**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K/A-1**

 

| **ý** | ** ** | **Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934 for the fiscal year ended December 31, 2004; or** |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                      |
| **o**      | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934.**                                                 |

 

**Commission File Number 0-28582**

 

**CHANNELLCOMMERCIAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                    | ** ** | **95-2453261**                     |
|-------------------------------------------------|------------|------------------------------------|
| (State or  other jurisdiction of incorporation) |       | (IRS  Employer Identification No.) |

 

**26040 Ynez Road**

**Temecula, CA 92591**

(Address of principal executive offices,including zip code)

 

Registrant’s telephone number, including areacode: **(951) 719-2600**

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

**None**

 

Securities registered pursuant to Section 12(g) ofthe Act:

 

Title of Class

**Common Stock, $0.01 Par Value**

 

Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes **ý  **No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K/A-1or any amendment to this Form 10-K/A-1. **ý**

 

On March 11,2005, the Registrant had 9,383,942 shares of Common Stock outstanding with apar value of $.01 per share.  Theaggregate market value of the 4,454,412 shares held by non-affiliates of theRegistrant was $19,153,972 computed by reference to the price at which theshares were last sold, as of the last business day of the Registrant’s mostrecently completed second fiscal quarter. Shares of Common Stock held by each officer and director and by eachperson who may be deemed to be an affiliate have been excluded.

 

Indicate by check mark whether the Registrantis an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o   No**ý**

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Part III ofthis Form 10-K/A-1 incorporates by reference certain information from theRegistrant’s definitive proxy statement (the “Proxy Statement”) for its annualmeeting of stockholders to be held on May 12, 2005.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**          | ** **                                                                                          | ** ** |
|--------------------------|-----------------------------------------------------------------------------------------------------|------------|
| ** **               | ** **                                                                                          | ** ** |
| **Item 1.**              | **Business**                                                                                        |       |
| ** **               | ** **                                                                                          |       |
| **Item  2.**             | **Properties**                                                                                      |       |
| ** **               | ** **                                                                                          |       |
| **Item  3.**             | **Legal  Proceedings**                                                                              |       |
| ** **               | ** **                                                                                          |       |
| **Item 4.**              | **Submission of Matters to a Vote of Security Holders**                                             |       |
|                     |                                                                                                |       |
| **PART II**         |                                                                                                |       |
| ** **               |                                                                                                |       |
| **Item 5.**              | **Market for Registrant’s Common Equity and Related Shareholder Matters**                      |       |
| ** **               | ** **                                                                                          |       |
| **Item 6.**              | **Selected Financial Data**                                                                         |       |
| ** **               | ** **                                                                                          |       |
| **Item 7.**              | **Management’s Discussion and Analysis of Financial Condition and  Results of Operations**     | ** ** |
| ** **               | ** **                                                                                          |       |
| **Item 7a.**             | **Quantitative and Qualitative Disclosures about Market Risk**                                      |       |
| ** **               | ** **                                                                                          |       |
| **Item 8.**              | **Financial Statements and Supplementary Data**                                                     |       |
| ** **               | ** **                                                                                          |       |
| **Item 9.**              | **Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure**           | ** ** |
|                     | ** **                                                                                          |       |
| **Item 9a.**             | **Controls and Procedures**                                                                         |       |
| ** **               | ** **                                                                                          |       |
| **Item  9b.**            | **Other  Information**                                                                              |       |
|                     |                                                                                                |       |
| **PART III**        |                                                                                                |       |
| ** **               |                                                                                                |       |
| **Item 10.**             | **Executive Officers and Directors of the  Registrant**                                             |       |
| ** **               | ** **                                                                                          |       |
| **Item 11.**             | **Executive Compensation**                                                                          |       |
| ** **               | ** **                                                                                          |       |
| **Item 12.**             | **Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters** | ** ** |
| ** **               | ** **                                                                                          |       |
| **Item 13.**             | **Certain Relationships and Related  Transactions**                                                 |       |
| ** **               | ** **                                                                                          |       |
| **Item 14.**             | **Principal Accounting Fees and Services**                                                          |       |
|                     |                                                                                                |       |
| **PART IV**         |                                                                                                |       |
| ** **               |                                                                                                |       |
| **Item 15.**             | **Exhibits, Financial Statement Schedules and  Reports on Form 8-K**                           |       |
|                     |                                                                                                |       |
| **FINANCIAL STATEMENTS** |                                                                                                |
| ** **               |                                                                                                |       |
| **GLOSSARY OF TERMS**    |                                                                                                |

 

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**PART I**

**i.****            Explanatory Note**

 

This Amendment No. 1 on Form 10-K/A (this “Amendment”)amends the registrant’s annual report on Form 10-K for the period endedDecember 31, 2004 originally filed on March 21, 2005 (the “Original Filing”).Channell Commercial Corporation (the “Company”) is filing the amendment tocorrect errors in the calculation of the cumulative timing difference betweenbook and tax depreciation.  The originalerror in the computation that occurred in 2001 and the effect of this errorcarried forward to years ended December 31, 2002, 2003 and 2004.  In addition, the Company had a mathematicalerror in the 2004 deferred income tax calculation that resulted in anadditional error in the reported deferred income tax balance  The recording error resulted in a restatementof deferred income taxes as of December 31, 2003 and December 31, 2004 as wellas income tax expense (benefit), net income (loss) before minority interest,net income (loss), net income (loss) per share and comprehensive net (loss)income for the fiscal years ended December 31, 2002, 2003 and 2004.  The effect of the restatement is described inNote R to the Consolidated Financial Statements included in this Form 10-K/A-1.

 

Except as describedabove, no other changes have been made to the original filing. This Amendmentcontinues to speak as of the date of the original filing, and the Registranthas not updated the disclosures contained therein to reflect any events whichoccurred at a date subsequent to the filing of the original filing.

 

**Item 1. Business**

 

**Background**

 

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

 

**General**

 

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

 

The Companyalso designs, manufactures and markets polyethylene water tanks for rural andresidential markets in Australia.  TheCompany’s primary product line of rotational molded tanks is used in theagricultural sector where water shortages require storage of rain and groundwater.  The Company also markets a rangeof water storage tanks for use in residential and rural-residential markets.  The Company operates out of four leasedfacilities in Australia.  The facilitiesare located in Dalby, Orange, Terang, and Adelaide.

 

The Companyentered the Australian water storage tank market in August 2004 with theacquisition of Bushman Tanks.  BushmanTanks is Australia’s largest manufacturer and distributor of rotational moldedpolyethylene water storage tanks.

 

The Company’s enclosureproduct line accounted for 78%, 79% and 59% of the Company’s net sales in 2002,2003 and 2004, respectively.  The Companyhas recently diversified a portion of its business with the acquisition ofBushman Tanks.  The Company’s waterrelated products product line accounted for 30% of the Company’s net sales in2004.  The Company has long-lived assetsin Australia of $2.6 million, $2.4 million and $5.5 million in 2002, 2003 and2004, respectively.

 

**Industry**

 

TheCompany operates primarily in two industries, the telecommunications industryand the Australian water storage tank industry.

 

Inthe telecommunications industry, broadband and local telephone operators arebuilding, rebuilding or upgrading signal delivery networks around theworld.  These networks are designed todeliver video, voice and/or data transmissions to individual residences andbusinesses.  Operators deploy a varietyof network technologies and architectures, such as HFC,

 

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VoIP, DLC, ADSL and FTTP(see “Glossary of Terms”) to carry broadband and narrowband signals.  These architectures are constructed ofelectronic hardware connected via coaxial cables, copper wires and/or opticalfibers, including various access devices, amplifiers, nodes, hubs and othersignal transmission and powering electronics. Many of these devices in the outside plant require housing in secure,protective enclosures and cable management connectivity systems, such as thosemanufactured by the Company.

 

Ascritical components of the outside plant, enclosure products provide (i) protectionagainst weather and vandalism, (ii) ready access for technicians whomaintain and manage the outside plant and, (iii) in some cases, providedissipation of heat generated by the active electronic hardware.  Broadband and local telephone networkoperators place great reliance on manufacturers of protective enclosuresbecause any material damage to the signal delivery networks is likely todisrupt communications services. Connectivity products provide critical data-rated connection pointswhich support cost effective service deployment and ensure signal integrity ismaintained throughout the network.

 

Theprimary drivers of demand for enclosures in the communications industry are theconstruction, rebuilding, upgrading and maintenance of signal delivery networksby broadband operators and local telephone companies.  For example, broadband networks are beingupgraded and prepared for advanced two-way services such as high-speed Internetaccess via cable modems, telephony and PCS transport. Local telephone serviceproviders are employing advanced technologies, such as a variety of digitalsubscriber line (“DSL”) technologies, which utilize installed copper wires forbroadband services.  These “local loop”copper wire systems often require significant upgrading and maintenance toprovide the optimal throughput necessary to carry high-speed broadband signals,increasing the need for fully sealed outside plant facilities in order tosustain network reliability and longevity.  Local telephone service providers are also employing various fiber tothe premise (FTTP) technologies to deliver higher bandwidth services tocustomers.  FTTP utilizes outside plantenclosures to protect the networks as well as fiber cable management devicesthat are both manufactured by the Company.

 

In theAustralian water storage tank industry, consumers utilize plastic, steel or concretetanks for the storage of water. Australia is an arid climate with limited water resources.  The combination of a growing population, amovement of people away from urban areas and limited rainfall has resulted inwater shortages in most geographic areas. Water storage tanks are used to store rain and ground water inresidential and commercial properties. The water is used for outside the home purposes such as gardening, pumpedinto the home for non potable uses such as washing machines and toilets and mayoften be used as a source of drinking water. Local, state and national governments have implemented severalregulations intended to conserve water. These include restrictions on the use of potable water and requirementsto install water storage tanks or other conservancy products in new residentialdwellings in selected areas.

 

**Business Strategy**

 

The Company’s strategy isto capitalize on its core strengths in the design and manufacture ofthermoplastic products, metal products and connectivity products and to usethese strengths to be a leading company in the markets it operates in as wellas to enter new markets.

 

The Company pursuesopportunities in**the global communicationsindustry by providing enclosures, connectivity products and other complementarycomponents to meet the evolving needs of its customers’ communicationsnetworks.  The Company’s wide range ofproducts, manufacturing expertise, application-based sales and marketingapproach and reputation for high quality products address key requirements ofits customers.

 

In addition to thecommunications industry, the Company seeks to leverage its expertise inplastics and metal manufacturing technologies to diversify into otherindustries.  The Company’s acquisition ofthe Bushman Tanks 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 theCompany’s strategy include the following:

 

***Focuson Core Telecommunications Business.**** *The Company will continue to seekto capitalize on its position as a leading designer, manufacturer and marketerof enclosures and copper wire connectors for the broadband/CATV and localtelephone industries in the North America, Europe, Middle East, Africa, Australiaand Asia markets through new product development.  The Company believes it currently supplies asubstantial portion of the enclosure product requirements of a number of majorbroadband operators.

 

The Company has investedin the development of a broad range of products designed specifically fortelecom applications. These include connectivity and enclosure products for DSLand FTTP based networks.  The Company hassuccessfully marketed its traditional broadband products to local telephonecompanies that have been designing and

 

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deployingbroadband networks to deliver competitive video and data services.  The Company will continue to target thismarket for growth, both with telephone network operators and with major systemOEMs.

 

***ExpandInternational Presence in Communications Industry.***  Management believes international marketsoffer significant opportunities for increased sales to both broadband andtelephone companies. The Company’s principal international markets currentlyinclude Canada, Mexico, Asia, the Pacific Rim, the Middle East, Africa andEurope.  Trends expected to result ininternational growth opportunities include the on-going deregulation and privatizationof telecommunications in many nations around the world and the focus ofnumerous countries on building, expanding and enhancing their communicationssystems to deliver broadband services in order to participate fully in theinformation-based global economy.  TheCompany will concentrate on expansion in international markets that arecharacterized by deregulation or privatization of telecommunications and by theavailability of capital for the construction of signal delivery networks.

 

***DevelopNew Products and Enter New Markets.**** *The Company continues to leverageits core capabilities in developing innovative products that meet the evolvingneeds of its customers.  Innovativeproducts offered by the Company include its MAH SeriesTM free-breathing telephonyenclosures, GLMTM 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.patent protection.  The Company’sproducts 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 expandingits product offering of water storage tanks to include underground tanks andrelated products primarily for the residential markets in Australia.  The Company’s principal customers arecurrently in rural areas.  The Companycontinues to develop innovative products to expand its presence in theresidential and rural-residential markets of Australia.  The Company may also pursue water storagetank markets beyond Australia in the future.

 

***Concentrateon Core Capabilities to Diversify into Other Industries***.  The Company believes its core competenciesare in the design and manufacture of plastic and metal infrastructureproducts.  The Company is pursuing astrategy to utilize these core competencies to diversify into other industriesto profitably grow.  Relevant industriesthat the Company may pursue include water, irrigation, power utility and otheroutside plant infrastructure products. The acquisition of Bushman Tanks to operate in the water industry is anexample of this diversification strategy.

 

**Products**

 

The Company currentlymarkets over 60 product families, with several thousand optional productconfigurations.  The primary functions ofthe Company’s products designed for the telecommunications industry are cablerouting and management, 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 pumping ofwater for both outside and inside the home usage.

 

***Enclosures. ***The Companymanufactures precision-molded, highly engineered and application-specificthermoplastic and metal fabricated enclosures for the communications industrythat are considered state-of-the-industry for many applications, having beenfield tested and received approvals and standardization certifications frommajor broadband 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 andmanufacturer of metal fabricated enclosures that house advanced electronics,fiber optic cable and power systems for broadband telecommunications networks(branded as “Rhino EnclosuresTM”).  TheCompany designs and manufactures a series of termination blocks, brackets andcable management devices for mounting inside its enclosure products.  To position itself as a full-line productsupplier, the Company also offers a variety of complementary products,including thermoplastic and composite grade level boxes for sub surface networkapplications..  These products aretypically purchased by customers as part of a system package and are marketedby the Company through its direct sales force to its customer base.  The Company is recognized in the industry forits differentiated product designs and the functionality, field performance andservice life of its products.

 

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***CopperConnectivity. ***TheCompany is a designer and manufacturer of innovative telephone connectivitydevices.  The Company’s InsulationDisplacement Connector (“IDC”) technology provides advanced “tool-less”termination systems for copper wires, the predominant medium used in the “LastMile” for telephone services worldwide. These proprietary IDC products environmentally seal network terminationpoints with a high level of reliability. The Company’s DSLink TM modular terminal block offerstelephone service providers a Category 5 (“Cat- 5”) solution to the risingcosts of DSL deployment in the local loop. The Company’s Mini-RockerTM line ofcopper connectivity modules, blocks and accessories offer environmentallysealed and Cat-5 data rated IDC tool-less circuit installation and have beenaccepted as a universal connectivity platform for network applicationsworldwide, including xDSL and VoIP services.

 

***FiberOptic 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 fiber to the premises (FTTP) network architectures.  Fiber optic electronic enclosures houseoptical electronics, power supplies and cables. The Company’s fiber optic splice cases are used for organizing, managingand protecting the connection points between separate lengths of fiber opticcable in the outside plant network. Fiber optic cable assemblies and interconnect hardware are used toconnect fiber optic electronics and fiber optic cables primarily forin-building applications.  All of theseproducts are designed and manufactured by the Company and marketed worldwide.

 

***OEMPrograms.***  TheCompany has OEM marketing programs through which other manufacturersincorporate the Company’s products as components of their telecommunicationssystems.  These OEM programs generallyinclude exchanges of technical information that the Company can use indeveloping new products and improvements and enhancements to existingdesigns.  The Company has establishedadditional relationships with systems integrators and innovative end users thatprovide valuable product improvement information.

 

***WaterProducts***.  TheCompany offers a range of water tank products for the storage of potable andnon potable water.  These productstypically store rain water collected from the roofs of homes or other buildingsor water pumped from underground wells. These products are primarily used by residential homes, agriculturalproperties and commercial buildings.  Accessoryproducts for these water tanks include filtration systems, connection devisesand pumps.

 

In addition to waterstorage tanks, the Company’s water product line includes applications for thecommunications industry.  Below groundenclosures protect networks from water and other damage.

 

**Marketingand Sales**

 

The Company markets itsproducts primarily through a direct sales force of technically trainedsalespeople. The Company employs an application-specific, systems approach tomarketing its products, offering the customer a complete, cost-effective systemsolution to meet its outside plant requirements.  All sales personnel have technical expertisein the products they market and are supported by the Company’sengineering and technical marketing staff.

 

Internal sales/customerservice departments administer and schedule incoming orders, handlerequests for product enhancements and service inquiries and support the Company’sdirect sales force. This department maintains direct communications with customersand the Company’s field sales and operations personnel.

 

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

 

Specific to the Company’swater tank products, a network of agents and distributors are utilized tomarket the Company’s products in addition to the use of a direct sales force.

 

The Company participatesin agricultural field days in Australia to market water storage products.  Agricultural field days are held in mostrural areas once or twice per year and are used by rural customers to purchasea variety of hardware products by attending a single event.  The Company uses radio and televisionadvertising to promote its water storage tank products throughout Australia.

 

**ManufacturingOperations**

 

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

 

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

 

The Company owns amajority of its manufacturing equipment. Manufacturing processes are performed by trained Company personnel.  These manufacturing processes includeinjection molding, structural foam molding, rotational molding, metalfabrication, automated discrete connector fabrication, rubber injection,transfer and compression molding, and termination block fabrication.  The Company has implemented severalcomprehensive process and quality assurance programs, including continuousmonitoring of key processes, regular product inspections and comprehensivetesting.

 

The Company’smanufacturing and distribution facilities as of December 31, 2004, includeapproximately 367,000 square feet in Temecula, California; 7,000 square feet inMississauga, Ontario, Canada; 34,000 square feet in Sydney, 43,000 square feetin Dalby, 22,000 square feet in Orange, 16,000 square feet in Terang, and13,000 square feet in Adelaide.  Themanufacturing operations in the United Kingdom were closed in June, 2004.

 

**ProductDevelopment and Engineering**

 

The Company’s productdevelopment and engineering staff has designed and tested the Company’sproducts and has developed core competencies in telecommunications outsideplant and water storage products. As a direct result, the Company has been ableto develop a broad series of superior products designed to meet the specificneeds of customers.  Distinguishingcharacteristics of the Company’s products include:

 

•                  Advancedmechanical innovations providing unique application specific performance andfeature sets;

•                  Sub-surfacenetwork access systems;

•                  Modularmetal fabricated enclosure product line covering multiple applications;

•                  Effectiveheat dissipation qualities for enclosure products;

•                  Advancedcopper IDC connectivity products;

•                  Asuperior environmental sealing and protection system in enclosure productsthat, unlike many competitors’ products, does not require gels, compounds orother methods to maintain the required seal;

•                  Productdesigns allowing communications equipment technicians easy access throughcovers that can be removed to fully expose the enclosed electronics;

•                  Compatibilitywith a variety of communications equipment signal delivery networkarchitectures;

•                  Versatilityof design to accommodate communications network growth through custom hardwareand universal mounting systems that adapt to a variety of new electronichardware;

•                  Excellentprotection and management of optical fibers and cables;

•                  ThermoplasticLaminated Coating (TLC®) that bonds directly to metal hardware andprotects against rust and deterioration;

•                  Highstrength and UV protected water storage products;

•                  Undergroundwater storage products; and

•                  Acomplete line of water storage accessories products including filtration, pumpsand connection devices.

 

The Company’s productdevelopment approach is applications-based and customer driven.  A team comprised of engineering, marketing,manufacturing and direct sales personnel work together to define, develop anddeliver comprehensive systems solutions to customers, focusing on the completedesign cycle from product concept through tooling and high-volumemanufacturing.  The Company is equippedto conduct many of its own product testing requirements for performancequalification purposes, enabling it to accelerate the product developmentprocess.  The Company spent $1.6 millionin 2002, $1.9 million in 2003, and $2.3 million in 2004 on research anddevelopment.

 

**Customers**

 

The Company sells itstelecommunications related products directly to broadband operators andtelephone companies throughout the world, principally within developednations.  The Company sells its productsto OEMs on a global basis.  The Companysells its water storage products in Australia directly to end users as well asto retailers, wholesalers, distributors and agents.  During 2004, the Company’s five largestcustomers accounted for 48.7% of total net sales.  In 2004, the Company’s five largest customersby sales in the United States were Verizon, Comcast, Cox, Time Warner andBright House Networks. Verizon and Comcast accounted for 21.7% and 14.6%,respectively, of the Company’s net sales in 2004.  In international markets, the Company’s fivelargest customers in 2004 by sales were Telstra (Australia), Rogers (Canada),Shaw (Canada), Uni Telco (Malaysia) and Eircom (Ireland).

 

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

 

**IntellectualProperty**

 

The Company owns substantiallyall of the patents and other technology employed by it in the manufacture anddesign of its products.  The Company’spatents, which expire through the year 2010, cover various aspects of theCompany’s products.  In addition, theCompany has certain trade secrets, know-how and trademarks related to itstechnology and products.

 

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

 

**Competition**

 

The telecommunicationsindustry is highly competitive.  TheCompany’s competitors include companies that are much larger than the Company,such as Tyco, 3M, Emerson, Arris and Corning in addition to competitors similarin size to the Company such as Carson Industries.  The Company believes its competitiveadvantages include its ability to service national and multi-national customers,its direct sales force, its specialized engineering resources and itsvertically integrated manufacturing operations.

 

Management believes theprincipal competitive factors in the telecommunications equipment market arecustomer service, new product capabilities, price, product availability, andproduct performance.

 

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

 

In the past, certain ofthe Company’s telecommunications customers have required relatively lengthyfield testing of new products prior to purchasing such products in quantity.  While field testing can delay theintroduction of new products, it can also act as a competitive advantage forthose products tested and approved because to a certain extent it creates abarrier to new product introduction and sales by competitors.

 

The water storageproducts industry in Australia is characterized by a few large competitors,including ARI Industries and Clark Tanks, and a high number of smaller,regional competitors.  The Companybelieves its competitive advantages include its low cost structure,manufacturing expertise, product design, marketing and sales expertise and itsnationwide coverage.  The Company is theonly nationwide manufacturer of water storage tanks in Australia.

 

Management believes thatthe principle competitive factors in the water storage industry are productquality, manufacturing capacity, and geographic location for logistics support,technical support and customer service. The multiple manufacturing plant locations provide nationwide marketcoverage in the industry which is not presently offered by any currentcompetitors.

 

Competitive pricepressures are prevalent in this industry. The Company has responded to these with ongoing process improvements,design optimization and targeted procurement programs.

 

The existing customerbase is widely dispersed throughout the rural market areas.  Promotion and awareness of the Company’sproducts and services is strongly reinforced. Long term direct marketing programs including media advertising, radioand television, and high profile promotion at exhibitions have been developedby the Company over many years.  Thesemarketing programs have established strong brand equity which creates acompetitive advantage/barrier to entry for other suppliers in severalsignificant market areas.

 

**RawMaterials; Availability of Complementary Products**

 

The principal rawmaterials used by the Company are thermoplastic resins, neoprene rubbers, hotand cold rolled steel,

 

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

 

Most plastic resins arepurchased under annual or multi-year purchase agreements to stabilize costs andimprove supplier delivery performance. Neoprene rubbers are manufactured using the Company’s proprietaryformulas.  Metal products are supplied instandard stock shapes, coils and custom roll forms.

 

The Company also relieson certain other manufacturers to supply products that complement the Company’sown product line, such as grade level boxes. The Company believes there are multiple sources of supply for theseproducts.

 

**Employees**

 

As of December 31,2004, the Company employed 592 people, of whom 70 were in sales, 431 were inmanufacturing operations, 32 were in research and development and 59 were inadministration.  The Company considersits employee relations to be good and recognizes its ability to attract andretain qualified employees is an important factor in its growth anddevelopment.  None of the Company’semployees is subject to a collective bargaining agreement, and the Company hasnot experienced any business interruption as a result of labor disputes withinthe past five years.

 

**Regulation**

 

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

 

The Company is alsosubject to a wide variety of federal, state and local environmental laws andregulations.  The Company utilizes,principally in connection with its thermoplastic manufacturing processes, alimited number of chemicals or similar substances that are classified ashazardous.  It is difficult to predictwhat impact these environmental laws and regulations may have on the Company inthe future.  Restrictions on chemicaluses or certain manufacturing processes could restrict the ability of theCompany to operate in the manner that it currently operates or is permitted tooperate.  Management believes that theCompany’s operations are in compliance in all material respects with currentenvironmental laws and regulations. Nevertheless, it is possible that the Company may experience releases ofcertain chemicals to environmental media which could constitute violations ofenvironmental law (and have an impact on its operations) or which could causethe Company to incur material cleanup costs or other damages.  For these reasons, the Company might becomeinvolved in legal proceedings involving exposure to chemicals or theremediation of environmental contamination from past or presentoperations.   Because certainenvironmental laws impose strict joint and several retrospective liability uponcurrent owners or operators of facilities from which there have been releasesof hazardous substances, the Company could be held liable for remedial measuresor other damages (such as liability in personal injury actions) at propertiesit owns or utilizes in its operations, even if the contamination were notcaused by the Company’s operations.

 

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

 

**AvailableInformation**

 

The Company’s Annual Report on Form 10-K,Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendmentsto those reports are available as soon as reasonably practicable after they arefiled or furnished to the Securities and Exchange Commission (“SEC”), throughour Internet website, www.channellcomm.com. Company filings are also available through a database maintained by theSEC at www.sec.gov.

 

7

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**Item 2.  Properties**

 

The Company’s facilitiesapproximate 504,000 square feet, of which approximately 63%, 22% and 15% wereused for manufacturing, warehouse and office space, respectively.  In Temecula, California, 261,000 square feetof the total 367,000 square feet are leased from William H. Channell, Sr.,the Company’s Chairman of the Board. (See “Certain Relationships and Related Transactions”, Item 13.)  The Company also leases an aggregate ofapproximately 137,000 square feet of manufacturing, warehouse and office spacein Canada, Australia and the United Kingdom. In Australia, 94,000 square feetof manufacturing and distribution space in Orange, Dalby, Terang and Adelaideare leased from the former owners of Bushman Tanks (See “Certain Relationshipsand Related Transactions”, Item 13).  InDecember, 2002, the Company announced steps to rationalize internationalmanufacturing operations to consolidate operations.  The Company has completed the facilitiesreduction program.  In 2002, the Companycompleted a sale and leaseback of approximately 103,000 square feet ofmanufacturing, warehouse and office space in Temecula, California.  The Company sold approximately 43,000 squarefeet of manufacturing, warehouse and office space in the United Kingdom inJanuary, 2003.  In the fourth quarter of2003, the Company further evaluated International operations to improve profitability.  A manufacturing facility in the UnitedKingdom was closed in June 2004.  The Company considers its current facilities, and its facilitiesfollowing the completion of the foregoing restructuring activities, to beadequate for its operations.

 

**Item 3.  Legal Proceedings**

 

The Company is from timeto time involved in ordinary routine litigation incidental to the conduct ofits business.  The Company regularlyreviews all pending litigation matters in which it is involved and establishesreserves deemed appropriate for such litigation matters.  Management believes that no presently pendinglitigation matters will have a material adverse effect on its business or onits results of operations.

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

No matters were submittedto a vote of security holders during the fourth quarter of the fiscal yearcovered by this report.

 

**PART II**

 

**Item 5.  Market for Registrant’sCommon Equity and Related Shareholder Matters**

 

The followingtable sets forth, for the periods indicated, the high and low sale prices forthe Company’s Common Stock, as reported on the NASDAQ National Market.

 
| ** **                             | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------------|------------|----------|------------|---------|------------|
| **Year Ended December 31, 2003:** |       |     |       |    |       |
| First  Quarter                         |       | $        | 5.46       |    | $          | 3.00 |   |
| Second  Quarter                        |       | 6.42     |       | 3.60    |       |
| Third  Quarter                         |       | 6.00     |       | 4.31    |       |
| Fourth  Quarter                        |       | 5.10     |       | 2.10    |       |
|                                   |       |     |       |    |       |
| **Year Ended December 31, 2004:** |       |     |       |    |       |
| First  Quarter                         |       | $        | 5.38       |    | $          | 3.85 |   |
| Second  Quarter                        |       | 4.58     |       | 3.60    |       |
| Third  Quarter                         |       | 4.50     |       | 2.90    |       |
| Fourth  Quarter                        |       | 8.50     |       | 3.55    |       |

 

The Companyhas not declared any dividends subsequent to its initial public offering in July 1996.

 

The Companycurrently anticipates it will retain all available funds to finance itsbusiness.  The Company does not intend topay cash dividends in the foreseeable future. Under the terms of the Company’s Loan and Security Agreement, theCompany has agreed not to pay any dividends.

 

As of March 2,2005, the Company had 9,383,942 shares of its Common Stock outstanding, held byapproximately 1,050 shareholders of record.

