** **

**UNITEDSTATES**

** SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

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**ý****                                  ****ANNUAL REPORT PURSUANTTO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

For the fiscal yearended:  March 29, 2003

 

**OR**

 

**o****            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**For thetransition period from                 to                     **

**Commissionfile number: 333-32207**

 

**HCC INDUSTRIES INC.**

(Exact name of Registrantas specified in its charter)

 
| **Delaware**                     |   | **95-2691666**      |
|----------------------------------|--------|---------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer    |
| incorporation or  organization)  |   | Identification No.) |

 

** **

**4232Temple City Blvd., Rosemead, California 91770**

(Address of principalexecutive offices)

 

 

**(626) 443-8933**

 (Registrant’s telephone number, includingarea code)

 

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**Securitiesregistered pursuant to Section 12 (b) of the Act:**

 
| **Title  of each class** |   | **Name  of each exchange on which registered** |
|--------------------------|--------|------------------------------------------------|
| None                     |   | None                                           |

 

** **

**Securitiesregistered pursuant to Section 12 (g) of the Act:**

**10 3⁄4%Senior Subordinated Notes Due 2007**

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.   Yes ý   No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes o    No ý

 

Registrant’s Common Stock, outstanding at March 29, 2003 was 137,945shares.

 

DOCUMENTS INCORPORATED BYREFERENCE:

 

None

 

 

 

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**HCC INDUSTRIES INC.**

 

**INDEX TO ANNUAL REPORT ON FORM 10-K**

 

 

 
| **PART I**     |            |                                                                                           |   |
|----------------|-----------------|------------------------------------------------------------------------------------------------|--------|
|           |            |                                                                                           |   |
|           | Item 1.         | BUSINESS                                                                                       |   |
|           | Item 2.         | PROPERTIES                                                                                     |   |
|           | Item 3.         | LEGAL PROCEEDINGS                                                                              |   |
|           | Item  4.        | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                           |
|           |            |                                                                                           |   |
|           |            |                                                                                           |   |
| **PART II**    |            |                                                                                           |   |
|           |            |                                                                                           |   |
|           | Item  5         | MARKET  FOR THE REGISTRANT’S COMMON EQUITY AND 

RELATED  STOCKHOLDER MATTERS             |
|           | Item 6.         | SELECTED FINANCIAL  DATA                                                                       |   |
|           | Item  7.        | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL 

CONDITION AND  RESULTS OF OPERATIONS |
|           | Item  7a.  | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT 

MARKET RATE RISK                             |
|           | Item  8.        | FINANCIAL  STATEMENTS AND SUPPLEMENTAL DATA                                                    |
|           | Item  9.        | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE          |
|           |            |                                                                                           |   |
| **PART III**   |            |                                                                                           |   |
|           |            |                                                                                           |   |
|           | Item  10.       | DIRECTORS  AND EXECUTIVE OFFICERS OF THE    REGISTRANT                               |
|           | Item 11.        | EXECUTIVE  COMPENSATION                                                                        |   |
|           | Item  12.       | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                |
|           | Item  13.       | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                                |
|           | Item 14.        | CONTROLS AND  PROCEDURES                                                                       |   |
|           |            |                                                                                           |   |
| **PART IV**    |            |                                                                                           |   |
|           |            |                                                                                           |   |
|           | Item  15.       | EXHIBITS,  FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                              |
|           |            |                                                                                           |   |
| **SIGNATURES** |            |                                                                                           |
|                |                 |                                                                                                |        |  |  |

 

2

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**PART I**

 

**Item 1 - Business**

 

**General**

 

                Except where thecontext indicates otherwise, the term “Company” means HCC Industries Inc. andits wholly owned subsidiaries Hermetic Seal Corporation, Glasseal Products,Inc., Sealtron, Inc.,  Norfolk AvonRealty Trust, HCC Industries International, HCC Machining Company, Inc. and HCCForeign Sales Corporation.

 

                The Company wasincorporated in Delaware in 1985 and is one of the largest custom manufacturersof high precision hermetically sealed electronic connection devices in theUnited States.  High precision hermeticseals are used primarily to permit the flow of electricity across a barrierused to separate different atmospheric media (such as gas or liquid to air orvacuum) existing on opposite sides of the barrier.  A hermetic seal is generally accomplished through the creation ofa glass-to-metal seal (“GTMS”). The hermetic seals manufactured by the Companygenerally fall into four categories - terminals, headers, connectors andmicroelectronics packages.  A “terminal”is a device characterized by having only a single contact pin, while a “header”has multiple contact pins inserted in a frame. A “connector” is a type of terminal or header which can be mechanicallycoupled to or uncoupled from another connection.  A “microelectronic package” is a container for thick and thinfilm substrates onto which hybrid circuitry has been etched.  The Company operates in the premium segmentof the market by providing high precision GTMS, custom designed to meetspecific customer requirements.  EachGTMS generally consists of a metal body or housing, metal contact pins, and aninsulator fabricated from glass, ceramic or glass/ceramic mixtures.  GTMS range in size from a two foot long,eight inch diameter cylindrical connector utilized for through-hullcommunication links for nuclear submarines, to a 40/1000 inch outside diameter(12/1000 inch inside diameter) implant to measure pressure in the heartchamber.

 

                The Companybelieves that it has been an industry leader in the design and manufacture ofGTMS since it developed its GTMS process in 1945.  The Company has developed over 75,000 different configurations,primarily for the following industries: (1) automotive (for use in, for example, the initiators in airbags andseat belt pretensioners); (2) aerospace and military electronics (for use in,for example, gyro guidance devices, flight instrumentation, jet enginecontrols, and space suit controls); (3) test and measurement (for use in, for example,temperature and pressure transducers, infrared detection instrumentation,electro-optical devices and fuel injection monitoring devices); (4) medicalelectronics (for use in, for example, pacemakers, kidney dialysis machines anddevices for monitoring vital life signs); (5) telecommunications (for use in,for example, fiber optics); and (6) energy (for use in, for example, oildrilling equipment and downhole logging instrumentation and for conventionaland nuclear electric power generating plants).

 

                Thedemand for the Company’s products is largely dependent on the automotive andaerospace industries.  Sales to theCompany’s ten largest customers accounted for approximately 37% of consolidatedsales for fiscal year 2003. Approximately 58% of the Company’s consolidated sales for fiscal 2003were to customers with which the Company had contractual agreements, solesource relationships, letters of intent or long-term purchase orders.  A substantial portion of these businessrelationships are informal and certain of the Company’s contractualarrangements may be terminated at will. Sales to the Company’s largest customer accounted for approximately 8%of consolidated sales for the fiscal year ended March 29, 2003.

 

3

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**CompetitiveStrengths**

 

                The Companybelieves that it has the following competitive strengths:

 

                *Long-TermCustomer Relationships.*  Manyof the Company’s customers have been customers for over twenty years.  The Company believes that both automotiveand aerospace OEMs continue to seek long-term partnerships with fewer coresuppliers.  The Company’s relationshipsare strengthened by the fact that many of its arrangements with its customersprovide for the Company to act as the sole source of supply for thecustomer.  The Company estimates thatapproximately 58% of the Company’s consolidated sales for fiscal year 2003 werefrom contractual agreements, sole source relationships, letters of intent orlong-term purchase orders.

 

                *MarketLeadership*.  A number of theCompany’s products hold leading market positions in their respective nichemarkets.  The Company focuses on highmargin custom products in a highly fragmented supplier base.

 

                *Commitmentto Quality and Service.*  TheCompany believes that its commitment to provide consistent, high qualityproducts and services and flexible manufacturing and custom designed productsat competitive prices, forms the basis for its strong and diversified customerrelationships.  The Company manufacturesmost of its parts to specific customer requirements.  The Company utilizes Statistical Process Control, Design FailureMode Effects Analysis, Process Failure Mode Analysis, and a strict adherence tocomplete manufacturing documentation in order to manufacture high qualityproducts for internal use as well as external customer sales.  The Company’s four operating subsidiariesare registered to ISO 9001.

 

*                Proprietary Technology.* The Company operates in the automotive, aerospace and general industrialtechnologies markets in which products typically require sophisticatedengineering and production techniques. The Company designs and manufactures new products to fulfill customerneeds, and has developed proprietary manufacturing technology since itsfounding in 1945.  The Company believesthat this proprietary technology helps enable it to attract and retaincustomers who require customized, high tolerance products.  The Company estimates that it has producedover 75,000 different variations of GTMS.

 

                *Low CostOperations.*  The Companybelieves that its extensive “in-house” capabilities and vertical integrationare competitive advantages that have allowed it to become a low costproducer.  By controlling the toleranceof the component parts, the Company has been able to reduce scrap and toincrease the yields of its products. Furthermore, the Company is continually developing and assessing itsprograms designed to increase efficiency and enhance economies of scale inorder to further reduce costs.

 

                *DiverseProducts and Customers.*  TheCompany has a diverse customer base, with sales of numerous product variationsto approximately 1,000 customers in fiscal 2003.  Over the past several years, the Company has recognizedconsistent long-term growth in sales of GTMS products to the telecommunication,automotive, aerospace and general industrial markets.

 

4

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**BusinessStrategy**

 

                The Company’sstrategy is to expand its business through:

 

                *Focusing onCore Strengths. *The Companycontinues to focus on what it believes are its core strengths and to invest inthose businesses that are consistent with those strengths and which exhibithigh growth potential.  Core strengthsinclude the timely custom design and manufacturing of high tolerance, highreliability components and the effective program management of long termcontracts and supply agreements.

 

                *LeveragingCustomer Relationships.*  TheCompany works closely with its customers to jointly develop and design newproducts and to improve the performance and lower the cost of the Company’scustomers’ products.  The Company hassole source supply contracts, shares product development, and enters into otherteaming arrangements with its key customers to further strengthen and broadenits relationships.  The Company believesthat this strategy, together with the successful performance under existingcontracts has led to additional long-term business from key existing customersand new customers.

 

                *PursuingSelective Acquisitions.*  TheCompany intends to pursue selective acquisitions and to add products andcapabilities that are complementary to its existing operations.  Priority is expected to be given toacquiring businesses whose products can be manufactured in the Company’sexisting facilities (“fold-in” acquisitions). The Company’s operations are characterized by a relatively high level ofoperating leverage; therefore, such fold-in acquisitions should allow theCompany to allocate costs across broader synergistic product lines and representadditional volume through the Company’s existing facilities which shouldprovide opportunities to improve profitability.

 

**Industries**

 

                The Companyestimates the total size of the GTMS market to be $600 million, withapproximately one-half estimated to be the specialized, high precision segmentsin which the Company competes.  TheCompany believes based upon internal analysis that the market for high-endhermetically sealed products is extremely fragmented, with no other competitoroffering the same breadth of products as the Company.  The Company believes that its focus on the high-end, customsegment of the GTMS market enables it to achieve higher margins.

 

                The Company sellsits products to five principal industries: (i) the telecommunication industry foruse in optical networking components; (ii) the automotive parts industry foruse in airbag initiators, seat belt pretensioners, climate control devices andanti-lock braking systems; (iii) the aerospace industry for use primarily incommercial and military aviation and electronics; (iv) general industry for useprimarily in process control, and other industrial and medical applications;and (v) the petrochemical industry, for use primarily in oil and gas downholelogging equipment.

 

*Telecommunication*

 

                The Companydesigns and manufactures highly engineered hermetic packaging used tofacilitate the infrastructure outbuild of fiber optic telecommunications,supporting global internet communications. The Company has a strong position in the current OC-192 technology, aswell as qualified designs for a variety of next generation products forincreased speed and bandwidth.

 

5

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*Automotive*

 

                TheCompany provides GTMS products used in initiators for airbag devices.  At present, each airbag device requires atleast one initiator (the device that deploys the airbag).  The automotive airbag industry has undergonedynamic growth over the recent past stemming from increased consumer demand forautomotive safety devices and federal regulations requiring such devices.  Regulations adopted by the National HighwayTraffic Safety Administration require that airbags be the automatic frontalcrash protection system used for both the driver and front passenger in 100% ofall passenger automobiles, light trucks and vans manufactured for sale in theUnited States.

 

                Although notmandated by law, initiator-based safety systems are also employed inautomobiles produced and sold in Europe and Asia, although fewer than in the U.S.  The systems utilized in Europe andAsia include airbag systems similar to those in use in the U. S. and seat-beltpretensioners that employ initiators. While the majority of airbag initiators manufactured for use in carsoutside the U. S. employ plastic initiators, there is a trend toward using GTMSin such products due to their increased reliability.

 

*Commercialand Military Aviation and Electronics*

 

                The Companyprovides hermetic seals that are used for a number of different applications incommercial and military aviation and electronics, primarily to protect guidanceand sensor devices from the effects of changes in atmospheric conditions.  The Company believes based upon internalestimates that GTMS products are utilized in almost every model of commercialaircraft currently in production and its customers include essentially allmajor aerospace suppliers.  TheCompany’s sales to the aerospace industry are dependent to a certain extent onnew construction of commercial and military aircraft. The Company competes witha number of different suppliers in this market, based on quality, delivery andprice.

 

*Generaland Industrial*

 

                The Companyprovides GTMS used in pressure and temperature transducers (sensors),industrial process control equipment, capacitor end-seals for electronicdevices and other industrial and medical applications.  The Company believes that its ability tohelp customers develop products to meet demanding specifications allows forsignificant opportunities within this market segment, including those customersnot currently served by the Company’s products.  The Company also believes that the increased sophistication ofequipment and increased level of automation being used in industrialapplications will increase demand for GTMS products.

 

*Petrochemical*

 

                The Companyprovides GTMS used for downhole logging equipment in the oil and gas industryprimarily under long-term contracts to oil field equipment and servicecompanies.  The Company’s sales to thisindustry during any period are somewhat dependent on the current level ofexploration and drilling in the oil and gas industry and current demand for andprice of crude oil.  The Companybelieves that it is one of only two significant providers of GTMS to thisindustry.  The Company expects that thetrend toward more sophisticated measurement-while-drilling equipment in thepetrochemical industry is likely to lead to more demand for the Company’sproducts.

 

6

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**Customersand Applications**

 

                The Company hasapproximately 1,000 active customers. The Company’s ten largest customersaccounted for approximately 37% of consolidated sales for fiscal year2003.  The Company’s largest customerrepresented approximately 8% of consolidated sales for fiscal year 2003.  Approximately 58% of the Company’sconsolidated sales for fiscal year 2003 were to customers with which theCompany had contractual agreements, sole source relationships, letters ofintent or long-term purchase orders. The Company only begins to manufacture products upon receipt of apurchase order.

 

                The followingtable sets forth the Company’s principal end-user markets and certainapplications for its products.

 
| **End  Markets**                         |   | **Automotive**                                                                                |   | **Aerospace**                                                                                                       |   | **Industrial/Petrochemical**                                                                                |   | **Telecommunication**                                                       |
|------------------------------------------|--------|-----------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|
|                                     |   |                                                                                          |   |                                                                                                                |   |                                                                                                        |   |                                                                        |
| Applications:                            |   | Airbag  Initiators

Thermistors

Airbag Pressure   Switches

ABS                              |   | Jet Engine Monitors  Avionics   Fuel Gauge Indicators  Temperature Sensors   De-icing Sensors  Air Speed Indicators |   | Process Control Sensors   Downhole Drilling  Sensors Lithium Batteries                                 |   | Optical Switching   DWDM Transport   Optical Components   Metro Access DWDM |
|                                     |   |                                                                                          |   |                                                                                                                |   |                                                                                                        |   |                                                                        |
| Specific example of product application: |   | Airbag initiator                                                                              |   | Temperature Sensors                                                                                                 |   | High pressure electrical bulkheads for downhole use  (oil exploration)                                      |   | Modulator                                                                   |
|                                     |   |                                                                                          |   |                                                                                                                |   |                                                                                                        |   |                                                                        |
| What the product does:                   |   | Electric current flows from crash sensor through  initiator to begin inflation of the airbag. |   | Passes electric current from sensors that detect  excessive heat and/or fire in aircraft                            |   | Carries electrical signals between geological  formation measurement tools and sensors.                     |   | Optical shutter to create binary code for laser  transmission along fiber.  |
|                                     |   |                                                                                          |   |                                                                                                                |   |                                                                                                        |   |                                                                        |
| Result:                                  |   | Airbag is inflated in approximately 6 to 14  milliseconds                                     |   | Warning signal and automatic release of fire retardant                                                              |   | Allows precise measurement of geology while  protecting sensitive equipment from extreme heat and pressure. |   | Higher speed data transmission.                                             |

 

 

7

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**ManufacturingProcess**

 

                A GTMS is made byassembling three sets of component parts (metal contacts or pins, glass bead(s)and an outer metal housing or shell) on a graphite fixture.  This assembly is put through a controlledatmosphere furnace at approximately 1,800 degrees Fahrenheit until the glassbecomes molten.  The graphite fixture isused to hold the components in place while the glass is molten.  As the assembly cools, a physical and/orchemical bond is formed between the glass and the shell as well as the glassand the pin, thus forming a hermetic seal.

 

                The Companybelieves that its extensive “in-house” capabilities are a key competitiveadvantage that has allowed it to become a low cost producer.  By specifically controlling the tolerance ofthe component parts, the Company believes that it is able to increase the endyields of its product.  This attentionto quality throughout the manufacturing process also helps to ensure the timelydelivery of its products.  It also enablesthe Company to respond very quickly to prototype and new product developmentopportunities.

 

                The Companymanufactures most of its parts to specific customer requirements.  All three of the Company’s operatingsubsidiaries use Computer Aided Design (“CAD”) to produce the drawings andspecifications required by the customer. The Company estimates that it has produced over 75,000 differentvariations to GTMS since 1945.  Thisextensive library of designs enables the Company to suggest design changes toits customers that reduce manufacturing costs without sacrificing quality and thereforereduce the cost to the customer (value engineering).

 

                The Company hasmade a significant investment in Computer Numerically Controlled (“CNC”)machining equipment in order to manufacture the metal shells and pins todemanding customer specifications.  TheCompany also machines most of its own graphite fixtures thereby allowing it tomaintain process quality.  Many of theglass preforms used in the Company’s products are manufactured internally aswell.  The Company has many proprietaryformulas for glass and glass/ceramic mixtures that it has developed in over 55years of manufacturing.  In addition,the Company has extensive capabilities in selective plating of precious andnon-precious metals.

 

                The Companyutilizes Statistical Process Control (“SPC”), Design Failure Mode EffectsAnalysis, Process Failure Mode Effects Analysis and a strict adherence tocomplete manufacturing documentation in order to manufacture high qualityproducts for internal use as well as external customer sales.  The Company believes that its knowledge anduse of these procedures give the Company a competitive advantage.  Hermetic, Glasseal, Sealtron and HCCMachining are ISO 9001 registered. The ISO 9001 registration, an internationalstandard of quality, should facilitate business expansion in Europe.

