<PAGE>
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: OCTOBER 2, 1999
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 November 16, 1999
was 135,495 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
OCTOBER 2, APRIL 3,
1999 1999
-------- ----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,621 $ 17,395
Trade accounts receivable, less allowance for
doubtful accounts of $65 at October 2, 1999
and $40 at April 3, 1999 10,773 9,834
Inventories 4,227 4,370
Prepaid and deferred income taxes 819 293
Other current assets 441 468
--------- ---------
Total current assets 29,881 32,360
PROPERTY, PLANT AND EQUIPMENT, NET 20,293 19,153
OTHER ASSETS:
Intangible assets 5,208 5,352
Deferred financing costs 2,918 3,108
Deferred income taxes 4,275 4,275
Restricted cash 6,276 6,120
--------- ---------
TOTAL ASSETS $ 68,851 $ 70,368
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,178 $ 1,125
Accounts payable 2,029 2,449
Accrued liabilities 6,287 6,707
--------- ---------
Total current liabilities 9,494 10,281
LONG TERM LIABILITIES:
Long-term debt, net of current portion 101,945 102,043
Other long-term liabilities 9,296 9,416
--------- ---------
120,735 121,740
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock; $.10 par value; authorized 550,000
shares, issued and outstanding 135,495 shares 14 14
Additional paid-in capital 200 200
Accumulated deficit (52,098) (51,586)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (51,884) (51,372)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 68,851 $ 70,368
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ---------------------------
October 2, September 26, October 2, September 26,
1999 1998 1999 1998
----------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 14,280 $ 17,159 $ 26,498 $ 35,406
Cost of goods sold 9,790 10,496 18,936 21,429
---------- ---------- ---------- ----------
GROSS PROFIT 4,490 6,663 7,562 13,977
Selling, general and administrative expenses 1,549 2,109 3,119 4,197
---------- ---------- ---------- ----------
EARNINGS FROM OPERATIONS 2,941 4,554 4,443 9,780
OTHER INCOME (EXPENSE):
Interest and other income 182 175 374 352
Interest expense (2,830) (2,764) (5,657) (5,486)
---------- ---------- ---------- ----------
Total other expense, net (2,648) (2,589) (5,283) (5,134)
Earnings (loss) before taxes 293 1,965 (840) 4,646
Taxes (benefit) on earnings (loss) 114 775 (328) 1,824
---------- ---------- ----------- ----------
NET EARNINGS (LOSS) $ 179 $ 1,190 $ (512) $ 2,822
========== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Months Ended
----------------------------------
October 2, September 26,
1999 1998
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (512) $ 2,822
Reconciliation of net earnings (loss) to net cash provided
by operating activities:
Depreciation 965 819
Amortization 334 335
Deferred income taxes (526) (2,700)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable, net (939) 568
Decrease in inventories 143 42
(Increase) in other assets (129) (140)
(Decrease) Increase in accrued liabilities (540) 958
(Decrease) in accounts payable and income
taxes payable (420) (599)
----------- -------------
Net cash (used in) provided by operating activities (1,624) 2,105
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,569) (1,457)
----------- -------------
Net cash used in investing activities (1,569) (1,457)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (581) (479)
----------- -------------
Net cash used in financing activities (581) (479)
----------- -------------
Net (decrease) increase in cash and cash equivalents (3,774) 169
Cash and cash equivalents at beginning of period 17,395 13,441
----------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,621 $ 13,610
=========== =============
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Capital lease obligations and mortgages $ 536 $ 3,145
=========== =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
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HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
October 2, 1999
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. 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 3, 1999. Operating results for the three and six
month periods ended October 2, 1999 are not necessarily indicative of the
operating results for the full fiscal year.
2. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
October 2, April 3,
1999 1999
----------- ---------
<S> <C> <C>
Raw materials and component parts $ 2,091 $ 2,279
Work in process 2,136 2,091
----------- ---------
$ 4,227 $ 4,370
=========== =========
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<CAPTION>
October 2, April 3,
1999 1999
----------- ---------
<S> <C> <C>
Land $ 4,017 $ 4,017
Buildings and improvements 9,036 8,699
Furniture, fixtures and equipment 17,046 15,278
----------- ---------
30,099 27,994
Less accumulated depreciation (9,806) (8,841)
----------- ---------
$ 20,293 $ 19,153
=========== =========
</TABLE>
5
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HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
October 2, 1999
4. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
October 2, April 3,
1999 1999
----------- ---------
<S> <S> <S>
10 3/4% Senior Subordinated Notes - interest payable
semi-annually; due May 15, 2007 $ 90,000 $ 90,000
Subordinated Notes due Selling Shareholders -
12% interest payable semi-annually; due March 28, 2001 2,500 2,500
Subordinated Bonus Notes - 10% interest payable semi-annually;
$3,000,000 due March 28, 2001 and
$1,085,000 due April 3, 2002 4,085 4,085
Term loans on land, building and improvements -
8% interest payable monthly; due may 2008 2,762 2,762
Other 3,776 3,821
----------- ---------
103,123 103,168
Less current portion 1,178 1,125
----------- ---------
$ 101,945 $ 102,043
=========== =========
</TABLE>
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. At October 2, 1999, the
135,495 outstanding shares of common stock were designated as follows:
<TABLE>
<CAPTION>
Shares Voting Rights
Class Outstanding Amount Per Share
----- ----------- ---------- -------------
<S> <C> <C> <C>
A 103,193 $ 10,000 1
B 27,506 3,000 1
C 4,316 --- None
D 480 --- 10
----------- ----------
135,495 $ 13,000
=========== ==========
</TABLE>
The remaining 414,505 shares of authorized but unissued common stock are
undesignated as to class.
6
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
October 2, 1999
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 PRPs to pay their pro rata share of the
environmental remediation costs may result in the Company being required to bear
costs in excess of its pro rata 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
March 28, 1998. 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 October 2, 1999, the accrual for estimated
environmental costs was $9,296,000.
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 reserves are adequate, but as the scope of its
obligations becomes more clearly defined, this reserve may be modified and
related charges against earnings may be made.
Pursuant to the Recapitalization Agreement, the Selling Group has agreed to
indemnify the Company with respect to the after-tax costs of contingent
environmental and other liabilities, subject to a cap for all indemnified
liabilities of $30 million. Pursuant to the Recapitalization Agreement, 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. Any
environmental costs, net of tax benefit, are expected to be funded from the
escrow account. Actual
7
<PAGE>
expenditures for environmental remediation were $106,000 for the quarter
ended October 2, 1999 and $203,000 for the fiscal year ended April 3, 1999.
HCC INDUSTRIES INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
October 2, 1999
6. COMMITMENTS AND CONTINGENCIES, Continued:
Other
On March 3, 1998, Walter Neubauer, formerly the largest shareholder of the
Company and presently a significant shareholder of Special Devices, Inc., the
Company's largest customer, filed a lawsuit in California Superior Court 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. In March, 1999,
defendants filed a motion for summary judgment contending that they were
entitled to prevail as a matter of law. In September, 1999, the motion was
granted as to five of the six claims alleged (including all claims against the
Company). The remaining claim, breach of contract, is pending against Andrew
Goldfarb. Plaintiff is presently seeking reversal of the granting of summary
judgment in the California Court of Appeal. Based upon the Company's analysis of
the current facts, it is management's belief that the Company should ultimately
prevail in this matter, although there can be no assurance in this regard at
this time.
On May 7, 1998, the Company filed an action against Walter Neubauer in
California Superior Court for preliminary and permanent injunctive relief and
damages for (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 the
former stockholder in August 1996. A preliminary injunction was granted in
September, 1998. The case was consolidated with Mr. Neubauer's action, discussed
above, and discovery is proceeding.
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.
8
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (IN MILLIONS)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
--------------------------------------- -------------------------------------
Oct. 2, Sept. 26, Oct. 2, Sept. 26,
1999 Percent 1998 Percent 1999 Percent 1998 Percent
---- ------- ---- ------- ---- ------ ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $14.3 100.0% $17.2 100.0% $26.4 100.0% $35.4 100.0%
Gross profit 4.5 31.4% 6.7 38.8% 7.6 28.5% 14.0 39.5%
Selling, general and administrative
expenses 1.5 10.8% 2.1 12.3% 3.1 11.8% 4.2 11.9%
Earnings from operations 2.9 20.6% 4.6 26.5% 4.4 16.8% 9.8 27.6%
Other income/expense (2.6) -18.5% (2.6) -15.1% (5.3) -19.9% (5.1) -14.5%
Net earnings (loss) $0.2 1.3% $1.2 6.9% $(0.5) -1.9% $2.8 8.0%
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 2, 1999 ("2000 QUARTER") TO THE
THREE MONTHS ENDED SEPTEMBER 26, 1998 ("1999 QUARTER")
NET SALES
The Company's net sales decreased by approximately 16.9% or $2.9
million to $14.3 million for the 2000 Quarter compared to sales of $17.2 million
for the 1999 Quarter. The significant decrease was due to decreasing demand in
all non-automotive product lines. Sales to existing aerospace, industrial
process control, and petrochemical customers decreased by approximately 26% in
the 2000 Quarter compared to the 1999 Quarter. Based on current order volume,
the Company expects significant weakness in the aerospace, industrial process
control and petrochemical markets to continue in the next quarter.
