-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cco5S9FHkMwFA6xpbGR4fkiGJr9AYp7a7rwB+V9N72uXR/EAfnuOKCeCBHv9KNCQ QpRxhjm7SNU/OfAlBxITaw== 0000950135-98-001565.txt : 19980317 0000950135-98-001565.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950135-98-001565 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980316 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HADCO CORP CENTRAL INDEX KEY: 0000729533 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 042393279 STATE OF INCORPORATION: MA FISCAL YEAR END: 1030 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12102 FILM NUMBER: 98565919 BUSINESS ADDRESS: STREET 1: 12A MANOR PKWY CITY: SALEM STATE: NH ZIP: 03079 BUSINESS PHONE: 6038988000 MAIL ADDRESS: STREET 1: 12A MONOR PARKWAY CITY: SALEM STATE: NH ZIP: 03079 10-Q 1 HADCO CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JANUARY 31, 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 organization) Identification No.) 12A MANOR PARKWAY, SALEM, NEW HAMPSHIRE 03079 - --------------------------------------- ----- (Address of principal executive offices) (Zip Code) TELEPHONE (603) 898 8000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports). and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Registrant has 13,134,192 shares of Common Stock, $0.05 Par Value, outstanding at March 11, 1998. 2 HADCO CORPORATION AND SUBSIDIARIES INDEX PART I PAGE Financial Information: Consolidated Condensed Balance Sheets as of JANUARY 31, 1998 and OCTOBER 25, 1997, respectively ...... 3 Consolidated Condensed Statements of Operations for the Quarter ended JANUARY 31, 1998 and JANUARY 25, 1997 respectively............................. 4 Consolidated Condensed Statements of Cash Flows for the three months ended JANUARY 31, 1998 and JANUARY 25, 1997 respectively......................... 5 Notes to Consolidated Condensed Financial Statements................................................ 6 Management's Discussion and Analysis of Results of Operations and Financial Condition...................... 16 PART II Other Information.......................................... 19 Signatures................................................. 20 2 3 HADCO CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited) (In thousands)
ASSETS ------ January 31, October 25, 1998 1997 ----------- ----------- Current Assets: Cash and cash equivalents .................... $ 9,813 $ 12,171 Short-term investments ....................... 1,582 1,562 Accounts receivable, net of allowance for doubtful accounts of $1,750 in 1998 and $1,700 in 1997, respectively ................. 99,912 92,222 Inventories .................................. 54,016 46,000 Deferred tax asset ........................... 10,982 10,483 Prepaid and other expenses ................... 4,232 4,245 -------- -------- Total current assets ........................ 180,537 166,683 Property, Plant and Equipment, net ............. 239,819 231,490 Acquired Intangible Assets, net ................ 97,870 101,131 Other Assets ................................... 7,601 3,213 -------- -------- $525,827 $502,517 ======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT Current Liabilities: Short-term debt, current portion of long-term debt and capital lease obligations .......... $ 4,793 $ 5,064 Accounts payable ............................ 69,382 68,594 Accrued payroll and other employee benefits . 22,733 28,279 Accrued taxes ............................... 8,669 1,775 Other accrued expenses ...................... 8,443 9,278 --------- --------- Total current liabilities ........... 114,020 112,990 --------- --------- Long-Term Debt and Capital Lease Obligations, net of current portion ...................... 118,769 109,716 --------- --------- Deferred Tax Liability ....................... 31,185 30,685 --------- --------- Other Long-Term Liabilities .................. 9,192 9,214 --------- --------- Commitments and Contingencies ................ Stockholders' investment: Common stock, $.05 par value- Authorized 25,000 shares Issued and outstanding 13,114 in 1998 and 13,086 in 1997 ............................... 657 655 Paid-in Capital .............................. 168,843 168,246 Deferred Compensation ........................ (93) (117) Retained Earnings ............................ 83,254 71,128 --------- --------- Total stockholders' investment ............. 252,661 239,912 --------- --------- $ 525,827 $ 502,517 ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 4 HADCO CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS UNAUDITED (In thousands, except share data)
Quarter Ended ------------- January 31, January 25, 1998 1997 ----------- ----------- Net Sales ..................................................... $ 198,276 $ 111,536 Cost of Sales ................................................. 159,208 85,159 ----------- ----------- Gross Profit ............................................. 39,068 26,377 Operating Expenses ............................................ 17,784 10,820 Write-off of acquired in-process research and development ................................. - 78,000 ----------- ----------- Income (Loss) From Operations ................................. 21,284 (62,443) Interest and Other Income, (net) .............................. 533 880 Interest Expense .............................................. (2,099) (933) ----------- ----------- Income (Loss) Before Provision for Income Taxes .................................... 19,718 (62,496) Provision for Income Taxes .................................... 7,591 6,665 ----------- ----------- Net Income (Loss) ............................................. $ 12,127 $ (69,161) =========== =========== Income (loss) per common and common equivalent Shares (Note 1) Basic Net Income (Loss) Per Share ........................ $ 0.93 $ (6.64) =========== =========== Diluted Net Income (Loss) Per Share ...................... $ 0.90 $ (6.64) =========== =========== Weighted average common and common equivalent Shares (Note 1) Basic .................................................... 13,095,776 10,413,306 =========== =========== Diluted .................................................. 13,504,957 10,413,306 =========== ===========
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 5 HADCO CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands)
Three Months Ended ------------------ January 31, January 25, 1998 1997 ----------- ----------- Total Cash Provided From Operations Activities ............................... $ 7,653 $ 8,331 Cash Flows From Investing Activities: Purchases of short-term investments ..................................... (2,020) 6,137 Maturities of short-term investments .................................... 2,000 -- Purchases of property, plant and equipment .............................. (19,366) (11,011) Acquisition of Zycon Corp. .............................................. -- (209,661) -------- --------- Net Cash Used In Investing Activities ........................................ (19,386) (214,535) Cash Flows From Financing Activities: Principal payments under capital lease obligations ...................... (255) (413) Principal payments of long-term debt .................................... (969) (33,690) Proceeds from issuance of long-term debt ................................ 10,000 215,000 Proceeds from exercise of stock options ................................. 147 328 Tax benefit from stock options .......................................... 452 1,018 -------- --------- Net Cash Provided by Financing Activities .................................... 9,375 182,243 -------- --------- Net decrease in Cash and Cash Equivalents .................................... (2,358) (23,961) Cash and Cash Equivalents Beginning of Period ................................ 12,171 32,786 -------- --------- Cash and Cash Equivalents End of Period ...................................... $ 9,813 $ 8,825 ======== ========= Supplemental disclosure of cash flow information: Cash paid during period for: Interest ............................................................... $ 1,407 $ 311 ======== ========= Income taxes (net of refunds) ......................................... $ 322 $ 405 ======== ========= Acquisition of Zycon Corporation Fair value of assets acquired ........................................... $ 212,509 Liabilities assumed ..................................................... (114,993) Cash Paid ............................................................... (204,885) Acquisition costs incurred .............................................. (7,600) Write-off of acquired in-process research and development ............................................... 78,000 --------- Goodwill ................................................................ $ (36,969) =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 6 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Hadco Corporation's (the "Company") principal products are complex multilayer rigid printed circuits and backplane assemblies. The consolidated financial statements reflect the application of certain accounting policies. For information as to the significant accounting policies followed by the Company and other financial and operating information, see this note and elsewhere in the accompanying notes to consolidated condensed financial statements, as well as the Company's Form 10-K as filed with the Securities and Exchange Commission (SEC) on January 16, 1998; These financial statements should be read in conjunction with the financial statements included in the above-referenced SEC filing. SHORT TERM INVESTMENTS The Company's investments in held-to-maturity securities are as follows:
