<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JULY 26, 1997
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 04-393279
- ------------- ---------
(State or other jurisdiction (I.R.S. Employer
of incorporation organization) Identification No.)
12A MANOR PARKWAY, SALEM, NEW HAMPSHIRE 03079
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
TELEPHONE (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 13,086,062 shares of Common Stock, $0.05 Par Value, outstanding
at August 29, 1997.
<PAGE> 2
HADCO CORPORATION AND SUBSIDIARIES
INDEX
PART I PAGE
Financial Information:
Consolidated Condensed Balance Sheets as of
July 26, 1997 and October 26, 1996 ....................................... 3
Consolidated Condensed Statements of Operations for the Quarters
ended July 26, 1997 and July 27, 1996 and nine months ended July
26, 1997 and July 27, 1996, respectively ................................. 4
Consolidated Condensed Statements of Cash Flows for the nine
months ended July 26, 1997 and July 27, 1996, respectively ............... 5
Notes to Consolidated Condensed Financial Statements ..................... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................................... 14
PART II
Other Information ........................................................ 25
Signatures ............................................................... 26
2
<PAGE> 3
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
ASSETS
------
July 26, October 26,
1997 1996
-------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................. $ 24,866 $ 32,786
Short-term investments .................................... -- 9,401
Accounts receivable, net of allowance for
doubtful accounts of $1,700 in 1997 and
$1,100 in 1996, respectively ............................. 96,830 40,622
Inventories ............................................... 35,014 21,786
Deferred tax asset ........................................ 8,583 7,483
Prepaid and other expenses ................................ 4,566 1,483
-------- --------
Total Current Assets ................................. 169,859 113,561
Property, Plant and Equipment, net ........................ 220,593 103,735
Deferred Tax Asset ........................................ -- 2,117
Acquired Intangible Assets, net ........................... 105,352 --
Other Assets .............................................. 4,688 88
-------- --------
$500,492 $219,501
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
----------------------------------------
Current Liabilities:
Short-term debt, current portion of long-term
debt and capital lease obligations ....................... $ 5,290 $ 1,907
Accounts payable .......................................... 64,029 42,265
Accrued payroll and other employee benefits ............... 29,414 17,592
Other accrued expenses .................................... 6,747 8,236
-------- --------
Total Current Liabilities ............................ 105,480 70,000
-------- --------
Long-Term Debt and Capital Lease Obligations,
net of current portion ...................................... 125,995 1,515
-------- --------
Deferred Tax Liability ........................................ 31,385 --
-------- --------
Other Long-Term Liabilities ................................... 9,214 9,145
-------- --------
Commitments and Contingencies (Note 7)
Stockholders' investment:
Common stock, $.05 par value -
Authorized 25,000 shares
Issued and outstanding 13,082 in
1997 and 10,382 in 1996 ................................... 655 521
Paid-in capital ............................................... 168,129 30,939
Deferred compensation ......................................... (146) (240)
Retained earnings ............................................. 59,780 107,621
-------- --------
Total Stockholders' Investment ....................... 228,418 138,841
-------- --------
$500,492 $219,501
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE> 4
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
------------------------ ------------------------
July 26, July 27, July 26, July 27,
1997 1996 1997 1996
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Sales ................................. $183,274 $88,225 $475,472 $252,799
Cost of Sales ............................. 144,020 65,806 371,378 186,967
-------- ------- -------- --------
Gross Profit ......................... 39,254 22,419 104,094 65,832
Operating Expenses ........................ 17,902 9,509 47,143 28,690
Write off of acquired in-process
research and development .................. -- -- 78,000 --
-------- ------- -------- --------
Income (Loss) from Operations ............. 21,352 12,910 (21,049) 37,142
Interest and Other Income, net ............ 761 276 1,989 959
Interest Expense .......................... (3,428) (82) (8,679) (270)
-------- ------- -------- --------
Income (Loss) Before Provision
