** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-K**

 

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| **ý** | **ANNUAL REPORT PURSUANT TO SECTION  13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)** |
|------------|-----------------------------------------------------------------------------------------------------------|

**For the fiscal year ended:  March 30, 2002**

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)** |
|-------|---------------------------------------------------------------------------------------------------------------|

**For the transition period from              to              **

**Commission file number: 333-32207**

 

**HCC INDUSTRIES INC.**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                   |   | **95-2691666**                       |
|----------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer Identification No.) |
|                                                           |   |                                 |
| **4232 Temple City Blvd., Rosemead,  California 91770**        |
| (Address of principal executive offices)                       |
|                                                           |   |                                 |
|                                                           |   |                                 |
| **(626) 443-8933**                                             |
| (Registrant’s telephone number, including area code)      |

 

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Securities registered pursuant to Section 12 (b) of the Act:

 

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

 

Securities registered pursuant to Section 12 (g) of the Act:

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

 

Indicate by check mark whetherthe registrant:  (1) has filed allreports required to be filed by Section 13 or 15 (d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days.   Yes ý    No o

 

Registrant’s Common Stock,outstanding at March 30, 2002 was 137,945 shares.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Documents referenced on Exhibits Index, which begins on page 45

 

 

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**HCCINDUSTRIES INC.**

 

**INDEXTO ANNUAL REPORT ON FORM 10-K**

 
|           |     |   | **Caption**                                                                                 |
|----------------|----------|--------|---------------------------------------------------------------------------------------------|
|           |     |   |                                                                                        |
| **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                                             |
|           |     |   |                                                                                        |
| **PART IV**    |
|           |     |   |                                                                                        |
|           | Item 14. | -      | EXHIBITS, FINANCIAL STATEMENT SCHEDULES,  AND REPORTS ON FORM 8-K                           |
|           |     |   |                                                                                        |
| **SIGNATURES** |

 

2

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**PART I**

 

**Item1 - Business**

 

**General**

 

Except wherethe context indicates otherwise, the term “Company” means HCC Industries Inc.and its 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 Companywas incorporated in Delaware in 1985 and is one of the largest custommanufacturers of high precision hermetically sealed electronic connectiondevices in the United States.  Highprecision hermetic seals are used primarily to permit the flow of electricityacross a barrier used to separate different atmospheric media (such as gas orliquid to air or vacuum) existing on opposite sides of the barrier.  A hermetic seal is generally accomplishedthrough the creation of a glass-to-metal seal (“GTMS”). The hermetic sealsmanufactured by the Company generally fall into four categories - terminals,headers, connectors and microelectronics packages.  A “terminal” is a device characterized by having only a singlecontact pin, while a “header” has multiple contact pins inserted in aframe.  A “connector” is a type ofterminal or header which can be mechanically coupled to or uncoupled fromanother connection.  A “microelectronicpackage” is a container for thick and thin film substrates onto which hybridcircuitry has been etched.  The Companyoperates in the premium segment of the market by providing high precision GTMS,custom designed to meet specific customer requirements.  Each GTMS generally consists of a metal bodyor housing, metal contact pins, and an insulator fabricated from glass, ceramicor glass/ceramic mixtures.  GTMS rangein size from a two foot long, eight inch diameter cylindrical connectorutilized for through-hull communication links for nuclear submarines, to a40/1000 inch outside diameter (12/1000 inch inside diameter) implant to measurepressure in the heart chamber.

 

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, forexample, temperature and pressure transducers, infrared detectioninstrumentation, electro-optical devices and fuel injection monitoringdevices); (4) medical electronics (for use in, for example, pacemakers, kidneydialysis machines and devices for monitoring vital life signs); (5)telecommunications (for use in, for example, fiber optics); and (6) energy (foruse in, for example, oil drilling equipment and downhole logginginstrumentation and for conventional and nuclear electric power generatingplants).

 

The demand forthe Company’s products is largely dependent on the telecommunication,automotive and aerospace industries. Sales to the Company’s largest customer accounted for approximately 23%of consolidated sales for the fiscal year ended March 30, 2002.  The Company stopped selling products to thiscustomer in March 2002.  Sales to theCompany’s ten largest customers accounted for approximately 43% of consolidatedsales during the 2002 fiscal year. Approximately 70% of the Company’s consolidated sales for fiscal 2002were 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.

 

3

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**Competitive Strengths**

 

The Companybelieves that it has the following competitive strengths:

 

*Long-Term Customer Relationships.*  Many of the Company’s customers have beencustomers for over twenty years.  TheCompany believes that both automotive and aerospace OEMs continue to seeklong-term partnerships with fewer core suppliers.  The Company’s relationships are strengthened by the fact thatmany of its arrangements with its customers provide for the Company to act asthe sole source of supply for the customer. The Company estimates that approximately 70% of the Company’sconsolidated sales for fiscal year 2002 were from contractual agreements, solesource relationships, letters of intent or long-term purchase orders.

 

*Market Leadership*.  A number of the Company’s products holdleading market positions in their respective niche markets.  The Company focuses on high margin customproducts in a highly fragmented supplier base.

 

*Commitment to Quality and Service.*  The Company believes that its commitment toprovide consistent, high quality products and services and flexiblemanufacturing and custom designed products at competitive prices, forms thebasis for its strong and diversified customer relationships.  The Company manufactures most of its partsto specific customer requirements.  TheCompany utilizes Statistical Process Control, Design Failure Mode EffectsAnalysis, Process Failure Mode Analysis, and a strict adherence to completemanufacturing documentation in order to manufacture high quality products forinternal use as well as external customer sales.  The Company’s four operating subsidiaries are registered to ISO9001.

 

*Proprietary Technology.*  The Company operates in the automotive,aerospace and general industrial technologies markets in which productstypically require sophisticated engineering and production techniques.  The Company designs and manufactures new productsto fulfill customer needs, and has developed proprietary manufacturingtechnology since its founding in 1945. The Company believes that this proprietary technology helps enable it toattract and retain customers who require customized, high toleranceproducts.  The Company estimates that ithas produced over 75,000 different variations of GTMS.

 

*Low Cost Operations.*  The Company believes that its extensive  “in-house” capabilities and verticalintegration are competitive advantages that have allowed it to become a lowcost producer.  By controlling thetolerance of the component parts, the Company has been able to reduce scrap andto increase 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.

 

*Diverse Products and Customers.*  The Company has a diverse customer base,with sales of numerous product variations to approximately 1,000 customers infiscal 2002.  Over the past severalyears, the Company has recognized consistent long-term growth in sales of GTMSproducts to the telecommunication, automotive, aerospace and general industrialmarkets.

 

4

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**Business Strategy**

 

The Company’sstrategy is to expand its business through:

 

*Focusing on Core 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.

 

*Leveraging Customer Relationships.*  The Company works closely with its customersto jointly develop and design new products and to improve the performance andlower the cost of the Company’s customers’ products.  The Company has sole source supply contracts, shares productdevelopment, and enters into other teaming arrangements with its key customersto further strengthen and broaden its relationships.  The Company believes that this strategy, together with thesuccessful performance under existing contracts has led to additional long-termbusiness from key existing customers and new customers.

 

*Pursuing Selective Acquisitions.*  The Company intends to pursue selectiveacquisitions and to add products and capabilities that are complementary to itsexisting operations.  Priority isexpected to be given to acquiring businesses whose products can be manufacturedin the Company’s existing facilities (“fold-in” acquisitions).  The Company’s operations are characterizedby a relatively high level of operating leverage; therefore, such fold-inacquisitions should allow the Company to allocate costs across broadersynergistic product lines and represent additional volume through the Company’sexisting facilities which should provide opportunities to improveprofitability.

 

*Expanding Internationally.*  The Company is considering the expansion ofits operations in Europe.  The primarymotivation in a geographic expansion would most likely be to service the growthof its current customers’ operations as they expand their production operationsabroad.

 

**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 Companysells its products to five principal industries: (i) the telecommunicationindustry for use in optical networking components; (ii) the automotive partsindustry for use in airbag initiators, seat belt pretensioners, climate controldevices and anti-lock braking systems; (iii) the aerospace industry for useprimarily in commercial and military aviation and electronics; (iv) generalindustry for use primarily in process control, and other industrial and medicalapplications; and (v) the petrochemical industry, for use primarily in oil andgas downhole logging 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*

 

The Companyprovides 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.

 

*Commercial and Military Aviation andElectronics*

 

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.

 

*General and 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.

 

**Customers and Applications**

 

The Companyhas approximately 1,000 active customers. The Company’s ten largest customersaccounted for approximately 43% of net sales for fiscal year 2002.  The Company’s largest customer, SpecialDevices, Inc. (“SDI”) (a manufacturer of airbag initiators), representedapproximately 23% of consolidated sales for the fiscal year ended March 30,2002.  The Company stopped sellingproduct 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

 

6

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be able to ultimately regainits previous market share in these products. Approximately 70% of the Company’s consolidated sales for fiscal year2002 were to customers with which the Company had contractual agreements, solesource relationships, letters of intent or long-term purchase orders.  The Company only begins to manufactureproducts upon receipt of a purchase order.

 

The followingtable sets forth the Company’s principal end-user markets, certain applicationsfor its products and certain of the Company’s customers in fiscal year 2002.

 
| **End  Markets**                          |   | **Telecommunication**                                                      |   | **Automotive**                                                                                 |   | **Aerospace**                                                                                                      |   | **Industrial/Petrochemical**                                                                                 |
|-------------------------------------------|--------|----------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|
| Applications:                             |   | Optical  Switching  DWDM Transport  Optical Components Metro Access DWDM   |   | 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                                       |
|                                      |   |                                                                       |   |                                                                                           |   |                                                                                                               |   |                                                                                                         |
| Customers*:                               |   | Agere  W J Communications  MOEC  Codeon  Nortel  JDS Uniphase              |   | SDI  NCS Pyrotechnie  Keystone  Takata  Systron Donner  Lifesparc                              |   | Honeywell  Rosemount Aerospace  Hamilton Sundstrand  ITT Aerospace  Ametek Aerospace                               |   | Druck, Ltd.  Hawker Eternacel  Invensys  Schlumberger  Halliburton  Panametrics  Kemet                       |
|                                      |   |                                                                       |   |                                                                                           |   |                                                                                                               |   |                                                                                                         |
| Specific  example of product application: |   | Modulator                                                                  |   | Airbag  initiator                                                                              |   | Temperature  Sensors                                                                                               |   | High  pressure electrical bulkheads for downhole use (oil exploration)                                       |
|                                      |   |                                                                       |   |                                                                                           |   |                                                                                                               |   |                                                                                                         |
| What the  product does:                   |   | Optical  shutter to create binary code for laser transmission along fiber. |   | 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.                     |
|                                      |   |                                                                       |   |                                                                                           |   |                                                                                                               |   |                                                                                                         |
| Result:                                   |   | Higher speed  data transmission.                                           |   | 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. |

 

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*                                         Otherthan SDI, all of the customers listed represented individually less than 5% ofthe Company’s consolidated sales for fiscal year 2002.

 

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**Manufacturing Process**

 

A GTMS is madeby assembling three sets of component parts (metal contacts or pins, glassbead(s) and an outer metal housing or shell) on a graphite fixture.  This assembly is put through a controlled atmospherefurnace at approximately 1,800 degrees Fahrenheit until the glass becomesmolten.  The graphite fixture is used tohold 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 alsoenables the Company to respond very quickly to prototype and new productdevelopment opportunities.

 

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 andtherefore reduce the cost to the customer (value engineering).

 

The Companyhas made 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 50years 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.

 

**Marketing and 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 16Company-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.  Sales intothe EU accounted for approximately 12% (2002), 11% (2001), and 10% (2000), ofconsolidated sales by HCC.  Economic,political, governmental and regulatory conditions in such international marketscould adversely affect the Company’s ability to successfully enter or operatein such markets.  Therefore, noassurances can be given that the Company’s attempts to expand its business intosuch international markets will be successful. The Company currently has 8 independent regional manufacturers-salesrepresentatives spread geographically across North America and Europe.  These representatives, who do notexclusively sell the Company’s products, are remunerated on a commissionbasis.  The Company believes there is asignificant opportunity to increase its sales through expansion of its sales anddistribution efforts, both within the markets it currently serves and in newmarkets.

 

8

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**Competition**

 

The Companybelieves based upon internal analysis that most of the Company’s competitors inthe GTMS sector of the industry in which it competes are smaller and have lesstechnological and manufacturing expertise than the Company.  The Company believes that it occupies afavorable competitive position because of its experience in engineering andproduction techniques and also its extensive vertical integration.  Price has generally been a less significantcompetitive factor than the quality and design of the GTMS because their costtypically is a small percentage of the total cost of the end products in whichthey are used and because of the importance of the uses to which many of theCompany’s products are put.  Inaddition, products for airbag initiators are qualified for particular newautomotive 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 March30, 2002, the Company had a backlog of $25.2 million compared to $52.4 million asof March 31, 2001.  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 30,2002, the Company had approximately 575 employees, substantially all of whomwere located in the United States.  Noneof the Company’s employees are subject to a union contract. The Companyconsiders its relations with its employees to be excellent.

 

**Raw Materials**

 

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.