(in thousands) January 31, October 25, 1998 1997 ----------- ----------- Fair Fair Market Market Cost Value Cost Value Maturity ---- ----- ---- ----- -------- Certificate of Deposit ........ $1,582 $1,582 $1,562 $1,562 Within 1 year ====== ====== ====== ======
FOREIGN CURRENCY TRANSLATION The functional currency of the Company's Malaysian subsidiary is the United States dollar. Accordingly, all remeasurement gains and losses resulting from transactions denominated in currencies other than United States dollars are included in the consolidated statements of operations. To date, the resulting gains and losses have not been material. RECLASSIFICATION The Company has reclassified certain prior year information to conform with the current year's presentation. INTERIM FINANCIAL STATEMENTS The accompanying consolidated balance sheet as of January 31, 1998, and the consolidated statements of operations and cash flows for the three month periods ended January 25, 1997 and January 31, 1998 are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation of results for these interim periods. Results of operations for the interim period are not necessarily indicative of results to be expected for the entire year or any future period. 6 7 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) NET INCOME (LOSS) PER SHARE Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", replaces the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income or loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of stock options that could share in the earnings of the Company. Diluted income (loss) per common share is computed using the weighted average number of common and common equivalent shares outstanding during each period. For those periods where a net loss is reported, stock options are not considered; as their effect would be anti-dilutive. Basic and diluted income (loss) per share, as required by SFAS No. 128, are as follows:
Three Months Ended January 31, January 25, 1998 1997 ----------- ----------- (in thousands except per share data) Income (Loss) ............................... $12,127 $(69,161) ======= ======== Basic weighted average shares outstanding .... 13,096 10,413 Weighted average common equivalent shares .... 409 - ------- -------- Diluted weighted average shares outstanding .. 13,505 10,413 ======= ======== Basic Net Income (Loss) Per Share ............ $ 0.93 $ (6.64) ======= ======== Diluted Net Income (Loss) Per Share .......... $ 0.90 $ (6.64) ======= ========
These financial statements have been prepared and presented based on the new standard. Prior period amounts have been restated to conform to current year presentation. For the three month periods ended January 31, 1998 and January 25, 1997, 485,290 and -0- anti-dilutive weighted shares, respectively, have been excluded from the number of potential common shares outstanding. 2. ACQUISITION OF ZYCON On January 10, 1997, the Company acquired substantially all of the outstanding common stock of Zycon Corporation ("Zycon"). The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16, and accordingly, Zycon's operating results since January 10, 1997 are included in the accompanying consolidated financial statements. Unaudited pro forma operating results for the Company, assuming the acquisition of Zycon occurred on October 29, 1995 are as follows: 7 8 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) 2. ACQUISITION OF ZYCON (CONTINUED)
Three Months Ended ------------------------------ (in thousands, except per share data) January 31, January 25, 1998 1997 ----------- ----------- Net Sales ......................... $198,276 $172,547 Net Income ........................ 12,127 8,274 Basic Net Income (Loss) Per Share . $ 0.93 $ 0.76 Diluted Net Income (Loss) Per Share $ 0.90 $ 0.76
For purposes of these pro forma operating results, the in-process R&D was assumed to have been written off prior to October 29, 1995, so that the operating results presented include only recurring costs. 3. INVENTORIES Inventories are stated at the lower of cost, first-in, first-out (FIFO), or market and consist of the following (in thousands):
January 31, October 25, 1998 1997 ----------- ----------- Raw Materials ......... $19,143 $14,167 Work-in-process ....... 34,873 31,833 ------- ------- $54,016 $46,000 ======= =======
4. INTANGIBLE ASSETS The Company has assessed the realizability of its acquired intangible assets in accordance with SFAS No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. Under SFAS No. 121, the Company is required to assess the valuation of its long-lived assets, including intangible assets, based on the estimated cash flows to be generated by such assets. 5. LINES OF CREDIT The Company has an unsecured Revolving Credit Agreement, as amended, (the "Agreement") with a group of banks. The Agreement provides for direct borrowings or letters of credit for up to $400 million and expires January 8, 2002. Borrowings under the Agreement bear interest, at the Company's option, at either; (i) the Eurodollar Rate plus the Applicable Eurodollar Rate Margin (both as defined in the Agreement) ranging between .5% and 1.1375%, based on certain financial ratios of the Company, or (ii) the Base Rate, as defined. The Company is required to pay a quarterly commitment fee ranging from .2% to .375% per annum, based on certain financial ratios of the Company, of the unused commitment under the Agreement. If the Company obtains certain debt financing, as defined, the banks may require the Company to repay up to $150,000,000 of amounts 8 9 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) LINES OF CREDIT (CONTINUED) outstanding under the Agreement. At January 31, 1998, borrowings of $110,000,000 were outstanding under the agreement at a weighted average interest rate of 6.34%. The Agreement places several restrictions on the Company, including limitations on mergers, acquisitions and sales of a substantial portion of its assets, as well as certain limitations on liens, guarantees, additional borrowings, changes in the Company's capitalization, as defined, and investments. The Agreement also requires the Company to maintain certain financial covenants, including minimum levels of consolidated net worth, a maximum ratio of funded debt to EBITDA, maximum capital expenditures and minimum interest coverage, as defined, during the term of the Agreement. At January 31, 1998, the Company was in compliance with all loan covenants. The Company has a line of credit arrangement with a Malaysian bank denominated in Malaysian ringgits and U.S. dollars for aggregate borrowings of approximately $4.0 million for the purpose of acquiring land, facilities and equipment for the Company's Malaysian subsidiary. The arrangement is renewable annually. At January 31, 1998, there were no amounts outstanding under this arrangement. 6. LONG TERM DEBT
January 31, 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 .................................. $ 801 $ 820 Revolving credit agreement (Note 5) ........................... 110,000 100,000 Obligations under capital leases .............................. 12,761 13,960 -------- -------- 123,562 114,780 Less - Current portion ........................................ 4,793 5,064 -------- -------- $118,769 $109,716 ======== ========
