** **

**UNITEDSTATES**

**SECURITIESAND 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,  2006; or** |
| ** **     | ** ** | ** ** |
| **o**          | ** ** | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934.** |

 

**For thetransition period from                    to                    **

Commission FileNumber  **0-28582**

**CHANNELLCOMMERCIAL CORPORATION**

(Exact name of registrantas 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**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.  Yes  o     No  **x**

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or 15(d) of the Act.  Yes  o     No  **x**

 

Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes  **x**     No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statements incorporatedby reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):

 

LargeAccelerated Filer  o               AcceleratedFiler  o               Non-accelerated Filer  x

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes  o     No  **x**

 

On March 27, 2007, the registrant had 9,543,584 sharesof Common Stock outstanding with a par value of $.01 per share.  The aggregate market value of the 4,741,783shares held by non-affiliates of the registrant was $15,647,884 computed byreference 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 BY REFERENCE

Part III of this Form 10-K incorporates by reference certain informationfrom the registrant’s definitive proxy statement for its 2007 annual meeting ofstockholders.

 

 

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**TABLE OFCONTENTS**
| ** **               | ** ** | ** **                                                                                                              | ** ** | **Page**   |
|--------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I**               | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item  1.**             | ** ** | **Business**                                                                                                            | ** ** | **1**      |
| **Item 1A**              | ** ** | **Risk Factors**                                                                                                        | ** ** | **7**      |
| **Item 1B.**             | ** ** | **Unresolved  Staff Comments**                                                                                          | ** ** | **12**     |
| **Item 2.**              | ** ** | **Properties**                                                                                                          | ** ** | **12**     |
| **Item 3.**              | ** ** | **Legal Proceedings**                                                                                                   | ** ** | **12**     |
| **Item 4.**              | ** ** | **Submission  of Matters to a Vote of Security Holders**                                                                | ** ** | **12**     |
| ** **               | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **PART II**              | ** ** | ** **                                                                                                              |       |       |
| **Item 5.**              | ** ** | **Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities** |       | **12**     |
| **Item 6.**              | ** ** | **Selected  Financial Data**                                                                                            | ** ** | **13**     |
| **Item 7.**              | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                         | ** ** | **15**     |
| **Item 7A.**             | ** ** | **Quantitative  and Qualitative Disclosures About Market Risk .**                                                       | ** ** | **24**     |
| **Item 8.**              | ** ** | **Financial  Statements and Supplementary Data**                                                                        | ** ** | **25**     |
| **Item 9.**              | ** ** | **Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure**                               | ** ** | **25**     |
| **Item 9A.**             | ** ** | **Controls and  Procedures**                                                                                            | ** ** | **25**     |
| **Item 9B.**             | ** ** | **Other Information**                                                                                                   | ** ** | **26**     |
| ** **               | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **PART  III**            |       |                                                                                                                    |       |       |
| **Item 10.**             | ** ** | **Directors,  Executive Officers and Corporate Governance**                                                             | ** ** | **26**     |
| **Item 11.**             | ** ** | **Executive  Compensation**                                                                                             | ** ** | **26**     |
| **Item 12.**             | ** ** | **Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters**                    | ** ** | **27**     |
| **Item 13.**             | ** ** | **Certain  Relationships and Related Transactions, and Director Independence**                                          | ** ** | **27**     |
| **Item 14.**             | ** ** | **Principal  Accounting Fees and Services**                                                                             | ** ** | **27**     |
| ** **               | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **PART IV**              |       |                                                                                                                    |       |       |
| **Item 15.**             | ** ** | **Exhibits,  Financial Statement Schedules**                                                                            | ** ** | **27**     |
| ** **               | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **FINANCIAL STATEMENTS** |       | **F-1**                                                                                                                 |
| ** **               |       | ** **                                                                                                              |
| **GLOSSARY OF TERMS**    |       | **G-1**                                                                                                                 |

 

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**PART I**

**Item 1. Business.**

### **Background**

Channell Commercial Corporation (the “Company”) wasincorporated in Delaware on April 23, 1996, as the successor to ChannellCommercial Corporation, a California corporation.  The Company’s executive offices are located at26040 Ynez Road, Temecula, California 92591, and its telephone number at thataddress is (951) 719-2600.

### **General**

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,advanced copper VoIP termination and connectorization products, fiber opticcable management systems for fiber to the premises (“FTTP”) networks, and heatshrink products.  The Company’s enclosureproducts house, protect and provide access to advanced telecommunicationshardware, including both radio frequency (“RF”) 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 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 also designs, manufactures and marketspolyethylene water tanks for rural and residential markets in Australia.  The Company’s primary product line ofrotational molded tanks is used in the agricultural sector where watershortages require storage of rain and ground water.  The Company also markets a range of waterstorage tanks for use in residential and rural-residential markets.  The Company’s water tank business operatesout of six leased facilities in Australia. The facilities are located in New South Wales (2), Queensland (2),Victoria and South Australia.

The Company entered the Australian water storage tankmarket in August 2004 with the acquisition of Bushman Tanks.  Bushman Tanks is Australia’s largestmanufacturer and distributor of rotational molded polyethylene water storagetanks.

The Company’s enclosure product line accounted for46%, 44%, and 59% of the Company’s net sales in 2006, 2005 and 2004,respectively.  The Company diversifiedits business with the acquisition of Bushman Tanks in 2004.  The Company’s water related products productline accounted for 45% of the Company’s net sales in 2006 and 48% of theCompany’s net sales in 2005.  The Companyhad long-lived assets in Australia with a book value of $6.8 million, $5.3million and $5.5 million at December 31, 2006, 2005 and 2004,respectively.  For financial segment andgeographic information, see Note N to the Company’s Consolidated FinancialStatements included herein.

### **Industry**

The Company serves customers primarily in twoindustries, the global telecommunications industry and the Australian waterstorage tank industry.

In the telecommunications industry, CATV/broadband andlocal telephone operators are building, rebuilding or upgrading signal deliverynetworks around the world.  Thesenetworks are designed to deliver video, voice and/or data transmissions toindividual residences and businesses. Operators deploy a variety of network technologies and architectures,such as HFC, VoIP, DLC, ADSL and FTTP (see “Glossary of Terms”) to carrybroadband and narrowband signals.  Thesearchitectures are constructed of electronic hardware connected via coaxialcables, copper wires and/or optical fibers, including various access devices,amplifiers, nodes, hubs and other signal transmission and powering electronics.  Many of these devices in the outside plantrequire housing in secure, protective enclosures and cable managementconnectivity systems, such as those manufactured by the Company.

As critical components of the outside plant, enclosureproducts provide (i) environmental and vandalism protection, (ii) ready accessfor technicians who maintain and manage the outside plant and (iii) in somecases, dissipation of heat generated by the active electronic hardware.  CATV/broadband and local telephone networkoperators place great reliance on manufacturers of protective enclosuresbecause any material damage to the distributed network elements is likely todisrupt communications services. Connectivity products provide critical broadband data-rated connectionpoints which support cost effective service deployment and ensure signalintegrity is maintained throughout the network.

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The primary drivers of demand for enclosures in thecommunications industry are the construction, rebuilding, upgrading andmaintenance of signal delivery networks by CATV/broadband network operators andlocal telephone companies.  For example,broadband networks are being upgraded and prepared for advanced two-wayservices such as high-speed Internet access via cable modems, traditional wirelinetelephony and xDSL transport. Local telephone service providers are employingadvanced technologies, such as a variety of digital subscriber line (“DSL”)technologies, which utilize installed copper wires for broadband services.  These “local loop” copper wire systems oftenrequire significant upgrading and maintenance to provide the optimal throughputnecessary to carry high-speed broadband signals, increasing the need fordata-rated fully sealed outside plant facilities in order to sustain network reliabilityand longevity.   Local telephone serviceproviders are also employing various FTTP technologies to deliver higherbandwidth services to customers.  FTTPutilizes outside plant enclosures to protect the networks, as well as fibercable management devices, both of which are manufactured by the Company.  Similar architectures are deployed world-widewhich utilize multiple configurations of enclosure and connectivity products.

In the Australian water storage tank industry,consumers utilize plastic, steel or concrete tanks for the storage ofwater.  Australia has an arid climatewith limited water resources.  Thecombination of a growing population, a movement of people away from urban areasand limited rainfall has resulted in water shortages in most geographicareas.  Water storage tanks are used tostore rain and ground water in residential and commercial properties.  The water is used for outside the homepurposes such as gardening, pumped into the home for non-potable uses such aswashing machines and toilets and may often be used as a source of drinkingwater.  Local, state and nationalgovernments have implemented several regulations intended to conservewater.  These include restrictions on theuse of potable water and requirements to install water storage tanks or otherconservancy products in new residential dwellings in selected areas.

### **BusinessStrategy**

The Company’s strategy is to capitalize on itsestablished customer relationships, broadband strength and core capabilities inthe design and manufacture of thermoplastic products, metal products andconnectivity products.

The Company pursues opportunities in**the global communications industry by providing enclosures,connectivity products and other complementary components to meet the evolvingneeds of its customers’ communications networks.  The Company’s wide range of products,manufacturing expertise, application-based sales and marketing approach andreputation for high quality products address key requirements of its customers.

In addition to the communications industry, theCompany seeks to leverage its expertise in plastics and metal manufacturingtechnologies to diversify into other industries.  The Company’s acquisition of the BushmanTanks business is an example of this diversification.  Bushman Tanks utilizes plastic rotationalmolding technology to produce water tanks, a process similar to that used bythe Company to manufacture thermoplastic enclosures for the communicationsindustry.  The Company believes it canapply its advanced rotational manufacturing technologies to the Bushman Tanksoperations to improve performance.

Principal elements of the Company’s strategy includethe following:

***Focus on Core Telecommunications Business***. The Company will continue to seek to capitalize on its position as aleading designer, manufacturer and marketer of enclosures, grade level boxes,and copper wire connectors for the broadband/CATV and local telephoneindustries in the North America, Europe, Middle East, Africa, Australia andAsia markets through direct marketing and new product development.  The Company believes it currently supplies asubstantial portion of the enclosure product requirements of a number of majorbroadband network operators.

The Company has invested in the development of a broadrange of products designed specifically for telecom applications. These includeconnectivity and enclosure products for xDSL and FTTP based networks.  The Company has successfully marketed itstraditional broadband products to local telephone companies that have beendesigning and deploying broadband networks to deliver competitive video anddata services.  The Company will continueto target this market for growth, both with telephone network operators andwith major system original equipment manufacturers (“OEMs”).

***Expand International Presence in CommunicationsIndustry***.  Management believes international marketsoffer significant opportunities for increased sales to both broadband andtelephone companies. The Company’s principal international markets currentlyinclude Canada, Mexico, South Asia, the Pacific Rim, the Middle East, Africaand Europe.  Trends expected to result ininternational growth opportunities include the on-going deregulation andprivatization of telecommunications in many nations around the world and thefocus of numerous countries on building, expanding and enhancing theircommunications systems to deliver broadband services in order to participatefully in the information-based global economy. The Company will concentrate on expansion in international markets thatare characterized by deregulation or privatization of telecommunications and bythe availability of capital for the construction of signal delivery networks.

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***Develop New Products and Enter New Markets***. The Company continues to leverage its core capabilities in developinginnovative products that meet the evolving needs of its customers.  Innovative products offered by the Companyinclude its MAH SeriesTM free-breathing telephony enclosures, GLBTM  grade level box sub-surface enclosures, the Mini-RockerTMinsulation displacement copper connectivity products, and a range of RhinoTMmetal fabricated enclosures.  The Companycontinually invests in ongoing improvement and enhancement projects for theexisting products developed by the Company, several of which have received U.S.and international patent protection.  TheCompany’s products are designed to improve the performance of its customers’ outsideplant systems.  The Company has a provenrecord in designing, developing and manufacturing “next generation” productsthat provide solutions for its customers and offer advantages over thoseoffered by other suppliers to the industry. The Company also believes its core capabilities are applicable tomarkets outside the telecommunications industry.

The Company is expanding its product offering of waterstorage tanks to include smaller tanks designed primarily for the residentialmarkets in Australia.  The Company’sprincipal customers are currently in rural areas.  However, due to various water restrictionsand government rebates, more industry growth is projected for the urbanmarkets.  The Company continues todevelop innovative products to expand its presence in both the residential andrural-residential markets of Australia. The Company also plans to pursue water storage tank markets in theAmericas segment.

***Concentrate on Core Capabilities to Diversify intoOther Industries***.  The Companybelieves its core competencies are in the design and manufacture of plastic andmetal enclosure products for industrial infrastructure applications and copperwire connectivity.  The Company ispursuing a strategy to utilize these core competencies to diversify into otherindustries to grow profitably.  Relevantindustries that the Company may pursue include water, irrigation, power utilityand other outside plant infrastructure products.  The acquisition of Bushman Tanks to operatein the water industry is an example of this diversification strategy.

**Products**

The Company currently markets over 60 productfamilies, with several thousand optional product configurations.  The primary functions of the Company’sproducts designed for the telecommunications industry are cable routing andmanagement, equipment access, heat dissipation and security.   The Company believes that it offers one ofthe most complete lines of outside plant infrastructure products in thetelecommunications industry. The primary functions of the Company’s productsdesigned for the water industry are the filtration, storage and distribution ofwater for both outside and inside rural and suburban residences.

***Enclosures***. The Company manufactures precision-molded, highly engineered andapplication-specific thermoplastic and metal fabricated enclosures for thecommunications industry that are considered state-of-the-industry, having beenfield tested and received approvals and standardization certifications frommajor broadband/CATV and telephone company operators.  Most of the Company’s products are designedfor 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 broadbandoperators for increased network reliability, lower maintenance, improvedsecurity, reduced utility right-of-way conflicts, and aesthetic appeal. Theenclosure products, particularly the thermoplastic versions, must provideadvanced heat dissipation characteristics increasingly required for theprotection of active electronics in many network installations.  The Company is also a designer and manufacturerof metal fabricated enclosures that house advanced electronics, fiber opticcable and power systems for broadband telecommunications networks (branded as “RhinoEnclosuresTM”).  The Company designs andmanufactures a series of termination blocks, brackets and cable managementdevices for mounting inside its enclosure products.  The Company is recognized in the industry forits differentiated product designs and the functionality, field performance andservice life of its products.

***Copper Connectivity***. The Company is a designer and manufacturer of innovative copper wireconnectivity devices.  The Company’sInsulation Displacement Connector (“IDC”) technology provides advanced “tool-less”termination systems for copper wires, the predominant medium used in the “LastMile” and in-building premises distribution for telephone servicesworldwide.  These proprietary IDCproducts environmentally seal network termination points with a high level ofreliability.  The Company’s Mini-RockerTMline of copper connectivity modules, blocks and accessories offerenvironmentally sealed and Cat-5 data rated IDC tool-less circuit installationand have been accepted as a universal connectivity platform for networkapplications worldwide, including xDSL and VoIP services.

***Fiber Optic Products***. The Company offers a range of fiber optic cable management productsdesigned for use in telephone and broadband networks.  These products are particularly well suitedfor both HFC and FTTP network architectures. Fiber optic electronic enclosures house optical electronics, powersupplies and cables.  The Company’s fiberoptic splice cases are used for organizing, managing and protecting theconnection points between separate lengths of fiber optic cable in the outsideplant network.  Fiber optic cableassemblies and interconnect hardware are used to connect

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fiber optic electronics and fiber optic cablesprimarily for in-building applications. All of these products are designed and manufactured by the Company andmarketed worldwide.

***Grade Level Boxes***. The Company is a designer and supplier of grade level boxes used forsub-surface network access.  Storage ofunderground cables, irrigation valves, and power utility distribution pointsrepresent some of the leading cross industry applications.  A series of these products has been designedspecifically for, and such products are widely deployed in, FTTP networks.

***OEM Programs***. The Company has OEM marketing programs through which other manufacturersincorporate the Company’s products as components of their telecommunications systems.  These OEM programs generally includeexchanges of technical information that the Company can use in developing newproducts and improvements and enhancements to existing designs.  The Company has established additionalrelationships with systems integrators and innovative end users that providevaluable product improvement information.

***Water Products***. The Company offers a range of water tank products for the storage ofpotable and non-potable water.  Theseproducts typically store rain water collected from the roofs of homes or otherbuildings or water pumped from underground wells.  These products are primarily used byresidential homes, agricultural properties and commercial buildings.  Accessory products for these water tanksinclude filtration systems, connection devices and pumps.

In addition to water storage tanks, the Company’swater product line includes enclosures for various access applications.  The Company’s line of grade level boxes aredesigned and configured for water distribution and irrigation applications.

**Marketing and Sales**

The Company markets its products primarily through adirect sales force of technically trained salespeople. The Company employs anapplication-specific, systems approach to marketing its products, offering thecustomer a complete, cost-effective system solution to meet its outside plantrequirements.  All sales personnel havetechnical expertise in the products they market and are supported by theCompany’sengineering and technical marketing staff. Product marketing specialists are assigned to provide technical supportand commercial direction for the Company’s strategic product groups.

Internal sales/customer service departments administerand schedule incoming orders, handle requests for product enhancements andservice inquiries and support the Company’s direct sales force. Thesedepartments maintain direct communications with customers and the Company’sfield sales and operations personnel.

By engaging in public relations activities, productliterature development, market research and advertising, the marketingdepartment also promotes and positions the Company within both domestic andinternational markets.  The Companyregularly attends, participates and exhibits its products at industry tradeshows and conferences within domestic and international markets throughout theyear.

Specific to the Company’s water tank products, theCompany uses a network of agents and distributors to market its products inaddition to using a direct sales force.

The Company participates in agricultural field days inAustralia to market water storage products. Agricultural field days are held in most rural areas once or twice peryear and are used by rural customers to purchase a variety of hardware productsby attending a single event.  The Companyalso uses radio and television advertising to promote its water storage tankproducts throughout Australia.

**Manufacturing Operations**

The Company’s vertically integrated manufacturingoperations enable the Company to control each step in the manufacturingprocess, including product design and engineering; design and production ofmany of its own dies, tools, molds and fixtures.  The vertically integrated manufacturingoperations apply to both the communications equipment and water product lines.

The Company’s manufacturing expertise enables it tomodify its product lines to meet changing market demands, rapidly andefficiently produce large volumes of products, control expenses and ensureproduct quality.  Management considersthe Company’s manufacturing expertise a distinct and significant competitiveadvantage, providing it with the ability to satisfy the requirements of majorcustomers with relatively short lead-times by promptly booking and shippingorders.

The Company owns a majority of its manufacturingequipment.  Manufacturing processes areperformed by trained Company personnel. These manufacturing processes include injection molding, structural foammolding, rotational

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molding, metal fabrication, automated discreteconnector fabrication, 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 product inspectionsand comprehensive testing.

The Company’s manufacturing, distribution and officefacilities as of December 31, 2006, include approximately 371,000 square feetused in the Americas segment, net of 53,000 square feet the Company sub-leases,and 145,000 square feet used by the International segment. 

**ProductDevelopment and Engineering**

The Company’s product development and engineeringstaff has designed and tested the Company’s products and has developed corecompetencies in telecommunications outside plant and water storage products. Asa direct result, the Company has been able to develop a broad series ofsuperior products designed to meet the specific needs of customers.  Distinguishing characteristics of the Company’sproducts include:

·                  Advanced mechanicalinnovations providing unique application-specific performance and feature sets;

·                  Sub-surfacenetwork access systems;

·                  Modular metalfabricated enclosure product line covering multiple applications;

·                  Effective heatdissipation qualities for enclosure products;

·                  Advanced copperIDC connectivity products;

·                  A superiorenvironmental sealing and protection system in enclosure products that, unlikemany competitors’ products, does not require gels, compounds or other methodsto maintain the required seal;

·                  Product designsallowing communications equipment technicians easy access through covers thatcan be removed to fully expose the enclosed electronics;

·                  Compatibilitywith a variety of communications equipment signal delivery network architectures;

·                  Versatility ofdesign to accommodate communications network growth through custom hardware anduniversal mounting systems that adapt to a variety of new electronic hardware;

·                  Excellentprotection and management of optical fibers and cables;

·                  ThermoplasticEpoxy Coating that bonds directly to metal hardware and protects against rustand deterioration;

·                  High strengthand UV protected water storage products;

·                  Undergroundwater storage products; and

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

 

The Company’s product development approach isapplications-based and customer driven. A team comprised of engineering, marketing, manufacturing and directsales personnel work together to define, develop and deliver comprehensivesystems solutions to customers, focusing on the complete design cycle fromproduct concept through tooling and high-volume manufacturing.  The Company is equipped to conduct many of itsown product testing requirements for performance qualification purposes,enabling it to accelerate the product development process.  The Company spent $2.2 million in 2006, $2.4million in 2005, and $2.1 million in 2004 on research and development.

**Customersand Backlog**

The Company sells its telecommunications relatedproducts directly to broadband operators and telephone companies throughout theworld, principally within developed nations. The Company sells its products to OEMs on a global basis.  The Company sells its water storage products inAustralia directly to end users as well as to retailers, wholesalers,distributors and agents.  During 2006,the Company’s five largest customers accounted for 29.4% of total net sales. In2006, the Company’s five largest customers by sales in the United States wereVerizon, Comcast, Time Warner, Cox, and Bright House Networks.  Verizon accounted for slightly less than 10%of the Company’s net sales for 2006 and 17.2% of the Company’s net sales for2005.  In international markets, theCompany’s five largest customers in 2006 by sales were Telstra (Australia),British Telecom (UK), Shaw (Canada), Rogers (Canada), and Middendorp Electric(Australia).

The Company has historically operated with arelatively small backlog. Sales and operating results in any quarter areprimarily dependent upon orders booked and products shipped in thequarter.  The Company’s customersgenerally do not enter into long-term supply contracts providing for futurepurchase commitments of the Company’s products. Rather, the Company believes that many of its customers periodicallyreview their supply relationships and adjust buying patterns based upon theircurrent assessment of the products and pricing available in themarketplace.  From fiscal period tofiscal period, significant changes in the level of purchases of the Company’sproducts by specific customers can and do result from this periodicassessment.  Customers of water productsin Australia are typically individual users that may keep their product forseveral years before making a repeat purchase, as well as distributors that buyin quantity and market the Company’s products.

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**Intellectual Property**

The Company owns substantially all of the patents andother technology employed by it in the manufacture and design of its products.  The Company’s patents, which expire throughthe year 2024, cover various aspects of the Company’s products.  In addition, the Company has certain tradesecrets, know-how and trademarks related to its technology and products.

Management does not believe any single patent or otherintellectual property right is material to the Company’s success as awhole.  The Company maintains anintellectual property protection program designed to preserve its intellectualproperty assets.

**Competition**

***Telecommunications***. The telecommunications industry is highly competitive.  The Company’s competitors include companiesthat are much larger than the Company, such as Tyco, 3M, Emerson, and Corning,in addition to competitors similar in size to the Company such as CarsonIndustries.  The Company believes itscompetitive advantages include its ability to service national andmulti-national customers, its direct sales force, its specialized engineeringresources and its vertically integrated manufacturing operations.

Management believes the principal competitive factorsin the telecommunications equipment market are customer service, new productdevelopment capabilities, price, product availability, and product performance.

Competitive price pressures are common in the industry.  In the past, the Company has respondedeffectively to competition with cost controls through vertical integrationutilizing advanced manufacturing techniques, cost-effective product designs andmaterial selection, and an aggressive procurement approach.

In the past, certain of the Company’stelecommunications customers have required relatively lengthy field testing ofnew products prior to purchasing such products in quantity.  While field testing can delay theintroduction of new products, it can also act as a competitive advantage forthose products tested and approved.

***Water Storage***. The water storage products industry in Australia is characterized by afew large competitors, including Hills Industries, Nylex and Clark Tanks, and ahigh number of smaller, regional competitors. The Company believes its competitive advantages include its high-volumeproduction capacity, manufacturing expertise, product design, marketing andsales expertise and its nationwide coverage.

Management believes that the principal competitivefactors in the water storage industry are product quality, manufacturingcapacity, and geographic location for logistics support, technical support andcustomer service.  The multiplemanufacturing plant locations, combined with urban distribution centers,provide nationwide market coverage in the industry.

Competitive price pressures are prevalent in thisindustry.  The Company has responded tothese with ongoing process improvements, design optimization and targetedprocurement programs.  More recently, thehigh demand for products nationwide and the resultant long lead timesexperienced by most producers has eased some of the pricing pressures.  In recent years, Australia has beenexperiencing a severe drought, which has fueled demand among customers.