 

8

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**Item 6.  Selected FinancialData**

 

The selectedconsolidated financial data presented below for each of the five years in theperiod ended December 31, 2004, have been derived from auditedconsolidated financial statements, which for the most recent three years appearelsewhere herein. The data should be read in conjunction with the financialstatements, related notes and other financial information included therein(amounts in thousands, except per share data).

 
| ** **                                               | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **2000**                         | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                               | ** ** | ** **                       | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| **OPERATING DATA:**                                      |       |                             |       |   |   |   |   |   |   |   |   |
| Net sales                                                |       | $                                | 128,179    |   | $ | 88,698 |   | $ | 84,785 |   | $ | 76,537 |   | $ | 100,134 |   |
| Cost of goods sold                                       |       | 81,108                           |       | 69,892 |   | 57,450 |   | 53,960 |   | 72,151 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |
| Gross profit                                             |       | 47,071                           |       | 18,806 |   | 27,335 |   | 22,577 |   | 27,983 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |
| Operating expenses                                       |       |                             |       |   |   |   |   |   |   |   |   |
| Selling                                                  |       | 15,484                           |       | 12,789 |   | 9,246 |   | 9,465 |   | 14,279 |   |
| General and  administrative                              |       | 14,231                           |       | 14,124 |   | 11,452 |   | 7,710 |   | 8,584 |   |
| Research and  development                                |       | 2,771                            |       | 2,331 |   | 1,619 |   | 1,902 |   | 2,336 |   |
| Restructuring  charge                                    |       | 1,513                            |       | 2,999 |   | 1,228 |   | 1,565 |   | (690 | ) |
| Asset  impairment charge                                 |       | 4,569                            |       | 4,322 |   | 2,154 |   | 1,238 |   | — |   |
| Goodwill  impairment charge                              |       | —                           |       | 11,772 |   | 966 |   | — |   | — |   |
|                                                     |       | 38,568                           |       | 48,337 |   | 26,665 |   | 21,880 |   | 24,509 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |
| Income (loss) from operations                            |       | 8,503                            |       | (29,531 | ) | 670 |   | 697 |   | 3,474 |   |
| Interest income (expense), net                           |       | (2,859                           | )          | (3,874 | ) | (1,999 | ) | (571 | ) | (489 | ) |
| Income (loss) before income taxes                        |       | 5,644                            |       | (33,405 | ) | (1,329 | ) | 126 |   | 2,985 |   |
| Income taxes (benefit)                                   |       | 2,076                            |       | (7,641 | ) | 1,713 |   | 200 |   | (791 | ) |
| Net income (loss) before minority interest               |       | 3,568                            |       | (25,843 | ) | (3,042 | ) | (74 | ) | 3,776 |   |
| Minority interest                                        |       | —                           |       | — |   | — |   | — |   | 167 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                        |       | $                                | 3,568      |   | $ | (25,764 | ) | $ | (3,042 | ) | $ | (74 | ) | $ | 3,609 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |
| **NET INCOME (LOSS) PER SHARE:**                         |       |                             |       |   |   |   |   |   |   |   |   |
| Basic                                                    |       | $                                | 0.39       |   | $ | (2.85 | ) | $ | (0.34 | ) | $ | (0.01 | ) | $ | 0.39 |   |
| Diluted                                                  |       | $                                | 0.39       |   | $ | (2.85 | ) | $ | (0.34 | ) | $ | (0.01 | ) | $ | 0.39 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |
| **WEIGHTED  AVERAGE NUMBER OF SHARES OUTSTANDING:**      |       |                             |       |   |   |   |   |   |   |   |   |
| Basic                                                    |       | 9,091                            |       | 9,050 |   | 9,048 |   | 9,126 |   | 9,203 |   |
| Diluted                                                  |       | 9,126                            |       | 9,050 |   | 9,048 |   | 9,126 |   | 9,223 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |
| **BALANCE SHEET DATA:**                                  |       |                             |       |   |   |   |   |   |   |   |   |
| Current assets                                           |       | $                                | 51,531     |   | $ | 39,626 |   | $ | 23,449 |   | $ | 30,407 |   | $ | 37,686 |   |
| Total assets                                             |       | 116,748                          |       | 84,811 |   | 53,621 |   | 53,435 |   | 78,481 |   |
| Long-term obligations (including current  maturities)(3) |       | 40,364                           |       | 36,816 |   | 6,548 |   | 3,906 |   | 8,840 |   |
| Stockholders’ equity                                |       | 63,927                           |       | 36,931 |   | 34,899 |   | 36,816 |   | 42,484 |   |
|                                                     |       |                             |       |   |   |   |   |   |   |   |   |
| **OTHER DATA:**                                          |       |                             |       |   |   |   |   |   |   |   |   |
| Gross margin(1)                                          |       | 36.7                             | %          | 21.2 | % | 32.2 | % | 29.5 | % | 27.9 | % |
| Operating margin(2)                                      |       | 6.6                              |       | (33.3 | ) | 0.8 |   | 0.9 |   | 3.5 |   |
| Capital expenditures (excluding capital  leases)         |       | 11,606                           |       | 3,153 |   | 1,886 |   | 1,203 |   | 3,281 |   |
| Cash provided by (used in):                              |       |                             |       |   |   |   |   |   |   |   |   |
| Operating  activities                                    |       | 8,352                            |       | 13,964 |   | 19,767 |   | 7,127 |   | 9,228 |   |
| Investing  activities                                    |       | (11,857                          | )          | (3,153 | ) | 4,346 |   | 1,154 |   | (20,025 | ) |
| Financing  activities                                    |       | 1,876                            |       | (2,927 | ) | (29,832 | ) | (2,662 | ) | 7,550 |   |

 

----

(1)          Gross margin is gross profit as a percentage of net sales.

(2)          Operating margin is income (loss) fromoperations as a percentage of net sales.

(3)          Includes all interest bearing debt and capital lease obligations.

 

9

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

 

**General**

 

The Company isa designer and manufacturer of telecommunications equipment supplied totelephone and broadband network providers worldwide and of water storageproducts marketed primarily in Australia. In addition to Company manufactured products, the Company marketscomplementary products manufactured by third parties. The Company sellsproducts directly to broadband operators and telephone companies throughout theUnited States, Canada, Australia, Asia, Europe, the Middle East and Africa andcertain other international markets, principally within developed nations.  The Company’s customers of water storageproducts in Australia are typically individual users whom will keep the productfor several years without a repeat purchase. The Company believes that many of its customers periodically reviewtheir supply relationships and consequently the Company can experiencesignificant changes in buying patterns from specific customers between fiscalperiods. The Company has historically operated with a relatively small backlogwith sales and operating results in any quarter principally dependent uponorders booked and products shipped in that quarter.  The Company’s customers generally do not enterinto long-term supply contracts providing for future purchase commitments forthe Company’s products. These factors, when combined with the Company’soperating leverage and the need to incur certain capital expenditures andexpenses in part based upon the expectation of future sales, causes the Company’soperating results to be at risk to changing customer buying patterns.  If sales levels in a particular period do notmeet the Company’s expectations, operating results for that period may bematerially and adversely affected.

 

The Company usesnumerous raw materials in its manufacturing processes.  Although management believes that the Companyhas adequate sources of supply for such raw materials, increases in the marketprices of the Company’s raw materials could significantly increase the Company’scost of goods sold and materially adversely affect the Company’sprofitability.  The Company’sprofitability may also be materially and adversely affected by decreases in itssales volume because many of the costs associated with the Company’sfacilities, product development, engineering, tooling and other manufacturingprocesses are essentially fixed in nature and must be spread over its salesbase in order to maintain historical levels of profitability.

 

**Critical Accounting Policies**

 

The 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 make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Management bases its estimates on historical experience andon assumptions 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.

 

The criticalaccounting policies requiring estimates and assumptions that managementbelieves have the most significant impact on the Company’s consolidated financialstatements are:

 

•             Accounts receivables reserves

•             Allowances for excess and obsolete inventory

•             Valuation of goodwill and long-lived assets

•             Restructuring costs

•             Accounting for income taxes

•             Foreign currency translation

 

***Accountsreceivable Reserves and estimated sales returns.*** Allowancesfor doubtful accounts are maintained for estimated losses expected to resultfrom the inability of our customers to make required payments.  Provisions for uncollectible accounts aremade based on the Company’s specific assessment of the collectability of allpast due accounts.   An adverse change infinancial condition of a significant customer or group of customers couldmaterially affect management’s estimates related to doubtful accounts.  Provisions for sales returns are made basedon historical experience.

 

***Allowancesfor excess and obsolete inventory.*** Theestimates of excess and obsolete inventory are based on management’sassumptions about and analysis of relevant factors including historical salesand usage of items in inventory, current levels of orders and backlog,forecasted demand, product life cycle and market conditions.  If actual market conditions become lessfavorable than anticipated by management, additional allowances for excess andobsolete inventory could be required.  Inthe event management adjusts estimates such as forecasted sales or expectedproduct lifecycles, the value of the Company’s inventory may become understatedor overstated and recognition of such understatement or

 

10

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overstatement will affect cost of sales in afuture period, which could materially affect the Company’s operating resultsand financial position.

 

***Valuationof goodwill and long-lived assets***. Management reviews goodwill and long-lived assets for impairment whenevents or changes in circumstances indicate the carrying values may not befully recoverable. Management assesses potential impairment of the carryingvalues of these assets based on market prices, if available, and/or assumptionsabout and estimates of future cash flows expected to be generated from theseassets. Future cash flows may be adversely impacted by operating performance,market conditions and other factors.  Animpairment charge would be based on the amount by which the carrying valueexceeds fair value.  Fair value isestimated by management based on market prices, if available, and/or forecasteddiscounted cash flows, using a discount rate commensurate with the risksinvolved. Assumptions related to future cash flows and discount rates involvemanagement judgment and are subject to significant uncertainty. If future cashflows, discount rates and other assumptions used in the assessment andmeasurement of impairment differ from management’s estimates and forecasts,additional impairment charges could be required.

 

***Restructuringcosts***.  Restructuring costs are recorded inaccordance with FASB Statement 146, Accounting for Costs Associated With Exitor Disposal Activities.  One-timeseverance benefits for employees terminated are recorded at the time managementcommits to the plan to reduce the work force, knows the amount of thetermination benefit, is unlikely to change the plan and has communicated toemployees the intended work force reduction. Liabilities for costs that will continue to be incurred under a contractfor its remaining term without an economic benefit, such as for facility leasepayments for premises vacated, are recorded when the Company ceases to use theright conveyed by the contract.  In thecase of vacated leased facilities, the liability is based on the future leasepayments required under the contract less the estimated future rental incomethe Company may earn by subletting the facilities or estimates of costsincurred to terminate a lease with a landlord. These estimates of future sublet income are based on current economicconditions, current condition of the local leasing market, past experience andjudgments supplied by professionals in the local real estate market.  These estimates are subject to significantuncertainty and may change.  Additionalcharges could be required as a result in the changes in estimates.

 

***Accountingfor income taxes***.  Income taxes are recorded foreach of the jurisdictions in which the Company operates. Management records theactual current income tax payable and assesses the temporary differencesresulting from differing treatment of items, such as reserves and accruals, fortax and accounting purposes. These differences result in deferred tax assetsand liabilities which are included within the consolidated balance sheet.  In assessing the realizability of deferredtax assets, management considers whether it is more likely than not that someportion or all of the deferred tax assets 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.  In addition, the realizationof deferred tax assets is also dependent upon audits by tax authorities of taxfilings which may result in a revision to previous amounts claimed.  Significant management judgment is involvedin assessing the Company’s ability to realize any future benefit from deferredtax assets. In the event that actual results differ from management estimatesand management adjusts these estimates in future periods, the Company’soperating results and financial position could be materially affected.

 

***Foreigncurrency translation. ***The Company has foreign subsidiaries thattogether accounted for 31.5 % of the Company’s net revenues and 48.8% of theCompany’s assets as of and for the year ended December 31, 2004. Inpreparing the Company’s consolidated financial statements, the Company isrequired to translate the financial statements of its foreign subsidiaries fromthe currencies in which they keep their accounting records into United Statesdollars. This process results in exchange gains and losses which, underrelevant accounting guidance, are either included within the Company’sstatement of operations or as a separate part of the Company’s net equity underthe caption “cumulative translation adjustment.”

 

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

 

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

 

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

 

11

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Based onmanagement’s assessment of the factors discussed above, the Company considersthe functional currency of each of its international subsidiaries to be eachsubsidiary’s local currency. Accordingly, the Company had cumulativetranslation gains of ($1.0) million that were included as part of accumulatedother comprehensive loss within the Company’s balance sheet at December 31,2004. During the year ended December 31, 2004, the Company includedtranslation adjustments of a gain of approximately ($1.1) million underaccumulated other comprehensive income and loss.

 

If the Companyhad determined that the functional currency of its subsidiaries was UnitedStates dollars, these gains or losses would have decreased or increased theCompany’s loss for the year ended December 31, 2004. The magnitude ofthese gains or losses depends upon movements in the exchange rates of theforeign currencies in which the Company transacted business as compared to thevalue of the United States dollar.  Thesecurrencies include the British pound, the Canadian dollar and the Australiandollar. Any future translation gains or losses could be significantly higherthan those the Company recorded for the year ended December 31, 2004.

 

**NewAccounting Pronouncements**

 

***Recent AccountingPronouncements****.*   In November 2004, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs,an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 retains the general principle of ARB No.43, Chapter 4,“Inventory Pricing,” that inventories are presumed to be stated at cost;however, it amends ARB No. 43 to clarify that abnormal amounts of idlefacilities, freight, handling costs and spoilage should be recognized ascurrent period expenses.  Also, SFAS No. 151requires fixed overhead costs be allocated to inventories based on normalproduction capacity.  The guidance inSAFS No. 151 is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005.  TheCompany believes that implementing SFAS No. 151 should not have a materialimpact on its financial condition or results of operations.

 

InDecember 2004, the FASB issued Statement 123 (revised 2004), *Share-Based**Payment*(Statement123(R)).  This Statement is a revision toStatement 123, *Accounting for Stock-Based Compensation*,and supersedes Opinion 25, *Accounting for StockIssued to Employees*. Statement 123(R) requires the measurement of the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award.  Thecost will be recognized over the period during which an employee is required toprovide service in exchange for the award. No compensation cost is recognized for equity instruments for whichemployees do not render service.  TheCompany will adopt Statement 123(R) on July 1, 2005, requiringcompensation cost to be recognized as expense for the portion of outstandingunvested awards, based on the grant-date fair value of those awards calculatedusing the Black-Scholes option pricing model under Statement 123 for pro formadisclosures.  The effect of adoptingStatement 123(R) will decrease the Company’s pretax net income by approximately$400 during 2005.

 

12

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**Results of Operations**

 

The following table sets forth the Company’soperating results for the periods indicated expressed as a percentage of netsales.

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **2002**                         | ** ** | **2003** | ** ** | **2004** | ** ** |
|                                       |       |                             |       |   |   |   |   |
| Net Sales                                  |       | 100.0                            | %          | 100.0 | % | 100.0 | % |
| Cost of Sales                              |       | 67.8                             |       | 70.5 |   | 72.1 |   |
|                                       |       |                             |       |   |   |   |   |
| Gross Profit                               |       | 32.2                             |       | 29.5 |   | 27.9 |   |
|                                       |       |                             |       |   |   |   |   |
| Selling                                    |       | 10.9                             |       | 12.4 |   | 14.2 |   |
| General and administrative                 |       | 13.5                             |       | 10.1 |   | 8.6 |   |
| Research and development                   |       | 1.9                              |       | 2.5 |   | 2.3 |   |
| Restructuring charge                       |       | 1.4                              |       | 2.0 |   | (0.7 | ) |
| Asset impairment charge                    |       | 2.5                              |       | 1.6 |   | — |   |
| Goodwill impairment charge                 |       | 1.2                              |       | — |   | — |   |
|                                       |       |                             |       |   |   |   |   |
| Income from operations                     |       | 0.8                              |       | 0.9 |   | 3.5 |   |
|                                       |       |                             |       |   |   |   |   |
| Interest income (expense), net             |       | (2.4                             | )          | (0.7 | ) | (0.5 | ) |
|                                       |       |                             |       |   |   |   |   |
| Income (loss) before income taxes          |       | (1.6                             | )          | 0.2 |   | 3.0 |   |
| Income taxes (benefit)                     |       | (2.0                             | )          | 0.3 |   | (0.8 | ) |
| Net income (loss) before minority interest |       | (3.6                             | )          | (0.1 | ) | 3.8 |   |
| Minority interest                          |       | —                           |       | — |   | 0.2 |   |
|                                       |       |                             |       |   |   |   |   |
| Net income (loss)                          |       | (3.6                             | )%         | (0.1 | )% | 3.6 | % |

 

**Comparison of Year Ended December 31,2004 with Year Ended December 31, 2003**

 

In August of 2004 the Company acquired75% of the Bushman Tanks business (the “acquired company”).  Bushman Tanks is Australia’s largestmanufacturer of plastic water storage tanks. The Bushman Tanks financial results have been consolidated in theCompany’s financial statements for the twelve months ended December 31,2004.  The consolidated results includefive months of business activity of Bushman Tanks.  A minority interest has been recorded for the25% equity owned by ANZ Private Equity, a unit of Australia and New ZealandBanking Group Ltd.

 

***Net Sales***.  Net sales increased $23.6 million or 30.8%from $76.5 million in 2003 to $100.1 million in 2004.   The increase was due to the addition of theacquired business and growth in both the core Americas and Internationalsegments.

 

Americas net sales increased $7.6 million or11.7% from $64.8 million to $72.4 million. The increase was due to higher sales to a major telephone customer anddue to growth in connectivity and metal enclosure sales.  The major telephone customer purchasedplastic enclosures for a construction project to install fiber communicationlines to customer premises.

 

International net sales increased $16.0million or 136.3% from $11.7 million to $27.7 million.  The increase was primarily due to sales ofthe acquired company.  In addition, highersales to telephone customers in the Asian market contributed to the salesgrowth.

 

Sales to Verizon of $21.8 million in 2004represented 21.7% of Company sales in the period.  Sales to Verizon in 2003 were $8.0 millionrepresenting 10.5% of the Company sales in the period.  The second largest customer in 2004 wasComcast with sales of $14.6 million representing 14.6% of the total.  Sales to Comcast in 2003 were $20.7 millionrepresenting 27.1% of the Company sales in the period.

 

***Gross Profit***.  Gross profit increased $5.4 million from$22.6 million in 2003 to $28.0 million in 2004. The increase was primarily dueto the addition of gross profit earned by the acquired company.  Gross profit dollars in the Americas segmentdecreased due to higher raw material costs for plastic and steel.  Gross profit dollars in the Internationalsegment increased due to the addition of the acquired company and the closureof a manufacturing facility in the United Kingdom.  The

 

13

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closure of the United Kingdom facility lowered the overhead coststructure of International operations primarily due to the elimination offacility lease costs, middle management and indirect support costs.

 

As a percentage of net sales, gross profitdecreased from 29.5% in 2003 to 27.9% in 2004. The decline is due primarily to increased raw material costs for plasticand steel in the Americas segment.  Grossprofit as a percentage of net sales increased in the international segment dueto the addition of the acquired company which has a higher gross profitpercentage than the other Channell businesses and savings associated with theclosure of the manufacturing facility in the United Kingdom.

 

***Selling. ***Selling expensesincreased $4.8 million or 50.9% from $9.5 million in 2003 to $14.3 million in2004.  The increase is due to theaddition of selling expenses of the acquired company and higher commissions andfreight costs as a result of the increased sales level.  The freight cost increase is also due to anincrease in full truckload shipments to customers in which the Company pays thefreight cost.

 

As a percentage of net sales, selling expenseincreased from 12.4% in the 2003 period to 14.3% in the 2004 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 administrativeexpenses increased $0.9 million or 11.3% from $7.7 million in 2003 to $8.6million in 2004.   The increase is due tothe addition of the acquired company partially offset by lower general andadministrative expense in the Americas segment. In December of 2004 the Company sold its receivable owed fromAdelphia at a discount for $1.4 million. The receivable had previously been written off and thus the $1.4 millionproceeds were recorded as a reduction to general and administrative expenses inthe Americas segment in 2004.  Partiallyoffsetting this credit to expense in the fourth quarter of 2004 were additionalaccruals and charges for management incentive bonus $0.5 million, state salestax $0.4 million, expenses to evaluate an acquisition candidate that theCompany decided not to further pursue $0.2 million and audit and consultingfees mostly related to the worthless stock deduction associated with the UnitedKingdom operations and costs associated with review and modification ofinternal controls in response to the disclosure requirements of the SarbanesOxley Act $0.1 million.

 

## ***As a percentage of net sales, general and administrativeexpenses decreased from 10.1% in the 2003 period to 8.6% in***the 2004 period.  The decrease is due to the lower costs in theAmericas segment as well as the increased sales level without a correspondingincrease in general and administrative costs.

 

***Research and Development***.  Research and development expenses increased$0.4 million or 22.8% from $1.9 million in 2003 to $2.3 million in 2004.  The increase is due to spending on newproduct development programs, primarily for telephone connectivity products andthermoplastic enclosures for both telephone and cable customers.

 

As a percentage of net sales, research anddevelopment expenses decreased from 2.5% to 2.3% due to the addition of theacquired company which has a lower level of research and development spendingas compared to the other Channell businesses.

 

***Restructuring charge***.  Restructuring charges of ($0.7) million in2004 compare to $1.6 million in 2003.

 

In 2003, the Company evaluated Internationaloperations to improve profitability.  Aplan was developed to close a manufacturing facility in Internationaloperations by mid-year 2004.  Additionalrestructuring charges of $1.6 million were recorded in the fourth quarter of2003 for employee severance and facility closure cost.

 

In 2004, a credit to restructuring charge of ($0.7)million was recorded primarily due to the subletting of a vacated facility inthe United Kingdom at a cost less than previously estimated by management.

 

***Impairment of Fixed Assets***.  In 2003, an asset impairment charge of $1.2million was recorded for production equipment in International operations aspart of the closure of a manufacturing facility.  There was no impairment of fixed assets in2004.

 

***Incomefrom Operations****. *As a result of the items discussedabove, income from operations increased $2.8 million or 398.4% from $0.7million in 2003 to $3.5 million in 2004. Operating margin as a percent of sales increased from 0.9% to 3.5%.

 

***InterestExpense, Net****.*  Net interest expense decreased from $0.6million in 2003 to $0.5 million in 2004. The decrease was attributable to lower amortization of prepaid bankorigination fees in 2004.  Total debt andinterest expense increased in August due to the acquisition of BushmanTanks.

 

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# ***Income Taxes***.  Income tax expense decreased from $0.2million in 2003 to ($0.8) million in 2004. The effective tax rate of 159% in 2003 compares to (26.5%) in 2004. The decline is due to an ordinary worthless stockdeduction in 2004 offset by an increase in the valuation allowance.  The worthless stock deduction is associatedwith the United Kingdom operations.  As aresult of the decision to close the manufacturing facility in the UnitedKingdom, an independent party was commissioned to appraise the value of thelegal entity.  The appraisal concludedthat the entity was financially insolvent. Being insolvent, the entity therefore met the requirements for aworthless stock deduction.

 

**Comparison of Year Ended December 31,2003 with Year Ended December 31, 2002**

 

The Company implementedactions in 2002 and 2003 to restructure the Company due to decreased demand inthe telecommunications industry.  Theseactions resulted in a lower cost structure, a return to a positive income fromoperations, lower debt and an increase in the Company’s cash balance.   Shown below are the sales, income fromoperations, loss per share, debt and cash balance for 2001, 2002 and 2003:

 
| ** **                                                              | ** **   | **Year Ended December 31,**                 | ** **   |
|-------------------------------------------------------------------------|--------------|--------------------------------------------------|--------------|
| ** **                                                              | ** **   | **2001**                                         | ** **   | **2002** | ** ** | **2003** | ** ** |
| *** ***                                                            | *** *** | **(amounts in million, except  loss per share)** | *** *** |
| Net Sales                                                               |         | $                                                | 88.7         |   | $ | 84.8 |   | $ | 76.5 |   |
|                                                                    |         |                                             |         |   |   |   |   |
| Income (loss) from operations                                           |         | $                                                | (29.5        | ) | $ | 0.7 |   | $ | 0.7 |   |
|                                                                    |         |                                             |         |   |   |   |   |
| Loss per share                                                          |         | $                                                | (2.85        | ) | $ | (0.34 | ) | $ | (0.01 | ) |
|                                                                    |         |                                             |         |   |   |   |   |
| Total debt  as of December 31 (loans, capital leases and mortgage) |         | $                                                | 36.8         |   | $ | 6.5 |   | $ | 3.9 |   |
|                                                                    |         |                                             |         |   |   |   |   |
| Cash and cash equivalents                                               |         | $                                                | 8.8          |   | $ | 3.2 |   | $ | 9.5 |   |

 

In the fourth quarter of2003, the Company further evaluated International operations to improveprofitability.  A plan was developed toclose a manufacturing facility in International operations by mid-year 2004.  Additional non-recurring charges wererecorded in 2003 as a result of these actions including employee severancebenefits, inventory reserves, impairment of assets and facility closurecost.  The facility closure cost chargeis a revision to restructuring costs recorded in the third quarter of 2001 andthe fourth quarter of 2002.  The revisionis due to a change in the estimated sublease income from vacated facilitiesbased on management’s latest estimate.

 

***NetSales***.  Net salesdecreased $8.3 million or 9.7% from $84.8 million in 2002 to $76.5 million in2003.  The decrease resulted from aslowdown in equipment purchases by telecommunications service providers in boththe Americas and International operations.

 

Americas net salesdecreased $5.2 million or 7.4% from $70.0 million to $64.8 million.  In 2003, two major broadband operatorsreduced purchases compared to 2002.  Onecustomer reduced purchases as a result of substantially completing its networkupgrade program.  The second customerreduced purchases in the first half of 2003 due to deterioration in itsfinancial condition and the need to reduce spending.  The second customer resumed purchases at ahigher level in the second half of 2003. The declines from broadband customers were partially offset by a 16.6%increase in sales from the Company’s largest telephone customer, Verizon.  In addition, the Americas segment sold $1.5million of slow moving inventory in 2002 as part of the Company’s debtreduction program which also contributed to the period over period salesdecline.  There were no material sales ofslow moving inventory in 2003.

 

International net salesdecreased $3.1 million or 20.8% from $14.8 million to $11.7 million.  The decrease in International sales was dueto generally depressed industry conditions and lower sales of productsdiscontinued as part of the Company’s restructuring program.

 

Sales toComcast of $20.7 million in 2003 represented 27.1% of Company sales in theperiod.  Comcast acquired AT&T’sbroadband business in the fourth quarter of 2002 thereby increasing itspurchases from the Company. The second largest customer in 2003 was Verizonwith sales of $8.0 million representing 10.5% of the total.  Sales to AT&T of $20.2 million in 2002represented 23.8% of Company sales for the period. Combined AT&T andComcast sales for the 2002 period were $23.7 million or 28.0% of the Company’ssales in the period.  Sales to TimeWarner of $8.3 million in 2002 represented 9.8% of Company sales.

 

***Gross Profit***.  Gross profit decreased $4.7 million from $27.3million in 2002 to $22.6 million in 2003. The decrease is mainly due to the lower sales volume, which resulted inlower manufacturing production rates and higher unabsorbed overhead.  A secondary factor was product mix,predominately in the Americas.  Thechange in product mix was due to:  1) ahigher percentage of products purchased externally for resale that the Companysells as a package with core product lines

 

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that have a lower gross profit than enclosuresthat are manufactured internally, and, 2) a higher percentage of connectivityproducts that had a lower gross profit than thermoplastic enclosures.  The gross profit of connectivity products wasaffected by sales of new products whose manufacture is still in the start upphase and thus current product costs are higher than those anticipated duringfull scale production.

 

In 2002, grossprofit was reduced by $0.4 million of special charges in the fourth quarter towrite down inventory of discontinued products. In 2003, gross profit was reduced by $0.1 million of special charges towrite down inventory as part of the closure of an International manufacturingfacility.  Excluding the special chargesin both years, gross profit decreased $5.0 million from $27.7 million in 2002to $22.7 million in 2003.

 

As apercentage of net sales, gross profit decreased from 32.2% in 2002 to 29.5% in2003.  Excluding the special chargesrecorded in both years, gross profit as a percentage of net sales decreasedfrom 32.7% in 2002 to 29.7% in 2003.  Thereasons for the decrease are the same as those noted above for gross profitdollars.

 

***Selling. ***Sellingexpenses increased $0.2 million or 2.4% from $9.3 million in 2002 to $9.5million in 2003.  The increase is primarilyin freight costs due to higher fuel prices and an increase in full truckloadshipments to customers in which the Company pays the freight costs.

 

As a percentage of net sales, selling expenseincreased from 10.9% in 2002 to 12.4% in 2003. The higher percentage is primarily due to the reasons noted above.

 

***General and Administrative***.  General and administrative expenses decreased$3.7 million or 32.7% from $11.4 million in 2002 to $7.7 million in 2003.   The year 2002 included a $2.0 million chargeto increase the allowance for bad debt primarily as a result of the Chapter 11bankruptcy filing of a major broadband customer.  Excluding the charge, general andadministrative expense decreased by $1.7 million or 18.4%.  The decrease is due to cost reductions inadministrative functions primarily within the Americas operations.

 

As a percentage of net sales, general andadministrative expenses decreased from 13.5% in the 2002 period to 10.1% in the2003 period.  Excluding the charge forbad debt, general and administrative expenses as a percentage of net sales were11.1% in the 2002 period and 10.1% in the 2003 period.

 

***Research and Development***.  Research and development expenses increased$0.3 million or 17.5% from $1.6 million in 2002 to $1.9 million in 2003.  The increase is due to spending on projectsfor new product development in connectivity and thermoplastic enclosure productlines.  As a percentage of net sales,research and development expenses increased from 1.9% in 2002 to 2.5% in 2003.

