UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ___________________ /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: JULY 1, 2000 OR / / 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 (I.R.S. Employer incorporation or organization) Identification No.) 4232 TEMPLE CITY BLVD., ROSEMEAD, CALIFORNIA 91770 -------------------------------------------------- (Address of principal executive offices) (626) 443-8933 -------------------------------------------------- (Registrant's telephone number, including area code) ___________________ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Registrant's Common Stock, outstanding at August 7, 2000 was 137,945 shares. PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS HCC INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS JULY 1, APRIL 1, 2000 2000 --------- --------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents $ 10,956 $ 14,537 Trade accounts receivable, less allowance for doubtful accounts of $60 at July 1, 2000 and $51 at April 1, 2000 12,970 10,041 Inventories 4,149 4,515 Income taxes receivable 1,027 2,255 Prepaid and other current assets 650 728 --------- --------- Total current assets 29,752 32,076 PROPERTY, PLANT AND EQUIPMENT, NET 22,601 21,605 OTHER ASSETS: Intangible assets 4,991 5,063 Deferred financing costs 2,632 2,727 Deferred income taxes 4,100 4,100 Restricted cash 6,200 6,197 --------- --------- TOTAL ASSETS $ 70,276 $ 71,768 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt $ 7,026 $ 6,994 Accounts payable 2,754 2,950 Accrued liabilities 6,516 8,877 --------- --------- Total current liabilities 16,296 18,821 LONG TERM LIABILITIES: Long-term debt, net of current portion 97,664 97,475 Other long-term liabilities 8,982 9,178 --------- --------- 122,942 125,474 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Common stock; $.10 par value; authorized 550,000 shares, issued and outstanding 137,945 shares at July 1, 2000 and 135,495 shares at April 1, 2000 14 14 Additional paid-in capital 326 200 Accumulated deficit (53,006) (53,920) --------- --------- TOTAL STOCKHOLDERS' DEFICIT (52,666) (53,706) --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 70,276 $ 71,768 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. 2 HCC INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT SHARE DATA) UNAUDITED THREE MONTHS ENDED -------------------------- JULY 1, JULY 3, 2000 1999 ---------- ---------- NET SALES $ 18,517 $ 12,218 Cost of goods sold 12,360 9,146 ---------- ---------- GROSS PROFIT 6,157 3,072 Selling, general and administrative expenses 1,961 1,569 ---------- ---------- EARNINGS FROM OPERATIONS 4,196 1,503 ---------- ---------- OTHER INCOME (EXPENSE): Interest and other income 190 192 Interest expense (2,862) (2,827) ---------- ---------- Total other expense, net (2,672) (2,635) ---------- ---------- EARNINGS (LOSS) BEFORE TAXES 1,524 (1,132) Taxes (benefit) on earnings (loss) 610 (442) ---------- ---------- NET EARNINGS (LOSS) $ 914 $ (690) ========== ========== The accompanying notes are an integral part of these condensed consolidated financial statements. 3 HCC INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) UNAUDITED THREE MONTHS ENDED ---------------------------------- JULY 1, JULY 3, 2000 1999 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 914 $ (690) Reconciliation of net earnings (loss) to net cash provided by operating activities: Depreciation 526 484 Amortization 167 167 Non-cash stock compensation 76 --- Deferred income taxes --- (441) Changes in operating assets and liabilities: (Increase) decrease in trade accounts receivable, net (2,929) 1,135 Decrease in inventories 366 202 Decrease (increase) in other assets 75 (310) (Decrease) in other liabilities (2,557) (2,683) Increase in accounts payable and income taxes payable/receivable 1,032 440 ----------- ------------ Net cash used in operating activities (2,330) (1,696) ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (900) (508) ----------- ------------ Net cash used in investing activities (900) (508) ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of stock 50 --- Principal payments on long-term debt (401) (277) ----------- ------------ Net cash used in financing activities (351) (277) ----------- ------------ Net (decrease) in cash and cash equivalents (3,581) (2,481) Cash and cash equivalents at beginning of period 14,537 17,395 ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,956 $ 14,914 =========== ============ SUPPLEMENTAL NONCASH FINANCING ACTIVITIES: Capital lease obligations 622 536 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements July 1, 2000 1. INTERIM FINANCIAL STATEMENTS: The accompanying unaudited condensed consolidated financial statements of HCC Industries Inc. and Subsidiaries (the "Company"), include all adjustments (consisting of normal recurring entries) which management believes are necessary for a fair presentation of the financial position and results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Interim financial statements are subject to possible adjustments in connection with the annual audit of the Company's accounts for the full year. