**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

----

 

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

 

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

 

**OR**

 

**o****                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES**

**EXCHANGEACT OF 1934**

 

**                Forthe transition period from                         to                      **

 

**Commission file number: 333-32207**

 

**HCC INDUSTRIES INC.**

(Exact name of Registrantas 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 ofprincipal executive offices)

 

 

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

 

----

 

Indicate by check markwhether the registrant:  (1) has filedall reports required to be filed by Section 13 or 15 (d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes ý   No o

 

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

 

 

**PART I -FINANCIAL INFORMATIONItem 1.    Condensed ConsolidatedFinancial Statements**

 

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

 

**ASSETS**
|                                                                                                                    |   | **December  29,  2001** |   | **March 31,  2001** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|---------------------|--------|
|                                                                                                                    |   | **(unaudited)**         |   |                |   |
| **Current Assets**:                                                                                                     |   |                    |   |                |   |
| Cash and cash  equivalents                                                                                              |   | $                       | 8,180  |                | $      | 8,896 |   |
| Trade accounts  receivable, less allowance for doubtful accounts of $67 at December 29, 2001  and $61 at March 31, 2001 |   | 9,363                   |   | 10,799              |   |
| Inventories                                                                                                             |   | 5,619                   |   | 6,468               |   |
| Income taxes  receivable                                                                                                |   | —                  |   | 728                 |   |
| Prepaid and  other current assets                                                                                       |   | 1,759                   |   | 1,398               |   |
|                                                                                                                    |   |                    |   |                |   |
| Total current  assets                                                                                                   |   | 24,921                  |   | 28,289              |   |
|                                                                                                                    |   |                    |   |                |   |
| **Property, Plant and Equipment, net**                                                                                  |   | 25,469                  |   | 25,836              |   |
|                                                                                                                    |   |                    |   |                |   |
| **Other Assets**:                                                                                                       |   |                    |   |                |   |
| Intangible  assets                                                                                                      |   | 4,558                   |   | 4,775               |   |
| Deferred  financing costs                                                                                               |   | 1,817                   |   | 2,071               |   |
| Deferred income  taxes                                                                                                  |   | 2,080                   |   | 2,080               |   |
| Restricted cash                                                                                                         |   | 5,949                   |   | 6,171               |   |
|                                                                                                                    |   |                    |   |                |   |
| **Total assets**                                                                                                        |   | $                       | 64,794 |                | $      | 69,222 |   |
|                                                                                                                    |   |                    |   |                |   |
|                                                                                                                    |   |                    |   |                |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**                                                                |   |
|                                                                                                                    |   |                    |   |                |   |
| **Current Liabilities**:                                                                                                |   |                    |   |                |   |
| Current portion  of long-term debt                                                                                      |   | $                       | 3,002  |                | $      | 3,103 |   |
| Accounts payable                                                                                                        |   | 1,130                   |   | 3,897               |   |
| Income taxes  payable                                                                                                   |   | 504                     |   | ——        |   |
| Accrued  liabilities                                                                                                    |   | 6,697                   |   | 10,270              |   |
|                                                                                                                    |   |                    |   |                |   |
| Total current  liabilities                                                                                              |   | 11,333                  |   | 17,270              |   |
|                                                                                                                    |   |                    |   |                |   |
| **Long Term Liabilities**:                                                                                              |   |                    |   |                |   |
| Long-term debt,  net of current portion                                                                                 |   | 86,917                  |   | 87,864              |   |
| Other long-term  liabilities                                                                                            |   | 8,325                   |   | 8,702               |   |
|                                                                                                                    |   | 106,575                 |   | 113,836             |   |
|                                                                                                                    |   |                    |   |                |   |
| **Commitments and contingencies**                                                                                       |   |                    |   |                |   |
|                                                                                                                    |   |                    |   |                |   |
| **Stockholders’ Equity (Deficit):**                                                                                |   |                    |   |                |   |
| Common stock;  $.10 par value; authorized 550,000 shares, issued and outstanding 137,945  shares                        |   | 14                      |   | 14                  |   |
| Additional  paid-in capital                                                                                             |   | 343                     |   | 343                 |   |
| Accumulated  deficit                                                                                                    |   | (42,138                 | )      | (44,971             | )      |
|                                                                                                                    |   |                    |   |                |   |
| **Total stockholders’ deficit**                                                                                    |   | (41,781                 | )      | (44,614             | )      |
|                                                                                                                    |   |                    |   |                |   |
| **Total liabilities and stockholders’  deficit**                                                                   |   | $                       | 64,794 |                | $      | 69,222 |   |