 

**Marketingand Sales**

 

                The Company’sproducts are marketed throughout the Unites States to customers in a widevariety of industries, both by Company-employed salespersons, who work out ofthe Company’s plants, and by a number of independent regional manufacturers’sale representatives.  The 24Company-employed salespersons receive a base salary plus bonus potential.  Sales in Europe are through two salesoffices located in Northampton, England and Paris, France.  As part of the Company’s growth strategy,the Company believes that it can capture an increasing share of the businessoutside the United States. International sales (primarily Europe) accounted for approximately 19%(2003), 12% (2002), and 11% (2001), of consolidated sales by HCC.  Economic, political, governmental andregulatory conditions in such international markets could adversely affect theCompany’s ability to successfully enter or operate in such markets.  Therefore, no assurances can be given thatthe Company’s attempts to expand its business into such international marketswill be successful.  The Companycurrently has 8 independent regional manufacturers-sales representatives spreadgeographically across North America and Europe.  These representatives, who do not exclusively sell the Company’sproducts, are remunerated on a commission basis.  The Company believes there is a significant opportunity toincrease its sales through expansion of its sales and distribution efforts,both within the markets it currently serves and in new markets.

 

8

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## **Competition**

 

The Company believes based upon internal analysis thatmost of the Company’s competitors in the GTMS sector of the industry in whichit competes are smaller and have less technological and manufacturing expertisethan the Company.  The Company believesthat it occupies a favorable competitive position because of its experience inengineering and production techniques and also its extensive verticalintegration.  Price has generally been aless significant competitive factor than the quality and design of the GTMSbecause their cost typically is a small percentage of the total cost of the endproducts in which they are used and because of the importance of the uses towhich many of the Company’s products are put. In addition, products for airbag initiators are qualified for particularnew automotive models and new products are subject to design and processverification testing (prior to which there are no sales) which typically takes8 to 24 months and, therefore, helps to inhibit new entry into the market.

 

**Backlog**

 

                As of March 29,2003, the Company had a backlog of $26.9 million compared to $25.2 million asof March 30, 2002.  The Company sells amajority of its products pursuant to contractual agreements, sole sourcerelationships, letters of intent or long-term purchase orders, each of whichmay permit early termination by the customer. However, due to the specialized, highly engineered nature of theCompany’s product, it is not practical in many cases for customers to shifttheir business to other suppliers without incurring significant switching andopportunity costs.

 

**Employees**

 

                At March 29, 2003,the Company had approximately 534 employees, substantially all of whom werelocated in the United States.  None ofthe Company’s employees are subject to a union contract. The Company considersits relations with its employees to be excellent.

 

**RawMaterials**

 

                The Companyobtains raw materials, component parts and supplies from a variety of sourcesand generally from more than one supplier. The Company’s principal raw materials are steel and glass.  The Company’s suppliers and sources of rawmaterials are based in the United States and the Company believes that itssources are adequate for its needs for the foreseeable future.  The loss of any one supplier would not havea material adverse effect on the Company’s financial condition or results ofoperations.

 

**EnvironmentalMatters**

 

                The Company’soperations are subject to numerous environmental laws, including thoseregulating air emissions and discharges to water, and the storage, handling anddisposal of solid and hazardous waste. The Company believes that it is in substantial compliance with such lawsand regulations.  Because environmentallaws are becoming increasingly more stringent, the Company’s environmentalcapital expenditures and costs for environmental compliance may increase in thefuture.

 

                Under certainenvironmental laws, in particular CERCLA, a current or previous owner oroperator of real property may be liable for the costs of removal or remediationof hazardous or toxic substances on, under or in such property.  Generally, liability under CERCLA is jointand several and remediation can extend to properties owned by thirdparties.  Persons who arrange for thedisposal or treatment of hazardous or toxic substances or otherwise cause therelease of such substances into the environment may also be liable under suchlaws for the costs of removal or remediation of such substances at a disposalor treatment facility or other location where the substances have migrated orcome to be located, whether or not such facility or location is or ever wasoperated by such person and regardless of whether the method of disposal ortreatment was legal at the time.  Suchlaws often impose liability whether or not the owner or operator knew of, orwas responsible for the presence of such hazardous or toxic substances, and theliability under such laws has been interpreted to be strict, joint and severalunless the harm is divisible and there is a reasonable basis for the allocationof responsibility.  In addition, thepresence of hazardous or toxic substances, or the failure to properly remedysuch property may adversely affect the market value of the property, as well asthe owner’s ability to sell or lease the property.  The Company has potential liability under environmental laws forthe remediation of contamination at two of its facilities (see Item 3 forfurther discussion of environmental matters).

 

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**Item 2 - Properties**

 

**Facilities**

 

                The Company’sprincipal executive offices are owned by the Company and are located in theHermetic Seal facility located in Rosemead, California.  Additionally, the Company has operatingfacilities in El Monte, California, Lakewood, New Jersey, and Reading, Ohio, asset forth below.  The Company also ownsapproximately 47,400 square feet of plant and office space in Avon,Massachusetts, which is currently vacant.

 
| **Location** |   | **Owned/Leased** |   | **Square Feet** |
|--------------|--------|------------------|--------|-----------------|
| Rosemead, CA |   | Owned            |   | 37,000          |
| El Monte, CA |   | Owned            |   | 110,000         |
| Lakewood, NJ |   | Owned            |   | 50,000          |
| Reading, OH  |   | Owned            |   | 37,000          |

 

 

 

**Item 3 - Legal Proceedings**

 

**EnvironmentalMatters**

 

*Rosemead,California*

 

                *RegionalGroundwater Contamination.*  Aportion of the San Gabriel Valley in which the Rosemead facility is located wasdesignated by the EPA as a federal Superfund site in 1984.  The Company has been named as a potentiallyresponsible party (“PRP”) under CERCLA for the El Monte Operable Unit.  If the Rosemead facility contributed to theregional contamination, such contribution is in connection with alleged spillsof the degreasing solvent tetracholoroethylene (PCE).

 

                Many othercompanies are believed to be contributors to the groundwater contamination inthe El Monte Operable Unit.  The Companyand 18 other such companies have formed the Northwest El Monte Community TaskForce (the “Task Force”) to undertake the investigation of the remediation, toidentify other potential contributors and potentially to undertake requiredremediation.  In March 1995, the TaskForce entered into a Consent Administrative Order with the EPA to perform aRemedial Investigation and Feasibility Study (RI/FS) of the El Monte OperableUnit.  The RI/FS was completed in 1999and the EPA issued an interim record of decision.  The RI/FS costs of approximately $2,400,000 to date have beenfunded with about one-quarter of the costs coming from governmental entitiesand the balance paid pursuant to a confidential interim allocation agreement ofTask Force members.  To date anadditional $2,200,000 has been spent or committed to be spent to undertakeearly remediation efforts on a voluntary basis.  In addition, the Task Force, in conjunction with SouthernCalifornia Water Company, received a $650,000 grant through the San GabrielValley Water Quality Authority (“WQA”) to upgrade remediation facilities inconnection with the remediation of the deep aquifer on the west side of the ElMonte Operable Unit in 2001.  Thosefacilities have been installed.  In2002, an additional $3,250,000 grant was awarded by the WQA to undertakefurther shallow and deep aquifer remediation as well as pay for ongoingoperations and maintenance of the deep aquifer remedy.  It is anticipated that an agreement betweensome members of the Task Force and the EPA to undertake the balance of theremediation required consistent with the record of decision will be executed bySeptember 2003.

 

                *On-site/Soiland Groundwater Cleanup Costs. *Inaddition to the Operable Unit Remediation costs, the Company has voluntarilyundertaken both on-site soil and groundwater remediation.  In 1995, the Company installed a soil vaporextraction system.  To date, theremediation system has removed over 99% of contaminants in the soil.

 

                The Company hasinstalled a groundwater extraction system in conjunction with a neighboringfacility.   This system extractscontaminated water from the shallow aquifer and pumps the water for use in ourneighbor’s manufacturing process prior to discharge to the municipal sanitarysewer.  The system has been operationalsince August 1996 and is designed to capture contaminated groundwater fromunder the Company’s property before it impacts the regional groundwaterflow.  Although the system has beensuccessful, it is premature to determine how long it will be needed toremediate the groundwater to acceptable levels, or if the operation of thesystem will be discontinued and replaced with a regional groundwater remediationprogram.

 

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                The Companybelieves that its financial liability with respect to regional groundwatercontamination may be substantially reduced by acting on its own initiative tocommence early remediation of groundwater contamination under its property.

 

 

*Avon,Massachusetts*

 

                The Company’sfacility in Avon, Massachusetts, currently inactive, was purchased in 1985 andoperated as its Hermetite facility until June 1988.  The facility became inactive in August of 1989. Subsequent to itsclosure, the Company identified significant levels of solvents in thegroundwater.  Subsurface investigationshave delineated a plume of contaminants extending from the facility, beneath aneighboring property and into a town public water supply wellfield about 800feet to the southeast of the property. Despite the risk that the contaminants pose to the wellfield, the levelsat the well field remain within acceptable drinking water standards.

 

                The Avon propertyis subject to Massachusetts “Chapter 21E,” the state’s hazardous site cleanupprogram.  The property is classified asa “Tier 1B” category based on the level of contaminants.  Under Tier 1B procedures, the Company maydesign its own remediation program subject to state oversight, auditing, andscheduling.

 

                Pursuant to thisprocedure, the Company, through its licensed consultants, designed aremediation system which is intended to capture the contaminants before theyreach the town wells.  In 1996, theprogram was approved, constructed and became operational.  In 1999, to accelerate the cleanup, theCompany installed additional extraction wells closer to the source area andremoved the suspected source of contamination. No additional infrastructure is anticipated at this time.  To date, the system has been very successfulin reducing contaminant levels. Although the system has been successful, it is premature to determinehow long it will be needed to remediate the groundwater to acceptable levels.

 

 

*FinancialImpact*

 

Uncertainty as to (a) the extent to which the Companycaused, if at all, the conditions being investigated, (b) the extent ofenvironmental contamination and risks, (c) the applicability of changing andcomplex environmental laws (d) the number and financial viability of otherPRP’s, (e) the stage of the investigation and/or remediation, (f) theunpredictability of investigation and/or remediation costs (including as towhen they will be incurred), (g) applicable clean-up standards, (h) the remediation(if any) that will ultimately be required, and (i) available technology make itdifficult to assess the likelihood and scope of further investigation orremediation activities or to estimate the future costs of such activities ifundertaken.  In addition, liabilityunder CERCLA is joint and several, and any potential inability of other PRP’sto pay their pro rata share of the environmental remediation costs may resultin the Company being required to bear costs in excess of its pro rata share.

 

                In fiscal 1997,the Company determined a cost estimate and accrued $10,000,000 for existingestimated environmental remediation and other related costs.  The time frame over which the Companyexpects to incur such costs varies with each site, ranging up to 30 years. Themost significant judgments and assumptions underlying the measurement of theenvironmental liability for the Avon site relate to the projected costs of theremediation, the effectiveness of the remediation technology on the sitegeology and the estimated time required for the remediation.  The most significant judgments andassumptions underlying the measurement of the environmental liability for theEl Monte Operable Unit are the determination of the extent (vertical andhorizontal migration of contaminants) of the contamination within the EMOU, theprojected costs to complete the required remediation, the expected timeframerequired to complete the remediation, the required standard of clean up to berequired by the regulatory agencies and the ultimate number and financialviability of the Potentially Responsible Parties.

 

                As of March 29,2003, the accrual for estimated environmental costs was $7,438,000.  Actual expenditures for environmentalremediation were $736,000 (2003) $528,000 (2002) and $476,000 (2001).  The Company believes its accrual isadequate, but as the scope of its obligations becomes more clearly defined,this accrual may be modified and related charges against earnings may be made.

 

11

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                Claims forrecovery of costs already incurred and future costs have been asserted againstvarious insurance companies.  TheCompany has neither recorded any asset nor reduced any liability inanticipation of recovery with respect to such claims made.

 

**Other**

 

                In August2002, the Company filed a lawsuit in California Superior Court against SpecialDevices, Inc. (“SDI”) alleging breach of contract.  The allegations primarily related to SDI’s failure to tenderpayment to the Company for shipments of parts the Company manufactured anddelivered and SDI’s breach of exclusivity requirements.  In June 2003, the Company settled thislawsuit with SDI.  Under the terms ofthe settlement SDI paid the Company $530,000 and certain mutual releasesrelated to the underlying claims of the litigation were executed.  When combined with earlier payments from SDIrelated to certain initial claims in the litigation, the aggregate recovery onthe lawsuit was approximately $800,000.

 

**               **In addition to the above, the Company is involved inother claims and litigation arising in the normal course of business.  Based on the advice of counsel and in theopinion of management, the ultimate resolution of these matters will not have asignificant adverse impact on the results of operations, cash flows orfinancial position of the Company.

 

The Company currently maintains insurance coverage forproduct liability claims.  There can beno assurance that coverage under insurance policies will be adequate to coverany future product liability claims against the Company.  In addition, product liability insurancecoverage is expensive, difficult to maintain and may be unobtainable in thefuture on acceptable terms.

 

 

Indemnification/Restricted Cash

 

                Pursuant to theterms of a recapitalization in 1997, the selling shareholders agreed toindemnify the Company for the after-tax costs of contingent liabilities up to atotal of $30 million.  As part of thetransaction, $6 million was withheld by the Company from the purchase price tothe selling shareholders and placed in an interest bearing escrow account(“Restricted Cash”) intended primarily to fund the after-tax costs of theenvironmental liability and other contingencies.  Upon agreement of the parties, but in no event before February2004, any funds remaining in the account will be paid to the sellingshareholders.  At this date, the onlyremaining contingencies are environmental contingencies and residual litigationcosts. The restricted cash escrow balance was $5,311,000 at March 29, 2003 and$5,901,000 at March 30, 2002.   In theevent the Restricted Cash is not adequate to cover the liabilities, the Companyhas been informed by the selling stockholders that they will draw upon personalfunds to cover such excess costs.

 

                Included in otherassets is $391,000 due from a selling shareholder or shareholders related tolegal costs advanced on litigation.  TheCompany has been advised by one of the selling shareholders that he disputessome or all of this receivable. However, if such dispute is not otherwise resolved, the Company believesthat this advance is recoverable from the Restricted Cash.

 

## ** **

 

**Item4 - Submission of Matters to a Vote of Security Holders**

 

None

 

12

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**PART II**

 

 

**Item5  — Market for the Registrant’s Common Equity and Related StockholderMatters**

 

                Not Applicable

 

 

**Item6  — Selected Financial Data**

 

**               **The following selected consolidated financialinformation for each of the five fiscal years in the period ended March 29,2003 has been derived from the audited consolidated financial statements of theCompany.  The information presentedbelow should be read in conjunction with Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and the consolidatedfinancial statements of the Company and related notes thereto appearingelsewhere herein (in thousands).

 
|                                                                                          |   | **April 3,** |    | **April 1,** |   | **March 31,** |   | **March 30,** |    | **March 29,** |   |
|-----------------------------------------------------------------------------------------------|--------|--------------|---------|--------------|--------|---------------|--------|---------------|---------|---------------|--------|
|                                                                                          |   | **1999**     |    | **2000**     |   | **2001**      |   | **2002**      |    | **2003**      |   |
| **Statement of Operations Data**                                                              |   |         |    |         |   |          |   |          |    |          |   |
| Net sales                                                                                     |   | $            | 67,701  |         | $      | 54,607        |   | $             | 80,539  |          | $      | 64,207 |   | $ | 41,086 |   |
| Cost of goods  sold                                                                           |   | 41,361       |    | 39,794       |   | 53,405        |   | 43,278        |    | 33,080        |   |
| Gross profit                                                                                  |   | 26,340       |    | 14,813       |   | 27,134        |   | 20,929        |    | 8,006         |   |
| Selling, general  and administrative expenses                                                 |   | 7,213        |    | 8,073        |   | 8,329         |   | 6,424         |    | 5,851         |   |
| Impairment of  assets                                                                         |   | —       |    | —       |   | —        |   | —        |    | 500           |   |
| Earnings from  operations                                                                     |   | 19,127       |    | 6,740        |   | 18,805        |   | 14,505        |    | 1,655         |   |
| Other Income  (Expense)                                                                       |   |         |    |         |   |          |   |          |    |          |   |
| Interest and  other income                                                                    |   | 755          |    | 734          |   | 649           |   | 233           |    | 132           |   |
| Interest expense                                                                              |   | (11,190      | )       | (11,333      | )      | (10,717       | )      | (9,847        | )       | (9,582        | )      |
| Total other  expense, net                                                                     |   | $            | (10,435 | )            | $      | (10,599       | )      | $             | (10,068 | )             | $      | (9,614 | ) | $ | (9,450 | ) |
| Earnings (loss)  before taxes, extraordinary items and cumulative effect of accounting change |   | 8,692        |    | (3,859       | )      | 8,737         |   | 4,891         |    | (7,795        | )      |
| Taxes (benefit)  on earnings (loss)                                                           |   | 3,325        |    | (1,525       | )      | 2,975         |   | 1,705         |    | (891          | )      |
|                                                                                          |   |         |    |         |   |          |   |          |    |          |   |
| Earnings (loss)  before extraordinary items and cumulative effect of accounting change        |   | 5,367        |    | (2,334       | )      | 5,762         |   | 3,186         |    | (6,903        | )      |
| Extraordinary  gain, net of taxes(1)                                                          |   | —       |    | —       |   | 3,187         |   | —        |    | —        |   |
| Cumulative  effect of accounting change                                                       |   | —       |    | —       |   | —        |   | —        |    | (3,561        | )      |
|                                                                                          |   |         |    |         |   |          |   |          |    |          |   |
| Net earnings  (loss)                                                                          |   | $            | 5,367   |         | $      | (2,334        | )      | $             | 8,949   |          | $      | 3,186 |   | $ | (10,465 | ) |
|                                                                                          |   |         |    |         |   |          |   |          |    |          |   |
| **Balance Sheet Data (at period end)**                                                        |   |         |    |         |   |          |   |          |    |          |   |
| Total assets                                                                                  |   | $            | 70,368  |         | $      | 71,768        |   | $             | 69,222  |          | $      | 65,635 |   | $ | 51,153 |   |
| Working capital                                                                               |   | 22,079       |    | 13,255       |   | 11,019        |   | 14,753        |    | 11,595        |   |
| Long-term debt,  less current portion                                                         |   | 102,043      |    | 97,475       |   | 87,864        |   | 86,627        |    | 84,833        |   |
| Stockholders’  deficit                                                                   |   | (51,372      | )       | (53,706      | )      | (44,614       | )      | (41,411       | )       | (51,859       | )      |
| Dividends  declared                                                                           |   | —       |    | —       |   | —        |   | —        |    | —        |   |

----

(1)          Represents gain on early retirement of debt, net oftaxes.

 

 

13

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**Item7  —  Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

                The followingtable and discussion should be read in conjunction with the informationcontained in the consolidated financial statements and notes thereto of theCompany appearing elsewhere herein. Unless otherwise stated, all references to years means the Company’sfiscal year ending March 29, 2003 (2003), March 30, 2002 (2002), and March 31,2001 (2001), respectively.