 

***Restructuring charge.***  In the fourth quarter of 2002, the Companyinitiated actions to improve profitability in International operations.  The actions taken included head count andfacility square footage reductions in International operations.  In addition, the management of Internationaloperations was consolidated under one management team.  Restructuring charges of $1.2 million wererecorded in 2002 as a result of these actions.

 

***Impairment of Fixed Assets***.  In 2002, an asset impairment charge of $2.2million was recorded for production equipment in International operations aspart of the rationalization and downsizing of International manufacturingoperations and for tooling associated with products discontinued in theAmericas.

 

In 2003, an asset impairment charge of $1.2million was recorded for production equipment in International operations aspart of the closure of a manufacturing facility.

 

***Impairment of Goodwill. ***In 2002, agoodwill impairment charge in the International segment was recorded for $1.0million.  This impairment charge resultedin the full amortization of the goodwill associated with the A.C. Egertonacquisition.

 

There were no goodwill impairment charges in2003.

 

***Income(Loss) from Operations****. *As a result of the items discussedabove, income from operations was unchanged at $0.7 million in both 2002 and2003.  Operating margin as a percent ofsales increased from 0.8% to 0.9%.

 

***InterestExpense, Net****.*  Net interest expense decreased from $2.0million in 2002 to $0.6 million in 2003. The decrease was attributable to the lower level of debt in 2003.

 

***Income Taxes***.  Income tax expense decreased from $1.7million in 2002 to $0.2 million in 2003. The effective tax rate of 129% in 2002 compares to 159% in 2003.   The higher tax expense in 2002 was primarilyattributable to an increase in the

 

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valuation allowance for deferred tax assets related to net operatingloss carry forwards of foreign subsidiaries. The increase in valuation allowance was due to the uncertainty of futuretaxable income in these subsidiaries.  Inboth years, the Company recorded a tax expense for income earned in theAmericas.  In both years, a tax benefitwas not recorded for foreign operating losses in International operations dueto the uncertainty of the realization of the tax loss carry forwards.

 

**Liquidity and Capital Resources**

 

Cash and cash equivalents on December 31,2004 were $5.5 million, a decrease of $4.1 million from the December 31,2003 balance of $9.5 million.  Thedecrease was due to cash used for the acquisition of the Bushman Tanks businesspartially offset by cash generated from on going operations and a decrease inworking capital primarily due to a larger accounts payable balance.

 

Net cash used by investing activities was($20.7) million in 2004 as compared to net cash provided by investingactivities of $1.2 million in 2003.  Inthe 2004 period, the Company acquired the Bushman Tanks business.  Capital expenditures for property andequipment were higher in the 2004 period due to equipment required torefacilitate manufacturing facilities in the Americas as part of the transferof operations previously performed in Europe. In the 2003 period, the Company sold a building in the U.K. for $2.2million.

 

Net cash provided by financing activities in2004 was $8.3 million compared to net cash used of ($2.7) million in 2003.  In the 2004 period, the Company acquired theBushman Tank business and financed the purchase with a term loan from TheNational Australia Bank Ltd. and equity provided by ANZ Private Equity.  In the 2003 period, the Company repaid debt.

 

Accounts receivable increased from $10.1million at December 31, 2003 to $13.9 million at December 31, 2004primarily to due the addition of the acquired company and the higher level ofsales.  In terms of days salesoutstanding, accounts receivable decreased from 44 days at December 31,2003 to 37 days at December 31, 2004.

 

Inventories increased from $8.9 million at December 31,2003, to $14.2 million at December 31, 2004.  The increase is due to the addition of theacquired company and due to additional inventory necessary to meet the highersales demand.  Days inventory on handdecreased from 55 days at December 31, 2003 to 52 days at December 31,2004.

 

Accounts payable increased from $5.1 millionat December 31, 2003 to $16.1 million at December 31, 2004.  Days payables increased from 32 days to 59days, respectively.  The increase is dueto the addition of the acquired company in the consolidated financial statements,a higher percentage of product being purchased versus produced in house, higherinventory purchases to meet sales demand and the extension of vendor paymentterms.

 

The Company and its subsidiaries have enteredinto the following financing arrangements:

 

1.               On September 25,2002, the Company entered into a three-year Loan and Security Agreement with anasset-based lender in the United States. The Loan and Security Agreement’sinitial term loan balance of $4.7 million and initial revolver balance of $2.1million as well as $9.6 million in cash were used to repay in full the priorCredit Agreement.  The three-year term loan is repayable in quarterlypayments based on a five-year amortization schedule with a balloonrepayment at maturity.  At December 31,2004, the outstanding balance of the term loan was $2.8 million, with nooutstanding balance in the revolver.

 

Under the Loanand Security Agreement, the outstanding balance bears interest payable monthlyat a variable rate based on either LIBOR or the lender’s base rate.  The weighted average interest rate under theLoan and Security Agreement at December 31, 2004 was 4.41%.

 

TheLoan and Security Agreement contains various financial and operating covenantsthat impose limitations on the Company’s ability, among other things, to incuradditional indebtedness, merge or consolidate, sell assets except in theordinary course of business, make certain investments, enter into leases andpay dividends.  The Company is also required to comply with a fixed chargecoverage ratio financial covenant among others.  The Company was incompliance as of December 31, 2004 with the covenants of the Loan andSecurity Agreement.

 

2.               In July 2004,a subsidiary of the Company located in Australia, Channell Pty Ltd., enteredinto a one-year Loan and Security Agreement with a commercial bank inAustralia.  The Loan and SecurityAgreement contains a revolver line of credit for working capital needs.  The agreement is reviewed annually with thebank for yearly renewals.  At December 31,2004 the outstanding balance of the facility was $0.2 million.

 

Under the Loanand Security Agreement, the balance bears interest payable monthly at avariable rate based on the lender’s base rate. The weighted average interest rate at December 31, 2004 was 6.75%.

 

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The Loan andSecurity Agreement contains various financial and operating covenants thatimpose limitations on Channell Pty Ltd.’s ability, among other things, to incuradditional indebtedness, merge or consolidate and sell assets except in theordinary course of business.  Channell Pty Ltd. is also required to complywith an interest coverage ratio.  Channell Pty Ltd. was in compliance asof December 31, 2004 with the covenants of the Loan and SecurityAgreement.

 

3.               On August 2,2004, a subsidiary of the Company, Channell Bushman Pty Ltd., entered into afive-year Loan and Security Agreement with a commercial bank in Australia.  Channell Bushman Pty Ltd. is the holdingcompany established to acquire the Bushman Tanks business.  The Loan and Security Agreement’s initialterm loan balance of $5.8 million was used as part of the consideration paid toacquire the Bushman Tanks business.  The five-year term loan is repayablein quarterly payments based on a five-year amortization schedule.  The loan and security agreement also includesa revolving credit facility, reviewed annually, for working capital needs inthe amount of $1.4 million, a capital expenditure line of credit in the amountof $4.2 million and a $1.2 million facility to fund future “earn out” paymentsto the seller if the Bushman Tanks business achieves specified performancetargets in 2005 and 2006.  The Loan andSecurity Agreement is guaranteed by Channell Pty Ltd., a subsidiary of theCompany in Australia.  At December 31,2004, the outstanding balance of the term loan was $5.6 million and $0.0million on the revolving line of credit. There were no advances on either the capital expenditure line of creditor the earn line credit facility.

 

Under the Loanand Security Agreement, the outstanding balance bears interest payable monthlyat a variable rate based on the lender’s base rate.  The weighted average interest rate under theLoan and Security Agreement at December 31, 2004 was 5.75%.

 

The Loan and SecurityAgreement contains various financial and operating covenants that imposelimitations on Channell Bushman Pty Ltd.’s ability, among other things, toincur additional indebtedness, merge or consolidate, sell assets except in theordinary course of business, make certain investments, enter into leases andpay dividends.  Channell Bushman Pty Ltd. is also required to comply witha Debt/EBIT ratio, capital adequacy ratio, debit service coverage ratio andinterest coverage ratio.  ChannellBushman Pty Ltd. was in compliance as of December 31, 2004 with thecovenants of the Loan and Security Agreement.

 

4.               On August 2,2004, the Company and Channell Bushman Pty Ltd. entered into an Investment andShareholder’s Agreement with a private equity firm in Australia.  The private equity investment was obtained aspart of the financing of the Bushman Tanks acquisition.  The private equity party invested $2.6 million,the net amount received after paying a capital raising fee, for ownership of25% of the outstanding and voting shares of Channell Bushman Pty Ltd.  As part of the agreement, the private equityparty has the right to appoint one member of the Board of Directors of ChannellBushman Pty Ltd. with the Company appointing the remaining three members.  The agreement specifies that certain actionstaken by the Board of Directors require unanimous approval, among other things,a proposal to sell all or substantially all of the assets of Channell BushmanPty Ltd., material asset acquisitions or disposals not included in the annualbusiness plan, any plan to limit or dissolve the business, the issuance of anysecurities, capital restructuring, granting of a security interest on assetsand related party transactions.

 

It is theintent of the private equity party to exit its investment in Channell BushmanPty Ltd. within 5 years.  The Agreementcontains clauses to facilitate the exit of the private equity party.  The agreement specifies that after two years,the Company has an option to acquire all of the shares owned by the privateequity party.  The agreement specifiesthat the value of the shares is to be fair market value as determined by anindependent appraiser.  There are nominimum or maximum amounts specified in the agreement.  After five years, both the Company and theprivate equity party have the right to initiate a sale of Channell Bushman PtyLtd.  At such time, the other party mayelect to buy out the shares of the party initiating the sale at the fair marketvalue as determined by an independent appraiser.  Otherwise, Channell Bushman Pty Ltd. would beoffered for sale with the assistance of a financial advisor.

 

Contractual obligations, consistingprincipally of payment for noncancellable operating lease obligations, longterm debt and capital leases.  Futurepayments required under these contractual obligations have been summarized inthe notes to the Consolidated Financial Statements as follows: (i) leasecommitments –Note M, (ii) long term debt – Note F, and (iii) capitallease obligations – Note G.

 

The Company believes that cash flow fromoperations should be sufficient to fund the Company’s capital expenditure andworking capital requirements through 2005.

 

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**Contractual Obligations and Other Commitments**

 

The following table summarizes the Company’scontractual obligations and other commitments as of December 31, 2004:

 
| ** **                       | ** ** | ** ** | ** ** | **2006 to** | ** ** | **2007 to** | ** ** | **2009 and**   | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|-------------|------------|-------------|------------|----------------|------------|------------|------------|
| **(amounts in thousands)**       | ** ** | **2005**   | ** ** | **2007**    | ** ** | **2008**    | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Contractual Obligations          |       |       |       |        |       |        |       |           |       |       |       |
| Long Term  Debt (1)              |       | $          | 5,334      |        | $          | 2,873       |       | $              | 1,998      |       | $          | — |   | $ | 10,205 |   |
| Capital  Lease Obligations       |       | 36         |       | 104         |       | —      |       | —         |       | 140        |       |
| Operating  Lease Obligations (2) |       | 2,676      |       | 2,165       |       | 2,147       |       | 1,912          |       | 8,900      |       |
| Employment  Contracts (3)        |       | 796        |       | 1,512       |       | 683         |       | —         |       | 2,991      |       |
| Purchase  Obligations (4)        |       | 12,370     |       | —      |       | —      |       | —         |       | 12,370     |       |
|                             |       | $          | 21,212     |        | $          | 6,654       |       | $              | 4,828      |       | $          | 1,912 |   | $ | 34,606 |   |

 

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(1)   The Company entered into a three-year Loan andSecurity Agreement which includes a term loan and revolver line of credit withan asset-based lender in the United States on September 25, 2002.  The Company entered into a one-year Loan andSecurity Agreement which includes a revolver line of credit with a commercialbank in Australia in July 2004.  TheCompany also entered into a five-year Loan and Security Agreement whichincludes a term loan and revolver line of credit with a commercial bank inAustralia in August 2004. See Note F to the Consolidated FinancialStatements.

(2)   The Company leases manufacturing and officespace and machinery & equipment under several operating leasesexpiring through 2012.  See Note M to theConsolidated Financial Statements.

(3)   The Company has employment agreements with itsChairman of the Board expiring July 7, 2006 and its President and ChiefExecutive Officer expiring December 8, 2008.  Both contracts are renewable every 5years.  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’sbase salary is $745,616 per year effective July 2004, and is subject to anannual cost of living increase based on the consumer price index.  Base salary may also be increased based onthe discretion of the Board of Directors. In the event the President and Chief Executive Officer is terminated theCompany will be obligated to make a lump sum severance payment equal to threetimes his then current base salary.

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

 

**Off-BalanceSheet Arrangements**

 

Our off-balance sheet arrangements consist ofoperating leases, employment contracts and purchase obligations as describedabove.  In addition, as discussed in NoteL to the Consolidated Financial Statements, the Company guaranteed debt of theCompany’s principal stockholder and Chairman of the Board of approximately $0.8million in 1997.  The guaranteed debt wasincurred in connection with construction of the facilities leased to theCompany and is collateralized by said facilities.  The loan amount subject to the unsecuredguarantee is 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, 2004, the outstandingloan balance subject to the guarantee totaled $0.6 million.

 

**Forward-Looking Statements and Risk Factors**

 

Certain statements contained in this AnnualReport on Form 10-K/A-1 are “forward-looking” statements within themeaning of the Private Securities Litigation Reform Act of 1995 (the “Act”),which provides certain “safe harbor” provisions for forward-lookingstatements.  All forward-lookingstatements made in this Annual Report on Form 10-K/A-1 are made pursuantto the Act.  Forward-looking statementsinclude statements which are predictive in nature; which depend upon or referto future events or conditions; or which include words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “estimates,” or variations or negatives thereofor by similar or comparable words or phrases. In addition, any statement concerning future financial performance,ongoing business strategies or prospects, and possible future Company actionsthat may be provided by management are also forward-looking statements asdefined by the Act.  Forward-lookingstatements are based on current expectations and projections about futureevents and are subject to risks, uncertainties, and assumptions about theCompany; and economic and market factors in the countries in which the Companydoes business, among other things.  Thesestatements are not guarantees of future performance, and the Company has nospecific intentions to update these statements.

 

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Actual events and results may differmaterially from those expressed or forecasted in forward-looking statements dueto a number of factors.  The principalimportant risk factors that could cause the Company’s actual performance andfuture events and actions to differ materially from such forward-lookingstatements include, but are not limited to, the risk factors discussed below.

 

***Obsolescenceand Technological Change.* **The communications industry is in a stateof rapid technological change.  Theintroduction of new technologies, network architectures or changes in industrystandards can render the Company’s existing products or products underdevelopment obsolete or unmarketable. 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.  Further, while managementanticipates that a number of factors, including network capacity requirements,existing investments in wire-line networks, security and long-term costeffectiveness, will result in growth of wire-line networks, there can be noassurance that future advances or further development of these or other newtechnologies will not have a material adverse effect on the Company’sbusiness.  The Company’s growthstrategies are designed, in part, to take advantage of opportunities that theCompany believes are emerging as a result of the development of enhanced voice,video, data and other transmission networks, and high-speed Internet access inthe telecommunications industry.  Therecan be no assurance that demand resulting from these emerging trends willcontinue or that the Company’s products will be met with market acceptance.

 

***Importanceof New Product Development to Growth.*** A significant factor in the Company’s abilityto grow and remain competitive will be its ability to anticipate changes intechnology, industry standards and customer preferences, and to successfullydevelop and introduce new products on a timely basis.  New product development often requireslong-term forecasting of market trends, development and implementation of newdesigns and processes, and substantial capital commitment.  Trends toward consolidation of thecommunications industry and convergence of technologies may require the Companyto quickly adapt to rapidly changing market conditions and customerrequirements.  Trends in consumer preferencesin Australia for the aesthetic design of water storage tanks may require theCompany to redesign or develop new water tanks and accessory products.

 

The Company’smanufacturing and marketing expertise has enabled it to successfully developand market new products in the past. However, any failure by the Company to anticipate or respond in acost-effective and timely manner to technological developments or changes inindustry standards or customer requirements, or any significant delays inproduct development or introduction, could have a material adverse effect onthe Company’s business, operating results and financial condition.

 

***Concentrationof Customers.*** Thetelecommunications industry is the largest industry the Company operates in andis highly concentrated. A relatively small number of customers account for alarge percentage of the Company’s available market.  Consequently, the Company’s five largestcustomers accounted for 57.7% and 48.7% of the Company’s total net sales in2003 and 2004, respectively.  Verizonaccounted for 21.7% of the Company’s total net sales in 2004 and 10.5% of theCompany’s net sales in 2003.  Comcastaccounted for 14.6% of the Company’s total net sales in 2004 and 27.1% of theCompany’s net sales in 2003.  Mergers andacquisitions in the telecommunications industry, which are expected tocontinue, not only increase the concentration of the industry and of theCompany’s customer base but also from time to time delay customers’ capitalexpenditures as newly merged service providers consolidate operations.  In the event one of the Company’s majorcustomers were to terminate purchases of the Company’s products, the Company’soperating results would be adversely affected.

 

***Dependenceon the Telecommunications Industry.*** Although the Company has recently diversifieda portion of its business with the acquisition of Bushman Tanks, a manufacturerof water storage tanks, the Company expects that sales to thetelecommunications industry will continue to represent a substantial portion ofits total sales.  Demand for productswithin this industry depends primarily on capital spending by service providersfor constructing, rebuilding, maintaining or upgrading their systems.  The amount of capital spending and,therefore, the Company’s sales and profitability, are affected by a variety offactors, including general economic conditions, access by service providers tofinancing, government regulation of service providers, demand for services andtechnological developments in the telecommunications technology.  While the industry generally experiencedabove average growth in the late 1990’s, since 2001 the telecommunicationsequipment industry has been materially adversely affected by service providers’reductions of their capital expenditures.

 

The Company’s success isdependent upon continued demand by the communications industry for productsused in signal transmission systems which may be affected by factors beyond theCompany’s control, including the convergence of video, voice, and datatransmission systems occurring within the broadband and telephone markets,continuing consolidation of companies within those markets and the provision ofInternet access by broadband operators and local telephone companies.

 

***LimitedBacklog***.  TheCompany’s customers typically require prompt shipment of the Company’s productswithin a narrow timeframe.  As a result,the Company has historically operated with a relatively small backlog.  Sales and operating results in any quarterare principally dependent upon orders booked and products shipped in thatquarter.  Further, the

 

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Company’s customersgenerally do not enter into long-term supply contracts providing for futurepurchase commitments for the Company’s products.  These factors, when combined with the Company’soperating leverage (see “Operating Leverage” below) and the need to incurcertain capital expenditures and expenses in part based upon the expectation offuture sales, may place the Company’s operating results at risk to changing customerbuying patterns.  If sales levels in aparticular period do not coincide with the Company’s expectations, operatingresults for that period may be materially and adversely affected.

 

***PriceFluctuations of Raw Materials; Availability of Complementary Products.*** The Company’s cost of sales may be materiallyaffected by increases in the market prices of the raw materials, includingresins, used in the Company’s manufacturing processes.  The Company does not engage in hedgingtransactions for such materials, although it periodically enters into purchaseagreements for certain raw materials for as much as one year or more.  There can be no assurance that priceincreases in raw materials can be passed on to the Company’s customers throughincreases in product prices.  Inaddition, in order to position itself as a full-line product supplier, theCompany relies on certain manufacturers to supply products, including gradelevel boxes that complement the products manufactured by the Company.  Although the Company believes 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 theCompany’s own products.

 

***EnergyCosts and Availability*.** The Company’s cost of sales may be materially affected by increases inthe market prices of electricity, natural gas and water used in the Company’smanufacturing processes. California is the site of the Company’s largestmanufacturing operation.  The energycosts 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 thatthe Company’s energy costs can be passed on to the Company’s customers throughincreases in product prices.  Further,disruptions or delays in the supply of electricity, natural gas and water tothe Company could have a material adverse effect on sales of the Company’sproducts.

 

***Acquisitionsand Failure to Integrate Acquired Businesses*.** In the event of any acquisition by theCompany, there can be no assurance that the Company will be able to identifyand acquire attractive acquisition candidates, profitably manage any suchacquired businesses or successfully integrate such acquired businesses into theCompany without substantial costs, delays or other problems.  Acquisitions involve a number of specialrisks, including, but not limited to, adverse short-term effects on the Company’sreported financial condition or results of operations, diversion of management’sattention, dependence on retention, hiring and training of key personnel, risksassociated with unanticipated problems or liabilities and amortization ofacquired intangible assets, some or all of which could have a material adverseeffect on the Company’s business, financial condition or results of operations.

 

The Company acquiredBushman Tanks in August 2004.  Thesuccessful integration of this business into Channell requires among otherthings the retention of key personnel, the implementation of the Oracleinformation system used by all Channell businesses, the implementation offinancial accounting and internal controls required by all U.S. publicly ownedcorporations, the time and attention of Channell executive management, theintegration of management styles and culture as well as the hiring of peoplenecessary to implement the aforementioned items and to expand the business

 

In addition, there can beno assurance that any businesses acquired in the future will be profitable atthe time of acquisition or will achieve sales and profitability justifying theCompany’s investment therein or that the Company will realize the synergiesexpected from such acquisitions.

 

The failure to obtain anyor all of the desired results from acquisitions could have a material adverseeffect on the Company’s business, financial condition and results ofoperations.

 

***OperatingLeverage.*** Becausethe fixed costs of facilities, product development, engineering, tooling andmanufacturing are a relatively high percentage of total costs, the Company’sability to operate profitably is dependent on generating a sufficient volume ofproduct sales, thereby spreading fixed costs over the sales base.  Due to this “operating leverage”, a reductionin sales or the rate of sales growth has had in the past and could have in thefuture a disproportionately adverse effect on the Company’s financial results.

 

***Seasonalityand Fluctuations in Operating Results. ***TheCompany’s business is seasonal in nature, with the first and fourth quartersgenerally reflecting lower sales due to the impact of adverse weatherconditions on construction projects that may alter or postpone the needs ofcustomers for delivery of the Company’s telecommunications products.  In addition, first quarter sales may alsoreflect telecommunication customer delays in implementation of their annualcapital expenditure plans.  The waterstorage tank business in Australia is traditionally slow during the fourth quarterdue to holidays and restrictions on the number of days in which large truckscan utilize major roads to deliver water storage tanks to customers.  The Company’s operating results may alsofluctuate significantly from quarter to quarter due to several other factors,including the volume and timing of orders from and shipments to majorcustomers, the timing of new product introductions and deployment as well asthe availability of products by the Company or its competitors, weatherconditions in Australia which may affect the sales of water storage tanks as alarge percentage of sales occur at outdoor agricultural farm fairs, the

 

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overall level of capital expenditures by broadbandoperators and telephone companies, market acceptance of new and enhancedversions of the Company’s products, variations in the mix of products theCompany sells, and the availability and costs of raw materials.

 

***RisksAssociated with International Operations*.** International sales, including export salesfrom U.S. operations, accounted for 23.8%, 21.2% and 33.9% of the Company’s netsales in 2002, 2003 and 2004, respectively. The percentage of international sales to total Company sales hasincreased with the acquisition of the Bushman Tanks business.  Due to its international sales, the Companyis subject to the risks of conducting business internationally, includingunexpected changes in or impositions of legislative or regulatory requirements,fluctuations in the U.S. dollar which could materially adversely affect U.S.dollar revenues or operating expenses, tariffs and other barriers andrestrictions, longer collection cycles, greater difficulty in accountsreceivable collection, potentially adverse taxes and the burdens of complyingwith a variety of international laws and communications standards.  The Company is also subject to generalgeopolitical risks, such as political and economic instability and changes indiplomatic and trade relationships, in connection with its Internationaloperations.  There can be no assurancethat these risks of conducting business internationally will not have amaterial adverse effect on the Company’s business.

 

***Competition. ***The industries in whichthe Company operates are highly competitive. The level and intensity of competition may increase in the future.  The Company’s competitors in thetelecommunications industry include companies that are much larger than theCompany, such as Tyco, 3M, Marconi, Arris and Corning.  The Company’s business strategy includesincreased focus on telephone connectivity. There can be no assurance that the Company will be able to competesuccessfully against its competitors, most of whom have access to greaterfinancial resources than the Company. The Company’s competitors in the Australian water storage tank businessincludes Nylex which is much larger than the Company as well as smallercompanies that have market position in specific geographic regions.  There can be no assurances that the Companywill be able to successfully compete against these competitors or increase itssales by obtaining a higher market share.

 

***Disruptionsat the Company’s Manufacturing Facility; Lease with Related Party*.**  The majority of the Company’s manufacturingoperations are currently located at the Company’s facilities in Temecula,California, which also includes the Company’s principal warehouse and corporateoffice operations.  The Company’s successdepends in large part on the orderly operation of these facilities.  Because the Company’s manufacturingoperations and administrative departments are concentrated at this facility, afire, earthquake, power interruption or other disaster at this facility couldmaterially and adversely affect its business and results of operations.  The Company maintains property insurance onthis facility as well as business interruption insurance.

 

The Company currentlyleases a portion of its Temecula facilities from William H. Channell, Sr.,a principal stockholder and Chairman of the Board of the Company.  The Company believes the terms of theseleases are no less favorable than would be available from an unrelated thirdparty after arm’s length negotiations. Although the Company has renewal options through the year 2015 underthese leases, there can be no assurance that the Company and Mr. Channell, Sr.will be able to agree on additional renewal terms for the properties currentlyleased by the Company.  The failure ofthe Company to renew the leases would require the Company to relocate itsexisting facilities, which could have a material adverse effect on the Company’sbusiness, financial condition or results of operations.

 

The Company currentlyleases four facilities in Australia from the former owners of BushmanTanks.  Although the Company believesthese leases are in total in excess of fair market value by $27,000 per year,the Company does not believe that amount is significant compared to totalmanufacturing costs and thus does not place it in a competitive disadvantage.  Although the Company also has renewal optionsthrough the year 2015 under these leases, there can be no assurance that theCompany and then former owners will be able to agree on additional renewalterms for the properties currently leased by the Company.  The failure of the Company to renew theleases would require the Company to relocate its existing facilities, whichcould have a material adverse effect on the Company’s business, financialcondition or results of operations.

 

***Dependenceon Key Personnel*.** The future success of the Company depends in part on its ability toattract and retain key executive, engineering, marketing and salespersonnel.  Key personnel of the Companyinclude William H. Channell, Sr., Chairman of the Board, William H.Channell, Jr., President and Chief Executive Officer and the other executiveofficers of the Company.  The market forqualified personnel in the communications industry is competitive and the lossof certain key personnel could have a material adverse effect on the Company.  The Company has employment contracts withWilliam H. Channell, Jr. and William H. Channell, Sr.

 

***ChangingRegulatory Environment.**** *The communications industry issubject to regulation in the United States and other countries.  Federal and state agencies regulate most ofthe Company’s domestic customers. Changes in current or future laws orregulations, in the United States or elsewhere, could materially adverselyaffect the Company’s business. Government regulation in Australia has increased demand for waterstorage tanks through the offering of rebates to those whom purchase watertanks and by requiring the installation of water storage tanks or other waterconservation products in

 

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new homes built inselected regions.  There can be noassurances that these regulations will remain in affect.  A lessening of these regulations most likelywould lead to lower demand for water storage products and thus negativelyaffect the Company’s sales.

 

***UncertainAbility to Manage Industry Volatility*.**  The Company’s business has required and isexpected to continue to require significant Company resources in terms ofpersonnel, management and other infrastructure. The Company’s ability to manage effectively the volatility of thetelecommunications industry requires it to attract, train, motivate and managenew employees successfully, to integrate new employees into its overalloperations and to continue to improve its operational, financial and managementinformation systems.

 

***Environmental Matters.*** The Company is subject to a wide variety offederal, state and local environmental laws and regulations and uses a limitednumber of chemicals that are classified or could be classified as hazardous orsimilar substances.  Although managementbelieves that the Company’s operations are in compliance in all materialrespects with current environmental laws and regulations, the Company’s failureto comply with such laws and regulations could have a material adverse effecton the Company.

 

***Weather Matters***.  The Company business may be affected byadverse changes in weather patterns in Australia that may affect the demand forwater storage tanks.  Australia iscurrently experiencing a severe water shortage due to less rainfall, inadequatenational infrastructure to store water for use during drought periods and thegrowth in population in non urban areas. A change in the weather pattern which provides additional rainfall andlessens the affect of the drought could have a negative impact on the demandfor water storage tanks.

 

**SelectedQuarterly Financial Data**

 

Set forth below iscertain unaudited quarterly financial information. (See also Note P to theConsolidated Financial Statements included elsewhere herein.)  The Company believes that all necessaryadjustments, consisting only of normal recurring adjustments, have beenincluded in the amounts stated below to present fairly, and in accordance withgenerally accepted accounting principles, the selected quarterly informationwhen read in conjunction with the Financial Statements.

 
| ** **                         | ** ** | **December 31,2003**  | ** ** | **December 31,2004**  | ** ** |
|------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                         | ** ** | **(amounts in thousands)** | ** ** | **(amounts in thousands)** | ** ** |
| ** **                         | ** ** | **1st**                    | ** ** | **2nd**                    | ** ** | **3rd** | ** ** | **4th** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| ** **                         | ** ** | **Quarter**                | ** ** | **Quarter**                | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Net sales                          |       | $                          | 16,218     |                       | $          | 20,285 |   | $ | 19,434 |   | $ | 20,600 |   | $ | 17,720 |   | $ | 21,303 |   | $ | 27,615 |   | $ | 33,496 |   |
| Gross profit                       |       | 4,482                      |       | 6,449                      |       | 5,515 |   | 6,131 |   | 5,344 |   | 5,928 |   | 7,896 |   | 8,815 |   |
| Income (loss) from operations      |       | (67                        | )          | 1,838                      |       | 712 |   | (1,786 | ) | 151 |   | 930 |   | 1,784 |   | 609 |   |
| Income  (loss) before income taxes |       | (188                       | )          | 1,699                      |       | 534 |   | (1,919 | ) | 90 |   | 841 |   | 1,614 |   | 440 |   |
|                                    |            |                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

### **Item 7a.  Quantitativeand Qualitative Disclosures about Market Risk**

 

The marketrisk inherent in the Company’s market risk sensitivity instruments is thepotential loss arising from adverse changes in interest rates and foreigncurrency exchange rates.  All financialinstruments held by the Company and described below are held for purposes otherthan trading.

