** **

**UNITEDSTATES**

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

**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 June  30, 2004**                                                                                                           |
|       |       | ** **                                                                                                                                                  |
|       |       | **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)

 

**(951)719-2600**

(Registrant’s telephonenumber, including area code)

 

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

Yes  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

 

**9,302,774 shares of common stock of the Registrant wereoutstanding at August 6, 2004.**

** **

** **

----

** **

**PART1 –**                  FINANCIAL INFORMATION

** **

**ITEM 1.**                             FINANCIALSTATEMENTS

** **

**CHANNELLCOMMERCIAL CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

*(amountsin thousands, except per share data)*

 
| ** **                                                                               | ** ** | **Six months ended  June 30,** | ** ** | **Three months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                       | ** ** | **2003**                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Net sales                                                                                |       | $                              | 39,023     |                             | $          | 36,503 |   | $ | 21,303 |   | $ | 20,285 |   |
| Cost of goods  sold                                                                      |       | 27,751                         |       | 25,572                           |       | 15,375 |   | 13,836 |   |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Gross profit                                                                             |       | 11,272                         |       | 10,931                           |       | 5,928 |   | 6,449 |   |
| Operating  expenses                                                                      |       |                           |       |                             |       |   |   |   |   |
| Selling                                                                                  |       | 5,299                          |       | 4,647                            |       | 2,696 |   | 2,345 |   |
| General and  administrative                                                              |       | 3,827                          |       | 3,728                            |       | 1,739 |   | 1,876 |   |
| Research and  development                                                                |       | 1,065                          |       | 785                              |       | 563 |   | 390 |   |
|                                                                                     |       | 10,191                         |       | 9,160                            |       | 4,998 |   | 4,611 |   |
| Income from  operations                                                                  |       | 1,081                          |       | 1,771                            |       | 930 |   | 1,838 |   |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Interest  expense, net                                                                   |       | 150                            |       | 260                              |       | 89 |   | 139 |   |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Income before  income taxes                                                              |       | 931                            |       | 1,511                            |       | 841 |   | 1,699 |   |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Income taxes                                                                             |       | —                         |       | 731                              |       | (76 | ) | 631 |   |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Net income                                                                               |       | $                              | 931        |                             | $          | 780 |   | $ | 917 |   | $ | 1,068 |   |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Net income per  share                                                                    |       |                           |       |                             |       |   |   |   |   |
| Basic                                                                                    |       | $                              | 0.10       |                             | $          | 0.09 |   | $ | 0.10 |   | $ | 0.12 |   |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Diluted                                                                                  |       | $                              | 0.10       |                             | $          | 0.09 |   | $ | 0.10 |   | $ | 0.12 |   |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Net income                                                                               |       | $                              | 931        |                             | $          | 780 |   | $ | 917 |   | $ | 1,068 |   |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Other  comprehensive (loss) income, net of tax Foreign currency translation  adjustments |       | (581                           | )          | 1,202                            |       | (630 | ) | 732 |   |
|                                                                                     |       |                           |       |                             |       |   |   |   |   |
| Comprehensive  net income                                                                |       | $                              | 350        |                             | $          | 1,982 |   | $ | 287 |   | $ | 1,800 |   |

 

Theaccompanying notes are an integral part of these financial statements.

** **

**1**

----

** **

**CHANNELLCOMMERCIAL CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

*(amountsin thousands)*

 
| ** **                                                                                                                                                                                             | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                             | ** ** | **(Unaudited)**    | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                                                                                             |       |               |       |                   |       |
| **Current  assets**                                                                                                                                                                                    |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                             |       | $                  | 10,843     |                   | $          | 9,527 |   |
| Accounts  receivable, net                                                                                                                                                                              |       | 10,173             |       | 10,051                 |       |
| Inventories                                                                                                                                                                                            |       | 8,911              |       | 8,855                  |       |
| Deferred income  taxes                                                                                                                                                                                 |       | 812                |       | 876                    |       |
| Prepaid expenses  and misc. receivables                                                                                                                                                                |       | 1,044              |       | 996                    |       |
| Income taxes  receivable                                                                                                                                                                               |       | 752                |       | 102                    |       |
|                                                                                                                                                                                                   |       |               |       |                   |       |
| Total current  assets                                                                                                                                                                                  |       | 32,535             |       | 30,407                 |       |
|                                                                                                                                                                                                   |       |               |       |                   |       |
| **Property  and equipment at cost, net**                                                                                                                                                               |       | 16,228             |       | 17,164                 |       |
| **Deferred  income taxes**                                                                                                                                                                             |       | 5,119              |       | 5,277                  |       |
| **Intangible  assets, net**                                                                                                                                                                            |       | 591                |       | 613                    |       |
| **Other  assets**                                                                                                                                                                                      |       | 572                |       | 504                    |       |
|                                                                                                                                                                                                   |       |               |       |                   |       |
|                                                                                                                                                                                                   |       | $                  | 55,045     |                   | $          | 53,965 |   |
|                                                                                                                                                                                                   |       |               |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                         |       |               |       |                   |       |
| **Current  liabilities**                                                                                                                                                                               |       |               |       |                   |       |
| Accounts payable                                                                                                                                                                                       |       | $                  | 6,586      |                   | $          | 5,103 |   |
| Short term debt  (including current maturities of long term debt)                                                                                                                                      |       | 949                |       | 952                    |       |
| Current  maturities of capital lease obligations                                                                                                                                                       |       | 19                 |       | 57                     |       |
| Accrued  restructuring liability                                                                                                                                                                       |       | 1,914              |       | 2,857                  |       |
| Accrued expenses                                                                                                                                                                                       |       | 4,921              |       | 4,240                  |       |
|                                                                                                                                                                                                   |       |               |       |                   |       |
| Total current  liabilities                                                                                                                                                                             |       | 14,389             |       | 13,209                 |       |
|                                                                                                                                                                                                   |       |               |       |                   |       |
| **Long  term debt, less current maturities**                                                                                                                                                           |       | 2,356              |       | 2,830                  |       |
| **Capital  lease obligations, less current maturities**                                                                                                                                                |       | 121                |       | 67                     |       |
| **Deferred  gain on sale leaseback transaction**                                                                                                                                                       |       | 483                |       | 513                    |       |
| **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 - 9,372 shares  at December 31, 2003 and June 30, 2004; outstanding - 9,128 shares at  December 31, 2003 and June 30, 2004 |       | 94                 |       | 94                     |       |
| Additional  paid-in capital                                                                                                                                                                            |       | 28,664             |       | 28,664                 |       |
| Treasury stock -  244 shares at 2003 and 2004                                                                                                                                                          |       | (1,871             | )          | (1,871                 | )          |
| Retained  earnings                                                                                                                                                                                     |       | 11,401             |       | 10,470                 |       |
| Accumulated  other comprehensive loss - Foreign currency translation                                                                                                                                   |       | (592               | )          | (11                    | )          |
|                                                                                                                                                                                                   |       |               |       |                   |       |
| **Total  stockholders’ equity**                                                                                                                                                                   |       | 37,696             |       | 37,346                 |       |
|                                                                                                                                                                                                   |       |               |       |                   |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                                                   |       | $                  | 55,045     |                   | $          | 53,965 |   |

** **

Theaccompanying notes are an integral part of these financial statements.

