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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MAY 2, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-12102
HADCO CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 04-2393279
- ------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
12A MANOR PARKWAY, SALEM, NEW HAMPSHIRE 03079
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (603) 898-8000
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Registrant has 13,242,127 shares of Common Stock, $0.05 Par Value, outstanding
at June 8, 1998.
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HADCO CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
May 2, 1998 and October 25, 1997, respectively...................... 3
Consolidated Condensed Statements of Operations for the
Three Months ended May 2, 1998 and April 26, 1997 and
six months ended May 2, 1998 and April 26, 1997,
respectively........................................................ 4
Consolidated Condensed Statements of Cash Flows
for the six months ended May 2, 1998
and April 26, 1997, respectively.................................... 5
Notes to Consolidated Condensed Financial
Statements.......................................................... 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition.............................. 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 26
Item 2. Changes in Securities ............................................. 26
Item 4. Submission of Matters to a Vote of Security Holders .............. 26
Item 6. Exhibits and Reports on Form 8-K .................................. 27
SIGNATURE..................................................................... 30
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HADCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
(In thousands)
ASSETS May 2, October 25,
1998 1997
-------- -----------
Current Assets:
Cash and cash equivalents ............................. $ 4,997 $ 12,171
Short-term investments ................................ - 1,562
Accounts receivable, net of allowance for
doubtful accounts of $2,589 in 1998 and
$1,700 in 1997, respectively ......................... 114,352 92,222
Inventories ........................................... 75,095 46,000
Deferred tax asset .................................... 20,106 10,483
Prepaid and other current expenses .................... 8,058 4,245
-------- --------
Total Current Assets ............................. 222,608 166,683
Property, Plant and Equipment, net .................... 318,335 231,490
Acquired Intangible Assets, net ....................... 195,026 101,131
Other Assets .......................................... 3,472 3,213
-------- --------
$739,441 $502,517
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Short-term debt and current portion of long-term debt.. $ 4,837 $ 5,064
Accounts payable ...................................... 74,169 68,594
Accrued Payroll and other employee benefits ........... 29,246 28,279
Accrued Taxes ......................................... 494 1,775
Other accrued expenses ................................ 15,229 9,278
-------- --------
Total Current Liabilities ........................ 123,975 112,990
-------- --------
Long Term Debt, net of current portion .................... 359,037 109,716
-------- --------
Deferred Tax Liability .................................... 51,668 30,685
-------- --------
Other Long-Term Liabilities ............................... 9,192 9,214
-------- --------
Commitments and Contingencies
Stockholders' investment:
Common stock, $.05 par value -
Authorized 50,000 shares in 1998 and 25,000 in 1997
Issued and outstanding 13,212 in
1998 and 13,086 in 1997 ............................... 662 655
Paid-in capital ........................................... 171,466 168,246
Deferred compensation ..................................... (75) (117)
Retained earnings ......................................... 23,516 71,128
-------- --------
Total Stockholders' Investment ................... 195,569 239,912
-------- --------
$739,441 $502,517
======== ========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
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HADCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited )
(In thousands, except share data)
Three Months Ended Six Months Ended
------------------ ----------------
May 2, April 26, May 2, April 26,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net Sales .................................................. $ 209,587 $ 180,662 $ 407,863 $ 292,198
Cost of Sales .............................................. 172,857 142,199 332,065 227,358
----------- ----------- ----------- -----------
Gross Profit .......................................... 36,730 38,463 75,798 64,840
Operating Expenses ......................................... 21,526 17,999 39,310 28,819
Restructuring and other non-recurring charges (Note 7) ..... 5,947 - 5,947 -
Write-off of acquired in-process
research and development ................................. 63,050 - 63,050 78,000
----------- ----------- ----------- -----------
Income (Loss) From Operations .............................. (53,793) 20,464 (32,509) (41,979)
Interest and Other Income (Expense), net ................... 844 (70) 1,377 806
Interest Expense ........................................... (4,195) (4,318) (6,294) (5,251)
----------- ----------- ----------- -----------
Income (Loss) Before
Provision for Income Taxes ................................. (57,144) 16,076 (37,426) (46,424)
Provision for Income Taxes ................................. 2,595 6,123 10,186 12,788
Net Income (Loss) .......................................... $ (59,739) $ 9,953 $ (47,612) $ (59,212)
----------- ----------- ----------- -----------
Income (loss) per common and common equivalent Shares (Note 1)
Basic Net Income (Loss) Per Share.......................... $(4.54) $.95 $(3.63) $(5.67)
====== ==== ====== ======
Diluted Net Income (Loss) Per Share........................ $(4.54) $.91 $(3.63) $(5.67)
====== ==== ====== ======
Weighted average common and common equivalent Shares
outstandingc (Note 1)
Basic .................................................... 13,161,078 10,458,213 13,130,418 10,434,555
=========== =========== =========== ===========
Diluted .................................................. 13,161,078 10,956,458 13,130,418 10,434,555
=========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
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HADCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
Six Months Ended
----------------
May 2, April 26,
1998 1997
----- ---------
Total Cash Provided From Operating Activities .................................... $ 12,595 $ 13,990
--------- ---------
Cash Flows From Investing Activities:
Purchases of short-term investments ......................................... (2,020) -
Maturities of short-term investments ........................................ 3,582 9,401
Purchases of property, plant and equipment .................................. (48,186) (29,611)
Acquisitions of Continental in 1998 and Zycon in 1997 ....................... (190,032) (209,661)
--------- ---------
Net Cash Used In Investing Activities ............................................ (236,656) (229,871)
Cash Flows From Financing Activities:
Principal payments of long-term debt ........................................ (43,218) (36,621)
Proceeds from issuance of long-term debt .................................... 256,878 225,000
Proceeds from exercise of stock options ..................................... 477 435
Tax benefit from exercise of stock options .................................. 1,270 1,387
Proceeds from the sale of Common Stock ...................................... 1,480 -
--------- ---------
Net Cash Provided by Financing Activities ........................................ 216,887 190,201
--------- ---------
Net decrease in Cash and Cash Equivalents ........................................ (7,174) (25,680)
Cash and Cash Equivalents Beginning of Period .................................... 12,171 32,786
--------- ---------
Cash and Cash Equivalents End of Period .......................................... $ 4,997 $ 7,106
========= =========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest ................................................................... $ 4,689 $ 4,282
========= =========
Income taxes (net of refunds) ............................................. $ 10,906 $ 9,070
========= =========
Acquisitions of Continental in 1998 and Zycon in 1997:
Fair value of assets acquired ............................................... $ 140,123 $ 212,509
Liabilities assumed ......................................................... (47,905) (114,993)
Cash paid ................................................................... (186,083) (204,885)
Acquisition costs incurred .................................................. (3,949) (7,600)
Write-off of acquired in-process
research and development ................................................... 63,050 78,000
--------- ---------
Goodwill .................................................................... $ (34,764) $ (36,969)
========= =========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hadco Corporation's (the "Company" or "Hadco") principal products are
multilayer rigid printed circuits and backplane assemblies. The
consolidated condensed financial statements reflect the application of
certain accounting policies. For information as to the significant
accounting policies followed by the Company and other financial and
operating information, see this note and elsewhere in the accompanying
notes to consolidated condensed financial statements, as well as the
Company's Annual Report on Form 10-K for the fiscal year ended October 25,
1997, Quarterly Report on Form 10-Q for the fiscal quarter ended January
31, 1998, Current Reports on From 8-K dated February 18, 1998. February
20, 1998, and May 1, 1998 and current report on From 8-K dated March 26,
1998 as amended by Current Report on Form 8-K/A dated May 1, 1998. These
financial statements should be read in conjunction with the financial
statements included in those above-referenced SEC filings.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's Malaysian subsidiary is the
United States dollar. Accordingly, all remeasurement gains and losses
resulting from transactions denominated in currencies other than United
States dollars are included in the consolidated condensed statements of
operations. To date, the resulting gains and losses have not been
material.
RECLASSIFICATION
The Company has reclassified certain prior year information to conform
with the current year's presentation.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated condensed balance sheet as of May 2, 1998,
and the consolidated statements of operations and cash flows for the six
month periods ended May 2, 1998 and April 26, 1997 are unaudited but, in
the opinion of management, include all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair presentation of
results for these interim periods. Results of operations for the interim
period are not necessarily indicative of results to be expected for the
entire year or any future period.
