UNITED STATES SECURITIES AND EXCHANGE COMMISSION

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended: December 28, 2002
		For the quarterly period ended: June 28, 2003
OR		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to
Commission file number: 333-32207

HCC INDUSTRIES INC.

HCC INDUSTRIES INC.
(Exact name of Registrant as specified in its charter)

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

4232 Temple City Blvd., Rosemead, California 91770
(Address of principal executive offices)

(626) 443-8933
(Registrant’s telephone number, including area code)

(Exact name of Registrant as specified in its charter)

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

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 ý No o

~~Registrant’s~~Indicate ~~Common~~by check mark whether the registrant is an accelerated filer ~~Stock,~~(as ~~outstanding~~defined atin ~~February~~Rule ~~10,~~12b-2 ~~2003~~of ~~was~~the ~~137,945~~Securities ~~shares~~Exchange Act of 1934). Yes o No ý

Registrant’s Common Stock, outstanding at August 8, 2003 was 137,945 shares.

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

HCC INDUSTRIES INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands, except share data)

Consolidated Balance Sheets

	June 28, 2003			March 29, 2003
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	2,994		$	6,215
Trade accounts receivable, less allowance for doubtful accounts of $80 (2004) and $70 (2003)	6,775			6,626
Inventories	5,411			5,174
Income taxes receivable	2,474			2,473
Prepaid and other current assets	804			857

Total current assets	18,458			21,345

Property, Plant and Equipment, net	21,781			22,278

Other Assets:
Intangible assets	800			825
Deferred financing costs	1,310			1,394
Restricted cash	5,181			5,311

Total Assets	$	47,530		$	51,153


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current Liabilities:
Current portion of long-term debt	$	1,693		$	1,779
Accounts payable	1,324			1,504
Accrued liabilities	4,690			6,467

Total current liabilities	7,707			9,750

Long Term Liabilities:
Long-term debt, net of current portion	84,440			84,833
Environmental and other liabilities	8,385			8,429
	100,532			103,012

Commitments and Contingencies

Stockholders’ Equity (Deficit):
Common stock; $.10 par value; authorized 550,000 shares, issued and outstanding 137,945 shares	14			14
Additional paid-in capital	377			377
Accumulated deficit	(53,393		)	(52,250		)

Total Stockholders’ Deficit	(53,002		)	(51,859		)

Total Liabilities and Stockholders’ Deficit	$	47,530		$	51,153

(in thousands, except share data)

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

The accompanying notes are an integral part of these consolidated financial statements.

HCC INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands)(unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

	Three Months Ended
	June 28, 2003			June 29, 2002

NET SALES	$	12,116		$	10,591

Cost of goods sold	9,015			8,597

GROSS PROFIT	3,101			1,994

Selling, general and administrative expenses	1,881			1,473

EARNINGS FROM OPERATIONS	1,220			521

OTHER INCOME (EXPENSE):
Interest and other income	11			39
Interest expense	(2,375		)	(2,429		)

Total other expense, net	(2,364		)	(2,390		)

LOSS BEFORE TAX BENEFIT	(1,144		)	(1,869		)

Tax benefit on loss	—			(748		)

NET LOSS	$	(1,144	)	$	(1,121	)

(in thousands)

(unaudited)

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

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

HCC INDUSTRIES INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Three Months Ended
	June 28, 2003			June 29, 2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,144	)	$	(1,121	)
Reconciliation of net loss to net cash used in operating activities:
Depreciation	618			670
Amortization	109			109
Changes in operating assets and liabilities:
(Increase) Decrease in trade accounts receivable, net	(149		)	1,268
(Increase) Decrease in inventories	(237		)	303
(Increase) Decrease in other assets	182			(856		)
(Decrease) in accounts payable	(180		)	(540		)
(Decrease) in accrued and other liabilities	(1,821		)	(2,968		)

Net cash used in operating activities	(2,622		)	(3,135		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(120		)	(58		)

Net cash used in investing activities	(120		)	(58		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt	(479		)	(1,622		)
Proceeds from issuance of long-term debt	—			1,091

Net cash used in financing activities	(479		)	(531		)

Net decrease in cash and cash equivalents	(3,221		)	(3,724		)

Cash and cash equivalents at beginning of period	6,215			10,990

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2,994		$	7,266

SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Capital lease obligations	$	—		$	414
Cash taxes paid	$	—		$	—
Cash interest paid	$	4,586		$	4,467

(in thousands)

(unaudited)

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

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

HCC INDUSTRIES INC. AND ~~SUBSIDIARIES~~SUBSIDIARIESNotes to Condensed Consolidated Financial Statements June 28, 2003

Notes to Condensed Consolidated Financial Statements

December 28, 2002

1. INTERIM FINANCIAL STATEMENTS AND ACCOUNTING POLICIES:

The accompanying unaudited condensed consolidated financial statements of HCC Industries Inc. and Subsidiaries (the “Company”), include all adjustments (consisting of normal recurring entries) which management believes are necessary for a fair presentation of the financial position and results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. It is suggested that the accompanying interim financial statements be read in conjunction with the Company’s audited financial statements and footnotes as of and for the year ended March 3029, ~~2002~~ 2003. Operating results for the three ~~and~~ ~~nine~~ month period ended ~~December~~June 28, ~~2002~~2003 are not necessarily indicative of the operating results for the full fiscal year.