 

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

 

2

----

 

**HCC INDUSTRIES INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(in thousands)(unaudited)**

 
|                                                              |   | **Three  Months Ended** |       | **Nine  Months Ended**  |       |
|-------------------------------------------------------------------|--------|-------------------------|------------|-------------------------|------------|
|                                                              |   | **December  29,  2001** |       | **December  30,  2000** |       | **December  29,  2001** |   | **December  30,  2000** |   |
| **NET SALES**                                                     |   | $                       | 14,394     |                    | $          | 21,158 |   | $ | 51,542 |   | $ | 59,886 |   |
|                                                              |   |                    |       |                    |       |   |   |   |   |
| Cost of goods  sold                                               |   | 9,839                   |       | 14,029                  |       | 34,741 |   | 39,348 |   |
|                                                              |   |                    |       |                    |       |   |   |   |   |
| **GROSS PROFIT**                                                  |   | 4,555                   |       | 7,129                   |       | 16,801 |   | 20,538 |   |
|                                                              |   |                    |       |                    |       |   |   |   |   |
| Selling, general  and administrative expenses                     |   | 1,246                   |       | 2,211                   |       | 4,887 |   | 6,529 |   |
|                                                              |   |                    |       |                    |       |   |   |   |   |
| **EARNINGS FROM OPERATIONS**                                      |   | 3,309                   |       | 4,918                   |       | 11,914 |   | 14,009 |   |
|                                                              |   |                    |       |                    |       |   |   |   |   |
| **OTHER INCOME (EXPENSE):**                                       |   |                    |       |                    |       |   |   |   |   |
| Interest and  other income                                        |   | 55                      |       | 156                     |       | 196 |   | 508 |   |
| Interest expense                                                  |   | (2,459                  | )          | (2,594                  | )          | (7,388 | ) | (8,122 | ) |
|                                                              |   |                    |       |                    |       |   |   |   |   |
| Total other  expense, net                                         |   | (2,404                  | )          | (2,438                  | )          | (7,192 | ) | (7,614 | ) |
|                                                              |   |                    | ** ** |                    | ** ** |   | ** ** |   | ** ** |
| **EARNINGS  BEFORE TAXES AND EXTRAORDINARY ITEM**                 |   | 905                     |       | 2,480                   |       | 4,722 |   | 6,395 |   |
| Taxes on  earnings                                                |   | 362                     |       | 992                     |       | 1,889 |   | 2,558 |   |
|                                                              |   |                    |       |                    |       |   |   |   |   |
| Earnings before  extraordinary item                               |   | 543                     |       | 1,488                   |       | 2,833 |   | 3,837 |   |
|                                                              |   |                    |       |                    |       |   |   |   |   |
| Extraordinary  gain on retirement of debt, net of taxes of $2,125 |   | —                  |       | —                  |       | — |   | 3,187 |   |
|                                                              |   |                    |       |                    |       |   |   |   |   |
| **NET EARNINGS**                                                  |   | $                       | 543        |                    | $          | 1,488 |   | $ | 2,833 |   | $ | 7,024 |   |

 

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

 

3

----

 