On the automotive side, unit shipments of airbag initiator products
increased moderately due to customer demand on existing programs. The Company's
airbag initiator shipments to its largest customer, Special Devices, Inc.
("SDI") increased 16% for the 2000 Quarter compared to the 1999 Quarter. This
increased volume was offset by decreased volumes to other automotive customers
and a price reduction effected under a new supply agreement with SDI. The new
agreement with SDI was effective March 18, 1999 and expires on December 31,
2002. Overall, revenue from all automotive shipments decreased approximately 2%
in the 2000 Quarter compared to the 1999 Quarter. Based on current order volume,
the Company expects a slight increase in revenue from automotive products over
the next quarter.
GROSS PROFIT
Gross profit decreased by approximately 32.8% or $2.2 million, to $4.5
million for the 2000 Quarter compared to $6.7 for the 1999 Quarter. Gross margin
decreased to 31.4% for the 2000 Quarter from 38.8% for the 1999 Quarter.
The decrease in gross profit is attributable to the decreased sales
volume. The decrease in gross margin was primarily attributable to the
significant decrease in revenue and the corresponding impact of fixed overhead
costs leveraged against lower revenue. Additionally, gross margin was impacted
by price concessions on automotive products that have exceeded the Company's
ability to reduce its production costs. The ongoing weakness in demand will
continue to negatively impact gross profitability and gross margin.
9
<PAGE>
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 decreased 28.6%
to $1.5 million for the 2000 Quarter compared to $2.1 million for the 1999
Quarter. S,G&A expenses as a percent to sales decreased to 10.8% in the 2000
Quarter from 12.3% for the 1999 Quarter.
Selling expenses decreased approximately 11% in the 2000 Quarter
compared to the 1999 Quarter. This decrease was attributable to lower selling
commissions recorded against approximately $2.9 million fewer sales.
Additionally, G&A expenses overall were lower in the 2000 Quarter as the 1999
Quarter included approximately $0.6 million of contingent compensation
expenses earned for the period. There was no such contingent compensation
expense earned in the 2000 Quarter. The decreased percentage of S,G&A
expenses to sales reflects the impact of the decreased commissions and
non-recurring contingent compensation expenses.
EARNINGS FROM OPERATIONS
Operating earnings decreased 37.0% or $1.7 million to $2.9 million for
the 2000 Quarter compared to $4.6 million for the 1999 Quarter. Operating
margins decreased to 20.6% in the 2000 Quarter from 26.5% for the 1999 Quarter.
The decrease in operating earnings and margin was attributable to the
same factors (as discussed above) that contributed to the decrease in gross
profit and gross margin and improvements in S,G&A expenses as a percent to
sales.
OTHER EXPENSE, NET
Other expense, net (which is predominantly net interest expense) was
flat at $2.6 million for the 2000 and 1999 Quarters. The Company has $103.1
million of indebtedness as of October 2, 1999 compared to $101.8 million at
September 26, 1998.
NET EARNINGS
Net earnings decreased by approximately $1.0 million to $0.2 million
for the 2000 Quarter from $1.2 million in the 1999 Quarter.
The decrease in net earnings was primarily attributable to the after
tax impact of the decrease in gross profit and partially offset by the decreased
SG&A expenses in the 2000 Quarter.
COMPARISON OF THE SIX MONTHS ENDED OCTOBER 2, 1999 ("2000 PERIOD") TO THE SIX
MONTHS ENDED SEPTEMBER 26, 1998 ("1999 PERIOD")
NET SALES
The Company's net sales decreased by approximately 25.4% or $9.0
million to $26.4 million for the 2000 Period compared to sales of $35.4 million
for the 1999 Period. The significant decrease was due to decreasing demand in
all product lines. Sales to existing aerospace, industrial process control, and
petrochemical customers decreased significantly in the 2000 Period. Net
non-automotive shipments decreased by approximately 30% in the 2000 Period
compared to the 1999 Period. Based on current
10
<PAGE>
order volume, the Company expects significant weakness in the aerospace,
industrial process control and petrochemical markets to continue in the next
quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
On the automotive side, unit shipments of airbag initiator products
decreased significantly due to customer demand on existing programs. The
Company's airbag initiator shipments to its largest customer, Special Devices,
Inc. ("SDI") decreased 8% for the 2000 Period compared to the 1999 Period. This
decreased volume was magnified by decreases in automotive shipments to other
customers and a price reduction effected under a new supply agreement with SDI.
