**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

 
| **ý** |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                          |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                        |
|       |   | **For the quarterly period ended  September 30, 2003**                                                                                                                                                                 |
|       |   |                                                                                                                                                                                                                        |
|       |   | **OR**                                                                                                                                                                                                                      |
|       |   |                                                                                                                                                                                                                        |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                         |
|       |   |                                                                                                                                                                                                                        |
|       |   | **For  the transition period from                                to** |

 

 

**CommissionFile No. 0-28582**

 

 

**CHANNELL COMMERCIAL CORPORATION**

(Exact name of Registrantas specified in its charter)

 

 

**DELAWARE**

(State or otherjurisdiction of incorporation or organization)

 

 

**95-2453261**

(I.R.S. EmployerIdentification No.)

 

 

**26040Ynez Road, Temecula, California**

(Address of principalexecutive offices)

 

**92591**

(Zip Code)

 

**(909)719-2600**

(Registrant’s telephonenumber, including area code)

 

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

Yes  **ý**       No  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  o       No  **ý**

 

**9,127,661  shares ofcommon stock of the Registrant were outstanding at November 4, 2003.**

** **

** **

----

 

**PART 1 –**                  FINANCIAL INFORMATION

** **

**ITEM1.**                             FINANCIAL STATEMENTS

** **

**CHANNELLCOMMERCIAL CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

***(amounts inthousands, except per share data)***

 
|                                                                              |   | **Nine months endedSeptember 30,** |   | **Three months endedSeptember 30,** |   |
|-----------------------------------------------------------------------------------|--------|-----------------------------------------|--------|------------------------------------------|--------|
|                                                                              |   | **2003**                                |   | **2002**                                 |   | **2003** |   | **2002** |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Net sales                                                                         |   | $                                       | 55,937 |                                     | $      | 65,065 |   | $ | 19,434 |   | $ | 19,401 |   |
| Cost of goods sold                                                                |   | 39,491                                  |   | 43,160                                   |   | 13,919 |   | 13,966 |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Gross profit                                                                      |   | 16,446                                  |   | 21,905                                   |   | 5,515 |   | 5,435 |   |
| Operating expenses                                                                |   |                                    |   |                                     |   |   |   |   |   |
| Selling                                                                           |   | 6,994                                   |   | 6,973                                    |   | 2,347 |   | 2,012 |   |
| General and  administrative                                                       |   | 5,776                                   |   | 8,799                                    |   | 2,048 |   | 2,144 |   |
| Research and development                                                          |   | 1,193                                   |   | 1,215                                    |   | 408 |   | 377 |   |
|                                                                              |   | 13,963                                  |   | 16,987                                   |   | 4,803 |   | 4,533 |   |
| Income from operations                                                            |   | 2,483                                   |   | 4,918                                    |   | 712 |   | 902 |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Interest expense, net                                                             |   | 438                                     |   | 1,812                                    |   | 178 |   | 491 |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Income before income  taxes                                                       |   | 2,045                                   |   | 3,106                                    |   | 534 |   | 411 |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Income taxes                                                                      |   | 730                                     |   | 1,640                                    |   | (1 | ) | 261 |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Net income                                                                        |   | $                                       | 1,315  |                                     | $      | 1,466 |   | $ | 535 |   | $ | 150 |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Net income per share                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Basic                                                                             |   | $                                       | 0.14   |                                     | $      | 0.16 |   | $ | 0.06 |   | $ | 0.02 |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Diluted                                                                           |   | $                                       | 0.14   |                                     | $      | 0.16 |   | $ | 0.06 |   | $ | 0.02 |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Net income                                                                        |   | $                                       | 1,315  |                                     | $      | 1,466 |   | $ | 535 |   | $ | 150 |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Other comprehensive  income, net of tax  Foreign currency translation adjustments |   | 1,281                                   |   | 635                                      |   | 79 |   | 20 |   |
|                                                                              |   |                                    |   |                                     |   |   |   |   |   |
| Comprehensive net income                                                          |   | $                                       | 2,596  |                                     | $      | 2,101 |   | $ | 614 |   | $ | 170 |   |

 

The accompanying notesare an integral part of these financial statements.

 

1

----

 

**CHANNELL COMMERCIAL CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

*(amounts in thousands)*

 
|                                                                                                                                                                                                                                                   |   | **September 30,  2003** |   | **December 31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|-----------------------------|--------|
|                                                                                                                                                                                                                                                   |   | **(Unaudited)**              |   |                        |   |
| **ASSETS**                                                                                                                                                                                                                                             |   |                         |   |                        |   |
| **Current  assets**                                                                                                                                                                                                                                    |   |                         |   |                        |   |
| Cash and cash equivalents                                                                                                                                                                                                                              |   | $                            | 7,285  |                        | $      | 3,162 |   |
| Accounts receivable, net                                                                                                                                                                                                                               |   | 10,174                       |   | 10,156                      |   |
| Inventories                                                                                                                                                                                                                                            |   | 8,959                        |   | 7,757                       |   |
| Deferred income taxes                                                                                                                                                                                                                                  |   | 1,037                        |   | 1,037                       |   |
| Prepaid expenses and  misc. receivables                                                                                                                                                                                                                |   | 1,478                        |   | 1,090                       |   |
| Income taxes receivable                                                                                                                                                                                                                                |   | 248                          |   | 247                         |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| Total current assets                                                                                                                                                                                                                                   |   | 29,181                       |   | 23,449                      |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| **Property  and equipment at cost, net**                                                                                                                                                                                                               |   | 19,271                       |   | 25,431                      |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| **Deferred  income taxes**                                                                                                                                                                                                                             |   | 4,467                        |   | 4,367                       |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| **Intangible  assets, net**                                                                                                                                                                                                                            |   | 504                          |   | 504                         |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| **Other  assets**                                                                                                                                                                                                                                      |   | 484                          |   | 412                         |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
|                                                                                                                                                                                                                                                   |   | $                            | 53,907 |                        | $      | 54,163 |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                         |   |                         |   |                        |   |
| **Current  liabilities**                                                                                                                                                                                                                               |   |                         |   |                        |   |
| Accounts payable                                                                                                                                                                                                                                       |   | $                            | 5,211  |                        | $      | 5,820 |   |
| Short term debt  (including current maturities of long term debt)                                                                                                                                                                                      |   | 952                          |   | 952                         |   |
| Current maturities of  capital lease obligations                                                                                                                                                                                                       |   | 87                           |   | 694                         |   |
| Accrued restructuring  liability                                                                                                                                                                                                                       |   | 1,320                        |   | 2,155                       |   |
| Accrued expenses                                                                                                                                                                                                                                       |   | 4,663                        |   | 3,625                       |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| Total current liabilities                                                                                                                                                                                                                              |   | 12,233                       |   | 13,246                      |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| **Long  term debt, less current maturities**                                                                                                                                                                                                           |   | 3,067                        |   | 4,877                       |   |
| **Capital  lease obligations, less current maturities**                                                                                                                                                                                                |   | 31                           |   | 25                          |   |
| **Deferred  gain on sale leaseback transaction**                                                                                                                                                                                                       |   | 529                          |   | 574                         |   |
| **Commitments  and contingencies**                                                                                                                                                                                                                     |   | —                       |   | —                      |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| **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 - 9,369 shares in  December 31, 2002 and 9,372 in September 30, 2003; outstanding -  9,125 shares in December 31, 2002 and 9,128 in September 30, 2003 |   | 94                           |   | 94                          |   |
| Additional paid-in  capital                                                                                                                                                                                                                            |   | 28,664                       |   | 28,655                      |   |
| Treasury stock - 244  shares in 2002 and 2003                                                                                                                                                                                                          |   | (1,871                       | )      | (1,871                      | )      |
| Retained earnings                                                                                                                                                                                                                                      |   | 11,872                       |   | 10,556                      |   |
| Accumulated other  comprehensive loss - Foreign currency translation                                                                                                                                                                                   |   | (712                         | )      | (1,993                      | )      |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| **Total  stockholders’ equity**                                                                                                                                                                                                                   |   | 38,047                       |   | 35,441                      |   |
|                                                                                                                                                                                                                                                   |   |                         |   |                        |   |
| **Total  liabilities and stockholders’ equity**                                                                                                                                                                                                   |   | $                            | 53,907 |                        | $      | 54,163 |   |

