** **

**UNITEDSTATES SECURITIES 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 29, 2002**                                                                                                    |
|       |   |                                                                                                                                                        |   |   |   |   |
| **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 ofRegistrant 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 principalexecutive offices)

 

 

**(626) 443-8933**(Registrant’stelephone number, including area code)

 

----

 

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

 

 

Registrant’s CommonStock, outstanding at August 12, 2002 was 137,945 shares.

 

 

1

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**PART I -FINANCIAL INFORMATION**

**Item 1.    Condensed Consolidated Financial Statements**

 

 

**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

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

 

 
|                                                                                             |   | **June 29,** |   | **March 30,** |   |
|--------------------------------------------------------------------------------------------------|--------|--------------|--------|---------------|--------|
|                                                                                             |   | **2002**     |   | **2002**      |   |
|                                                                                             |   | (unaudited)  |   |          |   |
| **ASSETS**                                                                                       |   |         |   |          |   |
| **Current  Assets:**                                                                             |   |         |   |          |   |
| Cash and cash  equivalents                                                                       |   | $            | 7,266  |          | $      | 10,990 |   |
| Trade accounts  receivable, less allowance for  doubtful accounts of $79 (2003) and $70 (2002)   |   | 7,088        |   | 8,356         |   |
| Inventories                                                                                      |   | 5,713        |   | 6,016         |   |
| Income taxes  receivable                                                                         |   | 1,254        |   | 506           |   |
| Prepaid and  other current assets                                                                |   | 1,264        |   | 1,130         |   |
|                                                                                             |   |         |   |          |   |
| Total current  assets                                                                            |   | 22,585       |   | 26,998        |   |
|                                                                                             |   |         |   |          |   |
| **Property,  Plant and Equipment, net**                                                          |   | 24,283       |   | 24,895        |   |
|                                                                                             |   |         |   |          |   |
| **Other  Assets:**                                                                               |   |         |   |          |   |
| Intangible  assets                                                                               |   | 4,461        |   | 4,486         |   |
| Deferred  financing costs                                                                        |   | 1,648        |   | 1,732         |   |
| Deferred income  taxes                                                                           |   | 1,623        |   | 1,623         |   |
| Restricted cash                                                                                  |   | 5,875        |   | 5,901         |   |
|                                                                                             |   |         |   |          |   |
| **Total  assets**                                                                                |   | $            | 60,475 |          | $      | 65,635 |   |
|                                                                                             |   |         |   |          |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**                                         |   |         |   |          |   |
|                                                                                             |   |         |   |          |   |
| **Current  Liabilities:**                                                                        |   |         |   |          |   |
| Current portion  of long-term debt                                                               |   | $            | 2,040  |          | $      | 2,109 |   |
| Accounts payable                                                                                 |   | 935          |   | 1,475         |   |
| Accrued  liabilities                                                                             |   | 6,000        |   | 8,661         |   |
|                                                                                             |   |         |   |          |   |
| Total current  liabilities                                                                       |   | 8,975        |   | 12,245        |   |
|                                                                                             |   |         |   |          |   |
| **Long  Term Liabilities:**                                                                      |   |         |   |          |   |
| Long-term debt,  net of current portion                                                          |   | 86,165       |   | 86,627        |   |
| Other long-term  liabilities                                                                     |   | 7,867        |   | 8,174         |   |
|                                                                                             |   | 103,007      |   | 107,046       |   |
|                                                                                             |   |         |   |          |   |
| **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                                                                      |   | 360          |   | 360           |   |
| Accumulated  deficit                                                                             |   | (42,906      | )      | (41,785       | )      |
|                                                                                             |   |         |   |          |   |
| **Total  stockholders’ deficit**                                                            |   | (42,532      | )      | (41,411       | )      |
|                                                                                             |   |         |   |          |   |
| **Total  liabilities and stockholders’ deficit**                                            |   | $            | 60,475 |          | $      | 65,635 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

