----

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**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**FORM10-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 30, 2001**

**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**

 

**HCCINDUSTRIES INC.**(Exact name of Registrant as specified in its charter)

 

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

 

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

 

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

****

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Indicate by check mark whether theregistrant:  (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes ý  No o

Registrant’sCommon Stock, outstanding at August 13, 2001 was 137,945 shares.

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**PART I- FINANCIAL INFORMATIONItem 1.****Condensed Consolidated Financial Statements**

**HCC INDUSTRIES INC. ANDSUBSIDIARIESCondensed Consolidated Balance Sheets(in thousands, except share data)**

**ASSETS**

|                                                  | **June  30,**                                                                                                                           |    | **March  31,** |    |
|-------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------|---------|----------------|---------|
|                                                  | **2001**                                                                                                                                |    | **2001**       |    |
|                                                  | ****                                                                                                                                    |    | ****           |    |
|                                                  | (unaudited)                                                                                                                             |    |           |    |
| **Current Assets**:                                   |                                                                                                                                    |    |           |    |
|                                                  | Cash and cash  equivalents                                                                                                              | $       | 5,386          |    | $ | 8,896 |   |
|                                                  | Trade accounts  receivable, less allowance for   doubtful accounts of $70 at June 30, 2001   and $61 at March 31, 2001                  | 10,978  |           | 10,799  |   |
|                                                  | Inventories                                                                                                                             | 6,817   |           | 6,468   |   |
|                                                  | Income taxes  receivable                                                                                                                | ---     |           | 728     |   |
|                                                  | Prepaid and other  current assets                                                                                                       | 1,558   |           | 1,398   |   |
|                                                  |                                                                                                                                         |    |                |    |
|                                                  |                                                                                                                                    |    |           |    |
|                                                  | Total current assets                                                                                                                    | 24,739  |           | 28,289  |   |
|                                                  |                                                                                                                                    |    |           |    |
| **Property, Plant and  Equipment, net**               | 26,272                                                                                                                                  |    | 25,836         |    |
|                                                  |                                                                                                                                    |    |           |    |
| **Other Assets**:                                     |                                                                                                                                    |    |           |    |
|                                                  | Intangible assets                                                                                                                       | 4,703   |           | 4,775   |   |
|                                                  | Deferred financing  costs                                                                                                               | 1,986   |           | 2,071   |   |
|                                                  | Deferred income taxes                                                                                                                   | 2,080   |           | 2,080   |   |
|                                                  | Restricted cash                                                                                                                         | 6,009   |           | 6,171   |   |
|                                                  |                                                                                                                                         |    |                |    |
|                                                  | Total assets                                                                                                                            | $       | 65,789         |    | $ | 69,222 |   |
|                                                  |                                                                                                                                         |    |                |    |
|                                                  |                                                                                                                                    |    |           |    |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY (DEFICIT)**   |
|                                                  |
| **Current Liabilities**:                              |                                                                                                                                    |    |           |    |
|                                                  | Current portion of  long-term debt                                                                                                      | $       | 3,028          |    | $ | 3,103 |   |
|                                                  | Accounts payable                                                                                                                        | 3,277   |           | 3,897   |   |
|                                                  | Income taxes payable                                                                                                                    | 446     |           | ---     |   |
|                                                  | Accrued liabilities                                                                                                                     | 6,627   |           | 10,270  |   |
|                                                  |                                                                                                                                         |    |                |    |
|                                                  | Total current  liabilities                                                                                                              | 13,378  |           | 17,270  |   |
|                                                  |                                                                                                                                    |    |           |    |
| **Long Term Liabilities**:                            |                                                                                                                                    |    |           |    |
|                                                  | Long-term debt, net of  current portion                                                                                                 | 87,424  |           | 87,864  |   |
|                                                  | Other long-term  liabilities                                                                                                            | 8,461   |           | 8,702   |   |
|                                                  |                                                                                                                                         |    |                |    |
|                                                  | 109,263                                                                                                                                 |    | 113,836        |    |
|                                                  |                                                                                                                                         |    |                |    |
| **Commitments and contingencies**                     |                                                                                                                                    |    |           |    |
|                                                  |                                                                                                                                    |    |           |    |
| **Stockholders’ Equity  (Deficit):**             |                                                                                                                                    |    |           |    |
|                                                  | Common stock; $.10 par  value; authorized 550,000   shares, issued and outstanding 137,945 shares at   June 30, 2001 and March 31, 2001 | 14      |           | 14      |   |
|                                                  | Additional paid-in  capital                                                                                                             | 343     |           | 343     |   |
|                                                  | Accumulated deficit                                                                                                                     | (43,831 | )              | (44,971 | ) |
|                                                  |                                                                                                                                         |    |                |    |
| **Total stockholders' deficit**                       | (43,474                                                                                                                                 | )       | (44,614        | )       |
|                                                  |                                                                                                                                         |    |                |    |
| **Total liabilities and  stockholders’ deficit** | $                                                                                                                                       | 65,789  |           | $       | 69,222 |   |
|                                                  |                                                                                                                                         |    |                |    |
|                                                       |                                                                                                                                         |         |                |         |  |  |  |  |

