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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
---------
(Mark One)
[ x ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended March 28, 1998,
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-27482
XETEL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2310781
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2105 GRACY FARMS LANE
AUSTIN, TEXAS 78758
(Address of principal executive offices, including zip code)
(512) 435-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 Par Value Per Share
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 other 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ x].
At June 16, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $16,431,376 (affiliates being, for these
purposes only, directors, executive officers and holders of more than 5% of the
Registrant's Common Stock). At June 16, 1998, there were 9,067,922 outstanding
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information is incorporated into Part III of this report by reference
to the Proxy Statement for the Registrant's 1998 annual meeting of stockholders
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
Form 10-K.
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PART I
ITEM 1. BUSINESS
THE COMPANY
In addition to the historical information contained herein, the discussion in
this Form 10-K contains certain forward-looking statements, within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that involve risks and uncertainties, such as statements
concerning: growth and expansion, future operating results, developments in the
Company's markets and strategic focus, and new production processes and
capabilities. The cautionary statements made in this Form 10-K should be read
as being applicable to all related forward-looking statements whenever they
appear in this Form 10-K. Actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed under the section "Risk Factors".
XeTel Corporation ("XeTel" or the "Company") holds ISO 9002 and BABT
certifications and provides advanced design and prototype services,
manufactures sophisticated surface mount assemblies and supplies full-service
manufacturing solutions to original equipment manufacturers ("OEMs") primarily
in the telecommunications, networking and computer industries. The Company's
design and prototype services support customers in the product development
phase and assist in their efforts to reduce time to market and time to volume
as well as production costs. In its assembly operations, the Company employs
advanced surface mount technologies and manufacturing processes and has
developed production capabilities using advanced packaging technologies such as
ball grid array (BGA). The Company incorporates its design and prototype
services and assembly capabilities, together with materials management,
advanced testing, systems integration and order fulfillment services, to
provide turnkey solutions for its customers. The Company believes that as a
result of providing design and prototype services, it is well positioned to
provide value added manufacturing of products through production volumes. The
Company believes that its turnkey operations provide its customers with quick
turnaround, greater production flexibility and shorter delivery cycles. The
Company's principal OEM customers include Allied Signal, Advanced Micro
Devices, General Instrument, Linkabit Wireless, a subsidiary of The Titan
Corporation, Micro Motion, a subsidiary of Emerson Electric, Motorola (various
divisions), SBE, Telematics, a subsidiary of ECI Telecom Ltd., Trimble
Navigation, Westinghouse Electric and Xplore Technologies. The Company is
headquartered in Austin, Texas with manufacturing services operations in Austin
and Dallas, Texas and San Ramon, California.
The Company was incorporated in Texas in 1984 and reincorporated in Delaware in
1995. The Company maintains its principal executive offices at 2105 Gracy Farms
Lane, Austin, Texas 78758, and its telephone number is (512) 435-1000.
RISK FACTORS
The following summary of risk factors relevant to an investment in shares of
the Company's common stock is derived, in part, from the section captioned
"Risk Factors" in the prospectus of the Company dated February 13, 1996 (the
"Prospectus"), as filed with the Securities and Exchange Commission (the
"Commission") pursuant to the initial registration of shares of common stock of
the Company under the Securities Act of 1933, as amended (the "Securities
Act"). This discussion does not purport to be complete and is subject to, and
qualified by, the discussion of risk factors set forth in the Prospectus. A
copy of the Prospectus may be inspected without charge at the Commission's
principal offices in Washington, D.C. and copies of all or any part thereof may
be obtained from such office upon payment of prescribed fees. The Commission
also maintains a World Wide Website which provides online access to reports,
proxy and information statements and other information regarding registrants
that they file electronically with the Commission (including the Company) at
the address http:// www.sec.gov.
FLUCTUATIONS IN OPERATING RESULTS. XeTel's operating results are affected by a
number of factors, including timing of orders from and shipments to major
customers, availability of materials and components, the volume of orders
relative to the Company's capacity, timing of expenditures in anticipation of
future sales, the gain or loss of significant customers, variations in the mix
between consignment and component purchase arrangements with customers,
variations in the demand for products in the industries served by the Company
and general economic conditions. Operating results can also be significantly
influenced by the development and introduction of new products or technologies
by the Company's customers, or such customer's competitors, which may
materially and adversely affect the demand for the Company's services. The
Company's customers generally require short delivery cycles, and a substantial
portion of the Company's backlog is typically scheduled for delivery within 120
days. In the absence of substantial backlog, quarterly sales and operating
results depend on the volume and timing of bookings received during the quarter
which can be difficult to forecast. Backlog fluctuations affect the Company's
ability to plan production and inventory levels, which could lead to
fluctuations in operating results. Variations in the size and delivery
schedules of purchase orders received by the Company, changes in customers'
delivery requirements, or the rescheduling or cancellation of orders and
commitments, may result in substantial fluctuations in backlog from period to
period. Accordingly, the Company believes that backlog may not be a meaningful
indicator of future operating results.
A significant portion of the Company's expenses is relatively fixed in nature
and planned expenditures are based in part on anticipated orders. The
inability to adjust expenditures quickly enough to compensate for a decline in
net sales may magnify the adverse impact of such decline in the Company's
results of operations. Due to the factors noted above and elsewhere in this
Form 10-K and other filings with the Securities and Exchange Commission, the
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Company's future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Past financial performance
should not be considered a reliable indicator of future performance and
investors should not use historical trends to anticipate results or trends in
future periods. Any shortfall in revenue and earnings from the levels
anticipated by securities analysts could have an immediate and significant
effect on the trading price of the Company's common stock in any given period.
Also, the Company participates in a highly dynamic industry which often results
in volatility of the Company's common stock price.
CONCENTRATION OF CUSTOMERS. The Company's customer base is highly
concentrated. The Company's three largest customers accounted for
approximately 20%, 16% and 9%, respectively, of net sales for its fiscal year
ended March 28, 1998 ("fiscal 1998"). For the fiscal year ended March 29, 1997
("fiscal 1997"), the Company's three largest customers accounted for
approximately 14%, 9% and 8%, of its net sales. The Company anticipates that a
significant portion of its sales will continue to be concentrated in a
relatively small number of customers for the foreseeable future. In addition,
the Company's objective is to develop new and expand existing relationships
with leading and emerging OEM's in the electronics industry. Such emerging
growth and technology companies tend to have limited operating histories, and
also may have changes in management and limited capitalization. As a result,
the Company may experience difficulties in maintaining long-term relationships
with these customers and in receiving payment for services rendered to them.
To the extent that any significant customers of the Company terminate their
relationship with the Company, or the Company is unable, for any reason, to
receive payment for its services, the Company's business, financial condition
and results of operations likely would be materially and adversely affected.
UNAVAILABILITY OF COMPONENTS AND MATERIALS. Components and material used by
XeTel in producing surface mount assemblies and turnkey solutions are purchased
by XeTel from approved suppliers of its customers. Any failure on the part of
suppliers to deliver required components to the Company or any failure of such
components to meet performance requirements could impair the Company's ability
to meet scheduled shipment dates and could delay sales of systems by the
Company's customers and thereby adversely affect the Company's business,
financial condition and results of operations. The Company has in the past
experienced shortages of certain types of electronic components, and may
experience shortages of certain electronic components that are in short supply
generally within the electronics industry. Component shortages or price
fluctuations, to the extent not absorbed by customers under its agreements with
the Company, could have a material adverse effect on the Company's business,
financial condition and results of operations. Certain components used in a
number of the Company's customer programs are obtained from a single source.
VARIABILITY OF CUSTOMER REQUIREMENTS; ABSENCE OF LONG-TERM PURCHASE ORDERS.
The level and timing of purchase orders placed by the Company's customers are
affected by a number of factors, including variation in demand for the
customer's products, customer attempts to manage inventory and changes in the
customer's manufacturing strategies. Many of such factors are outside of the
control of the Company. The Company typically does not obtain long-term
purchase orders or commitments, but instead works with its customers to develop
nonbinding forecasts of the future volume of orders. Based on such nonbinding
forecasts, the Company makes commitments regarding the level of business that
it will seek and accept, the timing of production schedules and the levels and
utilization of personnel and other resources. Generally, customers may cancel,
reduce or delay purchase orders and commitments without penalty, except for
payment for services rendered, materials purchased or procured and, in certain
circumstances, charges associated with such cancellation, reduction or delay.
Significant or numerous cancellations, reductions or delays in orders by
customers, or inability by customers to pay for services provided by the
Company or to pay for components and materials purchased by the Company on such
customer's behalf, could have a material adverse effect on the Company's
business, financial condition and results of operations.
MANAGEMENT OF GROWTH AND EXPANSION. The Company's design, prototype, assembly
and turnkey solutions business and multi-site locations have grown rapidly in
recent years. This growth has increased the Company's fixed costs and required
it to hire additional personnel. Furthermore, the Company plans to establish
additional regional manufacturing services centers which will increase the
Company's fixed costs and will require additional personnel. A continuing
period of rapid growth, including geographic expansions, could place a
significant strain on the Company's management, operations and other resources.
The Company's ability to manage its growth will require it to manage its
existing resources more efficiently, to continue to invest in its operations,
including its financial and management information systems and internal process
controls, and to retain, motivate and manage its employees. If the Company's
management is unable to manage growth effectively, the quality of the Company's
services and its ability to retain key personnel could be materially and
adversely affected, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
YEAR 2000 COMPLIANCE. In fiscal 1998, the Company began a year 2000 data
assessment project to address all necessary code changes, testing and
implementation for all of its systems. Many of the Company's business and
operating systems are currently year 2000 compliant, and therefore, the Company
is undertaking additional efforts to identify and modify those systems which
may not be year 2000 compliant. Anticipated spending for the year 2000 date
conversion project will be expensed as incurred or new software will be
capitalized and amortized over the software's useful life and is not expected
to have a significant impact on the Company's results of operations. Project
completion is planned during fiscal 1999. The costs of the project and the
date on which the Company believes it will complete the year 2000 modifications
are based on management's best estimates, which are derived utilizing numerous
assumptions of future events, including the continuous availability of certain
resources and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes,
and similar uncertainties. In addition, there can be no assurance that the
systems of other companies on which the Company's systems rely will be
converted on a timely basis or that such failure by another company to convert
would not have an adverse effect on the Company's systems.
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INDUSTRY OVERVIEW
The electronics manufacturing services market emerged over 20 years ago as a
result of the need by OEMs to utilize additional manufacturing sources for
excess production capacity when in-house capacity was insufficient to meet
product demand. Small, local manufacturers were often used by OEMs for
temporary and unpredictable capacity overruns and for specialty work, when
required. As a result of the capital intensive requirements of the
manufacturing process and the demand for more complex and sophisticated
technologies, outsourcing by OEMs has continued to gain acceptance. Today, many
OEMs consider the electronics manufacturing services industry an integral part
of their business and manufacturing strategy and have established long-term
relationships with electronics manufacturers. As a result, the electronics
manufacturing services industry has experienced significant growth. The
Institute for Interconnecting and Packaging Electronic Circuits ("IPC")
estimates the market for providing electronics manufacturing services was $18
billion in 1997, 83% of which was attributable to the approximately 35
companies in the industry that achieved net sales in 1997 of over $100 million.
According to IPC, sales for companies in the electronics manufacturing services
industry have grown at an average rate of 20% per year since 1984, and will
continue to grow through 2000, at an average rate of 25% per year.
The Company believes that there are four principal factors supporting the trend
by OEMs in the electronics industry to establish continuing relationships with
independent manufacturers for design, engineering and volume production of
sophisticated electronics products. First, the demand for more complex
electronics products has increased significantly due to the continued
development of more advanced telecommunications, networking and computer
systems and other devices for rapidly growing markets. The manufacture of these
products requires increasingly advanced engineering and manufacturing expertise
and substantial capital investment. By using independent manufacturers, OEMs
can reduce their overall capital equipment requirements while maintaining
access to advanced manufacturing facilities. Second, due to intense competitive
pressures and shorter life cycles for products in the electronics industry,
OEMs are required to reduce the time needed to both introduce new products to
market and manufacture such products in volume. OEMs can reduce product time
to market and time to volume by using the specialization and flexibility
afforded by an independent manufacturer's design, prototype and manufacturing
expertise. Third, as OEMs experience greater levels of competition, many OEMs
seek to focus their resources on their core competencies in technology and
product development and marketing. By offering comprehensive electronics
assembly and turnkey manufacturing services, independent manufacturers enable
OEMs to concentrate their efforts on such activities. Finally, OEMs in the
electronics industry are faced with increased difficulties in reducing overhead
while planning, procuring and managing their inventories efficiently due to
frequent design changes, short product life cycles, large investments in
electronics components, component price fluctuations and the need to achieve
economies of scale in materials procurement. OEMs can reduce product costs by
using an independent manufacturer's volume procurement, materials management
and manufacturing capabilities.