** **

**2**

----

** **

**CHANNELLCOMMERCIAL CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

*(amountsin thousands)*

 
| ** **                                           | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| **Cash  flows from operating activities:**           |       |                           |       |   |   |
| Net income                                           |       | $                              | 931        |   | $ | 780 |   |
| Depreciation and  amortization                       |       | 2,297                          |       | 3,228 |   |
| Deferred income  taxes                               |       | 221                            |       | (100 | ) |
| (Gain) Loss on  disposal of fixed asset              |       | (20                            | )          | 109 |   |
| Amortization of  deferred gain on sale leaseback     |       | (30                            | )          | (30 | ) |
| Change in assets  and liabilities:                   |       |                           |       |   |   |
| (Increase)  decrease in assets:                      |       |                           |       |   |   |
| Accounts receivable                                  |       | (252                           | )          | (1,058 | ) |
| Inventories                                          |       | (200                           | )          | (940 | ) |
| Prepaid expenses                                     |       | (50                            | )          | 376 |   |
| Other                                                |       | (68                            | )          | (64 | ) |
| Income taxes  receivable                             |       | (640                           | )          | — |   |
| Increase  (decrease) in liabilities:                 |       |                           |       |   |   |
| Accounts payable                                     |       | 1,567                          |       | 101 |   |
| Accrued expenses                                     |       | 715                            |       | 479 |   |
| Restructuring  liability                             |       | (1,003                         | )          | (548 | ) |
| Income taxes  payable                                |       | —                         |       | 242 |   |
|                                                 |       |                           |       |   |   |
| Net cash  provided by operating activities           |       | 3,468                          |       | 2,575 |   |
|                                                 |       |                           |       |   |   |
| **Cash  flows from investing activities:**           |       |                           |       |   |   |
| Acquisition of  property and equipment               |       | (1,510                         | )          | (639 | ) |
| Proceeds from  the sales of property and equipment   |       | 24                             |       | 2,314 |   |
|                                                 |       |                           |       |   |   |
| Net cash (used  in) provided by investing activities |       | (1,486                         | )          | 1,675 |   |
|                                                 |       |                           |       |   |   |
| **Cash  flows from financing activities:**           |       |                           |       |   |   |
| Repayment of  debt                                   |       | (476                           | )          | (1,541 | ) |
| Repayment of  obligations under capital lease        |       | 27                             |       | (436 | ) |
| Exercise of  stock options                           |       | —                         |       | 5 |   |
|                                                 |       |                           |       |   |   |
| Net cash used in  financing activities               |       | (449                           | )          | (1,972 | ) |
|                                                 |       |                           |       |   |   |
| Effect of  exchange rates on cash                    |       | (217                           | )          | 303 |   |
|                                                 |       |                           |       |   |   |
| Increase in cash  and cash equivalents               |       | 1,316                          |       | 2,581 |   |
|                                                 |       |                           |       |   |   |
| Cash and cash  equivalents, beginning of period      |       | 9,527                          |       | 3,162 |   |
|                                                 |       |                           |       |   |   |
| Cash and cash  equivalents, end of period            |       | $                              | 10,843     |   | $ | 5,743 |   |
|                                                 |       |                           |       |   |   |
| **Cash  paid during the period for:**                |       |                           |       |   |   |
| Interest                                             |       | $                              | 106        |   | $ | 172 |   |
|                                                 |       |                           |       |   |   |
| Income taxes                                         |       | $                              | 601        |   | $ | 407 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

3

----

 

**CHANNELLCOMMERCIAL CORPORATION**

**NOTES TOC****ONSOLIDATED FINANCIALSTATEMENTS  (Unaudited)**

**June 30, 2004 and 2003**

*(amounts in thousands, except pershare data)*

* *

1.                       *Unaudited financialstatements.*  In the opinion ofmanagement, the accompanying unaudited consolidated financial statementscontain all adjustments necessary to present fairly the consolidated financialposition of Channell Commercial Corporation (the “Company”) as of June 30, 2004and the results of its operations for the three months and six months endedJune 30, 2004 and June 30, 2003 and its cash flows for the six months endedJune 30, 2004 and June 30, 2003.  Theresults of operations and cash flows for the six months ended June 30, 2004 arenot necessarily indicative of the results to be expected for any other interimperiod or the full year.  Theseconsolidated financial statements should be read in combination with theaudited consolidated financial statements and notes thereto for the year endedDecember 31, 2003.  

 

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

 
| ** **      | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------|------------|--------------------|------------|------------------------|------------|
|            |       |               |       |                   |       |
| Raw Materials   |       | $                  | 2,930      |                   | $          | 2,895 |   |
| Work-in-Process |       | 2,564              |       | 2,468                  |       |
| Finished Goods  |       | 3,417              |       | 3,492                  |       |
|            |       | $                  | 8,911      |                   | $          | 8,855 |   |

 

3.                       *Intangible Assets. *The balance of the intangibleassets on the Company’s balance sheet fluctuates from period to period due tothe application of foreign currency translation to United States dollars incalculating the balance of goodwill of our foreign subsidiaries.

 

4.                       *Income**per share.*  Basicincome per share excludes dilution and is computed by dividing net incomeavailable to common stockholders by the weighted average number of commonshares outstanding for the six month and three month periods ended June 30,2004 and 2003.  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 six month and threemonth periods ended June 30, 2004 and 2003 (shares in thousands):

 
| ** **                        | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------|------------|-------------------------------|------------|
| ** **                        | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| ** **                        | ** ** | **Shares**                    | ** ** | **Per Share  Amount** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
|                              |       |                          |       |   |   |   |   |   |   |
| Basic income per  share           |       | 9,128                         |       | $ | 0.10 |   | 9,125 |   | $ | 0.09 |   |
| Effect of  dilutive stock options |       | 14                            |       | — |   | 13 |   | — |   |
| Diluted income  per share         |       | 9,142                         |       | $ | 0.10 |   | 9,138 |   | $ | 0.09 |   |

 

The following optionswere not included in the computation of diluted income per share due to theirantidilutive effect.

 
| ** **                                  | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **2004**                      | ** ** | **2003** | ** ** |
|                                        |       |                          |       |   |   |
| Options to  purchase shares of common stock |       | 1,413                         |       | 101 |   |
| Exercise prices                             |       | $4.25 - $13.75                |       | $6.50 - $13.75 |   |
| Expiration dates                            |       | July 2006 - May 2014          |       | July 2006 - May 2012 |   |

 

4

----

 
| ** **                        | ** ** | **Three months ended June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| ** **                        | ** ** | **Shares**                      | ** ** | **Per Share  Amount** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
|                              |       |                            |       |   |   |   |   |   |   |
| Basic income per  share           |       | 9,128                           |       | $ | 0.10 |   | 9,126 |   | $ | 0.12 |   |
| Effect of  dilutive stock options |       | 6                               |       | — |   | 14 |   | — |   |
| Diluted income  per share         |       | 9,134                           |       | $ | 0.10 |   | 9,140 |   | $ | 0.12 |   |

 

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

 
| ** **                                  | ** ** | **Three months ended June 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **2004**                        | ** ** | **2003** | ** ** |
|                                        |       |                            |       |   |   |
| Options to  purchase shares of common stock |       | 1,473                           |       | 101 |   |
| Exercise prices                             |       | $4.25 - $13.75                  |       | $6.50 - $13.75 |   |
| Expiration dates                            |       | July 2006 - May 2014            |       | July 2006 - May 2012 |   |

 

In February 2003,the Company offered current employees and non-employee directors an opportunityto exchange their outstanding 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 of 1,324,090new options were exchanged for options cancelled in March 2003.