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

 

 

**HCC INDUSTRIES INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(in thousands, except share data)Unaudited**

 

|                                          | Three  Months Ended        |
|-----------------------------------------------|----------------------------|
|                                          |                            |
|                                          | June  30,                  |   | July  1, |   |
|                                          | 2001                       |   | 2000 |   |
|                                          |                            |   |  |   |
|                                          |                       |   |   |   |
| **NET SALES**                                 | $                          | 18,790 |   | $ | 18,517 |   |
|                                          |                       |   |   |   |
| Cost of goods sold                            | 12,583                     |   | 12,360 |   |
|                                          |                            |   |  |   |
|                                          |                       |   |   |   |
| **GROSS PROFIT**                              | 6,207                      |   | 6,157 |   |
|                                          |                       |   |   |   |
| Selling, general and  administrative expenses | 1,916                      |   | 1,961 |   |
|                                          |                            |   |  |   |
|                                          |                       |   |   |   |
| **EARNINGS FROM OPERATIONS**                  | 4,291                      |   | 4,196 |   |
|                                          |                            |   |  |   |
|                                          |                       |   |   |   |
| **OTHER INCOME (EXPENSE):**                   |                       |   |   |   |
|                                          | Interest and other  income | 74 |   | 190 |   |
|                                          | Interest expense           | (2,465 | ) | (2,862 | ) |
|                                          |                            |   |  |   |
|                                          |                       |   |   |   |
|                                          | Total other expense,  net  | (2,391 | ) | (2,672 | ) |
|                                          |                            |   |  |   |
|                                          |                       |   |   |   |
| **EARNINGS BEFORE TAXES**                     | 1,900                      |   | 1,524 |   |
| Taxes on earnings                             | 760                        |   | 610 |   |
|                                          |                            |   |  |   |
|                                          |                       |   |   |   |
| **NET EARNINGS**                              | $                          | 1,140 |   | $ | 914 |   |
|                                          |                            |   |  |   |
|                                               |                            |  |  |  |  |  |  |  |

 

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

**HCCINDUSTRIES INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)Unaudited**

 