The Company believes that cash on hand of $53.70 million and cash generated from operations, prior to interest payments on long-term debt, will provide adequate funds for ongoing operations, planned capital expenditures and debt service for the near-term. ~~Over~~For the ~~next~~remainder 12of ~~months~~fiscal 2004, the primary cash obligations of the Company are interest payments ($ 94.2 5 million), principal payments on existing debt ($1.93 million), and capital expenditures ($ 0.5 - $ 0.75 million). Total cash used in the first three months of fiscal 2003 was $3.2 million for operations, investing and financing activities.

Total cash used in the first nine months of fiscal 2003 was $5.2 million for operations, investing and financing activities. The Company is currently negotiating with other potential lenders to secure a line of credit to augment its liquidity. There is no assurance that such negotiations will be successful.

For the longer term, the operating results of the Company must improve to satisfy its liquidity needs. The annual interest payments and principal payment obligations decrease only modestly over the next several years until the Notes become due in 2007. The Company is making substantial efforts to increase its sales levels and thereby improve the operating results. There is no assurance that these efforts will be successful. In addition, an increase in sales for the Company will require additional investment in working capital to support such increased operations.

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

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. No customer account exceeds 10% of the accounts receivable balance at ~~December~~June 28, ~~2002~~2003.

The ~~effective~~Company ~~tax benefit~~ recorded ~~for~~no ~~fiscal 2003 approximates the Federal statutory~~ tax ~~rate~~benefit ~~because~~ on the ~~state~~loss ~~tax~~incurred ~~regulations do~~in ~~not~~fiscal ~~allow~~2004 aas ~~carryback~~it ofwas ~~tax~~determined ~~losses. Such~~that ~~losses~~it ~~can~~was ~~only~~more ~~be carried forward and are subject to limitations~~likely onthan ~~their~~not ~~utilization. As~~that asuch ~~result,~~tax ~~a valuation~~benefit ~~allowance~~would ~~has~~not ~~been~~be ~~established for these state losses~~realized.

These financial statements reflect certain reclassifications to the prior period balances to conform to the current period presentation.

HCC INDUSTRIES INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

December 28, 2002

2. INVENTORIES:

Inventories consist of the following (in thousands):

	December 28, 2002		March 30, 2002
	June 28, 2003		March 29, 2003
Raw materials and component parts	$	43,~~132~~454	$	43,~~503~~237
Work in process	~~972~~1,192		1,~~513~~080
	$	5,104	$	6,016
Finished goods	765		857
Total Inventories	$	5,411	$	5,174

3. RESTRICTED CASH:

The restricted cash balance represents escrowed funds held back in the 1997 ~~Recapitalization~~ recapitalization transaction to cover potential contingent liabilities of the ~~Selling Shareholders~~selling shareholders. In conjunction with the recapitalization transaction, the ~~Selling Shareholders~~selling shareholders agreed to indemnify the Company for the after-tax costs of contingent liabilities up to a total of $30 million. As part of the transaction, $6 million was withheld by the Company from the purchase price to the ~~Selling~~selling ~~Shareholders~~ shareholders and placed in a restricted cash account intended primarily to fund the after-tax costs of the environmental liability and other contingencies. Upon agreement of the parties, but in no event before February 2004, any funds remaining in the account will be paid to the ~~Selling Shareholders~~selling shareholders. At this date, the only remaining contingencies are environmental contingencies and residual ~~litigation~~ litigation costs. In ~~from~~ the ~~Neubauer~~event ~~litigation~~the ~~(as~~restricted cash ~~described~~is innot ~~our~~adequate ~~Form~~to ~~10-K~~cover ~~for~~the liabilities, the ~~year~~Company has been informed by ~~ended~~the ~~March~~selling ~~28,~~stockholders ~~2002)~~that they will draw upon personal funds to cover such excess costs.

4. PROPERTY, PLANT AND EQUIPMENT:

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

	December 28, 2002			March 30, 2002
	June 28, 2003			March 29, 2003
Land	$	4,017		$	4,017
Buildings and improvements	9,~~448~~463			9,~~938~~458
Furniture, fixtures and equipment	26,~~471~~776			26,~~254~~661
	39,936			40,209
	40,256			40,136
Less accumulated depreciation	(1718,~~244~~475		)	(1517,~~314~~858		)
	$	2221,~~692~~781		$	2422,~~895~~278

Included in the above table is equipment acquired under capitalized leases. At June ~~December~~ 28, ~~2002~~2003, the cost of the leased equipment was $97,~~179~~854,000 and the accumulated amortization was $2,~~888~~379,000. At March 3029, ~~2002~~2003, the cost of the leased equipment was $108,~~431~~836,000 and the accumulated amortization was $2,~~237~~651,000.

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

5. ACCRUED LIABILITIES:

Accrued liabilities consist of the following (in thousands):

	December 28, 2002		March 30, 2002
	June 28, 2003		March 29, 2003
Accrued compensation	$	2,~~002~~239	$	21,~~689~~747
Accrued interest	1,107		3,251
Accrued other	1,~~630~~344		1,~~781~~469
	$	4,~~739~~690	$	76,~~721~~467

6. LONG-TERM DEBT:

Long-term debt consists of the following (in thousands):

	December 28,		March 30,
	June 28, 2003		March 29, 2003
	2002		2002
10 3/4% Senior Subordinated Notes - interest payable semi-annually; due May 15, 2007	$	79,785	$	79,785
10 ¾% Senior Subordinated Notes - interest payable semi-annually; due May 15, 2007	$	79,785	$	79,785
Term loans on land, building and improvements - 8% interest payable monthly; due May 2008	2,763		2,763
Term loans on land, building and improvements - 8% interest payable monthly; due May 2008	2,762		2,762
Capital lease obligations (interest rates ranging between 6.36% and 8.70%)	3,585		4,064
Capital lease obligations (interest rates ranging between 6.36% and 8.70%)	4,575		6,189
	86,133		86,612
	87,122		88,736
Less current portion	1,693		1,779
Less current portion	1,780		2,109
	$	84,440	$	84,833
	$	85,342	$	86,627