7. SUBSEQUENT EVENT In February 1998, the Company entered into an agreement to acquire the outstanding common stock of Continental Circuits Corp., an Arizona based manufacturer of printed circuits, for approximately $185 million or $23.90 per share. It is currently expected that if this transaction is successfully completed, its completion will occur in the second quarter of fiscal 1998 and will be accounted for as a purchase business combination in accordance with APB No. 16 "Accounting for Business Combinations." 9 10 HADCO CORPORATION AND SUBSIDIARIES 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," "intends," "future," "could," and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) identify forward-looking statements. RESULTS OF OPERATIONS FIRST QUARTER Net sales for the three months ended January 31, 1998 increased 77.8% over the three months ended January 25, 1997. The increase resulted from several factors including the acquisition of Zycon, which added $63.4 million to printed circuit net sales in the quarter, and an increase in both backplane and printed circuit net sales excluding Zycon. Backplane assembly net sales increased due to higher product volume and shipments. Printed circuit net sales increased due to higher production volume and shipments and a shift toward products with more layers and greater densities. In addition, average pricing for printed circuits decreased slightly for the first quarter of 1998 over the same period in 1997. Net sales from backplane assemblies increased to 20.5% of net sales (excluding Zycon printed circuit net sales) from 18.1% in the first quarter of 1997. The gross profit margin decreased to 19.7% in the three months ended January 31, 1998 from 22.3% in the comparable period in fiscal 1997. The decrease resulted from increased investment in new capacity and technologies at certain facilities, start-up expenses for the west coast backplane operation, and lower overall gross margins from the Zycon operations (including ongoing start-up expenses associated with the volume production facility in Malaysia). Operating expenses, as a percent of net sales, decreased to 9.0% in the three months ended January 31, 1998 from 9.7% in the comparable period in fiscal 1997 due to increased net sales and the fixed nature of the Company's operating expenses. Income (loss), as a percent of net sales, from operations decreased to 10.7% in the three months ended January 31, 1998 from 13.9% in the comparable period in fiscal 1997, primarily as a result of the same factors affecting gross profits. Interest income decreased in the first quarter of 1998 as compared to the first quarter of 1997 due to lower average cash balances available for investing. Interest expense increased in the first quarter of 1998 as compared to the first quarter of 1997, due to an increase in outstanding debt relating to the acquisition of Zycon. 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. 10 11 HADCO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FIRST QUARTER (CONTINUED) The Company believes that excess capacity may exist in the printed circuit and electronic assembly industries, as well as fluctuating growth rates in the electronics industry as a whole. Both factors could have a material adverse effect on future orders and pricing. Despite these beliefs regarding the electronics industry as a whole, it should be noted that the Company has historically needed to increase its own manufacturing capacity to maintain and expand its market position. However, the Company's manufacturing capacity needs could change at any time or times in the future. The Company also believes that the potential exists for a shortage of materials in such industries, which could have a material adverse effect on future unit costs. In response to such concerns, the Company engages in the normal industry practices of maintaining primary and secondary vendors and diversifying its customer base. There can be no assurances, however, that such measures would be sufficient to protect the Company against any shortages of materials. 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. The Company anticipates an effective annual income tax rate for fiscal 1998 of 38.5%, 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 January 31, 1998, the Company had working capital of approximately $66.5 million and a current ratio of 1.58, 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 January 31, 1998 were approximately $11.4 million, a decrease of $2.3 million from approximately $13.7 million at October 25, 1997. In December 1997, the Company negotiated a $400 million unsecured senior revolving credit loan facility with a group of banks, which amended and restated an existing credit facility (the "Amended Credit Facility"). Interest on loans outstanding under the Amended Credit Facility is, at the Company's option, bear interest at either (1) the Eurodollar Rate, plus the Applicable Eurodollar Rate Margin (both as defined in "Amended Credit Facility"). Or (2) the Base Rate as defined in the Amended Credit Facility. At January 31, 1998, $110 million was outstanding under the Amended Credit Facility. The Amended Credit Facility matures in January 2002. See Note 5 to Notes to Consolidated Condensed 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 fiscal 1998. Because the Company's capital requirements cannot be predicted with certainty, however, there is no assurance that the Company will not require additional financing during this period. There is no assurance that any additional financing will be available on terms satisfactory to the Company or not disadvantageous to the Company's security holders. The Company intends to draw on the Amended Credit Facility in connection with its proposed acquisition of Continental Circuits Corp. should such transaction be successfully consummated. See Note 7 to Notes to Consolidated Condensed Financial Statements. 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. 11 12 HADCO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DEPENDENCE ON ELECTRONICS INDUSTRY The Company's principal customers are electronics OEMs and contract manufacturers in the computing (mainly workstations, servers, mainframes, storage and notebooks), data communications/telecommunications and industrial automation industries, including process controls, automotive, medical and instrumentation. These industry segments, and the electronics industry as a whole, are characterized by intense competition, relatively short product life-cycles and significant fluctuations in product demand. In addition, the electronics industry is generally subject to rapid technological change and product obsolescence. Discontinuance or modifications of products containing components manufactured by the Company could have a material adverse effect on the Company's business, financial condition and results of operations. Further, the electronics industry is subject to economic cycles and has in the past experienced, and is likely in the future to experience, recessionary periods. A recession or any other event leading to excess capacity or a downturn in the electronics industry would likely result in intensified price competition, reduced gross margins and a decrease in unit volume, all of which would have a material adverse effect on the Company's business, financial condition and results of operations. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company's quarterly operating results have varied and may continue to fluctuate significantly. At times in the past, the Company's net sales and net income have decreased from the prior quarter. Operating results are affected by a number of factors, including the timing and volume of orders from and shipments to customers relative to the Company's manufacturing capacity, level of product and price competition, product mix, the number of working days in a particular quarter, trends in the electronics industry and general economic factors. In recent years, the Company's gross margins have varied primarily as a result of capacity utilization, product mix, lead times, volume levels and complexity of customer orders. There can be no assurance that the Company will be able to manage the utilization of manufacturing capacity or product mix in a manner that would maintain or improve gross margins or the Company's business, financial condition and results of operations. The timing and volume of orders placed by the Company's customers vary due to customer attempts to manage inventory, changes in customers' manufacturing strategies and variation in demand for customer products. An interruption in manufacturing resulting from shortages of parts or equipment, fire, earthquake or other natural disaster, equipment failure or otherwise would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's expense levels are relatively fixed and are based, in part, on expectations of future revenues. Consequently, if revenue levels are below expectations, this occurrence is likely to materially adversely affect the Company's business, financial condition and results of operations. Results of operations in any period are not necessarily indicative of the results to be expected for any future period. Due to all of the foregoing factors, it is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. Such an event could have a material adverse effect on the price of the Company's Common Stock. VARIABILITY OF ORDERS The level and timing of orders placed by the Company's customers vary due to a number of factors, including customer attempts to manage inventory, changes in the customers' manufacturing strategies and variation in demand for customer products due to, among other things, technological change, new product introductions, product life-cycles, competitive conditions or general economic conditions. Since the Company generally does not obtain long-term purchase orders or commitments from its customers, it must anticipate the future volume of orders based on discussions with its customers. A substantial portion of sales in a given quarter may depend on obtaining orders for products to be manufactured and shipped in the same quarter in which those orders are received. The Company relies on its estimate of anticipated future volumes when making 12 13 HADCO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS VARIABILITY OF ORDERS (CONTINUED) 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. ACQUISITIONS In February 1998, the Company entered into an agreement to acquire all of the outstanding stock of Continental Circuits Corp., ("Continental") pursuant to a cash tender offer for all of the outstanding shares of common for approximately $185 million or $23.90 per share. If completed successfully, the tender offer is expected to be completed in the second fiscal quarter of 1998. See Note 7 to Notes to Consolidated Condensed Financial Statements. The Company acquired 100% of the capital stock of Zycon, a manufacturer of electronic interconnect products, on January 10, 1997 (the "Zycon acquisition"). Zycon currently operates as a wholly-owned subsidiary of the Company under the name Hadco Santa Clara, Inc. 