<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
-------------------
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended: March 28, 1998
OR
( ) 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 (I.R.S. Employer
incorporation or organization) Identification No.)
4232 Temple City Blvd., Rosemead, California 91770
--------------------------------------------------
(Address of principal executive offices)
(626) 443-8933
----------------------------------------------------
(Registrant's telephone number, including area code)
-------------------
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 whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Registrant's Common Stock, outstanding at March 28, 1998 was 134,955 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Documents referenced on Exhibits Index
<PAGE>
HCC INDUSTRIES INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
CAPTION PAGE
<S> <C> <C>
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. - BUSINESS . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. - PROPERTIES . . . . . . . . . . . . . . . . . . . . . 11
Item 3. - LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . 11
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS . . . . . . . . . . . . . . . . . . 14
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 5. - MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . 14
Item 6. - SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . 15
Item 7. - MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . 15
Item 8. - FINANCIAL STATEMENTS AND SUPPLEMENTAL
DATA . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 9. - CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE . . . . . . . . . . . . . . . . . . . . . 40
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Item 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT . . . . . . . . . . . . . . . . . . . . . 40
Item 11. - EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . 41
Item 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT. . . . . . . . . . . . . . . . 45
Item 13. - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS . . . . . . . . . . . . . . . . . . . . 46
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Item 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . 47
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
</TABLE>
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PART I
ITEM 1 - BUSINESS
GENERAL
Except where the context indicates otherwise, the term "Company" means HCC
Industries Inc. and its wholly owned subsidiaries Hermetic Seal Corporation,
Glasseal Products, Inc., Sealtron, Inc., Norfolk Avon Realty Trust, HCC
Industries International, and HCC Foreign Sales Corporation.
The Company was incorporated in Delaware in 1985 and is one of the largest
custom manufacturers of high precision hermetically sealed electronic connection
devices in the United States. High precision hermetic seals are used primarily
to permit the flow of electricity across a barrier used to separate different
atmospheric media (such as gas or liquid to air or vacuum) existing on opposite
sides of the barrier. A hermetic seal is generally accomplished through the
creation of a glass-to-metal seal ("GTMS").The hermetic seals manufactured by
the Company generally fall into four categories - terminals, headers, connectors
and microelectronics packages. A "terminal" is a device characterized by having
only a single contact pin, while a "header" has multiple contact pins inserted
in a frame. A "connector" is a type of terminal or header which can be
mechanically coupled to or uncoupled from another connection. A
"microelectronic package" is a container for thick and thin film substrates onto
which hybrid circuitry has been etched. The Company operates 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 body or
housing, metal contact pins, and an insulator fabricated from glass, ceramic or
glass/ceramic mixtures. GTMS range in size from a two foot long, eight inch
diameter cylindrical connector utilized for through-hull communication links for
nuclear submarines, to a 40/1000 inch outside diameter (12/1000 inch inside
diameter) implant to measure pressure in the heart chamber.
The Company believes that it has been an industry leader in the design and
manufacture of GTMS 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
and seat belt pretensioners); (2) aerospace and military electronics (for use
in, for example, gyro guidance devices, flight instrumentation, jet engine
controls, and space suit controls); (3) test and measurement (for use in, for
example, temperature and pressure transducers, infrared detection
instrumentation, electro-optical devices and fuel injection monitoring devices);
(4) medical electronics (for use in, for example, pacemakers, kidney dialysis
machines and devices for monitoring vital life signs); (5) telecommunications
(for use, in for example, coaxial cables); and (6) energy (for use in, for
example, oil drilling equipment and down-hole logging instrumentation and for
conventional and nuclear electric power generating plants).
On February 14, 1997, pursuant to a Stock Purchase and Sale Agreement (the
"Recapitalization Agreement") dated as of December 23, 1996, the Company,
certain members of management, Windward Capital Associates, L.P. ("Windward")
and certain affiliates of Windward (collectively, with Windward, the "Windward
Group") and Metropolitan Life Insurance Company ("MetLife") completed a
recapitalization of the Company (the "Recapitalization"). The Windward Group is
a group of related entities which make merchant banking investments pursuant to
certain program agreements. In connection with the Recapitalization, among
other things: (i) the Company entered into Credit Facilities, consisting of: (a)
a $10,000,000 five year Revolving Credit Facility, (b) a $30,000,000 five year
Tranche A Term Loan and (c) a $30,000,000 six and one-half year Tranche B Term
Loan; (ii) the Company issued $19,300,000, net of discount, in subordinated
notes to the Windward Group and MetLife along with 8,614 shares of common stock
and certain contingent anti-dilution warrants for an aggregate purchase price of
$22,500,000; (iii) the Company purchased a portion of the shares of Common Stock
(at $370 per share) beneficially owned by the selling stockholders for
$87,500,000, including certain transaction expenses, in cash (a portion of which
was paid at closing and the remainder of which was deposited in escrow at
closing) and $5,000,000 in contingent subordinated notes; (iv) the Windward
Group purchased 87,721 shares of Common Stock (at $370 per share) from the
Company for $32,500,000 in cash; and (v) the Company repaid certain of its
outstanding indebtedness. At March 29, 1997, as a result of item (iii) above,
$69,282,000 remained in an escrow account and is reflected on the balance sheet
of the Company as restricted cash and due to stockholders.
3
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This escrow was disbursed in April 1997. In accounting for the
recapitalization, no fair value adjustments were made to the book value of the
Company's assets and no goodwill was recognized. The contingent subordinated
notes vest upon achievement by the Company of certain operating performance
thresholds or achievement by the Windward Group of certain investment
performance thresholds. On March 28, 1998, upon partial vesting of the
Contingent Subordinated Notes, the Company recorded a $2,500,000 charge to
equity to reflect additional purchase price associated with the shares purchased
in the Recapitalization.
On May 6, 1997, the Company issued $90,000,000 in principal amount of
Senior Subordinated Notes due in May 2007 (the "Old Notes") and used the
proceeds of such issuance to, among other things, (i) repay 100% of the
outstanding principal amount, together with all accrued but unpaid interest
thereon, of each of Term Loan A and Term Loan B and (ii) repurchase all
outstanding Mezzanine Units for $22,500,000, the initial purchase price thereof,
together with accrued but unpaid interest on the Mezzanine Notes. As a result
of this refinancing, the Company recorded an extraordinary loss of $986,000, net
of taxes. In addition on May 6, 1997, the Company amended the Revolving Credit
Facility to, among other things, increase the amount available thereunder from
$10,000,000 to $20,000,000. Pursuant to the Registration Rights Agreement
entered into with the issuance of the Old Notes, the Company on November 3, 1997
filed a Registration Statement under the Securities Act of 1933 with the SEC to
exchange the Old Notes for $90,000,000 of Senior Subordinated Exchange Notes
(the "New Notes"). The terms of the New Notes and the Old Notes are identical
in all material respects.
On June 20, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Connector Industries of America, a glass-to-metal
sealing company. The purchase price included $2,100,000 in cash and a
contingent payment of $400,000 based upon the volume of business retained in the
immediately subsequent 18 month period. In its last fiscal year of operations,
the acquired company generated sales of approximately $3,200,000. The
transaction was accounted for as an asset purchase. In conjunction with the
acquisition, the Company assigned $1,372,000 to intangibles which will be
amortized over a 14 year period on a straight line basis. If the contingent
payment becomes payable, such amount will be recorded as additional purchase
price consideration and added to intangibles.
The demand for the Company's products is largely dependent on the
automotive and aerospace industries. Sales to Special Devices Inc. ("SDI"), the
Company's largest customer, accounted for approximately 37% of the Company's
consolidated sales for the fiscal year ended March 28, 1998. Sales to the
Company's ten largest customers accounted for approximately 50% of consolidated
sales during the 1998 fiscal year. Approximately 70% of the Company's
consolidated sales for fiscal 1998 were to customers with which the Company had
contractual agreements, sole source relationships, letters of intent or long-
term purchase orders. A substantial portion of these business relationships are
informal and certain of the Company's contractual arrangements may be terminated
at will. In the past, SDI has attempted to find such second source suppliers
and to secure a license from the Company to produce GTMS products internally.
In early 1997, SDI announced its intention to internally produce 100,000 glass-
to-metal seal units per week in partial substitution of the units supplied to
SDI by the Company. The Company shipped a weekly average of approximately
900,000 units to SDI during fiscal 1998. On December 8, 1997, the Company
signed a new supply agreement with SDI through the year 2000. The new agreement
provides for price concessions to SDI in consideration of a one year contract
extension and abatement of the volume discount from the previous agreement.
4
<PAGE>
The Company's sales have grown at a compound annual growth rate of 18% over
the last five years. While a substantial portion of the Company's growth over
the last several years has come from sales to the automotive industry,
particularly hermetically sealed connectors for use in airbag initiators, the
Company has also recognized consistent growth in its sales of GTMS products to
the aerospace, petrochemical and general industrial markets. The Company
believes this has been the result of its commitment to customer service,
development of close working relationships with many of its customers and the
value-added nature of its products.
COMPETITIVE STRENGTHS
The Company believes that it has the following competitive strengths:
LONG-TERM CUSTOMER RELATIONSHIPS. Many of the Company's customers,
including SDI, have been customers for over ten years. The Company believes
that both automotive and aerospace OEMs continue to seek long-term partnerships
with fewer core suppliers. The Company's relationships are strengthened by the
fact that many of its arrangements with its customers provide for the Company to
act as the sole source of supply for the customer. The Company estimates that
approximately 70% of the Company's consolidated sales for fiscal year 1998 were
from contractual agreements, sole source relationships, letters of intent or
long-term purchase orders.
MARKET LEADERSHIP. A number of the Company's products hold leading market
positions in their respective niche markets. The Company currently believes
based upon internal estimates that it produces hermetically sealed products for
approximately 50% of the airbag initiators produced in the U. S. The Company
believes, based upon long-term relationships with SDI and other airbag initiator
suppliers, that it is well positioned to continue to increase its market share,
as well as expand its sales internationally.
COMMITMENT TO QUALITY AND SERVICE. The Company believes that its
commitment to provide consistent, high quality products and services and
flexible manufacturing and custom designed products at competitive prices, forms
the basis for its strong and diversified customer relationships. The Company
manufactures most of its parts to specific customer requirements. The Company
utilizes Statistical Process Control, Design Failure Mode Effects Analysis,
Process Failure Mode Analysis, and a strict adherence to complete manufacturing
documentation in order to manufacture high quality products for internal use as
well as external customer sales. The Company's three operating subsidiaries are
registered to ISO 9001.
PROPRIETARY TECHNOLOGY. The Company operates in the automotive, aerospace
and general industrial technologies markets in which products typically require
sophisticated engineering and production techniques. The Company designs and
manufactures new products to fulfill customer needs, and has developed
proprietary manufacturing technology since its founding in 1945. The Company
believes that this proprietary technology helps enable it to attract and retain
customers who require customized, high tolerance products. The Company
estimates that it has produced over 75,000 different variations of GTMS.
LOW COST OPERATIONS. The Company believes that its extensive "in-house"
capabilities and vertical integration are competitive advantages that have
allowed it to become a low cost producer. By controlling the tolerance of the
component parts, the Company has been able to reduce scrap and to increase the
yields of its products. Furthermore, the Company is continually developing and
assessing its programs designed to increase efficiency and enhance economies of
scale in order to further reduce costs.
DIVERSE PRODUCTS AND CUSTOMERS. The Company has a diverse customer base,
with sales of numerous product variations to approximately 1,200 customers in
fiscal 1998. Over the past several years, the Company has recognized consistent
growth in sales of GTMS products to the automotive, aerospace and general
industrial markets.
BUSINESS STRATEGY
The Company's strategy is to expand its business through:
5
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FOCUSING ON CORE STRENGTHS. The Company continues to focus on what it
believes are its core strengths and to invest in those businesses that are
consistent with those strengths and which exhibit high growth potential. Core
strengths include the timely custom design and manufacturing of high tolerance,
high reliability components and the effective program management of long term
contracts and supply agreements.
LEVERAGING CUSTOMER RELATIONSHIPS. The Company works closely with its
customers to jointly develop and design new products and to improve the
performance and lower the cost of the Company's customers' products. The
Company has sole source supply contracts, shares product development, and enters
into other teaming arrangements with its key customers to further strengthen and
broaden its relationships. The Company believes that this strategy, together
with the successful performance under existing contracts has led to additional
long-term business from key existing customers and new customers.
PURSUING SELECTIVE ACQUISITIONS. The Company intends to pursue selective
acquisitions and to add products and capabilities that are complementary to its
existing operations. Priority is expected to be given to acquiring businesses
whose products can be manufactured in the Company's existing facilities ("fold-
in" acquisitions). The Company's operations are characterized by a relatively
high level of operating leverage; therefore, such fold-in acquisitions should
allow the Company to allocate costs across broader synergistic product lines and
represent additional volume through the Company's existing facilities which
should provide opportunities to improve profitability.
EXPANDING INTERNATIONALLY. The Company is considering the expansion of its
operations in Europe. The primary motivation in a geographic expansion would
most likely be to service the growth of its current customers' operations as
they expand their production operations abroad.
INDUSTRIES
The Company estimates the total size of the GTMS market to be $600 million,
with approximately one-half estimated to be the specialized, high precision
segments in which the Company competes. The Company believes based upon
internal analysis that the market for high-end hermetically sealed products is
extremely fragmented, with no other competitor offering the same breadth of
products as the Company. The Company believes that its focus on the high-end,
custom segment of the GTMS market enables it to achieve higher margins.
The Company sells its products to four principal industries: (i) the
automotive parts industry for use in airbag initiators, automotive crash
sensors, climate control devices and anti-lock braking systems; (ii) the
aerospace industry for use primarily in commercial and military aviation and
electronics; (iii) general industry for use primarily in process control, and
other industrial, medical and telecommunications applications; and (iv) the
petrochemical industry, for use primarily in oil and gas downhole analysis
equipment.