**HCC INDUSTRIES INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)**

 
|                                                                          |   | **For the  Nine Months Ended** |   |
|-------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                          |   | **December  29,  2001**        |   | **December  30,  2000** |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                    |   |                           |   |   |   |
| Net earnings                                                                  |   | $                              | 2,833  |   | $ | 7,024 |   |
| Reconciliation  of net earnings to net cash provided by operating activities: |   |                           |   |   |   |
| Depreciation                                                                  |   | 1,883                          |   | 1,544 |   |
| Amortization                                                                  |   | 471                            |   | 483 |   |
| Extraordinary  gain                                                           |   | —                         |   | (3,187 | ) |
| Non-cash stock  compensation                                                  |   | —                         |   | 76 |   |
| Changes in  operating assets and liabilities:                                 |   |                           |   |   |   |
| Decrease  (increase) in trade accounts receivable, net                        |   | 1,436                          |   | (3,455 | ) |
| Decrease  (increase) in inventories                                           |   | 849                            |   | (357 | ) |
| (Increase)  decrease in other assets                                          |   | (139                           | )      | (28 | ) |
| (Decrease) in  accrued and other liabilities                                  |   | (3,950                         | )      | (2,008 | ) |
| (Decrease)  increase in accounts payable and Income taxes payable/receivable  |   | (1,535                         | )      | 2,341 |   |
|                                                                          |   |                           |   |   |   |
| Net cash  provided by operating activities                                    |   | 1,848                          |   | 2,433 |   |
|                                                                          |   |                           |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                    |   |                           |   |   |   |
| Purchases of  property, plant and equipment                                   |   | (1,008                         | )      | (1,930 | ) |
|                                                                          |   |                           |   |   |   |
| Net cash used in  investing activities                                        |   | (1,008                         | )      | (1,930 | ) |
|                                                                          |   |                           |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                    |   |                           |   |   |   |
| Principal  payments on long-term debt                                         |   | (1,556                         | )      | (2,323 | ) |
| Proceeds from  sale of stock                                                  |   | —                         |   | 50 |   |
| Early retirement of debt                                                      |   | —                         |   | (4,598 | ) |
|                                                                          |   |                           |   |   |   |
| Net cash used in  financing activities                                        |   | (1,556                         | )      | (6,871 | ) |
|                                                                          |   |                           |   |   |   |
| Net decrease in  cash and cash equivalents                                    |   | (716                           | )      | (6,368 | ) |
|                                                                          |   |                           |   |   |   |
| Cash and cash  equivalents at beginning of period                             |   | 8,896                          |   | 14,537 |   |
|                                                                          |   |                           |   |   |   |
| **CASH AND CASH EQUIVALENTS AT END OF  PERIOD**                               |   | $                              | 8,180  |   | $ | 8,169 |   |
|                                                                          |   |                           |   |   |   |
| **SUPPLEMENTAL NONCASH FINANCING  ACTIVITIES:**                               |   |                           |   |   |   |
| Capital lease  obligations and mortgages                                      |   | $                              | 508    |   | $ | 2,881 |   |

 

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

 

4

----

**HCC INDUSTRIES INC. AND SUBSIDIARIES**Notes toCondensed Consolidated Financial StatementsDecember 29, 2001

 

 

1.             INTERIM FINANCIALSTATEMENTS:

 

The accompanying unaudited condensed consolidatedfinancial statements of HCC Industries Inc. and Subsidiaries (the “Company”),include all adjustments (consisting of normal recurring entries) whichmanagement believes are necessary for a fair presentation of the financialposition and results of operations for the periods presented.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted.  The year end condensed balance sheet datawas derived from audited financial statements, but does not include alldisclosures required by generally accepted accounting principles.  It is suggested that the accompanyinginterim financial statements be read in conjunction with the Company’s auditedfinancial statements and footnotes as of and for the year ended March 31,2001.  Operating results for the threeand nine month periods ended December 29, 2001 are not necessarily indicativeof the 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.  Accountsreceivable from Special Devices, Inc. (“SDI”), the Company’s largest customer,as of December 29, 2001 and March 31, 2001 were $2,127,000 and $3,042,000,respectively.

 

 

2.             INVENTORIES:

 

                Inventoriesconsist of the following (in thousands):

 
|                               |   | **December  29,  2001** |   | **March 31,  2001** |   |
|------------------------------------|--------|-------------------------|--------|---------------------|--------|
| Raw materials  and component parts |   | $                       | 4,131  |                | $      | 4,861 |   |
| Work in process                    |   | 1,488                   |   | 1,607               |   |
|                               |   |                    |   |                |   |
|                               |   | $                       | 5,619  |                | $      | 6,468 |   |

 

 

3.             PROPERTY, PLANT AND EQUIPMENT:

 

                Property, plant and equipment consistof the following (in thousands):

 
|                               |   | **December  29,  2001** |   | **March 31,  2001** |   |
|------------------------------------|--------|-------------------------|--------|---------------------|--------|
| Land                               |   | $                       | 4,017  |                | $      | 4,017 |   |
| Buildings and  improvements        |   | 9,935                   |   | 9,671               |   |
| Furniture,  fixtures and equipment |   | 26,168                  |   | 24,917              |   |
|                               |   |                    |   |                |   |
|                               |   | 40,120                  |   | 38,605              |   |
| Less accumulated  depreciation     |   | (14,651                 | )      | (12,769             | )      |
|                               |   | $                       | 25,469 |                | $      | 25,836 |   |

 

