UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

 

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).   Yes  o   No  ý

 

Registrant’s Common Stock, outstanding at August 8, 2003 was 137,945 shares.

 

 

PART I - FINANCIAL INFORMATION

Item 1.           Condensed Consolidated Financial Statements

 

HCC INDUSTRIES INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)

 

		June 28, 2003			March 29, 2003
		(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	2,994		$	6,215
Trade accounts receivable, less allowance for doubtful accounts of $80 (2004) and $70 (2003)		6,775			6,626
Inventories		5,411			5,174
Income taxes receivable		2,474			2,473
Prepaid and other current assets		804			857
Total current assets		18,458			21,345
Property, Plant and Equipment, net		21,781			22,278
Other Assets:
Intangible assets		800			825
Deferred financing costs		1,310			1,394
Restricted cash		5,181			5,311
Total Assets		$	47,530		$	51,153
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt		$	1,693		$	1,779
Accounts payable		1,324			1,504
Accrued liabilities		4,690			6,467
Total current liabilities		7,707			9,750
Long Term Liabilities:
Long-term debt, net of current portion		84,440			84,833
Environmental and other liabilities		8,385			8,429
		100,532			103,012
Commitments and Contingencies
Stockholders’ Equity (Deficit):
Common stock; $.10 par value; authorized 550,000 shares, issued and outstanding 137,945 shares		14			14
Additional paid-in capital		377			377
Accumulated deficit		(53,393		)	(52,250		)
Total Stockholders’ Deficit		(53,002		)	(51,859		)
Total Liabilities and Stockholders’ Deficit		$	47,530		$	51,153

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2

 

HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands)
(unaudited)

 

		Three Months Ended
		June 28, 2003			June 29, 2002
NET SALES		$	12,116		$	10,591
Cost of goods sold		9,015			8,597
GROSS PROFIT		3,101			1,994
Selling, general and administrative expenses		1,881			1,473
EARNINGS FROM OPERATIONS		1,220			521
OTHER INCOME (EXPENSE):
Interest and other income		11			39
Interest expense		(2,375		)	(2,429		)
Total other expense, net		(2,364		)	(2,390		)
LOSS BEFORE TAX BENEFIT		(1,144		)	(1,869		)
Tax benefit on loss		—			(748		)
NET LOSS		$	(1,144	)	$	(1,121	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 

		For the Three Months Ended
		June 28, 2003			June 29, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,144	)	$	(1,121	)
Reconciliation of net loss to net cash used in operating activities:
Depreciation		618			670
Amortization		109			109
Changes in operating assets and liabilities:
(Increase) Decrease in trade accounts receivable, net		(149		)	1,268
(Increase) Decrease in inventories		(237		)	303
(Increase) Decrease in other assets		182			(856		)
(Decrease) in accounts payable		(180		)	(540		)
(Decrease) in accrued and other liabilities		(1,821		)	(2,968		)
Net cash used in operating activities		(2,622		)	(3,135		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(120		)	(58		)
Net cash used in investing activities		(120		)	(58		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt		(479		)	(1,622		)
Proceeds from issuance of long-term debt		—			1,091
Net cash used in financing activities		(479		)	(531		)
Net decrease in cash and cash equivalents		(3,221		)	(3,724		)
Cash and cash equivalents at beginning of period		6,215			10,990
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	2,994		$	7,266
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Capital lease obligations		$	—		$	414
Cash taxes paid		$	—		$	—
Cash interest paid		$	4,586		$	4,467

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 28, 2003

 

1.                                      INTERIM FINANCIAL STATEMENTS AND ACCOUNTING POLICIES:

 

The accompanying unaudited condensed consolidated financial statements of HCC Industries Inc. and Subsidiaries (the “Company”), include all adjustments (consisting of normal recurring entries) which management believes are necessary for a fair presentation of the financial position and results of operations for the periods presented.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.  It is suggested that the accompanying interim financial statements be read in conjunction with the Company’s audited financial statements and footnotes as of and for the year ended March 29, 2003.  Operating results for the three month period ended June 28, 2003 are not necessarily indicative of the operating results for the full fiscal year.

