** **

**UNITED STATES**

** SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

#### **FORM 10-Q**

----

 

**ý        QUARTERLY REPORT PURSUANT TO SECTION 13OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended:  September 29, 2001**

 

**OR**

 

**o****        TRANSITION REPORT PURSUANTTO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition period from _________ to __________**

 

## **Commission file number: 333-32207**

 

 

 

**HCCINDUSTRIES INC.**

(Exactname of Registrant as specified in its charter)

 

 

| **Delaware**                     |   | **95-2691666**       |
|----------------------------------|--------|----------------------|
| (State  or other jurisdiction of |   | (I.R.S.  Employer    |
| incorporation  or organization)  |   | Identification  No.) |

 

 

| **4232 Temple City Blvd., Rosemead, California 91770** |
|--------------------------------------------------------|
| (Address  of principal executive offices)              |

 

 

| **(626)  443-8933**                                        |
|------------------------------------------------------------|
| (Registrant’s  telephone number, including area code) |

 

----

 

Indicateby 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 forsuch 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

 

 

Registrant’sCommon Stock, outstanding at November 9, 2001 was 137,945 shares.

 

 

**PART I - FINANCIAL INFORMATION**

**Item 1.   CondensedConsolidated Financial Statements**

 

**HCC INDUSTRIES INC. ANDSUBSIDIARIES**

**Condensed Consolidated BalanceSheets**

**(in thousands, except sharedata)**

 
|                                                                                                                     |   | **September  29,** |   | **March  31,** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|----------------|--------|
|                                                                                                                     |   | **2001**           |   | **2001**       |   |
|                                                                                                                     |   | **(unaudited)**    |   |           |   |
| **ASSETS**                                                                                                               |   |               |   |           |   |
| **Current  Assets**:                                                                                                     |   |               |   |           |   |
| Cash  and cash equivalents                                                                                               |   | $                  | 8,966  |           | $      | 8,896 |   |
| Trade  accounts receivable, less allowance for doubtful accounts of $65 at September  29, 2001 and $61 at March 31, 2001 |   | 11,143             |   | 10,799         |   |
| Inventories                                                                                                              |   | 5,678              |   | 6,468          |   |
| Income  taxes receivable                                                                                                 |   | ---                |   | 728            |   |
| Prepaid  and other current assets                                                                                        |   | 2,455              |   | 1,398          |   |
|                                                                                                                     |   |               |   |           |   |
| Total  current assets                                                                                                    |   | 28,242             |   | 28,289         |   |
|                                                                                                                     |   |               |   |           |   |
| **Property,  Plant and Equipment, net**                                                                                  |   | 26,058             |   | 25,836         |   |
|                                                                                                                     |   |               |   |           |   |
| **Other  Assets**:                                                                                                       |   |               |   |           |   |
| Intangible  assets                                                                                                       |   | 4,631              |   | 4,775          |   |
| Deferred  financing costs                                                                                                |   | 1,902              |   | 2,071          |   |
| Deferred  income taxes                                                                                                   |   | 2,080              |   | 2,080          |   |
| Restricted  cash                                                                                                         |   | 5,997              |   | 6,171          |   |
|                                                                                                                     |   |               |   |           |   |
| **Total  assets**                                                                                                        |   | $                  | 68,910 |           | $      | 69,222 |   |

 

 
| **LIABILITIES  AND STOCKHOLDERS' EQUITY (DEFICIT)**                                              |
|--------------------------------------------------------------------------------------------------|
|                                                                                             |   |   |   |   |   |
| **Current  Liabilities**:                                                                        |   |   |   |   |   |
| Current  portion of long-term debt                                                               |   | $ | 3,060 |   | $ | 3,103 |   |
| Accounts  payable                                                                                |   | 2,422 |   | 3,897 |   |
| Income  taxes payable                                                                            |   | 1,213 |   | --- |   |
| Accrued  liabilities                                                                             |   | 8,787 |   | 10,270 |   |
|                                                                                             |   |   |   |   |   |
| Total  current liabilities                                                                       |   | 15,482 |   | 17,270 |   |
|                                                                                             |   |   |   |   |   |
| **Long  Term Liabilities**:                                                                      |   |   |   |   |   |
| Long-term  debt, net of current portion                                                          |   | 87,390 |   | 87,864 |   |
| Other  long-term liabilities                                                                     |   | 8,362 |   | 8,702 |   |
|                                                                                             |   | 111,234 |   | 113,836 |   |
|                                                                                             |   |   |   |   |   |
| **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                                                                      |   | 343 |   | 343 |   |
| Accumulated  deficit                                                                             |   | (42,681 | ) | (44,971 | ) |
|                                                                                             |   |   |   |   |   |
| **Total  stockholders' deficit**                                                                 |   | (42,324 | ) | (44,614 | ) |
|                                                                                             |   |   |   |   |   |
| **Total  liabilities and stockholders’ deficit**                                            |   | $ | 68,910 |   | $ | 69,222 |   |