5

----

4.             LONG-TERM DEBT:

 

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

 
|                                                                                       |   | **December  29,  2001** |   | **March 31,  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%)                  |   | 6,289                   |   | 7,337               |   |
|                                                                                       |   |                    |   |                |   |
|                                                                                       |   | 89,919                  |   | 90,967              |   |
| Less current  portion                                                                      |   | 3,002                   |   | 3,103               |   |
|                                                                                       |   | $                       | 86,917 |                | $      | 87,864 |   |

 

5.                                       CAPITAL STOCK:

 

                                                TheCompany is authorized to issue an aggregate of 550,000 shares of commonstock.  These shares may be issued infour different classes (A, B, C or D shares) which differ only in voting rightsper share.  At December 29, 2001, 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 remaining 412,055 shares of authorized butunissued common stock are undesignated as to class.

 

6

----

6.             COMMITMENTS ANDCONTINGENCIES:

 

Environmental

 

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

 

                                                InAugust 1994, the U.S. Environmental Protection Agency (“EPA”) identified theCompany as a potentially responsible party (“PRP”) in the El Monte OperableUnit (“EMOU”) of the San Gabriel Valley Superfund Sites.  In early 1995, the Company and the EPAexecuted an Administrative Consent Order which requires the Company and otherPRP’s to perform a Remedial Investigation and Feasibility Study (“RI/FS”) forthe EMOU.  The RI/FS was completed in1999 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.

 

As of December 29, 2001, the accrual for estimatedenvironmental costs was $8,325,000. Actual expenditures for environmental remediation were $37,000 and$377,000 for the three and nine month periods ended December 29, 2001,respectively, and $476,000 for the fiscal year ended March 31, 2001.  The Company believes its accrual is adequate,but as the scope of its obligations becomes more clearly defined, this accrualmay be modified and related charges against earnings 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

----

Other

 

                                                On March 3, 1998, Walter Neubauer, aformer stockholder of the Company and a current stockholder of SDI, filed alawsuit in California Superior Court (Case BC186937; Walter Neubauer vs. AndrewGoldfarb, et. al.) against the Company and certain other stockholders alleging(i) breach of fiduciary duty, (ii) fraud, (iii) negligent misrepresentation,(iv) negligence, (v) violations of corporations code and (vi) breach ofcontract.  The allegations primarilyrelate to the Company’s exercise of an option to acquire Mr. Neubauer’s stockin August 1996.  In September 1999, fiveof the six claims were dismissed upon a summary judgement motion made by theCompany, including all of the claims against the Company.  The remaining claim against Andrew Goldfarbwas settled in December 2001.

 

On May 7, 1998, the Company filed a lawsuit againstMr. Neubauer in California Superior Court alleging (i) breach of contract, (ii)intentional interference with business relations and (iii) interference withprospective business advantage.  All allegationsrelate to violations of the noncompetition agreement executed by Mr. Neubauerin August 1996.  In October 2001, theCompany entered into a settlement agreement with Mr. Neubauer to resolve theseclaims as well as any residual claims against the Company from the litigationdiscussed above.

 

In addition to the above, the Company is involved inother claims and litigation arising in the normal course of business.  Based on the advice of counsel and in theopinion of management, the ultimate resolution of these matters will not have asignificant effect on the financial position or the results of operations ofthe Company.

 

 

7.             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 Intangible Assets” .  SFAS No. 141 replaces APB 16 andeliminates pooling-of-interests accounting prospectively.  It also provides guidance on purchaseaccounting related to the recognition of intangible assets and accounting fornegative goodwill.

 

SFAS No. 142 changes the accounting for goodwill froman amortization method to an impairment-only approach.  Under SFAS No. 142, goodwill will be testedannually and adjusted whenever events or circumstances occur indicating thatgoodwill might be impaired.  SFAS No.141 and SFAS No. 142 are effective for all business combinations completedafter June 30, 2001.  Upon adoption ofSFAS No. 142, amortization of goodwill recorded for business combinations consummatedprior to July 1, 2001 will cease, and intangible assets acquired prior to July1, 2001 that do not meet the criteria for recognitions under SFAS No. 141 willbe reclassified to goodwill.  Companiesare required to adopt SFAS No. 142 for fiscal years beginning after December15, 2001, but early adoption is permitted. The Company has not yet determined the impact these standards will haveon its financial statements.

