** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **

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| **ý**                            |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                             |
|---------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                  |   |                                                                                                                                                       |
|                                  |   | **For the quarterly period  ended:  December 28, 2002**                                                                                               |
|                                  |   |                                                                                                                                                       |
|                                  |   | **OR**                                                                                                                                                     |
|                                  |   |                                                                                                                                                       |
| **o**                                 |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                       |
|                                  |   |                                                                                                                                                       |
|                                  |   | **For the transition period from**                   **to** |
|                                  |   |                                                                                                                                                       |
| **Commission file number: 333-32207** |

 

**HCC INDUSTRIES INC.**

(Exact name of Registrantas 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)        |
|                                                              |   |                                   |

 

----

 

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

 

Registrant’s CommonStock, outstanding at February 10, 2003 was 137,945 shares.

 

 

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**PART I -FINANCIAL INFORMATION**

**Item 1.    Condensed Consolidated Financial Statements**

 

**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**Consolidated Balance Sheets**

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

 
|                                                                                            |   | **December 28,  2002** |   | **March 30,  2002** |   |
|-------------------------------------------------------------------------------------------------|--------|------------------------|--------|---------------------|--------|
|                                                                                            |   | **(unaudited)**        |   |                |   |
| **ASSETS**                                                                                      |   |                   |   |                |   |
| **Current  Assets**:                                                                            |   |                   |   |                |   |
| Cash and cash equivalents                                                                       |   | $                      | 5,759  |                | $      | 10,990 |   |
| Trade accounts receivable, less allowance for doubtful accounts of $90  (2003) and $70 (2002)   |   | 6,577                  |   | 8,356               |   |
| Inventories                                                                                     |   | 5,104                  |   | 6,016               |   |
| Income taxes receivable                                                                         |   | 1,644                  |   | 506                 |   |
| Prepaid and other current assets                                                                |   | 1,201                  |   | 1,130               |   |
|                                                                                            |   |                   |   |                |   |
| Total current assets                                                                            |   | 20,285                 |   | 26,998              |   |
|                                                                                            |   |                   |   |                |   |
| **Property,  Plant and Equipment, net**                                                         |   | 22,692                 |   | 24,895              |   |
|                                                                                            |   |                   |   |                |   |
| **Other  Assets**:                                                                              |   |                   |   |                |   |
| Intangible assets                                                                               |   | 850                    |   | 4,486               |   |
| Deferred financing costs                                                                        |   | 1,479                  |   | 1,732               |   |
| Deferred income taxes                                                                           |   | 1,623                  |   | 1,623               |   |
| Restricted cash                                                                                 |   | 5,375                  |   | 5,901               |   |
|                                                                                            |   |                   |   |                |   |
| **Total  Assets**                                                                               |   | $                      | 52,304 |                | $      | 65,635 |   |
|                                                                                            |   |                   |   |                |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                         |   |                   |   |                |   |
|                                                                                            |   |                   |   |                |   |
| **Current  Liabilities**:                                                                       |   |                   |   |                |   |
| Current portion of long-term debt                                                               |   | $                      | 1,780  |                | $      | 2,109 |   |
| Accounts payable                                                                                |   | 917                    |   | 1,475               |   |
| Accrued liabilities                                                                             |   | 4,739                  |   | 7,721               |   |
|                                                                                            |   |                   |   |                |   |
| Total current liabilities                                                                       |   | 7,436                  |   | 11,305              |   |
|                                                                                            |   |                   |   |                |   |
| **Long  Term Liabilities**:                                                                     |   |                   |   |                |   |
| Long-term debt, net of current portion                                                          |   | 85,342                 |   | 86,627              |   |
| Environmental and other liabilities                                                             |   | 8,640                  |   | 9,114               |   |
|                                                                                            |   | 101,418                |   | 107,046             |   |
|                                                                                            |   |                   |   |                |   |
| **Commitments  and Contingencies**                                                              |   |                   |   |                |   |
|                                                                                            |   |                   |   |                |   |
| **Stockholders’  Equity (Deficit):**                                                       |   |                   |   |                |   |
| Common stock; $.10 par value; authorized 550,000 shares, issued and  outstanding 137,945 shares |   | 14                     |   | 14                  |   |
| Additional paid-in capital                                                                      |   | 360                    |   | 360                 |   |
| Accumulated deficit                                                                             |   | (49,488                | )      | (41,785             | )      |
|                                                                                            |   |                   |   |                |   |
| **Total  Stockholders’ Deficit**                                                           |   | (49,114                | )      | (41,411             | )      |
|                                                                                            |   |                   |   |                |   |
| **Total  Liabilities and Stockholders’ Deficit**                                           |   | $                      | 52,304 |                | $      | 65,635 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

 

2

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS**

**(in thousands)**

**(unaudited)**

 