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 any acquired business profitably in the future. Contemporaneous with the Zycon acquisition, nine senior management personnel of Zycon were terminated. There can be no assurance that the Company will not be materially adversely affected by such terminations or that the Company will be able to retain key personnel at any acquired business. Accordingly, operating expenses associated with the acquired business may have a material adverse effect on the Company's business, financial condition and results of operations in the future. The Company may from time to time pursue the acquisition of other companies, assets, products or technologies. The Company may incur additional indebtedness in connection with a future business acquisition, and the incurrence of substantial amounts of debt in connection with future acquisitions could increase the risk of the Company's operations. If the Company's cash flow and existing working capital are not sufficient to fund its general working capital requirements or to service its indebtedness, the Company would have to raise additional funds through the sale of its equity securities, the refinancing of all or part of its indebtedness or the sale of assets or subsidiaries. There can be no assurance that any of these sources of funds would be available in amounts sufficient for the Company to meet its obligations. The cost of debt financing may also impair the ability of the Company to maintain adequate working capital or to make future acquisitions. In addition, the issuance of additional shares of Common Stock in connection with future acquisitions could be dilutive to existing investors. Acquisitions involve a number of operating risks that could materially adversely affect the Company's operating results, including the diversion of management's attention to assimilate the operations, products and personnel of the acquired companies, 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. 13 14 HADCO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPETITION The electronic interconnect industry is highly fragmented and characterized by intense competition. The Company believes that its major competitors are the large U.S. and international independent and captive producers that also manufacture multilayer printed circuits and provide backplane and other electronic assemblies. Some of these competitors have significantly greater financial, technical and marketing resources, greater name recognition and a larger installed customer base than the Company. In addition, these competitors may have the ability to respond more quickly to new or emerging technologies, may adapt more quickly to changes in customer requirements and may devote greater resources to the development, promotion and sale of their products than the Company. During periods of recession or economic slowdown in the electronics industry and other periods when excess capacity exists, electronics OEMs become more price sensitive, which could have a material 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 in times of Asian economic turmoil, currency devaluations or financial market instability, such as 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. TECHNOLOGICAL CHANGE, PROCESS DEVELOPMENT AND PROCESS DISRUPTION The market for the Company's products and services is characterized by rapidly changing technology and continuing process development. The future success of the Company's business will depend in large part upon its ability to maintain and enhance its technological capabilities, develop and market products and services that meet changing customer needs and successfully anticipate or respond to technological changes, on a cost-effective and timely basis. In addition, the electronic interconnect industry could in the future encounter competition from new technologies that render existing electronic interconnect technology less competitive or obsolete, including technologies that may reduce the number of printed circuits required in electronic components. There can be no assurance that the Company will effectively respond to the technological requirements of the changing market. To the extent the Company determines that new technologies and equipment are required to remain competitive, the development, acquisition and implementation of such technologies and equipment are likely to continue to require significant capital investment by the Company. There can be no assurance that capital will be available for this purpose in the future or that investments in new technologies will result in commercially viable technological processes or that there will be commercial applications for these technologies. Moreover, the Company's business involves highly complex manufacturing processes that have in the past and could in the future be subject to periodic failure or disruption. Process disruptions can result in delays in certain product shipments. There can be no assurance that failures or disruptions will not occur in the future. The loss of revenue and earnings to the Company from such a technological change, process development or process disruption, as well as any 14 15 HADCO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TECHNOLOGICAL CHANGE, PROCESS DEVELOPMENT AND PROCESS DISRUPTION (CONTINUED) disruption of the Company's operations resulting from a natural disaster such as an earthquake, fire or flood, could have a material adverse effect on the Company's business, financial condition and results of operations. MALAYSIA FACILITY 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 expects that the Malaysia facility may continue to incur operating losses during future quarters of operations as a result of various factors, including, without limitation, initial operating inefficiencies, other start-up costs, and price competition for the products which the Company intends to produce at the new facility. 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, 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. Therefore, there can be no assurance that economic problems in Malaysia or other Asian countries will not have a material adverse impact on the Company's business, financial condition or 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, and 43% in fiscal 1996 on a pro forma basis including Zycon. In fiscal 1997, Solectron accounted for approximately 15% of the net sales of the Company. The Company generally does not obtain long-term purchase orders or commitments from its customers, and the orders received by the Company generally require delivery within 90 days. Given the Company's strategy of developing long-term purchasing relationships with high growth companies, the Company's dependence on a number of its most significant customers may increase. There can be no assurance that the Company will be able to identify, attract and retain customers with high growth rates or that the customers that it does attract and retain will continue to grow. Although there can be no assurance that the Company's principal customers will continue to purchase products and services from the Company at current levels, the Company expects to continue to depend upon its principal customers for a significant portion of its net sales. The loss of or decrease in orders from one or more major customers could have a material adverse effect on the Company's business, financial condition and results of operations. MANUFACTURING CAPACITY The Company believes its long-term competitive position depends in part on its ability to increase manufacturing capacity. The Company may obtain such additional capacity through acquisitions or expansion of its current facilities. Either approach would require