 

8

----

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

 

9

----

 

**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  Nine Months Ended** |   |
|-----------------------------------------------|--------|---------------------------------------|--------|--------------------------------|--------|
|                                          |   | **Dec. 29,  2001**                    |   | **Percent**                    |   | **Dec. 30,  2000** |   | **Percent** |   | **Dec. 29,  2001** |   | **Percent** |   | **Dec. 30,  2000** |   | **Percent** |   |
|                                          |   |                                  |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                     |   | $                                     | 14.4   |                           | 100.0  | % | $ | 21.2 |   | 100.0 | % | $ | 51.5 |   | 100.0 | % | $ | 59.9 |   | 100.0 | % |
| Gross profit                                  |   | 4.6                                   |   | 31.6                           | %      | 7.1 |   | 33.7 | % | 16.8 |   | 32.6 | % | 20.5 |   | 34.3 | % |
| Selling, general  and administrative expenses |   | 1.2                                   |   | 8.7                            | %      | 2.2 |   | 10.5 | % | 4.9 |   | 9.5 | % | 6.5 |   | 10.9 | % |
| Earnings from  operations                     |   | 3.3                                   |   | 23.0                           | %      | 4.9 |   | 23.2 | % | 11.9 |   | 23.1 | % | 14.0 |   | 23.4 | % |
| Other  income/expense                         |   | (2.4                                  | )      | -16.7                          | %      | (2.4 | ) | -11.5 | % | (7.2 | ) | -14.0 | % | (7.6 | ) | -12.7 | % |
| Extraordinary  gain, net                      |   | —                                |   | 0.0                            | %      | — |   | 0.0 | % | — |   | 0.0 | % | 3.2 |   | 5.3 | % |
| Net earnings                                  |   | $                                     | 0.5    |                           | 3.8    | % | $ | 1.5 |   | 7.0 | % | $ | 2.8 |   | 5.5 | % | $ | 7.0 |   | 11.7 | % |
|                                               |        |                                       |        |                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Comparison of the Three Months EndedDecember 29, 2001 (“2002 Quarter”) to the Three Months Ended December 30, 2000(“2001 Quarter”)**

 

*NetSales*

 

                TheCompany’s net sales decreased by approximately 32% or $6.8 million to $14.4million for the 2002 Quarter compared to sales of $21.2 million for the 2001Quarter.

 

                Salesto existing aerospace, industrial process control, and petrochemical customersdecreased by approximately 8% in the 2002 Quarter compared to the 2001Quarter.  Based on current order volume, the Company expects continued weaknessin the aerospace, industrial process control and petrochemical markets tocontinue over the next quarter.

 

                On the automotive side, revenue from airbag and seatbelt initiator products decreased due to both decreasing volumes andcontractual price reductions on existing programs.  The Company’s unit shipments to its largest customer, SpecialDevices, Inc. (“SDI”) decreased 31% for the 2002 Quarter compared to the 2001Quarter.  Overall, revenue from allautomotive shipments decreased approximately 39% in the 2002 Quarter comparedto the 2001 Quarter.  The Company’scontract with SDI expired in January 2002 and is not expected to berenewed.  The Company continues toservice SDI based on existing purchase orders. However, the Company expects significant future decreases in unit shipmentsto SDI.  The decrease in revenue fromSDI will be partially offset by increases in unit shipments on new and existingprograms to other automotive customers over the next several quarters.  On the whole, the Company expects lowerrevenues from automotive products during fiscal 2003.  The Company is aggressively pursuing additional opportunities inthe automotive market.

 

                TheCompany has continued to develop a significant market presence in thetelecommunications markets through component products designed for opticalnetworking infrastructure.  Shipments ofthese products increased dramatically throughout Fiscal Year 2001; however,they have slowed significantly due to reduced spending by service providers onoptical networking infrastructure systems.  Sales of these products decreased 74% in the 2002 Quarter comparedto the 2001 Quarter.  Based on currentorder volume and industry reports, the Company expects continued weakness inthe telecommunications markets over the next several quarters.

 

10

----

 

*GrossProfit*

 

                Grossprofit decreased by approximately 36% or $2.5 million, to $4.6 million for the2002 Quarter compared to $7.1 million for the 2001 Quarter.  Gross margin decreased to 31.6% for the 2002Quarter from 33.7% for the 2001 Quarter.