~~The~~On ~~Company~~June ~~had~~18, a2003, ~~Revolving~~the ~~Credit~~Company ~~Facility~~entered upinto toa $87.0 5 million, ~~which~~Revolving Credit ~~was~~Agreement ~~collateralized~~(the by“Revolver”). ~~accounts~~Under ~~receivable,~~the ~~inventory~~terms ~~and equipment. The~~of ~~Revolving~~the ~~Credit~~Revolver, the Company ~~Facility~~may ~~included~~borrow ~~covenants~~up ~~requiring~~to ~~maintenance~~85% of ~~certain~~eligible ~~financial~~accounts ~~ratios~~receivable. AtThe ~~June~~Revolver ~~29,~~provides ~~2002,~~for ~~the~~interest ~~Company~~on ~~was~~outstanding ~~not~~balances inat the ~~compliance~~bank’s ~~with~~prime ~~the~~rate ~~required~~plus ~~ratios. In~~1 ½% (or LIBOR plus 3½%) and is collateralized by accounts ~~September~~receivable, ~~2002~~inventories, equipment and intangible assets of the Company’s. There ~~bank~~are ~~declined~~no toborrowings ~~waive~~outstanding under the ~~violations~~Revolver ofand ~~the covenants~~ on ~~the~~June ~~Company’s~~28, ~~Revolving~~2003, ~~Credit~~approximately ~~Facility~~$4,400,000 ~~and~~was ~~terminated the agreement~~available. The ~~Company~~Revolver ~~had~~includes nocovenants requiring ~~borrowings~~maintenance ~~outstanding~~of oncertain financial ratios. At June 28, 2003, the ~~Revolving~~Company ~~Credit~~was ~~Facility~~in atcompliance with the ~~date of~~required ~~termination~~ratios.

~~Future~~Minimum ~~minimum lease~~ payments due under ~~capital~~long-term ~~lease~~debt ~~obligations~~as atof ~~December~~June 2829, ~~2002~~2003 are as follows (in thousands):

Fiscal Year	Amount
	Capitalized Leases
2003	$	601
Fiscal Year	Total Obligation			Less Interest Portion		Net Amount		Other Debt		Total
2004	~~2,039~~$	1,482		$	182	$	1,300	$	—	$	1,300
2005	1,~~656~~657			125		1,532		—		1,532
2006	732			29		703		—		703
2007	51			1		50		—		50
	5,079
2008								79,785		79,785
Less interest	(504		)
2009 and thereafter								2,763		2,763
	$	43,~~575~~922		$	337	$	3,585	$	82,548	$	86,133

The fair value of the 10 ¾% Senior Subordinated Notes (“Notes”) may vary from time to time based on Company specific factors and other market related factors external to the Company. Presently, the Company is unaware of any recent trading activity or trade prices, however, the Company believes the fair value of the Notes may be significantly less than the carrying value. This belief is based upon the current market conditions in the high-yield bond market, the recent losses incurred by the Company and the Company’s knowledge of the past limited trading activity in the Notes including the Company’s repurchase of Notes in fiscal 2001. Further, continued poor operating performance by the Company may negatively impact the credit quality of the Notes, which may have a negative impact on the fair value of the Notes. Although the Company believes that the fair value of the Notes may be significantly less than the carrying value, settlement of the Notes at less than the carrying amount may not be possible or may not be a prudent management decision.

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. At ~~December~~June 28, ~~2002~~2003 and March 30, 2002, the 137,945 outstanding shares of common stock were designated as follows:

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

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

At June ~~December~~ 28, ~~2002 and March 30~~2003, ~~2002~~ the Company had options outstanding to purchase 1721,~~230~~315 shares of its common stock at prices from $~~370~~0.4900 to $1,111.47 per share. Of the options outstanding, options to purchase 35,~~367~~200 shares were fully vested at ~~December~~ June 28, ~~2002~~2003.

8. ENVIRONMENTAL AND OTHER LIABILITIES:

Environmental and other liabilities consist of the following (in thousands):

	December 28, 2002		March 30, 2002
	June 28, 2003		March 29, 2003
Due to Selling Shareholders	$	1,~~005~~003	$	~~940~~991
Environmental Liability	7,~~635~~382		87,~~174~~438
	$	8,~~640~~385	$	98,~~114~~429

The due to ~~Selling~~selling ~~Shareholders~~shareholders represents interest earned to the benefit of the ~~Selling~~selling ~~Shareholders~~shareholders on the restricted cash account in accordance with the terms of the ~~Recapitalization~~recapitalization transaction in ~~February~~ February 1997. Payment of this liability is subject to the same limitations as the ~~Restricted~~restricted ~~Cash~~cash (See Note 3).

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. The RI/FS was completed in 1999 and the EPA issued an interim record of decision. In addition, the Company’s facility in Avon, Massachusetts is subject to Massachusetts “Chapter 21E”, the State’s hazardous site clean-up program. Uncertainty as to (a) the extent to which the Company caused, if at all, the conditions being investigated, (b) the extent of environmental contamination and risks, (c) the applicability of changing and complex environmental laws (d) the number and financial viability of other PRP’s, (e) the stage of the investigation and/or remediation, (f) the unpredictability of investigation and/or remediation costs (including as to when they will be incurred), (g) applicable clean-up standards, (h) the remediation (if any) that will ultimately be required, and (i) available technology make it difficult to assess the likelihood and scope of further investigation or remediation activities or to estimate the future costs of such activities if undertaken. In addition, liability under CERCLA is joint and several, and any potential inability of other PRP’s to pay their pro rata share of the environmental remediation costs may result in the Company being required to bear costs in excess of its pro rata share.