 
|                                                                          |   | **Three Months  Ended** |   | **Nine  Months Ended** |   |
|-------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                          |   | **Dec. 28,  2002**      |   | **Dec. 29,  2001**     |   | **Dec. 28,  2002** |   | **Dec. 29,  2001** |   |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| **NET SALES**                                                                 |   | $                       | 9,678  |                   | $      | 14,394 |   | $ | 30,272 |   | $ | 51,542 |   |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| Cost of goods  sold                                                           |   | 7,800                   |   | 9,839                  |   | 24,473 |   | 34,741 |   |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| **GROSS PROFIT**                                                              |   | 1,878                   |   | 4,555                  |   | 5,799 |   | 16,801 |   |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| Selling, general  and administrative expenses                                 |   | 1,525                   |   | 1,246                  |   | 4,470 |   | 4,887 |   |
| Impairment of  assets                                                         |   | —                  |   |                   |   | 500 |   | — |   |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| **EARNINGS FROM OPERATIONS**                                                  |   | 353                     |   | 3,309                  |   | 829 |   | 11,914 |   |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| **OTHER INCOME (EXPENSE):**                                                   |   |                    |   |                   |   |   |   |   |   |
| Interest and  other income                                                    |   | 35                      |   | 55                     |   | 104 |   | 196 |   |
| Interest expense                                                              |   | (2,387                  | )      | (2,459                 | )      | (7,208 | ) | (7,388 | ) |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| Total other  expense, net                                                     |   | (2,352                  | )      | (2,404                 | )      | (7,104 | ) | (7,192 | ) |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| **EARNINGS (LOSS) BEFORE TAXES AND  CUMULATIVE EFFECT OF ACCOUNTING  CHANGE** |   | (1,999                  | )      | 905                    |   | (6,275 | ) | 4,722 |   |
| Taxes (benefit)  on earnings (loss)                                           |   | (736                    | )      | 362                    |   | (2,133 | ) | 1,889 |   |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| **EARNINGS  (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE**            |   | (1,263                  | )      | 543                    |   | (4,142 | ) | 2,833 |   |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| Cumulative  effect of accounting change                                       |   | —                  |   | —                 |   | (3,561 | ) | — |   |
|                                                                          |   |                    |   |                   |   |   |   |   |   |
| **NET EARNINGS (LOSS)**                                                       |   | $                       | (1,263 | )                      | $      | 543 |   | $ | (7,703 | ) | $ | 2,833 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
|                                                                                            |   | **For the  Nine Months Ended** |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                            |   | **December  28,  2002**        |   | **December  29,  2001** |   |
|                                                                                            |   |                           |   |   |   |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                      |   |                           |   |   |   |
| Net earnings  (loss)                                                                            |   | $                              | (7,703 | ) | $ | 2,833 |   |
| Reconciliation  of net earnings (loss) to net cash (used in) provided by operating  activities: |   |                           |   |   |   |
| Depreciation                                                                                    |   | 1,931                          |   | 1,883 |   |
| Amortization                                                                                    |   | 328                            |   | 471 |   |
| Impairment of  assets                                                                           |   | 500                            |   | — |   |
| Cumulative  effect of accounting change                                                         |   | 3,561                          |   | — |   |
| Changes in  operating assets and liabilities:                                                   |   |                           |   |   |   |
| Decrease in  trade accounts receivable, net                                                     |   | 1,779                          |   | 1,436 |   |
| Decrease in  inventories                                                                        |   | 912                            |   | 849 |   |
| (Increase) in  other assets and income taxes receivable                                         |   | (684                           | )      | (139 | ) |
| (Decrease) in  accounts payable                                                                 |   | (558                           | )      | (1,535 | ) |
| (Decrease) in  accrued and other liabilities                                                    |   | (3,456                         | )      | (3,950 | ) |
|                                                                                            |   |                           |   |   |   |
| Net cash (used  in) provided by operating activities                                            |   | (3,390                         | )      | 1,848 |   |
|                                                                                            |   |                           |   |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                      |   |                           |   |   |   |
| Purchases of  property, plant and equipment                                                     |   | (227                           | )      | (1,008 | ) |
|                                                                                            |   |                           |   |   |   |
| Net cash used in  investing activities                                                          |   | (227                           | )      | (1,008 | ) |
|                                                                                            |   |                           |   |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                      |   |                           |   |   |   |
| Principal  payments on long-term debt                                                           |   | (2,705                         | )      | (1,556 | ) |
| Proceeds from  issuance of long-term debt                                                       |   | 1,091                          |   | — |   |
|                                                                                            |   |                           |   |   |   |
| Net cash used in financing activities                                                           |   | (1,614                         | )      | (1,556 | ) |
|                                                                                            |   |                           |   |   |   |
| Net decrease in  cash and cash equivalents                                                      |   | (5,231                         | )      | (716 | ) |
|                                                                                            |   |                           |   |   |   |
| Cash and cash  equivalents at beginning of period                                               |   | 10,990                         |   | 8,896 |   |
|                                                                                            |   |                           |   |   |   |
| **CASH AND CASH EQUIVALENTS AT END OF  PERIOD**                                                 |   | $                              | 5,759  |   | $ | 8,180 |   |
|                                                                                            |   |                           |   |   |   |
| **SUPPLEMENTAL NONCASH FINANCING  ACTIVITIES:**                                                 |   |                           |   |   |   |
| Capital lease  obligations                                                                      |   | $                              | — |   | $ | 508 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

** **

**4**

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

Notes to CondensedConsolidated Financial Statements

December 28, 2002

 

 

1.                                       INTERIMFINANCIAL STATEMENTS AND ACCOUNTING POLICIES:

 

The accompanying unaudited condensed consolidatedfinancial statements of HCC Industries Inc. and Subsidiaries (the “Company”),include all adjustments (consisting of normal recurring entries) whichmanagement believes are necessary for a fair presentation of the financialposition and results of operations for the periods presented.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted.  The year end condensed balance sheet datawas derived from audited financial statements, but does not include alldisclosures required by generally accepted accounting principles.  It is suggested that the accompanyinginterim financial statements be read in conjunction with the Company’s auditedfinancial statements and footnotes as of and for the year ended March 30,2002.  Operating results for the threeand nine month period ended December 28, 2002 are not necessarily indicative ofthe operating results for the full fiscal year.

 

The Company believes thatcash on hand of $5.7 million and cash generated from operations, prior tointerest payments on long-term debt, will provide adequate funds for ongoingoperations, planned capital expenditures and debt service for thenear-term.  Over the next 12 months, theprimary cash obligations of the Company are interest payments ($ 9.2million), principal payments on existing debt ($1.9 million), and capitalexpenditures ($ 0.5 - $ 0.75 million).

 

Total cash used in thefirst nine months of fiscal 2003 was $5.2 million for operations, investing andfinancing activities.  The Company iscurrently negotiating with other potential lenders to secure a line of creditto augment its liquidity.  There is noassurance that such negotiations will be successful.

 

For the longer term, theoperating results of the Company must improve to satisfy its liquidityneeds.  The annual interest payments andprincipal payment obligations decrease only modestly over the next severalyears until the Notes become due in 2007. The Company is making substantial efforts to increase its sales levelsand thereby improve the operating results. There is no assurance that these efforts will be successful.  In addition, an increase in sales for theCompany will require additional investment in working capital to support suchincreased operations.