 

5.                       *Stock Based Compensation.* Statement of Financial Accounting StandardsNo. 148, “*Accounting for Stock Based Compensation –Transition and Disclosure on Amendment of SFAS 123*“, encourages,but does not require, companies to record compensation cost for stock-basedemployee compensation plans at fair value. The Company has chosen to continue to account for stock-basedcompensation using the intrinsic value method prescribed in previously issuedstandards.  Accordingly, compensationcost for stock options is measured as the excess, if any, of the quoted marketprice of the Company’s stock at the date of grant over the amount an employeemust pay to acquire the stock.

 

Pursuant to theexchange offer described in Note 4 above, participating eligible option holderswere granted a new option for each old cancelled option.  For each new option granted, the vestingstatus and vesting schedule of the old option was preserved.  The weighted average fair value of theoptions issued in September 2003 was $1.91. The weighted average exercise price was $4.84.

 

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:

 
| ** **                                                                      | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                      | ** ** | **2003** | ** ** |
|                                                                            |       |                          |       |   |   |
| Reported net  income (in thousands)                                             |       | $                             | 931        |   | $ | 780 |   |
| Less expense  determined under fair value accounting for all awards, net of tax |       | $                             | 221        |   | $ | 52 |   |
| Proforma net  income (in thousands)                                             |       | $                             | 710        |   | $ | 728 |   |
|                                                                            |       |                          |       |   |   |
| Reported basic  and diluted net income per share                                |       | $                             | 0.10       |   | $ | 0.09 |   |
| Less expense  determined under fair value accounting for all awards, net of tax |       | $                             | 0.02       |   | $ | 0.01 |   |
| Proforma basic  and diluted net income per share                                |       | $                             | 0.08       |   | $ | 0.08 |   |

 

5

----

 
| ** **                                                                      | ** ** | **Three months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                        | ** ** | **2003** | ** ** |
|                                                                            |       |                            |       |   |   |
| Reported net  income (in thousands)                                             |       | $                               | 917        |   | $ | 1,068 |   |
| Less expense  determined under fair value accounting for all awards, net of tax |       | $                               | 111        |   | $ | 46 |   |
| Proforma net  income (in thousands)                                             |       | $                               | 806        |   | $ | 1,022 |   |
|                                                                            |       |                            |       |   |   |
| Reported basic  and diluted net income per share                                |       | $                               | 0.10       |   | $ | 0.12 |   |
| Less expense  determined under fair value accounting for all awards, net of tax |       | $                               | 0.01       |   | $ | 0.01 |   |
| Proforma basic  and diluted net income per share                                |       | $                               | 0.09       |   | $ | 0.11 |   |

 

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

 
| ** **               | ** ** | **Periods ended June 30,** | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **2004**                   | ** ** | **2003** | ** ** |
|                     |       |                       |       |   |   |
| Expected life  (years)   |       | 5 years                    |       | 5 years |   |
| Risk-free  interest rate |       | 3.50                       | %          | 3.00 | % |
| Expected  volatility     |       | 40                         | %          | 40 | % |
| Expected  dividend yield |       | —                     |       | — |   |

 

6.               *        Segments*.  The Company’s predominant business is themanufacturing and distribution of telecommunications equipment.  There are two segments:  Americas and International.  Americas includes the United States, Centraland South America and Canada. International includes Europe, Africa, Middle East, Australia and Asia.  The following table summarizes segmentinformation for the six months and three months ended June 30, 2004 and 2003(in thousands):

 
| ** **                               | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **2004**                      | ** ** | **2003** | ** ** |
|                                     |       |                          |       |   |   |
| Revenues from  unrelated entitities (1): |       |                          |       |   |   |
| Americas                                 |       | $                             | 32,782     |   | $ | 30,456 |   |
| International                            |       | 6,241                         |       | 6,047 |   |
|                                     |       | $                             | 39,023     |   | $ | 36,503 |   |
|                                     |       |                          |       |   |   |
| Income (loss)  from operations:          |       |                          |       |   |   |
| Americas                                 |       | $                             | 2,295      |   | $ | 2,490 |   |
| International                            |       | (1,214                        | )          | (719 | ) |
|                                     |       | $                             | 1,081      |   | $ | 1,771 |   |
|                                     |       |                          |       |   |   |
| Interest  expense, net:                  |       |                          |       |   |   |
| Americas                                 |       | $                             | 27         |   | $ | 15 |   |
| International                            |       | 123                           |       | 245 |   |
|                                     |       | $                             | 150        |   | $ | 260 |   |

 

6

----

 
| ** **                               | ** ** | **Three months ended June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **2004**                        | ** ** | **2003** | ** ** |
|                                     |       |                            |       |   |   |
| Revenues from  unrelated entitities (1): |       |                            |       |   |   |
| Americas                                 |       | $                               | 17,772     |   | $ | 17,387 |   |
| International                            |       | 3,531                           |       | 2,898 |   |
|                                     |       | $                               | 21,303     |   | $ | 20,285 |   |
|                                     |       |                            |       |   |   |
| Income (loss)  from operations:          |       |                            |       |   |   |
| Americas                                 |       | $                               | 1,514      |   | $ | 1,995 |   |
| International                            |       | (584                            | )          | (157 | ) |
|                                     |       | $                               | 930        |   | $ | 1,838 |   |
|                                     |       |                            |       |   |   |
| Interest  expense, net:                  |       |                            |       |   |   |
| Americas                                 |       | $                               | 30         |   | $ | 22 |   |
| International                            |       | 59                              |       | 117 |   |
|                                     |       | $                               | 89         |   | $ | 139 |   |

 

----

(1) Note:  Revenues from any individual foreign countrydid not exceed 10% of total revenues for the period.