 

**Environmental Matters**

 

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

 

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failure to properly remedy suchproperty may adversely affect the market value of the property, as well as theowner’s ability to sell or lease the property. The Company has potential liability under environmental laws for theremediation of contamination at two of its facilities (see Item 3 for furtherdiscussion of environmental matters).

 

**Item2 - 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           |   |

 

**Item3 - Legal Proceedings**

 

**Environmental Matters**

 

*Rosemead, California*

 

*Regional Groundwater Contamination.*  A portion of the San Gabriel Valley in whichthe Rosemead facility is located was designated by the EPA as a federalSuperfund site in 1984.  The Company hasbeen named as a potentially responsible party (“PRP”) under CERCLA for the ElMonte Operable Unit.  If the Rosemeadfacility contributed to the regional contamination, such contribution is inconnection with alleged spills of 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 of 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 betweenthe Task Force and the EPA to undertake the balance of the remediation requiredconsistant with the record of decision will be executed by December 2002.

 

*On-site/Soil and Groundwater CleanupCosts. *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.

 

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The Companyhas installed 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 to remediatethe groundwater to acceptable levels, or if the operation of the system will bediscontinued and replaced with a regional groundwater remediation program.

 

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 fact that contaminants continue to move toward thewellfield, the levels at the well field remain within acceptable drinking waterstandards.

 

The Avonproperty is subject to Massachusetts “Chapter 21E,” the state’s hazardous sitecleanup program.  The property isclassified as a “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 tothis procedure, 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.

 

 

*Financial Impact*

 

Uncertainty asto (a) the extent to which the Company caused, if at all, the conditions beinginvestigated, (b) the extent of environmental contamination and risks, (c) theapplicability of changing and complex environmental laws (d) the number andfinancial viability of other PRP’s, (e) the stage of the investigation and/orremediation, (f) the unpredictability of investigation and/or remediation costs(including as to when they will be incurred), (g) applicable clean-upstandards, (h) the remediation (if any) that will ultimately be required, and(i) available technology make it difficult to assess the likelihood and scopeof further investigation or remediation activities or to estimate the futurecosts of such activities if undertaken. In addition, liability under CERCLA is joint and several, and anypotential inability of other PRP’s to pay their pro rata share of theenvironmental remediation costs may result in the Company being required to bearcosts in excess of its pro rata share.

 

In fiscal1997, the Company with the help of independent consultants, determined a costestimate and accrued $10,000,000 for existing estimated environmentalremediation and other related costs. The time frame over which the Company expects to incur such costs varieswith each site, ranging up to 20 years. This estimate is based on progress madein determining the magnitude of such costs, experience gained from

 

11

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sites on which remediation isongoing or has been completed, and the timing and extent of remedial actionsrequired by the applicable governmental authorities.

 

As of March30, 2002, the accrual for estimated environmental costs was $8,174,000.  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.

 

 

**Other**

 

On March 3,1998, Walter Neubauer, a former stockholder of the Company and a currentstockholder of SDI, filed a lawsuit in California Superior Court (CaseBC186937; Walter Neubauer vs. Andrew Goldfarb, et. al.) against the Company andcertain other stockholders alleging (i) breach of fiduciary duty, (ii) fraud,(iii) negligent misrepresentation, (iv) negligence, (v) violations ofcorporations code and (vi) breach of contract. The allegations primarily relate to the Company’s exercise of an optionto acquire Mr. Neubauer’s stock in August 1996.  In September 1999, five of the six claims were dismissed upon asummary judgment motion made by the Company, including all of the claimsagainst the Company.  The remainingclaim against Andrew Goldfarb, the former Chief Executive Officer, was settledin December 2001.

 

On May 7, 1998,the Company filed a lawsuit against Mr. Neubauer in California Superior Courtalleging (i) breach of contract, (ii) intentional interference with businessrelations and (iii) interference with prospective business advantage.  All allegations relate to violations of thenoncompetition agreement executed by Mr. Neubauer in August 1996.  In October 2001, the Company entered into asettlement agreement with Mr. Neubauer to resolve these claims as well as anyresidual claims against the Company from the litigation discussed above.

 

In addition tothe above, the Company is involved in other claims and litigation arising inthe normal course of business.  Based onthe advice of counsel and in the opinion of management, the ultimate resolutionof these matters will not have a significant effect on the financial positionor the results of operations of the Company.

 

The Companycurrently maintains insurance coverage for product liability claims.  There can be no assurance that coverageunder insurance policies will be adequate to cover any future product liabilityclaims against the Company.  Inaddition, product liability insurance coverage is expensive, difficult tomaintain and may be unobtainable in the future on acceptable terms.

 

 

**Indemnification**

 

Pursuant to theterms of a recapitalization in early 1997, the selling stockholders agreed toindemnify the Company with respect to the after-tax costs of contingentliabilities, subject to a cap for all indemnified liabilities of $30 million.  In February 1997, a $6.0 million interestbearing escrow account was established by the selling stockholders (the“Deferred Amount”) to secure indemnity claims of the Company.  Although there can be no assurances, theCompany believes that the Deferred Amount should be adequate to cover theseliabilities.  In the event the DeferredAmount is inadequate to cover the liabilities, the Company has been informed bythe selling stockholders that they will draw upon personal funds to cover suchexcess costs.

 

**Item 4 - Submission of Matters to a Vote ofSecurity Holders**

 

None

 

12

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**PART II**

 

**Item 5 -  Market for the Registrant’sCommon Equity and Related Stockholders Matters**

 

Not Applicable

 

 

**Item 6 -  Selected Financial Data**

 

The followingselected consolidated financial information for each of the five fiscal yearsin the period ended March 30, 2002 has been derived from the auditedconsolidated financial statements of the Company.  The information presented below should be read in conjunctionwith Item 7. “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and the consolidated financial statements of the Companyand related notes thereto appearing elsewhere herein (in thousands).

 
|                                                  |   | **March 28,  1998** |   | **April 3,  1999** |   | **April 1,  2000** |   | **March 31,  2001** |   | **March 30,  2002** |   |
|-------------------------------------------------------|--------|---------------------|--------|--------------------|--------|--------------------|--------|---------------------|--------|---------------------|--------|
| **Statement of Operations Data**                      |   |                |   |               |   |               |   |                |   |                |   |
| Net sales                                             |   | $                   | 64,561 |               | $      | 67,701             |   | $                   | 54,607 |                | $      | 80,539 |   | $ | 64,207 |   |
| Cost of goods sold                                    |   | 38,922              |   | 41,361             |   | 39,794             |   | 53,405              |   | 43,278              |   |
| Gross profit                                          |   | 25,639              |   | 26,340             |   | 14,813             |   | 27,134              |   | 20,929              |   |
| Selling, general and administrative  expenses         |   | 8,552               |   | 7,213              |   | 8,073              |   | 8,329               |   | 6,424               |   |
| Non-recurring expense(1)                              |   | 1,250               |   | —             |   | —             |   | —              |   | —              |   |
| Earnings from operations                              |   | 15,837              |   | 19,127             |   | 6,740              |   | 18,805              |   | 14,505              |   |
| Interest and other income                             |   | 510                 |   | 755                |   | 734                |   | 649                 |   | 233                 |   |
| Interest expense                                      |   | (10,327             | )      | (11,190            | )      | (11,333            | )      | (10,717             | )      | (9,847              | )      |
|                                                  |   |                |   |               |   |               |   |                |   |                |   |
| Earnings (loss) before taxes, and  extraordinary item |   | 6,020               |   | 8,692              |   | (3,859             | )      | 8,737               |   | 4,891               |   |
| Taxes (benefit) on earnings (loss)                    |   | 2,406               |   | 3,325              |   | (1,525             | )      | 2,975               |   | 1,705               |   |
|                                                  |   |                |   |               |   |               |   |                |   |                |   |
| Earnings (loss) before extraordinary item             |   | 3,614               |   | 5,367              |   | (2,334             | )      | 5,762               |   | 3,186               |   |
| Extraordinary gain/(loss), net of taxes(2)            |   | (986                | )      | —             |   | —             |   | 3,187               |   | —              |   |
|                                                  |   |                |   |               |   |               |   |                |   |                |   |
| Net earnings (loss)                                   |   | $                   | 2,628  |               | $      | 5,367              |   | $                   | (2,334 | )                   | $      | 8,949 |   | $ | 3,186 |   |
|                                                  |   |                |   |               |   |               |   |                |   |                |   |
| **Balance Sheet Data (at period end)**                |   |                |   |               |   |               |   |                |   |                |   |
| Total assets                                          |   | $                   | 62,860 |               | $      | 70,368             |   | $                   | 71,768 |                | $      | 69,222 |   | $ | 65,635 |   |
| Working capital                                       |   | 16,883              |   | 22,079             |   | 13,255             |   | 11,019              |   | 14,753              |   |
| Long-term debt, less current portion                  |   | 98,201              |   | 102,043            |   | 97,475             |   | 87,864              |   | 86,627              |   |
| Stockholders’ deficit                            |   | (56,940             | )      | (51,372            | )      | (53,706            | )      | (44,614             | )      | (41,411             | )      |
| Dividends declared                                    |   | —              |   | —             |   | —             |   | —              |   | —              |   |

 

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(1)          Represents$1.3 million non-recurring expense for financial advisory fee.

(2)          Representsgain/(loss) on early retirement of debt, net of taxes (tax benefit).

 

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**Item 7 -  Management’s Discussion andAnalysis of Financial Condition and Results of 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 30, 2002 (2002), March 31, 2001 (2001), and April 1,2000 (2000), respectively.

 

**Results of Operations (In millions)**

 
|                                          |   | **2002** |   | **Percent** |   | **2001** |   | **Percent** |   | **2000** |   | **Percent** |   |
|-----------------------------------------------|--------|----------|--------|-------------|--------|----------|--------|-------------|--------|----------|--------|-------------|--------|
|                                          |   |     |   |        |   |     |   |        |   |     |   |        |   |
| Net sales                                     |   | $        | 64.2   |        | 100.0  | %        | $      | 80.5        |   | 100.0    | %      | $           | 54.6   |   | 100.0 | % |
| Gross profit                                  |   | 20.9     |   | 32.6        | %      | 27.1     |   | 33.7        | %      | 14.8     |   | 27.1        | %      |
| Selling, general and administrative  expenses |   | 6.4      |   | 10.0        | %      | 8.3      |   | 10.3        | %      | 8.1      |   | 14.8        | %      |
| Earnings from operations                      |   | 14.5     |   | 22.6        | %      | 18.8     |   | 23.4        | %      | 6.7      |   | 12.3        | %      |
| Other expense, net                            |   | (9.6     | )      | (15.0       | )%     | (10.1    | )      | (12.5       | )%     | (10.6    | )      | (19.4       | )%     |
| Extraordinary gain (1)                        |   | —   |   | —      |   | 3.2      |   | 4.0         | %      | —   |   | —      |   |
| Net earnings (loss)                           |   | $        | 3.2    |        | 5.0    | %        | $      | 8.9         |   | 11.1     | %      | $           | (2.3   | ) | (4.3 | )% |

 

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(1)    Represents extraordinary gain onearly retirement of debt, net of taxes.

 

**Critical Accounting Policies**

 

In response to the SEC’s Release No. 33-8040, “Cautionary AdviceRegarding Disclosure About Critical Accounting Policies,” we identified themost critical accounting policies upon which our financial status depends.  We determined the critical principles byconsidering accounting policies that involve the most complex or subjectivedecisions or assessments.  We statethese accounting policies in the notes to the consolidated financial statementsand at relevant sections in the management’s discussion and analysis.

 

The Company does not believe there is a great likelihood thatmaterially different amounts would be reported under different conditions orusing different assumptions related to the accounting policies describedbelow.  However, application of theseaccounting policies involves the exercise of judgment and use of assumptions asto future uncertainties and, as a result, actual results could differ fromthese estimates.  This discussion andanalysis should be read in conjunction with our consolidated financialstatements and related notes included elsewhere in this report.

 

**RevenueRecognition**

 

Substantially all of the Company’s revenues are recognized whenproducts are shipped to unaffiliated customers.  The SEC’s Staff Accounting Bulletin (SAB) No. 101, “RevenueRecognition” provides guidance on the application of generally acceptedaccounting principles to selected revenue recognition issues.  The Company’s revenue recognition policy isin accordance with generally accepted accounting principles and SAB No. 101.

 

**Allowancefor Uncollectible Accounts Receivable**

 

Accounts receivable have been reduced by an allowance for amounts that may becomeuncollectible in the future.  Thisestimated allowance is based primarily on management’s evaluation of thefinancial condition of the customer.

 

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**Allowancefor Obsolete and Excess Inventory**

 

Inventories are valued at the lower of cost (first-in, first-out method) or market and have been reduced byan allowance for excess and obsolete inventories.  The estimated allowance is based on management’s review ofinventories on hand compared to estimated future usage and sales.

 

**Impairmentof Long-Lived Assets**

 

Goodwill, intangible and other long-lived assets are reviewed by management for impairment wheneverevents or changes in circumstances indicate the carrying amount may not berecoverable.  Goodwill and otherintangible assets totaled $6,218,000 as of March 30, 2002 and represented 9.5%of total assets.  The majority of theseassets resulted from the acquisitions of the wholly owned subsidiaries in 1983and 1989.  These subsidiaries have a longhistory of operating success and profitability and hold significant market positionsin the majority of their product lines. Their products are not subject to rapid technological or functionalobsolescence, which should result in continuous demand for products for manyyears.

