<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended AUGUST 1, 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 13,363,047 shares of Common Stock, $0.05 Par Value, outstanding
at October 13, 1998.
<PAGE> 2
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q/A of Hadco Corporation (Amendment No. 1 to
Quarterly Report on Form 10-Q for the quarter ended August 1, 1998) amends and
restates items 1 and 2 of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended August 1, 1998 (File No. 0-12102).
<PAGE> 3
HADCO CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
August 1, 1998 (unaudited) and October 25, 1997,
respectively ................................................... 3
Consolidated Condensed Statements of Operations
for the Three Months ended August 1, 1998 and
July 26, 1997 and nine months ended August 1, 1998
and July 26, 1997 (unaudited), respectively .................... 4
Consolidated Condensed Statements of Cash Flows
for the nine months ended August 1, 1998
and July 26, 1997 (unaudited), respectively .................... 5
Notes to Consolidated Condensed Financial
Statements ..................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 23
SIGNATURE ................................................................. 35
2
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HADCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS August 1,
- ------ 1998 October 25,
(unaudited) 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .................................. $ 4,933 $ 12,171
Short-term investments ..................................... -- 1,562
Accounts receivable, net of allowance for
doubtful accounts of $2,404 in 1998 and
$1,700 in 1997, respectively .............................. 104,357 92,222
Inventories ................................................ 65,862 46,000
Deferred tax asset ......................................... 15,456 10,483
Prepaid and other current expenses ......................... 16,068 4,245
-------- --------
Total Current Assets .................................. 206,676 166,683
Property, Plant and Equipment, net ......................... 323,084 231,490
Acquired Intangible Assets, net ............................ 194,442 101,131
Other Assets ............................................... 9,600 3,213
-------- --------
$733,802 $502,517
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
- ----------------------------------------
Current Liabilities:
Short-term debt and current portion of long-term debt ...... $ 4,484 $ 5,064
Accounts payable ........................................... 65,173 68,594
Accrued payroll and other employee benefits ................ 25,947 28,279
Accrued taxes .............................................. 1,619 1,775
Other accrued expenses ..................................... 18,240 9,278
-------- --------
Total Current Liabilities ............................. 115,463 112,990
-------- --------
Long Term Debt, net of current portion ......................... 366,898 109,716
-------- --------
Deferred Tax Liability ......................................... 51,668 30,685
-------- --------
Other Long-Term Liabilities .................................... 9,192 9,214
-------- --------
Commitments and Contingencies (Note 7)
Stockholders' investment:
Common stock, $.05 par value -
Authorized 50,000 shares in 1998 and 25,000
in 1997. Issued and outstanding 13,321 in
1998 and 13,086 in 1997 .................................... 667 655
Paid-in capital ................................................ 173,338 168,246
Deferred compensation .......................................... (59) (117)
Retained earnings .............................................. 16,635 71,128
-------- --------
Total Stockholders' Investment ........................ 190,581 239,912
-------- --------
$733,802 $502,517
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE> 5
HADCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited )
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
August 1, July 26, August 1, July 26,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales ...................................... $ 201,392 $ 183,274 $ 609,255 $ 475,472
Cost of Sales .................................. 182,812 144,020 514,877 371,378
----------- ----------- ----------- -----------
Gross Profit .............................. 18,580 39,254 94,378 104,094
Operating Expenses ............................. 21,324 17,902 60,635 47,143
Restructuring and other non-recurring
charges (Note 6) .......................... 1,105 -- 7,052 --
Write-off of acquired in-process
research and development................... -- -- 63,050 78,000
----------- ----------- ----------- -----------
Income (Loss) From Operations .................. (3,849) 21,352 (36,359) (21,049)
Interest and Other Income, net ................. 464 761 1,841 1,989
Interest Expense ............................... (8,035) (3,428) (14,329) (8,679)
----------- ----------- ----------- -----------
Income (Loss) Before
Provision for Income taxes ..................... (11,420) 18,685 (48,847) (27,739)
Provision (Benefit) for Income Taxes .......... (4,540) 7,316 5,646 20,104
----------- ----------- ----------- -----------
Net Income (Loss) .............................. $ (6,880) $ 11,369 $ (54,493) $ (47,843)
=========== =========== =========== ===========
Income (loss) per common and common
equivalent Shares (Note 1)
Basic Net Income (Loss) Per Share ......... $ (.52) $ .96 $ (4.14) $ (4.36)
=========== =========== =========== ===========
Diluted Net Income (Loss) Per Share ....... $ (.52) $ .93 $ (4.14) $ (4.36)
=========== =========== =========== ===========
Weighted average common and
common equivalent Shares
outstanding (Note 1)
Basic ..................................... 13,254,923 11,781,681 13,172,017 10,969,745
=========== =========== =========== ===========
Diluted ................................... 13,254,923 12,254,439 13,172,017 10,969,745
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE> 6
HADCO CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
August 1, July 26,
1998 1997
--------- ---------
<S> <C> <C>
Total Cash Provided by Operating Activities ................... $ 33,549 $ 26,915
--------- ---------
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 ............... (68,873) (47,810)
Acquisitions of Continental Circuits Corp. in 1998
and Zycon Corporation in 1997 .......................... (192,532) (209,661)
--------- ---------
Net Cash Used In Investing Activities ......................... (259,843) (248,070)
--------- ---------
Cash Flows From Financing Activities:
Principal payments of long-term debt ..................... (245,713) (149,044)
Net proceeds from issuance of long-term debt ............. 459,665 224,954
Proceeds from exercise of stock options .................. 770 1,178
Tax benefit from exercise of stock options ............... 1,742 5,041
Proceeds from the sale of common stock ................... 2,592 131,106
--------- ---------
Net Cash Provided by Financing Activities ..................... 219,056 213,235
--------- ---------
Net decrease in Cash and Cash Equivalents ..................... (7,238) (7,920)
Cash and Cash Equivalents Beginning of Period ................. 12,171 32,786
--------- ---------
Cash and Cash Equivalents End of Period ....................... $ 4,933 $ 24,866
========= =========
Supplemental disclosure of cash flow information:
Cash paid during period for:
Interest ................................................ $ 4,689 $ 7,065
========= =========
Income taxes (net of refunds) .......................... $ 11,636 $ 15,663
========= =========
Acquisitions of Continental Circuits Corp. in 1998 and
Zycon Corporation in 1997:
Fair value of assets acquired ............................ $ 137,623 $ 212,509
Liabilities assumed ...................................... (66,381) (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 ................................................. $ (55,740) $ (36,969)
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
<PAGE> 7
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 Reports on Form
10-Q for the fiscal quarters ended January 31, 1998 and May 2, 1998;
Quarterly Report on Form 10-Q/A for the fiscal quarter ended May 2,
1998; Current Reports on Form 8-K dated February 18, 1998, February
20, 1998, May 1, 1998 and May 14, 1998; Current Report on Form 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.