The existing customer base is widely dispersedthroughout the rural market areas. Promotion and awareness of the Company’s products and services isstrongly reinforced.  Long-term directmarketing programs, including media advertising, radio and television, and highprofile promotion at exhibitions, have been developed by the Company over manyyears.  These marketing programs haveestablished strong brand equity, which creates a competitive advantage inseveral significant market areas.

**Raw Materials; Availability of ComplementaryProducts**

The principal raw materials used by the Company arethermoplastic resins, neoprene rubbers, hot and cold rolled steel, stainlesssteel, copper and brass.  The Companyalso uses certain other raw materials, such as fasteners, packaging materialsand communications cable.  Managementbelieves the Company has adequate sources of supply for the raw materials usedin its manufacturing processes and it attempts to develop and maintain multiplesources of supply in order to extend the availability and encourage competitivepricing of these materials.

Most plastic resins are purchased under individualpurchase orders based on price and availability at the time of order.  Neoprene rubbers are manufactured using theCompany’s proprietary formulas.  Metalproducts are supplied in standard stock shapes, coils and custom roll forms.

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The Company also relies on certain other manufacturersto supply products that complement the Company’s own product line, such asgrade level boxes.  The Company believesthere are multiple sources of supply for these products.

**Employees**

As of December 31, 2006, the Company employed 568people, of whom 71 were in sales, 419 were in manufacturing operations, 21 werein research and development and 57 were in administration.  The Americas segment includes 345 employees andthe International segment includes 223 employees.  The Company considers its employee relationsto be good and recognizes its ability to attract and retain qualified employeesis an important factor in its growth and development.  None of the Company’s employees is subject toa collective bargaining agreement, and the Company has not experienced anybusiness interruption as a result of labor disputes within the past five years.

**Regulation**

The telecommunications industry is subject toregulations in the United States and other countries.  Federal and state regulatory agenciesregulate 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.  The Tele-communicationsAct lifted certain restrictions on the ability of companies, including RBOCsand other customers of the Company, to compete with one another and generallyreduced the regulation of the communications industry.

The Company is also subject to a wide variety offederal, state and local environmental laws and regulations.  The Company utilizes, principally inconnection with its thermoplastic manufacturing processes, a limited number ofchemicals or similar substances that are classified as hazardous.  It is difficult to predict what impact theseenvironmental laws and regulations may have on the Company in the future.  Restrictions on chemical uses or certainmanufacturing processes could restrict the ability of the Company to operate inthe manner that 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 storage products industry in Australia isalso subject to regulation.  National,state and local regulatory agencies regulate and in some cases mandate the useof water storage products to conserve water usage.  Examples include restrictions on the use ofpotable water for gardening, the washing of cars and other non-essentialuses.  In addition, several agencies haveoffered rebates to those who purchase water storage products to conservewater.  Most recently, governmentagencies have mandated that new residential dwellings in the states of NewSouth Wales and Victoria require a water conservation device such as a waterstorage tank.  The city of Sydney is locatedin New South Wales and the city of Melbourne is located in Victoria.  The effect of these regulations has been toincrease 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.**

**Forward Looking Statements**

Certain statements contained in this Annual Report onForm 10-K are “forward-looking” statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 (the “Act”), which provides certain “safeharbor” provisions for forward-looking statements.  All forward-looking statements made in thisAnnual Report on Form 10-K are made pursuant to the Act.  Forward-looking statements include statementsthat are predictive in nature; that depend upon or refer to future events orconditions; or that include words such as “expects,” “anticipates,” “intends,” “plans,”“believes,” “estimates,” or variations or negatives thereof or by similar orcomparable words or phrases.  Inaddition, any statements that may be provided by our management concerningfuture financial performance, ongoing business strategies or prospects or ourpossible future actions are also forward-looking statements as defined by theAct.  Forward-looking statements arebased on current expectations and projections about future events and aresubject to risks, uncertainties, and assumptions about us; and economic andmarket factors in 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.

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Actual events and results may differ materially fromthose expressed or forecasted in forward-looking statements due to a number offactors.  The principal important riskfactors that could cause our actual performance and future events and actionsto differ materially from such forward-looking statements include, but are notlimited to, the risk factors discussed below.

**Risk Factors**

***The industries in which we operate are subject toobsolescence and technological change, which could adversely affect our sales***. The communications industry is in a state of rapid technologicalchange.  The introduction of newtechnologies, network architectures or changes in industry standards can renderour existing products or products under development obsolete or unmarketable,which could adversely affect our sales. For example, satellite, wireless and other communication technologiesunder development or currently being deployed may represent a threat to copper,coaxial and fiber optic-based systems by reducing the need for wire-linenetworks.  Our growth strategies are designed,in part, to take advantage of opportunities that we believe are emerging as aresult of the development of enhanced voice, video, data and other transmissionnetworks and high-speed Internet access in the telecommunicationsindustry.  Reductions in demand resultingfrom these emerging trends or failure of our products to continue to receivemarket acceptance could adversely affect our sales.

***A significant reduction in newproduct development could negatively affect our business and results ofoperations.*** Asignificant factor in our ability to grow and remain competitive will be ourability to anticipate changes in technology, industry standards and customerpreferences, and to successfully develop and introduce new products on a timelybasis.  New product development oftenrequires long-term forecasting of market trends, development and implementationof new designs 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 manufacturing and marketing expertise has enabledus to successfully develop and market new products in the past.  However, any failure by us to anticipate orrespond in a cost-effective and timely manner to technological developments orchanges in industry standards or customer requirements, or any significantdelays in product development or introduction, could have a material adverseeffect on our business, operating results and financial condition.

***Weare dependent on a small number of customers for a significant percentage ofsales.*** Thetelecommunications industry is the largest industry in which we operate and ishighly concentrated. A relatively small number of customers account for a largepercentage of our available market. Consequently, our five largest customers accounted for 29.4% and 33.6%of our total net sales in 2006 and 2005, respectively.  Verizon accounted for slightly less than 10%of our total net sales in 2006 and 17.2% of our total net sales in 2005.  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.

***A significant reduction incapital spending patterns of telecommunications industry service providerscould 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 total sales.  Demand for products within this industrydepends primarily on capital spending by service providers for constructing,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, access by service providers tofinancing, government regulation of service providers, demand for services anddevelopments 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 is dependent upon continued demand by thecommunications industry for products used in signal transmission systems, whichmay be affected by factors beyond our control, including the convergence ofvideo, voice, and data transmission systems occurring within the broadband andtelephone markets, continuing consolidation of companies within those marketsand the provision of Internet access, and other bandwidth intensive services,by broadband operators and local telephone companies.  A reduction in demand for products used insignal transmission systems could adversely affect our sales and results ofoperations.

***We operate with a relativelysmall backlog amount, and accordingly, any change in customer buying patternsmay adversely affect our results of operations.***  Our customers typically require promptshipment of our products within a narrow timeframe.  As a result, we have historically operatedwith a relatively small backlog.  Salesand operating results in any quarter are principally dependent upon ordersbooked and products shipped in that quarter. Further, our customers

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generally do not enter into long-term supply contractsproviding for future purchase commitments for our products.  These factors, when combined with ouroperating leverage and the need to incur certain capital expenditures andexpenses, in part based upon the expectation of future sales, may place ouroperating results at risk to changing customer buying patterns.  If sales levels in a particular period do notcoincide with our expectations, operating results for that period may bematerially and adversely affected.

***Increases in raw materials prices may cause ourresults of operations to suffer***.  Our cost ofsales, gross margins and results of operations have been and may continue to bematerially affected by increases in the market prices of the raw materials usedin our manufacturing processes.  Inparticular, the products we manufacture for sale in both our communicationsinfrastructure market and our water storage market are primarily composed ofpolyethylene resins, which are derived from petroleum-based commodities.  The increasing price of these commodities hassignificantly increased our raw materials cost within these markets and, as aresult, has significantly reduced our gross margins.

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.

***Disruptions or delays in obtaining certain componentsof our products could disrupt the manufacture of our products and cause oursales 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.

***Increases in the cost, andinterruption in the availability, of energy may adversely impact our sales andresult of operations.*** Our cost of sales may be materially affected by increases in the marketprices of electricity, natural gas and water used in our manufacturingprocesses.  California is the site of ourlargest manufacturing operation.  Theenergy costs of California manufacturing firms may increase.  There exists the possibility ofinterruption(s) in the supply of energy to California’s manufacturingfirms.  There can be no assurance thatour energy costs 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.

***If we are unable to amend our existing creditagreements or enter into new credit agreements on favorable terms, or at all,our liquidity may be adversely affected***.  Our primary existingdomestic and international credit facilities expire in the first half of2007.  We are currently engaged inongoing discussions with our lenders under those credit facilities. Based onthese discussions, we expect to be able to amend our existing agreements with thoselenders, or enter into new agreements with those lenders, providing for anextension of the maturity of those facilities beyond current maturities orproviding for new facilities to extend beyond current maturities. However, we cannot provide assurance that we will be able to amend thoseagreements or enter into new agreements providing for credit facilitiesextending beyond current maturities. In addition, even if we are able to amendthose agreements or enter into new agreements, we may not be able to do so onterms comparable to our current terms, or terms that are otherwise favorable tous. If we are unable to renew or amend these agreements on favorable terms, orat all, our ability to fund our future operations, make capital expendituresand maintain adequate working capital may be adversely affected.

***We may not be successful inidentifying and acquiring suitable acquisition targets and integrating acquiredcompanies.* **Therecan be no assurance that we will be able to identify and acquire attractiveacquisition candidates.  In the event ofan acquisition by us, we cannot provide assurance that we will profitablymanage any of the acquired businesses or successfully integrate such acquiredbusinesses into our business without substantial costs, delays or otherproblems.  Acquisitions involve a numberof special risks, including, but not limited to, adverse short-term effects onour reported financial condition or results of operations, diversion ofmanagement’s attention, dependence on retention, hiring and training of keypersonnel, risks associated with unanticipated problems or liabilities andamortization of acquired intangible assets, some or all of which could have amaterial adverse effect on our business, financial condition or results of operations.

For example, we acquired Bushman Tanks in August 2004,and the integration of that business has been ongoing since theacquisition.  The successful integrationof this business into our business has required, among other things, theretention of key personnel, the implementation of the Oracle information systemused by all of our other businesses, the implementation of financial accountingand internal controls required by all U.S. publicly-owned corporations, thetime and attention of our executive management, the integration of managementstyles and culture as well as the hiring of people necessary to implement theaforementioned items and to expand the business.  While the integration efforts were substantiallycomplete as of the end of 2006, we are still working on completing theimplementation of the Oracle

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information system into Bushman Tanks.

In addition, there can be no assurance that anybusinesses we acquire in the future will be profitable at the time ofacquisition or will achieve sales and profitability justifying our investmenttherein or that we will realize the synergies expected from such acquisitions.

The failure to obtain any or all of the desiredresults from acquisitions could have a material adverse effect on our business,financial condition and results of operations.

***As a result of the fixed costs ofoperating our business, a reduction in sales or sales growth coulddisproportionately 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. ***Our business is seasonal in nature, with the firstand fourth quarters generally reflecting lower sales due to the impact ofadverse weather conditions on construction projects that may alter or postponethe needs of customers for delivery of our telecommunications products.  Furthermore, a large portion of our sales arelinked to discretionary capital spending budgets of our customers, which mayexacerbate the seasonality of our revenue when customers implement internalcost reduction measures.  In addition,first quarter sales may also reflect telecommunication customer delays inimplementation of their annual capital expenditure plans.  The water storage tank business in Australiais traditionally slow during the fourth quarter due to holidays andrestrictions on the number of days in which large trucks can utilize majorroads to deliver water storage tanks to customers.  Our operating results may also fluctuatesignificantly from quarter to quarter due to several other factors, includingthe volume and timing of orders from and shipments to major customers, thetiming of new product introductions and deployment as well as the availabilityof products by us or our competitors, the availability and amount of fiscalincentives, weather conditions in Australia, which may affect the sales ofwater storage tanks as a large percentage of sales occur at outdooragricultural farm fairs, the overall level of capital expenditures by broadbandoperators and telephone companies, market acceptance of new and enhancedversions of our products, variations in the mix of products we sell, and theavailability and costs of raw materials. 

***Our international operationssubject us to the social, political and economic risks of doing business inforeign countries*.** International sales, including export salesfrom U.S. operations, accounted for 49.8%, 47.5%, and 32.8% of our net sales in2006, 2005 and 2004, respectively.  Thepercentage of international sales to our total sales has increased with theacquisition of the Bushman Tanks business. Due to our international sales, we are subject to the risks ofconducting business internationally, including unexpected changes in orimpositions of legislative or regulatory requirements, fluctuations in the U.S.dollar, which could materially adversely affect U.S. dollar revenues oroperating expenses, tariffs and other barriers and restrictions, longercollection cycles, greater difficulty in accounts receivable collection,potentially adverse taxes and the burdens of complying with a variety ofinternational 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 whichwe operate are highly competitive.  Thelevel and intensity of competition may increase in the future.  Our competitors in the telecommunicationsindustry include companies that are much larger than us, such as Tyco, 3M,Emerson and Corning.  Our businessstrategy includes increased focus on telephone connectivity.  There can be no assurance that we will beable to compete successfully against our competitors, most of whom have accessto greater financial resources than we do. Our competitors in the Australian water storage tank business includeHills Industries, Nylex and Clark Tanks. There can be no assurances that we will be able to successfully competeagainst these competitors or increase our sales by obtaining a higher marketshare.

***A disruption at our Temecula,California manufacturing facility could adversely affect our business andresults of operations.*** The majority of our manufacturing operations are currently located atour facilities in Temecula, California, which also includes our principalwarehouse and corporate office operations. Our success 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.

***Inability to renew our relatedparty leases could adversely affect our business.***  We currently lease a portion of our Temeculafacilities from The Channell Family Trust, one of our principal stockholders,of which William H. Channell, Sr.,

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our Chairman of the Board, and Jacqueline M. Channell,a director and our corporate secretary, are co-trustees.  We believe the terms of the leases for ourTemecula, California facilities are no less favorable than would be availablefrom an unrelated third party after arm’s length negotiations.

In addition, we currently lease three facilities inAustralia from the former owners of Bushman Tanks, who are also stockholders ofours.  Although we believe these leasesare in total in excess of fair market value by $27,000 per year, we do notbelieve that amount is significant compared to total manufacturing costs andthus does not place us at a competitive disadvantage.

Although our leases expire in, or have renewal optionsthrough, the year 2015, there can be no assurance that we will be able to agreeon additional renewal terms for the properties currently leased by us. Ourfailure to renew the leases would require us to relocate our existingfacilities, which could have a material adverse effect on our business,financial condition or results of operations.

***The termination of transportation and logisticsservices by the primary freight provider for our Bushman Tanks business couldcontinue to adversely impact our sales and results of operations***. As of October 12, 2006, the primary freight provider for our BushmanTanks water storage tank manufacturing and distribution business unilaterallywithdrew its transportation and logistics services.  Accordingly, the agreement with the freightprovider has been terminated, and Bushman Tanks has reserved its rights inrelation to any damages 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. In addition, as Bushman Tanks transitions its transportation andlogistics services, the timing of scheduled deliveries may continue to betemporarily pushed out to subsequent periods. The disruption in transportation and logistics services due to thetermination of such services by the former freight provider, the success of theimplementation of replacement transportation and logistics services, the legalcost associated 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.

***We are subject to governmentallaws and regulations, which could adversely affect our business.**** *The communicationsindustry is subject to regulation in the United States and othercountries.  Federal and state agenciesregulate most of our domestic customers. Changes in current or future laws orregulations, in the United States or elsewhere, could materially adverselyaffect our business.  Governmentregulation in Australia has increased demand for water storage tanks byencouraging the installation of water storage tanks or other water conservationproducts in new homes built in selected regions.  There can be no assurances that theseregulations will remain in effect.  Alessening of these regulations and related incentives most likely would lead tolower demand for water storage products and thus negatively affect our sales.

***If we are unable to attract andretain key management and other personnel, our business and results ofoperations could be adversely affected*.**  Our business has required and is expected tocontinue to require significant resources in terms of personnel, management andother infrastructure.  Our future successdepends in part on our ability to attract and retain key executive,engineering, marketing and sales personnel. Our key personnel include William H. Channell, Jr., President and ChiefExecutive Officer and our other executive officers.  This executive group has average tenure withthe Company of approximately 20 years.

In addition, our ability to manage effectively thevolatility of the telecommunications industry requires us to attract, train,motivate and manage new employees successfully, to integrate new employees intoour overall operations and to continue to improve our operational, financialand management information systems. Because the market for qualified personnelin the communications industry is competitive, loss of our key personnel couldhave a material adverse effect on us.  Likewise, our inability to attract new employees, or to train, manage orretain such employees, could adversely affect our results of operations.

***Environmental laws and regulationscould limit our ability to operate as we are currently operating and couldresult in additional costs.*** We are subject to a wide variety of federal,state and local environmental laws and regulations and use a limited number ofchemicals that are classified or could be classified as hazardous or similarsubstances.  Although we believe that ouroperations are in compliance in all material respects with currentenvironmental laws and regulations, our failure to comply with such laws andregulations could limit our ability to operate as we are currently operatingand could result in fines or penalties, which, in turn, could have a materialadverse effect on our business and results of operations.

***Weather patterns in Australia mayaffect the demand for water storage tanks.***  Our business may be affected by adversechanges in weather patterns in Australia that may affect the demand for waterstorage tanks.  Prior to 2005, Australiaexperienced a severe water shortage for several years due to less rainfall,inadequate national infrastructure to store water for use during droughtperiods and the growth in population in non urban areas.  In 2005, Australia received a significant

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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.**

None.

**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 William H. Channell, Sr., theCompany’s Chairman of the Board, and Jacqueline M. Channell, a director and theCompany secretary, are co-trustees.  TheTemecula facilities are used by the Americas segment. The Company also leasesan aggregate of approximately 152,000 square feet of manufacturing, warehouseand office space in Canada, Australia and the United Kingdom. In Australia,72,000 square feet of manufacturing and distribution space in Dalby, Terang,and Adelaide are leased from the former owners of Bushman Tanks. The Canadafacilities are used by the Americas segment and the Australia and UnitedKingdom facilities are used by the International segment.  The Company considers its current facilitiesto be adequate for its operations.

**Item 3.  Legal Proceedings.**

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

**Item 4.  Submission of Mattersto a Vote of Security Holders.**

None.

**PART II**

**Item 5.  Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases 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, 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    |       |
|                               |       |     |       |    |       |
| **Year  Ended December 31, 2005:** |       |     |       |    |       |
| First Quarter                      |       | $        | 10.39      |    | $          | 6.47 |   |
| Second Quarter                     |       | 7.87     |       | 5.20    |       |
| Third Quarter                      |       | 10.20    |       | 6.37    |       |
| Fourth Quarter                     |       | 10.25    |       | 4.27    |       |

 

TheCompany has not declared any dividends subsequent to its initial publicoffering in July 1996.

 

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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 27, 2007, the Company had 9,543,584 sharesof its Common Stock outstanding, held by approximately 1,060 shareholders ofrecord.

### **STOCKHOLDER RETURN PERFORMANCE GRAPH**

The following is a linegraph presentation comparing the Company’s cumulative total return fromDecember 31, 2001 to December 31, 2006 with the performance of the NASDAQmarket, the Standard & Poor’s Industrials Index (“S & P Industrials”)and Standard and Poor’s Communications Equipment Index (“S & PCommunications Equipment”) for the same period.

COMPARISON OF 5 YEARCUMULATIVE TOTAL RETURN*

AMONG CHANNELL COMMERCIALCORPORATION,

THE NASDAQ STOCK MARKET(U.S.) INDEX,

THE S & PCOMMUNICATIONS EQUIPMENT INDEX AND THE S & P INDUSTRIALS INDEX

 

·                  $100,invested on 12/31/2001 in stock or index-including reinvestment of dividends.

Fiscal year ending December 31**.**

**Item 6.  Selected Financial Data.**

The selected consolidatedfinancial data presented below for each of the five years in the period endedDecember 31, 2006, have been derived from the Company’s audited consolidatedfinancial statements, which for the most recent three years appear elsewhereherein. The data should be read in conjunction with the financial statements,related notes and other financial information included therein (amounts inthousands, except per share data).

 

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| ** **                                         | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **OPERATING DATA:**                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Net sales(1)                                       |       | $                                          | 109,138    |   | $ | 116,065 |   | $ | 102,200 |   | $ | 78,100 |   | $ | 86,862 |   |
| Cost of goods sold                                 |       | 76,055                                     |       | 81,060 |   | 72,151 |   | 53,960 |   | 57,450 |   |
|                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Gross profit(1)                                    |       | 33,083                                     |       | 35,005 |   | 30,049 |   | 24,140 |   | 29,412 |   |
|                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating expenses                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Selling(1)                                         |       | 21,993                                     |       | 22,407 |   | 16,345 |   | 11,028 |   | 11,323 |   |
| General and  administrative(2)                     |       | 12,500                                     |       | 11,688 |   | 8,811 |   | 7,837 |   | 11,463 |   |
| Research and  development(2)                       |       | 2,222                                      |       | 2,356 |   | 2,109 |   | 1,775 |   | 1,608 |   |
| Restructuring  charge (recovery)                   |       | —                                     |       | — |   | (690 | ) | 1,565 |   | 1,228 |   |
| Asset impairment  charge                           |       | —                                     |       | 97 |   | — |   | 1,238 |   | 2,154 |   |
| Goodwill  impairment charge                        |       | 4,829                                      |       | — |   | — |   | — |   | 966 |   |
|                                               |       | 41,544                                     |       | 36,548 |   | 26,575 |   | 23,443 |   | 28,742 |   |
|                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| (Loss) income from  operations                     |       | (8,461                                     | )          | (1,543 | ) | 3,474 |   | 697 |   | 670 |   |
| Interest income  (expense), net                    |       | (857                                       | )          | (495 | ) | (489 | ) | (571 | ) | (1,999 | ) |
| (Loss) income before  income tax expense (benefit) |       | (9,318                                     | )          | (2,038 | ) | 2,985 |   | 126 |   | (1,329 | ) |
| Income taxes (benefit)                             |       | (777                                       | )          | 5,012 |   | (791 | ) | 200 |   | 1,713 |   |
| Net (loss) income  before minority interest        |       | (8,541                                     | )          | (7,050 | ) | 3,776 |   | (74 | ) | (3,042 | ) |
| Minority interest                                  |       | (1,712                                     | )          | (170 | ) | 167 |   | — |   | — |   |
|                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| Net (loss) income                                  |       | $                                          | (6,829     | ) | $ | (6,880 | ) | $ | 3,609 |   | $ | (74 | ) | $ | (3,042 | ) |
|                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| **NET (LOSS) INCOME PER SHARE:**                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Basic                                              |       | $                                          | (0.72      | ) | $ | (0.73 | ) | $ | 0.39 |   | $ | (0.01 | ) | $ | (0.34 | ) |
| Diluted                                            |       | $                                          | (0.72      | ) | $ | (0.73 | ) | $ | 0.39 |   | $ | (0.01 | ) | $ | (0.34 | ) |
|                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| **WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:** |       |                                       |       |   |   |   |   |
| Basic                                              |       | 9,543                                      |       | 9,448 |   | 9,203 |   | 9,126 |   | 9,048 |   |
| Diluted                                            |       | 9,543                                      |       | 9,448 |   | 9,223 |   | 9,126 |   | 9,048 |   |
|                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| **BALANCE SHEET DATA:**                            |       |                                       |       |   |   |   |   |   |   |   |   |
| Current assets                                     |       | $                                          | 29,457     |   | $ | 25,022 |   | $ | 37,686 |   | $ | 30,407 |   | $ | 23,449 |   |
| Total assets(3)                                    |       | 61,878                                     |       | 60,706 |   | 78,481 |   | 53,435 |   | 53,621 |   |
| Long-term obligations                              |       |                                       |       |   |   |   |   |   |   |   |   |
| (including current  maturities)(4)                 |       | 14,245                                     |       | 7,624 |   | 8,840 |   | 3,906 |   | 6,548 |   |
| Stockholders’ equity                          |       | 30,150                                     |       | 35,959 |   | 42,484 |   | 36,816 |   | 34,899 |   |
|                                               |       |                                       |       |   |   |   |   |   |   |   |   |
| **OTHER DATA:**                                    |       |                                       |       |   |   |   |   |   |   |   |   |
| Gross margin(5)                                    |       | 30.3                                       | %          | 30.2 | % | 29.4 | % | 30.9 | % | 33.9 | % |
| Operating margin(6)                                |       | (7.8                                       | )          | (1.3 | ) | 3.4 |   | 0.9 |   | 0.8 |   |
| Capital expenditures  (excluding capital leases)   |       | 3,871                                      |       | 4,339 |   | 3,281 |   | 1,203 |   | 1,886 |   |
| Cash provided by (used  in):                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Operating  activities                              |       | (2,287                                     | )          | 1,672 |   | 9,395 |   | 7,127 |   | 19,767 |   |
| Investing  activities                              |       | (3,765                                     | )          | (4,315 | ) | (20,025 | ) | 1,154 |   | 4,346 |   |
| Financing activities                               |       | (5,564                                     | )          | 201 |   | 7,383 |   | (2,662 | ) | (29,832 | ) |

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(1)             Includesreclassified shipping costs previously netted against related revenues,resulting in an increase to net sales, gross profit and selling expenses of$2,535, $2,066, $1,563 and $2,077 for 2005, 2004, 2003, and 2002,respectively.  This reclassification hadno effect on net income (loss) for any period.