|                                                                        | Three  Months Ended                                                 |
|-----------------------------------------------------------------------------|---------------------------------------------------------------------|
|                                                                        |                                                                     |
|                                                                        | June  30,                                                           |   | July  1, |   |
|                                                                        | 2001                                                                |   | 2000 |   |
|                                                                        |                                                                     |   |  |   |
|                                                                        |                                                                |   |   |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                  |                                                                |   |   |   |
| Net earnings                                                                | $                                                                   | 1,140 |   | $ | 914 |   |
| Reconciliation of net  earnings to net cash   used in operating activities: |                                                                |   |   |   |
|                                                                        | Depreciation                                                        | 621 |   | 526 |   |
|                                                                        | Amortization                                                        | 157 |   | 167 |   |
|                                                                        | Non-cash stock  compensation                                        | --- |   | 76 |   |
|                                                                        | Changes in operating  assets and liabilities:                       |   |   |   |   |
|                                                                        | (Increase) in trade  accounts receivable, net                       | (179 | ) | (2,929 | ) |
|                                                                        | (Increase) decrease in  inventories                                 | (349 | ) | 366 |   |
|                                                                        | Decrease in other  assets                                           | 2 |   | 75 |   |
|                                                                        | (Decrease) in other  liabilities                                    | (3,884 | ) | (2,557 | ) |
|                                                                        | Increase in accounts  payable and income taxes   payable/receivable | 554 |   | 1,032 |   |
|                                                                        |                                                                     |   |  |   |
|                                                                        |                                                                |   |   |   |
|                                                                        | Net cash used in  operating activities                              | (1,938 | ) | (2,330 | ) |
|                                                                        |                                                                     |   |  |   |
|                                                                        |                                                                |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                  |                                                                |   |   |   |
|                                                                        | Purchases of property,  plant and equipment                         | (1,057 | ) | (900 | ) |
|                                                                        |                                                                     |   |  |   |
|                                                                        |                                                                |   |   |   |
|                                                                        | Net cash used in  investing activities                              | (1,057 | ) | (900 | ) |
|                                                                        |                                                                     |   |  |   |
|                                                                        |                                                                |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                  |                                                                |   |   |   |
|                                                                        | Principal payments on  long-term debt                               | (515 | ) | (401 | ) |
|                                                                        | Proceeds from sale of  stock                                        | --- |   | 50 |   |
|                                                                        |                                                                     |   |  |   |
|                                                                        |                                                                |   |   |   |
|                                                                        | Net cash used in  financing activities                              | (515 | ) | (351 | ) |
|                                                                        |                                                                     |   |  |   |
|                                                                        |                                                                |   |   |   |
| Net (decrease) in cash  and cash equivalents                                | (3,510                                                              | ) | (3,581 | ) |
|                                                                        |                                                                |   |   |   |
| Cash and cash  equivalents at beginning of period                           | 8,896                                                               |   | 14,537 |   |
|                                                                        |                                                                     |   |  |   |
|                                                                        |                                                                |   |   |   |
| **CASH AND CASH EQUIVALENTS AT  END OF PERIOD**                             | $                                                                   | 5,386 |   | $ | 10,956 |   |
|                                                                        |                                                                     |   |  |   |
|                                                                        |                                                                |   |   |   |
|                                                                        |                                                                |   |   |   |
| **SUPPLEMENTAL NONCASH  FINANCING ACTIVITIES:**                             |                                                                |   |   |   |
|                                                                        | Capital lease  obligations                                          | --- |   | 622 |   |
|                                                                             |                                                                     |  |  |  |  |  |  |  |

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

**HCC INDUSTRIES INC. ANDSUBSIDIARIES**Notes to Condensed Consolidated FinancialStatementsJune 30, 2001

 

1.          INTERIMFINANCIAL STATEMENTS:

Theaccompanying unaudited condensed consolidated financial statements of HCCIndustries Inc. and Subsidiaries (the “Company”), include all adjustments(consisting of normal recurring entries) which management believes arenecessary for a fair presentation of the financial position and results ofoperations for the periods presented. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted. The year end condensed balance sheet data was derived from auditedfinancial statements, but does not include all disclosures required bygenerally accepted accounting principles. It is suggested that the accompanying interim financial statements beread in conjunction with the Company’s audited financial statements andfootnotes as of and for the year ended March 31, 2001.  Operating results for the three-month periodended June 30, 2001 are not necessarily indicative of the operating results forthe full fiscal year.

TheCompany grants uncollateralized credit to its customers who are located invarious geographical areas.  Estimatedcredit losses and returns have been provided for in the financial statementsand, to date, have been within management’s expectations.  Accounts receivable from Special Devices,Inc. (“SDI”), the Company’s largest customer, as of June 30, 2001 and March 31,2001 were $3,155,000 and $3,042,000, respectively.

