**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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| **ý**                            |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                   |
|---------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                  |
|                                  |   | **For the quarterly  period ended:  June 28, 2003**                                                                                                                                                                                                                                                                        |
|                                  |
| **OR**                                |
|                                  |   |                                                                                                                                                                                                                                                                                                                            |
| **o**                                 |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                  |
|                                  |
|                                  |   | **For the transition  period from                           to                         ** |
|                                  |
| **Commission file number: 333-32207** |

 

| **HCC  INDUSTRIES INC.**                                        |
|-----------------------------------------------------------------|
| (Exact name of Registrant as specified in  its charter)         |
|                                                            |
| **Delaware**                                                    |   | **95-2691666** |
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |
| **4232 Temple City Blvd., Rosemead, California 91770**          |
| (Address of principal executive offices)                        |
|                                                            |
| **(626) 443-8933**                                              |
| (Registrant’s telephone number, including  area code)      |

 

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Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes  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 atAugust 8, 2003 was 137,945 shares.

 

 

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**PART I - FINANCIALINFORMATION**

**Item 1.****           CondensedConsolidated Financial Statements**

 

**HCCINDUSTRIES INC. AND SUBSIDIARIESConsolidated 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 partof these consolidated financial statements.

 

2

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**HCCINDUSTRIES INC. AND SUBSIDIARIESCONDENSED 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 partof these condensed consolidated financial statements.

 

3

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**HCCINDUSTRIES INC. AND SUBSIDIARIESCONDENSED 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 partof these condensed consolidated financial statements.

** **

**4**

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** **

**HCCINDUSTRIES INC. AND SUBSIDIARIES**Notes to Condensed Consolidated Financial StatementsJune 28, 2003

 

1.                                      INTERIMFINANCIAL STATEMENTS AND ACCOUNTING POLICIES:

 

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

 

The Company believes that cash on hand of$3.0 million and cash generated from operations, prior to interest payments onlong-term debt, will provide adequate funds for ongoing operations, plannedcapital expenditures and debt service for the near-term.  For the remainder of fiscal 2004, theprimary 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 usedin the first three months of fiscal 2003 was $3.2 million for operations,investing and financing activities.

** **

For the longer term, the operating results ofthe Company must improve to satisfy its liquidity needs.  The annual interest payments and principalpayment obligations decrease only modestly over the next several years untilthe Notes become due in 2007.  TheCompany is making substantial efforts to increase its sales levels and therebyimprove the operating results.  There isno assurance that these efforts will be successful.  In addition, an increase in sales for the Company will requireadditional investment in working capital to support such increased operations.

 

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

 

TheCompany grants uncollateralized credit to its customers who are located invarious geographical areas.  Estimatedcredit losses and returns have been provided for in the financial statementsand, to date, have been within management’s expectations.  No customer account exceeds 10% of theaccounts receivable balance at June 28, 2003.

 

The Company recorded no tax benefit onthe loss incurred in fiscal 2004 as it was determined that it was more likelythan not that such tax benefit would not be realized.

 

5

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2.                                      INVENTORIES:

 

Inventoriesconsist 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.                                      RESTRICTEDCASH:

 

The restrictedcash balance represents escrowed funds held back in the 1997 recapitalizationtransaction to cover potential contingent liabilities of the sellingshareholders.  In conjunction with therecapitalization transaction, the selling shareholders agreed to indemnify theCompany for the after-tax costs of contingent liabilities up to a total of $30million.  As part of the transaction, $6million was withheld by the Company from the purchase price to the selling shareholdersand placed in a restricted cash account intended primarily to fund theafter-tax costs of the environmental liability and other contingencies.  Upon agreement of the parties, but in noevent before February 2004, any funds remaining in the account will be paid tothe selling shareholders.  At this date,the only remaining contingencies are environmental contingencies and residuallitigation costs.  In the event the restrictedcash is not adequate to cover the liabilities, the Company has been informed bythe selling stockholders that they will draw upon personal funds to cover suchexcess 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 equipmentacquired under capitalized leases.  AtJune 28, 2003, the cost of the leased equipment was $7,854,000 and theaccumulated amortization was $2,379,000. At March 29, 2003, the cost of the leased equipment was $8,836,000 andthe accumulated amortization was $2,651,000.