In fiscal 1997, the Company determined a cost estimate and accrued $10,000,000 for existing estimated environmental remediation and other related costs. The time frame over which the Company expects to incur such costs varies with each site, ranging up to 30 years. The most significant judgments and assumptions underlying the measurement of the environmental liability for the Avon site relate to the projected costs of the remediation, the effectiveness of the remediation technology on the site geology and the estimated time required for the remediation. The most significant judgments and assumptions underlying the measurement of the environmental liability for the El Monte Operable Unit are the determination of the extent (vertical and horizontal migration of contaminants) of the contamination within the EMOU, the projected costs to complete the required remediation, the expected timeframe required to complete the remediation, the required standard of clean up to be required by the regulatory agencies and the ultimate number and financial viability of the Potentially Responsible Parties.

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

The EPA has selected a remediation plan for the EMOU and has required the PRP’s to submit a plan. The Company is currently negotiating with the EPA and other PRP’s to attempt to develop an operating plan and financial allocation to share the cost of the required remediation. There is no assurance that such negotiations will be successful at reaching an agreement.

As of ~~December~~June 28, ~~2002~~2003, the accrual for estimated environmental costs was $7,~~635~~382,000. Actual expenditures for environmental remediation were $~~539~~56,000 for the ~~nine~~ three months ended ~~December~~June 28, ~~2002~~ 2003, and $~~528~~736,000 for the fiscal year ended March 3029, ~~2002~~2003. The Company believes its accrual is adequate, but as the scope of its obligations becomes more clearly defined, this accrual may be modified and related charges against earnings may be made.

Claims 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.

9 COMMITMENTS AND CONTINGENCIES

OnIn August 2, 2002, the Company filed a lawsuit in California Superior Court ~~(Case GC030102, Hermetic Seal Corporation, HCC Industries Inc. vs. Special Devices, Inc.)~~ against Special Devices, Inc. (“SDI”) ~~and certain other fictitious defendants~~ alleging ~~various claims~~ breach of ~~breaches of~~ contract. The allegations primarily related ~~relate~~ to SDI’s failure to tender payment to the Company for shipments of parts the Company manufactured and delivered ~~pursuant to various purchase orders~~ and~~/or agreements~~ ~~and~~ SDI’s breach of exclusivity requirements. ~~The~~In ~~ultimate~~June ~~resolution~~2003, ofthe ~~these~~Company settled ~~claims~~this islawsuit with SDI. Under ~~not~~the ~~expected~~terms toof ~~have~~the asettlement ~~material~~SDI ~~impact~~paid onthe Company $530,000 and certain mutual releases related to the ~~results~~underlying claims of ~~operations~~the orlitigation were executed. When combined with earlier payments from SDI ~~financial~~related ~~position~~to ofcertain initial claims in the ~~Company~~litigation, the aggregate recovery on the lawsuit was approximately $800,000.

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. ~~RECENT~~ NEW ACCOUNTING PRONOUNCEMENTS:

In ~~June~~April ~~2001~~2003, the ~~Financial Accounting Standards Board (“~~FASB”) issued ~~Statement~~SFAS ~~of Financial Accounting Standards~~ No. ~~141 (“SFAS 141”)~~149, “~~Accounting~~Amendment ~~for~~of ~~Business~~Statement 133 ~~Combinations”~~on ~~and~~Derivative ~~No.~~Instruments ~~142 (“SFAS 142”), “Goodwill~~ and ~~Other~~Hedging ~~Intangibles~~Activities.”, The ~~effective~~Company ~~for~~does ~~fiscal~~not ~~years~~invest ~~beginning~~in ~~after~~or ~~December 15,~~issue ~~2001. Under~~derivative ~~the~~instruments ~~new rules, goodwill~~ and ~~intangible~~ ~~assets~~does ~~deemed~~not toengage ~~have indefinite lives are no longer amortized but is subject to annual impairment tests~~ in ~~accordance~~hedging ~~with the Statements~~activities.