for Income Taxes .......................... 18,685 13,104 (27,739) 37,831
Provision for Income Taxes ................ 7,316 5,110 20,104 14,752
-------- ------- -------- --------
Net Income (Loss) .................... $ 11,369 $ 7,994 $(47,843) $ 23,079
======== ======= ======== ========
Net Income (Loss)
Per Share ................................. $ .93 $ .72 $ (4.36) $ 2.08
======== ======= ======== ========
Weighted Average Shares Outstanding ....... 12,254,439 11,100,474 10,969,745 11,111,441
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE> 5
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
July 26, July 27,
1997 1996
--------- --------
<S> <C> <C>
Total Cash Provided From Operating Activities ..................... $ 26,915 $ 34,012
--------- --------
Cash Flows from Investing Activities
Purchases of short-term investments .......................... -- (4,632)
Maturities of short-term investments ......................... 9,401 14,167
Purchases of property, plant and equipment ................... (47,810) (42,066)
Proceeds from sale of property, plant and equipment .......... -- 255
Acquisition of Zycon Corporation, net of cash
acquired of $2,824 ......................................... (209,661) --
--------- --------
Net Cash Used In Investing Activities ............................. (248,070) (32,276)
--------- --------
Cash Flows From Financing Activities:
Principal payments under capital lease obligations ........... (1,194) (1,722)
Principal payments of long-term debt ......................... (147,850) (69)
Proceeds from issuance of long-term debt ..................... 224,954 --
Proceeds from exercise of stock options ...................... 1,178 1,685
Proceeds from issuance of common stock ....................... 131,106 --
Tax benefit from exercise of options ......................... 5,041 3,989
--------- --------
Net Cash Provided by Financing Activities ......................... 213,235 3,883
--------- --------
Net increase (decrease) in Cash and Cash Equivalents .............. (7,920) 5,619
Cash and Cash Equivalents Beginning of Period ..................... 32,786 21,307
--------- --------
Cash and Cash Equivalents End of Period ........................... $ 24,866 $ 26,926
========= ========
Supplemental Disclosure of Cash Flow Information:
Cash Paid during Period for:
Interest ................................................ $ 7,605 $ 207
========= ========
Income taxes (net of refunds) .......................... $ 15,663 $ 8,312
========= ========
Acquisition of Zycon Corporation
Fair value of assets acquired ................................ $ 212,509 --
Liabilities assumed .......................................... (114,993) --
Cash paid .................................................... (204,885) --
Acquisition costs incurred ................................... (7,600) --
Write-off of acquired in-process research and development .... 78,000 --
--------- --------
Goodwill ..................................................... $ (36,969) --
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
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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") principal products are complex
multilayer rigid printed circuits and backplane assemblies. The
consolidated 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 as filed with the Securities and Exchange
Commission ("SEC") on January 9, 1997, as amended by the Annual Report on
Form 10-K/A as filed with the SEC on May 12, 1997; Form S-3 filed with
the SEC on February 19, 1997, as amended to date; and Form 8-K as filed
with the SEC on January 24, 1997, as amended by Form 8-K/A as filed with
the SEC on February 14, 1997 and May 12, 1997. These financial statements
should be read in conjunction with the financial statements included in
the 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 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 balance sheet as of July 26, 1997, and the
consolidated statements of operations and cash flows for the three and
nine-month periods ended July 27, 1996, and July 26, 1997 are unaudited
but, in the opinion of management, include all adjustments (consisting of
normal, recurring adjustments) necessary for a fair presentation of
results for these interim periods. The results of operations for the
three and nine months ended July 26, 1997 are not necessarily indicative
of results to be expected for the entire fiscal year.
NET INCOME (LOSS) PER SHARE
---------------------------
Net income per share was computed based on the weighted average number of
common and common equivalent shares outstanding during each period.
Common equivalent shares include outstanding stock options and are
included when dilutive. Fully diluted net income (loss) per share has not
been separately presented as it would not be materially different from
net income (loss) per share as presented.