In response to the intense competition in the electronics manufacturing
services industry, an increasing number of independent manufacturers have
expanded the range of their value added services to serve as a single source
provider of a comprehensive set of services, or turnkey solutions, for their
customers. For example, by developing design and prototype expertise, an
independent manufacturer can assist an OEM customer in the critical
preproduction planning phase of product development, and follow on with
traditional volume production services. The expansion in the types of value
added services offered by independent electronics manufacturers has enabled
OEMs to streamline their production processes by utilizing fewer independent
service providers to meet their production needs. As a result, the
establishment of mutually beneficial strategic relationships between OEMs and
independent manufacturers are increasingly becoming an important competitive
factor for both OEMs and independent manufacturers within their respective
industries.
In addition, rapid advances in technology have further supported the trend by
OEMs to utilize independent electronics manufacturers. OEMs in the advanced
electronics industries continue to devote considerable resources to the
development of new technologies to incorporate into their products. Due to
their reduced size and higher performance standards, these products require
state-of-the-art assembly, manufacturing and process technologies to achieve
targeted levels of performance. OEMs are increasingly utilizing independent
electronics manufacturers that have demonstrated capabilities in these
developing technologies.
XETEL STRATEGY
The Company's objective is to establish and expand long-term relationships with
OEMs of advanced electronics products primarily in the telecommunications,
networking and computer industries by providing a wide range of sophisticated
design and manufacturing services. In order to attain this goal and assist
customers in continually improving time to market and time to volume
production, the Company's strategy includes the following elements:
IMPLEMENT ADVANCED MANUFACTURING PROCESS TECHNOLOGIES. To meet anticipated
long-term market demands, the Company has invested and intends to continue to
invest in advanced manufacturing process technologies. The Company expects that
it will continue to work closely with its customers to identify and implement
the next-stage process technologies needed for the design and manufacture of
complex new products. The Company will continue to expand its capabilities in
leading surface mount technologies such as fine pitch surface mount and intends
to further develop its capabilities in BGA. Moreover, the Company plans to
devote additional resources to the development of capabilities in chip-on-board
("COB") process technologies.
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DEVELOP DESIGN, PROTOTYPE, AND MANUFACTURING SERVICES CENTERS IN TARGETED
GEOGRAPHIC AREAS. XeTel has expanded the range of its value added services to
include design, prototype and preproduction services, volume production,
testing, system integration, and order fulfillment. During fiscal 1997,
additional full-service manufacturing centers were acquired in Dallas, Texas
and San Ramon, California. By offering these services, the Company believes
that it is well positioned with its customers to provide value added
manufacturing of their products through production volumes. The Company plans
to establish similar design, prototype and manufacturing service centers in
other geographic areas which have a high current customer concentration, or in
certain other targeted geographic markets. This expansion may be implemented by
acquisitions of existing companies or the commencement of new operations in
these areas. No assurance can be given that any acquisition by the Company
will not materially and adversely affect the Company's business, financial
condition and results of operations or that any such acquisition will enhance
the Company's business.
EXPAND STATE-OF-THE-ART MANUFACTURING CAPACITY. During fiscal 1998, the Company
relocated its Austin manufacturing and administrative operations to new
facilities totaling 145,000 square feet. To support higher demand levels , the
Company increased its investments in advanced test, surface mount ("SMT") and
other equipment during fiscal 1998. The Company expects to continue to expand
its manufacturing facilities with state-of-the-art equipment and retain
additional personnel to increase its production capacity and enhance its
customer service.
CONTINUE TO IMPROVE PRODUCTION AND BUSINESS PROCESSES. The Company continually
seeks to improve production quality and reduce cycle time. The Company combines
materials management and continuous flow manufacturing with sophisticated
computer-aided design and manufacturing capabilities to shorten the time from
receipt of customers' electronic design data to manufacturing. The Company will
continue to coordinate its design, prototype, manufacturing and support
operations to provide customers with quick turnaround, greater production
flexibility and shorter delivery cycles. In addition, the Company seeks to
refine its computer integrated manufacturing processes, including management
resources planning ("MRP II"), materials procurement and order fulfillment. All
of the quality management systems at the Company's three sites are ISO 9002
certified.
EXPAND SERVICES TO TARGETED CUSTOMERS. The Company targets customers with
which it can establish long-term, primary or sole source relationships and
endeavors to provide such customers with turnkey solutions for existing and new
products. The Company intends to expand the range of services that it provides
by developing expertise in areas complementary to the Company's existing
capabilities and identifying additional market opportunities where its
capabilities can improve customer time to market, time to volume, product
yields and utilization.
MANUFACTURING CAPABILITIES AND SERVICES
XeTel seeks to establish strategic relationships with its customers primarily
in the telecommunications, networking and computer industries by providing
advanced manufacturing process technologies and high quality, responsive and
flexible manufacturing services. Such technologies and services include the
following:
DESIGN AND PROTOTYPE SERVICES. As XeTel's customers experience greater
competition and shorter product life cycles in their respective industries,
XeTel has responded by expanding its design, prototype and preproduction
services. The Company's engineers work closely with customers to design
products that will meet customers' specifications for functionality and
reliability, while providing optimal manufacturability under planned production
requirements. By applying its computer-aided design and manufacturing
capabilities and quick turnaround techniques in manufacturing and surface mount
assembly to the design and prototype of a customer's product, the Company's
engineering team assists the customer in improving the manufacturability and
performance reliability of the product and thereby reducing production time and
costs. Following completion of the design and engineering of a product, the
Company can, as requested by the customer, manufacture prototypes or
preproduction versions of the product. The Company believes that as a result of
its involvement in the design and prototype of a customer's product, it is well
positioned to provide value added manufacturing of the product through
production volumes.
SURFACE MOUNT ASSEMBLY SERVICES. XeTel has made a substantial investment in
specialized equipment which includes 18 SMT machines, GenRad and Realm testers
and nitrogen atmosphere reflow soldering machines. In addition, the Company
employs advanced manufacturing processes, including sophisticated surface mount
technologies. SMT has generally replaced pin-through-hole technology as the
preferred method for printed circuit board assemblies. Using SMT, the leads on
integrated circuits and other electronic components are soldered to the surface
of the printed circuit board rather than inserted into holes, thereby
accommodating a substantially greater component density than can be achieved
with pin-through-hole technology. This permits a reduction in the size of the
printed circuit board which, in turn, enhances the performance of the product
and can reduce the costs of materials. Advanced surface mount technologies,
which include double-sided component attachment and fine pitch SMT component
placement, have further increased the component density and reduced the printed
circuit board size. Double-sided component attachment consists of SMT
components placed on both sides of the printed circuit board, and fine pitch
SMT involves placing components with tightly spaced leads, typically less than
30 mil lead-to-lead spacing. Currently, the most common fine pitch surface
mount device is a quad flat pack ("QFP"), which is a device with tightly spaced
leads around the periphery. Substantially all of the printed circuit boards
assembled by the Company utilize SMT, and an increasing percentage employ fine
pitch SMT and double-sided SMT attachment. In addition, XeTel continues to
devote resources to develop new process technologies to support customer
requirements.
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XeTel has integrated BGA placement capabilities into its manufacturing
processes. A BGA component has leads arrayed on the underside of the component
which supports higher speed devices and results in better assembly yields than
fine pitch surface mount placement. XeTel is currently directing additional
resources into the development of COB technology and has produced engineering
samples utilizing this technology. Two methods of COB technology exist: direct
chip attachment ("DCA") and wirebonding. Specifically, DCA (commonly known as
"flip-chip") involves placing the chip (or integrated circuit) with the leads
facing down so that the electrical interconnects are in direct contact with the
printed circuit board. In comparison, wirebonding involves sequentially bonding
wires from the chip leads to the printed circuit board.
TURNKEY SOLUTIONS. To meet the diverse requirements and specifications of its
customers, the Company has broadened the range of its electronics manufacturing
services to provide turnkey solutions. The Company's turnkey solutions
generally consist of product design and prototype, component procurement,
utilization of the components to manufacture printed circuit board assemblies,
testing, systems integration services, order fulfillment and distribution to
the OEM or directly to its customers. The Company's testing services include
test development, board-level in-circuit testing and functional and
environmental stress screening of both board-level and system-level products.
ADVANCED MANUFACTURING PROCESSES. XeTel has applied statistical process
control ("SPC") and design of experiment ("DOE") techniques in order to control
its critical process parameters. Additionally, the Company's total quality
management ("TQM") approach supports continuous improvement in key processes
such as cycle time reduction. To improve production efficiencies, a variety of
computer-aided manufacturing methods have been implemented. For example, the
Company has implemented an innovative automated system to reduce the set-up
time and improve the quality of loading components on its SMT placement
machines, and has also internally developed a data collection system which
utilizes touchscreen technology to gather data to maintain process controls and
provide quality feedback. The quality management systems at the Company's three
facilities are ISO 9002 certified.
MATERIALS MANAGEMENT. XeTel's materials management organization focuses on
supply and inventory management. The Company's services include planning,
purchasing and warehousing of electronic components. XeTel's materials
management system combines traditional approaches such as MRP II with
responsive procurement strategies, including just-in-time inventory management
techniques and dock-to-stock shipments from qualified suppliers. XeTel actively
manages its materials pipeline and supplier base to enable the Company's
customers to adjust production requirements within established frameworks. The
Company maintains more than one supply source wherever possible, however,
components for certain major OEM contracts are only obtainable from a single
source. The Company's computer integrated information systems facilitate the
tracking of components and materials from forecast to delivery, thus enabling
the Company to efficiently procure components and materials, determine
inventory levels by customer and monitor the flow of parts through each major
step of the production process. The Company provides its customers with
flexible inventory arrangements, including in certain circumstances the
acceptance of components on a consignment basis, or the purchase of components
in advance of lengthy manufacturing programs. An interruption or loss of any
such component supply could have a material adverse effect on the Company's
business, financial condition and results of operations.
PROGRAM MANAGEMENT. Customer responsiveness is a key priority at XeTel. To
provide better service to its customers, the Company has implemented a customer
team approach. Each customer team typically consists of a program manager, an
assigned customer engineer and a materials planner, resulting in a cohesive
group with expertise in the production process. Customer teams interact with
customers on a regular basis and work with XeTel's engineering, materials
management and manufacturing personnel to enhance responsiveness to customers.
CUSTOMERS AND MARKETING
XeTel has over 14 years of experience in the electronics manufacturing services
industry. The Company serves a diversified customer base consisting of
approximately 120 customers spread over a variety of growing industries,
including the telecommunications, networking and computer industries.
Although XeTel serves a large and varied group of customers, a substantial
portion of the Company's sales are derived from a small number of customers.
Three of the Company's customers, Motorola SD, General Instrument, and SBE,
accounted for 20%, 16% and 9% of the Company's net sales for fiscal 1998,
respectively, and 0%, 9% and 4% of net sales for fiscal 1997, respectively. In
addition, the Company's fifteen largest customers (including Motorola SD,
General Instrument, and SBE) collectively accounted for approximately 78% of
the Company's net sales during fiscal 1998. The loss of, or a significant
curtailment of purchases by, one or more of these customers, or any other
significant customer of the Company, could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's customers typically enter into a manufacturing services agreement
("MSA") with XeTel to provide the general terms and conditions applicable to
purchase orders delivered to the Company. A MSA is not an authorization for the
Company to provide services or ship product, but provides the contractual
framework for the future relationship between the parties. Although the terms
of MSAs will vary from customer to customer depending on the particular
requirements of each customer, the Company's standard MSA provides that (i) the
Company will provide price quotations for services to the customer, (ii) if the
customer determines to proceed with ordering services based on such price
quotations, the customer then will provide a purchase order to the Company and,
(iii) the Company may then accept such purchase order, at which time the
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Company is authorized to ship product or provide services in accordance with
the terms of the purchase order. Upon execution of a MSA, the customer will
typically provide the Company with a binding purchase order for required
deliveries for a minimum of 90 days, and will further provide a nonbinding
forecast of its requirements for an additional 180 to 270 day period, updated
monthly. In the event of the modification or cancellation of a purchase order,
the customer is generally liable for services rendered, materials purchased or
procured and, in certain circumstances, charges associated with such
modification or cancellation. MSAs typically are terminable by either party
upon 120 days prior written notice to the other for convenience or within 30
days prior written notice to the other for cause. Significant cancellations,
reductions or delays in orders by customers, or inability by customers to pay
for services provided by the Company or to pay for components and materials
purchased by the Company on such customer's behalf, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company markets its services through its sales and marketing organization
and its customer support and service organization. The Company also utilizes
independent sales representative organizations located in the major electronics
market areas in the United States to develop new customer introductions and
generate new orders from existing customers.