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 August
1, 1998, and the consolidated statements of operations for the three
months and nine months ended August 1, 1998 and July 26, 1997 and
statement of cash flows for the nine month periods ended August 1,
1998 and July 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.
6
<PAGE> 8
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
Basic and diluted shares outstanding are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
(in thousands, except per share data)
August 1, July 26, August 1, July 26,
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Basic weighted average shares outstanding .......... 13,255 11,782 13,172 10,970
Weighted average common equivalent shares .......... -- 472 -- --
------ ------ ------ ------
Diluted weighted average shares outstanding ........ 13,255 12,254 13,172 10,970
====== ====== ====== ======
</TABLE>
Diluted weighted average shares outstanding for the three month
period ended August 1, 1998 does not include 1,400,488 common
equivalent shares, as their effect would be anti-dilutive. There
were no anti-dilutive shares for the three month period ended July
26, 1997. Diluted weighted averages shares outstanding for the nine
month periods ended August 1, 1998 and July 26, 1997, respectively,
do not include 1,308,420 and 1,189,084 common equivalent shares as
their effect would be anti- dilutive.
2. ACQUISITIONS
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 Acquisition, 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 "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 acquisitions are included in the
accompanying consolidated condensed financial statements. In
accordance with APB Opinion No. 16, the Company allocated the
purchase price of the Acquisitions based on the fair value of the
assets acquired and liabilities assumed. Significant portions of the
purchase price of both were identified in independent appraisals,
using proven valuation procedures and techniques, as intangible
assets. 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 future alternative uses. This allocation
represents the estimated fair value based on risk-adjusted cash
flows related to the in-process R&D projects. At the date of each
acquisition, the development of these projects had not yet reached
technological feasibility, and the R&D in progress had no
alternative future uses. Accordingly, these costs were expensed as
of the respective acquisition date.
7
<PAGE> 9
ACQUISITIONS (CONTINUED)
Continental's in-process R&D value is comprised of 8 primary R&D
programs. These projects include the introduction of certain new
technologies. At the acquisition date, Continental's R&D programs
ranged in completion from 10% to 80%, and total continuing R&D
commitments to complete the projects are currently expected to be
significant. Remaining development efforts for the Continental
programs are complex and include the development and advancement of
advanced chemical, electrical, and engineering solutions.
Expenditures to complete the Continental projects are subject to
change, given the uncertainties of the development process, and no
assurance can be given that deviations from these estimates will not
occur. Additionally, these projects will require maintenance R&D
after they have reached a state of technological and commercial
feasibility. In addition to usage of the acquired companies'
internal cash flows, Hadco currently believes it will provide a
substantial amount of funding to complete each acquired company's
programs.
There is risk associated with the completion of the projects, and
there is no assurance that each will meet with either technological
or commercial success. The substantial delay or outright failure of
the Continental R&D would impact the Company's financial condition.
The value assigned to purchased in-process technology was determined
by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net
cash flows to their present value. The revenue projection used to
value the in-process research and development is based on estimates
of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product
introductions by the Company and its competitors.
The rates utilized to discount the net cash flows to their present
value are based on the cost of Continental's weighted average cost
of capital. This discount rate is commensurate with Continental's
corporate maturity and the uncertainties in the economic estimates
described above.
The forecasts used by the Company in valuing in-process R&D were
based upon assumptions the Company believes to be reasonable but
which are inherently uncertain and unpredictable. The Company's
assumptions may be incomplete or inaccurate, and unanticipated
events and circumstances are likely to occur. For these reasons,
actual results may vary from the projected results.
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.
8
<PAGE> 10
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
The aggregate purchase prices of $212,485,000 and $190,032,000,
including acquisition costs, for the Zycon and Continental
Acquisitions, respectively, were allocated as follows:
Zycon Continental
--------- -----------
(in thousands)
Current assets......................... $ 41,790 $ 24,056
Property, plant and equipment.......... 95,193 67,144
Acquired intangibles................... 65,500 46,190
In-process R&D......................... 78,000 63,050
Other assets........................... 3,526 233
Goodwill............................... 40,869 55,740
Liabilities............................ (112,393) (66,381)
--------- --------
$ 212,485 $190,032
========= ========
Unaudited pro forma operating results for the Company, assuming the
acquisitions of Zycon and Continental occurred on October 27, 1996,
are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ -----------------------
(in thousands, except per share data)
August 1, July 26, August 1, July 26,
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Sales ......................... $201,392 $215,479 $661,206 $630,112
Net Income ........................ (6,880) 10,580 1,139 26,856
Basic Net Income (Loss) Per Share . $ (.52) $ .90 $ .09 $ 2.45
Diluted Net Income (Loss) Per Share $ (.52) $ .86 $ .08 $ 2.34
</TABLE>
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):
August 1, October 25,
1998 1997
--------- -----------
Raw Materials........................... $27,861 $16,728
Work-in-process......................... 38,001 29,272
------- -------
$65,862 $46,000
======= =======
9
<PAGE> 11
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4. LINES OF CREDIT
The Company's $400 million Credit Facility is pursuant to an Amended
and Restated Revolving Credit Agreement, as amended. The Credit
Facility provides for direct borrowings or letters of credit for
up to $400 million and expires January 8, 2002. Borrowings under the
Credit Facility bear interest, at the Company's option, at either:
(i) the Eurodollar Rate plus the Applicable Eurodollar Rate Margin
(both as defined in the Credit Facility) ranging between .5% and
1.1375%, based on certain financial ratios of the Company, or (ii)
the Base Rate (as defined in the Credit Facility). 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 Credit Facility. At August 1, 1998,
borrowings of $160,000,000 were outstanding under the Credit
Facility at a weighted average interest rate of 6.75%.