NET INCOME (LOSS) PER SHARE
The Company adopted SFAS No. 128, "Earnings per share", effective for the
quarter ended January 31, 1998 which replaces the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Prior period amounts have been restated to conform to the current
period presentation. Under SFAS No. 128, basic net income (loss) per
common share is computed based on income (loss) available to common
stockholders and the weighted average number of common shares outstanding
during the period. The dilutive net income (loss) per share is computed
based on including the number of additional common shares that would have
been outstanding if the dilutive potential of common shares had been
issued.
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
Basic and diluted shares outstanding, are as follows:
Three Months Ended Six Months Ended
------------------ ----------------
(in thousands, except per share data)
May 2, April 26, May 2, April 26,
1998 1997 1998 1997
---- ---- ---- ----
Basic weighted average shares outstanding 13,161 10,458 13,130 10,435
Weighted average common equivalent shares - 498 - -
------ ------ ------ ------
Diluted weighted average shares outstanding 13,161 10,956 13,130 10,435
====== ====== ====== ======
Diluted weighted average shares outstanding for the three month periods
ended May 2, 1998 and April 26, 1997, do not include 383,997 and 575,366
common equivalent shares, respectively, as their effect would be
anti-dilutive. Diluted weighted averages shares outstanding for the six
month periods ended May 2, 1998 and April 26, 1997, respectively, do not
include 401,798 and 571,815 common equivalent shares as their effect would
be anti- dilutive.
2. AQUISITIONS
On January 10, 1997, the Company acquired (the "Zycon Acquisition") all of
the outstanding common stock of Zycon Corporation ("Zycon"), and on March
20, 1998, the Company acquired (the "Continental Acquisition", and
together with the Zycon Acquistion, the "Acquisitions") all of the
outstanding common stock of Continental Circuits Corp. ("Continental").
These acquisitions were financed by the $400 million unsecured senior
revolving credit facility with a group of banks, which amended and
restated an existing credit facility (the "Amended Credit Facility"),
under which the Company borrowed approximately $215,000,000 upon
consummation of the Zycon Acquisition and approximately $220,000,000 upon
consummation of the Continental Acquisition. These acquisitions were
accounted for as purchases in accordance with Accounting Principles Board
Opinion No. 16, and accordingly, Zycon's and Continental's operating
results since the respective dates of acquisition are included in the
accompanying consolidated condensed financial statements. In accordance
with ABP Opinion No. 16, the Company allocated the purchase price of the
Acquisitions based on the fair value of assets acquired and liabilities
assumed. Significant portions of the purchase price of both Acquisitions
were identified in independent appraisals as intangible assets using
proven valuation procedures and techniques. These intangible assets
include approximately $78,000,000 and $63,050,000 for Zycon and
Continental, respectively, for acquired in-process research and
development ("in-process R&D") for projects that did not have a future
alternative use. Acquired intangibles include developed technology,
customer relationships, assembled workforce, trade names and trademarks.
These intangibles are being amortized over their estimated useful lives of
12 to 30 years.
Unaudited pro forma operating results for the Company, assuming the
acquisitions of Zycon and Continental occurred on October 27, 1996, are as
follows:
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
ACQUISITIONS (CONTINUED)
Three Months Ended Six Months Ended
------------------ ----------------
(in thousands, except per share data)
May 2, April 26, May 2, April 26,
1998 1997 1998 1997
---- ---- ---- ----
Net Sales ............................ $226,196 $212,524 $459,814 $414,633
Net Income ........................... $ (473) $ 9,010 $ 8,880 $ 16,275
Basic Net Income (Loss) Per Share .... $(.04) $.86 $.68 $1.56
Diluted Net Income (Loss) Per Share .. $(.04) $.82 $.66 $1.49
For purposes of these pro forma operating results, the acquired in-process
R&D was assumed to have been written off prior to October 27, 1996, so
that the operating results presented include only recurring costs.
3. INVENTORIES
Inventories are stated at the lower of cost, first-in, first-out (FIFO),
or market and consist of the following (in thousands):
May 2, October 25,
1998 1997
---- ----
Raw Materials....................... $33,656 $14,167
Work-in-process..................... 41,439 31,833
------- -------
$75,095 $46,000
======= =======
4. INTANGIBLE ASSETS
The Company has assessed the realizability of its acquired intangible
assets in accordance with SFAS No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. " Under
SFAS No. 121, the Company is required to assess the valuation of its
long-lived assets, including intangible assets, based on the estimated
cash flows to be generated by such assets. See Note 7.
5. LINES OF CREDIT
The Company's $400 million Amended Credit Facility is pursuant to an
Amended and Restated Revolving Credit Agreement, as amended (the
"Agreement). The Agreement provides for direct borrowings or letters of
credit for up to $400 million and expires January 8, 2002. Borrowings
under the Agreement bear interest, at the Company's option, at either: (i)
the Eurodollar Rate plus the Applicable Eurodollar Rate Margin (both as
defined in the Agreement) ranging between .5% and 1.1375%, based on
certain financial
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
LINES OF CREDIT (CONTINUED)
ratios of the Company, or (ii) the Base Rate (as defined in the
Agreement). The Company is required to pay a quarterly commitment fee
ranging from .2% to .375% per annum, based on certain financial ratios of
the Company, of the unused commitment under the Agreement. If the Company
obtains certain debt financing, as defined, the banks may require the
Company to repay up to $150,000,000 of amounts outstanding under the
Agreement. At May 2, 1998, borrowings of $345,000,000 were outstanding
under the agreement at a weighted average interest rate of 6.56%.
The Agreement places several restrictions on the Company, including
limitations on mergers, acquisitions and sales of a substantial portion of
its assets, as well as certain limitations on liens, guarantees,
additional borrowings, changes in the Company's capitalization, as
defined, and investments. The Agreement also requires the Company to
maintain certain financial covenants, including, among other things,
minimum levels of consolidated net worth, a maximum ratio of consolidated
funded debt to EBITDA, maximum capital expenditures and minimum interest
coverage, as defined, during the term of the Agreement. At May 2, 1998,
the Company was in compliance with all loan covenants.
The Company has a line of credit arrangement with a Malaysian bank
denominated in Malaysian ringgits and U.S. dollars for aggregate
borrowings of $3.4 million for the purpose of acquiring land, facilities
and equipment for the Company's Malaysian subsidiary. The arrangement is
renewable annually. At May 2, 1998, there were no amounts outstanding
under this arrangement.
6. LONG TERM DEBT
May 2, October 25,
1998 1997
------- -----------
(In thousands)
Loan agreements in connection with the expansion
of a building. The loans bear interest at rates
from 1% to 7% through March, 2011 and are
collateralized by property and an irrevocable
letter of credit. Payments of principal and
interest are quarterly............................. $ 778 $ 820
Revolving credit agreement (Note 5)................ 345,000 100,000
Obligations under capital leases................... 18,096 13,960
-------- --------
363,874 114,780
Less - Current portion............................. 4,837 5,064
-------- --------
$359,037 $109,716
======== ========
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
7. RESTRUCTURING AND OTHER NON-RECURRING CHARGES
On April 6, 1998, the Company announced the planned consolidation of its
two East Coast quick-turn prototype facilities into the larger of the two
facilities located at Haverhill, MA. The Company incurred and recorded in
the fiscal quarter ended May 2, 1998 non-recurring charges in connection
with the consolidation totaling $5.9 million. The component of this charge
classified as restructuring-related met the criteria set forth in Emerging
Issues and Task Force Issue ("EITF") 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The amount
recorded as a liability, which totaled $1.5 million, relates to severance
and other payroll-related costs, as well as lease termination costs.
Non-recurring costs include costs associated with the abandonment of
assets at one of the facilities. The components of the restructuring and
other non-recurring costs during the three months ended May 2, 1998 are as
follows:
Amount
(in thousands)
Loss on abandonment of assets ................................ $1,965
Severance benefits and associated legal costs ................ 129
Lease termination loss ....................................... 1,336
------
Total Restructuring Charges .................................. 3,430
Other Non-recurring Charges .................................. 2,517
------
Total Restructuring and Other Charges ........................ $5,947
======
Included in the restructuring and other charges is $2.5 million, which
represents the write-down of existing assets to their net realizable
value, in accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of."