AUTOMOTIVE
The Company provides GTMS products used in initiators for airbag devices.
At present, each airbag device requires at least one initiator (the device that
deploys the airbag). The automotive airbag industry has undergone dynamic
growth over the recent past stemming from increased consumer demand for
automotive safety devices and federal regulations requiring such devices.
Currently, regulations adopted by the National Highway Traffic Safety
Administration require that airbags be the automatic frontal crash protection
system used for both the driver and front passenger in at least 95% of passenger
automobiles manufactured from September 1, 1996 to August 31, 1997 for sale in
the U. S., and in 100% of passenger automobiles manufactured thereafter. For
light trucks and vans, the regulations require that airbags be the automatic
frontal crash protection system used for at least the driver in no less than 80%
of light trucks and vans manufactured from September 1, 1997 to August 31, 1998
for sale in the U. S., and for both the driver and front passenger in 100% of
light trucks and vans manufactured thereafter.
Although not mandated by law, initiator-based safety systems are also
employed in automobiles produced and sold in Europe and Asia, although fewer
than in the U. S. The systems utilized in Europe and Asia include airbag
systems similar to those in use in the U. S. and seat-belt pretensioners that
employ
6
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initiators. While the majority of airbag initiators manufactured for use
in cars outside the U. S. employ plastic initiators, there is a trend toward
using GTMS in such products due to their increased reliability.
COMMERCIAL AND MILITARY AVIATION AND ELECTRONICS
The Company provides hermetic seals that are used for a number of different
applications in commercial and military aviation and electronics, primarily to
protect guidance and sensor devices from the effects of changes in atmospheric
conditions. The Company believes based upon internal estimates that GTMS
products are utilized in almost every model of commercial aircraft currently in
production and its customers include essentially all major aerospace suppliers.
The Company's sales to the aerospace industry are dependent to a certain extent
on new construction of commercial and military aircraft. The Company competes
with a number of different suppliers in this market, based on quality, delivery
and price.
GENERAL AND INDUSTRIAL
The Company provides GTMS used in pressure and temperature transducers
(sensors), industrial process control equipment, capacitor end-seals for
electronic devices and other industrial, medical and telecommunications
applications to a number of manufacturers. The Company believes that its
ability to help customers develop products to meet demanding specifications
allow for significant opportunities within this market segment, including those
customers not currently served by the Company's products. The Company also
believes that the increased sophistication of equipment and increased level of
automation being used in industrial applications will increase demand for GTMS
products.
PETROCHEMICAL
The Company provides GTMS used for down-hole logging equipment in the oil
and gas industry primarily under long-term contracts to oil field equipment and
service companies. The Company's sales to this industry during any period are
somewhat dependent on the current level of exploration and drilling in the oil
and gas industry and current demand for and price of crude oil. The Company
believes that it is one of only two significant providers of GTMS to this
industry. The Company expects that the trend toward more sophisticated
measurement-while-drilling equipment in the petrochemical industry is likely to
lead to more demand for the Company's products.
CUSTOMERS AND APPLICATIONS
In the past year, the Company has sold products to over 1,200 customers.
The Company's ten largest customers accounted for approximately 50% of net sales
for fiscal year 1998. The Company's largest customer, SDI (a manufacturer of
airbag initiators), represented approximately 37% of consolidated sales for the
fiscal year ended March 28, 1998.
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Approximately 70% of the Company's consolidated sales for fiscal year 1998
were to customers with which the Company had contractual agreements, sole source
relationships, letters of intent or long-term purchase orders. The Company only
begins to manufacture products upon receipt of a purchase order. The Company's
relationship with SDI includes a three-year contract expiring December 31, 2000
to produce at least 75% of SDI's GTMS for its initiators provided the Company
maintains pricing and quality which are generally equivalent to or better than
other suppliers. The Company believes that it currently provides nearly all of
SDI's GTMS components. In early 1997, SDI announced its intention to internally
produce 100,000 glass-to-metal seal units per week in partial substitution of
the glass-to-metal seal units supplied to SDI by the Company.
The following table sets forth the Company's principal end-user markets,
certain applications for its products and certain of the Company's customers in
fiscal year 1998.
<TABLE>
<S> <C> <C> <C>
End Markets Automotive Aerospace Industrial/Petrochemical
Applications: Airbag Initiators Jet Engine Monitors Process Control Sensors
Crash Sensors Avionics Down Hole Drilling Sensors
Thermistors Fuel Gauge Indicators Lithium Batteries
Airbag Pressure Temperature Telecommunication
Switches Sensors Switching Devices
ABS De-icing Sensors Hybrid Circuit Packaging
Variable Speed Air Speed Indicators
Transmission Controls
Customers*: SDI Allied Signal ABB
Keystone Rosemount Aerospace Baker-Hughes
NCS Pyrotechnie Honeywell Schlumberger
Hughes Halliburton
Litton Western Atlas
Eaton Kemet
Sprague
Druck, Ltd.
Omni Rel
Power Conversion, Inc.
Specific example of Airbag initiator Temperature Sensors High pressure electrical
product application: bulkheads for down-hole
use (oil exploration)
What the product does: Electric current flows from Passes electric current from Carries electrical signals
crash sensor through initiator sensors that detect excessive between geological formation
to begin inflation of the heat and/or fire in aircraft measurement tools and sensors.
airbag.
Result: Airbag is inflated in Warning signal and automatic Allows precise measurement of
approximately 6 to 14 release of fire retardant geology while protecting
milliseconds sensitive equipment from extreme
heat and pressure.
</TABLE>
* Other than SDI, all of the customers listed represented individually less
than 4% of the Company's consolidated sales for fiscal year 1998.
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MANUFACTURING PROCESS
A GTMS is made by assembling three sets of component parts (metal contacts
or pins, glass bead(s) and an outer metal housing or shell) on a graphite
fixture. This assembly is put through a controlled atmosphere furnace at
approximately 1,800 degrees Fahrenheit until the glass becomes molten. The
graphite fixture is used to hold the components in place while the glass is
molten. As the assembly cools, a physical and chemical bond is formed between
the glass and the shell as well as the glass and the pin, thus forming a
hermetic seal.
The Company believes that its extensive "in-house" capabilities are a key
competitive advantage that has allowed it to become a low cost producer. By
specifically controlling the tolerance of the component parts, the Company
believes that it is able to increase the end yields of its product. This
attention to quality throughout the manufacturing process also helps to ensure
the timely delivery of its products. It also enables the Company to respond
very quickly to prototype and new product development opportunities.
The Company manufactures most of its parts to specific customer
requirements. All three of the Company's operating subsidiaries use Computer
Aided Design ("CAD") to produce the drawings and specifications required by the
customer. The Company estimates that it has produced over 75,000 different
variations to GTMS since 1945. This extensive library of designs enables the
Company to suggest design changes to its customers that reduce manufacturing
costs without sacrificing quality and therefore reduce the cost to the customer
(value engineering).
The Company has made a significant investment in Computer Numerically
Controlled ("CNC") machine tools in order to manufacture the metal shells and
pins to demanding customer specifications. The Company also machines most of
its own graphite fixtures thereby allowing it to maintain process quality. Many
of the glass preforms used in the Company's products are manufactured internally
as well. The Company is preparing to embark on a program to significantly
expand its glass manufacturing capability. This allows the Company to sell
glass to outside customers as an additional source of revenues. The Company has
many proprietary formulas for glass and glass/ceramic mixtures that it has
developed in over 50 years of manufacturing.
The Company utilizes Statistical Process Control ("SPC"), Design Failure
Mode Effects Analysis, Process Failure Mode Effects Analysis and a strict
adherence to complete manufacturing documentation in order to manufacture high
quality products for internal use as well as external customer sales. The
Company believes that its knowledge and use of these procedures give the Company
a competitive advantage. Hermetic, Glasseal and Sealtron became registered to
ISO 9001 within the past 24 months. The ISO 9001 registration, an international
standard of quality, should facilitate business expansion in Europe.
MARKETING AND SALES
The Company's products are marketed throughout the Unites States to
customers in a wide variety of industries, both by Company-employed
salespersons, who work out of the Company's plants, and by a number of
independent regional manufacturers' sale representatives. The 14
Company-employed salespersons receive a base salary plus bonus potential. Sales
in Europe are through a two person office in Northampton, England. As part of
the Company's growth strategy, the Company believes that it can capture an
increasing share of the business outside the United States. Economic,
political, governmental and regulatory conditions in such international markets
could adversely affect the Company's ability to successfully enter or operate in
such markets. Therefore, no assurances can be given that the Company's attempts
to expand its business into such international markets will be successful. The
Company currently has 18 independent regional manufacturers-sales
representatives spread geographically across the U. S. and Europe. These
representatives, who do not exclusively sell the Company's products, are
remunerated on a commission basis. The Company believes there is a significant
opportunity to increase its sales through expansion of its sales and
distribution efforts, both within the markets it currently serves and in new
markets.
COMPETITION
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The Company believes based upon internal analysis that most of the
Company's competitors in the GTMS sector of the industry in which it competes
are smaller and have less technological and manufacturing expertise than the
Company. The Company believes that it occupies a favorable competitive position
because of its experience in engineering and production techniques. Price has
generally been a less significant competitive factor than the quality and design
of the GTMS because their cost typically is a small percentage of the total cost
of the end products in which they are used and because of the importance of the
uses to which many of the Company's products are put. In addition, products for
airbag initiators are qualified for particular new automotive models and new
products are subject to design and process verification testing (prior to which
there are no sales) which typically takes 8 to 24 months and therefore helps to
inhibit new entry into the market.
BACKLOG
As of March 28, 1998, the Company had a backlog of $33.9 million compared
to $28.8 million as of March 29, 1997. The Company has historically maintained
a strong backlog of orders. The Company sells a majority of its products
pursuant to contractual agreements, sole source relationships, letters of intent
or long-term purchase orders, each of which may permit early termination by the
customer. However, due to the specialized, highly engineered nature of the
Company's product, it is not practical in many cases for customers to shift
their business to other suppliers without incurring significant switching and
opportunity costs.
EMPLOYEES
At March 28, 1998, the Company had approximately 800 employees,
substantially all of whom were located in the Unites States. None of the
Company's employees is subject to a union contract. The Company considers its
relations with its employees to be excellent.
RAW MATERIALS
The Company obtains raw materials, component parts and supplies from a
variety of sources and generally from more than one supplier. The Company's
principal raw materials are steel and glass. The Company's suppliers and
sources of raw materials are based in the United States and the Company believes
that its sources are adequate for its needs for the foreseeable future. The
loss of any one supplier would not have a material adverse effect on the
Company's financial condition or results of operations.
ENVIRONMENTAL MATTERS
The Company's operations are subject to numerous Environmental laws,
including those regulating air emissions and discharges to water, and the
storage, handling and disposal of solid and hazardous waste. The Company
believes that it is in substantial compliance with such laws and regulations.
Because Environmental Laws are becoming increasingly more stringent, the
Company's environmental capital expenditures and costs for environmental
compliance may increase in the future.
Under certain Environmental Laws, in particular CERCLA, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
property. Generally, liability under CERCLA is joint and several and
remediation can extend to properties owned by third parties. Persons who
arrange for the disposal or treatment of hazardous or toxic substances or
otherwise cause the release of such substances into the environment may also be
liable under such laws for the costs of removal or remediation of such
substances at a disposal or treatment facility or other location where the
substances have migrated or come to be located, whether or not such facility or
location is or ever was operated by such person and regardless of whether the
method of disposal or treatment was legal at the time. Such laws often impose
liability whether or not the owner or operator knew of, or was responsible for
the presence of such hazardous or toxic substances, and the liability under such
laws has been interpreted to be strict, joint and several unless the harm is
divisible and there is a reasonable basis for the allocation of responsibility.
In addition, the presence of hazardous or toxic substances, or the failure to
remedy such property properly may adversely affect the market value of the
property, as well as the owner's ability to sell or lease the property. The
Company has potential liability
10
<PAGE>
under Environmental Laws for the remediation of contamination at two of its
facilities (see Item 3 for further discussion of environmental matters).
ITEM 2 - PROPERTIES
FACILITIES
The Company's principal executive offices are owned by the Company and are
located in the Hermetic Seal facility located in Rosemead, California.
Additionally, the Company has operating facilities in El Monte, California;
Lakewood, New Jersey, and Reading, Ohio, as set forth below. The Company also
owns approximately 47,400 square feet of plant and office space in Avon,
Massachusetts, which is currently vacant.
<TABLE>
<CAPTION>
Location Owned/Leased Square Feet
<S> <C> <C>
Rosemead, CA . . . . . . . . . . . Owned 37,000
El Monte, CA . . . . . . . . . . . Leased* 38,000
Lakewood, NJ . . . . . . . . . . . Owned 50,000
Reading, OH. . . . . . . . . . . . Owned 37,000
</TABLE>
* On May 22, 1998, the Company purchased the facility located in El Monte,
California consisting of real property and an industrial building of
approximately 110,000 square feet.
ITEM 3 - LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
ROSEMEAD, CALIFORNIA
REGIONAL GROUNDWATER CONTAMINATION. A portion of the San Gabriel Valley in
which the Rosemead facility is located was designated by the EPA as a federal
Superfund site in 1984. To facilitate cleanup and improve administration of the
site, the EPA subdivided the valley into seven geographically distinct "operable
units". The Company has been named as a potentially responsible party ("PRP")
under CERCLA for the El Monte Operable Unit. The El Monte Operable Unit
underlies the City of El Monte and portions of the Cities of Temple City and
Rosemead and has boundaries which are defined roughly by the extent of known
solvent contamination in the shallow groundwater. To the extent the Rosemead
facility contributed to the regional contamination, such contribution is in
connection with alleged spills of the degreasing solvent tetracholoroethylene
(PCE) during the period from the 1950's until sometime in the mid-1980's when
the Company stopped using this solvent.