 

**DeferredIncome Tax Assets**

 

Deferred income tax assets and liabilities have been recorded for the differences between thefinancial accounting and income tax basis of assets and liabilities.  Recorded deferred income tax assets andliabilities are described in detail under Note 6 - “Taxes on Earnings” in therelated notes to the consolidated financial statements.  Significant factors considered by managementin the determination of the probability of realization of deferred tax assetsinclude historical operating results and expectations of future earnings andtaxable income.

 

**Protectionof the Environment**

 

The Company’s operations involve the use and disposal of certain substances regulated underenvironmental protection laws.  On anongoing, regular basis, certain processes continue to be modified in order toreduce the impact on the environment, including the reduction or elimination ofcertain chemicals used in and wastes generated from operations.  Liabilities related to environmental mattersare further discussed under Note 9 - “Commitments and Contingencies” in therelated notes to the consolidated financial statements.

 

**Contingencies**

 

The Company is subject to various investigations, claims, legal andadministrative proceedings, covering a wide range of matters that arise in theordinary course of business activities. Any liability that may result from these proceedings in not expected tohave a material adverse effect on the Company’s financial position, net incomeor cash flow.

 

A number of claims / disputes have arisen with SDI in conjunction withthe wind down of the sales to SDI.  TheCompany is pursuing its claims and will use all remedies available to resolvethe issues.  The ultimate resolution ofthese claims is not expected to have a material impact on the results ofoperations or financial position of the Company.

 

**OtherMatters**

 

The Company does not have off-balance sheet arrangements, financings orother relationships with unconsolidated entities or other persons, also knownas “special purpose entities” (SPEs). In the ordinary course of business, the Company leases certain realproperties, primarily sales and office facilities, and equipment.  Transactions with related parties are in theordinary course of business, are conducted on an arm’s-length basis, and arenot material to the Company’s financial position, net income or cash flow.

 

**ContractualObligations Related to Long-term Debt and Related Risk Disclosure**

 

The Company isexposed to market risk from changes in interest rates on the Company’sRevolving Credit Facility.  At March 30,2002, the Company had no outstanding borrowings under the Revolver.  See

 

15

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Note 4 - “Long-term Debt” andNote 5 - “Line of Credit” in the related notes to the consolidated financialstatements.

 

**Comparison of the Fiscal Year Ended 2002 with2001**

 

*Net Sales*

 

The Company’snet sales decreased by approximately 20.2% or $16.3 million to $64.2 millionfor 2002 compared to sales of $80.5 million for 2001.  The decrease was due to decreasing demand in all markets.  Sales to existing aerospace, industrialprocess control, and petrochemical customers decreased by approximately 2% in2002 compared to 2001.  Based on current order volume, the Companyexpects continued weakness in the aerospace, industrial process control andpetrochemical markets to continue over the next quarter.

 

On theautomotive side, unit shipments of airbag initiator products decreasedsignificantly due to a decline in customer demand on several existingprograms.  The Company’s airbaginitiator shipments to its largest customer, Special Devices, Inc. (“SDI”)decreased approximately 20% in 2002 compared to 2001.  Overall, revenue from all automotive shipments decreasedapproximately 26% in 2002 compared to 2001. In January 2002, the Company’s annual supply agreement with SDI expiredand was not renewed.  The Companystopped selling 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 revenues from automotive products during fiscal 2003.

 

The Companyhas 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, the Companyexpects significant weakness in these markets to prevail for the next fewquarters.

 

*Gross Profit*

 

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

 

The decreasein gross profit is attributable to the $16.3 million decrease in sales in2002.  The decrease in gross margin wasprimarily 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 $1.9million decrease in S,G&A expenses was primarily attributable to decreasedcompensation costs and reduced legal expenses due to the settlement of theNeubauer litigation.  The improvement inthe percentage of S,G&A expenses to sales reflects the impact of thesignificant decrease in S,G&A expenses over lower revenue.

 

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*Earnings from 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 (as discussedabove) that contributed to the decrease in gross profit, gross margin andS,G&A expenses.

 

*Other Expense, net*

 

Other expense,net (which is predominantly net interest expense) decreased 5.0% or $0.5million 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.

 

*Net Earnings*

 

Net earningsdecreased by approximately $5.7 million to $3.2 million for 2002 from netearnings of  $8.9 million in 2001.  The decrease in net earnings was primarilyattributable to the decrease in earnings from operations and the extraordinarygain recognized in 2001, partially offset by the reduction in interest expense.

 

**Comparison of the Fiscal Year Ended 2001 with2000**

 

*Net Sales*

 

The Company’snet sales increased by approximately 47.4% or $25.9 million to $80.5 millionfor 2001 compared to sales of $54.6 million for 2000.  The significant increase was due to increasing demand in allmarkets, other than automotive products. Sales to existing aerospace, industrial process control, andpetrochemical customers increased by approximately 47% in 2001 compared to2000.

 

The Companyhas continued to develop a significant market presence in the telecom marketsthrough component products designed for optical networking infrastructure.  Sales of these products increased by $14.3million in 2001 compared to 2000.

 

On theautomotive side, unit shipments of airbag initiator products decreasedmoderately due to customer demand on several existing programs.  The Company’s airbag initiator shipments toits largest customer, Special Devices, Inc. (“SDI”) decreased approximately 5%in 2001 compared to the 2000.  Overall,revenue from all automotive shipments decreased approximately 5% in 2001compared to 2000.  On January 16, 2001,the Company entered into a 12-month supply agreement with SDI.  The agreement resulted in an immediate 12%price decrease and contained provisions for future price decreases subject toimplementation of cost reduction initiatives and/or increased unit volumes.

 

*Gross Profit*

 

Gross profitincreased by approximately 83.1% or $12.3 million, to $27.1 million for 2001compared to $14.8 million for 2000. Gross margin increased to 33.7% for 2001 from 27.1% for 2000.

 

The increasein gross profit is attributable to the increased sales volume. The increase ingross margin was primarily attributable to the significant increase in revenueand the corresponding impact of fixed overhead costs leveraged against higherrevenue.

 

 

*Selling, General and Administrative Expenses*

 

Selling,general and administrative (“S,G&A”) expenses increased by approximately2.5% or $0.2 million to $8.3 million for 2001 compared to $8.1 million for2000.  S,G&A expenses as a percentto sales decreased to 10.3% in 2001 from 14.8% for 2000.

 

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The $0.2million increase in S,G&A expenses was primarily attributable to a $0.3million increase in selling commissions incurred on the higher sales volume,and a $0.7 million increase in management incentive plans incurred with theimproved operating results of the Company. These increased costs were mostly offset by non-recurring due diligencecosts associated with two abandoned acquisitions as well as compensation costsincurred during the management transition in 2000.  The improvement in the percentage of S,G&A expenses to salesreflects the increased growth in net sales.

 

*Earnings from Operations*

 

Operatingearnings increased $12.1 million to $18.8 million for 2001 compared to $6.7million for 2000.  The significantincrease in operating earnings and margin was attributable to the same factors(as discussed above) that contributed to the increase in gross profit, grossmargin and S,G&A expenses as a percent to sales.

 

*Other Expense, net*

 

Other expense,net (which is predominantly net interest expense) decreased 4.7% or $0.5million to $10.1 million in 2001 compared to $10.6 million in 2000.  The $0.5 million decrease was primarilyattributable to lower interest expense realized from the early retirement ofdebt during 2001.  The Company has $91.0million of indebtedness as of March 31, 2001 compared to $104.5 million atApril 1, 2000.

 

*Extraordinary Gain, net*

 

During 2001,the Company purchased for retirement $10.2 million face value of it’s 10.75%Senior Subordinated Notes for $4.6 million in cash.  The transaction resulted in an extraordinary gain on the earlyretirement of debt of $3.2 million, net of taxes of $2.1 million. The purchaseof this indebtedness will reduce interest costs by $1.1 million annually.

 

*Net Earnings*

 

Net earningsincreased by approximately $11.2 million to $8.9 million for 2001 from a netloss of $2.3 million in 2000.  Theincrease in net earnings was primarily attributable to the increase in earningsfrom operations, the decrease in interest expense and the extraordinary gain,all as discussed above.

 

**Liquidity and Capital Resources**

 

Net cashprovided by operating activities was $6.0 million for 2002 compared to $8.7million for 2001.  The decrease of $2.7million was primarily attributable to decreased net earnings.

 

Net cash usedin investing activities was $0.7 million for 2002 compared to $2.6 million for2001.  The decrease was due to areduction in purchases of property, plant and equipment.

 

Net cash usedin financing activities was $3.2 million for 2002 compared to $11.8 million for2001. The decrease in 2002 is primarily attributable to the early retirement ofdebt in 2001 and a decrease in principal payments on long-term debt.

 

As of March30, 2002, the Company’s outstanding indebtedness was $88.7 million, consistingof $79.8 million principal amount of the senior subordinated notes and $8.9million of other borrowings.  TheCompany also maintains a $8 million Revolving Credit Facility (“the Revolver”)to augment its liquidity requirements. Borrowings under the Revolver may be used for general and othercorporate purposes.  The Revolverprovides for interest on outstanding balances at the bank’s LIBOR rate plus 2%and is collateralized by accounts receivable of the Company.  At March 30, 2002, there was $8.0 millionavailable under the Revolver.  TheRevolver includes covenants requiring maintenance of certain financialratios.  At March 30, 2002 and March 31,2001 there were no borrowings outstanding under the Revolver and the Companywas in compliance with the required financial ratios.

 

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The Companybelieves that cash flow from operations and the availability of borrowingsunder the Revolving Credit Facility will provide adequate funds for ongoingoperations, planned capital expenditures and debt service during the term ofthe Revolver.

 

Capitalexpenditures for fiscal 2003 are expected to focus on investments in equipmentto expand prototyping and qualification of new programs for new and existingcustomers.  Expected capital expendituresfor fiscal 2003 are approximately $1.0 million and will be financed throughworking capital.

 

**Impact Of RecentlyIssued Accounting Standards**

 

In July 2001,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) Nos. 141 and 142, “Business Combinations” and“Goodwill and Other Intangible Assets”. SFAS No. 141 replaces APB 16 and eliminates pooling-of-interestsaccounting prospectively.  It alsoprovides guidance on purchase accounting related to the recognition ofintangible assets and accounting for negative goodwill.

 

SFAS No. 142changes the accounting for goodwill from an amortization method to animpairment-only approach.  Under SFASNo. 142, goodwill will be tested annually and adjusted whenever events orcircumstances occur indicating that goodwill might be impaired.  SFAS No. 141 and SFAS No. 142 are effectivefor all business combinations completed after June 30, 2001.  Upon adoption of SFAS No. 142, amortizationof goodwill recorded for business combinations consummated prior to July 1,2001 will cease, and intangible assets acquired prior to July 1, 2001 that donot meet the criteria for recognition under SFAS No. 141 will be reclassifiedto goodwill.  Companies are required toadopt SFAS No. 142 for fiscal years beginning after December 15, 2001, butearly adoption is permitted.  TheCompany has not yet determined the impact these standards will have on itsfinancial statements.

 

In October2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets,” which replaces SFAS No. 121, “Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to be DisposedOf”.  SFAS No. 144 establishes oneaccounting model, based on framework established in SFAS No. 121, for therecognition, measurement and reporting of impairment of long-lived assets to beheld and used, and measurement of long-lived assets to be disposed of bysale.  Adoption of SFAS No. 144 is requiredfor the Company’s fiscal year beginning March 31, 2002 although earlyapplication is permitted.  The Companydoes not believe this new standard will have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

In May 2002,the FASB issued SFAS 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment ofFAS 13, and Technical Corrections.” Among other things, SFAS 145 rescinds various pronouncements regardingearly extinguishments of debt and allows extraordinary accounting treatment forearly extinguishment only when the provisions of Accounting Principles BoardOpinion No. 30, “Reporting the Results of Operations / Reporting the Effects ofDisposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions” are met.  SFAS 145 provisions regarding earlyextinguishment of debt are generally effective for fiscal years beginning afterMay 15, 2002.  Management does notbelieve that the adoption of this statement will have a material impact on ourconsolidated financial statements.

 

**Inflation**

 

Althoughincreases in operating costs could adversely affect the Company’s operations,management does not believe inflation has had a material effect on operatingprofit during the past several years.

 

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**Disclosure RegardingForward Looking Statements**

 

This filingcontains statements that are “forward looking statements”, and includes, amongother things, discussions of the Company’s business strategy and expectationsconcerning market position, future operations, margins, profitability,liquidity and capital resources. Although the Company believes that the expectations reflected in suchforward looking statements are reasonable, it can give no assurance that suchexpectations will prove to have been correct.

 

All phases ofthe operations of the Company are subject to a number of uncertainties, risksand other influences, including general economic conditions, regulatory changesand competition, many of which are outside the control of the Company, any oneof which, or a combination of which, could materially affect the results of theCompany’s operations and whether the forward looking statements made by theCompany ultimately prove to be accurate. The Company does not assume any obligation to update these forwardlooking statements.

