The Company spent $1.9 millionin 2007, $2.2 million in 2006, and $2.4 million in 2005 on research anddevelopment.

 

**Customersand Backlog**

 

The Company sells itstelecommunications-related products directly to broadband operators andtelephone companies throughout the world, principally within developednations.  The Company sells its productsto OEMs on a global basis.  The Companysells its water harvesting products in Australia directly to end users inaddition to retailers, wholesalers, distributors and agents. During 2007, theCompany’s five largest customers accounted for 33% of total net sales. In 2007,the Company’s five largest customers by sales in the United States wereVerizon, Comcast, Time Warner, Trinet, and Cox. During 2006, the Company’s fivelargest customers accounted for 29.4% of total net sales. In 2006, the Company’sfive largest customers by sales in the United States were Verizon, Comcast,Time Warner, Cox, and Bright House Networks. There were no customers that accounted for more than 10% of the Company’snet sales for 2007 or 2006.  Ininternational markets, the Company’s five largest customers in 2007 by saleswere McCrackens (Australia), Stratco (Australia), Telstra (Australia), Shaw(Canada), and British Telecom (UK).   TheCompany’s five largest customers in international markets in 2006 by sales wereTelstra (Australia), British Telecom (UK), Shaw (Canada), Rogers (Canada) andMiddencorp Electric (Australia).

 

The Company hashistorically operated with a relatively small backlog. Sales and operatingresults in any quarter are primarily dependent upon orders booked and productsshipped in the quarter.  The Company’scustomers generally do not enter into long-term supply contracts providing forfuture purchase commitments of the Company’s products.  Rather, the Company believes that many of itscustomers periodically review their supply relationships and adjust buyingpatterns based upon their current assessment of the products and pricingavailable in the marketplace.  Fromfiscal period to fiscal period, significant changes in the level of purchasesof the Company’s products by specific customers can and do result from thisperiodic assessment.  Customers of waterproducts in Australia are typically rural business owners that may keep theirproduct for several years before making a repeat purchase, as well asdistributors that buy in quantity and market the Company’s products.

 

**IntellectualProperty**

 

The Company owns substantiallyall of the patents and other technology employed by it in the manufacture anddesign of its products.  The Company’spatents, which expire through the year 2026, cover various aspects of theCompany’s products.  In addition, theCompany has certain trade secrets, know-how and trademarks related to itstechnology and products.

 

Management does notbelieve any single patent or other intellectual property right is material tothe Company’s success as a whole.  TheCompany maintains an intellectual property protection program designed topreserve its intellectual property assets.

 

**Competition**

 

***Telecommunications.*** The telecommunications industry is highlycompetitive.  The Company’s competitorsinclude companies that are much larger than the Company, such as Tyco, 3M,Emerson, and Corning, in addition to competitors similar in size to theCompany, such as Carson Industries.  TheCompany believes its competitive advantages include its ability to servicenational and multi-national customers, its direct sales force, its specializedengineering resources and its vertically integrated manufacturing operations.

 

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Management believes theprincipal competitive factors in the telecommunications equipment market are customerservice, new product development capabilities, price, product availability, andproduct performance.

 

Competitive pricepressures are common in the industry.  Inthe past, the Company has responded effectively to competition with costcontrols through vertical integration utilizing advanced manufacturingtechniques, cost-effective product designs and material selection, and anaggressive procurement approach.

 

In the past, certain ofthe Company’s telecommunications customers have required relatively lengthyfield testing of new products prior to purchasing such products inquantity.  While field testing can delaythe introduction of new products, it can also act as a competitive advantagefor those products tested and approved.

 

***WaterHarvesting. ***The water storage products industry inAustralia is characterized by a few large competitors, including HillsIndustries, Nylex and Clark Tanks, and a large number of smaller, regionalcompetitors.  The Company believes itscompetitive advantages include its nationally recognized brand, high-volumeproduction capacity, manufacturing expertise, product design, marketing andsales expertise and its nationwide transportation capabilities.

 

Managementbelieves that the principal competitive factors in the water storage industryare product quality, manufacturing capacity, and geographic location forlogistics support, technical support and customer service.  The multiple manufacturing plant locations,combined with urban distribution centers, provide nationwide market coverage inthe industry.

 

Competitive pricepressures are prevalent in this industry. The Company has responded to these with ongoing process improvements,design optimization and targeted procurement programs.  In the first half of 2007, high demand forproducts nationwide and related long lead times experienced by most producers,eased some of the pricing pressures.

 

The existingcustomer base is widely dispersed throughout the rural market areas.  Promotion and awareness of the Company’sproducts and services are strongly reinforced. Long-term direct marketing programs, including media advertising, radioand television, and high profile promotion at exhibitions, have been developedby the Company over many years.  Thesemarketing programs have established strong brand equity, which creates acompetitive advantage in several significant market areas.

 

**RawMaterials; Availability of Complementary Products**

 

The principal rawmaterials used by the Company are thermoplastic resins, neoprene rubbers, hotand cold rolled steel, stainless steel, copper and brass.  The Company also uses certain other rawmaterials, such as fasteners, packaging materials and communicationscable.  Management believes the Companyhas adequate sources of supply for the raw materials used in its manufacturingprocesses and it attempts to develop and maintain multiple sources of supply inorder to extend the availability and encourage competitive pricing of thesematerials.

 

Most plasticresins are purchased under individual purchase orders based on price andavailability at the time of order. Neoprene rubbers are manufactured using the Company’s proprietaryformulas.  Metal products are supplied instandard stock shapes, coils and custom roll forms.

 

The Company alsorelies on certain other manufacturers to supply products that complement theCompany’s own product line, such as grade level boxes.  The Company believes there are multiplesources of supply for these products.

 

**Employees**

 

As of December 31,2007, the Company employed 618 people. The Americas segment includes 403 employees and the Internationalsegment includes 215 employees.  TheCompany considers its employee relations to be good and recognizes its abilityto attract and retain qualified employees is an important factor in its growthand development.  None of the Company’semployees is subject to a collective bargaining agreement, and the Company hasnot experienced any business interruption as a result of labor disputes withinthe past five years.

 

**Regulation**

 

The telecommunicationsindustry is subject to regulations in the United States and othercountries.  Federal and state regulatoryagencies regulate most of the Company’s domestic customers.  On February 1, 1996, the United StatesCongress passed the Telecommunications Act of 1996 that the President signedinto law on February 8, 1996.  TheTele-communications Act lifted certain restrictions on the ability ofcompanies, including RBOCs and other customers of the Company, to compete withone another and generally reduced the regulation of the communicationsindustry.

 

The Company isalso subject to a wide variety of federal, state and local environmental lawsand regulations.  The Company utilizes,principally in connection with its thermoplastic manufacturing processes, alimited number of chemicals or similar substances that are classified ashazardous.  It is difficult to predictwhat impact these environmental laws and regulations may have on the Company inthe future.  Restrictions on chemicaluses or certain 

 

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manufacturingprocesses could restrict the ability of the Company to operate in the mannerthat it currently operates or is permitted to operate.  Management believes that the Company’soperations are in compliance in all material respects with currentenvironmental laws and regulations. Nevertheless, it is possible that the Company may experience releases ofcertain chemicals to environmental media which could constitute violations ofenvironmental law (and have an impact on its operations) or which could causethe Company to incur material cleanup costs or other damages.  For these reasons, the Company might becomeinvolved in legal proceedings involving exposure to chemicals or theremediation of environmental contamination from past or presentoperations.  Because certainenvironmental laws impose strict joint and several retrospective liability uponcurrent owners or operators of facilities from which there have been releasesof hazardous substances, the Company could be held liable for remedial measuresor other damages (such as liability in personal injury actions) at propertiesit owns or utilizes in its operations, even if the contamination were notcaused by the Company’s operations.

 

The water storageproducts industry in Australia is also subject to regulation.  National, state and local regulatory agenciesregulate and in some cases mandate the use of water storage products toconserve water usage.  Examples includerestrictions on the use of potable water for gardening, the washing of cars andother non-essential uses.  In addition,several agencies have offered rebates to those who purchase water storageproducts to conserve water.  Mostrecently, government agencies have mandated that new residential dwellings inthe states of New South Wales and Victoria require a water conservation devicesuch as a water storage tank.  The cityof Sydney is located in New South Wales and the city of Melbourne is located inVictoria.  The effect of these regulationshas been to increase the demand for water storage tanks in Australia.  However, there can be no guarantee that theseregulations and rebates will remain in existence.

 

**Item 1A. Risk Factors.**

 

**ForwardLooking Statements**

 

Certain statementscontained in this Annual Report on Form 10-K are “forward-looking”statements within the meaning of the Private Securities Litigation Reform Actof 1995 (the “Act”), which provides certain “safe harbor” provisions forforward-looking statements.  Allforward-looking statements made in this Annual Report on Form 10-K aremade pursuant to the Act. Forward-looking statements include statements that are predictive innature; that depend upon or refer to future events or conditions; or thatinclude words such as “expects,” “anticipates,” “intends,” “plans,” “believes,”“estimates,” or variations or negatives thereof or by similar or comparablewords or phrases.  In addition, anystatements that may be provided by our management concerning future financialperformance, ongoing business strategies or prospects or our possible futureactions are also forward-looking statements as defined by the Act.  Forward-looking statements are based oncurrent expectations and projections about future events and are subject torisks, uncertainties, and assumptions about us; and economic and market factorsin the countries in which we do business, among other things.  These statements are not guarantees of futureperformance, and we have no specific intentions to update thesestatements.  References to “we,” “us” or “our”are references to the Company.

 

Actual events andresults may differ materially from those expressed or forecasted inforward-looking statements due to a number of factors.  The principal important risk factors thatcould cause our actual performance and future events and actions to differmaterially from such forward-looking statements include, but are not limitedto, the risk factors discussed below.

 

**RiskFactors**

 

***Theindustries in which we operate are subject to obsolescence and technologicalchange, which could adversely affect our sales.***** **The communications industry is in a state of rapidtechnological change.  The introductionof new technologies, network architectures or changes in industry standards canrender our existing products or products under development obsolete orunmarketable, which could adversely affect our sales.  For example, satellite, wireless and othercommunication technologies under development or currently being deployed mayrepresent a threat to copper, coaxial and fiber optic-based systems by reducingthe need for wire-line networks.  Ourgrowth strategies are designed, in part, to take advantage of opportunitiesthat we believe are emerging as a result of the development of enhanced voice,video, data and other transmission networks and high-speed Internet access inthe telecommunications industry. Reductions in demand resulting from these emerging trends or failure ofour products to continue to receive market acceptance could adversely affect oursales.

 

***Increases in raw materials pricesmay cause our results of operations to suffer.*** Our cost of sales, gross margins and results of operations have been andmay continue to be materially affected by increases in the market prices of theraw materials used in our manufacturing processes.  In particular, the products we manufacturefor sale in both our communications infrastructure market and our water storagemarket are primarily composed of polyethylene resins, which are derived frompetroleum-based commodities.  Theincreasing price of these commodities has significantly increased our rawmaterials cost within these markets and, as a result, has significantly reducedour gross margins.

 

7

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Because we are limited in our ability to pass onincremental price increases to our customers, and because we do not engage inhedging transactions for our raw materials, we may not be able to effectivelyoffset increases in the prices of raw materials.  Accordingly, continued increases in thesecosts, particularly continued increases in the cost of oil, will continue toreduce our gross margins and negatively impact our results of operations.

 

***Asignificant reduction in new product development could negatively affect ourbusiness and results of operations.*** A significantfactor in our ability to grow and remain competitive will be our ability toanticipate changes in technology, industry standards and customer preferences,and to successfully develop and introduce new products on a timely basis.  New product development often requireslong-term forecasting of market trends, development and implementation of newdesigns and processes, and substantial capital commitment.  Trends toward consolidation of thecommunications industry and convergence of technologies may require us toquickly adapt to rapidly changing market conditions and customerrequirements.  Trends in consumerpreferences in Australia for the aesthetic design and other attributes of waterstorage tanks may require us to redesign or develop new water tanks andaccessory products.

 

Our manufacturingand marketing expertise has enabled us to successfully develop and market newproducts in the past.  However, anyfailure by us to anticipate or respond in a cost-effective and timely manner totechnological developments or changes in industry standards or customerrequirements, or any significant delays in product development or introduction,could have a material adverse effect on our business, operating results andfinancial condition.

 

***Weare dependent on a small number of customers for a significant percentage ofsales.*** The telecommunications industry is the largestindustry in which we operate and is highly concentrated. A relatively smallnumber of customers account for a large percentage of our availablemarket.  Consequently, our five largestcustomers accounted for 33% and 29.4% of our total net sales in 2007 and 2006,respectively.  There were no customersgreater than 10% of our total net sales in 2007 or 2006.  Mergers and acquisitions in thetelecommunications industry, which are expected to continue, not only increasethe concentration of the industry and of our customer base, but also from timeto time delay customers’ capital expenditures as newly merged service providersconsolidate operations.  In the event oneof our major customers was to terminate purchases of our products, ouroperating results would be adversely affected.

 

***Asignificant reduction in capital spending patterns of telecommunicationsindustry service providers could adversely affect our results of operations.*** Although we diversified our business with theacquisition of Bushman Tanks, we expect that sales to the telecommunicationsindustry will continue to represent a substantial portion of our totalsales.  Demand for products within thisindustry depends primarily on capital spending by service providers forconstructing, rebuilding, maintaining or upgrading their systems.  The amount of capital spending and,therefore, our sales and results of operations, are affected by a variety offactors, including general economic conditions, the rate of new homeconstruction,  access by serviceproviders to financing, government regulation of service providers, demand forservices and developments in the telecommunications technology.  While the industry generally experiencedsubstantial growth in the late 1990’s, since 2001 the telecommunicationsequipment industry has been materially adversely affected by service providers’reductions of their overall capital expenditures.

 

Our success isdependent upon continued demand by the communications industry for productsused in signal transmission systems, which may be affected by factors beyondour control, including the convergence of video, voice, and data transmissionsystems occurring within the broadband and telephone markets, continuingconsolidation of companies within those markets and the provision of Internetaccess, and other bandwidth intensive services, by broadband operators and localtelephone companies.  A reduction indemand for products used in signal transmission systems could adversely affectour sales and results of operations.

 

***Weoperate with a relatively small backlog amount, and accordingly, any change incustomer buying patterns may adversely affect our results of operations.*** Our customers typically require prompt shipment of our products within anarrow timeframe.  As a result, we havehistorically operated with a relatively small backlog.  Sales and operating results in any quarterare principally dependent upon orders booked and products shipped in thatquarter.  Further, our customersgenerally do not enter into long-term supply contracts providing for futurepurchase commitments for our products. These factors, when combined with our operating leverage and the need toincur certain capital expenditures and expenses, in part based upon theexpectation of future sales, may place our operating results at risk tochanging customer buying patterns.  Ifsales levels in a particular period do not coincide with our expectations,operating results for that period may be materially and adversely affected.

 

***Disruptions or delays inobtaining certain components of our products could disrupt the manufacture ofour products and cause our sales and results of operations to suffer.*** In order to position ourselves as a full-line product supplier, we relyon certain manufacturers to supply products, including major subcomponents thatcomplement the products manufactured by us. Although we believe there aremultiple sources of supply for these products, disruptions or delays in thesupply of such products could have a material adverse effect on sales of ourown products, which, in turn, could negatively affect our results ofoperations.

 

8

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***Increasesin the cost, and interruption in the availability, of energy may adverselyimpact our sales and result of operations.***  Our cost ofsales may be materially affected by increases in the market prices ofelectricity, natural gas and water used in our manufacturing processes.  California is the site of our largestmanufacturing operation.  The energycosts of California manufacturing firms may increase.  There exists the possibility of interruption(s) inthe supply of energy to California’s manufacturing firms.  There can be no assurance that our energycosts can be passed on to our customers through increases in productprices.  Further, disruptions or delaysin the supply of electricity, natural gas and water to us could have a materialadverse effect on sales of our products.

 

***Wemay not be successful in identifying and acquiring suitable acquisition targetsand integrating acquired companies.***** **There can be no assurance that we will be able toidentify and acquire attractive acquisition candidates.  In the event of an acquisition by us, wecannot provide assurance that we will profitably manage any of the acquiredbusinesses or successfully integrate such acquired businesses into our businesswithout substantial costs, delays or other problems.  Acquisitions involve a number of specialrisks, including, but not limited to, adverse short-term effects on ourreported financial condition or results of operations, diversion of management’sattention, dependence on retention, hiring and training of key personnel, risksassociated with unanticipated problems or liabilities and amortization ofacquired intangible assets, some or all of which could have a material adverseeffect on our business, financial condition or results of operations.

 

In addition, therecan be no assurance that any businesses we acquire in the future will beprofitable at the time of acquisition or will achieve sales and profitabilityjustifying our investment therein or that we will realize the synergiesexpected from such acquisitions.

 

The failure toobtain any or all of the desired results from acquisitions could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***As aresult of the fixed costs of operating our business, a reduction in sales orsales growth could disproportionately affect our financial results.*** Because the fixed costs of facilities, productdevelopment, engineering, tooling and manufacturing are a relatively highpercentage of total costs, our ability to operate profitably is dependent ongenerating a sufficient volume of product sales, thereby spreading fixed costsover the sales base.  Due to this “operatingleverage,” a reduction in sales or the rate of sales growth has had in the pastand could have in the future a disproportionately adverse effect on ourfinancial results.

 

***Ouroperating results may fluctuate significantly from quarter to quarter due toseasonal selling patterns and other factors. ***Ourbusiness is seasonal in nature, with the first and fourth quarters generallyreflecting lower sales due to the impact of adverse weather conditions onconstruction projects that may alter or postpone the needs of customers fordelivery of our telecommunications products. Furthermore, a large portion of our sales are linked to discretionarycapital spending budgets of our customers, which may exacerbate the seasonalityof our revenue when customers implement internal cost reduction measures.  In addition, first quarter sales may alsoreflect telecommunication customer delays in implementation of their annualcapital expenditure plans.  The waterstorage tank business in Australia is traditionally slow during the fourthquarter due to holidays and restrictions on the number of days in which largetrucks can utilize major roads to deliver water storage tanks tocustomers.  Our operating results mayalso fluctuate significantly from quarter to quarter due to several otherfactors, including the volume and timing of orders from and shipments to majorcustomers, the timing of new product introductions and deployment as well asthe availability of products by us or our competitors, the availability andamount of fiscal incentives, weather conditions in Australia, which may affectthe sales of water storage tanks as a large percentage of sales occur atoutdoor agricultural farm fairs, the overall level of capital expenditures bybroadband operators and telephone companies, market acceptance of new andenhanced versions of our products, variations in the mix of products we sell,and the availability and costs of raw materials.

 

***Ourinternational operations subject us to the social, political and economic risksof doing business in foreign countries*****.** Internationalsales, including export sales from U.S. operations, accounted for 48.7%, 49.8%,and 47.5% of our net sales in 2007, 2006 and 2005, respectively.  The percentage of international sales to ourtotal sales has increased with the acquisition of the Bushman Tanksbusiness.  Due to our internationalsales, we are subject to the risks of conducting business internationally,including unexpected changes in or impositions of legislative or regulatoryrequirements, fluctuations in the U.S. dollar, which could materially adverselyaffect U.S. dollar revenues or operating expenses, tariffs and other barriersand restrictions, longer collection cycles, greater difficulty in accountsreceivable collection, potentially adverse taxes and the burdens of complyingwith a variety of international laws and communications standards.  We are also subject to general geopoliticalrisks, such as political and economic instability and changes in diplomatic andtrade relationships, in connection with our international operations.  There can be no assurance that these risks ofconducting business internationally will not have a material adverse effect onour business.

 

***Weface competition in the industries in which we sell our products. ***The industries in which we operate are highlycompetitive.  The level and intensity ofcompetition may increase in the future. Our competitors in the telecommunications industry include companiesthat are much larger than us, such as Tyco, 3M, Emerson and Corning.  Our business strategy includes increasedfocus on telephone connectivity.  Therecan be no assurance that we will be able to compete successfully against ourcompetitors, most of whom have access to greater financial resources than wedo.  Our competitors in the Australianwater storage tank business include Hills Industries, Nylex and ClarkTanks.  There can be no assurances thatwe will be able to successfully compete against these competitors or increaseour sales by obtaining a higher market share.

 

9

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***Adisruption at our Temecula, California manufacturing facility could adverselyaffect our business and results of operations.*** The majority of our manufacturing operations are currently located atour facilities in Temecula, California, which also includes our principal warehouseand corporate office operations.  Oursuccess depends in large part on the orderly operation of thesefacilities.  Although we maintainproperty and business interruption insurance on this facility, a fire,earthquake, power interruption or other disaster could materially and adverselyaffect our business and results of operations.

 

***Inabilityto renew our related party leases could adversely affect our business.*** We currently lease a portion of our Temecula facilities from theChannell Family Trust, one of our principal stockholders, of which JacquelineM. Channell, our Chairman of the Board and corporate secretary, is soletrustee.  In addition, the Company alsoleases a parcel of land, adjacent to its headquarters building, from William H.Channell Jr., President and Chief Executive Officer and his wife, CarolynChannell.  We believe the terms of theleases for our Temecula, California facilities are no less favorable than wouldbe available from an unrelated third party after arm’s length negotiations.

 

In addition, wecurrently lease three facilities in Australia from the former owners of BushmanTanks, who are also stockholders of ours. Although we believe these leases are in total in excess of fair marketvalue by $27,000 per year, we do not believe that amount is significantcompared to total manufacturing costs and thus does not place us at acompetitive disadvantage.

 

Although ourleases expire in, or have renewal options through, the year 2025, there can beno assurance that we will be able to agree on additional renewal terms for theproperties currently leased by us. Our failure to renew the leases wouldrequire us to relocate our existing facilities, which could have a materialadverse effect on our business, financial condition or results of operations.

 

***Thetermination of transportation and logistics services by the primary freightprovider for our Bushman Tanks business could continue to adversely impact ourresults of operations.***  As of October 12,2006, the primary freight provider for our 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 we do not believe Bushman Tanks has breached the terms of theagreement, we have 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 our working capital and results of operations.

 

***Weare subject to governmental laws and regulations, which could adversely affectour business.**** *The communications industry is subject to regulationin the United States and other countries. Federal and state agencies regulate most of our domestic customers.Changes in current or future laws or regulations, in the United States orelsewhere, could materially adversely affect our business.  Government regulation in Australia hasincreased demand for water storage tanks by encouraging the installation ofwater storage tanks or other water conservation products in new homes built inselected regions.  There can be noassurances that these regulations will remain in effect.  A lessening of these regulations and relatedincentives most likely would lead to lower demand for water storage productsand thus negatively affect our sales.

 

***If weare unable to attract and retain key management and other personnel, ourbusiness and results of operations could be adversely affected*****.**  Our businesshas required and is expected to continue to require significant resources interms of personnel, management and other infrastructure.  Our future success depends in part on ourability to attract and retain key executive, engineering, marketing and salespersonnel.  Our key personnel includeWilliam H. Channell, Jr., President and Chief Executive Officer and ourother executive officers.

 

In addition, ourability to manage effectively the volatility of the telecommunications industryrequires us to attract, train, motivate and manage new employees successfully,to integrate new employees into our overall operations and to continue toimprove our operational, financial and management information systems. Becausethe market for qualified personnel in the communications industry iscompetitive, loss of our key personnel could have a material adverse effect onus.   Likewise, our inability to attractnew employees, or to train, manage or retain such employees, could adverselyaffect our results of operations.