Many other companies are believed to be contributors to the groundwater
contamination in the El Monte Operable Unit. The Company and 16 other such
companies have formed the Northwest El Monte Community Task Force (the "Task
Force") to undertake the investigation of the remediation, to identify other
potential contributors and potentially to undertake required remediation. In
March of 1995, the Task Force entered into a Consent Administrative Order with
the EPA to perform a Remedial Investigation and Feasibility Study (RI/FS) of the
operable unit. The RI/FS which began in October of 1995 was originally
scheduled for 90 weeks. It presently appears that the RI/FS process will not be
complete before March 1999. The RI/FS costs of approximately $2.1 million to
date have been funded with about one-quarter of the costs coming from
governmental entities and the balance paid pursuant to a confidential interim
allocation agreement of Task Force members. The interim agreement with respect
to the allocation of RI/FS expenses is not binding on any of the participants
regarding the allocation of remediation expenses.
ON-SITE/SOIL AND GROUNDWATER CLEANUP COSTS. In addition to the Operable
Unit Remediation costs, the Company has voluntarily undertaken both on-site soil
and groundwater remediation. In 1995, pursuant to a contract with Fero
Engineering, the Company installed a soil vapor extraction system which has, to
date, reduced contamination in the soil. The system has been functioning for
approximately 30
11
<PAGE>
months and although it is not possible to determine how long it will take to
complete the remediation, the Company and Fero Engineering believe that the
system may need to be in place for an additional two to three years at an
operating and maintenance cost of $20,000 per year.
The Company has installed a groundwater extraction system in conjunction
with its neighbor, Crown City Plating Company. This system extracts
contaminated water from below the facility and pumps the water for use in Crown
City's manufacturing process prior to discharge to the municipal sanitary sewer.
The system has been operational since August 1996 and is designed to capture
contaminant flow from under the facility containing and cleaning the groundwater
before it impacts the regional groundwater flow. Although the system has been
successful, it is premature to determine how long operation of it will be needed
to remediate the groundwater to acceptable levels, or if the operation of the
system will be discontinued and replaced with a regional groundwater remediation
program. The Company estimates the ongoing operating and maintenance costs for
this system to be $30,000 per year.
The Company believes that its financial liability with respect to regional
groundwater contamination may be substantially reduced by acting on its own
initiative to commence early remediation of groundwater contamination under its
property.
AVON, MASSACHUSETTS
The Company's facility in Avon, Massachusetts, currently inactive, was
purchased in 1985 and operated as its Hermetite facility until August of 1989 at
which time all equipment was removed. Subsequent to its closure, the Company
identified significant levels of solvents trichloroethylene ("TCE") and 1,1,1
trichloroethane ("TCA") in the groundwater. Subsurface investigations have
delineated a plume of contaminants extending from the facility, beneath the
neighboring Den Lea property and into a town public water supply wellfield about
800 feet to the southeast of the property. Since the discovery of contaminants
in 1991, the level of contaminants at the facility has decreased. Despite the
fact that contaminants continue to move toward the wellfield, the levels at the
well field remain within acceptable drinking water standards.
The Avon property is subject to Massachusetts "Chapter 21E," the state's
hazardous site cleanup program. The site was initially classified in the
program's "Tier 1A" category, the highest tier based on the proximity to the
town wellfield. The property has since been reclassified to a less stringent
"Tier 1B" category based on the level of contaminants. Under Tier 1B
procedures, the Company may design its own remediation program subject to state
oversight, auditing, and scheduling.
12
<PAGE>
Pursuant to this procedure, the Company, through GZA GeoEnvironmental,
Inc., its licensed consultants, designed a pump and treat remediation system
which is intended to capture the contaminants before they reach the town wells.
In July 1996, the program was approved by the Massachusetts Department of
Environmental Protection and the Company entered into an agreement with
Environmental Reclamation, Inc. to construct the remediation system. The system
has been designed so that its capacity can be expanded to clean the site in less
time if desired by increasing the number of extraction wells. The initial cost
of the system and the first year of operation and maintenance is $116,000.
Construction of the system has been completed and the system has recently become
operational. If no additional extraction wells are used, the Company estimates
that cleanup could take 20 years at $20,000 per year. Once the system is in
place, the Company will determine whether it is cost beneficial to accelerate
the cleanup of the site.
The Company has resolved the claims asserted by its neighbor Den Lea
Corporation which owns an adjacent piece of property. In 1992, Den Lea sued the
Company for $400,000 in property damage caused by the migrating contamination.
In 1993, the suit was withdrawn "without prejudice" based on the Company's
assurance that it would remediate the site. In August 1997, Den Lea executed a
release and hold harmless agreement with the Company in return for a cash
payment of $250,000 to settle all potential claims against the Company.
REMEDIATION
It is not presently possible to determine definitively the ultimate cost to
the Company for regional groundwater remediation in Rosemead. Such a definitive
determination cannot be made until (i) the completion of the RI/FS, and the
subsequent selection and approval by regulatory authorities of a remediation
strategy and program, if any, which may not be complete for twenty-four to
thirty-six months and (ii) an agreement among Task Force members is reached
regarding the Company's allocable share of remediation liability. Based on the
analysis of environmental engineering consultants, the Company believes its
present value cost exposure at the Avon site to be somewhere between $500,000
and approximately $2,500,000, with the upper end estimate based upon the
necessity of operating an expanded treatment system for twenty years. Based
upon the analysis of such environmental engineering consultants, the Company
established a $10 million accrual as of March 29, 1997, prior to accounting for
taxes, in respect of all such environmental matters.
Pursuant to the Recapitalization Agreement, the Selling Group has agreed to
indemnify the Company with respect to the after-tax costs of contingent
environmental and other liabilities, subject to a cap for all indemnified
liabilities of $30 million. Pursuant to the Recapitalization Agreement, a $6.0
million interest bearing escrow account was established by the selling
stockholders (the "Deferred Amount") to secure indemnity claims of the Company
and others, including with respect to environmental liabilities. Although there
can be no assurances, the Company believes that the Deferred Amount should be
adequate to cover the costs of the remediation. In the event the Deferred
Amount is inadequate to cover the costs of remediation, the Company has been
informed by the individual members of the Selling Group that they will draw upon
personal funds to cover such excess costs. If the Selling Group has aggregate
indemnification liabilities in respect of environmental matters in excess of $30
million, the Company has agreed to indemnify the Selling Group for such claims
to the extent such claims exceed $30 million.
In addition, the Company has insurance coverage that may cover at least a
portion of its costs. Presently, 75% of the Company's legal costs are being
reimbursed by some of the Company's insurance carriers under a reservation of
rights by the Company and the insurance company for the balance of the legal
costs.
13
<PAGE>
OTHER
On March 3, 1998, Walter Neubauer, a former stockholder of the Company
filed a lawsuit in California Superior Court (Case BC186937; Walter Neubauer vs.
Andrew Goldfarb, et. al.) against the Company and certain other stockholders
alleging (i) breach of fiduciary duty, (ii) fraud, (iii) negligent
misrepresentation, (iv) negligence, (v) violations of corporations code and (vi)
breach of contract. The allegations primarily relate to the Company's exercise
of an option to acquire Mr. Neubauer's stock in August 1996. The former
stockholder is seeking damages of $40.0 million. Based upon the Company's
analysis of the current facts, it is management's belief that the Company should
ultimately prevail in this matter, although there can be no assurance in this
regard at this time.
On May 7, 1998, the Company filed a lawsuit against the former stockholder
in California Superior Court alleging (i) breach of contract, (ii) intentional
interference with business relations and (iii) interference with prospective
business advantage. All allegations relate to violations of the noncompetition
agreement executed by the former stockholder in August 1996. The Company is
seeking damages of $50.0 million.
There are other various claims and legal proceedings against the Company
relating to its operations in the normal course of business, none of which the
Company believes will be material to its financial position and results of its
operations. The Company generally obtains indemnification agreements from its
customers and currently maintains insurance coverage for product liability
claims. There can be no assurance that indemnification from its customers and
coverage under insurance policies will be adequate to cover any future product
liability claims against the Company. In addition, product liability insurance
coverage is expensive, difficult to maintain and may be unobtainable in the
future on acceptable terms.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
Not Applicable
14
<PAGE>
ITEM 6 - SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
The following selected consolidated financial information for each of the
five fiscal years ended April 2, 1994, April 1, 1995, March 30, 1996, March 29,
1997, and March 28, 1998 has been derived from the audited consolidated
financial statements of the Company. The information presented below should be
read in conjunction with Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and related notes thereto appearing elsewhere herein
(in thousands).
<TABLE>
<CAPTION>
April 2, April 1, March 30, March 29, March 28,
1994 1995 1996 1997 1998
---------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 29,663 $ 40,307 $ 52,207 $ 56,683 $ 64,561
Cost of goods sold 20,458 25,423 32,562 35,729 38,922
---------- ---------- ----------- ------------ -------------
Gross profit 9,205 14,884 19,645 20,954 25,639
Selling, general and
administrative expenses 5,364 6,274 9,107 9,308 8,552
Non-recurring expense(1) -- -- -- 10,000 1,250
---------- ---------- ----------- ------------ -------------
Earnings from operations 3,841 8,610 10,538 1,646 15,837
Interest and other income 646 136 279 479 510
Interest expense (1,893) (1,715) (1,924) (2,946) (10,327)
Other expense(2) -- (1,369) -- -- --
---------- ---------- ----------- ------------ -------------
Earnings (loss) before taxes, change
in accounting principle and
extraordinary loss 2,594 5,662 8,893 (821) 6,020
Taxes (benefit) on earnings (loss) 1,140 1,810 3,230 (293) 2,406
Earnings (loss) before change in
accounting principle and extraordinary
loss 1,454 3,852 5,663 (528) 3,614
Change in accounting principle(3) 1,782 -- -- -- --
Extraordinary loss, net of tax(4) -- -- -- (1,186) (986)
---------- ---------- ----------- ------------ -------------
Net earnings (loss) $ 3,236 $ 3,852 $ 5,663 $ (1,714) $ 2,628
---------- ---------- ----------- ------------ -------------
---------- ---------- ----------- ------------ -------------
BALANCE SHEET DATA (AT PERIOD END)
Total assets $ 23,819 $ 27,061 $ 33,668 $ 116,141 $ 62,860
Working capital 2,403 5,541 10,387 7,594 16,883
Long-term debt, less
current portion 11,848 9,846 9,811 78,916 98,201
Stockholders' equity (deficit) 5,707 9,197 14,885 (53,340) (56,940)
Dividends declared --- --- --- --- ---
</TABLE>
(1) Represents $10.0 million non-recurring expense for environmental
remediation for fiscal 1997 and $1.3 million non-recurring expense for
financial advisory fee for fiscal 1998.
(2) Represents loss on sale of real property.
(3) Represents gain on cumulative effect of change in accounting principle
(SFAS 109).
(4) Represents loss on retirement of debt, net of tax benefit.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table and discussion should be read in conjunction with the
information contained in the consolidated financial statements and notes thereto
of the Company appearing elsewhere herein. Unless otherwise stated, all
references to years means the Company's fiscal year ending March 28, 1998
(1998), March 29, 1997 (1997) and March 30, 1996 (1996), respectively.
15
<PAGE>
RESULTS OF OPERATIONS (IN MILLIONS)
<TABLE>
<CAPTION>
1998 Percent 1997 Percent 1996 Percent
----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales $64.6 100.0% $56.7 100.0% $52.2 100.0%
Gross profit 25.6 39.7% 21.0 37.0% 19.6 37.6%
Selling, general and administrative
expenses 8.5 13.2% 9.3 16.4% 9.1 17.4%
Non-recurring expense 1.3 1.9% 10.0 17.6% 0.0 0.0%
Earnings (loss) from operations 15.8 24.5% 1.6 2.9% 10.5 20.2%
Other income/(expense) (9.8) (15.2%) (2.5) (4.4%) (1.6) (3.2%)
Extraordinary loss (1) (1.0) (1.5%) (1.2) (2.1%) 0.0 0.0%
Net earnings (loss) $2.6 4.1% ($1.7) (3.0%) $5.7 10.8%
</TABLE>
(1) Represents extraordinary loss on retirement of debt, net of tax benefit.
COMPARISON OF THE FISCAL YEAR ENDED 1998 WITH 1997
NET SALES
The Company's net sales increased by approximately 13.9% or $7.9 million to
$64.6 million for 1998 compared to sales of $56.7 million for 1997. The
increase was primarily due to increasing demand in non-automotive products.
Sales to existing aerospace, industrial process control, and petrochemical
customers increased significantly in 1998. Net non-automotive shipments
increased by 25.4% in 1998 compared to 1997. Based on current order volume, the
Company expects continued growth in the aerospace, industrial process control
and petrochemical markets.
On the automotive side, unit shipments of airbag initiator products
increased significantly due to increased volumes on existing programs and the
development of some new programs. This increased volume was offset by a price
reduction effected under a new three year supply agreement with the Company's
largest customer, Special Devices, Inc. ("SDI"). Overall, revenue from
automotive shipments was flat in 1998 compared to 1997. The new agreement with
SDI was effective October 1, 1997 and expires on December 31, 2000.
GROSS PROFIT
Gross profit increased by approximately 22.4% or $4.6 million, to $25.6
million for 1998 compared to $21.0 million for 1997. Gross margin increased to
39.7% for 1998 from 37.0% for 1997.
The increase in gross profit was attributable to the increased sales
volume. The increase in gross margin was primarily attributable to an improved
sales mix between product lines coupled with efficiencies gained through
increased operating leverage on the higher sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("S,G&A") expenses decreased by
approximately 8.1% or $0.8 million to $8.5 million for 1998 compared to $9.3
million for 1997. S,G&A expenses as a percent to sales decreased to 13.2% in
1998 from 16.4% for 1997.