 

The Company has revenues from external customers fromthe following product lines:  

 
| ** **    | ** ** | **Six months ended June 30,** | ** ** |
|---------------|------------|-------------------------------|------------|
| ** **    | ** ** | **2004**                      | ** ** | **2003** | ** ** |
|          |       |                          |       |   |   |
| Product lines |       |                          |       |   |   |
| Enclosures    |       | $                             | 31,166     |   | $ | 28,862 |   |
| Connectivity  |       | 4,076                         |       | 3,622 |   |
| Other         |       | 3,781                         |       | 4,019 |   |
|          |       | $                             | 39,023     |   | $ | 36,503 |   |

 
| ** **    | ** ** | **Three months ended June 30,** | ** ** |
|---------------|------------|---------------------------------|------------|
| ** **    | ** ** | **2004**                        | ** ** | **2003** | ** ** |
|          |       |                            |       |   |   |
| Product lines |       |                            |       |   |   |
| Enclosures    |       | $                               | 16,344     |   | $ | 15,880 |   |
| Connectivity  |       | 2,444                           |       | 1,828 |   |
| Other         |       | 2,515                           |       | 2,577 |   |
|          |       | $                               | 21,303     |   | $ | 20,285 |   |

 

The Company has identifiable assets in the followinggeographic regions:  

 
| ** **            | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------|------------|--------------------|------------|------------------------|------------|
| ** **            | ** ** | **(Unaudited)**    | ** ** | ** **             | ** ** |
| Identifiable  Assets: |       |               |       |                   |       |
| Americas              |       | $                  | 47,153     |                   | $          | 40,949 |   |
| International         |       | 7,892              |       | 13,016                 |       |
|                  |       | $                  | 55,045     |                   | $          | 53,965 |   |

 

7

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7.               *        Recent AccountingPronouncements*.  In January2003, the Financial Accounting Standards Board (“FASB”) issued InterpretationNo. 46, “Consolidation of Variable Interest Entities - an interpretation of ARB51” (“FIN 46”), which subsequently has been revised by FIN 46-R. The primaryobjectives of FIN 46-R are to provide guidance on the identification ofentities for which control is achieved through means other than through votingrights (variable interest entities or VIEs) and how to determine when and whichbusiness enterprises should consolidate the VIE (as the primary beneficiary).This new model for consolidation applies to an entity in which either (1) theequity investors (if any) do not have a controlling financial interest or (2)the equity investment at risk is insufficient to finance that entity’sactivities without receiving additional subordinated financial support fromother parties. In addition, FIN 46-R requires that both the primary beneficiaryand all other enterprises with a significant variable interest in a VIE makeadditional disclosures. FIN 46-R is effective for VIEs created after January31, 2003 and is effective for all VIEs created before February 1, 2003 that areSpecial Purpose Entities (SPEs) in the first reporting period ending afterDecember 15, 2003 and for all other VIEs created before February 1, 2003 in thefirst reporting period ending after March 15, 2004. The Company believes thereare no entities qualifying as VIEs and the adoption of FIN 46-R to date has nothad any effect on the Company’s financial position, cash flows or results ofoperations.

 

InMarch 2004, The Securities and Exchange Commission (“SEC”) issued StaffAccounting Bulletin 104 “Revenue Recognition” (“SAB 104”), an update to theguidance in SAB 101 “Revenue Recognition in Financial Statements” 101 (codifiedin Topic 13: “Revenue Recognition”).  Theprimary objectives of SAB 104 are to reflect the issuance of EITF Issue 00-21,“Revenue Arrangements with Multiple Deliverables”, to delete the guidance onreporting revenues gross as a principal or net as an agent because EITF Issue99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, and torescind SAB 101 “Revenue Recognition in Financial Statements - Frequently AskedQuestions and Answers (FAQ)” and incorporate selected portions of the FAQ intoTopic 13.  The FAQ permitted registrants to elect a policy of notrecognizing any revenue on equipment sold on an installed basis untilinstallation is complete.  Because EITF Issue 00-21 requires revenuearrangements with multiple deliverables to be divided into separate units ofaccounting if certain criteria are met, this election is no longer available toregistrants upon adoption of EITF Issue 00-21. The Company believes that SAB104 has not had any effect on Company’s financial position, cash flows, orresults of operations,

 

8.     *        RestructuringCharges*.  In the fourthquarter of 2002, the Company announced a restructuring plan to rationalizeinternational manufacturing operations. As part of the plan, various manufacturing operations in theInternational *segment* were either consolidatedor outsourced.  The management of allInternational operations was consolidated under the Managing Director,International.  The restructuring chargetotaled $1,228.  The principal actions inthe restructuring plan involved the closure of facilities and a reduction inhead count.

 

In the fourth quarter of2003, the Company further evaluated International operations to improveprofitability.   A plan was developed toclose a manufacturing facility in International operations by mid-year2004.  As part of the plan, there is areduction of approximately 31 employees in the International operations.  There were 25 employees severed in the secondquarter of 2004, and $153 severance payments were made. The restructuringcharge totaled $1,565.  The principalcomponents of the 2003 restructuring charge involved the closure of facilitiesand 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 for restructuringcharges during 2004 are summarized in the table below:

 
| ** **                                              | ** ** | **Facilities** | ** ** | **Workforce  Reduction** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|----------------|------------|--------------------------|------------|-----------|------------|
|                                                    |       |           |       |                     |       |      |       |
| Restructuring  accrual balance at March 31, 2004        |       | $              | 2,046      |                     | $          | 219       |       | $ | 2,265 |   |
|                                                    |       |           |       |                     |       |      |       |
| Costs incurred  in the three months ended June 30, 2004 |       | 198            |       | 153                      |       | 351       |       |
|                                                    |       |           |       |                     |       |      |       |
| Restructuring  accrual balance at June 30, 2004         |       | $              | 1,848      |                     | $          | 66        |       | $ | 1,914 |   |

 

9.                       *Sale LeasebackArrangement.*  In January,2003, the Company sold a facility located in Orpington Kent, UnitedKingdom.  The proceeds from the saletotaled $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. Included in the proceeds was prepaid rent for one year which totaled$213.  The resulting lease is beingaccounted for as an operating lease.

 

In June, 2002, theCompany entered into a sale and leaseback agreement for a warehouse facility locatedin Temecula, California.  The proceedsfrom the sale totaled approximately $6,200 and resulted in a pretax deferredgain of $604.  The

 

8

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resulting lease is being accounted for as an operatinglease.  The lease base term is ten yearswith two five-year options at rental amounts to be adjusted to the fair marketrental value at the end of the base term. A portion of the proceeds from the sale was used to pay the outstandingmortgage balance on the facility of $4,036. As of June 30, 2004 the unamortized balance of the deferred gain is$483.

 

10.           *Income Taxes*.  In the second quarter of fiscal 2004, theCompany commissioned an independent appraisal of a subsidiary in the UnitedKingdom.  This appraisal follows theCompany’s announcement in February 2004 to close the European manufacturingoperations.  Based on the independentappraisal, the Company concluded that the subsidiary was insolvent as of June30, 2004 and therefore met the requirements of an ordinary worthless stockdeduction under the Internal Revenue Code. The amount of the worthless stock deduction is approximately $8,000 witha corresponding federal income tax benefit of approximately $2,700.  The Company has an effective tax rate of 0.0%for the six month ended June 30, 2004. This differs from the federal statutory rate of 34.0% primarily due tothe subsidiary stock deduction described above offset by foreign operatinglosses incurred without a tax benefit recorded and in increase in the Company’svaluation allowance against the deferred tax assets.  The Company increased its valuation allowanceas of June 30, 2004 due to the uncertainty of generating future taxable incomeduring the periods in which the taxable temporary differences are expected toreverse, including the net operating loss carryforwards.   The Company’s effective tax rate for thethree months ended June 30, 2004 of (9.0%) also reflects the reversal of theFederal income tax liability of approximately $100 recorded as of March 31,2004.  The determination of thesubsidiary stock deduction in the second quarter of 2004 resulted in areduction in the tax liability recorded as of March 31, 2004.