8. ENVIRONMENTAL MATTERS
The Company is required to comply with all federal, state, county and
municipal regulations regarding protection of the environment. There can
be no assurance that more stringent environmental laws will not be adopted
in the future and, if adopted, the costs of compliance with more stringent
environmental laws could be substantial. Waste treatment and disposal are
major considerations for printed circuit manufacturers. The Company uses
chemicals in the manufacture of its products that are classified by the
Environmental Protection Agency (EPA) as hazardous substances. The Company
is aware of certain chemicals that exist in the ground at certain of its
facilities. The Company has notified various governmental agencies and
continues to work with them to monitor and resolve these matters. During
March 1995, the Company received a Record Of Decision (ROD) from the New
York State Department of Environmental Conservation (NYSDEC),
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ENVIRONMENTAL MATTERS (CONTINUED)
regarding soil and groundwater contamination at its Owego, New York
facility. Based on a Remedial Investigation and Feasibility Study (RIFS)
for apparent on-site contamination at that facility and a Focused
Feasibility Study (FFS), each prepared by environmental consultants of the
Company, the NYSDEC has approved a remediation program of groundwater
withdrawal and treatment and iterative soil flushing. The Company has
executed a Modification of the Order on Consent to implement the approved
ROD. The cost, based upon the FFS, to implement this remediation is
estimated to be $4.6 million, and is expected to be expended as follows:
$260,000 for capital equipment and $4.3 million for operation and
maintenance costs which will be incurred and expended over the estimated
life of the program of 30 years. NYSDEC has notified the Company that it
will take additional samples from a wetland area near the Company's Owego
facility. Analytical reports of earlier sediment samples indicated the
presence of certain inorganics. There can be no assurance that the Company
and/or other third parties will not be required to conduct additional
investigations and remediation at that location, the costs of which are
currently indeterminable due to the numerous variables described in the
fifth paragraph of this Environmental Matters note.
From 1974 to 1980, the Company operated a printed circuit manufacturing
facility in Florida as a lessee of property that is now the subject of a
pending lawsuit (the "Florida Lawsuit") and investigation by the Florida
Department of Environmental Protection (FDEP). Hadco and others are
participating in alternative dispute resolution regarding the site with an
independent mediator. In connection with mediation, in February 1992 the
FDEP presented computer-generated estimates of remedial costs, for
activities expected to be spread over a number of years, that ranged from
approximately $3.3 million to $9.7 million. Mediation sessions were
conducted in March 1992 but were then suspended during ongoing assessment
and feasibility activities. On June 9, 1992, the Company entered into a
Cooperating Parties Agreement in which it and Gould, Inc., another prior
lessee of the site, agreed to fund certain assessment and feasibility
study activities at the site. The cost of such activities is not expected
to be material to the Company. Management believes it is likely that it
will participate in implementing a continuing remedial program for the
site, the costs of which are currently unknown. In June 1995, Hadco was
named a third-party defendant in the Florida Lawsuit. See Note 9 below.
The Company has commenced the operation of a groundwater extraction system
at its Derry, New Hampshire facility to address certain groundwater
contamination and groundwater migration control issues. Further
investigation is underway to determine the areal extent of the groundwater
contaminant plume. Because of the uncertainty regarding both the quantity
of contaminants beneath the building at the site and the long-term
effectiveness of the groundwater migration control system the Company has
installed, it is not possible to make a reliable estimate of the length of
time remedial activity will have to be performed. However, it is
anticipated that the groundwater extraction system will be operated for at
least 30 years. There can be no assurance that the Company will not be
required to conduct additional investigations and remediation relating to
the Derry facility. The total costs of such groundwater extraction system
and of conducting any additional investigations and remediation relating
to the Derry facility are not fully determinable due to the numerous
variables described in the fifth paragraph of this Environmental Matters
note.
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ENVIRONMENTAL MATTERS (CONTINUED)
The City of Santa Clara adopted an ordinance that, as of April 1, 1997,
reduced the amount of waste, including copper and nickel, that companies
such as the Company may discharge into the city sanitary sewer. The
ordinance provides for substantial penalties for intentional or negligent
violations. These penalties include fines ranging from $10,000 to $50,000
per day, revocation of required business permits, the issuance of a cease
and desist order and, under certain circumstances, up to nine months'
imprisonment. Under the ordinance, the Company is subject to stringent
requirements on the amount of water it can discharge. The concentration
limit for Hadco's copper discharge was reduced from 2.70 milligrams per
liter to 1.02 milligrams per liter, and the concentration limit for
Hadco's nickel discharge was reduced from 2.60 milligrams per liter to
0.15 milligrams per liter. The Company believes it is currently in
compliance with new discharge limits.
The Company accrues estimated costs associated with known environmental
matters, when such costs can be reasonably estimated. The cost estimates
relating to future environmental clean-up are subject to numerous
variables, the effects of which can be difficult to measure, including the
stage of the environmental investigations, the nature of potential
remedies, possible joint and several liability, the magnitude of possible
contamination, the difficulty of determining future liability, the time
over which remediation might occur, and the possible effects of changing
laws and regulations.
Management believes the ultimate disposition of above known environmental
matters described in this "Environmental Matters" note will not have a
material adverse effect upon the liquidity, capital resources, business or
consolidated financial position of the Company. However, one or more of
such environmental matters could have a significant negative impact on the
Company's consolidated financial results for a particular reporting
period.
9. LEGAL PROCEEDINGS AND CLAIMS
The Company is one of 33 entities which have been named as potentially
responsible parties in a lawsuit pending in the federal district court of
New Hampshire concerning environmental conditions at the Auburn Road,
Londonderry, New Hampshire landfill site. Local, state and federal
entities and certain other parties to the litigation seek contribution for
past costs, totaling approximately $20 million, allegedly incurred to
assess and remediate the Auburn Road site. In December 1996, following
publication and comment period, the EPA amended the ROD to change the
remedy at the Auburn Road site from active groundwater remediation to
future monitoring. Other parties to the lawsuit also allege that future
monitoring will be required. The Company is contesting liability, but is
participating in mediation with 27 other parties in an effort to resolve
the lawsuit.
In connection with the Florida Lawsuit pending in the Circuit Court for
Broward County, Florida (described in Note 8 above), each of Hadco and
Gould, Inc., another prior lessee of the site of the printed circuit
manufacturing facility in Florida, was served with a third-party complaint
in June 1995, as third-party defendants in such pending Florida Lawsuit by
a party who had previously been named as a defendant when the Florida
Lawsuit was commenced in 1993 by the FDEP. The Florida Lawsuit seeks
damages relating to environmental pollution and FDEP costs and expenses,
civil penalties, and declaratory and injunctive relief to require the
parties to complete assessment and remediation of soil and groundwater
contamination. The other parties include alleged owners of the property
and Fleet Credit Corporation, a secured lender to a prior lessee of the
property.
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
LEGAL PROCEEDINGS AND CLAIMS (CONTINUED)
In March 1993, the EPA notified Hadco Santa Clara (formerly Zycon) of its
potential liability for maintenance and remediation costs in connection
with a hazardous waste disposal facility operated by Casmalia Resources, a
California Limited Partnership, in Santa Barbara County, California. The
EPA identified Hadco Santa Clara as one of the 65 generators which had
disposed the greatest amounts of materials at the site. Based on the total
tonnage contributed by all generators, Hadco Santa Clara's share is
estimated at approximately 0.2% of the total weight.
The Casmalia site was regulated by the EPA during the period when the
material was accepted. There is no allegation that Hadco Santa Clara
violated any law in the disposal of material at the site, rather the EPA's
actions stemmed from the fact that Casmalia Resources may not have the
financial means to implement a closure plan for the site and because of
Hadco Santa Clara's status as a generator of hazardous waste.
In June 1997, the United States District Court in Los Angeles, California
approved and entered a Consent Decree among the EPA and 49 entities
(including Hadco Santa Clara) acting through the Casmalia Steering
Committee (CSC). The Consent Decree sets forth the terms and conditions
under which the CSC will carry out work aimed at final closure of the
site. Certain closure activities will be performed by the CSC. Later work
will be performed by the CSC, if funded by other parties. Under the
Consent Decree, the settling parties will work with the EPA to pursue the
non-settling parties to ensure they participate in contributing to the
closure and long-term operation and maintenance of the facility.
The EPA will continue as the lead regulatory agency during the final
closure work. Because long-term maintenance plans for the site will not be
determined for a number of years, it has not yet been decided which
regulatory agency will oversee this phase of the work plan or how the
long-term costs will be funded. However, the agreement provides a
mechanism for ensuring that an appropriate federal, state or local agency
will assume regulatory responsibility for long-term maintenance.
The future costs in connection with the lawsuits described in the
preceding paragraphs are currently indeterminable due to such factors as
the unknown timing and extent of any future remedial actions which may be
required, the extent of any liability of the Company and of other
potentially responsible parties, and the financial resources of the other
potentially responsible parties.