 

**Item 7a -  Quantitative and QualitativeDisclosures About Market Risk**

 

The Company isexposed to market risk from changes in interest rates on the Company’sRevolving Credit Facility.  At March 30,2002, the Company had no outstanding borrowings under the Revolver and,therefore, changes in interest rates would have no impact on the Company’sresults of operations.

 

**Item 8 -  Financial Statements andSupplemental Data**

 
| INDEX TO  FINANCIAL STATEMENTS                                                                                                        |
|---------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                  |
| Report of Independent Accountants                                                                                                     |
|                                                                                                                                  |
| Consolidated Balance Sheets as of March 30, 2002 and March 31, 2001                                                                   |
|                                                                                                                                  |
| Consolidated Statements of Operations for  the years ended March 30, 2002, March 31, 2001 and April 1, 2000                           |
|                                                                                                                                  |
| Consolidated Statements of Stockholders’  Equity (Deficit) for the years ended March 30, 2002, March 31, 2001 and April  1, 2000 |
|                                                                                                                                  |
| Consolidated Statements of Cash Flows for  the years ended March 30, 2002, March 31, 2001 and April 1, 2000                           |
|                                                                                                                                  |
| 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 financialstatements, the notes thereto, is not applicable, or not required.

 

20

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REPORT OF INDEPENDENT ACCOUNTANTS

 

Board of Directors andStockholders

HCC Industries Inc. andSubsidiaries

Rosemead, California

 

In our opinion, theconsolidated financial statements listed in the accompanying index presentfairly, in all material respects, the financial position of HCC Industries Inc.and Subsidiaries at March 30, 2002 and March 31, 2001, and the results of theiroperations and their cash flows for each of the three years in the period endedMarch 30, 2002 in conformity with accounting principles generally accepted inthe United States of America.  Inaddition, in our opinion, the financial statement schedule listed in theaccompanying index presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements.  These financialstatements and financial statement schedule are the responsibility of theCompany’s management; our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial 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.

 
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|
| Los Angeles,  California        |
| May 15, 2002                    |

 

21

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**HCC INDUSTRIES INC.AND SUBSIDIARIES**

**Consolidated Balance Sheets**

**(in thousands, exceptshare data)**

 
|                                                                                            |   | **March 30,  2002** |   | **March 31,  2001** |   |
|-------------------------------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
|                                                                                            |   |                |   |                |   |
| **ASSETS**                                                                                      |   |                |   |                |   |
|                                                                                            |   |                |   |                |   |
| **Current Assets**:                                                                             |   |                |   |                |   |
| Cash and cash equivalents                                                                       |   | $                   | 10,990 |                | $      | 8,896 |   |
| Trade accounts receivable, less allowance  for doubtful accounts of $70 (2002) and $61 (2001)   |   | 8,356               |   | 10,799              |   |
| Inventories                                                                                     |   | 6,016               |   | 6,468               |   |
| Income taxes receivable                                                                         |   | 506                 |   | 728                 |   |
| Prepaid and other current assets                                                                |   | 1,130               |   | 1,398               |   |
|                                                                                            |   |                |   |                |   |
| Total current assets                                                                            |   | 26,998              |   | 28,289              |   |
|                                                                                            |   |                |   |                |   |
| **Property, Plant and Equipment, net**                                                          |   | 24,895              |   | 25,836              |   |
|                                                                                            |   |                |   |                |   |
| **Other Assets**:                                                                               |   |                |   |                |   |
| Intangible assets                                                                               |   | 4,486               |   | 4,775               |   |
| Deferred financing costs                                                                        |   | 1,732               |   | 2,071               |   |
| Deferred income taxes                                                                           |   | 1,623               |   | 2,080               |   |
| Restricted cash                                                                                 |   | 5,901               |   | 6,171               |   |
|                                                                                            |   |                |   |                |   |
| **Total assets**                                                                                |   | $                   | 65,635 |                | $      | 69,222 |   |
|                                                                                            |   |                |   |                |   |
|                                                                                            |   |                |   |                |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)**                                        |   |                |   |                |   |
|                                                                                            |   |                |   |                |   |
| **Current Liabilities**:                                                                        |   |                |   |                |   |
| Current portion of long-term debt                                                               |   | $                   | 2,109  |                | $      | 3,103 |   |
| Accounts payable                                                                                |   | 1,475               |   | 3,897               |   |
| Accrued liabilities                                                                             |   | 8,661               |   | 10,270              |   |
|                                                                                            |   |                |   |                |   |
| Total current liabilities                                                                       |   | 12,245              |   | 17,270              |   |
|                                                                                            |   |                |   |                |   |
| **Long Term Liabilities**:                                                                      |   |                |   |                |   |
| Long-term debt, net of current portion                                                          |   | 86,627              |   | 87,864              |   |
| Other long-term liabilities                                                                     |   | 8,174               |   | 8,702               |   |
|                                                                                            |   | 107,046             |   | 113,836             |   |
|                                                                                            |   |                |   |                |   |
| **Commitments and contingencies**                                                               |   |                |   |                |   |
|                                                                                            |   |                |   |                |   |
| **Stockholders’ Equity (Deficit):**                                                        |   |                |   |                |   |
| Common stock; $.10 par value; authorized  550,000 shares, issued and outstanding 137,945 shares |   | 14                  |   | 14                  |   |
| Additional paid-in capital                                                                      |   | 360                 |   | 343                 |   |
| Accumulated deficit                                                                             |   | (41,785             | )      | (44,971             | )      |
|                                                                                            |   |                |   |                |   |
| **Total stockholders’ deficit**                                                            |   | (41,411             | )      | (44,614             | )      |
|                                                                                            |   |                |   |                |   |
| **Total liabilities and stockholders’ deficit**                                            |   | $                   | 65,635 |                | $      | 69,222 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

22

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**HCC INDUSTRIES INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands)**

 
|                                                              |   | **For The  Year Ended** |   |
|-------------------------------------------------------------------|--------|-------------------------|--------|
|                                                              |   | **March 30,  2002**     |   | **March 31,  2001** |   | **April 1,  2000** |   |
|                                                              |   |                    |   |   |   |   |   |
| **Net sales**                                                     |   | $                       | 64,207 |   | $ | 80,539 |   | $ | 54,607 |   |
| Cost of goods sold                                                |   | 43,278                  |   | 53,405 |   | 39,794 |   |
|                                                              |   |                    |   |   |   |   |   |
| **Gross profit**                                                  |   | 20,929                  |   | 27,134 |   | 14,813 |   |
|                                                              |   |                    |   |   |   |   |   |
| Selling, general and administrative  expenses                     |   | 6,424                   |   | 8,329 |   | 8,073 |   |
|                                                              |   |                    |   |   |   |   |   |
| **Earnings from operations**                                      |   | 14,505                  |   | 18,805 |   | 6,740 |   |
|                                                              |   |                    |   |   |   |   |   |
| **Other income (expense):**                                       |   |                    |   |   |   |   |   |
| Interest and other income                                         |   | 233                     |   | 649 |   | 734 |   |
| Interest expense                                                  |   | (9,847                  | )      | (10,717 | ) | (11,333 | ) |
|                                                              |   |                    |   |   |   |   |   |
| Total other expenses, net                                         |   | (9,614                  | )      | (10,068 | ) | (10,599 | ) |
|                                                              |   |                    |   |   |   |   |   |
| **Earnings (loss) before taxes and extraordinary item**           |   | 4,891                   |   | 8,737 |   | (3,859 | ) |
|                                                              |   |                    |   |   |   |   |   |
| Taxes (benefit) on earnings (loss)                                |   | 1,705                   |   | 2,975 |   | (1,525 | ) |
|                                                              |   |                    |   |   |   |   |   |
| Earnings (loss) before extraordinary item                         |   | 3,186                   |   | 5,762 |   | (2,334 | ) |
|                                                              |   |                    |   |   |   |   |   |
| Extraordinary gain on retirement of debt,  net of taxes of $2,125 |   | —                  |   | 3,187 |   | — |   |
|                                                              |   |                    |   |   |   |   |   |
| **Net earnings (loss)**                                           |   | $                       | 3,186  |   | $ | 8,949 |   | $ | (2,334 | ) |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

23

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**HCC INDUSTRIES INC.AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**(in thousands)**

 
|                        |   | **Common Stock** |   | **Additional  Paid-In** |   | **Retained  Earnings** |   | **Total  Stockholders’** |   |
|-----------------------------|--------|------------------|--------|-------------------------|--------|------------------------|--------|-------------------------------|--------|
|                        |   | **Shares**       |   | **Amount**              |   | **Capital**            |   | **(Deficit)**                 |   | **Equity(Deficit)** |   |
|                        |   |             |   |                    |   |                   |   |                          |   |   |   |
| **Balance, April 3, 1999**  |   | 135              |   | $                       | 14     |                   | $      | 200                           |   | $ | (51,586 | ) | $ | (51,372 | ) |
|                        |   |             |   |                    |   |                   |   |                          |   |   |   |
| Net loss                    |   | —           |   | —                  |   | —                 |   | (2,334                        | )      | (2,334 | ) |
|                        |   |             |   |                    |   |                   |   |                          |   |   |   |
| **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 | ) |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

24

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**HCC INDUSTRIES INC.AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

 
|                                                                                 |   | **For The  Year Ended** |   |
|--------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                 |   | **March 30,2002**       |   | **March 31,  2001** |   | **April 1,  2000** |   |
| **Cash flows from operating activities**:                                            |   |                    |   |   |   |   |   |
| Net earnings (loss)                                                                  |   | $                       | 3,186  |   | $ | 8,949 |   | $ | (2,334 | ) |
| Reconciliation of net earnings (loss) to  net cash provided by operating activities: |   |                    |   |   |   |   |   |
| Depreciation                                                                         |   | 2,599                   |   | 2,251 |   | 1,773 |   |
| Amortization                                                                         |   | 628                     |   | 639 |   | 670 |   |
| Deferred income taxes                                                                |   | 903                     |   | 1,622 |   | (19 | ) |
| Extraordinary gain                                                                   |   | —                  |   | (3,187 | ) | — |   |
| Non-cash stock compensation                                                          |   | 17                      |   | 93 |   | — |   |
| Changes in operating assets and  liabilities:                                        |   |                    |   |   |   |   |   |
| Decrease (increase) in trade accounts  receivable, net                               |   | 2,443                   |   | (758 | ) | (207 | ) |
| Decrease (increase) in inventories                                                   |   | 452                     |   | (1,953 | ) | (145 | ) |
| Decrease (increase) in other assets                                                  |   | 17                      |   | 44 |   | (43 | ) |
| (Decrease) increase in other liabilities                                             |   | (2,137                  | )      | 917 |   | 1,595 |   |
| (Decrease) increase in accounts payable and  income taxes receivable/payable         |   | (2,125                  | )      | 59 |   | (1,224 | ) |
|                                                                                 |   |                    |   |   |   |   |   |
| Net cash provided by operating activities                                            |   | 5,983                   |   | 8,676 |   | 66 |   |
|                                                                                 |   |                    |   |   |   |   |   |
| **Cash flows from investing activities:**                                            |   |                    |   |   |   |   |   |
| Purchases of property, plant and equipment                                           |   | (736                    | )      | (2,565 | ) | (1,644 | ) |
|                                                                                 |   |                    |   |   |   |   |   |
| Net cash used in investing activities                                                |   | (736                    | )      | (2,565 | ) | (1,644 | ) |
|                                                                                 |   |                    |   |   |   |   |   |
| **Cash flows from financing activities**:                                            |   |                    |   |   |   |   |   |
| Principal payments on long-term debt                                                 |   | (3,153                  | )      | (7,204 | ) | (1,280 | ) |
| Early retirement of debt                                                             |   | —                  |   | (4,598 | ) | — |   |
| Proceeds from sale of stock                                                          |   | —                  |   | 50 |   | — |   |
|                                                                                 |   |                    |   |   |   |   |   |
| Net cash used in financing activities                                                |   | (3,153                  | )      | (11,752 | ) | (1,280 | ) |
|                                                                                 |   |                    |   |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                |   | 2,094                   |   | (5,641 | ) | (2,858 | ) |
|                                                                                 |   |                    |   |   |   |   |   |
| Cash and cash equivalents at beginning of  period                                    |   | 8,896                   |   | 14,537 |   | 17,395 |   |
| **Cash and cash equivalents at end of period**                                       |   | $                       | 10,990 |   | $ | 8,896 |   | $ | 14,537 |   |
|                                                                                 |   |                    |   |   |   |   |   |
| **Supplemental noncash financing activities**:                                       |   |                    |   |   |   |   |   |
| Capital lease obligations                                                            |   | $                       | 922    |   | $ | 3,917 |   | $ | 2,581 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

25

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**HCC INDUSTRIES INC.  AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

 

**1.****                                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES:**

 

General

 

HCC Industries Inc. and Subsidiaries (“HCC” or “Company”) wasincorporated in Delaware in 1985.  HCCdesigns, manufactures and markets broad lines of state-of-the-art, highprecision electronic connection devices known as hermetic seals and operates inone reportable industry segment.  TheCompany’s products are sold primarily in North America and Europe to theaerospace, energy, telecommunications, test and measurement and automotiveindustries.