6
<PAGE> 7
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
1. NET INCOME (LOSS) PER SHARE (CONTINUED)
--------------------------------------
On March 31, 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings per Share". SFAS No. 128 establishes standards for
computing and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. SFAS No. 128 is
effective for fiscal years ending after December 15, 1997, and early
adoption is not permitted. When adopted by the Company, SFAS No. 128 will
require restatement of prior year's earnings per share. The Company
believes that the adoption of SFAS No. 128 will not have a material
effect on its financial statements.
2. ACQUISITION OF ZYCON
--------------------
On January 10, 1997, the Company acquired substantially all of the
outstanding common stock of Zycon Corporation ("Zycon"). The acquisition
was financed by a new bank credit facility of up to $250,000,000, of
which the Company borrowed approximately $215,000,000, upon consummation
of the acquisition (see Note 5). The acquisition has been accounted for
as a purchase in accordance with APB Opinion No. 16, and accordingly,
Zycon's operating results from January 10, 1997 are included in the
accompanying consolidated financial statements.
In accordance with APB Opinion No. 16, the Company has allocated the
purchase price based on the fair value of assets acquired and liabilities
assumed. A significant portion of the purchase price, as described below,
has been identified in an independent appraisal as intangible assets
using proven valuation procedures and techniques, including approximately
$78,000,000 of in-process research and development ("in-process R&D").
Acquired intangibles include developed technology, customer
relationships, assembled workforce and trade names/trademarks. These
intangibles are being amortized over their estimated useful lives of 12
to 30 years.
The portion of the purchase price allocated to the in-process R&D
projects that did not have a future alternative use totaled $78,000,000
and was charged to expense as of the acquisition date. Due to a
difference in the bases of certain assets for financial statement and
income tax purposes, deferred income taxes of $28,000,000 have been
provided as part of the purchase price allocation in accordance with SFAS
No. 109.
The aggregate purchase price of $212,485,000, including acquisition
costs, was allocated as follows:
<TABLE>
(in thousands)
--------------
<S> <C>
Current Assets...................................... $ 41,790
Property, plant and equipment....................... 95,193
Acquired intangibles................................ 72,000
In-process R&D...................................... 78,000
Other assets........................................ 3,526
Goodwill............................................ 36,969
Liabilities assumed................................. (114,993)
---------
$ 212,485
=========
</TABLE>
7
<PAGE> 8
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
2. ACQUISITION OF ZYCON (CONTINUED)
-------------------------------
Unaudited pro forma operating results for the Company, assuming the
acquisition of Zycon occurred on October 29, 1995 are as follows:
<TABLE>
<CAPTION>
(in thousands, except per share data)
QUARTERS ENDED NINE MONTHS ENDED
----------------------- -----------------------
July 26, July 27, July 26, July 27,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $183,274 $136,627 $536,483 $409,690
Net Income 11,369 5,996 29,218 21,590
Net Income Per Share $ .93 $ .54 $ 2.55 $ 1.94
</TABLE>
For purposes of these pro forma operating results, the in-process R&D was
assumed to have been written off prior to October 29, 1995, 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):
<TABLE>
<CAPTION>
July 26, October 26,
1997 1996
------- ----------
<S> <C> <C>
Raw Material .............................. $14,098 $ 8,008
Work-In-Process ........................... 20,916 13,778
------- -------
$35,014 $21,786
======= =======
</TABLE>
4. INTANGIBLE ASSETS
-----------------
The Company assesses 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. Intangible assets are
amortized on a straight-line basis, based on their estimated lives, as
follows:
<TABLE>
<CAPTION>
Estimated July 26,
Life 1997
--------- -------
(in thousands)
<S> <C> <C>
Developed technology....................... 12 Years $30,000
Customer relations......................... 25 Years 19,000
Assembled workforce........................ 12 Years 10,000
Trade names/trademarks..................... 30 Years 6,500
Goodwill................................... 20 Years 43,469
--------
$108,969
Less - Accumulated amortization............ (3,617)
--------
$105,352
========
</TABLE>
8
<PAGE> 9
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
5. LINES OF CREDIT
---------------
In connection with the Zycon acquisition discussed in Note 2, the Company