 

6

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5.                                      ACCRUEDLIABILITIES:

 

Accrued liabilities consist of thefollowing (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-TERMDEBT:

 

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 RevolvingCredit Agreement (the “Revolver”). Under the terms of the Revolver, the Companymay borrow up to 85% of eligible accounts receivable.  The Revolver provides for interest on outstanding balances at thebank’s prime rate plus 1 1⁄2% (or LIBOR plus 31⁄2%) and is collateralized by accountsreceivable, inventories, equipment and intangible assets of the Company.  There are no borrowings outstanding underthe Revolver and on June 28, 2003, approximately $4,400,000 was available.  The Revolver includes covenants requiringmaintenance of certain financial ratios. At June 28, 2003, the Company was in compliance with the requiredratios.

 

7

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Minimumpayments due under long-term debt as of June 29, 2003 are as follows (inthousands):

 
|                |   | **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 103⁄4% Senior Subordinated Notes (“Notes”) may vary from time to time based onCompany specific factors and other market related factors external to theCompany.  Presently, the Company isunaware of any recent trading activity or trade prices, however, the Companybelieves the fair value of the Notes may be significantly less than thecarrying value.  This belief is basedupon the current market conditions in the high-yield bond market, the recentlosses incurred by the Company and the Company’s knowledge of the past limitedtrading activity in the Notes including the Company’s repurchase of Notes infiscal 2001.  Further, continued poor operatingperformance by the Company may negatively impact the credit quality of theNotes, which may have a negative impact on the fair value of the Notes.  Although the Company believes that the fairvalue 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 ormay not be a prudent management decision.

 

7.                                       CAPITAL STOCK:

 

The Company is authorized to issue anaggregate of 550,000 shares of common stock. These shares may be issued in four different classes (A, B, C or Dshares) which differ only in voting rights per share.  At June 28, 2003 and March 30, 2002, the 137,945 outstandingshares 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 |                          |   |   |

 

Theremaining 412,055 shares of authorized but unissued common stock areundesignated as to class.

 

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

 

8

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8.                                      ENVIRONMENTALAND OTHER LIABILITIES:

 

Environmental and other liabilities consist of the following (inthousands):

 
|                        |   | **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 thebenefit of the selling shareholders on the restricted cash account inaccordance with the terms of the recapitalization transaction in February1997.  Payment of this liability issubject to the same limitations as the restricted cash (See Note 3).

 

In August 1994, the U.S. EnvironmentalProtection Agency (“EPA”) identified the Company as a potentially responsibleparty (“PRP”) in the El Monte Operable Unit (“EMOU”) of the San Gabriel ValleySuperfund Sites.  In early 1995, theCompany and the EPA executed an Administrative Consent Order which requires theCompany and other PRP’s to perform a Remedial Investigation and Feasibility Study(“RI/FS”) for the EMOU.  The RI/FS wascompleted 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 hazardoussite clean-up program.  Uncertainty asto (a) the extent to which the Company caused, if at all, the conditions beinginvestigated, (b) the extent of environmental contamination and risks, (c) theapplicability of changing and complex environmental laws (d) the number andfinancial viability of other PRP’s, (e) the stage of the investigation and/orremediation, (f) the unpredictability of investigation and/or remediation costs(including as to when they will be incurred), (g) applicable clean-upstandards, (h) the remediation (if any) that will ultimately be required, and(i) available technology make it difficult to assess the likelihood and scopeof further investigation or remediation activities or to estimate the futurecosts of such activities if undertaken. In addition, liability under CERCLA is joint and several, and anypotential inability of other PRP’s to pay their pro rata share of theenvironmental remediation costs may result in the Company being required tobear costs in excess of its pro rata share.

 

In fiscal 1997, the Company determined acost estimate and accrued $10,000,000 for existing estimated environmentalremediation and other related costs. The time frame over which the Company expects to incur such costs varieswith each site, ranging up to 30 years. The most significant judgments andassumptions underlying the measurement of the environmental liability for theAvon site relate to the projected costs of the remediation, the effectivenessof the remediation technology on the site geology and the estimated timerequired for the remediation.  The mostsignificant judgments and assumptions underlying the measurement of theenvironmental liability for the El Monte Operable Unit are the determination ofthe extent (vertical and horizontal migration of contaminants) of thecontamination within the EMOU, the projected costs to complete the requiredremediation, the expected timeframe required to complete the remediation, therequired standard of clean up to be required by the regulatory agencies and theultimate number and financial viability of the Potentially Responsible Parties.