16
<PAGE>
The $0.8 million decrease in S,G&A expenses reflects an approximate $1.2
million reduction in compensation costs. The decreased SG&A expenses was
partially offset by approximately $0.4 million of higher selling expenses
incurred in supporting the increased sales volume. The improvement in the
percentage of S,G&A expenses to sales reflects the increased growth in net sales
outpacing the increase in overall S,G&A expenses.
NON-RECURRING EXPENSE
The non-recurring expense was attributable to a $1.3 million financial
advisory fee paid in December 1997 to Windward Capital Partners for financial
advisory services rendered in connection with the Recapitalization of the
Company in February 1997. For 1997, the $10.0 million charge represents
estimated environmental costs.
EARNINGS FROM OPERATIONS
Operating earnings increased $14.2 million to $15.8 million for 1998
compared to $1.6 million for 1997. The increase in operating earnings and
operating margin was primarily attributable to the $8.7 million reduction in
non-recurring expenses, increased gross profit and lower S,G&A expenses (all
as discussed above) in 1998 compared to 1997.
OTHER EXPENSE, NET
Other expense, net increased $7.3 million to $9.8 million in 1998 from $2.5
million for 1997. This increase was attributable to the increased interest
expense associated with debt incurred in conjunction with the Recapitalization
in February 1997. The Company had $99.1 million of long-term debt as of March
28, 1998 compared to $82.5 million at March 29, 1997.
NET EARNINGS
Net earnings increased by approximately $4.3 million to $2.6 million for
1998 from a loss of $1.7 million in 1997. The increase in net earnings was
primarily attributable to the increase in earnings from operations (discussed
above), partially offset by the increase in interest expense in 1998.
COMPARISON OF THE FISCAL YEAR ENDED 1997 WITH 1996
NET SALES
The Company's sales increased by approximately 8.6% or $4.5 million to
$56.7 million for 1997 from $52.2 million for 1996.
This increase was attributable to approximately equal dollar volume
increases in the Company's automotive and non-automotive products. On the
automotive side, shipments of airbag initiator products increased significantly
due to increased volumes of existing programs. The increased initiator
shipments were partially offset by scheduled price decreases on the SDI
initiator program and the scheduled completion of an electronic sensor program.
In non-automotive products, the Company experienced consistent growth in all of
its aerospace, industrial and petrochemical products.
17
<PAGE>
GROSS PROFIT
Gross profit increased by approximately 6.7% or $1.4 million, to $21.0
million for 1997 from $19.6 million for 1996. Gross margin during this period
decreased from 37.6% to 37.0%.
The increase in gross profit was primarily attributable to the increased
sales volume. The decrease in gross margin was primarily attributable to an
increase in overtime labor costs associated with the relocation and expansion of
Hermetic Seal's machine shop to a new facility during the year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by approximately
2.2% or $0.2 million to $9.3 million for 1997 from $9.1 million for 1996. S,G&A
expenses as a percent to sales decreased to 16.4% from 17.4% for the prior
period.
The $0.2 million increase in base S,G&A expenses reflects the higher costs
of supporting the increased sales volume. The improvement in the percentage of
S,G&A expenses to sales reflects the improved leverage on the fixed portion of
the expenses.
EARNINGS FROM OPERATIONS
Operating earnings decreased by approximately 84.4% or $8.9 million to $1.6
million in 1997 from $10.5 million for the prior year. Operating margins for
the period decreased from 20.2% in 1996 to 2.9% for 1997.
The decrease in operating earnings and margin was attributable to the $10.0
million non-recurring expense recorded in 1997 related to estimated
environmental costs. The non-recurring expense was partially offset by the same
factors that contributed to the increase in gross profit and improvements in
S,G&A expenses as a percent to sales. Excluding this non-recurring expense,
operating earnings increased by approximately 10.5% or $1.1 million to $11.6
million in 1997 from $10.5 million in 1996.
OTHER EXPENSE, NET
Other expense, net increased by approximately 50.0% or $0.8 million to $2.5
million in 1997 from $1.6 million for 1996. This increase was attributable to
the increased interest expense of $1.0 million partially offset by increased
interest income of $0.2 million. The higher interest costs were due, in part,
to additional debt incurred to finance the Recapitalization and additional debt
incurred to finance capital expenditures. The increased interest income of $0.2
million is the result of higher treasury balances in 1997.
NET EARNINGS (LOSS)
Net earnings decreased by approximately $7.4 million to a $1.7 million loss
for 1997 from net earnings of $5.7 million for 1996.
The decrease in net earnings was attributable to the $10.0 million
non-recurring expense, the increased debt service costs and extraordinary loss
incurred in connection with the Recapitalization. Excluding the non-recurring
expense, net earnings decreased by approximately 24.6% or $1.4 million to $4.3
million for 1997.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $8.7 million for 1998
compared to $1.8 million for 1997. The increase of $6.9 million was primarily
attributable to increased net earnings (discussed above) and a decrease in
working capital requirements.
Net cash used in investing activities was $3.9 million for 1998 compared to
$1.8 million for 1997. The $2.1 million increase was primarily attributable to
the $2.2 million acquisition of Connector Industries of America in June 1997.
As of March 28, 1998, the Company's outstanding indebtedness is $99.1
million, consisting of $90.0 million principal amount of the senior subordinated
notes and $9.1 million of other borrowings. The Company amended the Revolving
Credit Facility ("the Agreement") subsequent to the Offering to augment its
liquidity requirements by increasing the size of the facility to $20.0 million.
Borrowings under the Agreement may be used for general and other corporate
purposes. The Agreement provides for interest on outstanding balances at the
bank's prime rate plus 1-1/4% and is collateralized by accounts receivable and
inventories of the Company. At March 28, 1998 there was $15,273,000 available
under the Agreement. The Agreement includes covenants requiring maintenance of
certain financial ratios. At March 28, 1998 and March 29, 1997 there were no
borrowings outstanding under the Agreement.
The Company has a Capital Lease Line of $5.8 million for financing
manufacturing equipment expiring June 30, 1998. The agreement provides for
thirty-six (36) or sixty (60) month terms with interest at 2.00% above the
bank's index rate. The bank's index rate is the U.S. Treasury Note
bond-equivalent yield per annum corresponding to the average life of the lease.
At March 28, 1998 and March 29, 1997, there was $3.5 million and $2.3 million,
respectively, outstanding under the Capital Lease Line.
The Company believes that cash flow from operations and the availability
of borrowings under the Revolving Credit Facility and Capital Lease Line will
provide adequate funds for ongoing operations, planned capital expenditures
and debt service during the terms of such facilities. To the extent certain
performance thresholds with respect to the Contingent Notes (see Note 1 of
the Consolidated Financial Statements) and Contingent Bonuses (see Item 11)
are met, and such obligations become vested, the Company believes that cash
flow from operations and availability of borrowings will be sufficient to
fund such obligations.
Capital expenditures for fiscal 1999 are expected to focus on vertical
integration with investments in equipment to expand manufacturing capacity in
machining, glass production, sealing and plating, as well as automation
equipment to lower production costs on the high volume production lines.
Expected capital expenditures for fiscal 1999 are approximately $3.5 million
(excluding the purchase of the El Monte building) and will be financed through
working capital and the Capital Lease Line. In addition, on May 22, 1998, the
Company purchased the facility located in El Monte, California consisting of
real property and an industrial building of approximately 110,000 square feet
(see Note 11 to the Consolidated Financial Statements).
On December 8, 1997 the Company signed a new supply agreement with Special
Devices, Inc. through the year 2000. The new agreement provides for price
concessions to SDI in consideration of a one year contract extension and
abatement of the volume discount from the previous agreement.
Regarding the Year 2000 compliance issue for information systems, the
Company has recognized the need to ensure that its computer operations and
operating systems will not be adversely affected by the upcoming calendar Year
2000 and is cognizant of the time sensitive nature of the problem. The Company
has assessed how it may be impacted by Year 2000 and has formulated and
commenced implementation of a comprehensive plan to address known issues as they
relate to its information systems. The plan, as it relates to information
systems, involves a combination of software modification, upgrades and
replacement. The necessary modifications to the Company's information systems
are expected to be completed by the first quarter of 1999 and the Company
preliminarily estimates the cost to be in the range of $0.7 to $1.2 million.
The Company is not yet able to estimate the cost of Year 2000 compliance with
respect to customers and suppliers; however, based on a preliminary review,
management does not expect that such costs will have a material adverse effect
on the future consolidated results of operations of the Company.
19
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." The standard establishes guidelines
for the reporting and display of comprehensive income and its components in
financial statements. Disclosure of comprehensive income and its components
will be required beginning with the Company's fiscal year ending 1999.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The standard requires that
companies disclose "operating segments" based on the way management
disaggregates the Company for making internal operating decisions. The new
rules will be effective for the Company's 1999 fiscal year-end.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirement for pensions and other postretirement benefits. The
implementation of SFAS No. 132 is not expected to have an impact on the
Company's financial statements. The standard will be effective for the Company
for the year ended April 3, 1999.
FACTORS AFFECTING FUTURE PERFORMANCE
Although increases in operating costs could adversely affect the Company's
operations, management does not believe inflation has had a material effect on
operating profit during the past several years.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This filing contains statements that are "forward looking statements", and
includes, among other things, discussions of the Company's business strategy and
expectations concerning market position, future operations, margins,
profitability, liquidity and capital resources. Although the Company believes
that the expectations reflected in such forward looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct.
All phases of the operations of the Company are subject to a number of
uncertainties, risks and other influences, including general economic
conditions, regulatory changes and competition, many of which are outside the
control of the Company, any one of which, or a combination of which, could
materially affect the results of the Company's operations and whether the
forward looking statements made by the Company ultimately prove to be accurate.
20
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS Page
<S> <C>
Report of Independent Accountants 22
Consolidated Balances Sheets as of March 28, 1998 and
March 29, 1997 23
Consolidated Statements of Earnings for the years ended
March 28, 1998, March 29, 1997 and March 30, 1996 24
Consolidated Statements of Stockholder's Equity (Deficit)
for the years ended March 28, 1998, March 29, 1997 and
March 30, 1996 25
Consolidated Statements of Cash Flows for the years ended
March 28, 1998, March 29, 1997 and March 30, 1996 26
Notes to Consolidated Financial Statements 27
Schedule II - Valuation and Qualifying Accounts 39
</TABLE>
All other financial statement schedules not listed have been omitted since the
required information is included in the consolidated financial statements, the
notes thereto, is not applicable, or not required.
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
HCC Industries Inc. and Subsidiaries
Rosemead, California
We have audited the accompanying consolidated balance sheets of HCC Industries
Inc. and Subsidiaries (the "Company") as of March 28, 1998 and March 29, 1997,
and the related consolidated statements of earnings, stockholders' equity and
cash flows and financial statement schedule for each of the three years in the
period ended March 28, 1998. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HCC Industries
Inc. and Subsidiaries as of March 28, 1998 and March 29, 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 28, 1998 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
May 29, 1998
22
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 28, MARCH 29,
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,441 $ 6,841
Restricted cash --- 69,282
Trade accounts receivable, less allowance for
doubtful accounts of $40 (1998 and 1997) 10,136 6,904
Inventories 4,610 4,376
Prepaid and deferred income taxes 260 533
Other current assets 416 223
--------- ---------
Total current assets 28,863 88,159
PROPERTY, PLANT AND EQUIPMENT, NET 14,617 12,264
OTHER ASSETS:
Intangible assets 5,643 4,507
Deferred financing costs, net 3,532 1,827
Deferred income taxes 4,192 3,269
Restricted cash 6,013 6,039
Other --- 76
--------- ---------
TOTAL ASSETS $ 62,860 $ 116,141
--------- ---------
--------- ---------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 897 $ 3,537
Accounts payable 2,947 2,553
Accrued liabilities 6,384 5,193
Income taxes payable 1,752 ---
Due to stockholders --- 69,282
--------- ---------
Total current liabilities 11,980 80,565
LONG TERM LIABILITIES:
Long-term debt, net of current portion 98,201 78,916
Other long-term liabilities 9,619 10,000
--------- ---------
119,800 169,481
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock; $.10 par value; authorized 550,000
shares, issued and outstanding 134,955 shares at
March 28, 1998 and 143,569 shares at March 29, 1997 13 14
Accumulated deficit (56,953) (53,354)
--------- ---------
TOTAL STOCKHOLDERS' DEFICIT (56,940) (53,340)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 62,860 $ 116,141
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
23
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
----------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
NET SALES $ 64,561 $ 56,683 $ 52,207
Cost of goods sold 38,922 35,729 32,562
----------- ---------- ----------
GROSS PROFIT 25,639 20,954 19,645
Selling, general and administrative expenses 8,552 9,308 9,107
Non-recurring expense 1,250 10,000 ---
----------- ---------- ----------
EARNINGS FROM OPERATIONS 15,837 1,646 10,538
----------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest and other income 510 479 279
Interest expense (10,327) (2,946) (1,924)
----------- ---------- ----------
Total other expenses, net (9,817) (2,467) (1,645)
----------- ---------- ----------
EARNINGS (LOSS) BEFORE TAXES AND EXTRAORDINARY ITEM 6,020 (821) 8,893
Taxes (benefit) on earnings (loss) 2,406 (293) 3,230
----------- ---------- ----------
Earnings (loss) before extraordinary item 3,614 (528) 5,663
Extraordinary loss on retirement of debt, net
of tax benefit of $656 (1998) and $657 (1997) (986) (1,186) ---
----------- ---------- ----------
NET EARNINGS (LOSS) $ 2,628 $ (1,714) $ 5,663
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
24
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
-------------------- PAID-IN NOTE EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE (DEFICIT) EQUITY(DEFICIT)
------ ------ ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1995 490 $ 49 $ 1,558 $ --- $ 7,590 $ 9,197
Sale of stock 10 1 199 (175) --- 25
Net earnings --- --- --- --- 5,663 5,663
------ ------ ---------- ---------- ---------- ------------
BALANCE, MARCH 30, 1996 500 50 1,757 (175) 13,253 14,885
Payment of note receivable --- --- --- 175 --- 175
Repurchases of stock (453) (46) (38,637) --- (64,893) (103,576)
Sale of stock in recapitalization 97 10 36,880 --- --- 36,890
Net loss --- --- --- --- (1,714) (1,714)
------ ------ ---------- ---------- ---------- ------------
BALANCE, MARCH 29, 1997 144 14 --- --- (53,354) (53,340)
Repurchases of stock (9) (1) --- --- (6,227) (6,228)
Net earnings --- --- --- --- 2,628 2,628
------ ------ ---------- ---------- ---------- ------------
BALANCE MARCH 28, 1998 135 $ 13 $ --- $ --- $(56,953) $ (56,940)
------ ------ ---------- ---------- ---------- ------------
------ ------ ---------- ---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For The Year Ended
---------------------------------------
March 28, March 29, March 30,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 2,628 $ (1,714) $ 5,663
Reconciliation of net earnings (loss) to net cash
provided by operating activities:
Depreciation 1,442 1,195 934
Amortization 715 604 435
Deferred income taxes (1,111) (3,922) 181
Extraordinary loss 986 1,186 ---
Non-recurring expense --- 10,000 ---
Non-cash expense 3,000 --- ---
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable, net (2,853) 851 (2,057)
Decrease (increase) in inventories 25 (323) (798)
(Increase) decrease in other assets (91) (6,161) 23
Increase (decrease) in accrued liabilities 810 260 (259)
Increase in accounts payable
and income taxes payable 3,120 (166) 940
--------- --------- ---------
Net cash provided by operating activities 8,671 1,810 5,062
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition (2,200) --- ---
Purchases of property, plant and equipment (1,666) (1,943) (615)
Cash collected on notes receivable --- 175 ---
--------- --------- ---------
Net cash used in investing activities (3,866) (1,768) (615)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (80,607) (22,489) (1,449)
Proceeds from issuance of long-term debt 90,000 90,309 ---
Repurchases of stock (3,728) (33,331) ---
Restricted cash due to selling stockholders --- (69,282) ---
Deferred financing costs (3,870) (1,945) ---
Sale of stock --- 38,874 25
Cost of recapitalization --- (1,984) ---
--------- --------- ---------
Net cash provided by (used in) financing
activities 1,795 152 (1,424)
--------- --------- ---------
Net increase in cash and cash equivalents 6,600 194 3,023
Cash and cash equivalents at beginning of period 6,841 6,647 3,624
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,441 $ 6,841 $ 6,647
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Capital lease obligations $ 1,796 $ 1,426 $ 1,417
Notes payable to stockholders 2,500 --- ---
Bonus notes payable to employees 3,000 --- ---
Due to selling stockholders --- 70,245 ---
Note received from sale of stock --- --- 175
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
HCC Merger Corp. was organized in 1989 to acquire HCC Industries Inc. and
Subsidiaries ("HCC" or "Company"). HCC designs, manufactures and markets
broad lines of state-of-the-art, high precision electronic connection devices
known as hermetic seals. The Company's products are sold primarily in North
America and Europe to the aerospace, energy, test and measurement and
automotive industries.