 

The Company believes that cash on hand of $3.0 million and cash generated from operations, prior to interest payments on long-term debt, will provide adequate funds for ongoing operations, planned capital expenditures and debt service for the near-term.  For the remainder of fiscal 2004, the primary cash obligations of the Company are interest payments ($4.5 million), principal payments on existing debt ($1.3 million), and capital expenditures ($ 0.5 - $ 0.75 million).  Total cash used in the first three months of fiscal 2003 was $3.2 million for operations, investing and financing activities.

 

For the longer term, the operating results of the Company must improve to satisfy its liquidity needs.  The annual interest payments and principal payment obligations decrease only modestly over the next several years until the Notes become due in 2007.  The Company is making substantial efforts to increase its sales levels and thereby improve the operating results.  There is no assurance that these efforts will be successful.  In addition, an increase in sales for the Company will require additional investment in working capital to support such increased operations.

 

The Company generally manufactures products under both individual firm purchase orders and fixed price, long-term production contracts.  The contracts vary in length, but generally are completed within 12 to 24 months.  Sales under individual purchase orders and long-term production contracts are recognized at the time units are shipped and title and risk of loss transfers (FOB shipping point).  Our products are warranted to meet the specifications of manufacture and customer “right of return” is only for failure to meet the specifications.

 

The Company grants uncollateralized credit to its customers who are located in various geographical areas.  Estimated credit losses and returns have been provided for in the financial statements and, to date, have been within management’s expectations.  No customer account exceeds 10% of the accounts receivable balance at June 28, 2003.

 

The Company recorded no tax benefit on the loss incurred in fiscal 2004 as it was determined that it was more likely than not that such tax benefit would not be realized.

 

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2.                                      INVENTORIES:

 

Inventories consist of the following (in thousands):

 

		June 28, 2003			March 29, 2003
Raw materials and component parts		$	3,454		$	3,237
Work in process		1,192			1,080
Finished goods		765			857
Total Inventories		$	5,411		$	5,174

 

3.                                      RESTRICTED CASH:

 

The restricted cash balance represents escrowed funds held back in the 1997 recapitalization transaction to cover potential contingent liabilities of the selling shareholders.  In conjunction with the recapitalization transaction, the selling shareholders agreed to indemnify the Company for the after-tax costs of contingent liabilities up to a total of $30 million.  As part of the transaction, $6 million was withheld by the Company from the purchase price to the selling shareholders and placed in a restricted cash account intended primarily to fund the after-tax costs of the environmental liability and other contingencies.  Upon agreement of the parties, but in no event before February 2004, any funds remaining in the account will be paid to the selling shareholders.  At this date, the only remaining contingencies are environmental contingencies and residual litigation costs.  In the event the restricted cash is not adequate to cover the liabilities, the Company has been informed by the selling stockholders that they will draw upon personal funds to cover such excess costs.

 

4.                                      PROPERTY, PLANT AND EQUIPMENT:

 

Property, plant and equipment consist of the following (in thousands):

 

		June 28, 2003			March 29, 2003
Land		$	4,017		$	4,017
Buildings and improvements		9,463			9,458
Furniture, fixtures and equipment		26,776			26,661
		40,256			40,136
Less accumulated depreciation		(18,475		)	(17,858		)
		$	21,781		$	22,278

 

Included in the above table is equipment acquired under capitalized leases.  At June 28, 2003, the cost of the leased equipment was $7,854,000 and the accumulated amortization was $2,379,000.  At March 29, 2003, the cost of the leased equipment was $8,836,000 and the accumulated amortization was $2,651,000.

 

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5.                                      ACCRUED LIABILITIES:

 

Accrued liabilities consist of the following (in thousands):

 

		June 28, 2003			March 29, 2003
Accrued compensation		$	2,239		$	1,747
Accrued interest		1,107			3,251
Accrued other		1,344			1,469
		$	4,690		$	6,467

 

6.                                       LONG-TERM DEBT:

 

Long-term debt consists of the following (in thousands):

 

		June 28, 2003			March 29, 2003
10 3/4% Senior Subordinated Notes - interest payable semi-annually; due May 15, 2007		$	79,785		$	79,785
Term loans on land, building and improvements - 8% interest payable monthly; due May 2008		2,763			2,763
Capital lease obligations (interest rates ranging between 6.36% and 8.70%)		3,585			4,064
		86,133			86,612
Less current portion		1,693			1,779
		$	84,440		$	84,833