In ~~adopting~~May 2003, the FASB issued SFAS No. ~~142~~150, “~~Goodwill~~Accounting ~~and~~for ~~Other Intangible Assets”, the~~Certain ~~Company~~Financial ~~ceased~~Instruments ~~amortizing~~with ~~goodwill~~Characteristics ~~in the first quarter~~ of ~~fiscal~~both ~~2003~~Liabilities and ~~has~~ ~~assessed~~Equity.” SFAS ~~initial~~No. ~~impairment~~150 ~~under~~changes ~~transitional~~the accounting ~~rules~~guidance ~~as of March 31, 2002. Goodwill amortization~~ for ~~fiscal~~certain ~~2002~~financial ~~was $189,000~~instruments ~~or $47~~that,~~000~~ ~~per~~under ~~quarter. During~~previous ~~the~~guidance, ~~quarter~~could ~~ended~~be ~~September~~classified ~~28,~~as ~~2002,~~equity ~~the~~or ~~Company~~“mezzanine” ~~completed~~equity ~~its~~by ~~assessment~~now ofrequiring ~~the~~those ~~estimated~~instruments ~~fair~~to ~~value~~be ofclassified ~~its~~as ~~two~~liabilities ~~reporting~~(or ~~units~~assets ~~under~~in some circumstances) in the ~~transitional rules~~statement of ~~SFAS~~financial ~~142~~position. Further, ~~using~~SFAS aNo. ~~valuation~~150 ~~method~~requires ~~based~~disclosure regarding onthe aterms ~~multiple~~ of ~~earnings before~~those ~~interest,~~instruments ~~taxes, depreciation~~ and ~~amortization~~settlement alternatives. ~~For~~SFAS ~~purposes~~No. of150 ~~its~~is ~~assessment~~generally ~~under~~effective ~~FAS~~for all ~~142,~~financial ~~the~~instruments ~~Company~~entered ~~concluded~~into itor ~~had~~modified ~~two~~after ~~reporting~~May ~~units~~31, ~~Hermetic~~2003, ~~(consisting~~and ofis ~~Hermetic~~otherwise ~~Seal~~effective ~~Corporation~~at ~~and~~the ~~its~~beginning ~~related entities/operations) and Glasseal (consisting~~ of ~~Glasseal~~the ~~Products,~~first ~~Inc.~~interim ~~and~~period ~~its~~beginning after ~~subsidiary~~June ~~Sealtron~~15, ~~Inc~~2003.). ~~For~~The ~~purposes~~adoption of SFAS ~~calculating~~No. ~~EBITDA~~150 ofwill ~~each of~~not ~~the~~have ~~reporting~~a ~~units,~~material ~~the~~impact ~~Company~~on ~~used~~the ~~forward~~financial 12position, ~~months forecasted operating~~ results of ~~for~~operations ~~fiscal~~or ~~2003~~cash ~~due~~flows toof 1) the ~~loss in March 2002 of SDI,~~Company.

formerly its largest customer and 2) the significant decrease in sales to the telecommunications market. An allocation of the cost of shared resources and corporate expenses directly related to the reporting units was also reflected in EBITDA. The multiple applied against EBITDA was 5.7. As a result, the Company determined that the goodwill of the Company’s reporting units was fully impaired and has recorded an impairment charge of $3,561,000. No income tax benefit has been recognized for this charge, as the goodwill is not deductible for income tax purposes. Had this charge been recognized in the first quarter of fiscal 2003, the net loss would have increased from $1,121,000 as reported to $4,682,000.

In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking Fund Requirements and SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. Also, this statement amends SFAS No. 13, Accounting for Leases and other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changes conditions. The provisions of this Statement related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provision relating to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002. All other provisions of this Statement shall be effective for financial statements issued on or after May 15, 2002. The Company does not believe it will have a material impact on its financial position or results of its operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial reporting for costs associated with exits or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The provisions of this Statement are effective for exit or disposal activities initiated after December 31, 2002. The Company does not believe it will have a material impact on its financial position or results of its operations.

PART I - FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Consolidated Financial Statements” included in the Company’s Form 10-K for the year ended March 29, 2003.

Results of Operations (In millions)

	For the Three Months Ended										~~For the Nine Months Ended~~
	Dec. 28, 2002			Percent		Dec. 29, 2001			Percent		Dec. 28, 2002			Percent		Dec. 29, 2001			Percent
	June 28, 2003			Percent		June 29, 2002			Percent
Net sales	$	912.71		100.0	%	$	1410.46		100.0	%	$	~~30.3~~		~~100.0~~	%	$	~~51.5~~		~~100.0~~	%
Gross profit	13.91			1925.6	%	42.60			3118.69	%	~~5.8~~			~~19.1~~	%	~~16.8~~			~~32.6~~	%
Selling, general and administrative expenses	1.59			15.57	%	1.25			814.72	%	~~4.5~~			~~14.8~~	%	~~4.9~~			~~9.5~~	%
Write-down on impairment of assets	—			—		—			—		0.5			1.6	%	—			—
Earnings from operations	1.2			9.9	%	0.5			4.7	%
Earnings from operations	0.3			3.1	%	3.3			23.0	%	0.8			2.6	%	11.9			23.1	%
Other income/expense	(2.4		)	-19.8	%	(2.4		)	-22.6	%
Other income/expense	(2.4		)	(24.7	)%	(2.4		)	(16.7	)%	(7.1		)	(23.4	)%	(7.2		)	(14.0	)%
Net loss	$	(1.1	)	-9.1	%	$	(1.1	)	-10.4	%
Cumulative effect of accounting change	—			—		—			—		(3.6		)	(11.9	)%	—			—
Net earnings (loss)	$	(1.3	)	(13.4	)%	$	0.5		3.8	%	$	(7.7	)	(25.4	)%	$	2.8		5.5	%

Comparison of the Three Months Ended ~~December~~ June 28, ~~2002~~2003 (“~~2003~~2004 Quarter”) to the Three Months Ended June ~~December~~ 29, ~~2001~~ 2002 (“~~2002~~2003 Quarter”)

Net Sales

The Company’s net sales ~~decreased~~increased by approximately $41.75 million or 3314.4% to $912.7 1 million for the ~~2003~~2004 Quarter compared to sales of $1410.46 million for the ~~2002~~ 2003 Quarter.

Sales to existing aerospace, industrial process control and petrochemical customers ~~decreased~~ increased by approximately 1315.5% in the 2004 ~~2003~~ Quarter compared to the ~~2002~~ 2003 Quarter. Based on current order volume, the Company expects renewed weakness in the aerospace, industrial process control and petrochemical markets in the next quarter due to ~~continue~~a ~~over~~slowdown ~~the~~in ~~next~~an ~~several~~industrial ~~quarters~~program.