substantial additional capital, and there can be no assurance that such capital will be available from cash generated by current operations. Further, there can be no assurance that the Company will be able to acquire sufficient capacity or successfully integrate and manage such additional facilities. In addition, the Company's expansion of its manufacturing capacity has significantly increased and will continue to significantly increase its fixed costs, and the future profitability of the Company will depend on its ability to utilize its manufacturing capacity in an effective manner. The 15 16 HADCO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANUFACTURING CAPACITY (CONTINUED) failure to obtain sufficient capacity or to successfully integrate and manage additional manufacturing facilities could adversely affect the Company's relationships with its customers and materially adversely affect the Company's business, financial condition and results of operations. The Company has a large manufacturing facility in Santa Clara, California, and an earthquake or other natural disaster in that area that results in an interruption of manufacturing at such facility would have a material adverse effect on the Company's business, financial condition and results of operations. MANAGEMENT OF GROWTH The Company has initiated significant expansion, including geographic expansion, of its operations, which has placed, and will continue to place, significant demands on the Company's management, operational, technical and financial resources. These demands are compounded by the Zycon acquisition and the proposed acquisition of Continental Circuits Corp. The Company expects that expansion will require additional management personnel and the development of further expertise by existing management personnel. The Company's ability to manage growth effectively, particularly given the increasing scope of its operations, will require it to continue to implement and improve its operational, financial and management information systems as well as to further develop the management skills of its managers and supervisors and to train, motivate and manage its employees. The Company's failure to effectively manage future growth, if any, could have a material adverse effect on the Company's business, financial condition and results of 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. ENVIRONMENTAL MATTERS The Company is subject to a variety of local, state and federal environmental laws and regulations relating to the storage, use, discharge and disposal of chemicals, solid waste and other hazardous materials used during its manufacturing process, as well as air quality regulations and restrictions on water use. When violations of environmental laws occur, the Company can be held liable for damages and the costs of remedial actions and can also be subject to revocation of permits necessary to conduct its business. Any such revocations could require the Company to cease or limit production at one or more of its facilities, which could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company's failure to comply with present and future regulations could restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violation. The Company operates in several environmentally sensitive locations and is subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes or restrictions on discharge limits, emissions levels, or material storage or handling might require a high level of unplanned capital investment and/or relocation. There can be no assurance that compliance with new or existing regulations will not have a material adverse effect on the Company's business, financial condition and results of operations. AVAILABILITY OF RAW MATERIALS AND COMPONENTS While the Company has not entered into any supply agreements and does not have any guaranteed sources of raw materials or components, it routinely purchases raw materials and components from several key material suppliers. Although alternative material suppliers are currently available, a significant unplanned event at a 16 17 HADCO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AVAILABILITY OF RAW MATERIALS AND COMPONENTS (CONTINUED) 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 potential exists for shortages of certain types of raw materials or components and any such future shortages or price fluctuations in raw materials could have a material adverse effect on the Company's manufacturing operations and future unit costs, thereby materially adversely affecting the Company's business, financial condition and results of operations. Product changes and the overall demand for electronic interconnect products could increase the industry's use of new laminate materials, standard laminate materials, multilayer blanks, electronic components and other materials, and therefore such materials may not be readily available to the Company in the future. Electronic components used by the Company in producing backplane assemblies are purchased by the Company and, in certain circumstances, the Company may bear the risk of component price fluctuations. There can be no assurance that shortages of certain types of electronic components will not occur in the future. Component shortages or price fluctuations could have a material adverse effect on the Company's backplane assembly business, thereby materially adversely affecting the Company's business, financial condition and results of operations. To the extent that the Company's backplane assembly business expands as a percentage of the Company's net sales, component shortages and price fluctuations could, to a greater extent, materially adversely affect the Company's business, financial condition and results of operations. DEPENDENCE ON KEY PERSONNEL The Company's future success depends to a large extent upon the continued services of key managerial and technical employees, none of whom, except for the President/Chief Executive Officer, is bound by an employment agreement or a non-competition agreement. The President/Chief Executive Officer's non-competition agreement is for one year after the termination of his employment with the Company. The loss of the services of any of the Company's key employees could have a material adverse effect on the Company. The Company believes that its future success depends on its continuing ability to attract and retain highly qualified technical, managerial and marketing personnel. Competition for such personnel is intense, especially for engineering personnel, and there can be no assurance that the Company will be able to attract, assimilate or retain such personnel. If the Company is unable to hire and retain key personnel, the Company's business, financial condition and results of operations may be materially adversely affected. INTELLECTUAL PROPERTY The Company's success depends in part on its proprietary techniques and manufacturing expertise, particularly in the area of complex multilayer printed circuits. The Company has few patents and relies primarily on trade secret protection of its intellectual property. There can be no assurance that the Company will be able to protect its trade secrets or that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets. In addition, litigation may be necessary to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of patent infringement. If any infringement claim is asserted against the Company, the Company may seek to obtain a license of the other party's intellectual property rights. There is no assurance that a license would be available on reasonable terms or at all. Litigation with respect to patents or other intellectual property matters could result in substantial costs and diversion of management and other resources and could have a material adverse effect on the Company's business, financial condition and results of operations. 17 18 HADCO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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. 