2.          INVENTORIES:

             Inventoriesconsist of the following (in thousands):

|                               | June  30, |   | March  31, |   |
|------------------------------------|-----------|--------|------------|--------|
|                               | 2001      |   | 2001       |   |
|                               |           |   |            |   |
|                               |      |   |       |   |
| Raw materials and  component parts | $         | 4,841  |       | $      | 4,861 |   |
| Work in process                    | 1,976     |   | 1,607      |   |
|                               |           |   |            |   |
|                               |      |   |       |   |
|                               | $         | 6,817  |       | $      | 6,468 |   |
|                               |           |   |            |   |

 

3.             PROPERTY, PLANT AND EQUIPMENT:

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

|                               | June  30, |   | March  31, |   |
|------------------------------------|-----------|--------|------------|--------|
|                               | 2001      |   | 2001       |   |
|                               |           |   |            |   |
|                               |      |   |       |   |
|                               |      |   |       |   |
| Land                               | $         | 4,017  |       | $      | 4,017 |   |
| Buildings and  improvements        | 9,671     |   | 9,671      |   |
| Furniture, fixtures  and equipment | 25,974    |   | 24,917     |   |
|                               |           |   |            |   |
|                               |      |   |       |   |
|                               | 39,662    |   | 38,605     |   |
| Less accumulated  depreciation     | (13,390   | )      | (12,769    | )      |
|                               |           |   |            |   |
|                               | $         | 26,272 |       | $      | 25,836 |   |
|                               |           |   |            |   |

 

4.             LONG-TERM DEBT:

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

|                                                                                         | June  30, |   | 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%)                  | 6,822     |   | 7,337      |   |
|                                                                                         |           |   |            |   |
|                                                                                         |      |   |       |   |
|                                                                                         | 90,452    |   | 90,967     |   |
| Less current portion                                                                         | 3,028     |   | 3,103      |   |
|                                                                                         |           |   |            |   |
|                                                                                         | $         | 87,424 |       | $      | 87,864 |   |
|                                                                                         |           |   |            |   |

 

5.          CAPITALSTOCK:

|   | The  Company is authorized to issue an aggregate of 550,000 shares of common  stock.  These shares may be issued in  four different classes (A, B, C or D shares) which differ only in voting  rights per share.  At June 30, 2001,  the 137,945 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 |           |   |   |
|   |             |   |        |   |           |   |

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

 

6.          COMMITMENTSAND CONTINGENCIES:

             Environmental

Asan ongoing facet of the Company's business, it is required to maintaincompliance with various environmental regulations.  The cost of this compliance is included in the Company'soperating results as incurred.  Theseongoing costs include permitting fees and expenses and specialized effluentcontrol systems as well as monitoring and site assessment costs required byvarious governmental agencies.  In theopinion of management, the maintenance of this compliance will not have asignificant effect on the financial position or results of operations of theCompany.

InAugust 1994, the U.S. Environmental Protection Agency ("EPA")identified the Company as a potentially responsible party ("PRP") inthe El Monte Operable Unit ("EMOU") of the San Gabriel ValleySuperfund Sites.  In early 1995, the Companyand the EPA executed an Administrative Consent Order which requires the Companyand other PRP'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 of decision.  In addition, the Company’s facility in Avon,Massachusetts is subject to Massachusetts “Chapter 21E”, the State’s hazardoussite clean-up program.  Uncertainty asto (a) the extent to which the Company caused, if at all, the conditions beinginvestigated, (b) the extent of environmental contamination and risks, (c) theapplicability of changing and complex environmental laws (d) the number andfinancial viability of other PRP’s, (e) the stage of the investigation and/orremediation, (f) the unpredictability of investigation and/or remediation costs(including as to when they will be incurred), (g) applicable clean-upstandards, (h) the remediation (if any) that will ultimately be required, and(i) available technology make it difficult to assess the likelihood and scopeof further investigation or remediation activities or to estimate the futurecosts of such activities if undertaken. In addition, liability under CERCLA is joint and several, and anypotential inability of other PRP’s to pay their pro rata share of theenvironmental remediation costs may result in the Company being required tobear costs in excess of its pro rata share.