The new agreement with SDI was effective March 18, 1999 and expires on December
31, 2002. Overall, revenue from all automotive shipments decreased approximately
18% in the 2000 Period compared to the 1999 Period. Based on current order
volume, the Company expects a slight increase in revenue from automotive
products over the next quarter.
GROSS PROFIT
Gross profit decreased by approximately 45.7% or $6.4 million, to $7.6
million for the 2000 Period compared to $14.0 for the 1999 Period. Gross margin
decreased to 28.5% for the 2000 Period from 39.5% for the 1999 Period.
The decrease in gross profit is attributable to the decreased sales
volume. The decrease in gross margin was primarily attributable to the
significant decrease in revenue and the corresponding impact of fixed overhead
costs leveraged against lower revenue. Additionally, gross margin was impacted
by price concessions on automotive products that have exceeded the Company's
ability to reduce its production costs. The ongoing decreases in sales will
continue to impact gross profitability and gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("S,G&A") expenses decreased by
approximately 26.2% to $3.1 million for the 2000 Period compared to $4.2
million for the 1999 Period. S,G&A expenses as a percent to sales decreased
slightly to 11.8% in the 2000 Period from 11.9% for the 1999 Period.
The decrease in selling, general and administrative expenses were a
result of lower contingent compensation accruals, and slightly lower commission
costs. The improvement in the percentage of S,G&A expenses to sales reflects the
decreased overall costs.
EARNINGS FROM OPERATIONS
Operating earnings decreased 55.1% or $5.4 million to $4.4 million for
the 2000 Period compared to $9.8 million for the 1999 Period. Operating margins
decreased to 16.8% in the 2000 Period from 27.6% for the 1999 Period.
The significant decrease in operating earnings and margin was
attributable to the same factors (as discussed above) that contributed to the
decrease in gross profit and gross margin and improvements in S,G&A expenses as
a percent to sales.
OTHER EXPENSE, NET
Other expense, net (which is predominantly net interest expense)
increased 3.9% or $0.2 million to $5.3 million in the 2000 Period compared to
$5.1 million in the 1999 Period. The $0.2 million increase was attributable
to additional interest expense incurred with the additional indebtedness and
net of increased interest income recognized in the 2000 Period compared to
the 1999 Period. The Company has $103.1 million of long-term debt as of
October 2, 1999 compared to $101.8 million at September 26, 1998.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
NET EARNINGS
Net earnings decreased by approximately $3.3 million to a net loss of
$0.5 million for the 2000 Period from $2.8 million in the 1999 Period.
The decrease in net earnings was primarily attributable to the decrease
in earnings from operations in the 2000 Period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1.6 million for the 2000
Period compared to $2.1 million provided by operating activities for the 1999
Period. The increase of $3.7 million of cash consumed was primarily
attributable to a reduction in earnings from operations.
Net cash used in financing activities was $0.6 million for the 2000
Period compared to $0.5 million for the 1999 Period.
Net cash used in investing activities was $1.6 million for the 2000
Period compared to $1.5 million for the 1999 Period.
As of October 2, 1999, the Company's outstanding long-term debt is
$103.1 million. The Company has a Revolving Credit Facility up to $20.0 million
and is collateralized by accounts receivable and inventories. At October 2, 1999
there was $18.2 million available under the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility may be used for general and other
corporate purposes. To date, the Company has not used any amounts under the
Revolving Credit Facility.
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. To the extent certain performance
thresholds with respect to the Contingent Notes and Contingent Bonuses are met,
and such obligations become vested, the Company believes that cash flow from
operations and availability of borrowings will be sufficient to fund such
obligations.
Capital expenditures for fiscal 2000 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 2000 are approximately $3.0
million and will be financed through working capital and the Revolving Credit
Facility.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
YEAR 2000 ISSUE
The Year 2000 readiness issue, which is common to most businesses,
arises from the inability of information systems, and other time and date
sensitive products and systems to properly recognize and process date-sensitive
information or system failures. Assessments of the potential cost and effects of
Year 2000 issues vary significantly among businesses, and it is extremely
difficult to predict the actual impact. Recognizing this uncertainty, management
is continuing to actively analyze, assess and plan for various Year 2000 issues
across its business. The products manufactured by the Company do not have issues
related to Year 2000 functionality.