 

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

 

9

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The EPA has selected a remediation planfor the EMOU and has required the PRP’s to submit a plan.  The Company is currently negotiating withthe EPA and other PRP’s to attempt to develop an operating plan and financialallocation to share the cost of the required remediation.  There is no assurance that such negotiationswill be successful at reaching an agreement.

 

Asof June 28, 2003, the accrual for estimated environmental costs was$7,382,000.  Actual expenditures forenvironmental 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 isadequate, 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 havebeen asserted against various insurance companies.  The Company has neither recorded any asset nor reduced anyliability in anticipation of recovery with respect to such claims made.

 

9                                         COMMITMENTSAND CONTINGENCIES

 

In August 2002, the Company filed a lawsuit inCalifornia Superior Court against Special Devices, Inc. (“SDI”) alleging breachof contract.  The allegations primarilyrelated to SDI’s failure to tender payment to the Company for shipments ofparts the Company manufactured and delivered and SDI’s breach of exclusivityrequirements.  In June 2003, the Companysettled this lawsuit with SDI.  Underthe terms of the settlement SDI paid the Company $530,000 and certain mutualreleases related to the underlying claims of the litigation were executed.  When combined with earlier payments from SDIrelated to certain initial claims in the litigation, the aggregate recovery onthe lawsuit was approximately $800,000.

 

Inaddition to the above, the Company is involved in other claims and litigationarising in the normal course of business. Based on the advice of counsel and in the opinion of management, theultimate resolution of these matters will not have a significant effect on thefinancial position or the results of operations of the Company.

 

10.                                NEWACCOUNTING PRONOUNCEMENTS

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities.”  The Company does not invest in or issuederivative instruments and does not engage in hedging activities.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities andEquity.”  SFAS No. 150 changes theaccounting guidance for certain financial instruments that, under previousguidance, could be classified as equity or “mezzanine” equity by now requiringthose instruments to be classified as liabilities (or assets in somecircumstances) in the statement of financial position.  Further, SFAS No. 150 requires disclosureregarding the terms of those instruments and settlement alternatives.  SFAS No. 150 is generally effective for allfinancial instruments entered into or modified after May 31, 2003, and isotherwise effective at the beginning of the first interim period beginningafter June 15, 2003.  The adoption ofSFAS No. 150 will not have a material impact on the financial position, resultsof operations or cash flows of the Company.

 

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**PART I - FINANCIALINFORMATION**

 

**Item 2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following discussion and analysis shouldbe read in conjunction with the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and “Consolidated FinancialStatements” 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 theThree Months Ended June 28, 2003 (“2004 Quarter”) to the Three Months EndedJune 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 salesof $10.6 million for the 2003 Quarter.

 

Sales to existing aerospace, industrial processcontrol and petrochemical customers increased by approximately 15.5% in the2004 Quarter compared to the 2003 Quarter. Based on current order volume, the Company expects renewed weakness inthe aerospace, industrial process control and petrochemical markets in the nextquarter due to a slowdown in an industrial program.

 

On the automotive side, revenue from automotiveshipments increased approximately 38.7% in the 2004 Quarter compared to the2003 Quarter.  This is a result of theCompany’s efforts to redevelop a broader base of sales after the loss of amajor customer in fiscal 2003.  On thewhole, the Company expects growth over the next two quarters in unit volume onnew and existing programs.  However, theCompany has been advised by an existing automotive customer that production isexpected to be shifted in-house by the customer in January 2004.  This product generated approximately $3.8million in sales for fiscal 2003.