 

On February14, 1997, pursuant to a Stock Purchase and Sale Agreement dated as of December23, 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 theRecapitalization, no fair value adjustments were made to the book value of theCompany’s assets and no goodwill was recognized.  The amounts paid to the selling stockholders to purchase andretire the shares of common stock was charged to stockholders’ equity as atreasury stock transaction.

 

Indemnification

 

In addition,in connection with the Recapitalization, a $6,000,000 interest bearing escrowaccount was established by the selling stockholders to indemnify the Companywith respect to after-tax costs of contingent liabilities, subject to a cap forall indemnified liabilities of $30 million. The escrow account has been classified as restricted cash on theconsolidated balance sheet.  Therestricted cash escrow balance was $5,901,000 at March 30, 2002 and $6,171,000at March 31, 2001.  Any funds remainingin this account upon satisfaction of conditions specified in the escrowagreement, will be paid to the selling stockholders.

 

Principles Of Consolidation

 

Theconsolidated financial statements include the accounts of the Company and allwholly owned subsidiaries.  Allintercompany transactions (which are primarily sales/purchases andreceivables/payables) have been eliminated in consolidation.

 

The Company’s10 3⁄4% Senior Subordinated Notes are guaranteed by all operating subsidiaries ofthe Company (the “Subsidiary Guarantors”). The guarantee obligations of the Subsidiary Guarantors (which are alldirect or indirect wholly owned subsidiaries of the Company) are full,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 on aconsolidated basis.  Separate financialstatements of the Subsidiary Guarantors are not included in the accompanyingfinancial statements because management of the Company has determined thatseparate financial statements of the Subsidiary Guarantors would not bematerial to investors.

 

Use of Estimates

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, reported results of operations and disclosure of contingencies atthe dates of the consolidated financial statements.  Actual results could differ from those estimates.

 

26

----

 

Accounting Period

 

Theconsolidated financial statements are based on the fiscal year ending on theSaturday nearest to March 31.

 

Revenue Recognition

 

The Companygenerally manufactures 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.

 

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 Geographic Information

 

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.

 

Sales toSpecial Devices, Incorporated (“SDI”) were $14,596,000 (23%), $20,736,000 (26%)and $21,193,000 (39%) for the fiscal years 2002, 2001 and 2000,respectively.  The Company stoppedselling product to SDI in March 2002. The related accounts receivable from SDI as of March 30, 2002 and March31, 2001 was $2,401,000 and $3,042,000, respectively.  Sales to another customer amounted to $8,920,000 (11%) for thefiscal year 2001 and the related receivable as of March 31, 2001 was $375,000.

 

Sales toEuropean customers were approximately $7,738,000 (12%), $9,250,000 (12%), and$5,663,000 (10%) of the Company’s consolidated sales for fiscal years 2002,2001 and 2000, respectively.  Sales areattributed to countries based on the location of customers.

 

Inventories

 

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

 

Property, Plant and Equipment

 

Property,plant and equipment is recorded at cost. Depreciation is computed generally by the straight-line method over theestimated useful lives of the respective assets of 3 years to 40 years.

 

Repairs and maintenance are charged directly to expense asincurred.  Additions and betterments toproperty, plant and equipment are capitalized. When assets are disposed of, the related cost and accumulateddepreciation thereon are removed from the accounts and any resulting gain orloss is included in operations.

 

27

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Intangible Assets

 

The excess ofpurchase price over net assets acquired is amortized on a straight-line basisover the estimated useful lives of the respective assets of 14 to 40years.  Amortization expense was$288,000 (2002), $288,000 (2001), and $289,000 (2000).  Accumulated amortization on the excesspurchase price over net assets acquired was $3,114,000 and $2,826,000 as ofMarch 30, 2002 and March 31, 2001, respectively.

 

Long-Lived Assets

 

In accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 121, long-livedassets held and used by the Company are reviewed for impairment whenever eventsor changes in circumstances indicate that the carrying amount of an asset maynot be recoverable.  For purposes ofevaluating the recoverability of long-lived assets, the Company evaluates thecarrying value of its goodwill and property, plant and equipment on an ongoingbasis and recognizes an impairment when the estimated future undiscounted cashflows from operations are less than the carrying value of the relatedlong-lived assets.

 

Fair Value of FinancialInstruments

 

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 30, 2002 and March 31,2001 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.  Income tax expense is the tax payable forthe period and the change during the period in deferred tax assets andliabilities.

 

Stock Based EmployeeCompensation 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,which involves 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”.

 

Recently Issued Accounting Standards

 

In July 2001, the Financial AccountingStandards Board (“FASB”) issued (“SFAS”) Nos. 141 and 142, “BusinessCombinations” and “Goodwill and Other Intangible Assets”.  SFAS No. 141 replaces APB 16 and eliminatespooling-of-interests accounting prospectively. It also provides guidance on purchase accounting related to therecognition of intangible assets and accounting for negative goodwill.

 

28

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SFAS No. 142 changes the accounting forgoodwill from an amortization method to an impairment-only approach.  Under SFAS No. 142, goodwill will be testedannually and adjusted whenever events or circumstances occur indicating thatgoodwill might be impaired.  SFAS No.141 and SFAS No. 142 are effective for all business combinations completed afterJune 30, 2001.  Upon adoption of SFASNo. 142, amortization of goodwill recorded for business combinationsconsummated prior to July 1, 2001 will cease, and intangible assets acquiredprior to July 1, 2001 that do not meet the criteria for recognition under SFASNo. 141 will be reclassified to goodwill. Companies are required to adopt SFAS No. 142 for fiscal years beginningafter December 15, 2001, but early adoption is permitted.  The Company has not yet determined theimpact these standards will have on its financial statements.

 

InOctober 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” which replaces SFAS No. 121, “Accounting forthe Impairment of Long-Lived Assets and for Long-Lived Assets to be DisposedOf”.  SFAS No. 144 establishes oneaccounting model, based on framework established in SFAS No. 121, for therecognition, measurement and reporting of impairment of long-lived assets to beheld and used, and measurement of long-lived assets to be disposed of bysale.  Adoption of SFAS No. 144 isrequired for the Company’s fiscal year beginning March 31, 2002 although earlyapplication is permitted.  The Companydoes not believe this new standard will have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

InMay 2002, the FASB issued SFAS No. 145, “Rescission of FASB Nos. 4, 44, and 64,Amendment of FASB No. 13, and Technical Corrections.”  Among other things, SFAS No. 145 rescinds various pronouncementsregarding early extinguishments of debt and allows extraordinary accountingtreatment for early extinguishment only when the provisions of AccountingPrinciples Board Opinion No. 30, “Reporting the Results of Operations /Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions” aremet.  SFAS 145 provisions regardingearly extinguishment of debt are generally effective for fiscal years beginningafter May 15, 2002.  Management does notbelieve that the adoption of this statement will have a material impact on itsconsolidated financial statements.

 

 

**2.             INVENTORIES:**

 

Inventoriesconsist of the following (in thousands):

 
|                              |   | **March 30,2002** |   | **March 31,  2001** |   |
|-----------------------------------|--------|-------------------|--------|---------------------|--------|
|                              |   |              |   |                |   |
| Raw materials and component parts |   | $                 | 4,503  |                | $      | 4,861 |   |
| Work in process                   |   | 1,513             |   | 1,607               |   |
|                              |   |              |   |                |   |
|                              |   | $                 | 6,016  |                | $      | 6,468 |   |

 

29

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

 

Property, plant and equipment consist of thefollowing (in thousands):

 
|                              |   | **March 30,  2002** |   | **March 31,  2001** |   |
|-----------------------------------|--------|---------------------|--------|---------------------|--------|
|                              |   |                |   |                |   |
| Land                              |   | $                   | 4,017  |                | $      | 4,017 |   |
| Buildings and improvements        |   | 9,938               |   | 9,671               |   |
| Furniture, fixtures and equipment |   | 26,254              |   | 24,917              |   |
|                              |   |                |   |                |   |
|                              |   | 40,209              |   | 38,605              |   |
| Less accumulated depreciation     |   | (15,314             | )      | (12,769             | )      |
|                              |   | $                   | 24,895 |                | $      | 25,836 |   |

 

**4.****             LONG-TERMDEBT:**

 

Long-term debt consists of the following (inthousands):

 
|                                                                                        |   | **March 30,  2002** |   | **March 31,  2001** |   |
|---------------------------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
| 10 3⁄4% Senior  Subordinated Notes - interest payable semi-annually; due May 15, 2007    |   | $                   | 79,785 |                | $      | 79,785 |   |
|                                                                                        |   |                |   |                |   |
| Subordinated  Bonus Notes - 10% interest payable semi-annually; due April 3, 2002           |   | —              |   | 1,083               |   |
|                                                                                        |   |                |   |                |   |
| Term loans  on land, building and improvements - 8% interest payable monthly; due May  2008 |   | 2,762               |   | 2,762               |   |
|                                                                                        |   |                |   |                |   |
| Capital  lease obligations (interest rates ranging between 6.36% and 9.63%)                 |   | 6,189               |   | 7,337               |   |
|                                                                                        |   |                |   |                |   |
|                                                                                        |   | 88,736              |   | 90,967              |   |
| Less current portion                                                                        |   | 2,109               |   | 3,103               |   |
|                                                                                        |   |                |   |                |   |
|                                                                                        |   | $                   | 86,627 |                | $      | 87,864 |   |

 

 

On May 6, 1997, the Company issued $90,000,000 in principal amount of10 3⁄4% Senior Subordinated Notes (“Notes”) due in May 2007 and used the proceedsof such issuance to refinance existing debt. In issuing the Notes, the Company incurred $3,870,000 in deferredfinancing costs.  These costs are beingamortized using the straight-line method (which approximates the effectiveinterest method) over the term of the respective Notes.  The fair value of the Notes may vary fromtime to time based on the Company’s operating performance and other marketrelated factors external to the Company. Presently, the Company believes the fair value of the Notes to besignificantly less than the carrying value.

 

During fiscal year 2001, the Company purchased for retirement $10.2million face value of the Notes for $4.6 million in cash.  The transaction resulted in an extraordinarygain on the early retirement of debt of $3.2 million, net of taxes of $2.1million.

 

30

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The Notes are redeemable at the option of the Company commencing on May15 of the year set forth below at the redemption prices also set forth below:

 

| **Period**          |   | **Redemption  Price** |   |
|---------------------|--------|-----------------------|--------|
|                |   |                  |   |
| 2002                |   | 105.375               | %      |
| 2003                |   | 103.583               | %      |
| 2004                |   | 101.792               | %      |
| 2005 and thereafter |   | 100.000               | %      |

 

Minimumpayments due under long-term debt as of March 30, 2002 are as follows (inthousands):

 

| **Fiscal Year**     |   | **Amount** |   |
|---------------------|--------|------------|--------|
|                |   |       |   |
| 2003                |   | $          | 2,109  |   |
| 2004                |   | 1,768      |   |   |
| 2005                |   | 1,527      |   |   |
| 2006                |   | 735        |   |   |
| 2007                |   | 50         |   |   |
| 2008 and thereafter |   | 82,547     |   |   |
|                |   |       |   |   |
|                |   | $          | 88,736 |   |
|                     |        |            |        |  |  |  |

 

Cash payments for interest were$9,462,000 (2002), $10,325,000 (2001) and $10,906,000 (2000).  Included in accrued liabilities is interestpayable of $3,251,000 at March 30, 2002 and $3,274,000 at March 31, 2001.

 

**5.****                                      LINEOF CREDIT:**

 

The Company has a revolving credit facility agreement of up to$8,000,000 expiring on January 30, 2004. The Revolver provides for interest on outstanding balances at the bank’sLIBOR rate plus 2% and is collateralized by accounts receivable of theCompany.  At March 30, 2002 and March31, 2001, the prime rate was 4.75% and 8.00%, respectively.  At March 30, 2002, there was $8,000,000available under the Revolver.  TheRevolver includes covenants requiring maintenance of certain financialratios.  At March 30, 2002 and March 31,2001 there were no borrowings outstanding under the Revolver.