 

***Environmentallaws and regulations could limit our ability to operate as we are currentlyoperating and could result in additional costs.*** Weare subject to a wide variety of federal, state and local environmental lawsand regulations and use a limited number of chemicals that are classified orcould be classified as hazardous or similar substances.  Although we believe that our operations are incompliance in all material respects with current environmental laws andregulations, our failure to comply with such laws and regulations could limitour ability to operate as we are currently operating and could result in finesor penalties, which, in turn, could have a material adverse effect on ourbusiness and results of operations.

 

10

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***Weatherpatterns in Australia may affect the demand for water storage tanks.*** Our business may be affected by adverse changes in weather patterns inAustralia that may affect the demand for water storage tanks.  Prior to 2007, Australia experienced a severewater shortage for several years due to less rainfall, inadequate nationalinfrastructure to store water for use during drought periods and the growth inpopulation in both urban and non urban areas. Beginning in the latter part of 2007 and continuing into 2008, Australiahas received a significant amount of rainfall. A prolonged period of changed weather patterns providing additionalrainfall and lessening the effect of the drought could have a negative impacton the demand for water storage tanks and, accordingly, adversely affect oursales.

 

**Item 1B.  Unresolved StaffComments.**

 

Not applicable.

 

**Item 2.  Properties.**

 

The Company’s manufacturing, warehouse and officefacilities approximate 516,000 square feet worldwide.  In Temecula, California, 265,000 square feetof the total 364,000 square feet are leased from the Channell Family Trust, oneof the Company’s principal stockholders, of which Jacqueline M. Channell, theCompany’s Chairman of the Board, and Company secretary, is a trustee.  In addition, the Company also leases a parcelof land, adjacent to its headquarters building, from William H. Channell Jr.,President and Chief Executive Officer and his wife, Carolyn Channell.  The Temecula facilities are used by theAmericas segment. The Company also leases an aggregate of approximately 152,000square feet of manufacturing, warehouse and office space in Canada, Australiaand the United Kingdom. In Australia, 72,000 square feet of manufacturing anddistribution space in Dalby, Terang, and Adelaide are leased from the formerowners of Bushman Tanks. The Canada facilities are used by the Americas segmentand the Australia and United Kingdom facilities are used by the Internationalsegment.  The Company considers itscurrent facilities to be adequate for its operations.

 

**Item 3.  Legal Proceedings.**

 

The Company isfrom time to time involved in ordinary routine litigation incidental to theconduct of its business.  The Companyregularly reviews all pending litigation matters in which it is involved andestablishes reserves 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 4.  Submission of Mattersto a Vote of Security Holders.**

 

None.

 

**PART II**

 

**Item 5.  Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities.**

 

The Company’s common stock is listed on the NASDAQGlobal Market (formerly the NASDAQ National Market) and is traded under thesymbol “CHNL.”  The following table setsforth, for the periods indicated, the high and low sale prices for the Company’sCommon Stock, as reported on the NASDAQ Global Market.

 

| ** **                              | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Year Ended December 31,  2007:** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                           | ** ** | $          | 4.27       |       | $          | 2.93 |   |
| Second Quarter                          |       | 5.19       |       | 3.67       |       |
| Third Quarter                           |       | 6.01       |       | 3.35       |       |
| Fourth Quarter                          |       | 4.75       |       | 1.10       |       |
| ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Year Ended December 31,  2006:** | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                           | ** ** | $          | 5.25       |       | $          | 3.57 |   |
| Second Quarter                          |       | 5.00       |       | 3.22       |       |
| Third Quarter                           |       | 3.48       |       | 2.75       |       |
| Fourth Quarter                          |       | 3.34       |       | 2.38       |       |

 

11

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The Company has not declared any dividends subsequentto its initial public offering in July 1996.

 

The Company currently anticipates it will retain allavailable funds to finance its business. The Company does not intend to pay cash dividends in the foreseeablefuture.  Under the terms of the Company’sLoan and Security Agreement, the Company has agreed not to pay any dividends(see “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Liquidity and Capital Resources”).

 

As of March 21,2008, the Company had 9,544,134 shares of its Common Stock outstanding, held byapproximately 100 stockholders of record.

 

The disclosure required by Item 201(d) of Regulation S-K isincorporated by reference to the Company’s definitive proxy statement for its2008 Annual Meeting of Stockholders.

 

### **STOCKHOLDER RETURNPERFORMANCE GRAPH**

### ** **

The following is aline graph presentation comparing the Company’s cumulative total return from December 31,2002 to December 31, 2007 with the performance of the NASDAQ market, theStandard & Poor’s Industrials Index (“S & P Industrials”) andStandard and Poor’s Communications Equipment Index (“S & PCommunications Equipment”) for the same period.

 

 

 

12

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**Item 6.  Selected Financial Data.**

 

The selectedconsolidated financial data presented below as of and for each of the fiveyears in the period ended December 31, 2007, have been derived from theCompany’s audited consolidated financial statements, which as of December 31,2006 and 2007 and for the years ended December 31, 2005, 2006 and 2007appear elsewhere herein. The data should be read in conjunction with thefinancial statements, related notes and other financial information includedtherein (amounts in thousands, except per share data).

 
| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| **OPERATING DATA:**                                     |       |                             |       |   |   |   |   |   |   |   |   |
| Net sales                                               |       | $                                | 133,163    |   | $ | 109,138 |   | $ | 116,065 |   | $ | 102,200 |   | $ | 78,100 |   |
| Cost of goods sold                                      |       | 92,240                           |       | 76,055 |   | 81,060 |   | 72,151 |   | 53,960 |   |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Gross profit                                            |       | 40,923                           |       | 33,083 |   | 35,005 |   | 30,049 |   | 24,140 |   |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Operating expenses                                      |       |                             |       |   |   |   |   |   |   |   |   |
| Selling                                                 |       | 22,131                           |       | 21,993 |   | 22,407 |   | 16,345 |   | 11,028 |   |
| General and administrative                              |       | 14,868                           |       | 12,500 |   | 11,688 |   | 8,811 |   | 7,837 |   |
| Research and development                                |       | 1,865                            |       | 2,222 |   | 2,356 |   | 2,109 |   | 1,775 |   |
| Restructuring charge (recovery)                         |       | —                           |       | — |   | — |   | (690 | ) | 1,565 |   |
| Goodwill impairment charge                              |       | —                           |       | 4,829 |   | — |   | — |   | — |   |
| Asset impairment charge                                 |       | —                           |       | — |   | 97 |   | — |   | 1,238 |   |
|                                                    |       | 38,864                           |       | 41,544 |   | 36,548 |   | 26,575 |   | 23,443 |   |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Income (loss) from operations                           |       | 2,059                            |       | (8,461 | ) | (1,543 | ) | 3,474 |   | 697 |   |
| Interest income (expense), net                          |       | (1,323                           | )          | (857 | ) | (495 | ) | (489 | ) | (571 | ) |
| Income (loss) before income tax expense (benefit)       |       | 736                              |       | (9,318 | ) | (2,038 | ) | 2,985 |   | 126 |   |
| Income taxes (benefit)                                  |       | 484                              |       | (777 | ) | 5,012 |   | (791 | ) | 200 |   |
| Net income (loss) before minority interest              |       | 252                              |       | (8,541 | ) | (7,050 | ) | 3,776 |   | (74 | ) |
| Minority interest in income (loss) of subsidiaries      |       | (21                              | )          | (1,712 | ) | (170 | ) | 167 |   | — |   |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                       |       | $                                | 273        |   | $ | (6,829 | ) | $ | (6,880 | ) | $ | 3,609 |   | $ | (74 | ) |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| **NET INCOME (LOSS) PER SHARE:**                        |       |                             |       |   |   |   |   |   |   |   |   |
| Basic                                                   |       | $                                | 0.03       |   | $ | (0.72 | ) | $ | (0.73 | ) | $ | 0.39 |   | $ | (0.01 | ) |
| Diluted                                                 |       | $                                | 0.03       |   | $ | (0.72 | ) | $ | (0.73 | ) | $ | 0.39 |   | $ | (0.01 | ) |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| **WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:**      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                   |       | 9,544                            |       | 9,543 |   | 9,448 |   | 9,203 |   | 9,126 |   |
| Diluted                                                 |       | 9,545                            |       | 9,543 |   | 9,448 |   | 9,223 |   | 9,126 |   |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| **BALANCE SHEET DATA:**                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Current assets                                          |       | $                                | 33,049     |   | $ | 29,457 |   | $ | 25,022 |   | $ | 37,686 |   | $ | 30,407 |   |
| Total assets                                            |       | 66,847                           |       | 61,878 |   | 60,706 |   | 78,481 |   | 53,435 |   |
| Long-term obligations (including current maturities)(1) |       | 18,153                           |       | 14,245 |   | 7,624 |   | 8,840 |   | 3,906 |   |
| Stockholders’ equity                               |       | 31,764                           |       | 30,150 |   | 35,959 |   | 42,484 |   | 36,816 |   |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| **OTHER DATA:**                                         |       |                             |       |   |   |   |   |   |   |   |   |
| Gross margin(2)                                         |       | 30.7                             | %          | 30.3 | % | 30.2 | % | 29.4 | % | 30.9 | % |
| Operating margin(3)                                     |       | 1.6                              |       | (7.8 | ) | (1.3 | ) | 3.4 |   | 0.9 |   |
| Capital expenditures (excluding capital leases)         |       | 3,917                            |       | 3,871 |   | 4,339 |   | 3,281 |   | 1,203 |   |
| Cash provided by (used in):                             |       |                             |       |   |   |   |   |   |   |   |   |
| Operating activities                                    |       | 1,596                            |       | (2,287 | ) | 1,672 |   | 9,395 |   | 7,127 |   |
| Investing activities                                    |       | (3,754                           | )          | (3,765 | ) | (4,315 | ) | (20,025 | ) | 1,154 |   |
| Financing activities                                    |       | 2,228                            |       | 5,564 |   | 201 |   | 7,383 |   | (2,662 | ) |

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| (1) | Includes all interest bearing debt and capital lease  obligations.               |
|-----|----------------------------------------------------------------------------------|
| (2) | Gross margin is gross profit as a percentage of net  sales.                      |
| (3) | Operating margin is income (loss) from operations as  a percentage of net sales. |

 

13

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**Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

### **Introduction andOverview**

### ** **

The Company is adesigner and manufacturer of telecommunications equipment supplied tocommunications network operators worldwide and water storage tanks distributedin consumer markets throughout Australia. In late 2007, the Company introducedproducts to serve North American water harvesting markets.  Major productlines include a complete line of thermoplastic and metal fabricated enclosures,advanced copper termination and connectorization products, fiber-optic cable managementsystems and polyethylene water storage tanks.

 

The Company hastwo reportable segments, Americas and International.  The Americas segment includes the Company’soperations in the United States and Canada. The International segment includes the Company’s operations in Australia(including the Bushman Tanks business) and the United Kingdom.

 

During the lastsix years, demand for communications infrastructure equipment has fluctuateddramatically.  At various times in the past there have been significant slowdownsin capital spending by both cable and telecom network operators due to severalfactors including, but not limited to, service provider consolidation, delaysin outside plant upgrade/rebuild projects, and enhancing free cash flow tostrengthen their balance sheets and pay down debt.  These changes have hada significant negative impact on overall demand for infrastructure products,and at various times have directly reduced demand for the Company’s productsand increased price competition within its industry, which has led toreductions in the Company’s revenues and contributed to the Company’s reportedoperating losses in 2006 and 2005.

 

Within the waterstorage portion of the Company’s business, demand continues to grow inAustralia due to the country’s generally arid climate and the widespread waterconservation efforts.  Demand for the Company’s water storage products isalso driven by regulatory factors at the local, state, and federal governmentlevels.  However, periods of significant rainfall could negatively affectthe sales of the Company’s product.

 

Within both thecommunications infrastructure market and water storage market, the high priceof petroleum-based commodities has had a negative impact on the Company’s grossmargins.  The products manufactured in both of the markets in which theCompany 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 petroleum-based commodity price increases would havea negative impact on the Company’s performance.

 

The Companycontinues to invest in the development of new communications infrastructureproducts and water storage tanks and believes that in both markets it has theleading product portfolios in terms of performance and features.

 

The Companymeasures its success by monitoring net sales and gross margins with a near-termgoal of maintaining positive cash flows, while striving to achieve long-termoperating profits.  The Company believes that there continue to belong-term growth opportunities within both the communications infrastructureequipment and water tank markets.

 

**CriticalAccounting Policies**

 

The Company’s Consolidated Financial Statements have been prepared inconformity with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires managementto make estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Management bases its estimates onhistorical experience and on assumptions that are believed to be reasonableunder the circumstances and revises its estimates, as appropriate, when changesin events or circumstances indicate that revisions may be necessary. Althoughthese estimates are based on management’s knowledge of and experience with pastand current events and on management’s assumptions about future events, it ispossible that they may ultimately differ materially from actual results.  However, the Company is not currently awareof any reasonably likely events or circumstances that could result inmaterially different results from the current estimates.

 

The Company believes the following critical accounting policies are themost significant to the presentation of its financial statements and requirethe most subjective and complex judgments. These matters, and the judgments and uncertainties affecting them, arealso essential to understanding the Company’s reported and future operatingresults.  See Note B to the ConsolidatedFinancial Statements for a more comprehensive discussion of the Company’ssignificant accounting policies, including recent accounting pronouncements.

 

***RevenueRecognition and Accounts Receivable Reserves*****. **Revenuesare recognized when title passes and the risks and rewards of ownership havepassed to the customer, based on the terms of sale.  Title passes generally upon shipment.  Provisions for estimated sales returns arebased on the Company’s historical sales returns experience.  Provisions for uncollectible accounts aremade based upon specific percentages of the past due outstanding accountsreceivable aging categories or upon specific circumstances.  Development of the specific percentagesrequires a high 

 

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degree of judgmentand the use of various internal and external factors. An adverse change in thefinancial condition of a significant customer or group of customers couldmaterially affect management’s estimate of the percentages for provisions foruncollectible accounts.

 

***Inventories*****. **Theestimates of excess and obsolete inventory are based on management’sassumptions about and analysis of relevant factors including historical salesand usage of items in inventory, current levels of orders and backlog,forecasted demand, product life cycle and market conditions.  Managementpersonnel play a key role in the Company’s inventory risk assessment process ofproviding updated sales forecasts, managing new product introductions andworking with manufacturing to maximize recovery of excess inventory.  If actual market conditions become lessfavorable than anticipated by management, additional allowances for excess andobsolete inventory could be required.  In the event management adjustsestimates such as forecasted sales or expected product lifecycles, the value ofthe Company’s inventory may become understated or overstated and recognition ofsuch understatement or overstatement will affect cost of sales in a futureperiod, which could materially affect the Company’s operating results andfinancial position.

 

***Impairmentof Long-Lived and Intangible Assets*****.  **The Company accounts for goodwill andother intangible assets in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142, “*Goodwill and OtherIntangible Assets*.” SFAS No. 142 requires that goodwill andidentifiable intangible assets with indefinite useful lives be tested forimpairment at least annually. SFAS No. 142 also requires that intangibleassets with estimable useful lives be amortized over their respective estimateduseful lives and reviewed for impairment in accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.”

 

The Companyassesses the recoverability of the carrying value of goodwill and otherintangible assets with indefinite useful lives at least annually or wheneverevents or changes in circumstances indicate that the carrying amount of theasset may not be fully recoverable.  Theimpairment test consists of a comparison of the fair value of an intangibleasset with its carrying amount.  If thecarrying amount of an intangible asset exceeds its fair value, then animpairment loss is recognized in an amount equal to the excess.  Recoverability of goodwill is measured at thereporting unit level based on a two-step approach. First, the carrying amountof the reporting unit is compared to the fair value as estimated by the futurenet discounted cash flows expected to be generated by the reporting unit. Tothe extent that the carrying value of the reporting unit exceeds the fair valueof the reporting unit, a second step is performed, wherein the reporting unit’sassets and liabilities are valued. The implied fair value of goodwill iscalculated as the fair value of the reporting unit in excess of the fair valueof all non-goodwill assets and liabilities allocated to the reporting unit. Tothe extent the reporting unit’s carrying value of goodwill exceeds its impliedfair value, an impairment exists and must be recognized. This process requiresthe use of discounted cash flow models that utilize estimates of future revenueand expenses as well as the selection of appropriate discount rates.  To measure the impairment of indefinite-livedintangibles, the Company uses the relief from royalty method in itsvaluation.  Under the relief from royaltymethod, an estimated royalty rate is applied against an estimate of futurerevenues, discounted to present value, to determine the savings associated withowning the trademark intangible.  Theimpairment test consists of a comparison of the fair value of an intangibleasset with its carrying amount.  If thecarrying amount of an intangible asset exceeds its fair value, then animpairment loss is recognized in an amount equal to that excess.  There is inherent uncertainty in theseestimates, and changes in these factors over time could result in an impairmentcharge.  Goodwill impairment testsperformed on the Bushman Tanks reporting unit as of December 31, 2007,2006 and 2005 indicated that no impairment charges were required, while the June 30,2006 test resulted in an impairment of $4,829. Any material change in the estimates of future sales, gross profit oroperating expenses individually or collectively would result in additionalimpairment.

 

***IncomeTaxes*****. **Income taxes are recorded for each of thejurisdictions in which the Company operates. Management records the actualcurrent income tax payable and assesses the temporary differences resultingfrom differing treatment of items, such as reserves and accruals, for tax andaccounting purposes. These differences result in deferred tax assets andliabilities which are included within the consolidated balance sheet.  Inaddition, SFAS 109,*Accounting for IncomeTaxes*, requiresrecognition of future tax benefits attributable to tax net loss carryforwardsand deductible temporary differences between financial statement and income taxbases of assets and liabilities.

 

Deferred taxassets must be reduced by a valuation allowance if, based on the weight ofavailable evidence, it is more likely than not that some portion or all of thebenefits will not be realized. The ultimate realization of deferred tax assetsis dependent upon the generation of future taxable income during periods inwhich those temporary differences become deductible.  Since the Companyhas had cumulative net operating losses in its domestic operations in recentyears, its ability to use forecasted future earnings is diminished.  As a result, management concluded, as of December 31,2005 and 2006, that a full valuation allowance against the domestic netdeferred tax asset was appropriate.  TheCompany continues to recognize a full valuation allowance against its netdomestic deferred tax asset at December 31, 2007.  Management has also determined that a fullvaluation allowance is required on the net operating loss carryforward in oneof the Asian operations within its International segment because of uncertaintyregarding its realization.  No valuationwas required on the remaining foreign net deferred tax asset as management hasdetermined that it is more likely than not to be realized.  The ultimate realization of the remaining netforeign deferred tax assets is dependent upon the generation of future taxableincome during the periods in which those temporary differences 

 

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become deductible.Significant management judgment is involved in assessing the Company’s abilityto realize any future benefit from deferred tax assets. In the event thatactual results differ from management estimates and management adjusts theseestimates in future periods, the Company’s operating results and financial positioncould be materially affected.

 

***ForeignCurrency Translation*****. **The Company has foreign subsidiaries thattogether accounted for 48.6% of the Company’s net revenues and 61.0% of theCompany’s assets as of and for the year ended December 31, 2007. In preparingthe Company’s consolidated financial statements, the Company is required totranslate the financial statements of its foreign subsidiaries from thecurrencies in which they keep their accounting records into United Statesdollars. This process results in exchange gains and losses which, underrelevant accounting guidance, are either included within the Company’sstatement of operations or as a separate part of the Company’s net equity underthe caption “accumulated other comprehensive income.”

 

Under relevantaccounting guidance, the treatment of these translation gains or losses dependsupon management’s determination of the functional currency of each subsidiary.This determination involves consideration of relevant economic facts andcircumstances affecting the subsidiary. Generally, the currency in which thesubsidiary transacts a majority of its transactions, including billings,financing, payroll and other expenditures, would be considered the functionalcurrency. However, management must also consider any dependency of thesubsidiary upon the parent and the nature of the subsidiary’s operations.

 

If managementdeems any subsidiary’s functional currency to be its local currency, then anygain or loss associated with the translation of that subsidiary’s financialstatements is included in accumulated other comprehensive income. However, ifmanagement deems the functional currency to be United States dollars, then anygain or loss associated with the translation of these financial statementswould be included within the Company’s statement of operations.

 

If the Companydisposes of any of its subsidiaries, any cumulative translation gains or losseswould be realized into the Company’s statement of operations. If managementdetermines that there has been a change in the functional currency of asubsidiary to United States dollars, then any translation gains or lossesarising after the date of the change would be included within the Company’sstatement of operations.

 

Based onmanagement’s assessment of the factors discussed above, the Company considersthe functional currency of each of its international subsidiaries to be eachsubsidiary’s local currency.

 

**Resultsof Operations**

 

The followingtable sets forth the Company’s operating results for the periods indicatedexpressed as a percentage of net sales.

 

| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                              |       |                             |       |   |   |   |   |
| Net Sales                                         |       | 100.0                            | %          | 100.0 | % | 100.0 | % |
| Cost of Sales                                     |       | 69.3                             |       | 69.7 |   | 69.8 |   |
|                                              |       |                             |       |   |   |   |   |
| Gross Profit                                      |       | 30.7                             |       | 30.3 |   | 30.2 |   |
|                                              |       |                             |       |   |   |   |   |
| Selling                                           |       | 16.6                             |       | 20.2 |   | 19.3 |   |
| General and administrative                        |       | 11.1                             |       | 11.5 |   | 10.1 |   |
| Research and development                          |       | 1.4                              |       | 2.0 |   | 2.0 |   |
| Impairment of goodwill                            |       | —                           |       | 4.4 |   | — |   |
| Asset impairment charge                           |       | —                           |       | — |   | 0.1 |   |
|                                              |       |                             |       |   |   |   |   |
| Income (loss) from operations                     |       | 1.6                              |       | (7.8 | ) | (1.3 | ) |
|                                              |       |                             |       |   |   |   |   |
| Interest expense, net                             |       | 1.0                              |       | (0.8 | ) | (0.4 | ) |
|                                              |       |                             |       |   |   |   |   |
| Income (loss) before income tax expense (benefit) |       | 0.6                              |       | (8.6 | ) | (1.7 | ) |
| Income taxes (benefit)                            |       | 0.4                              |       | (0.7 | ) | 4.3 |   |
| Net income (loss) before minority interest        |       | 0.2                              |       | (7.9 | ) | (6.0 | ) |
| Minority interest                                 |       | —                           |       | (1.6 | ) | (0.1 | ) |
|                                              |       |                             |       |   |   |   |   |
| Net income (loss)                                 |       | 0.2                              | %          | (6.3 | )% | (5.9 | )% |

 

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# **Comparisonof Year Ended December 31, 2007 with Year Ended December 31, 2006**

# ** **

***NetSales***.  Net sales increased $24.1 million or 22.1%from $109.1 million in 2006 to $133.2 million in 2007.   The increase was primarily due to higherdemand across all product lines within both of the Company’s reportingsegments.

 

Americas net salesincreased $14.7 million or 24.6% from $59.3 million in 2006 to $74.0 million in2007.  The increase was primarily due tohigher demand from the Company’s core telecom and cable customers that havebeen upgrading their network infrastructures. Sales to large telecom and service providers fluctuate from period toperiod based on the status of such customers’ infrastructure projects andtherefore are difficult to predict.