2

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

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

# **Unaudited**

 

 
|                                          |   | **Three  Months Ended** |   |
|-----------------------------------------------|--------|-------------------------|--------|
|                                          |   | **June 29,**            |   | **June 30,** |   |
|                                          |   | **2002**                |   | **2001** |   |
| **NET SALES**                                 |   | $                       | 10,591 |   | $ | 18,790 |   |
|                                          |   |                    |   |   |   |
| Cost of goods  sold                           |   | 8,597                   |   | 12,583 |   |
|                                          |   |                    |   |   |   |
| **GROSS PROFIT**                              |   | 1,994                   |   | 6,207 |   |
|                                          |   |                    |   |   |   |
| Selling, general  and administrative expenses |   | 1,473                   |   | 1,916 |   |
|                                          |   |                    |   |   |   |
| **EARNINGS FROM OPERATIONS**                  |   | 521                     |   | 4,291 |   |
|                                          |   |                    |   |   |   |
| **OTHER INCOME (EXPENSE):**                   |   |                    |   |   |   |
| Interest and  other income                    |   | 39                      |   | 74 |   |
| Interest expense                              |   | (2,429                  | )      | (2,465 | ) |
|                                          |   |                    |   |   |   |
| Total other expense,  net                     |   | (2,390                  | )      | (2,391 | ) |
|                                          |   |                    |   |   |   |
| Earnings (loss) before taxes (benefit)        |   | (1,869                  | )      | 1,900 |   |
| Taxes (benefit)  on earnings (loss)           |   | (748                    | )      | 760 |   |
|                                          |   |                    |   |   |   |
| **NET EARNINGS (LOSS)**                       |   | $                       | (1,121 | ) | $ | 1,140 |   |

 

 

 

 

 

 

 

 

 

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

3

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**Unaudited**

 

 
|                                                                              |   | **Three  Months Ended** |   |
|-----------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                              |   | **June 29,**            |   | **June 30,** |   |
|                                                                              |   | **2002**                |   | **2001** |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                        |   |                    |   |   |   |
| Net earnings  (loss)                                                              |   | $                       | (1,121 | ) | $ | 1,140 |   |
| Reconciliation  of net earnings (loss) to net cash  used in operating activities: |   |                    |   |   |   |
| Depreciation                                                                      |   | 670                     |   | 621 |   |
| Amortization                                                                      |   | 109                     |   | 157 |   |
| Changes in  operating assets and liabilities:                                     |   |                    |   |   |   |
| Decrease  (increase) in trade accounts receivable, net                            |   | 1,268                   |   | (179 | ) |
| Decrease  (increase) in inventories                                               |   | 303                     |   | (349 | ) |
| (Increase)  decrease in other assets and income  taxes receivable                 |   | (856                    | )      | 730 |   |
| (Decrease) in  accounts payable                                                   |   | (540                    | )      | (620 | ) |
| (Decrease) in  accrued and other liabilities                                      |   | (2,968                  | )      | (3,438 | ) |
|                                                                              |   |                    |   |   |   |
| Net cash used in  operating activities                                            |   | (3,135                  | )      | (1,938 | ) |
|                                                                              |   |                    |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                        |   |                    |   |   |   |
| Purchases of  property, plant and equipment                                       |   | (58                     | )      | (1,057 | ) |
|                                                                              |   |                    |   |   |   |
| Net cash used in  investing activities                                            |   | (58                     | )      | (1,057 | ) |
|                                                                              |   |                    |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                        |   |                    |   |   |   |
| Principal  payments on long-term debt                                             |   | (1,622                  | )      | (515 | ) |
| Proceeds from  issuance of long-term debt                                         |   | 1,091                   |   | — |   |
|                                                                              |   |                    |   |   |   |
| Net cash used in  financing activities                                            |   | (531                    | )      | (515 | ) |
|                                                                              |   |                    |   |   |   |
| Net (decrease)  in cash and cash equivalents                                      |   | (3,724                  | )      | (3,510 | ) |
|                                                                              |   |                    |   |   |   |
| Cash and cash  equivalents at beginning of period                                 |   | 10,990                  |   | 8,896 |   |
|                                                                              |   |                    |   |   |   |
| **CASH AND CASH EQUIVALENTS AT END OF  PERIOD**                                   |   | $                       | 7,266  |   | $ | 5,386 |   |

 

 

 

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

4

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

Notes to CondensedConsolidated Financial Statements

June 29, 2002

 

 

 

1.             INTERIM FINANCIALSTATEMENTS:

 

The accompanying unaudited condensed consolidatedfinancial statements of HCC Industries Inc. and Subsidiaries (the “Company”),include all adjustments (consisting of normal recurring entries) whichmanagement believes are necessary for a fair presentation of the financialposition and results of operations for the periods presented.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted.  The year end condensed balance sheet datawas derived from audited financial statements, but does not include alldisclosures 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 30, 2002.  Operating results for the three-month periodended June 29, 2002 are not necessarily indicative of the operating results forthe full fiscal year.