 

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

**HCCINDUSTRIES INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF EARNINGS**

**(in thousands)**

**(unaudited)**

 

 
|                                                              |   | **Three  Months Ended** |          | **Six  Months Ended** |          |
|-------------------------------------------------------------------|--------|-------------------------|---------------|-----------------------|---------------|
|                                                              |   | **Sept.  29,**          |          | **Sept.  30,**        |          | **Sept.  29,** |   | **Sept.  30,** |   |
|                                                              |   | **2001**                |          | **2000**              |          | **2001** |   | **2000** |   |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| **NET  SALES**                                                    |   | $                       | 18,358        |                  | $             | 20,211 |   | $ | 37,148 |   | $ | 38,728 |   |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| Cost  of goods sold                                               |   | 12,319                  |          | 12,959                |          | 24,902 |   | 25,319 |   |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| **GROSS  PROFIT**                                                 |   | 6,039                   |          | 7,252                 |          | 12,246 |   | 13,409 |   |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| Selling,  general and administrative expenses                     |   | 1,725                   |          | 2,357                 |          | 3,641 |   | 4,318 |   |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| **EARNINGS  FROM OPERATIONS**                                     |   | 4,314                   |          | 4,895                 |          | 8,605 |   | 9,091 |   |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| **OTHER  INCOME (EXPENSE):**                                      |   |                    |          |                  |          |   |   |   |   |
| Interest  and other income                                        |   | 67                      |          | 162                   |          | 141 |   | 352 |   |
| Interest  expense                                                 |   | (2,464                  | )             | (2,666                | )             | (4,929 | ) | (5,528 | ) |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| Total  other expense, net                                         |   | (2,397                  | )             | (2,504                | )             | (4,788 | ) | (5,176 | ) |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| **EARNINGS  BEFORE TAXES****AND EXTRAORDINARY ITEM**              |   | 1,917                   |     | 2,391                 |     | 3,817 |     | 3,915 |     |
| Taxes  on earnings                                                |   | 767                     |          | 956                   |          | 1,527 |   | 1,566 |   |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| Earnings  before extraordinary item                               |   | 1,150                   |          | 1,435                 |          | 2,290 |   | 2,349 |   |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| Extraordinary  gain on retirement of debt, net of taxes of $2,125 |   | ---                     |     | 3,187                 |     | --- |     | 3,187 |     |
|                                                              |   |                    |          |                  |          |   |   |   |   |
| **NET  EARNINGS**                                                 |   | $                       | 1,150         |                  | $             | 4,622 |   | $ | 2,290 |   | $ | 5,536 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

**HCC INDUSTRIES INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
|                                                                          |   | **For  the Six Months Ended** |   |
|-------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                          |   | **September  29,**            |   | **September  30,** |   |
|                                                                          |   | **2001**                      |   | **2000** |   |
|                                                                          |   |                          |   |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                    |   |                          |   |   |   |
| Net  earnings                                                                 |   | $                             | 2,290  |   | $ | 5,536 |   |
| Reconciliation  of net earnings to net cash provided by operating activities: |   |                          |   |   |   |
| Depreciation                                                                  |   | 1,214                         |   | 974 |   |
| Amortization                                                                  |   | 313                           |   | 326 |   |
| Extraordinary  gain                                                           |   | ---                           |   | (3,187 | ) |
| Non-cash  stock compensation                                                  |   | ---                           |   | 76 |   |
| Changes  in operating assets and liabilities:                                 |   |                          |   |   |   |
| (Increase)  in trade accounts receivable, net                                 |   | (344                          | )      | (1,292 | ) |
| Decrease  in inventories                                                      |   | 790                           |   | 15 |   |
| (Increase)  in other assets                                                   |   | (883                          | )      | (112 | ) |
| (Decrease)  in other liabilities                                              |   | (1,823                        | )      | (494 | ) |
| Increase  in accounts payable and Income taxes payable/receivable             |   | 466                           |   | 1,906 |   |
|                                                                          |   |                          |   |   |   |
| Net  cash provided by operating activities                                    |   | 2,023                         |   | 3,748 |   |
|                                                                          |   |                          |   |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                    |   |                          |   |   |   |
| Purchases  of property, plant and equipment                                   |   | (928                          | )      | (3,111 | ) |
|                                                                          |   |                          |   |   |   |
| Net  cash used in investing activities                                        |   | (928                          | )      | (3,111 | ) |
|                                                                          |   |                          |   |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                    |   |                          |   |   |   |
| Principal  payments on long-term debt                                         |   | (1,025                        | )      | (813 | ) |
| Proceeds  from sale of stock                                                  |   | ---                           |   | 50 |   |
| Early retirement of debt                                                      |   | ---                           |   | (4,598 | ) |
|                                                                          |   |                          |   |   |   |
| Net cash used in financing activities                                         |   | (1,025                        | )      | (5,361 | ) |
|                                                                          |   |                          |   |   |   |
| Net  increase (decrease) in cash and cash equivalents                         |   | 70                            |   | (4,724 | ) |
|                                                                          |   |                          |   |   |   |
| Cash  and cash equivalents at beginning of period                             |   | 8,896                         |   | 14,537 |   |
|                                                                          |   |                          |   |   |   |
| **CASH  AND CASH EQUIVALENTS AT END OF PERIOD**                               |   | $                             | 8,966  |   | $ | 9,813 |   |
|                                                                          |   |                          |   |   |   |
| **SUPPLEMENTAL  NONCASH FINANCING ACTIVITIES:**                               |   |                          |   |   |   |
| Capital  lease obligations                                                    |   | $                             | 508    |   | $ | 622 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