entered into a $250,000,000 unsecured Revolving Credit Agreement (the
"Agreement") with a bank. The Agreement provides for direct borrowings or
letters of credit and expires January 8, 2002. Borrowings under the
Agreement bear interest, at the Company's option, at either; (i) the
Eurodollar rate plus a margin ranging between .5% and 1.125%, based on a
certain financial ratio of the Company, or (ii) the Base Rate, as
defined. The Company is required to pay a quarterly commitment fee
ranging from .2% to .375%, based on a certain financial ratio of the
Company, of the unused commitment under the Agreement. If the Company
obtains certain debt financing, as defined, the bank may require the
Company to repay up to $150,000,000 of amounts outstanding under the
Agreement. At July 26, 1997, borrowings of $115,000,000 were outstanding
under the agreement at a weighted average interest rate of 6.70%.
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 minimum levels of
consolidated net worth, a maximum ratio of funded debt to EBITDA, maximum
capital expenditures and interest coverage, as defined, during the term
of the Agreement. At July 26, 1997, 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 approximately $4.0 million for the purpose of acquiring
land, facilities and equipment for the Company's Malaysian subsidiary.
The arrangement is renewable annually. At July 26, 1997, there were no
borrowings outstanding under this arrangement.
9
<PAGE> 10
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
6. LONG-TERM DEBT
--------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
July 26, October 26,
1997 1996
-------- ----------
(in thousands)
<S> <C> <C>
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 due quarterly ................................................. $ 864 $ 916
Revolving credit agreement (Note 5) ............................... 115,000 --
Loan agreements in connection with the purchase of
manufacturing equipment. The loans bear interest at 7.1%
to 11.3%, are payable in monthly installments of
principal and interest through June, 2001, and are
collateralized by machinery and equipment ......................... 14,108 --
Obligations under capital leases .................................. 1,313 2,506
-------- ------
$131,285 $3,422
Less - Current portion ............................................ 5,290 1,907
-------- ------
$125,995 $1,515
======== ======
</TABLE>
7. ENVIRONMENTAL MATTERS
---------------------
During March 1995, the Company received a Record of Decision ("ROD") from
the New York State Department of Environmental Conservation ("NYSDEC"),
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 interactive soil flushing.
The Company recently 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 requested that
the Company consider taking additional samples from a wetland area near
the Company's Owego facility. Analytical reports of earlier sediment
samples indicated the
10
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HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
7. ENVIRONMENTAL MATTERS (CONTINUED)
--------------------------------
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"). On June 9,1992, the
Company entered into a Cooperating Parties Agreement in which it and
Gould, Inc., another prior lessee of the site, have agreed to fund
certain assessment and feasibility study activities at the site, and an
environmental consultant has been retained to perform such activities.
The cost of such activities is not expected to be material to the
Company. In addition to the Cooperating Parties Agreement, Hadco and
others are participating in alternative dispute resolution regarding the
site with an independent mediator. In connection with the mediation, in
February 1997 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 have been suspended during the
ongoing assessment and feasibility activities. 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. Also see
the seventh paragraph of this Environmental Matters note relating to the
Company's having been named as a third-party defendant in the Florida
Lawsuit.
The Company has commenced the operation of a groundwater extraction
system at its Derry, New Hampshire facility to address certain
groundwater contamination and migration control issues. 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.
Included in operating expenses are charges for actual expenditures and
accruals, based on estimates, for environmental matters. During fiscal
1996 and for the nine months ended July 26, 1997, the Company made, and
charged to operating expenses, actual payments of approximately $680,000
and $241,000, respectively, for environmental matters. In 1996, the
Company also accrued and charged to operating expenses approximately
$1,825,000 as a cost estimate for environmental matters.