 

International net salesincreased $9.4 million or 18.9% from $49.8 million in 2006 to $59.2 million in2007.  The increase was primarily dueincreased demand for the Company’s products due to the ongoing drought,regulatory requirements, and incentives in the urban markets of Australia.

 

***GrossProfit***.  Gross profit increased $7.8 million from$33.1 million in 2006 to $40.9 million in 2007. The increase was due to higher gross profit dollars resulting from thehigher revenues in both reporting segments of the Company.  Gross profit dollars in the Americas segmentincreased $3.6 million from $18.2 million in 2006 to $21.8 million in 2007.  Gross profit of $19.1 million in 2007 in theInternational segment was $4.2 million higher than in 2006.

 

As a percentage of netsales, gross profit increased from 30.3% in 2006 to 30.7% in 2007.  The increase is primarily due to a highergross profit percentage in the International segment, which increased from29.9% in 2006 to 32.4% in 2007.  Thisincrease is primarily as a result of manufacturing cost reductions along withprice increases.  Offsetting the increasein the International segment was a decrease in the gross profit percentage inthe Americas segment from 30.7% in 2006 to 29.4% in 2007.  This decrease was primarily due to higher rawmaterial costs related to increased commodity prices and higher direct laborcosts as a percentage of sales.

 

***Selling. ***Selling expenses increased slightly from $22.0 millionin 2006 to $22.1 million in 2007.

 

As a percentage of netsales, selling expenses decreased from 20.2% in 2006 to 16.6% in 2007.  The lower percentage is primarily due to thesmall increase in total selling expenses compared to the increase insales.  The Company was able to keepselling expenses down primarily as a result of increased efficienciesassociated with the management and operation of the Company’s internationalshipping activities.

 

***General and Administrative*****.**  General and administrativeexpenses were $14.9 million in 2007, an increase of $2.4 million or 19.2% from2006.  The increase is due primarily tohigher compensation and benefits expense of $1.7 million due to increased headcount, higher expenses related to the upgrading of the Company’s EnterpriseResource Planning systems of $0.8 million and start-up costs related to thedevelopment of the water storage business in the Americas segment of $0.2million.  These increases were partiallyoffset by decreases in other general and administrative expenses.

 

## ***As a percentage of net sales, general andadministrative expenses decreased from 11.5% in 2006 to 11.2% in 2007.***

## *** ***

***Researchand Development***.  Research and development expenses were $1.9million in 2007, a decrease of $0.3 million or 13.6% from 2006.  Spending on new product development programsin 2007 was slightly less than the previous year due to a higher level ofcapitalization of internal costs in the development of new tools and equipmentassociated with new designs of products.

 

As a percentage of netsales, research and development expenses decreased from 2.0% in 2006 to 1.4% in2007.

 

***Impairmentof Goodwill.***  Goodwill impairment expense was $4.8 millionin 2006, compared to no impairment in 2007. The impairment was related to the Company’s Bushman Tanks operation 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 as a resultof increasing prices in raw materials. The primary raw materials used in the manufacture of Bushman Tanksproducts are petroleum-based resins.  Theprice of these resins has been continually increasing as the price of oilincreases.  The valuation methodology forgoodwill is summarized in Note B to the Consolidated Financial Statements.

 

***Income (Loss) from Operations****. *As a result of theitems discussed above, income from operations was $2.1 million in 2007 comparedto a loss from operations of ($8.5) million in 2006.  Operating margin as a percent of sales was1.6% in 2007 compared to (7.8%) in 2006.

 

***Interest Expense, Net****.*  Interest expense,net of interest income, was $1.3 million in 2007 compared to $0.9 million in2006 due to the higher level of outstanding debt in 2007.

 

# ***Income Taxes***. Income tax expense of $0.5 million in 2007 compares to an income taxbenefit of ($0.8) million in 2006.  Theeffective tax rate was 65.8% in 2007 and (8.3%) in 2006.  The Company has a full valuation allowance onthe realization of the domestic net deferred tax asset.  Approximately $.04 million of state taxexpense has been 

 

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# **recorded in the results of operations in the U.S.for 2007.  The tax expense recorded inthe current year was primarily a result of the income in the Company’s foreignoperations.  The tax benefit recorded in2006 was the result of the loss in the foreign operations.  The low effective tax rate for 2006 wasprimarily related to the $4,829 charge for the impairment of goodwill, which isa non-deductible item for determining income tax.**

# ** **

# **Comparisonof Year Ended December 31, 2006 with Year Ended December 31, 2005**

# ** **

***NetSales***.  Net sales decreased $7.0 million or 6.0% from$116.1 million in 2005 to $109.1 million in 2006.   The decrease was primarily due to the lowerdemand from the Company’s telecom and cable customers in the Americas segment.

 

Americas net salesdecreased $6.0 million or 9.2% from $65.3 million in 2005 to $59.3 million in2006.  The decrease was due to the lowervolume of sales to the Company’s core telecom and cable customers.  Sales to large telecom and service providersfluctuate period to period based on the status of such customers’infrastructure projects and therefore are difficult to predict.

 

International net salesdecreased $1.0 million or 1.9% from $50.8 million in 2005 to $49.8 million in2006.  The decrease was primarily due tothe lower volume of sales to the Company’s telecom customers in Australia andAsia due to reduced capital expenditures and slower deployment of certainCompany-supplied products.

 

Sales to Verizondeclined in 2006 to slightly less than 10% of Company sales in the period.  Sales to Verizon of $19.9 million in 2005represented 17.2% of Company sales in the period.  Sales to Verizon have historically fluctuatedfrom year to year.

 

***GrossProfit***.  Gross profit decreased $1.9 million from$35.0 million in 2005 to $33.1 million in 2006. The decrease was primarily dueto the lower amount of gross profit in the International segment.  Gross profit dollars in the Internationalsegment decreased by $2.8 million due to lower sales volume and a lower grossprofit percentage due primarily to higher raw material costs.  The decrease in the International segment waspartially offset by an increase of $0.9 million in the Americas segment due toa higher gross profit percentage caused by greater leveraging of fixed costs.

 

As a percentage of netsales, gross profit increased from 30.2% in 2005 to 30.3% in 2006.  The increase is primarily due to a highergross profit percentage in the Americas segment, which increased from 26.5% in2005 to 30.7% in 2006.  This increase isprimarily due to a stronger mix of the higher margin enclosure productline.  Offsetting the increase in theAmericas segment was a decrease in the gross profit percentage in theInternational segment from 34.8% in 2005 to 29.9% in 2006.  This decrease was primarily due to higher rawmaterial costs related to increased commodity prices, labor inefficiencies associatedwith the local move of one of the Australian manufacturing operations to a newfacility and disruptions caused by the termination of transportation andlogistics services by the primary freight provider of Bushman Tanks.

 

***Selling.**** *Sellingexpenses decreased $0.4 million or 1.8% from $22.4 million in 2005 to $22.0million in 2006.  The decrease is due tothe lower volume of sales.

 

As a percentage of netsales, selling expenses increased from 19.3% in 2005 to 20.2% in 2006.  The higher percentage is primarily due to theincrease in freight costs in both the Americas and International segments dueto fuel surcharges in addition to inefficiencies associated with the managementand operation of the Company’s international shipping activities.

 

***General and Administrative*****.**  General and administrativeexpenses were $12.5 million in 2006, an increase of $0.8 million or 6.8% from2005.  The increase is due primarily tostock-based compensation expense of $0.3 million, lease settlement costs of$0.3 million in the International segment, severance cost of $0.2 million andother various expenses.

 

As a percentage of netsales, general and administrative expenses increased from 10.1% in 2005 to11.5% in 2006.  The increase is due tothe decreased sales level without a proportional decrease in general andadministrative costs that are relatively fixed in nature.

 

***Researchand Development***.  Research and development expenses were $2.2million in 2006, a decrease of $0.2 million or 8.3% from 2005.  Spending on new product development programsin 2006 was slightly less than the previous year due to the introduction offewer communication products.

 

As a percentage of netsales, research and development expenses remained the same at 2.0% in 2006 and2005.

 

***Impairmentof Goodwill.***  Goodwill impairment expense was $4.8 millionin 2006, compared to no impairment in 2005. The impairment was related to the Company’s Bushman Tanks operation 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 as a resultof increasing prices in raw materials. The primary raw materials used in the manufacture of Bushman Tanksproducts are petroleum-based resins.  Theprice of these resins has been continually increasing as the price of oilincreases.  The valuation methodology forgoodwill is summarized in Note B to the Consolidated Financial Statements.

 

18

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***Impairment of Fixed Assets***.  There was no impairment of fixed assets in2006.  In 2005, there was an impairmentcharge of $0.1 million due to the writedown of some manufacturing equipment inthe Americas segment.

 

***Income from Operations****. *As a result of theitems discussed above, loss from operations increased $6.9 million from ($1.5)million in 2005 to ($8.5) million in 2006. Operating margin as a percent of sales decreased from (1.3%) in 2005 to(7.8%) in 2006.

 

***Interest Expense, Net****.*  Interest expense,net of interest income, was $0.9 million in 2006 compared to $0.5 million in2005.

 

# ***Income Taxes***. There was an income tax benefit of ($0.8) million in 2006 compared to anincome tax expense of $5.0 million in 2005. The effective tax rate was an income tax benefit of (8.3%) in 2006 andan income tax expense of 246.0% in 2005. The benefit in 2006 was primarily dueto the current year loss in foreign operations whereas the expense in 2005 wasprimarily the result of recognizing a full valuation allowance on the domesticnet deferred tax asset.  No benefit wasrecorded for the 2006 domestic loss due to the full valuation allowancerecognized on the net domestic deferred tax asset at December 31, 2006.

# ** **

**Liquidity and Capital Resources**

 

Cash and cash equivalentson December 31, 2007 were $2.1 million, a slight decrease of $0.1 millionfrom the December 31, 2006 balance of $2.2 million.  The decrease was due to cash used for capitalexpenditures, offset by cash provided by operating activities and financingactivities.

 

Net cash provided byoperating activities was $1.6 million during 2007, compared to net cash used inoperating activities of ($2.3) million in 2006. The cash provided by operating activities in 2007 is primarily due tothe combination of net income of $0.3 million and the $6.1 million of non-cashdeductions most of which is depreciation and amortization, which more thanoffset the cash used in operating activities as a result of the increase ininventories of $2.7 million, increase in accounts receivable of $0.6 million,and a decrease in accounts payable of $2.2 million.

 

Net cash used ininvesting activities was $3.8 million in 2007 and 2006.  During 2007, the Company spent $1.3 millionmore than the previous year in the Americas segment on new tools and equipmentfor the production of new products, whereas the Company spent $1.2 million lessthan the previous year in the International segment, primarily due to a $1.6million purchase in 2006 of trucks and trailers in association with itstransition of transportation and logistics services from an outside freightprovider to internally managed operations.

 

Net cash provided byfinancing activities was $2.2 million in 2007 compared to net cash provided byfinancing activities of $5.6 million in 2006. The increase is due to additional borrowings under the Company’s creditfacilities needed to fund operations in 2006 and 2007 and to purchase thetrucks and trailers in the International segment in 2006.

 

Accounts receivableincreased from $11.7 million at December 31, 2006 to $12.8 million at December 31,2007 primarily due to a higher level of sales at the end of 2007 in theAmericas segment of the Company.  Interms of days sales outstanding, accounts receivable decreased from 43 days at December 31,2006 to 39 days at December 31, 2007 due to a higher percentage increaseof sales in the fourth quarter of 2007 compared to the percentage increase inthe accounts receivable balance.

 

Inventories increasedfrom $13.0 million at December 31, 2006 to $15.8 million at December 31,2007.  The increase is in line withhigher sales levels in 2007.  Daysinventory on hand increased from 63 days at December 31, 2006 to 68 daysat December 31, 2007.

 

Accounts payabledecreased from $10.9 million at December 31, 2006 to $9.4 million at December 31,2007.  Days payables decreased from 53days at December 31, 2006 to 41 days at December 31, 2007.  The decrease is primarily due to the loweraccounts payable balance in the International segment at year end.

 

TheCompany and its subsidiaries have entered into the following financingarrangements:

 

1.                                       On July 30,2007, the Company and Channell Commercial Canada Inc. (“Channell Canada”), asborrowers, entered into an Amended and Restated Loan and Security Agreementwith Bank of America, N.A. and Bank of America, Canada Branch.  The Amended and Restated Loan and SecurityAgreement contains a term loan of $2,500,000, capital expenditure facility ofup to $5,000,000 and revolving credit facility of up to $12,500,000 (dependingon the level of certain qualifying assets), which includes availability forletters of credit.  $8.1 million inproceeds from the Amended and Restated Loan and Security Agreement were used torepay in full the outstanding loans under the prior Loan and Security Agreementwith the same lenders.  The Amended andRestated Loan and Security Agreement terminates on June 30, 2010 (unlessterminated earlier pursuant to the terms thereof).

 

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Theterm loan is repayable in monthly payments based on a 60-month amortizationschedule and a balloon payment due June 30, 2010.   The capital expenditure loans will berepayable in equal monthly installments equal to the original principal amountof the loan divided by 60, with the remaining outstanding balance due on June 30,2010.  At December 31, 2007, theoutstanding balance of the term loan was $2.3 million and the outstandingbalance on the revolver was $5.6 million. No amounts were outstanding under the capital expenditure facility as ofthat date.

 

Underthe Amended and Restated Loan and Security Agreement, the outstanding balanceof the term loan and the revolver each bears interest payable monthly at avariable rate based on either LIBOR or the lender’s base rate.  Theinterest rate under the Amended and Restated Loan and Security Agreement at December 31,2007 was 7.75%.

 

Theloans under the Amended and Restated Loan and Security Agreement are guaranteedby Channell Limited, Channell Commercial Europe Limited and A.C. Egerton (Holdings)Limited, which are subsidiaries of the Company (the “Subsidiary Guarantors”)and are secured by substantially all assets of the Company and the SubsidiaryGuarantors.  In addition, any borrowingsmade by Channell Canada are secured by substantially all of the assets ofChannell Canada.  The Amended andRestated Loan and Security Agreement contains various financial and operatingcovenants that impose limitations on the borrowers’ and their subsidiaries’ability, among other things, to incur additional indebtedness, merge orconsolidate, sell assets except in the ordinary course of business, makecertain investments, enter into leases and pay dividends.  The Amended and Restated Loan and SecurityAgreement requires the Company to maintain a lockbox on the revolving creditfacility. The Amended and Restated Loan and Security Agreement also generallyprovides that if there exists an event of default thereunder, the lenders oradministrative agents would have the option of accelerating the outstanding obligationsand terminating all commitments thereunder.

 

2.                                       On October 3,2007, Channell Bushman Pty Ltd, a majority-owned subsidiary of the Company (“ChannellBushman”), and Bushmans Group Pty Limited, Australian Bushman Tanks PtyLimited, Bushmans Engineering Pty Limited and Polyrib Tanks Pty Limited, each awholly owned subsidiary of Channell Bushman (the “Channell Bushman Subsidiaries”),entered into a Facility Agreement with an Australian private debt fund and aFixed and Floating Charge (the “Security Agreement”) with the same private debtfund.  The Facility Agreement terminateson September 30, 2010 (unless terminated earlier pursuant to the termsthereof). The Facility Agreement contains a term loan of $7,104,000 and arevolving credit facility of up to $4,440,000 (depending on the level ofcertain qualifying assets).   $9.9million in proceeds from the Facility Agreement was used to repay, in full, theCompany’s outstanding debt under a Loan and Security Agreement with acommercial bank in Australia.

 

Theterm loan is repayable in monthly payments beginning March 2008 based on afifty-month amortization schedule and a balloon payment due September 30,2010.  At December 31, 2007, theoutstanding balance under the term loan was $7.0 million and the outstandingbalance on the revolver was $2.8 million.

 

InMarch 2008, Channell Bushman entered into a sale and leaseback transactionwith an equipment finance company with respect to its truck fleet.  The net proceeds from the sale of $1,276,000were used to pay down the term loan.

 

Underthe Facility Agreement, the outstanding balance of the term loan bears interestpayable monthly at a variable rate based on the lender’s base rate.  The interest rate under the FacilityAgreement at December 31, 2007 was 12.39% for the term loan and 13.39% forthe revolver.

 

Theloans under the Facility Agreement are guaranteed by the Channell BushmanSubsidiaries, and are secured by all assets of Channell Bushman and theChannell Bushman Subsidiaries.  TheFacility Agreement and Security Agreement contain various financial andoperating covenants that impose limitations on Channell Bushman’s and theChannell Bushman Subsidiaries’ ability to, among other things, incur orguarantee additional indebtedness, merge or consolidate, sell assets except inthe ordinary course of business, make certain investments, issue or redeemshares, transfer ownership of the share capital of the Channell BushmanSubsidiaries, grant further security interests, and pay dividends. The FacilityAgreement and Security Agreement provide that on the occurrence of an event ofdefault, the lender may declare the outstanding obligations under the FacilityAgreement immediately due and payable, terminate its commitments under theFacility Agreement and enforce its rights under its security interests,including taking possession of and otherwise acting as owner of the assets ofChannell Bushman and the Channell Bushman Subsidiaries, appointing a receiverover the assets of Channell Bushman and the Channell Bushman Subsidiaries withthe power to, among other things, sell the assets, and causing 100% of theshares of each controlled entity to be registered in its name. The lender mayalso declare the outstanding obligations under the Facility Agreement immediatelydue and payable should any change of control in Channell Bushman or anyChannell Bushman Subsidiary occur.

 

20

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3.                                       On October 8,2007, Channell Pty Ltd and Bushman Group Pty Limited entered into a new Loan andSecurity Agreement with a commercial bank in Australia that amended the prioragreement under which the outstanding loan balances were paid off with theinitial borrowing from the Facility Agreement described above.   The new Loan and Security Agreement extendsthe expiration of all remaining facilities to October 31, 2008.  Theremaining facilities include performance guarantees, credit card facilities andpayroll processing facilities.

 

Theloans under the Loan and Security Agreement are secured by all the assets ofChannell Pty Limited and a term deposit that was released in March 2008.  The Loan and Security Agreement containsvarious operating covenants that impose limitations on Channell Pty Limited’sand Bushman Group Pty Limited’s ability, among other things, to merge orconsolidate, sell assets except in the ordinary course of business, and paydividends.

 

InMarch 2008, Channell Pty Limited and Bushman Group Pty Limited refinancedthe facilities under the Loan and Security Agreement with another commercialbank in Australia.  In addition to theperformance guarantees, credit card facilities and payroll processingfacilities, the new agreement includes an equipment financing facility for eachentity.

 

4.                                       On August 2,2004, the Company and Channell Bushman entered into an Investment andShareholder’s Agreement with a private equity firm in Australia.  Theprivate equity investment was obtained as part of the financing of the BushmanTanks acquisition.  The private equity party invested $2.6 million, thenet amount received after paying a capital raising fee, for ownership of 25% ofthe outstanding and voting shares of Channell Bushman.  As part of theShareholder’s Agreement, the private equity party has the right to appoint onemember of the Board of Directors of Channell Bushman with the Companyappointing the remaining three members.  The Shareholder’s Agreementspecifies that certain actions taken by the Board of Directors requireunanimous approval, including, without limitation, a proposal to sell all orsubstantially all of the assets of Channell Bushman, material assetacquisitions or disposals not included in the annual business plan, any plan tolimit or dissolve the business, the issuance of any securities, capitalrestructuring, granting of a security interest on assets and related partytransactions.

 

It is the intent of theprivate equity party to exit from its investment in Channell Bushman within 5years after the original investment.  The Shareholder’s Agreement containsclauses to facilitate the exit of the private equity party.  TheShareholder’s Agreement specifies that after the date that is two years afterthe original investment, the Company has an option to acquire all of the sharesowned by the private equity party.  The Shareholder’s Agreement specifiesthat the value of the shares is to be fair market value as determined by anindependent appraiser.  There are no minimum or maximum amounts specifiedin the Shareholder’s Agreement.  After the date that is five years afterthe original investment, both the Company and the private equity party have theright to initiate a sale of Channell Bushman.  At such time, the otherparty may elect to buy out the shares of the party initiating the sale at thefair market value as determined by an independent appraiser.  Otherwise,Channell Bushman would be offered for sale with the assistance of a financialadvisor.

 

Contractual obligationsconsist principally of payment for noncancellable operating lease obligations,long-term debt and capital leases. Future payments required under these contractual obligations have beensummarized in the notes to the Consolidated Financial Statements as follows: (i) leasecommitments — Note L, (ii) long term debt — Note F, and (iii) capitallease obligations — Note G.

 

During the first quarterof 2008, the Company reduced its U.S. workforce by approximately 25% as part ofan overall restructuring plan.  Severancepayments related to the reduction in headcount were approximately $200,000.  In addition, the Company anticipates that itwill spend approximately $600,000 on facilities rationalization efforts in thefirst half of 2008.

 

Beginning in the latterpart of 2007 and continuing into 2008, much of Australia has received unusuallyhigh levels of rainfall, which will result in materially lower first quarterrevenues for Channell Bushman than were previously expected.   This reduction in revenue is expected tolimit Channell Bushman’s ability to borrow under the Facility Agreementdescribed above, at least in the short term, as the amounts available forborrowing thereunder are dependent on the level of qualifying assets, which hasbeen negatively impacted by the reduced revenues.  The reduction in available borrowing may requirethe Company and Channell Bushman to seek additional financing, or takealternative steps, to provide for Channell Bushman’s near-term liquidity needs. Management believes there are several alternatives toaddress this short-term issue and is currently evaluating these alternatives.

 

21

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Except as noted abovewith respect to Channell Bushman, the Company believes that cash flow fromoperations and the Company’s existing debt facilities should be sufficient tofund the Company’s capital expenditure and working capital requirements beyond2008.

 

**Contractual Obligations and Other Commitments**

 

Thefollowing table summarizes the Company’s contractual obligations and othercommitments as of December 31, 2007:

 

| ** **                      | ** ** | ** ** | ** ** | **2009 to** | ** ** | **2011 to** | ** ** | **2013 and**   | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------|------------|-------------|------------|-------------|------------|----------------|------------|------------|------------|
| **(amounts in thousands)**      | ** ** | **2008**   | ** ** | **2010**    | ** ** | **2012**    | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Contractual Obligations         |       |       |       |        |       |        |       |           |       |       |       |
| Long-Term Debt (1)              |       | $          | 11,611     |        | $          | 8,045       |       | $              | 5          |       | $          | — |   | $ | 19,661 |   |
| Capital Lease Obligations(2)    |       | 178        |       | 210         |       | —      |       | —         |       | 388        |       |
| Operating Lease Obligations (3) |       | 3,805      |       | 6,833       |       | 4,989       |       | 4,651          |       | 20,278     |       |
| Employment Contracts (4)        |       | 836        |       | —      |       | —      |       | —         |       | 836        |       |
|                            |       | $          | 16,430     |        | $          | 15,088      |       | $              | 4,994      |       | $          | 4,651 |   | $ | 41,163 |   |

 

----

(1)          The Company is party to an Amended andRestated Loan and Security Agreement, which includes a term loan, revolvingline of credit and capital expenditure facility with asset-based lenders in theUnited States and Canada, which expires June 30, 2010. InOctober 2007, certain subsidiaries of the Company also entered into athree-year Facility Agreement with an Australian private debt fund, whichincludes a term loan and revolving line of credit. Amounts include interestbased on the rates in effect at December 31, 2007. See Note F to theConsolidated Financial Statements and “Liquidity and Capital Resources” above.