**HCC INDUSTRIES INC. ANDSUBSIDIARIES**

Notesto Condensed Consolidated Financial Statements

September29, 2001

 

1.             INTERIMFINANCIAL STATEMENTS:

 

The accompanyingunaudited condensed consolidated financial statements of HCC Industries Inc.and Subsidiaries (the “Company”), include all adjustments (consisting of normalrecurring entries) which management believes are necessary for a fairpresentation of the financial position and results of operations for theperiods presented.  Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted.  The year end condensed balancesheet data was derived from audited financial statements, but does not includeall disclosures required by generally accepted accounting principles.  It is suggested that the accompanyinginterim financial statements be read in conjunction with the Company’s auditedfinancial statements and footnotes as of and for the year ended March 31, 2001.  Operating results for the three and sixmonth periods ended September 29, 2001 are not necessarily indicative of theoperating results for the full fiscal year.

 

The Company grantsuncollateralized credit to its customers who are located in variousgeographical areas.  Estimated creditlosses and returns have been provided for in the financial statements and, todate, have been within management’s expectations.  Accounts receivable from Special Devices, Inc. (“SDI”), theCompany’s largest customer, as of September 29, 2001 and March 31, 2001 were$3,361,000 and $3,042,000, respectively.

 

 

2.             INVENTORIES:

 

                Inventoriesconsist of the following (in thousands):
|                               |   | **September  29,** |   | **March  31,** |   |
|------------------------------------|--------|--------------------|--------|----------------|--------|
|                               |   | **2001**           |   | **2001**       |   |
|                               |   |               |   |           |   |
| Raw  materials and component parts |   | $                  | 3,920  |           | $      | 4,861 |   |
| Work  in process                   |   | 1,758              |   | 1,607          |   |
|                               |   |               |   |           |   |
|                               |   | $                  | 5,678  |           | $      | 6,468 |   |

 

 

3.             PROPERTY, PLANT AND EQUIPMENT:

 

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

 
|                               |   | **September 29,** |   | **March 31,** |   |
|------------------------------------|--------|-------------------|--------|---------------|--------|
|                               |   | **2001**          |   | **2001**      |   |
|                               |   |              |   |          |   |
|                               |   |              |   |          |   |
| Land                               |   | $                 | 4,017  |          | $      | 4,017 |   |
| Buildings  and improvements        |   | 9,926             |   | 9,671         |   |
| Furniture,  fixtures and equipment |   | 26,098            |   | 24,917        |   |
|                               |   |              |   |          |   |
|                               |   | 40,041            |   | 38,605        |   |
| Less  accumulated depreciation     |   | (13,983           | )      | (12,769       | )      |
|                               |   | $                 | 26,058 |          | $      | 25,836 |   |

** **

4.             LONG-TERMDEBT:

 

                Long-term debt consists of thefollowing (in thousands):
|                                                                                        |   | **September  29,** |          | **March  31,** |          |
|---------------------------------------------------------------------------------------------|--------|--------------------|---------------|----------------|---------------|
|                                                                                        |   | **2001**           |          | **2001**       |          |
|                                                                                        |   |               |          |           |          |
| 10  3⁄4% Senior Subordinated Notes - interest payable semi-annually; due May 2007        |   | $                  | 79,785        |      | $             | 79,785 |     |
|                                                                                        |   |               |          |           |          |
| Subordinated  Bonus Notes - 10% interest payable semi-annually; due April 3, 2002           |   | 1,083              |     | 1,083          |     |
|                                                                                        |   |               |          |           |          |
| Term  loans on land, building and improvements - 8% interest payable monthly; due  May 2008 |   | 2,762              |     | 2,762          |     |
|                                                                                        |   |               |          |           |          |
| Capital  Lease Obligations (interest rates ranging between 6.4% and 9.6%)                   |   | 6,820              |     | 7,337          |     |
|                                                                                        |   |               |          |           |          |
|                                                                                        |   | 90,450             |          | 90,967         |          |
| Less  current portion                                                                       |   | 3,060              |          | 3,103          |          |
|                                                                                        |   | $                  | 87,390        |           | $             | 87,864 |   |