11
<PAGE> 12
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
7. ENVIRONMENTAL MATTERS (CONTINUED)
--------------------------------
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 effect of changing
laws and regulations. The total reserve for environmental matters
currently identified by the Company amounted to $10.0 million at October
26, 1996 and $10.6 at July 26, 1997. The current portion of these costs
as of October 26, 1996 and July 26, 1997, amounted to approximately
$900,000 and $1,400,000, respectively, and is included in "Other accrued
expenses". The long-term portion of these costs amounted to approximately
$9.1 million and $9.2 million as of October 26, 1996 and July 26, 1997,
respectively, and is reported under the caption "Other Long-Term
Liabilities". Based on its assessment at the current time, management
estimates the cost of ultimate disposition of the above known
environmental matters to range from approximately $7.0 million to $12.0
million, and is expected to be spread over a number of years. Management
believes the ultimate disposition of the above known environmental
matters will not have a material adverse effect on 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 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 remedy the Auburn Road site. In December 1996, following
publication and comment period, the U.S. Environmental Protection Agency
("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 (as described in the second
paragraph of this Environmental Matters note), pending in the Circuit
Court of Broward County, Florida, Hadco and Gould, Inc., another prior
lessee of the site of the printed circuit manufacturing facility in
Florida, was each 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.
12
<PAGE> 13
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
7. ENVIRONMENTAL MATTERS (CONTINUED)
--------------------------------
In March 1993, the EPA notified the former 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 the former Zycon 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, the former Zycon'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 the former Zycon
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 the former Zycon'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 which had been executed
among the EPA and 49 entities (including the former Zycon) 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 future costs in connection with the lawsuits described in the above
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. Management currently believes, based on
the facts currently known to it, that it is probable that the ultimate
dispositions of the above lawsuits will not have a material adverse
effect on the Company's business and financial condition; however, there
can be no assurance that this will be the case.
8. ISSUANCE OF COMMON STOCK
------------------------
On June 5, 1997, the Company sold 2,300,000 shares of its common stock in
an underwritten public offering. Net proceeds to the Company were
$131,106,000, which were used to pay off $110,000,000 of the revolving
line of credit.
13
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----------------------------------
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. 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," "intends," "future," "could," 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
- ---------------------
THIRD QUARTER
- -------------
Net sales for the third quarter ended July 26, 1997 increased 107.7% the same
period in 1996. The increase resulted from several factors including the
acquisition of Zycon, which added $73.6 million to printed circuit net sales in
the quarter, and an increase in non-Zycon printed circuit net sales. Backplane
assembly net sales decreased by 1.1%. Printed circuit net sales increased due to
higher production volume and shipments and a shift toward products with more
layers and greater densities. In addition, average pricing for printed circuits
increased 0.8% for the third quarter of 1997 over the same period in 1996. Net
sales from backplane assemblies decreased to 9% of net sales (excluding the
former Zycon printed circuit net sales) from 19% in the third quarter 1996.
The gross profit margin decreased to 21.4 % in the third quarter ended July 26,
1997 from 25.4% in the third quarter of fiscal 1996. The decrease resulted
primarily from lower overall gross margins from the former Zycon operations,
including ongoing start-up expenses associated with the volume production
facility in Malaysia.
Operating expenses, as a percent of net sales, decreased to 9.8% in the third
quarter of 1997 as compared to 10.8% in the third quarter of 1996 due to
increased net sales and the fixed nature of the Company's operating expenses.
The decrease was offset by goodwill and purchased intangibles amortization of
$1,730,000.
Interest income increased in the third quarter of 1997 as compared to the third
quarter of 1996 due to higher average cash balances available for investing.
Interest expense was significantly higher in the third quarter of 1997 as
compared to the third quarter of 1996, due to an increase in outstanding debt as
a result of the Zycon acquisition.