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. It is suggested that the accompanying interim financial statements be read in conjunction with the Company's audited financial statements and footnotes as of and for the year ended April 1, 2000. Operating results for the three month period ended July 1, 2000 are not necessarily indicative of the operating results for the full fiscal year. The Company grants uncollateralized credit to its customers who are located in various geographical areas. Estimated credit losses and returns have been provided for in the financial statements and, to date, have been within management's expectations. Accounts receivable from SDI (the Company's largest customer) as of July 1, 2000 and April 1, 2000 were $5,484,000 and $4,713,000, respectively. 2. INVENTORIES: Inventories consist of the following (in thousands): JULY 1, APRIL 1, 2000 2000 -------- --------- Raw materials and component parts $ 2,797 $ 3,036 Work in process 1,352 1,479 -------- --------- $ 4,149 $ 4,515 ======== ========= 3. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of the following (in thousands): JULY 1, APRIL 1, 2000 2000 -------- --------- Land $ 4,017 $ 4,017 Buildings and improvements 9,168 9,160 Furniture, fixtures and equipment 20,557 19,043 -------- --------- 33,742 32,220 Less accumulated depreciation (11,141) (10,615) -------- --------- $ 22,601 $ 21,605 ======== ========= 5 HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements July 1, 2000 4. LONG-TERM DEBT: Long-term debt consists of the following (in thousands): JULY 1, APRIL 1, 2000 2000 ---------- --------- 10 3/4% Senior Subordinated Notes - interest payable semi-annually; due May 2007 $ 90,000 $ 90,000 Subordinated Notes due Selling Shareholders - 12% interest payable semi-annually; due March 2001 2,500 2,500 Subordinated Bonus Notes - 10% interest payable semi-annually; $3,000,000 due March 2001 and $1,085,000 due April 2002 4,085 4,085 Term loans on land, building and improvements - 8% interest payable monthly; due May 2008 2,762 2,762 Other 5,343 5,122 ---------- --------- 104,690 104,469 Less current portion 7,026 6,994 ---------- --------- $ 97,664 $ 97,475 ========== ========= 5. CAPITAL STOCK: The Company is authorized to issue an aggregate of 550,000 shares of common stock. These shares may be issued in four different classes (A, B, C or D shares) which differ only in voting rights per share. In June 2000, the Company sold 2,450 shares of Class A common stock to the Company's Chairman for $50,000. In conjunction with this transaction, the Company recorded non-cash compensation of $76,000 in the quarter ended July 1, 2000. At July 1, 2000, the 137,945 outstanding shares of common stock were designated as follows: SHARES VOTING RIGHTS CLASS OUTSTANDING AMOUNT PER SHARE ----- ----------- ---------- ------------- A 105,643 $ 11,000 1 B 27,506 3,000 1 C 4,316 --- None D 480 --- 10 ----------- ---------- 137,945 $ 14,000 =========== ========== The remaining 412,055 shares of authorized but unissued common stock are undesignated as to class. 6 HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements July 1, 2000 6. COMMITMENTS AND CONTINGENCIES: Environmental As an ongoing facet of the Company's business, it is required to maintain compliance with various environmental regulations. The cost of this compliance is included in the Company's operating results as incurred. These ongoing costs include permitting fees and expenses and specialized effluent control systems as well as monitoring and site assessment costs required by various governmental agencies. In the opinion of management, the maintenance of this compliance will not have a significant effect on the financial position or results of operations of the Company. In August 1994, the U.S. Environmental Protection Agency ("EPA") identified the Company as a potentially responsible party ("PRP") in the El Monte Operable Unit ("EMOU") of the San Gabriel Valley Superfund Sites. In early 1995, the Company and the EPA executed an Administrative Consent Order which requires the Company and other PRP's to perform a Remedial Investigation and Feasibility Study ("RI/FS") for the EMOU. In addition, the Company's facility in Avon, Massachusetts is subject to Massachusetts "Chapter 21E", the State's hazardous site clean-up program. Uncertainty as to (a) the extent to which the Company caused, if at all, the conditions being investigated, (b) the extent of environmental contamination and risks, (c) the applicability of changing and complex environmental laws (d) the number and financial viability of other PRP's, (e) the stage of the investigation and/or remediation, (f) the unpredictability of investigation and/or remediation costs (including as to when they will be incurred), (g) applicable clean-up standards, (h) the remediation (if any) that will ultimately be required, and (i) available technology make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. In addition, liability under CERCLA is joint and several, and any potential inability of other PRP's to pay their prorata share of the environmental remediation costs may 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 range of estimated costs of $9,000,000 to $11,000,000 associated with the various claims and assertions it faces. The time frame over which the Company expects to incur such costs varies with each site, ranging up to 20 years as of April 1, 2000. These estimates are based partly on progress made in determining the magnitude of such costs, experience gained from sites on which remediation is ongoing or has been completed, and the timing and extent of remedial actions required by the applicable governmental authorities. As a result, the Company accrued $10,000,000 in fiscal 1997 for existing estimated environmental remediation and other related costs which the Company believes to be the best estimate of the liability. As of April 1, 2000, the accrual for estimated environmental costs was $9,178,000. Actual expenditures for environmental remediation were $196,000 for the quarter ended July 1, 2000 and $238,000 for the fiscal year ended April 1, 2000. Claims for recovery of costs already incurred and future costs have been asserted against various insurance companies. The Company has neither recorded any asset nor reduced any liability in anticipation of recovery with respect to such claims made. The Company believes its accrual is adequate, but as the scope of its obligations becomes more clearly defined, this accrual may be modified and related charges against earnings may be made. 7 HCC INDUSTRIES INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements July 1, 2000 6. COMMITMENTS AND CONTINGENCIES, Continued: Other On March 3, 1998, Walter Neubauer, a former stockholder of the Company and a current stockholder of SDI, filed a lawsuit in California Superior Court (Case BC186937; Walter Neubauer vs. Andrew Goldfarb, 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 of contract. The allegations primarily relate to the Company's exercise of an option to acquire Mr. Neubauer's stock in August 1996. In September 1999, five of the six claims were dismissed upon a summary judgement motion made by the Company, including all of the claims against the Company. The remaining claim is against Andrew Goldfarb for alleged violations of oral representations. On May 7, 1998, the Company filed a lawsuit against Mr. Neubauer in California Superior Court alleging (i) breach of contract, (ii) intentional interference with business relations and (iii) interference with prospective business advantage. All allegations relate to violations of the noncompetition agreement executed by Mr. Neubauer in August 1996. A preliminary injunction was granted in September 1998. The Company is seeking damages of $50.0 million. In addition to the above, the Company is involved in other claims and litigation arising in the normal course of business. Based on the advice of counsel and in the opinion of management, the ultimate resolution of these matters will not have a significant effect on the financial position or the results of operations of the Company. Indemnification Pursuant to the Recapitalization Agreement, the Selling Group has agreed to indemnify the Company with respect to the after-tax costs of contingent liabilities, subject to a cap for all indemnified liabilities of $30 million. In February 1997, a $6.0 million interest bearing escrow account was established by the selling stockholders (the "Deferred Amount") to secure indemnity claims of the Company and others, including with respect to environmental liabilities. 