The Credit Facility 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 Credit Facility
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 Credit Facility. The Company
received waivers of defaults with respect to certain of its loan
covenants for the four quarter period ended August 1, 1998. For
information with respect to certain "Subsequent Events", see Note 9
to Consolidated Condensed Financial Statements.
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 August 1, 1998, there were no
amounts outstanding under this arrangement.
10
<PAGE> 12
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5. LONG TERM DEBT
August 1, 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 due quarterly ......................... $ 755 $ 820
Revolving credit agreement (Note 4) ....... 160,000 100,000
9 1/2 Senior Subordinated Notes
due 2008, net of discount ................. 199,337 --
Obligations under capital leases .......... 11,290 13,960
-------- --------
371,382 114,780
Less - Current portion .................. 4,484 5,064
-------- --------
$366,898 $109,716
======== ========
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.
11
<PAGE> 13
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
6. 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)." Non-recurring costs
include costs associated with the abandonment of assets at one of
the facilities. On July 31, 1998, the Company announced a limited
restructuring of its workforce, which reduced the Company's
workforce by approximately 3%. This restructuring was in addition to
the consolidation of the East Coast Tech Center Facilities. The cost
of this limited restructuring is comprised of severance and related
benefits for the terminated employees. As of August 1, 1998 the
Company has recorded a liability for both restructurings totaling
$2.5 million, which relates to severance and other payroll related
costs, as well as lease termination costs. The components of the
restructuring and other non-recurring costs during the nine months
ended August 1, 1998 are as follows:
<TABLE>
<CAPTION>
East Coast
Facility Company-wide
Consolidation Restructuring Total
------------- ------------- ------
(Amount in thousands)
<S> <C> <C> <C>
Loss on abandonment of assets ........................... $1,965 $ -- $1,965
Severance benefits and associated legal costs ........... 129 1,105 1,234
Lease termination loss .................................. 1,336 -- 1,336
------ ------ ------
Total Restructuring Charges ............................. 3,430 1,105 4,535
Other Non-recurring Charges ............................. 2,517 -- 2,517
------ ------ ------
Total Restructuring and Other Charges ................... $5,947 $1,105 $7,052
====== ====== ======
</TABLE>
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 ."
7. 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
12
<PAGE> 14
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
LEGAL PROCEEDINGS AND CLAIMS (CONTINUED)
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 a Florida lawsuit pending in the Circuit Court
for Broward County, Florida (the "Florida Lawsuit"), 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.
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.
13
<PAGE> 15
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
LEGAL PROCEEDINGS AND CLAIMS (CONTINUED)
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. 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.
14
<PAGE> 16
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
8. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
As of August 1, 1998
----------------------------------------------------------------------------
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
------------ ------------- ----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ..................... $ 1,499 $ 1,939 $ 1,495 $ -- $ 4,933
Accounts receivable, net ...................... 49,848 6,424 48,085 -- 104,357
Inventories ................................... 23,280 6,824 35,758 -- 65,862
Deferred tax asset ............................ 3,473 -- 11,983 -- 15,456
Prepaid and other current assets .............. 9,301 265 6,502 -- 16,068
--------- ------- -------- --------- --------
Total current assets ....................... 87,401 15,452 103,823 -- 206,676
Property, Plant and Equipment, net ................ 139,415 49,956 133,713 -- 323,084
Intercompany Receivable ........................... -- 118 105,246 (105,364) --
Investments in Subsidiaries ....................... 19,438 -- 268,231 (287,669) --
Acquired Intangible Assets, net ................... 194,442 -- -- -- 194,442
Other Assets ...................................... 2,205 243 7,152 -- 9,600
--------- ------- -------- --------- --------
$ 442,901 $65,769 $618,165 $(393,033) $733,802
========= ======= ======== ========= ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt ............. $ 3,590 $ 92 $ 802 $ -- $ 4,484
Accounts payable .............................. 28,610 5,699 30,864 -- 65,173
Intercompany payable .......................... 66,154 39,210 -- (105,364) --
Accrued payroll and other employee
benefits ...................................... 3,319 151 22,477 -- 25,947
Accrued taxes ................................. 14,317 119 (12,817) -- 1,619
Other accrued expenses ........................ 2,473 132 15,635 -- 18,240
--------- ------- -------- --------- --------
Total current liabilities .................. 118,463 45,403 56,961 (105,364) 115,463
Long Term Debt, net of current portion ............ 6,036 315 360,547 -- 366,898
Deferred Tax Liability ............................ 50,785 -- 883 -- 51,668
Other Long Term Liabilities ....................... -- -- 9,192 -- 9,192
Stockholders' Investment:
Common stock, $0.05 par value;
Authorized - 50,000 shares
Issued and outstanding - 13,321
in 1998 .................................... 11 29,654 667 (29,665) 667
Paid-in capital ............................... 400,616 -- 173,338 (400,616) 173,338
Deferred compensation ......................... -- -- (59) -- (59)
Retained earnings ............................. (133,010) (9,603) 16,636 142,612 16,635
--------- ------- -------- --------- --------
Total stockholders' investment ............. 267,617 20,051 190,582 (287,669) 190,581
--------- ------- -------- --------- --------
$ 442,901 $65,769 $618,165 $(393,033) $733,802
========= ======= ======== ========= ========
</TABLE>
15
<PAGE> 17
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(Continued)
CONDENSED CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
As of October 25, 1997
----------------------------------------------------------------------------
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
------------ ------------- ----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ................. $ (1,603) $ 2,249 $ 11,525 $ -- $ 12,171
Short-term investments .................... -- -- 1,562 -- 1,562