COMPETITION
XeTel competes in the electronics manufacturing services industry which is
highly fragmented and is characterized by intense competition. The Company
competes against numerous domestic independent electronics manufacturers,
including ACT Manufacturing, Atlantic Design, AVEX Electronics, Benchmark
Electronics, DII Group, Flextronics, IEC Electronics, Jabil Circuit, SCI
Systems, Solectron and numerous regional manufacturers. Certain of these
competitors have substantially greater manufacturing, financial and marketing
resources than the Company. In addition, the Company may be operating at a cost
disadvantage compared to manufacturers who have greater direct buying power
with component suppliers or who have lower cost structures. Current and
prospective customers continually evaluate the merits of manufacturing products
internally and will from time to time offer manufacturing services to third
parties in order to utilize excess capacity. During downturns in the
electronics industry, OEMs may become more price sensitive.
The Company believes that the principal competitive factors in the electronics
manufacturing services industry are quality, service, technology, manufacturing
capability, price, reliability, timeliness and regional access. There can be no
assurance that competition from existing or potential competitors will not have
a material adverse effect on the Company's business, financial condition or
results of operations. The introduction of lower priced competition or
significant price reductions by the Company's competitors could result in price
reductions that would adversely affect the Company's business, financial
condition and results of operations, as could the introduction of new
technologies which would render the Company's manufacturing process technology
less competitive or obsolete.
BACKLOG
The Company's backlog as of March 28, 1998 was approximately $112.3 million
compared to approximately $66.1 million as of March 29, 1997. Backlog consists
of purchase orders received by the Company and commitments under scheduled
releases, both of which generally specify delivery dates within twelve months.
Variations in the size and delivery schedules of purchase orders received by
the Company, as well as changes in customers' delivery requirements or the
rescheduling or cancellation of orders and commitments, has resulted in the
past and may result in substantial fluctuation in backlog from period to
period. Accordingly, the Company believes that backlog may not be a meaningful
indicator of future financial results. See "Variability of Customer
Requirements" and "Fluctuations in Operating Results."
EMPLOYEES
As of March 28, 1998, the Company had approximately 650 full-time employees
supplemented from time to time by part-time employees. The employees are not
represented by a union, and the Company believes its employee relations to be
satisfactory.
The Company's success depends to an extent upon the continued services of
several key employees. The loss of certain key personnel could have a material
adverse effect on the Company. The Company's business also depends upon its
ability to continue to attract and retain senior managers and skilled
employees. Failure to do so could adversely affect the Company's operations.
ENVIRONMENTAL MATTERS
In the past, electronics manufacturing services companies have used
chlorofluorocarbon ("CFC") cleaners which are believed to contribute to
depletion of the ozone layer in the atmosphere. In 1993, the Company eliminated
the use of CFC-based chemicals in its manufacturing operations.
The Company is required to comply with all federal, state, county and municipal
regulations regarding protection of the environment. The Company believes that
its facilities currently comply with all applicable regulations regarding
environmental protection. The cost to the Company of such compliance to date
has not materially affected the Company's business, financial condition or
results of operations. However, there can be no assurance that violations will
not occur in the future as a result of human error, equipment failure or other
causes. The Company cannot predict the nature, scope or effect of environmental
legislation or regulatory requirements that could be imposed or how existing or
future laws or regulations will be administered or interpreted. Compliance with
more stringent laws or regulations, as well as more vigorous enforcement
policies of regulatory agencies, could require substantial expenditures by the
Company and could adversely affect the Company's business, financial condition
and results of operations.
<PAGE> 8
ACQUISITIONS
In July 1996, the Company acquired Maxtron Corporation located in Dallas,
Texas. Maxtron was a contract manufacturer focusing on high complexity, custom
assemblies. In December 1996, the Company acquired the manufacturing operations
of SBE, Inc. located in San Ramon, California. Under the asset purchase
agreement related to the SBE, Inc. transaction, the Company acquired all
manufacturing activities, including production. The companies have entered
into a long term purchasing agreement under which SBE, Inc. will purchase
contract manufacturing services from the Company. The Company believes these
recent acquisitions will further establish and expand long-term relationships
with OEM's of advanced electronic products in targeted geographic areas.
However, no assurance can be given that such expansion will have a positive
effect on the Company's operating results.
ITEM 2. PROPERTIES
XeTel leases 145,000 square feet of space in Austin, Texas for its executive
offices and manufacturing operations. Additional leased manufacturing plants
are located in Dallas, Texas (25,000 square feet) and San Ramon, California
(25,000 square feet).
A disruption of the Company's manufacturing operations resulting from sustained
process abnormalities, human error, theft, government intervention or a natural
disaster such as fire, earthquake, or flood could cause the Company to limit
its manufacturing operations and consequently have a material adverse effect on
the Company.
The Company believes that its existing facilities are adequate for its current
level of business. The Company anticipates that additional space will be needed
to meet increased demand associated with targeted geographic markets currently
not served by the Company.
ITEM 3. LEGAL PROCEEDINGS
To the Company's knowledge, there are no pending legal proceedings to which it
is a party or to which any of its property is subject that are material to the
Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
COMMON STOCK INFORMATION
The following table sets forth the quarterly high and low per share sales
prices of the Company's common stock by quarter for fiscal 1998 and fiscal 1997
as reported by the Nasdaq National Market. The Company's common stock is quoted
on the Nasdaq National Market under the symbol "XTEL".
<TABLE>
<CAPTION>
1998 1997
---- ----
QUARTER HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First $6 3/8 $4 3/8 $10 $6 5/8
Second 6 1/8 5 7 7/8 3 3/4
Third 5 1/2 3 3/4 5 3 1/4
Fourth 4 1/4 3 1/2 6 1/8 3 3/4
</TABLE>
XeTel has not paid any dividends since its inception and does not intend to pay
any dividends in the foreseeable future. As of June 19, 1998, the approximate
number of record shareholders was 1,864 based upon the information obtained
from the Company's transfer agent.
<PAGE> 9
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements, including the notes to financial statements. The
information set forth below is not necessarily indicative of results of future
operations. The information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FIVE YEAR SELECTED FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
March 28, March 29, March 30, April 1, April 2,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 112,685 $ 90,453 $ 117,846 $ 64,507 $ 52,451
Cost of sales 105,171 83,442 102,605 58,689 49,801
--------- --------- --------- --------- ---------
Gross profit 7,514 7,011 15,241 5,818 2,650
Selling, general and administrative expenses 6,469 6,573 5,875 4,146 4,059
--------- --------- --------- --------- ---------
Income (loss) from operations 1,045 438 9,366 1,672 (1,409)
Interest (expense) income, net (30) 268 (605) (411) (323)
--------- --------- --------- --------- ---------
Income (loss) before income taxes 1,015 706 8,761 1,261 (1,732)
Provision (benefit) for income taxes 386 257 3,106 319 (252)
--------- --------- --------- --------- ---------
Net income (loss) $ 629 $ 449 $ 5,655 $ 942 $ (1,480)
========= ========= ========= ========= =========
Basic earnings (loss) per share $ 0.07 $ 0.05 $ 0.85 $ 0.37 $ (0.59)
========= ========= ========= ========= =========
Basic weighted average shares outstanding 8,863 8,709 6,673 2,531 2,521
========= ========= ========= ========= =========
Diluted earnings (loss) per share $ 0.07 $ 0.05 $ 0.76 $ 0.14 $ (0.59)
========= ========= ========= ========= =========
Diluted weighted average shares outstanding 9,532 9,575 7,411 6,646 2,521(1)
========= ========= ========= ========= =========
Balance Sheet Data:
Working capital $ 20,953 $ 20,384 $ 20,560 $ 1,007 $ 1,137
Total assets 58,806 39,802 45,156 22,950 15,282
Notes payable and current portion of long-term debt 5,800 -- -- 7,016 5,612
Long-term debt, less current portion 2,667 42 -- -- 379
Stockholders' equity $ 27,744 $ 26,661 $ 24,922 $ 4,403 $ 3,446
========= ========= ========= ========= =========
</TABLE>
(1) Weighted average shares outstanding excludes shares of common stock
issuable upon the conversion of the outstanding shares of Series A Preferred
Stock because the inclusion of such shares would be antidilutive.
<PAGE> 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this document contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Actual results could differ materially from those projected
in the forward-looking statements throughout this document as a result of the
risk factors set forth above and elsewhere.
OVERVIEW
XeTel was founded in 1984. In 1986, Rohm U.S.A., Inc., ("Rohm") a subsidiary of
Rohm Co., Ltd., Japan, a diversified electronics company, acquired a
controlling interest in the Company. Since its inception, the Company has
manufactured surface mount assemblies and performed other manufacturing
services for OEMs in the electronics industry. In a number of cases, such
services were rendered during periods in which customers were experiencing
fluctuations in demand for their products. During such periods, the Company's
net sales and operating results were and are subject to significant
fluctuations that often were and are tied to the market demand for its
customers' products, competitive factors and the customers' need to utilize
independent manufacturers to maintain sufficient product supply to meet such
demand.
Annual and/or quarterly gross margins and operating results are also affected
by the level of capacity utilization of manufacturing facilities, indirect
labor and selling, general and administrative expenses. Accordingly, gross
margins and operating income margins have generally improved during periods of
high volume and high capacity utilization. XeTel generally has idle capacity
and reduced operating margins during periods of lower-volume.
In an effort to achieve greater stability and higher gross margins, the Company
made the strategic decision in 1993 to reduce its dependence on the computer
industry and expand its service offerings in order to establish long-term
relationships with targeted customers in diversified markets. With the addition
of new management personnel in 1993, including a new President in September
1993, the Company focused certain of its resources to establish capabilities in
product design and prototype, improve materials management processes,
restructure the Company's management organization, establish dedicated customer
teams, and to expand and diversify its customer base. The Company has reduced
its role as a source of additional capacity for OEMs during periods of
fluctuating product demand and has positioned itself to provide a more
comprehensive set of services within the electronics manufacturing services
industry.
The development and growth of the Company's business has generally followed the
trend by OEMs in the electronics industry to outsource certain of their
manufacturing requirements. Recognizing the benefits offered by using
independent manufacturers, OEMs in the electronics industry have increasingly
relied on independent manufacturers not only as a source of additional
manufacturing capacity during periods of fluctuating demand, but as the primary
source for their manufacturing and assembly needs. In addition, the Company has
developed competencies in additional areas where it can add value to its
customers' requirements, such as design, prototype, systems integration and
order fulfillment and has sought to use such competencies to forge long-term
relationships as a single source provider of turnkey solutions for its
customers. During fiscal 1997, XeTel acquired two full-service manufacturing
services centers in Dallas, Texas and San Ramon, California to further
establish and expand its long-term relationships with OEM's of advanced
electronic products.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net sales of certain items in
the Statement of Income. The financial information and the discussion below
should be read in conjunction with the financial statements and notes thereto.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
March 28, March 29, March 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 93.3 92.2 87.1
------ ------ ------
Gross profit 6.7 7.8 12.9
Selling, general and administrative expenses 5.7 7.3 5.0
------ ------ ------
Income from operations 1.0 0.5 7.9
Interest (expense) income, net (0.1) 0.3 (0.5)
------ ------ ------
Income before income taxes 0.9 0.8 7.4
Provision for income taxes 0.3 0.3 2.6
------ ------ ------
Net income 0.6% 0.5% 4.8%
====== ====== ======
</TABLE>
<PAGE> 11
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales for fiscal 1998 increased 24.6% to $112.7 million from $90.5 million
for fiscal 1997. The increase in net sales resulted primarily from increased
shipments to the Company's major computer, telecommunications, and networking
customers. The Company's sales to its three largest customers for fiscal 1998
represented 20%, 16% and 9% respectively, of total net sales. Sales to the
Company's three largest customers for fiscal 1997 represented 14%, 9% and 8%
respectively, of total net sales.