(2)          See Note G to the Consolidated FinancialStatements.

(3)          The Company leases manufacturing andoffice space and machinery and equipment under several operating leasesexpiring through 2015. See Note L to the Consolidated Financial Statements.

(4)          The Company has an employment agreementwith its President and Chief Executive Officer expiring December 8, 2008.This contract is renewable every 5 years. The President and Chief ExecutiveOfficer’s salary was $825,000 for 2007 and is subject to an annual cost ofliving increase based on the consumer price index. Base salary may also beincreased at the discretion of the Board of Directors. In the event thePresident and Chief Executive Officer is terminated, the Company will beobligated to make a lump sum severance payment equal to three times his thencurrent base salary. See Note L to the Consolidated Financial Statements.

 

**Off-BalanceSheet Arrangements**

 

As discussed in Note K tothe Consolidated Financial Statements, the Company guaranteed debt of theChannell Family Trust, one of the Company’s principal stockholders, of whichthe Company’s Chairman of the Board and Secretary (who is also a director) istrustee, of approximately $0.8 million in 1997. The guaranteed debt was incurred in connection with construction of thefacilities leased to the Company and is collateralized by said facilities.  The loan amount subject to the unsecuredguarantee is expected to decline before expiring in 2017.  It is not practicable to estimate the fairvalue of the guarantee; however, the Company does not anticipate that it willincur losses as a result of this guarantee. The Company has not recorded a liability for this guarantee.  If the principal stockholder were to defaulton the outstanding loan balance, the Company may 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 stockholder.  At December 31, 2007, the outstandingloan balance subject to the guarantee totaled $0.5 million.

 

**Item 7A.  Quantitative andQualitative Disclosures about Market Risk.**

 

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

 

**Interest Rate Sensitivity**

 

The Company and itssubsidiaries have entered into two financing agreements.  In July 2007,the Company entered into a three-year Loan and Security Agreement with assetbased lenders in the United States and Canada that expires June 30,2010.  The agreement contains a term loan, revolving line of credit andcapital expenditure facility.  In October 2007, many of the Company’sAustralian subsidiaries entered into a Facility Agreement with an Australianprivate debt fund in Australia, which contains a term loan and a revolving lineof credit that expire in September 2010. These 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 credit facility are variable.

 

 

22

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Based upon the amount ofvariable rate debt outstanding at the end of the year, and holding the variablerate debt balance constant, each one percentage point increase in interestrates occurring on the second day of an annual period would result in anincrease in interest expense of approximately $0.18 million per year. This analysis does not consider the effects of economic activity on the Company’ssales and profitability in such an environment.

 

**Exchange Rate Sensitivity**

 

The Company has assetsand liabilities outside the United States that are subject to fluctuations inforeign currency exchange rates.  Assets and liabilities outside theUnited States are primarily located in the United Kingdom, Australia, andCanada.  The Company’s investment in foreign subsidiaries with afunctional currency other than the U.S. dollar is generally consideredlong-term.  Accordingly, the Company does not hedge theseinvestments.  The Company also purchases a limited portion of its rawmaterials from foreign countries.  These purchases are generallydenominated in U.S. dollars and are accordingly not subject to exchange ratefluctuations.  The Company has minimal foreign currency transaction gainsor losses.  The Company has not engaged in forward purchases of foreigncurrency and other similar contracts to reduce its economic exposure to changesin exchange rates because the associated risk is not considered significant.

 

**Item 8.  Financial Statements and SupplementaryData.**

 

**SelectedQuarterly Financial Data**

 

See Note O to the Company’sConsolidated Financial Statements.

 

ConsolidatedFinancial Statements of Channell Commercial Corporation are as follows:

 
| Report of Independent  Registered Public Accounting Firm                                                                                                              | F-1    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                  |   |
| Report of Independent  Registered Public Accounting Firm                                                                                                              | F-2    |
|                                                                                                                                                                  |   |
| Report of Independent  Registered Public Accounting Firm                                                                                                              | F-3    |
|                                                                                                                                                                  |   |
| Consolidated Balance  Sheets as of December 31, 2006 and December 31, 2007                                                                                  | F-4    |
|                                                                                                                                                                  |   |
| Consolidated Statements  of Operations and Comprehensive Income (Loss) for the years endedDecember 31, 2005, December 31,  2006, and December 31, 2007 | F-5    |
|                                                                                                                                                                  |   |
| Consolidated Statement  of Stockholders’ Equity for the years ended December 31, 2005,December 31, 2006, and  December 31, 2007                   | F-6    |
|                                                                                                                                                                  |   |
| Consolidated Statements  of Cash Flows for the years ended December 31, 2005,December 31, 2006, and  December 31, 2007                                 | F-7    |
|                                                                                                                                                                  |   |
| Notes to Consolidated  Financial Statements                                                                                                                           | F-8    |
|                                                                                                                                                                  |   |
| Financial statement  schedules are as follows:                                                                                                                        |   |
|                                                                                                                                                                  |   |
| Schedule II - Valuation  and Qualifying Accounts                                                                                                                      |   |
|                                                                                                                                                                  |   |
| All remaining schedules are omitted because they are  not applicable, or the required information isincluded in the financial statements or  the notes thereto.       |   |

### ** **

### **Item 9.  Changes in andDisagreements with Accountants on Accounting and Financial**Disclosure.

### ** **

None.

 

### **Item 9A(T).  Controls andProcedures.**

### ** **

**Evaluation of Disclosure Controls and Procedures**

 

TheCompany maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “ExchangeAct”), that are designed to ensure that information required to be disclosed inthe Company’s Exchange Act reports is recorded, processed, summarized, andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission regulations, and that such information isaccumulated and communicated to the Company’s management, including its ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.  As of 

 

 

23

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December 31,2007, the management of the Company, including the Chief Executive Officer andChief Financial Officer, carried out an assessment of the Company’s disclosurecontrols and procedures and concluded that they were not effective as of theend of the period covered by this report.

 

**Management’s Report on Internal Control over FinancialReporting**

 

*This Section of this Annual Report on Form 10-Kwill not be deemed incorporated by reference by any general statementincorporating by reference this Annual Report on Form 10-K into any filingunder the Securities Act of 1933, as amended, or the Exchange Act, except tothe extent that the Company specifically incorporates this information byreference, and will not otherwise be deemed filed under the Securities Act of1933, as amended, or the Exchange Act.*

 

TheCompany’s management is responsible for establishing and maintaining adequateinternal control over financial reporting (as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934, as amended). A system of internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. Management, including the Chief ExecutiveOfficer and Chief Financial Officer, assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2007. Inmaking this assessment, management used the criteria set forth by the Committeeof Sponsoring Organizations of the Treadway Commission (COSO) in InternalControl-Integrated Framework. Management has concluded that, as of December 31,2007, the Company’s internal control over financial reporting is not effectivebased on these criteria.

 

Duringthe process of assessing the status of the internal control infrastructure, theCompany identified significant deficiencies in internal controls that rose tothe level of “material weaknesses” in the financial closing cycle at theCompany’s Bushman Tanks operating segment. As a result of the weaknesses identified in management’s evaluation, theCompany committed to take the following actions to improve internal controlover financial reporting:

 

1.                               Design,implement and document control procedures adequate to support the Company’sday-to-day accounting and the financial closing and reporting process.

 

2.                               Strengthencontrols and procedures to require formal reviews and sign-offs evidencingreview and approval of each journal entry, account reconciliation andaccounting analysis by an individual at a more senior level who possesses therequisite skills and is independent of the preparation of the entry orreconciliation.

 

ThisAnnual Report on Form 10-K does not include an attestation report of theCompany’s registered public accounting firm regarding internal control overfinancial reporting. Management’s report was not subject to attestation by theCompany’s registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit the Company to provide onlymanagement’s report in this Annual Report on Form 10-K.

 

**Changes in Internal Control over Financial Reporting**

 

Therewere no changes in our internal controls over financial reporting during thequarter ended December 31, 2007 that have materially affected, or arereasonably likely to materially affect the Company’s internal controls overfinancial reporting.

 

### **Item 9B.  Other Information**

### ** **

None.

 

**PART III**

 

### **Item 10. Directors, Executive Officers and Corporate Governance.**

### ** **

The information required by this item is incorporatedby reference to the Company’s definitive proxy statement for its 2008 AnnualMeeting of Stockholders.

### ** **

### **Item 11. Executive Compensation.**

### ** **

The information required by this item is incorporatedby reference to the Company’s definitive proxy statement for its 2008 AnnualMeeting of Stockholders.

 

 

24

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**Item 12. Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.**

 

The information required by this item is incorporatedby reference to the Company’s definitive proxy statement for its 2008 AnnualMeeting of Stockholders.

 

**Item 13. CertainRelationships and Related Transactions, and Director Independence.**

 

The information required by this item is incorporatedby reference to the Company’s definitive proxy statement for its 2008 AnnualMeeting of Stockholders.

 

**Item 14. Principal AccountantFees and Services.**

 

The information required by this item is incorporatedby reference to the Company’s definitive proxy statement for its 2008 AnnualMeeting of Stockholders.

 

**PART IV**

 

**Item 15. Exhibits, FinancialStatement Schedules.**

 
| (a)    |                                                                   | The following financial  statements and schedules are filed as a part of this report:                                                                        |
|--------|------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (1)                                                                    | Consolidated Financial  Statements                                                                                                                           |
|   |                                                                   | See index included in  Part II, Item 8.                                                                                                                 |
|   | (2)                                                                    | Consolidated Financial  Statement Schedules                                                                                                                  |
|   |                                                                   | Schedule II — Valuation  and Qualifying Accounts                                                                                                        |
|   |                                                                   | All remaining schedules are omitted because they are  not applicable, or the required information is included in the financial  statements or notes thereto. |
|   |                                                                   |                                                                                                                                                         |
|   | (a)(3) and (c).   The following exhibits are filed herewith: |

 

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                       |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1         |       | Restated  Certificate of Incorporation of the Company (Exhibit 3.1)(1)                                                                                                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2         |       | Bylaws  of the Company, as amended as of December 17, 2007 (34)                                                                                                                                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                             |
| 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)(6)                                                                                                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4*       |       | Channell  Commercial Corporation 2004 Incentive Bonus Plan(8)                                                                                                                                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                             |
| 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)(5) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6        |       | 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)(10)                                                                                                                                                                                                              |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7*       |       | Employment  Agreement dated July 8, 1996 between the Company and William H.  Channell, Sr. (Exhibit 10.8)(1)                                                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.8*       |       | Channell  Commercial Corporation 1996 Performance-Based Annual Incentive Compensation  Plan (Exhibit 10.10)(1)                                                                                                                                                                                                                                                                              |

 

 

25

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| 10.9   |   | 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)                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.10  |   | Lease  dated May 29, 1996 between the Company and the Channell Family Trust  (Exhibit 10.12)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.11  |   | 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)(11)                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.12  |   | Form of  Indemnity Agreement (Exhibit 10.17)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.13  |   | Form of  Agreement Regarding Intellectual Property (Exhibit 10.18)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.14  |   | 401(k) Plan  of the Company (Exhibit 10.19)(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.15  |   | A.C.  Egerton (Holdings) PLC Share Purchase Agreement (Exhibit 2)(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.16  |   | Lease  dated June 27, 2002 between the Company and Ynez Street, Ltd.  (Exhibit 10.29)(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.17* |   | Amendment  to Employment Agreement dated December 9, 2003 between the Company and  William H. Channell, Sr. (Exhibit 10.19)(7)                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.18* |   | Employment  Agreement dated December 9, 2003 between the Company and William H.  Channell, Jr. (Exhibit 10.20)(7)                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.19  |   | Share  and Asset Purchase Agreement dated as of July 14, 2004 by and among  Australia’s Bushman Tanks Pty Ltd, Douglas Robin Young, Richard James Young,  Lokan Nominees Pty Ltd and Lenbridge Grange Pty Ltd, Belsiasun Pty Ltd and  Elcarva Pty Ltd, the holders of all the outstanding shares of Bushmans Group  Pty Ltd, Hold-On Industries Australia Pty Ltd, Australian Bushman Tanks Pty  Ltd, and Polyrib Tanks Pty Ltd, on the one hand, and Channell Commercial  Corporation and Channell Bushman Pty Limited, on the other hand  (Exhibit 99.2)(9) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.20* |   | Employment  Letter dated June 27, 2005 between the Company and Jerry Collazo  (Exhibit 99.2)(12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.21* |   | Long-Term  Incentive Plan for William H. Channell, Jr. (Exhibit 10.1)(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.22  |   | 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)(14)                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.23  |   | 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)(14)                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.24  |   | 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)(15)                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.25  |   | Lease  dated July 13, 2006 between Channell Pty Ltd and Ing Management Ltd  (Exhibit 10.32)(17)                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.26* |   | Employment  Letter dated August 31, 2006 between the Company and Patrick E. McCready  (Exhibit 10.1)(18)                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.27  |   | 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)(19)                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.28  |   | 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)(20)                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.29  |   | 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) (21)                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.30  |   | 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)(22)                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.31  |   | 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)(24)                                                                                                                                                                                                                     |

 

 

26

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| 10.32  |   | 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)(25)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.33  |   | 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)(26) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.34  |   | 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 (Exhibit 10.1)(27)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.35  |   | 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. (Exhibit 10.1)(28)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.36  |   | 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 (Exhibit 10.1)(29)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.37  |   | 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)(30)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.38  |   | 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)(31)                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.39  |   | 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)(31)                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.40  |   | 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)(31)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.41  |   | Lease dated  September 13, 2007 between the Company, on the one hand, and William H.  Channell, Jr. and Carolyn Channell, on the other hand  (Exhibit 10.47)(33)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.42  |   | Amendment  No. 2 to Lease dated May 1996 between the Company and the Channell  Family Trust, dated as of November 12, 2007(Exhibit 10.48)(33)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.43  |   | First Amendment  to Amended and Restated Loan and Security Agreement, dated as of  November 27, 2007, by and among Bank of America, N.A., Bank of America,  Canada Branch, the Company and Channell Commercial Canada Inc.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.44* |   | Employment  Letter dated October 23, 2007 between the Company and Christopher  Glenn(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.45* |   | Employment  Letter dated February 5, 2008 between the Company and Robert Swelgin(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.46  |   | Business  Finance Agreement effective March 12, 2008 between Channell Pty Limited  and Westpac Banking Corporation(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.47  |   | Business  Finance Agreement effective March 12, 2008 between Bushman Group Pty  Limited and Westpac Banking Corporation(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 14     |   | Channell  Commercial Corporation Code of Business Conduct and Ethics  (Exhibit 14)(7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 16.1   |   | Letter  dated March 27, 2006 from Grant Thornton LLP, regarding change in  Certifying Accountant (Exhibit 16.1)(16)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 16.2   |   | Letter  dated October 22, 2007 from Deloitte & Touche LLP, regarding  change in Certifying Accountant (Exhibit 16.1)(32)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 18     |   | Letter  dated March 30, 2007 from Deloitte & Touche LLP, regarding  change in Accounting Principle (Exhibit 18.2) (23)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 21     |   | Subsidiaries  of the Company(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

 

27

----

 
| 23.1   |   | Consent  of BDO Seidman, LLP(34)                                                                                                                                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                       |
| 23.2   |   | Consent  of Deloitte and Touche LLP(34)                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                       |
| 23.3   |   | Consent  of Grant Thornton LLP(34)                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                       |
| 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-Q on August 12,  2002.                            |
|   |   |                                                                                                                                                                 |
| (5)    |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on October 1, 2002.                              |
|   |   |                                                                                                                                                                 |
| (6)    |   | Incorporated by reference to Appendix B filed in  connection with the Company’s Definitive Proxy Statement on March 26,  2003.                             |
|   |   |                                                                                                                                                                 |
| (7)    |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-K on March 5, 2004.                               |
|   |   |                                                                                                                                                                 |
| (8)    |   | Incorporated by reference to Appendix B filed in  connection with the Company’s Definitive Proxy Statement on April 16,  2004.                             |
|   |   |                                                                                                                                                                 |
| (9)    |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on August 6, 2004.                               |
|   |   |                                                                                                                                                                 |
| (10)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-Q on November 15,  2004.                          |
|   |   |                                                                                                                                                                 |
| (11)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on June 15, 2005.                                |
|   |   |                                                                                                                                                                 |
| (12)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on June 28, 2005.                                |
|   |   |                                                                                                                                                                 |
| (13)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on September 9,  2005.                           |
|   |   |                                                                                                                                                                 |
| (14)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-Q on November 21,  2005.                          |
|   |   |                                                                                                                                                                 |
| (15)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on March 6, 2006.                                |
|   |   |                                                                                                                                                                 |
| (16)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on March 29, 2006.                               |
|   |   |                                                                                                                                                                 |
| (17)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-Q on August 17,  2006.                            |
|   |   |                                                                                                                                                                 |
| (18)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on September 8,  2006.                           |
|   |   |                                                                                                                                                                 |
| (19)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on September 21,  2006.                          |
|   |   |                                                                                                                                                                 |
| (20)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on November 17,  2006.                           |
|   |   |                                                                                                                                                                 |
| (21)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on February 8,  2007.                            |
|   |   |                                                                                                                                                                 |
| (22)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on February 15,  2007.                           |
|   |   |                                                                                                                                                                 |
| (23)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-K on April 2, 2007.                               |
|   |   |                                                                                                                                                                 |
| (24)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-Q on May 15, 2007.                                |
|   |   |                                                                                                                                                                 |
| (25)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on May 18, 2007.                                 |
|   |   |                                                                                                                                                                 |
| (26)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on June 29, 2007.                                |
|   |   |                                                                                                                                                                 |
| (27)   |   | Incorporated by reference to the indicated exhibits filed in connection  with the Company’s Form 8-K on July 31, 2007.                                |
|   |   |                                                                                                                                                                 |
| (28)   |   | Incorporated by reference to the indicated exhibits filed in connection  with the Company’s Form 8-K on August 3, 2007.                               |
|   |   |                                                                                                                                                                 |
| (29)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on September 4,  2007.                           |
|   |   |                                                                                                                                                                 |
| (30)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on October 4, 2007.                              |

 

28

----

 
| (31)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on October 10,  2007.   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                        |
| (32)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 8-K on October 22,  2007.   |
|   |   |                                                                                                                                        |
| (33)   |   | Incorporated by reference to the indicated exhibits  filed in connection with the Company’s Form 10-Q on November 14,  2007. |
|   |   |                                                                                                                                        |
| (34)   |   | Filed herewith.                                                                                                                             |
|        |        |                                                                                                                                             |  |  |

 

 

29

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**Report of IndependentRegistered Public Accounting Firm**

 

Boardof Directors and Shareholders

ChannellCommercial Corporation

Temecula, California

 

We have audited the accompanying consolidated balancesheet of Channell CommercialCorporation(the “Company”) as of December 31, 2007 and the related consolidatedstatements of operations and comprehensive (loss) income, stockholders’ equity,and cash flows for the year then ended. In connection with our audit of thefinancial statements, we have also audited the 2007 financial statementschedule listed in the accompanying index. These consolidated financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements and schedule based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallpresentation of the financial statements and schedule.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Channell CommercialCorporationat December 31, 2007 and the results of its operations and its cash flowsfor the year then ended**,** inconformity with accounting principles generally accepted in the United Statesof America.

 

Also, in ouropinion, the 2007 financial statement schedule, when considered in relation tothe basic consolidated financial statements taken as a whole, present fairly,in all material respects, the information set forth therein.

 

/s/ BDOSeidman, LLP

 

San Diego,California

March 24,2008

 

F-1

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To theBoard of Directors and Stockholders ofChannell Commercial Corporation

 

We have audited theaccompanying consolidated balance sheet of Channell Commercial Corporation andsubsidiaries (the “Company”) as of December 31, 2006, and the relatedconsolidated statements of operations and comprehensive  income (loss), stockholders’ equity, and cashflows for the year then ended.  Our audit also included the financialstatement schedule for the year ended December 31, 2006 listed in theindex at Item 15.  These financialstatements and the financial statement schedule are the responsibility of theCompany’s management.  Our responsibility is to express an opinion onthese financial statements and the financial statement schedule based on ouraudit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement.  The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financialreporting.  Our audit included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, such 2006consolidated financial statements present fairly, in all material respects, thefinancial position of Channell Commercial Corporation and subsidiaries as of December 31,2006, and the results of their operations and their cash flows for the yearthen ended in conformity with accounting principles generally accepted in theUnited States of America.  Also, in our opinion, such financialstatement schedule, when considered in relation to the basic 2006 consolidatedfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

 

 As discussed in Note B to the financialstatements, the Company changed its method of accounting for share-basedpayment in conformity with Statement of Financial Accounting Standards No. 123(R),**Share-BasedPayment,**effective January 1, 2006.

 
| */s/ DELOITTE & TOUCHE LLP* |   |   |   |
|--------------------------------------|--------|--------|--------|
|                                 |   |   |   |
| San  Diego, California               |   |   |   |
| April 2,  2007                  |   |   |   |

 

F-2

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors andStockholders

Channell CommercialCorporation

 

We have audited theconsolidated statement of operations and comprehensive income (loss),stockholders’ equity, and cash flows of Channell Commercial Corporation (aDelaware corporation) and subsidiaries (collectively, the “Company”) for theyear ended December 31, 2005.  Ouraudit of the basic financial statements included the financial statementschedule listed in the index appearing under Item 15 (a) (2).  These financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audit.

 

We conducted our auditin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the results of operations and cash flows of ChannellCommercial Corporation and subsidiaries for the year ended December 31,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.  Also, in our opinion,the related financial statement schedule, when considered in relation to thebasic financial statements taken as a whole, present fairly, in all materialrespects, the information set forth therein.