 

 

**Resultsof Operations (In millions)**

 
|                                          |   | **2003** |   | **Percent** |   | **2002** |   | **Percent** |   | **2001** |   | **Percent** |   |
|-----------------------------------------------|--------|----------|--------|-------------|--------|----------|--------|-------------|--------|----------|--------|-------------|--------|
|                                          |   |     |   |        |   |     |   |        |   |     |   |        |   |
| Net sales                                     |   | $        | 41.1   |        | 100.0  | %        | $      | 64.2        |   | 100.0    | %      | $           | 80.5   |   | 100.0 | % |
| Gross profit                                  |   | 8.0      |   | 19.5        | %      | 20.9     |   | 32.6        | %      | 27.1     |   | 33.7        | %      |
| Selling, general  and administrative expenses |   | 5.9      |   | 14.4        | %      | 6.4      |   | 10.0        | %      | 8.3      |   | 10.3        | %      |
| Write-down on  impairment of assets           |   | .5       |   | 1.2         | %      | —   |   | —      |   | —   |   | —      |   |
| Earnings from  operations                     |   | 1.7      |   | 4.1         | %      | 14.5     |   | 22.6        | %      | 18.8     |   | 23.4        | %      |
| Other expense,  net                           |   | (9.4     | )      | (22.9       | )%     | (9.6     | )      | (15.0       | )%     | (10.1    | )      | (12.5       | )%     |
| Cumulative  effect of accounting Change       |   | (3.6     | )      | (8.8        | )%     | —   |   | —      |   | —   |   | —      |   |
| Extraordinary  gain(1)                        |   | —   |   | —      |   | —   |   | —      |   | 3.2      |   | 4.0         | %      |
| Net earnings  (loss)                          |   | $        | (10.5  | )           | (25.5  | )%       | $      | 3.2         |   | 5.0      | %      | $           | 8.9    |   | 11.1 | % |

----

 

 (1)   Representsextraordinary gain on early retirement of debt, net of taxes.

 

 

**Comparisonof the Fiscal Year Ended 2003 with 2002**

 

*Net Sales*

 

                TheCompany’s net sales decreased by approximately 36.0% or $23.1 million to $41.1million for 2003 compared to sales of $64.2 million for 2002.  The decrease was due to decreased demand inall markets, but primarily due to the loss of an automotive contract asdiscussed below.

 

                Salesto existing aerospace, industrial process control, and petrochemical customersdecreased by approximately 14% in 2003 compared to 2002.  Based on current order volume, the Companyexpects modest strengthening of demand in the aerospace, industrial processcontrol and petrochemical markets over the next few quarters.

 

                Onthe automotive side, unit shipments of airbag initiator products decreasedsignificantly due to the loss of a significant customer.  The Company’s airbag initiator shipments toits formerly largest customer, Special Devices, Inc. (“SDI”) ended in March2002.  Overall, revenue from allautomotive shipments decreased approximately 74% in 2003 compared to 2002.  Currently, the Company is in the process oftransitioning its capacity to other manufacturers of initiators and micro gasgenerators for the production of airbags and seat belt pretensioners.  However, these programs and relationshipswith other customers will take time to develop and there is no assurance theCompany will be able to ultimately regain its previous market share in theseproducts.  On the whole, the Companyexpects significantly lower revenues from automotive products during fiscal2004.

 

                TheCompany had developed a significant market presence in the telecommunicationsmarkets through components designed for optical networking infrastructure.  However, shipments of these productsdecreased dramatically as the market for these products collapsed.  Sales of these products decreased byapproximately 61% in 2003 compared to 2002. Based on recent industry reports, the Company expects significantweakness in these markets during fiscal 2004.

 

 

14

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*GrossProfit*

 

                Grossprofit decreased by approximately 61.7% or $12.9 million, to $8.0 million for2003 compared to $20.9 million for 2002. Gross margin decreased to 19.5% for 2003 from 32.6% for 2002.

 

                Thedecrease in gross profit is primarily attributable to the $23.1 milliondecrease in sales in 2003.  The decreasein gross margin was primarily attributable to the significant decrease inrevenue and the corresponding impact of fixed overhead costs leveraged on lowerrevenue.  The most significant fixedoverhead costs are depreciation, utilities and property taxes.  These costs are allocated to inventory andultimately cost of sales, based on the proportion of total fixed costs to totaldirect labor costs.  The ongoingweakness in sales will continue to adversely impact gross profitability andgross margin.

 

*Selling,General and Administrative Expenses*

 

                Selling,general and administrative (“S,G&A”) expenses decreased by approximately7.8% or $0.5 million to $5.9 million for 2003 compared to $6.4 million for2002.  S,G&A expenses as a percentto sales increased to 14.4% in 2003 from 10.0% for 2002.

 

                The$0.5 million decrease in S,G&A expenses was primarily attributable todecreased compensation costs.  Theincrease in the percentage of S,G&A expenses to sales reflects the impactof the modest decrease in S,G&A expenses in relation to the significantlylower revenue.

 

*Earningsfrom Operations*

 

                Operatingearnings decreased $12.8 million to $1.7 million for 2003 compared to $14.5million for 2002.  The significantdecrease in operating earnings was attributable to the same factors (asdiscussed above) that contributed to the decrease in gross profit, gross marginand S,G&A expenses.

 

*OtherExpense, net*

 

*               *Other expense, net (which ispredominantly net interest expense) decreased 2.1% or $0.2 million to $9.4million in 2003 compared to $9.6 million in 2002.  The $0.2 million decrease was primarily attributable to lowerinterest expense.  The Company has $86.6million indebtedness as of March 29, 2003 compared to $88.7 million at March30, 2002.

 

*Income Taxes*

 

                The Company'seffective tax rate for fiscal 2003 was a benefit of 11.4% versus a provision of34.9% during fiscal 2002.  The change isattributable to the tax effect of the Company's net loss offset by a fullvaluation allowance recorded against the Company's deferred tax assets.  The valuation allowance was recorded toreduce the deferred tax assets to the amount expected to be realized.

 

*NetEarnings*

 

                Netearnings decreased by approximately $13.7 million to a $10.5 million loss for2003 compared to net earnings of $3.2 million in 2002.  The decrease in net earnings was primarilyattributable to the decrease in earnings from operations and the $3.6 millioncharge related to the Cumulative Effect of an Accounting Change.

 

**Comparisonof the Fiscal Year Ended 2002 with 2001**

 

*NetSales*

 

                TheCompany’s net sales decreased by approximately 20.2% or $16.3 million to $64.2million for 2002 compared to sales of $80.5 million for 2001.  The decrease was due to decreasing demand inall markets.  Sales to existingaerospace, industrial process control, and petrochemical customers decreased byapproximately 2% in 2002 compared to 2001. Based on current order volume,the Company expects continued weakness in the aerospace, industrial processcontrol and petrochemical markets to continue over the next quarter.

 

15

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                Onthe automotive side, unit shipments of airbag initiator products decreasedsignificantly due to a decline in customer demand on several existingprograms.  The Company’s airbag initiatorshipments to its formerly largest customer, Special Devices, Inc. decreasedapproximately 20% in 2002 compared to 2001. Overall, revenue from all automotive shipments decreased approximately26% in 2002 compared to 2001.  InJanuary 2002, the Company’s annual supply agreement with SDI expired and wasnot renewed.  The Company stoppedselling product to SDI in March 2002. Currently, the Company is in the process of transitioning its capacityto other manufacturers of initiators and micro gas generators for theproduction of airbags and seat belt pretensioners.  However, these programs and relationships with other customerswill take time to develop and there is no assurance the Company will be able toultimately regain its previous market share in these products.  On the whole, the Company expectssignificantly lower future revenues from automotive products.

 

                TheCompany has continued to develop a significant market presence in thetelecommunications markets through component products designed for opticalnetworking infrastructure.  Shipments ofthese products decreased dramatically as the market for these productscollapsed.  Sales of these productsdecreased by approximately 59% in 2002 compared to 2001.  Based on recent industry reports, theCompany expects significant weakness in these markets to prevail for the nextfew quarters.

 

*GrossProfit*

 

                Grossprofit decreased by approximately 22.9% or $6.2 million, to $20.9 million for2002 compared to $27.1 million for 2001. Gross margin decreased to 32.6% for 2002 from 33.7% for 2001.

 

                Thedecrease in gross profit is attributable to the $16.3 million decrease in salesin 2002.  The decrease in gross marginwas primarily attributable to the impact of fixed overhead costs leveraged overlower revenue.

 

*Selling,General and Administrative Expenses*

 

                Selling,general and administrative (“S,G&A”) expenses decreased by approximately22.9% or $1.9 million to $6.4 million for 2002 compared to $8.3 million for2001.  S,G&A expenses as a percentto sales decreased to 10.0% in 2002 from 10.3% for 2001.  S,G&A expenses are expected to increasein 2003 over 2002 due to the impact of the litigation settlement received in2002.

 

                The$1.9 million decrease in S,G&A expenses was primarily attributable todecreased compensation costs and reduced legal expenses due to the settlementof the Neubauer litigation.  Theimprovement in the percentage of S,G&A expenses to sales reflects theimpact of the significant decrease in S,G&A expenses over lower revenue.

 

*Earningsfrom Operations*

 

                Operatingearnings decreased $4.3 million to $14.5 million for 2002 compared to $18.8million for 2001.  The significantdecrease in operating earnings was attributable to the same factors (asdiscussed above) that contributed to the decrease in gross profit, gross marginand S,G&A expenses.

 

*OtherExpense, net*

 

                Otherexpense, net (which is predominantly net interest expense) decreased 5.0% or$0.5 million to $9.6 million in 2002 compared to $10.1 million in 2001.  The $0.5 million decrease was primarilyattributable to lower interest expense realized from the early retirement ofdebt during 2001.  The Company has $88.7million of indebtedness as of March 30, 2002 compared to $91.0 million at March31, 2001.

 

*NetEarnings*

 

                Netearnings decreased by approximately $5.7 million to $3.2 million for 2002 fromnet earnings of  $8.9 million in2001.  The decrease in net earnings wasprimarily attributable to the decrease in earnings from operations and theextraordinary gain recognized in 2001, partially offset by the reduction ininterest expense.

 

 

16

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**Liquidityand Capital Resources**

 

                Netcash used in operating activities was $2.2 million for 2003 compared to netcash provided of $6.0 million for 2002. The decrease of $8.2 million was primarily attributable to decreased netearnings (excluding the charge related to the cumulative effect of accountingchange).

 

                Netcash used in investing activities was $0.4 million for 2003 compared to $0.7million for 2002.  The decrease was dueto a reduction in purchases of property, plant and equipment.

 

                Netcash used in financing activities was $2.1 million for 2003 compared to $3.2million for 2002. The decrease in 2003 is primarily attributable to a decreasein required principal payments on long-term debt.

 

                Asof March 29, 2003, the Company’s outstanding indebtedness was $86.6 million,consisting of $79.8 million principal amount of the senior subordinated notesand $6.8 million of capitalized lease obligations and mortgage debt.    OnJune 18, 2003, the Company entered into a $7.5M Revolving Credit Agreement (the“Revolver”). Under the terms of the Revolver, the Company may borrow up to 85%of eligible accounts receivable.  TheRevolver provides for interest on outstanding balances at the bank’s prime rateplus 1 1⁄2% (or LIBOR plus 31⁄2%) and is collateralized by accounts receivable,inventories, equipment and intangible assets of the Company.  There are no borrowings outstanding underthe Revolver and on June 18, 2003, approximately $4,000,000 was available.  The Revolver includes covenants requiringmaintenance of certain financial ratios.

 

                TheCompany believes that cash on hand of $6.2 million, income tax refunds fromcarryback of tax losses of $2.6 million and cash generated from operations,prior to interest payments on long-term debt, will provide adequate funds forongoing operations, planned capital expenditures and debt service for thenear-term.  Over the next 12 months, theprimary cash obligations of the Company are interest payments ($9.4 million),principal payments on existing debt ($1.8 million), and capital expenditures($0.6 -$0.8 million).

 

                Forthe longer term, the operating results of the Company must improve to satisfyits liquidity needs.  The annual interestpayments and principal payment obligations decrease only modestly over the nextseveral years until the Notes become due in 2007.  The Company is making substantial efforts to increase its saleslevels and thereby improve the operating results.  There is no assurance that these efforts will be successful.  In addition, an increase in sales for theCompany will require additional investment in working capital to support suchincreased operations.

 

                Capitalexpenditures for fiscal 2004 are expected to focus on investments in equipmentto expand prototyping and qualification of new programs for new and existingcustomers.  Expected capitalexpenditures for fiscal 2004 are approximately $0.8 million and will be financedthrough working capital.

 

**CriticalAccounting Policies**

 

                In response to the SEC’s Release No. 33-8040,“Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” weidentified the most critical accounting policies upon which our financialstatus depends.  We determined thecritical principles by considering accounting policies that involve the mostcomplex or subjective decisions or assessments.  We state these accounting policies in the notes to theconsolidated financial statements and at relevant sections in the management’sdiscussion and analysis.

 

                The Company does not believe there is a greatlikelihood that materially different amounts would be reported under differentconditions or using different assumptions related to the accounting policiesdescribed below.  However, applicationof these accounting policies involves the exercise of judgment and use ofassumptions as to future uncertainties and, as a result, actual results coulddiffer from these estimates.  Thisdiscussion and analysis should be read in conjunction with our consolidatedfinancial statements and related notes included elsewhere in this report.

 

## ***Revenue Recognition***

 

                The Companygenerally manufacturers products under both individual firm purchase orders andfixed price, long-term production contracts. The contracts vary in length, but generally are completed within 12 to24 months.  Sales under individualpurchase orders and long-term production contracts are recognized at the timeunits are shipped and title and risk of loss transfers (FOB shippingpoint).  Our products are warranted tomeet the specifications of manufacture and customer “right of return” is onlyfor failure to meet the specifications.

 

17

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## ***Allowance for UncollectibleAccounts Receivable***

 

                Accounts receivable have been reduced by an allowancefor amounts that may become uncollectible in the future.  This estimated allowance is based primarilyon management’s evaluation of the financial condition of the various customersand, to date, has been within management’s expectations.  No customer account exceeds 10% of theaccounts receivable balance at March 29, 2003.

 

## ***Allowance for Obsolete and ExcessInventory***

 

                Inventories are valued at the lower of cost(first-in, first-out method) or market and have been reduced for any identifiedexcess or obsolete inventories. Management bases it’s analysis of excess or obsolete inventories onactual demand for components or raw material stocks.

 

## ***Impairment of Long-Lived Assets***

 

                Intangibleand other long-lived assets are reviewed by management for impairment whenever events or changes incircumstances indicate the carrying amount may not be recoverable.

 

                Intangible assetsrelate to a customer listing acquired in 1997. Total cost of the customer list was $1,400,000 and it is amortized over14 years on a straight-line basis. Amortization expense is $100,000 for each fiscal year 2003, 2002 and2001.  Accumulated amortization was$575,000 and $475,000 at March 29, 2003 and March 30, 2002, respectively.  Amortization expense will be $100,000 peryear through fiscal 2011.

 

Goodwill

 

                In adopting SFAS No. 142 “Goodwill and OtherIntangible Assets”, the Company ceased amortizing goodwill in the first quarterof fiscal 2003 and has assessed initial impairment under transitional rules asof March 31, 2002.  The goodwill wasacquired at a cost of approximately $6,200,000 and had previously beenamortized on a straight-line basis over 40 years.  Goodwill amortization for fiscal 2002 and 2001 was $189,000 eachyear.  Accumulated amortization ofgoodwill was $2,639,000 at March 30, 2002. If no amortization had been recorded in fiscal 2002 and 2001, proformanet income would have been $3,375,000 and $9,138,000, respectively.

 

                During the quarter ended September 28, 2002, theCompany completed its assessment of the estimated fair value of its tworeporting units under the transitional rules of SFAS No. 142 using a valuationmethod based on a multiple of earnings before interest, taxes, depreciation andamortization.  For purposes of itsassessment under SFAS No. 142, the Company concluded it had two reportingunits, Hermetic (consisting of Hermetic Seal Corporation and its relatedentities/operations) and Glasseal (consisting of Glasseal Products, Inc. andits subsidiary Sealtron, Inc.).  Forpurposes of calculating earnings before interest, taxes, depreciation andamortization (“EBITDA”) of each of the reporting units, the Company usedforward 12 months forecasted operating results for fiscal 2003 due to 1) theloss in March 2002 of SDI, formerly its largest customer and 2) the significantdecrease in sales to the telecommunications market.  An allocation of the cost of shared resources and corporateexpenses directly related to the reporting units was also reflected in EBITDA.  The multiple applied against EBITDA was5.7.  As a result, the Companydetermined that the goodwill of the Company’s reporting units was fullyimpaired and has recorded an impairment charge of $3,561,000.  No income tax benefit has been recognizedfor this charge, as the goodwill is not deductible for income tax purposes.

## ** **

## ***Deferred Income Tax Assets***

 

                Deferred income tax assets and liabilities have beenrecorded for the differences between the financial accounting and income taxbasis of assets and liabilities. Recorded deferred income tax assets and liabilities are described indetail under Note 7 - “Taxes on Earnings” in the related notes to theconsolidated financial statements. Significant factors considered by management in the determination of theprobability of realization of deferred tax assets include historical operatingresults and expectations of future earnings and taxable income.  During Fiscal 2003, the Company recorded afull valuation allowance against its deferred tax assets, as it was determinedthat it was more likely than not that they will not be realized.

 

18

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## ***Protection of the Environment***

 

                The Company’s operations involve the use and disposalof certain substances regulated under environmental protection laws.  On an ongoing, regular basis, certainprocesses continue to be modified in order to reduce the impact on theenvironment, including the reduction or elimination of certain chemicals usedin and wastes generated from operations. Liabilities related to environmental matters are further discussed underItem 3 — “Legal Proceedings” and under Note 10 - “Environmental and OtherLiabilities” in the related notes to the consolidated financial statements.

 

*Contingencies*

 

                The Company is subject to various investigations,claims, legal and administrative proceedings, covering a wide range of mattersthat arise in the ordinary course of business activities.  Any liability that may result from theseproceedings in not expected to have a material adverse effect on the Company’sresults of operations, cash flows or financial position.

 

                A number of claims / disputes have arisen with SDI inconjunction with the wind down of the sales to SDI.  The Company is pursuing its claims and will use all remediesavailable to resolve the issues.  Theultimate resolution of these claims is not expected to have a material adverseimpact on the results of operations, cash flows or financial position of theCompany.

 

## ***Other Matters***

 

                The Company does not have off-balance sheetarrangements, financings or other relationships with unconsolidated entities orother persons, also known as “special purpose entities” (SPEs).  In the ordinary course of business, theCompany leases certain real properties, primarily sales and office facilities,and equipment.  Transactions withrelated parties are in the ordinary course of business, are conducted on anarm’s-length basis, and are not material to the Company’s financial position,results of operations or cash flow.

 

 

## ***Contractual Obligations Related toLong-term Debt and Related Risk Disclosure***

 

**               **The Company is exposed to market risk from changes ininterest rates on the Company’s Revolving Credit Facility.  At June 18, 2003 (the effective date of theFacility), the Company had no outstanding borrowings under the Revolver.  See Note 5 - “Long-term Debt” and Note 6 -“Revolving Credit Facility” in the related notes to the consolidated financialstatements.

 

19

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**ImpactOf Recently Issued Accounting Standards**

 

                Statementof Financial Accounting Standard No. 145: In May 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“SFAS”) No. 145, “Rescission of FASNos. 4, 44, and 64, Amendment of FAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescindsvarious pronouncements regarding early extinguishments of debt and allowsextraordinary accounting treatment for early extinguishment only when theprovisions of Accounting Principles Board Opinion No. 30, “Reporting theResults of Operations / Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions” are met.  SFAS No. 145 provisionsregarding early extinguishment of debt are generally effective for fiscal yearsbeginning after May 15, 2002. Management does not believe that the adoption of this statement willhave a material impact on our consolidated financial statements.