 

**The accompanying notes are an integral part of thesefinancial statements.**

** **

**2**

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**CHANNELLCOMMERCIAL CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)**

***(amounts inthousands)***

** **
|                                               |   | **Nine months ended  September 30,** |   |
|----------------------------------------------------|--------|-------------------------------------------|--------|
|                                               |   | **2003**                                  |   | **2002** |   |
| **Cash  flows from operating activities:**         |   |                                      |   |   |   |
| Net income                                         |   | $                                         | 1,315  |   | $ | 1,466 |   |
| Depreciation and  amortization                     |   | 4,785                                     |   | 5,405 |   |
| Deferred income taxes                              |   | (100                                      | )      | 670 |   |
| Loss on disposal of fixed  assets                  |   | 62                                        |   | 168 |   |
| Foreign currency  transaction gain                 |   | 16                                        |   | — |   |
| Change in assets and  liabilities:                 |   |                                      |   |   |   |
| (Increase) decrease in  assets:                    |   |                                      |   |   |   |
| Accounts receivable                                |   | 374                                       |   | 3,113 |   |
| Inventories                                        |   | (859                                      | )      | 2,522 |   |
| Prepaid expenses                                   |   | (160                                      | )      | 36 |   |
| Other                                              |   | (70                                       | )      | 24 |   |
| Income taxes receivable                            |   | (71                                       | )      | 5,076 |   |
| Increase (decrease) in liabilities:                |   |                                      |   |   |   |
| Accounts payable                                   |   | (789                                      | )      | 414 |   |
| Accrued expenses                                   |   | 1,003                                     |   | 385 |   |
| Restructuring liability                            |   | (899                                      | )      | (1,359 | ) |
| Income taxes payable                               |   | —                                    |   | 479 |   |
|                                               |   |                                      |   |   |   |
| Net cash provided by  operating activities         |   | 4,607                                     |   | 18,399 |   |
|                                               |   |                                      |   |   |   |
| **Cash  flows from investing activities:**         |   |                                      |   |   |   |
| Acquisition of property  and equipment             |   | (915                                      | )      | (1,420 | ) |
| Proceeds from the sales  of property and equipment |   | 2,320                                     |   | 6,614 |   |
|                                               |   |                                      |   |   |   |
| Net cash provided by  investing activities         |   | 1,405                                     |   | 5,194 |   |
|                                               |   |                                      |   |   |   |
| **Cash  flows from financing activities:**         |   |                                      |   |   |   |
| Repayment of debt                                  |   | (1,809                                    | )      | (27,795 | ) |
| Repayment of obligations  under capital lease      |   | (614                                      | )      | (1,716 | ) |
| Exercise of stock options                          |   | 9                                         |   | — |   |
|                                               |   |                                      |   |   |   |
| Net cash used in  financing activities             |   | (2,414                                    | )      | (29,511 | ) |
|                                               |   |                                      |   |   |   |
| Effect of exchange rates  on cash                  |   | 525                                       |   | 66 |   |
|                                               |   |                                      |   |   |   |
| Increase (decrease) in  cash and cash equivalents  |   | 4,123                                     |   | (5,852 | ) |
|                                               |   |                                      |   |   |   |
| Cash and cash  equivalents, beginning of period    |   | 3,162                                     |   | 8,762 |   |
|                                               |   |                                      |   |   |   |
| Cash and cash  equivalents, end of period          |   | $                                         | 7,285  |   | $ | 2,910 |   |
|                                               |   |                                      |   |   |   |
| **Cash  paid during the period for:**              |   |                                      |   |   |   |
| Interest                                           |   | $                                         | 239    |   | $ | 1,512 |   |
|                                               |   |                                      |   |   |   |
| Income taxes                                       |   | $                                         | 757    |   | $ | 832 |   |

** **

**The accompanying notes are an integral part of thesefinancial statements.**

** **

**3**

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**CHANNELL COMMERCIALCORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)**

**SEPTEMBER 30, 2003 and 2002**

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

 

1.                                       *Unauditedfinancial statements:*  In theopinion of management, the accompanying unaudited consolidated financialstatements contain all adjustments necessary to present fairly the consolidatedfinancial position of Channell Commercial Corporation (the “Company”) as ofSeptember 30, 2003 and the results of its operations for the three monthsand nine months ended September 30, 2003 and  September 30, 2002 and its cash flows for the nine monthsended September 30, 2003 and September 30, 2002.  The results of operations and cash flows forthe nine months ended September 30, 2003, are not necessarily indicativeof the results to be expected for any other interim period or the fullyear.  These consolidated financialstatements should be read in combination with the audited consolidatedfinancial statements and notes thereto for the year ended December 31,2002.