 

The Company generally manufactures products under bothindividual firm purchase orders and fixed price, long-term productioncontracts.  The contracts vary inlength, but generally are completed within 12 to 24 months.  Sales under individual purchase orders andlong-term production contracts are recognized at the time units are shipped andtitle and risk of loss transfers (FOB shipping point).  Our products are warranted to meet thespecifications of manufacture and customer “right of return” is only forfailure to meet the specifications.

 

The Company grants uncollateralized credit to itscustomers who are located in various geographical areas.  Estimated credit losses and returns havebeen provided for in the financial statements and, to date, have been withinmanagement’s expectations.  No customeraccount exceeds 10% of the accounts receivable balance at December 28, 2002.

 

The effective tax benefit recorded for fiscal 2003approximates the Federal statutory tax rate because the state tax regulationsdo not allow a carryback of tax losses. Such losses can only be carried forward and are subject to limitationson their utilization.  As a result, avaluation allowance has been established for these state losses.

 

These financial statements reflect certainreclassifications to the prior period balances to conform to the current periodpresentation.

 

5

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**HCC INDUSTRIES INC. AND SUBSIDIARIES**

Notes to CondensedConsolidated Financial Statements

December 28, 2002

 

2.                                       INVENTORIES:

 

Inventories consist of the following (in thousands):

 
|                               |   | **December  28,  2002** |   | **March 30,  2002** |   |
|------------------------------------|--------|-------------------------|--------|---------------------|--------|
|                               |   |                    |   |                |   |
| Raw materials  and component parts |   | $                       | 4,132  |                | $      | 4,503 |   |
| Work in process                    |   | 972                     |   | 1,513               |   |
|                               |   |                    |   |                |   |
|                               |   | $                       | 5,104  |                | $      | 6,016 |   |

 

3.                                       RESTRICTEDCASH:

 

The restricted cash balance represents escrowed fundsheld back in the 1997 Recapitalization transaction to cover potentialcontingent liabilities of the Selling Shareholders.  In conjunction with the recapitalization transaction, the SellingShareholders agreed to indemnify the Company for the after-tax costs ofcontingent liabilities up to a total of $30 million.  As part of the transaction, $6 million was withheld by theCompany from the purchase price to the Selling Shareholders and placed in arestricted cash account intended primarily to fund the after-tax costs of theenvironmental liability and other contingencies.  Upon agreement of the parties, but in no event before February2004, any funds remaining in the account will be paid to the SellingShareholders.  At this date, the onlyremaining contingencies are environmental contingencies and residual litigationcosts from the Neubauer litigation (as described in our Form 10-K for the yearended March 28, 2002).

 

4.                                       PROPERTY,PLANT AND EQUIPMENT:

 

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

 
|                               |   | **December  28,  2002** |   | **March 30,  2002** |   |
|------------------------------------|--------|-------------------------|--------|---------------------|--------|
|                               |   |                    |   |                |   |
| Land                               |   | $                       | 4,017  |                | $      | 4,017 |   |
| Buildings and  improvements        |   | 9,448                   |   | 9,938               |   |
| Furniture,  fixtures and equipment |   | 26,471                  |   | 26,254              |   |
|                               |   |                    |   |                |   |
|                               |   | 39,936                  |   | 40,209              |   |
| Less accumulated  depreciation     |   | (17,244                 | )      | (15,314             | )      |
|                               |   | $                       | 22,692 |                | $      | 24,895 |   |

 

Included in theabove table is equipment acquired under capitalized leases.  At December 28, 2002, the cost of the leasedequipment was $9,179,000 and the accumulated amortization was $2,888,000.  At March 30, 2002, the cost of the leasedequipment was $10,431,000 and the accumulated amortization was $2,237,000.

 

The Company hasrecognized a $0.5 million write-down in the fair value of one of its propertiesfor the quarter ended September 28, 2002. The vacant property located in Avon, Massachusetts had been held inanticipation of potential future use as a manufacturing facility.  In September 2002, the Board authorizedmanagement to pursue selling the property. Based on recent market activity and management’s best estimate, the fairvalue of the property was less than the current book value and required acorresponding write-down to properly reflect its estimated fair market value.

 

6

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5.                                       ACCRUEDLIABILITIES:

 

Accruedliabilities consist of the following (in thousands):

 
|                  |   | **December  28,  2002** |   | **March 30,  2002** |   |
|-----------------------|--------|-------------------------|--------|---------------------|--------|
|                  |   |                    |   |                |   |
| Accrued  compensation |   | $                       | 2,002  |                | $      | 2,689 |   |
| Accrued interest      |   | 1,107                   |   | 3,251               |   |
| Accrued other         |   | 1,630                   |   | 1,781               |   |
|                  |   |                    |   |                |   |
|                  |   | $                       | 4,739  |                | $      | 7,721 |   |

 

6.                                       LONG-TERMDEBT:

 

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

 
|                                                                                       |   | **December  28,** |   | **March 30,** |   |
|--------------------------------------------------------------------------------------------|--------|-------------------|--------|---------------|--------|
|                                                                                       |   | **2002**          |   | **2002**      |   |
|                                                                                       |   |              |   |          |   |
| 10 3⁄4% Senior Subordinated Notes - interest payable semi-annually;  due May 15, 2007   |   | $                 | 79,785 |          | $      | 79,785 |   |
|                                                                                       |   |              |   |          |   |
| Term loans on  land, building and improvements - 8% interest payable monthly; due May 2008 |   | 2,762             |   | 2,762         |   |
|                                                                                       |   |              |   |          |   |
| Capital lease  obligations (interest rates ranging between 6.36% and 8.70%)                |   | 4,575             |   | 6,189         |   |
|                                                                                       |   |              |   |          |   |
|                                                                                       |   | 87,122            |   | 88,736        |   |
| Less current  portion                                                                      |   | 1,780             |   | 2,109         |   |
|                                                                                       |   |              |   |          |   |
|                                                                                       |   | $                 | 85,342 |          | $      | 86,627 |   |

 

The Company had a Revolving Credit Facility up to $8.0million, which was collateralized by accounts receivable, inventory andequipment.  The Revolving CreditFacility included covenants requiring maintenance of certain financial ratios.  At June 29, 2002, the Company was not incompliance with the required ratios.  InSeptember 2002, the Company’s bank declined to waive the violations of thecovenants on the Company’s Revolving Credit Facility and terminated theagreement.  The Company had noborrowings outstanding on the Revolving Credit Facility at the date oftermination.