 

The Federal income taxesof the Company for the years ended December 31, 1997, 1998, 2000, and 2001 arecurrently under examination by the Internal Revenue Service (IRS).  In July 2002, the IRS issued the proposedresult of their examination for the years ended December 31, 1997 and 1998,which increases the 1997 income tax amount due by $315 related to transferpricing for sales to the Company’s Canadian subsidiary.  In November 2003, the IRS agreed to reducethe transfer pricing assessment for the 1997 and 1998 tax years to $19 whichwas accrued at December 31, 2003. Management believes that the ultimate outcome of IRS audits for theyears ended 2000 and 2001 will not have a material adverse impact on theCompany’s consolidated results of operations or financial position.

 

11.           *Commitments andContingencies. *In 2001, theState of Texas issued a report assessing the Company additional sales and usetax of $1,600, including interest.  TheCompany has appealed the assessment and is currently providing the State ofTexas with documentation to support the Company’s contention that the transactionsdid not require the Company to remit sales and use tax to the State of Texas.The State of Texas has agreed to a reduction of the amount owed to $600.  The Company has paid the State of Texas $400.  The Company believes that it has meritoriousdefenses to the remaining claim of $200 and intends to vigorously defend itsposition.  The Company believes that theultimate outcome of this examination will not result in a material impact onthe Company’s consolidated results of operations or financial position.

 

12.           *Related PartyTransactions. *In May 2002,the Company sold its RF line of passive electronic devices to RMSCommunications, Inc., which is owned by Gary Napolitano, a former officer ofthe 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 interest at7% per annum.  The amount due from RMS Communications,Inc. included in accounts receivable at June 30, 2004 is $320.  The account is currently in arrears.  The Company has a security interest in theinventory and a personal guarantee from Mr. Napolitano and believes the amountwill be paid in full.

 

13.           *Concentrations.*  Sales to Comcast of $8.6 million in the firstsix months of 2004 represented 22.1% of Company sales in the period.  Sales to Comcast of $9.8 million in the firstsix months of 2003 represented 26.8% of Company sales for the period.  The second largest customer in the first sixmonths of 2004 was Verizon with sales of $5.4 million representing 13.7% of thetotal.  Sales to Verizon of $4.0 millionin the first six months of 2003 represented 11.0% of Company sales.  Sales to Comcast of $5.0 million in thesecond quarter of 2004 represented 23.3% of Company sales in the period.  Sales to Comcast of $5.7 million in thesecond quarter of 2003 represented 28.1% of Company sales for the period.  The second largest customer in the secondquarter of 2004 was Verizon with sales of $3.7 million representing 17.4% ofthe total.  Sales to Verizon of $2.5million in the second quarter of 2003 represented 12.3% of Company sales.

 

14.           *Guarantees.*  In 1997, the Company guaranteed debt of theCompany’s principal stockholder and Chairman of the Board of approximately$754.  The guaranteed debt was incurredin connection with construction of the facilities leased to the Company and iscollateralized by said facilities.  Theloan amount subject to the unsecured guarantee is expected to decline beforeexpiring in 2017. It is not practicable to estimate the fair value of theguarantee; however, the Company does not anticipate that it will incur lossesas a result of this guarantee.  TheCompany has not recorded a liability for this guarantee.  If the principal stockholder were to defaulton the outstanding loan balance, the Company may be required to repay theremaining principal balance. The maximum potential amount the Company would berequired to pay is equal to

 

9

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the outstanding principal and interest balance of the loan to thestockholder.  At June 30, 2004, theoutstanding loan balance subject to the guarantee totaled $597.

 

15.           *Subsequent Events.*  On August 2, 2004, the Company, through amajority-owned subsidiary, acquired a controlling interest in Bushman Tanks,Australia’s largest manufacturer and distributor of rotational molded plastic(polyethylene) water storage tanks. Assets acquired included, among others, plant and equipment, inventory,accounts receivable, and intellectual property. The purchase price was $16.1 million subject to a working capitaladjustment.  An additional $1.4 millionis payable to the sellers in the event that the Bushman Tanks business achievesspecified performance targets in 2005 and 2006.

 

The $16.1 million purchase price consisted of $7.3million in cash contributed by the Company, 175,113 shares of the Company’scommon stock valued at $0.6 million, a $5.6 million term loan from The NationalAustralia Bank Ltd, one of Australia’s leading financial institutions, and $2.6million in cash contributed by ANZ Private Equity, a unit of Australia and NewZealand Banking Group Ltd.  As a resultof the transaction, the Company acquired a 75% equity interest in BushmanTanks, and ANZ Private Equity acquired the remaining 25%.  Bushman Tanks’ results will be consolidatedin the Company’s financial statements, which will also reflect a minorityinterest for ANZ Private Equity’s ownership position.

 

In determining the purchase price, the Companyconsidered, among other factors, comparable transactions and valuations and theexpected contribution to its earnings. The Company will include the results of operations for Bushman Tanksbeginning as of the date of acquisition, August 2, 2004.

 

10

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

** **

 

**Results of Operations**

 

**Comparison of the Six Months Ended June 30, 2004with the Six Months Ended June 30, 2003**

 

*Net Sales*.  Net sales in the first six months of 2004were $39.0 million, an increase of $2.5 million or 6.9% compared to the firstsix months of 2003.

 

Americas net sales were $32.8 million in the first sixmonths of 2004, an increase of $2.3 million or 7.6%.  The increase was due to higher sales to amajor telephone customer, growth in metal enclosures and connectivity OEM salesand improved weather conditions compared to the first six months of 2003.

 

International net sales were $6.2 million,**an increase of $0.2 million or 3.2%.  The increase is due to growth in sales totelephone customers in Asia.

 

Sales to Comcast of $8.6 million in the first sixmonths of 2004 represented 22.1% of Company sales in the period.  Sales to Comcast of $9.8 million in the firstsix months of 2003 represented 26.8% of Company sales for the period.  The second largest customer in the first sixmonths of 2004 was Verizon with sales of $5.4 million representing 13.7% of thetotal.  Sales to Verizon of $4.0 millionin the first six months of 2003 represented 11.0% of Company sales.

 

*Gross Profit*.  Gross profit in the first six months of 2004was $11.3 million, an increase of $0.3 million or 3.1%. The improvement was dueto the higher sales volume in the Americas, which resulted in highermanufacturing production rates and higher overhead absorption.

 

As a percentage of net sales, gross profit decreasedfrom 29.9% in the first six months of 2003 to 28.9% in the first six months of2004.    The decline is due primarily toincreased raw material costs for plastic and steel.