 

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

 
|            |   | **September 30,2003** |   | **December 31,2002** |   |
|-----------------|--------|----------------------------|--------|---------------------------|--------|
| Raw Materials   |   | $                          | 3,327  |                      | $      | 3,324 |   |
| Work-in-Process |   | 2,595                      |   | 2,374                     |   |
| Finished Goods  |   | 3,037                      |   | 2,059                     |   |
|            |   | $                          | 8,959  |                      | $      | 7,757 |   |

 

3.                                       *Income pershare:*  Basic income pershare excludes dilution and is computed by dividing net income available tocommon stockholders by the weighted average number of common shares outstandingfor the nine month period and three month period ended September 30, 2003and 2002.  Diluted income per sharereflects the potential dilution that could occur if dilutive options to acquirecommon stock were exercised.  Thefollowing is a reconciliation of the number of shares (denominator) used in thebasic and diluted income per share computations for the nine month and threemonth periods ended September 30, 2003 and 2002 (shares in thousands):

 
|                             |   | **Nine months ended  September 30,** |   |
|----------------------------------|--------|-------------------------------------------|--------|
|                             |   | **2003**                                  |   | **2002** |   |
|                             |   | **Shares**                                |   | **Per  Share  Amount** |   | **Shares** |   | **Per  Share  Amount** |   |
|                             |   |                                      |   |   |   |   |   |   |   |
| Basic income per share           |   | 9,126                                     |   | $ | 0.14 |   | 9,026 |   | $ | 0.16 |   |
| Effect of dilutive stock options |   | 38                                        |   | — |   | 49 |   | — |   |
| Diluted income per share         |   | 9,164                                     |   | $ | 0.14 |   | 9,075 |   | $ | 0.16 |   |

 

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

 
|                                        |   | **September 30,2003**      |   | **September 30,2002**      |   |
|---------------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|
|                                        |   |                            |   |                            |   |
| Options to purchase shares of common  stock |   | 101                             |   | 866                             |   |
| Exercise prices                             |   | $6.50- $13.75                   |   | $6.50- $13.75                   |   |
| Expiration dates                            |   | July 2006 -  May 2012 |   | July 2006 -  May 2012 |   |

 

4

----

 
|                             |   | **Three months ended  September 30,** |   |
|----------------------------------|--------|--------------------------------------------|--------|
|                             |   | **2003**                                   |   | **2002** |   |
|                             |   | **Shares**                                 |   | **PerShare  Amount** |   | **Shares** |   | **Per  Share  Amount** |   |
|                             |   |                                       |   |   |   |   |   |   |   |
| Basic income per share           |   | 9,127                                      |   | $ | 0.06 |   | 9,026 |   | $ | 0.02 |   |
| Effect of dilutive stock options |   | 88                                         |   | — |   | 11 |   | — |   |
| Diluted income per share         |   | 9,215                                      |   | $ | 0.06 |   | 9,037 |   | $ | 0.02 |   |

 

The following options were not included in thecomputation of diluted income per share due to their antidilutive effect.

 
|                                       |   | **September 30,2003** |   | **September 30,2002** |   |
|--------------------------------------------|--------|----------------------------|--------|----------------------------|--------|
|                                       |   |                       |   |                       |   |
| Options to purchase shares of common stock |   | 101                        |   | 866                        |   |
| Exercise prices                            |   | $6.50- $13.75              |   | $6.50 - $13.75             |   |
| Expiration dates                           |   | July 2006 -           |   | July 2006 -           |   |
|                                       |   | May 2012              |   | May 2012              |   |

 

 

In February 2003, the Company offered currentemployees 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.

 

4.               *Stock BasedCompensation:* Statement ofFinancial Accounting Standards No. 123, “*Accounting for Stock Based Compensation*”,encourages, but does not require, companies to record compensation cost forstock-based employee compensation plans at fair value.  The Company has chosen to continue toaccount for stock-based compensation using the intrinsic value methodprescribed in previously 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.

 

InFebruary 2003, the Company offered current employees and non-employeedirectors an opportunity to exchange their outstanding options granted underthe 1996 Stock Plan.  The tender offerexpired on March 20, 2003. Pursuant to the offer, a total of 1,326,890 options were cancelled onMarch 20, 2003.  OnSeptember 24, 2003, a total of 1,324,090 new options were exchanged forthose cancelled in March 2003. Eligible option holders who participated in the “Offer to Exchange” weregranted a new option for each old cancelled option.  For each new option granted, the vesting status and vestingschedule of the old option was preserved. The weighted average fair value of the options issued in September 2003was $1.91.  The weighted averageexercise price was $4.84.

 

In accordance withthe guidance of SFAS No. 148, the compensation on a proforma basis isrecognized for each of the new options granted under the “Offer to Exchange”that is either fully or partially vested as of the end of the quarter endingSeptember 30, 2003.  Due to thepreservation of the vesting status and vesting schedule of the oldoptions, the cumulative proforma effect of these new options is significant inthis quarter.

 

Had compensationcost for the plan been determined based on the fair value of the options at thegrant dates based on the above method, the Company’s net income and income pershare would have been:

 

5

----

 
|                                      |   | **Nine Months Ended September 30,** |   |
|-------------------------------------------|--------|------------------------------------------|--------|
|                                      |   | **2003**                                 |   | **2002** |   |
|                                      |   |                                     |   |   |   |
| Reported net income   (in thousands) |   | $                                        | 1,315  |   | $ | 1,466 |   |
| Proforma net income   (in thousands) |   | $                                        | 425    |   | $ | 1,253 |   |
|                                      |   |                                     |   |   |   |
| Reported basic net income per share       |   | $                                        | 0.14   |   | $ | 0.16 |   |
| Proforma basic net income per share       |   | $                                        | 0.05   |   | $ | 0.14 |   |
|                                      |   |                                     |   |   |   |
| Reported diluted net income per share     |   | $                                        | 0.14   |   | $ | 0.16 |   |
| Proforma diluted net income per share     |   | $                                        | 0.05   |   | $ | 0.14 |   |

 

 
|                                             |   | **Three Months Ended September 30,** |   |
|--------------------------------------------------|--------|-------------------------------------------|--------|
|                                             |   | **2003**                                  |   | **2002** |   |
|                                             |   |                                      |   |   |   |
| Reported net income   (in thousands)        |   | $                                         | 535    |   | $ | 150 |   |
| Proforma net income   (loss) (in thousands) |   | $                                         | (303   | ) | $ | 25 |   |
|                                             |   |                                      |   |   |   |
| Reported basic net income per share              |   | $                                         | 0.06   |   | $ | 0.02 |   |
| Proforma basic net income (loss) per share       |   | $                                         | (0.03  | ) | $ | 0.00 |   |
|                                             |   |                                      |   |   |   |
| Reported diluted net income per share            |   | $                                         | 0.06   |   | $ | 0.02 |   |
| Proforma diluted net income (loss) per share     |   | $                                         | (0.03  | ) | $ | 0.00 |   |

 

The fair value ofoptions at date of grant was estimated using the Black-Scholes model with thefollowing weighted average assumptions:

 
|                    |   | **Nine Months and  Three Months Ended September 30,** |   |
|-------------------------|--------|------------------------------------------------------------|--------|
|                    |   | **2003**                                                   |   | **2002** |   |
|                    |   |                                                       |   |   |   |
| Expected life (years)   |   | 5 years                                                    |   | 5 years |   |
| Risk-free interest rate |   | 3.0                                                        | %      | 3.0 | % |
| Expected volatility     |   | 40                                                         | %      | 40 | % |
| Expected dividend yield |   | —                                                     |   | — |   |