On March 27, 1998, the Company received a written notice from legal
counsel for the Lemelson Medical, Education & Research Foundation Limited
Partnership (the "Lemelson Partnership"), alleging that the Company is
infringing certain patents held by the Lemelson Partnership and offering
to license such patents to the Company. The ultimate outcome of this
matter is not currently determinable, and there can be no assurance that
the outcome of this matter will not have a material adverse effect upon
the Company's business, financial condition and results of operations.
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HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
LEGAL PROCEEDINGS AND CLAIMS (CONTINUED)
Litigation with respect to patents and other intellectual property matters
can result in substantial damages, require the cessation of the
manufacture, use and sale of infringing products and the use of certain
processes, or require the infringing party to obtain a license to the
relevant intellectual property.
On January 12, 1998, Hadco Santa Clara (formerly Zycon) received notice of
the filing of a lawsuit, before the Superior Court (County of Santa Clara,
California), against it by Jackie Riley, Keith Riley and Richard Riley for
damages (including punitive damages) for alleged injuries suffered,
including Richard Riley's cancer, as a result of the alleged emission at a
Zycon facility of effluent from allegedly toxic and hazardous chemical
substances. Because this matter is at an early stage, the Company believes
it cannot assess the potential range of damages that might be awarded
should the plaintiffs prevail.
10. SUBSEQUENT EVENT - DEBT OFFERING
On May 18, 1998, the Company sold $200.0 million aggregate principal
amount of its 9-1/2% Senior Subordinated Notes due 2008 (the "Notes") to
certain purchasers. The purchasers subsequently resold the Notes to
"qualified institutional buyers" in reliance upon Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"), and offshore
purchasers pursuant to Rule 904 of Regulation S under the Securities Act.
The Notes were so resold at a price equal to 99.66% of their principal
amount.
Interest on the Notes is payable semiannually on each June 15 and December
15, commencing December 15, 1998. The Notes are redeemable at the option
of the Company, in whole or in part, at any time on or after June 15,
2003, at 104.75% of their principal amount, plus accrued interest, with
such percentages declining ratably to 100% of their principal amount, plus
accrued interest. At any time on or prior to June 15, 2001 and subject to
certain conditions, up to 35% of the aggregate principal amount of the
Notes may be redeemed, at the option of the Company, with the proceeds of
certain equity offerings of the Company at 109.50% of the principal amount
thereof, plus accrued interest. In addition, at any time prior to June 15,
2003, the Company may redeem the Notes, at its option, in whole or in
part, at a price equal to the principal amount thereof, together with
accrued interest, plus the Applicable Premium (as defined in the Indenture
governing the Notes).
The Notes are guaranteed, on a senior subordinated basis, by each of the
Company's U.S. Restricted Subsidiaries (as defined in the Indenture) (the
"Guarantors"). The net proceeds received by the Company from the issuance
and sale of the Notes, approximately $193,820 million, was used to repay
outstanding indebtedness under the Amended Credit Facility previously
incurred to, among other things, finance the Acquisitions.
The Indenture under that which the Notes were issued (the "Indenture")
imposes certain limitations on the ability of the Company, its
subsidiaries and, in certain circumstances, the Guarantors, to, among
other things, incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, create liens,
engage in transactions with stockholders and affiliates, sell assets and
engage in mergers and consolidations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
discussed below or elsewhere in this quarterly report including, without
limitation, "Environmental Matters," are forward-looking statements that
involve risks and uncertainties. The Company makes such forward-looking
statements under the provisions of the "Safe Harbor" section of the
Private Securities Litigation Reform Act of 1995. Any forward-looking
statements should be considered in light of the factors described below
under "Factors That May Affect Future Results." Actual results may vary
materially from those projected, anticipated or indicated in any
forward-looking statements. In this quarterly report, the words
"anticipates," "believes," "expects," "estimates," "intends," "may,"
"future," "could," "will," and similar words or expressions (as well as
other words or expressions referencing future events, conditions or
circumstances) identify forward-looking statements.
RESULTS OF OPERATIONS
SECOND QUARTER
Net sales for the second quarter of 1998 increased 16.0% over the same
period in 1997. The increase resulted from several factors including the
acquisition of Continental on March 20, 1998, which added $16.8 million to
printed circuit net sales in the quarter, and an increase in backplane
assembly net sales. Backplane assembly net sales increased 104.4 % due to
higher product volume and shipments. Printed circuit net sales decreased
0.5% due to lower production volume and shipments, and a 4.4% decrease in
average pricing. The shift towards printed circuits with more layers and
greater densities partially offset the decrease in the volume of shipments
and decrease in price. Net sales from backplane assemblies increased to
15.6% of net sales from 8.8% in the second quarter of 1997.
The gross profit margin decreased to 17.5% in the second quarter of 1998
from 21.3% in the comparable period in fiscal 1997. The decrease resulted
from lower capacity utilization from printed circuit operations, and lower
overall gross margins from the Hadco Santa Clara (formerly Zycon) and
Hadco Phoenix (formerly Continental) operations.
Operating expenses, as a percent of net sales, increased to 10.3% in the
second quarter of 1998 from 10.0% in the comparable period in fiscal 1997
due to increased goodwill and purchased intangibles amortization expenses
from the acquisition of Continental.
Income from operations for the second quarter of 1998 was reduced by
approximately $63 million due to a non-recurring write-off relating to
acquired in-process research and development recorded in connection with
the Continental Acquisition, and by approximately $5.9 million in
restructuring and other non-recurring charges related to the consolidation
of the Company's East Coast Tech Center operations. The remaining goodwill
and purchased intangibles from the Continental Acquisition will be
amortized over 12 to 20 years, with an average amortization period of 16
years, which will reduce income from operation by approximately $1.5
million per fiscal quarter.
Income from operations, as a percent of net sales, decreased prior to the
write-off of acquired in-process research and development and the
restructuring and other non-recurring charges to 7.3% in the second
quarter of 1998 from 11.3% in the comparable period in fiscal 1997,
primarily as a result of the decrease in gross profits.
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16
SECOND QUARTER (CONTINUED)
Interest income decreased in the second quarter of 1998 as compared to the
second quarter of 1997 due to lower average cash balances available for
investing. Interest expense decreased slightly in the second quarter of
1998 as compared to the second quarter of 1997, due to lower average
outstanding debt balances for the second quarter of 1998 compared to the
second quarter of 1997.
The Company includes in operating expenses charges for actual expenditures
and accruals, based on estimates, for environmental matters. To the extent
and in amounts Hadco believes circumstances warrant, it will continue to
accrue and charge to operating expenses cost estimates relating to
environmental matters. The Company believes the ultimate disposition of
known environmental matters will not have a material adverse effect upon
the liquidity, capital resources, business or consolidated financial
position of the Company. However, one or more of such environmental
matters could have a significant negative impact on the Company's
consolidated financial results for a particular reporting period.
The Company believes that excess capacity may exist in the printed circuit
and electronic assembly industries. In addition, growth rates in the
electronics industry as a whole have fluctuated historically. These
factors could have a material adverse effect on future orders and pricing.
However, the Company has historically needed to increase its manufacturing
capacity to maintain and expand its market position, although the
Company's manufacturing capacity needs could change at any time or times
in the future. The Company also believes that the potential exists for a
shortage of materials in the printed circuit and electronic assembly
industries, which could have a material adverse effect on future unit
costs. In response to such concerns, the Company engages in the normal
industry practices of maintaining primary and secondary vendors and
diversifying its customer base. There can be no assurances, however, that
such measures will be sufficient to protect the Company against any
shortages of materials.
YEAR TO DATE
Net sales for the six months ended May 2, 1998 increased 39.6% over net
sales for the six months ended April 26, 1997. The increase resulted from
several factors including the acquisitions of Zycon and Continental, which
added $80.2 million to printed circuit net sales in the six month period,
and an increase in both backplane assembly and printed circuit net sales
(excluding these Acquisitions). Backplane assembly net sales increased due
to higher production volume and shipments. Printed circuit net sales
increased due to higher production volume and shipments and a shift
towards products with more layers and greater densities. In addition,
average pricing for printed circuits decreased 3.4% for the first six
months of fiscal 1998 over the same period in fiscal 1997. Net sales from
backplane assemblies increased to 14.2% of net sales from 11.7% in the
first six months of fiscal 1997.