Gross profit for fiscal 1998 increased to $7.5 million from $7.0 million in
fiscal 1997. Gross profit is defined as net sales less cost of sales. Cost of
sales consists of direct labor, direct material and manufacturing overhead
(which includes manufacturing and process engineering expenses). Gross margin
(gross profit as a percentage of net sales) decreased to 6.7% for fiscal 1998
from 7.8% for fiscal 1997. The decrease in the Company's gross margin is
mainly due to higher costs associated with strategic investments made to expand
and upgrade equipment and facilities. Management intends to continue to expand
the range of services it provides and focus on market opportunities where its
capabilities in rendering value added services in a cost effective manner can
improve productivity, product yields and utilization.
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries and related expenses, marketing and promotional expenses, and sales
commissions paid to direct sales personnel and independent sales representative
organizations. SG&A expenses for fiscal 1998 remained relatively flat at $6.5
million as compared to fiscal 1997. SG&A expenses represented 5.7% of net sales
for fiscal 1998 as compared to 7.3% for fiscal 1997. The decrease in SG&A
expenses as a percentage of sales reflects the effect of cost controls during
fiscal 1998.
Other (expense) income, net for fiscal 1998 reflects expense of $30,000
compared to income of $268,000 for fiscal 1997. The change in other (expense)
income, net was due to increased interest expense incurred on the term note and
revolving line of credit in fiscal 1998.
The provision for income taxes of $386,000 and $257,000 reflects an effective
tax rate of 38.0% and 36.4% for fiscal 1998 and fiscal 1997, respectively. The
higher effective tax rate for fiscal 1998 was primarily due to increased
goodwill amortization expense during fiscal 1998 that was deductible for
financial reporting purposes but was not deductible for tax purposes.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 decreased 23.2% to $90.5 million from $117.8 million
for fiscal 1996. The decrease in net sales was primarily due to cancellations
and rescheduled orders from certain of the Company's major telecommunications
and networking customers. The Company's sales to its three largest customers
for fiscal 1997 represented 14%, 9% and 8%, respectively, of total net sales.
Sales to the Company's three largest customers for fiscal 1996 represented 24%,
18% and 15%, respectively, of total net sales.
Gross profit for fiscal 1997 decreased 53.9% to $7.0 million from $15.2 million
in fiscal 1996. Gross margin decreased to 7.8% for fiscal 1997 from 12.9% for
fiscal 1996. The decrease in the Company's gross margin reflects the effects
of lower sales levels and the lower absorption of fixed costs. The lower sales
levels also contributed to lower inventory and accounts receivable balances.
SG&A expenses for fiscal 1997 increased 10.2% to $6.5 million from $5.9 million
in fiscal 1996. SG&A expenses represented 7.3% of net sales for fiscal 1997 as
compared to 5.0% for fiscal 1996. Higher SG&A expenses were primarily
attributable to increased public company expenses and additional expenses
associated with newly acquired businesses.
Other (expense) income, net for fiscal 1997 reflects income of $268,000 versus
an expense of $605,000 for fiscal 1996. The change was due to interest earned
from an increase in cash and cash equivalents and a decrease in interest
expense resulting from the payment of amounts outstanding under the Company's
revolving line of credit and notes payable. This debt was paid off in
February, 1996 with a portion of proceeds from the Company's initial public
offering.
The provision for income taxes of $257,000 and $3.1 million reflects an
effective tax rate of 36.4% and 35.5% for fiscal 1997 and fiscal 1996,
respectively. The lower effective tax rate for fiscal 1996 was due to a
decrease in the Company's valuation allowance. As a result of the decrease,
the Company had no valuation allowance at March 30, 1996 or March 29, 1997.
<PAGE> 12
QUARTERLY RESULTS
The following table sets forth certain quarterly financial data for the periods
indicated (in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
March 28, Dec. 27, Sept. 27, June 28,
FISCAL 1998 1998 1997 1997 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales $ 37,724 $ 27,772 $ 22,722 $ 24,467
Gross Profit 2,568 930 1,720 2,296
Income (loss) from operations 890 (606) 90 672
Net income (loss) 502 (388) 61 455
======== ======== ======== ========
Basic earnings (loss) per share $ 0.06 $ (0.04) $ 0.01 $ 0.05
======== ======== ======== ========
Basic weighted average
shares outstanding 8,927 8,840 8,821 8,811
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.05 $ (0.04) $ 0.01 $ 0.05
======== ======== ======== ========
Diluted weighted average
shares outstanding 9,356 8,840 9,662 9,638
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
March 29, Dec. 28, Sept. 28, June 29,
FISCAL 1997 1997 1996 1996 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net Sales $ 24,083 $ 17,979 $ 20,129 $ 28,262
Gross Profit 2,276 972 857 2,906
Income (loss) from operations 432 (624) (674) 1,304
Net income (loss) 305 (334) (368) 846
======== ======== ======== =========
Basic earnings (loss) per share $ 0.03 $ (0.04) $ (0.04) $ 0.10
======== ======== ======== =========
Basic weighted average
shares outstanding 8,786 8,772 8,742 8,535
======== ======== ======== =========
Diluted earnings (loss) per share $ 0.03 $ (0.04) $ (0.04) $ 0.09
======== ======== ======== =========
Diluted weighted average
shares outstanding 9,587 8,772 8,742 9,503
======== ======== ======== =========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $21.0 million at the end of fiscal 1998, compared to $20.4
million at the end of fiscal 1997. In addition to the Company's working
capital as of March 28, 1998, which includes cash and cash equivalents of $7.2
million, the Company also has $19 million available from unused credit
facilities.
Net cash used in operating activities during fiscal 1998 was $2.7 million on
higher year over year sales levels. Net cash provided by operating activities
was $4.9 million in fiscal 1997 on lower year over year sales levels and net
cash used in operating activities was $1.5 million in fiscal 1996.
Capital expenditures during fiscal 1998, 1997 and 1996 were $6.3 million, $1.4
million and $2.5 million, respectively. Management anticipates capital
expenditures in fiscal 1999 will not exceed the level of capital expenditures
made in fiscal 1998. During fiscal 1998, the Company relocated its Austin
manufacturing and administrative operations and incurred larger capital
expenditures to upgrade its equipment and capabilities. The Company's
<PAGE> 13
expenditures on research and development in fiscal 1998, 1997 and 1996 were
$183,000, $180,000 and $174,000, respectively.
The Company has negotiated $36 million in credit lines and equipment financing
facilities: (i) a revolving line of credit for $17 million from a commercial
bank, (ii) a $3.3 million term loan facility, and (iii) an equipment financing
facility for $16 million from a financial services company ($7.5 million
unused). There was $5.3 million and $0 outstanding under the commercial bank
line of credit and $3.3 million and $0 outstanding under the term note at March
28, 1998 and March 29, 1997, respectively.
The bank facility bears interest at LIBOR plus 1.25% to 1.75% depending upon
certain financial ratios and/or prime (such rate determined based upon the
amounts and period of loans), matures August 31, 1999 and is secured by certain
assets of the Company. The bank facility requires the payment of a monthly
commitment fee equal to one-eighth of one percent (1/8%) on the unused balance,
and borrowings are limited based upon certain collateral availability
requirements. The term loan facility bears interest at 9.2% with a maturity of
August 31, 2000. The equipment financing facility provides for the leasing of
equipment over a five-year period commencing on the date of acceptance of such
equipment.
The financing facilities contain certain restrictions which, among other
things, require maintenance of a minimum level of tangible net worth and other
operating and financial ratios.
The Company believes that its working capital, together with cash generated
from operations and financing facilities, will be sufficient to satisfy
anticipated sales growth and investment in manufacturing facilities and
equipment through its 1999 fiscal year.
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The information required by Item 8 of Form 10-K is presented here in the
following order:
<TABLE>
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Balance Sheet as of March 28, 1998 and March 29, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Statement of Income for the fiscal years ended March 28, 1998, March 29, 1997
and March 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Statement of Changes in Stockholders' Equity for the fiscal years ended March 28, 1998,
March 29, 1997 and March 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Statement of Cash Flows for the fiscal years ended March 28, 1998, March 29, 1997
and March 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
<PAGE> 15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of XeTel Corporation
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of XeTel
Corporation (the "Company") at March 28, 1998 and March 29, 1997, and the
results of its operations and its cash flows for each of the three fiscal years
in the period ended March 28, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
- ----------------------------------
PRICE WATERHOUSE LLP
Austin, Texas
April 25, 1998
<PAGE> 16
XETEL CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
March 28, March 29,
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,239 $ 7,032
Trade accounts receivable, net of
allowance for doubtful accounts
of $240 and $240, respectively 22,887 13,886
Inventories 18,061 10,499
Prepaid expenses and other 927 1,836
-------- --------
Total current assets 49,114 33,253
Property and equipment, net 8,955 5,599
Goodwill 737 950
-------- --------
Total assets $ 58,806 $ 39,802
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 19,396 $ 9,940
Notes payable and current portion
of long term debt 5,800 --
Accrued expenses and other liabilities 2,965 2,929
-------- --------
Total current liabilities 28,161 12,869
Deferred income taxes 234 230
Long term debt 2,667 42
Commitments (Note 7)
Stockholders' equity:
Common stock, $0.0001 par value,
25,000,000 shares authorized,
8,998,896 and 8,816,085 shares
issued and 8,936,400 and 8,795,589
shares outstanding, respectively 21,142 20,998
Retained earnings 6,625 5,996
Deferred compensation (23) (333)
-------- --------
Total stockholders' equity 27,744 26,661
-------- --------
Total liabilities and
stockholders' equity $ 58,806 $ 39,802
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 17
XETEL CORPORATION
STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------
March 28, March 29, March 30,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 112,685 $ 90,453 $ 117,846
Cost of sales 105,171 83,442 102,605
--------- --------- ---------
Gross profit 7,514 7,011 15,241
Selling, general and
administrative
expenses 6,469 6,573 5,875
--------- --------- ---------
Income from operations 1,045 438 9,366
Other (expense) income, net (30) 268 (605)
--------- --------- ---------
Income before income taxes 1,015 706 8,761
Provision for income taxes 386 257 3,106
--------- --------- ---------
Net income $ 629 $ 449 $ 5,655
========= ========= =========
Basic earnings per share $ 0.07 $ 0.05 $ 0.85
========= ========= =========
Basic weighted average
shares outstanding 8,863 8,709 6,673
========= ========= =========
Diluted earnings per share $ 0.07 $ 0.05 $ 0.76
========= ========= =========
Diluted weighted average
shares outstanding 9,532 9,575 7,411
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 18
XETEL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Series A Retained
Preferred Stock Common Stock Earnings Total
--------------- ------------ Deferred (Accumulated Stockholders'
Shares Amount Shares Amount Comp Deficit) Equity
--------- ---------- --------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1995 3,864 $ 3,235 2,512 $ 1,276 -- $ (108) $ 4,403
Stock options exercised -- -- 53 65 -- -- 65
Deferred compensation -- -- -- 64 $ (64) -- --
Amortization of deferred
compensation -- -- -- -- 9 -- 9
Net income -- -- -- -- -- 5,655 5,655
Conversion of preferred
stock (3,864) (3,235) 3,864 3,235 -- -- --
Issuance of common
stock under initial
public offering -- -- 2,094 14,790 -- -- 14,790
--------- ---------- --------- ---------- ------------ ------------ ---------
Balance, March 30, 1996 -- -- 8,523 19,430 (55) 5,547 24,922
Stock options exercised -- -- 68 77 -- -- 77
Tax benefit on
disqualifying -- -- -- 46 -- -- 46
dispositions
Amortization of deferred
compensation -- -- -- -- 16 -- 16
Acquisition- XeTel Dallas -- -- 207 1,448 (294) -- 1,154
Net income -- -- -- -- -- 449 449
Other -- -- (2) (3) -- -- (3)
--------- ---------- --------- ---------- ------------ ------------ ---------
Balance, March 29, 1997 -- -- 8,796 20,998 (333) 5,996 26,661
Stock options exercised -- -- 115 149 -- -- 149
Employee stock purchase
plan -- -- 67 254 -- -- 254
Transfer of restricted stock -- -- (42) (294) 294 -- --
Tax benefit on
disqualifying dispositions -- -- -- 35 -- -- 35
Amortization of deferred
compensation -- -- -- -- 16 -- 16
Net income -- -- -- -- -- 629 629
--------- ---------- --------- ---------- ------------ ----------- ---------
Balance, March 28, 1998 -- $ -- 8,936 $ 21,142 $ (23) $ 6,625 $ 27,744
========= ========== ========= ========== ============ =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 19
XETEL CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
March 28, March 29, March 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 629 $ 449 $ 5,655
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 2,736 2,080 1,453
Deferred income tax benefit 121 5 (323)
Loss on disposal of equipment 51 16 94
Change in operating assets and liabilities:
(Increase) decrease in--
Trade accounts receivable (9,001) 5,949 (9,250)
Inventories (7,562) 4,524 (7,413)
Prepaid expenses and other 788 (509) (428)
Increase (decrease) in--
Trade accounts payable 9,456 (4,745) 3,922
Accrued expenses, taxes, and other liabilities 35 (2,845) 4,778
-------- -------- --------
Cash (used in) provided by operating activities (2,747) 4,924 (1,512)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of equipment 426 -- --
Purchases of property and equipment (6,334) (1,416) (2,507)
Acquisition, net of cash acquired - XeTel Dallas -- (18) --
Acquisition, net of cash acquired - XeTel West -- (1,631) --
-------- -------- --------
Cash used in investing activities (5,908) (3,065) (2,507)
-------- -------- --------
Cash flows from financing activities:
Net borrowings under debt agreements 8,424 (92) (7,016)
Proceeds from stock options exercised 149 77 65
Cash proceeds from stock issued under employee
stock purchase plan 254 -- --
Tax benefit on disqualifying dispositions 35 46 --
Net proceeds from initial public offering -- -- 14,790
-------- -------- --------
Cash provided by financing activities 8,862 31 7,839
-------- -------- --------
Increase in cash and cash equivalents 207 1,890 3,820
Cash and cash equivalents, beginning of period 7,032 5,142 1,322
-------- -------- --------
Cash and cash equivalents, end of period $ 7,239 $ 7,032 $ 5,142
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 20
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
XeTel provides advanced design and prototype services, manufactures
sophisticated surface mount assemblies and supplies turnkey solutions to
original equipment manufacturers primarily in the telecommunications,
networking and computer industries. XeTel incorporates its design and
prototype services and assembly capabilities together with materials
management, advanced testing, systems integration services and order
fulfillment to provide turnkey solutions for its customers.