 

                Thedecrease in gross profit is attributable to the $6.8 million decrease in salesrevenue in the 2002 Quarter compared to the 2001 Quarter and partially offsetby lower variable manufacturing expenses. The decrease in gross margin was primarily attributable to the impact offixed overhead costs leveraged on lower sales revenue.

 

*Selling,General and Administrative Expenses*

 

                Selling,general and administrative (“S,G&A”) expenses decreased by approximately44% to $1.2 million for the 2002 Quarter compared to $2.2 million for the 2001Quarter.  S,G&A expenses as apercent to sales decreased to 8.7% in the 2002 Quarter from 10.5% for the 2001Quarter.

 

                G&Aexpenses overall were lower in the 2002 Quarter as compared to the 2001 Quarterdue to decreased compensation costs and reduced legal expenses resulting fromthe settlement of the Neubauer litigation. The decreased percentage of S,G&A expenses to sales reflects theabove cited cost reductions exceeding the percentage decrease in sales.

 

*Earningsfrom Operations*

 

                Operatingearnings decreased by approximately 33% or $1.6 million to $3.3 million for the2002 Quarter compared to $4.9 million for the 2001 Quarter.  Operating margins decreased to 23.0% in the2002 Quarter from 23.2% for the 2001 Quarter.

 

                Thedecrease in operating earnings and margin was attributable to the same factors(as discussed above) that contributed to the decrease in gross profit and grossmargin.

 

 

*OtherExpense, net*

 

                Otherexpense, net (which is predominantly net interest expense) was $2.4 million forboth the 2002 and 2001 Quarters.  TheCompany has $89.9 million of indebtedness as of December 29, 2001 compared to$94.8 million at December 30, 2000.

 

 

*NetEarnings*

 

                Netearnings decreased by approximately $1.0 million to $0.5 million for the 2002Quarter compared to $1.5 million in the 2001 Quarter.

 

                Thedecrease in net earnings was primarily attributable to the decrease in earningsfrom operations in the 2002 Quarter.

 

11

----

 

**Comparisonof the Nine Months Ended December 29, 2001 (“2002 Period”) to the Nine MonthsEnded December 30, 2001 (“2001 Period”)**

 

*NetSales*

 

                TheCompany’s net sales decreased by approximately 14% or $8.4 million to $51.5million for the 2002 Period compared to sales of $59.9 million for the 2001Period.

 

                Sales to existing aerospace, industrial processcontrol and petrochemical customers increased by approximately 6% in the 2002Period compared to the 2001 Period. Based on current order volume, the Company expects continued weakness inthe aerospace, industrial process control and petrochemical markets over thenext quarter.

 

                On the automotive side, revenue from airbag and seatbelt initiator products decreased due to both decreasing volumes andcontractual price reductions on existing programs.  The Company’s unit shipments to its largest customer, SpecialDevices, Inc. (“SDI”) decreased 20% for the 2002 Period compared to the 2001Period.  Overall, revenue from allautomotive shipments decreased approximately 26% in the 2002 Period compared tothe 2001 Period.  The Company’s contractwith SDI expired in January 2002 and is not expected to be renewed.  The Company continues to service SDI basedon existing purchase orders.  However,the Company expects significant future decreases in unit shipments to SDI.  The decrease in revenue from SDI will bepartially offset by increases in unit shipments on new and existing programs toother automotive customers over the next several quarters.  On the whole, the Company expects lowerrevenues from automotive products during fiscal 2003.  The Company is aggressively pursuing additional opportunities inthe automotive market.

 

                TheCompany has continued to develop a significant market presence in thetelecommunications markets through component products designed for opticalnetworking infrastructure.  Shipments ofthese products increased dramatically throughout Fiscal Year 2001; however,they have slowed significantly due to reduced spending by service providers onoptical networking infrastructure systems. Sales of these products decreased 46% in the 2002 Period compared to the2001 Period.  Based on current ordervolume and industry reports, the Company expects continued weakness in the telecommunicationsmarkets over the next several quarters.

 

*GrossProfit*

 

                Grossprofit decreased by approximately 18% or $3.7 million, to $16.8 million for the2002 Period compared to $20.5 million for the 2001 Period.  Gross margin decreased to 32.6% for the 2002Period from 34.3% for the 2001 Period.

 

                Thedecrease in gross profit is attributable to the decreased sales volume. Thedecrease in gross margin was primarily attributable to the impact of fixedoverhead costs leveraged against lower revenues.

