**UNITED STATES 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:  September  28, 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 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)       |

 

----

 

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.   Yesý   No o

 

 

Registrant’s CommonStock, outstanding at November 11, 2002 was 137,945 shares.

 

 

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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)**

 
|                                                                                            |   | **September 28,  2002** |   | **March 30,  2002** |   |
|-------------------------------------------------------------------------------------------------|--------|-------------------------|--------|---------------------|--------|
|                                                                                            |   | **(unaudited)**         |   |                |   |
| **ASSETS**                                                                                      |   |                    |   |                |   |
| **Current  Assets**:                                                                            |   |                    |   |                |   |
| Cash and cash equivalents                                                                       |   | $                       | 9,567  |                | $      | 10,990 |   |
| Trade accounts receivable, less allowance for doubtful accounts of $81  (2003) and $70 (2002)   |   | 6,730                   |   | 8,356               |   |
| Inventories                                                                                     |   | 5,357                   |   | 6,016               |   |
| Income taxes receivable                                                                         |   | 973                     |   | 506                 |   |
| Prepaid and other current assets                                                                |   | 1,211                   |   | 1,130               |   |
|                                                                                            |   |                    |   |                |   |
| Total current assets                                                                            |   | 23,838                  |   | 26,998              |   |
|                                                                                            |   |                    |   |                |   |
| **Property,  Plant and Equipment, net**                                                         |   | 23,233                  |   | 24,895              |   |
|                                                                                            |   |                    |   |                |   |
| **Other  Assets**:                                                                              |   |                    |   |                |   |
| Intangible assets                                                                               |   | 875                     |   | 4,486               |   |
| Deferred financing costs                                                                        |   | 1,563                   |   | 1,732               |   |
| Deferred income taxes                                                                           |   | 1,623                   |   | 1,623               |   |
| Restricted cash                                                                                 |   | 5,579                   |   | 5,901               |   |
|                                                                                            |   |                    |   |                |   |
| **Total  assets**                                                                               |   | $                       | 56,711 |                | $      | 65,635 |   |
|                                                                                            |   |                    |   |                |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                         |   |                    |   |                |   |
|                                                                                            |   |                    |   |                |   |
| **Current  Liabilities**:                                                                       |   |                    |   |                |   |
| Current portion of long-term debt                                                               |   | $                       | 1,915  |                | $      | 2,109 |   |
| Accounts payable                                                                                |   | 1,114                   |   | 1,475               |   |
| Accrued liabilities                                                                             |   | 8,050                   |   | 8,661               |   |
|                                                                                            |   |                    |   |                |   |
| Total current liabilities                                                                       |   | 11,079                  |   | 12,245              |   |
|                                                                                            |   |                    |   |                |   |
| **Long  Term Liabilities**:                                                                     |   |                    |   |                |   |
| Long-term debt, net of current portion                                                          |   | 85,744                  |   | 86,627              |   |
| Other long-term liabilities                                                                     |   | 7,739                   |   | 8,174               |   |
|                                                                                            |   | 104,562                 |   | 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                                                                             |   | (48,225                 | )      | (41,785             | )      |
|                                                                                            |   |                    |   |                |   |
| **Total  stockholders’ deficit**                                                           |   | (47,851                 | )      | (41,411             | )      |
|                                                                                            |   |                    |   |                |   |
| **Total  liabilities and stockholders’ deficit**                                           |   | $                       | 56,711 |                | $      | 65,635 |   |

 

The accompanying notesare 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)**