 

**Market Risk**

 

The Companyand its subsidiaries have entered into three financing agreements.  In September 2002, the Company enteredinto a three-year Loan and Security Agreement with an asset based lender in theUnited States.  The agreement contains aterm loan and a revolver line of credit. In July 2004, the Company entered into a one-year Loan and SecurityAgreement which contains a revolver line of credit with a commercial bank inAustralia.  In August 2004, theCompany entered into a five-year Loan and Security Agreement which contains aterm loan and revolver line of credit with a commercial bank in Australia.  The loan and security agreements allow forthe outstanding balance to bear interest at a variable rate based on the lender’sbase rate.  The credit facility exposesoperations to changes in short-term interest rates since the interest rates onthe credit facility are variable.

 

If the variablerates on the Company’s loan and security agreements were to increase by 1% fromthe rate at December 31, 2004, and if the Company had borrowed during allof fiscal 2004 the maximum amount (approximately $39 million) at any time in2004 under its credit facility at the increased interest rate, the Company’sinterest expense would have increased, and net income would have decreased by$0.2 million.  A marginal income tax rateof 38.0% was used in this analysis.  Thisanalysis does not consider the effects of economic activity on the Company’ssales and profitability in such an environment.

 

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**Foreign Exchange Risk**

 

The Company has assets and liabilities outside theUnited States that are subject to fluctuations in foreign currency exchangerates.  Assets and liabilities outsidethe United States are primarily located in the United Kingdom, Australia andCanada.  The Company’s investment inforeign subsidiaries with a functional currency other than the U.S. dollar aregenerally considered long-term. Accordingly, the Company does not hedge these net investments.  The Company also purchases a limited portionof its raw materials from foreign countries. These purchases are generally denominated in U.S. dollars and areaccordingly not subject to exchange rate fluctuations.  The Company has not engaged in forwardforeign exchange and other similar contracts to reduce its economic exposure tochanges in exchange rates because the associated risk is not consideredsignificant.

 

**Item 8.  Financial Statementsand Supplementary Data**

 

ConsolidatedFinancial Statements of Channell Commercial Corporation are as follows:

 
| Report of Independent Registered Public  Accounting Firm                                                                                                               |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets as of December 31,  2003 and December 31, 2004                                                                                   |   |
| Consolidated Statements of Operations and  Comprehensive Income (Loss) for the years ended December 31, 2002, December 31,  2003, and December 31, 2004 |   |
| Consolidated Statement of Stockholders’  Equity for the years ended December 31, 2002, December 31, 2003,  and December 31, 2004                   |   |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2002, December 31, 2003, and December 31,  2004                                 |   |
| Notes to Consolidated Financial Statements                                                                                                                             |   |

 

Financialstatement schedules are as follows:

 

Schedule II- Valuation and Qualifying Accounts

 

All remainingschedules are omitted because they are not applicable, or the requiredinformation is included in the financial statements or the notes thereto.

 

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

 

There has beenno change of accountants or disagreements on any matter of accountingprinciple, practice, financial statement disclosure or auditing scope orprocedure during the period covered by this report.

 

### **Item 9A.  Controlsand Procedures**

 

**Evaluation of Disclosure Controls andProcedures**

 

The Company maintains disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities and Exchange Actof 1934 (the “Exchange Act”), that are designed to ensure that informationrequired to be disclosed in the Company’s Exchange Act reports are recorded,processed, summarized, and reported within the time periods specified in rules andforms of the Securities and Exchange Commission regulations, and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. As of December 31, 2004, the management of the Company carried outan assessment concluding that the Company’s disclosure controls and procedureswere not effective as of December 31, 2004, because of the materialweaknesses described below.

 

Due to the material weaknesses described below, the Company’smanagement performed additional analyses and other post-closing proceduresincluding reviewing all significant account balances and disclosures in theconsolidated financial statements contained in this Annual Report on Form 10-K/A,to ensure the Company’s consolidated financial statements are in accordancewith accounting principles generally accepted in the United States of America.Accordingly,

 

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management believes that the consolidated financial statements includedin this Annual Report, fairly present in all material respects, the Company’sfinancial condition, results of operations, and cash flows for all periodspresented.

 

**Management’s Report on Internal Control OverFinancial Reporting**

 

Management of the Company is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.The Company’s internal control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external reportingpurposes in accordance with accounting principles generally accepted in theUnited States of America. Internal control over financial reporting includesthose policies and procedures that (i) pertain to the maintenance ofrecords that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of the assets of the Company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the Company are being madeonly in accordance with authorizations of management and directors of theCompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the interim or annualconsolidated financial statements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2004. Inperforming its assessment of the effectiveness of the Company’s internalcontrol over financial reporting, management applied the criteria described in *Internal Control-Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

A material weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected. Management identified the following control deficiencieswhich represent material weaknesses in the Company’s internal control over financialreporting as of December 31, 2004:

 

The Company did not maintain effective controls over the accuracy ofits accounting for income taxes and the determination of income taxes payable,deferred income tax assets and liabilities and the related income taxprovision. Specifically, the Company did not have effective controls toaccurately calculate current income tax expense. In addition, the Company didnot have effective controls to monitor the difference between the income taxbasis and the financial reporting basis of assets and liabilities and reconcilethe difference to its deferred income tax asset and liability balances. Thiscontrol deficiency resulted in restatements to the Company’s 2002, 2003, and2004 annual consolidated financial statements to correct deferred taxes and thetax provisions. Additionally, this control deficiency could result in amisstatement of deferred taxes, tax accruals and the tax provision that wouldresult in a material misstatement to the Company’s interim or annual consolidatedfinancial statements that would not be prevented or detected. Accordingly,management has determined that this control deficiency constitutes a materialweakness.

 

The control deficiency described above could result in a misstatementof the aforementioned accounts or disclosures that would result in a materialmisstatement to the Company’s interim or annual consolidated financialstatements that would not be prevented or detected. Accordingly, management hasdetermined that the control deficiencies described above constitutes a materialweakness.

 

**Changes in Internal Control Over FinancialReporting**

 

During the fourth quarter of the year ended December 31, 2004,there were no changes in the Company’s internal control over financialreporting that have materially affected, or was reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**Recent Developments Relating to the Company’sInternal Control Over Financial Reporting**

 

The Company is implementing enhancements and changes to its internalcontrol over financial reporting to remediate the material weakness describedabove. This remediation began in 2005.

 

The Company has enhanced the competence of the organization by hiringstaff competent in accounting principles generally accepted in the UnitedStates of America (“GAAP”), and the Company will continue to enhance itsfinancial

 

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accounting and reporting competencies by recruiting additionalqualified staff and further developing its existing staff by reinforcingexisting continuing education programs.

 

The Company’s Audit Committee meets regularly withmanagement and the independent accountants to review accounting, auditing,financial matters and internal control structure.  The Audit Committee andthe independent accountants have free access to each other, with or withoutmanagement being present.

 

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

 

There were no events required to be reported on Form 8-Kduring the fourth quarter of 2004 that were not so reported**.**

 

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**PART III**

 

### **Item 10.  ExecutiveOfficers and Directors of the Registrant**

### ** **

The following table sets forth informationwith respect to the Company’s executive officers and directors and their agesas of March 4, 2005. 

 
| **Name**                      | ** ** | **Age** | ** ** | **Positions**                                            |
|-------------------------------|------------|---------|------------|----------------------------------------------------------|
| William H. Channell, Sr. |       | 77      |       | Chairman of the Board and Director                       |
| William H. Channell, Jr. |       | 47      |       | President, Chief Executive Officer and Director          |
| Jacqueline M. Channell        |       | 73      |       | Secretary and Director                                   |
| David Iannini(1) (2)     |       | 45      |       | Director                                                 |
| Guy Marge(1) (2)         |       | 61      |       | Director                                                 |
| Dana Brenner(1)               |       | 62      |       | Director                                                 |
| Stephen Gill (2)              |       | 62      |       | Director                                                 |
| Edward J. Burke               |       | 49      |       | Vice President, Corporate Engineering                    |
| Timothy Hankinson             |       | 52      |       | Managing Director, International                         |
| John B. Kaiser                |       | 53      |       | Vice President, North American Sales                     |
| Scott Kiefer                  |       | 45      |       | Corporate Controller and Interim Chief Financial Officer |
| Andrew M. Zogby               |       | 44      |       | Vice President, Corporate Marketing                      |

 

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(1)          Audit Committee Member

(2)          Compensation Committee Member

 

The Company’s Board of Directors wascomprised of seven members at March 4, 2005.  The directors of the Company are staggeredinto three classes, with the directors in a single class elected at each annualmeeting of stockholders to serve for a term of three years or until theirsuccessors have been elected and qualified. The authorized number of members ofthe Board of Directors is currently seven. The executive officers of theCompany serve at the pleasure of the Board of Directors. 

 

William H. Channell, Sr., the son of theCompany’s founder, James W. Channell, has been the Chairman of the Board sinceJuly, 1996. From 1966 to November, 2001 and from July, 2002 to December, 2003 Mr. Channell, Sr.was Chief Executive Officer.  Mr. Channell, Sr.is a co-trustee of the Channell Family Trust, which is a principal stockholderof the Company, and is the husband of Jacqueline M. Channell and the father ofWilliam H. Channell, Jr. His term as a Director expires in 2005. 

 

William H. Channell, Jr. has beenPresident and Chief Executive Officer since December, 2003.  He was President and Chief Operating Officerof the Company from 1996 to December, 2003. He has been a Director of the Company since 1984. Since joining theCompany in 1979, Mr. Channell, Jr. has held the positions ofExecutive Vice President, Director of Marketing and National Sales Manager. Mr. Channell, Jr.is a principal stockholder of the Company and is the son of William H. Channell, Sr.and Jacqueline M. Channell. His term as a Director expires in 2006. 

 

Jacqueline M. Channell is Secretary and hasbeen a Director since 1966 except for approximately three months in 2001. Sheis a co-trustee of the Channell Family Trust, which is a principal stockholderof the Company, and is the wife of William H. Channell, Sr. and the motherof William H. Channell, Jr.  Mrs. Channell’sterm as a Director expires in 2006. 

 

Guy Marge became a Director of the Company inAugust, 2002.  Mr. Marge isPresident and Chief Executive Officer of Western Brass Industries, Inc.and Storm Industries, Inc.  From1988 to 2001, Mr. Marge was Chief Executive Officer of the Milhous Group, Inc.,a manufacturer of plastic, metal-formed and pre-cast concrete products.  From 1978 to 1988, Mr. Marge heldexecutive management positions with Kearney-National, Inc., The UnitedGroups, Inc., and Uniroyal Technology Corporation.  Mr. Marge’s term as a Director expiresin 2007.

 

Dana Brenner became a Director of the Companyin March, 2003.  Mr. Brenner is themanaging partner of Brenner, Bigler & Associates, an accounting firmwith offices in Woodland Hills and Blythe, California, focused on medium andsmall businesses as well as individuals. Mr. Brenner has over 35 years of public accounting experience withcompanies in 

 

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various industries includingmanufacturing, construction, real estate, mortgage banking and creditunions.  Mr. Brenner’s term as aDirector expires in 2005.

 

David Iannini became a Director of theCompany in May, 2004.  Mr. Ianniniis President of MAR & Associates. MAR & Associates providesstrategic and investment banking services to public and private companies. Mr. Ianniniserved as Chief Financial Officer of YP.Net, Inc., from 2002 to 2004.  From 1999 to 2002, Mr. Iannini wasTreasurer and Vice President of Corporate Development of Viad Corp.  Mr. Iannini was an investment bankerprimarily with Salomon Brothers from 1986 to 1999. Mr. Iannini’s term as adirector expires in 2007.

 

Stephen Gill became a Director of the Companyin May, 2004.  Mr. Gill has spent 35years in the aerospace composites manufacturing industry with M.C. GillCorporation, serving as President and CEO from 1991 to 2001.  Mr. Gill has also served on the boardsof M. C. Gill Corp, Spaulding Composites and SIR Worldwide, Inc.  Mr. Gill’s term as a director expires in2007.  

 

Edward J. Burke has been the Company’s VicePresident, Corporate Engineering since May, 1996 and has served in varioussimilar capacities with the Company since 1984. Mr. Burke has held varioustechnical positions in the thermoplastic product engineering and tooling designfield since 1978. 

 

Timothy Hankinson joined the Company in 1998as Managing Director, Australia and Asia as a result of the acquisition of A.C.Egerton PLC.  Mr. Hankinson had beenManaging Director of A.C. Egerton PLC since 1991.  Prior to 1991, Mr. Hankinson had servedas General Manager of an Australian aircraft manufacturer.  Mr. Hankinson became Managing Director,International in December, 2002.

 

John B. Kaiser has been the Company’s VicePresident, North American Sales since 1999. He held the position of Director of Marketing for the Company from 1987to 1991 and he was Vice President, Broadband Division from 1995 through 1998.Between 1991 and 1995, Mr. Kaiser held the position of District Manager,Southern California, for the General Polymers Division of Ashland Chemical, athermoplastics distributor, where his responsibilities included generalmanagement of district operations, including sales, warehousing, procurementand logistics. 

 

Scott Kiefer has been the Company’s CorporateController since 2002 and was named interim Chief Financial Officer in February of2005.  Mr. Kiefer joined the Companyas Manager of Cost Accounting in 2001. From 2000 to 2001 Mr. Kiefer was Chief Accounting Officer ofImaging Technologies Corporation.  From 1996to 2000, Mr. Kiefer was U.S. Controller for Flowserve.  From 1992 to 1996 Mr. Kiefer was NorthAmerican Finance Manager for Flowserve. He has over 20 years of financial, accounting and management experience.

 

Andrew M. Zogby has been the Company’s VicePresident, Corporate Marketing since March, 1996. Prior to joining the Company,Mr. Zogby was Director of Strategic Marketing, Broadband ConnectivityGroup for ADC Telecommunications, a publicly traded telecommunicationsequipment supplier to both telephone and broadband network providers worldwide.He had been with ADC Telecommunications since 1990. Mr. Zogby has heldvarious technical marketing positions in the telecommunications equipmentindustry since 1984. 

 

### **Compensationof Directors**

 

Directors who arealso officers of the Company (except as indicated below) receive no additionalcompensation for their services as directors. Prior to 2003, the Company’s non-management directors receivedcompensation consisting of an annual retainer fee of $25,000 plus $1,000 forattendance at any meeting of the Board of Directors or any committee thereof,plus direct out-of-pocket costs related to such attendance.  Effective January 2003, the fee forcommittee meetings was reduced to $500. In November 2004, the Board of Directors approved increasing theannual retainer fee to $50,000 for the Chair of the Audit Committee and to$30,000 for non-Chair members of the Audit Committee.  These increases are effective January 2005.  The Board of Directors also approved an additionalpayment of $10,000 to the Chair of Audit Committee for 2004.   Mrs. Channell also receivesnon-management director retainer and attendance fees. In addition, pursuant tothe Company’s 1996 Incentive Stock Plan (as described below), each non-managementdirector (including Mrs. Channell) received options to acquire 1,000shares of the Company’s Common Stock with an exercise price equal to $11.00 pershare,  and on the date of each of theCompany’s annual stockholder meetings after the initial public offering, eachnon-management director (including non-executive officers who serve asdirectors) serving on the Board of Directors immediately following such meetingare to receive options to acquire an additional 1,000 shares of the Company’sCommon Stock with an exercise price equal to the market value of the CommonStock on the date such options are granted. These options will becomeexercisable at a rate of 33 1/3% per year commencing on the first anniversaryof the date of issuance and will have a term of 10 years. 

 

28

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**Audit Committee Financial Expert**

** **

The Board of Directors has determined that Mr. DanaBrenner qualifies as a “financial expert” within the meaning of SECrules.  Mr. Brenner is the managing partner of Brenner, Bigler &Associates, an accounting firm with offices in Woodland Hills and Blythe,California.  Mr. Brenner has over 35 years of public accountingexperience with companies in various industries, including manufacturing,construction, real estate, mortgage banking and credit unions. Mr. Brenneris independent as defined by SEC and NASD rules.

 

**Code of Ethics**

** **

The Company has adopted aCode of Ethics within the meaning of Item 406(b) of Regulation S-K. ThisCode of Ethics applies to all employees, including its principal executiveofficer, principal financial officer and principal accounting officer. ThisCode of Ethics has been filed as Exhibit 14 to the 2003 Annual Report on Form 10-K.  If the Company makes substantive amendmentsto this Code of Ethics or grants any waiver, including any implicit waiver, theCompany will disclose the nature of such amendment or waiver on its web sitewithin five days of such amendment or waiver.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

** **

Information required by Item 405 ofRegulation S-K is incorporated by reference to the Company’s Proxy Statementrelating to its 2004 annual meeting of stockholders.

 

### **Item 11.  ExecutiveCompensation**

### ** **

Summary Compensation Table

 

The following table sets forth the annual andlong-term compensation of the Company’s Chief Executive Officer and the fouradditional most highly compensated executive officers for the years ended December 31,2002, 2003 and 2004 (collectively, the “Named Officers”). 

 
| ** **                        | ** ** | ** ** | ** ** | ** **               | ** ** | ** **       | ** ** | **Other  Annual** | ** ** | **Restricted** | ** ** | **Underlying** | ** ** | **LTIP**         | ** ** | **All  Other** | ** ** |
|-----------------------------------|------------|------------|------------|--------------------------|------------|------------------|------------|-------------------|------------|----------------|------------|----------------|------------|------------------|------------|----------------|------------|
| **Name and Positions**            | ** ** | ** ** | ** ** | **Annual  Compensation** | ** ** | **Compensation** | ** ** | **Stock  Awards** | ** ** | **Options/**   | ** ** | **Payouts**    | ** ** | **Compensation** | ** ** |
| **Held with the Company**         | ** ** | **Years**  | ** ** | **Salary  ($)**          | ** ** | **Bonus  ($)**   | ** ** | **($)(1)**        | ** ** | **($)**        | ** ** | **SARs(#)**    | ** ** | **($)**          | ** ** | **($)**        | ** ** |
|                              |       |       |       |                     |       |             |       |              |       |           |       |           |       |             |       |           |       |
| **William H. Channell, Jr.** | ** ** | **2004**   | ** ** | **730,603**              | ** ** | **1,060,000**    | **(7)**    | **—**        | ** ** | **—**     | ** ** | **150,000**    | ** ** | **—**       | ** ** | **20,858**     | **(5)**    |
| **President  and Chief**          | ** ** | **2003**   | ** ** | **656,109**              | ** ** | **261,206**      | ** ** | **—**        | ** ** | **—**     | ** ** | **1,267,800**  | **(6)**    | **—**       | ** ** | **23,260**     | **(5)**    |
| **Executive  Officer**            | ** ** | **2002**   | ** ** | **508,300**              | ** ** | **447,500**      | **(2)**    | **—**        | ** ** | **—**     | ** ** | **—**     | ** ** | **—**       | ** ** | **20,916**     | **(5)**    |
|                              |       |       |       |                     |       |             |       |              |       |           |       |           |       |             |       |           |       |
| **Thomas Liguori (8)**            | ** ** | **2004**   | ** ** | **221,379**              | ** ** | **88,950**       | ** ** | **—**        | ** ** | **—**     | ** ** | **—**     |       |             | ** ** | **19,517**     | **(3)**    |
| **Chief  Financial Officer**      | ** ** | **2003**   | ** ** | **197,925**              | ** ** | **80,340**       | ** ** | **—**        | ** ** | **—**     | ** ** | **50,000**     | ** ** | **—**       | ** ** | **18,638**     | **(3)**    |
| ** **                        | ** ** | **2002**   | ** ** | **185,250**              | ** ** | **60,060**       | ** ** | **—**        | ** ** | **—**     | ** ** | **—**     | ** ** | **—**       | ** ** | **8,079**      | **(9)**    |
|                              |       |       |       |                     |       |             |       |              |       |           |       |           |       |             |       |           |       |
| **John B. Kaiser**                | ** ** | **2004**   | ** ** | **172,359**              | ** ** | **55,443**       | ** ** | **—**        | ** ** | **—**     | ** ** | **—**     |       |             | ** ** | **21,244**     | **(4)**    |
| **Vice  President,**              | ** ** | **2003**   | ** ** | **161,200**              | ** ** | **66,960**       | ** ** | **—**        | ** ** | **—**     | ** ** | **145,270**    | **(6)**    | **—**       | ** ** | **19,498**     | **(4)**    |
| **North  American Sales**         | ** ** | **2002**   | ** ** | **147,250**              | ** ** | **47,740**       | ** ** | **—**        | ** ** | **—**     | ** ** | **—**     | ** ** | **—**       | ** ** | **3,996**      | **(5)**    |
|                              |       |       |       |                     |       |             |       |              |       |           |       |           |       |             |       |           |       |
| **Andrew M. Zogby**               | ** ** | **2004**   | ** ** | **190,501**              | ** ** | **75,126**       | ** ** | **—**        | ** ** | **—**     | ** ** | **—**     |       |             | ** ** | **20,535**     | **(4)**    |
| **Vice  President,**              | ** ** | **2003**   | ** ** | **179,777**              | ** ** | **21,100**       | ** ** | **—**        | ** ** | **—**     | ** ** | **150,060**    | **(6)**    | **—**       | ** ** | **18,959**     | **(4)**    |
| **Corporate  Marketing**          | ** ** | **2002**   | ** ** | **164,305**              | ** ** | **53,269**       | ** ** | **—**        | ** ** | **—**     | ** ** | **—**     | ** ** | **—**       | ** ** | **2,546**      | **(5)**    |
|                              |       |       |       |                     |       |             |       |              |       |           |       |           |       |             |       |           |       |
| **Edward J. Burke**               | ** ** | **2004**   | ** ** | **171,247**              | ** ** | **70,000**       | ** ** | **—**        | ** ** | **—**     | ** ** | **—**     |       |             | ** ** | **17,392**     | **(4)**    |
| **Vice  President,**              | ** ** | **2003**   | ** ** | **148,412**              | ** ** | **60,242**       | ** ** | **—**        | ** ** | **—**     | ** ** | **148,550**    | **(6)**    | **—**       | ** ** | **16,371**     | **(4)**    |
| **Corporate  Engineering**        | ** ** | **2002**   | ** ** | **138,908**              | ** ** | **45,035**       | ** ** | **—**        | ** ** | **—**     | ** ** | **—**     | ** ** | **—**       | ** ** | **749 (**      | **10)**    |

 

----

| (1)  | For each individual named, compensation excludes perquisites and other  personal benefits that did not exceed the lesser of $50,000 or 10% of the  total annual salary and bonus reported for such individual.                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | The bonus of William H. Channell, Jr. shown in 2002 is based on  Company performance in 2001 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (3)  | Company contributions to the 401(k) Plan and Company paid auto lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (4)  | Company paid premiums for life insurance, Company contributions to the  401(k) Plan and Company paid auto lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (5)  | Company paid premiums for life insurance and Company paid auto lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (6)  | In February, 2003, the Company offered current employees and  non-employee directors an opportunity to exchange their outstanding options  granted under the 1996 Stock Plan. The tender offer expired March 20,  2003. Outstanding options were cancelled for those employees and non-employee  directors who tendered their shares. On September 24, 2003 new options  were exchanged for the options cancelled in March, 2003. Included in the 2003  Underlying Options/SARs (#) are new options that were exchanged:  Mr. Channell, Jr.: 596,400; Mr. Kaiser: 95,270;  Mr. Zogby: 100,060; and Mr. Burke: 98,550. |
| (7)  | Includes $0.5 million accrued bonus for estimated long term incentive  plan. Payment based on the increase in the Company’s market capitalization.  The $0.5 million is earned in 2004 with payment expected in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (8)  | Mr. Liguori resigned as Chief Financial Officer in February,  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (9)  | Company paid auto lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| (10) | Company paid life insurance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

29

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***1996Incentive Stock Plan***

*** ***

The Company’s 1996Incentive Stock Plan (the “1996 Stock Plan”) currently permits the granting tothe Company’s key employees, Directors and other service providers of (i) optionsto purchase shares of the Company’s Common Stock and (ii) shares of theCompany’s Common Stock that are subject to certain vesting and otherrestrictions (“Restricted Stock”). Initially, a maximum of 750,000 shares of Common Stock were reserved forissuance under the 1996 Stock Plan.  In1999, the 1996 Stock Plan was amended to allow a maximum of 1,500,000 shares tobe issued under the 1996 Stock Plan.  

 

The 1996 StockPlan is administered by the Compensation Committee of the Board ofDirectors.  The aggregate number of stockoptions or shares of Restricted Stock that may be granted to any singleparticipant under the 1996 Stock Plan during any fiscal year of the Company is100,000.  The purpose of the 1996 StockPlan is to secure for the Company and its stockholders the benefits arisingfrom stock ownership by key employees, directors and other service providersselected by the Compensation Committee. 

 

All optionsgranted under the 1996 Stock Plan are non-transferable and exercisable ininstallments determined by the Compensation Committee, except that each optionis to be exercisable in minimum annual installments of 20% commencing with thefirst anniversary of the option’s grant date. Each option granted has a termspecified in the option agreement, but all options expire no later than tenyears from the date of grant. Options under the 1996 Stock Plan may bedesignated as “incentive stock options” for federal income tax purposes or asoptions which are not qualified for such treatment, or “non-qualified stockoptions”.  In the case of incentive stockoptions, the exercise price must be at least equal to the fair market value ofthe stock on the date the option is granted. The exercise price of anon-qualified option need not be equal to the fair market value of the stock atthe date of grant, but may be granted with any exercise price which is not lessthan 85% of the fair market value at the time the option is granted, as theCompensation Committee may determine. The aggregate fair market value (determinedat the time the options are granted) of the shares covered by incentive stockoptions granted to any employee under the 1996 Stock Plan (or any other plan ofthe Company) which may become exercisable for the first time in any onecalendar year may not exceed $100,000. 

 

Upon exercise ofany option, the purchase price must generally be paid in full either in cash orby certified or cashier’s check. However, in the discretion of the CompensationCommittee, the terms of a stock option grant may permit payment of the purchaseprice by means of (i) cancellation of indebtedness owed by the Company, (ii) deliveryof shares of Common Stock already owned by the optionee (valued at fair marketvalue as of the date of exercise), (iii) delivery of a promissory notesecured by the shares issued, (iv) delivery of a portion of the sharesissuable upon exercise (i.e., exercise for the “spread” on the option payablein shares), or (v) any combination of the foregoing or any other meanspermitted by the Compensation Committee. 

 

Any grants ofrestricted stock will be made pursuant to Restricted Stock Agreements, whichwill provide for vesting of shares at a rate to be determined by theCompensation Committee with respect to each grant of restricted stock.  Until vested, shares of restricted stock aregenerally non-transferable and are forfeited upon termination ofemployment.  The Company has not made anygrants of restricted stock. 

 

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 2003 StockPlan or any other stock option plan that may be adopted by the Company.  At the time the Board approved the offer,certain employees’ and non-employee directors’ outstanding options had exerciseprices that were significantly higher than the current market price of theCompany’s common stock.  The Board ofDirectors made the offer in order to provide these option holders with thebenefit of owning options that, over time, may have a greater potential toincrease in value.  The Board ofDirectors believes that this will create better performance incentives forthese option holders.  The offer expiredon March 20, 2003.  A total of1,326,890 options to purchase shares of the Company were accepted for exchangeand cancelled on March 20, 2003. The 2003 Incentive Stock Plan was approved at the Annual Meeting ofStockholders on April 25, 2003.  On September 24,2003, a total of 1,324,090 new options were exchanged for options cancelled inMarch, 2003.   

 

Eligible optionholders who participated in the offer received a new option on the new grantdate in exchange for each old option that was validly tendered and accepted forexchange.  The number of shares coveredby each new option was equal to the number of shares covered by the oldoptions, and the vested status and vesting schedule of the old options waspreserved and continued.  The exerciseprice of the new options was equal to the closing sale price of the Company’scommon stock as reported on the Nasdaq National Market on the grant date of thenew options.

 

30

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***2003Incentive Stock Plan***

*** ***

The Company’s 2003 IncentiveStock Plan (the “2003 Stock Plan”) currently permits the granting of (i) incentivestock options to purchase shares of the Company’s Common Stock to employees ofthe Company and the Company’s subsidiaries and (ii) nonqualified stockoptions to purchase shares of the Company’s Common Stock to employees,Directors and consultants of the Company and the Company’s subsidiaries.  The 2003 Stock Plan also permits the grantingof shares of the Company’s Common Stock (“Stock Awards”) that are subject tovesting restrictions based on continued employment or attainment of performancegoals (“Restricted Stock”) to employees, Directors and consultants of theCompany and the Company’s subsidiaries. Incentive stock options and nonqualified stock options are grantedsubject to the terms of a stock option agreement entered into between theparticipant and the Company.  A maximumof 3,100,000 shares of Company Common Stock are reserved for issuance under the2003 Stock Plan.