 

5.             CAPITAL STOCK:

 

                The Company is authorized to issue an aggregate of550,000 shares of common stock.  Theseshares may be issued in four different classes (A, B, C or D shares) whichdiffer only in voting rights per share. At September 29, 2001, the 137,945 outstanding shares of common stockwere designated as follows:

 
|      |   | **Shares**      |   |       |   | **Voting  Rights** |   |
|-----------|--------|-----------------|--------|------------|--------|--------------------|--------|
| **Class** |   | **Outstanding** |   | **Amount** |   | **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 butunissued common stock are undesignated as to class.

 

6.             COMMITMENTS AND CONTINGENCIES:

 

Environmental

 

As an ongoing facet ofthe Company's business, it is required to maintain compliance with variousenvironmental regulations.  The cost ofthis compliance is included in the Company's operating results as incurred.  These ongoing costs include permitting feesand expenses and specialized effluent control systems as well as monitoring andsite assessment costs required by various governmental agencies.  In the opinion of management, themaintenance of this compliance will not have a significant effect on thefinancial position or results of operations of the Company.

 

                In August 1994, the U.S.Environmental Protection Agency ("EPA") identified the Company as apotentially responsible party ("PRP") in the El Monte Operable Unit("EMOU") of the San Gabriel Valley Superfund Sites.  In early 1995, the Company and the EPAexecuted an Administrative Consent Order which requires the Company and otherPRP's to perform a Remedial Investigation and Feasibility Study("RI/FS") for the EMOU.  TheRI/FS was completed in 1999 and the EPA issued an interim record ofdecision.  In addition, the Company’sfacility in Avon, Massachusetts is subject to Massachusetts “Chapter 21E”, theState’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 environmentalcontamination and risks, (c) the applicability of changing and complexenvironmental laws (d) the number and financial viability of other PRP’s, (e)the stage of the investigation and/or remediation, (f) the unpredictability ofinvestigation and/or remediation costs (including as to when they will beincurred), (g) applicable clean-up standards, (h) the remediation (if any) thatwill ultimately be required, and (i) available technology make it difficult toassess the likelihood and scope of further investigation or remediationactivities or to estimate the future costs of such activities ifundertaken.  In addition, liabilityunder CERCLA is joint and several, and any potential inability of other PRP’sto pay their pro rata share of the environmental remediation costs may resultin the Company being required to bear costs in excess of its pro rata share.

 

                In fiscal 1997, the Company withthe help of independent consultants, determined a cost estimate and accrued$10,000,000 for existing estimated environmental remediation and other relatedcosts.  The time frame over which theCompany expects to incur such costs varies with each site, ranging up to 20years. This estimate is based on progress made in determining the magnitude ofsuch costs, experience gained from sites on which remediation is ongoing or hasbeen completed, and the timing and extent of remedial actions required by theapplicable governmental authorities.

 

As of September 29, 2001,the accrual for estimated environmental costs was $8,362,000.  Actual expenditures for environmentalremediation were $99,000 and $340,000 for the three and six month periods endedSeptember 29, 2001, respectively, and $476,000 for the fiscal year ended March31, 2001.  The Company believes itsaccrual is adequate, but as the scope of its obligations becomes more clearlydefined, this accrual may be modified and related charges against earnings maybe made.

 

Claims for recovery ofcosts already incurred and future costs have been asserted against variousinsurance companies.  The Company hasneither recorded any asset nor reduced any liability in anticipation ofrecovery with respect to such claims made.

 

Other

 

                On March 3, 1998, WalterNeubauer, a former stockholder of the Company and a current stockholder of SDI,filed a lawsuit in California Superior Court (Case BC186937; Walter Neubauervs. Andrew Goldfarb, et. al.) against the Company and certain otherstockholders alleging (i) breach of fiduciary duty, (ii) fraud, (iii) negligentmisrepresentation, (iv) negligence, (v) violations of corporations code and(vi) breach of contract.  Theallegations primarily relate to the Company’s exercise of an option to acquireMr. Neubauer’s stock in August 1996.  InSeptember 1999, five of the six claims were dismissed upon a summary judgementmotion made by the Company, including all of the claims against theCompany.  The remaining claim is againstAndrew Goldfarb for alleged violations of oral representations and is scheduledfor trial in December 2001.