 

31

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**6.****                                      TAXESON EARNINGS:**

 

The componentsof income tax expense (benefit) before extraordinary item consist of thefollowing (in thousands):

 

|      |   | **2002** |   | **2001** |   | **2000** |   |
|-----------|--------|----------|--------|----------|--------|----------|--------|
| Current:  |   |     |   |     |   |     |   |
| Federal   |   | $        | 749    |     | $      | 1,190    |   | $ | (1,233 | ) |
| State     |   | 53       |   | 163      |   | (273     | )      |
|      |   | 802      |   | 1,353    |   | (1,506   | )      |
|      |   |     |   |     |   |     |   |
| Deferred: |   |     |   |     |   |     |   |
| Federal   |   | 751      |   | 1,378    |   | (17      | )      |
| State     |   | 152      |   | 244      |   | (2       | )      |
|      |   | 903      |   | 1,622    |   | (19      | )      |
|      |   |     |   |     |   |     |   |
|      |   | $        | 1,705  |     | $      | 2,975    |   | $ | (1,525 | ) |

 

TheCompany’s effective tax rate differs from the statutory federal income tax rateas follows:

 
|                                           |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                           |   |     |   |     |   |     |   |
| Tax provision (benefit) at the statutory  rate |   | 34.0     | %      | 34.0     | %      | (34.0    | )%     |
| Nondeductible expenses                         |   | 1.5      | %      | 0.7      | %      | 2.1      | %      |
| State taxes, net of federal benefit            |   | 2.8      | %      | 1.6      | %      | (4.7     | )%     |
| Other                                          |   | (3.4     | )%     | (2.2     | )%     | (2.9     | )%     |
|                                           |   |     |   |     |   |     |   |
|                                           |   | 34.9     | %      | 34.1     | %      | (39.5    | )%     |

 

The components of the netdeferred taxes are as follows (in thousands):

 
|                       |   | **March 30,  2002** |   | **March 31,  2001** |   |
|----------------------------|--------|---------------------|--------|---------------------|--------|
| Deferred Tax Assets:       |   |                |   |                |   |
| Environmental liabilities  |   | $                   | 3,270  |                | $      | 3,481 |   |
| Accrued bonus and other    |   | 461                 |   | 983                 |   |
|                       |   | 3,731               |   | 4,464               |   |
| Deferred  Tax Liabilities: |   |                |   |                |   |
| Depreciation and other     |   | (1,647              | )      | (1,402              | )      |
|                       |   |                |   |                |   |
| Deferred Tax Asset, net    |   | $                   | 2,084  |                | $      | 3,062 |   |

 

Cash tax payments were $950,000(2002), $3,250,000 (2001), and $239,000 (2000).

 

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**7.****                                      CAPITALSTOCK:**

 

The Company is authorized to issue an aggregate of 550,000 shares ofcommon stock.  These shares may beissued in four different classes (A, B, C or D shares) which differ only invoting rights per share as follows:

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

 

During fiscal year 2001, the Company sold 2,450 shares of Class Acommon stock to the Company’s Chairman for $50,000.  In conjunction with this transaction, the Company recorded non-cashcompensation of $76,000 during fiscal year 2001.  The changes in each class of common shares for each of the threeyears in the period ended March 30, 2002 are as follows (in thousands):

 
|                     |   | **Class of  Common Stock** |   |           |   |       |   |
|--------------------------|--------|----------------------------|--------|----------------|--------|------------|--------|
|                     |   | **A**                      |   | **B**          |   | **C**      |   | **D** |   | **Total** |   |
|                     |   | **Shares**                 |   | **Par  Value** |   | **Shares** |   | **Par  Value** |   | **Shares** |   | **Par  Value** |   | **Shares** |   | **Par  Value** |   | **Shares** |   | **Par  Value** |   |
|                     |   |                       |   |           |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance - April 3, 1999  |   | 103                        |   | $              | 10     |       | 27     |   | $ | 3 |   | 4 |   | $ | 1 |   | 1 |   | $ | — |   | 135 |   | $ | 14 |   |
|                     |   |                       |   |           |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance - April 1, 2000  |   | 103                        |   | 10             |   | 27         |   | 3 |   | 4 |   | 1 |   | 1 |   | — |   | 135 |   | 14 |   |
| Sale of Stock            |   | 3                          |   | —         |   | —     |   | — |   | — |   | — |   | — |   | — |   | 3 |   | — |   |
|                     |   |                       |   |           |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance - March 31, 2001 |   | 106                        |   | 10             |   | 27         |   | 3 |   | 4 |   | 1 |   | 1 |   | — |   | 138 |   | 14 |   |
|                     |   |                       |   |           |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance - March 30, 2002 |   | 106                        |   | $              | 10     |       | 27     |   | $ | 3 |   | 4 |   | $ | 1 |   | 1 |   | $ | — |   | 138 |   | $ | 14 |   |

 

 Theremaining 412,055 shares are undesignated as to class.

 

In February 1997, the Company adopted a stock option plan (the “OptionPlan”) which provides for the grant to employees and directors, from time totime, of non-qualified stock options to purchase up to an aggregate of 17,990shares of common 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.  There were no options granted during fiscalyear 2002.  As of March 30, 2002, 17,230options have been granted under the Option Plan which entitles the holders topurchase upon vesting 17,230 shares of common stock at an exercise price of$370.49

 

33

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pershare.  At March 30, 2002, options on3,367 shares were exercisable and options to purchase 760 shares of commonstock remained available for grant.

 

The Company granted options to purchase 5,000 and 2,500 shares ofcommon stock for the fiscal years 2001 and 2000, respectively, with an exerciseprice of $370 per share (or higher), which is equal to (or above) the fairvalue of common stock at the date of grant, except for 1,000 options in fiscalyear 2000 with an exercise price below estimated fair market value.  Such difference will be recognized asadditional compensation expense on a straight line basis over the vestingperiod of the underlying options. During fiscal year 2002 and 2001, the Company recorded non-cashcompensation of $17,000 related to these options.  At March 30, 2002, options on 2,166 shares were exercisable.

 

The weighted average fair value of each option granted was estimated onthe date of grant to be approximately $85 to $100 using the minimum valuemethod with the following assumptions (i) risk-free interest rate of 5.32% and6.38% for fiscal 2001 and 2000, respectively, (ii) expected option life of 5years, (iii) forfeiture rate of 0 and (iv) no expected dividends.

 

The Company has adopted the disclosure only provisions of SFAS No.123.  For the years ended March 30,2002, March 31, 2001 and April 1, 2000, had the Company recognized compensationexpense in accordance with Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation”, net earnings (loss) would have been$2,938,000, $8,715,000 and ($2,566,000), respectively.

 

**8.****                                      EMPLOYEEBENEFITS:**

 

In 1993, the Company adopted the HCC Savings and Investment Plan (the“Plan”) which covers all eligible full-time employees.  The Company established the Plan to meet therequirements of a qualified retirement plan pursuant to the provisions ofSection 401(k) of the Internal Revenue Code. The Plan provides participants the opportunity to make tax deferredcontributions to a retirement trust account in amounts up to 15% of their grosswages.  The Company has elected to makematching contributions in amounts that may change from year to year.  The Company contributed $668,000 (2002),$667,000 (2001) and $572,000 (2000) in matching contributions to the Plan.

 

Included in accrued liabilities is accrued compensation of $2,557,000at March 30, 2002 and $3,791,000 at March 31, 2001.

 

**9.****                                      COMMITMENTSAND CONTINGENCIES:**

 

Environmental

 

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

 

34

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In August 1994, the U.S. Environmental Protection Agency (“EPA”)identified the Company as a potentially responsible party (“PRP”) in the ElMonte Operable Unit (“EMOU”) of the San Gabriel Valley Superfund Sites.  In early 1995, the Company and the EPAexecuted an Administrative Consent Order which requires the Company and otherPRP’s to perform a Remedial Investigation and Feasibility Study (“RI/FS”) forthe EMOU.  The RI/FS was completed in1999 and the EPA issued an interim record of decision.  In addition, the Company’s facility in Avon,Massachusetts is subject to Massachusetts “Chapter 21E”, the State’s hazardoussite clean-up program.  Uncertainty asto (a) the extent to which the Company caused, if at all, the conditions beinginvestigated, (b) the extent of environmental contamination and risks, (c) theapplicability of changing and complex environmental laws (d) the number andfinancial viability of other PRP’s, (e) the stage of the investigation and/orremediation, (f) the unpredictability of investigation and/or remediation costs(including as to when they will be incurred), (g) applicable clean-upstandards, (h) the remediation (if any) that will ultimately be required, and(i) available technology make it difficult to assess the likelihood and scopeof further investigation or remediation activities or to estimate the futurecosts of such activities if undertaken. In addition, liability under CERCLA is joint and several, and anypotential inability of other PRP’s to pay their pro rata share of theenvironmental remediation costs may result in the Company being required tobear costs in excess of its pro rata share.

 

In fiscal 1997, the Company with the help of independent consultants,determined a cost estimate and accrued $10,000,000 for existing estimatedenvironmental remediation and other related costs.  The time frame over which the Company expects to incur such costsvaries with each site, ranging up to 20 years. This estimate is based onprogress made in determining the magnitude of such costs, experience gainedfrom sites on which remediation is ongoing or has been completed, and thetiming and extent of remedial actions required by the applicable governmentalauthorities.

 

As of March30, 2002, the accrual for estimated environmental costs was $8,174,000.  Actual expenditures for environmental remediationfor each of the three years in the period ended March 30, 2002 were $528,000(2002), $476,000 (2001) and $238,000 (2000). The Company believes its accrual is adequate, but as the scope of itsobligations becomes more clearly defined, this accrual may be modified andrelated charges against earnings may be made.

 

Claims for recovery of costs already incurred and future costs havebeen asserted against various insurance companies.  The Company has neither recorded any asset nor reduced anyliability in anticipation of recovery with respect to such claims made.

 

Other

 

On March 3, 1998, Walter Neubauer, a former stockholder of the Companyand a current stockholder of SDI, filed a lawsuit in California Superior Court(Case BC186937; Walter Neubauer vs. Andrew Goldfarb, et. al.) against theCompany and certain other stockholders alleging (i) breach of fiduciary duty,(ii) fraud, (iii) negligent misrepresentation, (iv) negligence, (v) violationsof corporations code and (vi) breach of contract.  The allegations primarily relate to the Company’s exercise of anoption to acquire Mr. Neubauer’s stock in August 1996.  In September 1999, five of the six claimswere dismissed upon a summary judgement motion made by the Company, includingall of the claims against the Company. The remaining claim against Andrew Goldfarb, the former Chief ExecutiveOfficer, as an individual, for alleged violations of oral representations wassettled in December 2001.

 

On May 7, 1998, the Company filed a lawsuit against Mr. Neubauer inCalifornia Superior Court alleging (i) breach of contract, (ii) intentionalinterference with business relations and (iii) interference with prospectivebusiness advantage.  All allegationsrelate to violations of the noncompetition agreement executed by Mr. Neubauerin August 1996.  In October 2001, theCompany entered into a settlement

 

35

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agreement with Mr. Neubauer toresolve these claims as well as any residual claims against the Company fromthe litigation discussed above.

 

A number of claims / disputes have arisenwith SDI in conjunction with the wind down of the sales to SDI.  The Company is pursuing its claims and willuse all remedies available to resolve the issues.  The ultimate resolution of these claims is not expected to have amaterial impact on the financial position of the Company.

 

In addition to the above, the Company is involved in other claims andlitigation arising in the normal course of business.  Based on the advice of counsel and in the opinion of management,the ultimate resolution of these matters will not have a significant effect onthe results of operations or financialposition or the results of operations of the Company.

 

**10.****                               RELATEDPARTY TRANSACTIONS:**

 

The Company pays an annual management fee of $125,000 plus expenses toWindward Capital Partners (a member of the investor group).  The total annual management fee and expensespaid to Windward Capital Partners was $155,000, $143,000 and $218,000 for thefiscal years ended March 30, 2002, March 31, 2001 and April 1, 2000,respectively.

 

36

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**HCC INDUSTRIESINC.  AND SUBSIDIARIES**

**SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS**

**(In thousands)**

 
|                            |   | **Balance  at  Beginning  of Year** |   | **Additions-  Charged  to Costs  and  Expenses** |   | **Deductions-  Uncollectible  Accounts  Write Offs** |   | **Balance  at End  of Year** |   |
|---------------------------------|--------|-------------------------------------|--------|--------------------------------------------------|--------|------------------------------------------------------|--------|------------------------------|--------|
|                            |   |                                |   |                                             |   |                                                 |   |                         |   |
| **2002**                        |   |                                |   |                                             |   |                                                 |   |                         |   |
| Allowance for doubtful accounts |   | $                                   | 61     |                                             | $      | 40                                                   |   | $                            | 31     |   | $ | 70 |   |
|                            |   |                                |   |                                             |   |                                                 |   |                         |   |
| **2001**                        |   |                                |   |                                             |   |                                                 |   |                         |   |
| Allowance for doubtful accounts |   | $                                   | 51     |                                             | $      | 81                                                   |   | $                            | 71     |   | $ | 61 |   |
|                            |   |                                |   |                                             |   |                                                 |   |                         |   |
| **2000**                        |   |                                |   |                                             |   |                                                 |   |                         |   |
| Allowance for doubtful accounts |   | $                                   | 46     |                                             | $      | 11                                                   |   | $                            | 6      |   | $ | 51 |   |

 

37

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**Item 9 -  Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

 

None

 

**PART III**

 

**Item 10 -  Directors and ExecutiveOfficers for the Registrant**

 

**Management**

 

The following table sets forth certain information concerning thedirectors and executive officers of the Company.  Each director is elected for a one (1) year term or until suchperson’s successor is duly elected and qualified.

 
| **Name**               |   | **Age** |   | **Position**                                                 |   |
|------------------------|--------|---------|--------|--------------------------------------------------------------|--------|
| Richard Ferraid        |   | 46      |   | Director,  Chairman, President and CEO of HCC                |   |
| Christopher H. Bateman |   | 50      |   | Director,  Vice President and Chief Financial Officer of HCC |   |
| Robert H. Barton III   |   | 68      |   | Director of  HCC                                             |   |
| Andy Goldfarb          |   | 54      |   | Director of  HCC                                             |   |
| Fred Hauser            |   | 65      |   | Director of  HCC                                             |   |
| John M. Leonis         |   | 68      |   | Director of  HCC                                             |   |
| Robert H. Rau          |   | 65      |   | Director of  HCC                                             |   |
| Thomas J. Sikorski     |   | 41      |   | Director of  HCC                                             |   |
| Gary L. Swenson        |   | 64      |   | Director of  HCC                                             |   |

 

Mr. Ferraid joined the Company in 1992 and currently serves as theChairman, President and Chief Executive Officer of HCC.  Prior to becoming the President and CEO ofHCC in March 2000, he served in various capacities including President ofGlasseal from 1994-2000.  Mr. Ferraidbecame a director of the Company in February 1997 following the consummation ofthe Recapitalization.  Mr. Ferraidpreviously worked at Electrical Industries, a competitor of the Company.  Mr. Ferraid has over 20 years of experiencein the GTMS industry.