 

 
| /s/ Grant Thornton LLP  |   |   |   |
|-------------------------|--------|--------|--------|
|                    |   |   |   |
| Los Angeles, California |   |   |   |
| March 31, 2006     |   |   |   |

 

F-3

----

 

CHANNELL COMMERCIALCORPORATION

CONSOLIDATED BALANCESHEETS

December 31,

(amounts in thousands,except per share data)

 
| ** **                                                                                                                                                                                                                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                                                                                                                                              |       |     |       |     |       |
| Current assets                                                                                                                                                                                                                                      |       |     |       |     |       |
| Cash and cash  equivalents                                                                                                                                                                                                                          |       | $        | 1,825      |     | $          | 2,235 |   |
| Restricted cash                                                                                                                                                                                                                                     |       | 282      |       | —   |       |
| Accounts  receivable, net of allowance for doubful accounts of $281 at  December 31, 2007 and $220 at December 31, 2006                                                                                                                   |       | 12,807   |       | 11,673   |       |
| Inventories, net                                                                                                                                                                                                                                    |       | 15,763   |       | 13,018   |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                          |       | 1,436    |       | 931      |       |
| Income taxes  receivable                                                                                                                                                                                                                            |       | —   |       | 881      |       |
| Deferred income  taxes, net                                                                                                                                                                                                                         |       | 936      |       | 719      |       |
| Total current assets                                                                                                                                                                                                                                |       | 33,049   |       | 29,457   |       |
|                                                                                                                                                                                                                                                |       |     |       |     |       |
| Property and  equipment, net                                                                                                                                                                                                                        |       | 19,036   |       | 18,799   |       |
| Deferred income  taxes, net                                                                                                                                                                                                                         |       | 642      |       | 1,017    |       |
| Goodwill                                                                                                                                                                                                                                            |       | 10,998   |       | 9,848    |       |
| Intangible  assets, net                                                                                                                                                                                                                             |       | 2,128    |       | 2,097    |       |
| Other assets                                                                                                                                                                                                                                        |       | 994      |       | 660      |       |
|                                                                                                                                                                                                                                                |       | $        | 66,847     |     | $          | 61,878 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                           |       |     |       |     |       |
| Current  liabilities                                                                                                                                                                                                                                |       |     |       |     |       |
| Accounts payable                                                                                                                                                                                                                                    |       | $        | 9,447      |     | $          | 10,902 |   |
| Short-term debt  (including current maturities of long-term debt)                                                                                                                                                                                   |       | 10,335   |       | 13,723   |       |
| Current  maturities of capital lease obligations                                                                                                                                                                                                    |       | 153      |       | 138      |       |
| Income taxes  payable                                                                                                                                                                                                                               |       | 178      |       | —   |       |
| Accrued expenses                                                                                                                                                                                                                                    |       | 5,444    |       | 4,371    |       |
| Total current  liabilities                                                                                                                                                                                                                          |       | 25,557   |       | 29,134   |       |
|                                                                                                                                                                                                                                                |       |     |       |     |       |
| Long-term debt,  less current maturities                                                                                                                                                                                                            |       | 7,467    |       | —   |       |
| Capital lease  obigations, less current maturities                                                                                                                                                                                                  |       | 198      |       | 384      |       |
| Other long-term  liabilities                                                                                                                                                                                                                        |       | 906      |       | 1,332    |       |
| Total liabilities                                                                                                                                                                                                                                   |       | 34,128   |       | 30,850   |       |
| Commitments and  contingencies (Note L)                                                                                                                                                                                                             |       | —   |       | —   |       |
| Minority  interest                                                                                                                                                                                                                                  |       | 955      |       | 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  December 31, 2007 and 9,787 at December 31, 2006, outstanding -  9,544 shares at December 31, 2007 and 9,543 shares at December 31,  2006 |       | 98       |       | 98       |       |
| Additional  paid-in capital                                                                                                                                                                                                                         |       | 31,210   |       | 31,093   |       |
| Treasury stock -  244 shares in 2007 and 2006                                                                                                                                                                                                       |       | (1,871   | )          | (1,871   | )          |
| Retained  earnings (accumulated deficit)                                                                                                                                                                                                            |       | 113      |       | (160     | )          |
| Accumulated  other comprehensive income -                                                                                                                                                                                                           |       |     |       |     |       |
| Foreign currency  translation                                                                                                                                                                                                                       |       | 2,214    |       | 990      |       |
| Total  stockholders’ equity                                                                                                                                                                                                                    |       | 31,764   |       | 30,150   |       |
|                                                                                                                                                                                                                                                |       | $        | 66,847     |     | $          | 61,878 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

F-4

----

 

CHANNELL COMMERCIALCORPORATION

CONSOLIDATED STATEMENTSOF OPERATIONS

AND COMPREHENSIVE INCOME(LOSS)

Year endedDecember 31,

(amounts in thousands,except per share data)

 
| ** **                                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                               |       |     |       |     |       |     |       |
| Net sales                                          |       | $        | 133,163    |     | $          | 109,138  |       | $ | 116,065 |   |
| Cost of goods sold                                 |       | 92,240   |       | 76,055   |       | 81,060   |       |
| Gross Profit                                       |       | 40,923   |       | 33,083   |       | 35,005   |       |
|                                               |       |     |       |     |       |     |       |
| Operating expenses                                 |       |     |       |     |       |     |       |
| Selling                                            |       | 22,131   |       | 21,993   |       | 22,407   |       |
| General and  administrative                        |       | 14,868   |       | 12,500   |       | 11,688   |       |
| Research and  development                          |       | 1,865    |       | 2,222    |       | 2,356    |       |
| Impairment of  goodwill                            |       | —   |       | 4,829    |       | —   |       |
| Asset impairment  charge                           |       | —   |       | —   |       | 97       |       |
|                                               |       | 38,864   |       | 41,544   |       | 36,548   |       |
|                                               |       |     |       |     |       |     |       |
| Income (loss)  from operations                     |       | 2,059    |       | (8,461   | )          | (1,543   | )          |
| Interest income                                    |       | 43       |       | 86       |       | 70       |       |
| Interest expense                                   |       | (1,366   | )          | (943     | )          | (565     | )          |
| Income (loss)  before income tax expense (benefit) |       | 736      |       | (9,318   | )          | (2,038   | )          |
|                                               |       |     |       |     |       |     |       |
| Income tax  expense (benefit)                      |       | 484      |       | (777     | )          | 5,012    |       |
| Income (loss)  before minority interest            |       | 252      |       | (8,541   | )          | (7,050   | )          |
| Minority  interest in loss of subsidiaries         |       | (21      | )          | (1,712   | )          | (170     | )          |
| Net income  (loss)                                 |       | $        | 273        |     | $          | (6,829   | )          | $ | (6,880 | ) |
|                                               |       |     |       |     |       |     |       |
| Net income  (loss) per share                       |       |     |       |     |       |     |       |
| Basic and  diluted                                 |       | $        | 0.03       |     | $          | (0.72    | )          | $ | (0.73 | ) |
|                                               |       |     |       |     |       |     |       |
| Net income (loss)                                  |       | $        | 273        |     | $          | (6,829   | )          | $ | (6,880 | ) |
|                                               |       |     |       |     |       |     |       |
| Other comprehensive income (loss), net of tax      |       |     |       |     |       |     |       |
| Foreign currency  translation adjustment           |       | 1,224    |       | 677      |       | (726     | )          |
|                                               |       |     |       |     |       |     |       |
| Comprehensive  income (loss)                       |       | $        | 1,497      |     | $          | (6,152   | )          | $ | (7,606 | ) |

 

The accompanying notes are an integral part of thesefinancial statements.

 

F-5

----

 

CHANNELL COMMERCIALCORPORATION

CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY

Years endedDecember 31, 2005, 2006 and 2007

(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  (loss)** | ** ** | **equity** | ** ** |
|                               |       |              |       |        |       |                |       |             |       |              |       |                   |       |               |       |       |       |
| Balance, January 1, 2005      |       | 9,608             |       | $           | 96         |                | $          | 29,671           |       | 244               |       | $                      | (1,871     | )                  | $          | 13,549     |       | $ | 1,039 |   | $ | 42,484 |   |
|                               |       |              |       |        |       |                |       |             |       |              |       |                   |       |               |       |       |       |
| Exercise of employee stock options |       | 179               |       | 2           |       | 1,079               |       | —           |       | —            |       | —                 |       | —             |       | 1,081      |       |
| Foreign currency translation       |       | —            |       | —      |       | —              |       | —           |       | —            |       | —                 |       | (726               | )          | (726       | )          |
| Net loss for the year              |       | —            |       | —      |       | —              |       | —           |       | —            |       | (6,880                 | )          | —             |       | (6,880     | )          |
|                               |       |              |       |        |       |                |       |             |       |              |       |                   |       |               |       |       |       |
| Balance, December 31, 2005    |       | 9,787             |       | $           | 98         |                | $          | 30,750           |       | 244               |       | $                      | (1,871     | )                  | $          | 6,669      |       | $ | 313 |   | $ | 35,959 |   |
|                               |       |              |       |        |       |                |       |             |       |              |       |                   |       |               |       |       |       |
| Stock-based compensation           |       | —            |       | —      |       | 343                 |       | —           |       | —            |       | —                 |       | —             |       | 343        |       |
| Foreign currency translation       |       | —            |       | —      |       | —              |       | —           |       | —            |       | —                 |       | 677                |       | 677        |       |
| Net loss for the year              |       | —            |       | —      |       | —              |       | —           |       | —            |       | (6,829                 | )          | —             |       | (6,829     | )          |
|                               |       |              |       |        |       |                |       |             |       |              |       |                   |       |               |       |       |       |
| Balance, December 31, 2006    |       | 9,787             |       | $           | 98         |                | $          | 31,093           |       | 244               |       | $                      | (1,871     | )                  | $          | (160       | )          | $ | 990 |   | $ | 30,150 |   |
|                               |       |              |       |        |       |                |       |             |       |              |       |                   |       |               |       |       |       |
| Stock-based compensation           |       | —            |       | —      |       | 115                 |       | —           |       | —            |       | —                 |       | —             |       | 115        |       |
| Exercise of employee stock options |       | 1                 |       | —      |       | 2                   |       | —           |       | —            |       | —                 |       | —             |       | 2          |       |
| Foreign currency translation       |       | —            |       | —      |       | —              |       | —           |       | —            |       | —                 |       | 1,224              |       | 1,224      |       |
| Net income for the year            |       | —            |       | —      |       | —              |       | —           |       | —            |       | 273                    |       | —             |       | 273        |       |
|                               |       |              |       |        |       |                |       |             |       |              |       |                   |       |               |       |       |       |
| Balance, December 31, 2007    |       | 9,788             |       | $           | 98         |                | $          | 31,210           |       | 244               |       | $                      | (1,871     | )                  | $          | 113        |       | $ | 2,214 |   | $ | 31,764 |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

F-6

----

 

CHANNELL COMMERCIALCORPORATION

CONSOLIDATED STATEMENTSOF CASH FLOWS

Year endedDecember 31,

(amounts in thousands)

 
| ** **                                                                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from operating activities:                                                                |       |     |       |     |       |     |       |
| Net income  (loss)                                                                                   |       | $        | 273        |     | $          | (6,829   | )          | $ | (6,880 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                       |       | 4,929    |       | 5,101    |       | 4,480    |       |
| Stock-based compensation                                                                             |       | 115      |       | 343      |       | —   |       |
| Asset impairment  charge                                                                             |       | —   |       | —   |       | 97       |       |
| Loss (gain) on  disposal of fixed assets                                                             |       | 50       |       | 43       |       | (6       | )          |
| Amortization of  deferred gain on sale leaseback                                                     |       | (60      | )          | (60      | )          | (60      | )          |
| Impairment of  goodwill                                                                              |       | —   |       | 4,829    |       | —   |       |
| Deferred income  taxes                                                                               |       | 336      |       | (758     | )          | 4,924    |       |
| Provision for  doubtful accounts                                                                     |       | 125      |       | (31      | )          | 95       |       |
| Provision for  inventory obsolescence                                                                |       | 656      |       | 131      |       | 797      |       |
| Minority  interest in (loss) income of subsidiaries                                                  |       | (21      | )          | (1,712   | )          | (170     | )          |
| Changes in  assets and liabilities:                                                                  |       |     |       |     |       |     |       |
| Accounts  receivable                                                                                 |       | (582     | )          | (2,562   | )          | 5,051    |       |
| Inventories                                                                                          |       | (2,724   | )          | (1,277   | )          | 1,561    |       |
| Prepaid expenses  and other current assets                                                           |       | (457     | )          | 93       |       | (155     | )          |
| Income taxes                                                                                         |       | 1,070    |       | (816     | )          | 1,292    |       |
| Other assets                                                                                         |       | (311     | )          | (60      | )          | (337     | )          |
| Accounts payable                                                                                     |       | (2,239   | )          | 1,602    |       | (6,930   | )          |
| Restructuring  liability                                                                             |       | —   |       | —   |       | (141     | )          |
| Accrued expenses  and other liabilities                                                              |       | 436      |       | (324     | )          | (1,946   | )          |
|                                                                                                 |       |     |       |     |       |     |       |
| Net cash  provided by (used in) operating activities                                                 |       | 1,596    |       | (2,287   | )          | 1,672    |       |
|                                                                                                 |       |     |       |     |       |     |       |
| Cash flows from investing activities:                                                                |       |     |       |     |       |     |       |
| Purchase of  property and equipment                                                                  |       | (3,917   | )          | (3,871   | )          | (4,339   | )          |
| Proceeds from  sale of property and equipment                                                        |       | 163      |       | 106      |       | 24       |       |
|                                                                                                 |       |     |       |     |       |     |       |
| Net cash used in  investing activities                                                               |       | (3,754   | )          | (3,765   | )          | (4,315   | )          |
|                                                                                                 |       |     |       |     |       |     |       |
| Cash flows from financing activities:                                                                |       |     |       |     |       |     |       |
| Repayment of  debt                                                                                   |       | (14,695  | )          | (1,972   | )          | (2,395   | )          |
| Borrowings from  credit facilities                                                                   |       | 17,882   |       | 7,710    |       | 1,550    |       |
| Repayment of  obligations under capital lease, net                                                   |       | (679     | )          | (174     | )          | (35      | )          |
| Restricted cash                                                                                      |       | (282     | )          | —   |       | —   |       |
| Exercise of  employee stock options                                                                  |       | 2        |       | —   |       | 1,081    |       |
|                                                                                                 |       |     |       |     |       |     |       |
| Net cash  provided by financing activities                                                           |       | 2,228    |       | 5,564    |       | 201      |       |
|                                                                                                 |       |     |       |     |       |     |       |
| Effect of exchange rates on cash                                                                     |       | (480     | )          | (425     | )          | 137      |       |
| Decrease in cash  and cash equivalents                                                               |       | (410     | )          | (913     | )          | (2,305   | )          |
| Cash and cash equivalents, beginning of year                                                         |       | 2,235    |       | 3,148    |       | 5,453    |       |
| Cash and cash equivalents, end of year                                                               |       | $        | 1,825      |     | $          | 2,235    |       | $ | 3,148 |   |
| Cash paid during the year for:                                                                       |       |     |       |     |       |     |       |
| Interest                                                                                             |       | $        | 1,348      |     | $          | 1,064    |       | $ | 499 |   |
| Income taxes                                                                                         |       | $        | 21         |     | $          | 604      |       | $ | 148 |   |
| Non-cash investing acitivities:                                                                      |       |     |       |     |       |     |       |
| Purchases of  property and equipment which are included in:                                          |       |     |       |     |       |     |       |
| Obligations  under capital leases                                                                    |       | $        | 464        |     | $          | 506      |       | $ | — |   |
| Accounts payable                                                                                     |       | $        | 63         |     | $          | 48       |       | $ | — |   |

 

The accompanying notes are an integral part of thesefinancial statements.

 

F-7

----

 

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS-continued**

*(amountsin thousands, except per share data)*

 

**NOTE A—DESCRIPTION OF BUSINESS**

 

Channell Commercial Corporation and its subsidiaries(collectively, the “Company”) is a designer and manufacturer oftelecommunications equipment supplied to broadband and telephone networkproviders worldwide.  Major product linesinclude a complete line of thermoplastic and metal fabricated enclosures, advancedcopper termination and connectorization products, fiber optic cable managementsystems for fiber to the premises (FTTP) networks, and heat shrinkproducts.  The Company’s enclosureproducts house, protect and provide access to advanced telecommunicationshardware, including both radio frequency electronics and photonics, andtransmission media, including coaxial cable, copper wire and optical fibers,used in the delivery of voice, video and data services.  The enclosure products are deployed within theaccess portion of the local signal delivery network, commonly known as the “outsideplant,” “local loop” or “last mile,” that connects the network provider’ssignal origination point or local office with its residential and businesscustomers.  The Company’s connectivityproducts provide critical network connection points between cables or networktransmission devices.

 

The Company alsodesigns, manufactures and markets polyethylene water tanks for rural andresidential markets in Australia.  TheCompany’s primary product line of rotational molded tanks is used in theagricultural sector where water shortages require storage of rain and groundwater.  The Company also markets a rangeof water storage tanks for use in residential and rural-residential markets.

 

**NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

***Estimates***. In preparing financial statements in conformity with generally acceptedaccounting principles, management is required to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities at the date of the financial statements,and the reported amounts of revenues and expenses during the reportingperiod.  Significant estimates includeaccounts receivables allowances, inventory valuation reserve, valuation ofgoodwill and long-lived assets and the deferred tax asset valuationallowance.  Actual results could differfrom those estimates, and the differences could be material.

 

***Basisof Consolidation.**** *The consolidated financial statements include the accountsof Channell Commercial Corporation and its subsidiaries.  All intercompany transactions and balanceshave been eliminated.  Minority interestrepresents a 25% equity interest in Bushman Tanks acquired by ANZ PrivateEquity.

 

***ForeignCurrency Translation.***  Assets and liabilities offoreign operations are translated into U.S. dollars at year-end exchangerates.  Income and expenses aretranslated into U.S. dollars at average rates of exchange prevailing during theperiod.  Adjustments resulting from translatingforeign functional currency financial statements into U.S. dollars are includedin other comprehensive income.  Foreigncurrency transaction gains and losses are included in general andadministrative expenses.  Transactionsgains and losses were not significant in 2007, 2006 and 2005.

 

***Cashand Cash Equivalents.***  Cash and cash equivalentsinclude cash on hand, cash in banks and short-term investments with originalmaturities of 90 days or less.

 

***Inventories.***** **Inventoriesare stated at the lower of cost or market. Cost is determined by the first-in,first-out method of accounting.  Costincludes material, direct production costs, and factory overhead costs.  Reserves for excess and obsolete inventoriesare determined by an analysis of relevant factors including historical salesand usage of items in inventory, current levels of orders and backlog,forecasted demand, product life cycle, and market conditions.

 

***Propertyand Equipment.***  Property and equipment are stated at cost.Depreciation is computed using the straight-line method over the estimateduseful lives of the assets.  Capitallease assets are amortized over the lease term. Expenditures for all maintenance and repairs are charged against income.Additions, major renewals and replacements that increase the useful lives ofassets are capitalized. Amortization of leasehold improvements is computedusing the straight-line method over the shorter of the lease term or theestimated useful life of the leasehold improvements.

 

***Impairment of Long-Lived andIntangible Assets***.  When events or circumstancesindicate the carrying value of a long-lived asset may be impaired, the Companyestimates the future undiscounted cash flows to be derived from the asset toassess whether or not a potential impairment exists.  If the carrying value exceeds the estimate offuture undiscounted cash flows, the impairment is calculated as the excess ofthe carrying value of the asset over the estimate of its fair value.  The Company recorded an impairment of $97 inthe year ended December 31, 2005. No impairment was recorded in the years ended December 31, 2007 and2006.

 

F-8

----

 

***IncomeTaxes*****. **The Company accounts for income taxes in accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 109, *Accounting for Income Taxes*, which requires that the Companyrecognize deferred tax liabilities and assets based on the differences betweenthe financial statement carrying amounts and the tax bases of assets and liabilities,using enacted tax rates in effect in the years the differences are expected toreverse.  Deferred income tax benefit(expense) results from the change in deferred tax assets or deferred taxliabilities.  A valuation allowance isrecorded when it is more likely than not that some or all deferred tax assetswill not be realized.

 

***Impairmentof Goodwill and Other Intangible Assets.***  The Companyaccounts for goodwill and other intangible assets in accordance with SFAS No. 142,*Goodwill and Other Intangible Assets*.SFAS No. 142 requires that goodwill and identifiable intangible assetswith indefinite useful lives be tested for impairment at least annually.

 

The Company assesses therecoverability of the carrying value of goodwill and other intangible assetswith indefinite useful lives at least annually or whenever events or changes incircumstances indicate that the carrying amount of the asset may not be fullyrecoverable. The impairment test consists of a comparison of the fair value ofan intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value,then an impairment loss is recognized in an amount equal to that excess.Recoverability of goodwill is measured at the reporting unit level based on atwo-step approach. First, the carrying amount of the reporting unit is comparedto the fair value as estimated by the future net discounted cash flows expectedto be generated by the reporting unit. To the extent that the carrying value ofthe reporting unit exceeds the fair value of the reporting unit, a second stepis performed, wherein the reporting unit’s assets and liabilities are valued.The implied fair value of goodwill is calculated as the fair value of thereporting unit in excess of the fair value of all non-goodwill assets andliabilities allocated to the reporting unit. To the extent the reporting unit’scarrying value of goodwill exceeds its implied fair value, an impairment existsand must be recognized. This process requires the use of discounted cash flowmodels that utilize estimates of future revenue and expenses as well as theselection of appropriate discount rates. To measure the impairment of indefinite-lived intangibles, the Companyuses the relief from royalty method in its valuation.  Under the relief from royalty method, anestimated royalty rate is applied against an estimate of future revenues,discounted to present value, to determine the savings associated with owningthe trademark intangible.  The impairmenttest consists of a comparison of the fair value of an intangible asset with itscarrying amount.  If the carrying amountof an intangible asset exceeds its fair value, then an impairment loss isrecognized in an amount equal to that excess.

 

The Company tests thevalue of goodwill for impairment annually at December 31 (prior to December 31,2006 goodwill was tested for impairment at June 30 for the Bushman Tanksreporting unit) or whenever events or changes in circumstance indicate that thecarrying amount of such assets may not be recoverable.  The test involves significant judgment inestimating projections of fair value generated through future performance ofthe operating segment.  In calculating thefair value, the Company relies on factors such as operating results, businessplans, economic projections, and anticipated cash flows used in discounting thecash flows.  Inherent uncertainties existin determining and applying such factors.

 

During the fourth quarterended December 31, 2006, the Company changed the date of its annualgoodwill impairment testing from June 30 to December 31 for theBushman Tanks reporting unit in order to better align with the Company’s normalbusiness process for updating its strategic plan and forecasts.  Additionally this change will coincide withthe Company’s Australian statutory reporting, which requires annual impairmenttesting at December 31.  The Companybelieves that the resulting change in accounting principle related to theannual testing date will not delay, accelerate, or avoid an impairmentcharge.  Goodwill impairment testsperformed as of December 31, 2007, 2006, and 2005 and June 30, 2005indicated that no impairment charges were required, while the June 30,2006 test resulted in an impairment of $4,829. The Company determined that the change in accounting principle relatedto the annual testing date is preferable under the circumstances and does notresult in adjustments to the financial statements when applied retrospectively.

 

On August 2, 2004the Company, through a majority-owned subsidiary, acquired a controllinginterest in Bushman Tanks, a manufacturer and distributor of rotational moldedplastic (polyethylene) water storage tanks. Included in the Share and Asset Purchase Agreement, the sellers ofBushman Tanks agreed to a “non-compete” clause whereby the sellers of BushmanTanks would not directly or indirectlycarry on or be engaged or involved in any trade, business or undertaking thatis in competition with the Bushman Tanks business.  The Company performed an evaluation of thenon-compete agreement and determined the fair value to be $1,600.  The non-compete agreement is recorded in thereporting unit of Bushman Tanks, which is part of the International segment, asa separately identifiable intangible asset and is being amortized overthe ten-year contractual term on a straight-line basis.  The amount of goodwill recorded in theBushman Tanks acquisition is not deductible for tax purposes.

 

During the quarter ended June 30,2006, the Company reclassified a nonamortizing indefinite-life trademark

 

F-9

----

 

intangible asset fromgoodwill to intangible assets, including the December 31, 2005 amounts forcomparative purposes, which resulted in an increase in intangible assets of$655, a decrease in goodwill of $459, and an increase in deferred taxliabilities of $196, as of December 31, 2005.  The difference in amounts between the twobalance sheet dates is because of a difference in the foreign currencytranslation rate at those dates.  Thisreclassification occurred in the Bushman reporting unit, which is part of theInternational segment. The table below has been adjusted to reflect thisreclassification effective January 1, 2005.