 

On May 7, 1998, theCompany filed a lawsuit against Mr. Neubauer in California Superior Courtalleging (i) breach of contract, (ii) intentional interference with businessrelations and (iii) interference with prospective business advantage.  All allegations relate to violations of thenoncompetition agreement executed by Mr. Neubauer in August 1996.  In October 2001, the Company entered into asettlement agreement with Mr. Neubauer to resolve these claims as well as anyresidual claims against the Company from the litigation discussed above.

 

In addition to theabove, the Company is involved in other claims and litigation arising in thenormal course of business.  Based on theadvice of counsel and in the opinion of management, the ultimate resolution ofthese matters will not have a significant effect on the financial position orthe results of operations of the Company.

 

 

7.             RECENTACCOUNTING PRONOUNCEMENTS

 

In July 2001, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) Nos. 141 and 142, “Business Combinations” and“Goodwill and Other Intangible Assets” . SFAS No. 141 replaces APB 16 and eliminates pooling-of-interestsaccounting prospectively.  It alsoprovides guidance on purchase accounting related to the recognition ofintangible assets and accounting for negative goodwill.

 

SFAS No. 142 changes theaccounting for goodwill from an amortization method to an impairment-onlyapproach.  Under SFAS No. 142, goodwillwill be tested annually and whenever events or circumstances occur indicatingthat goodwill might be impaired.  SFASNo. 141 and SFAS No. 142 are effective for all business combinations completedafter June 30, 2001.  Upon adoption ofSFAS No. 142, amortization of goodwill recorded for business combinationsconsummated prior to July 1, 2001 will cease, and intangible assets acquiredprior to July 1, 2001 that do not meet the criteria for recognitions under SFASNo. 141 will be reclassified to goodwill. Companies are required to adopt SFAS No. 142 for fiscal years beginningafter December 15, 2001, but early adoption is permitted.  The Company has not yet determined theimpact these standards will have on its financial statements.

** **

In October 2001, theFinancial Accounting Standards Board issued SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121,“Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of.”   SFAS No. 144 establishes one accountingmodel, based on framework established in SFAS No. 121, for the recognition,measurement and reporting of impairment of long-lived assets to be held andused and measurement of long-lived assets to be disposed of by sale.  Adoption of SFAS No. 144 is required for theCompany’s fiscal year beginning April 1, 2002 although early application ispermitted.  The Company is currentlyevaluating the impact this new standard will have on its financial position,results of operations and cash flows.

 

**PART I - FINANCIAL INFORMATION**

 

 

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

 

 

**Results of Operations (In millions)**

 
|                                          |   | **For the Three   Months Ended** |   | **For the Six Months Ended** |   |
|-----------------------------------------------|--------|---------------------------------------|--------|------------------------------|--------|
|                                          |   | **Sept. 29,**                         |   |                         |   | **Sept. 30,** |   |   |   | **Sept. 29,** |   |   |   | **Sept. 30,** |   |   |   |
|                                          |   | **2001**                              |   | **Percent**                  |   | **2000** |   | **Percent** |   | **2001** |   | **Percent** |   | **2000** |   | **Percent** |   |
|                                          |   |                                  |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                          |   |                                  |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                     |   | $                                     | 18.4   |                         | 100.0  | % | $ | 20.2 |   | 100.0 | % | $ | 37.1 |   | 100.0 | % | $ | 38.7 |   | 100.0 | % |
| Gross profit                                  |   | 6.0                                   |   | 32.9                         | %      | 7.3 |   | 35.9 | % | 12.2 |   | 33.0 | % | 13.4 |   | 34.6 | % |
| Selling, general and administrative  expenses |   | 1.7                                   |   | 9.4                          | %      | 2.4 |   | 11.7 | % | 3.6 |   | 9.8 | % | 4.3 |   | 11.1 | % |
| Earnings from operations                      |   | 4.3                                   |   | 23.5                         | %      | 4.9 |   | 24.2 | % | 8.6 |   | 23.2 | % | 9.1 |   | 23.5 | % |
| Other income/expense                          |   | (2.4                                  | )      | (13.1                        | )%     | (2.5 | ) | (12.4 | )% | (4.8 | ) | (12.9 | )% | (5.2 | ) | (13.4 | )% |
| Extraordinary gain, net                       |   | ---                                   |   | 0.0                          | %      | 3.2 |   | 15.8 | % | --- |   | 0.0 | % | 3.2 |   | 8.2 | % |
| Net earnings                                  |   | $                                     | 1.2    |                         | 6.3    | % | $ | 4.6 |   | 22.9 | % | $ | 2.3 |   | 6.2 | % | $ | 5.5 |   | 14.3 | % |

 

**Comparisonof the Three Months Ended September 29, 2001 (”2002 Quarter”) to the ThreeMonths Ended September 30, 2000 (“2001 Quarter”)**

 

 

### *Net Sales*

 

                The Company’s net salesdecreased by approximately $1.8 million or 9% to $18.4 million for the 2002Quarter compared to sales of $20.2 million for the 2001 Quarter.