 

Mr. Bateman joined the Company in 1986 and has served in variouscapacities.  He currently serves as VicePresident, 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 on the Board ofDirectors of Methodist Hospital Foundation, a non-profit foundation.

 

Mr. Barton was elected a director of HCC in February 1997 following theconsummation of the Recapitalization. Mr. Barton was elected Chairman of French Holdings, Inc. in October 1996and Chairman and CEO of Meridian Automotive Systems, Inc. in April 1997.  Mr. Barton was Chairman, President and ChiefExecutive Officer of Alcoa Fujikura Ltd. from May 1984 to December 1996.  He currently serves on the Board ofDirectors of and as senior advisor to Alcoa Fujikura Ltd., and is Chairman,President and Chief Executive Officer of Meridian Automotive Systems, Inc.

 

Mr. Goldfarb retired as Chairman, Chief Executive Officer and Presidentof HCC in January 2000 after having served in various capacities since1976.  Mr. Goldfarb has been a directorof the Company since 1979 and continues to serve the Company in that role.  He currently serves on the Board ofDirectors of Safety Components International.

 

Mr. Hauser was elected a director of HCC in April 1999.  Mr. Hauser retired from Metropolitan LifeInsurance Company in 1997 as Senior Vice President and Corporate Controllerafter 39 years with the company.  Mr.Hauser has served as a director of METMOR, MetLife’s mortgage bankingoperations, and MetLife Securities, a broker dealer.  Mr. Hauser has also served on the board of the New York chapterof the Financial Executives Institute, an organization of Chief FinancialOfficers, Treasurers and Controllers of major corporations, and was itsPresident in 1993-1994.

 

38

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

 

Mr. Rau was elected a director of HCC in July 1998.  Mr. Rau retired December 31, 1998 asPresident of the Aerostructures Group of The Goodrich Company.  Prior to its merger with Goodrich, Mr. Rauwas President and Chief Executive Officer of Rohr, Inc. from 1993 to 1997.  Before joining Rohr, he was an ExecutiveVice President of Parker Hannifin Corporation and President of its AerospaceSector.  In addition, Mr. Rau is a pastmember of the Board of Governors of the Aerospace Industries Association, apast Chairman of the General Aviation Manufacturers Association, a member ofthe Board of Directors of Goodrich Aerospace Europe Innovative Solutions andSupport Corp., and Chairman of the International Advisory Panel of SingaporeAerospace.

 

Mr. Sikorski was elected a director of HCC in February 1997 followingthe consummation 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 Private EquityInvestments at MetLife from 1992 to 1994 and prior to that was a Vice Presidentin the Leveraged Buyout Group at the First Boston Corporation from 1986 to 1992.  Mr. Sikorski currently serves on the Boardof Directors of DCV Holdings, Inc. and Palace Entertainment, Inc.  Mr. Sikorski is Mr. Swenson’s son-in-law.

 

Mr. Swenson was elected a director of HCC in February 1997 followingthe consummation 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.

 

**Item 11 -  Executive Compensation**

 

The following table sets forth the total value of compensation receivedby the Chief Executive Officer and the two most highly compensated executiveofficers, other than the Chief Executive Officer, who served as executiveofficers of the Company as of March 30, 2002, (collectively with the ChiefExecutive Officer, the “Named Executive Officers”) for services rendered in allcapacities to the Company for the year ended March 30, 2002.

 

39

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**Summary CompensationTable(1)**

 
|                              |   | **Fiscal  Year** |       | **Annual  Compensation** |      | **Long-Term  Compensation -  Number of  Securities  Underlying  Options** |   | **All Other  Compensation(2)** |   |
|-----------------------------------|--------|------------------|------------|--------------------------|-----------|---------------------------------------------------------------------------|--------|--------------------------------|--------|
| **Name and  Principal Position**  |   |             | **Salary** |                     | **Bonus** |                                                                      |   |                           |
|                              |   |             |       |                     |      |                                                                      |   |                           |   |   |   |
| Richard Ferraid                   |   | 2002             |       | $                        | 364,000   |                                                                      | $      | 497,546                        | (4)    | $ | 17,000 |   | $ | 16,160 |   |
| Chairman, Chief Executive Officer |   | 2001             |       | $                        | 350,000   |                                                                      | $      | 526,968                        | (3)    | 17,000 |   | $ | 14,790 |   |
| and President                     |   | 2000             |       | $                        | 218,806   |                                                                      | $      | 51,150                         |   | — |   | $ | 13,590 |   |
|                              |   |             |       |                     |      |                                                                      |   |                           |   |   |   |
| Christopher Bateman               |   | 2002             |       | $                        | 220,480   |                                                                      | $      | 340,135                        | (4)    | — |   | $ | 16,160 |   |
| Chief Financial Officer and       |   | 2001             |       | $                        | 212,496   |                                                                      | $      | 476,968                        | (3)    | — |   | $ | 15,360 |   |
| Vice President                    |   | 2000             |       | $                        | 207,874   |                                                                      | $      | 51,150                         |   | — |   | $ | 20,058 |   |
|                              |   |             |       |                     |      |                                                                      |   |                           |   |   |   |
| Dennis Moore                      |   | 2002             |       | $                        | 124,415   |                                                                      | $      | 187,542                        | (4)    | — |   | $ | 16,826 |   |
| Vice President                    |   | 2001             |       | $                        | 119,910   |                                                                      | $      | 257,858                        | (3)    | — |   | $ | 15,922 |   |
|                              |   | 2000             |       | $                        | 117,359   |                                                                      | $      | 28,859                         |   | — |   | $ | 9,955 |   |
|                                   |        |                  |            |                          |           |                                                                           |        |                                |        |  |  |  |  |  |  |

 

----

(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 2002 all other compensation included thefollowing amounts: Mr. Ferraid, $6,800 for Company contributions into the Company’s401(k) plan, $9,000 for automobile allowance and $360 for allocated lifeinsurance; Mr. Bateman, $6,800 for Company contributions into the Company’s401(k) plan, $9,000 for automobile allowance and $360 for allocated lifeinsurance; Mr. Moore, $6,800 of Company contributions into the Company’s 401(k)plan, $9,000 for automobile allowance and $1,026 for allocated life insurance;

(3)          Includes payment of deferred compensationearned in fiscal 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 compensationearned in fiscal 1999 under the terms of the Contingent Bonus Plan asfollows:  Mr. Ferraid $170,301; Mr.Bateman $141,918 and Mr. Moore $75,690.

 

**Grants of Stock Options**

 

Options on 3,000 shares were granted to Mr. Ferraid during the fiscalyear ended March 31, 2001.  Theseoptions vest at 1/3 per year for calendar years 2001, 2002 and 2003.  Options on 2,500 shares were granted to Mr.Ferraid during the fiscal year ended April 1, 2000.  The options vest at 1/3 per year for fiscal years 2001, 2002 and2003.  These options are not part of theOption Plan as discussed below.

 

The following table sets forth information concerning the value of unexercisedoptions held by the Named Executive Officers. The Named Executive Officers did not exercise any options during thefiscal year ended March 30, 2002.

 
|                |   | **Options  Outstanding at March 31, 2002**                         |   |
|---------------------|--------|--------------------------------------------------------------------|--------|
| **Name**            |   | **Number of  Shares  Under Option -  Exercisable/  Unexercisable** |   | **Value of  Unexercised  Options -  Exercisable/  Unexercisable(1)** |   |
|                |   |                                                               |   |   |   |
| Richard Ferraid     |   | 2,410 / 6,680                                                      |   | $ 246,746/$123,744 |   |
| Christopher Bateman |   | 244 / 2,951                                                        |   | $ - / $- |   |
| Dennis Moore        |   | 71/ 1,074                                                          |   | $ - / $- |   |
|                     |        |                                                                    |        |  |  |  |

 

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(1)          There is no public market for the Company’sstock.   The fair market value of ashare of Common Stock is assumed to be equal to the exercise price per share ofthe options that were granted under the Option Plan ($370.49 per share).

 

40

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**EmploymentAgreements**

 

In March 2000, Richard Ferraid entered into an employment agreementwith HCC (the “Employment Agreement”). Pursuant to the Employment Agreement, Mr. Ferraid will be employed byHCC until March 31, 2003 provided that HCC may terminate Mr. Ferraid by reasonof disability, death or for good cause (as defined in the EmploymentAgreement).  Upon termination by theCompany for reasons other than death, disability or good cause, Mr. Ferraid willbe entitled to receive salary and benefits for a period of 24 months.  The agreement provides for a base salary tobe determined in accordance with HCC’s policies and an annual bonus contingenton certain performance-based criteria. Pursuant to the terms of the agreement, Mr. Ferraid, during the term ofthe Employment Agreement and a one year period thereafter, may not solicitcustomers of the Company, engage in business with any competing entity orinduce any other employee of the Company to leave his or her employment withthe Company.  On December 31, 2000, Mr.Ferraid’s employment agreement was amended to reflect the additional stockoptions granted to him.

 

Mr. Goldfarb’s employment agreement with the Company expired on April1, 2000.  In fiscal 2001, the Companyexecuted an agreement that compensates Mr. Goldfarb at $156,000 per year forconsulting services and certain non-compete provisions.  The agreement has a two-year term andexpired on March 31, 2002.

 

Mr. Rau served as the Chief Executive Officer (CEO) of the Company fromJanuary 3, 2000 through March 8, 2000 (when Mr. Ferraid was named CEO) andagreed to serve as the Non-Executive Chairman of the Company for a one yearperiod ending December 31, 2000.  Mr.Rau’s compensation for the period was $450,000.  Mr. Rau was also given an option to purchase 2,450 shares of HCCstock at a price of $50,000, which purchase was made in June 2000.

 

**OptionPlan**

 

In connection with the Recapitalization, HCC adopted the Option Planwhich provides for the grant to employees from time to time of non-qualifiedstock options to purchase up to an aggregate of 22,887 shares (reduced to17,990 shares in December 2000) of Common Stock at exercise prices to bedetermined by the Board of Directors. The Option Plan provides for the grant of management options to purchase5,485 shares of Common Stock (the “Management Options”), management performanceoptions to purchase 10,870 shares of Common Stock (the “Management PerformanceOptions”), director options to non-affiliates of Windward to purchase 585shares of Common Stock (the “Director Options”), and director performanceoptions to non-affiliates of Windward to purchase 1,120 shares of Common Stock(the “Director Performance Options”). The Management Options and Director Options were granted subject to anEBITDA (as defined in the Option Plan) vesting schedule that provides for 20%of each series of options to vest in each of fiscal year 1998 through fiscalyear 2002 if 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 addition, regardless ofwhether the performance criteria are achieved, all Options including, theperformance-based Options, will vest automatically on the seventh anniversaryof the date of grant.  To date, only 20%of stock options related to the Management Options and Director Options havevested.

 

The Management Performance Options and Director Performance Optionswere granted subject to a vesting schedule providing for approximately 50% ofeach series of options to vest upon a Change of Control in which the WindwardGroup realizes a 30% compounded annual rate of return on its aggregate equityinvestment in the Company and the remaining options vesting upon a Change ofControl in which Windward Group realizes a 40% compounded annual rate of returnon its aggregate equity investment in the Company.

 

As of March 30, 2002, 17,230 options have been granted under the OptionPlan which entitle the holders to purchase upon vesting 17,230 shares of CommonStock at an exercise price of $370.49 per share.  An additional 760 Management Options and Management PerformanceOptions may be granted under the Option Plan.

 

41

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**ContingentBonus Plan**

 

In connection with the Recapitalization, HCC adopted the Bonus Plan,pursuant to which the Company will grant Bonus Units (each representing aninterest in the bonus pool of $6.0 million) to certain key employees (the“Participants”).  The Bonus Units willbe awarded by a committee of the Board of Directors of HCC formed to administerthe Bonus Plan.  On April 3, 1999 andMarch 28, 1998, $1.1 million and  $3.0million of Bonus Units became vested, respectively.  Vested contingent bonuses become due and payable on the thirdanniversary of the applicable vesting date and will bear interest at 10% perannum (payable semi-annually in arrears) from each applicable vesting dateuntil paid in full.  Pursuant to thisPlan, the $3.0 million of Bonus Units vested in 1998 and the $1.1 million ofBonus Units vested in 1999 were paid during fiscal 2001 and 2002, respectively.