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(2)             Includesreclassified legal costs relating to patents previously included in researchand development expenses, resulting in an increase to general andadministrative expenses, and a decrease to research and development expenses,of $314, $227, $127 and $11 for 2005, 2004, 2003 and 2002, respectively. Thisreclassification had no effect on net income (loss) for any period.

(3)             Includesrecognition of a deferred tax liability of $196 and $211 as of December 31,2005 and 2004, respectively, due to the reclassification of a nonamortizingindefinite-life trademark intangible asset from goodwill to intangible assets.The difference in the amounts between the two balance sheet dates is because ofa difference in the foreign currency translation rate at those dates.

(4)             Includesall interest bearing debt and capital lease obligations.

(5)             Grossmargin is gross profit as a percentage of net sales.

(6)             Operating margin is(loss) income from operations as a percentage of net sales.

 

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

### **Introduction and Overview**

Channell Commercial Corporation (the “Company”) is adesigner and manufacturer of telecommunications equipment supplied tocommunications network operators worldwide and water storage tanks distributedin consumer markets throughout Australia.  Major product lines include acomplete line of thermoplastic and metal fabricated enclosures, advanced coppertermination and connectorization products, fiber-optic cable management systemsand polyethylene water storage tanks.

The Company has two reportable segments, Americas andInternational.  The Americas segmentincludes the Company’s operations in the United States and Canada.  The International segment includes theCompany’s operations in Australia (including the Bushman Tanks business) andthe United Kingdom.

During the last five years, demand for communicationsinfrastructure equipment has fluctuated dramatically.  At various times inthe past there have been significant slowdowns in capital spending by bothcable and telecom network operators due to several factors including, but notlimited to, service provider consolidation, delays in outside plantupgrade/rebuild projects, and enhancing free cash flow to strengthen theirbalance sheets and pay down debt.  These changes have had a significantnegative impact on overall demand for infrastructure products, and at varioustimes have directly reduced demand for the Company’s products and increasedprice competition within its industry, which has led to reductions in theCompany’s revenues and contributed to the Company’s reported operating losses.

Within the water storage portion of the Company’sbusiness, demand continues to grow in Australia due to the country’s generallyarid climate and the widespread water conservation efforts.  Demand forthe Company’s water storage products is also driven by regulatory factors atthe local, state, and federal government levels.  Periods of significantrainfall could negatively affect the sales of the Company’s product.

Within both the communications infrastructure marketand water storage market, the historically high price of petroleum-basedcommodities has had a negative impact on the Company’s gross margins.  Theproducts manufactured in both of the markets in which the Company operates areprimarily composed of polyethylene resins, which are primarily derived fromcommodities such as oil and natural gas.  The Company is limited in itsability to pass on incremental price increases to its customers. Continued petroleum-based commodity price increases would have a negativeimpact on the Company’s performance.

The Company continues to invest in the development ofnew communications infrastructure products and water storage tanks and believesthat in both markets it has the leading product portfolios in terms ofperformance and features.

The Company measures its success by monitoring netsales and gross margins with a near-term goal of maintaining positive cashflows, while striving to achieve long-term operating profits.  The Companybelieves that there continue to be long-term growth opportunities within boththe communications infrastructure equipment and water tank markets.

The Company’s net sales, gross profit, sellingexpenses, general and administrative expenses and research and developmentexpenses, and any ratio calculated therefrom, as used throughout this report,reflect the correction of the classification of certain shipping costs chargedto customers and legal costs related to patents in the Company’s Americassegment. The Company’s accounts receivable, other assets, deferred incometaxes, goodwill, intangible assets, current assets and total assets, and anyratio calculated therefrom, as used throughout this report, reflect thecorrection of the classification of certain accounts receivable reserves,intangible assets, goodwill and deferred tax balances.  See Note B to the Consolidated FinancialStatements included in Item 8, Financial Statements and Supplementary Data.

**CriticalAccounting Policies**

The Company’s ConsolidatedFinancial Statements have been prepared in conformity with accountingprinciples generally accepted in the United States of America. The preparationof these financial statements requires management to

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make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Management bases its estimates on historical experience and onassumptions that are believed to be reasonable under the circumstances andrevises its estimates, as appropriate, when changes in events or circumstancesindicate that revisions may be necessary. Although these estimates are based onmanagement’s knowledge of and experience with past and current events and onmanagement’s assumptions about future events, it is possible that they mayultimately 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 thefollowing critical accounting policies are the most significant to thepresentation of its financial statements and require the most subjective andcomplex judgments.  These matters, andthe judgments and uncertainties affecting them, are also essential tounderstanding the Company’s reported and future operating results.  See Note B to the Consolidated FinancialStatements for a more comprehensive discussion of the Company’s significantaccounting policies, including recent accounting pronouncements.

***Revenue Recognition and Accounts Receivable Reserves*. **Revenues are recognized when title passesand the risks and rewards of ownership have passed to the customer, based onthe terms of sale.  Title passesgenerally upon shipment.  Provisions forestimated sales returns are based on the Company’s historical sales returnsexperience.  Provisions for uncollectibleaccounts are made based upon specific percentages of the past due outstandingaccounts receivable aging categories or upon specific circumstances.  Development of the specific percentagesrequires a high degree of judgment and the use of various internal and externalfactors. An adverse change in the financial condition of a significant customeror group of customers could materially affect management’s estimate of thepercentages for provisions for uncollectible accounts.

***Inventories***. The estimates 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.

***Impairment of Long-Lived and Intangible Assets***. The Company accounts for goodwill and other intangible assets inaccordance with Statement of Financial Accounting Standards (“SFAS”)No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requiresthat goodwill and identifiable intangible assets with indefinite useful livesbe tested for impairment at least annually. SFAS No. 142 also requiresthat intangible assets with estimable useful lives be amortized over theirrespective estimated useful lives and reviewed for impairment in accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”

The Company assesses the recoverability of thecarrying value of goodwill and other intangible assets with indefinite usefullives at least annually or whenever events or changes in circumstances indicatethat the carrying amount of the asset may not be fully recoverable.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. 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, 2006, 2005 and2004 and June 30, 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 offuture sales, gross profit or operating expenses individually or collectivelywould result in additional impairment.

***Income Taxes***. Income taxes are recorded for each of the jurisdictions in which theCompany operates. Management records the actual current income tax payable andassesses the temporary differences resulting from differing treatment of items,such as reserves and accruals, for tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities which are includedwithin the consolidated balance sheet.  In addition, SFAS 109,

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*Accounting for Income Taxes*, requires recognition of future taxbenefits attributable to tax net loss carryforwards and deductible temporarydifferences between financial statement and income tax bases of assets andliabilities.

Deferred tax assets must be reduced by a valuationallowance if, based on the weight of available evidence, it is more likely thannot that some portion or all of the benefits will not be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income during periods in which those temporary differences becomedeductible.  Management has determined that a full valuation allowance isrequired on the net operating loss carryforward in one of the Asian operationswithin its International segment because of uncertainty regarding itsrealization.  No valuation was requiredon the remaining foreign net deferred tax asset as management has determinedthat it is more likely than not to be realized. The ultimate realization of the remaining net foreign deferred taxassets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible. “Significant managementjudgment is involved in assessing the Company’s ability to realize any futurebenefit from deferred tax assets. In the event that actual results differ frommanagement estimates and management adjusts these estimates in future periods,the Company’s operating results and financial position could be materiallyaffected.

***Foreign Currency Translation***. The Company has foreign subsidiaries that together accounted for 49.7%of the Company’s net revenues and 56.8% of the Company’s assets as of and forthe year ended December 31, 2006. In preparing the Company’s consolidatedfinancial statements, the Company is required to translate the financialstatements of its foreign subsidiaries from the currencies in which they keeptheir accounting records into United States dollars. This process results inexchange gains and losses which, under relevant accounting guidance, are eitherincluded within the Company’s statement of operations or as a separate part ofthe Company’s net equity under the caption “accumulated other comprehensiveincome.”

Under relevant accounting guidance, the treatment ofthese translation gains or losses depends upon management’s determination ofthe functional currency of each subsidiary. This determination involves considerationof relevant economic facts and circumstances affecting the subsidiary.Generally, the currency in which the subsidiary transacts a majority of itstransactions, including billings, financing, payroll and other expenditures,would be considered the functional currency. However, management must alsoconsider any dependency of the subsidiary upon the parent and the nature of thesubsidiary’s operations.

If management deems any subsidiary’s functionalcurrency to be its local currency, then any gain or loss associated with thetranslation of that subsidiary’s financial statements is included inaccumulated other comprehensive income. However, if management deems thefunctional currency to be United States dollars, then any gain or lossassociated with the translation of these financial statements would be includedwithin the Company’s statement of operations.

If the Company disposes of any of its subsidiaries,any cumulative translation gains or losses would be realized into the Company’sstatement of operations. If management determines that there has been a changein the functional currency of a subsidiary to United States dollars, then anytranslation gains or losses arising after the date of the change would beincluded within the Company’s statement of operations.

Based on management’s assessment of the factorsdiscussed above, the Company considers the functional currency of each of itsinternational subsidiaries to be each subsidiary’s local currency.

 

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**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,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                               |       |                                       |       |   |   |   |   |
| Net Sales                                          |       | 100.0                                      | %          | 100.0 | % | 100.0 | % |
| Cost of Sales                                      |       | 69.7                                       |       | 69.8 |   | 70.6 |   |
|                                               |       |                                       |       |   |   |   |   |
| Gross Profit                                       |       | 30.3                                       |       | 30.2 |   | 29.4 |   |
|                                               |       |                                       |       |   |   |   |   |
| Selling                                            |       | 20.2                                       |       | 19.3 |   | 16.0 |   |
| General and  administrative                        |       | 11.5                                       |       | 10.1 |   | 8.4 |   |
| Research and  development                          |       | 2.0                                        |       | 2.0 |   | 2.3 |   |
| Impairment of  goodwill                            |       | 4.4                                        |       | — |   | — |   |
| Restructuring  charge (recovery)                   |       | —                                     |       | — |   | (0.7 | ) |
| Asset impairment  charge                           |       | —                                     |       | 0.1 |   | — |   |
|                                               |       |                                       |       |   |   |   |   |
| (Loss) income  from operations                     |       | (7.8                                       | )          | (1.3 | ) | 3.4 |   |
|                                               |       |                                       |       |   |   |   |   |
| Interest  expense, net                             |       | (0.8                                       | )          | (0.4 | ) | (0.5 | ) |
|                                               |       |                                       |       |   |   |   |   |
| (Loss) income  before income tax expense (benefit) |       | (8.6                                       | )          | (1.7 | ) | 2.9 |   |
| Income taxes  (benefit)                            |       | (0.7                                       | )          | 4.3 |   | (0.8 | ) |
| Net (loss)  income before minority interest        |       | (7.9                                       | )          | (6.0 | ) | 3.7 |   |
| Minority  interest                                 |       | (1.6                                       | )          | (0.1 | ) | 0.2 |   |
|                                               |       |                                       |       |   |   |   |   |
| Net (loss) income                                  |       | (6.3                                       | )%         | (5.9 | )% | 3.5 | % |

 

# **Comparison of Year Ended December 31, 2006 withYear Ended December 31, 2005**

In August of 2004 the Company acquired 75% of theBushman Tanks business (the “acquired company”).  Bushman Tanks believes it is Australia’slargest manufacturer of plastic water storage tanks.  The Bushman Tanks financial results have beenconsolidated in the Company’s financial statements for the twelve months endedDecember 31, 2005 and 2006.  A minorityinterest has been recorded for the 25% equity owned by ANZ Private Equity, aunit of Australia and New Zealand Banking Group Ltd.

***Net Sales***.  Net salesdecreased $7.0 million or 6.0% from $116.1 million in 2005 to $109.1 million in2006.   The decrease was primarily due tothe lower demand from the Company’s telecom and cable customers in the Americassegment.

Americas net sales decreased $6.0 million or 9.2% from$65.3 million in 2005 to $59.3 million in 2006. The decrease was due to the lower volume of sales to the Company’s coretelecom and cable customers.  Sales tolarge telecom and service providers fluctuate period to period based on thestatus of such customers’ infrastructure projects and therefore are difficultto predict.

International net sales decreased $1.0 million or 1.9%from $50.8 million in 2005 to $49.8 million in 2006.  The decrease was primarily due to the lowervolume of sales to the Company’s telecom customers in Australia and Asia due toreduced capital expenditures and slower deployment of certain Company-suppliedproducts.

Sales to Verizon declined in 2006 to slightly lessthan 10% of Company sales in the period. Sales to Verizon of $19.9 million in 2005 represented 17.2% of Companysales in the period.  Sales to Verizonhave historically fluctuated from year to year. Accordingly, the Company cannot accurately predict what sales to Verizonwill be in 2007.

***Gross Profit***. Gross profit decreased $1.9 million from $35.0 million in 2005 to $33.1million in 2006. The decrease was primarily due to the lower amount of grossprofit in the International segment. Gross profit dollars in the International segment decreased by $2.8million due to lower sales volume and a lower gross profit percentage dueprimarily to higher raw material costs. The decrease in the International segment was partially offset by anincrease of $0.9 million in the Americas segment due to a higher gross profitpercentage caused by greater leveraging of fixed costs.

As a percentage of net sales, gross profit increasedfrom 30.2% in 2005 to 30.3% in 2006.  Theincrease is primarily due to a higher gross profit percentage in the Americassegment, which increased from 26.5% in 2005 to 30.7% in 2006.  This increase is primarily due to a strongermix of the higher margin enclosure product line.  Offsetting the increase in the

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Americas segment was a decrease in the gross profitpercentage in the International segment from 34.8% in 2005 to 29.9% in2006.  This decrease was primarily due tohigher raw material costs related to increased commodity prices, laborinefficiencies associated with the local move of one of the Australianmanufacturing operations to a new facility and disruptions caused by thetermination of transportation and logistics services by the primary freightprovider 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 net sales, selling expensesincreased from 19.3% in 2005 to 20.2% in 2006. The higher percentage is primarily due to the increase in freight costsin both the Americas and International segments due to fuel surcharges inaddition to inefficiencies associated with the management and operation of theCompany’s international shipping activities.

***General and Administrative***. General and administrative expenses were $12.5 million in 2006, anincrease of $0.8 million or 6.8% from 2005. The increase is due primarily to stock-based compensation expense of$0.3 million, lease settlement costs of $0.3 million in the Internationalsegment, severance cost of $0.2 million and other various expenses.

***As a percentage of net sales, general andadministrative expenses increased from 10.1% in 2005 to 11.5% in 2006.  The increase is due to the decreased saleslevel without a proportional decrease in general and administrative costs thatare relatively fixed in nature.***

***Research and Development. ***Research and development expenses were $2.2 millionin 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 net sales, research and developmentexpenses remained the same at 2.0% in 2006 and 2005.

***Impairment of Goodwill***. Goodwill impairment expense was $4.8 million in 2006, compared to noimpairment in 2005.  The impairment wasrelated to the Company’s Bushman Tanks operation in Australia.  The primary cause for this impairment ofgoodwill was the decrease in gross margins and operating income in the BushmanTanks business, which have been negatively impacted as a result of increasingprices in raw materials.  The primary rawmaterials used in the manufacture of Bushman Tanks products are petroleum-basedresins.  The price of these resins hasbeen continually increasing as the price of oil increases.  The valuation methodology for goodwill issummarized in Note B to the Consolidated Financial Statements.

***Impairment of Fixed Assets***. There was no impairment of fixed assets in 2006.  In 2005, there was an impairment charge of$0.1 million due to the writedown of some manufacturing equipment in theAmericas segment.

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

***Interest Expense, Net***. Interest expense, net of interest income, was $0.8 million in 2006compared to $0.5 million in 2005.

***IncomeTaxes***.  There was an income tax benefit of ($0.8)million in 2006 compared to an income tax expense of $5.0 million in 2005.  The effective tax rate was an income taxbenefit of (8.3%) in 2006 and an income tax expense of 246.0% in 2005. Thebenefit in 2006 was primarily due to the current year loss in foreignoperations whereas the expense in 2005 was primarily the result of recognizinga full valuation allowance on the domestic net deferred tax asset.  No benefit was recorded for the 2006 domesticloss due to the full valuation allowance recognized on the net domesticdeferred tax asset at December 31, 2006.

# **Comparison of Year Ended December 31, 2005 withYear Ended December 31, 2004**

InAugust of 2004 the Company acquired 75% of the Bushman Tanks business (the “acquiredcompany”).  Bushman Tanks is Australia’slargest manufacturer of plastic water storage tanks.  The Bushman Tanks financial results have beenconsolidated in the Company’s financial statements for the twelve months endedDecember 31, 2004 and 2005.  Theconsolidated results include five months of business activity of Bushman Tanksfor 2004 and twelve months for 2005.  Aminority interest has been recorded for the 25% equity owned by ANZ PrivateEquity, a unit of Australia and New Zealand Banking Group Ltd.

 

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***Net Sales. ***Net sales increased $13.9 millionor 13.6% from $102.2 million in 2004 to $116.1 million in 2005.   The increase was due to the addition of theacquired business for a full year and partially offset a decline in revenues inthe Americas Segment.

Americas net sales decreased $9.1 million or 12.2%from $74.4 million in 2004 to $65.3 million in 2005.  The decrease was due to lower sales ofthermoplastic enclosures, primarily to Verizon.

International net sales increased $23.0 million or82.7% from $27.8 million in 2004 to $50.8 million in 2005.  The increase was primarily due to sales ofthe acquired company.

Sales to Verizon of $19.9 million in 2005 represented17.2% of Company sales in the period. Sales to Verizon were $16.2 million in the first six months of thefiscal year.   Sales to Verizon havehistorically fluctuated from year to year. Sales to Verizon of $21.8 million in 2004 represented 21.3% of Companysales in the period.  The second largestcustomer in 2005 was Comcast, with sales of $8.3 million representing 7.1% ofthe total sales in the period.  Sales toComcast in 2004 were $14.6 million representing 14.3% of the Company sales inthe period.

***Gross Profit. ***Gross profit increased $5.0million from $30.0 million in 2004 to $35.0 million in 2005. The increase wasprimarily due to the addition of gross profit earned by the acquiredcompany.  Gross profit dollars in theAmericas segment decreased by $3.8 million due to lower sales volume.  Gross profit dollars in the Internationalsegment increased by $8.7 million due to the addition of the acquired company.

As a percentage of net sales, gross profit increasedfrom 29.4% in 2004 to 30.2% in 2005.  Theoverall increase is due to an increase in the International segment thatoutweighed a decrease in the Americas segment. Gross profit as a percentage of net sales increased in the Internationalsegment due to the addition of the acquired company, which has a higher grossprofit percentage than the Company’s other businesses. The decrease in theAmericas segment resulted primarily from unabsorbed costs from lower volumes.

***Selling.***  Sellingexpenses increased $6.1 million or 37.4% from $16.3 million in 2004 to $22.4million in 2005.  The increase is due tothe addition of selling expenses of the acquired company as well as increasedfreight costs across all segments.

As a percentage of net sales, selling expenseincreased from 16.0% in the 2004 period to 19.3% in the 2005 period.  The higher percentage is primarily due to theincrease in freight costs and the addition of selling expenses for the acquiredcompany.  The acquired company has ahigher percentage of selling expense to net sales than the other Channellbusinesses primarily due to the freight costs incurred to transport waterstorage tanks to customers.

***Generaland Administrative*.**  General and administrative expenses increased$2.9 million or 33.0% from $8.8 million in 2004 to $11.7 million in 2005.   The increase is due to the addition of theacquired company, partially offset by lower general and administrative expensein the Americas segment.

***As a percentage of net sales, general andadministrative expenses increased from 8.6% in the 2004 period to 10.1% in the2005 period.  The increase is due to thelower volumes in the Americas segment.***

***Research and Development.*** Research and development expenses increased $0.3 million or 14.3% from$2.1 million in 2004 to $2.4 million in 2005. The increase is due to spending on new product development programs,primarily for telephone connectivity products and thermoplastic enclosures forboth telephone and cable customers.

As a percentage of net sales, research and developmentexpenses decreased from 2.1% in 2004 to 2.0% in 2005.

***Restructuring Charge. ***Therewere no restructuring charges in 2005 compared to ($0.7) million in 2004.  In 2004, a credit to restructuring charge of($0.7) million was recorded primarily due to the subletting of a vacatedfacility in the United Kingdom at a cost less than previously estimated bymanagement.

***Impairment of Fixed Assets. ***There was no impairment of fixed assets in 2004.  In 2005, there was an impairment charge of$0.1 million due to the writedown of some manufacturing equipment in theAmericas segment.

***Income from Operations****. *As a result of theitems discussed above, income (loss) from operations decreased $5.0 million or142.9% from $3.5 million in 2004 to ($1.5) million in 2005.  Operating margin as a percent of salesdecreased from 3.4% in 2004 to (1.3%) in 2005.

***Interest Expense, Net****.*  Net interestexpense remained the same at $0.5 million in 2004 and 2005.

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***IncomeTaxes.***  There was an income tax benefit of ($0.8) million in2004 compared to an income tax expense of $5.0 million in 2005.  The effective tax rate was (26.5%) in 2004and 246.0% in 2005. The 2004 benefit was primarily due to an ordinary worthlessstock deduction, whereas the expense in 2005 was primarily the result of anincrease in the valuation allowance on the realization of the net deferred taxasset.

**Liquidity andCapital Resources**

Cash and cash equivalents on December 31, 2006 were$2.2 million, a decrease of $0.9 million from the December 31, 2005 balance of$3.1 million.  The decrease was primarilydue to cash used in operating activities and cash used for capitalexpenditures, offset by cash provided from financing activities.

Net cash used in operating activities was ($2.3)million during 2006, compared to net cash provided by operating activities of$1.7 million in 2005.  The cash used inoperating activities in 2006 is primarily due to an increase in accountsreceivable and inventories of $3.9 million and an increase in the income taxreceivable of $0.8 million, partially offset by an increase in accounts payableof $1.6 million.  The increase in accountsreceivable and inventories is due to the increased volume of activity duringthe last month of 2006 compared to the same period of 2005.

Net cash used in investing activities was ($3.8)million in 2006 and ($4.3) million in 2005. During the fourth quarter of 2006, the Company purchased approximately$1.6 million of trucks and trailers in the International segment in associationwith its transition of transportation and logistics services from an outsidefreight provider to internally managed operations.

Net cash provided by financing activities was $5.6million in 2006, compared to net cash provided by financing activities of $0.2million in 2005.  The increase is due toadditional borrowings under the Company’s credit facilities needed to fundoperations in 2006 and to purchase the trucks and trailers in the Internationalsegment.

Accounts receivable increased from $8.4 million atDecember 31, 2005 to $11.7 million at December 31, 2006 primarily due to ahigher level of sales at the end of 2006 in both segments of the Company.  In terms of days sales outstanding, accountsreceivable increased from 32 days at December 31, 2005 to 43 days at December31, 2006 due to a higher level of accounts receivable at the end of the year,as described above.

Inventories increased from $11.4 million at December31, 2005, to $13.0 million at December 31, 2006.  The increase is in line with higher saleslevels in 2006.  Days inventory on handincreased from 60 days at December 31, 2005 to 63 days at December 31, 2006.

Accounts payable increased from $8.7 million atDecember 31, 2005 to $10.9 million at December 31, 2006.  Days payables increased from 46 days to 53days, respectively.  The increase is dueto a higher level of activity at year end, as well as more favorable paymentterms for the Company.