 

7

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Futureminimum lease payments under capital lease obligations at December 28, 2002 are(in thousands):

 
| **Fiscal Year** |   | **Amount** |   |
|-----------------|--------|------------|--------|
|            |   |       |   |
| 2003            |   | $          | 601    |   |
| 2004            |   | 2,039      |   |
| 2005            |   | 1,656      |   |
| 2006            |   | 732        |   |
| 2007            |   | 51         |   |
|            |   | 5,079      |   |
| Less interest   |   | (504       | )      |
|            |   |       |   |
|            |   | $          | 4,575  |   |

 

Thefair value of the 10 3⁄4% Senior Subordinated Notes (“Notes”) may vary from timeto time based on Company specific factors and other market related factorsexternal to the Company.  Presently, theCompany is unaware of any recent trading activity or trade prices, however, theCompany believes the fair value of the Notes may be significantly less than thecarrying value.  This belief is basedupon the current market conditions in the high-yield bond market, the recentlosses incurred by the Company and the Company’s knowledge of the past limitedtrading activity in the Notes including the Company’s repurchase of Notes infiscal 2001.  Further, continued pooroperating performance by the Company may negatively impact the credit qualityof the Notes, which may have a negative impact on the fair value of theNotes.  Although the Company believesthat the fair value of the Notes may be significantly less than the carryingvalue, settlement of the Notes at less than the carrying amount may not bepossible or may not be a prudent management decision.

 

7.                                       CAPITALSTOCK:

 

The Company isauthorized to issue an aggregate of 550,000 shares of common stock.  These shares may be issued in four differentclasses (A, B, C or D shares) which differ only in voting rights pershare.  At December 28, 2002 and March30, 2002, the 137,945 outstanding shares of common stock were designated asfollows:

 
| **Class** |   | **Shares  Outstanding** |   | **Amount** |   | **Voting Rights  Per Share** |   |
|-----------|--------|-------------------------|--------|------------|--------|------------------------------|--------|
| A         |   | 105,643                 |   | $          | 11,000 |                         | 1      |   |
| B         |   | 27,506                  |   | 3,000      |   | 1                            |   |
| C         |   | 4,316                   |   | —     |   | None                         |   |
| D         |   | 480                     |   | —     |   | 10                           |   |
|      |   | 137,945                 |   | $          | 14,000 |                         |   |   |

 

The remaining 412,055 shares of authorized butunissued common stock are undesignated as to class.

 

At December 28, 2002 and March 30, 2002 the Companyhad options outstanding to purchase 17,230 shares of its common stock at pricesfrom $370.49 to $1,111.47 per share.  Ofthe options outstanding, options to purchase 3,367 shares were fully vested atDecember 28, 2002.

 

8

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8.                                       ENVIRONMENTALAND OTHER LIABILITIES:

 

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

 
|                         |   | **December  28,  2002** |   | **March 30,  2002** |   |
|------------------------------|--------|-------------------------|--------|---------------------|--------|
|                         |   |                    |   |                |   |
| Due to Selling  Shareholders |   | $                       | 1,005  |                | $      | 940 |   |
| Environmental  Liability     |   | 7,635                   |   | 8,174               |   |
|                         |   |                    |   |                |   |
|                         |   | $                       | 8,640  |                | $      | 9,114 |   |

 

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

 

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

 

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

 

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

 

9

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

 

As of December 28, 2002, the accrual for estimatedenvironmental costs was $7,635,000. Actual expenditures for environmental remediation were $539,000 for thenine months ended December 28, 2002, and $528,000 for the fiscal year endedMarch 30, 2002.  The Company believesits accrual is adequate, but as the scope of its obligations becomes moreclearly defined, this accrual may be modified and related charges against earningsmay be made.

 

Claims for recovery of costs already incurred andfuture costs have been asserted against various insurance companies.  The Company has neither recorded any assetnor reduced any liability in anticipation of recovery with respect to suchclaims made.

 

9                                          COMMITMENTSAND CONTINGENCIES

 

On August 2, 2002, the Company filed a lawsuit in California SuperiorCourt (Case GC030102, Hermetic Seal Corporation, HCC Industries Inc. vs.Special Devices, Inc.) against Special Devices, Inc. (“SDI”) and certain otherfictitious defendants alleging various claims of breaches of contract.  The allegations primarily relate to SDI’sfailure to tender payment to the Company for shipments of parts the Companymanufactured and delivered pursuant to various purchase orders and/oragreements and SDI’s breach of exclusivity requirements.  The ultimate resolution of these claims isnot expected to have a material impact on the results of operations orfinancial position of the Company.

 

In addition to the above,the Company is involved in other claims and litigation arising in the normalcourse of business.  Based on the adviceof counsel and in the opinion of management, the ultimate resolution of thesematters will not have a significant effect on the financial position or theresults of operations of the Company.

 

10.                                 RECENTACCOUNTING PRONOUNCEMENTS:

 

In June 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards No. 141 (“SFAS141”), “Accounting for Business Combinations” and No. 142 (“SFAS 142”), “Goodwilland Other Intangibles”, effective for fiscal years beginning after December 15,2001.  Under the new rules, goodwill andintangible assets deemed to have indefinite lives are no longer amortized butis subject to annual impairment tests in accordance with the Statements.