CASH EQUIVALENTS
All highly liquid investments purchased with original maturities of three
months or less are classified as cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost (principally standard cost which
approximates actual cost on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization on
property and equipment is calculated on the straight-line method over the
estimated useful lives of the assets, which range from three to seven years.
REVENUE RECOGNITION
Sales are recognized on the date of shipment to customers. Sales returns are
not material.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes ("SFAS No. 109"). Under SFAS No. 109, deferred income taxes are
provided for temporary differences between the basis of assets and liabilities
for financial reporting and tax purposes.
EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
Earnings per Share ("SFAS No. 128"), beginning with the third quarter of fiscal
1998. All prior period earnings per common share data have been restated to
conform to the provisions of this statement. Earnings per share are computed by
dividing net income by the weighted average number of common shares and common
share equivalents outstanding (if dilutive) during the period. Common share
equivalents are comprised of stock options. The number of common share
equivalents outstanding relating to stock options is computed using the
treasury stock method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, trade accounts receivable and payable, and notes payable and
long-term debt, approximate fair values.
SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company's exposure to concentrations of credit risk relate
primarily to trade receivables. The Company controls credit risk by performing
credit evaluations for all new customers and requires letters of credit, bank
guarantees and advanced payments, if deemed necessary. The Company had one
customer that represented 38% of the Company's trade accounts receivable as of
March 28, 1998. Through fiscal 1998, bad debt write-offs have not been
material.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 1998
presentation.
USE OF ESTIMATES
Judgments and estimates by management are required in the preparation of
financial statements to conform with generally accepted accounting principles.
The estimates and underlying assumptions effect the reported amounts of assets
and liabilities, the disclosure of contingencies at the balance sheet date and
<PAGE> 21
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
the reported revenues and expenses for the period. Actual results could
differ from those estimates.
STOCK BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting and Disclosure of Stock-Based Compensation" for the
fiscal year ended March 29, 1997. SFAS No. 123 introduces a fair-value based
method of accounting for stock-based compensation. It encourages, but does not
require, companies to recognize compensation expense for grants of stock, stock
options, and other equity instruments to employees based on their estimated
fair market value on the date of grant. The Company has opted to apply the
accounting rules contained in APB Opinion No. 25, "Accounting for Stock Issued
to Employees". As such, SFAS No. 123 did not have any effect on the Company's
financial position or results of operations. Companies that continue to use
APB Opinion No. 25 are required to present in the notes to the consolidated
financial statements the pro forma effects on reported net income and earnings
per share as if compensation expense had been recognized based on the fair
value of options granted (see Note 10).
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components in a financial statement with the same prominence as other
financial statements. Comprehensive income is defined as net income adjusted
for changes in stockholders' equity resulting from events other than net income
or transactions related to an entity's capital instruments. The Company is
required to adopt FAS 130 effective March 29, 1998, with reclassification of
financial statements for earlier years required. The adoption of this new
accounting standard is not expected to have a material impact on the financial
statements.
In June 1997, the FASB issued FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about operating segments. Generally, FAS 131 requires that
financial information be reported on the basis that is used internally for
evaluating performance. The Company is required to adopt FAS 131 effective
March 29, 1998, and comparative information for earlier years must be restated.
This statement does not need to be applied to interim financial statements in
the initial year of application.
NOTE 2 INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 28, March 29,
1998 1997
-------- --------
<S> <C> <C>
Raw materials $ 13,944 $ 7,795
Work in progress 3,731 2,567
Finished goods 386 137
-------- --------
$ 18,061 $ 10,499
======== ========
</TABLE>
As of March 28, 1998 and March 29, 1997, the Company had allowances for
obsolete raw materials (principally printed circuit board components) of
$490,000 and $490,000, respectively. Cost of sales for fiscal 1998, 1997 and
1996 include provisions to the allowance for obsolete materials of $344,000,
$168,000 and $318,000, respectively.
NOTE 3 PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following (in thousands):
<TABLE>
<CAPTION>
March 28, March 29,
1998 1997
-------- --------
<S> <C> <C>
Machinery and equipment $ 13,204 $ 14,373
Furniture and fixtures 838 335
Leasehold improvements 3,506 409
-------- --------
17,548 15,117
Less: Accumulated depreciation
and amortization (8,593) (9,518)
-------- --------
$ 8,955 $ 5,599
======== ========
</TABLE>
<PAGE> 22
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 4 NOTES PAYABLE AND LONG-TERM DEBT
The Company has (i) a revolving line of credit for $17 million from a
commercial bank, (ii) a term loan facility for $3.3 million, (iii) an equipment
financing facility from a financial services company, and (iv) a revolving line
of credit for $3 million from Rohm U.S.A., Inc. ("Rohm"), which is a
wholly-owned subsidiary of Rohm Co. Ltd., Japan. The Rohm line of credit
expired on March 31, 1998. There was $5.3 million and $0 outstanding under the
commercial bank line of credit and $3.3 million and $0 outstanding under the
term note at March 28, 1998 and March 29, 1997, respectively. The revolving
line of credit bears interest ranging between 6.9% and 7.4%. The term loan
facility bears interest at 9.2%, is secured by certain assets, and matures on
August 31, 2000. There was no outstanding loan balance under the Rohm line of
credit as of March 28, 1998 and March 29, 1997.
The $17 million line of credit bears interest at LIBOR plus 1.25% or 1.75%,
depending on certain financial ratios, and/or prime (such rate determined based
upon the amounts and period of loans), matures on August 31, 1999 and is
secured by certain assets of the Company. The facility requires payment of a
commitment fee equal to one-eighth of 1% (1/8%) on the unused balance, and
borrowings are limited based upon certain collateral availability requirements
The equipment financing facility provides for the leasing of equipment over a
five-year period commencing on the date of acceptance of such equipment. All
equipment leased to date under this facility has qualified for operating lease
treatment.
The financing facilities contain certain restrictions which include maintenance
of a minimum level of tangible net worth and other operating and financial
ratios. At March 28, 1998, the Company was in compliance with all debt
covenants.
Interest paid totaled $209,000, $18,000 and $704,000 for fiscal 1998, 1997 and
1996, respectively.
NOTE 5 INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------
March 28, March 29, March 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Federal
Current $ 228 $ 255 $ 3,013
Deferred 125 (37) (280)
State
Current 37 7 416
Deferred (4) 32 (43)
-------- -------- --------
$ 386 $ 257 $ 3,106
======== ======== ========
</TABLE>
The differences in income taxes provided and the amounts determined by applying
the federal statutory tax rate to income before income taxes result from the
following:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------
March 28, March 29, March 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Add (deduct) the effect of state income tax 2.6 3.8 3.2
Change in valuation allowance -- -- (1.8)
Other, net 1.4 (1.4) 0.1
-------- -------- --------
38.0% 36.4% 35.5%
======== ======== ========
</TABLE>
<PAGE> 23
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
The components of deferred income tax assets, included in prepaid expenses and
other current assets, and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
March 28, March 29,
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Reserves $ 200 $ 215
Franchise tax 39 151
Accrued vacation 70 69
Other 174 165
---------- ----------
Gross current deferred tax asset 483 600
---------- ----------
Deferred tax liabilities:
Depreciation (229) (230)
Other (5) --
---------- ----------
Gross long-term deferred tax liability (234) (230)
---------- ----------
Net deferred tax asset $ 249 $ 370
========== ==========
</TABLE>
Income taxes totaling $170,000, $3,157,000 and $360,000 were paid in fiscal
1998, 1997 and 1996, respectively.
NOTE 6 CAPITAL STOCK
PREFERRED AND COMMON STOCK
XeTel was incorporated on April 3, 1984 under the laws of the state of Texas.
On January 20, 1995, XeTel was reincorporated in Delaware which resulted in a
change in the par value of the preferred stock from $0.10 per share to $0.0001
per share, and a change in the par value of the common stock from no par to
$0.0001 per share. The reincorporation decreased authorized preferred and
common stock from 6,000,000 and 10,000,000 shares to 4,000,000 and 8,000,000
shares, respectively. The Company filed a restatement of its certificate of
incorporation in December 1995 which, among other things, increased the
authorized shares of common stock to 25 million and provided for automatic
conversion of the outstanding shares of Series A Preferred Stock to common
stock upon closing of the Company's initial public offering.
As a result of the initial public offering, effective February 14, 1996, all
outstanding shares of Series A Preferred Stock were converted, on a one-for-one
basis, to common stock.
The board of directors has the authority to issue the preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the Company's stockholders. The issuance of
the preferred stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of common
stock.
NOTE 7 LEASE COMMITMENTS
XeTel leases its operating facility and certain office equipment under
noncancellable operating leases. Rental expense under all operating leases was
approximately $3,024,000, $1,233,000 and $779,000 during fiscal 1998, 1997 and
1996, respectively. Future noncancellable minimum rental payments under all
operating leases with initial terms of greater than one year are $3,728,000 in
1999, $3,575,000 in 2000, $3,267,000 in 2001, $2,316,000 in 2002, $1,492,000 in
2003 and an aggregate of $7,343,000 thereafter.
<PAGE> 24
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
NOTE 8 SALES TO MAJOR CUSTOMERS
XeTel's sales are concentrated in the electronics industry; however, the
customers operate in diverse markets and geographic areas. The following table
summarizes the percentage of gross revenues generated by sales to customers
that account for more than 10% of sales in fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
March 28, March 29, March 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Customer A 20% 14% 24%
Customer B 16 -- 18
Customer C -- -- 15
</TABLE>
Accounts receivable from customer A represented 38% of the Company's trade
accounts receivable as of March 28, 1998.
NOTE 9 RELATED PARTY TRANSACTIONS
In addition to the debt arrangements with Rohm described in Note 4, the Company
has transactions with certain divisions of Rohm Corporation, a wholly-owned
subsidiary of Rohm, during the normal course of business. Purchases from such
divisions were $191,000, $526,000 and $908,000 for fiscal 1998, 1997 and 1996,
respectively. Accounts payable to such divisions were $14,000 and $54,000 as of
March 28, 1998 and March 29, 1997, respectively. Accounts receivable from such
divisions were not significant.