Accounts receivable, net .................. 145 56 92,021 -- 92,222
Inventories ............................... 11,229 5,116 29,655 -- 46,000
Deferred tax asset ........................ -- -- 10,483 -- 10,483
Prepaid and other current assets .......... 2,271 113 1,861 -- 4,245
-------- ------- -------- --------- --------
Total current assets ................... 12,042 7,534 147,107 -- 166,683
Property, Plant and Equipment, net ............ 67,525 33,462 130,503 -- 231,490
Intercompany Receivable ....................... 12,184 -- 863 (13,047) --
Investments in Subsidiaries ................... 23,435 -- 142,560 (165,995) --
Acquired Intangible Assets, net ............... 101,131 -- -- -- 101,131
Other Assets .................................. 619 1,852 742 -- 3,213
-------- ------- -------- --------- --------
$216,936 42,848 421,775 (179,042) 502,517
======== ======= ======== ========= ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt ......... $ 4,215 $ 104 $ 745 $ -- $ 5,064
Accounts payable .......................... 21,608 4,745 42,241 -- 68,594
Intercompany payable ...................... -- 13,047 -- (13,047) --
Accrued payroll and other employee
benefits ............................... 5,693 225 22,361 -- 28,279
Accrued taxes ............................. 3,880 269 (2,374) -- 1,775
Other accrued expenses .................... 1,514 56 7,708 -- 9,278
-------- ------- -------- --------- --------
Total current liabilities .............. 36,910 18,446 70,681 (13,047) 112,990
Long Term Debt, net of current portion ........ 8,278 353 101,085 -- 109,716
Deferred Tax Liability ........................ 29,802 -- 883 -- 30,685
Other Long Term Liabilities ................... -- -- 9,214 -- 9,214
Stockholders' Investment:
Common stock, $0.05 par value;
Authorized - 25,000 shares
Issued and outstanding - 13,086
in 1997 ................................ 11 29,654 655 (29,665) 655
Paid-in capital ........................... 212,474 -- 168,246 (212,474) 168,246
Deferred compensation ..................... -- -- (117) -- (117)
Retained earnings ......................... (70,539) (5,605) 71,128 76,144 71,128
-------- ------- -------- --------- --------
Total stockholders' investment ......... 141,946 24,049 239,912 (165,995) 239,912
-------- ------- -------- --------- --------
$216,936 $42,848 $421,775 $(179,042) $502,517
======== ======= ======== ========= ========
</TABLE>
16
<PAGE> 18
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ending August 1, 1998
----------------------------------------------------------------------------
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
------------ ------------- ----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net Sales ...................................... $94,699 $ 7,995 $98,698 $ -- $201,392
Cost of Sales .................................. 91,814 9,623 81,375 -- 182,812
------- ------- ------- ------ --------
Gross Profit ............................... 2,885 (1,628) 17,323 -- 18,580
Operating Expenses ............................. 5,329 850 15,145 -- 21,324
Restructuring and Other Non-Recurring
Charges .................................... -- -- 1,105 -- 1,105
------- ------- ------- ------ --------
Income (Loss) From Operations .............. (2,444) (2,478) 1,073 -- (3,849)
Interest and Other Income ...................... (338) 1,049 (1,397) 1,150 464
Interest Expense ............................... (251) (8) (7,776) -- (8,035)
------- ------- ------- ------ --------
Income (Loss) Before Provision for
Income Taxes ............................... (3,033) (1,437) (8,100) 1,150 (11,420)
Provision for Income Taxes ..................... 302 161 (5,164) 161 (4,540)
Equity in income (loss) of subsidiary .......... (2,748) -- (4,933) 7,681 --
------- ------- ------- ------ --------
Net Income (Loss) .......................... $(6,083) $(1,598) $(7,869) $8,670 $ (6,880)
======= ======= ======= ====== ========
<CAPTION>
For the Nine Months Ending August 1, 1998
----------------------------------------------------------------------------
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
------------ ------------- ----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net Sales ...................................... $239,537 $25,273 $344,445 $ -- $609,255
Cost of Sales .................................. 214,572 25,735 274,570 -- 514,877
-------- ------- -------- ------- --------
Gross Profit ............................... 24,965 (462) 69,875 -- 94,378
Operating Expenses ............................. 12,773 2,686 45,176 -- 60,635
Restructuring and Other Non-Recurring
Charges .................................... -- -- 7,052 -- 7,052
Write-off of Acquired In-Process Research
and Development ............................ 63,050 -- -- -- 63,050
-------- ------- -------- ------- --------
Income (Loss) From Operations .............. (50,858) (3,148) 17,647 -- (36,359)
Interest and Other Income ...................... 483 1,661 (2,155) 1,852 1,841
Interest Expense ............................... (642) (398) (13,289) -- (14,329)
-------- ------- -------- ------- --------
Income (Loss) Before Provision for
Income Taxes ............................... (51,017) (1,885) 2,203 1,852 (48,847)
Provision for Income Taxes ..................... 7,457 260 (2,331) 260 5,646
Equity in income (loss) of subsidiary .......... (3,997) -- (60,619) 64,616 --
-------- ------- -------- ------- --------
Net Income (Loss) .......................... $(62,471) $(2,145) $(56,085) $66,208 $(54,493)
======== ======= ======== ======= ========
</TABLE>
17
<PAGE> 19
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ending July 26, 1997
----------------------------------------------------------------------------
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
------------ ------------- ----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net Sales ..................................... $64,505 $10,171 $108,598 $ -- $183,274
Cost of Sales ................................. 52,794 5,960 85,266 -- 144,020
------- ------- -------- ------- --------
Gross Profit .............................. 11,711 4,211 23,332 -- 39,254
Operating Expenses ............................ 3,895 3,029 10,978 -- 17,902
------- ------- -------- ------- --------
Income (Loss) From Operations ............. 7,816 1,182 12,354 -- 21,352
Interest and Other Income ..................... -- -- (781) 1,542 761
Interest Expense .............................. (560) (176) (2,692) -- (3,428)
------- ------- -------- ------- --------
Income (Loss) Before Provision for
Income Taxes .............................. 7,256 1,006 8,881 1,542 18,685
Provision for Income Taxes .................... 3,572 216 3,312 216 7,316
Equity in income (loss) of subsidiary ......... (752) -- 4,474 (3,722) --
------- ------- -------- ------- --------
Net Income (Loss) ......................... $ 2,932 $ 790 $ 10,043 $(2,396) $ 11,369