The Company includes in operating expense 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 expense 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. See
Note 7 of Notes to the Company's Consolidated Condensed Financial Statements.
14
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----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
THIRD QUARTER (CONTINUED)
- -------------------------
The Company believes that excess capacity may exist in the printed circuit and
electronic assembly industries, as well as fluctuating growth rates in the
electronics industry as a whole. Both factors could have a material adverse
effect on future orders and pricing. Despite these beliefs regarding the
electronics industry as a whole, it should be noted that the Company has
historically needed to increase its own manufacturing capacity to maintain and
expand its market position. However, 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 such 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 would be sufficient to protect the
Company against any shortages of materials.
YEAR TO DATE
- ------------
Net sales for the nine months ended July 26, 1997 increased 88.1% over net sales
for the nine months ended July 27, 1996. The increase resulted from several
factors including the acquisition of Zycon, which added $155.0 million to
printed circuit net sales after January 10, 1997, and an increase in both
backplane assembly and non-Zycon printed circuit net sales. Backplane assembly
net sales increased due to higher product volume and shipments. Printed circuit
net sales increased due to higher production volume and shipments and a shift
toward products with more layers and greater densities. In addition, average
pricing for printed circuits increased 0.5% for the first nine months of fiscal
1997 over the same period in fiscal 1996. Net sales from backplane assemblies
increased to 15.2% of total net sales, excluding the former Zycon operations,
from 14.7% in the first nine months of fiscal 1996.
The gross profit margin decreased to 21.9% in the nine months ended July 26,
1997 from 26.0% in the comparable period in fiscal 1996. The decrease resulted
primarily from lower overall gross margins from the former Zycon operations,
including ongoing start-up expenses associated with the volume production
facility in Malaysia.
Operating expenses, as a percent of net sales, decreased to 9.9% in the nine
months ended July 26, 1997 from 11.3% in the comparable period of fiscal 1996,
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 of $3,617,000.
Income from operations for the nine months ended July 26, 1997 was reduced by
$78 million due to a non-recurring write-off relating to acquired in-process
research and development recorded in connection with the Zycon acquisition. 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 $1.6 million per fiscal quarter.
15
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HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
--------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
YEAR-TO-DATE (CONTINUED)
- ------------------------
Excluding the non-recurring write-off of $78 million for acquired in-process
research and development, operating margins decreased to 12.0% for the nine
months ended July 26, 1997 from 14.7% in the comparable period in fiscal 1996,
primarily as a result of the same factors affecting gross profit margins, and of
goodwill amortization from the Zycon acquisition.
Interest income decreased in the nine months ended July 26, 1997 as compared to
the nine months ended July 27, 1996, due to lower daily average cash balances
available for investing. Interest expense was significantly higher in the nine
months ended July 26, 1997 as compared to the nine months ended July 27, 1996,
due to an increase in outstanding debt as a result of the Zycon acquisition.
INCOME TAXES
- ------------
In accordance with generally accepted accounting principles, the Company
provides for income taxes on an interim basis, using its expected effective
annual income tax rate. Although the Company has incurred a loss before income
taxes during the nine months ended July 26, 1997, the Company has recorded an
income tax provision because the write-off of acquired in-process research and
development is not deductible for income tax purposes. Without taking into
consideration the write-off of acquired in-process research and development, the
Company anticipates an effective annual income tax rate for fiscal 1997 of 40%,
which is approximately equal to the combined federal and state statutory rates.
The effective rate was increased by amortization of goodwill and acquired
intangibles which is not tax deductible, which 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 1997 is based on current tax laws.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At July 26, 1997, the Company had working capital of approximately $64.4 million
and a current ratio of 1.61, compared to working capital of approximately $43.6
million and a current ratio of 1.62 as of October 26, 1996. Cash, cash
equivalents and short-term investments at July 26, 1997 were approximately $24.9
million, a decrease of $17.3 million from approximately $42.2 million at October
26, 1996.