 

The 2003 Stock Plan isadministered by the Compensation Committee of the Board of Directors.  The aggregate number of stock options thatmay be granted to any single participant under the 2003 Stock Plan during anyfiscal year of the Company is 1,000,000. The purpose of the 2003 Stock Plan is to secure for the Company and itsstockholders the benefits arising from stock ownership by employees, directorsand consultants selected by the Compensation Committee. 

 

Options granted under the2003 Stock Plan are non-transferable other than by will or by the laws ofdescent or distribution and exercisable, during the lifetime of theparticipant, only by the participant at times and under conditions determinedby the Compensation Committee.  Eachoption granted has a term specified in the stock option agreement, but alloptions expire no later than ten years from the date of grant.  Options under the 2003 Stock Plan may bedesignated as “incentive stock options” for federal income tax purposes or as “nonqualifiedstock options.”  In the case of incentivestock options, the exercise price must be at least equal to the fair marketvalue of the share of Company Common Stock on the date the option isgranted.  The exercise price of anonqualified stock option need not be equal to the fair market value of the shareof Company Common Stock on the date of grant, but may be granted, at thediscretion of the Compensation Committee, at any exercise price which is notless than 85% of the fair market value at the time the option is granted.  The aggregate fair market value (determinedat the time the options are granted) of the shares of Company Common Stockcovered by incentive stock options granted to any employee under the 2003 StockPlan (or any other plan of the Company) which may become exercisable for thefirst time in any one calendar year may not exceed $100,000.

 

Upon exercise of anoption, the purchase price must generally be paid in full in cash or bycashiers check.  However, at thediscretion of the Compensation Committee, the terms of a stock option agreementmay permit payment of the purchase price by means of (i) delivery ofshares of Common Stock already owned by the participant (valued at fair marketvalue as of the date of exercise), (ii) to the extent permitted byapplicable law, delivery of a promissory note secured by the shares issued, (iii) deliveryof a portion of the shares issuable upon exercise (i.e., exercise for the “spread”on the option payable in shares), or (iv) any combination of the foregoingor any other means permitted by the Compensation Committee.

 

Grants of Stock Awardsare made pursuant to a restricted stock agreement entered into between theCompany and the participant.  A stockagreement provides (i) the rate at which shares of Restricted Stock willvest and (ii) any other terms and restrictions deemed appropriate by theCompensation Committee.  Until vested,shares of Restricted Stock are generally non-transferable and forfeitable upontermination of employment.

 

In the event of a merger,reorganization or sale of substantially all of the assets of the Company, theCompensation Committee, may, in its discretion, do one or more of thefollowing: (i) shorten the period during which options are exercisable, (ii) accelerateany vesting schedule to which an option or Stock Award is subject; (iii) arrangeto have the surviving or successor entity assume the Stock Awards and theoptions or grant replacement options or (iv) cancel options or StockAwards upon payment to the participants in cash, with respect to each option orStock Award to the extent then exercisable or vested, of an amount that isequal to the excess of the fair market value of the Company’s Common Stock (atthe effective time of the merger, reorganization, sale or other event) over (inthe case of options) the exercise price of the option.

 

The Board of Directorsmay at any time amend, alter or suspend or terminate the 2003 Stock Plan.  No amendment, alteration or suspension ortermination of the 2003 Stock Plan may impair the rights of a participant, unlessmutually agreed to by the Company and the participant.

 

31

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**Options/SAR Grants Table**

 

The followingtable sets forth the stock options granted to the Named Officers for the yearended December 31, 2004.

 
| ** **                         | ** ** | ** **       | ** ** | **% of Total**     | ** ** | ** **   | ** ** | ** **          | ** **             | **Potential Realized**   | ** ** |
|------------------------------------|------------|------------------|------------|--------------------|------------|--------------|------------|---------------------|------------------------|--------------------------|------------|
| ** **                         | ** ** | **Number of**    | ** ** | **Options/SARs**   | ** ** | ** **   | ** ** | ** **          | ** **             | **Value at**             | ** ** |
| ** **                         | ** ** | **Securities**   | ** ** | **Granted to**     | ** ** | **Exercise** | ** ** | ** **          | ** **             | **Assumed Annual**       | ** ** |
| ** **                         | ** ** | **Underlying**   | ** ** | **Employees**      | ** ** | **On Base**  | ** ** | ** **          | ** **             | **Rates of Stock Price** | ** ** |
| ** **                         | ** ** | **Options/SARs** | ** ** | **in Fiscal Year** | ** ** | **Price**    | ** ** | ** **          | ** **             | **Appreciation of**      | ** ** |
| **Name**                           | ** ** | **Granted**      | ** ** | **2004**           | ** ** | **($/Sh)**   | ** ** | **Expiration Date** | ** **             | **Option Term (1)**      | ** ** |
| ** **                         | ** ** | ** **       | ** ** | ** **         | ** ** | ** **   | ** ** | ** **          | ** **             | **5%**                   | ** ** | **10%** | ** ** |
| **William  H. Channell, Jr.** | ** ** | **150,000**      | ** ** | **71**             | **%**      | **$**        | **4.81**   | ** **          | **November 2014** | ** **               | **$**      | **453,747** | ** ** | **$** | **1,149,885** | ** ** |
|                                    |            |                  |            |                    |            |              |            |                     |                        |                          |            |  |  |  |  |  |

 

----

| (1) | The calculation of potential realizable value assumes annual growth  rates for each of the grants shown over their 10-year option term. For  example, a $4.81 per share price with a 5% annual growth rate results in a  stock price of $7.83 per share and a 10% rate results in a stock price of  $12.48 per share. Actual gains, if any, on exercised stock options are  dependent on the future performance of the stock. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Aggregated Option/SAR Exercises in LastFiscal Year and December 31, 2004 Option/SAR Values**

 

The following table sets forth the number andvalue of outstanding stock options at December 31, 2004. No options wereexercised in 2004.

 
| ** **                         | ** ** | ** **   | ** ** | ** **   | ** ** | **Number of Shares**          | ** ** | ** **                       | ** ** | ** **      | ** **    |
|------------------------------------|------------|--------------|------------|--------------|------------|-------------------------------|------------|----------------------------------|------------|-----------------|---------------|
| ** **                         | ** ** | **Shares**   | ** ** | ** **   | ** ** | **Underlying Unexercised**    | ** ** | **Value of Unexercised In-the-** | ** ** |
| ** **                         | ** ** | **Acquired** | ** ** | ** **   | ** ** | **Options/SARs**              | ** ** | **Money Options/SARs**           | ** ** |
| ** **                         | ** ** | **On**       | ** ** | **Value**    | ** ** | **at December 31, 2004** | ** ** | **at December 31, 2004**    | ** ** |
| **Name**                           | ** ** | **Exercise** | ** ** | **Realized** | ** ** | **Exercisable**               | ** ** | **Unexerciseable**               | ** ** | **Exercisable** | ** **    | **Unexerciseable** | ** ** |
|                               |       |         |       |         |       |                          |       |                             |       |            |          |   |   |
| **William  H. Channell, Jr.** | ** ** | **0**        | ** ** | **0**        | ** ** | **498,801**                   | ** ** | **597,599**                      | ** ** | **$**           | **1,826,304** | ** ** | **$** | **2,257,096** | ** ** |
|                               |       |         |       |         |       |                          |       |                             |       |            |          |   |   |
| **Thomas  Liguori**                | ** ** | **0**        | ** ** | **0**        | ** ** | **85,807**                    | ** ** | **33,333**                       | ** ** | **$**           | **254,257**   | ** ** | **$** | **119,665** | ** ** |
|                               |       |         |       |         |       |                          |       |                             |       |            |          |   |   |
| **John B.  Kaiser**                | ** ** | **0**        | ** ** | **0**        | ** ** | **61,937**                    | ** ** | **33,333**                       | ** ** | **$**           | **216,780**   | ** ** | **$** | **116,666** | ** ** |
|                               |       |         |       |         |       |                          |       |                             |       |            |          |   |   |
| **Andrew  M. Zogby**               | ** ** | **0**        | ** ** | **0**        | ** ** | **66,727**                    | ** ** | **33,333**                       | ** ** | **$**           | **233,545**   | ** ** | **$** | **116,666** | ** ** |
|                               |       |         |       |         |       |                          |       |                             |       |            |          |   |   |
| **Edward  J. Burke**               | ** ** | **0**        | ** ** | **0**        | ** ** | **65,217**                    | ** ** | **33,333**                       | ** ** | **$**           | **228,260**   | ** ** | **$** | **116,666** | ** ** |

 

### **ProfitSharing and Savings Plans**

### ** **

The Company maintains a plan, established in1993, in accordance with Section 401(k) of the Internal Revenue Code.  Under the terms of this plan, eligibleemployees may make voluntary contributions to the extent allowable by law.  Employees of the Company are eligible toparticipate in the plan 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 annual increments.

 

**Employment Contracts**

** **

The Company inDecember, 2003 entered into a five-year employment agreement, renewable everyfive years, with William H. Channell, Jr.  Mr. Channell, Jr.’s annual salary is $745,616 effective July 2004,subject to an annual cost of living adjustment. Mr. Channell, Jr. is entitled to participate in the StockPlan, the 401(k) Plan and the Incentive Compensation 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. Mr. Channell, Jr. is also entitled to certain other benefitspaid for by the Company, including an automobile allowance, health insuranceand sick leave, in accordance with the Company’s customary practices for seniorexecutive officers.  In the event thatthe Company were to terminate Mr. Channell, Jr. without cause (as definedin the agreement), or Mr. Channell, Jr. were to terminate hisemployment for good reason (also as defined in the agreement and including,without limitation, a change of control of the Company), 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.  

 

32

----

 

The Company amended in December, 2003 the employment agreement with Mr. Channell, Sr.originally entered into in July, 1996.  Mr. Channell, Sr.’sannual salary starting in December, 2003 is $50,000.  Mr. Channell, Sr.’s benefitsinclude (i)  during the term of the agreement, the payment of premiums fora term disability policy providing for $250,000 in annual benefits in the caseof his temporary or permanent disability, (ii) during the lifetime of Mr. Channell, Sr.and his wife, Jacqueline M. Channell, medical insurance for each of Mr. andMrs. Channell comparable to that provided to the Company’s seniorexecutive officers,  (iii) during Mr. Channell, Sr.’slifetime, a portion of the premiums on a $1,500,000 life insurance policy ownedby Mr. Channell, Sr., under which Mrs. Channell is thebeneficiary, and (iv) an automobile allowance.

 

Effective beginning in the Company’s 1996fiscal year, the Board of Directors adopted the Company’s 1996Performance-Based Annual Incentive Compensation Plan (the “Incentive Plan”).Eligible participants consist of key employees of the Company. The IncentivePlan is administered by the Compensation Committee of the Board of Directors.The amount of awards granted under the Incentive Plan is determined based on anobjective computation of the actual performance of the Company relative topre-established performance goals. Measures of performance may include level ofsales, EBITDA, net income, income from operations, earnings per share, returnon sales, expense reductions, return on capital, stock appreciation, return onequity, invention, design or development of proprietary products orimprovements thereto (patented or otherwise), or sales of such proprietaryproducts or improvements or profitability achieved from sales of proprietaryproducts or improvements. Awards under the Incentive Plan are payable in cashor, at the election of the Compensation Committee, Common Stock of the Company.Mr. William H. Channell, Jr., the Company’s President and ChiefExecutive Officer, receives a bonus based on the factors above. The bonus wasearned and payable based on continued service in subsequent years for fiscalyear 2001 and prior.  In 2002, theCompensation Committee changed the bonus to be earned and payable in thecurrent year.  The Compensation Committeemay establish a bonus pool from which all awards under the Incentive Plan maybe granted as well as individual, non-bonus pool awards. 

 

The Company’s executive compensation programis administered by the Compensation Committee of the Board of Directors.  As of March 4, 2005, the members of thisCommittee included Mr. Guy Marge, as Chairperson, Mr. David Ianniniand Mr. Stephen Gill. It is the responsibility of the Committee to reviewand approve the Company’s executive compensation plans and policies and tomonitor these compensation programs in relation to the performance of theparticular executive and the overall performance of the Company.

 

In February 2003, the Company offeredcurrent employees and non-employee directors an opportunity to exchange theiroutstanding options granted under the 1996 Stock Plan.  The tender offer expired on March 20,2003.  Pursuant to the offer, a total of1,326,890 options were cancelled on March 20, 2003.  On September 24, 2003, a total of1,324,090 new options were exchanged for options cancelled in March 2003.  (See “Executive Compensation—1996 IncentiveStock Plan”, Item 11.)

 

33

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The followingis a line graph presentation comparing the Company’s cumulative total returnfrom December 31, 1999 to December 31, 2004 with the performance ofthe NASDAQ market, the S & P Industrials and a similar Industry Indexfor the same period.

 

**COMPARISONOF 5 YEAR CUMULATIVE TOTAL RETURN***

AMONG CHANNELL COMMERCIAL CORPORATION,

THE NASDAQ STOCK MARKET (U.S.) INDEXTHE S & P COMMUNICATIONS EQUIPMENT INDEX AND THE S & P INDUSTRIALSINDEX

 

 

----

* $100invested on 12/31/99 in stock or index-including reinvestment ofdividends.  Fiscal year ending December31.

 

Copyright ©2002, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. Allrights reserved.

www.researchdatagroup.com/S&P.htm

 

**BoardMeetings and Committees**

** **

The Board ofDirectors held 11 meetings during the fiscal year ending December 31,2004. The Board has two standing committees: the Audit Committee and theCompensation Committee; both established in June 1996.  The Board does not have a NominatingCommittee.  The Audit Committeerecommends engagement of the Company’s independent accountants, approves theservices performed by such accountants and reviews and evaluates the Company’saccounting systems and its system of internal accounting controls.  All members of the Audit Committee areindependent as defined by NASD rule 4200(a)(14).  Mr. Brenner is the managing partner ofBrenner, Bigler & Associates, an accounting firm with offices inWoodland Hills and Blythe, California.  Mr. Brenner has over 35 yearsof public accounting experience with companies in various industries, includingmanufacturing, construction, real estate, mortgage banking and creditunions.    The Board hasadopted a written charter for the Audit Committee.  The Compensation Committee makesrecommendations to the full Board of Directors regarding levels and types ofcompensation of the Company’s executive officers and administers the 1996 StockPlan, the 2003 Stock Plan and the Incentive Compensation Plan.  See “Executive Compensation” and “Descriptionof Certain Plans”.  In 2004, the AuditCommittee met 7 times and the Compensation Committee met 2 times in performingtheir responsibilities.  In 2004, nodirector failed to attend at least 75% of the aggregate number of Board andCommittee meetings during the period of his or her service.

 

**Compensation Committee Interlocks and InsiderParticipation in Compensation Decisions**

** **

During 2004,members of the Company’s Compensation Committee consisted of Messrs. GuyMarge as Chairman, David Iannini and Stephen Gill.  No additional information concerning theCompensation Committee or the Company’s executive officers is required by Item402 of Regulation S-K.

 

34

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**Compensation Committee Report**

** **

TheCompensation Committee Report required by Item 402(k) of Regulations S-K isincorporated by reference to the Company’s Proxy Statement relating to the 2005Annual Meeting of Stockholders.

 

**Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters**

** **

Information required by Item 201(d) of RegulationS-K is incorporated by reference to the Company’s Proxy Statement relating tothe 2005 Annual Meeting of Stockholders.

 

The followingtable sets forth certain information concerning those persons who are known bymanagement of the Company to be beneficial owners of more than 5% of theCompany’s outstanding common stock (as provided to the Company by such personsor the record holder of such shares).  

 
| ** **                                                                                                 | ** ** | **Amount and Nature of Beneficial Ownership** | ** ** | ** **      | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------|------------|
| **Name and Address**                                                                                       | ** ** | **No. of Shares**                        | ** ** | **Exercisable** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| **of Beneficial Owner**                                                                                    | ** ** | **Owned**                                     | ** ** | **Options (1)** | ** ** | **Total** | ** ** | **of Class** | ** ** |
|                                                                                                       |       |                                          |       |            |       |   |   |   |   |
| William H.  Channell, Sr. and   Jacqueline M. Channell, as co-trustees   of the Channell Family Trust |       |                                          |       |            |       |   |   |   |   |
| 26040 Ynez  Rd.                                                                                            |       |                                          |       |            |       |   |   |   |   |
| Temecula, CA  92591                                                                                        |       | 3,250,830                                     |       | 7,334           |       | 3,258,164 |   | 34.7 | % |
|                                                                                                       |       |                                          |       |            |       |   |   |   |   |
| William H.  Channell, Jr.                                                                             |       |                                          |       |            |       |   |   |   |   |
| 26040 Ynez  Rd.                                                                                            |       |                                          |       |            |       |   |   |   |   |
| Temecula, CA  92591                                                                                        |       | 715,250                                       |       | 605,934         |       | 1,321,184 |   | 13.2 | % |
|                                                                                                       |       |                                          |       |            |       |   |   |   |   |
| Rutabaga  Capital Management, LLC (2)                                                                      |       |                                          |       |            |       |   |   |   |   |
| 64 Broad  Street                                                                                           |       |                                          |       |            |       |   |   |   |   |
| Boston, MA  02109                                                                                          |       | 897,252                                       |       | —          |       | 897,252 |   | 9.6 | % |
|                                                                                                       |       |                                          |       |            |       |   |   |   |   |
| State of  Wisconsin Investment Board (3)                                                                   |       |                                          |       |            |       |   |   |   |   |
| P.O. Box  7842                                                                                        |       |                                          |       |            |       |   |   |   |   |
| Madison, WI  53707                                                                                         |       | 651,300                                       |       | —          |       | 651,300 |   | 6.9 | % |
|                                                                                                       |       |                                          |       |            |       |   |   |   |   |
| The Taylor  Family Trust                                                                                   |       |                                          |       |            |       |   |   |   |   |
| 1450  Ravenswood Lane                                                                                      |       |                                          |       |            |       |   |   |   |   |
| Riverside,  CA 92506                                                                                       |       | 469,960                                       |       | —          |       | 469,960 |   | 5.0 | % |
|                                                                                                       |       |                                          |       |            |       |   |   |   |   |
| Carrie S.  Channell                                                                                        |       |                                          |       |            |       |   |   |   |   |
| 18 Buena  Vista Avenue                                                                                     |       |                                          |       |            |       |   |   |   |   |
| Mill Valley,  CA 94941                                                                                     |       | 450,000                                       |       | —          |       | 450,000 |   | 4.8 | % |

 

----

| (1) | Refers to  the number of shares covered by options exercisable within 60 days of March  11, 2005.                                                                            |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Information  provided by Schedule 13G filing with the SEC in January 2005. Sole Voting  Power 405,250 shares.

Shared  Voting Power 492,002. Sole Dispositive Power 897,252. |
| (3) | Information  provided by Schedule 13G filing with the SEC in February 2005.                                                                                                  |

 

35

----

 

**Security Ownership of Management**

 

The followingtable sets forth certain information, as of March 11, 2005, concerning thebeneficial ownership of common stock by the Company’s directors and NamedOfficers, and all directors and executive officers of the Company as a group.

 
| ** **                                                              | ** ** | **Amount and Nature of Beneficial Ownership** | ** ** | ** **      | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------|------------|
| ** **                                                              | ** ** | **No. of Shares**                        | ** ** | **Exercisable** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| **Name of Beneficial Owner**                                            | ** ** | **Owned**                                     | ** ** | **Options (1)** | ** ** | **Total** | ** ** | **of Class** | ** ** |
|                                                                    |       |                                          |       |            |       |   |   |   |   |
| William H.  Channell, Sr.                                          |       | 3,250,830                                     |       | 667             |       | 3,251,497 |   | 34.6 | % |
| Jacqueline  M. Channell                                                 |       | —                                        |       | 6,667           |       | 6,667 |   | 0.1 | % |
| William H.  Channell, Jr.                                          |       | 715,250                                       |       | 605,934         |       | 1,321,184 |   | 13.2 | % |
| Thomas  Liguori                                                         |       | 31,300                                        |       | 102,474         |       | 133,774 |   | 1.4 | % |
| Guy Marge                                                               |       | 9,000                                         |       | 667             |       | 9,667 |   |   | * |
| Dana Brenner                                                            |       | —                                        |       | 667             |       | 667 |   |   | * |
| David  Iannini                                                          |       | —                                        |       | —          |       | — |   | 0.0 | % |
| Stephen Gill                                                            |       | 1,000                                         |       | —          |       | 1,000 |   |   | * |
| Edward J.  Burke                                                        |       | 1,000                                         |       | 81,884          |       | 82,884 |   |   | * |
| Andrew M.  Zogby                                                        |       | 300                                           |       | 83,394          |       | 83,694 |   |   | * |
| John B.  Kaiser                                                         |       | 890                                           |       | 78,604          |       | 79,494 |   |   | * |
| Total Listed                                                            |       | 4,009,570                                     |       | 960,958         |       | 4,970,528 |   | 48.0 | % |
| All present directors and executive officers  as a group (11 in number) |       | 4,009,570                                     |       | 1,005,792       |       | 5,015,362 |   | 48.3 | % |

 

----

*  Less than 1%

(1)  Refers to thenumber of shares coverd by options exercisable within 60 days of March 11,2005.

 

**Item 13. Certain Relationships and Related Transactions**

** **

TheCompany has two leases for approximately 261,000 square feet of manufacturing,warehouse and office space in Temecula, California, with William H. Channell, Sr.,a principal stockholder and Chairman of the Board of the Company. The term ofthe first lease is through December 31, 2005, with two five-year renewaloptions. Additionally, an adjacent 100,000 square foot building was constructedand completed in 1996. Subsequent to December 31, 1996, the Companyguaranteed debt of Mr. Channell, Sr. of approximately $0.8 millionincurred in connection with construction of the building.  The loan amount subject to the guarantee isexpected to decline before expiring in 2017. At December 31, 2004, the outstanding loan balance subject to theguarantee totaled $0.6 million.  It isnot practicable to estimate the fair value of the guarantee; however, theCompany does not anticipate that it will incur losses as a result of thisguarantee. This building is also being leased from Mr. Channell, Sr.through 2005, with two five-year renewal options. Both leases provide forpayments of insurance, repairs, maintenance and property taxes.  Rent expense paid under the leases was $1.3million, $1.3 million and $1.3 million for the years ended December 31,2002, 2003 and 2004, respectively.  TheCompany believes that the terms of these leases are no less favorable to theCompany than could be obtained from an independent third party.  

 

In May, 2002,the Company sold its RF line of passive electronic devices to RMSCommunications, Inc., which is owned by Gary Napolitano, a former officerof the Company.  A sale in the amount of$800,000 was recorded. RMS Communications, Inc. paid the Company $125,000in cash at the time of sale, and the remaining $675,000 is payable in monthlyinstallments through June 30, 2003, bearing interest at 7% per annum.  The account is currently in arrears.  The

 

36

----

 

amount due from RMSCommunications, Inc. included in accounts receivable at December 31,2004 is $251,000.  The Company hassecurity interest in the inventory and a personal guarantee from Mr. Napolitanoand believes the amount will be paid in full. The Company continues to purchase RF devices from Mr. Napolitanoand from other sources depending on price and supply of product.  The RF devices purchased from Mr. Napolitano’sfirm in 2004 approximated $100,000 and were used as components in the Company’sproduct lines.  The purchases in 2004 didnot result in a cash payment to Mr. Napolitano as the amounts owed wereused to offset the accounts receivable.

 

The Companypaid $72,912 and $75,829 in 2003 and 2004, respectively, to Carolyn Channellfor consulting services.   Mrs. Channell is the wife of William H.Channell, Jr., the Company’s President and Chief ExecutiveOfficer.   Mrs. Channellconsults on insurance coverage matters for the Company.

 

TheCompany has facilities in Orange, Dalby, Terang and Adelaide Australia that areleased from shareholders of the Company. These shareholders are former owners of Bushman Tanks.  The facilities comprise 94,000 square feet ofmanufacturing, warehouse and office space. The rent expense paid in the five months of August to December 2004was $135,720.  The Company hired anindependent firm to appraise the market lease rates for theses facilities andit was determined that the existing leases are in excess of fair market valueby approximately $27,000 per year.

 

**Item14. Principal Accounting Fees and Services**

** **

The information required by Item 14 of Form 10-K/A-1 isincorporated by reference to the Company’s definitive proxy statement for the2005 Annual Meeting of Stockholders. 

 

**PART IV**

** **

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

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

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                      |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1         |       | Restated Certificate of Incorporation of  the Company (1)                                                                                                                                                                                                                                                                                                                       |
| 3.2         |       | Bylaws of the Company (1)                                                                                                                                                                                                                                                                                                                                                       |
| 4           |       | Form of Common Stock Certificate (1)                                                                                                                                                                                                                                                                                                                                       |
| 10.1        |       | Tax Agreement between the Company and the  Existing Stockholders (1)                                                                                                                                                                                                                                                                                                            |
| 10.2.1*     |       | Channell Commercial Corporation 1996  Incentive Stock Plan (including forms of Stock Option Agreements and  Restricted Stock Agreement) (1)                                                                                                                                                                                                                                     |
| 10.2.2*     |       | Channell Commercial Corporation 2003  Incentive Stock Plan (including forms of Stock Option Agreement and  Restricted Stock Agreement) (8)                                                                                                                                                                                                                                      |
| 10.3        |       | Loan and Security Agreement dated as of  September 25, 2002 by and among the Company, Channell Commercial Canada  Inc., Fleet Capital Corporation, Fleet Capital Canada Corporation and, under  the circumstances set forth therein, Fleet National Bank, London U.K. Branch,  trading as Fleet Boston Financial, and the U.K. Borrowers (as defined  therein, if any) (6) |
| 10.3.1      |       | Loan and Security Agreement dated  October 24, 2003 by and among Channell Pty Ltd and National Australia  Bank Ltd (10)                                                                                                                                                                                                                                                    |
| 10.3.2      |       | Loan and Security Agreement dated  August 2, 2004 by and among Channell Bushman Pty Ltd and National  Australia Bank Ltd (10)                                                                                                                                                                                                                                              |
| 10.3.3      |       | Loan and Security Agreement dated  August 2, 2004 by and among Channell Pty Ltd and National Australia Bank  Ltd (10)                                                                                                                                                                                                                                                      |
| 10.3.4      |       | Investment and Shareholders Agreement dated  August 2, 2004 by and among Channell Bushman Pty Ltd and Australia and  New Zealand Banking Group Ltd (10)                                                                                                                                                                                                                    |

 

37

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| 10.4*  |   | Employment Agreement between the Company  and William H. Channell, Sr., dated July 8, 1996. (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.6*  |   | Channell Commercial Corporation 1996  Performance-Based Annual Incentive Compensation Plan (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7   |   | Lease dated December 22, 1989 between  the Company and William H. Channell, Sr., as amended (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Lease dated May 29, 1996 between the  Company and the Channell Family Trust (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.9   |   | Lease dated October 26, 2000 between  the Company and Belston Developments Inc. (4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.10  |   | Lease Agreement dated as of March 1,  1996 between Winthrop Resources Corp. and the Company (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11  |   | Form of Indemnity Agreement (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12  |   | Form of Agreement Regarding  Intellectual Property (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.13  |   | 401(k) Plan of the Company (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.14  |   | A.C. Egerton (Holdings) PLC Share Purchase  Agreement (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.15* |   | Amendment to Employment Agreement between  the Company and William H. Channell, Jr., dated December 31, 1998  (3)                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.17  |   | Lease dated June 27, 2002 between the  Company and Ynez Street, Ltd (5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.18  |   | Mutual Specific and General Release between  the Company and Richard A. Cude, dated August 2, 2002 (7)                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.19* |   | Amendment to Employment Agreement between  the Company and William H. Channell, Sr., dated December 9, 2003  (9)                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.20* |   | Employment Agreement between the Company  and William H. Channell, Jr., dated December 9, 2003 (9)                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.21  |   | Share and Asset Purchase Agreement dated as  of July 14, 2004 by and among Australia’s Bushman Tanks Pty Ltd., Douglas  Robin Young, Richard James Young, Lokan Nominees Pty Ltd and Lenbridge Grange  Pty Ltd, Belsiasun Pty Ltd and Elcarva Pty Ltd, the holders of all the  outstanding shares of Bushmans Group Pty Ltd, Hold-On Industries Australia  Pty Ltd, Australian Bushman Tanks Pty Ltd., and Polyrib Tanks Pty Ltd, on the  one hand, and Channell Commercial Corporation and Channell Bushman Pty  Limited, on the other hand.(11) |
| 14     |   | Channell Commercial Corporation Code of  Business Conduct and Ethics (9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 21     |   | Subsidiaries of the Company(12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 23     |   | Consent of Certified Public Accountants  (12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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. (12)                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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. (12)                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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 Scott Kiefer,  Interim CFO. (12)                                                                                                                                                                                                                                                                                                                                              |

 

----

* Management contract or, compensatory plan orarrangement.

 
| (1)  | Incorporated by reference  to the indicated exhibits filed in connection with the Company’s Registration  Statement on Form S-1 (File No. 333-3621). |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Incorporated by reference to the indicated exhibits filed in  connection with the Company’s Form 8-K on May 18, 1998.                                |
| (3)  | Incorporated by reference to the indicated exhibits filed in  connection with the Company’s Form 10-K on March 31, 1999.                             |
| (4)  | Incorporated by reference to the indicated exhibits filed in  connection with the Company’s Form 10-K on April 2, 2001.                              |
| (5)  | Incorporated by reference to the indicated exhibits filed in  connection with the Company’s Form 10-Q on August 9, 2002.                             |
| (6)  | Incorporated by reference to the indicated exhibits filed in  connection with the Company’s Form 8-K dated September 25, 2002.                       |
| (7)  | Incorporated by reference to the indicated exhibits filed in  connection with the Company’s Form 10-Q on November 12, 2002.                          |
| (8)  | Incorporated by reference to Appendix B filed in connection with the  Company’s Definitive Proxy Statement on March 26, 2003.                             |
| (9)  | Incorporated by reference to the indicated exhibits filed in  connection with the Company’s Form 10-K dated March 4, 2004.                           |
| (10) | Incorporated by reference to the indicated exhibits filed in  connection with the Company’s Form 10-Q dated November 5, 2004.                        |
| (11) | Incorporated by reference to the indicated exhibits filed in  connection with the Company’s Form 8-K on August 3, 2004.                              |
| (12) | Filed herewith.                                                                                                                                                     |

 

38

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors andStockholders

Channell Commercial Corporation

 

We have audited theconsolidated balance sheets of Channell Commercial Corporation as of December31, 2003 and 2004, and the related consolidated statements of operations andcomprehensive income (loss), stockholders’ equity, and cash flows for each ofthe three years in the period ended December 31, 2004.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate 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 nosuch 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.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Channell CommercialCorporation as of December 31, 2003 and 2004, and the consolidated results oftheir operations and their consolidated cash flows for each of the three yearsin the period ended December 31, 2004, in conformity with accounting principlesgenerally accepted in the United States of America.