The gross profit margin decreased to 18.6% in the six months ended May 2,
1998 from 22.2% in the comparable period in fiscal 1997. The decrease
resulted from lower capacity utilization from printed circuit facilities,
and lower overall gross margins from the Hadco Santa Clara and Hadco
Phoenix operations.
Operating expenses, as a percent of net sales, decreased to 9.6% in the
six months ended May 2, 1998 from 9.9% in the comparable period in fiscal
1997, due to increased net sales and the fixed nature of the Company's
operating expenses. The decrease was partially offset by goodwill and
purchased intangibles amortization.
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17
YEAR TO DATE (CONTINUED)
Income from operations for the six months ended May 2, 1998 and April 26,
1997, was reduced by $63 million and $78 million, respectively, over the
comparable respective preceding periods, due to non-recurring write-offs
of acquired in-process research and development recorded in connection
with the Continental and Zycon acquisitions. The remaining goodwill and
purchased intangibles will be amortized over 12 to 30 years, with an
average amortization period of 17 years, which will reduce income from
operations by approximately $3.1 million per fiscal quarter. In addition,
income from operations for the six months ended May 2, 1998, was reduced
by approximately $5.9 million for restructuring and other non-recurring
charges related to the consolidation of the Company's East Coast Tech
Center operations.
Excluding the non-recurring write-off and restructuring charges, income
from operations as a percent of net sales, decreased to 8.9% for the six
months ended May 2, 1998 from 12.3% in the comparable period in fiscal
1997, primarily as a result of the same factors affecting gross profit
margins, and of goodwill and purchased intangibles amortization from the
acquisitions.
Interest income increased in the six months ended May 2, 1998 as compared
to the six months ended April 26, 1997, due to higher daily average cash
balances available for investing. Interest expense increased in the six
months ended May 2, 1998 as compared to the six months ended April 26,
1997, due to an increase in outstanding debt as a result of the
acquisitions.
INCOME TAXES
In accordance with generally accepted accounting principles, the Company
provides for income taxes on an interim basis, using its effective annual
income tax rate. Although the Company has recorded a loss before income
taxes in 1998 and 1997, the Company anticipates an effective annual income
tax rate for fiscal 1998 of 39.75%, which is slightly less than the
combined federal and state statutory rates. The effective rate was
increased by amortization of goodwill which is not tax deductible, and was
offset by the tax benefit of the Company's foreign sales corporation and
various state investment tax credits. The effective tax rate for fiscal
1998 is based on current tax laws.
LIQUIDITY AND CAPITAL RESOURCES
At May 2, 1998, the Company had working capital of approximately $98.6
million and a current ratio of 1.80, compared to working capital of
approximately $53.7 million and a current ratio of 1.48 at October 25,
1997. Cash, cash equivalents and short-term investments at May 2, 1998
were approximately $5.0 million, a decrease of $8.7 million from
approximately $13.7 million at October 25, 1997.
In December 1997, the Company negotiated a $400 million unsecured senior
revolving credit loan facility with a group of banks, which amended and
restated an existing credit facility (the "Amended Credit Facility").
Interest on loans outstanding under the Amended Credit Facility is, at the
Company's option, payable at either (1) the Eurodollar Rate plus the
Applicable Eurodollar Rate Margin (both as defined in the Amended Credit
Facility), or (2) the Base Rate as defined in the Amended Credit Facility.
At May 2, 1998, $345 million was outstanding under the Amended Credit
Facility. The Amended Credit Facility matures in January 2002. See Notes 5
and 10 of Notes to Consolidated Condensed Financial Statements above.
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18
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company believes its existing working capital and borrowing capacity,
coupled with the funds generated from the Company's operations will be
sufficient to fund its anticipated working capital, capital expenditure
and debt payment requirements through fiscal 1998. Because the Company's
capital requirements cannot be predicted with certainty, however, there is
no assurance that the Company will not require additional financing during
this period. There is no assurance that any additional financing will be
available on terms satisfactory to the Company or not disadvantageous to
the Company's security holders.
DEBT OFFERING
On May 18, 1998, the Company sold $200.0 million aggregate principal
amount of its 9-1/2% Senior Subordinated Notes due 2008 (the "Notes") to
certain purchasers. The purchasers subsequently resold the Notes to
"qualified institutional buyers" in reliance upon Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"), and offshore
purchasers pursuant to Rule 904 of Regulation S under the Securities Act.
The Notes were so resold at a price equal to 99.66% of their principal
amount. The Notes are guaranteed, on a senior subordinated basis, by each
of the Company's U.S. Restricted Subsidiaries (as defined in the
Indenture) (the "Guarantors"). The net proceeds received by the Company
from the issuance and sale of the Notes, approximately $193,820 million,
was used to repay outstanding indebtedness under the Amended Credit
Facility previously incurred to, among other things, finance the
Acquisitions. The Indenture under that which the Notes were issued (the
"Indenture") imposes certain limitations on the ability of the Company,
its subsidiaries and, in certain circumstances, the Guarantors, to, among
other things, incur indebtedness, pay dividends, prepay subordinated
indebtedness, repurchase capital stock, make investments, create liens,
engage in transactions with stockholders and affiliates, sell assets and
engage in mergers and consolidations. See Note 10 of Notes to Consolidated
Condensed Financial Statements above.
YEAR 2000 COMPLIANCE
The Company is reviewing the areas within its business and operations
which could be adversely affected by Year 2000 issues and evaluating the
costs associated with modifying and testing its systems for the Year 2000.
Although the company is not yet able to estimate its incremental cost for
Year 2000 issues, based on its preliminary review to date, the Company
does not believe Year 2000 issues will have a material adverse effect on
the Company's business, financial condition or results of operations. The
Company is also working with suppliers to ensure their systems are Year
2000 compliant as well. All costs associated with supplier compliance will
be borne by the suppliers.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company operates in a changing environment that involves a number of
risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
DEPENDENCE ON ELECTRONICS INDUSTRY
The Company's principal customers are electronics Original Equipment
Manufacturers (OEMs) and contract manufacturers in the computing (mainly
workstations, servers, mainframes, storage and notebooks), data
communications/ telecommunications and industrial automation industries,
including process controls, automotive, medical and instrumentation. These
industry segments, and the electronics industry as a whole, are
characterized by intense competition, relatively short product life-cycles
and significant fluctuations in product demand. In addition, the
electronics industry is generally subject to rapid technological change
and
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19
DEPENDENCE ON ELECTRONICS INDUSTRY (CONTINUED)
product obsolescence. Discontinuance or modifications of products
containing components manufactured by the Company could have a material
adverse effect on the Company's business, financial condition and results
of operations. Further, the electronics industry is subject to economic
cycles and has in the past experienced, and is likely in the future to
experience, recessionary periods. A recession or any other event leading
to excess capacity or a downturn in the electronics industry would likely
result in intensified price competition, reduced gross margins and a
decrease in unit volume, all of which would have a material adverse effect
on the Company's business, financial condition and results of operations.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have varied and may continue to
fluctuate significantly from period to period, including on a quarterly
basis. At times in the past, the Company's net sales and net income have
decreased from the prior quarter. Operating results are affected by a
number of factors, including the timing and volume of orders from and
shipments to customers relative to the Company's manufacturing capacity,
product and price competition, product mix, number of working days in a
particular quarter, manufacturing process yields, the timing of
expenditures in anticipation of future sales, raw material and component
availability, the length of sales cycles, trends in the electronics
industry and general economic factors. In recent years, the Company's
gross margins have varied primarily as a result of capacity utilization,
product mix, lead times, volume levels and complexity of customer orders.
There can be no assurance that the Company will be able to manage the
utilization of manufacturing capacity or product mix in a manner that will
maintain or improve gross margins. The timing and volume of orders placed
by the Company's customers vary due to customer attempts to manage
inventory, changes in customers' manufacturing strategies and variation in
demand for customer products. The Company's expense levels are relatively
fixed and are based, in part, on expectations of future revenues.
Consequently, if revenue levels are below expectations, this occurrence is
likely to materially adversely affect the Company's business, financial
condition and results of operations.