 

The changes in thecarrying amount of goodwill, the non-compete agreement and the trademarkintangible for the years ended December 31, 2005, 2006 and 2007 aresummarized as follows:

 
| ** **                                | ** ** | ** **   | ** ** | **Intangible**  | ** ** | ** **     | ** ** |
|-------------------------------------------|------------|--------------|------------|-----------------|------------|----------------|------------|
| ** **                                | ** ** | ** **   | ** ** | **Non-Compete** | ** ** | **Trademark**  | ** ** |
| ** **                                | ** ** | **Goodwill** | ** ** | **Agreement**   | ** ** | **Intangible** | ** ** |
|                                      |       |         |       |            |       |           |       |
| Balance at January 1, 2005           |       | $            | 14,232     |            | $          | 1,763          |       | 702 |   |
|                                      |       |         |       |            |       |           |       |
| Contingent receivable for warranty claims |       | (146         | )          | —          |       | —         |       |
| Earn-out payment                          |       | 380          |       | —          |       | —         |       |
| Contingent earn-out payment               |       | 380          |       | —          |       | —         |       |
| Amortization of non-compete agreement     |       | —       |       | (177            | )          | —         |       |
| Effect of foreign currency translation    |       | (899         | )          | (109            | )          | (47            | )          |
|                                      |       |         |       |            |       |           |       |
| Balance at December 31, 2005         |       | 13,947       |       | 1,477           |       | 655            |       |
|                                      |       |         |       |            |       |           |       |
| Impairment of goodwill                    |       | (4,829       | )          | —          |       | —         |       |
| Adjustment for final settlement agreement |       | (86          | )          | —          |       | —         |       |
| Amortization of non-compete agreement     |       | —       |       | (204            | )          | —         |       |
| Effect of foreign currency translation    |       | 816          |       | 114             |       | 55             |       |
|                                      |       |         |       |            |       |           |       |
| Balance at December 31, 2006         |       | 9,848        |       | 1,387           |       | 710            |       |
|                                      |       |         |       |            |       |           |       |
| Amortization of non-compete agreement     |       | —       |       | (195            | )          | —         |       |
| Effect of foreign currency translation    |       | 1,150        |       | 147             |       | 79             |       |
|                                      |       |         |       |            |       |           |       |
| Balance at December 31, 2007         |       | $            | 10,998     |            | $          | 1,339          |       | $ | 789 |   |
|                                           |            |              |            |                 |            |                |            |  |  |  |

 

As of December 31,2007, the Company has recorded goodwill of $804 in its Canadian reporting unit,which is part of the Americas segment and $10,194 of goodwill in its BushmanTanks reporting unit, which is part of the International segment.

 

Basedon the impairment test as of June 30, 2006, the Company recorded a $4,829impairment related to the carrying value of goodwill related to the BushmanTanks reporting unit.  The primary cause for this impairment of goodwillwas the decrease in gross margins and operating income, which have beennegatively impacted by increasing prices in petroleum-based raw materials andother factors, which resulted in revisions of projected future earnings andcash flows.  The fair value of the Bushman Tanks reporting unit wasestimated using a combination of valuation techniques, including the expectedpresent value of future cash flows. Measurement of the impairment loss is anestimate, and continued increases in raw materials costs in excess of the expectationsof management, or other negative events or circumstances, could result inadditional impairment of goodwill in future reporting periods. There was noimpairment to the carrying value of goodwill in 2007 or 2005.

 

The estimatedamortization expense of the intangible non-compete agreement based on thecurrent balance and the December 31, 2007 foreign currency exchange rates,is $203 per year for the next five fiscal years, and $324 thereafter.

 

***RevenueRecognition and Accounts Receivable Reserves***.  Revenues arerecognized when title passes and the risks and rewards of ownership have passedto the customer, based on the terms of sale. Title passes generally upon shipment. Provisions for estimated sales returns are based on the Company’shistorical sales returns experience. Provisions for uncollectible accounts are made based upon specificpercentages derived from historical experience of the past due outstandingaccounts receivable aging categories or upon specific circumstances.

 

F-10

----

 

***Shipping and Handling Costs***. Shipping and handling costs paid to outside parties and billed tocustomers are included in sales, and the related costs are included in sellingexpenses. Shipping and handling costs are charged to expense as incurred. Totalshipping costs of $6,130, $10,638, and $10,543 were included in sellingexpenses for 2007, 2006 and 2005, respectively.

 

***SalesTax*****. **Revenues are disclosed net of sales tax collected fromcustomers and remitted to governmental entities.

 

***Income(Loss) Per Share***.  Basic income (loss) per share excludesdilution and is computed by dividing net income (loss) available to commonstockholders by the weighted average number of common shares outstanding forthe period.  Diluted income per sharereflects the potential dilution that could occur if options to acquire commonstock were exercised.

 

The following is areconciliation of the number of shares (denominator) used in the basic anddiluted income (loss) per share computations:

 
| ** **                       | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **Per**    | ** ** | ** ** | ** ** | **Per** | ** ** | ** ** | ** ** | **Per** | ** ** |
| ** **                       | ** ** | ** ** | ** ** | **Share**  | ** ** | ** ** | ** ** | **Share** | ** ** | ** ** | ** ** | **Share** | ** ** |
| ** **                       | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
|                             |       |       |       |       |       |       |       |   |   |   |   |   |   |
| Basic income (loss) per share    |       | 9,544      |       | $          | 0.03       |       | 9,543      |   | $ | (0.72 | ) | 9,448 |   | $ | (0.73 | ) |
|                             |       |       |       |       |       |       |       |   |   |   |   |   |   |
| Effect of dilutive stock options |       | 1          |       | —     |       | —     |       | — |   | — |   | — |   |
|                             |       |       |       |       |       |       |       |   |   |   |   |   |   |
| Diluted income (loss) per share  |       | 9,545      |       | $          | 0.03       |       | 9,543      |   | $ | (0.72 | ) | 9,448 |   | $ | (0.73 | ) |

 

The following weightedaverage options to purchase shares of common stock were not included in thecomputation of diluted income (loss) per share due to their antidilutiveeffect:

 
| ** **                                 | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2005**              | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
|                                       |       |                  |       |                  |       |                  |       |
| Options to purchase shares of common stock |       | 1,725                 |       | 1,751                 |       | 1,934                 |       |
|                                       |       |                  |       |                  |       |                  |       |
| Exercise prices                            |       | $4.15 –          |       | $2.83 –          |       | $3.25 –          |       |
|                                       |       | $13.75                |       | $13.75                |       | $13.75                |       |
|                                       |       |                  |       |                  |       |                  |       |
| Expiration dates                           |       | July 2010 – |       | July 2010 – |       | July 2006 – |       |
|                                       |       | May 2017         |       | October 2016     |       | August 2015      |       |

 

***FairValue of Financial Instruments.***  The carryingamount of cash, accounts receivable, accounts payable, accrued expenses andshort-term borrowings approximates fair value because of the short maturity ofthese financial instruments.  Long-termobligations are carried at amounts that approximate fair value.

 

***Accountingfor Stock-Based Compensation***.  Effective January 1,2006 the Company adopted SFAS No. 123R, *Share-BasedPayment*, which requires that compensation expense be recognized overthe requisite service period based on the fair value of the award, at the dateof grant.  The Company used the “modifiedprospective” method as described in SFAS No. 123R.  In the “modified prospective” method,compensation cost is recognized for all share-based payments granted after theeffective date and for all unvested awards granted prior to the effectivedate.  In accordance with SFAS No. 123R,prior period amounts were not restated. SFAS No. 123R also requires cash retained as a result of excess taxbenefits associated with these share-based payments to be classified asfinancing activities in the Consolidated Statements of Cash Flows, rather thanas operating cash flows as required under previous accounting principles.  The Company recorded no excess tax benefitsfor the years ended December 31, 2007 and 2006.

 

Share-based compensationexpense recognized during a period is based on the value of the portion ofshare-based payment awards that is ultimately expected to vest.  Share-based compensation expense recognizedin the Company’s consolidated statements of operations for the years ended December 31,2007 and 2006 included compensation expense for share-based payment awardsgranted prior to, but not yet vested as of, December 31, 2005 based on the

 

F-11

----

 

grant date fair valueestimated in accordance with the pro forma provisions of SFAS No. 123,  *Accounting for Stock BasedCompensation,* adjusted for estimated forfeitures, and share-basedpayment awards granted subsequent to December 31, 2005 based on the grantdate fair value estimated in accordance with SFAS No. 123R.  For share awards granted in 2007 and 2006,expenses are amortized under the straight-line attribution method over therequisite service period.  For allunvested share awards granted prior to 2006, expenses are amortized under thestraight-line method over the remaining vesting period of the options.

 

Total stock-based compensationexpense recognized in general and administrative expense was $115 or $(.01) pershare and $343 or $(.04) per share for the years ended December 31, 2007and 2006, respectively.

 

Prior to the adoption ofSFAS No. 123R, the stock-based compensation plans were accounted for usingthe intrinsic value method under APB Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations.  Pro forma information regarding the impact oftotal stock-based compensation on net income and income per share for priorperiods is required by SFAS No. 123R.

 

Such pro formainformation, determined as if the Company had accounted for its employee stockoptions under the fair value method according to SFAS No. 123 during 2005,is illustrated in the following table:

** **
| ** **                                                                                       | ** ** | **Year  ended**             | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                       | ** ** | **December 31,  2005** | ** ** |
|                                                                                             |       |                        |       |
| Reported net loss                                                                                |       | $                           | (6,880     | ) |
| Add stock-based compensation expense reported in net  (loss) income                              |       | —                      |       |
| Less total stock-based compensation expense,  determined under the fair value method, net of tax |       | (473                        | )          |
| Pro forma net loss                                                                               |       | $                           | (7,353     | ) |
|                                                                                             |       |                        |       |
| Reported basic and diluted net (loss) income per  share                                          |       | $                           | (0.73      | ) |
| Add stock-based compensation expense reported in net  loss                                       |       | —                      |       |
| Less total stock-based compensation expense,  determined under the fair value method             |       | (0.05                       | )          |
| Pro forma basic and diluted net (loss) income per  share                                         |       | $                           | (0.78      | ) |

 

***RecentAccounting Pronouncements.***  In September 2006,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, *Fair Value Measurements*, which defines fair value,establishes a framework for measuring fair value in GAAP and expandsdisclosures about fair value measurements. This Statement will be effective for financial statements issued forfiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years.  The Company has notdetermined the impact, if any, the adoption of SFAS 157 will have on itsfinancial position and results of operations, but does not believe the impactwill be material.

 

In February 2007,the FASB issued SFAS No. 159,*The FairValue Option for Financial Assets and Financial Liabilities — including anamendment of SFAS No. 115,* which allows measurement at fairvalue of eligible financial assets and liabilities that are not otherwisemeasured at fair value. If the fair value option for an eligible item iselected, then unrealized gains and losses for that item shall be reported incurrent earnings at each subsequent reporting date. SFAS No. 159 alsoestablishes presentation and disclosure requirements designed to drawcomparison between the different measurement attributes the company elects forsimilar types of assets and liabilities. This statement is effective for fiscalyears beginning after November 15, 2007. The Company is in the process ofevaluating the application of the fair value option and its effect on theCompany’s results of operations or financial condition.

 

In December 2007,the FASB issued SFAS No. 160, *Noncontrolling Interestsin Consolidated Financial Statements — an amendment of Accounting Research Bulletin (“ARB”) No. 51*,which establishes and expands accounting and reporting standards for minorityinterests, which will be recharacterized as noncontrolling interests, in asubsidiary and the deconsolidation of a subsidiary.  This statement is effective for fiscal yearsbeginning on or after December 15, 2008. Early adoption of this statement is prohibited, and the presentation anddisclosure requirements shall be applied retrospectively for all periodspresented.  The Company is currentlyassessing the potential impact that the adoption of this statement will have onits financial position and results of operations.

 

F-12

----

 

In December 2007,the FASB issued SFAS No. 141(revised),*Business Combinations.*  Under SFAS No. 141(R) anentity is required to recognize the assets acquired, liabilities assumed,contractual contingencies, and contingent consideration at their fair values onthe acquisition date.  SFAS No. 141(R) appliesto all business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008.  This statement is effective forfiscal years beginning on or after December 15, 2008.  The impact, if any, that the adoption of thisstatement will have on the Company’s financial position and results ofoperations will depend on the nature and size of business combinations theCompany consummates after the effective date.

 

***Researchand Development Costs***.  The Company follows the policyof expensing research and development costs in the periods incurred.

 

***Advertising Costs.*** The Companyfollows the policy of expensing advertising costs in the periods incurred.  Advertising expenses were $596, $516, and$696, in 2007, 2006, and 2005, respectively.

 

***Warranty.*** Warranty expense is estimated at the time of the sale based onhistorical warranty costs and analysis of defects that have occurred.

 

***Reclassifications.******* In 2007, theCompany reclassified the long-term portion of accrued workers’ compensationfrom accrued expenses to other long-term liabilities, including the December 31,2006 amount of $818 for comparative purposes. The Company had previously classified such accrued expenses undercurrent liabilities.

 

**NOTE C—INVENTORIES**

 

Inventories aresummarized as follows:

 
| ** **                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Raw materials                    |       | $        | 6,786      |     | $          | 6,043 |   |
| Work-in-process                  |       | 4,100    |       | 3,318    |       |
| Finished goods                   |       | 6,459    |       | 4,891    |       |
|                             |       | 17,345   |       | 14,252   |       |
|                             |       |     |       |     |       |
| Less inventory valuation reserve |       | (1,582   | )          | (1,234   | )          |
|                             |       | $        | 15,763     |     | $          | 13,018 |   |

 

**NOTE D—PROPERTY AND EQUIPMENT**

 

Property and equipmentare summarized as follows:

 
| ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Estimated**     | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                                     | ** ** | **2007**   | ** ** | **2006**   | ** ** | **useful  lives** | ** ** |
|                                           |       |       |       |       |       |              |       |
| Machinery and equipment                        |       | $          | 73,317     |       | $          | 68,221            |       | 3-10 years |   |
| Office furniture and equipment                 |       | 4,314      |       | 3,749      |       | 3 -7 years        |       |
| Leasehold improvements                         |       | 3,809      |       | 3,612      |       | 2-10 years        |       |
|                                           |       | 81,440     |       | 75,582     |       |              |       |
| Less accumulated depreciation and amortization |       | (62,404    | )          | (56,783    | )          |              |       |
|                                           |       | $          | 19,036     |       | $          | 18,799            |       |   |   |

 

Included inmachinery and equipment is $434 and $598 of equipment under capital lease at December 31,2007 and 2006, respectively.  Accumulatedamortization of assets under capital lease totaled $95 and $147 at December 31,2007 and 2006, respectively.  Totaldepreciation and amortization expense was $4,734, $4,897 and $4,303 for theyears ended December 31, 2007, 2006 and 2005, respectively.

 

F-13

----

 

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS–continued**

*(amountsin thousands, except per share data)*

 

**NOTE E—ACCRUED EXPENSES**

 

Accrued expenses consist of the following:

 

| ** **                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Accrued compensation and  benefits |       | $        | 3,319      |     | $          | 2,541 |   |
| Accrued warranty expenses          |       | 1,363    |       | 1,144    |       |
| Other                              |       | 762      |       | 686      |       |
|                               |       | $        | 5,444      |     | $          | 4,371 |   |

 

TheCompany provides a warranty for the replacement and repair of a defectiveproduct.  Historically, the Company has not experienced significant warrantycosts or returns.  The Company acquiredBushman Tanks in August 2004. Associated with the acquisition of Bushman Tanks was the assumption ofwarranties related to Bushman Tanks polyethylene water tanks.  Prior to November 1, 2006 the warrantyperiod was 25 years.  Effective November 1,2006, all new tanks ordered have a warranty period of 10 years.

 

Warrantyexpense is estimated by management at the time of the sale based on historicalwarranty costs and analysis of defects that have occurred in field installations.  The change in the Company’s warrantyliability for the years ended December 31, 2007, 2006 and 2005 issummarized as follows:

 

| Balance January 1, 2005            |   | $      | 1,165  |   |
|-----------------------------------------|--------|--------|--------|--------|
|                                    |   |   |   |
| Expense for new warranties              |   | 266    |   |
| Warranty claims                         |   | (319   | )      |
| Effect of foreign currency  translation |   | (93    | )      |
| Balance, December 31,  2005        |   | 1,019  |   |
|                                    |   |   |   |
| Expense for new warranties              |   | 491    |   |
| Warranty claims                         |   | (451   | )      |
| Effect of foreign currency  translation |   | 85     |   |
| Balance, December 31,  2006        |   | $      | 1,144  |   |
|                                    |   |   |   |
| Expense for new warranties              |   | 563    |   |
| Warranty claims                         |   | (470   | )      |
| Effect of foreign currency  translation |   | 126    |   |
| Balance, December 31,  2007        |   | $      | 1,363  |   |

 

F-14

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS–continued**

*(amountsin thousands, except per share data)*

 

**NOTE F—DEBT**

 

The Company’s debtconsists of the following at December 31:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Channell  Commercial Corporation and Channell Commercial Canada Inc., which is a  subsidiary of Channell Commercial Corporation (“Channell Canada”), as  borrowers, entered into an Amended and Restated Loan and Security Agreement  with asset-based lenders in the United States and Canada in July 2007.  The Amended and Restated Loan and Security Agreement contains a three-year term  loan that expires June 30, 2010 and is repayable in equal monthly  payments of $42 based on a five-year amortization schedule with a balloon  payment of $1,042 at maturity. Amounts borrowed under this facility bear  interest at a variable rate based on either the lender’s Base Rate or LIBOR.  The interest rate under the term loan was 7.75% at December 31, 2007.  The loans under the Amended and Restated Loan and Security Agreement are  guaranteed by Channell Limited, Channell Commercial Europe Limited and A.C.  Egerton (Holdings) Limited, which are direct and indirect subsidiaries of  Channell Commercial Corporation (the “Subsidiary Guarantors”), and are  secured by substantially all the assets of the borrowers as well as the  assets of the Subsidiary Guarantors. The interest rate on the term loan from  the original Loan and Security Agreement that was paid off in July 2007  with proceeds of the Amended and Restated Loan and Security Agreement was  9.25% at December 31, 2006. |       | $        | 2,333      |     | $          | 942 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |     |       |     |       |
| Channell Commercial Corporation and Channell Canada  entered into an Amended Loan and Security Agreement with asset-based lenders  in the United States and Canada in July 2007. The Amended Loan and  Security Agreement contains a revolving credit facility that expires June 30,  2010. Amounts borrowed under this facility bear interest at a variable rate  based on either the lender’s Base Rate or LIBOR. The interest rate under the  term loan was 7.75% at December 31, 2007. The loans under the Loan and  Security Agreement are guaranteed by the Subsidiary Guarantors and are  secured by all the assets of the borrowers and the Subsidiary Guarantors. The  interest rate on the revolving credit facility from the original Loan and  Security Agreement that was paid off in July 2007 was 9.25% at December 31,  2006. As the Company is obligated to repay the revolving credit facility as  cash flow permits, the balance outstanding is classified as current.                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 5,620    |       | 5,374    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |     |       |     |       |
| Channell Bushman Pty Limited (“Channell Bushman”), a  majority-owned subsidiary of Channell Commercial Corporation (“Channell  Bushman”), and Bushmans Group Pty Limited, Australian Bushman Tanks Pty  Limited, Bushmans Engineering Pty Limited and Polyrib Tanks Pty Limited, each  a wholly-owned subsidiary of Channell Bushman and an indirect subsidiary of  Channell Commercial Corporation together, the “Channell Bushman  Subsidiaries”), entered into a three-year Facility Agreement (the “Facility  Agreement”) with an Australian private debt fund in October 2007, which  contains a term loan. The term loan interest rate under the Facility  Agreement at December 31, 2007 was 12.39%. The term loan under the  Facility Agreement requires payments of $142 per month beginning  March 2008 with a balloon payment of $2,842 at maturity. The loans under  the Facility Agreement are guaranteed by the Channell Bushman Subsidiaries  and are secured by all the assets of Channell Bushman and subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                    |       | 7,016    |       | —   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |     |       |     |       |
| Channell Bushman and the Channell Bushman  Subsidiaries entered into a three-year Loan Facility Agreement with an  Australian private debt fund in October 2007 which contains a revolving  line of credit. The loans under the Facility Agreement are guaranteed by the  Channell Bushman Subsidiaries and are secured by all the assets of Channell  Bushman and Subsidiaries. The interest rate under the Facility Agreement at  December 31, 2007 for the revolving line of credit was 13.39%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 2,806    |       | —   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |     |       |     |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |            |          |            |          |            |  |  |

 

F-15

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS–continued**

*(amountsin thousands, except per share data)*

 
| Channell Bushman and Subsidiaries were party to a  five-year Loan and Security Agreement (the “Prior Australia Loan Agreement”)  with a commercial bank in Australia that was paid off in October 2007.  The interest rate under the Loan and Security Agreement for the term loan was  6.74% at December 31, 2006. |   | — |   | 3,629  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |
| The interest rates under the Prior Australia Loan  Agreement at December 31, 2006 for the revolving line of credit, “earn  out” facility and capital expenditure facility were 6.65%, 6.74%, and 6.85%,  respectively.                                                                                                   |   | — |   | 3,745  |   |
|                                                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |
| Other                                                                                                                                                                                                                                                                                                                                   |   | 27     |   | 33     |   |
|                                                                                                                                                                                                                                                                                                                                    |   | 17,802 |   | 13,723 |   |
| Less current maturities                                                                                                                                                                                                                                                                                                                 |   | 10,335 |   | 13,723 |   |
|                                                                                                                                                                                                                                                                                                                                    |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                    |   | $      | 7,467  |   | $      | — |   |
|                                                                                                                                                                                                                                                                                                                                         |        |        |        |        |        |  |  |

 

Channell Commercial Corporation, Channell Canada andthe Subsidiary Guarantors are parties to an Amended and Restated Loan andSecurity Agreement with asset-based lenders in the United States andCanada.  The Amended and Restated Loanand Security Agreement contains: (i) a term loan of $2,500; (ii) capitalexpenditure loans in an aggregate amount of up to $5,000; and (iii) arevolving credit facility with borrowings of up to a maximum of $12,500,depending on the level of certain qualifying assets.  The revolver under the Amended and RestatedLoan and Security Agreement has a $2,000 sub-limit for letters of credit.  As of December 31, 2007 and 2006,outstanding letters of credit totaled $586 and$1,186, respectively.  Theobligations under the Amended and Restated Loan and Security Agreement areguaranteed by the Subsidiary Guarantors and are secured by substantially allassets of the Company and the Subsidiary Guarantors.  In addition, any borrowings made by ChannellCanada are secured by substantially all of the assets of Channell Canada.  The Amended and Restated Loan and SecurityAgreement terminates on June 30, 2010 (unless terminated earlier pursuantto the terms thereof).  The terms andconditions of the Amended and Restated Loan and Security Agreement (other thanthe borrowing limits) are substantially similar to the previous Loan andSecurity Agreement with those same lenders (the “Previous Agreement”).  As of December 31, 2006, the borrowerswere in default under the Previous Agreement for failure: to maintain a minimumaggregate availability of $1,500 under the revolver (the aggregate availabilitywas $851); to have prepaid the domestic revolving loans in the amount of theexcess of the domestic revolving credit exposure over the domestic borrowingbase; and to have delivered the projections of Channell Commercial Corporationand its subsidiaries for fiscal year 2007. In February 2007, the borrowers received a waiver from the lendersfor these defaults.