 

The Company grants uncollateralized credit to itscustomers who are located in various geographical areas.  Estimated credit losses and returns havebeen provided for in the financial statements and, to date, have been withinmanagement’s expectations.

 

 

2.             INVENTORIES:

 

                Inventoriesconsist of the following (in thousands):

|                               |   | **June 29,** |   | **March 30,** |   |
|------------------------------------|--------|--------------|--------|---------------|--------|
|                               |   | **2002**     |   | **2002**      |   |
| Raw materials  and component parts |   | $            | 4,567  |          | $      | 4,503 |   |
| Work in process                    |   | 1,146        |   | 1,513         |   |
|                               |   |         |   |          |   |
|                               |   | $            | 5,713  |          | $      | 6,016 |   |

 

3.             PROPERTY, PLANT AND EQUIPMENT:

 

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

 

|                               |   | **June 29,** |   | **March 30,** |   |
|------------------------------------|--------|--------------|--------|---------------|--------|
|                               |   | **2002**     |   | **2002**      |   |
| Land                               |   | $            | 4,017  |          | $      | 4,017 |   |
| Buildings and  improvements        |   | 9,938        |   | 9,938         |   |
| Furniture,  fixtures and equipment |   | 26,312       |   | 26,254        |   |
|                               |   |         |   |          |   |
|                               |   | 40,267       |   | 40,209        |   |
| Less accumulated  depreciation     |   | (15,984      | )      | (15,314       | )      |
|                               |   | $            | 24,283 |          | $      | 24,895 |   |

** **

 

5

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4.             LONG-TERM DEBT:

 

                Long-term debt consists of thefollowing (in thousands):

 

|                                                                                       |   | **June 29,** |         | **March 30,** |   |
|--------------------------------------------------------------------------------------------|--------|--------------|--------------|---------------|--------|
|                                                                                       |   | **2002**     |         | **2002**      |   |
| 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 |   | 2,762        |         | 2,762         |   |
|                                                                                       |   |         |         |          |   |
| Capital Lease  Obligations (interest rates ranging between 6.36% and 8.70%)                |   | 5,658        |         | 6,189         |   |
|                                                                                       |   |         |         |          |   |
|                                                                                       |   | 88,205       |         | 88,736        |   |
| Less current  portion                                                                      |   | 2,040        |         | 2,109         |   |
|                                                                                       |   |         |         |          |   |
|                                                                                       |   | $            | 86,165       |          | $      | 86,627 |   |
|                                                                                            |        |              |              |               |        |  |  |  |  |

 

The Company has aRevolving Credit Facility up to $8.0 million, which is collateralized byaccounts receivable, inventory and equipment. Borrowings under the Revolving Credit Facility may be used for generaland other corporate purposes.  TheRevolving Credit Facility includes covenants requiring maintenance of certainfinancial ratios.  At June 29, 2002, theCompany was not in compliance with the required ratios.  There are no borrowings outstanding underthe Revolving Credit Facility.

 

5.                                       CAPITAL STOCK:

 

                                                TheCompany is authorized to issue an aggregate of 550,000 shares of commonstock.  These shares may be issued infour different classes (A, B, C or D shares) which differ only in voting rightsper share.  At June 29, 2002, the137,945 outstanding shares of common stock were 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

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6.             COMMITMENTS ANDCONTINGENCIES:

 

Environmental

 

As an ongoing facet of the Company’s business, it isrequired to maintain compliance with various environmental regulations.  The cost of this compliance is included inthe Company’s operating results as incurred. These ongoing costs include permitting fees and expenses and specializedeffluent control systems as well as monitoring and site assessment costsrequired by various governmental agencies. In the opinion of management, the maintenance of this compliance willnot have a significant effect on the financial position or results ofoperations of the Company.