VARIABILITY OF ORDERS
The level and timing of orders placed by the Company's customers vary due
to a number of factors, including customer attempts to manage inventory,
changes in the customers' manufacturing strategies and variation in demand
for customer products due to, among other things, technological changes,
new product introductions, product life-cycles, competitive conditions or
general economic conditions. Since the Company generally does not obtain
long-term purchase orders or commitments from its customers, it must
anticipate the future volume of orders based on discussions with its
customers. A substantial portion of sales in a given quarter may depend on
obtaining orders for products to be manufactured and shipped in the same
quarter in which those orders are received. The Company relies on its
estimate of anticipated future volumes when making commitments regarding
the level of business that it will seek and accept, the mix of products
that it intends to manufacture, the timing of production schedules and the
levels and utilization of personnel and other resources. A variety of
conditions, both specific to the individual customer and generally
affecting the customer's industry, may cause customers to cancel, reduce
or delay orders that were previously made or anticipated. A significant
portion of the Company's released backlog at any time may be subject to
cancellation or postponement without penalty. The Company cannot assure
the timely replacement of canceled, delayed or reduced orders. Significant
or numerous cancellations, reductions or delays in orders by a customer or
group of customers could materially adversely affect the Company's
business, financial condition and results of operations.
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ACQUISITIONS
On March 20, 1998, the Company acquired (the "Continental Acquisition")
all of the outstanding capital stock of Continental Circuits Corp.
("Continental"), for approximately $188 million (including acquisition
costs). On January 10, 1997, the Company acquired (the "Zycon
Acquisition", and together with the Continental Acquisition, the
"Acquisitions") all of the outstanding capital stock of Zycon Corporation
("Zycon"), for approximately $212 million (including acquisition costs).
The Company has limited experience in integrating acquired companies or
technologies into its operations. Therefore, there can be no assurance
that the Company will operate the acquired businesses profitably in the
future. The gross profit margins for Continental and Zycon for their
respective fiscal years ended July 31, 1997 and December 31, 1996 were
18.2% and 15.7%, respectively. The gross profit margins for Hadco (not
including Continental or Zycon) for its fiscal years ended October 26,
1996 and October 25, 1997 were 25.8% and 21.8%, respectively. As a result
of the Acquisitions, the Company expects its gross profit margin will be
lower in future fiscal quarters than has historically been the case.
Operating expenses associated with the acquired businesses may have a
material adverse effect on the Company's business, financial condition and
results of operations in the future. In addition, shortly after the
Continental Acquisition, one senior member of Continental's management
left the Company. There can be no assurance that the Company will be able
to retain key personnel at Continental.
The Company may from time to time pursue the acquisition of other
companies, assets, products or technologies. The Company may incur
additional indebtedness and additional charges against earnings in
connection with future acquisitions, and such incurrences could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Leverage" below. The Acquisitions involve a
number of operating risks that could materially adversely affect the
Company's operating results, including the diversion of management's
attention to assimilate the operations, products and personnel of the
acquired companies, the amortization of acquired intangible assets, and
the potential loss of key employees of the acquired companies.
Furthermore, acquisitions may involve businesses in which the Company
lacks experience. There can be no assurance that the Company will be able
to manage one or more acquisitions successfully, or that the Company will
be able to integrate the operations, products or personnel gained through
any such acquisitions without a material adverse effect on the Company's
business, financial condition and results of operations.
MANAGEMENT OF GROWTH
In fiscal 1997 and 1998, the Company has significantly expanded its
operations, including geographically, which has placed, and will continue
to place, significant demands on the Company's management, operational,
technical and financial resources. The Acquisitions have intensified these
demands. The Company expects that expansion will require additional
management personnel and the development of further expertise by existing
management personnel. The Company's ability to manage growth effectively,
particularly given the increasing scope of its operations, will require it
to continue to implement and improve its operational, financial and
management information systems as well as to further develop the
management skills of its managers and supervisors and to train, motivate
and manage its employees. The Company's failure to effectively manage
future growth could have a materiel adverse effect on the Company's
business, financial condition and results of operations. Competition for
personnel is intense, and there can be no assurance that the Company will
be able to attract, assimilate or retain additional highly qualified
employees in the future, especially engineering personnel. The failure to
hire and retain such personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
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COMPETITION
The electronic interconnect industry is highly fragmented and
characterized by intense competition. The Company believes its major
competitors are the large U.S. and international independent and captive
producers that also manufacture multilayer printed circuits and provide
backplane and other electronic assemblies. Some of these competitors have
significantly greater financial, technical and marketing resources,
greater name recognition and a larger installed customer base than the
Company. In addition, these competitors may have the ability to respond
more quickly to new or emerging technologies, may adapt more quickly to
changes in customer requirements and may devote greater resources to the
development, promotion and sale of their products than the Company.
During periods of recession or economic slowdown in the electronics
industry and other periods when excess capacity exists, electronics OEMs
become more price sensitive, which could have a material adverse effect on
interconnect pricing. In addition, the Company believes that price
competition from printed circuit manufacturers in Asia and other locations
with lower production costs may play an increasing role in the printed
circuit markets in which the Company competes. This price competition from
Asian printed circuit manufacturers may intensify as a result of economic
turmoil, currency devaluations or financial market instability that many
Asian countries are currently experiencing. Moreover, the Company's basic
interconnect technology is generally not subject to significant
proprietary protection, and companies with significant resources or
international operations may enter the market. Increased competition could
result in price reductions, reduced margins or loss of market share, any
of which could materially adversely affect the Company's business,
financial condition and results of operations.
The demand for printed circuits has continued to be affected by the
development of smaller, more powerful electronic components requiring less
printed circuit area. Expansion of the Company's existing products or
services could expose the Company to new competition. Moreover, new
developments in the electronics industry could render existing technology
obsolete or less competitive and could potentially introduce new
competition into the industry. There can be no assurance that the Company
will continue to compete successfully against present and future
competitors or that competitive pressures faced by the Company will not
have a material adverse effect on the Company's business, financial
condition and results of operations.
MALAYSIA FACILITY AND ASIAN ECONOMIC TURMOIL
Hadco Santa Clara (formerly Zycon) completed construction of a volume
manufacturing facility for printed circuits in Malaysia in fiscal 1997.
Hadco's management has no experience in operating foreign manufacturing
facilities, and there can be no assurance that the Company will operate
the new facility on a profitable basis. The Company believes that the
Malaysian facility could incur operating losses in the future as a result
of various factors, including, without limitation, operating
inefficiencies and price competition for the products which the Company
intends to produce at the facility. International operations are also
subject to a number of risks, including unforeseen changes in regulatory
requirements, exchange rates, tariffs and other trade barriers,
misappropriation of intellectual property, currency fluctuations, and
political and economic instability. Malaysia and other Asian countries
have recently experienced economic turmoil and a significant devaluation
of their local currencies. There can be no assurance that this period of
Asian economic turmoil will not result in increased price competition,
reduced sales by the Company's customers in Asia with a concomitant
reduction in such customers' orders for the Company's products,
restrictions on the transfer of funds overseas, employee turnover, labor
unrest, the reversal of current policies encouraging foreign investment
and trade, or other domestic Asian economic problems that could materially
adversely affect the Company's business, financial condition or results of
operations.
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TECHNOLOGICAL CHANGE, PROCESS DEVELOPMENT AND PROCESS DISRUPTION
The market for the Company's products and services is characterized by
rapidly changing technology and continuing process development. The future
success of the Company's business will depend in large part upon its
ability to maintain and enhance its technological capabilities, develop
and market products and services that meet changing customer needs and
successfully anticipate or respond to technological changes, on a
cost-effective and timely basis. In addition, the electronic interconnect
industry in the future could encounter competition from new technologies
that render existing electronic interconnect technology less competitive
or obsolete, including technologies that may reduce the number of printed
circuits required in electronic components. There can be no assurance that
the Company will effectively respond to the technological requirements of
the changing market. To the extent the Company determines that new
technologies and equipment are required to remain competitive, the
development, acquisition and implementation of such technologies and
equipment are likely to continue to require significant capital investment
by the Company. There can be no assurance that capital will be available
for this purpose in the future or that investments in new technologies
will result in commercially viable technological processes or that there
will be commercial applications for these technologies. Moreover, the
Company's business involves highly complex manufacturing processes that
have in the past and could in the future be subject to periodic failure or
disruption. Process disruptions can result in delays in certain product
shipments, and there can be no assurance that failures or disruptions will
not occur in the future. In addition, the Company has a large
manufacturing facility in Santa Clara, California, an area of the United
States that is subject to significant natural disasters, including
earthquakes, fires and flooding. The loss of revenue and earnings to the
Company from such a technological change, process development or process
disruption, as well as any disruption of the Company's operations
resulting from a natural disaster such as an earthquake, fire, flood or
drought in California or other locations where the Company has facilities,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
CUSTOMER CONCENTRATION
During the past several years, the Company's sales to a small number of
its customers have accounted for a significant percentage of the Company's
annual net sales. During fiscal 1995, 1996 and 1997, the Company's ten
largest customers accounted for approximately 46%, 48% and 47% of net
sales, respectively. In fiscal 1997, Solectron accounted for approximately
15% of the net sales of the Company. The Company generally does not obtain
long-term purchase orders or commitments from its customers, and the
orders received by the Company generally require delivery within 90 days.