 

**DirectorCompensation**

 

Each of Messrs. Barton, Leonis, Rau and Hauser receive an annual fee of$20,000.  In addition, Mr. Rau receiveda fee of $250,000 and $200,000 in fiscal 2001 and 2000, respectively, forserving as Chairman of the Board. Messrs. Barton, Leonis and Rau were granted 695, 470 and 470 stockoptions, respectively, of which 215, 150 and 150, respectively, are subject toa vesting schedule that generally provides for each option to vest 20% per yearover five years (25% over four years for Mr. Rau) commencing on the firstanniversary of the date of grant if the Company attains specified annual orcumulative earnings targets set forth in the Option Plan and the remainingoptions vest upon a change in control in which the Windward Group realizedspecified annual rates of return on its equity investment in the Company asdefined in the Option Plan.  All optionsautomatically vest on the seventh anniversary of the date of grant regardlessof whether the performance criteria are achieved.  All options have an exercise price equal to the fair value of thecommon stock at the date of grant ($370.49 per share).

 

**CompensationCommittee Interlocks and Insider Participation**

 

In fiscal 2002, the Company had no compensation committee andcompensation matters were handled either by Mr. Ferraid or by the Board ofDirectors.

 

42

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**Item 12 -  Security Ownership of CertainBeneficial Owners and Management**

 

The following table lists all shares of HCC’s Common Stock as of March30, 2002, beneficially owned by each director of HCC, each executive officer ofHCC and each person known by the Company to beneficially own more than 5% ofsuch outstanding shares of Common Stock at such date.  The table also reflects the percentage of the shares ownedbeneficially by 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 30, 2002 there were 137,945 shares of HCC Common Stockoutstanding.

 
| **Name and Address of Beneficial Owners**                                         |   | **Number of  Shares of  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)                                                          |   | —                                  |   | **          |   |
| Robert Barton(h)                                                                  |   | —                                  |   | **          |   |
| John M. Leonis(h)                                                                 |   | 270                                     |   | 0.2         | %      |
| Robert Rau(g)(h)                                                                  |   | 2,720                                   |   | 2.0         | %      |
| Fred Hauser(h)                                                                    |   | —                                  |   | **          |   |
| Andrew Goldarb(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        | %      |

 

----

*                 HCC’s common equity is divided intofour separate classes of Common stock, par value $.10 per share:  (i) Class A Common Stock with one vote pershare, (ii) Class B Common Stock with one vote per share, (iii) Class C CommonStock with no voting rights, except as required by applicable state law and(iv) Class D Common Stock with 10 votes per share.  Except for voting rights, all the common equity of the Companyhave identical economic terms.  Otherthan Windward/Merban, L.P. and Windward/Merchant, L.P., all other stockholdersof HCC own Class A Common Stock.  Seenote (a) below.

**          Less than 1.0%

 

(a)          Windward/Park HCC, L.L.C. owns 53,836 sharesof Class A Common Stock, Windward/Merban L.P. owns 6,451 shares of Class BCommon Stock and 4,316 shares of Class C Common Stock, Windward/Merchant, L.P.owns 21,055 shares of Class B Common Stock and 480 shares of Class D CommonStock and Windward 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.

 

43

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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 bedeemed to share beneficial ownership of the Common Stock owned of record by theWindward Group, 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 sharebeneficial ownership of shares of Common Stock owned of record by the WindwardGroup by virtue of its status as the general partner of Windward CapitalAssociates, 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 limitedpartners of Windward Capital Associates, L.P. None of Messrs. Swenson and Sikorski, in their capacities as limitedpartners of Windward Capital Associates, L.P., has or shares voting orinvestment power with Windward Capital Associates, L.P. with respect to theCommon Stock owned by Windward Capital Associates, L.P.

(f)            Includes 270 shares of Common Stock ownedby the Leonis Family 1989 Inter Vivos Family Trust dated March 6, 1989.

(g)         Includes 2,720 shares of Common Stock owned bythe Rau Family Trust dated December 14, 1984.

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

(i)             Includes 9,173 shares of Common Stockowned by the Bateman Rillorta Family Trust 2000 dated December 18, 2000.

(j)             Excludes outstanding options to purchaseshares of Common Stock of which 244 and 2,410 are exercisable at March 30, 2002for Mr. Bateman and Mr. Ferraid, respectively.

(k)          Includes 27,753 shares of Common Stock ownedby the Andrew and Denise Goldfarb Revocable Trust of 1995.  Also includes 1,350 shares of Common Stockowned by the Jessica Anne Goldfarb Irrevocable Trust and the 1,350 shares ofCommon Stock owned by the Rebecca Goldfarb Irrevocable Trust of which Mr.Goldfarb’s brother is the trustee.  Mr.Goldfarb disclaims beneficial ownership of the shares of Common Stock owned bysuch trusts.

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

 

**Item 13 -  Certain Relationships andRelated Transactions**

 

The Company pays an annual management fee of $125,000 plus expenses toWindward Capital Partners (a member of the investor group).  The total annual management fee and expensespaid to Windward Capital Partners was $155,000, $143,000 and $218,000 for thefiscal years ended March 30, 2002, March 31, 2001 and April 1, 2000, respectively.

 

44

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**PART IV**

 

**Item14****  -  Exhibits, Financial Statement Schedules, andReports on Form 8-K**

 

The following documents are filed as part of this report:

 
| **(a)(1)** | **Financial Statements**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       | Report of Independent Accountants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       | Consolidated Balance Sheets at March 30, 2002 and March 31, 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       | Consolidated Statements of Operations for  each of the three years ended March 30, 2002, March 31, 2001 and April 1,  2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       | Consolidated Statements of Stockholders’  Equity for each of the three years March 30, 2002, March 31, 2001 and April  1, 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       | Consolidated Statements of Cash Flows for  each of the three years ended March 30, 2002, March 31, 2001 and April 1,  2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       | Notes to Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **(a)(2)** | **Financial Statement Schedules**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       | Schedule II - Valuation and Qualifying  Accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       | All other  schedules for which provision is made in the applicable accounting  regulations of the Securities and Exchange Commission are not required under  the applicable instructions or the required information is included in the  Consolidated Financial Statements and Notes thereto, or they are inapplicable  and are therefore omitted.                                                                                                                                                                                                                                                                                                                                                     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       | The  guarantee obligations of the Subsidiary Guarantors (which are all direct or  indirect wholly owned subsidiaries of the Company) are full, unconditional  and joint and several.  The aggregate  assets, liabilities, earnings, and equity of the Subsidiary Guarantors are  substantially equivalent to the total assets, liabilities, earnings and equity  of HCC Industries Inc. and its subsidiaries on a consolidated basis.  Separate financial statements of the  Subsidiary Guarantors are not included in this Form 10-K because management  of the Company has determined that separate financial statements of the  Subsidiary Guarantors would not be material to investors. |

 

45

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

 

Regulation S-K Exhibit

Table Reference

 
| 2.     |   | **Plan of Acquisition, Reorganization,  Arrangement, Liquidation or Succession.**                                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                    |
| 2.1    |   | First  Amendment and Restatement of the Stock Purchase and Sale Agreement, dated as  of December 23, 1996, by and among the Company, the Windward Group, MetLife  and the Sellers named therein. (1)                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 2.3    |   | Escrow  Agreement, dated as of February 14, 1997, by and among the Company, Windward  Capital Associates L.P., the Sellers named therein and U. S. Trust Company of  California, N.A., as escrow agent. (1)                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.     |   | **Certificate of Incorporation and By-Laws.**                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.1    |   | Amended and  Restated Certificate of Incorporation of the Company.(1)                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.2    |   | Amended and  Restated By-Laws of the Company. (1)                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.3    |   | Certificate  of Incorporation of Hermetic Seal Corporation. (1)                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.4    |   | By-Laws of  Hermetic Seal Corporation. (1)                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.5    |   | Certificate  of Incorporation of Glasseal Products, 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 Sealtron Acquisition Corp. (1)                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.10   |   | By-Laws of  Sealtron Acquisition Corp. (1)                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.11   |   | Articles of  Incorporation of HCC Industries International. (1)                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.12   |   | By-Laws of  HCC Industries International. (1)                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.13   |   | Declaration  of Trust of Norfolk Avon Realty Trust. (1)                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.14   |   | Certificate  of Incorporation of HCC Machining Company, Inc.                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 3.15   |   | By-Laws of  HCC Machining Company, Inc.                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 4.     |   | **Instruments Defining the Right of Security  Holders, including Indentures.**                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 4.1    |   | Indenture,  dated as of May 6, 1997 (the “Indenture”), among the Company, the Subsidiary  Guarantors and IBJ Schroder Bank & Trust Company, as Trustee, relating to  the 103⁄4% Senior Subordinated Notes due 2007 and the 103⁄4% Senior Subordinated  Exchange Notes due 2007. (1) |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 4.2    |   | Form of 103⁄4%  Senior Subordinated Exchange Notes due 2007. (1)                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 4.4    |   | First  Supplemental Indenture, dated as of October 24, 1997, to the Indenture. (1)                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 9.     |   | **Voting Trust Agreement**                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 9.1    |   | Stockholders  Agreement, dated as of February 14, 1997, by and among the Company, the Windward  Group and the Stockholders named therein. (1)                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.    |   | **Material Contracts.**                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.2.3 |   | Credit  Agreement, dated as of February 12, 2002, between the Company and Union Bank  of California, N.A.                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 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 and between the Company and  Christopher H. Bateman (2)                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.9.1 |   | Employment  Agreement dated as of March 31, 2000, by and between the Company and Richard  L. Ferraid  (2)                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.9.2 |   | Amended and  Restated Employment Agreement dated as of December 31, 2000, by and between  the Company and Richard L. Ferraid.   (3)                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.10  |   | Financial  Advisory Services Agreement, dated as of February 14, 1997, by and between  Windward Capital Partners, L.P. and the Company. (1)                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 10.11  |   | Letter  Agreement, dated February 14, 1997 from the Company to Windward Capital  Partners, L.P., related to fees. (1)                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 12.    |   | **Ratio of Earnings to Fixed Charges.**                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 12.1   |   | Statement  regarding the computation of ratio of earnings to fixed charges for the  Company.                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 21.    |   | **Subsidiaries**                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 21.1   |   | Subsidiaries  of the Company. (1)                                                                                                                                                                                                                                                                       |

 

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(1)          Previouslyfiled under the same exhibit number as an exhibit to Registration Statement onForm S-4 (File No. 333-32207) and incorporated herein by reference.

 

(2)          Previouslyfiled under the same exhibit number as an exhibit to the Company’s AnnualReport on Form 10-K for the fiscal year ended April 1, 2000 and incorporatedherein by reference.

 

(3)          Previouslyfiled under the same exhibit number as an exhibit to the Company’s AnnualReport on Form 10-K for the fiscal year ended March 31, 2001 and incorporatedherein by reference.

 

**(a)(4)****                   Reportson Form 8-K**

 

None

 

46

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the registrant 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 4, 2002.

 
|   | HCC  INDUSTRIES INC. |
|--------|----------------------|
|   |                 |   |
|   | By:                  | /s/ | Richard L.  Ferraid |   |
|   |                 |   | Richard L.  Ferraid |
|   |                 | President  and Chief Executive Officer |

 

Pursuant tothe requirements of the Securities Act of 1934, this report has been signedbelow by the following persons in the capacities and on the dates indicated.

 
| **Signature** |                    | **Title** |                            | **Date** |
|---------------|-------------------------|-----------|---------------------------------|----------|
|          |                    |      |                            |     |   |
|          |                    |      |                            |     |   |
| /s/           | Richard L.  Ferraid     |      | Chairman, President and Chief   |     | June 4, 2002 |
|          | Richard L.  Ferraid     |      | Executive Officer               |     |   |
|          |                    |      | (Principal Executive Officer)   |     |   |
|          |                    |      |                            |     |   |
| /s/           | Christopher  H. Bateman |      | Director, Vice President and    |     | June 4, 2002 |
|          | Christopher  H. Bateman |      | Chief Financial Officer         |     |   |
|          |                    |      | (Principal Financial/Accounting |     |   |
|          |                    |      | Officer)                        |     |   |
|          |                    |      |                            |     |   |
| /s/           | Robert H. Barton,  III  |      | Director                        |     | June 4, 2002 |
|          | Robert H.  Barton, III  |      |                            |     |   |
|          |                    |      |                            |     |   |
| /s/           | Andrew  Goldfarb        |      | Director                        |     | June 4, 2002 |
|          | Andrew  Goldfarb        |      |                            |     |   |
|          |                    |      |                            |     |   |
| /s/           | Fred Hauser             |      | Director                        |     | June 4, 2002 |
|          | Fred Hauser             |      |                            |     |   |
|          |                    |      |                            |     |   |
| /s/           | John M.  Leonis         |      | Director                        |     | June 4, 2002 |
|          | John M.  Leonis         |      |                            |     |   |
|          |                    |      |                            |     |   |
| /s/           | Robert H.  Rau          |      | Director                        |     | June 4, 2002 |
|          | Robert H.  Rau          |      |                            |     |   |
|          |                    |      |                            |     |   |
| /s/           | Thomas J.  Sikorski     |      | Director                        |     | June 4, 2002 |
|          | Thomas J.  Sikorski     |      |                            |     |   |
|          |                    |      |                            |     |   |
| /s/           | Gary L.  Swenson        |      | Director                        |     | June 4, 2002 |
|          | Gary L.  Swenson        |      |                            |     |   |

 

47

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