 

                Statement ofFinancial Accounting Standard No. 146: In July 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).”  Under EITF Issue No.94-3, a liability for an exit cost is recognized at the date an entity commitsto an exit plan.  SFAS No. 146eliminates the definition and requirements for recognition of exit costs inEITF Issue No. 94-3 and requires that a liability for a cost associated with anexit or disposal activity be recognized when the liability is incurred.  This Statement also establishes that fairvalue is the objective for initial measurement of the liability.  The provisions of this Statement will beeffective after December 31, 2002.  Theadoption of SFAS No. 146 will affect the timing of the recognition of futurecosts associated with exit or disposal activities and will not affect previouscharges related to such activities.

 

                Statement ofFinancial Accounting Standard No.148: In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure — an amendment of SFAS No.123.”  This Statement amends FASBStatement No. 123, *Accounting forStock-Based Compensation,* to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this Statement amends the disclosure requirements ofStatement 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.  The amendments to Statement 123 inparagraphs 2(a)-2(e) of this Statement shall be effective for financialstatements for fiscal years ending after December 15, 2002.  Earlier application of the transitionprovisions in paragraphs 2(a)-2(d) is permitted for entities with a fiscal yearending prior to December 15, 2002, provided that financial statements for the2002 fiscal year have not been issued as of the date this Statement isissued.  Early application of thedisclosure provisions in paragraph 2(e) is encouraged.  The amendment to Statement 123 in paragraph2(f) of this Statement and the amendment to Opinion 28 in paragraph 3 shall beeffective for financial reports containing condensed financial statements forinterim periods beginning after December 15, 2002.  The Company does not believe this standard will have a materialimpact on its financial position or results of its operations.

 

                FinancialAccounting Standards Board Interpretation No. 45:  In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others.”  This Interpretation clarifies the requirements for a guarantor’saccounting for and disclosures of certain guarantees issued andoutstanding.  This Interpretation alsoclarifies the requirements related to the recognition of a liability by aguarantor at the inception of a guarantee for the obligations the guarantor hasundertaken in issuing that guarantee. The disclosure provisions of the Interpretation are effective forfinancial statements of interim or annual periods ending after December 15,2002.  The adoption of thisInterpretation did not have a material impact on the Company’s financialposition, results of operations or cash flows.

 

                FinancialAccounting Standards Board Interpretation No. 46:  In January 2003, the FASB issued Interpretation No. 46,“Consolidation of Variable Interest Entities — an Interpretation of ARB No.51.”  The Interpretation clarifies theapplication of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements,” to certain entities in which equity investors do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties.  The provisions of this Interpretation are effective for allenterprises with variable interests in variable interest entities created afterJanuary 31, 2003.  The adoption of thisInterpretation is not expected to have a significant impact on the Company’sfinancial results.

 

20

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**Inflation**

 

                Although increasesin operating costs could adversely affect the Company’s operations, managementdoes not believe inflation has had a material effect on operating profit duringthe past several years.

 

 

**DisclosureRegarding Forward Looking Statements**

 

                Thisfiling contains statements that are “forward looking statements”, and includes,among other things, discussions of the Company’s business strategy andexpectations concerning market position, future operations, margins,profitability, liquidity and capital resources.  Although the Company believes that the expectations reflected insuch forward looking statements are reasonable, it can give no assurance thatsuch expectations will prove to have been correct.

 

                Allphases of the operations of the Company are subject to a number ofuncertainties, risks and other influences, including general economicconditions, regulatory changes and competition, many of which are outside thecontrol of the Company, any one of which, or a combination of which, couldmaterially affect the results of the Company’s operations and whether theforward looking statements made by the Company ultimately prove to beaccurate.  The Company does not assumeany obligation to update these forward looking statements.

 

 

**Item7a  — Quantitative and Qualitative Disclosures About Market Rate Risk**

 

**               **The Company is exposed to market risk from changes ininterest rates on the Company’s Revolving Credit Facility.  At June 18, 2003 (effective date of theRevolving Credit Facility), the Company had no outstanding borrowings under theRevolver and, therefore, changes in interest rates would have no impact on theCompany’s results of operations.

 

21

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**Item8  — Financial Statements and Supplemental Data**

 

INDEX TO FINANCIAL STATEMENTS

 
| Report of  Independent Auditors                                      |
|----------------------------------------------------------------------|
|                                                                 |
| Consolidated Balance Sheets  as of March 29, 2003 and March 30, 2002 |
|                                                                 |
| Consolidated  Statements of Operations for the years ended           |
| March 29, 2003,  March 30, 2002, and March 31, 2001                  |
|                                                                 |
| Consolidated  Statements of Stockholders’ Equity (Deficit)      |
| for  the years ended March 29, 2003, March 30, 2002, and             |
| March  31, 2001                                                      |
|                                                                 |
| Consolidated  Statements of Cash Flows for the years ended           |
| March 29, 2003,  March 30, 2002, and March 31, 2001                  |
|                                                                 |
| Notes to  Consolidated Financial Statements                          |
|                                                                 |
| Schedule II - Valuation and Qualifying  Accounts                     |

 

All other financial statement schedules not listed have been omittedsince the required information is

included in the consolidated financial statements, the notes thereto,is not applicable, or not required.

 

 

22

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REPORT OF INDEPENDENT AUDITORS

 

 

Board of Directors andStockholders

HCC Industries Inc. and Subsidiaries

Rosemead, California

 

 

In our opinion, the consolidated financial statements listed in theaccompanying index present fairly, in all material respects, the financialposition of HCC Industries Inc. and Subsidiaries at March 29, 2003 and March30, 2002, and the results of their operations and their cash flows for each ofthe three years in the period ended March 29, 2003 in conformity withaccounting principles generally accepted in the United States of America.  In addition, in our opinion, the financialstatement schedule listed in the accompanying index presents fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated consolidated financial statements. These financial statements and financial statement schedule are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 1, effective March 31, 2002, the Company adoptedStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets.”

 

 
| /s/ PricewaterhouseCoopers LLP                                                               |
|----------------------------------------------------------------------------------------------|
| Los Angeles, California                                                                      |
| May 15, 2003, except for Note 6, and the fifth  paragraph of Note 1, as to which the date is |
| June 18, 2003.                                                                               |

 

 

23

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**ConsolidatedBalance Sheets**

**(in thousands, except share data)**

 

# **ASSETS**

 
|                                                                                             |   | **March 29,** |   | **March 30,** |   |
|--------------------------------------------------------------------------------------------------|--------|---------------|--------|---------------|--------|
|                                                                                             |   | **2003**      |   | **2002**      |   |
|                                                                                             |   |          |   |          |   |
| **Current  Assets:**                                                                             |   |          |   |          |   |
| Cash and cash  equivalents                                                                       |   | $             | 6,215  |          | $      | 10,990 |   |
| Trade accounts  receivable, less allowance for doubtful accounts of $70 (2003) and $70 (2002)    |   | 6,626         |   | 8,356         |   |
| Inventories                                                                                      |   | 5,174         |   | 6,016         |   |
| Income taxes  receivable                                                                         |   | 2,473         |   | 506           |   |
| Prepaid and  other current assets                                                                |   | 857           |   | 1,130         |   |
|                                                                                             |   |          |   |          |   |
| Total current  assets                                                                            |   | 21,345        |   | 26,998        |   |
|                                                                                             |   |          |   |          |   |
| **Property,  Plant and Equipment, net**                                                          |   | 22,278        |   | 24,895        |   |
|                                                                                             |   |          |   |          |   |
| **Other  Assets:**                                                                               |   |          |   |          |   |
| Goodwill                                                                                         |   | —        |   | 3,561         |   |
| Intangible  assets                                                                               |   | 825           |   | 925           |   |
| Deferred  financing costs                                                                        |   | 1,394         |   | 1,732         |   |
| Deferred income  taxes, net                                                                      |   | —        |   | 1,623         |   |
| Restricted cash                                                                                  |   | 5,311         |   | 5,901         |   |
|                                                                                             |   |          |   |          |   |
| **Total  assets**                                                                                |   | $             | 51,153 |          | $      | 65,635 |   |
|                                                                                             |   |          |   |          |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                         |
|                                                                                             |   |          |   |          |   |
| **Current  Liabilities:**                                                                        |   |          |   |          |   |
| Current portion  of long-term debt                                                               |   | $             | 1,779  |          | $      | 2,109 |   |
| Accounts payable                                                                                 |   | 1,504         |   | 1,475         |   |
| Accrued  liabilities                                                                             |   | 6,467         |   | 7,721         |   |
|                                                                                             |   |          |   |          |   |
| Total current  liabilities                                                                       |   | 9,750         |   | 11,305        |   |
|                                                                                             |   |          |   |          |   |
| **Long  Term Liabilities:**                                                                      |   |          |   |          |   |
| Long-term debt,  net of current portion                                                          |   | 84,833        |   | 86,627        |   |
| Environmental  and other liabilities                                                             |   | 8,429         |   | 9,114         |   |
|                                                                                             |   | 103,012       |   | 107,046       |   |
|                                                                                             |   |          |   |          |   |
| **Commitments  and contingencies**                                                               |   |          |   |          |   |
|                                                                                             |   |          |   |          |   |
| **Stockholders’  Equity (Deficit):**                                                        |   |          |   |          |   |
| Common stock;  $.10 par value; authorized 550,000 shares, issued and outstanding 137,945  shares |   | 14            |   | 14            |   |
| Additional  paid-in capital                                                                      |   | 377           |   | 360           |   |
| Accumulated  deficit                                                                             |   | (52,250       | )      | (41,785       | )      |
|                                                                                             |   |          |   |          |   |
| **Total  stockholders’ deficit**                                                            |   | (51,859       | )      | (41,411       | )      |
|                                                                                             |   |          |   |          |   |
| **Total  liabilities and stockholders’ deficit**                                            |   | $             | 51,153 |          | $      | 65,635 |   |

 

 

 

 

 

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

 

24

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

# **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

** (in thousands)**

 

 

 
|                                                                                                 |   | **For The  Year Ended** |    |
|------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                 |   | **March 29,**           |    | **March 30,** |   | **March 31,** |   |
|                                                                                                 |   | **2003**                |    | **2002** |   | **2001** |   |
|                                                                                                 |   |                    |    |   |   |   |   |
| **Net  sales**                                                                                       |   | $                       | 41,086  |   | $ | 64,207 |   | $ | 80,539 |   |
| Cost of goods  sold                                                                                  |   | 33,080                  |    | 43,278 |   | 53,405 |   |
|                                                                                                 |   |                    |    |   |   |   |   |
| **Gross  profit**                                                                                    |   | 8,006                   |    | 20,929 |   | 27,134 |   |
|                                                                                                 |   |                    |    |   |   |   |   |
| Selling, general  and administrative expenses                                                        |   | 5,851                   |    | 6,424 |   | 8,329 |   |
| Impairment of  assets                                                                                |   | 500                     |    | — |   | — |   |
|                                                                                                 |   |                    |    |   |   |   |   |
| **Earnings  from operations**                                                                        |   | 1,655                   |    | 14,505 |   | 18,805 |   |
|                                                                                                 |   |                    |    |   |   |   |   |
| **Other  income (expense):**                                                                         |   |                    |    |   |   |   |   |
| Interest and  other income                                                                           |   | 132                     |    | 233 |   | 649 |   |
| Interest expense                                                                                     |   | (9,582                  | )       | (9,847 | ) | (10,717 | ) |
|                                                                                                 |   |                    |    |   |   |   |   |
| Total other  expenses, net                                                                           |   | (9,450                  | )       | (9,614 | ) | (10,068 | ) |
|                                                                                                 |   |                    |    |   |   |   |   |
| **Earnings  (loss) before taxes and cumulative effect of accounting change and  extraordinary item** |   | (7,795                  | )       | 4,891 |   | 8,737 |   |
|                                                                                                 |   |                    |    |   |   |   |   |
| Taxes (benefit)  on earnings (loss)                                                                  |   | (891                    | )       | 1,705 |   | 2,975 |   |
|                                                                                                 |   |                    |    |   |   |   |   |
| Earnings (loss)  before cumulative effect of  accounting change and extraordinary item               |   | (6,904                  | )       | 3,186 |   | 5,762 |   |
|                                                                                                 |   |                    |    |   |   |   |   |
| Cumulative effect of accounting change                                                               |   | (3,561                  | )       | — |   | — |   |
|                                                                                                 |   |                    |    |   |   |   |   |
| Extraordinary  gain on retirement of debt, net of taxes of $2,125                                    |   | —                  |    | — |   | 3,187 |   |
|                                                                                                 |   |                    |    |   |   |   |   |
| **Net  earnings (loss)**                                                                             |   | $                       | (10,465 | ) | $ | 3,186 |   | $ | 8,949 |   |

 

 

 

 

 

 

 

 

 

 

 

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

 

25

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**(in thousands)**

 

 
|                         |   |              |   |        |   | **Additional** |   | **Retained**           |   | **Total**           |    |
|------------------------------|--------|-------------------|--------|-------------|--------|----------------|--------|------------------------|--------|---------------------|---------|
|                         |   | **Common  Stock** |   | **Paid-In** |   | **Earnings**   |   | **Stockholders’** |   |
|                         |   | **Shares**        |   | **Amount**  |   | **Capital**    |   | **(Deficit)**          |   | **Equity(Deficit)** |    |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| **Balance, April 1, 2000**   |   | 135               |   | $           | 14     |           | $      | 200                    |   | $                   | (53,920 | ) | $ | (53,706 | ) |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| Sale of stock                |   | 3                 |   | —      |   | 50             |   | —                 |   | 50                  |    |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| Non-cash stock  compensation |   | —            |   | —      |   | 93             |   | —                 |   | 93                  |    |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| Net earnings                 |   | —            |   | —      |   | —         |   | 8,949                  |   | 8,949               |    |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| **Balance, March 31, 2001**  |   | 138               |   | 14          |   | 343            |   | (44,971                | )      | (44,614             | )       |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| Non-cash stock  compensation |   | —            |   | —      |   | 17             |   | —                 |   | 17                  |    |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| Net earnings                 |   | —            |   | —      |   | —         |   | 3,186                  |   | 3,186               |    |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| **Balance, March 30, 2002**  |   | 138               |   | 14          |   | 360            |   | (41,785                | )      | (41,411             | )       |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| Non-cash stock  compensation |   | —            |   | —      |   | 17             |   | —                 |   | 17                  |    |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| Net loss                     |   | —            |   | —      |   | —         |   | (10,465                | )      | (10,465             | )       |
|                         |   |              |   |        |   |           |   |                   |   |                |    |
| **Balance, March 29, 2003**  |   | 138               |   | $           | 14     |           | $      | 377                    |   | $                   | (52,250 | ) | $ | 51,859 |   |
|                         |   |              |   |        |   |           |   |                   |   |                |    |

 

 

 

 

 

 

 

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

 

26

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 

 
|                                                                                            |   | **For The  Year Ended** |          |
|-------------------------------------------------------------------------------------------------|--------|-------------------------|---------------|
|                                                                                            |   | **March 29,**           |          | **March 30,** |   | **March 31,** |   |   |
|                                                                                            |   | **2003**                |          | **2002** |   | **2001** |   |   |
| **Cash flows from operating  activities**:                                                      |   |                    |          |   |   |   |   |   |
| Net earnings  (loss)                                                                            |   | $                       |  (10,465 | ) | $ |  3,186 |   | $ |  8,949 |   |   |
| Reconciliation  of net earnings (loss) to net cash provided by (used in) operating  activities: |   |                    |          |   |   |   |   |   |
| Depreciation                                                                                    |   | 2,544                   |          | 2,599 |   | 2,251 |   |   |
| Amortization                                                                                    |   | 438                     |          | 628 |   | 639 |   |   |
| Impairment of  assets                                                                           |   | 500                     |          | — |   | — |   |   |
| Cumulative  effect of accounting change                                                         |   | 3,561                   |          | — |   | — |   |   |
| Deferred income  taxes                                                                          |   | 2,059                   |          | 903 |   | 1,622 |   |   |
| Extraordinary  gain                                                                             |   | —                  |          | — |   | (3,187 | ) |   |
| Non-cash stock  compensation                                                                    |   | 17                      |          | 17 |   | 93 |   |   |
| Changes in  operating assets and liabilities:                                                   |   |                    |          |   |   |   |   |   |
| Decrease  (increase) in trade accounts receivable, net                                          |   | 1,730                   |          | 2,443 |   | (758 | ) |   |
| Decrease  (increase) in inventories                                                             |   | 842                     |          | 452 |   | (1,953 | ) |   |
| Decrease  (increase) in other assets                                                            |   | (1,540                  | )             | 17 |   | 44 |   |   |
| (Decrease)  increase in accounts payable                                                        |   | 29                      |          | (2,125 | ) | 59 |   |   |
| (Decrease)  increase in accrued and other liabilities                                           |   | (1,939                  | )             | (2,137 | ) | 917 |   |   |
|                                                                                            |   |                    |          |   |   |   |   |   |
| Net cash  provided by (used in) operating activities                                            |   | (2,224                  | )             | 5,983 |   | 8,676 |   |   |
|                                                                                            |   |                    |          |   |   |   |   |   |
| **Cash flows from investing  activities:**                                                      |   |                    |          |   |   |   |   |   |
| Purchases of  property, plant and equipment                                                     |   | (427                    | )             | (736 | ) | (2,565 | ) |   |
|                                                                                            |   |                    |          |   |   |   |   |   |
| Net cash used in  investing activities                                                          |   | (427                    | )             | (736 | ) | (2,565 | ) |   |
|                                                                                            |   |                    |          |   |   |   |   |   |
| **Cash flows from financing  activities**:                                                      |   |                    |          |   |   |   |   |   |
| Principal  payments on long-term debt                                                           |   | (3,215                  | )             | (3,153 | ) | (7,204 | ) |   |
| Proceeds from  issuance of long-term debt                                                       |   | 1,091                   |          | — |   | — |   |   |
| Early retirement  of debt                                                                       |   | —                  |          | — |   | (4,598 | ) |   |
| Proceeds from  sale of stock                                                                    |   | —                  |          | — |   | 50 |   |   |
|                                                                                            |   |                    |          |   |   |   |   |   |
| Net cash used in  financing activities                                                          |   | (2,124                  | )             | (3,153 | ) | (11,752 | ) |   |
|                                                                                            |   |                    |          |   |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                           |   | (4,775                  | )             | 2,094 |   | (5,641 | ) |   |
|                                                                                            |   |                    |          |   |   |   |   |   |
| Cash and cash  equivalents at beginning of period                                               |   | 10,990                  |          | 8,896 |   | 14,537 |   |   |
| **Cash and cash equivalents at end of  period**                                                 |   | $                       |  6,215   |   | $ |  10,990 |   | $ |  8,896 |   |   |
|                                                                                            |   |                    |          |   |   |   |   |   |
| **Supplemental noncash financing  activities**:                                                 |   |                    |          |   |   |   |   |   |
| Capital lease  obligations                                                                      |   | $                       |  1,091   |   | $ |  922 |   | $ |  3,917 |   |   |
| Cash taxes paid                                                                                 |   | $                       |  (983    | ) | $ |  950 |   | $ |  3,250 |   |   |
| Cash interest  paid                                                                             |   | $                       |  9,234   |   | $ |  9,462 |   | $ |  10,325 |   |   |
|                                                                                                 |        |                         |               |  |  |  |  |  |  |  |  |  |  |

 

 

 

 

 

 

 

 

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

27

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****                           ****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

 

General

 

             HCCIndustries Inc. and Subsidiaries (“HCC” or “Company”) was incorporated inDelaware in 1985.  HCC designs,manufactures and markets broad lines of state-of-the-art, high precisionelectronic connection devices known as hermetic seals and operates in onereportable industry segment.  TheCompany’s products are sold primarily in North America and Europe to theaerospace, energy, telecommunications, test and measurement and automotiveindustries.