 

In adopting SFAS No. 142 “Goodwill and Other Intangible Assets”, theCompany ceased amortizing goodwill in the first quarter of fiscal 2003 and hasassessed initial impairment under transitional rules as of March 31, 2002.  Goodwill amortization for fiscal 2002 was$189,000 or $47,000 per quarter.  Duringthe quarter ended September 28, 2002, the Company completed its assessment ofthe estimated fair value of its two reporting units under the transitionalrules of SFAS 142 using a valuation method based on a multiple of earningsbefore interest, taxes, depreciation and amortization.  For purposes of its assessment under FAS142, the Company concluded it had two reporting units, Hermetic (consisting ofHermetic Seal Corporation and its related entities/operations) and Glasseal(consisting of Glasseal Products, Inc. and its subsidiary Sealtron, Inc.).  For purposes of calculating EBITDA of eachof the reporting units, the Company used forward 12 months forecasted operatingresults for fiscal 2003 due to 1) the loss in March 2002 of SDI,

 

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formerly itslargest customer and 2) the significant decrease in sales to thetelecommunications market.  Anallocation of the cost of shared resources and corporate expenses directlyrelated to the reporting units was also reflected in EBITDA.  The multiple applied against EBITDA was5.7.  As a result, the Companydetermined that the goodwill of the Company’s reporting units was fully impaired and has recorded an impairmentcharge of $3,561,000.  No income taxbenefit has been recognized for this charge, as the goodwill is not deductiblefor income tax purposes.  Had this chargebeen recognized in the first quarter of fiscal 2003, the net loss would have increasedfrom $1,121,000 as reported to $4,682,000.

 

InApril 2002, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standard (SFAS) No. 145, Rescission of FASB Statements No.4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.  This Statement rescindsSFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, SFAS No.64, Extinguishments of Debt Made to Satisfy Sinking Fund Requirements and SFASNo. 44, Accounting for Intangible Assets of Motor Carriers.  Also, this statement amends SFAS No. 13,Accounting for Leases and other existing authoritative pronouncements to makevarious technical corrections, clarify meanings, or describe their applicabilityunder changes conditions.  The provisionsof this Statement related to the rescission of SFAS No. 4 shall be applied infiscal years beginning after May 15, 2002. The provision relating to SFAS No. 13 shall be effective fortransactions occurring after May 15, 2002. All other provisions of this Statement shall be effective for financialstatements issued on or after May 15, 2002. The Company does not believe it will have a material impact on itsfinancial position or results of its operations.

 

InJune 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated withExit or Disposal Activities.  Thisstatement addresses financial reporting for costs associated with exits ordisposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.94-3, Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).  The provisions of thisStatement are effective for exit or disposal activities initiated afterDecember 31, 2002.  The Company does notbelieve it will have a material impact on its financial position or results ofits operations.

 

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**PART I -FINANCIAL INFORMATION**

 

 

**Item2.     Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

 

**Resultsof Operations (In millions)**

 
|                                          |   | **For the  Three Months Ended** |   | **For the  Nine Months Ended** |   |
|-----------------------------------------------|--------|---------------------------------|--------|--------------------------------|--------|
|                                          |   | **Dec. 28,  2002**              |   | **Percent**                    |   | **Dec. 29,  2001** |   | **Percent** |   | **Dec. 28,  2002** |   | **Percent** |   | **Dec. 29,  2001** |   | **Percent** |   |
|                                          |   |                            |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                          |   |                            |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                          |   |                            |   |                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                     |   | $                               | 9.7    |                           | 100.0  | % | $ | 14.4 |   | 100.0 | % | $ | 30.3 |   | 100.0 | % | $ | 51.5 |   | 100.0 | % |
| Gross profit                                  |   | 1.9                             |   | 19.6                           | %      | 4.6 |   | 31.6 | % | 5.8 |   | 19.1 | % | 16.8 |   | 32.6 | % |
| Selling, general  and administrative expenses |   | 1.5                             |   | 15.5                           | %      | 1.2 |   | 8.7 | % | 4.5 |   | 14.8 | % | 4.9 |   | 9.5 | % |
| Write-down on  impairment of assets           |   | —                          |   | —                         |   | — |   | — |   | 0.5 |   | 1.6 | % | — |   | — |   |
| Earnings from  operations                     |   | 0.3                             |   | 3.1                            | %      | 3.3 |   | 23.0 | % | 0.8 |   | 2.6 | % | 11.9 |   | 23.1 | % |
| Other  income/expense                         |   | (2.4                            | )      | (24.7                          | )%     | (2.4 | ) | (16.7 | )% | (7.1 | ) | (23.4 | )% | (7.2 | ) | (14.0 | )% |
| Cumulative  effect of accounting change       |   | —                          |   | —                         |   | — |   | — |   | (3.6 | )  | (11.9 | )% | — |   | — |   |
| Net earnings  (loss)                          |   | $                               | (1.3   | )                              | (13.4  | )% | $ | 0.5 |   | 3.8 | % | $ | (7.7 | ) | (25.4 | )% | $ | 2.8 |   | 5.5 | % |

 

 

**Comparison of the Three Months EndedDecember 28, 2002 (“2003 Quarter”) to the Three Months Ended December 29, 2001(“2002 Quarter”)**

 

 

### *Net Sales*

 

TheCompany’s net sales decreased by approximately $4.7 million or 33% to $9.7million for the 2003 Quarter compared to sales of $14.4 million for the 2002Quarter.

 

Salesto existing aerospace, industrial process control and petrochemical customersdecreased by approximately 13% in the 2003 Quarter compared to the 2002Quarter.  Based on current order volume,the Company expects weakness in the aerospace, industrial process control andpetrochemical markets to continue over the next several quarters.

 

Onthe automotive side, revenue from airbag and seat belt initiator productsdecreased due to the termination of the supply agreement with SDI, formerly theCompany’s largest customer.  The Companystopped selling product to SDI in March 2002. Overall, revenue from all automotive shipments decreased approximately77% in the 2003 Quarter compared to the 2002 Quarter.  The Company expects the significant decrease in revenue from SDIwill be partially offset by increases in unit shipments of new and existingprograms to other automotive customers over the next several quarters.  On the whole, the Company expectssignificantly lower revenues from automotive products during fiscal 2003 and 2004.