======= ======= ======== ======= ========
<CAPTION>
For the Nine Months Ending July 26, 1997
----------------------------------------------------------------------------
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
------------ ------------- ----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net Sales ...................................... $142,678 $15,991 $316,803 $ -- $475,472
Cost of Sales .................................. 117,592 11,770 242,016 -- 371,378
-------- ------- -------- ------- --------
Gross Profit ............................... 25,086 4,221 74,787 -- 104,094
Operating Expenses ............................. 9,314 4,282 33,547 -- 47,143
Write-off of Acquired In-Process Research
and Development ............................ 78,000 -- -- -- 78,000
-------- ------- -------- ------- --------
Income (Loss) From Operations .............. (62,228) (61) 41,240 -- (21,049)
Interest and Other Income ...................... 5 -- 49 1,935 1,989
Interest Expense ............................... (1,585) (360) (6,734) -- (8,679)
-------- ------- -------- ------- --------
Income (Loss) Before Provision for
Income Taxes ............................... (63,808) (421) 34,555 1,935 (27,739)
Provision for Income Taxes ..................... 7,079 271 12,483 271 20,104
Equity in income (loss) of subsidiary .......... (2,627) -- (71,579) 74,206 --
-------- ------- -------- ------- --------
Net Income (Loss) .......................... $(73,514) $ (692) $(49,507) $75,870 $(47,843)
======== ======= ======== ======= ========
</TABLE>
18
<PAGE> 20
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ending August 1, 1998
----------------------------------------------------------------------------
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
------------ ------------- ----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities ................................ $(17,329) $ (7,383) $ 56,669 $ 1,592 $ 33,549
-------- -------- --------- ------- ---------
Cash Flows from Investing Activities:
Purchase of short-term investments ........ -- -- (2,020) -- (2,020)
Maturities of short-term investments ...... -- -- 3,582 -- 3,582
FSC dividend .............................. -- (1,852) 1,852 -- --
Purchase of property, plant and
equipment ................................. (17,637) (18,940) (32,296) -- (68,873)
Investments in subsidiaries ............... 727 1,852 (987) (1,592) --
Acquisition of Continental Circuits ....... -- -- (192,532) -- (192,532)
-------- -------- --------- ------- ---------
Net cash used in investing
activities ............................ (16,910) (18,940) (222,401) (1,592) (259,843)
-------- -------- --------- ------- ---------
Cash Flows from Financing Activities:
Principal payments of long-term debt ...... (38,302) (51) (207,360) -- (245,713)
Net proceeds from issuance of
long-term debt ............................ -- -- 459,665 -- 459,665
Proceeds from exercise of stock
options ................................... -- -- 770 -- 770
Tax benefit from exercise of options ...... -- -- 1,742 -- 1,742
Proceeds from the sale of common
stock ..................................... -- -- 2,592 -- 2,592
Intercompany payable ...................... 75,643 26,064 (101,707) -- --
-------- -------- --------- ------- ---------
Net cash (used in) provided by
financing activities .................. 37,341 26,013 155,702 -- 219,056
-------- -------- --------- ------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents .......................... 3,102 (310) (10,030) -- (7,238)
Cash and Cash Equivalents, Beginning
of Period ................................. (1,603) 2,249 11,525 -- 12,171
-------- -------- --------- ------- ---------
Cash and Cash Equivalents, End of Period ...... $ 1,499 $ 1,939 $ 1,495 $ -- $ 4,933
======== ======== ========= ======= =========
</TABLE>
19
<PAGE> 21
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ending July 26, 1997
----------------------------------------------------------------------------
Guarantor Non-Guarantor Parent Elimination Consolidated
Subsidiaries Subsidiaries Corporation Entries Total
------------ ------------- ----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities ................................ $ 35,218 $ 6,550 $ (16,517) $ 1,664 $ 26,915
-------- ------- --------- ------- ---------
Cash Flows from Investing Activities:
Maturities of short-term investments ...... -- -- 9,401 -- 9,401
FSC dividend .............................. -- (1,935) 1,935 -- --
Purchase of property, plant and equipment . (15,158) (758) (31,894) -- (47,810)
Investments in subsidiaries ............... 17,047 -- (15,383) (1,664) --
Acquisition of Zycon Corporation .......... -- -- (209,661) -- (209,661)
-------- ------- --------- ------- ---------
Net cash used in investing activities .. 1,889 (2,693) (245,602) (1,664) (248,070)
-------- ------- --------- ------- ---------
Cash Flows from Financing Activities:
Principal payments of long-term debt ...... (37,739) (105) (111,200) -- (149,044)
Proceeds from issuance of long-term debt .. 2,378 (2,378) 224,954 -- 224,954
Proceeds from exercise of stock options ... -- -- 1,178 -- 1,178
Tax benefit from exercise of options ...... -- -- 5,041 -- 5,041
Proceeds from the sale of common stock .... (1,115) -- 132,221 -- 131,106
Intercompany payable ...................... (1,115) -- 1,115 -- --
-------- ------- --------- ------- ---------
Net cash (used in) provided by
financing activities ................... (37,591) (2,483) 253,309 -- 213,235
-------- ------- --------- ------- ---------
Net Increase (Decrease) in Cash and
Cash Equivalents .......................... (484) 1,374 (8,810) -- (7,920)
Cash and Cash Equivalents, Beginning of
Period .................................... -- 104 32,682 -- 32,786
-------- ------- --------- ------- ---------
Cash and Cash Equivalents, End of Period ...... $ (484) $ 1,478 $ 23,872 $ -- $ 24,866
======== ======= ========= ======= =========
</TABLE>
20
<PAGE> 22
HADCO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(CONTINUED)
Basis of presentation. In connection with the acquisition of Continental
Circuits Corp., which was financed with approximately $184 million of
borrowings from the Credit Facility, the Company on May 18, 1998 sold
$200,000,000 aggregate principal amount of 9 1/2 % Senior Subordinated Notes
due in 2008 (the Notes). The Notes are fully and unconditionally guaranteed
on a senior subordinated basis, jointly and severally, by certain of the
Company's direct wholly-owned domestic subsidiaries (the Guarantors). The
Guarantors are Hadco Santa Clara, Inc., Hadco Phoenix, Inc., CCIR of Texas
Corp., and CCIR of California Corp. The condensed consolidating financial
statements of the Guarantors are presented above and should be read in
connection with the Consolidated Financial Statements of the Company.