 

                On February 14,1997, pursuant to a Stock Purchase and Sale Agreement dated as of December 23,1996, the Company, certain members of management and an investor groupcompleted a recapitalization of the Company (the “Recapitalization”).  In connection with the Recapitalization, theCompany issued an aggregate of 87,721 shares of common stock to the investorgroup and repurchased an aggregate of 245,972 shares of common stock from theformer principal stockholders.  As aresult, the investor group acquired a 65% ownership interest in theCompany.  In accounting for the Recapitalization,no fair value adjustments were made to the book value of the Company’s assetsand no goodwill was recognized.  Theamounts paid to the selling stockholders to purchase and retire the shares ofcommon stock was charged to stockholders’ equity as a treasury stocktransaction.

 

Liquidity and Capital Resources

 

                TheCompany believes that cash on hand of $6.2 million, income tax refunds fromcarryback of tax losses of $2.6 million and cash generated from operations,prior to interest payments on long-term debt, will provide adequate funds forongoing operations, planned capital expenditures and debt service for thenear-term.  Over the next 12 months, theprimary cash obligations of the Company are interest payments ($9.4 million),principal payments on existing debt ($1.8 million), and capital expenditures($0.6 -$0.8 million).

 

                Forthe longer term, the operating results of the Company must improve to satisfyits liquidity needs.  The annualinterest payments and principal payment obligations decrease only modestly overthe next several years until the Notes become due in 2007.  The Company is making substantial efforts toincrease its sales levels and thereby improve the operating results.  There is no assurance that these effortswill be successful.  In addition, anincrease in sales for the Company will require additional investment in workingcapital to support such increased operations.

 

                OnJune 18, 2003, the Company entered into a $7.5M Revolving Credit Agreement (the“Revolver”). Under the terms of the Revolver, the Company may borrow up to 85%of eligible accounts receivable.  TheRevolver provides for interest on outstanding balances at the bank’s prime rateplus 1 1⁄2% (or LIBOR plus 31⁄2%) and is collateralized by accounts receivable,inventories, equipment and intangible assets of the Company.  There are no borrowings outstanding underthe Revolver and on June 18, 2003, approximately $4,000,000 was available.  The Revolver includes covenants requiringmaintenance of certain financial ratios.

 

Indemnification/Restricted Cash

 

                In conjunctionwith the Recapitalization, the selling shareholders agreed to indemnify theCompany for the after-tax costs of contingent liabilities up to a total of $30million.  As part of the transaction, $6million was withheld by the Company from the purchase price to the sellingshareholders and placed in an interest bearing escrow account (“RestrictedCash”) intended primarily to fund the after-tax costs of the environmentalliability and other contingencies.  Uponagreement of the parties, but in no event before February 2004, any fundsremaining in the account will be paid to the selling shareholders.  At this date, the only remainingcontingencies are environmental contingencies and residual litigationcosts.  The restricted cash escrowbalance was $5,311,000 at March 29, 2003 and $5,901,000 at March 30, 2002.  In the event the Restricted Cash is notadequate to cover the liabilities, the Company has been informed by the sellingstockholders that they will draw upon personal funds to cover such excess costs.

 

 

28

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                Included in otherassets is $391,000 due from a selling shareholder or shareholders related tolegal costs advanced on litigation.  TheCompany has been advised by one of the selling shareholders that he disputes someor all of this receivable.  However, ifsuch dispute is not otherwise resolved, the Company believes that this advanceis recoverable from the Restricted Cash.

 

 

Principles Of Consolidation

 

                The consolidatedfinancial statements include the accounts of the Company and all wholly ownedsubsidiaries.  All intercompanytransactions (which are primarily sales/purchases and receivables/payables)have been eliminated in consolidation.

 

                The Company’s 103⁄4% Senior Subordinated Notes and the Revolving Credit Facility are guaranteed byall operating subsidiaries of the Company (the “Subsidiary Guarantors”).  The guarantee obligations of the SubsidiaryGuarantors (which are all direct or indirect wholly owned subsidiaries of theCompany) are full, unconditional and joint and several.  The aggregate assets, liabilities, earnings,and equity of the Subsidiary Guarantors are substantially equivalent to thetotal assets, liabilities, earnings and equity of HCC Industries Inc. and itssubsidiaries on a consolidated basis. Separate financial statements of the Subsidiary Guarantors are notincluded in the accompanying financial statements because management of theCompany has determined that separate financial statements of the SubsidiaryGuarantors would not be material to investors.

 

                The Company has nodirect or indirect guarantees of the indebtedness of others.

 

Use of Estimates

 

                The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities,reported results of operations and disclosure of contingencies at the dates ofthe consolidated financial statements. Actual results could differ from those estimates.

 

Accounting Period

 

                The consolidatedfinancial statements are based on the fiscal year ending on the Saturdaynearest to March 31.

 

Reclassifications

 

                Certainreclassifications have been made to the 2002 and 2001 financial statements toconform to the 2003 presentation.

 

Revenue Recognition

 

                The Companygenerally manufacturers products under both individual firm purchase orders andfixed price, long-term production contracts. The contracts vary in length, but generally are completed within 12 to24 months.  Sales under individualpurchase orders and long-term production contracts are recognized at the timeunits are shipped and title and risk of loss transfers (FOB shippingpoint).  Our products are warranted tomeet the specifications of manufacture and customer “right of return” is onlyfor failure to meet the specifications.

 

 

 

 

29

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Cash Equivalents

 

                The Companyconsiders all highly liquid investments purchased with an initial maturity ofthree months or less to be cash equivalents. The Company has bank balances, including cash, cash equivalents, andrestricted cash, which exceed federally insured limits.

 

Accounts Receivable, Concentration Of Credit Risk and GeographicInformation

 

                TheCompany grants uncollateralized credit to its customers who are located invarious geographical areas.  Estimatedcredit losses and returns have been provided for in the financial statementsand, to date, have been within management’s expectations.  No customer account exceeds 10% of theaccounts receivable balance at March 29, 2003.

 

                The Companystopped selling products to Special Devices, Inc. (“SDI”) in March 2002. Salesto SDI were $14,596,000 (23%) and $20,736,000 (26%) for the fiscal years 2002and 2001, respectively.  The relatedaccounts receivable from SDI as of March 30, 2002 was $2,401,000.  Sales to another customer amounted to$8,920,000 (11%) for the fiscal year 2001 and the related receivable as ofMarch 31, 2001 was $375,000.

 

                Sales toInternational customers (primarily Europe) were approximately $7,619,000 (19%),$7,738,000 (12%) and  $9,250,000 (12%)of the Company’s consolidated sales for fiscal years 2003, 2002 and 2001,respectively.  Sales are attributed tocountries based on the shipping location of customers.

 

Inventories

 

                Inventories arestated at the lower of cost (first-in, first-out method) or market.

 

Property, Plant and Equipment

 

                Property, plantand equipment is recorded at cost. Depreciation is computed generally by the straight-line method over theestimated useful lives of the respective assets as follows:  furniture, fixtures and equipment — 3 to 10years; buildings and improvements — 10 to 40 years.

 

                Repairsand maintenance are charged directly to expense as incurred.  Additions and betterments to property, plantand equipment are capitalized.  Whenassets are disposed of, the related cost and accumulated depreciation thereonare removed from the accounts and any resulting gain or loss is included inoperations in the period of disposition.

 

Intangible Assets

 

                Intangibleand other long-lived assets are reviewed by management for impairment whenever events or changes incircumstances indicate the carrying amount may not be recoverable.

 

                Intangible assetsrelate to a customer listing acquired in 1997. Total cost of the customer list was $1,400,000 and it is amortized over14 years on a straight-line basis. Amortization expense is $100,000 for each fiscal year 2003, 2002 and2001.  Accumulated amortization was$575,000 and $475,000 at March 29, 2003 and March 30, 2002, respectively.  Amortization expense will be $100,000 peryear through fiscal 2011.

 

 

 

30

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Goodwill

 

                In adopting SFAS No. 142 “Goodwill and OtherIntangible Assets”, the Company ceased amortizing goodwill in the first quarterof fiscal 2003 and has assessed initial impairment under transitional rules asof March 31, 2002.  The goodwill wasacquired at a cost of approximately $6,200,000 and had previously beenamortized on a straight-line basis over 40 years.  Goodwill amortization for fiscal 2002 and 2001 was $189,000 eachyear.  Accumulated amortization ofgoodwill was $2,639,000 at March 30, 2002. If no amortization had been recorded in fiscal 2002 and 2001, proformanet income would have been $3,375,000 and $9,138,000, respectively.

 

                During the quarter ended September 28, 2002, theCompany completed its assessment of the estimated fair value of its tworeporting units under the transitional rules of SFAS No. 142 using a valuationmethod based on a multiple of earnings before interest, taxes, depreciation andamortization.  For purposes of itsassessment under SFAS No. 142, the Company concluded it had two reportingunits, Hermetic (consisting of Hermetic Seal Corporation and its relatedentities/operations) and Glasseal (consisting of Glasseal Products, Inc. andits subsidiary Sealtron, Inc.).  Forpurposes of calculating earnings before interest, taxes, depreciation andamortization (“EBITDA”) of each of the reporting units, the Company usedforward 12 months forecasted operating results for fiscal 2003 due to 1) theloss in March 2002 of SDI, formerly its largest customer and 2) the significantdecrease in sales to the telecommunications market.  An allocation of the cost of shared resources and corporateexpenses directly related to the reporting units was also reflected inEBITDA.  The multiple applied againstEBITDA was 5.7.  As a result, the Companydetermined that the goodwill of the Company’s reporting units was fully impairedand has recorded an impairment charge of $3,561,000.  No income tax benefit has been recognized for this charge, as thegoodwill is not deductible for income tax purposes.

 

Impairment of Long-Lived Assets

 

                Long-lived assetsheld and used by the Company are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable.  For purposes ofevaluating the recoverability of long-lived assets, the Company evaluates thecarrying value of its intangible assets and property, plant and equipment on anongoing basis and recognizes an impairment when the estimated futureundiscounted cash flows from operations are less than the carrying value of therelated long-lived assets.

 

Fair Value of Financial Instruments

 

                All financialinstruments are held for purposes other than trading.  The estimated fair value of the Company’s long-term debt is basedon either quoted market prices or current rates for similar issues for debt ofthe same remaining maturities.  Allother non-derivative financial instruments as of March 29, 2003 and March 30,2002 approximate their carrying amounts either because of the short maturity ofthe instrument, or based on their effective interest rates compared to currentmarket rates for similar long-term debt or obligations.

 

Income Taxes

 

                The Companyaccounts for income taxes under the liability method.  Under this method, deferred tax assets and liabilities aredetermined based on the differences between the financial statement and taxbases of assets and liabilities using enacted tax rates in effect for the yearin which the differences are expected to reverse.  Valuation allowances are established when necessary to reducedeferred tax assets to the amount expected to be realized.  Significantfactors considered by management in the determination of the probability ofrealization of deferred tax assets include historical operating results andexpectations of future earnings and taxable income.  Income tax expense is the tax payable for the period andthe change during the period in deferred tax assets and liabilities.

 

31

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Stock Based Employee Compensation Awards

 

                SFASNo. 123, “Accounting for the Awards of Stock-Based Compensation to Employees”encourages, but does not require companies to record compensation cost forstock-based compensation plans at fair value. The Company has adopted the disclosure requirements of SFAS No. 123, whichinvolves pro forma disclosure of net income under SFAS No. 123, detaileddescriptions of plan terms and assumptions used in valuing stock optiongrants.  The Company has chosen tocontinue to account for stock-based employee compensation awards in accordancewith Accounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees”.

# ** **

 

**ImpactOf Recently Issued Accounting Standards**

 

                Statementof Financial Accounting Standard No. 145: In May 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“SFAS”) No. 145, “Rescission of FASNos. 4, 44, and 64, Amendment of FAS No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescindsvarious pronouncements regarding early extinguishments of debt and allowsextraordinary accounting treatment for early extinguishment only when theprovisions of Accounting Principles Board Opinion No. 30, “Reporting theResults of Operations / Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions” are met.  SFAS No. 145provisions regarding early extinguishment of debt are generally effective forfiscal years beginning after May 15, 2002. Management does not believe that the adoption of this statement willhave a material impact on our consolidated financial statements.

 

                Statement ofFinancial Accounting Standard No. 146: In July 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).”  Under EITF Issue No.94-3, a liability for an exit cost is recognized at the date an entity commitsto an exit plan.  SFAS No. 146eliminates the definition and requirements for recognition of exit costs inEITF Issue No. 94-3 and requires that a liability for a cost associated with anexit or disposal activity be recognized when the liability is incurred.  This Statement also establishes that fairvalue is the objective for initial measurement of the liability.  The provisions of this Statement will beeffective after December 31, 2002.  Theadoption of SFAS No. 146 will affect the timing of the recognition of futurecosts associated with exit or disposal activities and will not affect previouscharges related to such activities.

 

                Statement ofFinancial Accounting Standard No.148: In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure — an amendment of SFAS No.123.”  This Statement amends FASBStatement No. 123, *Accounting forStock-Based Compensation,* to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. In addition, this Statement amends the disclosure requirements ofStatement 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.  The amendments to Statement 123 inparagraphs 2(a)-2(e) of this Statement shall be effective for financialstatements for fiscal years ending after December 15, 2002.  Earlier application of the transitionprovisions in paragraphs 2(a)-2(d) is permitted for entities with a fiscal yearending prior to December 15, 2002, provided that financial statements for the2002 fiscal year have not been issued as of the date this Statement isissued.  Early application of thedisclosure provisions in paragraph 2(e) is encouraged.  The amendment to Statement 123 in paragraph2(f) of this Statement and the amendment to Opinion 28 in paragraph 3 shall beeffective for financial reports containing condensed financial statements forinterim periods beginning after December 15, 2002.  The Company does not believe this standard will have a materialimpact on its financial position or results of its operations.

 

 

32

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                FinancialAccounting Standards Board Interpretation No. 45:  In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others.”  This Interpretation clarifies the requirements for a guarantor’saccounting for and disclosures of certain guarantees issued andoutstanding.  This Interpretation alsoclarifies the requirements related to the recognition of a liability by aguarantor at the inception of a guarantee for the obligations the guarantor hasundertaken in issuing that guarantee.  Thedisclosure provisions of the Interpretation are effective for financialstatements of interim or annual periods ending after December 15, 2002.  The adoption of this Interpretation did nothave a material impact on the Company’s financial position, results ofoperations or cash flows.

 

                FinancialAccounting Standards Board Interpretation No. 46:  In January 2003, the FASB issued Interpretation No. 46,“Consolidation of Variable Interest Entities — an Interpretation of ARB No.51.”  The Interpretation clarifies theapplication of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements,” to certain entities in which equity investors do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties.  The provisions of this Interpretation are effective for allenterprises with variable interests in variable interest entities created afterJanuary 31, 2003.  The adoption of thisInterpretation is not expected to have a significant impact on the Company’sfinancial results.

 

 

**2.             INVENTORIES:**

 

                Inventoriesconsist of the following (in thousands):

 

|                               |   | **March 29,** |   | **March 30,** |   |
|------------------------------------|--------|---------------|--------|---------------|--------|
|                               |   | **2003**      |   | **2002**      |   |
|                               |   |          |   |          |   |
| Raw materials  and component parts |   | $             | 4,094  |          | $      | 4,503 |   |
| Work in process                    |   | 1,080         |   | 1,513         |   |
|                               |   |          |   |          |   |
|                               |   | $             | 5,174  |          | $      | 6,016 |   |

 

 

 

 

**3.             PROPERTY,PLANT AND EQUIPMENT:**

 

                Property, plant and equipmentconsist of the following (in thousands):

 

|                               |   | **March 29,** |   | **March 30,** |   |
|------------------------------------|--------|---------------|--------|---------------|--------|
|                               |   | **2003**      |   | **2002**      |   |
|                               |   |          |   |          |   |
| Land                               |   | $             | 4,017  |          | $      | 4,017 |   |
| Buildings and  improvements        |   | 9,458         |   | 9,938         |   |
| Furniture,  fixtures and equipment |   | 26,661        |   | 26,254        |   |
|                               |   |          |   |          |   |
|                               |   | 40,136        |   | 40,209        |   |
| Less accumulated  depreciation     |   | (17,858       | )      | (15,314       | )      |
|                               |   | $             | 22,278 |          | $      | 24,895 |   |

 

                Equipment acquiredunder capitalized leases is included in the table above.  The cost of leased equipment was $8,836,000(2003) and $10,431,000 (2002).  Theaccumulated amortization was $2,651,000 (2003) and $2,237,000 (2002).

 

 

33

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                The Companyrecognized a $0.5 million write-down in the fair value of one of its propertiesin the second quarter of Fiscal 2003. The vacant property located in Avon, Massachusetts had been held inanticipation of potential future use as a manufacturing facility.  In September 2002, the Board authorizedmanagement to pursue selling the property. Based on recent market activity and management’s best estimate, the fairvalue of the property was less than the current book value and required acorresponding write-down to properly reflect its estimated fair market value.

 

 

**4.****                                     ****ACCRUED LIABILITIES**

 

Accured liabilities consist of the following (inthousands):

 

|                  |   | **March 29,** |   | **March 30,** |   |
|-----------------------|--------|---------------|--------|---------------|--------|
|                  |   | **2003**      |   | **2002**      |   |
|                  |   |          |   |          |   |
| Accrued  compensation |   | $             | 1,747  |          | $      | 2,689 |   |
| Accrued interest      |   | 3,251         |   | 3,251         |   |
| Accrued other         |   | 1,469         |   | 1,781         |   |
|                  |   |          |   |          |   |
|                  |   | $             | 6,467  |          | $      | 7,721 |   |
|                  |   |          |   |          |   |

 

**5.             LONG-TERMDEBT:**

 

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

 

|                                                                                       |   | **March 29,** |   | **March 30,** |   |
|--------------------------------------------------------------------------------------------|--------|---------------|--------|---------------|--------|
|                                                                                       |   | **2003**      |   | **2002**      |   |
| 10 3⁄4% Senior Subordinated  Notes - interest payable semi-annually; due May 15, 2007   |   | $             | 79,785 |          | $      | 79,785 |   |
|                                                                                       |   |          |   |          |   |
| Term loans on  land, building and improvements - 8% interest payable monthly; due May 2008 |   | 2,763         |   | 2,762         |   |
|                                                                                       |   |          |   |          |   |
| Capital lease  obligations (interest rates ranging between 6.36% and 9.63%)                |   | 4,064         |   | 6,189         |   |
|                                                                                       |   |          |   |          |   |
|                                                                                       |   | 86,612        |   | 88,736        |   |
| Less current  portion                                                                      |   | 1,779         |   | 2,109         |   |
|                                                                                       |   |          |   |          |   |
|                                                                                       |   | $             | 84,833 |          | $      | 86,627 |   |

 

 

                OnMay 6, 1997, the Company issued $90,000,000 in principal amount of 10 3⁄4% SeniorSubordinated Notes (“Notes”) due in May 2007 and used the proceeds of suchissuance to refinance existing debt.  Inissuing the Notes, the Company incurred $3,870,000 in deferred financingcosts.  These costs are being amortizedusing the straight-line method (which approximates the effective interestmethod) over the term of the respective Notes. At March 29, 2003, the unamortized deferred financing cost was$1,394,000.  The Notes are redeemable atthe option of the Company commencing on May 15 of the year set forth at thefollowing redemption prices:  105.375%(2002), 103.583% (2003), 101.792% (2004) and 100% (2005 and thereafter).