 

We have also audited ScheduleII of Channell Commercial Corporation for each of the three years in the periodended December 31, 2004.  In our opinion,this schedule presents fairly, in all material respects, the informationrequired to be set forth therein.

 

As described in Note R to theconsolidated financial statements, the accompanying consolidated financialstatements for the years ended December 31, 2004, 2003 and 2002 have beenrestated.

 

 
| /s/ Grant  Thornton LLP                   |   |
|-------------------------------------------|--------|
|                                      |   |
| Los Angeles,  California                  |
| February 21,  2005, except for Note R,    |
| as to which the date is November 17, 2005 |
|                                           |        |  |

 

F-1

----

 

**CHANNELL COMMERCIAL CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**December 31,**

*(amounts in thousands)*

 
| ** **                                                                                                                                                                          | ** ** | **2003**          | ** ** | **2004**          | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| ASSETS                                                                                                                                                                              |       |              |       |              |       |
| Current assets                                                                                                                                                                      |       |              |       |              |       |
| Cash and cash equivalents                                                                                                                                                           |       | $                 | 9,527      |              | $          | 5,453 |   |
| Accounts receivable, net                                                                                                                                                            |       | 10,051            |       | 13,936            |       |
| Inventories                                                                                                                                                                         |       | 8,855             |       | 14,164            |       |
| Deferred income taxes                                                                                                                                                               |       | 876               |       | 1,951             |       |
| Prepaid expenses and other current assets                                                                                                                                           |       | 996               |       | 859               |       |
| Income taxes receivable                                                                                                                                                             |       | 102               |       | 1,323             |       |
| Total current assets                                                                                                                                                                |       | 30,407            |       | 37,686            |       |
|                                                                                                                                                                                |       |              |       |              |       |
| Property and  equipment, net                                                                                                                                                        |       | 17,164            |       | 19,301            |       |
| Deferred  income taxes                                                                                                                                                              |       | 4,747             |       | 4,043             |       |
| Goodwill                                                                                                                                                                            |       | 613               |       | 14,724            |       |
| Intangible  assets, net of amortization of $45 in 2004                                                                                                                              |       | —            |       | 1,763             |       |
| Other assets                                                                                                                                                                        |       | 504               |       | 964               |       |
|                                                                                                                                                                                |       | $                 | 53,435     |              | $          | 78,481 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                           |       |              |       |              |       |
| Current  liabilities                                                                                                                                                                |       |              |       |              |       |
| Accounts payable                                                                                                                                                                    |       | $                 | 5,103      |              | $          | 16,111 |   |
| Short term debt (including current  maturities of long term debt)                                                                                                                   |       | 952               |       | 4,332             |       |
| Current maturities of capital lease  obligations                                                                                                                                    |       | 57                |       | 36                |       |
| Accrued restructuring liability                                                                                                                                                     |       | 2,857             |       | 150               |       |
| Accrued expenses                                                                                                                                                                    |       | 4,240             |       | 7,619             |       |
| Total current liabilities                                                                                                                                                           |       | 13,209            |       | 28,248            |       |
|                                                                                                                                                                                |       |              |       |              |       |
| Long-term  debt, less current maturities                                                                                                                                            |       | 2,830             |       | 4,368             |       |
| Capital  lease obligations, less current maturities                                                                                                                                 |       | 67                |       | 104               |       |
| Deferred  gain on sale leaseback transaction                                                                                                                                        |       | 513               |       | 453               |       |
| Commitments  and contingencies                                                                                                                                                      |       | —            |       | —            |       |
| Minority  interest                                                                                                                                                                  |       | —            |       | 2,824             |       |
|                                                                                                                                                                                |       |              |       |              |       |
| Stockholders’  equity                                                                                                                                                          |       |              |       |              |       |
| Preferred stock, par value $.01 per share,  authorized–1,000 shares, none issued and outstanding                                                                               |       | —            |       | —            |       |
| Common stock, par value $.01 per share,  authorized–19,000 shares; issued – 9,372 in 2003 and 9,608 in 2004;  outstanding - 9,128 shares in 2003 and 9,364 shares in 2004 |       | 94                |       | 96                |       |
| Additional paid-in capital                                                                                                                                                          |       | 28,664            |       | 29,671            |       |
| Treasury stock – 244 shares in 2003 and  2004                                                                                                                                  |       | (1,871            | )          | (1,871            | )          |
| Retained earnings                                                                                                                                                                   |       | 9,940             |       | 13,549            |       |
| Accumulated other comprehensive income  (loss) - Foreign currency translation                                                                                                       |       | (11               | )          | 1,039             |       |
| Total stockholders’ equity                                                                                                                                                     |       | 36,816            |       | 42,484            |       |
|                                                                                                                                                                                |       | $                 | 53,435     |              | $          | 78,481 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-2

----

 

**CHANNELL COMMERCIAL CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVEINCOME (LOSS)**

**Year ended December 31,**

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

 
| ** **                                                                        | ** ** | **2002**          | ** ** | **2003**          | ** ** | **2004**          | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                        | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
|                                                                              |       |              |       |              |       |              |       |
| Net sales                                                                         |       | $                 | 84,785     |              | $          | 76,537            |       | $ | 100,134 |   |
| Cost of  goods sold                                                               |       | 57,450            |       | 53,960            |       | 72,151            |       |
|                                                                              |       |              |       |              |       |              |       |
| Gross profit                                                                      |       | 27,335            |       | 22,577            |       | 27,983            |       |
|                                                                              |       |              |       |              |       |              |       |
| Operating  expenses                                                               |       |              |       |              |       |              |       |
| Selling                                                                           |       | 9,246             |       | 9,465             |       | 14,279            |       |
| General and administrative                                                        |       | 11,452            |       | 7,710             |       | 8,584             |       |
| Research and development                                                          |       | 1,619             |       | 1,902             |       | 2,336             |       |
| Restructuring charge                                                              |       | 1,228             |       | 1,565             |       | (690              | )          |
| Asset impairment charge                                                           |       | 2,154             |       | 1,238             |       | —            |       |
| Goodwill impairment charge                                                        |       | 966               |       | —            |       | —            |       |
|                                                                              |       | 26,665            |       | 21,880            |       | 24,509            |       |
|                                                                              |       |              |       |              |       |              |       |
| Income from operations                                                            |       | 670               |       | 697               |       | 3,474             |       |
|                                                                              |       |              |       |              |       |              |       |
| Interest  income                                                                  |       | 89                |       | 122               |       | 129               |       |
| Interest  expense                                                                 |       | (2,088            | )          | (693              | )          | (618              | )          |
|                                                                              |       |              |       |              |       |              |       |
| Income (loss) before income tax expense  (benefit)                                |       | (1,329            | )          | 126               |       | 2,985             |       |
|                                                                              |       |              |       |              |       |              |       |
| Income tax  expense (benefit)                                                     |       | 1,713             |       | 200               |       | (791              | )          |
|                                                                              |       |              |       |              |       |              |       |
| Net income (loss) before minority interest                                        |       | (3,042            | )          | (74               | )          | 3,776             |       |
|                                                                              |       |              |       |              |       |              |       |
| Minority interest                                                                 |       | —            |       | —            |       | 167               |       |
|                                                                              |       |              |       |              |       |              |       |
| Net income (loss)                                                                 |       | $                 | (3,042     | )                 | $          | (74               | )          | $ | 3,609 |   |
|                                                                              |       |              |       |              |       |              |       |
| Net income (loss) per share                                                       |       |              |       |              |       |              |       |
| Basic                                                                             |       | $                 | (0.34      | )                 | $          | (0.01             | )          | $ | 0.39 |   |
|                                                                              |       |              |       |              |       |              |       |
| Diluted                                                                           |       | $                 | (0.34      | )                 | $          | (0.01             | )          | $ | 0.39 |   |
|                                                                              |       |              |       |              |       |              |       |
| Net (loss) income                                                                 |       | $                 | (3,042     | )                 | $          | (74               | )          | $ | 3,609 |   |
|                                                                              |       |              |       |              |       |              |       |
| Other comprehensive income, net of tax   Foreign currency translation adjustments |       | 688               |       | 1,982             |       | 1,050             |       |
|                                                                              |       |              |       |              |       |              |       |
| Comprehensive  net (loss) income                                                  |       | $                 | (2,354     | )                 | $          | 1,908             |       | $ | 4,659 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-3

----

 

**CHANNELL COMMERCIAL CORPORATION**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**

**Years ended December 31, 2002,2003 and 2004**

*(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, 2002   (as previously reported) |       | 9,269            |       | $           | 93         |               | $          | 28,334       |       | 244               |       | $                | (1,871     | )                 | $          | 13,622     |       | $ | (2,681 | ) | $ | 37,497 |   |
| Prior period  adjustment   (see Note R)              |       | —           |       | —      |       | —             |       | —       |       | —            |       | (566             | )          | —            |       | (645       | )          |
|                                                 |       |             |       |        |       |               |       |         |       |              |       |             |       |              |       |       |       |
| Balance, January  1, 2002   (as restated)            |       | 9,269            |       | $           | 93         |               | $          | 28,334       |       | 244               |       | $                | (1,871     | )                 | $          | 13,056     |       | $ | (2,681 | ) | $ | 36,852 |   |
| Exercise of  employee stock options                  |       | 100              |       | 1           |       | 321                |       | —       |       | —            |       | —           |       | —            |       | 322        |       |
| Foreign currency  translation                        |       | —           |       | —      |       | —             |       | —       |       | —            |       | —           |       | 688               |       | 688        |       |
| Net loss for the  year (as restated)                 |       | —           |       | —      |       | —             |       | —       |       | —            |       | (3,042           | )          | —            |       | (2,963     | )          |
|                                                 |       |             |       |        |       |               |       |         |       |              |       |             |       |              |       |       |       |
| Balance, December  31, 2002 (as restated)            |       | 9,369            |       | $           | 94         |               | $          | 28,655       |       | 244               |       | $                | (1,871     | )                 | $          | 10,014     |       | $ | (1,993 | ) | $ | 34,899 |   |
|                                                 |       |             |       |        |       |               |       |         |       |              |       |             |       |              |       |       |       |
| Exercise of  employee stock options                  |       | 3                |       | —      |       | 9                  |       | —       |       | —            |       | —           |       | —            |       | 9          |       |
| Foreign currency  translation                        |       | —           |       | —      |       | —             |       | —       |       | —            |       | —           |       | 1,982             |       | 1,982      |       |
| Net loss for the  year (as restated)                 |       | —           |       | —      |       | —             |       | —       |       | —            |       | (74              | )          | —            |       | (74        | )          |
|                                                 |       |             |       |        |       |               |       |         |       |              |       |             |       |              |       |       |       |
| Balance, December  31, 2003 (as restated)            |       | 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 (as restated)             |       | —           |       | —      |       | —             |       | —       |       | —            |       | 3,609            |       | —            |       | 3,609      |       |
|                                                 |       |             |       |        |       |               |       |         |       |              |       |             |       |              |       |       |       |
| Balance, December  31, 2004 (as restated)            |       | 9,608            |       | $           | 96         |               | $          | 29,671       |       | 244               |       | $                | (1,871     | )                 | $          | 13,549     |       | $ | 1,039 |   | $ | 42,484 |   |
|                                                      |            |                  |            |             |            |                    |            |              |            |                   |            |                  |            |                   |            |            |            |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-4

----

 

**CHANNELL COMMERCIAL CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Year ended December 31,**

*(amounts in thousands)*

 
| ** **                                                                                | ** ** | **2002**          | ** ** | **2003**          | ** ** | **2004**          | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Cash flows  from operating activities:                                                    |       |              |       |              |       |              |       |
| Net (loss) income                                                                         |       | $                 | (3,042     | )                 | $          | (74               | )          | $ | 3,609 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities: |       |              |       |              |       |              |       |
| Depreciation and amortization                                                             |       | 7,785             |       | 6,232             |       | 4,752             |       |
| Asset impairment charge                                                                   |       | 2,154             |       | 1,238             |       | —            |       |
| Goodwill impairment charge                                                                |       | 966               |       | —            |       | —            |       |
| Loss (gain) on disposal of fixed assets                                                   |       | 348               |       | 108               |       | (22               | )          |
| Amortization of deferred gain on sale  leaseback                                          |       | (30               | )          | (61               | )          | (60               | )          |
| Deferred income taxes                                                                     |       | 1,169             |       | (761              | )          | 109               |       |
| Changes in assets and liabilities:                                                        |       |              |       |              |       |              |       |
| Accounts receivable                                                                       |       | 3,120             |       | 751               |       | (1,237            | )          |
| Inventories                                                                               |       | 2,182             |       | (374              | )          | (2,394            | )          |
| Prepaid expenses and other current assets                                                 |       | 156               |       | 327               |       | 248               |       |
| Income taxes receivable                                                                   |       | 4,682             |       | 61                |       | (1,238            | )          |
| Other assets                                                                              |       | 32                |       | (90               | )          | (301              | )          |
| Accounts payable                                                                          |       | 562               |       | (1,046            | )          | 7,178             |       |
| Restructuring liability                                                                   |       | (388              | )          | 296               |       | (2,810            | )          |
| Accrued expenses                                                                          |       | 71                |       | 520               |       | 1,394             |       |
|                                                                                      |       |              |       |              |       |              |       |
| Net cash provided by operating activities                                                 |       | 19,767            |       | 7,127             |       | 9,228             |       |
|                                                                                      |       |              |       |              |       |              |       |
| Cash flows  from investing activities:                                                    |       |              |       |              |       |              |       |
| Purchase of property and equipment                                                        |       | (1,886            | )          | (1,203            | )          | (3,281            | )          |
| Proceeds from sale of property and  equipment                                             |       | 6,232             |       | 2,357             |       | 23                |       |
| Business acquisitions, net of cash acquired                                               |       | —            |       | —            |       | (16,767           | )          |
|                                                                                      |       |              |       |              |       |              |       |
| Net cash (used in) provided by investing  activities                                      |       | 4,346             |       | 1,154             |       | (20,025           | )          |
|                                                                                      |       |              |       |              |       |              |       |
| Cash flows  from financing activities:                                                    |       |              |       |              |       |              |       |
| Repayment of debt                                                                         |       | $                 | (35,133    | )                 | $          | (2,047            | )          | $ | (2,669 | ) |
| Proceeds from issuance of long-term debt                                                  |       | 6,742             |       | —            |       | 7,233             |       |
| Principal borrowings under capital lease  obligations                                     |       | —            |       | —            |       | 40                |       |
| Payment of capital lease obligations                                                      |       | (1,763            | )          | (624              | )          | (30               | )          |
| Proceeds from minority investor                                                           |       | —            |       | —            |       | 2,681             |       |
| Exercise of employee stock options                                                        |       | 322               |       | 9                 |       | 295               |       |
|                                                                                      |       |              |       |              |       |              |       |
| Net cash (used in) provided by financing  activities                                      |       | (29,832           | )          | (2,662            | )          | 7,550             |       |
|                                                                                      |       |              |       |              |       |              |       |
| Effect of  exchange rates on cash                                                         |       | 119               |       | 746               |       | (827              | )          |
|                                                                                      |       |              |       |              |       |              |       |
| Increase (decrease) in cash and cash  equivalents                                         |       | (5,600            | )          | 6,365             |       | (4,074            | )          |
|                                                                                      |       |              |       |              |       |              |       |
| Cash and  cash equivalents, beginning of year                                             |       | 8,762             |       | 3,162             |       | 9,527             |       |
|                                                                                      |       |              |       |              |       |              |       |
| Cash and  cash equivalents, end of year                                                   |       | $                 | 3,162      |              | $          | 9,527             |       | $ | 5,453 |   |
|                                                                                      |       |              |       |              |       |              |       |
| Cash paid  during the year for:                                                           |       |              |       |              |       |              |       |
| Interest                                                                                  |       | $                 | 1,608      |              | $          | 292               |       | $ | 364 |   |
|                                                                                      |       |              |       |              |       |              |       |
| Income taxes                                                                              |       | $                 | 1,122      |              | $          | 749               |       | $ | 809 |   |
|                                                                                      |       |              |       |              |       |              |       |
| Issuance of  common stock in business combination                                         |       | $                 | —     |              | $          | —            |       | $ | 714 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-5

----

 

**CHANNELL COMMERCIAL CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**December 31, 2002, 2003 and 2004**

*(amountsin thousands, except per share data)*

 

**NOTEA—DESCRIPTION OF BUSINESS**

 

The Company is a designer and manufacturer of telecommunicationsequipment supplied 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 premise (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 markets polyethylene water tanks for rural and residentialmarkets in Australia.  The Company’sprimary product line of rotational molded tanks is used in the agricultural sectorwhere water shortages require storage of rain and ground water.  The Company also markets a range of waterstorage tanks for use in residential and rural-residential markets.

 

**NOTEB—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Estimates*—Inpreparing financial statements in conformity with generally accepted accountingprinciples, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reporting period.  Significant estimates include accountsreceivables reserves, the inventory valuation reserve, restructuring accrualsassociated with vacated facilities, valuation of goodwill and long lived assetsand the deferred tax asset valuation allowance. Actual results could differ from those estimates and the differencescould be material.

 

*Basis ofConsolidation*—The consolidated financial statementsinclude the accounts of the Company and its subsidiaries.  All significant intercompany transactions andbalances have been eliminated.  Minorityinterest represents a 25% equity interest in Bushman Tanks acquired by ANZPrivate Equity (See Note Q).

 

*Basis ofPresentation*—As discussed in Note R, the accompanyingfinancial statements have been restated to reflect the correction of arecording error in the Company’s deferred income tax asset and the reportedincome tax expense (benefit) for the periods ended December 31, 2002, 2003 and2004.

 

*ForeignCurrency Translation*—Assets and liabilities of foreignoperations are translated into U.S. dollars at current exchange rates.  Income and expenses are translated into U.S.dollars at average rates of exchange prevailing during the period.  Adjustments resulting from translatingforeign functional currency financial statements into U.S. dollars are includedin other comprehensive income.  Foreigncurrency transaction gains and losses are included in general and administrativeexpenses.  Transactions gains and losseswere not significant in 2002, 2003 and 2004.

 

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

 

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

 

*Propertyand Equipment*—Property and equipment are stated atcost. Depreciation is computed using the straight-line method over theestimated useful lives of the assets. Capital lease assets are amortized usingthe straight-line method over the useful lives of the assets. Expenditures forall maintenance 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.

 

*Impairmentof Long-Lived Assets*—When events or circumstances indicatethe carrying value of a long-lived asset may be impaired, the Company estimatesthe future discounted cash flows to be derived from the asset to assess whetheror not a potential impairment exists.  Ifthe carrying value exceeds the estimate of future discounted cash flows, theimpairment is calculated as the excess of the carrying value of the asset overthe estimate of its fair market value.

 

F-6

----

 

*Goodwilland Other Intangible Assets*—In June 2001, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets,” which supersedes APB Opinion No. 17, “Intangible Assets.”  SFAS 142 eliminates the requirement toamortize goodwill and indefinite-lived intangible assets, requiring insteadthat those assets be measured for impairment at least annually, and more oftenwhen events indicate that an impairment exists. Intangible assets with finite lives will continue to be amortized overtheir useful lives.  SFAS 142 applies togoodwill and intangible assets arising from transactions completed before andafter the Statement’s effective date.

 

The Company has adopted SFAS142 as of January 1, 2002.  In applyingSFAS 142, the Company performed the transitional reassessment and impairmenttests required as of January 1, 2002, and determined that the goodwill ofthe Company has indefinite lives and that there was no impairment on theseassets. The Company discontinued amortizing these assets on January 1, 2002. Atthe time of adoption, the Company had accumulated amortization pertaining to goodwillof $10,303.

 

The Company tests the value ofgoodwill for impairment annually (December 31 for the Canadian reporting unitand June 30 for the Bushman’s reporting unit) or whenever events or changes incircumstance indicate that expected future discounted cashflows may beinsufficient to support the carrying amount of the asset.  The test involves significant judgment inestimating projections of fair value generated through future performance ofthe operating segment.  In calculatingthe fair value, the Company relies on factors such as operating results,business plans, economic projections, and anticipated cash flows used indiscounting the cash flows.  Inherentuncertainties exist in determining and applying such factors.

 

In the fourth quarter of 2002, the Company adjusted the carrying value of the goodwill in the Company’s International operations resulting in a non-cash impairment charge of $966.  The impairment charge was the result of restructuring activities that reduced the level of foreign operations and the exit of certain product lines.  There was no impairment to the carrying value of goodwill in 2003 or 2004.

 

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

 

The change in the carryingamount of goodwill and the non-compete agreement for the years ended December31, 2003 and 2004 is summarized as follows:

 
| ** **                                             | ** ** | ** **   | ** ** | **Non-Compete** | ** ** |
|--------------------------------------------------------|------------|--------------|------------|-----------------|------------|
| ** **                                             | ** ** | **Goodwill** | ** ** | **Agreement**   | ** ** |
|                                                   |       |         |       |            |       |
| Balance at  January 1, 2003                            |       | $            | 504        |            | $          | — |   |
|                                                   |       |         |       |            |       |
| Effect of  foreign currency translation                |       | 109          |       | —          |       |
|                                                   |       |         |       |            |       |
| Balance at  December 31, 2003                          |       | 613          |       | —          |       |
|                                                   |       |         |       |            |       |
| Additions  due to business acquistion                  |       | 12,442       |       | —          |       |
| Non-compete  agreement related to business acquisition |       | —       |       | 1,600           |       |
| Amortization  of non-compete agreement                 |       | —       |       | (45             | )          |
| Effect of  foreign currency translation                |       | 1,669        |       | 208             |       |
|                                                   |       |         |       |            |       |
| Balance at  December 31, 2004                          |       | $            | 14,724     |            | $          | 1,763 |   |

 

F-7

----

 

As of December 31, 2004, TheCompany has recorded goodwill of $659 in its Canadian reporting unit which ispart of the Americas segment, and $14,065 of goodwill in its Bushman Tanksreporting unit which is part of the International segment.

 

The estimated amortizationexpense for the next five fiscal years, based on current intangible balances,is $160 a year.

 

*RevenueRecognition and Accounts Receivable Reserves*—Revenuesare recognized when title passes and the risks and rewards of ownership havepassed to the customer, based on the terms of sale.  Title passes generally upon shipment.  Provisions for estimated sales returns arebased on the Company’s historical sales returns experience.  Provisions for sales allowances are based onthe Company’s historical experience for credits issued to customers for suchitems as a pricing error, items damaged during transportation or incorrectitems shipped to the customer. Provisions for uncollectible accounts are based on the Company’sspecific assessment of the collectibility of all past due accounts.

 

In 2002 the Company recorded areserve for a receivable from Adelphia, a major cable operator, in the amountof $1,573.  Adelphia declared bankruptcyand the Company subsequently wrote off the receivable.  In December 2004 the Company sold itsreceivable for cash to a third-party investor for $1,452.  The sale of the receivable resulted in achange in estimate of the Company’s allowance for uncollectible accounts forthe same amount.  The change in estimatewas reflected as a reduction of bad debt expense which is included in generaland administrative expenses.  The changein estimate for uncollectible accounts increased pretax basic and dilutedearnings per share by $0.16.

 

*ShippingCosts*—In accordance with the Emerging Issues TaskForce (“EITF”) Issue No. 00-10 “Accounting for Shipping and Handling Fees andCosts” shipping and handling costs billed to customers are included in salesand the related costs are included in selling expenses.  Shipping and handling costs are charged toexpense as incurred.  Total shippingcosts of $1,170, $1,336 and $4,004 are included in selling expenses for 2002,2003 and 2004, respectively.

 

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

 

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

 
| ** **                        | ** ** | **2002**   | ** ** | **2003**          | ** ** | **2004**   | ** ** |
|-----------------------------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Per**           | ** ** | ** ** | ** ** | **Per** | ** ** | ** ** | ** ** | **Per** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Share**         | ** ** | ** ** | ** ** | **Share** | ** ** | ** ** | ** ** | **Share** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Amount**        | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **(as restated)** | ** ** | ** ** | ** ** | **(as restated)** | ** ** | ** ** | ** ** | **(as restated)** | ** ** |
|                              |       |       |       |              |       |       |       |   |   |   |   |   |   |
| Basic income  (loss) per share    |       | 9,048      |       | (0.34             | )          | 9,126      |       | (0.01 | ) | 9,203 |   | 0.39 |   |
|                              |       |       |       |              |       |       |       |   |   |   |   |   |   |
| Effect of  dilutive stock options |       | —     |       | —            |       | —     |       | — |   | 20 |   | — |   |
|                              |       |       |       |              |       |       |       |   |   |   |   |   |   |
| Diluted  income (loss) per share  |       | 9,048      |       | (0.34             | )          | 9,126      |       | (0.01 | ) | 9,223 |   | 0.39 |   |

 

F-8

----

 

The following options were not included in the computation of dilutedincome (loss) per share due to their antidilutive effect:

 

| ** **                                  | ** ** | **2002**                       | ** ** | **2003**                           | ** ** | **2004**                       | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
|                                        |       |                           |       |                               |       |                           |       |
| Options to  purchase shares of common stock |       | 917                            |       | 1,894                              |       | 97                             |       |
|                                        |       |                           |       |                               |       |                           |       |
| Exercise  prices                            |       | $3.05 - $13.75                 |       | $3.16 - $13.75                     |       | $6.50 - $13.75                 |       |
|                                        |       |                           |       |                               |       |                           |       |
| Expiration  dates                           |       | July 2006 - May 2012 |       | July 2006 -December 2013 |       | July 2006 - 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.  The estimated fair value of thelong-term obligations is based on borrowing rates currently available to theCompany for loans with similar terms and maturities.

 

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

 

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

 

Participating eligible option holders were granted a new option foreach old cancelled option.  For each new optiongranted, the vesting status and vesting schedule of the old option waspreserved. The weighted average fair value of the options issued in September 2003was $1.91.  The weighted average exerciseprice was $4.84.

 

Had compensation cost for the plan been determined based on the fairvalue of the options at the grant dates based on the above method, the Company’snet income (loss) and income (loss) per share would have been:

 

| ** **                                                                       | ** ** | **2002**          | ** ** | **2003**          | ** ** | **2004**         | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated** | ** ** |
|                                                                             |       |              |       |              |       |             |       |
| Reported net (loss) income                                                       |       | $                 | (3,042     | )                 | $          | (74              | )          | $ | 3,609 |   |
| Add stock-based compensation expense  reported in net (loss) income              |       | —            |       | —            |       | —           |       |
| Less total stock-based compensation  expense, determined under fair value method |       | (305              | )          | (915              | )          | (449             | )          |
| Proforma net (loss) income                                                       |       | $                 | (3,347     | )                 | $          | (989             | )          | $ | 3,160 |   |
|                                                                             |       |              |       |              |       |             |       |
| Reported basic and diluted net (loss)  income per share                          |       | $                 | (0.34      | )                 | $          | (0.01            | )          | $ | 0.39 |   |
| Add stock-based compensation expense  reported in net (loss) income              |       | —            |       | —            |       | —           |       |
| Less total stock-based compensation  expense, determined under fair value method |       | (0.03             | )          | (0.10             | )          | (0.05            | )          |
| Proforma basic and diluted net income  (loss) per share                          |       | $                 | (0.37      | )                 | $          | (0.11            | )          | $ | 0.34 |   |

 

F-9

----

 

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

 

| ** **               | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |     |       |
| Expected  life (years)   |       | 5 years  |       | 5 years  |       | 5 years  |       |
| Risk-free  interest rate |       | 3.0      | %          | 3.0      | %          | 3.5      | %          |
| Expected  volatility     |       | 40       | %          | 40       | %          | 40       | %          |
| Expected  dividend yield |       | —   |       | —   |       | —   |       |

 

*Recent Accounting Pronouncements.*   In November 2004, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs,an Amendment of ARB No. 43, Chapter 4.” SFAS No. 151 retains the general principle of ARB No.43, Chapter 4,“Inventory Pricing,” that inventories are presumed to be stated at cost;however, it amends ARB No. 43 to clarify that abnormal amounts of idlefacilities, freight, handling costs and spoilage should be recognized ascurrent period expenses.  Also, SFAS No. 151requires fixed overhead costs be allocated to inventories based on normalproduction capacity.  The guidance inSAFS No. 151 is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005.  TheCompany believes that implementing SFAS No. 151 should not have a materialimpact on its financial condition or results of operations.