 

                                                InAugust 1994, the U.S. Environmental Protection Agency (“EPA”) identified theCompany as a potentially responsible party (“PRP”) in the El Monte OperableUnit (“EMOU”) of the San Gabriel Valley Superfund Sites.  In early 1995, the Company and the EPA executedan Administrative Consent Order which requires the Company and other PRP’s toperform a Remedial Investigation and Feasibility Study (“RI/FS”) for theEMOU.  The RI/FS was completed in 1999and the EPA issued an interim record of decision.  In addition, the Company’s facility in Avon, Massachusetts issubject to Massachusetts “Chapter 21E”, the State’s hazardous site clean-upprogram.  Uncertainty as to (a) theextent 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.

 

                                                Infiscal 1997, the Company with the help of independent consultants, 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 20 years. This estimate is based on progress madein determining the magnitude of such costs, experience gained from sites onwhich remediation is ongoing or has been completed, and the timing and extentof remedial actions required by the applicable governmental authorities.

 

As of June 29, 2002, the accrual for estimatedenvironmental costs was $7,867,000. Actual expenditures for environmental remediation were $307,000 for thethree months ended June 29, 2002 and $528,000 for the fiscal year ended March30, 2002.  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 of costs already incurred andfuture costs have been asserted against various insurance companies.  The Company has neither recorded any assetnor reduced any liability in anticipation of recovery with respect to suchclaims made.

 

 

7

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Other

 

                                                On August 2, 2002, the Company filed alawsuit in California Superior Court (Case GC030102, Hermetic Seal Corporation,HCC Industries Inc. vs. Special Devices, Inc.) against SDI and certain otherfictitious defendants alleging various claims of breaches of contract.  The allegations primarily relate to SDI’sfailure to tender payment to the Company for shipments of parts the Companymanufactured and delivered pursuant to various purchase orders and/oragreements and its breach of exclusivity requirements.  The ultimate resolution of these claims isnot expected to have a material impact on the results of operations orfinancial position of the Company.

 

In addition to the above,the Company is involved in other claims and litigation arising in the normalcourse of business.  Based on the adviceof counsel and in the opinion of management, the ultimate resolution of thesematters will not have a significant effect on the financial position or theresults of operations of the Company.

 

 

7.             RECENT ACCOUNTINGPRONOUNCEMENTS:

 

In June 2001, theFinancial Accounting Standards Board ("FASB") issued Statement ofFinancial Accounting Standards No. 141 ("SFAS 141"), "Accountingfor Business Combinations" and No. 142 ("SFAS 142"),"Goodwill and Other Intangibles", effective for fiscal yearsbeginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to haveindefinite lives are no longer amortized but is subject to annual impairmenttests in accordance with the Statements. Other intangibles assets will continue to be amortized over theirestimated useful lives. 

 

Application of the non-amortization provisions of SFAS142 did not result in a significant impact of the operating results of theCompany.  Under SFAS 142, goodwill mustbe assigned to reporting units and measured for impairment based upon fairvalue of the reporting units.  TheCompany has not yet completed the initial impairment test of goodwill underSFAS 142.

 

 

8

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**PART I -FINANCIAL INFORMATION**

 

 

**Item2.            Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

 

**Resultsof Operations (In millions)**

 
|                                          |   | **For the  Three  Months Ended** |   |
|-----------------------------------------------|--------|---------------------------------------|--------|
|                                          |   | **June 29,**                          |   |   |   | **June 30,** |   |   |   |
|                                          |   | **2002**                              |   | **Percent** |   | **2001** |   | **Percent** |   |
| Net sales                                     |   | $                                     | 10.6   |   | 100.0 | % | $ | 18.8 |   | 100.0 | % |
| Gross profit                                  |   | 2.0                                   |   | 18.9 | % | 6.2 |   | 33.0 | % |
| Selling, general  and administrative expenses |   | 1.5                                   |   | 14.2 | % | 1.9 |   | 10.1 | % |
| Earnings from  operations                     |   | 0.5                                   |   | 4.7 | % | 4.3 |   | 22.9 | % |
| Other  income/expense                         |   | (2.4                                  | )      | -22.6 | % | (2.4 | ) | -12.8 | % |
| Net earnings  (loss)                          |   | $                                     | (1.1   | ) | -10.4 | % | $ | 1.1 |   | 5.9 | % |

 

**Comparison of the Three Months EndedJune 29, 2002 (“2003 Quarter”) to the Three Months Ended June 30, 2001 (“2002Quarter”)**

 

*NetSales*

 

                TheCompany’s net sales decreased significantly by 43.6% or $8.2 million to $10.6million for the 2003 Quarter compared to sales of $18.8 million for the 2002Quarter.