 

5.                                       *Segments*:The Company’s predominant business is the manufacturing and distribution oftelecommunications equipment.  As aresult of rationalizing and streamlining international operations, the Companychanged its segment reporting in the first quarter of 2003.  There are now two segments:  Americas and International.  Americas includes the United States, Centraland South America and Canada.  Internationalincludes Europe, Africa, Middle East, Australia and Asia.  Some of the previous reporting segments havebeen combined due to their reduced size as a result of the general downturn inthe telecommunications industry, the rationalization of various product lineswithin the former segments and changes in the management structure of theCompany.  The new reporting segmentsreflect the current management structure and the reporting used internally byexecutive management.  The followingtables summarize segment information for the nine months and three months endedSeptember 30, 2003 and 2002 (in thousands):

 

6

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|                                  |   | **Nine Months Ended  September 30,** |   |
|---------------------------------------|--------|-------------------------------------------|--------|
|                                  |   | **2003**                                  |   | **2002** |   |
| Revenues from unrelated entities (1): |   |                                      |   |   |   |
| Americas                              |   | $                                         | 47,218 |   | $ | 53,381 |   |
| International                         |   | 8,719                                     |   | 11,684 |   |
|                                  |   | $                                         | 55,937 |   | $ | 65,065 |   |
| Income (loss) from operations:        |   |                                      |   |   |   |
| Americas                              |   | $                                         | 3,679  |   | $ | 6,081 |   |
| International                         |   | (1,196                                    | )      | (1,163 | ) |
|                                  |   | $                                         | 2,483  |   | $ | 4,918 |   |
| Interest expense, net:                |   |                                      |   |   |   |
| Americas                              |   | $                                         | 75     |   | $ | 1,488 |   |
| International                         |   | 363                                       |   | 324 |   |
|                                  |   | $                                         | 438    |   | $ | 1,812 |   |

 
|                                   |   | **Three  Months Ended  September 30,** |   |
|----------------------------------------|--------|---------------------------------------------|--------|
|                                   |   | **2003**                                    |   | **2002** |   |
| Revenues from  unrelated entities (1): |   |                                        |   |   |   |
| Americas                               |   | $                                           | 16,762 |   | $ | 15,272 |   |
| International                          |   | 2,672                                       |   | 4,129 |   |
|                                   |   | $                                           | 19,434 |   | $ | 19,401 |   |
| Income (loss)  from operations:        |   |                                        |   |   |   |
| Americas                               |   | $                                           | 1,189  |   | $ | 1,082 |   |
| International                          |   | (477                                        | )      | (180 | ) |
|                                   |   | $                                           | 712    |   | $ | 902 |   |
| Interest  expense, net:                |   |                                        |   |   |   |
| Americas                               |   | $                                           | 60     |   | $ | 394 |   |
| International                          |   | 118                                         |   | 97 |   |
|                                   |   | $                                           | 178    |   | $ | 491 |   |

 

----

(1)  Note:Revenues from any individual foreign country did not exceed 10% of totalrevenues for the period.

 

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

 
|         |   | **Nine Months Ended  September 30,** |   |
|--------------|--------|-------------------------------------------|--------|
|         |   | **2003**                                  |   | **2002** |   |
|         |   |                                      |   |   |   |
| Enclosures   |   | $                                         | 43,871 |   | $ | 50,524 |   |
| Connectivity |   | 5,887                                     |   | 8,981 |   |
| Other        |   | 6,179                                     |   | 5,560 |   |
|         |   | $                                         | 55,937 |   | $ | 65,065 |   |

 
|         |   | **Three Months Ended  September 30,** |   |
|--------------|--------|--------------------------------------------|--------|
|         |   | **2003**                                   |   | **2002** |   |
|         |   |                                       |   |   |   |
| Enclosures   |   | $                                          | 15,009 |   | $ | 14,836 |   |
| Connectivity |   | 2,265                                      |   | 2,670 |   |
| Other        |   | 2,160                                      |   | 1,895 |   |
|         |   | $                                          | 19,434 |   | $ | 19,401 |   |

 

Included in theConnectivity revenues for the nine months ended September 30, 2002 arerevenues from the RF product line of $1,956. The RF product line was sold in the second quarter of 2002 (See Note11).

 

7

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Included in theConnectivity revenues for the three months ended September 30, 2002 arerevenues from the RF product line of $6.

 

The Company hasidentifiable assets in the following geographic regions:

 
|                 |   | **September 30,** |   | **December 31,** |       |
|----------------------|--------|------------------------|--------|-----------------------|------------|
|                 |   | **2003**               |   | **2002**              |       |
|                 |   | **(Unaudited)**        |   |                  | ** ** |
| Identifiable Assets: |   |                   |   |                  |       |
| Americas             |   | $                      | 40,705 |                  | $          | 40,060 |   |
| International        |   | 13,202                 |   | 14,103                |       |
|                 |   | $                      | 53,907 |                  | $          | 54,163 |   |

 

6.                                       *RecentAccounting Pronouncements:* In May 2003, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.”  SFAS No. 150changes the classification in the statement of financial position of certaincommon financial instruments from either equity or mezzanine presentation toliabilities and requires an issuer of those financial statements to recognizechanges in fair value or redemption amount, as applicable, in earnings.  SFAS No. 150 is effective for financialinstruments entered into or modified after May 31, 2003 and is effectivefor the Company beginning July 1, 2003. The Company does not expect that provisions of SFAS No. 150 will have amaterial impact on the Company’s results of operations or financial position.

 

In January 2003, the FASBissued Interpretation “Consolidation of Variable Interest Entities - aninterpretation of ARB No. 51” (“FIN 46”). FIN 46 requires that if an entity hasa controlling financial interest in a variable interest entity, the assets,liabilities and results of activities of the variable interest entity should beincluded in the consolidated financial statements of the entity. FIN 46requires that its provisions are effective immediately for all arrangementsentered into after January 31, 2003. For those arrangements entered intoprior to January 31, 2003, the FIN 46 provisions are required to beadopted at the beginning of the first interim or annual period beginning afterJune 15, 2003. The Company does not expect that the provisions of FIN 46will have a material impact on the Company’s results of operations or financialposition.