On the automotive side, revenue from ~~airbag~~automotive shipments ~~and~~increased ~~seat~~approximately ~~belt~~38.7% ~~initiator~~in ~~products decreased~~the ~~due~~2004 toQuarter ~~the~~compared ~~termination~~to of the 2003 ~~supply~~Quarter. This ~~agreement~~is ~~with~~a ~~SDI,~~result ~~formerly~~of the Company’s ~~largest~~efforts ~~customer. The~~to ~~Company stopped~~redevelop ~~selling~~a ~~product~~broader tobase ~~SDI~~of insales ~~March~~after ~~2002. Overall,~~the ~~revenue~~loss ~~from~~of ~~all~~a major ~~automotive~~customer ~~shipments~~in ~~decreased~~fiscal ~~approximately~~2003. On the ~~77%~~whole, in the ~~2003~~Company ~~Quarter~~expects ~~compared~~growth toover the ~~2002~~next ~~Quarter. The~~two ~~Company~~quarters ~~expects~~in ~~the~~unit ~~significant~~volume ~~decrease~~on new inand ~~revenue~~existing ~~from~~programs. However, ~~SDI~~the ~~will~~Company behas ~~partially~~been ~~offset~~advised by ~~increases~~an inexisting ~~unit~~automotive ~~shipments~~customer ofthat ~~new~~production ~~and existing~~is ~~programs~~expected to ~~other~~be ~~automotive~~shifted ~~customers~~in-house ~~over~~by the ~~next~~customer ~~several~~in ~~quarters~~January 2004. OnThis ~~the~~product ~~whole,~~generated ~~the~~approximately ~~Company expects~~$3.8 ~~significantly~~million ~~lower~~in ~~revenues~~sales ~~from~~for ~~automotive products during~~ fiscal 2003 ~~and 2004~~.

In fiscal 2001 and 2002, the Company developed a significant market presence in the telecommunications markets through component products designed for optical networking infrastructure. Shipments of these products decreased dramatically, however, as the telecom market collapsed. Sales of these products decreased by approximately 5540.6% in the ~~2003~~2004 Quarter compared to the ~~2002~~2003 Quarter. Based on current order volume and industry reports, the Company expects continued weakness in the telecommunications markets over the next several quarters at a minimum.

1211

Gross Profit

Gross profit ~~decreased~~increased by approximately 5955% or $21.71 million, to $13.9 1 million for the ~~2003~~2004 Quarter compared to $42.60 million for the ~~2002~~ 2003 Quarter. Gross margin ~~decreased~~increased to 19 25.6% for the ~~2003~~2004 Quarter from 3118.69% for the ~~2002~~ 2003 Quarter.

The ~~decrease~~increase in gross profit is attributable to the ~~decreased~~increased sales volume. The ~~decrease~~increase in gross margin was primarily attributable to the ~~significant~~ ~~decrease~~increase in revenue and the corresponding impact of fixed overhead costs leveraged on ~~lower~~higher revenue. The most significant fixed overhead costs are depreciation, utilities and property taxes. These costs are allocated to inventory and ultimately cost of sales, based on the proportion of total fixed costs to total direct labor costs. ~~The~~Any ~~ongoing~~further ~~weakness~~weakening in sales demand will ~~continue to~~ adversely impact gross profitability and gross margin.

Selling, General and Administrative Expenses

Selling, general and administrative (“S,G&A”) expenses increased by approximately 2527% or $0.3 4 million to $1.59 million for the ~~2003~~2004 Quarter compared to $1.25 million for the ~~2002~~ 2003 Quarter. S,G&A expenses as a percent to sales increased to 15.57% in the ~~2003~~ 2004 Quarter from 814.72% for the ~~2002~~ 2003 Quarter.

Selling expenses were ~~flat~~ ~~(in~~higher ~~dollars)~~ in the ~~2003~~2004 Quarter compared to the ~~2002~~ 2003 Quarter~~. This~~ ~~reflects~~due to the ~~Company’s~~increased ~~continuing investment~~sales volume in ~~selling~~the ~~resources~~2004 ~~to increase its overall revenue~~Quarter. ~~G&A~~General ~~expenses~~and ~~overall~~Administrative ~~were~~expenses ~~approximately~~were ~~36%~~ higher in the ~~2003~~2004 Quarter ~~as compared to the 2002 Quarter. This is primarily~~ due to ~~reimbursement~~higher ~~of legal~~compensation costs inand ~~the 2002 quarter resulting from the settlement of the Neubauer~~financing ~~ligitation. The~~related ~~increased percentage of S~~costs,~~G&A~~ ~~expenses~~partially tooffset ~~sales~~by ~~reflects~~lower ~~the~~legal ~~impact of these~~ expenses ~~leveraged over significantly lower revenue~~.

Earnings from Operations

Operating earnings ~~decreased~~ increased by $3.0.7 million or 91140% to $01.32 million for the ~~2003~~2004 Quarter compared to $30.35 million for the ~~2002~~2003 Quarter. Operating margins ~~decreased~~increased to 39.19% in the 2004 ~~2003~~ Quarter from 234.07% for the ~~2002~~2003 Quarter.

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

Other Expense, net

Other expense, net (which is predominantly net interest expense) was unchanged at $2.4 million for the ~~2003~~ 2004 and ~~2002~~2003 Quarters. The Company has $8786.1 million of indebtedness as of ~~December~~June 28, ~~2002~~2003 compared to $8988.92 million at ~~December~~June 29, ~~2001~~2002. The reduced interest expense on the indebtedness was wholly offset by reduced interest earned on invested cash balances.