 

                Salesto existing aerospace, industrial process control, and petrochemical customersdecreased by approximately 22% in the 2003 Quarter compared to the 2002Quarter.  Based on current order volume, the Company expects weakness in the aerospace,industrial process control and petrochemical markets to continue over the nextquarter.

 

                On the automotive side, revenue from airbag and seatbelt initiator products decreased due to the termination of the supplyagreement with Special Devices, Inc. (“SDI”), formerly the Company’s largestcustomer.  The Company stopped sellingproduct to SDI in March 2002.  Overall,revenue from all automotive shipments decreased approximately 78% in the 2003Quarter compared to the 2002 Quarter. The Company is aggressively pursuing additional opportunities in theautomotive market.  The Company expectsthe significant decrease in revenue from SDI will be partially offset byincreases in unit shipments on new and existing programs to other automotivecustomers over the next several quarters. On the whole, the Company expects significantly lower revenues fromautomotive products during fiscal 2003.

 

                TheCompany has continued to develop a significant market presence in thetelecommunications markets through component products designed for opticalnetworking infrastructure.  Shipments ofthese products decreased dramatically as the market collapsed.  Sales of these products decreased by approximately80% in the 2003 Quarter compared to the 2002 Quarter.  Based on current order volume and industry reports, the Companyexpects continued weakness in the telecommunications markets over the nextseveral quarters at a minimum.

 

 

9

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*GrossProfit*

 

                Grossprofit decreased by approximately 67.7% or $4.2 million, to $2.0 million forthe 2003 Quarter compared to $6.2 for the 2002 Quarter.  Gross margin decreased to 18.9% for the 2003Quarter from 33.0% for the 2002 Quarter.

 

                Thedecrease in gross profit is attributable to the decreased sales volume.  The decrease in gross margin was primarilyattributable to the significant decrease in revenue and the correspondingimpact of fixed overhead costs leveraged against lower revenue.  The ongoing weakness in sales will continueto impact gross profitability and gross margin.

 

 

*Selling,General and Administrative Expenses*

 

                Selling,general and administrative (“S,G&A”) expenses decreased by approximately21.1% or  $0.4 million to $1.5 millionfor the 2003 Quarter compared to $1.9 million for the 2002 Quarter.  S,G&A expenses as a percent to salesincreased to 14.2% in the 2003 Quarter from 10.1% for the 2002 Quarter.

 

                Sellingexpenses decreased approximately 3% in the 2003 Quarter compared to the 2002Quarter.  This decrease was primarilyattributable to decreased selling commissions on the lower sales volume.   G&A expenses overall were lower in the2003 Quarter as compared to the 2002 Quarter due to decreased compensationcosts.  The increased percentage ofS,G&A expenses to sales reflects the fixed portion of those expensesleveraged over the lower revenue.

 

 

*Earningsfrom Operations*

 

                Operatingearnings decreased 88.4% or $3.8 million to $0.5 million for the 2003 Quartercompared to $4.3 million for the 2002 Quarter. Operating margins decreased to 4.7% in the 2003 Quarter from 22.9% forthe 2002 Quarter.

 

                Thedecrease in operating earnings and margin was attributable to the same factorsas discussed above.

 

 

*OtherExpense, net*

 

                Otherexpense, net (which is predominantly net interest expense) was flat at $2.4million in the 2003 and 2002 Quarters. The Company has $88.2 million of indebtedness as of June 29, 2002compared to $90.5 million at June 30, 2001.

 

 

*NetEarnings*

 

                Netearnings decreased by approximately $2.2 million to a net loss of $1.1 millionfor the 2003 Quarter from net earnings of $1.1 million in the 2002 Quarter.

 

                Thedecrease in net earnings was primarily attributable to the decrease in earningsfrom operations in the 2003 Quarter.

 

 

 

10

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**Liquidityand Capital Resources**

 

                Netcash used in operating activities was $3.1 million for the 2003 Quartercompared to $1.9 million used in operating activities for the 2002Quarter.  The increase of $1.2 millionof cash used was primarily attributable to the decrease in net earnings.  The cash used in operating activities isimpacted in the Company's first and third quarters by the semi-annual interestpayments on the Senior Subordinated Notes.