 

In December 2002,the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure—an amendment of SFAS 123.”  This statement amends SFAS No. 123,“Accounting for Stock-Based Compensation,” to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFASNo. 123 to require prominent disclosures in both annual and interim financialstatements about the method of accounting for stock-based employee compensationand the effect of the method used on reported results.  The Company has chosen to continue toaccount for stock-based compensation using the intrinsic value methodprescribed in APB Opinion No. 25 and related interpretations.  Accordingly, compensation expense for stockoptions is measured as the excess, if any, of the estimate of the market valueof the Company’s stock at the date of the grant over the amount an employeemust pay to acquire the stock.  TheCompany has adopted the annual disclosure provisions of SFAS No. 148 in itsfinancial reports for the year ended December 31, 2002 and the interimdisclosure provisions for its financial reports beginning with the quarterended March 31, 2003.  As theadoption of this standard involves disclosures only, SFAS No. 148 did not havea material impact on the results of operations, financial position orliquidity.

 

7.                                       *RestructuringCharge*:  In the fourthquarter of 2000, in connection with management’s plan to reduce costs andimprove operating efficiencies, the Company recorded a restructuring charge of$1,513.  The principal actions in therestructuring plan involved the closure of facilities and consolidation ofsupport infrastructure.  Most of thereductions occurred in the Company’s international operations.

 

In the third quarter of2001, due to a continued slowdown in the telecommunications industry, theCompany announced an additional restructuring plan in an effort to furtherreduce costs and align headcount and facilities with expected business levelsin all regions.  The additionalrestructuring charge totaled $2,999. The principal actions in the restructuring plan involved the closure offacilities and a reduction of headcount.

 

In the fourth quarter of2002, the Company announced a restructuring plan to further rationalizeinternational manufacturing operations. As part of the plan, various manufacturing operations previouslyperformed in the U.K. were either transferred to Australia or outsourced.  The management of Australia/Asia and Europewas 

 

8

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consolidated under theManaging Director, International.  Therestructuring charge totaled $1,228. The principal actions in the restructuring plan involved the closure offacilities and a reduction in head count.

 

The restructuring chargeswere determined based on formal plans approved by the Company’s managementusing the best information available to it at the time.  The amounts the Company may ultimately incurcould differ materially as the restructuring initiative is executed.   The changes in the accrual forrestructuring charges during 2003 are summarized in the table below:

 
|                                                             |   | **Facilities** |   | **WorkforceReduction** |   | **Total** |   |
|------------------------------------------------------------------|--------|----------------|--------|------------------------|--------|-----------|--------|
|                                                             |   |           |   |                   |   |      |   |
| Restructuring accrual  balance at January 1, 2003           |   | $              | 2,095  |                   | $      | 60        |   | $ | 2,155 |   |
|                                                             |   |           |   |                   |   |      |   |
| Costs incurred in the  nine months ended September 30, 2003 |   | 782            |   | 53                     |   | 835       |   |
|                                                             |   |           |   |                   |   |      |   |
| Restructuring accrual  balance at September 30, 2003        |   | $              | 1,313  |                   | $      | 7         |   | $ | 1,320 |   |

 

8.                                       *SaleLeaseback Arrangement:*  InJanuary 2003, the Company sold a facility located in Orpington Kent,United Kingdom.  The proceeds from thesale totaled $2,441 and resulted in a pretax loss of $110 which is included ingeneral and administrative expense in 2003. Terms of the sale included a provision for the Company to lease back thefacility for one year at no charge. Included in the proceeds was prepaid rentfor one year which totaled $213.  Theresulting lease is being accounted for as an operating lease.

 

In June, 2002, theCompany entered into a sale and leaseback agreement for a warehouse facilitylocated in Temecula, California.  Theproceeds from the sale totaled approximately $6,200 and resulted in a pretaxdeferred gain of $604.  The resultinglease is being accounted for as an operating lease.  The lease base term is ten years with two five-year options atrental amounts to be adjusted to the fair market rental value at the end of thebase term.  A portion of theproceeds  from the sale was used to paythe outstanding mortgage balance on the facility of $4,036.  As of September 30, 2003, theunamortized balance of the deferred gain is $529.

 

9.                                       IncomeTaxes: The effective tax rate of 35.7% and (0.2%) for the nine month period andthree month period ended September 30, 2003 differed from the statutoryrate of 34.0% primarily due to state taxes and certain foreign operating lossesincurred without a tax benefit recorded, offset by the benefit recognized froma research and development (“R&D”) tax credit.  The Company analyzed its R&D activities for the years 2001,2002, and 2003 and has changed its estimate of the R&D tax credit availableto offset its federal income tax liability for the tax years 2001, 2002, and2003.  The change in the estimate hadthe effect of reducing income tax expense by approximately $322 in the three monthsended September 30, 2003, equivalent to $.04 per basic and diluted share.

 

The Federal incometaxes of the Company for the years ended December 31, 1997, 1998, 2000,and 2001 are currently under examination by the Internal Revenue Service(IRS).  In July 2002, the IRSissued the proposed result of their examination for the years endedDecember 31, 1997 and 1998, which increases the 1997 income tax amount dueby $315 related to transfer pricing for sales to the Company’s Canadiansubsidiary.  Management believes thatthe Company will prevail in its appeal of the proposed adjustment or thatincome re-allocated from Canada to the United States will result in a refund ofCanadian income taxes which is substantially equal to the additional taxes dueto the US.

 

10.                                 *Commitmentsand Contingencies:*In 2001, the State of Texas issued a reportassessing the Company additional sales and use tax of $1,600, includinginterest.  The Company has appealed theassessment and is currently providing the State of Texas with documentation tosupport the Company’s contention that the transactions did not require theCompany to remit sales and use tax to the State of Texas. The State of Texashas agreed to a reduction of the amount owed to $520.  The Company has paid the State of Texas $400.  The Company believes that it has meritoriousdefenses to the remaining claim of $120 and intends to vigorously defend itsposition.  The Company believes that theultimate outcome of this examination will not result in a material impact on theCompany’s consolidated results of operations or financial position.

 

9

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11.                                 *Related**PartyTransactions: *InMay 2002, the Company sold its RF line of passive electronic devices toRMS Communications, Inc., which is owned by Gary Napolitano, a former officerof the Company.  A sale in the amount of$800 was recorded.  RMS Communications,Inc. paid the Company $125 in cash at the time of sale, and the remaining $675is payable in monthly installments through June 30, 2003, bearing interestat 7% per annum.  The amount due fromRMS Communications, Inc., included in accounts receivable at September 30,2003 is $349.  The account is currentlyin arrears.  The Company has a securityinterest in the inventory and a personal guarantee from Mr. Napolitano andbelieves the amount will be paid in full.

 

12.                                 *Concentrations: *Sales to Comcast of $14.8 millionin the first nine months of 2003 represented 26.5% of Company sales in theperiod.  Comcast acquired AT&T’sbroadband business in the fourth quarter of 2002.  Sales to Verizon of $6.1 million in the first nine months of 2003represented 10.9% of Company sales.

 

                                                Salesto AT&T of $13.8 million in the first nine months of 2002 represented 21.2%of Company sales for the period.  Salesto Time Warner of $6.6 million the first nine months of 2002 represented 10.1%of Company sales.