 

 

 

34

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                During fiscal year 2001, the Companypurchased for retirement $10.2 million face value of the Notes for $4.6 millionin cash.  The transaction resulted in anextraordinary gain on the early retirement of debt of $3.2 million, net oftaxes of $2.1 million.

 

                Minimumpayments due under long-term debt as of March 29, 2003 are as follows (inthousands):

 

|                 |   | **Capitalized  Leases** |   |         |   |       |   |
|----------------------|--------|-------------------------|--------|--------------|--------|------------|--------|
|                 |   |                    |   | **Less**     |   |       |   |   |   |   |   |
| **Fiscal**           |   | **Total**               |   | **Interest** |   | **Net**    |   | **Other** |   |   |   |
| **Year**             |   | **Obligation**          |   | **Portion**  |   | **Amount** |   | **Debt** |   | **Total** |   |
| 2004                 |   | $                       | 2,039  |         | $      | 260        |   | $ | 1,779 |   | $ | — |   | $ | 1,779 |   |
| 2005                 |   | 1,657                   |   | 125          |   | 1,532      |   | — |   | 1,532 |   |
| 2006                 |   | 732                     |   | 29           |   | 703        |   | — |   | 703 |   |
| 2007                 |   | 51                      |   | 1            |   | 50         |   | — |   | 50 |   |
| 2008                 |   |                    |   |         |   |       |   | 79,785 |   | 79,785 |   |
| 2009 and  thereafter |   |                    |   |         |   |       |   | 2,763 |   | 2,763 |   |
|                 |   | $                       | 4,479  |         | $      | 415        |   | $ | 4,064 |   | $ | 82,548 |   | $ | 86,612 |   |

 

 

The fair value of the 10 3⁄4% Senior Subordinated Notes(“Notes”) may vary from time to time based on Company specific factors andother market related factors external to the Company.  Presently, the Company is unaware of any recent trading activityor trade prices, however, the Company believes the fair value of the Notes maybe significantly less than the carrying value. This belief is based upon the current market conditions in thehigh-yield bond market, the recent losses incurred by the Company and theCompany’s knowledge of the past limited trading activity in the Notes includingthe Company’s repurchase of Notes in fiscal 2001.  Further, continued poor operating performance by the Company maynegatively impact the credit quality of the Notes, which may have a negativeimpact on the fair value of the Notes. Although the Company believes that the fair value of the Notes may besignificantly less than the carrying value, settlement of the Notes at lessthan the carrying amount may not be possible or may not be a prudent managementdecision.

 

 

**6.****                                     ****REVOLVING CREDIT FACILITY:**

 

                OnJune 18, 2003, the Company entered into a $7.5M Revolving Credit Agreement (the“Revolver”). Under the terms of the Revolver, the Company may borrow up to 85%of eligible accounts receivable.  TheRevolver provides for interest on outstanding balances at the bank’s prime rateplus 1 1⁄2% (or LIBOR plus 31⁄2%) and is collateralized by accounts receivable,inventories, equipment and intangible assets of the Company.  There are no borrowings outstanding underthe Revolver and on June 18, 2003, approximately $4,000,000 was available.  The Revolver includes covenants requiringmaintenance of certain financial ratios.

 

35

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**7.****                                     ****TAXES ON EARNINGS:**

 

            The components of income tax expense (benefit) before extraordinary itemconsist of the following

(in thousands):

|      |   | **2003** |   | **2002** |   | **2001** |   |
|-----------|--------|----------|--------|----------|--------|----------|--------|
| Current:  |   |     |   |     |   |     |   |
| Federal   |   | $        | (2,915 | )        | $      | 749      |   | $ | 1,190 |   |
| State     |   | (35      | )      | 53       |   | 163      |   |
|      |   | (2,950)  |   | 802      |   | 1,353    |   |
|      |   |     |   |     |   |     |   |
| Deferred: |   |     |   |     |   |     |   |
| Federal   |   | 1,711    |   | 751      |   | 1,378    |   |
| State     |   | 348      |   | 152      |   | 244      |   |
|      |   | 2,059    |   | 903      |   | 1,622    |   |
|      |   |     |   |     |   |     |   |
|      |   | $        | (891)  |     | $      | 1,705    |   | $ | 2,975 |   |

 

             The Company’s effective tax rate differs from the statutory federalincome tax rate as follows:

 

|                                           |   | **2003** |   | **2002** |   | **2001** |          |
|------------------------------------------------|--------|----------|--------|----------|--------|----------|---------------|
|                                           |   |     |   |     |   |     |          |
| Tax provision  (benefit) at the statutory rate |   | (34.0    | )%     | 34.0     | %      | 34.0     | %             |
| Valuation  allowance                           |   | 22.6     | %      | —   |   | —   |          |
| Nondeductible  expenses                        |   | 0.1      | %      | 1.5      | %      | 0.7      | %             |
| State taxes, net  of federal benefit           |   | 0.1      | %      | 2.8      | %      | 1.6      | %             |
| Other                                          |   | (0.2     | )%     | (3.4     | )%     | (2.2     | )%            |
|                                           |   |     |   |     |   |     |          |
|                                           |   | (11.4    | )%     | 34.9     | %      | 34.1     |  %  |

 

 

           The components of the net deferred taxesare as follows (in thousands):

 

|                        |   | **March 29,** |   | **March 30,** |   |
|-----------------------------|--------|---------------|--------|---------------|--------|
|                        |   | **2003**      |   | **2002**      |   |
| Deferred Tax  Assets:       |   |          |   |          |   |
| Environmental  liabilities  |   | $             | 2,980  |          | $      | 3,270 |   |
| Accrued vacation  and other |   | 566           |   | 461           |   |
|                        |   | 3,546         |   | 3,731         |   |
| Deferred Tax  Liabilities:  |   |          |   |          |   |
| Depreciation and  other     |   | (1,787        | )      | (1,647        | )      |
|                        |   |          |   |          |   |
| Deferred Tax  Asset, net    |   | 1,759         |   | 2,084         |   |
|                        |   |          |   |          |   |
| Valuation  allowance        |   | (1,759        | )      | —        |   |
|                        |   |          |   |          |   |
| Deferred Tax  Asset, net    |   | $             | — |          | $      | 2,084 |   |

 

 

 

                During Fiscal 2003, the Company recorded a fullvaluation allowance against its deferred tax assets, as it was determined thatit was more likely than not that they will not be realized.

 

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**8.****                                     ****CAPITAL STOCK:**

 

                TheCompany is authorized to issue an aggregate of 550,000 shares of commonstock.  These shares may be issued infour different classes (A, B, C or D shares) which differ only in voting rightsper share as follows:

 

|      |   | **Voting Rights** |
|-----------|--------|-------------------|
| **Class** |   | **Per Share**     |
| A         |   | 1                 |
| B         |   | 1                 |
| C         |   | None              |
| D         |   | 10                |

 

                During fiscal year 2001, theCompany sold 2,450 shares of Class A common stock to the Company’s Chairman for$50,000.  In conjunction with thistransaction, the Company recorded non-cash compensation of $76,000 duringfiscal year 2001.  The changes in eachclass of common shares for each of the three years in the period ended March29, 2003 are as follows (in thousands):

 
|                      |   | **Class of  Common Stock** |   |      |   |       |   |
|---------------------------|--------|----------------------------|--------|-----------|--------|------------|--------|
|                      |   | **A**                      |   | **B**     |   | **C**      |   | **D** |   | **Total** |   |
|                      |   |                       |   | **Par**   |   |       |   | **Par** |   |   |   | **Par** |   |   |   | **Par** |   |   |   | **Par** |   |
|                      |   | **Shares**                 |   | **Value** |   | **Shares** |   | **Value** |   | **Shares** |   | **Value** |   | **Shares** |   | **Value** |   | **Shares** |   | **Value** |   |
|                      |   |                       |   |      |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance - April  1, 2000  |   | 103                        |   | $         | 10     |       | 27     |   | $ | 3 |   | 4 |   | $ | 1 |   | 1 |   | $ | — |   | 135 |   | $ | 14 |   |
| Sale of Stock  (2001)     |   | 3                          |   | —    |   | —     |   | — |   | — |   | — |   | — |   | — |   | 3 |   | — |   |
|                      |   |                       |   |      |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance - March  29, 2003 |   | 106                        |   | $         | 10     |       | 27     |   | $ | 3 |   | 4 |   | $ | 1 |   | 1 |   | $ | — |   | 138 |   | $ | 14 |   |
|                      |   |                       |   |      |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

 The remaining 412,055 shares are undesignatedas to class.

 

                InFebruary 1997, the Company adopted a stock option plan (the “Option Plan”)which provides for the grant to employees and directors, from time to time, ofnon-qualified stock options to purchase up to an aggregate of 17,990 shares ofcommon stock at exercise prices to be determined by the Board ofDirectors.  The Option Plan provides forthe grant of management options to purchase 5,485 shares of common stock (the“Management Options”), management performance options to purchase 10,870 sharesof common stock (the “Management Performance Options”), director options topurchase 515 shares of common stock (the “Director Options”) and directorperformance options to purchase 1,120 shares of common stock (the “DirectorPerformance Options”).  The ManagementOptions and Director Options are subject to a vesting schedule that generallyprovides for each series of options to vest 20% per year over five years if theCompany attains specified annual or cumulative earnings targets as defined inthe Option Plan.  The ManagementPerformance Options and Director Performance Options are subject to a vestingschedule based on a change in control in which the investor group realizesspecified annual rates of return on its equity investment in the Company asdefined in the Option Plan.  All optionsare exercisable over a period of 10 years and will automatically vest on theseventh anniversary of the date on which the Option Plan was adopted,regardless of whether the performance criteria are achieved.  As of March 29, 2003, 15,815 options havebeen granted under the Option Plan which entitles the holders to purchase uponvesting 15,815 shares of common stock at an exercise price of $370.49 pershare.

 

 

 

 

37

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                TheCompany granted options to purchase 3,000 and 2,500 shares of common stockduring fiscal years 2001 and 2000, respectively, with an exercise price of $370per share (or higher), which is equal to (or above) the fair value of commonstock at the date of grant, except for 1,000 options in fiscal year 2000 withan exercise price below estimated fair market value.  Such difference will be recognized as additional compensationexpense on a straight line basis over the vesting period of the underlyingoptions.  During fiscal year 2002 and2001, the Company recorded non-cash compensation of $17,000 related to these options.

 

                Theweighted average fair value of each option granted was estimated on the date ofgrant to be approximately $85 to $100 using the minimum value method with thefollowing assumptions (i) risk-free interest rate of 5.32% and 6.38% for fiscal2001 and 2000, respectively, (ii) expected option life of 5 years, (iii)forfeiture rate of 0 and (iv) no expected dividends.

 

                Thefollowing table summarizes outstanding stock options:

 

|                           |   |          |   | **Weighted**        |   |
|--------------------------------|--------|---------------|--------|---------------------|--------|
|                           |   | **Number**    |   | **Average**         |   |
|                           |   | **of Shares** |   | **Exercise  Price** |   |
|                           |   |          |   |                |   |
| Outstanding at  April 1, 2000  |   | 21,325        |   | $                   | 379.18 |   |
| Granted                        |   | 5,000         |   | 740.98              |   |
| Canceled                       |   | 3,435         |   | 370.49              |   |
| Outstanding at  March 31, 2001 |   | 22,890        |   | 459.51              |   |
| Canceled                       |   | 160           |   | 370.49              |   |
| Outstanding at  March 30, 2002 |   | 22,730        |   | 460.14              |   |
| Canceled                       |   | 1,415         |   | 370.49              |   |
| Outstanding at  March 29, 2003 |   | 21,315        |   | $                   | 466.09 |   |

 

 

 

                The following table summarizesinformation concerning currently outstanding and exercisable stock options atMarch 29, 2003:

 

|         |   |            |   | **Weighted**  |   |            |   |
|--------------|--------|-----------------|--------|---------------|--------|-----------------|--------|
|         |   |            |   | **Average**   |   |            |   |
| **Exercise** |   | **Number**      |   | **Remaining** |   | **Number**      |   |
| **Price**    |   | **Outstanding** |   | **Life**      |   | **Exercisable** |   |
|         |   |            |   |          |   |            |   |
| 0.00         |   | 1,000           |   | 7.0           |   | 1,000           |   |
| 370.49       |   | 15,815          |   | 4.3           |   | 1,200           |   |
| 740.98       |   | 2,500           |   | 7.3           |   | 1,667           |   |
| 1,111.47     |   | 2,000           |   | 7.8           |   | 1,333           |   |
|         |   | 21,315          |   |          |   | 5,200           |   |

 

 

                TheCompany has adopted the disclosure only provisions of SFAS No. 123.  For the years ended March 29, 2003, March30, 2002 and March 31, 2001, had the Company recognized compensation expense inaccordance with Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation”, net earnings (loss) would have been($10,487,000), $2,938,000 and $8,715,000, respectively.

 

 

 

38

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**9.****                                     ****EMPLOYEE BENEFITS:**

 

                In 1993, theCompany adopted the HCC Savings and Investment Plan (the “Plan”) which coversall eligible full-time employees.  TheCompany established the Plan to meet the requirements of a qualified retirementplan pursuant to the provisions of Section 401(k) of the Internal Revenue Code.  The Plan provides participants theopportunity to make tax deferred contributions to a retirement trust account inamounts up to 15% of their gross wages. The Company has elected to make matching contributions in amounts thatmay change from year to year.  TheCompany contributed $543,000 (2003), $668,000 (2002), and $667,000 (2001) inmatching contributions to the Plan.

 

 

**10.          ENVIRONMENTALAND OTHER LIABILITIES:**

 

Environmental and other liabilities consist of thefollowing (in thousands):

 

|                        |   | **March 29,** |   | **March 30,** |   |
|-----------------------------|--------|---------------|--------|---------------|--------|
|                        |   | **2003**      |   | **2002**      |   |
|                        |   |          |   |          |   |
| Due to Selling Shareholders |   | $             | 991    |          | $      | 940 |   |
| Environmental  Liability    |   | 7,438         |   | 8,174         |   |
|                        |   |          |   |          |   |
|                        |   | $             | 8,429  |          | $      | 9,114 |   |

 

The due to Selling Shareholders represents interestearned to the benefit of the Selling Shareholders on the restricted cashaccount in accordance with the terms of the Recapitalization transaction inFebruary 1997.  Payment of thisliability is subject to the same limitations as the Restricted Cash.  (See Note 1).

 

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

 

                In fiscal 1997,the Company determined a cost estimate and accrued $10,000,000 for existingestimated environmental remediation and other related costs.  The time frame over which the Companyexpects to incur such costs varies with each site, ranging up to 30 years. Themost significant judgments and assumptions underlying the measurement of theenvironmental liability for the Avon site relate to the projected costs of theremediation, the effectiveness of the remediation technology on the sitegeology and the estimated time required for the remediation.  The most significant judgments andassumptions underlying the measurement of the environmental liability for theEl Monte Operable Unit are the determination of the extent (vertical andhorizontal migration of contaminants) of the contamination within the EMOU, the

 

 

 

 

39

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projected costs to complete the required remediation, the expectedtimeframe required to complete the remediation, the required standard of cleanup to be required by the regulatory agencies and the ultimate number andfinancial viability of the Potentially Responsible Parties.

 

                Currently at theAvon site, a remediation system has been installed and has been operational forseveral years.  Progress in theremediation is monitored regularly to assess the effectiveness of the systemand to provide a basis for periodic reporting to the Massachusetts Departmentof Environmental Protection.

 

                The EPA hasselected a remediation plan for the EMOU and has required the PRP’s to submit aplan.  The Company is currentlynegotiating with the EPA and other PRP’s to attempt to develop an operatingplan and financial allocation to share the cost of the required remediation.  There is no assurance that such negotiationswill be successful at reaching an agreement.

 

                As of March 29,2003, the accrual for estimated environmental costs was $7,438,000.  Actual expenditures for environmentalremediation were $736,000 (2003) $528,000 (2002) and $476,000 (2001).  The Company believes its accrual isadequate, but as the scope of its obligations becomes more clearly defined,this accrual may be modified and related charges against earnings may be made.

 

                Claims forrecovery of costs already incurred and future costs have been asserted againstvarious insurance companies.  TheCompany has neither recorded any asset nor reduced any liability inanticipation of recovery with respect to such claims made.

 

 

**11.          COMMITMENTSAND CONTINGENCIES**

 

                In August2002, the Company filed a lawsuit in California Superior Court against SpecialDevices, Inc. (“SDI”) alleging breach of contract.  The allegations primarily related to SDI’s failure to tenderpayment to the Company for shipments of parts the Company manufactured anddelivered and SDI’s breach of exclusivity requirements.  In June 2003, the Company settled thislawsuit with SDI.  Under the terms ofthe settlement SDI paid the Company $530,000 and certain mutual releasesrelated to the underlying claims of the litigation were executed.  When combined with earlier payments from SDIrelated to certain initial claims in the litigation, the aggregate recovery onthe lawsuit was approximately $800,000.

 

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

 

The Company currently maintains insurance coverage forproduct liability claims.  There can beno assurance that coverage under insurance policies will be adequate to coverany future product liability claims against the Company.  In addition, product liability insurancecoverage is expensive, difficult to maintain and may be unobtainable in thefuture on acceptable terms.

 

 

**12.          RELATED PARTY TRANSACTIONS:**

 

                The Company paysan annual management fee of $125,000 plus expenses to Windward Capital Partners(a member of the investor group).  Thetotal annual management fee and expenses paid to Windward Capital Partners was$143,000, $155,000, and $143,000 for the fiscal years ended March 29, 2003,March 30, 2002, and March 31, 2001, respectively.