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.

Asof June 30, 2001, the accrual for estimated environmental costs was$8,461,000.  Actual expenditures forenvironmental remediation were $241,000 for the three months ended June 30,2001 and $476,000 for the fiscal year ended March 31, 2001.  The Company believes its accrual isadequate, but as the scope of its obligations becomes more clearly defined,this accrual may be modified and related charges against earnings may be made.

Claimsfor recovery of costs already incurred and future costs have been assertedagainst various insurance companies. The Company has neither recorded any asset nor reduced any liability inanticipation of recovery with respect to such claims made.

 

 

 

             Other

OnMarch 3, 1998, Walter Neubauer, a former stockholder of the Company and acurrent stockholder of SDI, filed a lawsuit in California Superior Court (CaseBC186937; Walter Neubauer vs. Andrew Goldfarb, et. al.) against the Company andcertain other stockholders alleging (i) breach of fiduciary duty, (ii) fraud,(iii) negligent misrepresentation, (iv) negligence, (v) violations ofcorporations code and (vi) breach of contract. The allegations primarily relate to the Company’s exercise of an optionto acquire Mr. Neubauer’s stock in August 1996.  In September 1999, five of the six claims were dismissed upon asummary judgement motion made by the Company, including all of the claimsagainst the Company.  The remainingclaim is against Andrew Goldfarb for alleged violations of oralrepresentations.

OnMay 7, 1998, the Company filed a lawsuit against Mr. Neubauer in California SuperiorCourt alleging (i) breach of contract, (ii) intentional interference withbusiness relations and (iii) interference with prospective businessadvantage.  All allegations relate toviolations of the noncompetition agreement executed by Mr. Neubauer in August1996.  A preliminary injunction wasgranted in September 1998.  The Companyis seeking damages of approximately $15.0 million.

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

7.          RECENTACCOUNTING PRONOUNCEMENTS

InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards (“SFAS”) Nos. 141 and 142, “BusinessCombinations” and “Goodwill and Other Intangible Assets” .  SFAS No. 141 replaces APB 16 and eliminatespooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to therecognition of intangible assets and accounting for negative goodwill.

SFASNo. 142 changes the accounting for goodwill from an amortization method to animpairment-only approach.  Under SFASNo. 142, goodwill will be tested annually and whenever events or circumstancesoccur indicating that goodwill might be impaired.  SFAS No. 141 and SFAS No. 142 are effective for all businesscombinations completed after June 30, 2001. Upon adoption of SFAS No. 142, amortization of goodwill recorded forbusiness combinations consummated prior to July 1, 2001 will cease, andintangible assets acquired prior to July 1, 2001 that do not meet the criteriafor recognitions under SFAS No. 141 will be reclassified to goodwill.  Companies are required to adopt SFAS No. 142for fiscal years beginning after December 15, 2001, but early adoption ispermitted.  The Company has not yetdetermined the impact these standards will have on its financial statements.

**Item 2.**              **Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

**Results of Operations (In millions)**

|                                            | For  the Three  Months Ended |
|-------------------------------------------------|-----------------------------------|
|                                            |                                   |
|                                            | June  30,                         |   |   |   | July  1 |   |   |   |
|                                            | 2001                              |   | Percent |   | 2000 |   | Percent |   |
|                                            |                                   |   |  |   |  |   |  |   |
|                                            |                              |   |   |   |   |   |   |   |
| Net sales                                       | $                                 | 18.8 |   | 100.0 | % |  $ | 18.5 |   | 100.0 | % |
| Gross profit                                    | 6.2                               |   | 33.0 | % | 6.2 |   | 33.5 | % |
| Selling, general and  administrative   expenses | 1.9                               |   | 10.1 | % | 2.0 |   | 10.8 | % |
| Earnings from  operations                       | 4.3                               |   | 22.9 | % | 4.2 |   | 22.7 | % |
| Other income/expense                            | (2.4                              | ) | -12.8 | % | (2.7 | ) | -14.6 | % |
| Net earnings                                    | $                                 | 1.1 |   | 5.9 | % |  $ | 0.9 |   | 4.9 | % |