The Company andits subsidiaries have entered into the following financing arrangements:

1.                                       OnSeptember 25, 2002, the Company entered into a three-year Loan and SecurityAgreement with an asset-based lender in the United States.  The Loan and Security Agreement contains aterm loan and a revolving credit facility. The $4.7 million in proceeds from the original term loan borrowing andthe initial $2.1 million borrowing under the revolver, together with $9.6million in cash, were used to repay, in full, the Company’s prior creditagreement.  In September 2005 thisagreement was extended to December 31, 2005, and in December 2005, it wasfurther extended until February 28, 2006. In February 2006, it was amended and extended to March 31, 2007. InFebruary 2007, it was amended and extended to June 30, 2007.

The term loan is repayable in quarterly payments basedon a five-year amortization schedule with a balloon repayment due June 30,2007.  At December 31, 2006, theoutstanding balance of the term loan was $0.9 million, and the outstandingbalance of the revolver was $5.4 million. 

Under the Loan and Security Agreement, the outstandingbalance of the term loan and the revolver each bears interest payable monthlyat a variable rate based on either LIBOR or the lender’s base rate.  The interest rate under the Loan and SecurityAgreement at December 31, 2006 was 9.25%. 

The loans under the Loan and Security Agreement aresecured by all the assets of the Company. The Loan and Security Agreementcontains various financial and operating covenants that impose limitations onthe Company’s ability, among other things, to incur additional indebtedness,merge or consolidate, sell assets except in the ordinary course of business,make certain investments, enter into leases and pay dividends. The Agreementalso contains a subjective acceleration clause if there exists an event ofdefault under the Agreement, which allows the lender to terminate the facilityand require that any outstanding obligation be 

21

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repaid. As of December 31, 2006, the Company was indefault for failure: to maintain a minimum aggregate availability of $1.5million under the revolver; to have prepaid the domestic revolving loans in theamount of the excess of the domestic revolving credit exposure over the domesticborrowing base; and to have delivered the projections of the Company and itssubsidiaries for fiscal year 2007.  InFebruary 2007, the Company received a waiver from the lender for thesedefaults.  

On February 12,2007, the Loan and Security Agreement was amended.  The amendment, among other things, (i) waivedthe defaults described in the preceding paragraph, (ii) aggregated the domesticborrowing base, the United Kingdom borrowing base and the Canadian borrowingbase for purposes of determining the borrowing availability for domestic loansunder the revolving credit facility, (ii) temporarily reduced the requiredaggregate availability under the revolving credit facility from $1,500,000 to$500,000 through and including April 30, 2007, (iii) temporarily reduced thereserve against borrowing availability under the revolving credit facility from$600,000 to $300,000 until April 30, 2007, (iv) increased the maximum amount ofthe United Kingdom borrowing base from $400,000 to $600,000 and (v) extended theterm of the Loan Agreement from March 31, 2007 to June 30, 2007.

2.                                       OnAugust 2, 2004, Channell Bushman Pty Ltd and controlled entities, collectivelyknown as Bushmans Group Pty Ltd, which are subsidiaries of the Company, enteredinto a five-year Loan and Security Agreement with a commercial bank inAustralia. The $5.8 million in proceeds from the original term loan borrowingwas used to fund part of the consideration paid to acquire the Bushman Tanksbusiness.  Channell Bushman Group hasfrom time to time entered into new Loan and Security Agreements with the bank,which have amended and superseded the prior Loan and Security Agreements. On May 10, 2006, Channell Bushman Group entered into a new Loan and SecurityAgreement with the bank dated April 26, 2006 that amended (and superseded) theLoan and Security Agreement then in place.  That agreement, among otherthings, revised the financial covenants and increased the maximum borrowingsunder the revolving credit facility.  The Company has entered into subsequentnew Loan and Security Agreements with the bank on August 25, 2006 (dated August1, 2006), November 15, 2006 (dated November 8, 2006) and February 7, 2007(dated February 2, 2007), each of which amended (and superseded) the agreementpreviously in place.  The subsequentagreements, among other things, further amended the financial covenants andextended the expiration dates for the revolving credit facility and the masterasset finance agreement. As of December 31, 2006, the facilities under the then-currentLoan and Security Agreement included the following: a term loan that expires inJuly 2009; a revolving credit facility with maximum borrowings of AUD$3,200,000that expires in January 2007; a facility to fund “earn out” payments to thesellers of Bushman Tanks that expires in July 2008; a capital expenditurefacility that expires in July 2008; and a master asset finance agreementfacility that expires in January 2007.  The currently effective Loan andSecurity Agreement includes the following facilities: a term loan that expiresin July 2009; a revolving credit facility with maximum borrowings ofAUD$3,200,000 that expires in April 2007; a facility to fund “earn-out”payments to the sellers of Bushman Tanks that expires in July 2008; a capitalexpenditure facility that expires in July 2008; and a master asset financeagreement facility that expires in April 2007.

The loans under the Loan and Security Agreement aresecured by all the assets of Channell Bushman Group.  The Loan andSecurity Agreement contains various operating covenants that impose limitationson Channell Bushman Group’s ability, among other things, to merge orconsolidate, sell assets except in the ordinary course of business, and paydividends.  In addition, Channell Bushman Group is required to comply withcertain financial covenants relating to sales, gross profit and operatingprofit, and the bank, at its discretion, may terminate the Agreement if suchcovenants are not met.  The Agreement contractually obligates Channell BushmanGroup to repay the revolving credit facility as it receives payments from itscustomers.  The Agreement also provides that the bank will seek additionalsupport from the Company if there is further deterioration and contains asubjective acceleration clause should Channell Bushman Group come into adefault, which allows the bank to terminate the facility and require anyoutstanding obligations to be repaid.  The aggregate balance outstandingunder the revolving line of credit, “earn out” facility, and capitalexpenditure facility at December 31, 2006 was $3,745,000.

Under the Loan andSecurity Agreement, the outstanding balance bears interest payable monthly at avariable rate based on the lender’s base rate. The weighted average interest rate under the Loan and Security Agreementat December 31, 2006 was 6.75%.  As ofDecember 31, 2006, Channell Bushman Group was not in compliance with thefinancial covenants relating to sales, gross profit and operating profit.  As Channell Bushman Group has not received aformal waiver for its breach of the aforementioned bank covenants, the Companyis reclassifying approximately $3.9 million of long-term debt to short-termdebt.

3.                                       OnAugust 2, 2004, the Company and Channell Bushman Pty Ltd entered into anInvestment and Shareholder’s Agreement with a private equity firm inAustralia.  The private equity investmentwas obtained as part of the financing of the Bushman Tanks acquisition.  The private equity party invested $2.6million, the net amount

22

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received after paying a capital raising fee, forownership of 25% of the outstanding and voting shares of Channell Bushman PtyLtd.  As part of the agreement, theprivate equity party has the right to appoint one member of the Board of Directorsof Channell Bushman Pty Ltd with the Company appointing the remaining threemembers.  The agreement specifies thatcertain actions taken by the Board of Directors require unanimous approval,among other things, a proposal to sell all or substantially all of the assetsof Channell Bushman Pty Ltd, material asset acquisitions or disposals notincluded in the annual business plan, any plan to limit or dissolve thebusiness, the issuance of any securities, capital restructuring, granting of asecurity interest on assets and related party transactions.

It is the intent of the private equity party to exitfrom its investment in Channell Bushman Pty Ltd within 5 years after theoriginal investment.  The Agreementcontains clauses to facilitate the exit of the private equity party.  The Agreement specifies that after the datethat is two years after the original investment, the Company has an option toacquire all of the shares owned by the private equity party.  The Agreement specifies that the value of theshares is to be fair market value as determined by an independentappraiser.  There are no minimum ormaximum amounts specified in the Agreement. After the date that is five years after the original investment, boththe Company and the private equity party have the right to initiate a sale ofChannell Bushman Pty Ltd.  At such time,the other party may elect to buy out the shares of the party initiating thesale at the fair market value as determined by an independent appraiser.  Otherwise, Channell Bushman Pty Ltd would beoffered for sale with the assistance of a financial advisor.

Contractual obligations consist principally of paymentfor noncancellable operating lease obligations, long-term debt and capitalleases.  Future payments required underthese contractual obligations have been summarized in the notes to theConsolidated Financial Statements as follows: (i) lease commitments — Note L,(ii) long term debt — Note F, and (iii) capital lease obligations — Note G.

The Company believes that cash flow from operationsshould be sufficient to fund the Company’s capital expenditure and workingcapital requirements beyond 2007.

The Company is engaged in ongoing discussions with itsprimary lenders with respect to the loan facilities described above that maturein 2007.  Based on these discussions, theCompany expects that it will be able to amend its existing agreements withthose lenders, or enter into new agreements with those lenders, providing foran extension of the maturity of those loan facilities beyond current maturitiesor providing for new loan facilities to extend beyond current maturities. Inthe event the Company is unable to enter into new or amended agreements withits primary lenders, it believes that it can obtain adequate funding from othersources. See “Item 1A — Risk Factors — If we are unable to amend our existingcredit agreements or enter into new credit agreements on favorable terms, or atall, our liquidity may be adversely affected.”

**ContractualObligations and Other Commitments**

The following table summarizes the Company’scontractual obligations and other commitments as of December 31, 2006:

| *(amounts in thousands)* | ** ** | ** ** | ** ** | **2008 to** | ** ** | **2010 to** | ** ** | **2012 and** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|-------------------|------------|------------|------------|
| ** **                         | ** ** | **2007**   | ** ** | **2009**         | ** ** | **2011**         | ** ** | **Thereafter**    | ** ** | **Total**  | ** ** |
| Contractual  Obligations           |       |       |       |             |       |             |       |              |       |       |       |
| Long-Term Debt (1)                 |       | $          | 13,723     |             | $          | —           |       | $                 | —     |       | $          | — |   | $ | 13,723 |   |
| Capital Lease Obligations(2)       |       | 138        |       | 384              |       | —           |       | —            |       | 522        |       |
| Operating Lease Obligations (3)    |       | 3,248      |       | 6,175            |       | 4,971            |       | 5,904             |       | 20,298     |       |
| Employment Contracts (4)           |       | 862        |       | 862              |       | —           |       | —            |       | 1,724      |       |
| Purchase Obligations (5)           |       | 7,068      |       | —           |       | —           |       | —            |       | 7,068      |       |
|                               |       | $          | 25,039     |             | $          | 7,421            |       | $                 | 4,971      |       | $          | 5,904 |   | $ | 43,335 |   |

 

(1)            TheCompany has a Loan and Security Agreement which includes a term loan andrevolving line of credit with an asset-based lender in the United States, whichhas been extended through June 30, 2007. In August 2004, subsidiaries of the Company also entered into afive-year Loan and Security Agreement with a commercial bank in Australia,which includes a term loan and revolving line of credit.  The 2007 obligation excludes estimatedinterest costs of $998,000.  See Note Fto the Consolidated Financial Statements.

(2)            Capitallease obligations exclude interest costs of $43.  See Note G to the Consolidated FinancialStatements.

(3)            TheCompany leases manufacturing and office space and machinery & equipment underseveral operating leases expiring through 2015. See Note L to the Consolidated Financial Statements.

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(4)            TheCompany has employment agreements with its Chairman of the Board expiring July7, 2011 and its President and Chief Executive Officer expiring December 8,2008.  Both contracts are renewable every5 years.  The Chairman of the Board’ssalary is set at $50,000 per annum for the remainder of the term.  The President and Chief Executive Officer’ssalary was $793,153 for 2006, and is subject to an annual cost of livingincrease based on the consumer price index. Base salary may also be increased at the discretion of the Board ofDirectors.  In the event the Presidentand Chief Executive Officer is terminated, the Company will be obligated tomake a lump sum severance payment equal to three times his then current basesalary.

(5)            TheCompany believes it has adequate sources of supply for the raw materials usedin its manufacturing processes and it attempts to develop and maintain multiplesources of supply in order to extend the availability and encourage competitivepricing of these materials.  Most plasticresins are purchased under annual or multi-year pricing agreements to stabilizecosts and improve supplier delivery performance.  The Company is not contractually obligated topurchase product over the life of these agreements.

**Off-Balance SheetArrangements**

As discussed in Note K to the Consolidated FinancialStatements, the Company guaranteed debt of The Channell Family Trust, one ofthe Company’s principal stockholders, of which the Company’s Chairman of theBoard and Secretary (who is also a director) are co-trustees, of approximately$0.8 million in 1997.  The guaranteeddebt was incurred in connection with construction of the facilities leased tothe 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, 2006, the outstanding loanbalance subject to the guarantee totaled $0.52 million.

**Item 7A.**                 Quantitativeand Qualitative Disclosures about Market Risk.

The risk inherent in the Company’s market sensitiveinstruments is the potential loss arising from adverse changes in interestrates and foreign currency exchange rates.  All financial instruments heldby the Company described below are held for purposes other than trading.

**Interest RateSensitivity**

The Company and its subsidiaries have entered into twofinancing agreements.  In September 2002, the Company entered into athree-year Loan and Security Agreement with an asset based lender in the UnitedStates that has been extended through June 30, 2007.  The agreementcontains a term loan and a revolving line of credit.  In August 2004, theCompany’s Australian subsidiaries entered into a Loan and Security Agreementwith a commercial bank in Australia, which contains a term loan that expires inJuly 2009, a revolving line of credit that expires in April 2007, an “earn out”facility that expires in July 2008, a capital expenditure facility that expiresin July 2008 and a master asset finance agreement facility that expires inApril 2007.  The loan and security agreements allow for the outstandingbalance to bear interest at a variable rate based on the lender’s baserate.  The credit facilities expose the Company to changes in short-terminterest rates since the interest rates on the credit facility are variable.

Based upon the amount of variable rate debtoutstanding at the end of the year, and holding the variable rate debt balanceconstant, each one percentage point increase in interest rates occurring on thesecond day of an annual period would result in an increase in interest expenseof approximately $0.14 million per year.  This analysis does not considerthe effects of economic activity on the Company’s sales and profitability insuch an environment.

**Exchange RateSensitivity**

The Company has assets and liabilities outside theUnited States that are subject to fluctuations in foreign currency exchangerates.  Assets and liabilities outside the United States are primarilylocated in the United Kingdom, Australia, and Canada.  The Company’sinvestment in foreign subsidiaries with a functional currency other than theU.S. dollar is generally considered long-term.  Accordingly, the Companydoes not hedge these investments.  The Company also purchases a limitedportion of its raw materials from foreign countries.  These purchases aregenerally denominated in U.S. dollars and are accordingly not subject toexchange rate fluctuations.  The Company has minimal foreign currencytransaction gains or losses.  The Company has not engaged in forwardpurchases of foreign currency and other similar contracts to reduce itseconomic exposure to changes in exchange rates because the associated risk isnot considered significant.

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**Item 8.**                          FinancialStatements and Supplementary Data.

**Selected QuarterlyFinancial Data**

See Note O to the Company’s Consolidated FinancialStatements.

Consolidated Financial Statements of ChannellCommercial Corporation are as follows:

| Report of Independent  Registered Public Accounting Firm                                                                                                |   | F-1 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----|--------|
| Report of  Independent Registered Public Accounting Firm                                                                                                |   | F-2 |   |
| Consolidated Balance Sheets as of December 31, 2005  and December 31, 2006                                                                              |   | F-3 |   |
| Consolidated Statements of Operations and  Comprehensive Income (Loss) for the years ended December 31, 2004, December  31, 2005, and December 31, 2006 |   | F-4 |   |
| Consolidated Statement of Stockholders’ Equity for the  years ended December 31, 2004, December 31, 2005, and December 31, 2006                    |   | F-5 |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2004, December 31, 2005, and December 31, 2006                                  |   | F-6 |   |
| Notes to Consolidated Financial Statements                                                                                                              |   | F-7 |   |

 

Financial statementschedules are as follows:

Schedule II - Valuation and Qualifying Accounts

All remaining schedules are omitted because they arenot applicable, or the required information is included in the financialstatements or the notes thereto.

**Item 9.**                          Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

**Item 9A.**                 Controls andProcedures.

**Evaluation ofDisclosure Controls and Procedures**

The Company maintains disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securitiesand Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure thatinformation required to be disclosed in the Company’s Exchange Act reports isrecorded, processed, summarized, and reported within the time periods specifiedin the rules and forms of the Securities and Exchange Commission regulations,and that such information is accumulated and communicated to the Company’smanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. As of December 31, 2006, the management of the Company carried out anassessment of the Company’s disclosure controls and procedures and concludedthat, except as set forth below, they were effective as of the end of theperiod covered by this report.

As previously reported, the Company did not haveeffective controls to accurately calculate current income tax expense.  Specifically, the Company did not haveeffective controls to monitor the difference between the income tax basis andthe financial reporting basis of assets and liabilities and reconcile thedifference to its deferred income tax asset and liability balances. Managementhad determined that these deficiencies could lead to a material misstatement ofdeferred taxes, tax accruals and the tax provision that would not be preventedor detected.  Accordingly, managementdetermined that this control deficiency represented a material weakness in theCompany’s disclosure controls and procedures.

During the fiscal year ended December 31, 2005, due tothe limited tenure of the Company’s accounting staff, additionalreconciliations and post-closing adjustments were necessary to properly accountfor certain items of income and expense that the staff was not fully awareof.  The most significant manifestationsof this material weakness involved

25

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the accounting of the Company’s workers’ compensationliability as well as the Company’s unvouchered accounts payable balance.

One of the Company’s subsidiaries, Bushman Tanks, waspreviously a closely-held, family run business with mostly manual controls in place. During the process of assessing the status of the internal controlinfrastructure, the Company identified significant deficiencies in internalcontrols that rose to the level of “material weaknesses” in the revenue andpurchasing cycles.

As a result of the weaknesses identified in management’sevaluation, the Company committed to take the following actions to improve theCompany’s internal control over financial reporting:

·                  Setup a procedure to accurately prepare and review its accounting for income taxesand the determination of income taxes payable, deferred income tax assets andliabilities and the related income tax provision.

·                  Engageadditional personnel qualified as Certified Public Accountants to assist in thepreparation of the Company’s income taxes.

·                  Trainnew staff regarding the accounting for workers’ compensation liability as wellas the Company’s unvouchered accounts payable balance.

·                  Engageactuarial consultants to assist management in determining the appropriateaccrual for the Company’s workers’ compensation liability.

·                  Implementthe Company’s Oracle information system in the Bushman Tanks subsidiary toimprove the processes in the revenue and purchasing cycles. The Company hasdeveloped a plan to complete the implementation in the first half of 2007.  Therefore, remediation of the materialweaknesses in purchasing and revenue cycles in the Bushman Tanks subsidiary isnot yet complete.

**Changes inInternal Control Over Financial Reporting**

During the three months ended December 31, 2006 andduring the financial close process for that quarter, the Company took thefollowing actions that it believes addressed the material weaknesses related tothe accounting for income taxes, the workers’ compensation liability and theunvouchered accounts payable balance and strengthened its internal control overfinancial reporting.

·                  Completedthe restructuring of the Company’s process to accurately prepare and review itsaccounting for income taxes and the determination of income taxes payable. The Companyengaged additional personnel qualified as Certified Public Accountants toassist in the preparation of the Company’s income tax provision as well asgeneral accounting matters.

·                  Completedthe training of the Company’s staff in the preparation and analysis of theCompany’s workers’ compensation liability and unvouchered accounts payablebalance.  The Company engaged qualifiedactuarial consultants to assist the Company in determining the appropriateaccrual for workers’ compensation liability.

**Item 9B.**                 OtherInformation

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 2007 AnnualMeeting of Stockholders.

**Item 11.**                   ExecutiveCompensation.

The information required by this item is incorporatedby reference to the Company’s definitive proxy statement for its 2007 AnnualMeeting of Stockholders.

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**Item 12.**                   SecurityOwnership of Certain 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 2007 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 2007 AnnualMeeting of Stockholders.

**Item 14.**                   PrincipalAccounting Fees and Services.

The information required by this item is incorporatedby reference to the Company’s definitive proxy statement for its 2007 AnnualMeeting of Stockholders.

**PART IV**

**Item 15.**                   Exhibits,Financial Statement Schedules. 

(a)             Thefollowing financial statements and schedules are filed as a part of thisreport:(1)    Consolidated Financial Statements          See index included in Part II,Item 8.

(2)            ConsolidatedFinancial Statement SchedulesSchedule II — Valuation and Qualifying AccountsAll remaining schedules are omitted because they are not applicable, or therequired informationis 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  (Exhibit 3.2)(1)                                                                                                                                                                                                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 4               |       | Form of Common Stock  Certificate (Exhibit 4)(1)                                                                                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1            |       | Tax Agreement between  the Company and the Existing Stockholders (Exhibit 10.1)(1)                                                                                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.2*           |       | Channell Commercial  Corporation 1996 Incentive Stock Plan (including forms of Stock Option  Agreements and Restricted Stock Agreement) (Exhibit 10.2)(1)                                                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3*           |       | Channell Commercial  Corporation 2003 Incentive Stock Plan (including forms of Stock Option  Agreement and Restricted Stock Agreement)(7)                                                                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4*           |       | Channell Commercial  Corporation 2004 Incentive Bonus Plan(9)                                                                                                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5            |       | Loan and Security  Agreement dated as of September 25, 2002 by and among the Company, Channell  Commercial Canada Inc., Fleet Capital Corporation, Fleet Capital Canada  Corporation and, under the circumstances set forth therein, Fleet National  Bank, London U.K. Branch, trading as Fleet Boston Financial, and the U.K.  Borrowers (as defined therein, if any) (Exhibit 99)(6) |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6            |       | Loan and Security  Agreement dated October 24, 2003 by and between Channell Pty Ltd and National  Australia Bank Ltd (Exhibit 10.3.1)(11)                                                                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7            |       | Loan and Security  Agreement dated August 2, 2004 by and between Channell Bushman Pty Ltd and  National Australia Bank Ltd (Exhibit 10.3.2)(11)                                                                                                                                                                                                                                        |

 

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|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8   |   | Loan and Security  Agreement dated August 2, 2004 by and between Channell Pty Ltd and National  Australia Bank Ltd (Exhibit 10.3.3)(11)                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9   |   | Investment and  Shareholders Agreement dated August 2, 2004 by and among Channell Bushman Pty  Ltd and Australia and New Zealand Banking Group Ltd.(Exhibit 10.3.4)(11)                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.10* |   | Employment Agreement  dated July 8, 1996 between the Company and William H. Channell, Sr. (Exhibit  10.8)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.11* |   | Channell Commercial  Corporation 1996 Performance-Based Annual Incentive Compensation Plan  (Exhibit 10.10)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.12  |   | Lease dated December  22, 1989 between the Company and the Channell Family Trust (as successor in  interest to William H. Channell, Sr.), as amended (Exhibit 10.11)(1)                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.13  |   | Lease dated May 29,  1996 between the Company and the Channell Family Trust (Exhibit 10.12)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.14  |   | Lease dated October 26,  2000 between the Company and Belston Developments Inc. (Exhibit 10.15)(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.15  |   | Third Amendment to  Lease dated December 22, 1989 between the Company and the Channell Family  Trust (as successor in interest to William H. Channell, Sr.), effective as of  June 1, 2005 (Exhibit 99.1)(12)                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.16  |   | Form of Indemnity  Agreement (Exhibit 10.17)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.17  |   | Form of Agreement  Regarding Intellectual Property (Exhibit 10.18)(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.18  |   | 401(k) Plan of the  Company (Exhibit 10.19)(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.19  |   | A.C. Egerton (Holdings)  PLC Share Purchase Agreement (Exhibit 2)(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.20  |   | Lease dated June 27,  2002 between the Company and Ynez Street, Ltd. (Exhibit 10.29)(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.21* |   | Amendment to Employment  Agreement dated December 9, 2003 between the Company and William H. Channell,  Sr. (Exhibit 10.19)(8)                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.22* |   | Employment Agreement  dated December 9, 2003 between the Company and William H. Channell, Jr.  (Exhibit 10.20)(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.23  |   | Share and Asset  Purchase Agreement dated as of July 14, 2004 by and among Australia’s Bushman  Tanks Pty Ltd, Douglas Robin Young, Richard James Young, Lokan Nominees Pty  Ltd and Lenbridge Grange Pty Ltd, Belsiasun Pty Ltd and Elcarva Pty Ltd, the  holders of all the outstanding shares of Bushmans Group Pty Ltd, Hold-On  Industries Australia Pty Ltd, Australian Bushman Tanks Pty Ltd, and Polyrib  Tanks Pty Ltd, on the one hand, and Channell Commercial Corporation and  Channell Bushman Pty Limited, on the other hand (Exhibit 99.2)(10) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.24* |   | Employment Letter dated  June 27, 2005 between the Company and Jerry Collazo (Exhibit 99.2)(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.25* |   | Long-Term Incentive  Plan for William H. Channell, Jr. (Exhibit 10.1)(14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.26  |   | Waiver and Third  Amendment to Loan and Security Agreement dated as of November 18, 2005 by and  among the Company, Channell Commercial Canada Inc., Channell Limited,  Channell Commercial Europe Limited, Bank of America, N.A., BABC Global  Finance Inc., Bank of America, N.A., and the lenders party to the Loan and  Security Agreement dated as of September 25, 2002 (as amended) (Exhibit  10.25)(15)                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.27  |   | Assignment and  Assumption Agreement dated November 18, 2005 by and between Banc of America  Leasing and Capital, LLC and Bank of America, N.A. (relating to U.S. Loan and  Security Agreement) (Exhibit 10.26)(15)                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.28  |   | Waiver and Fourth  Amendment to Loan and Security Agreement dated as of February 28, 2006 by and  among Channell Commercial Corporation, Bank of America, N.A., BABC Global  Finance Inc., Bank of America, N.A. and the lenders party to the Loan and  Security Agreement dated as of September 25, 2002 (as amended) (Exhibit 10.1)(18)                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.29  |   | Loan and Security  Agreement dated as of December 1, 2005, by and among Channell Bushman Pty  Ltd, Bushmans Group Pty Ltd, Channell Pty Ltd, certain other subsidiaries of  the Company and National Australia Bank Ltd (Exhibit 10.30)(19)                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.30  |   | Loan and Security Agreement  dated April 26, 2006 and effective May 10, 2006, by and among Channell  Bushman Pty Ltd, Bushmans Group Pty Ltd, certain other subsidiaries of the  Company, and National Australia Bank Ltd (Exhibit 10.31)(19)                                                                                                                                                                                                                                                                                                                      |