 

On June 18, 2003, the Company entered into a $7.5 million Revolving Credit Agreement (the “Revolver”). Under the terms of the Revolver, the Company may borrow up to 85% of eligible accounts receivable.  The Revolver provides for interest on outstanding balances at the bank’s prime rate plus 1 ½% (or LIBOR plus 3½%) and is collateralized by accounts receivable, inventories, equipment and intangible assets of the Company.  There are no borrowings outstanding under the Revolver and on June 28, 2003, approximately $4,400,000 was available.  The Revolver includes covenants requiring maintenance of certain financial ratios.  At June 28, 2003, the Company was in compliance with the required ratios.

 

7

 

Minimum payments due under long-term debt as of June 29, 2003 are as follows (in thousands):

 

		Capitalized Leases
Fiscal Year		Total Obligation			Less Interest Portion			Net Amount			Other Debt			Total
2004		$	1,482		$	182		$	1,300		$	—		$	1,300
2005		1,657			125			1,532			—			1,532
2006		732			29			703			—			703
2007		51			1			50			—			50
2008											79,785			79,785
2009 and thereafter											2,763			2,763
		$	3,922		$	337		$	3,585		$	82,548		$	86,133

 

The fair value of the 10 ¾% Senior Subordinated Notes (“Notes”) may vary from time to time based on Company specific factors and other market related factors external to the Company.  Presently, the Company is unaware of any recent trading activity or trade prices, however, the Company believes the fair value of the Notes may be significantly less than the carrying value.  This belief is based upon the current market conditions in the high-yield bond market, the recent losses incurred by the Company and the Company’s knowledge of the past limited trading activity in the Notes including the Company’s repurchase of Notes in fiscal 2001.  Further, continued poor operating performance by the Company may negatively impact the credit quality of the Notes, which may have a negative impact on the fair value of the Notes.  Although the Company believes that the fair value of the Notes may be significantly less than the carrying value, settlement of the Notes at less than the carrying amount may not be possible or may not be a prudent management decision.

 

7.                                       CAPITAL STOCK:

 

The Company is authorized to issue an aggregate of 550,000 shares of common stock.  These shares may be issued in four different classes (A, B, C or D shares) which differ only in voting rights per share.  At June 28, 2003 and March 30, 2002, the 137,945 outstanding shares of common stock were designated as follows:

 

Class		Shares Outstanding		Amount			Voting Rights Per Share
A		105,643		$	11,000		1
B		27,506		3,000			1
C		4,316		—			None
D		480		—			10
		137,945		$	14,000

 

The remaining 412,055 shares of authorized but unissued common stock are undesignated as to class.

 

At June 28, 2003, the Company had options outstanding to purchase 21,315 shares of its common stock at prices from $0.00 to $1,111.47 per share.  Of the options outstanding, options to purchase 5,200 shares were fully vested at June 28, 2003.

 

8

 

8.                                      ENVIRONMENTAL AND OTHER LIABILITIES:

 

Environmental and other liabilities consist of the following (in thousands):

 

		June 28, 2003			March 29, 2003
Due to Selling Shareholders		$	1,003		$	991
Environmental Liability		7,382			7,438
		$	8,385		$	8,429

 

The due to selling shareholders represents interest earned to the benefit of the selling shareholders on the restricted cash account in accordance with the terms of the recapitalization transaction in February 1997.  Payment of this liability is subject to the same limitations as the restricted cash (See Note 3).

 

In August 1994, the U.S. Environmental Protection Agency (“EPA”) identified the Company as a potentially responsible party (“PRP”) in the El Monte Operable Unit (“EMOU”) of the San Gabriel Valley Superfund Sites.  In early 1995, the Company and the EPA executed an Administrative Consent Order which requires the Company and other PRP’s to perform a Remedial Investigation and Feasibility Study (“RI/FS”) for the EMOU.  The RI/FS was completed in 1999 and the EPA issued an interim record of decision.  In addition, the Company’s facility in Avon, Massachusetts is subject to Massachusetts “Chapter 21E”, the State’s hazardous site clean-up program.  Uncertainty as to (a) the extent to which the Company caused, if at all, the conditions being investigated, (b) the extent of environmental contamination and risks, (c) the applicability of changing and complex environmental laws (d) the number and financial viability of other PRP’s, (e) the stage of the investigation and/or remediation, (f) the unpredictability of investigation and/or remediation costs (including as to when they will be incurred), (g) applicable clean-up standards, (h) the remediation (if any) that will ultimately be required, and (i) available technology make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken.  In addition, liability under CERCLA is joint and several, and any potential inability of other PRP’s to pay their pro rata share of the environmental remediation costs may result in the Company being required to bear costs in excess of its pro rata share.