NOTE 10 EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan, which is described below. Accordingly,
no compensation cost has been recognized for its stock option plan. Had
compensation cost for the Company's stock option plan been determined based on
the fair market value at the date of grant for awards under that plan been
consistent with the method provided for by SFAS No. 123, the Company's net
income and the diluted earnings per share would have reflected the following
pro forma amounts for fiscal 1998 and fiscal 1997 (in thousands except per
share data):
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------
March 28, March 29,
1998 1997
-------- ---------
<S> <C> <C> <C>
Net Income As reported $629 $449
Pro forma $361 $357
Diluted earnings per share As reported $.07 $.05
Pro forma $.04 $.04
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------
March 28, March 29,
1998 1997
--------- ---------
<S> <C> <C>
Dividend yield -- --
Expected volatility 47.47% 40.35%
Risk-free rate of return 5.67% 6.34%
Expected life 5 years 5 years
</TABLE>
<PAGE> 25
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
XeTel's 1997 Stock Option Plan (the "Option Plan") provides for the grant of
common stock options to key employees. The exercise price of each option is the
fair market value of a share of common stock on the date of grant. The term of
each option can be no more than 10 years from the date of grant and expires 90
days after the termination of employment. Each option vests equally over a
period of four years from the date of grant. As of March 28, 1998, the Company
has reserved 1,949,225 shares of common stock for the Option Plan.
A summary of activity under the Option Plan is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OF SHARES AVERAGE
UNDER EXERCISE
OPTION PRICE ($)
---------- ----------
<S> <C> <C>
Options outstanding as of April 1, 1995 938,250 1.26
Granted 321,000 1.52
Exercised (52,675) 1.13
Canceled (34,575) 1.18
---------- ----------
Options outstanding as of March 30, 1996 1,172,000 1.34
Granted 418,500 5.06
Exercised (67,525) 1.28
Canceled (37,875) 2.68
---------- ----------
Options outstanding as of March 29, 1997 1,485,100 2.36
Granted 415,500 4.94
Exercised (115,775) 1.29
Canceled (179,625) 5.20
---------- ----------
Options outstanding as of March 28, 1998 1,605,200 2.82
========== ==========
Options exercisable at:
March 30, 1996 517,250 1.28
March 29, 1997 758,975 1.38
March 28, 1998 930,450 1.79
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES FAIR VALUE
Weighted average, grant date fair value of UNDER ----------
options granted during: OPTION ($)
--------- ----------
<S> <C> <C>
Fiscal 1996 321,000 .40
Fiscal 1997 418,500 2.28
Fiscal 1998 415,500 2.42
</TABLE>
<PAGE> 26
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
March 28, 1998
- -----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------- -----------------------------
Weighted
Weighted Average
Number of Average Remaining Number of Weighted
Options Exercise Cntractual Options Average
Exercise Price Outstanding Price Life (yrs) Exercisable Exercise Price
-------------- ----------- ----- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.22 - 1.22 213,125 $1.22 4.19 101,625 $1.22
1.23 - 1.23 422,875 1.23 2.69 415,375 1.23
1.33 - 4.00 344,575 1.80 2.54 282,075 1.33
4.38 - 4.88 165,000 4.63 5.77 40,000 4.64
5.00 - 6.00 459,625 5.13 5.95 91,375 5.11
----------- ----- ---- -------- -----
$1.22 - 6.00 1,605,200 $2.82 4.11 930,450 $1.79
=========== ===== ==== ======== =====
</TABLE>
In connection with options issued in fiscal 1996, the Company has recognized
compensation expense totaling $16,000 and $16,000 in fiscal 1998 and fiscal
1997, respectively.
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan ("Purchase Plan"), employees
meeting specific employment qualifications are eligible to participate and can
purchase shares semi-annually through payroll deductions at the lower of 85% of
the fair market value of the stock at the commencement or end of the offering
period. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions for up to 10% of qualified compensation to a maximum
of 1,500 shares per enrollment period. During fiscal 1998 and fiscal 1997,
67,481 and 0 shares were issued under the plan, respectively. Proceeds from
stock issued under the Purchase Plan were $254,000 and $0 for fiscal 1998 and
fiscal 1997, respectively. The weighted average estimated fair value of
purchase rights granted under the employee stock purchase plan was $1.39 per
share for fiscal 1998. As of March 28, 1998, 932,519 shares were reserved for
future issuance under the plan.
401 k PLAN
The Company sponsors a defined contribution retirement plan (the "401(k) Plan")
pursuant to Section 401(k) of the Internal Revenue Code. The 401(k) Plan was
amended effective July 1, 1995 whereby substantially all employees are eligible
to participate if they are at least 21 years of age, and such participants may
contribute up to 12% of their compensation. Also in connection with this
amendment, the Company elected to make matching contributions to participants
after the participants have completed one year of service. The matching
contribution is 25% of participant contributions, which is applied to a maximum
of 5% of each participant's compensation. The Company may also make profit
sharing and other contributions to the 401(k) Plan for the benefit of the
participants. Company contributions vest ratably over a five-year period.
Company contributions charged to operations were $137,000, $85,000 and $70,000
for fiscal 1998, 1997 and 1996, respectively.
NOTE 11 ACQUISITIONS
In July of 1996, the Company acquired Maxtron Corporation located in Dallas,
Texas for $500,000 in cash and $1,154,000 in common stock. The fair value of
the assets acquired, excluding cash, amounted to approximately $1 million. The
cost in excess of net assets acquired amounted to approximately $637,000 and
will be amortized as goodwill over a five-year period. The Company may pay
additional contingent consideration upon the achievement of certain performance
goals. This transaction was accounted for under the purchase method of
accounting with the results of operations from the acquired business included
in the Company's results of operations from the acquisition date forward.
In December 1996, the Company acquired the manufacturing operations of SBE, Inc.
("SBE"), located in San Ramon, California for approximately $1.6 million in
cash. The fair value of the assets acquired amounted to approximately $1.2
million. The costs, including acquisition costs, in excess of assets acquired
amounted to approximately $431,000 and will be amortized as goodwill over a
five-year period. The Company may pay additional contingent consideration upon
the achievement of certain performance goals. The companies have also entered
into a long term purchasing agreement under which SBE will purchase contract
manufacturing services from XeTel. The transaction was accounted for under the
purchase method of accounting with the results of operations from the acquired
manufacturing operations included in the Company's results of operations from
the acquisition date forward.
<PAGE> 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The directors and executive officers of the Company and their ages are as
follows:
<TABLE>
<S> <C> <C>
Ronald W. Guire 49 Chairman of the Board of Directors (Class III)
Angelo A. DeCaro, Jr. 46 President, Chief Executive Officer and Director (Class III)
Julian C. Hart 58 Senior Vice President, Chief Technical Officer, and Secretary
William A. Peten 50 Senior Vice President, Corporate Materials and Systems
Richard S. Chilinski 46 Vice President, Chief Financial Officer and Assistant Secretary
Stephen D. Sauter 38 Vice President, Sales and Marketing
Norman E. O'Shea 50 Vice President, General Manager XeTel West
James A. Roark 42 Vice President, General Manager XeTel Dallas
Raimon L. Conlisk 75 Director (Class II)
Sam L. Densmore 57 Director (Class I)
Kozo Sato 58 Director (Class II)
</TABLE>
Mr. Guire has served as Chairman of the Board of Directors since April 1998.
Prior to April 1998, Mr. Guire served as a Director of the Company from 1986 to
April 1998 and as Secretary from 1991 to September 1996. Mr. Guire has served
with EXAR Corporation ("EXAR"), a semiconductor designer and manufacturer,
since 1984 including as Executive Vice President since June 1995, as Senior
Vice President from 1989 to 1995 and as a director, Secretary of the Board of
Directors and Chief Financial Officer since 1985. Mr. Guire was formerly a
partner in the public accounting firm of Graubart & Co. from 1979 to 1985.
Mr. DeCaro has served as a Director and President of the Company since 1993,
and in August 1995 was elected its Chief Executive Officer. Mr. DeCaro was
employed by IBM from 1974 to 1993, and served as Director of Operations-Printed
Wiring Board and Services at IBM's circuit board facility in Austin, Texas from
1992 to 1993, and Plant Manager of the same facility from 1989 to 1992.
Mr. Hart, a founder of the Company, has served as Senior Vice President of the
Company since 1984, its Chief Technical Officer since November 1995 and
Secretary since September 1996. Mr. Hart served as a Director of the Company
from 1984 until May 1997. From 1964 to 1984, he was employed by Texas
Instruments ("TI") in various development engineering positions, including in
the development of TI's Advanced Scientific Computer. Mr. Hart is a registered
Professional Engineer and a member of The International Society for Hybrid
Microelectronics.
Mr. Peten has served as Senior Vice President - Corporate Materials and Systems
since April 1998. Prior to April 1998, Mr. Peten served as Vice President -
Material Acquisition and Control from 1993 to April 1998. Prior to joining
XeTel, Mr. Peten was employed by IBM for approximately 23 years where he held
numerous management assignments including Materials Manager for the IBM Printed
Circuit Panel Plant in Austin from 1989 to 1993.
Mr. Chilinski has served as Vice President and Chief Financial Officer of the
Company since January 1995 and its Assistant Secretary since November 1995. He
previously served as Chief Financial Officer/Controller of IBM PC Company
Austin, a manufacturer of personal computers, from 1993 to 1994, and Vice
President-Finance and Administration and Assistant Secretary of TN
Technologies, a subsidiary of Baker Hughes Technology Products Division,
engaged in the manufacture of process control technology, from 1988 to 1993. He
is a Certified Public Accountant.
Mr. Sauter has served as Vice President- Sales and Marketing since August 1997.
Prior to joining XeTel, Mr. Sauter was employed by Jabil Circuit, Inc. Mr.
Sauter was employed by Jabil Circuit for over 12 years and last held the
position of Sales and Marketing Manager for North America. Prior to Jabil, Mr.
Sauter worked for Texas Instruments in their Equipment Group as a Manufacturing
Engineer.
Mr. O'Shea has served as Vice President - General Manger XeTel West since
December 1996. Mr. O'Shea joined the Company as part of the acquisition of the
manufacturing operations of SBE. Prior to joining XeTel, Mr. O'Shea served as
Vice President of Manufacturing of SBE. From 1987 to 1993, Mr. O'Shea was
employed at NeXT Computer in Fremont, California, where he served as Process
Engineering Manager from 1987 to 1991 and Materials Manager from 1991 to 1993.
From 1979 to 1987 he was employed by Motorola where he held various management
positions.
Mr. Roark has served as Vice President - General Manager XeTel Dallas since
December 1997. Prior to joining XeTel, Mr. Roark served as Vice President of
Operations for Efficient Networks, Inc. from November 1993 until November 1997.
Prior to Efficient Networks, Mr. Roark worked for Silicon Graphics Computer
Systems and last held the position of Manufacturing Product Manager.
<PAGE> 28
Mr. Conlisk has served as a Director of the Company since 1991. Since 1977,
Mr. Conlisk has served as President of Conlisk Associates, an international
management consulting firm serving high technology companies. Mr. Conlisk
formerly served with Quantic Industries, Inc., a privately held manufacturer of
electronic systems and devices, as a Director from 1970 until his retirement in
1990, as Chairman from 1984 until his retirement and as President from 1984 to
1989. From 1970 to 1973, and from 1987 to 1990, Mr. Conlisk served as a
Director of the American Electronics Association. Mr. Conlisk has served as
Chairman of the Board of EXAR since 1994, after serving as a Director from 1985
and Vice Chairman of the Board of EXAR from 1990. He has served as Chairman of
the Board of SBE, since 1997, after serving as a Director of SBE from 1991.
Mr. Densmore has served as a Director of the Company since May 1997. Mr.
Densmore has served with RF Monolithics, Inc., a radio frequency component and
module designer and manufacturer, since 1993 including as President and Chief
Executive Officer since 1996, Director since 1994 and Executive Vice President,
Chief Operating Officer, Chief Financial Officer and Secretary from 1993 to
1996. In 1991, Mr. Densmore founded the IBC Group, a private consulting
company, and served as its President from 1991 to 1993. From 1984 to 1990, Mr.