Separate financial statements of the Guarantors are not presented because
(i) the Guarantors are wholly-owned and have fully and unconditionally
guaranteed the Notes on a joint and several basis and (ii) the Company's
management has determined such separate financial statements are not
material to investors and believes the condensed consolidating financial
statements presented are more meaningful in understanding the financial
position of the Guarantors.
There are no significant restrictions on the ability of the Guarantors to
make distributions to the Company.
9. SUBSEQUENT EVENT
On September 15, 1998 the Company amended its Credit Facility with the Third
Amendment and Modification Agreement dated as of September 14, 1998. This
most recent amendment to the Credit Facility, among other things, amended
and added certain covenants, changed the available borrowing capacity under
the Credit Facility from $400 million to the lesser of $300 million and the
Borrowing Base and granted the banks a first priority mortgage and security
interest in substantially all of the assets of each of the Company and the
subsidiaries which are guarantors of the Credit Facility. The Borrowing Base
is an amount, determined monthly (or more frequently in certain
circumstances) by the Agent (as defined in the Credit Facility), equal to
the sum of specified percentages of Eligible Accounts Receivable (domestic
and foreign), domestic Eligible Inventory, Eligible Fixed Assets and a
percentage, determined in the Agent's sole discretion, of Eligible Foreign
Inventory, less certain Reserves (all as defined in the Credit Facility).
Under this most recent amendment to the Credit Facility the Company is also
required to pay a quarterly usage fee based on an Applicable Base Rate
Usage Fee Margin and an Applicable Eurodollar Rate Usage Fee Margin (both as
defined in the Credit Facility). The Credit Facility expires and all
outstanding loans thereunder mature on January 8, 2002.
The Credit Facility contains customary representations and warranties. The
Credit Facility also contains extensive affirmative and negative covenants,
including, among others, certain limits on the ability of the Company and
its subsidiaries to incur indebtedness, create liens, make investments, pay
dividends or other distributions, engage in mergers, consolidations,
acquisitions or dispositions, enter into sale and leaseback transactions,
enter into guarantees, prepay subordinated indebtedness, make capital
expenditures or create any new series of capital stock or amend the terms of
existing capital stock. The Credit Facility also requires the Company to
maintain certain financial covenants, including maximum ratio of
Consolidated Funded Debt to EBITDA, minimum interest coverage, minimum
consolidated net worth and minimum fixed charge coverage. Certain financial
covenants have been modified and others added under this most recent
amendment to the Credit Facility, including an additional covenant with
respect to a minimum ratio of
21
<PAGE> 23
SUBSEQUENT EVENT (CONTINUED)
EBITDA to Consolidated Total Interest Expense, which covenant terminates at
the end of the Company's fiscal first quarter 1999, and a covenant limiting
the amount of Capital Expenditures the Company and its subsidiaries may
make, which covenant terminates at the end of the Company's fiscal fourth
quarter 1999. The Credit Facility also contains customary events of default.
The Company was in default as of the four quarter period ended August 1,
1998 with respect to two of its financial covenants, which defaults have
been waived by the Company's banks. See Note 4 to Consolidated Condensed
Financial Statements.
22
<PAGE> 24
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
THIRD QUARTER
Net sales for the third quarter of 1998 increased 9.9% over the same period
in 1997. The increase resulted from several factors including the
acquisition of Continental on March 20, 1998, which added $30.3 million to
printed circuit and design net sales in the quarter, and an increase in
backplane assembly net sales. Backplane assembly net sales increased 107.0 %
due to higher product volume and shipments. Printed circuit net sales
decreased due to lower production volume and shipments, and a 11.0% decrease
in average pricing for the third quarter of 1998 over the same period in
fiscal 1997. 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 17.2% of
net sales from 9.1% in the third quarter of 1997. The net sales increase for
the third quarter of 1998 over the same period in 1997 was partially offset
by the effects of a general slowdown in the broad electronics industry, the
economic situation in Asia, inventory backlogs in the end user market,
customer inventory adjustments and customer product transitions.