 

                Netcash used in investing activities was $0.1 million for the 2003 Quartercompared to $1.1 million for the 2002 Quarter. 

 

                Netcash used in financing activities was $0.5 million for the 2003 Quartercompared to $0.5 million for the 2002 Quarter. During the 2003 Quarter, the Company refinanced approximately $1.1million of term debt at 9.63% fixed interest to a lower fixed rate of 7.30%.

 

                As of June 29,2002, the Company’s outstanding long-term debt is $88.2 million.  The Company has a Revolving Credit Facilityup to $8.0 million, which is collateralized by accounts receivable, inventoryand equipment.  Borrowings under theRevolving Credit Facility may be used for general and other corporatepurposes.  The Revolving Credit Facilityincludes covenants requiring maintenance of certain financial ratios.  At June 29, 2002, the Company was not incompliance with the required ratios. There are no borrowings outstanding under the Revolving Credit Facility.

 

                TheCompany is currently in discussion with its bank for a waiver of thenon-compliant ratios.  The Companybelieves that cash flow from operations and the availability of borrowingsunder the Revolving Credit Facility will provide adequate funds for ongoingoperations, planned capital expenditures and debt service during the term ofsuch facility.

 

                Capitalexpenditures for fiscal 2003 are expected to focus on repairs and maintenanceof existing equipment.  Expected capitalexpenditures for fiscal 2003 will be approximately $0.5 to $0.75 million andwill be financed through working capital.

 

                Thisfiling contains statements that are “forward looking statements”, and includes,among other things, discussions of the Company’s business strategy andexpectations concerning market position, future operations, margins,profitability, liquidity and capital resources.  Although the Company believes that the expectations reflected insuch forward looking statements are reasonable, it can give no assurance thatsuch expectations will prove to have been correct.  All phases of the operations of the Company are subject to anumber of uncertainties, 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, could materiallyaffect the results of the Company’s operations and whether the forward lookingstatements made by the Company ultimately prove to be accurate.

 

 

## **Recent AccountingPronouncements**

 

In June 2001, the Financial Accounting Standards Board("FASB") issued Statement of Financial Accounting Standards No. 141("SFAS 141"), "Accounting for Business Combinations" andNo. 142 ("SFAS 142"), "Goodwill and Other Intangibles",effective for fiscal years beginning after December 15, 2001.  Under the new rules, goodwill and intangibleassets deemed to have indefinite lives are no longer amortized but is subjectto annual impairment tests in accordance with the Statements.  Other intangibles assets will continue to beamortized over their estimated useful lives. 

 

Application of thenon-amortization provisions of SFAS 142 did not result in a significant impactof the operating results of the Company. Under SFAS 142, goodwill must be assigned to reporting units andmeasured for impairment based upon fair value of the reporting units.  The Company has not yet completed theinitial impairment test of goodwill under SFAS 142.

## ** **

## ** **

## **Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

                TheCompany is exposed to market risk from changes in interest rates on the Company’sRevolving Credit Facility.  At June 29,2002, the Company had no outstanding borrowings under the line of credit and,therefore, changes in interest rates would have no impact on the Company’sresults of operations.

 

 

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**PARTII - OTHER INFORMATION**

 

Items 1 through 5 are omitted as they are notapplicable.

 

Item 6.            Exhibitsand Reports on Form 8-K

 

| (a)    | Exhibits:                                                    |
|--------|--------------------------------------------------------------|
|   |                                                         |   |
|   |                                                         | 12.1 - Computation of ratio of earnings to fixed  charges |
|   |                                                         | 99.1 - Certification Pursuant to 18 U.S.C. Section  1350, as Adopted to |
|   |                                                         | Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |                                                         |   |
| (b)    |  Reports on  Form 8-K  —  Not applicable |
|        |                                                              |  |  |

 

 

 

SIGNATURES

 

 
|         |            |   |   |
|--------------|-----------------|--------|--------|
|         |            |   |   | HCC INDUSTRIES INC. |
|         |            |   |   |   |   |   |
| DATED:       | August 12, 2002 |   |   | /s/ | Richard Ferraid |
|         |            |   |   | President and Chief Executive Officer |
|         |            |   |   |   |   |   |
| DATED:  | August 12, 2002 |   |   | /s/ | Christopher H. Bateman |
|         |            |   |   | Vice President and Chief Financial Officer |

 

 

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