 

In fiscal 2001 and 2002, the Company developed a significant marketpresence in the telecommunications markets through component products designedfor optical networking infrastructure. Shipments of these products decreased dramatically, however, as thetelecom market collapsed.  Sales ofthese products decreased by approximately 40.6% in the 2004 Quarter compared tothe 2003 Quarter.  Based on currentorder volume and industry reports, the Company expects continued weakness inthe 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 $3.1million for the 2004 Quarter compared to $2.0 million for the 2003Quarter.  Gross margin increased to25.6% for the 2004 Quarter from 18.9% for the 2003 Quarter.

 

The increase in gross profit is attributable to the increased salesvolume.  The increase in gross marginwas primarily attributable to the increase in revenue and the correspondingimpact of fixed overhead costs leveraged on higher revenue.  The most significant fixed overhead costsare depreciation, utilities and property taxes.  These costs are allocated to inventory and ultimately cost ofsales, based on the proportion of total fixed costs to total direct laborcosts. Any further weakening in sales demand will adversely impact grossprofitability and gross margin.

 

*Selling, General andAdministrative Expenses*

* *

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

 

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

 

*Earnings fromOperations*

* *

Operating earnings increased by $0.7 million or 140% to $1.2 millionfor the 2004 Quarter compared to $0.5 million for the 2003 Quarter.  Operating margins increased to 9.9% in the2004 Quarter from 4.7% for the 2003 Quarter.

 

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

 

*Other Expense, net*

* *

Other expense, net (which is predominantly net interest expense) wasunchanged at $2.4 million for the 2004 and 2003 Quarters.  The Company has $86.1 million ofindebtedness 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 reducedinterest 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 theloss incurred in fiscal 2004 as it was determined that it was more likely thannot that such tax benefit would not be realized.

 

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Liquidity and Capital Resources

* *

Net cash used in operatingactivities was $2.6 million for the2004 Quarter compared to cash used in operations of $3.1 million 2003Quarter.  The decrease of $0.5 millionin cash used in operations in the 2004 Quarter compared to the 2003 Quarter isdue to lower working capital demands in the 2004 Quarter.  The cash used in operating activities isimpacted in the Company’s first and third quarters by the semi-annual interestpayment of $4.3 million on the Senior Subordinated Notes.

 

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

 

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

 

As of June 28, 2003, theCompany’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 ofthe Revolver, the Company may borrow up to 85% of eligible accountsreceivable.  The Revolver provides forinterest on outstanding balances at the bank’s prime rate plus 1 1⁄2% (or LIBORplus 31⁄2%)and is collateralized by accounts receivable, inventories, equipment andintangible assets of the Company.  Thereare no borrowings outstanding under the Revolver and on June 28, 2003,approximately $4,400,000 was available. The Revolver includes covenants requiring maintenance of certainfinancial ratios.  At June 28, 2003, theCompany was in compliance with the required ratios.

 

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

 

Forthe longer term, the operating results of the Company must improve to satisfyits liquidity needs.  The annualinterest payments and principal payment obligations decrease only modestly overthe next several years until the Notes become due in 2007.  The Company is making substantial efforts toincrease its sales levels and thereby improve the operating results.  There is no assurance that these effortswill be successful.  In addition, anincrease in sales for the Company will require additional investment in workingcapital to support such increased operations.

 

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

** **

**Disclosure RegardingForward Looking Statements**

** **

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

 

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All phases of the operations of the Company are subject to a number ofuncertainties, risks and other influences, including general economicconditions, regulatory changes and competition, many of which are outside thecontrol of the Company, any one of which, or a combination of which, couldmaterially affect the results of the Company’s operations and whether theforward looking statements made by the Company ultimately prove to beaccurate.  The Company does not assumeany obligation to update these forward looking statements.

* *

## **Item 3.**           Quantitativeand Qualitative Disclosures About Market Risk

 

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

 

## **Item 4.**           Controls andProcedures

 

The Company’s management, with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer has evaluated the effectivenessof the Company’s disclosure controls and procedures (as such term is defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of the end of the period covered by thisreport.  Based on such evaluation, theCompany’s Chief Executive Officer and Chief Financial Officer have concludedthat, as of the end of such period, the Company’s disclosure controls andprocedures are effective.

 

There have not been any changes in the Company’s internal control overfinancial 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 relatesthat have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

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**PART II - OTHERINFORMATION**

 

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

 

Item 6.             Exhibitsand 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)                                 Reportson 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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