Net ~~Earnings~~ (Loss)

Net ~~earnings (~~loss~~) decreased~~ bywas ~~approximately~~unchanged at $1.81 million tofor aboth ~~net~~quarters. The ~~loss~~Company ofrecorded ~~$1.3~~no ~~million~~tax ~~for~~benefit on the ~~2003~~loss ~~Quarter~~incurred ~~from~~in ~~net~~fiscal ~~earnings~~2004 ofas ~~$0.5~~it ~~million~~was indetermined ~~the~~that ~~2002~~it ~~Quarter~~was more likely than not that such tax benefit would not be realized.

~~The substantial decrease in net earnings was due to the substantial decline in earnings from operations as discussed above.~~12

Comparison of the Nine Months Ended December 28, 2002 (“2003 Period”) to the Nine Months Ended December 29, 2001 (“2002 Period”)

Net Sales

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

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

On the automotive side, revenue from airbag and seat belt initiator products decreased due to the termination of the supply agreement with SDI, formerly the Company’s largest customer. The Company stopped selling product to SDI in March 2002. Overall, revenue from all automotive shipments decreased approximately 76% in the 2003 Period compared to the 2002 Period. The Company expects the significant decrease in revenue from SDI will be partially offset by increases in unit shipments of new and existing programs to other automotive customers over the next several quarters. On the whole, the Company expects significantly lower revenues from automotive products during fiscal 2003 and 2004.

In fiscal 2001 and 2002, the Company developed a significant market presence in the telecommunications markets through component products designed for optical networking infrastructure. Shipments of these products decreased dramatically, however, as the telecom market collapsed. Sales of these products decreased by approximately 70% in the 2003 Period compared to the 2002 Period. Based on current order volume and industry reports, the Company expects continued weakness in the telecommunications markets over the next several quarters at a minimum.

Gross Profit

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

The decrease in gross profit is attributable to the decrease in sales volume in the 2003 Period. The decrease in gross margin was primarily attributable to the significant decrease in revenue and the corresponding impact of fixed overhead costs leveraged on lower revenue. The most significant fixed overhead costs are depreciation, utilities and property taxes. These costs are allocated to inventory and ultimately cost of sales, based on the proportion of total fixed costs to total direct labor costs. The ongoing weakness in sales will continue adversely to impact gross profitability and gross margin.

Selling, General and Administrative Expenses

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

Selling expenses were flat (in dollars) in the 2003 Period compared to the 2002 Period. This reflects the Company’s continuing investment in selling resources to increase its overall revenue. G&A expenses overall were approximately 14% lower in the 2003 Period as compared to the 2002 Period due to decreased compensation costs, partially offset by higher legal costs (legal costs were lower in the 2002 Period because of the reimbursement of costs related to the Neubauer litigation). The increased percentage of S,G&A expenses to sales reflects the fixed portion of these expenses leveraged over significantly lower revenue.

Impairment of Assets

Earnings from Operations

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

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

Other Expense, net

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

Cumulative Effect of Accounting Change

In adopting SFAS No. 142 “Goodwill and Other Intangible Assets”, the Company ceased amortizing goodwill in the first quarter of fiscal 2003 and has assessed initial impairment under transitional rules as of March 31, 2002. Goodwill amortization for fiscal 2002 was $189,000 or $47,000 per quarter. During the quarter ended September 28, 2002, the Company completed its assessment of the estimated fair value of its two reporting units under the transitional rules of SFAS 142 using a valuation method based on a multiple of earnings. For purposes of calculating the earnings level of each of the reporting units, the Company included the impact of the following significant elements: 1) the recent loss of SDI, formerly its largest customer, 2) the significant decrease in sales to the telecommunications market and 3) an allocation of the cost of shared resources and corporate expenses directly related to the reporting units. As a result, the Company determined that the goodwill of the Company’s reporting units was fully impaired and has recorded an impairment charge of $3,561,000. No income tax benefit has been recognized for this charge, as the goodwill is not deductible for income tax purposes. Had this charge been recognized in the first quarter of fiscal 2003, the net loss would have increased from $1,121,000 as reported to $4,682,000.

Net Earnings (Loss)

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

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

Liquidity and Capital Resources

Net cash used ~~by operating~~in operating activities was $32.46 million for the 2004 ~~2003~~Quarter ~~Period~~ compared to cash ~~provided~~used byin operations of $13.81 million ~~2002~~ ~~Period~~2003 Quarter. The decrease of $50.~~2 million~~5 million in cash ~~provided~~used byin operations ~~was~~in ~~primarily~~the ~~attributable~~2004 Quarter compared to the 2003 Quarter is ~~significant~~due ~~decrease~~to lower working capital demands in ~~net~~the ~~earnings~~2004 Quarter. The cash used in operating activities is impacted in the Company’s first and third quarters by the semi-annual interest payment of $4.3 million on the Senior Subordinated Notes.

Net cash used in investing activities was $0.212 million for the ~~2003~~2004 ~~Period~~Quarter compared to $1.0.06 million for the ~~2002~~2003 ~~Period~~Quarter. The ~~decrease~~increase in cash used in investing activities is due to ~~reduced~~a slight increase in expenditures ~~for~~ for capital equipment.

Net cash used in financing activities was $10.65 million for ~~the~~both ~~2003 Period and the 2002 Period~~Quarters. Net principal payments on long-term debt was unchanged for the two ~~Periods~~ Quarters.