 

In fiscal 2001 and 2002,the Company developed a significant market presence in the telecommunicationsmarkets through component products designed for optical networkinginfrastructure.  Shipments of theseproducts decreased dramatically, however, as the telecom market collapsed.  Sales of these products decreased byapproximately 55% in the 2003 Quarter compared to the 2002 Quarter.  Based on current order volume and industryreports, the Company expects continued weakness in the telecommunications marketsover the next several quarters at a minimum.

 

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*GrossProfit*

 

Gross profit decreased byapproximately 59% or $2.7 million, to $1.9 million for the 2003 Quartercompared to $4.6 million for the 2002 Quarter. Gross margin decreased to 19.6% for the 2003 Quarter from 31.6% for the2002 Quarter.

 

The decrease in grossprofit is attributable to the decreased sales volume.  The decrease in gross margin was primarily attributable to thesignificant decrease in revenue and the corresponding impact of fixed overheadcosts leveraged on lower revenue.  Themost significant fixed overhead costs are depreciation, utilities  and property taxes.  These costs are allocated to inventory andultimately cost of sales, based on the proportion of total fixed costs to totaldirect labor costs. The ongoing weakness in sales will continue to adverselyimpact gross profitability and gross margin.

 

 

*Selling,General and Administrative Expenses*

 

Selling, general andadministrative (“S,G&A”) expenses increased by approximately 25% or $0.3million to $1.5 million for the 2003 Quarter compared to $1.2 million for the2002 Quarter.  S,G&A expenses as apercent to sales increased to 15.5% in the 2003 Quarter from 8.7% for the 2002Quarter.

 

Selling expenses wereflat (in dollars) in the 2003 Quarter compared to the 2002 Quarter.  This reflects the Company’s continuinginvestment in selling resources to increase its overall revenue.  G&A expenses overall were approximately36% higher in the 2003 Quarter as compared to the 2002 Quarter.  This is primarily due to reimbursement oflegal costs in the 2002 quarter resulting from the settlement of the Neubauerligitation.  The increased percentage ofS,G&A expenses to sales reflects the impact of these expenses leveragedover significantly lower revenue.

 

 

*Earningsfrom Operations*

 

Operating earningsdecreased by $3.0 million or 91% to $0.3 million for the 2003 Quarter comparedto $3.3 million for the 2002 Quarter. Operating margins decreased to 3.1% in the 2003 Quarter from 23.0% forthe 2002 Quarter.

 

The decrease in operatingearnings and margin was attributable to the same factors (as discussed above)that contributed to the decrease in gross profit and gross margin.

 

 

*OtherExpense, net*

 

Other expense, net (whichis predominantly net interest expense) was unchanged at $2.4 million for the2003 and 2002 Quarters.  The Company has$87.1 million of indebtedness as of December 28, 2002 compared to $89.9 millionat December 29, 2001. The reduced interest expense on the indebtedness waswholly offset by reduced interest earned on invested cash balances.

 

 

*NetEarnings (Loss)*

 

Net earnings (loss)decreased by approximately $1.8 million to a net loss of $1.3 million for the2003 Quarter from net earnings of $0.5 million in the 2002 Quarter.

 

The substantial decreasein net earnings was due to the substantial decline in earnings from operationsas discussed above.

 

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**Comparisonof the Nine Months Ended December 28, 2002 (“2003 Period”) to the Nine MonthsEnded December 29, 2001 (“2002 Period”)**

 

 

*NetSales*

 

The Company’s net salesdecreased by approximately $21.2 million or 41% to $30.3 million for the 2003Period compared to sales of $51.5 million for the 2002 Period.

 

Salesto existing aerospace, industrial process control and petrochemical customersdecreased by approximately 20% in the 2003 Period compared to the 2002Period.  Based on current order volume,the Company expects weakness in the aerospace, industrial process control andpetrochemical markets over the next several quarters.

 

Onthe automotive side, revenue from airbag and seat belt initiator productsdecreased due to the termination of the supply agreement with SDI, formerly theCompany’s largest customer.  The Companystopped selling product to SDI in March 2002. Overall, revenue from all automotive shipments decreased approximately76% in the 2003 Period compared to the 2002 Period.  The Company expects the significant decrease in revenue from SDIwill be partially offset by increases in unit shipments of new and existingprograms to other automotive customers over the next several quarters.  On the whole, the Company expectssignificantly lower revenues from automotive products during fiscal 2003 and2004.

 

In fiscal 2001 and 2002,the Company developed a significant market presence in the telecommunicationsmarkets through component products designed for optical networkinginfrastructure.  Shipments of theseproducts decreased dramatically, however, as the telecom market collapsed.  Sales of these products decreased byapproximately 70% in the 2003 Period compared to the 2002 Period.  Based on current order volume and industryreports, the Company expects continued weakness in the telecommunicationsmarkets over the next several quarters at a minimum.

 

 

*GrossProfit*

 

Gross profit decreased by$11.0 million or 65% to $5.8 million for the 2003 Period compared to $16.8million for the 2002 Period.  Grossmargin decreased to 19.1% for the 2003 Period from 32.6% for the 2002 Period.

 

The decrease in grossprofit is attributable to the decrease in sales volume in the 2003 Period.  The decrease in gross margin was primarilyattributable to the significant decrease in revenue and the correspondingimpact of fixed overhead costs leveraged on lower revenue.  The most significant fixed overhead costsare depreciation, utilities and property taxes.  These costs are allocated to inventory and ultimately cost ofsales, based on the proportion of total fixed costs to total direct laborcosts.  The ongoing weakness in saleswill continue adversely to impact gross profitability and gross margin.

 

 

*Selling,General and Administrative Expenses*

 

Selling, general andadministrative (“S,G&A”) expenses decreased by $0.4 million to $4.5 millionfor the 2003 Period compared to $4.9 million for the 2002 Period.  S,G&A expenses as a percent to salesincreased to 14.8% in the 2003 Period from 9.5% for the 2002 Period.