In January 1997, the Company obtained a senior revolving credit loan facility
for up to $250 million from BankBoston, N.A. (the "Credit Facility") (i)
primarily to finance the purchase of the shares of Common Stock of Zycon
pursuant to the tender offer completed by the Company on January 10, 1997, (ii)
to refinance Zycon's existing bank credit agreements, and (iii) for working
capital and other general corporate purposes. Interest on loans outstanding
under the Credit Facility is, at the Company's election, payable at either (1)
the higher of the lender's base rate or a floating rate equal to 1.5% over the
prevailing U.S. federal funds rate, or (2) a Eurodollar Rate, which is a fixed
rate equal to an applicable Eurodollar rate margin plus the prevailing
Eurodollar rate for interest periods of one, two, three or six
16
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HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
--------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
months. At July 26, 1997, $115 million was outstanding under the Credit
Facility. The Credit Facility will terminate in five years.
On June 5, 1997, the Company sold 2,300,000 shares of its common stock in an
underwritten public offering. Net proceeds to the Company were $131,106,000,
which were used to pay off $110,000,000 of the revolving line of credit.
The Company believes its existing working capital and borrowing capacity,
coupled with the funds generated from the Company's operations, and any sales of
securities, will be sufficient to fund its anticipated working capital, capital
expenditure and debt payment requirements through fiscal 1997. 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.
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 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
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 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.
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HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF 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. 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, level
of product and price competition, product mix, the number of working days in a
particular quarter, 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 would maintain or improve gross margins or the Company's business,
financial condition and results of operations. 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.
An interruption in manufacturing resulting from shortages of parts or equipment,
fire, earthquake or other natural disaster, equipment failure or otherwise would
have a material adverse effect on the Company's business, financial condition
and results of operations. 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.
Results of operations in any period are not necessarily indicative of the
results to be expected for any future period. Due to all of the foregoing
factors, it is possible that in some future quarter the Company's operating
results may be below the expectations of public market analysts and investors.
Such an event could have a material adverse effect on the price of the Company's
securities.
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 change, 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.
18
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HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
--------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
ACQUISITIONS
- ------------
The Company acquired 100% of the capital stock of Zycon, a manufacturer of
electronic interconnect products, on January 10, 1997 (the "Zycon acquisition").
The former Zycon currently operates as a wholly-owned subsidiary of the Company.
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 business profitably during the next year or in
the future. Contemporaneous with the Zycon acquisition, nine senior management
personnel of Zycon were terminated. There can be no assurance that the Company
will not be materially adversely affected by such terminations or that the
Company will be able to retain key personnel at the former Zycon. Accordingly,
operating expenses associated with the acquired business may have a material
adverse effect on the Company's business, financial condition and results of
operations in the future.
The Company may from time to time pursue the acquisition of other companies,
assets, products or technologies. The Company may incur additional indebtedness
in connection with a future business acquisition, and the incurrence of
substantial amounts of debt in connection with future acquisitions could
increase the risk of the Company's operations. If the Company's cash flow and
existing working capital are not sufficient to fund its general working capital
requirements or to service its indebtedness, the Company would have to raise
additional funds through the sale of its equity securities, the refinancing of
all or part of its indebtedness or the sale of assets or subsidiaries. There can
be no assurance that any of these sources of funds would be available in amounts
sufficient for the Company to meet its obligations. The cost of debt financing
may also impair the ability of the Company to maintain adequate working capital
or to make future acquisitions. In addition, the issuance of additional shares
of Common Stock in connection with future acquisitions could be dilutive to
existing investors. 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. 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.
COMPETITION
- -----------
The electronic interconnect industry is highly fragmented and characterized by
intense competition. The Company believes that 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
19
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HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL
--------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
COMPETITION (CONTINUED)
- -----------------------
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. 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 would
potentially introduce new competition into the industry. There can be no
assurance 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.