 

The Amended and Restated Loan and Security Agreementcontains various financial and operating covenants that impose limitations onthe borrowers’ and their subsidiaries’ ability, among other things, to incuradditional indebtedness, merge or consolidate, sell assets except in theordinary course of business, make certain investments, enter into leases andpay dividends.  The Amended and RestatedLoan and Security Agreement requires Channell Commercial Corporation tomaintain a lockbox on the revolving credit facility. The Amended and RestatedLoan and Security 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 Company was in compliance with all covenants atDecember 31, 2007 except for one negative covenant prohibiting certain salestransactions for which it received a waiver.

 

Channell Bushman and the Channell Bushman Subsidiariesare parties to a Facility Agreement with an Australian private debt fund.  In connection with the Facility Agreement,Channell Bushman and the Channell Bushman Subsidiaries also entered into aFixed and Floating Charge (Incorporating an Equitable Mortgage of Shares) (the “SecurityAgreement”), by and among Channell Bushman, the Channell Bushman Subsidiariesand the lender.

 

The Facility Agreement (denominated in Australiandollars) provides for credit facilities in the aggregate principal amount of$11,544, consisting of: (i) a term loan of $7,104 and (ii) arevolving facility with borrowings of up to $4,440, depending on the level ofcertain qualifying assets. The obligations of Channell Bushman under theFacility Agreement are guaranteed by the Channell Bushman Subsidiaries. Inaddition, under the Security Agreement, a first-ranking security interest inall of the assets of Channell Bushman and the Channell Bushman Subsidiaries isgranted to, and all of the share capital of the Channell Bushman Subsidiariesis pledged to, the lender as security for Channell Bushman and the ChannellBushman Subsidiaries’ obligations under the Facility Agreement. The FacilityAgreement terminates on September 30, 2010, unless earlier terminatedpursuant to the terms thereof.  In March 2008,Channell Bushman entered into a sale and leaseback transaction with an equipmentfinance company with respect to its truck 

 

F-16

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS–continued**

*(amountsin thousands, except per share data)*

 

fleet.  The net proceeds from the sale of $1,276 wereused to pay down the term loan.

 

TheFacility Agreement and Security Agreement contain various financial andoperating covenants that impose limitations on Channell Bushman and theChannell Bushman Subsidiaries’ ability to, among other things, incur orguarantee additional indebtedness, merge or consolidate, sell assets except inthe ordinary course of business, make certain investments, issue or redeemshares, transfer ownership of the share capital of the Channell BushmanSubsidiaries, grant further security interests, and pay dividends. The FacilityAgreement and Security Agreement provide that on the occurrence of an event ofdefault, the lender may declare the outstanding obligations under the FacilityAgreement immediately due and payable, terminate its commitments under theFacility Agreement and enforce its rights under its security interests,including taking possession of and otherwise acting as owner of the assets ofChannell Bushman and the Channell Bushman Subsidiaries, appointing a receiverover the assets of Channell Bushman and the Channell Bushman Subsidiaries withthe power to, among other things, sell the assets, and causing 100% of theshares of each Channell Bushman 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 Channell Bushman Subsidiary occur. Channell Bushman was incompliance with all covenants at December 31, 2007.

 

On October 8, 2007,Channell Pty Limited and Bushman Group Pty Limited, which are indirectsubsidiaries of Channell Commercial Corporation, entered into a new Loan andSecurity Agreement with the Bank that amended the Prior Australia LoanAgreement. The new Loan and Security Agreement extends the expiration date ofall remaining facilities under the Prior Australia Loan Agreement that were notrepaid with the initial borrowing under the Facility Agreement to October 31,2008.  The remaining facilities include performance guarantees, creditcard facilities and payroll processing facilities. The loans under the New Loanand Security Agreement are secured by all the assets of Channell Pty Limitedand a term deposit that was released in February 2008.

 

Thenew Loan and Security Agreement contains various operating covenants thatimpose limitations on Channell Pty Limited and Bushman Group Pty Limited’sability, among other things, to merge or consolidate, sell assets except in theordinary course of business, and pay dividends.  Except as amended asdescribed above, the remaining terms and conditions of the Prior Australia LoanAgreement (as they relate to Channell Pty Limited and Bushman Group PtyLimited) generally remain unchanged. Channell Pty Limited and Bushman Group PtyLimited were in compliance with all covenants at December 31, 2007.

 

In March 2008,Channell Pty Limited and Bushman Group Pty Limited refinanced the facilitiesunder the Loan and Security Agreement with another commercial bank inAustralia.  In addition to theperformance guarantees, credit card facilities and payroll processingfacilities, the new agreement includes an equipment financing facility for eachentity.

 

The Company’s debt at December 31,2007 is scheduled to mature as follows:

 

| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
|     |       |       |       |
| 2008     |       | $          | 10,335     |   |
| 2009     |       | 2,191      |       |
| 2010     |       | 5,271      |       |
| 2011     |       | 5          |       |
| 2012     |       | —     |       |
|     |       | $          | 17,802     |   |

 

F-17

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS–continued**

*(amountsin thousands, except per share data)*

 

## ***NOTE G—CAPITAL LEASE OBLIGATIONS***

## *** ***

The Company, under various agreements, leases certainmachinery and equipment that are classified as capital leases.  The leases expire on various dates through May 2010.  Future minimum payments, by year, are asfollows:

** **

| **Year**                           | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2008                               |       | $          | 178        |   |
| 2009                               |       | 154        |       |
| 2010                               |       | 56         |       |
|                               |       | 388        |       |
|                               |       |       |       |
| Less amount representing  interest |       | (37        | )          |
|                               |       | 351        |       |
| Less current maturities            |       | (153       | )          |
|                               |       | $          | 198        |   |

 

 

**NOTE H—INCOME TAXES**

 

The components of incometax expense (benefit) are as follows:

 

| ** **                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current                             |       |     |       |     |       |     |       |
| Federal                             |       | $        | 12         |     | $          | 78       |       | $ | (119 | ) |
| State                               |       | 25       |       | 24       |       | 20       |       |
| Foreign                             |       | 123      |       | (104     | )          | 187      |       |
|                                |       | 160      |       | (2       | )          | 88       |       |
| Deferred                            |       |     |       |     |       |     |       |
| Federal                             |       | —   |       | —   |       | 4,353    |       |
| State                               |       | —   |       | —   |       | 1,151    |       |
| Foreign                             |       | 324      |       | (775     | )          | (580     | )          |
|                                |       | 324      |       | (775     | )          | 4,924    |       |
| Total income tax expense  (benefit) |       | $        | 484        |     | $          | (777     | )          | $ | 5,012 |   |

 

The components ofincome (loss) before income tax expense were as follows:

 

| ** **    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
|          |       |     |       |     |       |     |       |
| United States |       | $        | 652        |     | $          | (1,127   | )          | $ | (1,541 | ) |
| Foreign       |       | 84       |       | (8,191   | )          | (497     | )          |
|          |       | $        | 736        |     | $          | (9,318   | )          | $ | (2,038 | ) |

 

Areconciliation from the U.S. Federal statutory income tax rate to the effectiveincome tax rate for the years ended December 31, is as follows:

 

F-18

----

 

**ChannelCommercial Corporation**

**Notes toConsolidated Financial Statements-****continued**

*(amounts in thousands, except pershare data)*

 

| ** **                                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |     |       |
| U.S. Federal statutory rate                                         |       | 34       | %          | (34      | )%         | (34      | )%         |
| State income taxes, net of  federal tax benefit                     |       | 5        |       | (1       | )          | (5       | )          |
| Research and development tax  credit                                |       | —   |       | —   |       | (25      | )          |
| Change in valuation allowance                                       |       | (19      | )          | 6        |       | 330      |       |
| Excess compensation                                                 |       | 10       |       | —   |       | —   |       |
| Meals and Entertainment                                             |       | 12       |       | —   |       | —   |       |
| Nondeductible expenses                                              |       | 2        |       | 2        |       | (1       | )          |
| Effect of subsidiaries taxed  at other than the U.S. statutory rate |       | 22       |       | 19       |       | (19      | )          |
|                                                                |       | 66       | %          | (8       | )%         | 246      | %          |

 

Thesignificant change in the effective income tax rate in 2005 is primarily theresult of recognizing a full valuation allowance against the domestic netdeferred tax asset in 2005.  The Companycontinued to maintain a full valuation allowance against its domestic netdeferred tax asset in 2006 and 2007.

 

Significant components ofthe Company’s deferred tax assets and liabilities are as follows:

 

| ** **                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Domestic Assets                            |       |     |       |     |       |
| Patents                                    |       | $        | 49         |     | $          | 147 |   |
| Allowance for bad debts                    |       | —   |       | 86       |       |
| Inventory capitalization                   |       | 134      |       | 67       |       |
| Vacation pay                               |       | 306      |       | 261      |       |
| Accrued liabilities and reserves           |       | 13       |       | 103      |       |
| Deferred gain on sale leaseback            |       | 103      |       | 126      |       |
| Deferred rent                              |       | —   |       | 61       |       |
| Goodwill                                   |       | 1,431    |       | 1,689    |       |
| State tax credits and loss carryforwards   |       | 1,316    |       | 1,354    |       |
| Federal tax credits and loss carryforwards |       | 4,092    |       | 3,869    |       |
| Inventory reserves                         |       | 131      |       | 21       |       |
| Share-based compensation                   |       | 174      |       | 130      |       |
|                                       |       | 7,749    |       | 7,914    |       |
| Valuation allowance                        |       | (6,114   | )          | (6,268   | )          |
|                                       |       | 1,635    |       | 1,646    |       |
|                                       |       |     |       |     |       |
| Domestic Liabilities                       |       |     |       |     |       |
| Accelerated depreciation                   |       | (1,635   | )          | (1,646   | )          |
| Net domestic deferred tax assets           |       | —   |       | —   |       |
|                                            |            |          |            |          |            |  |  |

 

F-19

----

** **

**ChannelCommercial Corporation**

**Notes toConsolidated Financial Statements-****continued**

*(amounts in thousands, except pershare data)*

 

| ** **                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
| Foreign deferred tax assets**:**        |       |     |       |     |       |
| Accrued liabilities and reserves        |       | $        | 1,278      |     | $          | 827 |   |
| Loss carryforwards                      |       | 822      |       | 1,180    |       |
|                                    |       | 2,100    |       | 2,007    |       |
| Foreign Deferred tax  liabilities       |       |     |       |     |       |
| Purchased intangibles                   |       | (237     | )          | (213     | )          |
| Exchange gain/loss and prepaid expenses |       | (285     | )          | (58      | )          |
|                                    |       | (522     | )          | (271     | )          |
|                                    |       |     |       |     |       |
| Net foreign deferred tax assets         |       | $        | 1,578      |     | $          | 1,736 |   |

 

The classificationof the net deferred tax asset between current and non-current is as follows:

 

| ** **                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
|                                |       |     |       |     |       |
| Net current assets                  |       | $        | 936        |     | $          | 719 |   |
| Net long-term assets  (liabilities) |       | 642      |       | 1,017    |       |
| Net deferred tax assets             |       | $        | 1,578      |     | $          | 1,736 |   |

 

Deferred tax assets and liabilities are determinedbased on temporary basis differences between assets and liabilities reportedfor financial reporting and tax reporting. The ultimate realization of the net deferred tax asset is dependent uponthe generation of future taxable income during the periods in which thosetemporary differences become deductible. Management considers projected future taxable income, recent financialperformance and tax planning strategies in making this assessment.  The Company is required to record a valuationallowance to reduce its net deferred tax asset to the amount that managementbelieves is more likely than not to be realized.  Accounting guidance allows the Company tolook to future earnings to support the realizability of the net deferredassets.  Since the Company has hadcumulative net operating losses in the domestic operations in recent years, theability to use forecasted future earnings is diminished.  As a result, management concluded as of December 31,2005 and 2006 that a full valuation allowance against the domestic net deferredtax asset was appropriate.  The Companycontinues to recognize a full valuation allowance against its net domesticdeferred tax asset at December 31, 2007. In addition, the Company had approximately $1,323 of net operating losscarryforwards with a potential tax benefit of $370 in one of the Asian operationswithin its International segment. Management has concluded that a full valuation allowance is required onthis net operating loss carryforward because of uncertainty regarding itsrealization.  The ultimate realization ofthe remaining net deferred tax assets is dependent upon the generation offuture taxable income during the periods in which those temporary differencesbecome deductible.  Management considersprojected future taxable income and tax planning strategies in making thisassessment.  Based on historical foreigntaxable income and projections for future taxable income over periods that thedeferred tax assets are deductible, management believes it is more likely thannot that the Company will realize the benefits of these deductible differences.  The amounts of deferred taxes consideredrealizable however, could materially change in the future if estimates offuture taxable income during the carryforward period are changed.

 

The Company has not provided for U.S. income taxes onforeign subsidiaries’ undistributed earnings of $5,005 at December 31,2007, since those earnings are expected to be reinvested indefinitely outsidethe U.S.  It is not practicable topredict the amount of U.S. income taxes that might be payable if these earningswere eventually repatriated.

 

As of December 31, 2007, the Company has federalnet operating losses of $11,663 and state net operating losses of $24,007.  The federal net operating losses expire invarying amounts beginning in 2024 unless previously utilized. 

 

F-20

----

 

**ChannelCommercial Corporation**

**Notes toConsolidated Financial Statements-****continued**

*(amounts in thousands, except pershare data)*

 

Thestate net operating losses generally begin expiring in material amounts in2011.  The Company also has foreign netoperating losses of approximately $4,064 that can be carried forwardindefinitely.

 

As of December 31, 2007, the Company has federalresearch and development credit carryforwards totaling $241.  The Company also has federal alternativeminimum tax credit carryforwards totaling $79 that can be carried forwardindefinitely and a foreign tax credit carryforward totaling $11, which can becarried forward for ten years.

 

The Company adopted the provisions of FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”),an interpretation of SFAS No. 109, on January 1, 2007.  FIN 48 prescribes a recognition thresholdthat a tax position is required to meet before being recognized in the financialstatements and provides guidance on derecognition, measurement, classification,interest and penalties, accounting in interim periods, disclosure andtransitions issues.  The adoption of FIN48 resulted in no impact to the Company’s consolidated financialstatements.  As of the date of theadoption, the Company had no material 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 2002 through 2007 tax years remain subject to examination by federaltax authorities while the 2003 through 2007 tax years remain subject toexamination by most state and foreign jurisdictions.

 

The Company recognizes interest and penalties relatedto uncertain tax positions in income tax expense.  As of the date of the adoption of FIN 48 and December 31,2007, the Company had no provisions for interest or penalties related touncertain tax positions.

 

**NOTE I—STOCK-BASED COMPENSATION**

 

In July 1996,the Company adopted the 1996 Incentive Stock Plan (the “1996 Stock Plan”),under which it was authorized to issue non-qualified stock options andincentive stock options to key employees, directors and consultants to purchaseup to an aggregate of 750 shares of the Company’s common stock.  The options have a term of ten years andgenerally become fully vested by the end of the third year.  In May 1999, the 1996 Stock Plan wasamended to increase the authorized number of shares to 1,500.

 

In January 2003,the Board of Directors approved an offer allowing current employees andnon-employee directors to exchange all of their outstanding options grantedunder the 1996 Stock Plan for new options to be granted under the Company’s2003 Incentive Stock Plan or any other stock option plan that may be adopted bythe Company.  The 2003 Incentive StockPlan was approved at the Annual Meeting of Stockholders on April 25,2003.  The authorized shares under the2003 Incentive Stock Plan are 3,100.

 

Atotal of 1,327 options to purchase shares of the Company were accepted forexchange and cancelled on March 20, 2003. On September 24, 2003, a total of 1,324 new options were exchangedfor options cancelled in March 2003. 

 

Eligibleoption holders who participated in the offer received a new option on the newgrant date in exchange for each old option that was validly tendered andaccepted for exchange. The number of shares covered by each new option wasequal to the number of shares covered by the old options, and the vested statusand vesting schedule of the old options was preserved and continued. Theexercise price of the new options was equal to the closing sale price of theCompany’s common stock as reported on the NASDAQ Stock Market on the grant dateof the new options. No expense was recognized in connection with the exchangeof options.

 

AtDecember 31, 2007, under the two plans described above, the Company hadtotal unvested stock-based compensation expense of $129. The unvested stockoptions will vest at various intervals over the next 2.4 years. Totalstock-based compensation expense, recognized in general and administrativeexpenses during the years ended December 31, 2007 and 2006 is shown in thefollowing table:

 

| ** **                                               | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Stock-based compensation expense included in net  income |       | $                                | 115        |   | $ | 343 |   |
| Effect on diluted income (loss) per share                |       | $                                | (0.01      | ) | $ | (0.04 | ) |

 

Thefair value of options at the date of grant was estimated using theBlack-Scholes option valuation model with the following weighted averageassumptions for all options granted during the period:

 

F-21

----

 

**ChannelCommercial Corporation**

**Notes toConsolidated Financial Statements-****continued**

*(amountsin thousands, except per share data)*

 

| ** **               | ** ** | **SFAS No. 123R  Expense 2007** | ** ** | **SFAS No. 123R  Expense 2006** | ** ** | **SFAS No. 123  Pro forma 2005** | ** ** |
|--------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------------|------------|
|                     |       |                                 |       |                                 |       |                                       |       |
| Expected term            |       | 5 years                              |       | 5 years                              |       | 5 years                                    |       |
| Risk-free interest rate  |       | 4.9                                  | %          | 4.7                                  | %          | 3.9                                        | %          |
| Expected volatility      |       | 100                                  | %          | 62                                   | %          | 50                                         | %          |
| Expected forfeiture rate |       | 7.5                                  | %          | 9.1                                  | %          | —                                     |       |
| Expected dividend yield  |       | —                               |       | —                               |       | —                                     |       |

 

Theweighted-average grant-date fair value of options granted during the yearsended December 31, 2007, 2006 and 2005 was $3.12, $1.89, and $3.52,respectively.  The expected volatility isbased on the historical volatility of the Company’s common stock.  The expected term and forfeiture rate ofoptions granted are based on analysis of historical employee termination ratesand option exercises.  The risk-freeinterest rates are based on the U.S. Treasury yield for a period consistentwith the expected term of the option at the date of grant.

 

Thetotal intrinsic value of options exercised during the years ended December 31,2007, 2006 and 2005 was $1, $0, and $635, respectively.

 

Asummary of option activity under the Company’s two stock plans, as of December 31,2007 and changes during the year then ended is presented below:

 

| ** **                                                                     | ** ** | **Shares of common stock under options** | ** ** | **Weighted- average exercise price** | ** ** | **Weighted- average remaining contractual term** | ** ** | **Aggregate  intrinsic value** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------|------------|--------------------------------|------------|
|                                                                           |       |                                     |       |                                 |       |                                             |       |                           |       |
| Outstanding at January 1, 2007                                            |       | 1,751                                    |       | $                                    | 4.70       |                                             |       |                           |       |   |
| Options granted                                                                |       | 14                                       |       | 4.07                                 |       |                                             |       |                           |       |
| Options forfeited                                                              |       | (94                                      | )          | 4.72                                 |       |                                             |       |                           |       |
| Options expired                                                                |       | —                                   |       | —                               |       |                                             |       |                           |       |
| Options exercised                                                              |       | (1                                       | )          | 4.84                                 |       |                                             |       |                           |       |
| Outstanding at December 31, 2007                                          |       | 1,670                                    |       | $                                    | 4.70       |                                             | 6.0        |                           | $          | — |   |
| Exercisable at December 31, 2007                                          |       | 1,636                                    |       | $                                    | 4.72       |                                             | 5.9        |                           | $          | — |   |
| Ending vested  and expected to vest in the future as of December 31, 2007 |       | 1,667                                    |       | $                                    | 4.70       |                                             | 6.0        |                           | $          | — |   |
| Available for grant at December 31, 2007                                  |       | 1,281                                    |       |                                 |       |                                             |       |                           |       |

 

Asummary of the status of the Company’s nonvested shares as of December 31,2007 and changes during the year then ended is presented below:

 

| **Nonvested  Shares**                | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|----------------|------------|
|                                 |       |       |       |           |       |
| Nonvested at January 1,  2007   |       | 101        |       | $              | 1.79       |   |
| Granted                              |       | 14         |       | 3.12           |       |
| Vested                               |       | (79        | )          | 1.71           |       |
| Forfeited or expired                 |       | (2         | )          | 2.37           |       |
| Nonvested at December 31,  2007 |       | 34         |       | $              | 2.04       |   |

 

F-22

----

 

**ChannelCommercial Corporation**

**Notes toConsolidated Financial Statements-****continued**

*(amountsin thousands, except per share data)*

 

**NOTE J—RETIREMENT PLAN**

 

The Company established a retirement plan inaccordance with section 401(k) of the Internal Revenue Code. Under theterms of this plan, eligible employees may make voluntary contributions to theextent allowable by law.  Employees ofthe Company are eligible after 90 days of employment.  Matching contributions by the Company to thisplan are discretionary and will not exceed that allowable for Federal incometax purposes.  The Company’scontributions are vested over five years in equal increments.  The accompanying statements of operationsinclude contribution expense of $0, $0, and $163 for the years ended December 31,2007, 2006 and 2005, respectively.

 

**NOTEK—RELATED PARTY TRANSACTIONS**

 

TheCompany has two leases for approximately 265 square feet of manufacturing,warehouse and office space in Temecula, California, with the Channell FamilyTrust, one of the Company’s principal stockholders, of which Jacqueline M.Channell, the Company’s Chairman of the Board and secretary, is a trustee. Theterm of the lease dated December 22, 1989 (as amended), for 103 squarefeet, expires on December 31, 2015. The term of the lease dated May 29, 1996 (as amended), for 162square feet, expires on April 30, 2012 and has two renewal options, onefor three years, eight months and a second for five years. Both leases providefor payments by the Company of insurance, repairs, maintenance and propertytaxes.  Rent expense paid under theleases was $1,416, $1,383, and $1,334 for the years ended December 31,2007, 2006, and 2005, respectively. Also, in 1997, the Company guaranteed debt of the Channell Family Trustof approximately $754 in connection with construction of one of the leasedfacilities described above.  The loanamount subject to the guarantee has declined and is expected to decline furtherbefore expiring in 2017.  At December 31,2007, the outstanding loan balance subject to the guarantee totaled $486.  It is not practicable to estimate the fairvalue of the guarantee; however, the Company does not anticipate that it willincur losses as a result of this guarantee. As such, the Company has not recorded a liability for this guarantee.  If the Channell Family Trust were to defaulton the outstanding loan balance, the Company might be required to repay theremaining principal balance.   Managementhas determined that the Channell Family Trust does not qualify as a “variableinterest entity” subject to consolidation under FIN 46 and FIN 46(R).

 

In 2007 theCompany entered into a lease with William H. Channell, Jr., the Company’sPresident and Chief Executive Officer, and his wife, Carolyn Channell, relatedto a parcel of land adjacent to the Company’s headquarters building inTemecula.  The lease dated September 13,2007 expires December 31, 2015 and has two five-year renewal options.  Rent paid under the lease was $25 in 2007.

 

Carolyn Channell was hired as an employee of the Companyin June 2005. The Company paid Mrs. Channell $70 in 2007 and 2006. Prior to being hired as an employee to handle specific insurance mattersfor the Company, Mrs. Channell was paid an additional $40 for herconsulting services in the first half of 2005. Mrs. Channell is the wife of William H. Channell, Jr., theCompany’s President and Chief Executive Officer.