On October 18, 1995, HCC Merger Corp. ("Merger Corp."), entered into an
agreement (as amended, the "Option Agreement") with a stockholder of Merger
Corp. (who is also a stockholder of Special Devices, Inc., the Company's largest
customer) in anticipation of a prior proposed acquisition of the Company by a
third party. In the Option Agreement, Merger Corp. was granted an option on
such stockholder's shares in Merger Corp. Such proposed transaction was not
consummated. In June 1996, Merger Corp. exercised its option and such
stockholder received $13,500,000 in consideration for his shares. Pursuant to
the Option Agreement, such stockholder (i) also received certain additional
amounts ($963,000) in connection with the consummation of the Recapitalization
described below and (ii) agreed that he would have no interest in any future
amounts actually paid to the other stockholders of the Company in connection
with any subsequent transaction, including the Recapitalization. On August 28,
1996 Merger Corp. merged into the Company (the "Merger").
On February 14, 1997, pursuant to a Stock Purchase and Sale Agreement (the
"Recapitalization Agreement") dated as of December 23, 1996, the Company,
certain members of management, Windward Capital Associates, L.P. ("Windward")
and certain affiliates of Windward (collectively, with Windward, the "Windward
Group") and Metropolitan Life Insurance Company ("MetLife") completed a
recapitalization of the Company (the "Recapitalization"). The Windward Group is
a group of related entities which make merchant banking investments pursuant to
certain program agreements. In connection with the Recapitalization, among
other things: (i) the Company entered into Credit Facilities, consisting of: (a)
a $10,000,000 five year Revolving Credit Facility, (b) a $30,000,000 five year
Tranche A Term Loan and (c) a $30,000,000 six and one-half year Tranche B Term
Loan; (ii) the Company issued $19,300,000, net of discount, in subordinated
notes to the Windward Group and MetLife along with 8,614 shares of common stock
and certain contingent anti-dilution warrants ("Mezzanine Units") for an
aggregate purchase price of $22,500,000; (iii) the Company purchased a portion
of the shares of Common Stock (at $370 per share) beneficially owned by the
selling stockholders for $87,500,000, including certain transaction expenses, in
cash (a portion of which was paid at closing and the remainder of which was
deposited in escrow at closing) and $5,000,000 in contingent subordinated notes;
(iv) the Windward Group purchased 87,721 shares of Common Stock (at $370 per
share) from the Company for $32,500,000 in cash; and (v) the Company repaid
certain of its outstanding indebtedness. At March 29, 1997, as a result of item
(iii) above, $69,282,000 remained in an escrow account and is reflected on the
balance sheet of the Company as restricted cash and due to stockholders. This
escrow was disbursed in April 1997. In accounting for the recapitalization, no
fair value adjustments were made to the book value of the Company's assets and
no goodwill was recognized. The contingent subordinated notes vest upon
achievement by the Company of certain operating performance thresholds or
achievement by the Windward Group of certain investment performance thresholds.
On March 28, 1998, upon partial vesting of the Contingent Subordinated Notes,
the Company recorded a $2,500,000 charge to equity to reflect additional
purchase price associated with the shares purchased in the Recapitalization as
described in (iii) above.
27
<PAGE>
In addition, in connection with the Recapitalization, a $6,000,000 interest
bearing escrow account was established by the selling stockholders to fund
certain contingencies and/or items specifically indemnified by the selling
stockholders. The escrow account has been classified as restricted cash on the
consolidated balance sheet. The restricted cash escrow balance was $6,013,000
at March 28, 1998 and $6,039,000 at March 29, 1997. Any funds remaining in this
account upon satisfaction of conditions specified in the escrow agreement, will
be paid to the selling stockholders.
On May 6, 1997, the Company issued $90,000,000 in principal amount of Senior
Subordinated Notes due in May 2007 (the "Old Notes") and used the proceeds of
such issuance to, among other things, (i) repay 100% of the outstanding
principal amount, together with all accrued but unpaid interest thereon, of each
of Term Loan A and Term Loan B and (ii) repurchase all outstanding Mezzanine
Units for $22,500,000, the initial purchase price thereof, together with accrued
but unpaid interest on the related notes. As a result of this refinancing, the
Company recorded an extraordinary loss of $986,000, net of taxes. In addition
on May 6, 1997, the Company amended the Revolving Credit Facility to, among
other things, increase the amount available thereunder from $10,000,000 to
$20,000,000. Pursuant to the Registration Rights Agreement entered into with
the issuance of the Old Notes, the Company on November 3, 1997 filed a
Registration Statement under the Securities Act of 1933 with the SEC to exchange
the Old Notes for $90,000,000 of Senior Subordinated Exchange Notes (the "New
Notes"). The terms of the New Notes and the Old Notes are identical in all
material respects.
On June 20, 1997, the Company acquired substantially all of the assets and
assumed certain liabilities of Connector Industries of America, a glass-to-metal
sealing company. The purchase price included $2,100,000 in cash and a
contingent payment of $400,000 based upon the volume of business retained in the
immediately subsequent 18 month period. In its last fiscal year of operations,
the acquired company generated sales of approximately $3,200,000. The
transaction was accounted for as an asset purchase. In conjunction with the
acquisition, the Company assigned $1,372,000 to intangibles which will be
amortized over a 14 year period on a straight line basis. If the contingent
payment becomes payable, such amount will be recorded as additional purchase
price consideration and added to intangibles. Pro forma results of operations
are not provided as the impact on Company operations is not material.
Principles Of Consolidation
The consolidated financial statements include the accounts of the Company and
all wholly owned subsidiaries. All significant intercompany transactions (which
are primarily sales/purchases and receivables/payables) have been eliminated in
consolidation.
The Company's Senior Subordinated Notes are guaranteed by all operating
subsidiaries of the Company (the "Subsidiary Guarantors"). 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 the accompanying financial statements because
management of the Company has determined that separate financial statements of
the Subsidiary Guarantors would not be material to investors.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, reported results of
operations and disclosure of contingencies at the dates of the consolidated
financial statements. Actual results could differ from those estimates.
28
<PAGE>
Accounting Period
The consolidated financial statements are based on the fiscal year ending on the
Saturday nearest to March 31.
Revenue Recognition
The Company generally recognizes revenue at the time of shipment.
Cash Equivalents
The Company considers all highly liquid investments purchased with an initial
maturity of three months or less to be cash equivalents. The Company has bank
balances, including cash and cash equivalents, which at times may exceed
federally insured limits.
Accounts Receivable And Concentration Of Credit Risk
The Company grants uncollateralized credit to its customers who are located
in various geographical areas. Estimated credit losses and returns have been
provided for in the financial statements and, to date, have been within
management's expectations. Sales to the Company's four largest customers
accounted for 42% (1998), 43% (1997) and 45% (1996) of total sales. At
March 28, 1998 and March 29, 1997, the four largest customers accounted for
approximately 40% and 30% of total accounts receivable, respectively.
Prior to August 1996, a stockholder of the Company was also a stockholder of
Special Devices, Inc. ("SDI"). Sales to SDI were $23,836,000, $15,243,000 and
$12,212,000 for the fiscal years 1998, 1997 and 1996, respectively. Accounts
receivable from SDI as of March 28, 1998 and March 29, 1997 were $3,100,000 and
$1,392,000, respectively. In August 1996, the stockholder sold his outstanding
shares back to the Company.
Inventories
Inventories are 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 the estimated useful lives of the
respective assets of 3 years to 40 years.
Repairs and maintenance are charged directly to expense as incurred. Additions
and betterments to property, plant and equipment are capitalized. When assets
are disposed of, the related cost and accumulated depreciation thereon are
removed from the accounts and any resulting gain or loss is included in
operations.
Intangible Assets
The excess of purchase price over net assets acquired is amortized on a
straight-line basis over the estimated useful lives of the respective assets of
14 to 40 years. Amortization expense was $264,000 (1998), $189,000 (1997) and
$189,000 (1996). Accumulated amortization on the excess purchase price over net
assets acquired was $1,958,000 and $1,694,000 as of March 28, 1998 and March 29,
1997, respectively.
29
<PAGE>
Long-Lived Assets
In fiscal 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The adoption of SFAS No. 121 was not
material to the Company's consolidated financial statements.
In accordance with SFAS No. 121, long-lived assets held and used by the Company
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the Company evaluates the
carrying value of its goodwill and property, plant and equipment on an ongoing
basis and recognizes an impairment when the estimated future undiscounted cash
flows from operations are less than the carrying value of the related long-lived
assets.
Income Taxes
The Company accounts for income taxes under the liability method. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Stock Based Employee Compensation Awards
Statement of Financial Accounting Standards No. 123, "Accounting for the Awards
of Stock-Based Compensation to Employees" ("SFAS No. 123") encourages, but does
not require companies to record compensation cost for stock-based compensation
plans at fair value. The Company has adopted the disclosure requirements of
SFAS No. 123, which involves proforma disclosure of net income under SFAS No.
123, detailed descriptions of plan terms and assumptions used in valuing stock
option grants. The Company has chosen to continue to account for stock-based
employee compensation awards in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees".
Reclassifications
Certain reclassifications have been made to previously reported amounts to
conform with the current year presentation.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". The standard establishes guidelines for the reporting and display of
comprehensive income and its components in financial statements. Disclosure of
comprehensive income and its components will be required beginning with the
Company's fiscal year ending 1999.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." The standard requires that companies
disclose "operating segments" based on the way management disaggregates the
Company for making internal operating decisions. The new rules will be
effective for the Company's 1999 fiscal year-end.
30
<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosure
requirement for pensions and other postretirement benefits. The implementation
of SFAS No. 132 is not expected to have an impact on the Company's financial
statements. The standard will be effective for the Company for the year ended
April 3, 1999.
2. INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 28, March 29,
1998 1997
--------- --------
<S> <C> <C>
Raw materials and component parts $ 2,340 $ 1,910
Work in process 2,270 2,466
--------- --------
$ 4,610 $ 4,376
--------- --------
--------- --------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
March 28, March 29,
1998 1997
--------- --------
<S> <C> <C>
Land $ 3,180 $ 3,180
Buildings and improvements 5,988 5,450
Furniture, fixtures and equipment 12,607 9,350
--------- --------
21,775 17,980
Less accumulated depreciation (7,158) (5,716)
--------- --------
$ 14,617 $ 12,264
--------- --------
--------- --------
</TABLE>
31
<PAGE>
4. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
March 28, March 29,
1998 1997
--------- --------
<S> <C> <C>
10 3/4% Senior Subordinated Notes - interest payable
semi-annually; due May 15, 2007 $ 90,000 $ ---
Subordinated Notes due Selling Shareholders -
12% interest payable semi-annually; due March 28, 2001 2,500 ---
Subordinated Bonus Notes - 10% interest payable
semi-annually; due March 28, 2001 3,000 ---
Tranche A Term Loan - bearing interest at the bank's
prime rate plus 1-1/4% payable monthly in arrears;
quarterly principal payments of varying amounts
through February 14, 2002 --- 30,000
Tranche B Term Loan - bearing interest at the bank's
prime rate plus 1-3/4% payable monthly in arrears;
quarterly principal payments of varying amounts
through August 14, 2003 --- 30,000
12% Subordinated Notes - interest payable
semi-annually; face value of $22,500,000 due
April 15, 2004, recorded at present value discounted
to an effective interest rate of 15.38%. --- 19,352
Other 3,598 3,101
--------- --------
99,098 82,453
Less current portion 897 3,537
--------- --------
$ 98,201 $ 78,916
--------- --------
--------- --------
</TABLE>
At March 28, 1998 and March 29, 1997, the prime rate was 8.50%.