18 19 HADCO CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Listing of Exhibits 3.1 - Amendment to Restated Articles of Organization dated March 4, 1998. *10.1 - Outside Directors Compensation Plan of 1998. *10.2 - Employee Stock Purchase Plan of November 17, 1997 (filed as Exhibit 10.1 to the Registration Statement No. 333-47589 on Form S-8 and incorporated herein by reference. (*) Indicates a management contract or any compensatory plan, contract or arrangement required to be filed as an exhibit. (b) Reports on From 8-K None 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized. Hadco Corporation Date: March 11, 1998 By: /s/ TIMOTHY P. LOSIK ------------------------ Timothy P. Losik Chief Financial Officer, Senior Vice President EX-3.1 2 AMENDMENT TO RESTATED ARTICLE 1 FEDERAL IDENTIFICATION NO. 04-2393279 ------------------ - --------- THE COMMONWEALTH OF MASSACHUSETTS Examiner William Francis Galvin Secretary of the Commonwealth ONE ASHBURTON PLACE, BOSTON, MASSACHUSETTS 02108-1512 ARTICLES OF AMENDMENT (GENERAL LAWS, CHAPTER 156B, SECTION 72) - --------- Name Approved We, Andrew E. Lietz -------------------------------------------, *President/XXXXXXX, and James C. Hamilton -------------------------------------------, *Clerk/XXXXXXXXXXX, of HADCO CORPORATION -----------------------------------------------------------------, (Exact name of corporation) located at: c/o James C. Hamilton, 73 Tremont Street, Boston, MA 02108, --------------------------------------------------------- (Street address of corporation in Massachusetts) certify that these Articles of Amendment affecting articles numbered: Article 3 ------------------------------------------------------------------- (Number those articles 1, 2, 3, 4, 5, and/or 6 being amended) of the Articles of Organization were duly adopted at a meeting held on March 4, 1998, by vote of: 10,377,873 shares of common stock of 13,107,357 shares outstanding, ------------ -------------- ---------- (type, class & series if any) shares of of shares outstanding, and ----------- ------------- ---------- (type class & series if any) shares of of shares outstanding. ------------ -------------- ---------- (type, class & series if any) C [] 1**being at least a majority of each type, class or series outstanding P [] and entitled to vote thereon:/XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX M [] XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX R.A.[] XXXXXXXXX: *Delete the inapplicable words. **Delete the inapplicable clause. 1 For amendments adopted pursuant to Chapter 156B, Section 70. 2 For amendments adopted pursuant to Chapter 156B, Section 71. Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on one side only of separate 8 1/2 X 11 sheets of paper with a left margin of at least 1 inch. - ---- Additions to more than one article may be made on a single sheet so P.C. long as each article requiring each addition is clearly indicated. 2 To change the number of shares and the par value (if any) of any type, class or series of stock which the corporation is authorized to issue, fill in the following: The total presently authorized is: - -------------------------------------------------------------------------------- WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS - -------------------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - -------------------------------------------------------------------------------- Common: N/A Common: 25,000,000 $0.05 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Preferred: N/A Preferred: N/A N/A - -------------------------------------------------------------------------------- Change the total authorized to: - -------------------------------------------------------------------------------- WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS - -------------------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - -------------------------------------------------------------------------------- Common: N/A Common 50,000,000 $0.05 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Preferred: N/A Preferred: N/A N/A - -------------------------------------------------------------------------------- 3 The foregoing amendment(s) will become effective when these Articles of Amendment are filed in accordance with General Laws, Chapter 156B, Section 6 unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. Later effective date: . ----------------------------- SIGNED UNDER THE PENALTIES OF PERJURY, this 4th day of March, 1998. /s/ Andrew E. Lietz , *President/*XXXXXXX - ------------------------------------------------------- Andrew E. Lietz /s/ James C. Hamilton , *Clerk/*XXXXXXXX - ------------------------------------------------------- James C. Hamilton *Delete the inapplicable words. 4 THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT (General Laws, Chapter 156B, Section 72) ================================================================================ I hereby approve the within Articles of Amendment, and the filing fee in the amount of $ ___________ having been paid, said article is deemed to have been filed with me this ________ day of_____________, 19____. Effective date: ------------------ WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION PHOTOCOPY OF DOCUMENT TO BE SENT TO: James C. Hamilton, Esquire Berlin, Hamilton & Dahmen, LLP --------------------------------------- 73 Tremont Street, Suite 403 --------------------------------------- Boston, MA 02108 --------------------------------------- EX-10.1 3 HADCO OUTSIDE DIRECTOR'S COMPENSATION PLAN 1 EXHIBIT 10.1 HADCO CORPORATION OUTSIDE DIRECTORS' COMPENSATION PLAN OF 1998 1. PURPOSE AND ESTABLISHMENT Hadco Corporation (the "Company"), hereby establishes the Hadco Corporation Outside Directors' Compensation Plan of 1998 (the "Plan") for those directors of the Company who are neither officers nor employees of the Company. All of the directors' annual fee will be paid in Restricted Stock of the Company and all or a portion of the Additional Director Fees (hereinafter defined) may be paid in Restricted Stock of the Company. The Plan also provides the opportunity for eligible directors to request that the Company defer payment of that portion of the annual fee or Additional Director Fees taken as shares of Restricted Stock of the Company, and further allows the director to defer Additional Director Fees taken as cash payments, as described more fully below. The purposes of this Plan are to align the interests of the directors more closely with the interests of other shareholders of the Company, to encourage the highest level of director performance by providing the directors with a direct interest in the Company's attainment of its financial goals, and to help attract and retain qualified directors. 2. DEFINITIONS a. "Additional Director Fees" means all those fees, in addition to the annual fee, that a Director may be entitled to in any year of service for attendance at Board or committee meetings and/or serving as a chairman of a committee. b. "Board" means the Board of Directors of the Company. c. "Committee" means the Joint Stock Option and Compensation Committee of the Board. d. "Common Stock Equivalent" means a hypothetical share of Stock which shall have a value on any date equal to the Fair Market Value of one share of Stock on that date. The amount distributed to a Director pursuant to Section 7 hereof shall be that number of shares of Stock equal to the number of Common Stock Equivalents then in the participating Director's Deferral Account. e. "Deferral Account" means the bookkeeping account established by the Company in respect to each Director pursuant to Section 6.3 hereof and to which shall be credited the Common Stock Equivalents into which deferred portions of the annual fee and/or Additional Director Fees are converted, and to which dividends are credited, and to which deferred cash payments, plus accrued interest, of the Additional Director Fees are credited pursuant to the Plan. 2 f. "Director" means a member of the Board who is neither an officer nor an employee of the Company, who was elected or appointed to the Board in a manner prescribed in the Bylaws of the Company. g. "Effective Date" means the date on which this Plan is approved by the Board. h. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. i. "Fair Market Value" means as of any applicable date: (i) if the Company's Stock is actively traded in the established over-the-counter market, the mean between the bid and asked prices quoted in such over-the-counter market at the close on the date nearest preceding the applicable date; (ii) if such Stock is listed on any national exchange, or traded in the NASDAQ National Market, the mean between the high and low sale prices quoted on such exchange or market on the trading day nearest preceding the applicable date; or (iii) if the Stock is not publicly traded, the value as determined from time to time by the Board. j. "Code" means the Internal Revenue Code of 1986, as amended from time to time. k. "Restricted Stock" means shares of Stock of the Company subject to terms and conditions as imposed from time to time by the Board, which shall include the following: (i) Restricted Stock awards may not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of except in accordance with the terms of the Plan and each transfer agent for the Stock shall be instructed to such effect. (ii) At such time as the Director ceases to serve on the Board, or upon such earlier date as the Committee or Board shall determine, the restrictions imposed by the Plan shall lapse. l. "Stock" means the $0.05 par value common stock of the Company. m. "Payment Date" means each of the dates each year on which the Company pays the annual fee and Additional Director Fees to Directors pursuant to Section 5. 3. PLAN ADMINISTRATION 3.1 The Board shall have full power and authority to interpret and construe the Plan, any forms and constructions thereof and any action thereunder. 