Given the Company's strategy of developing long-term purchasing
relationships with high growth companies, the Company's dependence on a
number of its most significant customers may increase. There can be no
assurance that the Company will be able to identify, attract and retain
customers with high growth rates or that the customers that it does
attract and retain will continue to grow. Although there can be no
assurance that the Company's principal customers will continue to purchase
products and services from the Company at current levels, the Company
expects to continue to depend upon its principal customers for a
significant portion of its net sales. The loss of or decrease in orders
from one or more major customers could have a material adverse effect on
the Company's business, financial condition and results of operations.
MANUFACTURING CAPACITY
The Company believes its long-term competitive position depends in part on
its ability to increase manufacturing capacity. The Company may obtain
such additional capacity through acquisitions or expansion of its current
facilities. Either approach would require substantial additional capital,
and there can be no assurance that such capital will be available from
cash generated by current operations. Further, there can be no assurance
that the Company will be able to acquire sufficient capacity or
successfully integrate and
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23
MANUFACTURING CAPACITY (CONTINUED)
manage such additional facilities. Although the Company has historically
needed to increase its manufacturing capacity, the Company believes that
excess capacity may exist in the printed circuit and electronic assembly
industries. In addition, growth rates in the electronics industry as a
whole have fluctuated historically. These factors could have a material
adverse effect on future orders and pricing. The Company's expansion of
its manufacturing capacity has significantly increased and will continue
to significantly increase its fixed costs, and the future profitability of
the Company will depend on its ability to utilize its manufacturing
capacity in an effective manner. The failure to obtain sufficient capacity
when needed or to successfully integrate and manage additional
manufacturing facilities could adversely impact the Company's
relationships with its customers and materially adversely affect the
Company's business, financial condition and results of operations.
ENVIRONMENTAL MATTERS
The Company is subject to a variety of local, state and federal
environmental laws and regulations relating to the storage, use, discharge
and disposal of chemicals, solid waste and other hazardous materials used
during its manufacturing process, as well as air quality regulations and
restrictions on water use. When violations of environmental laws occur,
the Company can be held liable for damages and the costs of remedial
actions and can also be subject to revocation of permits necessary to
conduct its business. Any such revocations could require the Company to
cease or limit production at one or more of its facilities, which could
have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, the Company's failure to
comply with present and future regulations could restrict the Company's
ability to expand its facilities or could require the Company to acquire
costly equipment or to incur other significant expenses to comply with
environmental regulations.
Environmental laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with
violation. The Company operates in several environmentally sensitive
locations and is subject to potentially conflicting and changing
regulatory agendas of political, business and environmental groups.
Changes or restrictions on discharge limits, emissions levels, or material
storage or handling might require a high level of unplanned capital
investment and/or relocation. There can be no assurance that compliance
with new or existing regulations will not have a material adverse effect
on the Company's business, financial condition and results of operations.
AVAILABILITY OF RAW MATERIALS AND COMPONENTS
Although the Company has not entered into any supply agreements and does
not have any guaranteed sources of raw materials or components, it
routinely purchases raw materials and components from several key material
suppliers. Although alternative material suppliers are currently
available, a significant unplanned event at a major supplier could have a
material adverse effect on the Company's operations. Hadco Santa Clara has
experienced shortages of certain types of raw materials in the past. The
Company believes that the potential exists for shortages of materials in
the printed circuit and electronic assembly industries, which could have a
material adverse effect on the Company's manufacturing operations and
future unit costs. Product changes and the overall demand for electronic
interconnect products could increase the industry's use of new laminate
materials, standard laminate materials, multilayer blanks, electronic
components and other materials, and therefore such materials may not be
readily available to the Company in the future. Electronic components used
by the Company in producing backplane assemblies are purchased by the
Company and, in certain circumstances, the Company may bear the risk of
component price fluctuations. There can be no assurance that shortages of
certain types of electronic components will
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AVAILABILITY OF RAW MATERIALS AND COMPONENTS (CONTINUED)
not occur in the future. Component shortages or price fluctuations could
have a material adverse effect on the Company's backplane assembly
business, thereby materially adversely affecting the Company's business,
financial condition and results of operations. To the extent that the
Company's backplane assembly business expands as a percentage of the
Company's net sales, component shortages and price fluctuations could, to
a greater extent, materially adversely affect the Company's business,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a large extent upon the continued
services of key managerial and technical employees. The only executive
officers of the Company bound by employment or non-compete agreements are
the President and Chief Executive Officer and a Senior Vice President
(formerly President and Chief Executive Officer of Continental). Hadco's
President and Chief Executive Officer's non-compete agreement expires one
year after the termination of his employment with the Company. Most other
key employees of the Company do not have employment or non-compete
agreements. The loss of the services of any of the Company's key employees
could have a material adverse effect on the Company. The Company believes
that its future success depends on its continuing ability to attract and
retain highly qualified technical, managerial and marketing personnel.
Competition for such personnel is intense, especially for engineering
personnel, and there can be no assurance that the Company will be able to
attract, assimilate or retain such personnel. If the Company is unable to
hire and retain key personnel, the Company's business, financial condition
and results of operations may be materially adversely affected.
INTELLECTUAL PROPERTY
The Company's success depends in part on its proprietary techniques and
manufacturing expertise, particularly in the area of complex multilayer
printed circuits. The Company has few patents and relies primarily on
trade secret protection of its intellectual property. There can be no
assurance that the Company will be able to protect its trade secrets or
that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's trade secrets. In addition, litigation may be necessary to
protect the Company's trade secrets, to determine the validity and scope
of the proprietary rights of others or to defend against claims of patent
infringement. If any infringement claim is asserted against the Company,
the Company may seek to obtain a license of the other party's intellectual
property rights. There is no assurance that a license would be available
on reasonable terms or at all. Litigation with respect to patents or other
intellectual property matters could result in substantial costs and
diversion of management and other resources and could have a material
adverse effect on the Company's business, financial condition and results
of operations.
VOLATILITY OF STOCK PRICE
The Company's Common Stock has experienced significant price volatility
historically, and such volatility may continue to occur in the future.
Factors such as announcements of large customer orders, order
cancellations, new product introductions by the Company or competitors or
general conditions in the electronics industry, as well as quarterly
variations in the Company's actual or anticipated results of operations,
may cause the market price of the Company's Common Stock to fluctuate
significantly. Furthermore, the stock market has experienced extreme price
and volume fluctuations in recent years, which has had a substantial
effect on the market price for securities issued by many technology
companies, often for reasons unrelated to the operating performance of the
specific companies. These broad market fluctuations may materially
adversely affect the price of the Company's Common Stock. There can be no
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25
VOLATILITY OF STOCK PRICE (CONTINUED)
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future, including fluctuations
that are unrelated to the Company's performance.
LEVERAGE
The Acquisitions and related debt financings have significantly increased
the Company's debt service obligations. Although the Company's cash flow
from operations has been sufficient to meet its debt service obligations
in the past, there can be no assurance that the Company's operating
results will continue to be sufficient for the Company to meet such
obligations in the future.
FORWARD-LOOKING STATEMENTS
A number of the matters and subject areas discussed in this Form 10-Q that
are not historical or current facts deal with potential future
circumstances and developments. The discussion of such matters and subject
areas is qualified by the inherent risks and uncertainties surrounding
future expectations generally, and also may differ materially from the
Company's actual future experience involving any one or more of such
matters and subject areas. The Company has attempted to identify, in
context, certain of the factors that it currently believes may cause
actual future experience and results to differ from the Company's current
expectations regarding the relevant matter or subject area. The operations
and results of the Company's business also may be subject to the effect of
other risks and uncertainties in addition to the relevant qualifying
factors identified elsewhere in the foregoing "Factors That May Affect
Future Results" section, including, but not limited to other risks and
uncertainties described from time to time in the Company's reports filed
with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 of Notes to Consolidated Condensed Financial Statements above
for a description of certain litigation in which the Company is currently
involved.
Item 2. Changes in Securities
(a) An amendment to the Company's Restated Articles of Organization to
increase the number of authorized shares of Common Stock from 25,000,000 shares
to 50,000,000 shares was approved at the Annual Meeting of Stockholders on March
4, 1998. Articles of Amendment were filed with the Commonwealth of Massachusetts
on March 4, 1998.