The Tranche A Term Loan, Tranche B Term Loan and 12% Subordinated Notes were
redeemed on May 6, 1997. As a result, the Company recognized an
extraordinary loss ($986,000 net of tax benefit) on unamortized financing
costs. On February 14, 1997, certain other debentures were redeemed
resulting in an extraordinary loss of $1,186,000 (net of tax benefit) for
unamortized discount and issuance costs.
In issuing the 10 3/4% Senior Subordinated Notes, the Company incurred
$3,870,000 in deferred financing costs. These costs will be amortized using
the straight-line method over the term of the respective notes. For the year
ended March 28, 1998, the Company incurred amortization expense of $467,000
on the deferred financing costs. In accordance with SFAS No. 107 "Disclosure
About Fair Value of Financial Instruments," the fair values of the Company's
long-term debt has been established based on current rates offered to the
Company for debt of the same remaining maturities. The carrying amounts of
the Company's loans approximate their fair values.
32
<PAGE>
Senior Subordinated Notes are redeemable at the option of the Company commencing
on May 15 of the year set forth below at the redemption prices also set forth
below:
<TABLE>
<CAPTION>
Redemption
Period Price
<S> <C>
2002 ................................................... 105.375%
2003 ................................................... 103.583%
2004 ................................................... 101.792%
2005 and thereafter .................................... 100.000%
</TABLE>
Minimum payments due under long-term debt as of March 28, 1998 are as follows
(in thousands):
<TABLE>
<CAPTION>
Fiscal
<S> <C>
1999 $ 897
2000 903
2001 6,322
2002 614
2003 351
2004 and thereafter 90,011
---------
$ 99,098
---------
---------
</TABLE>
Cash payments for interest were $6,893,000 (1998), $2,241,000 (1997) and
$1,379,000 (1996).
5. LINES OF CREDIT:
The Company has a revolving credit facility agreement, as amended on May 6,
1997, (the "Agreement") of up to $20,000,000 expiring on February 14, 2002. The
Agreement provides for interest on outstanding balances at the bank's prime rate
plus 1-1/4% and is collateralized by accounts receivable and inventories of the
Company. At March 28, 1998 there was $15,273,000 available under the Agreement.
The Agreement includes covenants requiring maintenance of certain financial
ratios. At March 28, 1998 and March 29, 1997 there were no borrowings
outstanding under the Agreement.
The Company has a capital lease line of credit of $5,843,000 for financing
manufacturing equipment expiring June 30, 1998. The agreement provides for
thirty-six (36) or sixty (60) month terms with interest at 2.00% above the
bank's index rate. The bank's index rate is the U.S. Treasury Note
bond-equivalent yield per annum corresponding to the average life of the lease.
At March 28, 1998 and March 29, 1997 there were $3,532,000 and $2,335,000 in
borrowings outstanding under the capital lease line, respectively.
33
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. TAXES ON EARNINGS:
The components of income tax expense (benefit) consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 2,392 $ 2,484 $ 2,403
State 469 488 646
-------- -------- --------
2,861 2,972 3,049
-------- -------- --------
Deferred:
Federal (942) (3,334) 147
State (169) (588) 34
-------- -------- --------
(1,111) (3,922) 181
-------- -------- --------
$ 1,750 $ (950) $ 3,230
-------- -------- --------
-------- -------- --------
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Tax provision at the statutory rate 34.0% (34.0%) 34.0%
Nondeductible expenses 2.2% 2.7% 0.8%
State taxes, net of federal benefit 4.6% (1.9%) 5.0%
Other (0.8%) (2.5%) (3.5%)
-------- -------- --------
40.0% (35.7%) 36.3%
-------- -------- --------
-------- -------- --------
</TABLE>
The components of the net deferred taxes are as follows (in thousands):
<TABLE>
<CAPTION>
March 28, March 29,
1998 1997
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Environmental liabilities $ 3,848 $ 4,000
Accrued vacation and other 1,460 215
-------- -------
5,308 4,215
Deferred Tax Liabilities:
Depreciation (856) (730)
-------- -------
Deferred Tax Asset, net $ 4,452 $ 3,485
-------- -------
-------- -------
</TABLE>
Cash tax payments were $859,000 (1998), $4,454,000 (1997), and $2,079,000
(1996).
34
<PAGE>
HCC INDUSTRIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. CAPITAL STOCK:
The Company is authorized to issue an aggregate of 550,000 shares of common
stock. These shares may be issued in four different classes (A, B, C or D
shares) which differ only in voting rights per share as follows:
<TABLE>
<CAPTION>
Voting Rights
Class Per Share
-------------
<S> <C>
A 1
B 1
C None
D 10
</TABLE>
The changes in each class of common shares for each of the three years in the
period ended March 28, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Class of Common Stock
-------------------------------------------------------------------------------
A B C D Total
Par Par Par Par Par
Shares Value Shares Value Shares Value Shares Value Shares Value
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1995 490 $ 49 490 $ 49
Sale of Stock 10 1 10 1
------ ------ -----
Balance - March 30, 1996 500 50 500 50
Repurchase of Stock (June
1996) (206) (21) (206) (21)
Repurchase of Stock (Feb-
ruary 1997) (246) (25) (246) (25)
Sale of Stock 63 6 28 $ 3 4 $ 1 1 $ -- 96 10
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Balance - March 29, 1997 111 10 28 3 4 1 1 -- 144 14
Repurchase of Stock (8) (1) (1) --- -- --- -- -- (9) (1)
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Balance - March 28, 1998 103 $ 9 27 $ 3 4 $ 1 1 $ -- 135 $ 13
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
</TABLE>
The remaining 415,045 shares are undesignated as to class.
In February 1997, the Company adopted a stock option plan (the "Option Plan")
which provides for the grant to employees and directors, from time to time, of
non-qualified stock options to purchase up to an aggregate of 22,887 shares of
common stock at exercise prices to be determined by the Board of Directors. The
Option Plan provides for the grant of management options to purchase 6,393
shares of common stock (the "Management Options"), management performance
options to purchase 14,206 shares of common stock (the "Management Performance
Options"), director options to purchase 710 shares of common stock (the
"Director Options") and director performance options to purchase 1,578 shares of
common stock (the "Director Performance Options"). The Management Options and
Director Options are subject to a vesting schedule that generally provides for
each series of options to vest 20% per year over five years if the Company
attains specified annual or cumulative earnings targets as defined in the Option
Plan. The Management Performance Options and Director Performance Options are
subject to a vesting schedule based on a change in control in which the Windward
Group realizes specified annual rates of return on its equity investment in the
Company as defined in the Option Plan. All options are exercisable over a
period of 10 years and will automatically vest on the seventh anniversary of the
date on which the Option Plan was adopted, regardless of whether the performance
criteria are achieved.
35
<PAGE>
The Company granted options to purchase 470 and 18,160 shares of common stock
for the years ended March 28, 1998 and March 27, 1997, respectively, with an
exercise price equal to the fair value of common stock at the date of grant
($370.49 per share). At March 28, 1998, 1,420 options were exercisable and
options to purchase 4,257 shares of common stock remained available for grant.
The fair value of each option granted was estimated on the date of grant to be
$99 using the minimum value method with the following assumptions (i) risk-free
interest rate of 6.43% and 6.25% for fiscal 1998 and 1997, respectively, (ii)
expected option life of 5 years, (iii) forfeiture rate of 0 and (iv) no expected
dividends.
The Company has adopted the disclosure only provisions of SFAS No. 123. For
the year ended March 28, 1998, had the Company recognized compensation
expense in accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation", net earnings would have been
$2,406,000. For the year ended March 29, 1997, due to the limited time
period for which stock options were outstanding, there was no significant
difference between the Company's net loss and the pro forma net loss.
8. EMPLOYEE BENEFIT PLANS:
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 the requirements of a qualified retirement plan pursuant to the
provisions of Section 401(k) of the Internal Revenue Code. The Plan provides
participants the opportunity to make tax deferred contributions to a retirement
trust account in amounts up to 15% of their gross wages. The Company has
elected to make matching contributions in amounts that may change from year to
year. The Company contributed $466,000 (1998), $480,000 (1997) and $323,000
(1996) in matching contributions to the Plan.
In connection with the Recapitalization, the Company adopted a bonus plan (the
"Bonus Plan"), pursuant to which the Company will grant Bonus Units (each
representing an interest in the bonus pool of $6.0 million) to certain key
employees. The Bonus Units will be awarded by a committee of the Board of
Directors of the Company formed to administer the Bonus Plan. Half of the
contingent bonuses vest upon the Company achieving certain performance-based
criteria during the 1998 fiscal year and the remaining half vest upon the
Company achieving certain performance-based criteria during the 1999 fiscal
year. Vested contingent bonuses become due and payable on the third anniversary
of the applicable vesting date and will bear interest at 10% per annum (payable
semi-annually in arrears) from each applicable vesting date until paid in full.
On March 28, 1998, the $3.0 million of Bonus Units related to the 1998 fiscal
year became vested.
9. COMMITMENTS AND CONTINGENCIES:
Environmental
As an ongoing facet of the Company's business, it is required to maintain
compliance with various environmental regulations. The cost of this compliance
is included in the Company's operating results as incurred. These ongoing costs
include permitting fees and expenses and specialized effluent control systems as
well as monitoring and site assessment costs required by various governmental
agencies. In the opinion of management, the maintenance of this compliance will
not have a significant effect on the financial position or results of operations
of the Company.
In August 1994, the U.S. Environmental Protection Agency ("EPA") identified the
Company as a potentially responsible party ("PRP") in the El Monte Operable Unit
("EMOU") of the San Gabriel Valley Superfund Sites. In early 1995, the Company
and the EPA executed an Administrative Consent Order which requires the Company
and other PRP's to perform a Remedial Investigation and Feasibility Study
("RI/FS") for the EMOU. In addition, the Company's facility in Avon,
Massachusetts is subject to Massachusetts "Chapter 21E", the State's hazardous
site clean-up program. Uncertainty as to (a) the extent to which the Company
caused, if at all, the conditions being investigated, (b) the extent of
environmental contamination and risks, (c) the applicability of changing and
complex environmental laws (d) the number and financial viability of
36
<PAGE>
other PRP's, (e) the stage of the investigation and/or remediation, (f) the
unpredictability of investigation and/or remediation costs (including as to when
they will be incurred), (g) applicable clean-up standards, (h) the remediation
(if any) that will ultimately be required, and (i) available technology make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. In addition, liability under CERCLA is joint and several, and any
potential inability of other PRP's to pay their prorata share of the
environmental remediation costs may result in the Company being required to bear
costs in excess of its prorata share.
In fiscal 1997, the Company with the help of independent consultants, determined
a range of estimated costs of $9,000,000 to $11,000,000 associated with the
various claims and assertions it faces. The time frame over which the Company
expects to incur such costs varies with each site, ranging up to 20 years as of
March 28, 1998. These estimates are based partly on progress made in determining
the magnitude of such costs, experience gained from sites on which remediation
is ongoing or has been completed, and the timing and extent of remedial actions
required by the applicable governmental authorities. As a result, the Company
accrued $10,000,000 in fiscal 1997 for existing estimated environmental
remediation and other related costs which the Company believes to be the best
estimate of the liability. As of March 28, 1998, the accrual for estimated
environmental costs was $9,619,000.
Claims for recovery of costs already incurred and future costs have been
asserted against various insurance companies. The Company has neither recorded
any asset nor reduced any liability in anticipation of recovery with respect to
such claims made.
The Company believes its reserves are adequate, but as the scope of its
obligations becomes more clearly defined, this reserve may be modified and
related charges against earnings may be made.
Pursuant to the Recapitalization Agreement, the Selling Group has agreed to
indemnify the Company with respect to the after-tax costs of contingent
environmental and other liabilities, subject to a cap for all indemnified
liabilities of $30 million. Pursuant to the Recapitalization Agreement, a $6.0
million interest bearing escrow account was established by the selling
stockholders (the "Deferred Amount") to secure indemnity claims of the Company
and others, including with respect to environmental liabilities. Any
environmental costs, net of tax benefit, are expected to be funded from the
escrow account. Actual expenditures for environmental remediation for each of
the three years in the period ended March 28, 1998 were $381,000 (1998),
$297,000 (1997) and $730,000 (1996).
Other
On March 3, 1998, Walter Neubauer, a former stockholder of the Company filed a
lawsuit in California Superior Court against the Company and certain other
stockholders alleging (i) breach of fiduciary duty, (ii) fraud, (iii) negligent
misrepresentation, (iv) negligence, (v) violations of corporations code and (vi)
breach of contract. The allegations primarily relate to the Company's exercise
of an option to acquire Mr. Neubauer's stock in August 1996. The former
stockholder is seeking damages of $40.0 million. Based upon the Company's
analysis of the current facts, it is management's belief that the Company should
ultimately prevail in this matter, although there can be no assurance in this
regard at this time.
37
<PAGE>
On May 7, 1998, the Company filed a lawsuit against the former stockholder in
California Superior Court alleging (i) breach of contract, (ii) intentional
interference with business relations and (iii) interference with prospective
business advantage. All allegations relate to violations of the noncompetition
agreement executed by the former stockholder in August 1996. The Company is
seeking damages of $50.0 million.