 

In December 2004,the FASB issued Statement 123 (revised 2004), *Share-Based**Payment*(Statement 123(R)).  This Statement is a revision to Statement123, *Accounting for Stock-Based Compensation*,and supersedes Opinion 25, *Accounting for StockIssued to Employees*. Statement 123(R) requires the measurement of the cost of employeeservices received in exchange for an award of equity instruments based on thegrant-date fair value of the award.  Thecost will be recognized over the period during which an employee is required toprovide service in exchange for the award. No compensation cost is recognized for equity instruments for whichemployees do not render service.  TheCompany will adopt Statement 123(R) on July 1, 2005, requiringcompensation cost to be recognized as expense for the portion of outstandingunvested awards, based on the grant-date fair value of those awards calculatedusing the Black-Scholes option pricing model under Statement 123 for pro formadisclosures.  Based on the number ofoptions currently outstanding, the effect of adopting Statement 123(R) willdecrease the Company’s pretax net income by approximately $400 during 2005.This estimate would change if the Company were to issue additional equityinstruments.

 

*Reclassifications*—Certainprior period amounts have been reclassified for comparison with 2004presentation.

 

**NOTE C—INVENTORIES**

 

Inventories are summarized as follows:

 
| ** **      | ** ** | **2003** | ** ** | **2004** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
|            |       |     |       |     |       |
| Raw  materials  |       | $        | 2,895      |     | $          | 4,777 |   |
| Work-in-process |       | 2,468    |       | 3,050    |       |
| Finished  goods |       | 3,492    |       | 6,337    |       |
|            |       |     |       |     |       |
|            |       | $        | 8,855      |     | $          | 14,164 |   |

 

F-10

----

 

**NOTE D—PROPERTY AND EQUIPMENT**

 

Property and equipment are summarized as follows:

 
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Estimated**    | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                      | ** ** | **2003**   | ** ** | **2004**   | ** ** | **useful lives** | ** ** |
|                                            |       |       |       |       |       |             |       |
| Machinery  and equipment                        |       | $          | 58,719     |       | $          | 59,799           |       | 3-10 years |   |
| Office  furniture and equipment                 |       | 3,145      |       | 2,752      |       | 3 -7 years       |       |
| Leasehold  improvements                         |       | 2,929      |       | 3,221      |       | 10-20 years      |       |
|                                            |       | 64,793     |       | 65,772     |       |             |       |
| Less  accumulated depreciation and amortization |       | (47,629    | )          | (46,471    | )          |             |       |
|                                            |       | $          | 17,164     |       | $          | 19,301           |       |   |   |

 

Included in machinery and equipment is $174 and $165 of equipment undercapital lease at December 31, 2003 and 2004.  Accumulated amortization of assets undercapital lease totaled $51 and $28 at December 31, 2003 and 2004,respectively.

 

As a result of the restructuring activities in the fourth quarter of2002 to rationalize International operations and reduce manufacturing costs,certain production equipment, tooling and leasehold improvements were idled orsold.  An impairment review of theseassets was conducted.  In the fourthquarter of 2002, the Company adjusted the carrying value of their productionequipment and tooling and leasehold improvements, resulting in a non-cashimpairment charge of $2,154.  The 2002impairment charge includes approximately $1,665 for equipment in theInternational operations and $489 for production tooling in the Americas.

 

In the fourth quarter of 2003, a plan was developed to close anadditional manufacturing facility in the International operations by mid-year2004.  An impairment review of the assetslocated in the facility was conducted. In the fourth quarter of 2003, the Company adjusted the carrying valueof production equipment, tooling and leasehold improvements resulting in a noncash impairment charge of $1,238 for equipment in International operations.

 

In January 2003, the Company entered into a sale of a facility inInternational operations located in Orpington, Kent, United Kingdom. Theproceeds from the sale totaled $2,441 and resulted in a pretax loss of $110which is included in general and administrative expense.  Terms of the sale included a provision forthe Company to lease back the facility for one year at no charge. Included inthe proceeds was prepaid rent for one year which totaled $213.  The resulting lease was accounted for as anoperating lease in fiscal 2003.

 

F-11

----

 

**NOTE E—ACCRUED EXPENSES**

 

Accrued expenses consist of the following:

 

| ** **        | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
|              |       |     |       |     |       |
| Accrued  vacation |       | $        | 841        |     | $          | 1,024 |   |
| Accrued  bonus    |       | 229      |       | 546      |       |
| Other             |       | 3,170    |       | 6,049    |       |
|              |       | $        | 4,240      |     | $          | 7,619 |   |

 

The Company provides a warranty for the replacement and repair of adefective product.  Historically, the Company has not experiencedsignificant warranty costs or returns. The Company acquired Bushman Tanks (see Note Q) in August 2004.  Associated with the acquisition of BushmanTanks was the assumption of warranties related to Bushman Tanks polyethylenewater tanks.  The typical warranty periodfor water tanks is 25 years which management believes is the industry standard.

 

Warranty expense is estimated by management at the time of the salebased on historical warranty costs and analysis of defects that have occurredin field installations.  The change inthe Company’s warranty liability in 2002 and 2003 was not significant.  The change in the Company’s warrantyliability (included in other above) for the year ended December 31, 2004is summarized as follows:

 

| 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 | ) |

 

F-12

----

 

**NOTE F—DEBT**

 

The Company’s debt consists of the following:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| The Company 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. Amounts borrowed under this facility bear interest at a  variable rate based on either the lender’s Base Rate or LIBOR. There was no  balance outstanding under the revolving line of credit at December 31,  2003, or 2004.                                                                                                                                                                                                                                                                           |       | $        | —     |     | $          | — |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |     |       |     |       |
| The Company 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 and is repayable in equal quarterly payments based on a five-year  amortization schedule with a balloon payment at maturity. Amounts  borrowed under this facility bear interest at a variable rate based on either  the lender’s Base Rate or LIBOR. The weighted average interest rate under the  term loan was 3.02% and 4.41% at December 31, 2003 and 2004,  respectively.                                                                                                                         |       | 3,770    |       | 2,828    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |     |       |     |       |
| Automobile loan payable in monthly  principal and interest installments of $1 through April, 2005. The note is  non-interest bearing and is collateralized by the automobile.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | 12       |       | 2        |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |     |       |     |       |
| A subsidiary of the Company, Channell Pty  Ltd., entered into a one-year Loan and Security Agreement with a commercial  bank in Australia in July 2004. The Loan and Security Agreement contains  a revolving line of credit. Amounts borrowed under this facility bear  interest payable monthly at a variable rate based on the lender’s Base Rate.  The weighted average interest rate at December 31, 2004 was 6.75%                                                                                                                                                                                                                                                                                  |       | —   |       | 234      |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |     |       |     |       |
| A subsidiary of the Company, Channell  Bushman Pty Ltd., entered into a five-year Loan and Security Agreement with a  commercial bank in Australia in August 2004. The Loan and Security  Agreement contains a five-year term loan that is repayable in quarterly  payments based on a five-year amortization schedule. Under the Loan and  Security Agreement, the outstanding balance bears interest payable monthly at  a variable rate based on the lender’s Base Rate. The weighted average  interest rate under the Loan and Security Agreement at December 31, 2004  was 5.75%                                                                                                                     |       | —   |       | 5,636    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |     |       |     |       |
| A subsidiary of the Company, Channell  Bushman Pty Ltd., entered into a five-year Loan and Security Agreement with a  commercial bank in Australia in August 2004. The Loan and Security  Agreement contains a revolving credit facility, a facility to fund future  “earn-out” payments to the sellers of Bushman Tanks, and a capital  expenditure facility. Under the Loan and Security Agreement, the outstanding  balance bears interest payable monthly at a variable rate based on the  lender’s Base Rate. There was no balance outstanding under the revolving line  of credit facility, the “earn-out” facility, or the capital expenditure  facility at December 31, 2004. |       | —   |       | —   |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 3,782    |       | 8,700    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |     |       |     |       |
| Less current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 952      |       | 4,332    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |     |       |     |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | $        | 2,830      |     | $          | 4,368 |   |

 

The Company entered into a three-year Loan and Security Agreement withan asset-based lender in the United States in September 2002.  Maximum borrowings available under thisfacility total $25,000.  The Agreementhas a $1,000 sub-limit for letters of credit. As of December 31, 2004, outstanding letters of credit totaled$986.  The Agreement contains various

 

F-13

----

 

financial and operating covenants that impose limitations on theCompany’s ability, among other things, to incur additional indebtedness, mergeor consolidate, sell assets except in the ordinary course of business, makecertain investments, enter into leases and pay dividends.  The Company is also required to comply with afixed charge coverage ratio and other financial covenants.  The Agreement requires the Company tomaintain a lockbox on the revolving credit facility.  The lockbox receipts automatically reduce theoutstanding balance of the revolving credit balance, if any.  The Agreement also contains a subjectiveacceleration clause should the Company come into a default which allows theasset-based lender to terminate the facility and require that any outstandingobligation to be repaid.  There was nobalance outstanding under the revolving line of credit at December 31,2004.  The Company was in compliance asof December 31, 2004 with the covenants of the Loan and SecurityAgreement.

 

Channell Pty Ltd, a subsidiary of the Company, entered into a one-yearLoan and Security Agreement with a commercial bank in Australia in July 2004.  The loan contains a revolving line of creditfor working capital needs with a maximum available borrowing of Australiadollars $1,200, which translated at December 31, 2004 exchange rates isapproximately $940 US dollars.  TheCompany is required to comply with an interest coverage ratio.  The agreement is reviewed annually with thebank for annual renewals.  The Agreementcontractually obligates the Company to repay the revolving credit facility asthe Company receives payments from its customers.  The Agreement also contains a subjectiveacceleration clause should the Company come into a default which allows thebank to terminate the facility and require any outstanding obligation to berepaid.  The revolving line of credit dueto its one-year term is classified as a short term debt.  The Company was in compliance as of December 31,2004 with the covenants of the Loan and Security Agreement.

 

Channell Bushman Pty Ltd, a subsidiary of the Company, entered into afive-year Loan and Security Agreement with a commercial bank in Australia in August 2004.  The loan contains a five-year term loan withmaximum borrowings of Australia dollars $8,000 that expires in July 2009,a revolving credit facility with maximum borrowings of Australia dollars$2,000, a facility to fund future “earn-out” payments to the sellers of BushmanTanks with maximum borrowings of Australia dollars $1,750, and a capitalexpenditure facility with maximum borrowings of Australia dollars $6,000.  Translated into US dollars at December 31,2004 exchange rates, the maximum borrowings are:  five-year term loan $6,240, revolving creditfacility $1,560, “earn-out” facility $1,365, capital expenditure facility$4,680.  The Agreement contains variousfinancial and operating covenants that impose limitations on the Company’sability, among other things, to merge or consolidate, sell assets except in theordinary course of business, and pay dividends. The Company is required to comply with an interest cover ratio and otherfinancial covenants.  The Agreementcontractually obligates the Company to repay the revolving credit facility asthe Company receives payments from its customers.  The Agreement also contains a subjectiveacceleration clause should the Company come into a default which allows thebank to terminate the facility and require any outstanding obligation to berepaid.  There was no balance outstandingunder the revolving line of credit, “earn-out” facility, or capital expenditurefacility at December 31, 2004.  TheCompany was in compliance as of December 31, 2004 with the covenants ofthe Loan and Security Agreement.

 

The Company’s debt at December 31, 2004 is scheduled to mature asfollows:

 

| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2005       |       | $          | 4,332      |   |
| 2006       |       | 1,248      |       |
| 2007       |       | 1,248      |       |
| 2008       |       | 1,248      |       |
| 2009       |       | 624        |       |
| Thereafter |       | —     |       |
|       |       | $          | 8,700      |   |

 

F-14

----

 

**NOTEG—CAPITAL LEASE OBLIGATIONS**

 

The Company leases certain machinery and equipment under variousagreements which are classified as capital leases.  The leases expire on various dates through December 2006.  Future minimum payments, by year, are asfollows:

 

| **Year**                           | ** ** | **Amount** | ** ** |
|------------------------------------|------------|------------|------------|
| 2005                               |       | $          | 39         |   |
| 2006                               |       | 116        |       |
|                               |       | 155        |       |
|                               |       |       |       |
| Less amount  representing interest |       | 15         |       |
|                               |       | 140        |       |
| Less current  maturities           |       | 36         |       |
|                               |       | $          | 104        |   |

 

**NOTE H—RESTRUCTURING CHARGES**

 

**2002Restructuring Charge**

 

In the fourth quarter of 2002, the Company announced a restructuring plan to rationalize International manufacturing operations.  As part of the plan, various manufacturing operations in the International segment were either consolidated or outsourced.  The management of all International operations was consolidated under the Managing Director, International.  The restructuring charge totaled $1,228.  The major components of the 2002 restructuring charge are as follows:

 
| Employee severance and related benefit cost |   | $     | 163    |   |
|---------------------------------------------|--------|-------|--------|--------|
| Cost  associated with vacated facilities    |   | 1,065 |   |
|                                        |   | $     | 1,228  |   |

 

*Severance*—The Company had a reduction of employees in the International operations.  The reduction was associated with the reduced level of manufacturing operations in the International operation going forward.

 

*Cost Associated with Vacated Facilities*—The Company has accrued $1,065 consisting principally of the costs of the remaining payments on leased facilities vacated less anticipated future income from sublease.  All of the facilities are located in the United Kingdom.  The accrual represents additional amounts the Company anticipated to be incurred in addition to those originally accrued in the 2000 and 2001 restructuring.  The additional accrual was necessary due to market conditions in the United Kingdom which made it difficult to sublet the properties.

 

**2003 Restructuring Charge**

 

In the fourth quarter of 2003, the Company further evaluated International operations to improve profitability.  A plan was developed to close a manufacturing facility in International operations by mid-year 2004.  As part of the plan, there is a reduction in the number of employees in the International operations.  The restructuring charge totaled $1,565.  The major components of the 2003 restructuring charge are as follows:

 
| Employee severance and related benefit cost |   | $     | 209    |   |
|---------------------------------------------|--------|-------|--------|--------|
| Cost  associated with vacated facilities    |   | 1,356 |   |
|                                        |   | $     | 1,565  |   |

 

*Severance*—The Company had a reduction of 39 employees in the International operations as a result of the decision to consolidate manufacturing operations.

 

F-15

----

 

*Cost Associated with Vacated Facilities*—The Company has accrued $1,356 consisting principally of the costs to terminate an existing lease agreement and the costs of the remaining payments on a second vacated leased facility less anticipated future income from sublease.  The facilities are located in the United Kingdom.  The accrual represents additional amounts the Company anticipated to be incurred in addition to those originally accrued in the 2000, 2001 and 2002 restructurings.  The additional accrual is necessary due to market conditions in the United Kingdom which have made it difficult to sublet the properties and terminate leases.

 

The restructuring charges were determined based on formal plansapproved by the Company’s management using the best information available to itat the time.  The amounts the Company mayultimately incur could differ materially as the restructuring initiative isexecuted.  The changes in the accrual forrestructuring charges during 2001, 2002 and 2003 are summarized in the tablebelow:

 
| ** **                                                           | ** ** | ** **     | ** ** | **Workforce** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|----------------|------------|---------------|------------|------------|------------|
| ** **                                                           | ** ** | **Facilities** | ** ** | **Reduction** | ** ** | **Total**  | ** ** |
|                                                                 |       |           |       |          |       |       |       |
| **Restructuring  accrual balance at January 1, 2002**           |       | $              | 2,344      |          | $          | 76         |       | $ | 2,420 |   |
|                                                                 |       |           |       |          |       |       |       |
| Charges to  operations in twelve months ended December 31, 2002 |       | 1,065          |       | 163           |       | 1,228      |       |
|                                                                 |       |           |       |          |       |       |       |
| Costs  incurred in twelve months ended December 31, 2002        |       | (1,314         | )          | (179          | )          | (1,493     | )          |
|                                                                 |       |           |       |          |       |       |       |
| **Restructuring  accrual balance at December 31, 2002**         |       | $              | 2,095      |          | $          | 60         |       | $ | 2,155 |   |
|                                                                 |       |           |       |          |       |       |       |
| Charges to  operations in twelve months ended December 31, 2003 |       | 1,356          |       | 209           |       | 1,565      |       |
|                                                                 |       |           |       |          |       |       |       |
| Costs  incurred in twelve months ended December 31, 2003        |       | (810           | )          | (53           | )          | (863       | )          |
|                                                                 |       |           |       |          |       |       |       |
| **Restructuring  accrual balance at December 31, 2003**         |       | $              | 2,641      |          | $          | 216        |       | $ | 2,857 |   |
|                                                                 |       |           |       |          |       |       |       |
| Costs  incurred in twelve months ended December 31, 2004        |       | (1,804         | )          | (213          | )          | (2,017     | )          |
|                                                                 |       |           |       |          |       |       |       |
| Adjustment  to restructuring accrual recorded 2004                   |       | (690           | )          | —        |       | (690       | )          |
|                                                                 |       |           |       |          |       |       |       |
| **Restructuring  accrual balance at December 31, 2004**         |       | $              | 147        |          | $          | 3          |       | $ | 150 |   |

 

A credit to restructuring charge of $690 was recorded in the thirdquarter of 2004 primarily due to the assignment of the lease of a vacatedfacility in the United Kingdom at a cost less than previously estimated bymanagement.  The facility closure costs wereoriginally estimated in the third quarter of 2001.  Due to difficulties in negotiating a leasetermination or subletting of the facility, the estimate for the facilityclosure costs was subsequently increased in the fourth quarter of 2002 andfurther increased in the fourth quarter of 2003.  In July 2004, the lease on the facilitywas assigned for the remaining lease term on more favorable terms thanmanagement had estimated.

 

F-16

----

 

**NOTE I—INCOME TAXES**

 

The components of income tax expense (benefit) are as follows:

 
| ** **                          | ** ** | **2002**          | ** ** | **2003**          | ** ** | **2004**          | ** ** |
|-------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                          | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Current                             |       |              |       |              |       |              |       |
| Federal                             |       | $                 | 347        |              | $          | 834               |       | $ | (1,225 | ) |
| State                               |       | 92                |       | 95                |       | 1                 |       |
| Foreign                             |       | 105               |       | 32                |       | 324               |       |
|                                |       | 544               |       | 961               |       | (900              | )          |
| Deferred                            |       |              |       |              |       |              |       |
| Federal                             |       | 1,138             |       | (607              | )          | (210              | )          |
| State                               |       | (861              | )          | (154              | )          | 349               |       |
| Foreign                             |       | 892               |       | —            |       | (30               | )          |
|                                |       |              |       |              |       |              |       |
|                                |       | 1,169             |       | (761              | )          | 109               |       |
|                                |       |              |       |              |       |              |       |
| Total income  tax expense (benefit) |       | $                 | 1,713      |              | $          | 200               |       | $ | (791 | ) |

 

The components of income (loss) before income tax expense were asfollows:

 
| ** **     | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| United  States |       | $        | 5,146      |     | $          | 4,609    |       | $ | 3,472 |   |
| Foreign        |       | (6,475   | )          | (4,483   | )          | (487     | )          |
|           |       |     |       |     |       |     |       |
|           |       | $        | (1,329     | )        | $          | 126      |       | $ | 2,985 |   |

 

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

 
| ** **                                                          | ** ** | **2002**          | ** ** | **2003**          | ** ** | **2004**          | ** ** |
|---------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                          | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
|                                                                |       |              |       |              |       |              |       |
| U.S. Federal  statutory rate                                        |       | (34               | )%         | (34               | )%         | (34               | )%         |
| State income  taxes, net of federal tax benefit                     |       | (5                | )          | (5                | )          | (5                | )          |
| Tax  settlement (Note M)                                            |       | —            |       | 15                |       | —            |       |
| Worthless  stock deduction                                          |       | —            |       | —            |       | (102              | )          |
| Research and  development tax credit                                |       | —            |       | (360              | )          | —            |       |
| Change in  valuation allowance                                      |       | —            |       | —            |       | 4                 |       |
| Nondeductible  expenses                                             |       | 1                 |       | 61                |       | 5                 |       |
| Foreign  operating losses with no benefit provided                  |       | 164               |       | 398               |       | —            |       |
| Effect of  subsidiaries taxes at other than the U.S. statutory rate |       | 3                 |       | 84                |       | 105               |       |
|                                                                |       | 129               | %          | 159               | %          | (27               | )%         |

 

F-17

----

 

In the second quarter of fiscal 2004, the Company commissioned anindependent appraisal of a subsidiary in the United Kingdom.  This appraisal follows the Company’sannouncement in February 2004 to close the European manufacturingoperations.  Based on the independentappraisal, the Company concluded that the subsidiary was insolvent as of June 30,2004 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.

 

Significant components of the Company’s deferred tax assets andliabilities are as follows:

 
| ** **                                 | ** ** | **2003**          | ** ** | **2004**          | ** ** |
|--------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Assets                                     |       |              |       |              |       |
| Patents                                    |       | $                 | 498        |              | $          | 360 |   |
| Allowance for bad debts                    |       | 105               |       | 124               |       |
| Inventory capitalization                   |       | 83                |       | 107               |       |
| Vacation pay                               |       | 360               |       | 408               |       |
| Accrued liabilities and reserves           |       | 238               |       | 634               |       |
| Deferred gain on sale leaseback            |       | 220               |       | 180               |       |
| Restructuring charge                       |       | 1,179             |       | 24                |       |
| Impairment charge                          |       | 4,551             |       | 3,173             |       |
| State tax credits and loss carryforwards   |       | 734               |       | 563               |       |
| Federal tax credits and loss carryforwards |       | —            |       | 1,593             |       |
| Inventory reserves                         |       | —            |       | 351               |       |
| Warranty                                   |       | —            |       | 328               |       |
| Foreign tax credit and loss carryforwards  |       | 5,888             |       | 617               |       |
| Valuation allowance                        |       | (5,888            | )          | (732              | )          |
|                                       |       | 7,968             |       | 7,730             |       |
|                                       |       |              |       |              |       |
| Liabilities                                |       |              |       |              |       |
| State taxes                                |       | 794               |       | —            |       |
| Accelerated depreciation                   |       | 1,551             |       | 1,736             |       |
|                                       |       | 2,345             |       | 1,736             |       |
| Net deferred tax asset                     |       | $                 | 5,623      |              | $          | 5,994 |   |

 

The classification of the net deferred tax asset between current andnon-current is as follows:

 
| ** **             | ** ** | **2003**          | ** ** | **2004**          | ** ** |
|------------------------|------------|-------------------|------------|-------------------|------------|
| ** **             | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** |
| Net current  assets    |       | $                 | 876        |              | $          | 1,951 |   |
| Net  long-term asset   |       | 4,747             |       | 4,043             |       |
| Net deferred tax asset |       | $                 | 5,623      |              | $          | 5,994 |   |

 

At December 31, 2004, the Company hadapproximately $2,058 of international operating loss carryforwards (primarilyin Australia and Malaysia) with a potential tax benefit of $617.  These loss carryforwards do not expire.  The Australia and Malaysia operations havehighly concentrated customers in the telecommunications industry.  The telecommunications industry in thisgeographic region has been depressed since 2001.  Management evaluated the customer base andstate of the telecommunications industry and concluded that there wassignificant uncertainty regarding realization of a tax benefit.  The Company has recorded a 100 % valuationallowance at December 31, 2003 and 2004 on the deferred tax asset relatingto the

 

F-18

----

 

foreign net operating loss carryforwards because ofuncertainty regarding its realization. The ultimate realization of the remaining 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 the historical domestic taxableincome and projections for future taxable income over periods that the deferredassets are deductible, management believes it is more likely than not that theCompany will realize the benefits of these deductible differences, net ofvaluation allowances as of December 31, 2004.  The amount of the deferred tax assetsconsidered realizable, however, could materially change in the near future ifestimates of future taxable income during the carryforward period are changed.

 

**NOTE J—STOCKHOLDERS’ EQUITY**

 

In July 1996, the Company adopted the 1996 Incentive Stock Plan(the 1996 Stock Plan), under which it was authorized to issue non-qualifiedstock options and incentive stock options to key employees, directors andconsultants to purchase up to an aggregate of 750 shares of the Company’scommon stock.  The options have a term often years and generally become fully vested by the end of the third year.  In May 1999, the 1996 Stock Plan wasamended to increase the authorized number of shares to 1,500.

 

In January, 2003, the Board of Directors approved anoffer allowing current employees and non-employee directors to exchange all oftheir outstanding options granted under the 1996 Stock Plan for new options tobe granted under the 2003 Stock Plan or any other stock option plan that may beadopted by the Company. The 2003 Incentive Stock Plan was approved at theAnnual Meeting of Stockholders on April 25, 2003.  The authorized shares under the 2003 IncentiveStock Plan are 3,100.

 

A total of 1,327 options to purchase shares of theCompany were accepted for exchange and cancelled on March 20, 2003.  On September 24, 2003, a total of 1,324new options were exchanged for options cancelled in March, 2003.

 

Eligible option holderswho participated in the offer received a new option on the new grant date inexchange for each old option that was validly tendered and accepted forexchange.  The number of shares coveredby each new option was equal to the number of shares covered by the oldoptions, and the vested status and vesting schedule of the old options waspreserved and continued.  The exerciseprice of the new options was equal to the closing sale price of the Company’scommon stock as reported on the Nasdaq National Market on the grant date of thenew options.

 

Plan transactions are as follows:

 
| ** **                                        | ** ** | **2002**   | ** ** | **2003**     | ** ** | **2004**   | ** ** |
|---------------------------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | **average**  | ** ** | ** ** | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | **exercise** | ** ** | ** ** | ** ** | **exercise** | ** ** | ** ** | ** ** | **exercise** | ** ** |
| ** **                                        | ** ** | **Shares** | ** ** | **price**    | ** ** | **Shares** | ** ** | **price** | ** ** | **Shares** | ** ** | **price** | ** ** |
|                                              |       |       |       |         |       |       |       |   |   |   |   |   |   |
| Options outstanding January 1,               |       | 1,092      |       | $            | 9.78       |       | 917        |   | $ | 10.24 |   | 1,894 |   | $ | 4.95 |   |
| Granted                                           |       | 28         |       | 4.09         |       | 2,336      |       | 4.71 |   | 213 |   | 4.80 |   |
| Exercised                                         |       | (100       | )          | 3.22         |       | (3         | )          | 3.28 |   | (61 | ) | 4.84 |   |
| Cancelled                                         |       | (103       | )          | 10.47        |       | (1,356     | )          | 8.12 |   | (19 | ) | 4.96 |   |
| Options outstanding December 31,             |       | 917        |       | $            | 10.24      |       | 1,894      |   | $ | 4.95 |   | 2,027 |   | $ | 4.94 |   |
|                                              |       |       |       |         |       |       |       |   |   |   |   |   |   |
| Options available for grant at  December 31, |       | 451        |       |         |       | 2,571      |       |   |   | 2,377 |   |   |   |

 

F-19

----

 

Weighted average fair values of options granted during the years are asfollows:

 
| ** **                                             | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |     |       |
| Exercise  price is below market price at date of grant |       | —   |       | —   |       | —   |       |
| Exercise  price equals market price at date of grant   |       | $        | 4.09       |     | $          | 4.71     |       | $ | 4.80 |   |
|                                                        |            |          |            |          |            |          |            |  |  |  |

 

The following information applies to options outstanding at December 31,2004:

 
| ** **                   | ** ** | ** **      | ** ** | **Weighted**     | ** ** | ** **   | ** ** |
|------------------------------|------------|-----------------|------------|------------------|------------|--------------|------------|
| ** **                   | ** ** | ** **      | ** ** | **average**      | ** ** | **Weighted** | ** ** |
| ** **                   | ** ** | ** **      | ** ** | **remaining**    | ** ** | **average**  | ** ** |
| ** **                   | ** ** | **Number**      | ** ** | **contractual**  | ** ** | **exercise** | ** ** |
| **Range of exercise prices** | ** ** | **outstanding** | ** ** | **life (years)** | ** ** | **price**    | ** ** |
| $3.16 -  $3.60               |       | 60              |       | 7                |       | $            | 3.33       |   |
| $4.15 -  $4.86               |       | 1,870           |       | 9                |       | 4.70         |       |
| $6.50 -  $13.75              |       | 97              |       | 5                |       | 10.45        |       |
|                         |       | 2,027           |       | 9                |       | $            | 4.94       |   |

 

At December 31, 2004, 1,136 of the 2,027 options outstanding wereexercisable by the optionee.

At December 31, 2003, 815 of the 1,894 options outstanding wereexercisable by the optionee.

 

**NOTE K—RETIREMENT PLAN**

 

The Company established a retirement plan in accordance with section 401(k)of the Internal Revenue Code. Under the terms of this plan, eligible employeesmay make voluntary contributions to the extent allowable by law.  Employees of the Company are eligible after90 days of employment.  Matchingcontributions by the Company to this plan are discretionary and will not exceedthat allowable for Federal income tax purposes. The Company’s contributions are vested over five years in equalincrements.  The accompanying statementsof operations include contribution expense of $0, $134 and $181 for the yearsended December 31, 2002, 2003 and 2004, respectively.

