-----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, DzcymrZeQ5ggebFm+U61O3NK2XKn2mde7X0JZbIemk/EqZtXP9zqDnrfYLssGiSk bUpkpfwA9Yfu+Q+NQ/qitg== 0000950135-98-005428.txt : 19981014 0000950135-98-005428.hdr.sgml : 19981014 ACCESSION NUMBER: 0000950135-98-005428 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980801 FILED AS OF DATE: 19981013 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/A SEC ACT: SEC FILE NUMBER: 000-12102 FILM NUMBER: 98724874 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/A 1 HADCO CORPORATION 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. 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). 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 4 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HADCO CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands)
ASSETS August 1, - ------ 1998 October 25, (unaudited) 1997 ----------- ----------- 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 ======== ========
The accompanying notes are an integral part of these consolidated condensed financial statements. 3 5 HADCO CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (unaudited ) (In thousands, except per share and share data)
Three Months Ended Nine Months Ended ------------------------------- ------------------------------- August 1, July 26, August 1, July 26, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated condensed financial statements. 4 6 HADCO CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)
Nine Months Ended -------------------------- August 1, July 26, 1998 1997 --------- --------- 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) ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. 5 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 8 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited) Basic and diluted shares outstanding are as follows:
Three Months Ended Nine Months Ended ---------------------- ---------------------- (in thousands, except per share data) August 1, July 26, August 1, July 26, 1998 1997 1998 1997 --------- -------- --------- -------- 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 ====== ====== ====== ======
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 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 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:
Three Months Ended Nine Months Ended ------------------------ ----------------------- (in thousands, except per share data) August 1, July 26, August 1, July 26, 1998 1997 1998 1997 --------- -------- --------- -------- 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
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 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 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 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:
East Coast Facility Company-wide Consolidation Restructuring Total ------------- ------------- ------ (Amount in thousands) 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 ====== ====== ======
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 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 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 16 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 8. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
As of August 1, 1998 ---------------------------------------------------------------------------- Guarantor Non-Guarantor Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation Entries Total ------------ ------------- ----------- ----------- ------------ (In Thousands) 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 ========= ======= ======== ========= ========
15 17 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued) CONDENSED CONSOLIDATING BALANCE SHEET
As of October 25, 1997 ---------------------------------------------------------------------------- Guarantor Non-Guarantor Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation Entries Total ------------ ------------- ----------- ----------- ------------ (In Thousands) 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 ======== ======= ======== ========= ========
16 18 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ending August 1, 1998 ---------------------------------------------------------------------------- Guarantor Non-Guarantor Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation Entries Total ------------ ------------- ----------- ----------- ------------ (In Thousands) 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) ======= ======= ======= ====== ======== For the Nine Months Ending August 1, 1998 ---------------------------------------------------------------------------- Guarantor Non-Guarantor Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation Entries Total ------------ ------------- ----------- ----------- ------------ (In Thousands) 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) ======== ======= ======== ======= ========
17 19 HADCO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ending July 26, 1997 ---------------------------------------------------------------------------- Guarantor Non-Guarantor Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation Entries Total ------------ ------------- ----------- ----------- ------------ (In Thousands) 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 ======= ======= ======== ======= ======== For the Nine Months Ending July 26, 1997 ---------------------------------------------------------------------------- Guarantor Non-Guarantor Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation Entries Total ------------ ------------- ----------- ----------- ------------ (In Thousands) 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) ======== ======= ======== ======= ========
18 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)
For the Nine Months Ending August 1, 1998 ---------------------------------------------------------------------------- Guarantor Non-Guarantor Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation Entries Total ------------ ------------- ----------- ----------- ------------ (In Thousands) 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 ======== ======== ========= ======= =========
19 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)
For the Nine Months Ending July 26, 1997 ---------------------------------------------------------------------------- Guarantor Non-Guarantor Parent Elimination Consolidated Subsidiaries Subsidiaries Corporation Entries Total ------------ ------------- ----------- ----------- ------------ (In Thousands) 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 ======== ======= ========= ======= =========
20 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 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 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. 23 25 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. 24 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 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. 26 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. 27 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 28 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 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 30 32 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 33 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. 32 34 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. 33 35 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. 34 36 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) 35 -----END PRIVACY-ENHANCED MESSAGE-----