In addition to the above, the Company is involved in other claims and litigation
arising in the normal course of business. Based on the advice of counsel and in
the opinion of management, the ultimate resolution of these matters will not
have a significant effect on the financial position or the results of operations
of the Company.
10. RELATED PARTY TRANSACTIONS:
For the year ended March 28, 1998 the Company paid a total of $1,466,000 in fees
to Windward Capital Partners consisting of a non-recurring financial advisory
fee of $1,250,000, an annual management fee of $125,000 and expenses totaling
$91,000.
11. SUBSEQUENT EVENT
On May 22, 1998 the Company purchased a facility in El Monte, California
consisting of real property and an industrial building of approximately 110,000
square feet (of which the Company was leasing approximately 38,000 square feet)
for $3,250,000 plus transaction costs of approximately $50,000. The Company
paid $537,500 in cash and assumed $2,762,500 in secured debt which is due May 1,
2008. Terms of the debt call for monthly payments of interest only at a rate of
8.0% per annum.
38
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS--
BALANCE CHARGED DEDUCTIONS--
AT TO COSTS UNCOLLECTIBLE BALANCE
BEGINNING AND ACCOUNTS AT END
OF YEAR EXPENSES WRITE OFFS OF YEAR
--------- ------------ ------------- -------
<S> <C> <C> <C> <C>
1998
Allowance for doubtful accounts $ 40 $ --- $ --- $ 40
--------- ------------ ------------- -------
--------- ------------ ------------- -------
1997
Allowance for doubtful accounts $ 40 $ 4 $ 4 $ 40
--------- ------------ ------------- -------
--------- ------------ ------------- -------
1996
Allowance for doubtful accounts $ 65 $ 36 $ 61 $ 40
--------- ------------ ------------- -------
--------- ------------ ------------- -------
</TABLE>
39
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS FOR THE REGISTRANT
MANAGEMENT
The following table sets forth certain information concerning the directors
and executive officers of the Company. Each director is elected for a one (1)
year term or until such person's successor is duly elected and qualified.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Andy Goldfarb 50 Chairman, President and Chief Executive Officer of HCC
Christopher H. Bateman 46 Director, Vice President and Chief Financial Officer of HCC
Richard Ferraid 42 Director of HCC and President of Glasseal
Robert H. Barton III 64 Director of HCC
Gary L. Swenson 60 Director of HCC
Noel E. Urben 60 Director of HCC
Thomas J. Sikorski 37 Director of HCC
John M. Leonis 64 Director of HCC
</TABLE>
Mr. Goldfarb joined the Company in 1976 and has served in various
capacities and currently serves as the Chairman, Chief Executive Officer and
President of HCC. Mr. Goldfarb has been a director of the Company since 1979.
Mr. Bateman joined the Company in 1986 from Touche Ross & Co. and has
served in various capacities and currently serves as a Vice President and the
Chief Financial Officer of HCC. Mr. Bateman has been a director of the Company
since 1989.
Mr. Ferraid joined the Company in 1992 and has served in various capacities
and currently serves as the President of Glasseal. Mr. Ferraid became a
director of the Company in February 1997 following the consummation of the
Recapitalization. Mr. Ferraid previously worked at Electrical Industries, a
competitor of the Company. Mr. Ferraid has 19 years of experience in the GTMS
industry.
Mr. Barton was elected a director of HCC in February 1997 following the
consummation of the Recapitalization. Mr. Barton was elected Chairman of French
Holdings, Inc. in October 1996 and Chairman and CEO of American Bumper & Mfg.
Co. in April 1997. Mr. Barton was Chief Executive Officer of Alcoa Fujikura
Ltd. from May 1984 to December 1996. He currently serves on the Board of
Directors of and as senior advisor of Alcoa Fujikura Ltd., and serves on the
Board of Directors of J. L. French Automotive Castings Inc. and American Bumper
& Mfg. Co.
Mr. Swenson was elected a director of HCC in February 1997 following the
consummation of the Recapitalization. Mr. Swenson has been President and Senior
Managing Director of Windward Capital Partners, L.P. since its founding in 1994,
and was a Managing Director of CS First Boston Corporation from 1974 to 1994.
Mr. Swenson currently serves on the Board of Directors of J. L. French
Automotive Castings Inc., Furr's Supermarkets, Inc. and American Bumper & Mfg.
Co. Mr. Swenson is Mr. Sikorski's father-in-law.
Mr. Urben was elected a director of HCC in February 1997 following the
consummation of the Recapitalization. Mr. Urben has been a Senior Managing
Director at Windward Capital Partners, L.P. since 1995, and prior to that he was
the President and a director at BT Capital Corporation. Mr. Urben currently
serves on the Board of Directors of Tycom Corporation, J. L. French Automotive
Castings, Inc. and Pressure Systems, Inc.
40
<PAGE>
Mr. Sikorski was elected a director of HCC in February 1997 following the
consummation of the Recapitalization. Mr. Sikorski has been a Managing Director
of Windward Capital Partners, L.P. since its founding in 1994. Prior to joining
Windward Capital Partners, L.P., Mr. Sikorski was Director of Private Equity
Investments at MetLife from 1992 to 1994 and prior to that was a Vice President
in the leveraged Buyout Group at the First Boston Corporation from 1986 to 1992.
Mr. Sikorski currently serves on the Board of Directors of Furr's Supermarkets,
Inc. and DCV Holdings, Inc. Mr. Sikorski is Mr. Swenson's son-in-law.
Mr. Leonis was elected a director of HCC in July 1997. Mr. Leonis is
currently Chairman of the Board of Directors of Litton Industries, Inc. Mr.
Leonis has worked at Litton Industries, Inc. in various capacities for 36 years.
Mr. Leonis currently serves as a member of the Board of Directors of the Los
Angeles World Affairs Council and Town Hall, and is a member of the Board of
Governors of the Aerospace Industries Association.
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth the total value of compensation received by
the Chief Executive Officer and the two most highly compensated executive
officers, other than the Chief Executive Officer, who served as executive
officers of the Company as of March 29, 1997, (collectively with the Chief
Executive Officer, the "Named Executive Officers") for services rendered in all
capacities to the Company for the year ended March 28, 1998.
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION -
NUMBER OF
ANNUAL COMPENSATION SECURITIES
FISCAL -------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(2)
---- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Andrew Goldfarb 1998 $301,725 $ 105,000 --- $ 22,491
Chairman of the Board of Directors 1997 $462,467 $ --- --- $ 25,319
Chief Executive Officer and 1996 $485,362 $2,545,000 --- $ 15,362
President of HCC
Christopher Bateman 1998 $201,150 $ 20,000 --- $ 24,070
Chief Financial Officer and 1997 $200,575 $ --- 3,195 $ 20,108
Vice President of HCC 1996 $200,000 $ 642,500 --- $ 17,020
Richard Ferraid 1998 $201,150 $ 40,000 --- $ 13,608
President of Glasseal 1997 $200,000 $ 75,000 3,590 $ 13,608
1996 $148,438 $ 250,000 --- $ 13,464
</TABLE>
- ---------
(1) None of the executive officers has received perquisites the value of which
exceeded the lesser of $50,000 or 10% of the salary and bonus of such
executive officer.
(2) For 1998, all other compensation included the following amounts: Mr.
Goldfarb, $6,000 of Company contributions into the Company's 401(k) plan,
$2,506 for automobile allowance and $13,985 for allocated life insurance;
Mr. Bateman, $6,000 for Company contributions into the Company's 401(k)
plan, $17,374 for automobile allowance and $696 for allocated life
insurance; Mr. Ferraid, $6,000 for Company contributions into the Company's
401(k) plan, $7,200 for automobile allowance and $408 for allocated life
insurance.
GRANTS OF STOCK OPTIONS
There were no options granted to the named executive officers and no
options were exercised by the named executive officers for the fiscal year ended
March 28, 1998.
41
<PAGE>
The following table sets forth information concerning the value of
unexercised options held by the Named Executive Officers. The Named Executive
Officers did not exercise any options during the fiscal year ended March 28,
1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT MARCH 28, 1998
-------------------------------------------
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDER OPTION - OPTIONS -
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
---------------- --------------------
<S> <C> <C>
Christopher Bateman 244 / 2,952 $ - / $ - (1)
Richard Ferraid 244 / 3,346 $ - / $ - (1)
</TABLE>
- ------------------
(1) There is no public market for the Company's stock. The fair market value
of a share of Common Stock is assumed to be equal to the exercise price per
share of the options held by the Named Executive Officers.
LONG-TERM INCENTIVE PLAN COMPENSATION
The following table sets forth information concerning awards during the
fiscal year ended March 28, 1998 to each of the Named Executive Officers under
the Company's Contingent Bonus Plan ("Bonus Plan").
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLAN AWARDS IN FISCAL 1998
PERFORMANCE
NAME NUMBER OF UNITS(1) PERIOD ESTIMATED FUTURE VALUE(2)
<S> <C> <C> <C>
Christopher Bateman 1.67 March 28, 2001 $50,000
Richard Ferraid .83 March 28, 2001 $25,000
</TABLE>
- ---------
(1) Each Bonus Unit represents a $30,000 interest in the bonus pool of $6.0
million. Half of the contingent bonuses vested upon the Company achieving
$22.0 million of Operating EBITDA (as defined in the Bonus Plan) during the
1998 fiscal year and the remaining half vest upon the Company achieving
$28.0 million of Operating EBITDA during the 1999 fiscal year. In
addition, if the Company completes an initial public offering (an "IPO") or
sale resulting in a Change in Control (as defined in the Bonus Plan) within
30 months of March 31, 1997 any unvested contingent bonuses will vest in
their entirety and become redeemable at par if (a) the equity market
capitalization of the Company is greater than $175 million for 20
consecutive trading days subsequent to the IPO (but prior to 30 months from
March 31, 1997) or if the equity valuation in the sale (after certain
specified adjustments) is greater than $175 million. Vested contingent
bonuses become due and payable on the third anniversary of the applicable
vesting date and bear interest at 10% per annum (payable semi-annually in
arrears) from each applicable vesting date until paid in full. Pursuant to
the Bonus Plan, all of an employee's Bonus Units terminate immediately when
such employee ceases to be employed by the Company, unless such employment
ceases due to such employee's death or disability, in which case such
employee will be vested in a portion of such employee's Bonus Units.
(2) Plans do not include threshold or maximum award levels.
EMPLOYMENT AGREEMENTS
In February 1997, Andrew Goldfarb, Christopher Bateman and Richard Ferraid
each entered into an employment agreement with HCC (the "Employment
Agreements"). Pursuant to the Employment Agreements, such executives will be
employed by HCC until April 1, 1999 (April 2000 in the case of Mr. Goldfarb)
provided that HCC may terminate such executive by reason of disability, death or
for good cause (as defined in the Employment Agreements). Upon termination by
the Company for reasons other than death, disability or good cause, the
42
<PAGE>
Executive will be entitled to receive salary, bonus and benefits for the
remainder of the term. Following the date of any termination (other than by
death) HCC has sole discretion to retain such executive as an exclusive
consultant for a term of two (three in the case of Mr. Goldfarb) years (the
"Consulting Period") in exchange for a consulting fee equal to 50% of base
salary. The agreement provides for a base salary to be determined in accordance
with HCC's policies and an annual bonus contingent on certain performance-based
criteria. Pursuant to the terms of the agreement, such executive, during the
term of the Employment Agreement and the Consulting Period may not solicit
customers of the Company, engage in business with any competing entity or induce
any other employee of the Company to leave his or her employment with the
Company.
OPTION PLAN
In connection with the Recapitalization, HCC adopted the Option Plan which
provides for the grant to employees from time to time of non-qualified stock
options to purchase up to an aggregate of 22,887 shares of Common Stock at
exercise prices to be determined by the Board of Directors. The Option Plan
provides for the grant of management options to purchase 6,393 shares of Common
Stock (the "Management Options"), management performance options to purchase
14,206 shares of Common Stock (the "Management Performance Options"), director
options to non-affiliates of Windward to purchase 710 shares of Common Stock
(the "Director Options"), and director performance options to non-affiliates of
Windward to purchase 1,578 shares of Common Stock (the "Director Performance
Options"). The Management Options and Director Options were granted subject to
an EBITDA (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 fiscal
year 2002 if the Company attains a specified target for each such year ($21.8
million EBITDA in fiscal 1998, $28.5 million EBITDA in fiscal 1999, $32.6
million EBITDA in fiscal 2000, $35.3 million EBITDA in fiscal 2001 and $37.6
million EBITDA in fiscal 2002). The Options will also vest if certain
cumulative EBITDA targets are achieved after certain multiple year periods or,
so long as the Windward Group realizes specified rates of return on its
aggregate equity investment, upon a Change of Control (as defined in the Option
Plan). In addition, regardless of whether the performance criteria are
achieved, all Options including, the performance-based Options, will vest
automatically on the seventh anniversary of the date of grant. On March 28,
1998, the 20% of stock options related to the 1998 fiscal year became vested.
The Management Performance Options and Director Performance Options were
granted subject to a vesting schedule providing for 50% of each series of
options to vest upon a Change of Control in which the Windward Group realizes a
30% compounded annual rate of return on its aggregate equity investment in the
Company and the remaining 50% of each series of options vesting upon a Change of
Control in which Windward Group realizes a 40% compounded annual rate of return
on its aggregate equity investment in the Company. As of March 28, 1998, 18,630
options have been granted under the Option Plan which entitle the holders to
purchase upon vesting 18,630 shares of Common Stock at an exercise price of
$370.49 per share. An additional 4,257 options may be granted under the Option
Plan.