**(unaudited)**

 
|                                                                          |   | **Three Months Ended** |   | **Six Months Ended** |   |
|-------------------------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
|                                                                          |   | **Sept. 28,  2002**    |   | **Sept. 29,  2001**  |   | **Sept. 28,  2002** |   | **Sept. 29,  2001** |   |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| **NET SALES**                                                                 |   | $                      | 10,004 |                 | $      | 18,358 |   | $ | 20,595 |   | $ | 37,148 |   |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| Cost of goods  sold                                                           |   | 8,077                  |   | 12,319               |   | 16,674 |   | 24,902 |   |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| **GROSS PROFIT**                                                              |   | 1,927                  |   | 6,039                |   | 3,921 |   | 12,246 |   |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| Selling, general  and administrative expenses                                 |   | 1,472                  |   | 1,725                |   | 2,945 |   | 3,641 |   |
| Impairment of  assets                                                         |   | 500                    |   | —               |   | 500 |   | — |   |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| **EARNINGS (LOSS) FROM OPERATIONS**                                           |   | (45                    | )      | 4,314                |   | 476 |   | 8,605 |   |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| **OTHER INCOME (EXPENSE):**                                                   |   |                   |   |                 |   |   |   |   |   |
| Interest and  other income                                                    |   | 30                     |   | 67                   |   | 69 |   | 141 |   |
| Interest expense                                                              |   | (2,392                 | )      | (2,464               | )      | (4,821 | ) | (4,929 | ) |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| Total other  expense, net                                                     |   | (2,362                 | )      | (2,397               | )      | (4,752 | ) | (4,788 | ) |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| **EARNINGS (LOSS) BEFORE TAXES AND  CUMULATIVE EFFECT OF ACCOUNTING  CHANGE** |   | (2,407                 | )      | 1,917                |   | (4,276 | ) | 3,817 |   |
| Taxes (benefit)  on earnings (loss)                                           |   | (649                   | )      | 767                  |   | (1,397 | ) | 1,527 |   |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| **EARNINGS  (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE**            |   | (1,758                 | )      | 1,150                |   | (2,879 | ) | 2,290 |   |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| Cumulative  Effect of Accounting Change                                       |   | (3,561                 | )      | —               |   | (3,561 | ) | — |   |
|                                                                          |   |                   |   |                 |   |   |   |   |   |
| **NET EARNINGS (LOSS)**                                                       |   | $                      | (5,319 | )                    | $      | 1,150 |   | $ | (6,440 | ) | $ | 2,290 |   |

 

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

 

3

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
|                                                                                            |   | **For the Six Months Ended** |   |
|-------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                            |   | **September 28,  2002**      |   | **September 29,  2001** |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                      |   |                         |   |   |   |
| Net earnings  (loss)                                                                            |   | $                            | (6,440 | ) | $ | 2,290 |   |
| Reconciliation  of net earnings (loss) to net cash (used in) provided by operating  activities: |   |                         |   |   |   |
| Depreciation                                                                                    |   | 1,313                        |   | 1,214 |   |
| Amortization                                                                                    |   | 219                          |   | 313 |   |
| Impairment of  assets                                                                           |   | 500                          |   | — |   |
| Cumulative  effect of accounting change                                                         |   | 3,561                        |   | — |   |
| Changes in  operating assets and liabilities:                                                   |   |                         |   |   |   |
| Decrease  (increase) in trade accounts receivable, net                                          |   | 1,626                        |   | (344 | ) |
| Decrease in  inventories                                                                        |   | 659                          |   | 790 |   |
| (Increase) in  other assets and income taxes receivable                                         |   | (226                         | )      | (155 | ) |
| (Decrease) in  accounts payable                                                                 |   | (361                         | )      | (1,475 | ) |
| (Decrease) in  accrued and other liabilities                                                    |   | (1,046                       | )      | (610 | ) |
|                                                                                            |   |                         |   |   |   |
| Net cash (used  in) provided by operating activities                                            |   | (195                         | )      | 2,023 |   |
|                                                                                            |   |                         |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                      |   |                         |   |   |   |
| Purchases of  property, plant and equipment                                                     |   | (151                         | )      | (928 | ) |
|                                                                                            |   |                         |   |   |   |
| Net cash used in  investing activities                                                          |   | (151                         | )      | (928 | ) |
|                                                                                            |   |                         |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                      |   |                         |   |   |   |
| Principal  payments on long-term debt                                                           |   | (2,168                       | )      | (1,025 | ) |
| Proceeds from  issuance of long-term debt                                                       |   | 1,091                        |   | — |   |
|                                                                                            |   |                         |   |   |   |
| Net cash used in financing activities                                                           |   | (1,077                       | )      | (1,025 | ) |
|                                                                                            |   |                         |   |   |   |
| Net (decrease)  increase in cash and cash equivalents                                           |   | (1,423                       | )      | 70 |   |
|                                                                                            |   |                         |   |   |   |
| Cash and cash  equivalents at beginning of period                                               |   | 10,990                       |   | 8,896 |   |
|                                                                                            |   |                         |   |   |   |
| **CASH AND CASH EQUIVALENTS AT END OF  PERIOD**                                                 |   | $                            | 9,567  |   | $ | 8,966 |   |
|                                                                                            |   |                         |   |   |   |
| **SUPPLEMENTAL NONCASH FINANCING  ACTIVITIES:**                                                 |   |                         |   |   |   |
| Capital lease  obligations                                                                      |   | $                            | — |   | $ | 508 |   |

 

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

September 28, 2002

 

 

1.             INTERIMFINANCIAL STATEMENTS:

 

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 threeand six month period ended September 28, 2002 are not necessarily indicative ofthe operating results for the 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.