 

*Selling,General and Administrative Expenses*

 

                Selling,general and administrative (“S,G&A”) expenses decreased by approximately25% to $4.9 million for the 2002 Period compared to $6.5 million for the 2001Period.  S,G&A expenses as a percentto sales decreased to 9.5% in the 2002 Period from 10.9% for the 2001 Period.

 

                G&Aexpenses overall were lower in the 2002 Period as compared to the 2001 Perioddue to decreased compensation costs and reduced legal expenses resulting fromthe settlement of the Neubauer litigation. The decreased percentage of S,G&A expenses to sales reflects theabove cited cost reductions exceeding the percentage decrease in sales.

 

12

----

 

*Earningsfrom Operations*

 

                Operatingearnings decreased by approximately 15% or $2.1 million to $11.9 million forthe 2002 Period compared to $14.0 million for the 2001 Period.  Operating margins decreased to 23.1% in the2002 Period from 23.4% for the 2001 Period.

 

                Thedecrease in operating earnings and margin was attributable to the same factors(as discussed above) that contributed to the decrease in gross profit and grossmargin.

 

*Extraordinary Gain, net*

 

                Duringthe 2001 Period, the Company purchased for retirement $10.2 million face valueof it’s 10.75% Senior Subordinated Notes for $4.6 million in cash.  The transaction resulted in an extraordinarygain on the early retirement of debt of $3.2 million, net of taxes of $2.1million. The purchase of this indebtedness will result in an after-tax yield tomaturity of 20.3% and reduces interest costs by $1.1 million annually.

 

*OtherExpense, net*

 

                Otherexpense, net (which is predominantly net interest expense) decreased byapproximately 6% or $0.4 million to $7.2 million in the 2002 Period compared to$7.6 million in the 2001 Period.  The$0.4 million decrease was attributable to lower interest expense realized fromlower total debt balances in the 2002 Period compared to the 2001 Period.  The Company has $89.9 million ofindebtedness as of December 29, 2001 compared to $94.8 million at December 30,2000.

 

* Net Earnings*

 

                Netearnings decreased by approximately 60% or $4.1 million to $2.8 million for the2002 Period compared to $7.0 million for the 2001 Period.

 

                Thesubstantial decrease in net earnings was due to the $3.2 million extraordinarygain on the retirement of debt in the 2001 Period and from the decrease inearnings from operations in the 2002 Period.

 

**Liquidityand Capital Resources**

 

                Netcash provided by operating activities was $1.8 million for the 2002 Periodcompared to $2.4 million for the 2001 Period. The decrease of $0.6 million of cash was primarily attributable to thedecrease in net earnings, (net of the extraordinary gain in 2001).

 

                Netcash used in investing activities was $1.0 million for the 2002 Period comparedto $1.9 million for the 2001 Period. The decrease in the 2002 Period is due to a substantial reduction incapital expenditures.

 

                Net cash used in financing activities was $1.6million for the 2002 Period compared to $6.9 million for the 2001 Period, due primarily to the purchase of the 10.75% Senior Subordinated Notes.

 

13

----

 

                Asof December 29, 2001, the Company’s outstanding long-term debt is $89.9million.  The Company has a RevolvingCredit Facility up to $20.0 million, which is collateralized by accountsreceivable and inventories.  At December29, 2001 there was $17.9 million available under the Revolving Credit Facility.  To date, the Company has not used anyamounts under the Revolving Credit Facility and is in compliance with its termsand conditions.

 

                TheCompany expects to finalize and execute in the fourth quarter an $8.0 millioncredit facility to replace the Revolving Credit Facility which expires in May2002.  The new line of credit will becollateralized by accounts receivable and inventories and may be used forgeneral and other corporate purposes.

 

                TheCompany believes that cash flow from operations and the availability ofborrowings under the Revolving Credit Facility or the new credit facility willprovide adequate funds for ongoing operations, planned capital expenditures anddebt service during the term 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$1.5 million and will be financed through working capital and/or purchase moneyindebtedness.

 

                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.

 

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

 

                TheCompany is exposed to market risk from changes in interest rates on theCompany’s Revolving Credit Facility.  AtDecember 29, 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.

 

14

----

 

**PARTII - OTHER INFORMATION**

 

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

 

Item 6.            Exhibitsand Reports on Form 8-K

 

                        (a)Exhibits:  12.1 - Computation of ratioof earnings to fixed charges

 

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

 

 

SIGNATURES

 

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

 

 

15

----