 

10

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

 

### **Results of Operations**

 

**Comparisonof the Nine Months Ended September 30, 2003 with the Nine Months EndedSeptember 30, 2002**

 

*NetSales*.  Net sales inthe first nine months of 2003 were $55.9 million, a decrease of $9.2 million or14.0% compared to the first nine months of 2002.  The decrease was in both the Americas and International segments.

 

Americas net sales were $47.2 million, a decrease of$6.2 million or 11.5%.  In 2003, twomajor cable operators reduced purchases compared to the first nine months of2002.  One customer reduced purchases asa result of substantially completing its network upgrade program.  The second customer reduced purchases due todeterioration in its financial condition and the need to reduce spending.  These declines from cable customers werepartially offset by a 22% increase in sales from the Company’s largesttelephone customer, Verizon.  Inaddition, the first nine months of 2002 had higher sales because one of theCompany’s largest customers resumed capital spending in the second quarter of2002 after nearly shutting down purchases in the previous nine months as partof a company wide program to minimize capital expenditures.  The resumption of spending by this customerresulted in a significant increase in the Company’s sales in the first ninemonths of 2002.  The Americas segmentsold $1.5 million of slow moving inventory in the first nine months of 2002 aspart of the Company’s debt reduction program which also contributed to theperiod over period sales decline.  Therewere no material sales of slow moving inventory in the first nine months of2003.

 

International net sales were $8.7 million, a decreaseof $3.0 million or 25.4%.  The decreasein International sales was primarily in European markets and was due togenerally depressed industry conditions and lower sales of productssubsequently discontinued as part of the Company’s restructuring program.

 

Sales to Comcast of $14.8 million in the first ninemonths of 2003 represented 26.5% of Company sales in the period.  Comcast acquired AT&T’s broadband businessin the fourth quarter of 2002 thereby increasing its purchases from theCompany. The second largest customer in the first nine months of 2003 wasVerizon with sales of $6.1 million representing 10.9% of the total.  Sales to AT&T of $13.8 million in thefirst nine months of 2002 represented 21.2% of Company sales for the period.Combined AT&T/Comcast sales for the 2002 period were $16.6 million for25.4%.  Sales to Time Warner of $6.6million the first nine months of 2002 represented 10.1% of Company sales.

 

*GrossProfit.*  Gross profitin the first nine months of 2003 was $16.4 million, a decrease of $5.5 millionor 24.9%. The decrease is mainly due to the lower sales volume, which resultedin lower 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 which have lower gross profits thanenclosures that are manufactured internally and 2) a higher percentage ofconnectivity products that had a lower gross profit than thermoplasticenclosures.  The gross profit ofconnectivity products was affected by sales of new products whose manufactureis in the start up phase and thus current product costs are higher than thoseanticipated during full scale production. The unfavorable product mix was partially offset by the absence of salesof slow moving inventory in the first nine months of 2003.

 

As a percentage ofnet sales, gross profit decreased from 33.7% in the first nine months of 2002to 29.4% in the first nine months of 2003.  The reasons for the decrease are the same as those noted above for grossprofit dollars.

##  

## *Selling.* Selling expenses were $7.0 million in the first nine months of 2003,unchanged from the first nine months of 2002. An increase in freight costs, partly due to higher fuel prices and anincrease in full truckload shipments in which the Company pays the freightcosts, was offset by a decline in telecommunications costs and salaries.  As a percentage of net sales, sellingexpense increased from 10.7% in the 2002 period to 12.5% in the 2003 period.

 

*Generaland Administrative.* General and administrative expenses were $5.8 million in the first ninemonths of 2003, a decrease of $3.0 million or 34.4%.  The first nine months of 2002 included a $2.0 million charge toincrease the allowance for bad debt primarily as a result of the Chapter 11bankruptcy filing of Adelphia. Excluding the charge, general and administrative expense decreased by$1.0 million or 15.0%.  The decrease isdue to cost reductions in administrative functions primarily within theAmericas operations.  As a percentage ofnet sales, general and administrative expenses decreased from 13.5% in the 2002period to 10.3% in the 2003 period. Excluding the charge for bad debt, general and administrative expenseswere 10.4% in the 2002 period and 10.3% in the 2003 period.

 

11

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*Researchand Development.* Research and development expenses of $1.2 million in the first ninemonths of 2003 were unchanged from the first nine months of 2002.  As a percentage of net sales, research anddevelopment expenses increased from 1.9% in the first nine months of 2002 to2.1% in the first nine months of 2003.

 

*Incomefrom Operations.* Income from operations decreased from $4.9million in the first nine months of 2002 to $2.5 million in the first ninemonths of 2003, a decrease of $2.4 million or 49.5%.  The decline is primarily attributable to the lower level of netsales.  Income from operations as apercentage of sales decreased from 7.6% to 4.4%.

 

*InterestExpense, Net.*  Netinterest expense in the first nine months of 2003 was $0.4 million, a decreaseof $1.4 million or 75.8% from the first nine months of 2002.  The decrease was primarily attributable to alower debt level at more favorable interest rates.

 

*IncomeTaxes*. Income tax expense was $0.7 million in the first ninemonths of 2003 compared to $1.6 million in the first nine months of 2002.  The effective income tax rate of 35.7% inthe first nine months of 2003 compares to 52.8% in the same period of 2002.  The decline in tax rate is the result of achange in estimate of the research and development tax credit available tooffset the federal income tax liability for fiscal 2001, 2002 and the ninemonths ended September 30, 2003. The change in estimate reduced income tax expense for the nine monthperiod ended September 30, 2003 by $322.

 

**Comparisonof the Three Months Ended September 30, 2003 with the Three Months EndedSeptember 30, 2002**

### ** **

*NetSales*.  Net sales inthe third quarter of 2003 were $19.4 million, unchanged from the third quarterof 2002.

 

Americas sales were $16.8 million, an increase of $1.5million or 9.8%.  The increase is due tohigher sales of connectivity products to OEM customers and the resumption ofpurchases by Adelphia.  Adelphia hadreduced purchases in 2002 after filing for Chapter 11 bankruptcy.

 

International net sales were $2.6 million, a decreaseof $1.5 million or 35.3%.  The decreasein International sales was due primarily to generally depressed industryconditions.

 

Sales to Comcast of $5.0 million in the third quarterof 2003 represented 25.7% of Company sales in the period.  Comcast acquired AT&T’s broadbandbusiness in the fourth quarter of 2002 thereby increasing its purchases fromthe Company.  The second largestcustomer in the third quarter of was Verizon with sales of $2.0 millionrepresenting 10.4% of the Company’s sales. Sales to AT&T of $4.7 million in the third quarter of 2002represented 24.2% of Company sales. Combined AT&T/Comcast sales in thethird quarter of 2002 were $5.4 million or 28.1% of Company sales.