 

                Sales to existing aerospace,industrial process control and petrochemical customers increased byapproximately 11% in the 2002 Quarter compared to the 2001 Quarter.  Based on current order volume, the Companyexpects consistent unit volume and revenue in the aerospace, industrial processcontrol and petrochemical markets over the next quarter.

 

                On the automotive side, revenuefrom airbag and seat belt initiator products decreased due to both decreasingvolumes and contractual price reductions on existing programs.  The Company’s unit shipments to its largestcustomer, Special Devices, Inc. (“SDI”) decreased 24% for the 2002 Quartercompared to the 2001 Quarter.  Overall,revenue from all automotive shipments decreased approximately 28% in the 2002Quarter compared to the 2001 Quarter. Based on current order volume, the Company expects further decreases inunit shipments of automotive products over the next quarter.

 

                The Company has continued to develop a significantmarket presence in the telecommunications markets through component productsdesigned for optical networking infrastructure.  Shipments of these products increased dramatically throughoutFiscal Year 2001; however, they have slowed significantly due to reducedspending by the service providers on optical systems.  Sales of these products decreased 26% in the 2002 Quartercompared to the 2001 Quarter.  Based oncurrent order volume and industry reports, the Company expects continuedweakness in the telecommunications markets over the next quarter.

 

 

*Gross Profit*

 

                Gross profit decreased by approximately 18% or $1.3million, to $6.0 million for the 2002 Quarter compared to $7.3 million for the2001 Quarter.  Gross margin decreased to33% for the 2002 Quarter from 36% for the 2001 Quarter.

 

                        The decrease in gross profit is attributableto the $1.8 million decrease in sales revenue in the 2002 Quarter compared tothe 2001 Quarter and partially offset by lower variable manufacturingexpenses.  The decrease in gross marginwas primarily attributable to the significant decrease in revenue and thecorresponding impact of fixed overhead costs leveraged on lower sales revenue.

 

 

*Selling, General and Administrative Expenses*

 

                Selling, general and administrative (“S,G&A”)expenses decreased by approximately 29% or $0.7 million to $1.7 million for the 2002 Quarter compared to $2.4million for the 2001 Quarter.  S,G&Aexpenses as a percent to sales decreased to 9.4% in the 2002 Quarter from 11.7%for the 2001 Quarter.

 

                Selling expenses decreased approximately 3% in the2002 Quarter compared to the 2001 Quarter. This decrease was primarily attributable to decreased sellingcommissions.   G&A expenses overallwere lower in the 2002 Quarter as compared to the 2001 Quarter due to decreasedcompensation costs.  The decreasedpercentage of S,G&A expenses to sales reflects the above cited costreductions exceeding the percentage decrease in sales.

* *

* *

*Earnings from Operations*

 

                Operating earnings decreased by $0.6 million or 12%to $4.3 million for the 2002 Quarter compared to $4.9 million for the 2001Quarter.  Operating margins decreased to23.5% in the 2002 Quarter from 24.2% for the 2001 Quarter.

 

                The decrease in operating earnings and margin wasattributable to the same factors (as discussed above) that contributed to thedecrease in gross profit and gross margin.

 

 

*Other Expense, net*

 

                Other expense, net (which is predominantly netinterest expense) was down slightly at $2.4 million for the 2002 Quartercompared to $2.5 million for the 2001 Quarter. As discussed below, the Company purchased for retirement $10.2 millionof it’s 10.75% Senior Subordinated Notes during the 2001 Quarter.  The Company has $90.4 million of indebtednessas of September 29, 2001 compared to $94.1 million at September 30, 2000.

 

 

*ExtraordinaryGain, net*

 

                During the 2001 Quarter, the Company purchased forretirement $10.2 million face value of it’s 10.75% Senior Subordinated Notesfor $4.6 million in cash.  Thetransaction resulted in an extraordinary gain on the early retirement of debtof $3.2 million, net of taxes of $2.1 million. The purchase of thisindebtedness will result in an after-tax yield to maturity of 20.3%.

* *

* *

*Net Earnings*

 

                Net earnings decreased by approximately $3.4 millionto $1.2 million for the 2002 Quarter from $4.6 million in the 2001 Quarter.

 

                The substantial decrease in net earnings was due tothe $3.2 million extraordinary gain on the retirement of debt recognized in the2001 Quarter.