**Comparisonof the Three Months Ended June 30, 2001 (“2002 Quarter”) to the Three MonthsEnded July 1, 2000 (“2001 Quarter”)**

*Net Sales*

             TheCompany’s net sales increased slightly by 1.5% or $0.3 million to $18.8 millionfor the 2002 Quarter compared to sales of $18.5 million for the 2001 Quarter.

             Salesto existing aerospace, industrial process control and petrochemical customersincreased by approximately 16% in the 2002 Quarter compared to the 2001Quarter.  Based on current order volume,the Company expects demand in the aerospace, industrial process control andpetrochemical markets to exhibit modest growth over the next quarter.

             Onthe automotive side, revenue from airbag and seat belt initiator productsdecreased due to both decreasing volumes and contractual price reductions onexisting programs.  The Company’s unitshipments to its largest customer, Special Devices, Inc. (“SDI”) decreased 6%for the 2002 Quarter compared to the 2001 Quarter.  Additionally, the Company’s unit shipments to its otherautomotive customers decreased approximately 18% for the 2002 Quarter comparedto the 2001 Quarter.  Overall, revenuefrom all automotive shipments decreased approximately 17% in the 2002 Quartercompared to the 2001 Quarter.  Based oncurrent order volume, the Company expects consistent unit volume and revenuefrom automotive products over the next quarter.

             TheCompany has continued to develop a significant market presence in the telecommunicationsmarkets through component products designed for optical networkinginfrastructure.  Shipments of theseproducts increased dramatically throughout Fiscal Year 2001; however, they haveslowed significantly due to reduced spending by the service providers onoptical systems.  Sales of theseproducts decreased 10% in the 2002 Quarter compared to the 2001 Quarter.  Based on current order volume and industryreports, the Company expects continued weakness in the telecommunicationsmarkets over the next quarter.

 

*Gross Profit*

             Grossprofit was unchanged at $6.2 million for both the 2002 and 2001 Quarters.  Gross margin decreased slightly to 33.0% forthe 2002 Quarter from 33.5% for the 2001 Quarter.

             Themodest decrease in gross margin was due to the impact of price concessions onautomotive products and changes in product mix.

*Selling, General and Administrative Expenses*

             Selling,general and administrative (“S,G&A”) expenses decreased by approximately5.0% or  $0.1 million to $1.9 millionfor the 2002 Quarter compared to $2.0 million for the 2001 Quarter.  S,G&A expenses as a percent to salesdecreased to 10.1% in the 2002 Quarter from 10.8% for the 2001 Quarter.

             Sellingexpenses increased approximately 6% in the 2002 Quarter compared to the 2001 Quarter.  This increase was primarily attributable toincreased selling commissions on approximately $0.3 million of increasedsales.   G&A expenses overall werelower 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 increased leverage onthe fixed portion of those expenses.

*Earnings from Operations*

             Operatingearnings increased 2.4% or $0.1 million to $4.3 million for the 2002 Quartercompared to $4.2 million for the 2001 Quarter. Operating margins increased to 22.9% in the 2002 Quarter from 22.7% forthe 2001 Quarter.

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

*Other Expense, net*

             Otherexpense, net (which is predominantly net interest expense) decreased to $2.4million in the 2002 Quarter compared to $2.7 million in the 2001 Quarter.  The decrease is due to lowered levels of netdebt outstanding, partially offset by reduced interest income.  The Company has $90.5 million ofindebtedness as of June 30, 2001 compared to $104.7 million at July 1, 2000.

*Net Earnings*

             Netearnings increased by approximately $0.2 million to $1.1 million for the 2002Quarter from net earnings of $0.9 million in the 2001 Quarter.