The gross profit margin decreased to 9.2% in the third quarter of 1998 from
21.4% in the comparable period in fiscal 1997. Lower pricing on printed
circuits caused gross margins to decrease by 9.3%. Lower capacity
utilization from printed circuit operations caused margins to decrease by
4.3%. The effect of lower overall gross margins from Hadco Santa Clara
(formerly Zycon) and Hadco Phoenix (formerly Continental) operations caused
margins to decrease by 2.0%. All of these decreases were partially offset by
lower unit costs through improved production efficiencies resulting in an
overall decrease in the gross margin of 12.2%. For additional information
regarding the factors affecting gross margin please see "Factors That May
Affect Future Results -- Risks Relating to Fluctuations in Quarterly
Operating Results," "Factors That May Affect Future Results -- Dependence
on Electronics Industry" and "Factors That May Affect Future Results --
Risks Relating to the Acquisitions and the Company's Acquisition Strategy."
Operating expenses, as a percent of net sales, increased to 10.6% in the
third quarter of 1998 from 9.8% in the comparable period in fiscal 1997 due
to increased goodwill and purchased intangibles amortization expenses from
the acquisition of Continental.
On July 31, 1998, the Company completed a limited restructuring of its
workforce, which reduced the Company's workforce by approximately 3%. This
restructuring was in addition to the consolidation of the East Coast Tech
Center Facilities. The cost of this limited restructuring is comprised of
severance and related benefits for the terminated employees. Income from
operations for the third quarter of 1998 was reduced by approximately $1.1
million related to this limited restructuring. Additionally, the general
economic slowdown in the broad electronics industry, the economic situation
in Asia, inventory backlogs in the end user market, customer inventory
adjustments and customer product transitions negatively affected net income
for third quarter of 1998.
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THIRD QUARTER (CONTINUED)
Interest income decreased in the third quarter of 1998 as compared to the
third quarter of 1997 due to lower average cash balances available for
investing. Interest expense increased in the third quarter of 1998 as
compared to the third quarter of 1997, due to higher average outstanding
debt balances for the third quarter of 1998 compared to the third quarter of
1997 as a result of the Continental Acquisition.
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 nine months ended August 1, 1998 increased 28.1% over net
sales for the nine months ended July 26, 1997. The increase resulted from
several factors including the acquisitions of Zycon and Continental, which
added $91.5 million to printed circuit net sales in the nine month period,
and an increase in backplane assembly 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 9.5% for the first nine months of fiscal 1998 over the
same period in fiscal 1997. Net sales from backplane assemblies increased to
15.2% of net sales from 10.7% in the first nine months of fiscal 1997. The
net sales increase for the nine months ended August 1, 1998 over the same
period in 1997 was partially offset by the effects of a general slowdown in
the broad electronics industry, the economic situation in Asia, inventory
backlogs in the end user market, customer inventory adjustments and customer
product transitions.
The gross profit margin decreased to 15.5% in the nine months ended
August 1, 1998 from 21.9% in the comparable period in fiscal 1997. Lower
pricing on printed circuits caused margins to decrease by 6.9%. Lower
capacity utilization from printed circuit operations caused margins to
decrease by 2.1%. The effect of lower overall gross margins from Hadco Santa
Clara (formerly Zycon) and Hadco Phoenix (formerly Continental) operations
caused margins to decrease by 1.8%. All of these decreases were partially
offset by lower unit costs achieved through improved production efficiencies
resulting in an overall decrease in the gross margin of 6.4%. For additional
information regarding the factors affecting gross margin please see "Factors
That May Affect Future Results -- Risks Relating to Fluctuations in
Quarterly Operating Results," "Factors That May Affect Future Results --
Dependence on Electronics Industry" and "Factors That May Affect Future
Results -- Risks Relating to the Acquisitions and the Company's Acquisition
Strategy." Operating expenses, as a percent of net sales, increased to 10.0%
in the nine months ended August 1, 1998 from 9.9% in the comparable period
in fiscal 1997, due to goodwill and purchased intangibles amortization.
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<PAGE> 26
YEAR TO DATE (CONTINUED)
Income from operations for the nine months ended August 1, 1998 and July 26,
1997, was reduced by $63 million and $78 million, respectively, 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 nine months ended August 1, 1998
was reduced by approximately $7.1 million for restructuring and other
non-recurring charges related to the consolidation of the Company's East
Coast Tech Center operations and limited restructuring of the Company's
workforce. The limited restructuring reduced the Company's workforce by
approximately 3%. 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."
See Note 6 of the Consolidated Condensed Financial Statements. Additionally,
the general economic slowdown in the broad electronics industry, the
economic situation in Asia, inventory backlogs in the end user market,
customer inventory adjustments and customer product transitions negatively
affected net income for the nine months ended August 1, 1998.
Interest income decreased in the nine months ended August 1, 1998 as
compared to the nine months ended July 26, 1997, due to lower daily average
cash balances available for investing. Interest expense increased in the
nine months ended August 1, 1998 as compared to the nine months ended July
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 August 1, 1998, the Company had working capital of approximately $91.2
million and a current ratio of 1.79, 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 August 1, 1998 were
approximately $4.9 million, a decrease of $8.8 million from approximately
$13.7 million at October 25, 1997.
In December 1997, the Company entered into a $400 million unsecured senior
revolving credit loan facility with a group of banks, which amended and
restated an existing credit facility (the "Credit Facility"). Interest on
loans outstanding under the Credit Facility is, at the Company's option,
payable at either (1) the Base Rate (as defined in the Credit Facility), or
(2) the Eurodollar Rate, plus the Applicable Eurodollar Rate Margin (both as
defined in the Credit Facility). As of August 1, 1998, the weighted average
interest rate on loans outstanding under the Credit Facility was 6.75%. At
August 1, 1998, $160 million was outstanding under the Credit Facility. The
Credit Facility matures in January 2002. The Company was in default as of
the four quarter period ended August 1, 1998 with respect to two of its
financial covenants, which defaults have been waived by the Company's banks.