 

The Company has facilities in Dalby, Terang, andAdelaide, Australia that are leased from stockholders of the Company.  These stockholders are former owners ofBushman Tanks.  The facilities comprise72 square feet of manufacturing, warehouse and office space.  The aggregate rent expense paid for thesefacilities was $261 and $254 in 2007 and 2006, respectively.  At the time of the Bushman Tanks acquisitionin 2004, the Company hired an independent firm to appraise the market leaserates for these facilities and it was determined that the existing leases werein excess of fair market value by approximately $27 per year.  Included in the liabilities assumed in theBushman Tanks acquisition is $93 related to these unfavorable leases.

 

### **NOTE L—COMMITMENTS ANDCONTINGENCIES**

### ** **

***Leases.*** The Company leases manufacturing andoffice space and machinery & equipment under several operating leasesexpiring through 2015. Rent expense under all operating leases amounted to$3,396, $3,277, and $2,791 for the years ended December 31, 2007, 2006 and2005, respectively. Rent expense for the years ended December 31, 2007 and2006 is net of sublease rental income of $263 and $99, respectively. Totalfuture minimum rental payments under noncancellable operating leases andsubleases with initial or remaining terms in excess of one year as of December 31,2007, including the operating leases with the related parties discussed in NoteK, are as follows:

 

F-23

----

 

**ChannelCommercial Corporation**

**Notes toConsolidated Financial Statements-****continued**

*(amountsin thousands, except per share data)*

 

| ** ** | ** ** | **Rental**   | ** ** | **Sublease** | ** ** |
|------------|------------|--------------|------------|--------------|------------|
| **Year**   | ** ** | **Payments** | ** ** | **Income**   | ** ** |
|       |       |         |       |         |       |
| 2008       |       | $            | 3,805      |         | $          | 131 |   |
| 2009       |       | 3,650        |       |         |       |
| 2010       |       | 3,183        |       |         |       |
| 2011       |       | 2,856        |       |         |       |
| 2012       |       | 2,133        |       |         |       |
| Thereafter |       | 4,651        |       |         |       |
|       |       | $            | 20,278     |         | $          | 131 |   |

 

In addition to these minimumrental commitments, certain of these operating leases provide for payments ofinsurance, repairs and maintenance and property taxes.

 

In June, 2002, the Company entered into a sale andleaseback agreement for a warehouse facility located in Temecula,California.  The proceeds from the saletotaled approximately $6,200 and resulted in a pretax deferred gain of$604.  The resulting lease is beingaccounted for as an operating lease.  Thebase lease term is ten years with two five-year options at rental amounts to beadjusted to the fair market rental value at the end of the base term.  The Company recorded income of $60, $61 and$60 in 2007, 2006 and 2005 respectively, related to the amortization of thedeferred gain.  The balance of theunamortized gain was $272 and $332 at December 31, 2007 and 2006,respectively.

 

***EmploymentAgreements****. *In December, 2003 the Company enteredinto an employment agreement with William H. Channell Jr., its President andChief Executive Officer.  The employmentagreement is for an initial five-year term and is automatically renewed foradditional five-year terms unless it is terminated by the Company or by Mr. Channell, Jr.in accordance with the agreement. Mr. Channell, Jr.’s salary (1) maybe increased from time to time in the discretion of the Board of Directors and (2) willbe increased annually, beginning July 1, 2004, to reflect the mostrecently published annualized percentage increase in the consumer price indexfor the Los Angeles, California area. The agreement also provides that his base salary will not be decreasedbelow $718 (which was the base salary on the original effective date of theagreement).  The total amount paid to Mr. Channell, Jr.as salary for 2007 was $825.

 

In addition to basesalary, Mr. Channell, Jr. is entitled to participate in cash andother bonus programs, including the 2003 Incentive Stock Plan, 401(k) planand the 2004 Incentive Bonus Plan. Pursuant to the agreement, the Company isalso required to maintain certain insurance policies for Mr. Channell Jr.’sbenefit and he is also entitled to certain other benefits, including an automobileallowance, health insurance, and vacation and sick leave, in accordance withcustomary practices for senior executive officers.  In the event that (1) the Companyterminates Mr. Channell, Jr.’s employment without “cause,” as definedin the agreement, or (2) Mr. Channell, Jr. terminates hisemployment with the Company for “good reason,” which is also specificallydefined in the agreement, Mr. Channell, Jr. would be entitled to alump sum payment equal to three times his then current base salary, all healthand life insurance benefits for three years, and accelerated vesting of anystock options or restricted stock granted to him.  In addition, if the Company terminates Mr. Channell, Jr.’semployment for any reason other than cause, it is required to maintain Mr. Channell, Jr.’sdisability policy, at its expense, until the date on which Mr. Channell, Jr.is 65 years old.  The agreement alsoprovides for certain benefits to Mr. Channell, Jr. upon his death ordisability.

 

The Company was party toan employment agreement with William H. Channell, Sr., the Company’sformer 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 theagreement, the Company will continue to provide Mrs. Jacqueline M.Channell with medical insurance (to the same extent such insurance is providedto the Company’s senior executive officers) during her lifetime.  Mrs. Channell is currently beingprovided with medical insurance in connection with her employment by theCompany.

 

***Taxes*****. **The Federal income taxes of the Companyfor the years ended December 31, 2003 and 2004 are currently underexamination by the Internal Revenue Service (“IRS”).  As of December 31, 2007, the Company andthe IRS have resolved all outstanding issues except for the one related to anordinary worthless stock deduction.  Theamount of the benefit under dispute is approximately $3,000.  The net benefit recognized for this positionwas approximately $300 with the remaining benefit being offset by the valuationallowance that has been established against the deferred tax asset.  TheCompany does not anticipate a material adverse impact on its financialstatements for this item.

 

F-24

----

 

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS—continued**

*(amountsin thousands, except per share data)*

 

***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.

 

***MinorityInterest.*** On August 2,2004, the Company and Channell Bushman entered into an Investment andShareholder’s Agreement with a private equity firm in Australia.  Theprivate equity investment was obtained as part of the financing of the BushmanTanks acquisition.  The private equity party invested $2.6 million, thenet amount received after paying a capital raising fee, for ownership of 25% ofthe outstanding and voting shares of Channell Bushman.  As part of theShareholder’s Agreement, the private equity party has the right to appoint onemember of the Board of Directors of Channell Bushman with the Companyappointing the remaining three members.  The Shareholder’s Agreementspecifies that certain actions taken by the Board of Directors requireunanimous approval, including, without limitation, a proposal to sell all orsubstantially all of the assets of Channell Bushman, material assetacquisitions or disposals not included in the annual business plan, any plan tolimit or dissolve the business, the issuance of any securities, capitalrestructuring, granting of a security interest on assets and related partytransactions.

 

It is the intent of theprivate equity party to exit from its investment in Channell Bushman withinfive years after the original investment.  The Shareholder’s Agreementcontains clauses to facilitate the exit of the private equity party.  TheShareholder’s Agreement specifies that after the date that is two years afterthe original investment, the Company has an option to acquire all of the sharesowned by the private equity party.  The Shareholder’s Agreement specifiesthat the value of the shares is to be fair market value as determined by anindependent appraiser.  There are no minimum or maximum amounts specified inthe Shareholder’s Agreement.  After the date that is five years after theoriginal investment, both the Company and the private equity party have theright to initiate a sale of Channell Bushman.  At such time, the otherparty may elect to buy out the shares of the party initiating the sale at thefair market value as determined by an independent appraiser.  Otherwise,Channell Bushman would be offered for sale with the assistance of a financialadvisor.

 

***Legal Proceedings.**** *The Company is from time to timeinvolved in ordinary routine litigation incidental to the conduct of itsbusiness.  The Company regularly reviewsall pending litigation matters in which it is involved and establishes reservesdeemed appropriate 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.

 

**NOTE M—CREDIT CONCENTRATIONS ANDMAJOR CUSTOMERS**

 

The Companymaintains cash balances in financial institutions located in the United States,Canada, Australia and the United Kingdom. Cash balances held in financial institutions in the U.K. totaled $298and $162 at December 31, 2007 and 2006, respectively.  Cash balances held in financial institutionsin Australia totaled $1,051 and $506 at December 31, 2007 and 2006,respectively.  Cash balances held infinancial institutions in Canada totaled $638 and $200 at December 31,2007 and 2006, respectively.  Cashbalances held in financial institutions located in the United States may, attimes, exceed federally insured limits. The Company has not experienced any losses in such accounts and believesit is not exposed to any significant credit risk on cash and cash equivalents.

 

The telecommunicationsindustry is the largest industry in which the Company operates and is highlyconcentrated.  A relatively small numberof customers account for a large percentage of the Company’s availablemarket.  Consequently, the Company’s fivelargest customers accounted for 33.0%, 29.4%, and 33.6%, of the Company’s totalnet sales in 2007, 2006, and 2005 respectively. Verizon accounted for 7.7% of the Company’s total net sales in 2007,8.3% of the Company’s total net sales in 2006, and 17.2% of the Company’s netsales in 2005.  Mergers and acquisitions in the telecommunications industry not onlyincrease the concentration of the industry and of the Company’s customer base,but also from time to time delay customers’ capital expenditures as newly mergedservices providers consolidate their operations.  In the event one of the Company’s majorcustomers were to terminate purchases of the Company’s products, the Company’soperating results would be adversely affected. The Company also operates in

 

F-25

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**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS—continued**

*(amountsin thousands, except per share data)*

 

thewater storage industry in Australia.  Nosingle customer accounts for a large percentage of sales in the sector.  The primary markets for the sale of theseproducts are to individuals and small businesses in the farming industry.  See Note N for the relative percentages ofrevenue from product line sales.

 

**NOTE N—SEGMENT AND GEOGRAPHICINFORMATION**

 

The operatingsegments of the Company have been aggregated into two geographical reportingsegments:  Americas andInternational.  Americas includes theUnited States, Central and South America and Canada.  International includes Europe, Africa, theMiddle East, Australia and Asia.  Thechief operating decision maker of both segments is William H. Channell, Jr.,President and Chief Executive Officer of the Company.  The Company’s four product lines are sold inboth segments.  The following tablessummarize segment information:

 
| ** **                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues from external customers(1):                   |       |     |       |     |       |     |       |
| Americas(2)                                            |       | $        | 74,009     |     | $          | 59,383   |       | $ | 65,283 |   |
| International                                          |       | 59,154   |       | 49,755   |       | 50,782   |       |
|                                                   |       | $        | 133,163    |     | $          | 109,138  |       | $ | 116,065 |   |
| Income (loss) from operations:                         |       |     |       |     |       |     |       |
| Americas                                               |       | $        | 1,174      |     | $          | (702     | )          | $ | (1,416 | ) |
| International                                          |       | 885      |       | (7,759   | )          | (127     | )          |
|                                                   |       | $        | 2,059      |     | $          | (8,461   | )          | $ | (1,543 | ) |
| Interest income:                                       |       |     |       |     |       |     |       |
| Americas                                               |       | $        | 4          |     | $          | 29       |       | $ | 3 |   |
| International                                          |       | 39       |       | 57       |       | 67       |       |
|                                                   |       | $        | 43         |     | $          | 86       |       | $ | 70 |   |
| Interest expense:                                      |       |     |       |     |       |     |       |
| Americas                                               |       | $        | 696        |     | $          | 477      |       | $ | 201 |   |
| International                                          |       | 670      |       | 466      |       | 364      |       |
|                                                   |       | $        | 1,366      |     | $          | 943      |       | $ | 565 |   |
|                                                   |       |     |       |     |       |     |       |
| Income tax expense (benefit):                          |       |     |       |     |       |     |       |
| Americas                                               |       | $        | 44         |     | $          | 130      |       | $ | 5,300 |   |
| International                                          |       | 440      |       | (907     | )          | (288     | )          |
|                                                   |       | $        | 484        |     | $          | (777     | )          | $ | 5,012 |   |
|                                                   |       |     |       |     |       |     |       |
| Identifiable assets:                                   |       |     |       |     |       |     |       |
| Americas(3)                                            |       | $        | 28,335     |     | $          | 28,682   |       | $ | 28,313 |   |
| International(4)(5)(6)                                 |       | 38,512   |       | 33,196   |       | 32,393   |       |
|                                                   |       | $        | 66,847     |     | $          | 61,878   |       | $ | 60,706 |   |
|                                                   |       |     |       |     |       |     |       |
| International change in goodwill:                      |       |     |       |     |       |     |       |
| Balance  January 1,                               |       | $        | 9,171      |     | $          | 13,273   |       | $ | 13,574 |   |
| Impairment of goodwill                                 |       | —   |       | (4,829   | )          | —   |       |
| Adjustment for  warranty claims and earn out agreement |       | —   |       | (86      | )          | 614      |       |
| Foreign currency  translation                          |       | 1,023    |       | 813      |       | (915     | )          |
| Balance  December 31,                             |       | $        | 10,194     |     | $          | 9,171    |       | $ | 13,273 |   |

 

F-26

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS—continued**

*(amountsin thousands, except per share data)*

 
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Depreciation and amortization: |       |     |       |     |       |     |       |
| Americas                       |       | $        | 3,043      |     | $          | 2,970    |       | $ | 3,060 |   |
| International                  |       | 1,886    |       | 2,131    |       | 1,420    |       |
|                           |       | $        | 4,929      |     | $          | 5,101    |       | $ | 4,480 |   |
|                           |       |     |       |     |       |     |       |
| Capital expenditures:          |       |     |       |     |       |     |       |
| Americas                       |       | $        | 2,879      |     | $          | 1,632    |       | $ | 2,391 |   |
| International                  |       | 1,038    |       | 2,239    |       | 1,948    |       |
|                           |       | $        | 3,917      |     | $          | 3,871    |       | $ | 4,339 |   |

----

| (1) | Revenues from external  customers from any individual foreign country did not exceed 10% of total  revenue.                                                                                                                                                                             |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes export sales  from the United States of approximately $146, $42, and $242, in 2007, 2006  and 2005, respectively.                                                                                                                                                              |
| (3) | Includes goodwill of  $804, $677, and $674, in 2007, 2006 and 2005, respectively. The change in  goodwill relates to foreign currency translation adjustment. Includes  long-lived assets in the United States of $11,778, $11,902, and $13,191, in  2007, 2006 and 2005, respectively. |
| (4) | Includes long-lived  assets in the United Kingdom of $9, $8, and $10, in 2007, 2006 and 2005,  respectively.                                                                                                                                                                            |
| (5) | Includes long-lived  assets in Australia of $7,249, $6,736, and $5,326, in 2007, 2006 and 2005  respectively.                                                                                                                                                                           |
| (6) | Includes goodwill of  $10,194, $9,171, and $13,273, non-compete agreement of $1,339, $1,387, and  $1,477, and trademark intangible of $789, $710 and $655 in 2007, 2006 and  2005, respectively.                                                                                        |

 

TheCompany had revenues from external customers from the following product lines:

 
| ** **             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|
| Enclosures             |       | $        | 56,628     |     | $          | 50,033   |       | $ | 51,395 |   |
| Water related products |       | 58,996   |       | 48,736   |       | 54,881   |       |
| Connectivity           |       | 12,176   |       | 8,608    |       | 9,006    |       |
| Other                  |       | 5,363    |       | 1,761    |       | 783      |       |
| Total                  |       | $        | 133,163    |     | $          | 109,138  |       | $ | 116,065 |   |

 

 

**NOTE O—QUARTERLY FINANCIAL DATA(Unaudited)**

 

Summarized quarterlyfinancial data for 2007 and 2006 follows:

 
| ** **               | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|--------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **               | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| 2007                     |       |        |       |        |       |        |       |        |       |
| Net sales                |       | $           | 32,853     |        | $          | 36,722      |       | $           | 33,856     |   | $ | 29,732 |   |
| Gross profit             |       | 9,974       |       | 11,927      |       | 10,148      |       | 8,874       |       |
| Net income  (loss)       |       | 115         |       | 931         |       | 42          |       | (815        | )          |
| Income (loss)  per share |       |        |       |        |       |        |       |        |       |
| Basic                    |       | 0.01        |       | 0.10        |       | —      |       | (0.09       | )          |
|                          |            |             |            |             |            |             |            |             |            |  |  |  |  |

 

F-27

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS—continued**

*(amountsin thousands, except per share data)*

 

 
| ** **     | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|----------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **     | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| 2006           |       |        |       |        |       |        |       |        |       |
| Net sales      |       | $           | 25,152     |        | $          | 29,948      |       | $           | 29,376     |   | $ | 24,662 |   |
| Gross profit   |       | 7,589       |       | 10,336      |       | 9,197       |       | 5,961       |       |
| Net loss (1)   |       | (1,556      | )          | (2,386      | )          | (106        | )          | (2,781      | )          |
| Loss per share |       |        |       |        |       |        |       |        |       |
| Basic          |       | (0.16       | )          | (0.25       | )          | (0.01       | )          | (0.29       | )          |
|                |            |             |            |             |            |             |            |             |            |  |  |  |  |

----

| (1) | During the second  quarter of 2006, the Company recorded a $4,829 impairment related to the  carrying value of goodwill in its International segment. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-28

----

 

**GLOSSARY OF TERMS**

 

*ADSL(Asymmetric Digital Subscriber Line): *A standard allowing digital broadbandsignals and standard telephone service to be transmitted up to 12,000 feet overa twisted copper pair.

 

*Broadband: *Transmission rates in excess of 1.544 mega bits persecond typically deployed for delivery of high-speed data, video and voiceservices. Also, a system for distributing television programming by a cablenetwork rather than by broadcasting electromagnetic radiation.

 

*Cat-5* (*Category 5*):  Network cabling that consists of four twistedpairs of copper wire terminated by data rated connectors.  Cat-5 cabling supports frequencies up to 100MHz and speeds up to 1000 Mbps.

 

*CATV(Community Antenna Television)*: More commonly known as cable TV.

 

*CableModem:*  Electronic transmission device placed on thebroadband network, located at end user locations, providing two-way, high-speeddata service capability, including internet access for subscribers.

 

*CoaxialCable:*  The most commonly used means of transmittingcable television signals.  It consists ofa cylindrical outer conductor (shield) surrounding a center conductor heldconcentrically in place by an insulating material.

 

*DLC(Digital Loop Carrier):*  Telecommunications transmissiontechnology which multiplexes multiple individual voice circuits onto copper orfiber cables.

 

*DSL(Digital Subscriber Line):* Generic descriptor covering various versions of DSLservices delivered over copper wires. Included are HDSL and ADSL services.

 

*FiberOptics:*  The process of transmitting infrared andvisible light frequencies through a low-loss glass fiber with a transmittinglaser or LED and a photo diode receiver.

 

*FTTP(Fiber-To-The-Premises):*  In a long distance networkconsisting of fiber optics, fiber-to-the-premises refers to the fiber opticsrunning from the distribution plant to the customer premise, which may be thecurb or the outside wall of the premise, at which point copper is used for theremaining connection.

 

*HDSL(High bit rate Digital Subscriber Line):*  By usingsophisticated coding techniques, a large amount of information may betransmitted over copper.  The HDSL schemeuses such coding over four copper wires and is primarily intended for highcapacity bi-directional business services.

 

*HFC(Hybrid Fiber Coax):*  A type of distribution plant that utilizesfiber optics to carry service from a CO to the carrier serving area, thencoaxial cable within the CSA to or close to the individual residences.

 

*RBOC(Regional Bell Operating Company):*  A term for theregional holding companies created when AT&T divested the Bell operatingcompanies.

 

*RF (RadioFrequency):*  An electromagnetic wave frequencyintermediate between audio frequencies and infrared frequencies used especiallyin wireless telecommunications and broadband transmission.

 

*VoIP(Voice over Internet Protocol):*A technology that allows you to make telephone callsusing a broadband Internet connection instead of a regular (or analog) phoneline.

 

x*DSL (Digital Subscriber Line):* Represents Genericdescription of  DSL covering higherbandwidth.

 

G-1

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this Form 10-K Annual Report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   |   | CHANNELL COMMERCIAL  CORPORATION               |
|--------|--------|------------------------------------------------|
|   |   |                                           | a  Delaware corporation |
|   |   |                                           |
|   |   |                                           |
|   |   |                                           |
|   |   |                                           |
|   | By:    | /s/ Jacqueline M. Channell                     |
|   |   | Jacqueline M. Channell                         |
|   |   | Chairman of the Board,  Secretary and Director |
|   |   | (Duly authorized  officer of the Registrant)   |
|   |   |                                           |
|   | Date:  | March 28, 2008                            |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Form 10-K AnnualReport has been signed by the following persons on behalf of the registrant andin the capacities indicated below as of March 28, 2008.

 

 
| **Signature**                      | ** ** | **Capacity in Which Signed**                        |
|------------------------------------|------------|-----------------------------------------------------|
|                               |       |                                                |
| /s/ Jacqueline M.  Channell        |       | Chairman of the Board,  Secretary and Director      |
| Jacqueline M. Channell             |       |                                                |
|                               |       |                                                |
| /s/ William H.  Channell, Jr. |       | President and Chief  Executive Officer and Director |
| William H.  Channell, Jr.     |       | (Principal Executive  Officer)                      |
|                               |       |                                                |
| /s/ Dana Brenner                   |       | Director                                            |
| Dana Brenner                       |       |                                                |
|                               |       |                                                |
| /s/ Guy Marge                      |       | Director                                            |
| Guy Marge                          |       |                                                |
|                               |       |                                                |
| /s/ Patrick E. McCready            |       | Chief Financial Officer  (Principal Financial       |
| Patrick E. McCready                |       | Officer and Principal  Accounting Officer)          |

 

 

----

 

**CHANNELLCOMMERCIAL CORPORATION**

 

**SCHEDULEII**

 

**VALUATIONAND QUALIFYING ACCOUNTS**

 

*(Amountsin thousands)*

 
| **Column A**             | ** ** | **Column B**     | ** ** | **Column C**   | ** ** | **Column D**   | ** ** | **Column E**        | ** ** |
|-------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|--------------------------|------------|
| ** **                    | ** ** | ** **            | ** ** | **Additions**       | ** ** | ** **          | ** ** | ** **               | ** ** |
| ** **                    | ** ** | **Balance at**   | ** ** | **Charged to** | ** ** | **Charged to** | ** ** | ** **               | ** ** | **Balance at** | ** ** |
| ** **                    | ** ** | **Beginning of** | ** ** | **Cost and**   | ** ** | **Other**           | ** ** | **Write-offs and**  | ** ** | **End of** | ** ** |
| ** **                    | ** ** | **Period**            | ** ** | **Expenses**        | ** ** | **Accounts**        | ** ** | **Deductions, Net** | ** ** | **Period** | ** ** |
| Accounts receivables reserves |       | (2007                 | )          | $                   | 220        |                | $          | 124                      |       | $ | — |   | $ | (63 | ) | $ | 281 |   |
|                          |       | (2006                 | )          | 265                 |       | (28                 | )          | 20                       |       | (37 | ) | 220 |   |
|                          |       | (2005                 | )          | 319                 |       | 95                  |       | 40                       |       | (189 | ) | 265 |   |
|                          |       |                  |       |                |       |                |       |                     |       |   |   |   |   |
| Inventory valuation reserve   |       | (2007                 | )          | $                   | 1,234      |                | $          | 656                      |       | $ | — |   | $ | (308 | ) | $ | 1,582 |   |
|                          |       | (2006                 | )          | 1,724               |       | 131                 |       | —                   |       | (621 | ) | 1,234 |   |
|                          |       | (2005                 | )          | 1,251               |       | 797                 |       | —                   |       | (324 | ) | 1,724 |   |

 

 

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