             Theincrease in net earnings was primarily attributable to the increase in earningsfrom operations and the decrease in net interest expense in the 2002 Quarter.

 

 

 

**Liquidity and Capital Resources**

             Netcash used in operating activities was $1.9 million for the 2002 Quartercompared to $2.3 million used in operating activities for the 2001Quarter.  The decrease of $0.4 millionof cash used was primarily attributable to the increase in net earnings, partiallyoffset by increased working capital changes.

             Netcash used in investing activities was $1.1 million for the 2002 Quartercompared to $0.9 million for the 2001 Quarter.

             Netcash used in financing activities was $0.5 million for the 2002 Quartercompared to $0.4 million for the 2001 Quarter. The increase in the 2002 Quarter was due to higher principal payments onexisting debt.

             Asof June 30, 2001, the Company’s outstanding long-term debt is $90.5million.  The Company has a RevolvingCredit Facility up to $20.0 million, which is collateralized by accountsreceivable and inventories.  At June 30,2001 there was $20.0 million available under the Revolving CreditFacility.  Borrowings under theRevolving Credit Facility may be used for general and other corporatepurposes.  To date, the Company has notused any amounts under the Revolving Credit Facility.

             TheCompany believes that cash flow from operations and the availability ofborrowings under the Revolving Credit Facility will provide adequate funds forongoing operations, planned capital expenditures and debt service during theterm of such facility.

             Capitalexpenditures for fiscal 2002 are expected to focus on vertical integration withinvestments in equipment to expand manufacturing capacity in machining, glassproduction, sealing and plating, as well as automation equipment to lowerproduction costs on the high volume production lines.  Expected capital expenditures for fiscal 2002 are approximately$3.5 million and will be financed through working capital and the RevolvingCredit Facility.

             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, couldmaterially affect the results of the Company’s operations and whether theforward looking statements made by the Company ultimately prove to be accurate.

**Recent Accounting Pronouncements**

             InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards (“SFAS”) Nos. 141 and 142, “BusinessCombinations” and “Goodwill and Other Intangible Assets” .  SFAS No. 141 replaces APB 16 and eliminatespooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to therecognition of intangible assets and accounting for negative goodwill.

             SFASNo. 142 changes the accounting for goodwill from an amortization method to animpairment-only approach.  Under SFASNo. 142, goodwill will be tested annually and whenever events or circumstancesoccur indicating that goodwill might be impaired.  SFAS no. 141 and SFAS No. 142 are effective for all businesscombinations completed after June 30, 2001. Upon adoption of SFAS No. 142, amortization of goodwill recorded forbusiness combinations consummated prior to July 1, 2001 will cease, andintangible assets acquired prior to July 1, 2001 that do not meet the criteriafor recognitions under SFAS No. 141 will be reclassified to goodwill.  Companies are required to adopt SFAS No. 142for fiscal years beginning after December 15, 2001, but early adoption ispermitted.  The Company has not yetdetermined the impact these standards will have on its financial statements.

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

             TheCompany is exposed to market risk from changes in interest rates on theCompany’s Revolving Credit Facility.  AtJune 30, 2001, the Company had no outstanding borrowings under the line ofcredit and, therefore, changes in interest rates would have no impact on theCompany’s results of operations.

**PART II - OTHER INFORMATION**

Items 1 through 5 are omitted as they arenot applicable.

Item 6.               Exhibitsand Reports on Form 8-K

                           (a)  Exhibits: 12 - Computation of ratio of earnings to fixed charges

                           (b)  Reports on Form 8-K  - Not applicable

 

| SIGNATURES |
|------------|
|       |
|       |   |   |
|       |   | HCC  INDUSTRIES INC. |
|       |   |   |
| DATED:     | August  13, 2001 |    s/s   Richard Ferraid |
|       |  |  |
|       |   | President  and Chief Executive Officer |
|       |   |   |
|       |   |   |
| DATED:     | August  13, 2001 |     s/s  Christopher H. Bateman |
|       |  |  |
|       |   | Vice  President and Chief Financial Officer |