 

In fiscal 1997, the Company determined a cost estimate and accrued $10,000,000 for existing estimated environmental remediation and other related costs.  The time frame over which the Company expects to incur such costs varies with each site, ranging up to 30 years. The most significant judgments and assumptions underlying the measurement of the environmental liability for the Avon site relate to the projected costs of the remediation, the effectiveness of the remediation technology on the site geology and the estimated time required for the remediation.  The most significant judgments and assumptions underlying the measurement of the environmental liability for the El Monte Operable Unit are the determination of the extent (vertical and horizontal migration of contaminants) of the contamination within the EMOU, the projected costs to complete the required remediation, the expected timeframe required to complete the remediation, the required standard of clean up to be required by the regulatory agencies and the ultimate number and financial viability of the Potentially Responsible Parties.

 

Currently at the Avon site, a remediation system has been installed and has been operational for several years.  Progress in the remediation is monitored regularly to assess the effectiveness of the system and to provide a basis for periodic reporting to the Massachusetts Department of Environmental Protection.

 

9

 

The EPA has selected a remediation plan for the EMOU and has required the PRP’s to submit a plan.  The Company is currently negotiating with the EPA and other PRP’s to attempt to develop an operating plan and financial allocation to share the cost of the required remediation.  There is no assurance that such negotiations will be successful at reaching an agreement.

 

As of June 28, 2003, the accrual for estimated environmental costs was $7,382,000.  Actual expenditures for environmental remediation were $56,000 for the three months ended June 28, 2003, and $736,000 for the fiscal year ended March 29, 2003.  The Company believes its accrual is adequate, but as the scope of its obligations becomes more clearly defined, this accrual may be modified and related charges against earnings may be made.

 

Claims for recovery of costs already incurred and future costs have been asserted against various insurance companies.  The Company has neither recorded any asset nor reduced any liability in anticipation of recovery with respect to such claims made.

 

9                                         COMMITMENTS AND CONTINGENCIES

 

In August 2002, the Company filed a lawsuit in California Superior Court against Special Devices, Inc. (“SDI”) alleging breach of contract.  The allegations primarily related to SDI’s failure to tender payment to the Company for shipments of parts the Company manufactured and delivered and SDI’s breach of exclusivity requirements.  In June 2003, the Company settled this lawsuit with SDI.  Under the terms of the settlement SDI paid the Company $530,000 and certain mutual releases related to the underlying claims of the litigation were executed.  When combined with earlier payments from SDI related to certain initial claims in the litigation, the aggregate recovery on the lawsuit was approximately $800,000.

 

In addition to the above, the Company is involved in other claims and litigation arising in the normal course of business.  Based on the advice of counsel and in the opinion of management, the ultimate resolution of these matters will not have a significant effect on the financial position or the results of operations of the Company.

 

10.                                NEW ACCOUNTING PRONOUNCEMENTS

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  The Company does not invest in or issue derivative instruments and does not engage in hedging activities.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 changes the accounting guidance for certain financial instruments that, under previous guidance, could be classified as equity or “mezzanine” equity by now requiring those instruments to be classified as liabilities (or assets in some circumstances) in the statement of financial position.  Further, SFAS No. 150 requires disclosure regarding the terms of those instruments and settlement alternatives.  SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003.  The adoption of SFAS No. 150 will not have a material impact on the financial position, results of operations or cash flows of the Company.

 

10

 

PART I - FINANCIAL INFORMATION

 

Item 2.           Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Consolidated Financial Statements” included in the Company’s Form 10-K for the year ended March 29, 2003.