 

The effective taxbenefit recorded for Fiscal 2003 approximates the Federal statutory tax ratebecause the state tax regulations do not allow a carryback of tax losses.  Such losses can only be carried forward andare subject to limitations on their utilization.  As a result, a valuation allowance has been established for thesestate losses.

 

 

2.             INVENTORIES:

 

Inventories consist of the following (in thousands):

 
|                               |   | **September 28,  2002** |   | **March 30,  2002** |   |
|------------------------------------|--------|-------------------------|--------|---------------------|--------|
| Raw materials  and component parts |   | $                       | 4,226  |                | $      | 4,503 |   |
| Work in process                    |   | 1,131                   |   | 1,513               |   |
|                               |   |                    |   |                |   |
|                               |   | $                       | 5,357  |                | $      | 6,016 |   |

 

 

3.             PROPERTY, PLANT ANDEQUIPMENT:

 

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

 
|                               |   | **September 28,  2002** |   | **March 30,  2002** |   |
|------------------------------------|--------|-------------------------|--------|---------------------|--------|
|                               |   |                    |   |                |   |
| Land                               |   | $                       | 4,017  |                | $      | 4,017 |   |
| Buildings and  improvements        |   | 9,448                   |   | 9,938               |   |
| Furniture,  fixtures and equipment |   | 26,394                  |   | 26,254              |   |
|                               |   |                    |   |                |   |
|                               |   | 39,859                  |   | 40,209              |   |
| Less accumulated  depreciation     |   | (16,626                 | )      | (15,314             | )      |
|                               |   | $                       | 23,233 |                | $      | 24,895 |   |

 

5

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The Company hasrecognized a $0.5 million write-down in the fair value of one of its propertiesfor the 2003 Quarter.  The vacantproperty located in Avon, Massachusetts was formerly the site of the Company’sHermitite subsidiary.  Based on recentmarket activity and management’s best estimate, the fair value of the propertyis less than the current book value and required a corresponding write-down toproperly reflect the fair market value.

 

 

4.             LONG-TERM DEBT:

 

Long-term debtconsists of the following (in thousands):

 
|                                                                                       |   | **September 28,  2002** |   | **March 30,  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%)                |   | 5,112                   |   | 6,189               |   |
|                                                                                       |   |                    |   |                |   |
|                                                                                       |   | 87,659                  |   | 88,736              |   |
| Less current  portion                                                                      |   | 1,915                   |   | 2,109               |   |
|                                                                                       |   |                    |   |                |   |
|                                                                                       |   | $                       | 85,744 |                | $      | 86,627 |   |

 

The Company had aRevolving Credit Facility up to $8.0 million, which was collateralized byaccounts receivable, inventory and equipment. The Revolving Credit Facility included covenants requiring maintenance ofcertain financial ratios.  At June 29,2002, the Company was not in compliance with the required ratios.  In September 2002, the Company’s bankdeclined to waive the violations of the covenants on the Company’s RevolvingCredit Facility and terminated the agreement. The Company had no borrowings outstanding on the Revolving CreditFacility at the date of termination.

 

The fair value of the 103⁄4% Senior Subordinated Notes may vary from time to time based on the Company'soperating performance and other market related factors external to theCompany.  Presently, the Companybelieves the fair value of the Notes to be significantly less than the carryingvalue.

 

 

5.             CAPITAL STOCK:

 

The Company is authorizedto issue an aggregate of 550,000 shares of common stock.  These shares may be issued in four differentclasses (A, B, C or D shares) which differ only in voting rights pershare.  At September 28, 2002, the137,945 outstanding shares of common stock were designated as follows:

 

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

 

The remaining412,055 shares of authorized but unissued common stock are undesignated as toclass.