 

*Selling*.  Selling expenses were $5.3 million in thefirst six months of 2004, an increase of $0.7 million or 14.0% from the firstsix months of 2003.  The increase is dueto higher freight and sales commissions as a result of the increased salesrevenue.  The freight cost increase isalso due to an increase in full truckload shipments to customers in which theCompany pays the freight cost.

 

As a percentage of net sales, selling expenseincreased from 12.7% in the 2003 period to 13.6% in the 2004 period.  The higher percentage is primarily due to theincrease in freight costs.

 

*General and Administrative*.  General and administrative expenses were $3.8million in the first six months of 2004, an increase of $0.1 million or2.7%.  The increase is primarily due tocosts incurred by the Company to evaluate opportunities to grow and diversifythe Company’s business operations.

 

As a percentage of net sales, general andadministrative expense decreased from 10.2% in the 2003 period to 9.8% in the2004 period.

 

*Research and Development*.  Research and development expenses were $1.1million in the first six months of 2004, an increase of $0.3 million or 35.7%from the first six months of 2003.  Theincrease is due to spending on new product development programs, primarily fortelephone connectivity products and thermoplastic enclosures for cablecustomers.

 

As a percentage of net sales, research and developmentexpenses increased from 2.2% in the first six months of 2003 to 2.7% in thefirst six months of 2004.

 

*Income from Operations*.  Income from operations decreased from $1.8million in the first six months of 2003 to $1.1 million in the first six monthsof 2004.  The decline is primarily due tohigher costs for raw materials, freight and sales commissions and the increasedlevel of R&D spending for new product development.  Income from operations as a percentage ofsales decreased from 4.9% to 2.8%.

 

*Interest Expense, Net*.  Net interest expense was $0.3 million in thefirst six months of 2003 and $0.2 million in the first six months of 2004.   The decrease is due to the lower level ofdebt.

 

*Income Taxes*.  Income tax expense was $0.7 million in thefirst six months of 2003 and $0.0 million in the first six months of 2004.  The effective tax rate was (0.0)% in thefirst six months of 2004 and 48.4 % for the same period in 2003.  The decline is due to an ordinary worthless stockdeduction in 2004 offset by an increase in the valuation allowance.

 

11

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**Comparison of the Three Months Ended June 30, 2004with the Three Months Ended June 30, 2003**

 

*Net Sales*.  Net sales in the second quarter of 2004 were$21.3 million, an increase of $1.0 million or 5.0% compared to the secondquarter of 2003.

 

Americas net sales were $17.8 million in the secondquarter of 2004, an increase of $0.4 million or 2.2%.  The increase was primarily due to highersales to a major telephone customer.

 

International net sales were $3.5 million, an increaseof $0.6 million or 21.8%.  The increaseis due to increased sales to telephone customers in Asia.

 

Sales to Comcast of $5.0 million in the second quarterof 2004 represented 23.3% of Company sales in the period.  Sales to Comcast of $5.7 million in thesecond quarter of 2003 represented 28.1% of Company sales for the period.  The second largest customer in the secondquarter of 2004 was Verizon with sales of $3.7 million representing 17.4% ofthe total.  Sales to Verizon of $2.5million in the second quarter of 2003 represented 12.3% of Company sales.

 

*Gross Profit*.  Gross profit in the second quarter of 2004was $5.9 million, a decrease of $0.5 million or 8.1%.   The decline is due primarily to higher rawmaterial costs for plastic and steel.

 

As a percentage of net sales, gross profit decreasedfrom 31.8% in the second quarter of 2003 to 27.8% in the second quarter of2004.   The reason for the increase isthe same as that noted above for gross profit dollars.

 

*Selling*.  Selling expenses were $2.7 million in thesecond quarter of 2004, an increase of $0.4 million or 15.0% from the secondquarter of 2003.  The increase is due tohigher freight and sales commissions as a result of the increased salesrevenue.  The freight cost increase isalso due to an increase in full truckload shipments to customers in which theCompany pays the freight cost.

 

As a percentage of net sales, selling expenseincreased from 11.6% in the 2003 period to 12.7% in the 2004 period.  The higher percentage is primarily due to theincrease in freight costs.

 

*General and Administrative*.  General and administrative expenses were $1.7million in the second quarter of 2004, a decrease of $0.1 million or 7.3%.  The decrease is primarily due to costreductions that were implemented in the Americas business operations.

 

As a percentage of net sales, general andadministrative expense decreased from 9.2% in the 2003 period to 8.2% in the2004 period.

 

*Research and Development*.  Research and development expenses were $0.6million in the second quarter of 2004, an increase of $0.2 million or 44.4%from the second quarter of 2003.  Theincrease is due to spending on new product development programs, primarily fortelephone connectivity products and thermoplastic enclosures for cablecustomers.

 

As a percentage of net sales, research and developmentexpenses increased from 1.9% in the second quarter of 2003 to 2.6% in thesecond quarter of 2004.

 

*Income from Operations*.  Income from operations decreased from $1.8million in the second quarter of 2003 to $0.9 million in the second quarter of2004.  The decline is primarily due tohigher costs for raw materials, freight, sales bonuses, sales commissions andthe increased level of R&D spending for new product development.  Income from operations as a percentage ofsales decreased from 9.1% to 4.4%.

 

*Interest Expense, Net*.  Net interest expense was $0.1 million in thesecond quarter of 2004, the same as the second quarter of 2003.

 

*Income Taxes*.  Income tax expense was $0.6 million in thesecond quarter of 2003 and $(0.1) million in the second quarter 2004.  The effective tax rate was (9.0)% in thesecond quarter of 2004 and 37.1% for the same period in 2003.  The decline is due to an ordinary worthlessstock deduction in 2004 offset by an increase in the valuation allowance.  The Company’s effective tax rate of (9.0)%also reflects the reversal of the Federal income tax liability of approximately$0.1 million recorded as of March 31, 2004.

 

12

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**Liquidity and Capital Resources**

 

Net cash provided by operating activities was $3.5million for the six months ended June 30, 2004, an increase of $0.9 millionfrom the same period of last year.  Theincrease in net cash provided by operating activities of $0.9 million is dueprimarily to lower increases in accounts receivable and inventories and alarger increase in accounts payable.

 

Net accounts receivable increased to $10.2 million atJune 30, 2004 from $10.1 million at December 31, 2003.  Days sales outstanding decreased from 50 daysat December 31, 2003 to 46 days at June 30, 2004.

 

Inventories were $8.9 million at June 30, 2004,unchanged from December 31, 2003.  Daysinventory was 59 days at December 31, 2003 and 58 days at June 30, 2004.

 

Accounts payable increased from $5.1 million atDecember 31, 2003 to $6.6 million at June 30, 2004.  Days payables were 35 days at December 31,2003 and 35 days at June 30, 2004.

 

Net cash used by investing activities was $1.5 millionin the first half of 2004 compared to net cash provided by investing activitiesof $1.7 million in the same period of 2003. The Company sold a building in the U.K. for $2.2 million in January of2003.