Densmore was employed at Recognition International, Inc., a document image
processing company. During that period, Mr. Densmore served as Senior Vice
President, Treasurer and Chief Financial Officer from 1989 to 1990 and Vice
President of Corporate Development from 1984 to 1989. Mr. Densmore is a
Certified Public Accountant.
Mr. Sato has served as a Director of the Company since 1986 and as Chairman of
the Board of Directors from 1986 to April 1998. Mr. Sato previously served as
the Company's Chief Executive Officer from 1986 to August 1995. Mr. Sato has
served as a director of Rohm Americas, Inc., a wholly owned subsidiary of Rohm
Co., Ltd., Japan, a diversified electronics company since February 1997. From
1984 to October 1997, Mr. Sato served as the Chief Executive Officer and
President of Rohm U.S.A., Inc., a wholly owned subsidiary of Rohm Co., Ltd.,
Japan.
There is no family relationship among any of the foregoing individuals.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference
to the information contained in the section captioned "Executive Officer
Compensation" of the Registrant's definitive Proxy Statement (Notice of Annual
Meeting of Shareholders) for the fiscal year ended March 28, 1998 to be held
August 11, 1998 which the Company will file with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding this item is incorporated herein by reference from the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Registrant's definitive Proxy Statement (Annual Meeting of
Shareholders) for the fiscal year ended March 28, 1998.
<PAGE> 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has engaged in a number of transactions with Rohm, its largest
stockholder. The Company believes that these transactions were on terms no less
favorable to the Company than would have been obtained from unaffiliated third
parties. All significant transactions in the past and future, if any, between
the Company and its officers, Directors, principal stockholders and affiliates
(including Rohm) will be approved by a majority of the Company's independent
Directors and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
At March 28, 1998, the Company had a $3 million revolving line of credit with
Rohm that bears interest at LIBOR plus 1.25%, is payable on demand and is
secured by certain equipment. The revolving line of credit with Rohm expired
on March 31, 1998. There were no outstanding balances under the Rohm line of
credit at March 28, 1998.
Interest paid to Rohm under the credit facility described above was
approximately $0, $0 and $704,000 in fiscal years 1998, 1997 and 1996,
respectively.
In addition to the arrangements described above, the Company has entered into
transactions in the ordinary course of business with certain divisions of Rohm
Corporation, a wholly owned subsidiary of Rohm. Component purchases from such
divisions were $191,000, $526,000 and $908,000 for fiscal years 1998, 1997 and
1996, respectively.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. The financial statements listed in ITEM 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, above are filed as part
of this Annual Report on Form 10-K.
2. Financial Statement Schedules. All schedules are omitted because they
are not applicable or the required information is shown in the
financial statements or notes thereto.
3. Exhibits. The exhibits listed in the accompanying Index to Exhibits
are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
During the fiscal quarter ended March 28, 1998 no current reports on Form 8-K
were filed.
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints, Angelo A. DeCaro, Jr. and
Richard S. Chilinski, and each or any of them, his true and lawful
attorney-in-fact and agent, each with the power of substitution and
resubstitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report ( Form 10-K) and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
XETEL CORPORATION
(Registrant)
Date: June 16 , 1998 By: /s/ Angelo A. DeCaro, Jr.
-------------------------------------
Angelo A. DeCaro, Jr.
President and Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Angelo A. DeCaro, Jr. June 16 , 1998
----------------------------------
Angelo A. DeCaro, Jr. President and Chief
Executive Officer
and Director (principal
executive officer)
/s/ Richard S. Chilinski June 16 , 1998
----------------------------------
Richard S. Chilinski Vice President,
Chief Financial Officer
and Assistant Secretary
(principal financial and
accounting officer)
/s/ Ronald W. Guire June 16 , 1998
----------------------------------
Ronald W. Guire Chairman of the Board of Directors
/s/ Kozo Sato June 16 , 1998
----------------------------------
Kozo Sato Director
/s/ Raimon L. Conlisk June 16, 1998
----------------------------------
Raimon L. Conlisk Director
/s/ Sam L. Densmore June 16, 1998
----------------------------------
Sam L. Densmore Director
</TABLE>
<PAGE> 31
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
Number
<S> <C>
3.2(1) Second Restated Certificate of Incorporation.
3.3(1) Restated Bylaws of the Registrant, as amended.
3.4(1) Registration Rights, dated June 18, 1986 among the Registrant Rohm Corporation, Julian C. Hart, David
W. Gault and Emory C. Garth.
4.1(1) Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2(1) Specimen Common Stock certificate.
10.2(1) Form of Indemnification Agreement between the Registrant and each of its directors and certain
executive officers.
10.20(1) Manufacturing Services Agreement February 22, 1989 between Motorola, Inc., MOS Memory Products Division
and the Registrant, and letter from Motorola, Inc., Fast Static RAM Module Division related thereto.
10.21(1) Mobile Communication Standard Terms and Conditions dated August 5, 1994 for Westinghouse Electric.
10.22(2) Master Lease Agreement between the Registrant and General Electric Capital Corporation.
10.23(2) $3,000,000 Promissory Note between the Registrant and Rohm U.S.A.
10.24(3) $7,000,000 Promissory Note between the Registrant and Texas Commerce Bank National Association.
10.25(3) Lease Agreement between Braker Phase III, Ltd. as Landlord, and the Registrant, as Tenant.
10.26(4) Lease Agreement between Delta HP Limited, as Landlord, and the Registrant, as Tenant.
10.27(4) First Amendment to Credit Agreement between the Registrant and Texas Commerce Bank National
Association.
10.28(4) Letter of Commitment between the Registrant and General Electric Capital Corporation.
10.29(4) Amended $3,000,000 Promissory Note between the Registrant and Rohm U.S.A.
10.30(5) Registrant's 1997 Stock Incentive Plan
10.31(5) Registrant's Employee Stock Purchase Plan
10.32(6) Lease Agreement between Braker Phase III, Ltd. as Landlord, and the Registrant, as Tenant.
10.33 Amended $10,000,000 Promissory Note between the Registrant and Chase Bank of Texas.
10.34 Second Amendment to Credit Agreement between the Registrant and Chase Bank of Texas.
10.35 Amended Letter of Commitment between the Registrant and General Electric Capital Corporation.
11.1 Computation of Earnings per Share.
23.1 Consent of Price Waterhouse LLP.
24.1 Power of Attorney, pursuant to which amendments to this Form 10-K may be filed, is included on the
signature page contained in Part IV of this Form 10-K.
27.1 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the like-numbered exhibits previously filed
with Registrant's Registration Statement on Form S-1, No. 33-99632 filed with
the Securities and Exchange Commission on February 14, 1996.
(2) Incorporated by reference to the like-numbered exhibits previously filed
with the Registrant's 1996 Form 10-K.
(3) Incorporated by reference to the like-numbered exhibits previously filed
with the Registrant's September 1996 Form 10-Q.
(4) Incorporated by reference to the like-numbered exhibits previously filed
with the Registrant's 1997 Form 10-K.
(5) Incorporated by reference to the like-numbered exhibits previously filed
with the Registrant's 1997 Form 14-A.
(6) Incorporated by reference to the like-numbered exhibits previously filed
with the Registrant's December 1997 Form 10-Q.
<PAGE> 1
EXHIBIT 10.33
FIRST AMENDMENT TO CREDIT AGREEMENT
(Borrowing Base)
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (Borrowing Base)(this
"Amendment") dated effective as of April 15, 1997 (the "Effective Date"), is by
and between XETEL CORPORATION ("Borrower"), and TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, a national banking association whose principal office is located
in Houston, Texas (the "Bank").
PRELIMINARY STATEMENT
The Bank and the Borrower have entered into a Credit Agreement (with
Borrowing Base) dated as of August 23, 1996 (the "Credit Agreement"). The
"Agreement", as used in the Credit Agreement, shall also refer to the Credit
Agreement as amended by this Amendment. All capitalized terms defined in the
Credit Agreement and not otherwise defined herein shall have the same meanings
herein as in the Credit Agreement. The Bank and the Borrower have agreed to
amend the Credit Agreement to the extent set forth herein, and in order to,
among other things, renew, modify and increase the Commitment.
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the Bank and the Borrower hereby agree as
follows:
Section 1. Revolving Credit Note. Section 1.1 of the Credit
Agreement is amended by redesignating the same as Section 1.1.A and by
substituting the following for the Section 1.1.A of the Credit Agreement:
"Subject to the terms and conditions hereof, the Bank agrees to make
loans ("Revolving Loan" or "Revolving Loans") to Borrower from time to
time before the Termination Date, not to exceed at any one time
outstanding for Borrower the lesser of the Borrowing Base or
$10,000,000.00 (the "Commitment"), Borrower having the right to
borrow, repay and reborrow. Each Revolving Loan and Repayment must be
at least the minimum amount required in the Revolving Note. The
Revolving Loans may only be used for supporting Borrower's accounts
receivable and inventory. The Bank and the Borrower agree that Chapter
15 of the Texas Credit Code shall not apply to this Agreement, the
Revolving Note or any Revolving Loan. The Revolving Loans shall be
evidenced by and shall bear interest and be payable as provided in the
promissory note of Borrower dated the Effective Date (together with
any and all renewals, extensions, modifications, replacements, and
rearrangements thereof and substitutions therefor, the "Revolving
Note") which is given in renewal, modification and increase of that
certain promissory note dated August 23, 1996 in the original
principal amount of $7,000,000.00 (including all prior notes of which
said note represents a renewal, extension, modification, increase,
substitution, rearrangement or replacement thereof, the "Renewed
Note"). The parties hereto agree that there is as of the Effective
Date an outstanding principal balance of $-0- under the Revolving Note
leaving a balance as of the Effective Date of $10,000,000.00 under the
Commitment available for Revolving Loans subject to the terms and
conditions of this Agreement. "Termination Date" means the earlier of
(a) August 31, 1998; or (b) the date specified by Bank pursuant to
Section 6.1 hereof.
Section 2. The Credit Agreement is amended by adding a new Section
1.1.B to read as follows:
"ADVANCE TERM NOTE 1.1.B Bank agrees to extend an advance loan
converting to a term loan on the Advance Termination Date (as defined
in the Advance Term Note) in the amount of $2,500,000.00
("Advance/Term Loan" or "Advance/Term Loans") to Borrower as evidenced
by a promissory note in proper form in the original principal amount
of $2,500,000.00 dated April 3, 1997 and maturing August 31, 2000
(together with any and all renewals, extensions, modifications and
replacements thereof and substitutions therefor, the "Advance/Term
Note")." The Advance/Term Loans shall be for the purpose of financing
Borrower's leasehold improvements."
Section 3. The Credit Agreement is amended by adding a new Section
1.1.C to read as follows:
"LOANS AND NOTES 1.1.C "Loan" or "Loans" shall refer to each and all
Revolving Loans and all Advance/Term Loans. "Note" or "Notes" shall
refer to each and both of the Revolving Note and the Advance/Term
Note."
Section 3. Section 1.4 of the Credit Agreement is amended by
substituting the following for Section 1.4 of the Credit Agreement:
"In consideration of the Commitment, Borrower will pay a Commitment
Fee (computed on the basis of the actual number of days elapsed in a
year comprised of 360 days) of one-eighth (1/8) of one percent (1%) on
the Revolving Loan based on the daily average difference between the
Commitment and the principal balance of the Revolving Note from the
date hereof to the Termination Date. The Commitment Fee is due and
payable quarterly in arrears beginning on September 30, 1996."
Section 4. Section 7.4 of the Credit Agreement is amended as follows:
"All representations, warranties, covenants and agreements made by or
on behalf of Borrower in connection with the Loan
First Amendment, Xetel Corporation, April 15, 1997
Page 1 of 2
<PAGE> 2
Documents will survive the execution and delivery of the Loan
Documents; will not be affected by any investigation made by any
Person, and will bind Borrower and the successors, trustees, receivers
and assigns of Borrower and will benefit the successors and assigns of
the Bank; provided that Bank's agreement to make Loans to Borrower
will not inure to the benefit of any successor or assign of Borrower
except for an approved merger or business combination. Except as
otherwise provided herein, the term of this Agreement will be until
the later of the final maturity of the Revolving Note or the Term
Note, whichever is later and the full and final payment of all
Obligations and all amounts due under the Loan Documents."