The Year 2000 issue has an impact on both information technology
("IT") systems and non-IT systems, such as manufacturing systems and physical
facilities including, but not limited to, security systems and utilities.
Although management believes that a majority of the Company's IT systems are
Year 2000 ready, such systems continue to be tested for Year 2000 readiness.
The Company is replacing or upgrading those systems that are identified as
non-Year 2000 compliant. Certain IT systems previously identified as non-Year
2000 compliant have been upgraded or replaced. Non-IT system issues are more
difficult to identify and resolve. The Company is actively identifying non-IT
Year 2000 issues concerning its physical facility locations. As non-IT areas
are identified, management formulates the necessary actions to ensure minimal
disruption to its business processes. Although management believes that its
efforts will be successful and the costs will be insignificant to its
consolidated financial position and results of operations, management also
recognizes that any failure or delay could cause a potential negative impact.
Independent of the Company's efforts to prepare for Year 2000
readiness, the Company has purchased and is implementing a new management
information system. This new system is Year 2000 compliant and is fully
operational as of October 2, 1999.
The Year 2000 readiness of its customers varies. The Company is not
investigating whether or not its customers are evaluating and/or preparing their
own systems. These efforts by customers to address Year 2000 issues may affect
the demand for certain products and services; however, the impact to the revenue
or any change in revenue patterns is highly uncertain.
The Company has also initiated efforts to assess the Year 2000
readiness of its key suppliers and business partners. The Company's direction of
this effort is to ensure the adequacy of resources and supplies to minimize any
potential business interruptions. While the Company continues to believe the
Year 2000 issue described above will not materially affect its consolidated
financial position or results of operations, it remains uncertain as to what
extent, if any, the Company may be impacted.
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
13
<PAGE>
The Company is exposed to market risk from changes in interest rates on
long-term debt obligations that impact the fair value of these obligations. At
October 2, 1999 the carrying value of our fixed-rate long-term debt approximated
its fair value.
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: November 16, 1999 /s/ Andrew Goldfarb
----------------- ----------------------------------------
President and Chief Executive Officer
DATED: November 16, 1999 /s/ Christopher H. Bateman
------------------- ------------------------------------------
Vice President and Chief Financial Officer
14
<PAGE>
EXHIBIT 12
HCC INDUSTRIES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Months Ended
---------------------------------
October 2, September 26,
1999 1998
------------- -------------
<S> <C> <C>
Earnings:
Earnings (loss) before taxes $ (840) $ 4,646
Add: Fixed Charges* 5,657 5,486
------ -------
$4,817 $10,132
====== =======
* Fixed Charges:
Interest expense $5,657 $ 5,486
------ -------
$5,657 $ 5,486
====== =======
Ratio of Earnings to Fixed Charges ----(1) 1.8
====== =======
</TABLE>
(1) There was a deficiency of earnings to fixed charges for the six months
ended October 2, 1999 of $840.
*The ratios of earnings to fixed charges were computed by dividing earnings by
fixed charges. For this purpose, "earnings" consist of earnings before taxes and
extraordinary item plus fixed charges and "fixed charges" consist of interest
expense and amortization of debt issuance costs.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-01-2000
<PERIOD-START> APR-04-1999
<PERIOD-END> OCT-02-1999
<CASH> 13,621
<SECURITIES> 0
<RECEIVABLES> 10,838
<ALLOWANCES> (65)
<INVENTORY> 4,227
<CURRENT-ASSETS> 29,881
<PP&E> 30,099
<DEPRECIATION> (9,806)
<TOTAL-ASSETS> 68,851
<CURRENT-LIABILITIES> 9,494
<BONDS> 101,945
0
0
<COMMON> 14
<OTHER-SE> (51,898)
<TOTAL-LIABILITY-AND-EQUITY> 68,851
<SALES> 14,280
<TOTAL-REVENUES> 14,280
<CGS> 9,790
<TOTAL-COSTS> 9,790
<OTHER-EXPENSES> 1,549
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 2,830
<INCOME-PRETAX> 293
<INCOME-TAX> 114
<INCOME-CONTINUING> 179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179
<EPS-BASIC> 1.321
<EPS-DILUTED> 1.321
</TABLE>