 

Net cash used in financing activities was $0.5 millionin the first six months of 2004 compared to $2.0 million in the first sixmonths of 2003.  The Company repaid debtin both periods.

 

The cash and cash equivalents balance was $10.8million at June 30, 2004, up $1.3 million from $9.5 million at December 31,2003.

 

The Board of Directors, on April 1, 1998, havingdetermined such action to be in the best interest of the Company, authorized astock repurchase plan of up to $2.0 million worth of Company stock. The planwas subsequently increased to $2.75 million by the Board on December 1,2000.  The Company repurchased 22,985shares at a cost of approximately $0.2 million in 1999; 30,900 shares of itscommon stock at a cost of approximately $0.2 million in 2000; and 52,300 sharesof its common stock at a cost of $0.3 million in 2001. The Company did notrepurchase stock in 2002 or 2003, or in the first half of 2004.

 

The Company entered into a three year Loan andSecurity Agreement with an asset-based lender on September 25, 2002. The Loanand Security Agreement’s initial term loan balance of $4.7 million and initialrevolver balance of $2.1 million as well as $9.6 million in cash were used torepay in full the prior Credit Agreement.  The three year term loan isrepayable in quarterly payments based on a five-year amortization schedule witha balloon repayment at maturity.  At June30, 2004, the outstanding balance of the term loan was $3.3 million, with nooutstanding 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 weightedaverage interest rate under the Loan and Security Agreement at June 30, 2004was 3.0%.

 

The Loan and Security Agreement contains variousfinancial and operating covenants that impose limitations on the Company’sability, among other things, to incur additional indebtedness, merge orconsolidate, sell assets except in the ordinary course of business, makecertain investments, enter into leases and pay dividends.  The Company isalso required to comply with a fixed charge coverage ratio financial covenantamong others.  The Company was in compliance as of June 30, 2004 with thecovenants of the Loan and Security 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 2004.

 

13

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**Contractual Obligations and Other Commitments**

 

The following table summarizes the Company’scontractual obligations and other commitments as of June 30, 2004:

 
| ** **                       | ** ** | **2004** | ** ** | **2005  to 2006** | ** ** | **2007  to 2008** | ** ** | **2009 and  Thereafter** | ** ** | **Total** | ** ** |
|----------------------------------|------------|----------|------------|-------------------|------------|-------------------|------------|--------------------------|------------|-----------|------------|
| Contractual  Obligations         |       |     |       |              |       |              |       |                     |       |      |       |
|                             |       |     |       |              |       |              |       |                     |       |      |       |
| Long Term Debt  (1)              |       | $        | 952        |              | $          | 2,356             |       | $                        | —     |      | $          | — |   | $ | 3,308 |   |
|                             |       |     |       |              |       |              |       |                     |       |      |       |
| Capital Lease  Obligations       |       | 42       |       | 118               |       | —            |       | —                   |       | 160       |       |
|                             |       |     |       |              |       |              |       |                     |       |      |       |
| Operating Lease  Obligations (2) |       | 2,728    |       | 3,223             |       | 2,188             |       | 2,673                    |       | 10,812    |       |
|                             |       |     |       |              |       |              |       |                     |       |      |       |
| Employment  Contracts (3)        |       | 768      |       | 1,483             |       | 1,018             |       | —                   |       | 3,269     |       |
|                             |       |     |       |              |       |              |       |                     |       |      |       |
| Purchase  Obligations (4)        |       | 7,125    |       | —            |       | —            |       | —                   |       | 7,125     |       |
|                             |       | $        | 11,615     |              | $          | 7,180             |       | $                        | 3,206      |      | $          | 2,673 |   | $ | 24,674 |   |

 

----

(1)   The Company entered into athree year Loan and Security Agreement with an asset-based lender on September25, 2002.

(2)   The Company leasesmanufacturing and office space and machinery and equipment under severaloperating leases expiring through 2012.

(3)   The Company has employmentagreements with its Chairman of the Board expiring July 7, 2006 and itsPresident and Chief Executive Officer expiring December 8, 2008.  Both contracts are renewable every 5years.  The Chairman of the Board’ssalary is set at $50,000 per annum for the remainder of the term.  The President and Chief Executive Officer’sbase year salary is $718,320 per year, and is subject to an annual cost ofliving increase based on the consumer price index.  Base salary may also be increased based onthe discretion of the Board of Directors. In the event the President and Chief Executive Officer is terminated theCompany will be obligated to make a lump sum severance payment equal to threetimes his then current base salary.

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

 

**Off-BalanceSheet Arrangements**

 

The Company’s off-balance sheet arrangements consistof operating leases, employment contracts and purchase obligations as describedabove.  In addition, the Companyguaranteed debt of the Company’s principal stockholder and Chairman of theBoard of approximately $754 in 1997.  Theguaranteed debt was incurred in connection with construction of the facilitiesleased to the Company and is collateralized by said facilities.  The loan amount subject to the unsecuredguarantee is expected to decline before expiring in 2017.  It is not practicable to estimate the fairvalue of the guarantee; however, the Company does not anticipate that it willincur losses as a result of this guarantee. The Company has not recorded a liability for this guarantee.  If the principal stockholder were to defaulton the outstanding loan balance, the Company may be required to repay theremaining principal balance.  The maximumpotential amount the Company would be required to pay is equal to theoutstanding principal and interest balance of the loan to the stockholder.  At June 30, 2004, the outstanding loan balancesubject to the guarantee totaled $597.

 

**CriticalAccounting 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 of America. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent 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.

 

14

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**Forward-LookingStatements**

 

Certain statements contained herein are“forward-looking” statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995 (the “Act”), which provides certain “safe harbor”provisions for forward-looking statements. All forward-looking statements made herein are made pursuant to the Act.  Forward-looking statements include statementswhich are predictive in nature; which depend upon or refer to future events orconditions; or which include words such as “expects,” “anticipates,” “intends,”“plans,” “believes,” “estimates,” or variations or negatives thereof or bysimilar or comparable words or phrases. In addition, any statement concerning future financial performance,ongoing business strategies or prospects, and possible future Company actionsthat may be provided by management are also forward-looking statements asdefined by the Act.  Forward-lookingstatements are based on current expectations and projections about futureevents and are subject to risks, uncertainties, and assumptions about theCompany; and economic and market factors in the countries in which the Companydoes business, among other things.  Thesestatements are not guarantees of future performance, and the Company has nospecific intentions to update these statements. Actual events and results may differ materially from those expressed orforecasted in forward-looking statements due to a number of factors including,among others: (1) the communications industry is in a state of rapidtechnological change which can render the Company’s products obsolete orunmarketable; (2) any failure by the Company to anticipate or respond totechnological developments or changes in industry standards or customerrequirements, or any significant delays in product development or introduction,could have a material adverse effect on the Company’s business, operatingresults and financial condition; (3) a relatively small number of customersaccount for a large percentage of the Company’s available market; (4) theCompany expects that sales to the telecommunications industry will continue torepresent a substantial portion of its total sales and the demand for productswithin this industry depends primarily on capital spending by serviceproviders; (5) the Company’s cost of sales may be materially affected byincreases in the market prices of the raw materials used in the Company’smanufacturing processes; (6) the Company is subject to the risks of conductingbusiness internationally; and (7) the industries in which the Company operatesare highly competitive.  Additional risksand uncertainties are outlined in the Company’s filings with the Securities andExchange Commission, including its most recent Annual Report on Form 10-K.