On September 15, 1998, the Company amended its Credit Facility. The most
recent amendment to the Credit Facility, among other things, amended and
added certain covenants, changed the available borrowing capacity under the
Credit Facility from $400 million to the lesser of $300 million and the
Borrowing Base (as defined in the Credit Facility)
25
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
and granted the banks a first priority mortgage and security interest in
substantially all of the assets of each of the Company and the subsidiaries
which are guarantors of the Credit Facility. Under the most recent amendment
to the Credit Facility, the Company is also required to pay a quarterly
usage fee based on an Applicable Base Rate Usage Fee Margin and an
Applicable Eurodollar Rate Usage Fee Margin. See Notes 4 and 9 to
Consolidated Financial Statements.
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 calendar year 1999. 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 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.
YEAR 2000 COMPLIANCE
The Company has undertaken an internal assessment of its operations, from
information and financial systems to each aspect of its manufacturing
processes, in order to determine the extent to which the Company may be
adversely affected by Year 2000 issues. This internal assessment is
approximately 75% complete at present and the Company expects to finish the
assessment process by its 1998 fiscal year end. To date, limited testing of
systems has been performed. The Company may conduct further testing and/or
an external audit following the conclusion of its internal assessment. To
date approximately 1,500 hours of employee time has been devoted to Year
2000 issues, and approximately $1.2 million has been expended in systems
upgrades directly relating to Year 2000 issues. Present estimates for
further expenditures of both employee time and expenses to address Year 2000
issues are between 5,500 and 8,000 hours and between $1.0 million and $3.0
million, respectively.
The Company has also undertaken a survey of its suppliers' Year 2000
compliance status and, to date, has received responses from approximately
half of those surveyed, a majority of whom have certified they are
compliant. Further, the Company has conferred with significant customers to
assure that various systems used for data and information exchanges between
them will be compatible following December 31, 1999.
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<PAGE> 28
YEAR 2000 COMPLIANCE (CONTINUED)
Based on its assessments to date, the Company believes it will not
experience any material disruption as a result of Year 2000 issues in
internal manufacturing processes, information processing or interface with
key customers, or with processing orders and billing. However, if certain
critical third party providers, such as those supplying electricity, water
or telephone service, experience difficulties resulting in disruption of
service to the Company, a shutdown of the Company's operations at individual
facilities could occur for the duration of the disruption. At present, the
Company has not developed contingency plans but intends to determine whether
to develop any such plan early in fiscal year 1999. There can be no
assurance that Year 2000 issues will not have a material adverse effect on
the Company's business, results of operation and financial condition.
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<PAGE> 29
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 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.
RISKS RELATING TO 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.
RISKS RELATING TO VARIABILITY OF ORDERS FROM CUSTOMERS; BACKLOG
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
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<PAGE> 30
RISKS RELATING TO VARIABILITY OF ORDERS FROM CUSTOMERS; BACKLOG (CONTINUED)
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.
RISKS RELATING TO THE ACQUISITIONS AND THE COMPANY'S ACQUISITION STRATEGY
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.
RISKS OF INABILITY TO MANAGE SIGNIFICANT 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
29
<PAGE> 31
RISK OF INABILITY TO MANAGE SIGNIFICANT GROWTH (CONTINUED)
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 material 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.
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.
RISKS RELATING TO OPERATION OF 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
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RISKS RELATING TO OPERATION OF MALAYSIA FACILITY AND ASIAN ECONOMIC TURMOIL
(CONTINUED)
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.
RAPID TECHNOLOGICAL CHANGE, CONTINUING PROCESS DEVELOPMENT AND POTENTIAL
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
31
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CUSTOMER CONCENTRATION (CONTINUED)
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. 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.
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RISKS OF INABILITY TO OBTAIN RAW MATERIALS AND COMPONENTS
Although the Company does not have guaranteed sources of raw materials and
components utilized in its operations, it does have supply agreements with a
limited number of key suppliers, and it routinely purchases raw materials
and components from several 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 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. Most of the executive
officers of the Company are bound by employment or non-compete agreements.
The non-compete restrictions expire one year or, under certain
circumstances, up to two years after the termination of the executive
officer's employment with the Company. Certain other key employees of the
Company also 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.
INVESTMENTS IN INTELLECTUAL PROPERTY; INTELLECTUAL PROPERTY PROTECTION
The Company's success depends in part on its proprietary techniques and
manufacturing expertise, particularly in the area of complex multilayer
printed circuits. As of August 1, 1998, the Company had capitalized
approximately $194 million of acquired intangible assets, consisting
primarily of developed technology, customer relationships and goodwill.
These intangible assets are being amortized over lives ranging from 12 to 30
years. The Company assesses the realizability and valuation of intangible
assets based on the estimated cash flows to be generated by such assets.
Based on its most recent analyses, the Company believes that no material
impairment of intangible assets exists as of August 1, 1998. Impairment
occurs when actual cash flows generated do not equal or exceed estimated
cash flows. However, the estimated cash flows are based on assumptions the
Company believes to be reasonable, but which are inherently uncertain and
unpredictable. The Company's assumptions may be incomplete or inaccurate,
and no assurance can be given that unanticipated events and circumstances
will not occur. Accordingly, actual cash flows may vary from the projected
cash flows. In such event, the Company may be required to write-off or
write-down the value of assets which are impaired. Any such write-off or
write-down may result in a material adverse effect on the financial
condition and results of operations of the Company. See Note 2 of Notes to
Consolidated Condensed Financial Statements.
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.
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INVESTMENTS IN INTELLECTUAL PROPERTY; INTELLECTUAL PROPERTY PROTECTION
(CONTINUED)
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.
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. The Company's ability to comply with the terms of the Indenture
and the Credit Facility, to make cash payments with respect to the Notes and
under the Credit Facility and to satisfy its other debt obligations or to
refinance any of such obligations will depend on the future performance of
the Company, which in turn is subject to prevailing economic conditions and
financial and other factors beyond its control. See Notes 4 and 9 to
Consolidated Condensed Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
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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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: October 13, 1998 By: /s/ Timothy P. Losik
---------------------------------
Timothy P. Losik
Senior Vice President and Chief
Financial Officer (principal
financial officer and principal
accounting officer)
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