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 could in the future 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. There can be no assurance that failures or
disruptions will not occur in the future. 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 earthquake, fire or flood, could have material
adverse effect on the Company's business, financial condition, and results of
operations.
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HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATION
----------------------------------
MALAYSIA FACILITY
- -----------------
Zycon recently completed construction of a volume manufacturing facility for
printed circuits in Malaysia. Hadco's management has no experience in operating
foreign manufacturing facilities, and there can be no assurance that the Company
will be able to operate the new facility on a profitable basis. The Company
expects that the Malaysia facility will incur operating losses during one or
more future quarters of operations as a result of various factors, including,
without limitation, initial operating inefficiencies, other start-up costs, and
price competition for the products which the Company intends to produce at the
new facility. Losses incurred in its Malaysia operations will not be deductible
for United States income tax purposes. 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.
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 1994, 1995 and 1996, the Company's ten largest
customers accounted for approximately 48%, 46% and 48% of net sales,
respectively, and 43% in fiscal 1996 on a pro forma basis including Zycon. In
fiscal 1996, Sun Microsystems accounted for approximately 10% of the net sales
of the Company (including Zycon). 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 ninety 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 manage such additional
facilities. In addition, 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 or to successfully integrate and
21
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HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATION
----------------------------------
MANUFACTURING CAPACITY (CONTINUED)
- ----------------------------------
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. The Company has a large
manufacturing facility in Santa Clara, California, and an earthquake or other
natural disaster in that area that results in an interruption of manufacturing
at such facility would have a material adverse effect on the Company's business,
financial condition and results of operations.
MANAGEMENT OF GROWTH
- --------------------
The Company has initiated significant expansion, including geographic expansion,
of its operations, which has placed, and will continue to place, significant
demands on the Company's management, operational, technical and financial
resources. These demands are compounded by the Zycon acquisition. 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, if any, could have a material adverse effect on the Company's
business, financial condition and results of operation. 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.
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
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----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATION
----------------------------------
ENVIRONMENTAL MATTERS (CONTINUED)
- ---------------------------------
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
- --------------------------------------------
While 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. The former Zycon has experienced shortages of certain types of raw
materials in the past. The potential exists for shortages of certain types of
raw materials or components and any such future shortages or price fluctuations
in raw materials could have a material adverse effect on the Company's
manufacturing operations and future unit costs, thereby materially adversely
affecting the Company's business, financial condition and results of operations.
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 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, none of whom, except for the
President/Chief Executive Officer, is bound by an employment agreement or a
non-competition agreement. The President/Chief Executive Officer's
non-competition agreement is for one year after the termination of his
employment with the Company. 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
23
<PAGE> 24
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATION
----------------------------------
DEPENDENCE ON KEY PERSONNEL (CONTINUED)
- ---------------------------------------
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
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.
24
<PAGE> 25
HADCO CORPORATION AND SUBSIDIARIES
----------------------------------
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
A report on Form 8-K dated January 10, 1997, filed by the Company on January 24,
1997 and amended and filed with the SEC on February 14, 1997 and May 12, 1997,
included the following financial statements:
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
-----------------------------------------
Report of Independent Public Accountants (Arthur Andersen LLP)
Independent Auditors' Report (KPMG Peat Marwick LLP)
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995, and 1994
Notes to Consolidated Financial Statements
(b) PRO FORMA FINANCIAL INFORMATION
-------------------------------
1. Pro Forma Combined Condensed Balance Sheet as of October 26, 1996
2. Pro Forma Combined Condensed Statement of Income for the Year Ended
October 26, 1996
3. Notes to Pro Forma Combined Condensed Financial Statements
25
<PAGE> 26
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
HADCO CORPORATION
Date: 9/3/97 By: /s/ Timothy P. Losik
-------------------------------
Timothy P. Losik
Chief Financial Officer,
Vice President
26
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