 

Results of Operations (In millions)

 

		For the Three Months Ended
		June 28, 2003			Percent		June 29, 2002			Percent
Net sales		$	12.1		100.0	%	$	10.6		100.0	%
Gross profit		3.1			25.6	%	2.0			18.9	%
Selling, general and administrative expenses		1.9			15.7	%	1.5			14.2	%
Earnings from operations		1.2			9.9	%	0.5			4.7	%
Other income/expense		(2.4		)	-19.8	%	(2.4		)	-22.6	%
Net loss		$	(1.1	)	-9.1	%	$	(1.1	)	-10.4	%

 

Comparison of the Three Months Ended June 28, 2003 (“2004 Quarter”) to the Three Months Ended June 29, 2002 (“2003 Quarter”)

 

Net Sales

 

The Company’s net sales increased by approximately $1.5 million or 14.4% to $12.1 million for the 2004 Quarter compared to sales of $10.6 million for the 2003 Quarter.

 

Sales to existing aerospace, industrial process control and petrochemical customers increased by approximately 15.5% in the 2004 Quarter compared to the 2003 Quarter.  Based on current order volume, the Company expects renewed weakness in the aerospace, industrial process control and petrochemical markets in the next quarter due to a slowdown in an industrial program.

 

On the automotive side, revenue from automotive shipments increased approximately 38.7% in the 2004 Quarter compared to the 2003 Quarter.  This is a result of the Company’s efforts to redevelop a broader base of sales after the loss of a major customer in fiscal 2003.  On the whole, the Company expects growth over the next two quarters in unit volume on new and existing programs.  However, the Company has been advised by an existing automotive customer that production is expected to be shifted in-house by the customer in January 2004.  This product generated approximately $3.8 million in sales for fiscal 2003.

 

In fiscal 2001 and 2002, the Company developed a significant market presence in the telecommunications markets through component products designed for optical networking infrastructure.  Shipments of these products decreased dramatically, however, as the telecom market collapsed.  Sales of these products decreased by approximately 40.6% in the 2004 Quarter compared to the 2003 Quarter.  Based on current order volume and industry reports, the Company expects continued weakness in the telecommunications markets over the next several quarters at a minimum.

 

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Gross Profit

 

Gross profit increased by approximately 55% or $1.1 million, to $3.1 million for the 2004 Quarter compared to $2.0 million for the 2003 Quarter.  Gross margin increased to 25.6% for the 2004 Quarter from 18.9% for the 2003 Quarter.

 

The increase in gross profit is attributable to the increased sales volume.  The increase in gross margin was primarily attributable to the increase in revenue and the corresponding impact of fixed overhead costs leveraged on higher revenue.  The most significant fixed overhead costs are depreciation, utilities and property taxes.  These costs are allocated to inventory and ultimately cost of sales, based on the proportion of total fixed costs to total direct labor costs. Any further weakening in sales demand will adversely impact gross profitability and gross margin.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (“S,G&A”) expenses increased by approximately 27% or $0.4 million to $1.9 million for the 2004 Quarter compared to $1.5 million for the 2003 Quarter.  S,G&A expenses as a percent to sales increased to 15.7% in the 2004 Quarter from 14.2% for the 2003 Quarter.

 

Selling expenses were higher in the 2004 Quarter compared to the 2003 Quarter due to the increased sales volume in the 2004 Quarter.  General and Administrative expenses were higher in the 2004 Quarter due to higher compensation costs and financing related costs, partially offset by lower legal expenses.

 

Earnings from Operations

 

Operating earnings increased by $0.7 million or 140% to $1.2 million for the 2004 Quarter compared to $0.5 million for the 2003 Quarter.  Operating margins increased to 9.9% in the 2004 Quarter from 4.7% for the 2003 Quarter.

 

The increase in operating earnings and margin was attributable to the same factors (as discussed above) that contributed to the increase in gross profit and gross margin.

 

Other Expense, net

 

Other expense, net (which is predominantly net interest expense) was unchanged at $2.4 million for the 2004 and 2003 Quarters.  The Company has $86.1 million of indebtedness as of June 28, 2003 compared to $88.2 million at June 29, 2002. The reduced interest expense on the indebtedness was wholly offset by reduced interest earned on invested cash balances.

