-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GFzxCbvrO8gpuDqMQHFyqiRyU5JBSn3KcCQhjlIehmqoZsDxizy21Z4AsiVzHN1M p+/HA9PsMsDBrolteO2EQw== 0000912057-99-006439.txt : 19991117 0000912057-99-006439.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006439 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991002 FILED AS OF DATE: 19991116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCC INDUSTRIES INC /DE/ CENTRAL INDEX KEY: 0000316884 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 952691666 STATE OF INCORPORATION: DE FISCAL YEAR END: 0403 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-32207 FILM NUMBER: 99758715 BUSINESS ADDRESS: STREET 1: 4232 TEMPLE CITY BLVD STREET 2: PO BOX 739 CITY: ROSEMEAD STATE: CA ZIP: 91770-1592 BUSINESS PHONE: 2132837500 MAIL ADDRESS: STREET 1: 4232 TEMPLE CITY BLVD STREET 2: PO BOX 739 CITY: ROSEMEAD STATE: CA ZIP: 91770-1592 10-Q 1 10-Q 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. 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 OCTOBER 2, APRIL 3, 1999 1999 -------- ---------- (UNAUDITED) 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 ========= =========
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)
Three Months Ended Six Months Ended ------------------------------ --------------------------- October 2, September 26, October 2, September 26, 1999 1998 1999 1998 ----------- ------------ ---------- ------------- 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 ========== ========== =========== ==========
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)
For the Six Months Ended ---------------------------------- October 2, September 26, 1999 1998 ----------- ------------- 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 =========== =============
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 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):
October 2, April 3, 1999 1999 ----------- --------- 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): October 2, April 3, 1999 1999 ----------- --------- 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 =========== =========
5 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):
October 2, April 3, 1999 1999 ----------- --------- 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 =========== =========
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:
Shares Voting Rights Class Outstanding Amount Per Share ----- ----------- ---------- ------------- A 103,193 $ 10,000 1 B 27,506 3,000 1 C 4,316 --- None D 480 --- 10 ----------- ---------- 135,495 $ 13,000 =========== ==========
The remaining 414,505 shares of authorized but unissued common stock are undesignated as to class. 6 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 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 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 For the Six Months Ended --------------------------------------- ------------------------------------- Oct. 2, Sept. 26, Oct. 2, Sept. 26, 1999 Percent 1998 Percent 1999 Percent 1998 Percent ---- ------- ---- ------- ---- ------ ---- ------- 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%
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 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 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 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 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 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 EX-12 2 EXHIBIT 12 EXHIBIT 12 HCC INDUSTRIES INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (IN THOUSANDS)
For the Six Months Ended --------------------------------- October 2, September 26, 1999 1998 ------------- ------------- 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 ====== =======
(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. EX-27 3 EXHIBIT 27
5 1,000 6-MOS APR-01-2000 APR-04-1999 OCT-02-1999 13,621 0 10,838 (65) 4,227 29,881 30,099 (9,806) 68,851 9,494 101,945 0 0 14 (51,898) 68,851 14,280 14,280 9,790 9,790 1,549 25 2,830 293 114 179 0 0 0 179 1.321 1.321
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