 

*GrossProfit.*  Gross profitin the third quarter of 2003 was $5.5 million, an increase of $0.1 million or1.5%.  The increase is due to slightlyhigher gross profit in the Americas segment as a result of the increased salesnoted above.

 

As a percentage ofnet sales, gross profit increased from 28.0% in the third quarter of 2002 to28.4% in the third quarter of 2003 due to the improvement in gross profit inthe Americas.

 

## *Selling.*  Selling expenses were $2.3 million in thethird quarter of 2003, an increase of $0.3 million or 16.7% from the thirdquarter of 2002.  The increase isprimarily due to higher freight costs in the Americas caused by an increase infuel costs and an increase in full truckload shipments in which the Companypays the freight costs.  As a percentageof net sales, selling expense increased from 10.4% in the 2002 period to 12.1%in the 2003 period.

 

*Generaland Administrative.* General and administrative expenses were $2.0 million in the thirdquarter of 2003 compared to $2.1 million for the third quarter of 2002.  As a percentage of net sales, general andadministrative expenses reduced from 11.1% in the 2002 period to 10.5% in the2003 period.

 

*Researchand Development.* Research and development expenses of $0.4 million in the third quarter of2003 were unchanged from the third quarter of 2002.  As a percentage of net sales, research and development expensesincreased from 1.9% to 2.1% quarter over quarter.

 

*Incomefrom Operations.* Income from operations decreased from $0.9 million in the third quarterof 2002 to $0.7 million in the current quarter, a decrease of $0.2 million or21.1%.  The decline is primarilyattributable to the higher selling expenses caused by increased freight costsfor shipping.

 

12

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*InterestExpense, Net.*  Netinterest expense in the third quarter of 2003 was $0.2 million, a decrease of$0.3 million or 63.7% from the third quarter of 2002.  The decrease was primarily attributable to a lower debt level atmore favorable interest rates.

 

*IncomeTaxes*.  Income taxexpense was ($0.001) million in the third quarter of 2003 compared to $0.3million in the third quarter of 2002. The effective income tax rate of (0.2%) in the third quarter of 2003compares to 63.4% in the same period of 2002. The decline in tax rate is the result of a change in estimate of theresearch and development tax credit available to offset the federal income taxliability for fiscal 2001, 2002 and the three months ended September 30,2003.  The change in estimate reducedincome tax expense for the three month period ended September 30, 2003 by$322.

 

 

**Liquidityand Capital Resources**

 

Net cash provided by operating activities was $4.6million for the nine months ended September 30, 2003, a decrease of $13.8million compared to the same period of last year.  The decrease in net cash provided by operating activities is dueprimarily to an income tax refund of $5.1 million and working capitalreductions in accounts receivable that provided $3.1 million of cash andinventory that provided $2.5 million in cash in the first nine months of 2002compared to no tax refund, a reduction in accounts receivable that provided$0.4 million of cash offset by an increase in inventory that used $0.9 millionin cash in the first nine months of 2003. The higher level of cash provided by operating activities in 2002 wasprimarily the result of actions taken as part of the Company’s restructuringand debt reduction program intended to generate cash.

 

Net accounts receivable remained constant at $10.2million at December 31, 2002 and September 30, 2003.  Days sales outstanding increased from 48days at December 31, 2002 to 50 days at September 30, 2003.

 

Inventories increased from $7.8 million atDecember 31, 2002 to $9.0 million at September 30, 2003.  Days inventory was 52 days atDecember 31, 2002 and 57 days at September 30, 2003.

 

Accounts payable reduced from $5.8 million atDecember 31, 2002 to $5.2 million at September 30, 2003.  Days payables was 34 days atDecember 31, 2002 and 36 days at September 30, 2003.

 

Net cash provided by investing activities was $1.4million in the first half of 2003 compared to $5.2 million in the same periodof 2002.  The Company sold a building inthe U.K. for $2.2 million in January of 2003 and completed asale/leaseback of a building in its U.S. facilities for $6.2 million inJune of 2002.

 

Net cash used in financing activities was $2.4 millionin the first nine months of 2003 compared to $29.5 million in the first ninemonths of 2002.  In both periods, theCompany repaid debt.

 

The cash and cash equivalents balance increased from$3.1 million at December 31, 2002 to $7.3 million at September 30,2003.

 

The Company entered into a three year Loan andSecurity Agreement with an asset-based lender on September 25, 2002. TheLoan and Security Agreement’s initial term loan balance of $4.7 million andinitial revolver balance of $2.1 million as well as $9.6 million in cash wereused to repay in full the prior Credit Agreement.  The three year termloan is repayable in quarterly payments based on a five-year amortizationschedule with a balloon repayment at maturity.  At September 30, 2003, the outstanding balance of the termloan was $4.0 million, with no outstanding balance in the revolver.

 

Under the Loan and Security Agreement, the outstandingbalance bears interest payable monthly at a variable rate based on either LIBORor the lender’s base rate. The weighted average interest rate under the Loanand Security Agreement at September 30, 2003 was 3.25%.

 

The Loan andSecurity Agreement contains various financial and operating covenants thatimpose limitations on the Company’s ability, among other things, to incuradditional indebtedness, merge or consolidate, sell assets except in theordinary course of business, make certain investments, enter into leases andpay dividends.  The Company is also required to comply with a fixed chargecoverage ratio financial covenant among others.  The Company was incompliance as of September 30, 2003 with the covenants of the Loan andSecurity Agreement.

 

The Company believes that cash flow from operationscoupled with borrowings under the Loan and Security Agreement will besufficient to fund the Company’s capital expenditure and working capitalrequirements through 2003.

 

13

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**Critical Accounting Policies**

 

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities.

 

We believe that the estimates, assumptions andjudgments involved in the accounting policies described in the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section of our most recent Annual Report on Form 10-K have the greatestpotential impact on our financial statements, so we consider these to be ourcritical accounting policies. Because of the uncertainty inherent in thesematters, actual results could differ from the estimates we use in applying thecritical accounting policies. Certain of these critical accounting policiesaffect working capital account balances, including the policies for revenuerecognition, the reserve for uncollectible accounts receivable and inventoryreserves. These policies require that we make estimates in the preparation ofour financial statements as of a given date.

 

Within the context of these critical accountingpolicies, we are not currently aware of any reasonably likely events or circumstancesthat would result in materially different amounts being reported.