7. SUBSEQUENT EVENT In July 2000, the Company purchased and retired $7,215,000 of its 10 3/4% Senior Subordinated Notes for $2,850,000 plus accrued interest. The transaction will result in an extraordinary gain on the early retirement of debt of $2,492,000, net of $1,662,000 in taxes. 8 PART I - FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS (IN MILLIONS) FOR THE THREE MONTHS ENDED --------------------------------------------- JULY 1, JULY 3, 2000 PERCENT 1999 PERCENT ------- ------- ------- ------- Net sales $18.5 100.0% $12.2 100.0% Gross profit 6.2 33.5% 3.1 25.4% Selling, general and administrative expenses 2.0 10.8% 1.6 13.1% Earnings from operations 4.2 22.7% 1.5 12.3% Other income/expense (2.7) -14.6% (2.6) -21.3% Net earnings (loss) $0.9 4.9% $(0.7) -5.7% COMPARISON OF THE THREE MONTHS ENDED JULY 1, 2000 ("2001 QUARTER") TO THE THREE MONTHS ENDED JULY 3, 1999 ("2000 QUARTER") NET SALES The Company's net sales increased by approximately 52.0% or $6.3 million to $18.5 million for the 2001 Quarter compared to sales of $12.2 million for the 2000 Quarter. The significant increase was due to increasing demand in all product lines. Sales to existing aerospace, industrial process control, petrochemical and telecommunications customers increased significantly in the 2001 Quarter. Net non-automotive shipments increased by approximately 67% in the 2001 Quarter compared to the 2000 Quarter. The Company experienced exceptionally strong demand in both the telecommunications and petrochemical markets. Based on current order volume, the Company expects strong demand in the industrial process control, petrochemical and telecommunications markets to continue in the next quarter. On the automotive side, unit shipments of airbag initiator products increased significantly due to increased volumes on existing programs and the development of new programs. The Company's airbag initiator shipments to its largest customer, Special Devices, Inc. ("SDI") increased 20% for the 2001 Quarter compared to the 2000 Quarter. Additionally, the Company's unit shipments to its other automotive customers increased approximately 90% for the 2001 Quarter compared to the 2000 Quarter. Overall, revenue from all automotive shipments increased approximately 25% in the 2001 Quarter compared to the 2000 Quarter. Based on current order volume, the Company expects consistent unit volume and revenue from automotive products over the next quarter. For the longer term, the Company expects SDI's unit volume to decrease as a result of the recent purchase of SDI's largest domestic competitor by SDI's largest customer. GROSS PROFIT Gross profit increased by approximately 100.0% or $3.1 million, to $6.2 million for the 2001 Quarter compared to $3.1 for the 2000 Quarter. Gross margin increased to 33.5% for the 2001 Quarter from 25.4% for the 2000 Quarter. The increase in gross profit is attributable to the increased sales volume. The increase in gross margin is due to efficiencies gained through operating leverage on the higher sales volume. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("S,G&A") expenses increased by approximately 25.0% or $0.4 million to $2.0 million for the 2001 Quarter compared to $1.6 million for the 2000 Quarter. S,G&A expenses as a percent to sales decreased to 10.8% in the 2001 Quarter from 13.1% for the 2000 Quarter. Selling expenses increased approximately 14% in the 2001 Quarter compared to the 2000 Quarter. This increase was attributable to increased payroll costs associated with additions to the Company's sales force and higher selling commissions on approximately $6.3 million of increased sales. Additionally, G&A expenses overall were higher in the 2001 Quarter as compared to the 2000 Quarter due to increased compensation costs and other expenses. The decreased percentage of S,G&A expenses to sales reflects the increased leverage on the fixed portion of those expenses. EARNINGS FROM OPERATIONS Operating earnings increased 180.0% or $2.7 million to $4.2 million for the 2001 Quarter compared to $1.5 million for the 2000 Quarter. Operating margins increased to 22.7% in the 2001 Quarter from 12.3% for the 2000 