 

 

 

40

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**13.          QUARTERLYFINANCIAL INFORMATION (UNAUDITED)**

 

|         |   | **First**                                  |   | **Second**  |   | **Third**   |   | **Fourth**  |   |
|--------------|--------|--------------------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
|         |   | **Quarter**                                |   | **Quarter** |   | **Quarter** |   | **Quarter** |   |
|         |   | **(In  thousands, except per share data)** |   |
|         |   |                                       |   |        |   |        |   |        |   |
| 2003         |   |                                       |   |        |   |        |   |        |   |
| Net sales    |   | $                                          | 10,591 |        | $      | 10,004      |   | $           | 9,678  |   | $ | 10,814 |   |
| Gross profit |   | 1,994                                      |   | 1,927       |   | 1,878       |   | 2,208       |   |
| Net Loss     |   | (1,121                                     | )      | (5,319      | )      | (1,263      | )      | (2,761      | )      |
|         |   |                                       |   |        |   |        |   |        |   |
| 2002         |   |                                       |   |        |   |        |   |        |   |
| Net sales    |   | $                                          | 18,790 |        | $      | 18,358      |   | $           | 14,394 |   | $ | 12,665 |   |
| Gross profit |   | 6,207                                      |   | 6,039       |   | 4,555       |   | 4,128       |   |
| Net Income   |   | 1,140                                      |   | 1,150       |   | 543         |   | 353         |   |
|         |   |                                       |   |        |   |        |   |        |   |
| 2001         |   |                                       |   |        |   |        |   |        |   |
| Net sales    |   | $                                          | 18,517 |        | $      | 20,211      |   | $           | 21,158 |   | $ | 20,653 |   |
| Gross profit |   | 6,157                                      |   | 7,252       |   | 7,129       |   | 6,596       |   |
| Net Income   |   | 914                                        |   | 4,622       |   | 1,488       |   | 1,925       |   |

 

 

 

 

41

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**SCHEDULEII****- VALUATION AND QUALIFYING ACCOUNTS**

**(In thousands)**

 

 
|                             |   |          |   | **Additions—** |   |                 |   |        |   |
|----------------------------------|--------|---------------|--------|---------------------|--------|----------------------|--------|-------------|--------|
|                             |   | **Balance**   |   | **Charged**         |   | **Deductions—** |   |        |   |
|                             |   | **at**        |   | **to Costs**        |   | **Uncollectible**    |   | **Balance** |   |
|                             |   | **Beginning** |   | **and**             |   | **Accounts**         |   | **at End**  |   |
|                             |   | **of Year**   |   | **Expenses**        |   | **Write Offs**       |   | **of Year** |   |
|                             |   |          |   |                |   |                 |   |        |   |
| **2003**                         |   |          |   |                |   |                 |   |        |   |
| Allowance for  doubtful accounts |   | $             | 70     |                | $      | 8                    |   | $           | 8      |   | $ | 70 |   |
|                             |   |          |   |                |   |                 |   |        |   |
| Tax Valuation  Allowance         |   | $             | — |                | $      | 1,759                |   | $           | — |   | $ | 1,759 |   |
|                             |   |          |   |                |   |                 |   |        |   |
| **2002**                         |   |          |   |                |   |                 |   |        |   |
| Allowance for  doubtful accounts |   | $             | 61     |                | $      | 40                   |   | $           | 31     |   | $ | 70 |   |
|                             |   |          |   |                |   |                 |   |        |   |
| **2001**                         |   |          |   |                |   |                 |   |        |   |
| Allowance for  doubtful accounts |   | $             | 51     |                | $      | 81                   |   | $           | 71     |   | $ | 61 |   |
|                             |   |          |   |                |   |                 |   |        |   |

 

 

**Item9  — Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure**

 

None

 

42

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**PART III**

 

**Item10  —  Directors and Executive Officers for the Registrant**

 

**Management**

 

                The followingtable sets forth certain information concerning the directors and executiveofficers of the Company.  Each directoris elected for a one (1) year term or until such person’s successor is dulyelected and qualified.

 
| **Name**               |   | **Age** |   | **Position**                                                 |   |
|------------------------|--------|---------|--------|--------------------------------------------------------------|--------|
| Richard Ferraid        |   | 47      |   | Director, Chairman, President and CEO of HCC                 |   |
| Christopher H. Bateman |   | 51      |   | Director, Vice President and Chief Financial Officer  of HCC |   |
| D. Thomas Divird       |   | 61      |   | Director of HCC                                              |   |
| Andy Goldfarb          |   | 55      |   | Director of HCC                                              |   |
| John M. Leonis         |   | 69      |   | Director of HCC                                              |   |
| Robert H. Rau          |   | 66      |   | Director of HCC                                              |   |
| Thomas J. Sikorski     |   | 42      |   | Director of HCC                                              |   |
| Gary L. Swenson        |   | 65      |   | Director of HCC                                              |   |

 

 

                Mr.Ferraid joined the Company in 1992 and currently serves as the Chairman,President and Chief Executive Officer of HCC. Prior to becoming the President and CEO of HCC in March 2000, he servedin various capacities including President of Glasseal from 1994-2000.  Mr. Ferraid became a director of the Companyin February 1997 following the consummation of the Recapitalization.  Mr. Ferraid previously worked at ElectricalIndustries, a competitor of the Company. Mr. Ferraid has over 20 years of experience in the GTMS industry.

 

                Mr. Bateman joined the Company in 1986 and has servedin various capacities.  He currentlyserves as Vice President, Secretary and Chief Financial Officer of HCC.  Mr. Bateman has been a director of theCompany since 1989.  Prior to joiningHCC, Mr. Bateman worked for Touche Ross & Co. from 1978 through 1986.  He currently serves as Chairman of the Boardof Directors of Methodist Hospital Foundation, a non-profit foundation.

 

                Mr.Divird was elected a director of HCC in May 2003.  Currently, Mr. Divird is Chairman and Chief Executive Officer ofPressure Systems, Inc.  Previously, Mr.Divird served as CEO of Coating Technologies International, Inc. from March1996 to April 1999.  During the priorfive years, Mr. Divird served as a general management and financial consultantwith several firms including the position of interim CEO at Meyer Sound Systemsand interim CFO at U. S. Leisure, Inc. From 1981 to 1990, Mr. Divird held the position of CFO at HexcelCorporation.  Mr. Divird currentlyserves on the Board of Directors of two other companies — Pressure Systems,Inc. and VBS Industries, Inc.  Mr.Divird holds a BS degree in Industrial Engineering from California StatePolytechnic University, San Luis Obispo, CA.

 

                Mr.Goldfarb retired as Chairman, Chief Executive Officer and President of HCC inJanuary 2000 after having served in various capacities since 1976.  Mr. Goldfarb has been a director of theCompany since 1979 and continues to serve the Company in that role.  He currently serves on the Board ofDirectors of Safety Components International.

 

                Mr.Leonis was elected a director of HCC in July 1997.  Mr. Leonis retired as Chairman of the Board of Directors ofLitton Industries, Inc. in April 1999. Mr. Leonis worked at Litton Industries in various capacities for over 36years.

 

                Mr.Rau was elected a director of HCC in July 1998.  Mr. Rau retired December 31, 1998 as President of theAerostructures Group of The Goodrich Company. Prior to its merger with Goodrich, Mr. Rau was President and ChiefExecutive Officer of Rohr, Inc. from 1993 to 1997.  Before joining Rohr, he was an Executive Vice President of ParkerHannifin Corporation and President of its Aerospace Sector.  In addition, Mr. Rau is a past member of theBoard of Governors of the Aerospace Industries Association, a past Chairman ofthe General Aviation Manufacturers Association, a member of the Board ofDirectors of Goodrich Aerospace Europe, Innovative Solutions and Support Corp.,and Chairman of the International Advisory Panel of Singapore Aerospace.

 

43

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                Mr.Sikorski was elected a director of HCC in February 1997 following theconsummation of the Recapitalization. Mr. Sikorski is currently a Managing Director of First ReserveCorporation.  Mr. Sikorski had been aManaging Director of Windward Capital Partners, L.P. since its founding in 1994until May 2002.  Prior to joiningWindward Capital Partners, L.P., Mr. Sikorski was Director of MetLife PrivateEquity Investments from 1992 to 1994 and prior to that was a Vice President inthe Leveraged Buyout Group at the First Boston Corporation from 1986 to 1992.  Mr. Sikorski currently serves on the Boardof Directors of Aquilex Services, Inc., Palace Entertainment, Inc. and QuantaServices, Inc.  Mr. Sikorski holds anundergraduate degree Magna Cum Laude from Harvard College and an MBA from theStanford Business School.  Mr. Sikorskiis Mr. Swenson’s son-in-law.

 

                Mr.Swenson was elected a director of HCC in February 1997 following theconsummation of the Recapitalization. Mr. Swenson has been President and Senior Managing Director of WindwardCapital Partners, L.P. since it’s founding in 1994, and was a Managing Directorof CS First Boston Corporation from 1974 to 1994.  Mr. Swenson currently serves on the Board of Directors ofMeridian Automotive Systems, Inc.  Mr.Swenson is Mr. Sikorski’s father-in-law.

 

 

**Item11  — Executive Compensation**

 

                Thefollowing table sets forth the total value of compensation received by theChief Executive Officer and the two most highly compensated executive officers,other than the Chief Executive Officer, who served as executive officers of theCompany as of March 29, 2003, (collectively with the Chief Executive Officer,the “Named Executive Officers”) for services rendered in all capacities to theCompany for the year ended March 29, 2003.

 

**Summary Compensation Table (1)**

 
| **Name and  Principal Position**   |   | **Fiscal**

**Year** |   |   |    |   |   | **Long-Term**

**Compensation -**

**Number of**

**Securities**

**Underlying**

**Options** |   | **All Other**

**Compensation(2)** |   |
|------------------------------------|--------|----------------------|--------|--------|---------|--------|--------|----------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                               |   |                 |
|                               |   |                 |
|                               |   |                 |
| **Annual  Compensation**           |
| **Salary**                         |   | **Bonus**            |
|                               |   |                 |   |   |    |   |   |                                                                                               |   |                               |   |
| Richard Ferraid                    |   | 2003                 |   | $      | 364,000 |   | $      | 109,679                                                                                            |   | $                                  | 17,000 |   | $ | 18,360 |   |
| Chairman, Chief  Executive Officer |   | 2002                 |   | $      | 364,000 |   | $      | 497,546                                                                                            | (4)    | $                                  | 17,000 |   | $ | 16,160 |   |
| and President                      |   | 2001                 |   | $      | 350,000 |   | $      | 526,968                                                                                            | (3)    | $                                  | 17,000 |   | $ | 14,790 |   |
|                               |   |                 |   |   |    |   |   |                                                                                               |   |                               |   |
| Christopher  Bateman               |   | 2003                 |   | $      | 220,480 |   | $      | 66,434                                                                                             |   | —                             |   | $ | 18,552 |   |
| Chief Financial  Officer and       |   | 2002                 |   | $      | 220,480 |   | $      | 340,135                                                                                            | (4)    | —                             |   | $ | 16,160 |   |
| Vice President                     |   | 2001                 |   | $      | 212,496 |   | $      | 476,968                                                                                            | (3)    | —                             |   | $ | 15,360 |   |
|                               |   |                 |   |   |    |   |   |                                                                                               |   |                               |   |
| Dennis Moore                       |   | 2003                 |   | $      | 124,415 |   | $      | 37,488                                                                                             |   | —                             |   | $ | 19,026 |   |
| Vice President                     |   | 2002                 |   | $      | 124,415 |   | $      | 187,542                                                                                            | (4)    | —                             |   | $ | 16,826 |   |
|                               |   | 2001                 |   | $      | 119,910 |   | $      | 257,858                                                                                            | (3)    | —                             |   | $ | 15,922 |   |
|                               |   |                 |   |   |    |   |   |                                                                                               |   |                               |   |
|                                    |        |                      |        |        |         |        |        |                                                                                                    |        |                                    |        |  |  |  |  |  |  |  |

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(1)          None of the executive officers has receivedperquisites the value of which exceeded the lesser of $50,000 or 10% of thesalary and bonus of such executive officer.

(2)          For 2003 all other compensation included the followingamounts: Mr. Ferraid, $9,000 for Company contributions into the Company’s401(k) plan, $9,000 for automobile allowance and $360 for allocated life insurance;Mr. Bateman, $9,000 for Company contributions into the Company’s 401(k) plan,$9,000 for automobile allowance and $552 for allocated life insurance; Mr.Moore, $9,000 of Company contributions into the Company’s 401(k) plan, $9,000for automobile allowance and $1,026 for allocated life insurance;

(3)          Includes payment of deferred compensation earned infiscal 1998 under the terms of the Contingent Bonus Plan as follows:  Mr. Ferraid $475,000; Mr. Bateman $425,000and Mr. Moore $228,537.

(4)          Includes payment of deferred compensation earned infiscal 1999 under the terms of the Contingent Bonus Plan as follows:  Mr. Ferraid $170,301; Mr. Bateman $141,918and Mr. Moore $75,690.

 

 

44

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**Grants of Stock Options**

 

                Optionson 3,000 shares were granted to Mr. Ferraid during the fiscal year ended March31, 2001.  These options vest at 1/3 peryear for calendar years 2001, 2002 and 2003. Options on 2,500 shares were granted to Mr. Ferraid during the fiscalyear ended April 1, 2000.  The optionsvest at 1/3 per year for fiscal years 2001, 2002 and 2003.  These options are not part of the OptionPlan as discussed below.

 

                The following table sets forthinformation concerning the value of unexercised options held by the NamedExecutive Officers.  The Named ExecutiveOfficers did not exercise any options during the fiscal year ended March 29,2003.

 
|                 |   | **Options  Outstanding at March 29, 2003** |   |
|----------------------|--------|--------------------------------------------|--------|
|                 |   | **Number of  Shares**                      |   | **Value of  Unexercised** |   |
|                 |   | **Under  Option -**                        |   | **Options -** |   |
|                 |   | **Exercisable/**                           |   | **Exercisable/** |   |
| **Name**             |   | **Unexercisable**                          |   | **Unexercisable(1)** |   |
|                 |   |                                       |   |   |   |
| Richard Ferraid      |   | 4,244 / 4,846                              |   | $ | 370,490/$- |   |
| Christopher  Bateman |   | 244 / 2,951                                |   | $ | - / $- |   |
| Dennis Moore         |   | 71/ 1,074                                  |   | $ | - / $- |   |

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(1)          There is no public market for the Company’s stock.   The fair market value of a share of CommonStock is assumed to be equal to the exercise price per share of the optionsthat were granted under the Option Plan ($370.49 per share).

 

**Employment Agreements**

 

                In March 2000, Richard Ferraidentered into an employment agreement with HCC (the “EmploymentAgreement”).  Pursuant to the EmploymentAgreement, Mr. Ferraid will be employed by HCC until March 31, 2004 providedthat HCC may terminate Mr. Ferraid by reason of disability, death or for goodcause (as defined in the Employment Agreement).  Upon termination by the Company for reasons other than death,disability or good cause, Mr. Ferraid will be entitled to receive salary andbenefits for a period of 24 months.  Theagreement provides for a base salary to be determined in accordance with HCC’spolicies and an annual bonus contingent on certain performance-basedcriteria.  Pursuant to the terms of theagreement, Mr. Ferraid, during the term of the Employment Agreement and a oneyear period thereafter, may not solicit customers of the Company, engage inbusiness with any competing entity or induce any other employee of the Companyto leave his or her employment with the Company.  On December 31, 2000, Mr. Ferraid’s employment agreement wasamended to reflect the additional stock options granted to him.

 

                Mr. Rau served as the ChiefExecutive Officer (CEO) of the Company from January 3, 2000 through March 8,2000 (when Mr. Ferraid was named CEO) and agreed to serve as the Non-ExecutiveChairman of the Company for a one year period ending December 31, 2000.  Mr. Rau’s compensation for the period was$450,000.  Mr. Rau was also given anoption to purchase 2,450 shares of HCC stock at a price of $50,000, whichpurchase was made in June 2000.

 

 

**Option Plan**

 

                In connection with theRecapitalization, HCC adopted the Option Plan which provides for the grant toemployees from time to time of non-qualified stock options to purchase up to anaggregate of 17,990 shares of Common Stock at exercise prices to be determinedby the Board of Directors.  The OptionPlan provides for the grant of management options to purchase 5,485 shares ofCommon Stock (the “Management Options”), management performance options topurchase 10,870 shares of Common Stock (the “Management Performance Options”),director options to non-affiliates of Windward to purchase 515 shares of CommonStock (the “Director Options”), and director performance options tonon-affiliates of Windward to purchase 1,120 shares of Common Stock (the“Director Performance Options”).  TheManagement Options and Director Options were granted subject to an EBITDA (asdefined in the Option Plan) vesting schedule that provides for 20% of eachseries of options to vest in each of fiscal year 1998 through fiscal year 2002if the Company attains a specified target for each such year.  The Options will also vest if certaincumulative EBITDA targets are achieved after certain multiple year periods or,so long as the Windward Group realizes specified rates of return on itsaggregate equity investment, upon a Change of Control (as defined in the OptionPlan).  In 

 

45

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addition,regardless of whether the performance criteria are achieved, all Optionsincluding, the performance-based Options, will vest automatically on theseventh anniversary of the date of grant. To date, only 20% of stock options related to the Management Options andDirector Options have vested.

 

                The Management PerformanceOptions and Director Performance Options were granted subject to a vestingschedule providing for approximately 50% of each series of options to vest upona Change of Control in which the Windward Group realizes a 30% compoundedannual rate of return on its aggregate equity investment in the Company and theremaining options vesting upon a Change of Control in which Windward Grouprealizes a 40% compounded annual rate of return on its aggregate equityinvestment in the Company.

 

                As of March 29, 2003, 15,815options have been granted under the Option Plan which entitle the holders topurchase upon vesting 15,815 shares of Common Stock at an exercise price of$370.49 per share.  An additional 2,175options may be granted under the Option Plan.

 

 

**Director Compensation**

 

                Each of Messrs. Leonis, Rau and Divirdreceive an annual fee of $20,000. Messrs. Leonis and Rau were granted 470 stock options each of which 150stock options each are subject to a vesting schedule that generally providesfor each option to vest 20% per year over five years (25% over four years forMr. Rau) commencing on the first anniversary of the date of grant if theCompany attains specified annual or cumulative earnings targets set forth inthe Option Plan and the remaining options vest upon a change in control inwhich the Windward Group realized specified annual rates of return on itsequity investment in the Company as defined in the Option Plan and consistentwith the terms of the management stock option plan.  All options automatically vest on the seventh anniversary of thedate of grant regardless of whether the performance criteria are achieved.  All options have an exercise price equal tothe fair value of the common stock at the date of grant ($370.49 per share).

 

**Compensation Committee Interlocks andInsider Participation**

 

                In fiscal 2003, the Company hadno compensation committee and compensation matters were handled either by Mr.Ferraid or by the Board of Directors.