 

 

**Forward-LookingStatements**

 

All statements contained in this quarterly report on Form 10-Q that arenot statements of historical facts constitute “forward-looking statements” andare made pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995. Any one or more of the expectations expressed inthese forward-looking statements may not be realized.  Although management believes that the expectations reflected inthese statements are reasonable, such statements involve certain risks,uncertainties and other factors that could cause the actual results of theCompany to be materially different from the historical results or from anyfuture results expressed or implied by such forward-looking statements.  These risks, uncertainties and other factorsinclude customer demand for the Company’s products, material costs that may beincurred, the Company’s ability to integrate acquired businesses, the effectivenessof the restructuring program commenced by the Company during the third quarterof 2001, the effectiveness of any additional restructuring programs that may beundertaken by the Company in the future, the mix of products that may be soldby the Company (i.e., whether the mix is dominated by higher margin enclosureproducts or lower margin connectivity products), economic trends within thetelecommunications industry and worldwide economic conditions generally.  Additional risks and uncertainties areoutlined in the Company’s filings with the Securities and Exchange Commission,including its most recent annual report on Form 10-K and its RegistrationStatement on Form S-1 under the heading “Risk Factors”.  The Company undertakes no obligation to publiclyrelease the results of any revisions to such forward-looking statements thatmay be made to reflect events or circumstances after the date hereof or toreflect the occurrence of unanticipated events.

 
| ITEM 3. |   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|---------|--------|------------------------------------------------------------|

 

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

 

The Company’s Loan and Security Agreement allows forthe outstanding balance to bear interest at a variable rate based on thelender’s base rate or LIBOR.  The creditfacility exposes the operations to changes in short-term interest rates sincethe interest rates on the credit facility are variable.

 

A hypothetical change of 1% in the interest rate forthese borrowings, assuming debt levels at September 30, 2003, would changeinterest expense by approximately $0.01 million for the three months endedSeptember 30, 2003.  This analysisdoes not consider the effects of economic activity on the Company’s sales andprofitability in such an environment.

 

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 isgenerally considered long-term. Accordingly, the Company does not hedge these 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 and other similar contracts to reduce its economic exposure to changesin exchange rates because the associated risk is not considered significant.

 

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| ITEM 4. |   | CONTROLS AND PROCEDURES |
|---------|--------|-------------------------|

 

Based on their evaluation as of the end of the fiscalquarter covered by this report (the “Evaluation Date”), the Company’s principalexecutive officer and principal financial officer have concluded that, as ofthe Evaluation Date, the Company’s disclosure controls and procedures (asdefined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934,as amended) are effective to ensure that material information relating to theCompany and its consolidated subsidiaries is recorded, processed, summarized,reported and made known to the Company’s management, including the Company’sprincipal executive and financial officers, on a timely basis by others withinthe Company and its consolidated subsidiaries.

 

To satisfy their responsibility for financialreporting, the Company’s CEO and CFO have established internal controls andprocedures which they believe are adequate to provide reasonable assurance thatthe Company’s assets are protected from loss. These internal controls arereviewed by the Company’s management in order to ensure compliance.  In addition, the Company’s Audit Committeemeets regularly with management and the independent accountants to reviewaccounting, auditing and financial matters. The Audit Committee and the independent accountants have free access toeach other, with or without management being present.

 

Subsequent to the Evaluation Date, there were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect the Company’s disclosure controls and procedures.

 

**PART II- OTHER INFORMATION**

 
| ITEM 1.     |   | LEGAL PROCEEDINGS |
|---------------------------------|--------|-------------------|

 

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

 
| ITEM 2. |   | CHANGES IN SECURITIES AND USE OF PROCEEDS |
|---------|--------|-------------------------------------------|

Not applicable.

 
| ITEM 3. |   | DEFAULTS UPON SENIOR SECURITIES |
|---------|--------|---------------------------------|

Not applicable.

 
| ITEM 4. |   |  SUBMISSION OF MATTERS TO A  VOTE OF SECURITY HOLDERS |
|---------|--------|------------------------------------------------------------|

Not applicable.

 
| ITEM 5. |   | OTHER INFORMATION |
|---------|--------|-------------------|

Not applicable.

 
| ITEM 6.     |   | EXHIBITS AND REPORTS ON FORM 8-K |
|---------------------------------|--------|----------------------------------|

 

(a)                                  Exhibits

 

 
| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |   | Restated Certificate of Incorporation of the Company  (1)                                                                                                                                                                                                                                                                                                                       |
| 3.2                 |   | Bylaws of the Company (1)                                                                                                                                                                                                                                                                                                                                                       |
| 4                   |   | Form of Common Stock Certificate (1)                                                                                                                                                                                                                                                                                                                                            |
| 10.1                |   | Tax Agreement between the Company and the Existing  Stockholders (1)                                                                                                                                                                                                                                                                                                            |
| 10.2.1              |   | Channell Commercial Corporation 1996 Incentive Stock  Plan (including form of Stock Option Agreements and Restricted Stock  Agreement) (1)                                                                                                                                                                                                                                      |
| 10.2.2              |   | Channell Commercial Corporation 2003 Incentive Stock  Plan (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) |

 

15

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| 10.4  |   | Employment Agreement between the Company and William  H. Channell, Sr. (1)                                                                                                                        |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5  |   | Employment Agreement between the Company and William  H. Channell, Jr. (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)                                                                             |
| 10.16 |   | Further Amendment to Employment  Agreement between the Company and William  H. Channell, Jr., dated July 15, 2002 (5)                                                                   |
| 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)                                                                                       |
| 31.1  |   | Certificate of Chief Executive Officer pursuant to  Rule 13a-14(a)/Rule 15d-14(a) under the Securities and Exchange Act of 1934.  (9)                                                             |
| 31.2  |   | Certificate of Chief Financial Officer pursuant to  Rule 13a-14(a)/Rule 15d-14(a) under the Securities and Exchange Act of 1934.  (9)                                                             |
| 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, Sr., CEO; and Thomas  Liguori, CFO. (9) |

 

(b)                                 Reports filed on Form 8-K in the third quarter of 2003.

 

On July 24, 2003, the Company filed a Form 8-K issuing a press release announcement of its financial results for the fiscal quarter ended June 30, 2003.

 

 

----

| (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) |   | Filed herewith.                                                                                                                                                |

 

16

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SIGNATURES

 

 

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

 

Dated:  November 4, 2003

 
|   |   |   |   |   | CHANNELL COMMERCIAL CORPORATION                                                  |                     |
|--------|--------|--------|--------|--------|----------------------------------------------------------------------------------|--------------------------|
|   |   |   |   |   | (Registrant)                                                                     |                     |
|   |   |   |   |   |                                                                             |
|   |   |   |   |   |                                                                             |
|   |   |   |   | By:    |                                                                             |  /s/ THOMAS LIGUORI |   |
|   |   |   |   |   | Thomas Liguori                                                                   |
|   |   |   |   |   | Chief Financial Officer                                                          |
|   |   |   |   |   | (Duly authorized officer and principal financial officer of the Registrant) |
|        |        |        |        |        |                                                                                  |                          |  |  |

 

17