Quarter. The increase in operating earnings and margin was attributable to the same factors (as discussed above) that contributed to the increase in gross profit, gross margin and S,G&A expenses as a percent to sales. OTHER EXPENSE, NET Other expense, net (which is predominantly net interest expense) was relatively flat at $2.7 million in the 2001 Quarter compared to $2.6 million in the 2000 Quarter. The Company has $104.7 million of indebtedness as of July 1, 2000 compared to $103.4 million at July 3, 1999. NET EARNINGS Net earnings increased by approximately $1.6 million to $0.9 million for the 2001 Quarter from a net loss of $0.7 million in the 2000 Quarter. The increase in net earnings was primarily attributable to the increase in earnings from operations in the 2001 Quarter. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $2.3 million for the 2001 Quarter compared to $1.7 million for the 2000 Quarter. The increase of $0.6 million of cash consumed was primarily attributable to an increase in accounts receivable. Net cash used in investing activities was $0.9 million for the 2001 Quarter compared to $0.5 million for the 2000 Quarter. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED As of July 1, 2000, the Company's outstanding indebtedness is $104.7 million, consisting of $90.0 million principal amount of the senior subordinated notes, $2.5 million of subordinated notes due Selling Shareholders pursuant to the Contingent Note Agreement, $4.1 million of subordinated bonus notes pursuant to the Contingent Bonus Plan, $2.8 million of mortgage debt and $5.3 million of other borrowings. The Company has a Revolving Credit Facility up to $20.0 million which is collateralized by accounts receivable and inventories. At July 1, 2000 no amounts were outstanding and $19.6 million was available under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility may be used for general and other corporate purposes. In July 2000, the Company purchased and retired $7,215,000 of its 10 3/4% Senior Subordinated Notes for $2,850,000 plus accrued interest. The transaction will result in an extraordinary gain on the early retirement of debt of $2,492,000 net of $1,662,000 in taxes. The Company believes that cash flow from operations and the availability of borrowings under the Revolving Credit Facility will provide adequate funds for ongoing operations, planned capital expenditures and debt service during the term of such facility. Capital expenditures for fiscal 2001 are expected to focus on vertical integration with investments in equipment to expand manufacturing capacity in machining, glass production, sealing and plating, as well as automation equipment to lower production costs on the high volume production lines. Expected capital expenditures for fiscal 2001 are approximately $3.5 million and will be financed through working capital and the Revolving Credit Facility. This filing contains statements that are "forward looking statements", and includes, among other things, discussions of the Company's business strategy and expectations concerning market position, future operations, margins, profitability, liquidity and capital resources. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. All phases of the operations of the Company are subject to a number of uncertainties, risks and other influences, including general economic conditions, regulatory changes and competition, many of which are outside the control of the Company, any one of which, or a combination of which, could materially affect the results of the Company's operations and whether the forward looking statements made by the Company ultimately prove to be accurate. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates on the Company's Revolving Credit Facility. At July 1, 2000, the Company had no outstanding borrowings under the line of credit and, therefore, changes in interest rates would have no impact on the Company's results of operations. 11 PART II - OTHER INFORMATION Items 1 through 5 are omitted as they are not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 12 - Computation of ratio of earnings to fixed charges (b) Reports on Form 8-K - Not applicable SIGNATURES HCC INDUSTRIES INC. DATED: August 9, 2000 /s/ Richard Ferraid ----------------------------------------------- President and Chief Executive Officer DATED: August 9, 2000 /s/ Christopher H. Bateman ----------------------------------------------- Vice President and Chief Financial Officer 12