 

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**Item12  — Security Ownership of Certain Beneficial Owners and Management**

 

                Thefollowing table lists all shares of HCC’s Common Stock as of March 29, 2003,beneficially owned by each director of HCC, each executive officer of HCC andeach person known by the Company to beneficially own more than 5% of such outstandingshares of Common Stock at such date. The table also reflects the percentage of the shares owned beneficiallyby all executive officers and directors of HCC as a group.  Share numbers and percentages in the tableare rounded to the nearest whole share. As of March 29, 2003 there were 137,945 shares of HCC Common Stockoutstanding.

 
| **Name and  Address**                                |   | **Number of  Shares of** |   |        |   |
|------------------------------------------------------|--------|--------------------------|--------|-------------|--------|
| **of  Beneficial Owners**                            |   | **Common  Stock***       |   | **Percent** |   |
|                                                 |   |                     |   |        |   |
| Windward/Park  HCC, L.L.C.(a)(b)                     |   | 53,836                   |   | 39.0        | %      |
| Windward/Merban,  L.P.(a)(b)                         |   | 10,767                   |   | 7.8         | %      |
| Windward/Merchant,  L.P.(a)(b)                       |   | 21,535                   |   | 15.6        | %      |
| Windward Capital  Associates, L.P.(a)(b)(c)          |   | 87,721                   |   | 63.6        | %      |
| Windward Capital  Associates, Inc.(b)(c)             |   | 87,721                   |   | 63.6        | %      |
| Gary  Swenson(b)(d)(e)                               |   | 87,721                   |   | 63.6        | %      |
| Thomas J.  Sikorski(b)(e)                            |   | —                   |   | **          |   |
| John M.  Leonis(h)                                   |   | 270                      |   | 0.2         | %      |
| Robert Rau(g)(h)                                     |   | 2,720                    |   | 2.0         | %      |
| Andrew  Goldfarb(h)(k)                               |   | 30,453                   |   | 22.1        | %      |
| Christopher  Bateman(h)(i)(j)                        |   | 9,173                    |   | 6.6         | %      |
| Richard  Ferraid(h)(j)                               |   | 3,558                    |   | 2.6         | %      |
|                                                 |   |                     |   |        |   |
| All directors  and executive officers of the Company |   |                     |   |        |   |
| as a group (7  persons)(j)(l)                        |   | 46,174                   |   | 33.5        | %      |

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*                 HCC’s common equity is divided into four separateclasses of Common stock, par value $.10 per share:  (i) Class A Common Stock with one vote per share, (ii) Class BCommon Stock with one vote per share, (iii) Class C Common Stock with no votingrights, except as required by applicable state law and (iv) Class D CommonStock with 10 votes per share.  Exceptfor voting rights, all the common equity of the Company have identical economicterms.  Other than Windward/Merban, L.P.and Windward/Merchant, L.P., all other stockholders of HCC own Class A CommonStock.  See note (a) below.

**          Less than 1.0%

 

(a)          Windward/Park HCC, L.L.C. owns 53,836 shares of ClassA Common Stock, Windward/Merban L.P. owns 6,451 shares of Class B Common Stockand 4,316 shares of Class C Common Stock, Windward/Merchant, L.P. owns 21,055shares of Class B Common Stock and 480 shares of Class D Common Stock andWindward Capital Associates, L.P. owns 1,583 shares of Class A CommonStock.  The Windward Group due to theircommon control may be deemed to beneficially own each other’s shares, but eachdisclaims such beneficial ownership. The Windward Group consists of Windward, Windward/Merchant, L.P., thepartners of which are Windward and an affiliate of Credit Suisse First BostonCorporation, Windward/Merban, L.P., the partners of which are Windward and anaffiliate of Credit Suisse First Boston Corporation and Windward/Park HCC, LLC,the members of which are Windward and MetLife. Pursuant to a set of program agreements, the Windward Group, along withcertain other entities, invests in merchant banking investments organized andmanaged by Windward and its affiliates. The program agreements govern the relationship among the Windward Groupand provide for, among other things, procedures for investments, allocations ofincome and loss, distributions of funds, transfers of interests between andamong the partners or members or third parties, provisions relating to theactivities of the general partner or manager, including in respect of fees,powers and limitations and removal by the other partners or members, andprocedures for the limited partners or non-managing members to exercise votingand management control of the investments. Windward and the other members of the Windward Group have reachedagreement concerning an early termination of the period during which they maymake future investments under their program agreements.  Windward and the other members have informedthe Company that such termination will not have any effect on their investmentin, or the management or control of, the Company.

 

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(b)         The business address for such person(s) is c/oWindward Capital Partners, L.P., 1177 Avenue of the Americas, 42nd Floor, NewYork, New York 10036.

(c)          Windward Capital Associates, L.P. may be deemed toshare beneficial ownership of the Common Stock owned of record by the WindwardGroup, by virtue of its status as the general partner of Windward/Merchant,L.P., Windward/Merban, L.P. and the Managing Member of Windward/Park HCC,L.L.C., but disclaims such beneficial ownership.  Windward Capital Associates, Inc. may be deemed to share beneficialownership of shares of Common Stock owned of record by the Windward Group byvirtue of its status as the general partner of Windward Capital Associates,L.P., but disclaims such beneficial ownership.

(d)         Mr. Swenson may be deemed to share beneficialownership of the shares of Common Stock owned of record by the Windward Group,by virtue of his status as the sole stockholder of Windward Capital Associates,Inc., the general partner of Windward Capital Associates, L.P.  Mr. Swenson disclaims such beneficialownership.  Windward Capital Associates,L.P. is the general partner of Windward/Merchant, L.P., Windward/Merban, L.P.and the Managing Member of Windward/Park HCC, L.L.C.

(e)        Messrs. Swenson and Sikorski are limited partners ofWindward Capital Associates, L.P.  Noneof Messrs. Swenson and Sikorski, in their capacities as limited partners ofWindward Capital Associates, L.P., has or shares voting or investment powerwith Windward Capital Associates, L.P. with respect to the Common Stock ownedby Windward Capital Associates, L.P.

(f)          Includes 270 shares of Common Stock owned by theLeonis Family 1989 Inter Vivos Family Trust dated March 6, 1989.

(g)       Includes 2,720 shares of Common Stock owned by the RauFamily Trust dated December 14, 1984.

(h)         The business address of such person(s) is c/o HCCIndustries, Inc., 4232 Temple City Blvd., Rosemead, CA  91770-1592.

(i)             Includes 9,173 shares of Common Stock owned by theBateman Rillorta Family Trust 2000 dated December 18, 2000.

(j)             Excludes outstanding options to purchase shares ofCommon Stock of which 244 and 4,244 are exercisable at March 29, 2003 for Mr.Bateman and Mr. Ferraid, respectively.

(k)          Includes 27,753 shares of Common Stock owned by theAndrew and Denise Goldfarb Revocable Trust of 1995.  Also includes 1,350 shares of Common Stock owned by the JessicaAnne Goldfarb Irrevocable Trust and the 1,350 shares of Common Stock owned bythe Rebecca Goldfarb Irrevocable Trust of which Mr. Goldfarb’s brother is thetrustee.  Mr. Goldfarb disclaimsbeneficial ownership of the shares of Common Stock owned by such trusts.

(l)             Excludes shares of Common Stock referred to in notes(d) and (e) above.

 

                         The following table sets forth, as of March 29, 2003,information as to all equity compensation plans of the Company includinginformation as to (a) the number of shares of Common Stock to be issued uponexercise of all outstanding options, warrants and rights, (b) the weightedaverage exercise price of all outstanding options, warrants and rights and (c)the number of shares of the Common Stock available for future issuance underequity compensation plans, other than shares to be issued upon exercise of alloutstanding options, warrants and rights. There are no equity compensation plans that have been approved by theCompany’s shareholders.  A descriptionof the Stock Option Plan is set forth in Item 11 — Executive Compensation.

 

 
| **Equity Compensation Plan  Information**                  |
|------------------------------------------------------------|
|                                                       |   | **(a)** |   | **(b)** |   | **(c)** |
| Plan Category                                              |   | Number of securities to be  issued upon exercise of outstanding options, warrants and rights. |   | Weighted-average exercise  price of outstanding options, warrants and rights. |   | Number of securities  remaining available for future issuance under equity compensation plans  (excluding securities reflected in column (a). |
| Equity compensation plans approved by security holders.    |   | 0 |   | 0 |   | 0 |
| Equity compensation plans not approved by security holders |   | 21,315 |   | $466.09 |   | 2,175 |

 

 

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**Item13  —   Certain Relationships and RelatedTransactions**

 

                The Company paysan annual management fee of $125,000 plus expenses to Windward Capital Partners(a member of the investor group).  Thetotal annual management fee and expenses paid to Windward Capital Partners was$143.000, $155,000 and $143,000 for the fiscal years ended March 29, 2003, March30, 2002 and March 31, 2001, respectively.

 

**Item14  —   Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**.

 

**               **The Company’s ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the Company’s disclosure controls and procedures (as such term is defined inRules 13A-14 (c) and 15d-14(c) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”) as of a date within 90 days prior to the filingdate of this annual report (the “Evaluation Date”).  Based on such evaluation, such officers have concluded that, asof the Evaluation Date, the Company’s disclosure controls and procedures areeffective in alerting them on a timely basis to material information relatingto the Company (including its consolidated subsidiaries) required to beincluded in the Company’s reports filed or submitted under the Exchange Act.

 

**Changesin Internal Controls**.

 

                 Since theEvaluation Date, there have not been any significant changes in the Company’sinternal controls or in other factors that could significantly affect suchcontrols.

 

 

 

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**PARTIV**

 

 

**Item 15****  —  Exhibits, Financial Statement Schedules, andReports on Form 8-K**

 

The following documents are filed as part of thisreport:

 

**(a)(1)      Financial Statements**

 

Report ofIndependent Auditors

 

Consolidated Balance Sheetsat March 29, 2003 and March 30, 2002

 

ConsolidatedStatements of Operations for each of the three years ended

March 29, 2003,March 30, 2002 and March 31, 2001.

 

ConsolidatedStatements of Stockholders’ Equity for each of the three years

March29, 2003, March 30, 2002 and March 31, 2001.

 

ConsolidatedStatements of Cash Flows for each of the three years ended

March 29, 2003,March 30, 2002 and March 31, 2001.

 

Notes toFinancial Statements

 

**(a)(2)      Financial Statement Schedules**

 

ScheduleII - Valuation and Qualifying Accounts

 

All other schedules for which provision is made in theapplicable accounting regulations of the Securities and Exchange Commission arenot required under the applicable instructions or the required information isincluded in the Consolidated Financial Statements and Notes thereto, or theyare inapplicable and are therefore omitted.

 

The guarantee obligations of the Subsidiary Guarantors(which are all direct or indirect wholly owned subsidiaries of the Company) arefull, unconditional and joint and several. The aggregate assets, liabilities, earnings, and equity of theSubsidiary Guarantors are substantially equivalent to the total assets,liabilities, earnings and equity of HCC Industries Inc. and its subsidiaries ona consolidated basis.  Separatefinancial statements of the Subsidiary Guarantors are not included in this Form10-K because management of the Company has determined that separate financialstatements of the Subsidiary Guarantors would not be material to investors.

 

**(a)(3)****                  ****Exhibits**

 

Regulation S-K Exhibit

Table Reference

 

2.                                       **Plan of Acquisition, Reorganization, Arrangement, Liquidationor Succession.**

 

2.1                               First Amendment and Restatement of theStock Purchase and Sale Agreement, dated as of December 23, 1996, by and amongthe Company, the Windward Group, MetLife and the

Sellers named therein.(1)

 

 

2.3                                 Escrow Agreement, dated as of February14, 1997, by and among the Company, Windward Capital Associates L.P., theSellers named therein and U. S. Trust Company of California, N.A., as escrowagent.(1)

 

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3.                                       **Certificate of Incorporation and By-Laws.**

 

3.1                                 Amended and Restated Certificate ofIncorporation of the Company.(1)

 

3.2                                 Amended and Restated By-Laws of theCompany.(1)

 

3.3                                 Certificate of Incorporation of HermeticSeal Corporation.(1)

 

3.4                                 By-Laws of Hermetic Seal Corporation.(1)

 

3.5                                 Certificate of Incorporation of GlassealProducts, Inc.(1)

 

3.6                                 By-Laws of Glasseal Products, Inc.(1)

 

3.7                                 Certificate of Incorporation of Sealtron,Inc.(1)

 

3.8                                 By-Laws of Sealtron, Inc.(1)

 

3.9                                 Certificate of Incorporation of SealtronAcquisition Corp.(1)

 

3.10                           By-Laws of Sealtron Acquisition Corp.(1)

 

3.11                           Articles of Incorporation of HCCIndustries International.(1)

 

3.12                           By-Laws of HCC IndustriesInternational.(1)

 

3.13                           Declaration of Trust of Norfolk AvonRealty Trust.(1)

 

3.14                           Certificate of Incorporation of HCC MachiningCompany, Inc.(4)

 

3.15                           By-Laws of HCC Machining Company, Inc.(4)

 

4.                                       **Instruments Defining the Right of Security Holders, includingIndentures.**

 

4.1                                 Indenture, dated as of May 6, 1997 (the“Indenture”), among the Company, the Subsidiary Guarantors and IBJ SchroderBank & Trust Company, as Trustee, relating to the 103⁄4% Senior SubordinatedNotes due 2007 and the 103⁄4% Senior Subordinated Exchange Notes due 2007.(1)

 

4.2                               Form of 103⁄4% Senior Subordinated ExchangeNotes due 2007.(1)

 

4.4                                 First Supplemental Indenture, dated as ofOctober 24, 1997, to the Indenture.(1)

 

9.                                       **Voting Trust Agreement**

 

9.1                                 Stockholders Agreement, dated as ofFebruary 14, 1997, by and among the Company, the

        Windward Group and the Stockholders named therein.(1)

 

9.1.1                        Amended and Restated StockholdersAgreement, dated February 14, 1997 and amended as of September 12, 2000, by andamong the Company, the Windward Group and the Stockholders named therein.

 

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10.                                 **Material Contracts.**

 

 

10.3                           HCC Industries Inc. Stock Option Plan,dated February 14, 1997.(1)

 

10.4         Form of Stock Option Agreement(included in Exhibit 10.3).(1)

 

10.8.1                  Employment Agreement dated as of April 3, 2000 by andbetween the Company and Christopher H. Bateman(2)

 

10.9.2                  Amended and Restated Employment Agreement dated as ofDecember 31, 2000, by and between the Company and Richard L. Ferraid.(3)

 

10.10                     Financial Advisory Services Agreement, dated as ofFebruary 14, 1997, by and between Windward Capital Partners, L.P. and theCompany.(1)

 

10.11                     Letter Agreement, dated February 14, 1997 from theCompany to Windward Capital Partners, L.P., related to fees.(1)

 

10.12                     Credit Agreement dated as of June 18, 2003, betweenHCC Industries Inc. and CIT Business Credit.

 

12.                                 **Ratio of Earnings to Fixed Charges.**

 

12.1                           Statement regarding the computation ofratio of earnings to fixed charges for the Company.

 

21.                                 **Subsidiaries**

 

21.1                           Subsidiaries of the Company.(1)

 

99.1                           Certification of Chief Executive Officerand Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

____________

(1)        Previously filed under the same exhibit number as anexhibit to Registration Statement on Form S-4 (File No. 333-32207) and incorporatedherein by reference.

 

(2)        Previously filed under the same exhibit number as anexhibit to the Company’s Annual Report on Form 10-K for the fiscal year endedApril 1, 2000 and incorporated herein by reference.

 

(3)        Previously filed under the same exhibit number as anexhibit to the Company’s Annual Report on Form 10-K for the fiscal year endedMarch 31, 2001 and incorporated herein by reference.

 

(4)        Previously filed under the same exhibit number as anexhibit to the Company’s Annual Report on Form 10-K for the fiscal year endedMarch 30, 2002 and incorporated herein by reference.

 

 

**(a)(4)****                  ****Reports on Form 8-K**

 

None

 

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**SIGNATURES**

 

                Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, in the city of Rosemead, State ofCalifornia, on June 23, 2003.

 

                                                                                                HCCINDUSTRIES INC.

 

 

                                                                                                By:     /s/     Richard L. Ferraid      

                                                                                                                       Richard L. Ferraid

                                                                                                          President and Chief ExecutiveOfficer

 

 

                Pursuant to therequirements of the Securities Act of 1934, this report has been signed belowby the following persons in the capacities and on the dates indicated.

 

 
| Signature                   |   | Title                            |   | Date          |
|-----------------------------|--------|----------------------------------|--------|---------------|
|                        |   |                             |   |          |
| /s/ Richard L. Ferraid      |   | Chairman, President and  Chief   |   | June 23, 2003 |
| Richard L. Ferraid          |   | Executive Officer                |   |          |
|                        |   | (Principal Executive  Officer)   |   |          |
|                        |   |                             |   |          |
| /s/ Christopher H.  Bateman |   | Director, Vice  President and    |   | June 23, 2003 |
| Christopher H. Bateman      |   | Chief Financial Officer          |   |          |
|                        |   | (Principal  Financial/Accounting |   |          |
|                        |   | Officer)                         |   |          |
|                        |   |                             |   |          |
| /s/ D. Thomas Divird        |   | Director                         |   | June 23, 2003 |
| D. Thomas Divird            |   |                             |   |          |
|                        |   |                             |   |          |
|                        |   | Director                         |   | June 23, 2003 |
| Andrew Goldfarb             |   |                             |   |          |
|                        |   |                             |   |          |
| /s/ John M. Leonis          |   | Director                         |   | June 23, 2003 |
| John M. Leonis              |   |                             |   |          |
|                        |   |                             |   |          |
| /s/ Robert H. Rau           |   | Director                         |   | June 23, 2003 |
| Robert H. Rau               |   |                             |   |          |
|                        |   |                             |   |          |
| /s/ Thomas J. Sikorski      |   | Director                         |   | June 23, 2003 |
| Thomas J. Sikorski          |   |                             |   |          |
|                        |   |                             |   |          |
| /s/ Gary L. Swenson         |   | Director                         |   | June 23, 2003 |
| Gary L. Swenson             |   |                             |   |          |

 

 

 

53

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**CERTIFICATION**

 

I, Richard L. Ferraid, President and Chief ExecutiveOfficer of HCC Industries Inc. certify that:

 

1.               I have reviewed this Annual Report on Form 10-K of HCCIndustries Inc.;

 

2.               Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.               Based on my knowledge, the financial statements, andother financial information included in this annual report, fairly present inall material respects the financial condition, results of operations and cashflows of the registrant as of, and for, the periods presented in this annualreport;

 

4.               The registrant’s other certifying officer and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)              Designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b)             Evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

c)              Presented in this annual report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

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

 

a)              All significant deficiencies in the design or operationof internal controls which could adversely affect the registrant’s ability torecord, process, summarize and report financial data and have identified forthe registrant’s auditors any material weaknesses in internal controls; and

 

b)             Any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.               The registrant’s other certifying officer and I haveindicated in this annual report whether or not there were significant changesin internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

 

                        
| Date:  June  23, 2003 | /s/    | Richard L. Ferraid      |
|----------------------------|--------|-------------------------|
|                       | Name:  | Richard L. Ferraid      |
|                       | Title: | Chief Executive Officer |

 

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**CERTIFICATION**

 

I, Christopher H. Bateman, Chief Financial Officer ofHCC Industries Inc. certify that:

 

1.               I have reviewed this Annual Report on Form 10-K of HCCIndustries Inc.;

 

2.               Based on my knowledge, this annual report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.               Based on my knowledge, the financial statements, andother financial information included in this annual report, fairly present inall material respects the financial condition, results of operations and cashflows of the registrant as of, and for, the periods presented in this annualreport;

 

4.               The registrant’s other certifying officer and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)              Designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b)             Evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

c)              Presented in this annual report our conclusions aboutthe effectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

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

 

a)              All significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)             Any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.               The registrant’s other certifying officer and I haveindicated in this annual report whether or not there were significant changesin internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

 
| Date:  June  23, 2003 | /s/    | Christopher H. Bateman  |
|----------------------------|--------|-------------------------|
|                       | Name:  | Christopher H. Bateman  |
|                       | Title: | Chief Financial Officer |

 

 

 

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