 

6

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6.             COMMITMENTSAND CONTINGENCIES:

 

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.

 

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

 

In fiscal 1997,the Company with the help of independent consultants, determined a costestimate 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 September 28, 2002, the accrual for estimatedenvironmental costs was $7,739,000. Actual expenditures for environmental remediation were $435,000 for thesix months ended September 28, 2002, and $528,000 for the fiscal year endedMarch 30, 2002.  The Company believesits accrual is adequate, but as the scope of its obligations becomes moreclearly defined, this accrual may be modified and related charges againstearnings may be 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

 

OnAugust 2, 2002, the Company filed a lawsuit in California Superior Court (CaseGC030102, Hermetic Seal Corporation, HCC Industries Inc. vs. Special Devices,Inc.) against Special Devices, Inc. (“SDI”) and certain other fictitiousdefendants 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 SDI’s 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.             RECENTACCOUNTING PRONOUNCEMENTS:

 

In June 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards No. 141 (“SFAS141”), “Accounting for Business Combinations” and No. 142 (“SFAS 142”),“Goodwill and Other Intangibles”, effective for fiscal years beginning afterDecember 15, 2001.  Under the new rules,goodwill and intangible assets deemed to have indefinite lives are no longeramortized but is subject to annual impairment tests in accordance with theStatements.

 

Inadopting SFAS No. 142 “Goodwill and Other Intangible Assets”, the Companyceased amortizing goodwill in the first quarter of Fiscal 2003 and has assessedinitial impairment under transitional rules as of March 31, 2002.  Goodwill amortization for Fiscal 2002 was$189,000 or $47,000 per quarter.  Duringthe quarter ended September 28, 2002, the Company completed its assessment ofthe estimated fair value of its two reporting units under the transitionalrules of SFAS 142 using a valuation method based on multiples of earnings.  As a result, the Company determined that thegoodwill of the Company’s reporting units was fully impaired and has recordedan impairment charge of $3,561,000.  Noincome tax benefit has been recognized for this charge, as the goodwill is notdeductible for income tax purposes.  Hadthis charge been recognized in the first quarter of Fiscal 2003, the net losswould have increased from $1,121,000 as reported to $4,682,000.

 

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** |   | **For the Six Months Ended** |   |
|-----------------------------------------------------|--------|---------------------------------------|--------|------------------------------|--------|
|                                                |   | **Sept. 28,  2002**                   |   | **Percent**                  |   | **Sept. 29,  2001** |   | **Percent** |   | **Sept. 28,  2002** |   | **Percent** |   | **Sept. 29,  2001** |   | **Percent** |   |
| Net sales                                           |   | $                                     | 10.0   |                         | 100.0  | % | $ | 18.4 |   | 100.0 | % | $ | 20.6 |   | 100.0 | % | $ | 37.1 |   | 100.0 | % |
| Gross profit                                        |   | 1.9                                   |   | 19.3                         | %      | 6.0 |   | 32.9 | % | 3.9 |   | 19.0 | % | 12.2 |   | 33.0 | % |
| Selling, general  and administrative  expenses |   | 1.5                                   |   | 14.7                         | %      | 1.7 |   | 9.4 | % | 2.9 |   | 14.3 | % | 3.6 |   | 9.8 | % |
| Write-down on  impairment of assets                 |   | 0.5                                   |   | 5.0                          | %      | 0.0 |   | 0.0 | % | 0.5 |   | 2.4 | % | 0.0 |   | 0.0 | % |
| Earnings (loss)  from operations                    |   | (0.0                                  | )      | (0.4                         | )%     | 4.3 |   | 23.5 | % | 0.5 |   | 2.3 | % | 8.6 |   | 23.2 | % |
| Other  income/expense                               |   | (2.4                                  | )      | (23.6                        | )%     | (2.4 | ) | (13.1 | )% | (4.8 | ) | (23.1 | )% | (4.8 | ) | (12.9 | )% |
| Cumulative  effect of accounting change             |   | (3.6                                  | )      | (35.6                        | )%     | — |   | 0.0 | % | (3.6 | ) | (17.3 | )% | — |   | 0.0 | % |
| Net earnings  (loss)                                |   | $                                     | (5.3   | )                            | (53.2  | )% | $ | 1.2 |   | 6.3 | % | $ | (6.4 | ) | (31.3 | )% | $ | 2.3 |   | 6.2 | % |

 

 

**Comparison of the Three Months EndedSeptember 28, 2002 (“2003 Quarter”) to the Three Months Ended September 29,2001 (“2002 Quarter”)**

 

*Net Sales*

 

TheCompany’s net sales decreased by approximately $8.4 million or 46% to $10.0million for the 2003 Quarter compared to sales of $18.4 million for the 2002Quarter.