 

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Selling expenses wereflat (in dollars) in the 2003 Period compared to the 2002 Period.  This reflects the Company’s continuinginvestment in selling resources to increase its overall revenue.  G&A expenses overall were approximately14% lower in the 2003 Period as compared to the 2002 Period due to decreasedcompensation costs, partially offset by higher legal costs (legal costs werelower in the 2002 Period because of the reimbursement of costs related to theNeubauer litigation).  The increasedpercentage of S,G&A expenses to sales reflects the fixed portion of theseexpenses leveraged over significantly lower revenue.

 

 

*Impairmentof Assets*

 

The Company has recognized a $0.5 million write-downin the fair value of one of its properties for the quarter ended September 28,2002.  The vacant property located inAvon, Massachusetts had been held in anticipation of potential future use as amanufacturing facility.  In September2002, the Board authorized management to pursue selling the property.  Based on recent market activity andmanagement’s best estimate, the fair value of the property was less than thecurrent book value and required a corresponding write-down to properly reflectits estimated fair market value.

 

 

*Earningsfrom Operations*

 

Operating earningsdecreased by $11.1 million or 93% to $0.8 million for the 2003 Period comparedto $11.9 million for the 2002 Period. Operating margins decreased to 2.6% in the 2003 Period from 23.1% forthe 2002 Period.

 

The decrease in operatingearnings and margin was attributable to the same factors (as discussed above)that contributed to the decrease in gross profit and gross margin.  In addition the write-down of the value ofthe vacant property contributed to the decreased operating earnings and margin.

 

 

*OtherExpense, net*

 

Other expense, net (whichis predominantly net interest expense) was substantially unchanged at $7.1million in the 2003 and $7.2 million in the 2002 Periods.  The Company has $87.1 million ofindebtedness as of December 28, 2002 compared to $89.9 million at December 29,2001.  The reduced interest expense onthe indebtedness was almost wholly offset by reduced interest earned oninvested cash balances.

 

 

*CumulativeEffect of Accounting Change*

 

In adopting SFAS No. 142“Goodwill and Other Intangible Assets”, the Company ceased amortizing goodwillin the first quarter of fiscal 2003 and has assessed initial impairment undertransitional rules as of March 31, 2002. Goodwill amortization for fiscal 2002 was $189,000 or $47,000 perquarter.  During the quarter endedSeptember 28, 2002, the Company completed its assessment of the estimated fairvalue of its two reporting units under the transitional rules of SFAS 142 usinga valuation method based on a multiple of earnings.   For purposes of calculating the earnings level of each of thereporting units, the Company included the impact of the following significantelements: 1) the recent loss of SDI, formerly its largest customer, 2) thesignificant decrease in sales to the telecommunications market and 3) anallocation of the cost of shared resources and corporate expenses directlyrelated to the reporting units.  As aresult, the Company determined that the goodwill of the Company’s reportingunits was fully impaired and has recorded an impairment charge of$3,561,000.  No income tax benefit hasbeen recognized for this charge, as the goodwill is not deductible for incometax purposes.  Had this charge beenrecognized in the first quarter of fiscal 2003, the net loss would haveincreased from $1,121,000 as reported to $4,682,000.

 

15

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*NetEarnings (Loss)*

 

Net earnings decreased byapproximately $10.5 million to a net loss of $7.7million for the 2003 Periodfrom net earnings of $2.8 million in the 2002 Period.

 

The substantial decreasein net earnings was due to the substantial decline in earnings from operations,the $0.5 million write down for asset impairment, and the $3.6 millioncumulative effect of accounting change for impairment of intangible assets.

 

 

**Liquidityand Capital Resources**

 

Net cash used byoperating activities was $3.4 millionfor the 2003 Period compared to cash provided by operations of $1.8 million2002 Period.  The decrease of $5.2million in cash provided by operations was primarily attributable to thesignificant decrease in net earnings.

 

Netcash used in investing activities was $0.2 million for the 2003 Period comparedto $1.0 million for the 2002 Period. The decrease in cash used in investing activities is due to reduced expendituresfor capital equipment.

 

Netcash used in financing activities was $1.6 million for the 2003 Period andthe 2002 Period.  Net principal paymentson long-term debt was unchanged for the two Periods.

 

As of December 28, 2002, the Company’s outstandinglong-term debt is $87.1 million.  TheCompany had a Revolving Credit Facility up to $8.0 million, which wascollateralized by accounts receivable, inventory and equipment.  The Revolving Credit Facility includedcovenants requiring maintenance of certain financial ratios.  At June 29, 2002, the Company was not incompliance with the required ratios.  InSeptember 2002, the Company’s bank declined to waive the violations of thecovenants on the Company’s Revolving Credit Facility and terminated the agreement.  The Company had no borrowings outstanding onthe Revolving Credit Facility at the date of termination.

 

The Company believes thatcash on hand of $5.7 million and cash generated from operations, prior tointerest payments on long-term debt, will provide adequate funds for ongoingoperations, planned capital expenditures and debt service for thenear-term.  Over the next 12 months, theprimary cash obligations of the Company are interest payments ($ 9.2 million),principal payments on existing debt ($1.9 million), and capital expenditures ($0.5 - $ 0.75 million).

 

Total cash used in thefirst nine months of fiscal 2003 was $5.2 million for operations, investing andfinancing activity.  The Company iscurrently negotiating with other potential lenders to secure a line of creditto augment its liquidity.  There is noassurance that such negotiations will be successful.

 

For the longer term, theoperating results of the Company must improve to satisfy its liquidityneeds.  The annual interest payments andprincipal payment obligations decrease only modestly over the next severalyears until the Notes become due in 2007. The Company is making substantial efforts to increase its sales levelsand thereby improve the operating results. There is no assurance that these efforts will be successful.  In addition, an increase in sales for theCompany will require additional investment in working capital to support suchincreased operations.