 

28

----

 
|        |   |                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.31  |   | Lease dated July 13,  2006 between Channell Pty Ltd and Ing Management Ltd (Exhibit 10.32)(20)                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.32* |   | Employment Letter dated  August 31, 2006 between the Company and Patrick E. McCready (Exhibit 10.1)(21)                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.33  |   | Loan and Security  Agreement dated August 11, 2006 and effective August 25, 2006, by and among  Channell Bushman Pty Ltd, Bushmans Group Pty Ltd, certain other subsidiaries  of the Company, and National Australia Bank Ltd (Exhibit 10.1)(21)                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.34  |   | Loan and Security  Agreement dated November 8, 2006 and effective November 15, 2006, by and  among Channell Bushman Pty Ltd, Bushmans Group Pty Ltd, certain other  subsidiaries of the Company, and National Australia Bank Ltd (Exhibit 10.1)(23)                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.35  |   | Loan and Security  Agreement dated February 2, 2007 and effective February 7, 2007 by and among  Channell Bushman Pty Ltd, Bushmans Group Pty Ltd, certain other subsidiaries  of the Company, and National Australia Bank Ltd (Exhibit 10.1) (24)                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.36  |   | Waiver and Fifth  Amendment to Loan and Security Agreement dated as of February 12, 2007 by and  among Channell Commercial Corporation, Bank of America, N.A., BABC Global  Finance Inc., Bank of America, N.A. and the lenders party to the Loan and  Security Agreement dated as of September 25, 2002 (as amended) (Exhibit 10.1)(25) |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 14     |   | Channell Commercial  Corporation Code of Business Conduct and Ethics (Exhibit 14)(8)                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 18.1   |   | Letter dated March 27,  2006 from Grant Thornton LLP, regarding changes in Certifying Accountant  (Exhibit 16.1)(17)                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 18.2   |   | Letter dated March 30,  2007 from Deloitte & Touche LLP, regarding change in Accounting Principle(26)                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 21     |   | Subsidiaries of the  Company (Exhibit 21)(16)                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 23.1   |   | Consent of Independent  Registered Public Accounting Firm (26)                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 23.2   |   | Consent of Independent  Registered Public Accounting Firm (26)                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 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 (26)                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 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 (26)                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| 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 (26)                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                     |
| *      |   | Management contract or compensatory plan or  arrangement.                                                                                                                                                                                                                                                                                |

----

(1)             Incorporated byreference to the indicated exhibits filed in connection with the Company’sRegistration Statement on Form S-1 (File No. 333-03621).

(2)             Incorporated byreference to the indicated exhibits filed in connection with the Company’s Form8-K on May 18, 1998.

(3)             Incorporated byreference to the indicated exhibits filed in connection with the Company’s Form10-K on March 31, 1999.

(4)             Incorporated byreference to the indicated exhibits filed in connection with the Company’s Form10-K on April 2, 2001.

(5)             Incorporated byreference to the indicated exhibits filed in connection with the Company’s Form10-Q on August 12, 2002.

(6)             Incorporated byreference to the indicated exhibits filed in connection with the Company’s Form8-K on October 1, 2002.

(7)             Incorporated byreference to Appendix B filed in connection with the Company’s Definitive ProxyStatement on March 26, 2003.

(8)             Incorporated byreference to the indicated exhibits filed in connection with the Company’s Form10-K on March 5, 2004.

(9)             Incorporated byreference to Appendix B filed in connection with the Company’s Definitive ProxyStatement on April 16, 2004.

(10)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onAugust 6, 2004.

(11)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 10-Q onNovember 15, 2004.

(12)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onJune 15, 2005.

(13)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onJune 28, 2005.

29

----

(14)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onSeptember 9, 2005.

(15)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 10-Q onNovember 21, 2005.

(16)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 10-K/A onNovember 21, 2005.

(17)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onMarch 6, 2006.

(18)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onMarch 29, 2006.

(19           Incorporated byreference to the indicated exhibits filed in connection with the Company’s Form10-Q on May 15, 2006.

(20)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 10-Q onAugust 17, 2006.

(21)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onSeptember 8, 2006.

(22)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onSeptember 21, 2006.

(23)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onNovember 17, 2006.

(24)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onFebruary 8, 2007.

(25)       Incorporated by referenceto the indicated exhibits filed in connection with the Company’s Form 8-K onFebruary 15, 2007.

(26)       Filed herewith.

30

----

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this Form10-K Annual Report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|        |   | CHANNELL COMMERCIAL CORPORATION                              |
|--------|--------|--------------------------------------------------------------|
|   |   | a Delaware  corporation                                      |
|   |   |                                                         |
|   | By:    | /s/ William H. Channell, Sr.                                 |
|   |   | William H. Channell, Sr.  Chairman of the Board and Director |
|   |   |                                                         |
|   | Date:  | April 2, 2007                                                |
|        |        |                                                              |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this Form 10-K Annual Report has been signed by thefollowing persons on behalf of the registrant and in the capacities indicatedbelow as of April 2, 2007.
|                              | **Signature** | ** **                                         | ** ** | **Capacity in Which Signed** | ** ** | ** ** |
|------------------------------|---------------|----------------------------------------------------|------------|------------------------------|------------|------------|
|                         |          |                                               |
| /s/ William H. Channell, Sr. |          | Chairman of the Board and Director                 |
| William H. Channell, Sr.     |          |                                               |
|                         |          |                                               |
| /s/ William H. Channell, Jr. |          | President and Chief Executive Officer and Director |
| William H. Channell, Jr.     |          | (Principal Executive Officer)                      |
|                         |          |                                               |
| /s/ Jacqueline M. Channell   |          | Secretary and Director                             |
| Jacqueline M. Channell       |          |                                               |
|                         |          |                                               |
| /s/ Dana Brenner             |          | Director                                           |
| Dana Brenner                 |          |                                               |
|                         |          |                                               |
| /s/ Guy Marge                |          | Director                                           |
| Guy Marge                    |          |                                               |
|                         |          |                                               |
| /s/ Stephen Gill             |          | Director                                           |
| Stephen Gill                 |          |                                               |
|                         |          |                                               |
| /s/ Patrick E. McCready      |          | Chief Financial Officer and                        |
| Patrick E. McCready          |          | (Principal Financial Officer and                   |
|                         |          | Principal Accounting Officer)                      |

 

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofChannell Commercial Corporation

We have audited the accompanying consolidated balancesheet of Channell Commercial Corporation and subsidiaries (the “Company”) as ofDecember 31, 2006, and the related consolidated statements of operations andcomprehensive (loss) income, stockholders’ equity, and cash flows for the yearthen ended.  Our audit also included the financial statement schedule forthe year ended December 31, 2006 listed in the index at Item 15.  These financial statements and the financialstatement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements andthe financial statement schedule based on our audit.  The consolidatedfinancial statements of the Company for the years ended December 31, 2005 and2004 were audited by other auditors whose report, dated March 31, 2006,expressed an unqualified opinion on those statements.

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 2006 consolidated financial statements presentfairly, in all material respects, the financial position of Channell CommercialCorporation and subsidiaries as of December 31, 2006, and the results of theiroperations and their cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States of America.  Also,in our opinion, such financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly in all material respects the information set forth therein.

As discussed in Note B to the financial statements, the Company changedits method of accounting for share-based payment in conformity with Statementof Financial Accounting Standards No. 123(R), **Share-Based Payment,**effectiveJanuary 1, 2006.

*/s/  DELOITTE & TOUCHELLP*

San Diego, CaliforniaApril 2, 2007

F-1

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors andStockholders

ChannellCommercial Corporation

We have audited theconsolidated balance sheet of Channell Commercial Corporation (the “Company”)as of December 31, 2005, and the related consolidated statements of operationsand comprehensive income (loss), stockholders’ equity, and cash flows for eachof the two years in the period ended December 31, 2005.  These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  The Company is notrequired to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting.  Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal 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 auditsprovide a reasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Channell CommercialCorporation as of December 31, 2005, and the consolidated results of theiroperations and their consolidated cash flows for each of the two years in theperiod ended December 31, 2005, in conformity with accounting principlesgenerally accepted in the United States of America.

We have also auditedSchedule II of Channell Commercial Corporation for each of the two years in theperiod ended December 31, 2005.  In ouropinion, this schedule presents fairly, in all material respects, theinformation required to be set forth therein.
| /s/ Grant Thornton LLP  |   |
|-------------------------|--------|
|                    |
| Los Angeles, California |
| March 31, 2006          |

 

F-2

----

**CHANNELL COMMERCIAL CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

**December 31,**

**(amounts in thousands, except per share data)**

 
| ** **                                                                                                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **ASSETS**                                                                                                                                                 |       |     |       |     |       |
| Current assets                                                                                                                                             |       |     |       |     |       |
| Cash and cash  equivalents                                                                                                                                 |       | $        | 2,235      |     | $          | 3,148 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $220 at December 31,  2006 and $265 at December 31, 2005                                   |       | 11,673   |       | 8,448    |       |
| Inventories, net                                                                                                                                           |       | 13,018   |       | 11,411   |       |
| Prepaid expenses  and other current assets                                                                                                                 |       | 931      |       | 1,000    |       |
| Income taxes  receivable                                                                                                                                   |       | 881      |       | 67       |       |
| Deferred income  taxes, net                                                                                                                                |       | 719      |       | 948      |       |
| Total current  assets                                                                                                                                      |       | 29,457   |       | 25,022   |       |
|                                                                                                                                                       |       |     |       |     |       |
| Property and equipment,  net                                                                                                                               |       | 18,799   |       | 18,929   |       |
| Deferred income taxes,  net                                                                                                                                |       | 1,017    |       | —   |       |
| Goodwill                                                                                                                                                   |       | 9,848    |       | 13,947   |       |
| Intangible assets, net                                                                                                                                     |       | 2,097    |       | 2,132    |       |
| Other assets                                                                                                                                               |       | 660      |       | 676      |       |
|                                                                                                                                                       |       | $        | 61,878     |     | $          | 60,706 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                             |       |     |       |     |       |
|  Current liabilities                                                                                                                                  |       |     |       |     |       |
| Accounts payable                                                                                                                                           |       | $        | 10,902     |     | $          | 8,677 |   |
| Short-term debt  (including current maturities of long-term debt)                                                                                          |       | 13,723   |       | 7,459    |       |
| Current  maturities of capital lease obligations                                                                                                           |       | 138      |       | 87       |       |
| Accrued expenses                                                                                                                                           |       | 5,189    |       | 5,494    |       |
| Total current  liabilities                                                                                                                                 |       | 29,952   |       | 21,717   |       |
|                                                                                                                                                       |       |     |       |     |       |
|  Capital lease obligations, less current  maturities                                                                                                  |       | 384      |       | 78       |       |
|  Deferred credits                                                                                                                                     |       | 514      |       | 393      |       |
|  Deferred income taxes, net                                                                                                                           |       | —   |       | 77       |       |
|  Commitments and contingencies (Note L)                                                                                                               |       | —   |       | —   |       |
|  Minority interest                                                                                                                                    |       | 878      |       | 2,482    |       |
|                                                                                                                                                       |       |     |       |     |       |
|  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 — 9,787 in 2006  and 2005; outstanding - 9,543 shares in 2006 and 2005 |       | 98       |       | 98       |       |
| Additional  paid-in capital                                                                                                                                |       | 31,093   |       | 30,750   |       |
| Treasury stock —  244 shares in 2006 and 2005                                                                                                         |       | (1,871   | )          | (1,871   | )          |
| Retained  earnings (accumulated deficit)                                                                                                                   |       | (160     | )          | 6,669    |       |
| Accumulated  other comprehensive income -                                                                                                                  |       |     |       |     |       |
| Foreign currency  translation                                                                                                                              |       | 990      |       | 313      |       |
| Total  stockholders’ equity                                                                                                                           |       | 30,150   |       | 35,959   |       |
|                                                                                                                                                       |       | $        | 61,878     |     | $          | 60,706 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

F-3

----

**CHANNELL COMMERCIAL CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**AND COMPREHENSIVE (LOSS) INCOME**

**Year ended December 31,**

**(amounts in thousands, except per share data)**

** **
| ** **                                                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                                                              |       | $        | 109,138    |     | $          | 116,065  |       | $ | 102,200 |   |
| Cost of goods sold                                                                     |       | 76,055   |       | 81,060   |       | 72,151   |       |
| Gross Profit                                                                           |       | 33,083   |       | 35,005   |       | 30,049   |       |
|                                                                                   |       |     |       |     |       |     |       |
| Operating expenses                                                                     |       |     |       |     |       |     |       |
| Selling                                                                                |       | 21,993   |       | 22,407   |       | 16,345   |       |
| General and  administrative                                                            |       | 12,500   |       | 11,688   |       | 8,811    |       |
| Research and  development                                                              |       | 2,222    |       | 2,356    |       | 2,109    |       |
| Impairment of  goodwill                                                                |       | 4,829    |       | —   |       | —   |       |
| Restructuring  charge (recovery)                                                       |       | —   |       | —   |       | (690     | )          |
| Asset impairment  charge                                                               |       | —   |       | 97       |       | —   |       |
|                                                                                   |       | 41,544   |       | 36,548   |       | 26,575   |       |
|                                                                                   |       |     |       |     |       |     |       |
| (Loss) income  from operations                                                         |       | (8,461   | )          | (1,543   | )          | 3,474    |       |
| Interest income                                                                        |       | 86       |       | 70       |       | 129      |       |
| Interest expense                                                                       |       | (943     | )          | (565     | )          | (618     | )          |
| (Loss) income  before income tax (benefit) expense                                     |       | (9,318   | )          | (2,038   | )          | 2,985    |       |
|                                                                                   |       |     |       |     |       |     |       |
| Income tax (benefit)  expense                                                          |       | (777     | )          | 5,012    |       | (791     | )          |
| Net (loss)  income before minority interest                                            |       | (8,541   | )          | (7,050   | )          | 3,776    |       |
| Minority  interest in (loss) income of subsidiaries                                    |       | (1,712   | )          | (170     | )          | 167      |       |
| Net (loss)  income                                                                     |       | $        | (6,829     | )        | $          | (6,880   | )          | $ | 3,609 |   |
|                                                                                   |       |     |       |     |       |     |       |
| Net (loss)  income per share                                                           |       |     |       |     |       |     |       |
| Basic and  diluted                                                                     |       | $        | (0.72      | )        | $          | (0.73    | )          | $ | 0.39 |   |
|                                                                                   |       |     |       |     |       |     |       |
| Net (loss) income                                                                      |       | $        | (6,829     | )        | $          | (6,880   | )          | $ | 3,609 |   |
|                                                                                   |       |     |       |     |       |     |       |
| Other comprehensive  income (loss), net of tax Foreign currency translation adjustment |       | 677      |       | (726     | )          | 1,050    |       |
|                                                                                   |       |     |       |     |       |     |       |
| Comprehensive (loss) income                                                            |       | $        | (6,152     | )        | $          | (7,606   | )          | $ | 4,659 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

F-4

----

**CHANNELL COMMERCIAL CORPORATION**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**Years ended December 31, 2004,2005 and 2006**

**(amounts in thousands)**

 

 
| ** **                          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **         | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------------|------------|-------------|------------|--------------------|------------|--------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                          | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**     | ** ** | ** **   | ** ** | ** **        | ** ** | ** **             | ** ** | **other**              | ** ** | **Total**  | ** ** |
| ** **                          | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **Treasury stock** | ** ** | **Retained** | ** ** | **comprehensive** | ** ** | **stockholders’** | ** ** |
| ** **                          | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **capital**        | ** ** | **Shares**   | ** ** | **Amount**        | ** ** | **earnings**           | ** ** | **Income (loss)** | ** ** | **equity** | ** ** |
| Balance, January 1,  2004           |       | 9,372            |       | $           | 94         |               | $          | 28,664       |       | 244               |       | $                      | (1,871     | )                      | $          | 9,940      |       | $ | (11 | ) | $ | 36,816 |   |
|                                |       |             |       |        |       |               |       |         |       |              |       |                   |       |                   |       |       |       |
| Exercise of employee stock  Options |       | 61               |       | 1           |       | 294                |       | —       |       | —            |       | —                 |       | —                 |       | 295        |       |
| Shares issued for  acquisition      |       | 175              |       | 1           |       | 713                |       | —       |       | —            |       | —                 |       | —                 |       | 714        |       |
| Foreign currency  translation       |       | —           |       | —      |       | —             |       | —       |       | —            |       | —                 |       | 1,050                  |       | 1,050      |       |
| Net earnings for the  year          |       | —           |       | —      |       | —             |       | —       |       | —            |       | 3,609                  |       | —                 |       | 3,609      |       |
|                                |       |             |       |        |       |               |       |         |       |              |       |                   |       |                   |       |       |       |
| Balance, December 31,  2004         |       | 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 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

F-5

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**CHANNELL COMMERCIAL CORPORATION**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**Year ended December 31,**

**(amounts in thousands)**
| ** **                                                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash flows from  operating activities:                                                                            |       |     |       |     |       |     |       |
| Net (loss)  income                                                                                                |       | $        | (6,829     | )        | $          | (6,880   | )          | $ | 3,609 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities:                         |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                                    |       | 5,101    |       | 4,480    |       | 4,752    |       |
| Stock-based  compensation                                                                                         |       | 343      |       | —   |       | —   |       |
| Asset impairment  charge                                                                                          |       | —   |       | 97       |       | —   |       |
| Loss (gain) on  disposal of fixed assets                                                                          |       | 43       |       | (6       | )          | (22      | )          |
| Amortization of  deferred gain on sale leaseback                                                                  |       | (60      | )          | (60      | )          | (60      | )          |
| Impairment of  goodwill                                                                                           |       | 4,829    |       | —   |       | —   |       |
| Deferred income  taxes                                                                                            |       | (758     | )          | 4,924    |       | 109      |       |
| Provision for  doubtful accounts                                                                                  |       | (31      | )          | (44      | )          | 84       |       |
| Provision for  inventory obsolescence                                                                             |       | 131      |       | 473      |       | 415      |       |
| Minority  interest in (loss) income of subsidiaries                                                               |       | (1,712   | )          | (170     | )          | 167      |       |
| Changes in  assets and liabilities (net of effects of purchase of Bushman Tanks in 2004):                         |       |     |       |     |       |     |       |
| Accounts  receivable                                                                                              |       | (2,562   | )          | 5,190    |       | (1,321   | )          |
| Inventories                                                                                                       |       | (1,277   | )          | 1,885    |       | (2,809   | )          |
| Prepaid expenses  and other current assets                                                                        |       | 93       |       | (155     | )          | 248      |       |
| Income taxes  receivable                                                                                          |       | (816     | )          | 1,292    |       | (1,238   | )          |
| Other assets                                                                                                      |       | (60      | )          | (337     | )          | (301     | )          |
| Accounts payable                                                                                                  |       | 1,602    |       | (6,930   | )          | 7,178    |       |
| Restructuring  liability                                                                                          |       | —   |       | (141     | )          | (2,810   | )          |
| Accrued expenses                                                                                                  |       | (324     | )          | (1,946   | )          | 1,394    |       |
| Net cash  provided by (used in) operating activities                                                              |       | (2,287   | )          | 1,672    |       | 9,395    |       |
|                                                                                                              |       |     |       |     |       |     |       |
| Cash flows from  investing activities:                                                                            |       |     |       |     |       |     |       |
| Purchase of  property and equipment                                                                               |       | (3,871   | )          | (4,339   | )          | (3,281   | )          |
| Proceeds from  sale of property and equipment                                                                     |       | 106      |       | 24       |       | 23       |       |
| Business  acquisitions, net of cash acquired                                                                      |       | —   |       | —   |       | (16,767  | )          |
| Net cash used in  investing activities                                                                            |       | (3,765   | )          | (4,315   | )          | (20,025  | )          |
| Cash flows from  financing activities:                                                                            |       |     |       |     |       |     |       |
| Repayment of  debt                                                                                                |       | (1,972   | )          | (2,395   | )          | (2,669   | )          |
| Borrowings from  credit facilities                                                                                |       | 7,710    |       | 1,550    |       |     |       |
| Proceeds from  issuance of long-term debt                                                                         |       | —   |       | —   |       | 7,233    |       |
| Repayment of  obligations under capital lease, net                                                                |       | (174     | )          | (35      | )          | 10       |       |
| Proceeds from  minority investor                                                                                  |       | —   |       | —   |       | 2,514    |       |
| Exercise of  employee stock options                                                                               |       | —   |       | 1,081    |       | 295      |       |
| Net cash  provided by financing activities                                                                        |       | 5,564    |       | 201      |       | 7,383    |       |
| Effect of exchange  rates on cash                                                                                 |       | (425     | )          | 137      |       | (827     | )          |
| Decrease in cash  and cash equivalents                                                                            |       | (913     | )          | (2,305   | )          | (4,074   | )          |
| Cash and cash  equivalents, beginning of year                                                                     |       | 3,148    |       | 5,453    |       | 9,527    |       |
| Cash and cash  equivalents, end of year                                                                           |       | $        | 2,235      |     | $          | 3,148    |       | $ | 5,453 |   |
| Cash paid during the  year for:                                                                                   |       |     |       |     |       |     |       |
| Interest                                                                                                          |       | $        | 1,064      |     | $          | 499      |       | $ | 364 |   |
| Income taxes                                                                                                      |       | $        | 604        |     | $          | 148      |       | $ | 809 |   |
| Non-cash investing  acitivities:                                                                                  |       |     |       |     |       |     |       |
| Purchases of  property and equipment which are included in obligations under capital leases  and accounts payable |       | $        | 554        |     | $          | —   |       | $ | — |   |
| Issuance of common stock in business combination                                                                  |       | $        | —     |     | $          | —   |       | $ | 714 |   |

The accompanyingnotes are an integral part of these financial statements.

 

F-6

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**CHANNEL COMERCIALCORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS*(amounts in thousands, except per share data)***

**NOTE A—DESCRIPTION OF BUSINESS**

Channell Commercial Corporation and its subsidiaries(the “Company”) is a designer and manufacturer of telecommunications equipmentsupplied to broadband and telephone network providers worldwide.  Major product lines include a complete lineof thermoplastic and metal fabricated enclosures, advanced copper terminationand connectorization products, fiber optic cable management systems for fiberto the premises (FTTP) networks, and heat shrink products.  The Company’s enclosure products house,protect and provide access to advanced telecommunications hardware, includingboth radio frequency (“RF”) electronics and photonics, and transmission media,including coaxial cable, copper wire and optical fibers, used in the deliveryof voice, video and data services.  Theenclosure products are deployed within the access portion of the local signaldelivery network, commonly known as the “outside plant,” “local loop” or “lastmile,” that connects the network provider’s signal origination point or localoffice with its residential and business customers.  The Company’s connectivity products providecritical network connection points between cables or network transmissiondevices.