 

Salesto existing aerospace, industrial process control and petrochemical customersdecreased by approximately 24% in the 2003 Quarter compared to the 2002Quarter.  Based on current order volume,the Company expects weakness in the aerospace, industrial process control andpetrochemical markets to continue over the next several quarters.

 

Onthe automotive side, revenue from airbag and seat belt initiator productsdecreased due to the termination of the supply agreement with SDI, formerly theCompany’s largest customer.  The Companystopped selling product to SDI in March 2002. Overall, revenue from all automotive shipments decreased approximately72% in the 2003 Quarter compared to the 2002 Quarter.  The Company expects the significant decrease in revenue from SDIwill be partially offset by increases in unit shipments of new and existingprograms to other automotive customers over the next several quarters.  On the whole, the Company expectssignificantly lower revenues from automotive products during fiscal 2003.

 

The Company has continuedto develop a significant market presence in the telecommunications marketsthrough component products designed for optical networking infrastructure.  Shipments of these products decreaseddramatically as the telecom market collapsed. Sales of these products decreased by approximately 83% in the 2003Quarter compared to the 2002 Quarter. Based on current order volume and industry reports, the Company expectscontinued weakness in the telecommunications markets over the next severalquarters at a minimum.

 

9

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*GrossProfit*

 

Gross profit decreased byapproximately 68% or $4.1 million, to $1.9 million for the 2003 Quartercompared to $6.0 million for the 2002 Quarter. Gross margin decreased to 19.3% for the 2003 Quarter from 32.9% for the2002 Quarter.

 

The decrease in grossprofit is attributable to the decreased sales volume.  The decrease in gross margin was primarily attributable to thesignificant decrease in revenue and the corresponding impact of fixed overheadcosts leveraged on lower revenue.  Theongoing weakness in sales will continue to impact gross profitability and grossmargin.

 

 

*Selling,General and Administrative Expenses*

 

Selling, general andadministrative (“S,G&A”) expenses decreased by approximately 12% or  $0.2 million to $1.5 million for the 2003Quarter compared to $1.7 million for the 2002 Quarter.  S,G&A expenses as a percent to salesincreased to 14.7% in the 2003 Quarter from 9.4% for the 2002 Quarter.

 

Selling expenses wereflat in the 2003 Quarter compared to the 2002 Quarter.  G&A expenses overall were approximately23% lower in the 2003 Quarter as compared to the 2002 Quarter due to decreasedcompensation costs.  The increasedpercentage of S,G&A expenses to sales reflects the fixed portion of theseexpenses leveraged over significantly lower revenue.

 

 

*Impairmentof Assets*

 

The Company hasrecognized a $0.5 million write-down in the fair value of one of its propertiesfor the 2003 Quarter.  The vacantproperty located in Avon, Massachusetts was formerly the site of the Company’sHermitite subsidiary.  Based on recentmarket activity and management’s best estimate, the fair value of the propertyis less than the current book value and required a corresponding write-down toproperly reflect the fair market value.

 

*Earnings(Loss) from Operations*

 

Operating earnings decreasedby $4.3 million or 100% to an operating loss from operations of $0.045 millionfor the 2003 Quarter compared to operating earnings of $4.3 million for the2002 Quarter.  Operating marginsdecreased to (0.4%) in the 2003 Quarter from 23.5% for the 2002 Quarter.

 

The decrease in operatingearnings and margin was attributable to the same factors (as discussed above)that contributed to the decrease in gross profit and gross margin.  In addition the write-down of the value of thevacant property contributed to the decreased operating earnings and margin.

 

 

*OtherExpense, net*

 

Other expense, net (whichis predominantly net interest expense) was flat at $2.4 million for the 2003and 2002 Quarters.  The Company has$87.7 million of indebtedness as of September 28, 2002 compared to $90.4million at September 29, 2001.