3.2 The Committee shall have the power and authority to administer the Plan, including the power and authority to: a. Impose such limitations, restrictions, and conditions as shall be deemed appropriate; 2 3 b. Adopt, amend and rescind administrative guidelines and other rules and regulations relating to the Plan, including the power to change the dates by which deferral requests must be submitted to the Clerk and the sole discretion as to whether deferral and distribution requests made under the Plan are approved; and c. Make all other determinations and to take all other actions necessary or advisable for the implementation and administration of the Plan. 3.3 Notwithstanding the foregoing, the Committee shall have no authority, discretion or power to alter any terms or conditions specified in the Plan, except in the sense of administering the Plan subject to the provisions of the Plan. 4. STOCK SUBJECT TO THE PLAN 4.1 Number of shares. There shall be authorized for issuance under the Plan, in accordance with the provisions of the Plan, 24,000 shares of Stock. This authorization may be increased from time to time by approval of the Board. The Company shall at all times during the term of the Plan retain as authorized and unissued Stock at least the number of shares from time to time required under the provisions of the Plan. The shares of Stock issuable hereunder shall be authorized and unissued shares or previously issued and outstanding shares of Stock reacquired by the Company. 4.2 Other Shares of Stock. Any shares of Stock that are subject to a Common Stock Equivalent and for any reason are not issued to a Director shall automatically become available again for use under the Plan. 4.3 Adjustments Upon Changes in Stock. If there shall be any change in the Stock of the Company, through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, spin-off, split up, dividend in kind or other change in the corporate structure, appropriate adjustments shall be made by the Committee (or if the Company is not the surviving corporation in any such transaction, the board of directors of the surviving corporation) in the aggregate number and kind of shares subject to the Plan, and the number and kind of shares which may be issued under the Plan. Appropriate adjustments may also be made by the Committee in the terms of Common Stock Equivalents under the Plan to reflect such changes and to modify any other terms on an equitable basis as the Committee in its discretion determines. 5. PAYMENT OF FEES 5.1 Payment of Annual Fees. Each Director who serves as a director shall be entitled to payment of an annual fee in such an amount as determined by the Board from time to time. The entire annual fee shall be distributed to the Director as Restricted Stock or, if the Director elects to defer payment as set forth below, shall be credited to the Director's Deferral Account as Common Stock Equivalents. 3 4 5.2 Payment of Additional Director Fees. In addition to the annual fee, Directors may be entitled to additional fees for attendance at Board or committee meetings and/or serving as chairman of a committee. Such Additional Director Fees are in amounts to be set from time to time by the Board. A Director may choose to accept payment of these Additional Director Fees in cash or Restricted Stock, and the Director may also elect to have such cash or Restricted Stock payments deferred as set forth in Section 6.1 below. If the Director fails to make an election regarding the form of payment, the total amount of the Additional Director Fees shall be paid in cash. 5.3 Payment Dates. All payments, distributions or credits of amounts in connection with the Director annual fee or Additional Director Fees shall be made not less than semi-annually. If payments are made semi-annually, the first payment, distribution or credit is to occur each year on the date of the annual meeting of the stockholders of the Company and the second payment, distribution or credit is to occur on the date which is six months after the date of the annual meeting of the stockholders of the Company. 6. DEFERRAL ELECTIONS 6.1 Deferral Elections for Directors. A Director may elect, in writing, on or before the last day of the month preceding each annual meeting of stockholders, on a form to be prescribed by the Clerk, the following: a. To defer the payment of all or any part of the Restricted Stock payment constituting the Director annual fee to be earned during the period immediately following the annual meeting of stockholders and ending on the date of the next succeeding annual meeting of stockholders. The Director shall specify on the election form the percentage amount of the Restricted Stock payment constituting the annual fee to be deferred. Amounts deferred by a Director pursuant to this Section 6.1(a) shall be converted into Common Stock Equivalents in accordance with Section 6.3. b. To receive payment of all or a specified percentage of the Additional Director Fees to be earned during the period immediately following the annual meeting of stockholders and ending on the date of the next succeeding annual meeting of stockholders, in Restricted Stock rather than cash. The Director shall specify on the election form the percentage amount to be paid in cash and the percentage amount to be paid in Restricted Stock. c. To defer the payment of all or any portion of the Additional Director Fees taken as a cash payment. The Director shall specify on the election form the percentage amount of the cash payment constituting the Additional Director Fees to be deferred. 4 5 d. To defer the payment of all or any portion of the Additional Director Fees taken as Restricted Stock payments pursuant to subsection (b) of this Section. The Director shall specify on the election form the percentage amount of the Restricted Stock payment constituting the Additional Director Fees to be deferred. Amounts deferred by a Director pursuant to this Section 6.1(d) shall be converted into Common Stock Equivalents in accordance with Section 6.3. Once made, the election shall remain in effect until revoked by the participating Director. Such revocation shall become effective for Directors' fees earned for the period beginning immediately following the annual meeting of stockholders next occurring after such revocation notice. 6.2 Deferral Elections for Director Candidates. Any individual who is a candidate for election to the Board may make elections, as listed in Section 6.1 above, regarding the payment of the annual fee and Additional Director Fees to be earned during the period beginning with the date of his or her election and ending on the date of the next succeeding annual meeting of stockholders. The election shall be made in writing, on or before the last day of the month preceding the annual meeting of stockholders prior to his or her election, on a form to be prescribed by the Clerk. 6.3 Establishment of Deferral Accounts. There shall be established for each participating Director an account which shall reflect the cash or Restricted Stock amounts deferred by the participating Director which would otherwise have been paid to such Director had no election to defer been made. Fees deferred by a Director shall be credited to such Deferral Account as of each Payment Date or such other date that such amounts would otherwise have been paid or distributed to the Director. Restricted Stock amounts that the Director elects to defer shall be converted to Common Stock Equivalents based on the Fair Market Value as of the Payment Date. A statement will be sent to each participating Director as to the balance of his or her Deferral Account at least once each calendar year. 6.4 Term of Deferrals. A deferral request made pursuant to Section 6.1 and approved by the Company shall defer the payment with respect to which the request was made until the participating Director leaves the Board. 6.5 Deferral Elections - First Year of the Plan. Elections to defer payment of all or a portion of the Restricted Stock constituting the annual fee, to have payment of all or any portion of the Additional Director Fees made in the form of Restricted Stock, or to defer the cash or Restricted Stock payments constituting Additional Director Fees shall be made by the Director, in writing, on a form to be prescribed by the Clerk, on or before the 30th day following the Effective Date of this Plan or on or before the last day of the month preceding the next annual meeting of stockholders, whichever is later. 5 6 7. DISTRIBUTION OF DEFERRED AMOUNTS 7.1 Distribution of Accounts. As soon as practicable following termination of service as a Director, a Director shall receive a distribution of his or her Deferral Account. Distribution of all deferred amounts shall be made in one lump sum. Distribution of deferred cash amounts shall be made in cash and shall include interested earned pursuant to Section 7.4. Distribution of the Restricted Stock amounts shall consist of one share of Stock for each Common Stock Equivalent credited to such Director's Deferral Account as of the Payment Date immediately preceding the date of distribution, plus any dividends credited to such account pursuant to Section 7.3. 