The Company also designs, manufactures and marketspolyethylene water tanks for rural and residential markets in Australia.  The Company’s primary product line ofrotational molded tanks is used in the agricultural sector where watershortages require storage of rain and ground water.  The Company also markets a range of waterstorage tanks for use in residential and rural-residential markets.

**NOTE B—SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

*Estimates*—In preparing financialstatements in conformity with generally accepted accounting principles,management is required to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements, and thereported amounts of revenues and expenses during the reporting period.  Significant estimates include accountsreceivables allowances, the inventory valuation reserve, valuation of goodwilland long-lived assets and the deferred tax asset valuation allowance.  Actual results could differ from thoseestimates and the differences could be material.

*Basis of Consolidation*—Theconsolidated financial statements include the accounts of Channell CommercialCorporation and its subsidiaries.  Allintercompany transactions and balances have been eliminated.  Minority interest represents a 25% equityinterest in Bushman Tanks acquired by ANZ Private Equity (see Note P).

*Foreign Currency Translation*—Assetsand liabilities of foreign operations are translated into U.S. dollars at yearend exchange rates.  Income and expensesare translated into U.S. dollars at average rates of exchange prevailing duringthe period.  Adjustments resulting fromtranslating foreign functional currency financial statements into U.S. dollarsare included in other comprehensive income. Foreign currency transaction gains and losses are included in generaland administrative expenses. Transactions gains and losses were not significant in 2006, 2005 and2004.

*Cash and Cash Equivalents*—Cashand cash equivalents include cash on hand, cash in banks and short-terminvestments with original maturities of 90 days or less.

*Inventories*—Inventories arestated 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.

*Property and Equipment*—Propertyand equipment are stated at cost. Depreciation is computed using the straight-linemethod over the estimated useful lives of the assets.  Capital lease assets are amortized over thelease term.  Expenditures for allmaintenance and repairs are charged against income. Additions, major renewalsand replacements that increase the useful lives of assets are capitalized.Amortization of leasehold improvements is computed using the straight-linemethod over the shorter of the lease term or the estimated useful life of theleasehold improvements.

*Impairment of Long-Lived and Intangible Assets*—Whenevents or circumstances indicate the carrying value of a long-lived asset maybe impaired, the Company estimates the future undiscounted cash flows to bederived from the asset to assess 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.  Noimpairment was recorded in the

F-7

----

years ended December 31, 2006 and 2004.

*Income Taxes*—The Company accountsfor income taxes in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 109, *Accounting for Income Taxes*,which requires that the Company recognize deferred tax liabilities and assetsbased on the differences between the financial statement carrying amounts andthe tax bases of assets and liabilities, using enacted tax rates in effect inthe years the differences are expected to reverse.  Deferred income tax benefit (expense) resultsfrom the change in deferred tax assets or deferred tax liabilities.  A valuation allowance is recorded when it ismore likely than not that some or all deferred tax assets will not be realized.

*Impairment of Goodwill and OtherIntangible Assets*—The Company accounts for goodwill and otherintangible assets in accordance with SFAS No. 142, *Goodwill andOther Intangible Assets*. SFAS No. 142 requires that goodwilland identifiable intangible assets with indefinite useful lives be tested forimpairment 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. Recoverability of goodwill is measured at the reporting unit levelbased on a two-step approach. First, the carrying amount of the reporting unitis compared to the fair value as estimated by the future net discounted cashflows expected to be generated by the reporting unit. To the extent that thecarrying value of the reporting unit exceeds the fair value of the reportingunit, a second step is performed, wherein the reporting unit’s assets andliabilities are valued. The implied fair value of goodwill is calculated as thefair value of the reporting unit in excess of the fair value of allnon-goodwill assets and liabilities allocated to the reporting unit. To theextent the reporting unit’s carrying value of goodwill exceeds its implied fairvalue, an impairment exists and must be recognized. This process requires theuse of discounted cash flow models that utilize estimates of future revenue andexpenses 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.  There is inherent uncertaintyin these estimates, and changes in these factors over time could result in animpairment charge.

The Company tests the value of goodwill for impairment annually atDecember 31 (prior to December 31, 2006 goodwill was tested for impairment atJune 30 for the Bushman Tanks reporting unit) or whenever events or changes incircumstance indicate that the carrying amount of such assets may not berecoverable.  The test involvessignificant judgment in estimating projections of fair value generated throughfuture performance of the operating segment. In calculating the fair value, the Company relies on factors such asoperating results, business plans, economic projections, and anticipated cashflows used in discounting the cash flows. Inherent uncertainties exist in determining and applying such factors.

During the fourth quarter ended December 31, 2006, the Company changedthe date of its annual goodwill impairment testing from June 30 to December 31for the Bushman Tanks reporting unit in order to better align with the Company’snormal business 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, 2006, 2005, and 2004 and June 30, 2005 indicatedthat no impairment charges were required, while the June 30, 2006 test resultedin an impairment of $4,829.  The Companydetermined that the change in accounting principle related to the annualtesting date is preferable under the circumstances and does not result inadjustments to the financial statements when applied retrospectively.

On August 2, 2004 the Company, through a majority-owned subsidiary,acquired a controlling interest in Bushman Tanks, a manufacturer anddistributor of rotational molded plastic (polyethylene) water storage tanks(see Note P).  Included in the Share andAsset Purchase Agreement, the sellers of Bushman Tanks agreed to a “non-compete”clause whereby the sellers of Bushman Tanks would not directly or indirectly carry on or be engaged or involved in any trade,business or undertaking that is in competition with the Bushman Tanksbusiness.  The Company performed anevaluation of the non-compete agreement and determined the fair value to be$1,600.  The non-compete agreement isrecorded in the reporting unit of Bushman Tanks, which is part of theInternational segment, as a separately identifiable intangible asset and isbeing amortized over the ten-year contractual term on a straight-linebasis.  The amount of goodwill recordedin the Bushman Tanks acquisition is not deductible for tax purposes.

During the quarter ended June 30, 2006, the Company reclassified anonamortizing indefinite-life trademark intangible asset from goodwill tointangible assets, including the December 31, 2005 amount for comparativepurposes, which resulted in an increase in intangible assets of $655, adecrease in goodwill of $459, and an

F-8

----

increase in deferred tax liabilities 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 changes in the carrying amount of goodwill, the non-competeagreement and the trademark intangible for the years ended December 31, 2004,2005 and 2006 are summarized as follows:
| ** **                                             | ** ** | ** **   | ** ** | **Non-Compete** | ** ** | **Trademark**  | ** ** |
|--------------------------------------------------------|------------|--------------|------------|-----------------|------------|----------------|------------|
| ** **                                             | ** ** | **Goodwill** | ** ** | **Agreement**   | ** ** | **Intangible** | ** ** |
|                                                   |       |         |       |            |       |           |       |
| Balance at  January 1, 2004                            |       | $            | 613        |            | $          | —         |       | $ | — |   |
| Additions due to  business acquisition                 |       | 12,007       |       | —          |       | 621            |       |
| Non-compete  agreement related to business acquisition |       | —       |       | 1,600           |       | —         |       |
| Amortization of  non-compete agreement                 |       | —       |       | (45             | )          | —         |       |
| Effect of  foreign currency translation                |       | 1,612        |       | 208             |       | 81             |       |
|                                                   |       |         |       |            |       |           |       |
| Balance at  December 31, 2004                          |       | 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 |   |

 

As of December 31, 2006, the Company has recorded goodwill of $677 inits Canadian reporting unit, which is part of the Americas segment and $9,171of goodwill in its Bushman Tanks reporting unit, which is part of theInternational 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 theexpectations of management, or other negative events or circumstances, couldresult in additional impairment of goodwill in future reporting periods. Therewas no impairment to the carrying value of goodwill in 2005 or 2004.

The estimated amortization expense of the intangible non-competeagreement based on the current balance and the December 31, 2006 foreigncurrency exchange rates, is $183 per year for the next five fiscal years, and$472 thereafter.

*Restructuring Costs*— Prior to2004 the Company recorded various restructuring charges related to itsinternational operations.  A relatedcredit to restructuring of $690 was recorded in 2004 primarily due to theassignment of the lease of a vacated facility in the United Kingdom at a costless than previously estimated.  Norestructuring charges were incurred in 2006 and 2005.

F-9

----

*Revenue Recognition and Accounts ReceivableReserves*—Revenues are recognized when title passes and therisks and rewards of ownership have passed to the customer, based on the termsof sale.  Title passes generally uponshipment.  Provisions for estimated salesreturns are based on the Company’s historical sales returns experience.  Provisions for uncollectible accounts aremade based upon specific percentages derived from historical experience of thepast due outstanding accounts receivable aging categories or upon specificcircumstances.

The Company reclassified $131 of the allowance fordoubtful accounts as of December 31, 2005, resulting in an increase to currentaccounts receivable and a decrease to other assets.  This reclassification was done in order toproperly match the long-term portion of the allowance for doubtful accountswith its related long-term receivable included in other assets.

*Shipping and Handling Costs*—Shippingand handling costs billed to customers are included in sales and the relatedcosts are included in selling expenses. Shipping and handling costs are chargedto expense as incurred. Total shipping costs of $10,638, $10,543 and $6,070were included in selling expenses for 2006, 2005 and 2004, respectively.

In 2006, the Company reclassified shipping costs charged to customersin its Americas segment that had previously been netted with revenues ratherthan reported at gross in accordance with the Company’s policy. Suchreclassified shipping costs charged to customers totaled $2,535 and $2,066 forthe years ended December 31, 2005 and 2004, respectively, resulting in anincrease in net sales, gross profit and selling expenses in the accompanyingconsolidated statements of operations and comprehensive income (loss). Thesereclassifications had no impact on the Company’s net income for any period. TheCompany’s net sales, gross profit and selling expenses, and any ratiocalculated therefrom, for the fiscal years ended December 31, 2005 and 2004,reflect the reclassifications described above.

*Sales Tax*—Revenues are disclosednet of sales tax collected from customers and remitted to governmentalentities.

*Income (Loss) Per Share*—Basicincome (loss) per share excludes dilution and is computed by dividing netincome (loss) available to common stockholders by the weighted average numberof common shares outstanding for the period. Diluted income per share reflects the potential dilution that couldoccur if options to acquire common stock were exercised.

The following is a reconciliationof the number of shares (denominator) used in the basic and diluted income(loss) per share computations:

 
| ** **                        | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Per**    | ** ** | ** ** | ** ** | **Per** | ** ** | ** ** | ** ** | **Per** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Share**  | ** ** | ** ** | ** ** | **Share** | ** ** | ** ** | ** ** | **Share** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Basic (loss)  income per share    |       | 9,543      |       | $          | (0.72      | )          | 9,448      |   | $ | (0.73 | ) | 9,203 |   | $ | 0.39 |   |
|                              |       |       |       |       |       |       |       |   |   |   |   |   |   |
| Effect of  dilutive stock options |       | —     |       | —     |       | —     |       | — |   | 20 |   | — |   |
|                              |       |       |       |       |       |       |       |   |   |   |   |   |   |
| Diluted (loss) income  per share  |       | 9,543      |       | $          | (0.72      | )          | 9,448      |   | $ | (0.73 | ) | 9,223 |   | $ | 0.39 |   |

 

F-10

----

The following options topurchase shares of common stock were not included in the computation of dilutedincome (loss) per share due to their antidilutive effect:
| ** **                                  | ** ** | **2006**         | ** **  | **2005**         | ** ** | **2004**         | ** ** |
|---------------------------------------------|------------|------------------|-------------|------------------|------------|------------------|------------|
|                                        |       |             |        |             |       |             |       |
| Options to  purchase shares of common stock |       | 1,751            |        | 1,934            |       | 1,494            |       |
|                                        |       |             |        |             |       |             |       |
| Exercise prices                             |       | $                | 2.83 — |             | $          | 3.25 —      |       | $ | 4.75 — |   |
|                                        |       | $                | 13.75       |             | $          | 13.75            |       | $ | 13.75 |   |
|                                        |       |             |        |             |       |             |       |
| Expiration dates                            |       | July 2010 — |        | July 2006 — |       | July 2006 — |       |
|                                        |       | October 2016     |        | August 2015      |       | May 2011         |       |

 

*Fair Value of Financial Instruments*—Thecarrying amount of cash, accounts receivable, accounts payable, accruedexpenses and short-term borrowings approximates fair value because of the shortmaturity of these financial instruments. Long-term obligations are carried at amounts that approximate fairvalue.

*Change in Accounting for Stock-Based Compensation*—Effective January 1, 2006 the Company adopted SFAS No. 123R, *Share-Based Payment*, which requires that compensationexpense be recognized over the requisite service period based on the fair valueof the award, at the date of grant.  TheCompany is utilizing the “modified prospective” method as described in SFAS No.123R.  In the “modified prospective”method, compensation cost is recognized for all share-based payments grantedafter the effective date and for all unvested awards granted prior to theeffective date.  In accordance with SFASNo. 123R, prior period amounts were not restated.  SFAS No. 123R also requires cash retained asa result of excess tax benefits associated with these share-based payments tobe classified as financing activities in the Consolidated Statements of CashFlows, rather than as operating cash flows as required under previousaccounting principles.  The Companyrecorded no excess tax benefits for the year ended December 31, 2006.

Share-based compensation expense recognized during aperiod is based on the value of the portion of share-based payment awards thatis ultimately expected to vest during the period.  Share-based compensation expense recognizedin the Company’s consolidated statements of operations for the year endedDecember 31, 2006 included compensation expense for share-based payment awardsgranted prior to, but not yet vested as of, December 31, 2005 based on thegrant date fair value estimated in accordance with the pro forma provisions of SFASNo. 123,  *Accountingfor Stock Based Compensation,* adjusted for estimated forfeitures,and share-based payment awards granted subsequent to December 31, 2005 based onthe grant date fair value estimated in accordance with SFAS No. 123R.  For share awards granted in 2006, expensesare amortized under the straight-line attribution method over the requisiteservice period.  For all unvested shareawards granted prior to 2006, expenses are amortized under the straight-linemethod over the remaining vesting period of the options.

The adoption of SFAS No.123R resulted in incremental stock-based compensation expense of $343 or $(.04)per share for the year ended December 31, 2006.

Prior to the adoption of SFAS No. 123R, the stock-based compensationplans were accounted for using the intrinsic value method under APB Opinion No.25, *Accounting for Stock Issued to Employees*,and related interpretations.  Pro formainformation regarding the impact of total stock-based compensation on netincome and income per share for prior periods is required by SFAS No. 123R.

F-11

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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 and2004, is illustrated in the following table:

** **
| ** **                                                                                        | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                                        | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|                                                                                              |       |                            |       |                            |       |
| Reported net  (loss) income                                                                       |       | $                               | (6,880     | )                               | $          | 3,609 |   |
| 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                            | )          | (449                            | )          |
| Pro forma net  (loss) income                                                                      |       | $                               | (7,353     | )                               | $          | 3,160 |   |
|                                                                                              |       |                            |       |                            |       |
| Reported basic  and diluted net (loss) income per share                                           |       | $                               | (0.73      | )                               | $          | 0.39 |   |
| Add stock-based  compensation expense reported in net (loss) income                               |       | —                          |       | —                          |       |
| Less total  stock-based compensation expense, determined under the fair value method              |       | (0.05                           | )          | (0.05                           | )          |
| Pro forma basic and  diluted net (loss) income per share                                          |       | $                               | (0.78      | )                               | $          | 0.34 |   |

 

*Recent Accounting Pronouncements*—InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued SFASNo. 157, *Fair Value Measurements*, which definesfair value, establishes a framework for measuring fair value in GAAP andexpands disclosures about fair value measurements.  This Statement will be effective forfinancial statements issued for fiscal years beginning after November 15, 2007,and interim periods within those fiscal years. The Company is currently evaluating the requirements of this newstandard and has not concluded its analysis on the impact to the Company’sconsolidated financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation (“FIN”)No. 48, *Accounting for Uncertainty in Income Taxes*,which becomes effective for fiscal years beginning after December 15,2006.  FIN No. 48  prescribes a recognition threshold andmeasurement process for recording in the financial statements uncertain taxpositions taken or expected to be taken in a tax return.  Additionally, FIN No. 48 provides guidance onderecognition, classification, accounting in interim periods and disclosurerequirements for uncertain tax positions. Management of the Company has not completed its assessment of theeffects of FIN No. 48 on the consolidated financial statements.

In September 2006,the FASB issued SFAS No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans—an amendment of FASBStatements No. 87, 88, 106, and 132(R)*, which requires anemployer to recognize the overfunded or underfunded status of a defined benefitplan as an asset or liability in its consolidated balance sheet. Under SFASNo. 158, actuarial gains and losses and prior service costs or creditsthat have not yet been recognized through earnings as net periodic benefit costwill be recognized in other comprehensive income, net of tax, until they areamortized as a component of net periodic benefit cost. SFAS No. 158 iseffective as of the end of the fiscal year ending after December 15, 2006and shall not be applied retrospectively. The Company does not believe theadoption of SFAS No. 158 will have a material effect on the Company’sconsolidated financial position, results of operations or cash flows.

In February 2007, theFASB issued SFAS No. 159,*The Fair ValueOption for Financial Assets and Financial Liabilities—including an amendment ofSFAS No. 115,* which allows measurement at fair value of eligiblefinancial assets and liabilities that are not otherwise measured at fair value.If the fair value option for an eligible item is elected, unrealized gains andlosses for that item shall be reported in current earnings at each subsequentreporting date. SFAS No. 159 also establishes presentation and disclosurerequirements designed to draw comparison between the different measurementattributes the company elects for similar types of assets and liabilities. Thisstatement is effective for fiscal years beginning after November 15, 2007. TheCompany is in the process of evaluating the application of the fair valueoption and its effect on the Company’s results of operations or financialcondition.

*Researchand Development Costs*—The Company follows the policy ofexpensing research and developments costs in the periods incurred.  Expenditures for product research anddevelopment activities were $2,222, $2,356, and $2,109, in 2006, 2005 and 2004,respectively.  In 2006, the Company reclassifiedlegal costs related to patents in its Americas segment that had previously beenincluded with research and development expenses.  Such reclassified legal costs totaled $314and $227 for the years ended December 31, 2005 and 2004, respectively,resulting in an increase in general and administrative expenses, and a decreasein research and development expenses, in the accompanying consolidatedstatements of operations and

F-12

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comprehensiveincome (loss).  These reclassificationshad no impact on the Company’s net income for any period.

*AdvertisingCosts*—The Company follows the policy of expensing advertisingcosts in the periods incurred. Advertising expenses were $516, $696, and $360, in 2006, 2005 and 2004,respectively.

*Warranty*—Warranty expense is estimated at the time of the sale based on historicalwarranty costs and analysis of defects that have occurred.

**NOTE C—INVENTORIES**

Inventoriesare summarized as follows:

|                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Raw materials                     |       | $        | 6,043      |     | $          | 5,567 |   |
| Work-in-process                   |       | 3,318    |       | 2,642    |       |
| Finished goods                    |       | 4,891    |       | 4,926    |       |
|                              |       | 14,252   |       | 13,135   |       |
|                              |       |     |       |     |       |
| Less inventory  valuation reserve |       | (1,234   | )          | (1,724   | )          |
|                              |       | $        | 13,018     |     | $          | 11,411 |   |

 

**NOTE D—PROPERTY AND EQUIPMENT**

Property and equipmentare summarized as follows:

|                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Estimated**         | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2006**   | ** ** | **2005**   | ** ** | **useful lives** | ** ** |
| Machinery and  equipment                        |       | $          | 68,221     |       | $          | 63,915                |       | 3-10 years |   |
| Office furniture  and equipment                 |       | 3,749      |       | 3,491      |       | 3 -7 years            |       |
| Leasehold  improvements                         |       | 3,612      |       | 3,280      |       | 7-11 years            |       |
|                                            |       | 75,582     |       | 70,686     |       |                  |       |
| Less accumulated  depreciation and amortization |       | (56,783    | )          | (51,757    | )          |                  |       |
|                                            |       | $          | 18,799     |       | $          | 18,929                |       |   |   |

 

Included in machinery and equipment is $598 and $222of equipment under capital lease at December 31, 2006 and 2005,respectively.  Accumulated amortizationof assets under capital lease totaled $147 and $58 at December 31, 2006 and2005, respectively.

**NOTE E—ACCRUED EXPENSES**

Accruedexpenses consist of the following:

|                               | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Accrued warranty  expenses    |       | $        | 1,144      |     | $          | 1,019 |   |
| Accrued workers  compensation |       | 938      |       | 893      |       |
| Accrued vacation              |       | 858      |       | 926      |       |
| Other                         |       | 2,249    |       | 2,656    |       |
|                          |       | $        | 5,189      |     | $          | 5,494 |   |

 

F-13

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The Company provides awarranty for the replacement and repair of a defective product. Historically, the Company has not experienced significant warranty costs orreturns.  The Company acquired BushmanTanks (see Note P) 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 warranty periodwas 25 years.  Effective November 1,2006, all new tanks ordered have a warranty period of 10 years.

Warranty expense isestimated by management at the time of the sale based on historical warrantycosts and analysis of defects that have occurred in field installations.  The change in the Company’s warrantyliability for the years ended December 31, 2006, 2005 and 2004 is summarized asfollows:

| Balance, January 1, 2004                                       |   | $      | 50     |   |
|----------------------------------------------------------------|--------|--------|--------|--------|
| Expense for new  warranties                                    |   | 192    |   |
| Product warranty  accrual assumed in Bushman Tanks acquisition |   | 1,092  |   |
| Warranty claims                                                |   | (169   | )      |
| Balance, December 31,  2004                                    |   | 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  |   |

 

F-14

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**NOTE F—DEBT**

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Channell  Commercial Corporation, together with Channell Commercial Canada (“Channell  Canada”), Channell Limited (“CL”) and Channell Europe Limited (“CEL”), which  are subsidiaries of Channell Commercial Corporation, entered into a Loan and  Security Agreement with an asset-based lender in the United States in  September 2002. The Loan and Security Agreement contains a three-year term  loan (now extended through June 2007) and is repayable in equal quarterly  payments of $236 based on a five-year amortization schedule with a balloon  payment of $471 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 rates under the term loan were 9.25% and 7.25% at December 31,  2006 and 2005, respectively. The loans under the Loan and Security Agreement  are secured by all the assets of the borrowers. |       | $        | 942        |     | $          | 1,885 |   |
| Channell  Commercial Corporation, Channell Canada, CL and CEL entered into a Loan and  Security Agreement with an asset-based lender in the United States in  September 2002. The Loan and Security Agreement contains a revolving credit  facility that expires June 30, 2007. 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 9.25% and 7.25% at December  31, 2006 and 2005, respectively. The loans under the Loan and Security  Agreement are secured by all the assets of the borrowers.                                                                                                                                                                                                                                                                                                                                           |       | 5,374    |       | -        |       |
| Channell Bushman  Pty Ltd and controlled entities, which are subsidiaries of the Channell  Commercial Corporation, entered into a five-year Loan and Security Agreement  with a commercial bank in Australia in August 2004, which contains a term  loan. The interest rate under the Loan and Security Agreement at December 31,  2006 was 6.74%. The term loan under this Agreement requires payments of $316  per quarter through July 31, 2009. Channell Bushman Pty, Ltd was not in  compliance with the loan covenants at December 31, 2006. The loans under the  Loan and Security Agreement are secured by all the assets of Channell Bushman  Pty Ltd and controlled entities.                                                                                                                                                                                                                                                                          |       | 3,629    |       | 4,077    |       |
| Channell Bushman  Pty Ltd and controlled entities, entered into a five-year Loan and Security  Agreement with a commercial bank in Australia in August 2004, which contains  a revolving line of credit, an “earn out” facility and a capital expenditure  facility. The interest rates under the Loan and Security Agreement at  December 31, 2006 for the revolving line of credit, the “earn out” facility  and the capital expenditure facility were 6.65%, 6.74%, and 6.85%,  respectively. The loans under the Loan and Security Agreement are secured by  all the assets of Channell Bushman Pty Ltd and controlled entities.                                                                                                                                                                                                                                                                                                         |       | 3,745    |       | 1,497    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |     |       |     |       |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 33       |       | -        |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 13,723   |       | 7,459    |       |
| Less current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 13,723   |       | 7,459    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |     |       |     |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | $        | 0          |     | $          | 0 |   |

 

Channell Commercial Corporation, Channell Canada, CLand CEL are parties to a Loan and Security Agreement with an asset-based lenderin the United States.  This Agreementcontains a term loan and a revolving credit facility.  The maximum amount available under therevolving credit facility is based on the level of certain qualifyingassets.  The revolver under thisAgreement has a $2,000 sub-limit for letters of credit.  As of December 31, 2006, outstanding lettersof credit totaled $1,186.