 

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*CumulativeEffect of Accounting Change*

 

Inadopting SFAS No. 142 “Goodwill and Other Intangible Assets”, the Companyceased amortizing goodwill in the first quarter of Fiscal 2003 and has assessedinitial impairment under transitional rules as of March 31, 2002.  Goodwill amortization for Fiscal 2002 was$189,000 or $47,000 per quarter.  Duringthe quarter ended September 28, 2002, the Company completed its assessment ofthe estimated fair value of its two reporting units under the transitionalrules of SFAS 142 using a valuation method based on multiples of earnings.  As a result, the Company determined that thegoodwill of the Company’s reporting units was fully impaired and has recordedan impairment charge of $3,561,000.  Noincome tax benefit has been recognized for this charge, as the goodwill is notdeductible for income tax purposes.  Hadthis charge been recognized in the first quarter of Fiscal 2003, the net losswould have increased from $1,121,000 as reported to $4,682,000.

 

 

*NetEarnings (Loss)*

 

Net earnings (loss)decreased by approximately $6.5 million to a net loss of $5.3 million for the2003 Quarter from net earnings of $1.2 million in the 2002 Quarter.

 

The substantial decreasein net earnings was due to the substantial decline in earnings from operationsand the $3.6 million cumulative effect of accounting change for impairment ofintangible assets.

 

 

**Comparisonof the Six Months Ended September 28, 2002 (“2003 Period”) to the Six MonthsEnded September 29, 2001 (“2002 Period”)**

 

 

*Net Sales*

 

The Company’s net salesdecreased by approximately $16.6 million or 45% to $20.6 million for the 2003Period compared to sales of $37.1 million for the 2002 Period.

 

Salesto existing aerospace, industrial process control and petrochemical customersdecreased by approximately 24% in the 2003 Period compared to the 2002Period.  Based on current order volume,the Company expects weakness in the aerospace, industrial process control andpetrochemical markets over the next several quarters.

 

Onthe automotive side, revenue from airbag and seat belt initiator productsdecreased due to the termination of the supply agreement with SDI, formerly theCompany’s largest customer.  The Companystopped selling product to SDI in March 2002. Overall, revenue from all automotive shipments decreased approximately75% in the 2003 Period compared to the 2002 Period.  The Company expects the significant decrease in revenue from SDIwill be partially offset by increases in unit shipments of new and existingprograms to other automotive customers over the next several quarters.  On the whole, the Company expectssignificantly lower revenues from automotive products during fiscal 2003.

 

The Company has continuedto develop a significant market presence in the telecommunications marketsthrough component products designed for optical networking infrastructure.  Shipments of these products decreased dramaticallyas the telecom market collapsed.  Salesof these products decreased by approximately 75% in the 2003 Period compared tothe 2002 Period.  Based on current ordervolume and industry reports, the Company expects continued weakness in thetelecommunications markets over the next several quarters at a minimum.

 

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*Gross Profit*

 

Gross profit decreased by$8.3 million or 68% to $3.9 million for the 2003 Period compared to $12.2million for the 2002 Period.  Grossmargin decreased to 19.0% for the 2003 Period from 33.0% for the 2002 Period.

 

The decrease in grossprofit is attributable to the decrease in sales volume in the 2003 Period.  The decrease in gross margin was primarilyattributable to the significant decrease in revenue and the correspondingimpact of fixed overhead costs leveraged on 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 $0.7 million to $2.9 million for the 2003Period compared to $3.6 million for the 2002 Period.  S,G&A expenses as a percent to sales increased to 14.3% inthe 2003 Period from 9.8% for the 2002 Period.

 

Selling expenses wereflat in the 2003 Period compared to the 2002 Period.  G&A expenses overall were approximately 29% lower in the 2003Period as compared to the 2002 Period due to decreased compensation costs.  The increased percentage of S,G&Aexpenses to sales reflects the fixed portion of these expenses leveraged oversignificantly lower revenue.

 

 

*Impairmentof Assets*

 

The Company hasrecognized a $0.5 million write-down in the fair value of one of its propertiesfor the 2003 Quarter.  The vacantproperty located in Avon, Massachusetts was formerly the site of the Company’sHermitite subsidiary.  Based on recentmarket activity and management’s best estimate, the fair value of the propertyis less than the current book value and required a corresponding write-down toproperly reflect the fair market value.