 

**ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The market risk inherentin the Company’s market risk sensitive instruments is the potential lossarising from adverse changes in interest rates and foreign currency exchangerates.  All financial instruments held bythe Company described below are held for purposes other than trading.

 

The Company’s Loan and Security Agreement allows for theoutstanding balance to bear interest at a variable rate based on the lender’sbase rate or LIBOR.  The credit facilityexposes the operations to changes in short-term interest rates since theinterest rates on the credit facility are variable.

 

A hypothetical change of 1% in the interest rate forthese borrowings, assuming debt levels at June 30, 2004, would change interestexpense by approximately $0.01 million for the three months ended June 30,2004.  This analysis does not considerthe effects of economic activity on the Company’s sales and profitability insuch 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 forwardpurchases of foreign currency and other similar contracts to reduce itseconomic exposure to changes in exchange rates because the associated risk isnot considered significant.

 

**ITEM 4.          CONTROLSAND 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-15(e) and 15d-15(e) under the Securities Exchange Act of1934, as amended) are effective to ensure that material information relating tothe Company and its consolidated subsidiaries is recorded, processed,summarized, reported and made known to the Company’s management, including theCompany’s principal executive and financial officers, on a timely basis byothers within the Company and its consolidated subsidiaries.

 

To satisfy their responsibility for financialreporting, the Company’s CEO and CFO have established internal controls forfinancial reporting which they believe are adequate to provide reasonableassurance that the Company’s assets are protected from loss. These internalcontrols are reviewed by the Company’s management in order to ensurecompliance.  In addition, the Company’sAudit Committee meets regularly with management and the independent accountantsto review accounting, auditing

 

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and financial matters.  The AuditCommittee and the independent accountants have free access to each other, withor without management being present.

 

There has been no change in the Company’s internalcontrol over financial reporting during the three months ended June 30, 2004that has materially affected, or is reasonably likely to materially affect,internal control over financial reporting.

 

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**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, USE OF  PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**                                                                                                                                                                                               |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       | Not applicable.                                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                |
| **ITEM 3.** | ** ** | **DEFAULTS UPON SENIOR SECURITIES**                                                                                                                                                                                                                                                 |
|        |       | Not applicable.                                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                |
| **ITEM 4.** | ** ** | **SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS**                                                                                                                                                                                                                            |
|        |       | At the Annual Meeting of Shareholders of the Company  held on May 13, 2004 in Temecula, California, 8,865,328 shares of the  Company’s stock were present either in person or by proxies solicited by  management to Regulation 14A under the Securities Exchange Act of 1934. |
|        |       |                                                                                                                                                                                                                                                                                |
|        |       | The Shareholders voted on the following matters:                                                                                                                                                                                                                                    |

 

1.     To elect one director to serve on theCompany’s Board of Directors:

 
| ** ** | ** ** | **Number of Shares For** | ** ** | **Number of Shares Withheld** |
|------------|------------|--------------------------|------------|-------------------------------|
| Guy Marge  |       | 7,247,292                |       | 1,618,036                     |

 

2      Approval of 2004 Incentive Bonus Plan

 
| **Number of  Shares for** | ** ** | **Number of  Shares against** | ** ** | **Number of  Abstained** | ** ** | **Number of  non-votes** |
|---------------------------|------------|-------------------------------|------------|--------------------------|------------|--------------------------|
| 5,475,792                 |       | 1,694,294                     |       | 199,350                  |       | 1,495,892                |

 
| **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 forms of Stock Option Agreements and Restricted Stock  Agreement) (1)                                                                                                                                                                                                                                |
| 10.2.2              |       | Channell Commercial Corporation 2003 Incentive Stock  Plan (including forms of Stock Option Agreements and Restricted Stock  Agreement) (8)                                                                                                                                                                                                                                |
| 10.3                |       | Loan and Security Agreement dated as of September  25, 2002 by and among the Company, Channell Commercial Canada Inc., Fleet  Capital Corporation, Fleet Capital Canada Corporation and, under the  circumstances set forth therein, Fleet National Bank, London U.K. Branch,  trading as Fleet Boston Financial, and the U.K. Borrowers (as defined  therein, if any) (6) |

 

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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)                                                                                                                                       |
| 10.6.1 |   | Channell Commercial Corporation 1996  Performance-Based Annual Incentive Compensation Plan (1)                                                                                                                   |
| 10.6.2 |   | Channell Commercial Corporation 2004 Incentive Bonus  Plan (10)                                                                                                                                                  |
| 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)                                                                                                           |
| 10.19  |   | Amendment to Employment Agreement between the  Company and William H. Channell, Sr., dated December 9, 2003 (9)                                                                                                  |
| 10.20  |   | Employment Agreement between the Company and William  H. Channell, Jr., dated December 9, 2003 (9)                                                                                                               |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)/Rule 15d-14(a) under the Securities and Exchange Act of 1934.  (11)                                                                         |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/Rule 15d-14(a) under the Securities and Exchange Act of 1934.  (11)                                                                         |
| 32.1   |   | Certification pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes- Oxley Act of     2002 by William H. Channell, Jr., CEO;  and Thomas Liguori, CFO. (11) |

 

(b)      Reports filed on Form 8-K in the second quarter of 2004.

 

On May 5, 2004, the Company filed a Form 8-Kof a press release of its financial results for the quarter ended March 31, 2004 and of a press release on the appointment of Board member David Iannini.

 

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(1)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Registration Statement on FormS-1 (File No. 333-3621).

(2)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on May 18, 1998.

(3)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-K on March 31, 1999.

(4)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-K on April 2, 2001.

(5)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on August 9, 2002.

(6)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 8-K on September 25, 2002.

(7)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-Q on November 12, 2002.

(8)     Incorporated by reference to Appendix Bfiled in connection with the Company’s Definitive Proxy Statement on March 26,2003.

(9)     Incorporated by reference to the indicatedexhibits filed in connection with the Company’s Form 10-K on March 5, 2004.

(10)   Incorporated by reference to Appendix B filedin connection with the Company’s Definitive Proxy Statement on April 16, 2004.

(11)   Filed herewith.

 

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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:  August  9, 2004 |   |                                             |
|------------------------------|--------|--------------------------------------------------|
|                         |   |                                             |
|                         |   | CHANNELL COMMERCIAL  CORPORATION                 |
|                         |   | (Registrant)                                     |
|                         |   |                                             |
|                         |   |                                             |
|                         | By:    | /s/ THOMAS LIGUORI                               |   |
|                         |   | Thomas Liguori                                   |
|                         |   | Chief Financial Officer                          |
|                         |   | (Duly authorized officer and principal financial |
|                         |   | officer of the Registrant)                       |

 

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