 

Capitalexpenditures for fiscal 2003 are expected to focus on improvements orrefurbishment of existing equipment. Expected capital expenditures for fiscal 2003 will be approximately $0.5and will be financed through working capital.

 

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This filing containsstatements that are “forward looking statements”, and includes, among otherthings, 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 of the operations of the Company are subject to a number ofuncertainties, risks and other influences, including general economicconditions, regulatory changes and competition, many of which are outside thecontrol of the Company, any one of which, or a combination of which, couldmaterially affect the results of the Company’s operations and whether theforward looking statements made by the Company ultimately prove to be accurate.

 

 

## **Recent AccountingPronouncements**

 

In July 2001, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) Nos. 141and 142, “Business Combinations” and “Goodwill and Other IntangibleAssets”.  SFAS No. 141 replaces APB 16and eliminates pooling-of-interests accounting prospectively.  It also provides guidance on purchaseaccounting related to the recognition of intangible assets and accounting fornegative goodwill.  The Companyimplemented SFAS No. 141 and 142 effective March 31, 2002, which impact isdisclosed above.

 

In October 2001, the Financial Accounting StandardsBoard issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” which replaces SFAS No. 121, “Accounting for Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of.”   SFAS No. 144 establishes one accountingmodel, based on framework established in SFAS No. 121, for the recognition,measurement and reporting of impairment of long-lived assets to be held andused and measurement of long-lived assets to be disposed of by sale.  Adoption of SFAS No. 144 is required for theCompany’s fiscal year beginning April 1, 2002 although early application ispermitted.  The Company adopted SFAS No.144 in fiscal 2003.

 

InApril 2002, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standard (SFAS) No. 145, Rescission of FASB Statements No.4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.  This Statement rescindsSFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, SFAS No.64, Extinguishments of Debt Made to Satisfy Sinking Fund Requirements and SFASNo. 44, Accounting for Intangible Assets of Motor Carriers.  Also, this statement amends SFAS No. 13,Accounting for Leases and other existing authoritative pronouncements to make varioustechnical corrections, clarify meanings, or describe their applicability underchanges conditions.  The provisions ofthis Statement related to the rescission of SFAS No. 4 shall be applied infiscal years beginning after May 15, 2002. The provision relating to SFAS No. 13 shall be effective fortransactions occurring after May 15, 2002. All other provisions of this Statement shall be effective for financialstatements issued on or after May 15, 2002. The Company does not believe it will have a material impact on itsfinancial position or results of its operations.

 

In June 2002, the FASBissued SFAS No. 146, Accounting for Costs Associated with Exit or DisposalActivities.  This statement addressesfinancial reporting for costs associated with exits or disposal activities and nullifiesEmerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).  The provisions of this Statement areeffective for exit or disposal activities initiated after December 31,2002.  The Company does not believe itwill have a material impact on its financial position or results of itsoperations.

 

## **Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

All of the Company’sindebtedness is at fixed interest rates and as such there is no exposure tomarket risk from changes in interest rates.

 

 

## **Item 4. Controls and Procedures**

 

Evaluation of DisclosureControls and Procedures.  The Company’sChief Executive Officer and Chief Financial Officer have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Actof 

 

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1934, as amended (the “Exchange Act”)) as of a datewithin 90 days prior to the filing date of this quarterly report (the“Evaluation Date”).  Based on suchevaluation, such officers have concluded that, as of the Evaluation Date, theCompany’s disclosure controls and procedures are effective in alerting them ona timely basis to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s reportsfiled or submitted under the Exchange Act.

 

Changes in InternalControls.  Since the Evaluation Date,there have not been any significant changes in the Company’s internal controlsor in other factors that could significantly affect such controls.

 

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**PARTII - OTHER INFORMATION**

 

Items 1 through 5 are omitted, as they are notapplicable.

 
| Item 6. | Exhibits and Reports on Form 8-K |
|---------|----------------------------------|
|    |                             |   |
|    | (a)                              | Exhibits: |
|    |                             | 12.1 - Computation of ratio of earnings to fixed  charges |
|    |                             | 99.1 - Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|    |                             |   |
|    | (b)                              | Reports on Form 8-K   - |
|    |                             | On September 18, 2002, a Form 8-K was filed to  disclose the termination of the Revolving Credit Facility. |
|         |                                  |  |  |

 

 

SIGNATURES

 

 
|                     |   |   |   |   |   | HCC INDUSTRIES INC.                        |
|--------------------------|--------|--------|--------|--------|--------|--------------------------------------------|
|                     |   |   |   |   |   |                                       |
|                     |   |   |   |   |   |                                       |
| DATED: February 10, 2003 |   |   |   |   |   | /s/   Richard  L. Ferraid        |
|                     |   |   |   |   |   | President and Chief Executive Officer      |
|                     |   |   |   |   |   |                                       |
|                     |   |   |   |   |   |                                       |
| DATED: February 10, 2003 |   |   |   |   |   | /s/    Christopher H. Bateman    |
|                     |   |   |   |   |   | Vice President and Chief Financial Officer |

 

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**CERTIFICATION**

 

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

 

1.               I have reviewedthis quarterly report on Form 10-Q of HCC Industries Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)              Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              Presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
|   | Date:   February 10, 2003 | /s/    | Richard L. Ferraid      |   |
|--------|--------------------------------|--------|-------------------------|--------|
|   |                           | Name:  | Richard L. Ferraid      |
|   |                           | Title: | Chief Executive Officer |

 

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**CERTIFICATION**

 

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

 

1.               I have reviewedthis quarterly report on Form 10-Q of HCC Industries Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)              Designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b)             Evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              Presented in thisquarterly report our conclusions about the effectiveness of the disclosure controlsand procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              All significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             Any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
|   | Date:   February 10, 2003 | /s/    | Christopher H. Bateman  |   |
|--------|--------------------------------|--------|-------------------------|--------|
|   |                           | Name:  | Christopher H. Bateman  |
|   |                           | Title: | Chief Financial Officer |

 

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