F-15

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The Agreement contains various financial and operatingcovenants that impose limitations on the borrowers’ ability, among otherthings, to incur additional indebtedness, merge or consolidate, sell assetsexcept in the ordinary course of business, make certain investments, enter intoleases and pay dividends.  The Agreementrequires Channell Commercial Corporation to maintain a lockbox on the revolvingcredit facility.  The Agreement alsocontains a subjective acceleration clause if there exists an event of defaultunder the Agreement, which allows the asset-based lender to terminate thefacility and require that any outstanding obligation to be repaid.  As of December 31, 2006, the borrowers werein default for failure: to maintain a minimum aggregate availability of $1,500under the revolver (the aggregate availability was $851); to have prepaid thedomestic revolving loans in the amount of the excess of the domestic revolvingcredit exposure over the domestic borrowing base; and to have delivered theprojections of Channell Commercial Corporation and its subsidiaries for fiscalyear 2007.  In February 2007, theborrowers received a waiver from the lender for these defaults.

On February 12, 2007, the Loan and Security Agreementwas amended, among other things: (i) to extend the term of the loans throughJune 30, 2007; (ii) to temporarily reduce the required aggregate availabilityunder the revolving credit facility from $1,500 to $500 through and includingApril 30, 2007; (iii) to temporarily reduce the reserve against borrowingavailability to $300 until April 20, 2007; (iv) to aggregate the domesticborrowing base, the United Kingdom borrowing base and the Canadian borrowingbase for purposes of determining the borrowing availability for domestic loansunder the revolving credit facility; and (v) increase the maximum amount of theUnited Kingdom borrowing base from $400 to $600.  The amendment also provided a waiver of thedefaults described in the preceding paragraph. The aggregate availability under the revolving credit facility was$2,897 at February 28, 2007.

Channell Bushman Pty Ltd and controlled entities,collectively known as Bushmans Group, subsidiaries of Channell CommercialCorporation, entered into a five-year Loan and Security Agreement with acommercial bank in Australia in August 2004. Channell Bushman Group has fromtime to time entered into new Loan and Security Agreements with the bank, whichhave amended and superseded the prior Loan and Security Agreements.  As of December 31, 2006, the facilities underthe then-current Loan and Security Agreement included the following: a termloan that expires in July 2009; a revolving credit facility with maximumborrowings of AUD $3,200 that expires in January 2007; a facility to fund “earnout” payments to the sellers of Bushman Tanks that expires in July 2008; acapital expenditure facility that expires in July 2008; and a master assetfinance agreement facility that expires in January 2007.   The currently effective Loan and SecurityAgreement includes the following facilities: a term loan that expires in July2009; a revolving credit facility with maximum borrowings of AUD$3,200 thatexpires in April 2007; a facility to fund “earn out” payments to the sellers ofBushman Tanks that expires in July 2008; a capital expenditure facility thatexpires in July 2008; and a master asset finance agreement facility thatexpires in April 2007.

The Agreement contains various financial and operatingcovenants that impose limitations on Channell Bushman Group’s ability, amongother things, to merge or consolidate, sell assets except in the ordinarycourse of business, and pay dividends.  In addition, Channell BushmanGroup is required to comply with certain financial covenants relating to sales,gross profit and operating profit, and the bank, at its discretion, mayterminate the Agreement if such covenants are not met.  The Agreement contractually obligatesChannell Bushman Group to repay the revolving credit facility as ChannellBushman Group receives payments from its customers.  The Agreement also provides that the bankwill seek additional support from Channell Commercial Corporation if there isfurther deterioration and contains a subjective acceleration clause shouldChannell Bushman Group come into a default, which allows the bank to terminatethe facility and require any outstanding obligations to be repaid.  The balance outstanding under the revolvingline of credit, “earn out” facility, and capital expenditure facility atDecember 31, 2006 was $3,745.  As ofDecember 31, 2006, Channell Bushman Group was not in compliance with thevarious financial covenants.  As ChannellBushman Group has not received a formal waiver for its breach of theaforementioned bank covenants, the Company has reclassified $3,878 of debt asshort-term in the accompanying 2006 balance sheet.

The Company is engaged in ongoing discussions with itsprimary lenders with respect to the facilities described above that mature in2007.  Based on these discussions, theCompany expects that it will be able to amend its existing agreements withthose lenders, or enter into new agreements with those lenders, providing foran extension of the maturity of those loan facilities beyond current maturitiesor providing for new loan facilities to extend beyond current maturities. Inthe event the Company is unable to enter new or amended agreements with itsprimary lenders, it believes that it can obtain adequate funding from othersources.

F-16

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## **NOTEG—CAPITAL LEASE OBLIGATIONS**

The Company leasescertain machinery and equipment under various agreements which are classifiedas capital leases.  The leases expire onvarious dates through December 2010. Future minimum payments, by year, are as follows:

| Year                               | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
|                               |       |       |       |
| 2007                               |       | $          | 171        |   |
| 2008                               |       | 256        |       |
| 2009                               |       | 136        |       |
| 2010                               |       | 2          |       |
|                               |       | 565        |       |
|                               |       |       |       |
| Less amount  representing interest | 43         |       |
|                               |       | 522        |       |
| Less current maturities            | 138        |       |
|                               |       | $          | 384        |   |

 

**NOTE H—INCOME TAXES**

The components of incometax expense (benefit) are as follows:
| ** **                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current                             |       |     |       |     |       |     |       |
| Federal                             |       | $        | 78         |     | $          | (119     | )          | $ | (1,225 | ) |
| State                               |       | 24       |       | 20       |       | 1        |       |
| Foreign                             |       | (104     | )          | 187      |       | 324      |       |
|                                |       | (2       | )          | 88       |       | (900     | )          |
| Deferred                            |       |     |       |     |       |     |       |
| Federal                             |       | 0        |       | 4,353    |       | (210     | )          |
| State                               |       | 0        |       | 1,151    |       | 349      |       |
| Foreign                             |       | (775     | )          | (580     | )          | (30      | )          |
|                                |       | (775     | )          | 4,924    |       | 109      |       |
| Total income tax  expense (benefit) |       | $        | (777       | )        | $          | 5,012    |       | $ | (791 | ) |

 

The components of income(loss) before income tax expense were as follows:
| ** **    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| United States |       | $        | (1,127     | )        | $          | (1,541   | )          | $ | 3,472 |   |
| Foreign       |       | (8,191   | )          | (497     | )          | (487     | )          |
|          |       | $        | (9,318     | )        | $          | (2,038   | )          | $ | 2,985 |   |

 

F-17

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A reconciliation from the U.S. Federal statutoryincome tax rate to the effective income tax rate for the years ended December31, is as follows:

|                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |     |       |
| U.S. Federal statutory  rate                                        |       | (34      | )%         | (34      | )%         | 34       | %          |
| State income taxes, net  of federal tax benefit                     |       | (1       | )          | (5       | )          | 5        |       |
| Worthless stock  deduction                                          |       | —   |       | —   |       | (102     | )          |
| Research and  development tax credit                                |       | —   |       | (25      | )          | —   |       |
| Change in valuation  allowance                                      |       | 6        |       | 330      |       | 4        |       |
| Nondeductible expenses                                              |       | 2        |       | (1       | )          | 5        |       |
| Effect of subsidiaries  taxed at other than the U.S. statutory rate |       | 19       |       | (19      | )          | 27       |       |
|                                                                |       | (8       | )%         | 246      | %          | (27      | )%         |

 

The significant change inthe effective income tax rate in 2005 is primarily the result of recognizing afull valuation allowance against the domestic net deferred tax asset in2005.  The Company continues to maintaina full valuation allowance against its domestic net deferred tax asset in 2006.

In the second quarter offiscal 2004, the Company commissioned an independent appraisal of a subsidiaryin the United Kingdom.  This appraisal followsthe Company’s announcement in February 2004 to close the European manufacturingoperations.  Based on the independentappraisal, the Company concluded that the subsidiary was insolvent as of June30, 2004 and therefore met the requirements of an ordinary worthless stockdeduction under the Internal Revenue Code. The amount of the worthless stock deduction is approximately $9,000 witha corresponding federal income tax benefit of approximately $3,000.

Significantcomponents of the Company’s deferred tax assets and liabilities are as follows:

|                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Assets                                      |       |     |       |     |       |
| Patents                                     |       | $        | 147        |     | $          | 257 |   |
| Allowance for  bad debts                    |       | 86       |       | 100      |       |
| Inventory  capitalization                   |       | 67       |       | 82       |       |
| Vacation pay                                |       | 261      |       | 369      |       |
| Accrued  liabilities and reserves           |       | 103      |       | 179      |       |
| Deferred gain on  sale leaseback            |       | 126      |       | 156      |       |
| Deferred rent                               |       | 61       |       | —   |       |
| Goodwill                                    |       | 1,689    |       | 2,626    |       |
| State tax  credits and loss carryforwards   |       | 1,354    |       | 1,092    |       |
| Federal tax  credits and loss carryforwards |       | 3,869    |       | 3,287    |       |
| Inventory  reserves                         |       | 21       |       | 556      |       |
| Share-based compensation                    |       | 130      |       | —   |       |
| Foreign net  deferred tax assets            |       | 1,736    |       | 871      |       |
|                                        |       | 9,650    |       | 9,575    |       |
| Valuation  allowance                        |       | (6,268   | )          | (7,068   | )          |
|                                        |       | 3,382    |       | 2,507    |       |
|                                        |       |     |       |     |       |
| Liabilities                                 |       |     |       |     |       |
| Accelerated  depreciation                   |       | 1,646    |       | 1,636    |       |
| Net deferred tax assets                     |       | $        | 1,736      |     | $          | 871 |   |

 

F-18

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Theclassification of the net deferred tax asset between current and non-current isas follows: 

|                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Net current assets                  |       | $        | 719        |     | $          | 948 |   |
| Net long-term assets  (liabilities) |       | 1,017    |       | (77      | )          |
| Net deferred tax assets             |       | $        | 1,736      |     | $          | 871 |   |

 

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 to lookto 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 has concluded that afull valuation allowance against the domestic net deferred tax asset wasappropriate.  Accordingly, as of December31, 2005, the valuation allowance was increased by approximately $7,068 with acorresponding adjustment to the provision for income taxes.  The Company continues to recognize a fullvaluation allowance against its net domestic deferred tax asset at December 31,2006.  In addition, the Company hadapproximately $1,307 of net operating loss carryforwards with a potential taxbenefit of $366 in one of the Asian operations within its Internationalsegment.  Management has concluded that afull valuation allowance is required on the net operating loss carryforward inone of the Asian operations within its International segment because ofuncertainty regarding its realization. The ultimate realization of the remaining net deferred tax assets isdependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible.  Management considers projected future taxableincome and tax planning strategies in making this assessment.  Based on historical foreign taxable incomeand projections for future taxable income over periods that the deferred taxassets are deductible, management believes it is more likely than not that theCompany 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 $3,394 at December 31, 2006,since those earnings are expected to be reinvested indefinitely outside theU.S.  It is not practicable to predict theamount of U.S. income taxes that might be payable if these earnings wereeventually repatriated.

As of December 31, 2006, the Company has federal netoperating losses of $11,048 and state net operating losses of $24,891.  The federal net operating losses expire invarying amounts beginning in 2024 unless previously utilized.  The state net operating losses generallybegin expiring in material amounts in 2011. The Company also has foreign net operating losses of approximately$5,100 that can be carried forward indefinitely.

As of December 31, 2006, 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.

**NOTEI—STOCK-BASED COMPENSATION**

In July 1996, theCompany adopted the 1996 Incentive Stock Plan (the “1996 Stock Plan”), underwhich it was authorized to issue non-qualified stock options and incentivestock options to key employees, directors and consultants to purchase up to anaggregate 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 was amendedto increase the authorized number of shares to 1,500.

F-19

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In January 2003, theBoard 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 the 2003 IncentiveStock Plan are 3,100.

A total of 1,327 optionsto purchase shares of the Company were accepted for exchange and cancelled onMarch 20, 2003.  On September 24, 2003, atotal of 1,324 new options were exchanged for options cancelled in March 2003.

Eligible option holders who participated in the offerreceived a new option on the new grant date in exchange for each old optionthat was validly tendered and accepted for exchange.  The number of shares covered by each newoption was equal to the number of shares covered by the old options, and thevested status and vesting schedule of the old options was preserved andcontinued.  The exercise price of the newoptions was equal to the closing sale price of the Company’s common stock asreported on the NASDAQ Global Market on the grant date of the new options.

At December 31, 2006, under the two plans describedabove, the Company had total unvested stock-based compensation expense of$314.  The unvested stock options willvest at various intervals over the next 2.7 years.  Total stock-based compensation expense,recognized in general and administrative expenses during 2006 is shown in thefollowing table:

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

 

The fair 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:

|                           | ** ** | **SFAS No. 123R  Expense  2006** | ** ** | **SFAS No. 123  Pro forma  2005** | ** ** | **SFAS No. 123  Pro forma  2004** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Expected term             |       | 5  years                                   |       | 5  years                                         |       | 5  years                                         |       |
| Risk-free interest rate   |       | 4.7%                                       |       | 3.9%                                             |       | 3.5%                                             |       |
| Expected volatility       |       | 62%                                        |       | 50%                                              |       | 40%                                              |       |
| Expected forfeiture  rate |       | 9.1%                                       |       | —                                           |       | —                                           |       |
| Expected dividend yield   |       | —                                     |       | —                                           |       | —                                           |       |

 

The weighted-average grant-date fair value of options granted duringthe years ended December 31, 2006, 2005 and 2004 was $1.89, $3.52 and $4.80,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-free interestrates are based on the U.S. Treasury yield for a period consistent with theexpected term of the option at the date of grant.

A summary of option activity under the Company’s two stock plans, as ofDecember 31, 2006 and changes during the year then ended is presented below:

F-20

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| ** **                                                                | ** ** | **Shares of  common stock  under  options** | ** ** | **Weighted-  average  exercise  price** | ** ** | **Weighted-  average  remaining  contractual  term** | ** ** | **Aggregate  intrinsic  value** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at January  1, 2006                                           |       | 1,934                                                 |       | $                                       | 5.10       |                                                 |       |                            |       |   |
| Options granted                                                           |       | 44                                                    |       | 3.32                                    |       |                                                 |       |                            |       |
| Options forfeited                                                         |       | (225                                                  | )          | 7.81                                    |       |                                                 |       |                            |       |
| Options expired                                                           |       | (2                                                    | )          | 11.00                                   |       |                                                 |       |                            |       |
| Options exercised                                                         |       | —                                                |       | —                                  |       |                                                 |       |                            |       |
| Outstanding at December  31, 2006                                         |       | 1,751                                                 |       | $                                       | 4.70       |                                                 | 7.0        |                            | $          | 4 |   |
| Exercisable at December  31, 2006                                         |       | 1,650                                                 |       | $                                       | 4.73       |                                                 | 6.9        |                            | $          | — |   |
| Ending vested and  expected to vest in the future as of December 31, 2006 |       | 1,741                                                 |       | $                                       | 4.71       |                                                 | 7.0        |                            | $          | 3 |   |
| Available for grant at December 31, 2006                                  |       | 1,201                                                 |       |                                    |       |                                                 |       |                            |       |

 

A summary of the status of the Company’s nonvested shares as ofDecember 31, 2006 and changes during the year then ended is presented below:

| Nonvested Shares          | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|--------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| Nonvested at January 1,  2006  |       | 563        |       | $                                                   | 1.96       |   |
| Granted                        |       | 44         |       | 1.89                                                |       |
| Vested                         |       | (389       | )          | 1.68                                                |       |
| Forfeited or expired           |       | (117       | )          | 3.01                                                |       |
| Nonvested at December 31, 2006 |       | 101        |       | $                                                   | 1.79       |   |

 

**NOTEJ—RETIREMENT PLAN**

The Company established a retirement plan inaccordance with section 401(k) of the Internal Revenue Code. Under the terms ofthis plan, eligible employees may make voluntary contributions to the extentallowable by law.  Employees of theCompany 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, $163, and $181 for the years ended December31, 2006, 2005 and 2004, respectively.

**NOTEK—RELATED PARTY TRANSACTIONS**

The Company has twoleases for approximately 265 square feet of manufacturing, warehouse and officespace in Temecula, California, with the Channell Family Trust, one of theCompany’s principal stockholders, of which William H. Channell, Sr., theCompany’s Chairman of the Board, and Jacqueline M. Channell, a director and theCompany secretary, are co-trustees.  Theterm of the lease dated December 22, 1989 (as amended), for 103 square feet,expires on December 31, 2015.  The termof the lease dated May 29, 1996, for 162 square feet, expires on December 30,2010 and has a five-year renewal option. Both leases provide for payments ofinsurance, repairs, maintenance and property taxes.  Rent expense paid under the leases was$1,383, $1,334, and $1,305 for the years ended December 31, 2006, 2005 and 2004respectively.  Also, in 1997, the Companyguaranteed debt of the Channell Family Trust of approximately $754 inconnection with construction of one of the leased facilities describedabove.  The loan amount subject to theguarantee is 

F-21

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expected to declinebefore expiring in 2017.  At December 31,2006, the outstanding loan balance subject to the guarantee totaled $520.  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 thisguarantee.  If the Channell Family Trustwere to default on the outstanding loan balance, the Company might be requiredto repay the remaining principal balance. Under FIN 46 and FIN 46(R), the Channell Family Trust does not qualifyas a “variable interest entity” subject to consolidation since (a) the totalequity investment at risk in the Trust is sufficient to permit financingwithout additional financial support from the Company and (b) William Channell,Sr., a co-trustee of the Channell Family Trust, has the direct ability to makedecisions about the Trust’s activities.

The Company purchased insurance through Talbot AgencyInc. in 2004.  Roy H. Taylor, Presidentof Talbot Agency Inc., is a co-trustee of the Taylor Family Trust, a beneficialowner of approximately 5% of the Company’s outstanding stock.  The total premiums and fees paid, whichincluded commissions earned, for insurance obtained through the Talbot Agencywere $44 for the year ended December 31, 2004.

In May, 2002, the Companysold its RF line of passive electronic devices to RMS Communications, Inc.,which is owned by Gary Napolitano, a former officer of the Company. A sale inthe amount of $800 was recorded. RMS Communications, Inc. paid the Company $125in cash at the time of sale, and the remaining $675 was payable in monthlyinstallments through June 30, 2003, bearing interest at 7% per annum. Theaccount is currently in arrears. A revised secured promissory note supersedingthe previous promissory note with RMS Communications, Inc. and Gary Napolitanopersonally has been entered into with RMS Communications, Inc. and GaryNapolitano personally. The revised secured promissory note is dated December31, 2005 and calls for the balance owed to the Company of $206 plus accruedinterest of $46 to be paid in monthly installments of $3.5 until the entireamount of the note is paid.  The Companyhas a security interest in the inventory and a personal guarantee from Mr.Napolitano.  A reserve of approximately$153 and $165 has been recorded against the receivable as of December 31, 2006and 2005, respectively, according to the Company’s policy for accountsreceivable allowances.  The Companycontinues to purchase RF devices from Mr. Napolitano and from other sourcesdepending on price and supply of product. The RF devices purchased from Mr.Napolitano’s firm in 2005 approximated $10, and were used in the Company’sproduct lines. The purchases in 2005 did not result in a cash payment to Mr.Napolitano as the amount was used to reduce the accounts receivable.  There were no purchases from Mr. Napolitano’scompany in 2006.

Carolyn Channell washired as an employee of the Company in June 2005. The Company paid Mrs.Channell $70 and $37 in 2006 and 2005, respectively.  Prior to being hiredas an employee to handle specific insurance matters for the Company, Mrs.Channell was paid an additional $40 for her consulting services in the firsthalf of 2005.  Mrs. Channell is the wifeof William H. Channell, Jr., the Company’s President and Chief ExecutiveOfficer.

The Company hasfacilities in Dalby, Terang, and Adelaide Australia that are leased fromstockholders of the Company.  Thesestockholders are former owners of Bushman Tanks.  The facilities comprise 72,000 square feet ofmanufacturing, warehouse and office space. The aggregate rent expense paid for these facilities was $254 and $230in 2006 and 2005, respectively.  At thetime of the Bushman Tanks acquisition in 2004, the Company hired an independentfirm to appraise the market lease rates for these facilities and it wasdetermined that the existing leases were in excess of fair market value byapproximately $27 per year.  Included inthe liabilities assumed in the Bushman Tanks acquisition is $146 related tothese unfavorable leases (see Note P).

### **NOTE L—COMMITMENTS AND CONTINGENCIES**

*Leases**—***The Companyleases manufacturing and office space and machinery & equipment underseveral operating leases expiring through 2015. Rent expense under all operating leases amounted to $3,277, $2,791, and$2,685 for the years ended December 31, 2006, 2005 and 2004, respectively.  Rent expense for the year ended December 31,2006 is net of sublease rental income of $99. Total future minimum rental payments under noncancellable operatingleases and subleases with initial or remaining terms in excess of one year asof December 31, 2006, including the operating leases with the related partiesdiscussed in Note K are as follows:

F-22

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| Year       | ** ** | **Rental Payments** | ** ** | **Sublease    Income** | ** ** |
|------------|------------|--------------------------|------------|----------------------------------|------------|
| 2007       |       | $                        | 3,248      |                             | $          | 263 |   |
| 2008       |       | 3,144                    |       | 131                              |       |
| 2009       |       | 3,031                    |       |                             |       |
| 2010       |       | 2,634                    |       |                             |       |
| 2011       |       | 2,337                    |       |                             |       |
| Thereafter |       | 5,904                    |       |                             |       |
|       |       | $                        | 20,298     |                             | $          | 394 |   |

 

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 $61, $60 and$60 in 2006, 2005 and 2004, respectively, related to the amortization of thedeferred gain.  The balance of theunamortized gain was $332 and $393 at December 31, 2006 and 2005, respectively.

InMarch 2007 the Company agreed to pay $287 for restoration costs to the landlordof an Australian manufacturing and office facility that the Company vacated in2006.  The majority of the settlementamount was accrued by the Company during the quarter ended December 31,2006.  An initial payment of $185 wasmade in 2006 and the balance was paid in March 2007.

*EmploymentAgreements—*In December, 2003 the Company entered into anemployment agreement with William H. Channell Jr., its President and ChiefExecutive 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)may be increased from time to time in the discretion of the Board of Directorsand (2) will be 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).  Mr. Channell’s base salaryfor the first half of fiscal year 2006 was $773, and was increased as of July1, 2006 in accordance with the terms of his employment agreement, to $812.  The total amount paid to Mr. Channell, Jr. assalary for 2006 was $793.

In addition to basesalary, Mr. Channell, Jr. is entitled to participate in cash and other bonusprograms, including the 2003 Incentive Stock Plan, 401(k) plan and the 2004Incentive Bonus Plan.  Additionally, theemployment agreement provides for incentive compensation to Mr. Channell, Jr.,based upon personal performance objectives and increases in the Company’smarket capitalization over a three-year period beginning in January 2004, to bepaid under Mr. Channell Jr.’s Long-Term Incentive Plan.  Pursuant to the agreement, the Company isalso required to maintain the following insurance policies for Mr. Channell’sbenefit: (1) a personal life insurance policy for Mr. Channell under which heis entitled to designate one or more beneficiaries; (2) travel and accidentinsurance under which he is entitled to designate one or more beneficiaries;and (3) a disability insurance policy on Mr. Channell as to which he is thebeneficiary.  Mr. Channell, Jr. is alsoentitled to certain other benefits, including an automobile allowance, health insurance,and vacation and sick leave, in accordance with customary practices for seniorexecutive officers.

In the event that (1) theCompany terminates Mr. Channell, Jr.’s employment without “cause,” as definedin the agreement, (2) Mr. Channell, Jr. terminates his employment with theCompany for “good reason,” which is also specifically defined in the agreementand generally consists of (a) a significant reduction of his duties, title,position or responsibilities without this consent, (b) a substantial reduction,without good business reasons, of the quality of office accommodations oremployment benefits without his consent, (c) a reduction of his base salary ora material reduction in his participation in incentive bonus programs withouthis consent, (d) relocation of his primary office to a facility more than 50miles away from his then primary office without his consent, or (e) a “changeof control” as specifically defined in the agreement, or (3) the Companydecides not to renew the agreement at the end of the initial five-year term orany 

F-23

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subsequent five-year term, then Mr. Channell, Jr.would be entitled to a lump sum payment equal to three times his then currentbase salary, all health and life insurance benefits for three years, andaccelerated vesting of any stock options or restricted stock granted tohim.  In addition, if the Companyterminates Mr. Channell, Jr.’s employment for any reason other than cause, itis required to maintain the disability policy described in the precedingparagraph, at its expense, until the date on which Mr. Channell, Jr. is 65years old.  The agreement also providesfor certain benefits to Mr. Channell, Jr. upon his death or disability.