 

Net Loss

 

Net loss was unchanged at $1.1 million for both quarters.  The Company recorded no tax benefit on the loss incurred in fiscal 2004 as it was determined that it was more likely than not that such tax benefit would not be realized.

 

12

 

Liquidity and Capital Resources

 

Net cash used in operating activities was $2.6 million for the 2004 Quarter compared to cash used in operations of $3.1 million 2003 Quarter.  The decrease of $0.5 million in cash used in operations in the 2004 Quarter compared to the 2003 Quarter is due to lower working capital demands in the 2004 Quarter.  The cash used in operating activities is impacted in the Company’s first and third quarters by the semi-annual interest payment of $4.3 million on the Senior Subordinated Notes.

 

Net cash used in investing activities was $0.12 million for the 2004 Quarter compared to $0.06 million for the 2003 Quarter.  The increase in cash used in investing activities is due to a slight increase in expenditures for capital equipment.

 

Net cash used in financing activities was $0.5 million for both Quarters.  Net principal payments on long-term debt was unchanged for the two Quarters.

 

As of June 28, 2003, the Company’s outstanding long-term debt is $86.1 million.  On June 18, 2003, the Company entered into a $7.5 million Revolving Credit Agreement (the “Revolver”). Under the terms of the Revolver, the Company may borrow up to 85% of eligible accounts receivable.  The Revolver provides for interest on outstanding balances at the bank’s prime rate plus 1 ½% (or LIBOR plus 3½%) and is collateralized by accounts receivable, inventories, equipment and intangible assets of the Company.  There are no borrowings outstanding under the Revolver and on June 28, 2003, approximately $4,400,000 was available.  The Revolver includes covenants requiring maintenance of certain financial ratios.  At June 28, 2003, the Company was in compliance with the required ratios.

 

The Company believes that cash on hand of $3.0 million and cash generated from operations, prior to interest payments on long-term debt, will provide adequate funds for ongoing operations, planned capital expenditures and debt service for the near-term.  For the remainder of fiscal 2004, the primary cash obligations of the Company are interest payments ($4.5 million), principal payments on existing debt ($1.3 million), and capital expenditures ($ 0.5 - $ 0.75 million).  Total cash used in the first three months of fiscal 2004 was $3.2 million for operations, investing and financing activity.

 

For the longer term, the operating results of the Company must improve to satisfy its liquidity needs.  The annual interest payments and principal payment obligations decrease only modestly over the next several years until the Notes become due in 2007.  The Company is making substantial efforts to increase its sales levels and thereby improve the operating results.  There is no assurance that these efforts will be successful.  In addition, an increase in sales for the Company will require additional investment in working capital to support such increased operations.

 

Capital expenditures for fiscal 2004 are expected to focus on improvements or refurbishment of existing equipment.  Expected capital expenditures for fiscal 2004 will be approximately $0.5 to 0.75 million and will be financed through working capital and/or the Revolving Credit Facility.

 

Disclosure Regarding Forward Looking Statements

 

This filing contains statements that are “forward looking statements”, and includes, among other things, discussions of the Company’s business strategy and expectations concerning market position, future operations, margins, profitability, liquidity and capital resources.  Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.

 

13

 

All phases of the operations of the Company are subject to a number of uncertainties, risks and other influences, including general economic conditions, regulatory changes and competition, many of which are outside the control of the Company, any one of which, or a combination of which, could materially affect the results of the Company’s operations and whether the forward looking statements made by the Company ultimately prove to be accurate.  The Company does not assume any obligation to update these forward looking statements.

 

Item 3.           Quantitative and Qualitative Disclosures About Market Risk

 

All of the Company’s indebtedness is at fixed interest rates and as such there is no exposure to market risk from changes in interest rates.

 

Item 4.           Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.  Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

 

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Items 1 through 5 are omitted, as they are not applicable.

 

Item 6.             Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits:

12.1 - Computation of ratio of earnings to fixed charges

31.1 - Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 - Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 - Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                                 Reports on Form 8-K -

None

 

SIGNATURES

 

 

			HCC INDUSTRIES INC.
DATED:	August 8, 2003		s/s      Richard L. Ferraid
			President and Chief Executive Officer
DATED:	August 8, 2003		s/s      Christopher H. Bateman
			Vice President and Chief Financial Officer

 

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