 

**NOTE L—RELATED PARTY TRANSACTIONS**

 

The Company has two leases for approximately 261,000square feet of manufacturing, warehouse and office space in Temecula,California, with William H. Channell, Sr., a principal stockholder andChairman of the Board of the Company. The term of the first lease is through December 31,2005, with two five-year renewal options. Additionally, an adjacent 100,000square foot building was constructed and completed in 1996. Subsequent to December 31,1996, the Company guaranteed debt of Mr. Channell, Sr. ofapproximately $754 incurred in connection with construction of thebuilding.  The loan amount subject to theguarantee is expected to decline before expiring in 2017.  At December 31, 2004, the outstandingloan balance subject to the guarantee totaled $583.  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. This building is also being leasedfrom Mr. Channell, Sr. through 2005, with two five-year renewaloptions. Both leases provide for payments of insurance, repairs, maintenanceand property taxes.  Rent expense paidunder the leases was $1,253, $1,284 and $1,305 for the years ended

 

F-20

----

 

December 31, 2002, 2003 and 2004,respectively.  The Company believes that atthe time the leases were consummated, the terms of these leases were no lessfavorable to the Company than could have been obtained from an independentthird party.

 

If the principal stockholder were to default on the outstanding loanbalance, the Company may be required to repay the remaining principal balance.The maximum potential amount the Company would be required to pay is equal tothe outstanding principal and interest balance of the loan to thestockholder.  At December 31, 2004,the outstanding loan balance subject to the guarantee totaled $583.

 

In January, 2001, the Company guaranteed personal debtof William H. Channell, Jr., the Company’s President and Chief OperatingOfficer of $650.  The guarantee wasterminated in March 2002.  Inconnection with this guarantee, William H. Channell, Jr. paid the Companya fee equal to 1% of the loan balance and provided as collateral to the Company300,000 shares of Company stock.

 

The Company purchased insurance through Talbot AgencyInc. in 2002, 2003, and 2004.  Roy H.Taylor, President of Talbot Agency Inc. is a co-trustee of the Taylor FamilyTrust, a beneficial owner of more than 5% of the Company’s outstandingstock.  The total premiums and fees paidfor insurance obtained through the Talbot Agency for the years ended December 31,2002, 2003 and 2004 was $253, $45 and $44 respectively, which includedcommissions earned.

 

In May, 2002, the Company sold its RF line of passive electronicdevices to RMS Communications, Inc., which is owned by Gary Napolitano, aformer officer of the Company.  A sale inthe amount of $800 was recorded. RMS Communications, Inc. paid the Company$125 in cash at the time of sale, and the remaining $675 is payable in monthlyinstallments through June 30, 2003, bearing interest at 7% per annum.  The account is currently in arrears.  The amount due from RMS Communications, Inc.included in accounts receivable at December 31, 2004 is $251.  The Company has security interest in theinventory and a personal guarantee from Mr. Napolitano and believes theamount will be paid in full.  The Companycontinues to purchase RF devices from Mr. Napolitano and from othersources depending on price and supply of product.  The RF devices purchased from Mr. Napolitano’sfirm in 2004 approximated $87 and were used as components in the Company’sproduct lines.  The purchases in 2004 didnot result in a cash payment to Mr. Napolitano as the amounts owed wereused to offset the accounts receivable.

 

The Company paid $73 and $76 in 2003 and 2004, respectively, to CarolynChannell for consulting services.   Mrs. Channell is the wife ofWilliam H. Channell, Jr., the Company’s President and Chief ExecutiveOfficer.   Mrs. Channell consultson insurance coverage matters for the Company.

 

The Company has facilities in Orange, Dalby, Terangand Adelaide Australia that are leased from shareholders of the Company.  These shareholders are former owners ofBushman Tanks.  The facilities comprise94,000 square feet of manufacturing, warehouse and office space.  The rent expense paid in the five months of August toDecember 2004 was $136.  The Companyhired an independent firm to appraise the market lease rates for thesefacilities and it was determined that the existing leases are in excess of fairmarket value by approximately $27 per year. Included in the liabilities assumed in the Bushman Tanks acquisition is$215 related to these unfavorable leases (Note Q).

 

F-21

----

 

**NOTEM—COMMITMENTS AND CONTINGENCIES**

 

*Leases**—***TheCompany leases manufacturing and office space and machinery &equipment under several operating leases expiring through 2012.  Rent expense under all operating leasesamounted to $2,325, $2,212, and $2,685 for the years ended December 31,2002, 2003 and 2004, respectively.  Totalfuture minimum rental payments under noncancellable operating leases as of December 31,2004, including the operating leases with the related parties discussed in NoteL are as follows:

 

| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
|       |       |       |       |
| 2005       |       | $          | 2,676      |   |
| 2006       |       | 1,108      |       |
| 2007       |       | 1,057      |       |
| 2008       |       | 1,073      |       |
| 2009       |       | 1,073      |       |
| Thereafter |       | 1,913      |       |
|       |       | $          | 8,900      |   |

 

In addition to these minimum rental commitments, certain of theseoperating leases provide for payments of insurance, repairs and maintenance andproperty taxes.

 

In June, 2002, the Company entered into a sale and leaseback agreementfor a warehouse facility located in Temecula, California.  The proceeds from the sale totaledapproximately $6,200 and resulted in a pretax deferred gain of $604.  The resulting lease is being accounted for asan operating lease.  The lease base termis ten years with two five-year options at rental amounts to be adjusted to thefair market rental value at the end of the base term.  A portion of the proceeds from the sale wasused to pay the outstanding mortgage balance on the facility of $4,036.  In fiscal 2002, the Company recorded incomeof $30 related to the amortization of the deferred gain leaving an unamortizedbalance of $574 at December 31, 2002. In 2003, the Company recorded income of $61 related to the amortizationof the deferred gain leaving an unamortized balance is $513 at December 31,2003.  In 2004, the Company recordedincome of $60 related to the amortization of the deferred gain leaving anunamortized balance of $453 at December 31, 2004.

 

*Employment Agreements**—***The Company in December, 2003 enteredinto a five year employment agreement, renewable every five years, with WilliamH. Channell, Jr.   Mr. Channell, Jr.’sannual salary is $746 effective July 2004, subject to an annual cost ofliving adjustment.  Mr. Channell, Jr.is entitled to participate in the Stock Plan, the 401(k) Plan and the IncentiveCompensation Plan.  Mr. Channell, Jr.is also entitled to certain other benefits paid for by the Company, includingan automobile allowance, health insurance and sick leave, in accordance withthe Company’s customary practices for senior executive officers.    In the event that the Company were toterminate Mr. Channell, Jr. without cause (as defined in theagreement), or Mr. Channell, Jr. were to terminate his employment forgood reason (also as defined in the agreement and including, withoutlimitation, a change of control of the Company), 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 to him.

 

The Company amended in December, 2003 the employmentagreement with Mr. Channell, Sr. originally entered into in July,1996.  Mr. Channell, Sr.’sannual salary starting in December, 2003 is $50.  Mr. Channell, Sr.’s benefitsinclude (i)  during the term of the agreement, the payment of premiums fora term disability policy providing for $250 in annual benefits in the case ofhis temporary or permanent disability, (ii) during the lifetime of Mr. Channell, Sr.and his wife, Jacqueline M. Channell, medical insurance for each of Mr. andMrs. Channell comparable to that provided to the Company’s seniorexecutive officers,  (iii) during Mr. Channell, Sr.’slifetime, a portion of the premiums on a $1,500 life insurance policy owned by Mr. Channell, Sr.,under which Mrs. Channell is the beneficiary, and (iv) an automobileallowance.

 

F-22

----

 

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

 

In 2001, the State ofTexas issued a report assessing the Company additional sales and use tax of$1,600, including interest.  The Companyhas appealed the assessment and is currently providing the State of Texas withdocumentation to support the Company’s contention that the transactions did notrequire the Company to remit sales and use tax to the State of Texas. The Stateof Texas has agreed to a reduction of the amount owed to $600.  The Company has paid the State of Texas$400.  The Company believes that it hasmeritorious defenses to the remaining claim of $200 and intends to vigorouslydefend its position.  The Company believesthat the ultimate outcome of this examination will not result in a materialimpact on the Company’s consolidated results of operations or financialposition.

 

**NOTE N—CREDIT CONCENTRATIONS AND MAJORCUSTOMERS**

 

The Company maintains cash balances in financial institutions locatedin the United States, Canada, Australia and the United Kingdom.  Cash balances held in financial institutionsin the U.K. totaled $343 and $122 at December 31, 2003 and 2004,respectively.  Cash balances held infinancial institutions in Australia totaled $2,539 and $3,168 at December 31,2003 and 2004, respectively.  Cashbalances held in financial institutions in Canada was not significant at December 31,2003 and 2004.  Cash balances held infinancial institutions located in the United States may, at times, exceedfederally insured limits.  The Companyhas not experienced any losses in such accounts and believes it is not exposedto any significant credit risk on cash and cash equivalents.

 

The telecommunications industry is the largest industry the Companyoperates in 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 57.2%,57.7% and 48.7% of the Company’s total net sales in 2002, 2003, and 2004,respectively.  Verizon accounted for21.7% of the Company’s total net sales in 2004 and 10.5% of the Company’s netsales in 2003.  Comcast accounted for 14.6%of the Company’s net sales in 2004. Mergers and acquisitions in the telecommunications industry, which areexpected to continue, not only increase the concentration of the industry andof the Company’s customer base, but also from time to time delay customers’capital expenditures as newly merged services providers consolidate theiroperations.  In the event one of theCompany’s major customers were to terminate purchases of the Company’sproducts, the Company’s operating results would be adversely affected.

 

F-23

----

 

**NOTE O—SEGMENT AND GEOGRAPHIC INFORMATION**

 

There are two segments:  Americasand International.  Americas includes theUnited States, Central and South America and Canada.  The following tables summarize segmentinformation:

 
| ** **                                  | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues from unrelated entities(1):        |       |     |       |     |       |     |       |
| Americas(2)                                 |       | $        | 69,963     |     | $          | 64,793   |       | $ | 72,379 |   |
| International                               |       | 14,822   |       | 11,744   |       | 27,755   |       |
|                                        |       | $        | 84,785     |     | $          | 76,537   |       | $ | 100,134 |   |
| Income (loss) from operations:              |       |     |       |     |       |     |       |
| Americas                                    |       | $        | 6,995      |     | $          | 4,570    |       | $ | 3,517 |   |
| International                               |       | (6,325   | )          | (3,873   | )          | (43      | )          |
|                                        |       | $        | 670        |     | $          | 697      |       | $ | 3,474 |   |
| Interest income:                            |       |     |       |     |       |     |       |
| Americas                                    |       | $        | 89         |     | $          | 18       |       | $ | 13 |   |
| International                               |       | —   |       | 104      |       | 116      |       |
|                                        |       | $        | 89         |     | $          | 122      |       | $ | 129 |   |
|                                        |       |     |       |     |       |     |       |
| Interest expense:                           |       |     |       |     |       |     |       |
| Americas                                    |       | $        | 1,663      |     | $          | 111      |       | $ | 225 |   |
| International                               |       | 425      |       | 582      |       | 393      |       |
|                                        |       | $        | 2,088      |     | $          | 693      |       | $ | 618 |   |
|                                        |       |     |       |     |       |     |       |
| Income tax expense (benefit) (as restated): |       |     |       |     |       |     |       |
| Americas                                    |       | $        | 1,713      |     | $          | 202      |       | $ | (1,125 | ) |
| International                               |       | —   |       | (2       | )          | 334      |       |
|                                        |       | $        | 1,713      |     | $          | 200      |       | $ | (791 | ) |
|                                        |       |     |       |     |       |     |       |
| Identifiable assets:                        |       |     |       |     |       |     |       |
| Americas(6)                                 |       | $        | 39,518     |     | $          | 40,419   |       | $ | 42,918 |   |
| International(3)(4)(5)                      |       | 14,103   |       | 13,016   |       | 35,563   |       |
|                                        |       | $        | 53,621     |     | $          | 53,435   |       | $ | 78,481 |   |
|                                        |       |     |       |     |       |     |       |
| International change in goodwill:           |       |     |       |     |       |     |       |
| Balance January 1,                     |       | $        | 966        |     | $          | —   |       | $ | — |   |
| Goodwill acquired                           |       | —   |       | —   |       | 12,442   |       |
| Impairment charge                           |       | (966     | )          | —   |       | —   |       |
| Foreign currency translation                |       | —   |       | —   |       | 1,623    |       |
| Balance December 31,                   |       | $        | —     |     | $          | —   |       | $ | 14,065 |   |
|                                        |       |     |       |     |       |     |       |
| Depreciation and amortization:              |       |     |       |     |       |     |       |
| Americas                                    |       | $        | 6,011      |     | $          | 4,958    |       | $ | 3,738 |   |
| International                               |       | 1,774    |       | 1,274    |       | 1,014    |       |
|                                        |       | $        | 7,785      |     | $          | 6,232    |       | $ | 4,752 |   |
| Capital expenditures:                       |       |     |       |     |       |     |       |
| Americas                                    |       | $        | 1,346      |     | $          | 790      |       | $ | 2,865 |   |
| International                               |       | 540      |       | 413      |       | 416      |       |
|                                        |       | $        | 1,886      |     | $          | 1,203    |       | $ | 3,281 |   |
|                                             |            |          |            |          |            |          |            |  |  |  |  |

 

F-24

----

 

----

(1)     Inter-geographic revenues were notsignificant.  Revenues from externalcustomers from any individual foreign country did not exceed 10% of totalrevenue.

(2)     Includes export sales from the United Statesof approximately $1,476, $611 and $1,963 in 2002, 2003 and 2004, respectively.

(3)     Includes long-lived assets in the UnitedKingdom of $5,582, $2,520 and $5 in 2002, 2003 and 2004, respectively.

(4)     Includes long-lived assets in Australia of$2,581, $2,419 and $5,513 in 2002, 2003 and 2004, respectively.

(5)     Includes goodwill of $14,065 and non-competeagreement of $1,763 in 2004.

(6)     Includes goodwill of $504, $613, and $659 in2002, 2003 and 2004, respectively.  Thechange in goodwill relates to foreign currency translation adjustment.

 

 

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

 
| ** **              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |     |       |
| Enclosures              |       | $        | 65,748     |     | $          | 60,308   |       | $ | 58,748 |   |
| Water  related products |       | 7,035    |       | 6,986    |       | 30,203   |       |
| Connectivity            |       | 10,525   |       | 8,169    |       | 9,797    |       |
| Other                   |       | 1,477    |       | 1,074    |       | 1,386    |       |
|                    |       |     |       |     |       |     |       |
| Total                   |       | $        | 84,785     |     | $          | 76,537   |       | $ | 100,134 |   |

 

F-25

----

 

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

 

Summarized quarterly financial data for 2003 and 2004 follows:

 
| ** **                 | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth (2)** | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|----------------|------------|
| ** **                 | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter**    | ** ** |
| 2003                       |       |        |       |        |       |        |       |           |       |
| Net sales                  |       | $           | 16,218     |        | $          | 20,285      |       | $              | 19,434     |   | $ | 20,600 |   |
| Gross profit               |       | 4,482       |       | 6,449       |       | 5,515       |       | 6,131          |       |
| Net income (loss)(1)       |       | (288        | )          | 1,068       |       | 535         |       | (1,389         | )          |
| Income (loss) per share(1) |       |        |       |        |       |        |       |           |       |
| Basic                      |       | (0.03       | )          | 0.12        |       | 0.06        |       | (0.15          | )          |
| Diluted                    |       | (0.03       | )          | 0.12        |       | 0.06        |       | (0.15          | )          |
|                            |            |             |            |             |            |             |            |                |            |  |  |  |  |

 
| ** **       | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **       | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| 2004             |       |        |       |        |       |        |       |        |       |
| Net sales        |       | $           | 17,720     |        | $          | 21,303      |       | $           | 27,615     |   | $ | 33,496 |   |
| Gross profit     |       | 5,344       |       | 5,928       |       | 7,896       |       | 8,815       |       |
| Net income       |       | 14          |       | 917         |       | 2,218       |       | 460         |       |
| Income per share |       |        |       |        |       |        |       |        |       |
| Basic            |       | 0.00        |       | 0.10        |       | 0.24        |       | 0.05        |       |
| Diluted          |       | 0.00        |       | 0.10        |       | 0.24        |       | 0.05        |       |
|                  |            |             |            |             |            |             |            |             |            |  |  |  |  |

 

----

(1)                In the fourth quarter of 2003, the Companyrecorded a restructuring charge of $1,565 (see Note H). The Company alsorecorded asset impairment charges totaling $1,238 (see Note D).

(2)                As discussed in Note R, the Company restatedits financial statements to correct error in the income tax provision.  The effect of these errors resulted in anadjustment to the fourth quarter financial data for the periods ended December31, 2003 and 2004.

 

**NOTE Q—ACQUISITION**

 

On August 2, 2004, the Company, through a majority-ownedsubsidiary, acquired a controlling interest in Bushman Tanks, a manufacturerand distributor of rotational molded plastic (polyethylene) water storagetanks.  Bushman Tanks operates out offour leased facilities in Australia, located in Dalby, Orange, Terang, andAdelaide.  The purchase price was$16,838.  The agreement provides forcontingent consideration of $2,800.  Ifpaid, the contingent consideration shall result in an additional element ofcost of the acquired entity.  In theevent that the Bushman Tanks business achieves specified sales targets in 2005and 2006, $1,400 is payable to the sellers. In addition, $1,400 may be paid tothe sellers if certain cost reduction targets are achieved.  The sellers will receive one-half of theamounts of the cost reductions in the specified cost items that are achievedbetween 2005 through 2009.  In the eventthat the cost incurred for these items exceeded a predetermined threshold, theseller would be liable to the Company for the amount of the cost exceeding thethreshold.  The purchase agreement includesa working capital adjustment based on the April 30, 2004 working capitalamounts. The amount of the adjustment at present is not finalized. The workingcapital adjustment as presently estimated by management has been included inthe $16,838 purchase price. The final working capital adjustment will result ina change to goodwill and the amount of consideration to the sellers.

 

Consideration for the acquisition of $16,838 consisted of $8,016 incash contributed by the Company, 175,113 shares of the Company’s common stockvalued at $714, a $5,520 term loan from The National Australia Bank Ltd, and$2,588 in cash contributed by ANZ Private Equity, a unit of Australia and NewZealand Banking Group Ltd. As a result of the transaction, the Company acquireda 75% equity interest in Bushman Tanks, and ANZ Private Equity acquired theremaining 25%. In addition, the Company incurred 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 based uponpreliminary estimates as of the acquisition date. Further adjustments to theacquired assets and assumed liabilities will be made following more detailed

 

F-26

----

 

reviews by management of tangible assets acquired and liabilitiesassumed. Changes in the estimated fair value of acquired assets and assumedliabilities will be reflected as a change in the allocated fair value of theidentifiable tangible and intangible assets and liabilities and goodwill in theperiod in which this determination is made, which management expects to be by March 31,2005.  The results of operations ofBushman Tanks are included in the Consolidated Statement of Operations from thedate of acquisition (August 2, 2004).

 

The following table summarizes the estimated fair value of the assetsacquired and liabilities assumed in the Bushman 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                      |       | 401           |       |
| Property, plant, and equipment, net |       | 3,089         |       |
| Goodwill                            |       | 12,442        |       |
| Intangible non-compete              |       | 1,600         |       |
| 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     |   |

 

The following unaudited pro forma financial information reflects theconsolidated results of operations of the Company as if the acquisition ofBushman Tanks had taken place on January 1, 2003.  The pro forma information includes the historicaloperations of the Company and Bushman Tanks (translated at the average currencyexchange rate for the applicable period) and gives effect to the acquisition asif it had occurred at the beginning of the applicable period.  The pro forma financial information is basedupon available information and assumptions and adjustment that the Companybelieves are reasonable.  The pro formafinancial information does not purport to represent what our results of operationsactually would have been had the transaction been effected on the assumed date.

 

F-27

----

 

*Amounts in thousands, except per share data*

 

| ** **            | ** ** | **2003**      | ** ** | **2004**      | ** ** |
|-----------------------|------------|---------------|------------|---------------|------------|
| ** **            | ** ** | **Pro Forma** | ** ** | **Pro Forma** | ** ** |
|                  |       |          |       |          |       |
| Net Sales             |       | $             | 103,866    |          | $          | 117,567 |   |
|                  |       |          |       |          |       |   |   |
| Net income            |       | $             | 692        |          | $          | 3,311 |   |
|                  |       |          |       |          |       |   |   |
| Net income  per share |       |          |       |          |       |
| Basic                 |       | $             | 0.07       |          | $          | 0.35 |   |
|                  |       |          |       |          |       |   |   |
| Diluted               |       | $             | 0.07       |          | $          | 0.35 |   |

 

**NOTER—PRIOR PERIOD ADJUSTMENT**

 

The Company has determined that non-current deferred income tax assetson the December 31, 2003 and 2004 balance sheets were overstated by $530 and$417, respectively.  This overstatementrelates to an error in the recording of the cumulative timing differencebetween book and tax depreciation.  Theoriginal error in the computation occurred in 2001 and the effect of this errorcarried forward to years ended December 31, 2002, 2003 and 2004.  In addition, the Company had a mathematicalerror in the 2004 deferred income tax calculation that resulted in anadditional error in the 2004 reported deferred income tax balance.  Accordingly, the amounts for deferred incometaxes and retained earnings were reduced from the amounts previously reportedon the December 31, 2003 and 2004 balance sheets by $530 and $417,respectively.

 

The recording errors described above resulted in a reduction ofdeferred income taxes as of December 31, 2003 and December 31, 2004.  The following table sets forth the balancesfor deferred income taxes as reported on the consolidated balance sheets of theCompany as of December 31, 2003 and December 31, 2004, and as restated toadjust for the accounting errors:

 

| ** **                               | ** ** | **December 31, 2003** | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Deferred income taxes (non-current):** |       |                       |       |                       |       |
| As previously reported                   |       | $                          | 5,277      |                       | $          | 4,460 |   |
| Restatement adjustment                   |       | $                          | 530        |                       | $          | 417 |   |
| As restated                              |       | $                          | 4,747      |                       | $          | 4,043 |   |

 

The recording error described above also impacted income tax expense(benefit), net income (loss) before minority interest, net income (loss),  net income (loss) per share and comprehensivenet (loss) income for the fiscal years ended December 31, 2002, 2003 and2004. The following table sets forth the balances for those items as reportedon the consolidated statements of operations and comprehensive income (loss)for the fiscal years ended December 31, 2002, 2003 and 2004, and asrestated to adjust for errors:

 

F-28

----

 
| ** **                                            | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Income  tax expense (benefit):**                    |       |     |       |     |       |     |       |
| As previously reported                                |       | $        | 1,737      |     | $          | 212      |       | $ | (678 | ) |
| Restatement adjustment                                |       | $        | (24        | )        | $          | (12      | )          | $ | (113 | ) |
| As restated                                           |       | $        | 1,713      |     | $          | 200      |       | $ | (791 | ) |
|                                                  |       |     |       |     |       |     |       |
| **Net  (loss) income before minority interest:**      |       |     |       |     |       |     |       |
| As previously reported                                |       | $        | (3,066     | )        | $          | (86      | )          | $ | 3,663 |   |
| Restatement adjustment                                |       | $        | (24        | )        | $          | (12      | )          | $ | (113 | ) |
| As restated                                           |       | $        | (3,042     | )        | $          | (74      | )          | $ | 3,776 |   |
|                                                  |       |     |       |     |       |     |       |
| **Net (loss)  income:**                               |       |     |       |     |       |     |       |
| As previously reported                                |       | $        | (3,066     | )        | $          | (86      | )          | $ | 3,496 |   |
| Restatement adjustment                                |       | $        | (24        | )        | $          | (12      | )          | $ | (113 | ) |
| As restated                                           |       | $        | (3,042     | )        | $          | (74      | )          | $ | 3,609 |   |
|                                                  |       |     |       |     |       |     |       |
| **Net  (loss) income per share (basic and diluted):** |       |     |       |     |       |     |       |
| As previously reported                                |       | $        | (0.34      | )        | $          | (0.01    | )          | $ | 0.38 |   |
| Restatement adjustment                                |       | $        | —     |     | $          | —   |       | $ | — |   |
| As restated                                           |       | $        | (0.34      | )        | $          | (0.01    | )          | $ | 0.39 |   |
|                                                  |       |     |       |     |       |     |       |
| **Comprehensive  net (loss) income:**                 |       |     |       |     |       |     |       |
| As previously reported                                |       | $        | (2,378     | )        | $          | 1,896    |       | $ | 4,546 |   |
| Restatement adjustment                                |       | $        | (24        | )        | $          | (12      | )          | $ | (113 | ) |
| As restated                                           |       | $        | (2,354     | )        | $          | 1,908    |       | $ | 4,659 |   |

 

**####**

 

F-29

----

 

**CHANNELL COMMERCIAL CORPORATION**

 

**SCHEDULE II**

 

**VALUATIONAND QUALIFYING ACCOUNTS**

 

*(Amounts inthousands)*

 
| ** **                     | ** ** | **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** | ** ** |
| **Column A**                   | ** ** | **Period**       | ** ** | **Expenses**   | ** ** | **Accounts**   | ** ** | **Deductions, Net** | ** ** | **Period** | ** ** |
|                           |       |             |       |           |       |           |       |                |       |   |   |   |   |
| Accounts  receivables reserves |       | (2004)           |       | $              | 356        |           | $          | 1,542               |       | $ | 65 |   | $ | (1,523 | ) | $ | 440 |   |
|                           |       | (2003)           |       | 623            |       | (232           | )          | —              |       | (35 | ) | 356 |   |
|                           |       | (2002)           |       | 102            |       | 2,065          |       | —              |       | (1,544 | ) | 623 |   |
|                           |       |             |       |           |       |           |       |                |       |   |   |   |   |
| Inventory  valuation reserve   |       | (2004)           |       | $              | 836        |           | $          | 735                 |       | $ | 89 |   | $ | (409 | ) | $ | 1,251 |   |
|                           |       | (2003)           |       | 340            |       | 569            |       | —              |       | 73 |   | 836 |   |
|                           |       | (2002)           |       | 38             |       | 302            |       | —              |       | — |   | 340 |   |

 

----

 

**GLOSSARYOF TERMS**

 

*ADSL (Asymmetric Digital Subscriber Line): *A standard allowingdigital broadband signals and standard telephone service to be transmitted upto 12,000 feet over a twisted copper pair.

 

*Broadband: *Transmission rates in excess of 1.544 mega bits per second typicallydeployed for delivery of high-speed data, video and voice services. Also, asystem for distributing television programming by a cable network rather thanby broadcasting electromagnetic radiation.

 

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

 

*Cable Modem:* Electronic transmission device placed on the broadband network, locatedat end user locations, providing two-way, high-speed data service capability,including internet access for subscribers.

 

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

 

*DLC(Digital Loop Carrier):*  Telecommunications transmission technologywhich multiplexes multiple individual voice circuits onto copper or fibercables.

 

*DSL(Digital Subscriber Line):* Generic descriptor covering various versions of DSL services deliveredover copper wires.  Included are HDSL andADSL services.

 

*FiberNode:*  Refers to the equipment that terminates thefiber cables originating from the host digital terminal.  This network element converts the opticalsignals to their coax electrical, RF equivalents.  Synonymous with optical network interface(ONI). 

 

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

 

*FTTC(Fiber-To-The-Curb):*  In a long distance network consisting offiber optics, fiber-to-the-curb refers to the fiber optics running from thedistribution plant to the curb, at which point copper is used for thecurb-to-home connection.

 

*FTTP(Fiber-To-The-Premise):*  In a long distance network consisting offiber optics, fiber-to-the-curb refers to the fiber optics running from thedistribution plant to the customer premise, which may be the curb or theoutside wall of the premise, at which point copper is used for the remainingconnection.

 

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

 

*Headend:*  Theprimary transmission point in a cable system supplying the hubs and trunkcables. 

 

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

 

*ONU(Optical Network Unit):*  The curb mounted electronics device whichconverts fiber optic signals to electrical for service delivery or copperwires. 

 

*PCS(Personal Communications Services):*  Any service offered on apersonal communications network.  Theseinclude basic telephone, voice mail, paging and others.  Personal communications networks operate inthe 1800-2000 mHz range, utilizing low power cells compared to traditionalcellular technology.

 

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

 

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

 

*VoIP(Voice over Internet Protocol):*A technology that allows you to make telephone calls using a broadbandInternet connection instead of a regular (or analog) phone line.

 

G-1

----

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Form 10-K/A-1 Annual Report to be signed on its behalf by theundersigned, thereunto duly authorized, in the City of Temecula, State ofCalifornia, on November 21, 2005.

 
|   | CHANNELL  COMMERCIAL CORPORATION |
|--------|----------------------------------|
|   | a Delaware corporation           |
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/ William  H. Channell, Jr. |   |
|   |                             | William H.  Channell, Jr. |
|   |                             | President  and Chief Executive Officer and Director |
|   |                             |   |
|   | By:                              | /s/ Jerry  Collazo |   |
|   |                             | Jerry  Collazo |
|   |                             | Chief  Financial Officer |
|        |                                  |  |  |  |

 

----