The Company entered into an employment agreement withMr. William H. Channell, Sr., the Chairman of the Board of Directors, in July1996 and amended that agreement in December, 2003.  The agreement is for a five-year term and isautomatically renewed for additional five-year terms unless terminated earlierby either party in accordance with the agreement. The agreement provides thatMr. Channell, Sr.’s annual salary will be $50 for the remainder of the term ofthe agreement.  Mr. Channell, Sr.’sbenefits under the agreement include (1) during the term of the agreement, thepayment of premiums for a term disability policy providing for $250 in annualbenefits in the case of his temporary or permanent disability, (2) during thelifetime of Mr. Channell, Sr. and his wife, Jacqueline M. Channell, medicalinsurance for each of Mr. and Mrs. Channell to the same extent such insuranceis provided to the Company’s senior executive officers, (3) during Mr.Channell, Sr.’s lifetime, payment of a portion of the premiums on a lifeinsurance policy owned by Mr. Channell, Sr., under which Mrs. Channell is thebeneficiary, and (4) an automobile allowance. The Company accrues for theseexpenses as incurred.

Upon termination of theagreement by the Company without “cause” (as defined in the agreement), Mr.Channell, Sr. will be entitled to receive a lump sum payment equal to threetimes Mr. Channell, Sr.’s base salary and accelerated vesting of his stockoptions and restricted stock.  Theagreement also provides for certain benefits to Mr. Channell, Sr. upon hisdisability.

*Taxes*—TheFederal income taxes of the Company for the years ended December 31, 2003 and2004 are currently under examination by the Internal Revenue Service (“IRS”).As of December 31, 2006, the Company and the IRS have resolved all outstandingissues except for the ordinary worthless stock deduction. The amount of thebenefit under dispute is approximately $3,000. As the Company has established afull valuation reserve on the net benefit to be obtained from this credit, theresolution of the ordinary worthless stock deduction will not have a materialadverse impact on the Company’s results of operations or financial position. Inaddition, the benefit has not been utilized on the Company’s tax returns. Also,the IRS completed an examination of the years ended December 31, 1997, 1999,2000, 2001 and 2002. The examination was settled with the Company retaining $241of $533 in research and development tax credits originally claimed. The Companyexpects that the results of these examinations will not have a material impacton the Company’s results of operations or financial condition.

*Termination of transportation and logisticsservices by the primary freight provider for our Bushman 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. In addition, as Bushman Tanks transitions its transportation andlogistics services, the timing of scheduled deliveries may continue to betemporarily pushed out to subsequent periods. The disruption in transportation and logistics services due to thetermination of such services by the former freight provider, the success of theimplementation of replacement transportation and logistics services, the legalcost associated 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.

*LegalProceedings*— Carson Industries LLCv. Channell Commercial Corporation (Calif. Superior Court Case No.BC334759).  For a number of years theCompany purchased grade level boxes from Carson Industries LLC (“Carson”) forresale to the Company’s customers.  In2004, the Company’s customers reported the failure of a number of Carson boxesin the field.  The Company determinedthat certain boxes sold to the Company by Carson in 2004 and thereafter did notconform to certain specifications.  OnJune 9, 2005, Carson filed the above-captioned lawsuit against the Company,principally seeking approximately $360 for product sold to the Company but notyet paid for.  On July 26, 2005, theCompany cross-complained against Carson for, among other things, breach ofcontract, breach of express and implied warranties, fraud and intentionalinterference with contractual relations.

F-24

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Duringcourt ordered mediation on March 21, 2006, the parties agreed to settle thelawsuit.  The final agreement was signedon April 17, 2006 whereby the Company paid to Carson $290 and returned toCarson approximately $70 of inventory previously purchased by the Company.  Carson agreed to indemnify the Company againstcertain product warranty claims for five years from the date of sale.

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

OnAugust 2, 2004, the Company, through a majority-owned subsidiary, acquired acontrolling interest in Bushman Tanks, a manufacturer and distributor ofrotational molded plastic (polyethylene) water storage tanks, for a purchaseprice of $16,838.  Bushman Tankscurrently operates out of six leased facilities in Australia, located inSydney, Dalby, Orange, Terang, Townsville, and Adelaide.  The original Share and Asset PurchaseAgreement provided for total contingent consideration of approximately $2,900if the Bushman Tanks business was to achieve certain sales and cost reductiontargets.  Any amounts paid as contingentconsideration were to result in additional goodwill.  Management assessed that an earn out of approximately$760 was earned for achieving the 2005 sales targets as of July 31, 2005, andthis amount was accrued as an increase to goodwill during the third quarter of2005.  In the fourth quarter of 2005,$380 of this earn out was paid, and $380 remained as an accrued liability as ofDecember 31, 2005 and March 31, 2006. Also, under the original agreement, if certain cost reduction targetswere to be achieved, the sellers were to receive one-half of the amounts of thecost reductions in the specified cost items. In the event that the costs incurred for these items exceeded apredetermined threshold, the seller was to be liable to the Company for theamount of the costs exceeding the threshold. Accordingly, $146 was recorded as a receivable for warranty claimsduring 2005 and recorded as a reduction to goodwill.  During the quarter ended June 30, 2006, theCompany and the sellers entered into an agreement that modified the originalterms of the contingent consideration. Pursuant to the agreement, the Company paid approximately $148 to thesellers to settle all current claims between the parties.  The sellers will forgo any additional earnout payments, and the Company will forgo any future warranty claims.  As a result of the settlement agreement, anet amount of $86 was recorded as a reduction to goodwill.  The Company believes that any impact of thisagreement will not have a material effect on its financial condition or resultsof operations.

**NOTE M—CREDIT CONCENTRATIONS AND MAJOR CUSTOMERS**

The Company maintains cash balances in financialinstitutions located in the United States, Canada, Australia and the UnitedKingdom.  Cash balances held in financialinstitutions in the U.K. totaled $162 and $180 at December 31, 2006 and 2005,respectively.  Cash balances held infinancial institutions in Australia totaled $506 and $1,338 at December 31,2006 and 2005, respectively.  Cashbalances held in financial institutions in Canada totaled $200 and $923 atDecember 31, 2006 and 2005, respectively. Cash balances held in financial institutions located in the UnitedStates may, at times, exceed federally insured limits.  The Company has not experienced any losses insuch accounts and believes it is not exposed to any significant credit risk oncash and cash equivalents.

The telecommunications industry is the largest industry in which theCompany operates and is highly concentrated. A relatively small number of customers account for a large percentage ofthe Company’s available market. Consequently, the Company’s five largest customers accounted for 29.4%,33.6%, and 47.8%, of the Company’s total net sales in 2006, 2005, and 2004respectively.  Verizon accounted for 8.3%of the Company’s total net sales in 2006, 17.2% of the Company’s net sales in2005, and 21.3% of the Company’s net sales in 2004.  The majority of sales to Verizon in 2006 and2005 occurred in the first six months of the fiscal year. Comcast accounted for 8.0 % of the Company’s netsales in 2006, 7.1% of the Company’s net sales in 2005 and 14.3% of the Company’snet sales in 2004.  Mergers andacquisitions in the telecommunications industry not only increase theconcentration of the industry and of the Company’s customer base, but also fromtime to time delay customers’ capital expenditures as newly merged servicesproviders consolidate their operations. In the event one of the Company’s major customers were to terminatepurchases of the Company’s products, the Company’s operating results would beadversely affected.  The Company alsooperates in the water storage industry in Australia.  No single customer accounts for a largepercentage of sales in the sector.  Theprimary markets for the sale of these products are to individuals and smallbusinesses in the farming industry.  SeeNote N for the relative percentages of revenue from product line sales.

F-25

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**NOTE N—SEGMENT AND GEOGRAPHIC INFORMATION**

The operating segments of the Company have beenaggregated into two geographical reporting segments:  Americas and International.  Americas includes the United States, Centraland South America and Canada.  Internationalincludes Europe, Africa, the Middle East, Australia and Asia.  The chief operating decision maker of bothsegments is William H. Channell, Jr., President and Chief Executive Officer ofthe Company.  The Company’s four productlines are sold in both segments.  Thefollowing tables summarize segment information:
| ** **                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues from external  customers(1):                 |       |     |       |     |       |     |       |
| Americas(2)                                           |       | $        | 59,383     |     | $          | 65,283   |       | $ | 74,445 |   |
| International                                         |       | 49,755   |       | 50,782   |       | 27,755   |       |
|                                                  |       | $        | 109,138    |     | $          | 116,065  |       | $ | 102,200 |   |
| Income (loss) from  operations:                       |       |     |       |     |       |     |       |
| Americas                                              |       | $        | (702       | )        | $          | (1,416   | )          | $ | 3,517 |   |
| International                                         |       | (7,759   | )          | (127     | )          | (43      | )          |
|                                                  |       | $        | (8,461     | )        | $          | (1,543   | )          | $ | 3,474 |   |
| Interest income:                                      |       |     |       |     |       |     |       |
| Americas                                              |       | $        | 29         |     | $          | 3        |       | $ | 13 |   |
| International                                         |       | 57       |       | 67       |       | 116      |       |
|                                                  |       | $        | 86         |     | $          | 70       |       | $ | 129 |   |
| Interest expense:                                     |       |     |       |     |       |     |       |
| Americas                                              |       | $        | 477        |     | $          | 201      |       | $ | 225 |   |
| International                                         |       | 466      |       | 364      |       | 393      |       |
|                                                  |       | $        | 943        |     | $          | 565      |       | $ | 618 |   |
|                                                  |       |     |       |     |       |     |       |
| Income tax expense  (benefit):                        |       |     |       |     |       |     |       |
| Americas                                              |       | $        | 130        |     | $          | 5,300    |       | $ | (1,125 | ) |
| International                                         |       | (907     | )          | (288     | )          | 334      |       |
|                                                  |       | $        | (777       | )        | $          | 5,012    |       | $ | (791 | ) |
|                                                  |       |     |       |     |       |     |       |
| Identifiable assets:                                  |       |     |       |     |       |     |       |
| Americas(3)                                           |       | $        | 28,682     |     | $          | 28,313   |       | $ | 42,918 |   |
| International(4)(5)(6)                                |       | 33,196   |       | 32,393   |       | 35,563   |       |
|                                                  |       | $        | 61,878     |     | $          | 60,706   |       | $ | 78,481 |   |
|                                                  |       |     |       |     |       |     |       |
| International change in  goodwill:                    |       |     |       |     |       |     |       |
| Balance January  1,                                   |       | $        | 13,273     |     | $          | 13,574   |       | $ | — |   |
| Impairment of  goodwill                               |       | (4,829   | )          | —   |       | —   |       |
| Goodwill  acquired                                    |       | —   |       | —   |       | 12,007   |       |
| Adjustment for  warranty claims and earnout agreement |       | (86      | )          | 614      |       | —   |       |
| Foreign currency  translation                         |       | 813      |       | (915     | )          | 1,567    |       |
| Balance December  31,                                 |       | $        | 9,171      |     | $          | 13,273   |       | $ | 13,574 |   |
|                                                  |       |     |       |     |       |     |       |
| Depreciation and  amortization:                       |       |     |       |     |       |     |       |
| Americas                                              |       | $        | 2,970      |     | $          | 3,060    |       | $ | 3,738 |   |
| International                                         |       | 2,131    |       | 1,420    |       | 1,014    |       |
|                                                  |       | $        | 5,101      |     | $          | 4,480    |       | $ | 4,752 |   |
|                                                  |       |     |       |     |       |     |       |
| Capital expenditures:                                 |       |     |       |     |       |     |       |
| Americas                                              |       | $        | 1,632      |     | $          | 2,391    |       | $ | 2,865 |   |
| International                                         |       | 2,239    |       | 1,948    |       | 416      |       |
|                                                  |       | $        | 3,871      |     | $          | 4,339    |       | $ | 3,281 |   |

 

F-26

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(1)                                  Revenuesfrom external customers from any individual foreign country did not exceed 10%of total revenue.

(2)                                  Includesexport sales from the United States of approximately $42, $242, and $1,963 in2006, 2005 and 2004, respectively.

(3)                                  Includesgoodwill of $677, $674, and $659 in 2006, 2005 and 2004, respectively.  The change in goodwill relates to foreigncurrency translation adjustment. Includes long-lived assets in the United States of $11,902, $13,191, and$13,902 in 2006, 2005 and 2004, respectively.

(4)                                  Includeslong-lived assets in the United Kingdom of $8, $10, and $5 in 2006, 2005 and2004, respectively.

(5)                                  Includeslong-lived assets in Australia of $6,736, $5,326, and $5,513 in 2006, 2005 and2004 respectively.

(6)                                  Includesgoodwill of $9,171, $13,273 and $13,574 and non-compete agreement of $1,387,$1,477 and $1,763 in 2006, 2005 and 2004 respectively.

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

|                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Enclosures              |       | $        | 50,033     |     | $          | 51,395   |       | $ | 60,305 |   |
| Water related  products |       | 48,736   |       | 54,881   |       | 30,690   |       |
| Connectivity            |       | 8,608    |       | 9,006    |       | 9,809    |       |
| Other                   |       | 1,761    |       | 783      |       | 1,396    |       |
| Total                   |       | $        | 109,138    |     | $          | 116,065  |       | $ | 102,200 |   |

 

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

Summarized quarterlyfinancial data for 2006 and 2005 follows:

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

 

|                         | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **              | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| 2005                    |       |        |       |        |       |        |       |        |       |
| Net sales(1)            |       | $           | 31,981     |        | $          | 33,179      |       | $           | 27,506     |   | $ | 23,399 |   |
| Gross profit            |       | 9,837       |       | 11,547      |       | 7,187       |       | 6,434       |       |
| Net income (loss) (3)   |       | 426         |       | 1,277       |       | (558        | )          | (8,025      | )          |
| Income (loss) per share |       |        |       |        |       |        |       |        |       |
| Basic                   |       | 0.05        |       | 0.13        |       | (0.06       | )          | (0.84       | )          |
| Diluted                 |       | 0.04        |       | 0.13        |       | (0.06       | )          | (0.84       | )          |
|                    |       |        |       |        |       |        |       |        |       |
|                         |            |             |            |             |            |             |            |             |            |  |  |  |  |

 

(1)                                  Includesreclassified shipping costs, resulting in an increase to net sales and anincrease to gross profit of $632 and $842 for the first and second quarters of2006, respectively, and of $603, $819, $648 and $465 for the first, second,third and fourth quarters of 2005, respectively.  This reclassification had no effect on netincome (loss) for any period.

F-27

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(2)                                  Duringthe second quarter of 2006, the Company recorded a $4,829 impairment related tothe carrying value of goodwill in its International segment.

(3)                                  Duringthe fourth quarter of 2005, the Company recorded a $7,068 charge to theprovision for income taxes as a result of a valuation allowance that wasprovided against the domestic net deferred tax asset.  (see Note H — Income Taxes)

**NOTE P—ACQUISITION**

On August 2, 2004, the Company, through a majority-owned subsidiary,acquired a controlling interest in Bushman Tanks, a manufacturer anddistributor of rotational molded plastic (polyethylene) water storagetanks.  The Company acquired BushmanTanks to diversify its business through entering a new growth market with lowercustomer concentration that leverages the Company’s core manufacturingcompetency.  Bushman Tanks currentlyoperates out of six leased facilities in Australia, located in Sydney, Dalby,Orange, Terang, Townsville, and Adelaide. The purchase price was $16,838. The consideration paid in excess of assets acquired was primarilyattributable to expected future cash flow, the Bushman Tanks brand and expectedprocurement synergies.  The originalShare and Asset Purchase Agreement provided for total contingent considerationof approximately $2,900 if the Bushman Tanks business was to achieve certainsales and cost reduction targets.  Anyamounts paid as contingent consideration were to result in additionalgoodwill.  Management assessed that anearn out of approximately $760 was earned for achieving the 2005 sales targetsas of July 31, 2005 and this amount was accrued as an increase to goodwillduring the third quarter of 2005.  In thefourth quarter of 2005, $380 of this earn out was paid, and $380 remained as anaccrued liability as of December 31, 2005 and March 31, 2006.  Also, under the original Agreement, ifcertain cost reduction targets were to be achieved, the sellers were to receiveone-half of the amounts of the cost reductions in the specified costitems.  In the event that the costsincurred for these items exceeded a predetermined threshold, the seller was tobe liable to the Company for the amount of the costs exceeding thethreshold.  Accordingly, $146 wasrecorded as a receivable for warranty claims during 2005 and recorded as areduction to goodwill.  During thequarter ended June 30, 2006, the Company and the sellers entered into anagreement that modified the original terms of the contingentconsideration.  Pursuant to theagreement, the Company paid approximately $148 to the sellers to settle allcurrent claims between the parties.  Thesellers will forgo any additional earn out payments and the Company will forgoany future warranty claims.  As a resultof the settlement agreement, a net amount of $86 was recorded as a reduction togoodwill.  The Company believes that anyimpact of this agreement will not have a material effect on its financialcondition or results of operations.

Consideration for theacquisition of $16,838 consisted of $8,016 in cash contributed by the Company,175,113 shares of Channell Commercial Corporation’s common stock valued at$714, a $5,520 term loan from The National Australia Bank Ltd, and $2,588 incash contributed by ANZ Private Equity, a unit of Australia and New ZealandBanking Group Ltd.  As a result of thetransaction, the Company acquired a 75% equity interest in Bushman Tanks, andANZ Private Equity acquired the remaining 25%. In addition, the Companyincurred direct acquisition costs of $758. The Bushman Tanks acquisition has been accounted for using the purchasemethod of accounting and, accordingly, the assets acquired and liabilitiesassumed have been recorded at their estimated fair values.

On August 2, 2004,Channell Commercial Corporation and Channell Bushman Pty Ltd entered into anInvestment and Shareholder’s Agreement with a private equity firm inAustralia.  The private equity investmentwas obtained as part of the financing of the Bushman Tanks acquisition.  The private equity party invested $2.6million, the net amount received after paying a capital raising fee, forownership of 25% of the outstanding and voting shares of Channell Bushman PtyLtd.  As part of the agreement, theprivate equity party has the right to appoint one member of the Board ofDirectors of Channell Bushman Pty Ltd with Channell Commercial Corporationappointing the remaining three members. The agreement specifies that certain actions taken by the Board ofDirectors require unanimous approval, among other things, a proposal to sellall or substantially all of the assets of Channell Bushman Pty Ltd, materialasset acquisitions or disposals not included in the annual business plan, anyplan to limit or dissolve the business, the issuance of any securities, capitalrestructuring, granting of a security interest on assets and related partytransactions.

The Company believes thatit is the intent of the private equity party to exit from its investment inChannell Bushman Pty Ltd within 5 years after the original investment.  The Agreement contains clauses to facilitatethe exit of the private equity party. The Agreement specifies that after the date that is two years after theoriginal investment, Channell Commercial Corporation has an option to acquireall of the shares owned by the private equity party.  The Agreement specifies that the value of theshares is to be fair market value as determined by an independentappraiser.  There are no minimum ormaximum amounts specified in the Agreement. After the date that is five years after the original investment, bothChannell Commercial Corporation and the private equity party have the right toinitiate a sale of 

F-28

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Channell Bushman Pty Ltd.  Atsuch time, the other party may elect to buy out the shares of the partyinitiating the sale at the fair market value as determined by an independentappraiser.  Otherwise, Channell BushmanPty Ltd would be offered for sale with the assistance of a financial advisor.

The results of operationsof Bushman Tanks are included in the Consolidated Statement of Operations fromthe date of acquisition (August 2, 2004). The following table summarizes theestimated fair value of the assets acquired and liabilities assumed in theBushman Tanks acquisition at August 2, 2004:

 

|                                     | ** ** | **Allocated**           | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **Purchase Price** | ** ** |
| Acquired assets:                    |       |                    |       |
| Cash                                |       | $                       | 99         |   |
| Receivables, net                    |       | 2,211                   |       |
| Inventories                         |       | 2,399                   |       |
| Other assets                        |       | 88                      |       |
| Deferred taxes                      |       | 215                     |       |
| Property, plant, and equipment, net |       | 3,089                   |       |
| Goodwill                            |       | 12,007                  |       |
| Intangible non-compete              |       | 1,600                   |       |
| Trademark intangible                |       | 621                     |       |
| Total Assets                        |       | 22,329                  |       |
|                                |       |                    |       |
| Assumed  liabilities:               |       |                    |       |
| Accounts payable                    |       | 3,109                   |       |
| Short term debt                     |       | 35                      |       |
| Accrued liabilities                 |       | 1,589                   |       |
| Total liabilities                   |       | 4,733                   |       |
|                                |       |                    |       |
| Purchase price                      |       | 16,838                  |       |
| Direct cost of  acquisition         |       | 758                     |       |
| Net assets  acquired                |       | $                       | 17,596     |   |

 

F-29

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**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 |       | (2006                 | )          | $265                |       | $(28                | )          | $20                      |       | $(37 | ) | $220 |   |
|                           |       | (2005                 | )          | 319                 |       | 95                  |       | 40                       |       | (189 | ) | 265 |   |
|                           |       | (2004                 | )          | 356                 |       | 1,542               |       | (56                      | )          | (1,523 | ) | 319 |   |
|                           |       |                  |       |                |       |                |       |                     |       |   |   |   |   |
| Inventory valuation  reserve   |       | (2006                 | )          | $1,724              |       | $131                |       | —                   |       | $(621 | ) | $1,234 |   |
|                           |       | (2005                 | )          | 1,251               |       | 797                 |       | —                   |       | (324 | ) | 1,724 |   |
|                           |       | (2004                 | )          | 836                 |       | 735                 |       | $89                      |       | (409 | ) | 1,251 |   |
|                           |       |                  |       |                |       |                |       |                     |       |   |   |   |   |

 

----

**GLOSSARY OF TERMS**

*ADSL(Asymmetric Digital Subscriber Line): *Astandard allowing digital broadband signals and standard telephone service tobe transmitted up to 12,000 feet over a twisted copper pair.

*Broadband: *Transmission rates inexcess of 1.544 mega bits per second typically deployed for delivery ofhigh-speed data, video and voice services. Also, a system for distributingtelevision programming by a cable network rather than by broadcastingelectromagnetic 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 cableTV.

*CableModem:*  Electronictransmission device placed on the broadband network, located at end userlocations, providing two-way, high-speed data service capability, includinginternet access for subscribers.

*CoaxialCable:*  The mostcommonly used means of transmitting cable television signals.  It consists of a cylindrical outer conductor(shield) surrounding a center conductor held concentrically in place by aninsulating material.

*DLC(Digital Loop Carrier):* Telecommunications transmission technology which multiplexes multipleindividual voice circuits onto copper or fiber cables.

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

*FiberOptics:*  The process oftransmitting infrared and visible light frequencies through a low-loss glassfiber with a transmitting laser or LED and a photo diode receiver.

*FTTP(Fiber-To-The-Premises):* In a long distance network consisting of fiber optics,fiber-to-the-premises refers to the fiber optics running from the distributionplant to the customer premise, which may be the curb or the outside wall of thepremise, at which point copper is used for the remaining connection.

*HDSL(High bit rate Digital Subscriber Line):*  By using sophisticated coding techniques, alarge amount of information may be transmitted over copper.  The HDSL scheme uses such coding over fourcopper wires and is primarily intended for high capacity bi-directional businessservices.

*HFC(Hybrid Fiber Coax):*  Atype of distribution plant that utilizes fiber optics to carry service from aCO to the carrier serving area, then coaxial cable within the CSA to or closeto the individual residences.

*RBOC(Regional Bell Operating Company):*  A term for the regional holding companiescreated when AT&T divested the Bell operating companies.

*RF (RadioFrequency):*  Anelectromagnetic wave frequency intermediate between audio frequencies andinfrared frequencies used especially in wireless telecommunications andbroadband transmission.

*VoIP(Voice over Internet Protocol):*A technology that allows youto make telephone calls using a broadband Internet connection instead of aregular (or analog) phone line.

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

G-1

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