7.2 Distribution to a Deceased Director's Estate. In the event of a Director's death before the distribution of his or her Deferral Account, payment of the Director's Deferral Account shall then be made to the beneficiary designated by the Director pursuant to Section 8.1 or, in the absence of a designation of beneficiary pursuant to Section 8.1, to his or her estate, in the time and manner selected by the Committee. If no beneficiary is designated, then the Committee may take into account the application of any duly appointed administrator or executor of a Director's estate and direct that the balance of the Director's Deferral Account be paid to his or her estate in the manner requested by such application. 7.3 Hypothetical Dividends on Common Stock Equivalents. Dividends and other distributions on Common Stock Equivalents shall be deemed to have been paid as if such Common Stock Equivalents were actual shares of Stock issued and outstanding on the respective record or distribution dates. Common Stock Equivalents shall be credited to the Director's Deferral Account on the basis of the value of the dividend or other distribution and the Fair Market Value of the Common Stock Equivalents on the date of the announcement of the dividend or distribution. Credits to a Director's Deferral Account for dividends or distributions shall be made on the same day as dividends or other distributions are otherwise paid. Fractional shares shall be credited to a Director's Deferral Account cumulatively, but the balance of shares of Common Stock Equivalents in a Director's Deferral Account shall be rounded to the next lower whole share for any distributions to such Director pursuant to this Section 7. The value of any fractional share shall be paid in cash. 7.4 Interest on Deferred Cash Payments. Interest shall be accrued and credited on deferred cash amounts, to be compounded annually, until distribution is made to the participating Director under the Plan. The interest rate shall be a flat rate of six percent (6%) per annum, or such other rate as determined from time to time by the Board. 7.5 Emergency Payments. In the event of an "unforeseeable emergency" as defined herein, the Committee may determine the amounts payable under Section 7 hereof and pay all or a part of such amounts in shares of Stock to the extent the Committee determines that such action is necessary in light of immediate and substantial needs of the Director occasioned by severe financial hardship. For the purposes of this Section, an "unforeseeable emergency" is a severe financial hardship to the Director resulting from a sudden and unexpected illness or accident of the Director or of a dependent (as defined in Section 152(a) of the Code) of the Director, loss of the Director's property due to casualty, or other similar extraordinary and unforeseeable 6 7 circumstances arising as a result of events beyond the control of the Director. Payments shall not be made pursuant to this Section to the extent that such hardship is or may be relieved: (i) through reimbursement or compensation by insurance or otherwise, (ii) by liquidation of the Director's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (iii) by cessation of the Director's deferrals under the Plan. Such action shall be taken only if a Director (or a Director's legal representatives) signs an application describing fully the circumstances which are deemed to justify the payment, together with an estimate of the amounts necessary to prevent such hardship, which application shall be approved by the Committee after making such inquiries as the Committee deems necessary and appropriate. 8. DESIGNATION OF BENEFICIARY 8.1 Designation. In the event of death of a participating Director at a time when deferred amounts remain credited to the Director's Deferral Account, such amounts will be paid to the beneficiary designated to receive such deferred amounts on a form to be supplied by and filed with the Clerk of the Company, if such named beneficiary survives the participating Director. If no beneficiary designation has been filed with the Clerk, or if the designated beneficiary does not survive the participating Director, such deferred amounts shall be distributed pursuant to the terms of Section 7.2. 8.2 Incapacity of the Participating Director or Beneficiary. If the Company shall find that any person to whom any amount is payable under this Plan has been judicially declared incompetent to carry on his or her own affairs or is a minor, distribution or payment of amounts due hereunder may be made to a duly appointed guardian or other legal representative in accordance with the applicable provisions of this Plan. Any such distribution or payment shall completely discharge any obligations or liabilities of the Company under this Plan with respect to such distributions or payments. 9. RIGHT TO AMEND, ALTER OR REVOKE The Company reserves the right to amend, alter, modify or revoke in whole or in part this Plan at any time; provided, however, that with respect to amounts as to which the period of deferral has commenced at the time of the Company's exercise of its rights under this Section 9, no exercise of such rights shall result in a forfeiture of such deferred amounts, a change in the time of payment of amounts, a change in terms and conditions under which forfeiture of such deferred amounts may occur, or a change in the provisions of this agreement governing the crediting of dividends on such deferred amounts, without the consent of the participating Director(s) affected by such exercise of rights, except as otherwise provided in this Plan. 7 8 10. GENERAL CREDITOR STATUS Each Director, and each other recipient of a Director's Deferral Account pursuant to Section 7, shall be and remain an unsecured general creditor of the Company with respect to any payments due and owing to such Director hereunder. All payments to persons entitled to benefits hereunder shall be made out of the general assets, and shall be the sole obligations, of the Company. The Plan is a promise to pay benefits in the future and it is the intention of the parties that it be "unfunded" for tax purposes (and for purposes of Title I of the Employment Retirement Income Security Act ("ERISA")). 11. GOVERNING LAW This Plan shall be construed in accordance with and governed by the laws of the Commonwealth of Massachusetts. 12. NO TRUST, LEGAL OR BENEFICIAL OWNERSHIP INTENDED No trust agreement is to be deemed created for the benefit of any participating Director, or the Director's beneficiary, executors, administrators, heirs, assigns or legal representatives as a result of this Plan. Similarly, no legal or beneficial interest in any of the Company's assets is intended to be conferred by the terms of the Plan. 13. PROHIBITION OF ALIENATION The right of the participating Director or the Director's designated beneficiary or any other person to the payment of amounts due under the Plan may not be assigned, transferred, pledged or encumbered except as otherwise provided in this Plan. 14. BINDING EFFECT The Plan, except as otherwise provided herein, shall be binding upon and inure to the benefit of the Company, the Board, its successors and assigns and participating Directors, their designated beneficiary, heirs, executors, administrators and legal representatives. 15. DISTRIBUTION UPON FINDING OF INCLUSION OF DEFERRED AMOUNTS IN GROSS INCOME If this Plan shall ever be determined to require the inclusion of all or part of any participating Director's deferred amounts in the Director's gross income for federal, state, or local income tax purposes prior to the time such amount would be required to be distributed or paid under the terms of this Plan, whether by taxing authorities of the United States or other sovereign nations or political subdivisions thereof, then only those amounts which would be treated as includable in gross income at such time will be paid over to the participating Director. All other deferred amounts will continue to be subject to the terms of this Plan. 8 9 16. AGREEMENT By requesting the Company to defer payment hereunder, a Director consents to the provisions of this Plan as they exist at the time of such request and as they may be amended thereafter by the Board, subject to the consent of the Director when required pursuant to Section 9. 17. EFFECTIVE DATE The Effective Date of this Plan is March 4, 1998. 9 EX-27 4 FINACIAL DATA SCHEDULE
5 1,000 US DOLLARS 3-MOS OCT-31-1998 OCT-26-1997 JAN-31-1998 1 9,813 1,582 99,912 1,750 54,016 180,537 464,083 224,264 525,827 114,020 118,769 0 0 657 252,004 525,827 198,276 198,276 159,208 176,992 0 0 1,566 19,718 7,591 12,127 0 0 0 12,127 .93 .90
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