 

 

*Earnings(Loss) from Operations*

 

Operating earningsdecreased by $8.1 million or 94.2% to $0.5 million for the 2003 Period comparedto $8.6 million for the 2002 Period. Operating margins decreased to 2.3% in the 2003 Period from 23.2% forthe 2002 Period.

 

The decrease in operatingearnings and margin was attributable to the same factors (as discussed above)that contributed to the decrease in gross profit and gross margin.  In addition the write-down of the value ofthe vacant property contributed to the decreased operating earnings and margin.

 

 

*OtherExpense, net*

 

Other expense, net (whichis predominantly net interest expense) was flat at $4.8 million in the 2003 and2002 Periods.  The Company has $87.7 millionof indebtedness as of September 28, 2002 compared to $90.4 million at September29, 2001.

 

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*CumulativeEffect of Accounting Change*

 

Inadopting SFAS No. 142 “Goodwill and Other Intangible Assets”, the Companyceased amortizing goodwill in the first quarter of Fiscal 2003 and has assessedinitial impairment under transitional rules as of March 31, 2002.  Goodwill amortization for Fiscal 2002 was$189,000 or $47,000 per quarter.  Duringthe quarter ended September 28, 2002, the Company completed its assessment ofthe estimated fair value of its two reporting units under the transitionalrules of SFAS 142 using a valuation method based on multiples of earnings.  As a result, the Company determined that thegoodwill of the Company’s reporting units was fully impaired and has recordedan impairment charge of $3,561,000.  Noincome tax benefit has been recognized for this charge, as the goodwill is notdeductible for income tax purposes.  Hadthis charge been recognized in the first quarter of Fiscal 2003, the net losswould have increased from $1,121,000 as reported to $4,682,000.

 

 

*NetEarnings (Loss)*

 

Net earnings decreased byapproximately $8.7 million to a net loss of $6.4 million for the 2003 Period fromnet earnings of $2.3 million in the 2002 Period.

 

The substantial decreasein net earnings was due to the substantial decline in earnings from operationsand the $3.6 million cumulative effect of accounting change for impairment ofintangible assets.

 

 

**Liquidityand Capital Resources**

 

Net cash used byoperating activities was $0.2 millionfor the 2003 Period compared to cash provided by operations of $2.0 million2002 Period.  The decrease of $2.2million of cash provided by operations was primarily attributable to thesignificant decrease in net earnings.

 

Netcash used in investing activities was $0.2 million for the 2003 Period comparedto $0.9 million for the 2002 Period. The decrease in cash used in investing activities is due to reducedexpenditures for capital equipment.

 

Netcash used in financing activities was $1.1 million for the 2003 Period comparedto $1.0 million for the 2002 Period. Net principal payments on long-term debt was unchanged for the twoPeriods.

 

As of September28, 2002, the Company’s outstanding long-term debt is $87.7 million.  The Company had a Revolving Credit Facilityup to $8.0 million, which was collateralized by accounts receivable, inventoryand equipment.  The Revolving CreditFacility included covenants requiring maintenance of certain financialratios.  At June 29, 2002, the Companywas not in compliance with the required ratios.  In September 2002, the Company’s bank declined to waive theviolations of the covenants on the Company’s Revolving Credit Facility and terminatedthe agreement.  The Company had noborrowings outstanding on the Revolving Credit Facility at the date oftermination.

 

TheCompany believes that cash on hand of $ 9.6 million and cash generated fromoperations will provide adequate funds for ongoing operations, planned capitalexpenditures and debt service for the near-term.  Over the next 12 months, the primary cash obligations of theCompany are interest payments ($ 9.2 million), principal payments on existingdebt ($1.9 million), and capital expenditures ($ 0.5 - $ 0.75 million).   The Company is currently negotiating withother potential lenders to secure a line of credit to augment itsliquidity.  There is no assurance thatsuch negotiations will be successful.

 

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Forthe longer term, the operating results of the Company must improve to satisfyits liquidity needs.  The annualinterest payments and principal payment obligations decrease only modestly overthe next several years.  The Company ismaking substantial efforts to increase its sales levels and thereby improve theoperating results.  There is noassurance that these efforts will be successful.  In addition, an increase in sales for the Company will requireadditional investment in working capital to support such increased operations.