As of ~~December~~June 28, ~~2002~~2003, the Company’s outstanding long-term debt is $8786.1 million. ~~The Company~~On ~~had~~June a18, ~~Revolving~~2003, ~~Credit~~the ~~Facility~~Company upentered tointo a $87.05 million, ~~which~~Revolving ~~was collateralized~~Credit byAgreement ~~accounts~~(the ~~receivable,~~“Revolver”). ~~inventory~~Under ~~and~~the ~~equipment. The~~terms ~~Revolving~~of the ~~Credit~~Revolver, ~~Facility~~the ~~included covenants~~Company ~~requiring~~may ~~maintenance~~borrow ofup ~~certain~~to ~~financial~~85% ~~ratios~~of eligible accounts receivable. AtThe ~~June~~Revolver ~~29,~~provides ~~2002,~~for interest on outstanding balances at the ~~Company~~bank’s ~~was~~prime ~~not~~rate ~~in compliance~~plus ~~with~~1 ½% ~~the~~(or ~~required~~LIBOR plus ~~ratios. In~~3½%) ~~September~~and ~~2002,~~is ~~the~~collateralized ~~Company’s~~by ~~bank~~accounts ~~declined~~receivable, toinventories, ~~waive~~equipment ~~the~~and intangible ~~violations~~assets of the Company. There ~~covenants~~are onno ~~the~~borrowings ~~Company’s~~outstanding ~~Revolving~~under ~~Credit~~the ~~Facility~~Revolver and ~~terminated~~on ~~the~~June ~~agreement~~28, 2003, approximately $4,400,000 was available. The ~~Company~~Revolver ~~had~~includes nocovenants ~~borrowings~~requiring ~~outstanding~~maintenance onof certain ~~the~~financial ~~Revolving~~ratios. At ~~Credit~~June ~~Facility~~28, at2003, the Company ~~date~~was ofin ~~termination~~compliance with the required ratios.

The Company believes that cash on hand of $53.70 million and cash generated from operations, prior to interest payments on long-term debt, will provide adequate funds for ongoing operations, planned capital expenditures and debt service for ~~the~~ the near-term. ~~Over~~For the ~~next~~remainder 12of fiscal ~~months~~2004, the primary cash obligations of the Company are interest payments ($ 94.25 million), principal payments on existing debt ($1.93 million), and capital expenditures ($ 0.5 - $ 0.75 million). Total cash used in the first three months of fiscal 2004 was $3.2 million for operations, investing and financing activity.

Total cash used in the first nine months of fiscal 2003 was $5.2 million for operations, investing and financing activity. The Company is currently negotiating with other potential lenders to secure a line of credit to augment its liquidity. There is no assurance that such negotiations will be successful.

Capital expenditures for fiscal ~~2003~~2004 are expected to focus on improvements or refurbishment of existing equipment. Expected capital expenditures for fiscal ~~2003~~2004 will be approximately $0.5 to 0.75 million and will be financed through working capital and/or the Revolving Credit Facility.

16Disclosure 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.

~~Recent Accounting Pronouncements~~13

InAll ~~July~~phases ~~2001,~~of the ~~Financial~~operations ~~Accounting~~of ~~Standards~~the ~~Board (“FASB”)~~Company ~~issued~~are ~~Statement~~subject ofto ~~Financial~~a ~~Accounting~~number ~~Standards~~of uncertainties, ~~(“SFAS”)~~risks ~~Nos. 141~~ and ~~142~~other influences, ~~“Business~~including ~~Combinations”~~general ~~and~~economic conditions, ~~“Goodwill~~regulatory changes and ~~Other~~competition, ~~Intangible Assets”. SFAS~~many ~~No.~~of ~~141~~which ~~replaces~~are ~~APB~~outside 16the ~~and~~control ~~eliminates~~of ~~pooling-~~the Company, any one of~~-interests~~ ~~accounting~~which, ~~prospectively. It~~or ~~also~~a ~~provides~~combination ~~guidance~~of onwhich, ~~purchase~~could ~~accounting~~materially ~~related~~affect to the ~~recognition~~results of ~~intangible~~the ~~assets~~Company’s operations and ~~accounting~~whether ~~for~~the ~~negative~~forward ~~goodwill. The~~looking statements made by the Company ~~implemented~~ ~~SFAS~~ultimately Noprove to be accurate. The ~~141~~Company ~~and~~does ~~142~~not ~~effective~~assume any ~~March~~obligation ~~31,~~to ~~2002,~~update ~~which~~these ~~impact~~forward ~~is disclosed~~looking ~~above~~statements.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

All of the Company’s indebtedness is at fixed interest rates and as such there is no exposure to market risk from changes in interest rates.

Item 4. Controls and Procedures

~~Evaluation~~The ofCompany’s ~~Disclosure Controls~~management, ~~and~~with ~~Procedures. The~~the participation of the Company’s ~~Chief~~ Chief Executive Officer and Chief Financial Officer ~~have~~has evaluated the ~~effectiveness~~ effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-1415(ce) and 15d-1415(ce) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

17There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

1934, as amended (the “Exchange Act”)) as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s reports filed or submitted under the Exchange Act.14

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

PART II - OTHER INFORMATION

Items 1 through 5 are omitted, as they are not applicable.

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

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

12.1 - Computation of ratio of earnings to fixed charges

31.1 - Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 - Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 - Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K -

None

SIGNATURES

		HCC INDUSTRIES INC.	~~HCC INDUSTRIES INC.~~
DATED: February 10, 2003			/s/ Richard L. Ferraid
DATED:	August 8, 2003	s/s Richard L. Ferraid
		President and Chief Executive Officer	~~President and Chief Executive Officer~~
DATED: February 10, 2003			/s/ Christopher H. Bateman
DATED:	August 8, 2003	s/s Christopher H. Bateman
		Vice President and Chief Financial Officer	~~Vice President and Chief Financial Officer~~

1915

CERTIFICATION

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

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

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

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

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

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

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

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

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

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

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

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

CERTIFICATION

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

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

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

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

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

Filing Compare · HCC INDUSTRIES INC /DE/