 

**Comparison of the Six Months Ended September 29, 2001 (“2002Period”) to the Six Months Ended September 30, 2000 (“2001 Period”)**

 

 

*Net Sales*

 

                The Company’s net sales decreased by approximately$1.6 million or 4% to $37.1 million for the 2002 Period compared to sales of$38.7 million for the 2001 Period.

 

                Sales to existing aerospace,industrial process control and petrochemical customers increased byapproximately 13% in the 2002 Period compared to the 2001 Period.  Based on current order volume, the Companyexpects consistent unit volume and revenue in the aerospace, industrial processcontrol and petrochemical markets over the next quarter.

 

                On the automotive side, revenuefrom airbag and seat belt initiator products decreased due to both decreasingvolumes and contractual price reductions on existing programs.  The Company’s unit shipments to its largestcustomer, Special Devices, Inc. (“SDI”) decreased 15% for the 2002 Periodcompared to the 2001 Period.  Overall,revenue from all automotive shipments decreased approximately 23% in the 2002Period compared to the 2001 Period. Based on current order volume, the Company expects further decreases inunit shipments of automotive products over the next quarter.

 

                The Company has continued to develop a significantmarket presence in the telecommunications markets through component productsdesigned for optical networking infrastructure.  Shipments of these products increased dramatically throughoutFiscal Year 2001; however, they have slowed significantly due to reducedspending by the service providers on optical systems.  Sales of these products decreased 20% in the 2002 Period comparedto the 2001 Period.  Based on currentorder volume and industry reports, the Company expects continued weakness inthe telecommunications markets over the next quarter.

* *

* *

*Gross Profit*

 

                Gross profit decreased by $1.2 million or 9% to $12.2million for the 2002 Period compared to $13.4 million for the 2001 Period.  Gross margin decreased to 33.0% for the 2002Period from 34.6% for the 2001 Period.

 

                The decrease in gross profit is attributable to thedecrease in sales volume in the 2002 Period. The decrease in gross margin was primarily attributable to the decreasein revenue and the corresponding impact of fixed overhead costs leveraged onlower sales revenue.

 

 

*Selling, General and Administrative Expenses*

 

                Selling, general and administrative (“S,G&A”)expenses decreased by $0.7 million or 16% to $3.6 million for the 2002 Periodcompared to $4.3 million for the 2001 Period. S,G&A expenses as a percent to sales decreased to 9.8% in the 2002Period from 11.1% for the 2001 Period.

 

                Selling expenses increased approximately 2% in the2002 Period compared to the 2001 Period. This increase was primarily attributable to slightly higher marketingexpenses incurred in the 2002 Period.  G&A expenses overall were lower in the 2002 Period as compared tothe 2001 Period due to decreased compensation costs.  The decreased percentage of S,G&A expenses to sales reflectsthe above cited cost reductions exceeding the percentage decrease in sales.

* *

*Earnings from Operations*

 

                Operating earnings decreased by $0.5 million or 5.5%to $8.6 million for the 2002 Period compared to $9.1 million for the 2001Period.  Operating margins decreased to23.2% in the 2002 Period from 23.5% for the 2001 Period.

 

                The decrease in operating earnings and margin wasattributable to the same factors (as discussed above) that contributed to thedecrease in gross profit and gross margin and improvement in S,G&A expensesas a percent to sales.

 

 

*Other Expense, net*

 

                Other expense, net (which is predominantly netinterest expense) decreased to $4.8 million in the 2002 Period compared to $5.2million in the 2001 Period.  Asdiscussed below, the Company purchased for retirement $10.2 million of it’s10.75% Senior Subordinated Notes during the 2001 Period.  The Company has $90.4 million ofindebtedness as of September 29, 2001 compared to $94.1 million at September30, 2000.

 

 

### *Extraordinary Gain,net*

 

                During the 2001 Period, the Company purchased forretirement $10.2 million face value of it’s 10.75% Senior Subordinated Notesfor $4.6 million in cash.  Thetransaction resulted in an extraordinary gain on the early retirement of debtof $3.2 million, net of taxes of $2.1 million. The purchase of thisindebtedness will result in an after-tax yield to maturity of 20.3%.

 

 

*Net Earnings*

 

                Net earnings decreased by approximately $3.2 millionto $2.3 million for the 2002 Period from $5.5 million in the 2001 Period.

 

                The substantial decrease in net earnings was due tothe $3.2 million extraordinary gain on the retirement of debt.

 

** **

**Liquidity and Capital Resources**

 

                Net cash provided by operating activities was $2.0 million for the 2002 Period compared to$3.7 million 2001 Period.  The decreaseof $1.7 million of cash generated was primarily attributable to the increase inother assets and the decrease in other liabilities.