43
<PAGE>
CONTINGENT BONUS PLAN
In connection with the Recapitalization, HCC adopted the Bonus Plan,
pursuant to which the Company will grant Bonus Units (each representing an
interest in the bonus pool of $6.0 million) to certain key employees (the
"Participants"). The Bonus Units will be awarded by a committee of the Board of
Directors of HCC formed to administer the Bonus Plan. Half of the contingent
bonuses vest upon the Company achieving $22.0 million of Operating EBITDA (as
defined in the Bonus Plan) during the 1998 fiscal year and the remaining half
vest upon the Company achieving $28.0 million of Operating EBITDA during the
1999 fiscal year. In addition, if the Company completes an IPO or a Sale Event
within 30 months of March 31, 1997 any unvested contingent bonuses will vest in
their entirety and become redeemable at par if (a) the equity market
capitalization of the Company is greater than $175.0 million for 20 consecutive
trading days subsequent to the IPO (but prior to 30 months from March 31, 1997)
or if the equity valuation in the sale (after certain specified adjustments) is
greater than $175.0 million. Vested contingent bonuses become due and payable
on the third anniversary of the applicable vesting date and will bear interest
at 10% per annum (payable semi-annually in arrears) from each applicable vesting
date until paid in full. On March 28, 1998, the $3.0 million of Bonus Units
related to the 1998 fiscal year became vested.
Pursuant to the Bonus Plan, all of an employee's Bonus Units terminate
immediately when such employee ceases to be employed by the Company, unless such
employment ceases due to such employees' death or disability, in which case such
employee will be vested in a portion of such employee's Bonus Units.
DIRECTOR COMPENSATION
Each of Messrs. Barton and Leonis receive an annual fee of $20,000. In
addition, in 1997 Messrs. Barton and Leonis received 695 and 470 stock options
respectively, of which 215 and 150, respectively, are subject to a vesting
schedule that generally provides for each option to vest 20% per year over five
years commencing on the first anniversary of the date of grant if the Company
attains specified annual or cumulative earnings targets set forth in the Option
Plan and the remaining options vest upon a change in control in which the
Windward Group realized specified annual rates of return on its equity
investment in the Company as defined in the Option Plan. All options
automatically vest on the seventh anniversary of the date of grant regardless of
whether the performance criteria are achieved. All options have an exercise
price equal to the fair value of the common stock at the date of grant ($370.49
per share).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In fiscal 1998, the Company had no compensation committee and compensation
matters were handled exclusively by Mr. Goldfarb, Chief Executive Officer and
Chairman of the Board of Directors of HCC.
44
<PAGE>
ITEM 12 - SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists all shares of HCC's Common Stock as of March 28,
1998, beneficially owned by each director of HCC, each executive officer of HCC
and each person known by the Company to beneficially own more than 5% of such
outstanding shares of Common Stock at such date. The table also reflects the
percentage of the shares owned beneficially by all executive officers and
directors of HCC as a group. Share numbers and percentages in the table are
rounded to the nearest whole share. As of March 28, 1998 there were 134,955
shares of Common Stock of HCC outstanding.
<TABLE>
<CAPTION>
Number of
Name and Address Shares of
of Beneficial Owners Common Stock* Percent of Class
- -------------------- ------------- ----------------
<S> <C> <C>
Windward/Park HCC, L.L.C.(a)(b) 53,836 39.9%
Windward/Merban, L.P.(a)(b) 10,767 8.0%
Windward/Merchant, L.P.(a)(b) 21,535 16.0%
Windward Capital Associates, L.P.(a)(b)(c) 87,721 65.0%
Windward Capital Associates, Inc.(b)(c) 87,721 65.0%
Gary Swenson(b)(d)(e) 87,721 65.0%
Thomas J. Sikorski(b)(e) --- **
Noel E. Urben(b)(e) --- **
Robert Barton --- **
John M. Leonis --- **
Andrew Goldarb(f)(h) 30,453 22.6%
Christopher Bateman(f)(g) 9,173 6.8%
Richard Ferraid(f)(g) 3,558 2.6%
All directors and executive officers of the Company
as a group (7 persons)(g)(i) 43,184 32.0%
</TABLE>
- ---------
* HCC's common equity is divided into four separate classes of Common stock,
par value $.10 per share: (i) Class A Common Stock with one vote per
share, (ii) Class B Common Stock with one vote per share, (iii) Class C
Common Stock 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 Company have identical economic
terms. Other than Windward/Merban, L.P. and Windward/Merchant, L.P., all
other stockholders of HCC own Class A Common Stock. See note (a) below.
** Less than 1.0%
(a) Windward/Park HCC, L.L.C. owns 53,836 shares of Class A Common Stock,
Windward/Merban L.P. owns 6,451 shares of Class B Common 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 Common Stock and Windward
Capital Associates, L.P. owns 1,583 shares of Class A Common Stock. The
Windward Group due to their common control may be deemed to beneficially
own each others shares, but each disclaims such beneficial ownership. The
Windward Group consists of Windward, Windward/Merchant, L.P., the partners
of which are Windward and an affiliate of Credit Suisse First Boston
Corporation, Windward/Merban, L.P., the partners of which are Windward and
an affiliate 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 with certain other
entities, invests in merchant banking investments organized and managed by
Windward and its affiliates. The program agreements govern the
relationship among the Windward Group and provide for, among other things,
procedures for investments, allocations of income and loss, distributions
of funds, transfers of interests between and among the partners or members
or third parties, provisions relating to the activities of the general
partner or manager, including in respect of fees, powers and limitations
and removal by the other partners or members, and procedures for the
limited partners or non-managing members to exercise voting and management
control of the investments. Windward and the other members of the Windward
Group have reached agreement concerning an early termination of the period
during which they may make future investments under their program
agreements. Windward and the other members have informed the Company that
such termination will not have any effect on their investment in, or the
management or control of, the Company.
(b) The business address for such person(s) is c/o Windward Capital Partners,
L.P., 1177 Avenue of the Americas, 42nd Floor, New York, New York 10036.
45
<PAGE>
(c) Windward Capital Associates, L.P. may be deemed to share beneficial
ownership of the Common Stock owned of record by the Windward 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 share beneficial ownership of shares of Common Stock owned
of record by the Windward Group by virtue of its status as the general
partner of Windward Capital Associates, L.P., but disclaims such beneficial
ownership.
(d) Mr. Swenson may be deemed to share beneficial ownership 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
beneficial ownership. 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, Sikorski and Urben are limited partners of Windward
Capital Associates, L.P. None of Messrs. Swenson, Sikorski and Urben, in
their capacities as limited partners of Windward Capital Associates, L.P.,
has or shares voting or investment power with Windward Capital Associates,
L.P. with respect to the Common Stock owned by Windward Capital Associates,
L.P.
(f) The business address of such person(s) is c/o HCC Industries, Inc., 4232
Temple City Blvd., Rosemead, CA 91770-1592.
(g) Excludes outstanding options to purchase shares of Common Stock of which
244 and 244 are exercisable at March 28, 1998 for Mr. Bateman and Mr.
Ferraid, respectively.
(h) Includes 27,753 shares of Common Stock owned by the Andrew and Denise
Goldfarb Revocable Trust of 1995. Also includes 1,350 shares of Common
Stock owned by the Jessica Anne Goldfarb Irrevocable Trust and the 1,350
shares of Common Stock owned by the Rebecca Goldfarb Irrevocable Trust of
which Mr. Goldfarb's brother is the trustee. Mr. Goldfarb disclaims
beneficial ownership of the share of Common Stock owned by such trusts.
(i) Excludes shares of Common Stock referred to in notes (d) and (e) above.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the year ended March 28, 1998 the Company paid a total of $1,466,000 in fees
to Windward Capital Partners consisting of a one time financial advisory fee of
$1,250,000, an annual management fee of $125,000 and expenses totaling $91,000.
46
<PAGE>
PART IV
<TABLE>
<CAPTION>
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
Page Reference
Form 10-K
--------------
<S> <C>
(a)(1) FINANCIAL STATEMENTS
Report of Independent Accountants 22
Consolidated Balance Sheets at March 28, 1998 and March 27, 1997 23
Consolidated Statements of Earnings for each of the three years ended
March 28, 1998, March 27, 1997 and March 30, 1996 24
Consolidated Statements of Stockholders' Equity for each of the three years
March 28, 1998, March 27, 1997 and March 30, 1996 25
Consolidated Statements of Cash Flows for each of the three years ended
March 28, 1998, March 27, 1997 and March 30, 1996 26
Notes to Financial Statements 27
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts 39
</TABLE>
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.
(a)(3) EXHIBITS
(a)(4) REPORTS ON FORM 8-K
None
47
<PAGE>
<TABLE>
<CAPTION>
Regulation S-K Exhibit
Table Reference
- ---------------------------
<C> <S>
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)
2.2 Subordinated Note Agreement, dated as of February 14, 1997, by and
among the Company, Windward/Merchant L.P., Windward/Merban L.P. and
MetLife. (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)
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 10 3/4% Senior Subordinated
Notes due 2007 and the 10 3/4% Senior Subordinated Exchange Notes
due 2007. (1)
4.2 Form of 10 3/4% Senior Subordinated Exchange Notes due 2007. (1)
4.3 Registration Rights Amendment, dated May 6, 1997, among the
Company, the Subsidiary Guarantors, and Credit Suisse First Boston
Corporation and Furman Selz LLC, as Initial Purchasers. (1)
4.4 First Supplemental Indenture, dated as of October 24, 1997, to the
Indenture. (1)
48
<PAGE>
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.
10.1 Credit Agreement, dates as of February 14, 1997, by and among the
Company, Fleet Capital Corporation, as Agent, and the Lender
Parties thereto. (1)
10.2 Amendment No. 1 to the Credit Agreement, dated as of May 6, 1997,
by and among the Company, Fleet Capital Corporation, as Agent, and
the Lender Parties thereto. (1)
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)
10.5 Contingent Bonus Plan of HCC Industries Inc., dated as of February
14, 1997. (1)
10.6 Form of Contingent Bonus Plan Award Agreement. (1)
10.7 Employment Agreement, dated as February 14, 1997, by and between
the Company and Andrew Goldfarb. (1)
10.8 Employment Agreement, dated as February 14, 1997, by and between
the Company and Christopher Bateman. (1)
10.9 Employment Agreement, dated as February 14, 1997, by and between
the Company and Richard Ferraid. (1)
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., relating to fees. (1)
10.12 Purchase Agreement, dated May 1, 1997, by and among the Company,
the Subsidiary Guarantors and Credit Suisse First Boston
Corporation and Furman Selz LLC, as Initial Purchasers. (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)
27. Financial Data Schedule
</TABLE>
- --------------
(1) Previously filed under the same exhibit number as an exhibit to
Registration Statement on Form S-4 (File No. 333-32207) and
incorporated herein by reference.
49
<PAGE>
SIGNATURES
Pursuant to the 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 the undersigned, thereunto duly authorized, in the city of
Rosemead, State of California, on June 25, 1998.
HCC INDUSTRIES INC.
<TABLE>
<S><C>
By: /s/ Andrew Goldfarb
-------------------------------------------------
Andrew Goldfarb
Chairman, President and Chief Executives Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Andrew Goldfarb Chairman, President and Chief June 25, 1998
- ----------------------------- Executive Officer
Andrew Goldfarb (Principle Executive Officer)
/s/ Christopher H. Bateman Director, Vice President and June 25, 1998
- ----------------------------- Chief Financial Officer
Christopher H. Bateman (Principle Financial Officer)
Principal Accounting
Officer)
/s/ Richard Ferraid Director June 25, 1998
- -----------------------------
Richard Ferraid
/s/ Robert H. Barton, III Director June 25, 1998
- -----------------------------
Robert H. Barton, III
/s/ Gary L. Swenson Director June 25, 1998
- -----------------------------
Gary L. Swenson
/s/ Noel E. Urben Director June 25, 1998
- -----------------------------
Noel E. Urben
/s/ Thomas J. Sikorski Director June 25, 1998
- -----------------------------
Thomas J. Sikorski
/s/ John M. Leonis Director June 25, 1998
- -----------------------------
John M. Leonis
</TABLE>
50
<PAGE>
HCC INDUSTRIES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------------------
MARCH 28, MARCH 29, MARCH 30,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Earnings:
Earnings before taxes and extraordinary item $ 6,020 $ (821) $ 8,893
Add: Fixed charges(1) 10,327 2,946 1,924
-------- -------- --------
$ 16,347 $ 2,125 $ 10,817
-------- -------- --------
-------- -------- --------
Fixed Charges:(1)
Interest expense $ 10,327 $ 2,946 $ 1,924
-------- -------- --------
-------- -------- --------
Ratio of Earnings to Fixed Charges 1.6 --(2) 5.6
-------- -------- --------
-------- -------- --------
</TABLE>
(1) The ratios of earnings to fixed charges were computed by adding earnings
before income taxes and extraordinary item to fixed charges and dividing by
fixed charges. Fixed charges consist of interest expense and amortization
of debt issuance costs.
(2) The Company's earnings were insufficient to cover fixed charges for the
year ended March 29, 1997. The dollar amount of the deficiency was
$821,000.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-28-1998
<PERIOD-END> MAR-28-1998
<CASH> 13,441
<SECURITIES> 0
<RECEIVABLES> 10,176
<ALLOWANCES> (40)
<INVENTORY> 4,610
<CURRENT-ASSETS> 28,863
<PP&E> 21,775
<DEPRECIATION> (7,158)
<TOTAL-ASSETS> 62,860
<CURRENT-LIABILITIES> 11,980
<BONDS> 98,201
0
0
<COMMON> 13
<OTHER-SE> (56,953)
<TOTAL-LIABILITY-AND-EQUITY> 62,860
<SALES> 64,561
<TOTAL-REVENUES> 64,561
<CGS> 38,922
<TOTAL-COSTS> 38,922
<OTHER-EXPENSES> 9,802
<LOSS-PROVISION> 47
<INTEREST-EXPENSE> 10,327
<INCOME-PRETAX> 6,020
<INCOME-TAX> 2,406
<INCOME-CONTINUING> 3,614
<DISCONTINUED> 0
<EXTRAORDINARY> (986)
<CHANGES> 0
<NET-INCOME> 2,628
<EPS-PRIMARY> 19.47
<EPS-DILUTED> 19.47
</TABLE>