 

Capitalexpenditures for fiscal 2003 are expected to focus on improvements orrefurbishment of existing equipment. Expected capital expenditures for fiscal 2003 will be approximately $0.5to $0.75 million and will be financed through working capital.

 

This filing containsstatements that are “forward looking statements”, and includes, among otherthings, discussions of the Company’s business strategy and expectationsconcerning market position, future operations, margins, profitability,liquidity and capital resources. Although the Company believes that the expectations reflected in suchforward looking statements are reasonable, it can give no assurance that suchexpectations will prove to have been correct. All phases of the operations of the Company are subject to a number ofuncertainties, risks and other influences, including general economicconditions, regulatory changes and competition, many of which are outside thecontrol of the Company, any one of which, or a combination of which, couldmaterially affect the results of the Company’s operations and whether theforward looking statements made by the Company ultimately prove to be accurate.

 

 

## **Recent AccountingPronouncements**

 

In July 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Nos. 141and 142, “Business Combinations” and “Goodwill and Other IntangibleAssets”.  SFAS No. 141 replaces APB 16and eliminates pooling-of-interests accounting prospectively.  It also provides guidance on purchaseaccounting related to the recognition of intangible assets and accounting fornegative goodwill.  The Company implementedSFAS No. 141 and 142 effective March 31, 2002, which impact is disclosed above.

 

In October 2001,the Financial Accounting Standards Board issued SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121,“Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of.”   SFAS No. 144 establishesone accounting model, based on framework established in SFAS No. 121, for therecognition, measurement and reporting of impairment of long-lived assets to beheld and used and measurement of long-lived assets to be disposed of bysale.  Adoption of SFAS No. 144 isrequired for the Company’s fiscal year beginning April 1, 2002 although earlyapplication is permitted.  The Companyadopted SFAS No. 144 in Fiscal 2003.

 

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

 

All of the Company’sindebtedness is at fixed interest rates and as such there is no exposure tomarket risk from changes in interest rates.

 

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## **Item 4. Controls and Procedures**

 

Evaluation of DisclosureControls and Procedures.  The Company’sChief Executive Officer and Chief Financial Officer have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)) as of a date within 90 days prior tothe filing date of this quarterly report (the “Evaluation Date”).  Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, the Company’s disclosure controlsand procedures are effective in alerting them on a timely basis to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the Company’s reports filed or submitted under theExchange Act.

 

Changes in InternalControls.  Since the Evaluation Date,there have not been any significant changes in the Company’s internal controlsor in other factors that could significantly affect such controls.

 

 

**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 ofratio of earnings to fixed charges

99.1- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted to Section 906of the Sarbanes-Oxley Act of 2002

 

(b)         Reports on Form 8-K -

On September 18, 2002, aForm 8-K was filed to disclose the termination of the Revolving CreditFacility.

 

 

 

SIGNATURES

 

 
|                            | HCC INDUSTRIES INC.                         |
|---------------------------------|---------------------------------------------|
|                            |                                        |
|                            |                                        |
| DATED:   November 11, 2002 | s/s  Richard  L. Ferraid               |
|                            | President and  Chief Executive Officer      |
|                            |                                        |
| DATED:   November 11, 2002 | s/s   Christopher H. Bateman           |
|                            | Vice President  and Chief Financial Officer |

 

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**CERTIFICATION**

 

I, Richard L. Ferraid, President and Chief Executive Officer of HCCIndustries Inc. certify that:

 

1.             I havereviewed this quarterly report on Form 10-Q of HCC Industries Inc.;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)             Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)            Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)             Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  November 11, 2002 | /s/    | Richard L. Ferraid      |
|-------------------------------|--------|-------------------------|
|                          | Name:  | Richard L. Ferraid      |
|                          | Title: | Chief Executive Officer |

 

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**CERTIFICATION**

 

I, Christopher H. Bateman, Chief Financial Officer of HCC IndustriesInc. certify that:

 

1.             I havereviewed this quarterly report on Form 10-Q of HCC Industries Inc.;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)             Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)            Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)             Presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The registrant’s othercertifying officer and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)             Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            Anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Date:  November 11, 2002 | /s/    | Christopher H. Bateman  |
|-------------------------------|--------|-------------------------|
|                          | Name:  | Christopher H. Bateman  |
|                          | Title: | Chief Financial Officer |

 

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