 

                Net cash used ininvesting activities was $0.9 million for the 2002 Period compared to $3.1million for the 2001 Period.

 

                Net cash used infinancing activities was $1.0 million for the 2002 Period comparedto $5.4 million, due primarily to thepurchase of the 10.75% Senior Subordinated Notes**,** for the 2001 Period.

 

                Asof September 29, 2001, the Company’s outstanding long-term debt is $90.4million.  The Company has a Revolving CreditFacility up to $20.0 million, which is collateralized by accounts receivableand inventories.  At September 29, 2001there was $19.5 million available under the Revolving Credit Facility.  Borrowings under the Revolving CreditFacility may be used for general and other corporate purposes.  To date, the Company has not used anyamounts under the Revolving Credit Facility.

 

                The Company believes that cash flow from operationsand the availability of borrowings under the Revolving Credit Facility will provideadequate funds for ongoing operations, planned capital expenditures and debtservice during the term of such facility.

 

                Capital expenditures for fiscal 2002 are expected tofocus on vertical integration with investments in equipment to expand manufacturingcapacity in machining, glass production, sealing and plating, as well asautomation equipment to lower production costs on the high volume productionlines.  Expected capital expendituresfor fiscal 2002 are approximately $2.0 million and will be financed throughworking capital, the Revolving Credit Facility and/or purchase moneyindebtedness.

 

 

                This filing contains statements that are “forwardlooking statements”, and includes, among other things, discussions of theCompany’s business strategy and expectations concerning market position, futureoperations, 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 beencorrect.  All phases of the operationsof the Company are subject to a number of uncertainties, risks and otherinfluences, including general economic conditions, regulatory changes andcompetition, many of which are outside the control of the Company, any one ofwhich, or a combination of which, could materially affect the results of theCompany’s operations and whether the forward looking statements made by theCompany ultimately prove to be accurate.

 

 

## **Recent Accounting Pronouncements**

 

In July 2001, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) Nos. 141 and 142, “Business Combinations” and“Goodwill and Other Intangible Assets” . SFAS No. 141 replaces APB 16 and eliminates pooling-of-interestsaccounting prospectively.  It alsoprovides guidance on purchase accounting related to the recognition ofintangible assets and accounting for negative goodwill.

 

SFAS No. 142 changes theaccounting for goodwill from an amortization method to an impairment-onlyapproach.  Under SFAS No. 142, goodwillwill be tested annually and whenever events or circumstances occur indicatingthat goodwill might be impaired.  SFASno. 141 and SFAS No. 142 are effective for all business combinations completedafter June 30, 2001.  Upon adoption ofSFAS No. 142, amortization of goodwill recorded for business combinationsconsummated prior to July 1, 2001 will cease, and intangible assets acquiredprior to July 1, 2001 that do not meet the criteria for recognitions under SFASNo. 141 will be reclassified to goodwill. Companies are required to adopt SFAS No. 142 for fiscal years beginningafter December 15, 2001, but early adoption is permitted.  The Company has not yet determined theimpact these standards will have on its financial statements.

 

 

InOctober 2001, the Financial Accounting Standards Board issued SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” whichreplaces SFAS No. 121, “Accounting for Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of.”  SFAS No. 144 establishes one accounting model, based on frameworkestablished in SFAS No. 121, for the recognition, measurement and reporting ofimpairment of long-lived assets to be held and used and measurement oflong-lived assets to be disposed of by sale. Adoption of SFAS No. 144 is required for the Company’s fiscal yearbeginning April 1, 2002 although early application is permitted.  The Company is currently evaluating theimpact this new standard will have on its financial position, results ofoperations and cash flows.

 

## **Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

                The Company is exposed to market risk from changes ininterest rates on the Company’s Revolving Credit Facility.  At September 29, 2001, the Company had nooutstanding borrowings under the line of credit and, therefore, changes ininterest rates would have no impact on the Company’s results of operations.

 

 

 

**PART II - OTHER INFORMATION**

 

Items 1 through 5 areomitted, 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 |
|    |   |                              |
|    |   | (b)                               | Reports on Form  8-K  -  Not applicable |

 

 

SIGNATURES

 
|   |             |   |                |                                        |   |   |
|--------|------------------|--------|---------------------|---------------------------------------------|--------|--------|
|   |             |   | HCC INDUSTRIES INC. |
|   |             |   |                |                                        |   |   |
| DATED: | November 9, 2001 |   | /s/                 | Richard  L. Ferraid                         |
|   |             |   |                | President and Chief  Executive Officer      |
|   |             |   |                |                                        |
|   |             |   |                |                                        |
| DATED: | November 9, 2001 |   | /s/                 | Christopher H. Bateman                      |
|   |             |   |                | Vice President and  Chief Financial Officer |