(b) On May 18, 1998, the Company sold $200.0 million aggregate principal
amount of its 9-1/2% Senior Subordinated Notes due 2008 (the "Notes") to certain
purchasers. The purchasers subsequently resold the Notes to "qualified
institutional buyers" in reliance upon Rule 144A under the Securities Act of
1933, as amended (the "Securities Act"), and offshore purchasers pursuant to
Rule 904 of Regulation S under the Securities Act. The Notes were so resold at a
price equal to 99.66% of their principal amount. The Indenture under the which
the Notes were issued imposes certain limitations on the ability of the Company,
its subsidiaries and, in certain circumstances, the Guarantors, to, among other
things, incur indebtedness, pay dividends, prepay subordinated indebtedness,
repurchase capital stock, make investments, create liens, engage in transactions
with stockholders and affiliates, sell assets and engage in mergers and
consolidations.
(c)(i) Under the Company's Outside Directors' Compensation Plan of 1998
(the "Outside Directors' Plan"), non-employee directors
("Non-Employee Directors") of the Company receive payment of an
annual fee in the form of restricted Common Stock of the Company.
Non-Employee Directors may elect to defer receipt of any such
payment. On March 4, 1998, the Non-Employee Directors received an
aggregate of 1,290 shares of Common Stock pursuant to the Outside
Directors' Plan. Of such shares, receipt of 215 shares was deferred
in accordance with the Outside Directors' Plan. The aggregate value
of all such shares issued on March 4, 1998 to Non-Employee Directors
was $59,985 (based on a fair market value on that date of $46.50 per
share).
(ii) On March 20, 1998, and as a condition to his employment as a Senior
Vice President of the Company, Frederick G. McNamee, III, agreed to
purchase 40,000 shares of Common Stock of the Company pursuant to a
Stock Purchase Agreement dated as of March 20, 1998. The purchase
price of $37.00 per share was based on the fair market value of such
shares on March 20, 1998, the date of purchase.
(iii) Each of the shares of Common Stock of the Company referenced in this
Item 2, Subsection (c) was issued by the Company in reliance on the
exemption from registration provided by Section 4(2) of the
Securities Act for an offering to a small number of knowledgeable
investors.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of Hadco Corporation was held on
March 4, 1998.
(b) No information provided due to inapplicability of item.
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27
(c) A vote was proposed to (1) fix the number of directors at eight (8)
and to elect a Board of Directors to serve for the ensuing year or
until their respective successors are duly elected and qualified;
(2) approve Hadco Corporation Employee Stock Purchase Plan of
November 17, 1997; (3) approve the amendment of the Corporation's
Restated Articles of Organization to increase the authorized shares
of Common Stock from 25,000,000 to 50,000,000; (4) ratify the
selection of Arthur Andersen LLP as auditors for the fiscal year
ending October 31, 1998.
The voting results are as follows:
Votes Votes Votes Votes Broker
For Against Withheld Abstained Non-Votes
(1)Horace H. Irvine II 11,807,602 N/A 39,923 N/A N/A
Andrew E. Lietz 11,807,907 N/A 39,618 N/A N/A
Patrick Sweeney 11,807,907 N/A 39,168 N/A N/A
Oliver O. Ward 11,806,602 N/A 41,463 N/A N/A
Lawrence Coolidge 11,806,862 N/A 40,663 N/A N/A
John F. Smith 11,804,703 N/A 42,822 N/A N/A
John E. Pomeroy 11,808,162 N/A 39,363 N/A N/A
James C. Taylor 11,807,162 N/A 40,363 N/A N/A
(2)Hadco Corporation 11,399,844 419,016 N/A 28,665 N/A
Employee Stock
Purchase Plan of
November 17, 1997
(3)Amendment to
Restated Articles of 10,377,873 1,454,606 N/A 15,046 N/A
Organization
(4)Arthur Andersen LLP 11,809,925 26,761 N/A 10,839 N/A
Ratification
(d) No information provided due to inapplicability of item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10.1 Non-Qualified Stock Option Plan dated November 29, 1995,
as amended and restated April 7, 1998.
*10.2 Form of Option Agreement to Non-Qualified Stock Option
Plan dated November 29, 1995, as amended and restated
April 7, 1998.
*10.3 Stock Purchase Agreement dated as of March 20, 1998
between Registrant and Frederick G. McNamee, III.
*10.4 Employment Agreement dated as of February 17, 1998
between Registrant and Frederick G. McNamee, III.
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28
10.5 Second Amendment and Modification Agreement among
Registrant and a group of Banks dated as of May 11,
1998.
27.1 Financial Data Schedule for the Period Ended May 2, 1998
(*) Indicates a management contract or any compensatory plan, contract or
arrangement required to be filed as an exhibit.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated February 17, 1998, filed by the Company
on February 18, 1998, reported on (i) an announcement by the Company that
it had agreed to acquire Continental Circuits Corp. for $23.90 per share
and (ii) an announcement by the Company of its financial results for the
first quarter ended January 31, 1998.
A Current Report on Form 8-K dated February 20, 1998, filed by the Company
on February 20, 1998, reported on an announcement by the Company that it
had commenced a tender offer for all outstanding shares of Continental
Circuits Corp.
A Current Report on Form 8-K dated May 1, 1998, filed by the Company on
May 1, 1998, reported on an announcement by the Company that on (i) March
27, 1998 it had received a notice from legal counsel to the Lemelson
Medical, Education & Research Foundation Limited Partnership alleging that
the Company is infringing certain patents held by said Foundation and
offering to license said patents to the Company and (ii) January 12, 1998,
Hadco Santa Clara, Inc. received a notice of a lawsuit against it relating
to alleged injuries suffered as a result of alleged emissions of effluent
from allegedly toxic and hazardous substances.
A Current Report on Form 8-K dated March 20, 1998, filed by the Company on
March 26, 1998, and amended by a Current Report on Form 8-K/A, filed by
the Company on May 1, 1998, reported on an announcement by the Company
that on March 20, 1998 it had, through an acquisition subsidiary,
consummated the acquisition of all of the outstanding common stock of
Continental Circuits Corp.
The above Current Report on Form 8-K/A included the following financial
statements of an acquired business, Continental Circuits Corp.:
(i) Financial Statements of Business Acquired
Report of Independent Auditors (Ernst & Young LLP)
Consolidated Balance Sheets at July 31, 1996 and 1997 and
January 31, 1998 (unaudited)
Consolidated Statements of Income for the Years Ended July 31,
1995, 1996 and 1997 and for the Six Months Ended February 2,
1997 (unaudited) and January 31, 1998 (unaudited)
Consolidated Statements of Cash Flow for the Years Ended
July 31, 1995, 1996 and 1997 and for the Six Months Ended
February 2, 1997 (unaudited) and January 31, 1998 (unaudited)
Consolidated Statements of Shareholders' Equity for the Years Ended
July 31, 1995, 1996 and 1997 and for the Six Months Ended
January 31, 1998 (unaudited)
Notes to Consolidated Financial Statements
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(ii) Pro Forma Condensed Consolidated Financial Statements (unaudited)
Pro Forma Condensed Consolidated Balance Sheet as of
January 31, 1998
Pro Forma Condensed Consolidated Statement of Operations for the
Year Ended October 25, 1997
Pro Forma Consolidated Statement of Operations for the Three Months
Ended January 31, 1998
Note to Pro Forma Condensed Consolidated Financial Statements
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SIGNATURE
Pursuant to the requirements 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.
Hadco Corporation
Date: June 11, 1998 By: /s/
-----------------------------------
Timothy P. Losik
Senior Vice President and Chief
Financial Officer (principal financial
officer and principal accounting officer)
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Exhibit Index
Exhibits
*10.1 Non-Qualified Stock Option Plan dated November 29, 1995,
as amended and restated April 7, 1998.
*10.2 Form of Option Agreement to Non-Qualified Stock Option
Plan dated November 29, 1995, as amended and restated
April 7, 1998.
*10.3 Stock Purchase Agreement dated as of March 20, 1998
between Registrant and Frederick G. McNamee, III.
*10.4 Employment Agreement dated as of February 17, 1998
between Registrant and Frederick G. McNamee, III.
10.5 Second Amendment and Modification Agreement among
Registrant and a group of Banks dated as of May 11,
1998.
27.1 Financial Data Schedule for the Period Ended May 2, 1998
31