Section 5. Section 7.6 of the Credit Agreement is amended as follows:
"EXPENSES 7.6 Any provision to the contrary notwithstanding, and
whether or not the transactions contemplated by this Agreement are
consummated, Borrower agrees to pay on demand all reasonable, direct
out-of-pocket expenses (including, without limitation, the fees and
expenses of counsel for Bank) in connection with the negotiation,
preparation, execution, filing, recording, modification, supplementing
and waiver of the Loan Documents and the making, servicing and
collection of the Loans. Notwithstanding anything contained herein to
the contrary, Borrower shall not pay more than $1,500.00 for any
single, annual field analysis of Borrower's assets. Borrower agrees to
pay Bank's standard Documentation Preparation and Processing Fee for
preparation, negotiation and handling of this Agreement not to exceed
the amount of $1,500.00. Borrower also agrees to pay Bank a
transaction fee of $8,500.00, which fee is due and payable upon the
execution of this Amendment. The obligations of the Borrower under
this and the following section will survive the termination of this
Agreement."
Section 6. Exhibit A of the Credit Agreement is hereby amended by
replacing prior Exhibit A with the Exhibit A attached hereto and hereby
incorporated into this Amendment and the Credit Agreement for all purposes.
Section 7. Exhibit C of the Credit Agreement is hereby amended by
replacing prior Exhibit C with the Exhibit C attached hereto and hereby
incorporated into this Amendment and the Credit Agreement for all purposes.
Section 8. The Borrower hereby represents and warrants to the Bank
that after giving effect to the execution and delivery of this Amendment: (a)
the representations and warranties set forth in the Credit Agreement are true
and correct on the date hereof as though made on and as of such date; and (b)
no Event of Default, or event which with passage of time, the giving of notice
or both would become an Event of Default, has occurred and is continuing as of
the date hereof.
Section 9. This Amendment shall become effective as of the Effective
Date upon its execution and delivery by each of the parties named in the
signature lines below.
Section 10. The Borrower further acknowledges that each of the other
Loan Documents is in all other respects ratified and confirmed, and all of the
rights, powers and privileges created thereby or thereunder are ratified,
extended, carried forward and remain in full force and effect except as the
Credit Agreement is amended by this Amendment.
Section 11. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed an original and all of which taken
together shall constitute but one and the same agreement.
Section 12. This Amendment shall be included within the definition of
"Loan Documents" as used in the Agreement.
Section 13. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF
THE UNITED STATES OF AMERICA.
THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN
AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS BUSINESS & COMMERCE
CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed effective as of the Effective Date.
BORROWER: XETEL CORPORATION
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Address:
-----------------------------
BANK: TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
First Amendment, Xetel Corporation, April 15, 1997
Page 2 of 2
<PAGE> 3
EXHIBIT A
BORROWING BASE REPORT
Accounts Receivable and Inventory
Borrowing Base Report for Period Beginning: ____________________ and Ending
____________________ ("Current Period") required by the Credit Agreement dated
August 23, 1996 (as amended, restated, and supplemented from time to time, the
"Agreement") by and between XETEL CORPORATION and Texas Commerce Bank National
Association
- --------------------------------------------------------------------------------
THE BORROWING BASE REPORT MUST BE SUBMITTED TO BANK WITHIN 20 DAYS OF THE LAST
DAY OF EACH FISCAL MONTH END. BORROWER MUST PROVIDE THE FOLLOWING ALONG WITH
THE BORROWING BASE REPORT: ACCOUNTS RECEIVABLE AGINGS AND LISTING AND ACCOUNTS
PAYABLE AGINGS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
Line 1. Total Accounts as of the end of the Current Period $
Ineligible Accounts as of the end of the Current Period: -----------------
2. That portion (e.g., invoice) of all of the Accounts
of any Account Debtor where the Account is more than
90 days from invoice date (net of unapplied cash and
return material authorizations) $
------------------
3. That portion of all of the Accounts of any Account
Debtor which exceeds 25% of the dollar amount of the
total of all Accounts for all Account Debtors for
the Current Period (Line 1) $
------------------
4. Intercompany and Affiliate Accounts (Total Intercompany
and Affiliate Accounts = $________________________ less
$_________________________ [not to exceed $500,000.00 in the
aggregate] in Intercompany and Affiliate Accounts
which Borrower, by signing below, certifies as arising
from "arms length" transactions) $
------------------
5. Government Accounts [Government Accounts means
receivables owed by the U.S. government or by the
government of any state, county, municipality, or
other political subdivision as to which Bank's
security interest or ability to obtain direct payment
of the proceeds is governed by any federal or state
statutory requirements other than those of the Uniform
Commercial Code, including, without limitation,
the Federal Assignment of Claims Act of 1940,
as amended.] $
------------------
6. Foreign Accounts $
------------------
7. Accounts subject to any dispute or setoff or contra account $
------------------
8. Other Ineligible Accounts $
------------------
9. Total Ineligible Accounts for the Current Period $
-----------------
(Add Lines 2 through 8)
10. Total Eligible Accounts for the Current Period $
-----------------
(Line 1 - Line 9)
11. Multiplied by: Accounts Advance Factor 80%
12. Equals: Accounts Component of Borrowing Base $
13. Total Foreign Accounts secured by a letter of credit issued
by a bank satisfactory to the Bank or covered by Exim bank
insurance ("Secured Foreign Accounts") $
-----------------
14. Multiplied by: Secured Foreign Accounts Advance Factor 90%
15. Equals: Secured Foreign Accounts Component of Borrowing Base $
-----------------
</TABLE>
EXHIBIT A
Page 1 of 2 Pages
<PAGE> 4
<TABLE>
<S> <C>
16. Accounts of Ericsson, Inc., Dell Computer Corp., Dell
International, Inc. and all Subsidiaries of Dell International, Inc.
or otherwise approved by
Bank in writing ("Acceptable Foreign Accounts") $
-----------------
17. Multiplied by: Acceptable Foreign Accounts Advance Factor 80%
18. Equals: Acceptable Foreign Accounts Component of Borrowing
Base $
-----------------
19. Net book value of Inventory as of the end of the Current Period $
-----------------
20. Less Other Ineligible Inventory $
21. Total Eligible Inventory as of the end of the
Current Period (Line 19 - Line 20) $
-----------------
22. Multiplied by: Inventory Advance Factor 25%
23. Equals: Inventory Component of Borrowing Base $
(Not to exceed 40% of the Borrowing Base at any time when -----------------
the aggregate amount outstanding under the Notes is equal to or
less than $7,000,000.00 and not to exceed 33% of the Borrowing Base
at any time when the aggregate amount outstanding under the Note
is greater than $7,000,000.00)
24. Total BORROWING BASE (not to exceed $7,000,000.00) as of
the end of the Current Period (Line 12 + Line 15 + Line 18
+ Line 23) $
-----------------
25. Less: Aggregate principal amount outstanding under
the Notes as of the end of the Current Period:
Revolving Note $
----------------
Term Note $
----------------
26. Equals: Amount available for borrowing subject to the terms of
the Agreement, if positive; or amount due, if negative $
-----------------
</TABLE>
The terms "Accounts" and "Inventory" have the respective meanings as set forth
in the Texas Business and Commerce Code in effect as of the date of the
Agreement. Inventory shall be valued at the lesser of: (a) market value; and
(b) cost. "Other Ineligible Accounts" mean all such Accounts of Borrower that
are not subject to a first and prior Lien in favor of Bank, those Accounts that
are subject to any Lien not in favor of Bank and those Accounts of Borrower as
shall be deemed from time to time to be, in the sole judgment of Bank,
ineligible for purposes of determining the Borrowing Base. "Other Ineligible
Inventory" means that Inventory of Borrower that is not subject to a first and
prior Lien in favor of Bank, that Inventory that is subject to any Lien not in
favor of Bank and that Inventory of Borrower as shall be deemed from time to
time to be in the sole judgment of Bank, ineligible for purposes of determining
the Borrowing Base. All other terms not defined herein shall have the
respective meanings as in the Agreement.
Borrower certifies that the above information and computations are true,
correct, complete and not misleading as of the date hereof.
Borrower: XETEL CORPORATION
By:
------------------------------------------------------------------------
Name:
----------------------------------------------------------------------
Title:
---------------------------------------------------------------------
Address:
-------------------------------------------------------------------
Date:
----------------------------------------------------------------------
EXHIBIT A
Page 2 of 2 Pages
<PAGE> 5
EXHIBIT C to Agreement between
XETEL CORPORATION ("Borrower") and Texas Commerce Bank National Association
("Bank") dated August 23, 1996 (as may be amended, restated and supplemented
in writing).
REPORTING REQUIREMENTS, FINANCIAL COVENANTS
AND COMPLIANCE CERTIFICATE
FOR CURRENT REPORTING PERIOD ENDING ________________, 199__ ("END DATE")
A. REPORTING PERIOD. THIS EXHIBIT WILL BE IN PROPER FORM AND SUBMITTED
WITHIN 45 DAYS OF THE END OF EACH FISCAL QUARTER INCLUDING THE LAST REPORTING
PERIOD OF THE FISCAL YEAR AND WITH THE FISCAL YEAR END FINANCIAL STATEMENT.
BORROWER'S FISCAL YEAR ENDS ON MARCH 31.
<TABLE>
========================================================================================================================
<S> <C>
B. Financial Reporting. Borrower will provide the following financial information within the times Compliance
indicated: Certificate
========================================================================================================================
WHO WHEN DUE WHAT Compliance
--- -------- ---- (Circle)
Yes No
- ------------------------------------------------------------------------------------------------------------------------
BORROWER (i) Within 90 days of fiscal Annual financial statements (balance Yes No
year end sheet, income statement, cash flow
statement) Audited (with unqualified
opinion) by independent certified public
accountants satisfactory to Bank,
accompanied by Compliance Certificate.
Note: Unqualified statements are
required unless the Bank gives written
approval allowing for a qualified
designation
------------------------------------------------------------------------------------------
(ii) Within 45 days of each Unaudited interim financial statements Yes No
Reporting Period End Date, accompanied by Compliance Certificate
including final period of
fiscal year
------------------------------------------------------------------------------------------
(iii) Within 30 days of each Borrowing Base Report (Exhibit A), along Yes No
fiscal month end with accounts receivable aging and
listing, inventory report and accounts
payable aging
========================================================================================================================
C. FINANCIAL COVENANTS. Borrower will comply COMPLIANCE CERTIFICATE
with the following financial covenants, defined
in accordance with GAAP and the definitions in
Section 8, and incorporating the calculation
adjustments indicated on the Compliance
Certificate:
- ------------------------------------------------------------------------------------------------------------------------
REQUIRED ACTUAL REPORTED Compliance
Except as specified otherwise, each covenant For Current Reporting Period/as of the End Date (Circle)
will be maintained at all times and reported for
each Reporting Period or as of each Reporting
Period End Date, as appropriate: Yes No
- ------------------------------------------------------------------------------------------------------------------------
I. Effective March 31, 1996, maintain a Tangible Stockholders' Equity $ Yes No
Net Worth as adjusted of at least -------------
$21,500,000.00. Note: At the end of each fiscal Minus: Goodwill $
year, beginning on March 31, 1997, and on the -------------
last day of each fiscal year thereafter, this Other Intangible
covenant will increase by 50% of Borrower's Assets $
annual net income generated and 100% of all -------------
equity created from stock issuance and Loans/Advances to
acquisition (net of goodwill). Increases to this Equity holders $
covenant on each fiscal year end are based on -------------
financial results generated over the twelve Loans to Affiliates $
months preceding each fiscal year end. -------------
Plus: Subordinated Debt $
-------------
=Tangible Net Worth as adjusted $
-------------
- ------------------------------------------------------------------------------------------------------------------------
II. Maintain a Current Ratio of at least 1.50 : Current Assets $ divided by Current Yes No
1.0. -------------------
Liabilities ($ + $ )
--------------------- --------------
[Note: Current Liabilities includes all Loan draws
made on the $10,000,000 revolving Note]
= $
-----------------------
Current Ratio
========================================================================================================================
D. Other Required Covenants to be maintained and to be certified. COMPLIANCE
CERTIFICATE
========================================================================================================================
REQUIRED ACTUAL REPORTED Compliance
-------- ---------------
* Bank may, in its sole and absolute discretion, approve (Circle)
certain one time write-offs that may then be added back
to net income to calculate losses.
- ------------------------------------------------------------------------------------------------------------------------
(i) Quarterly losses* shall not exceed Quarterly losses for the fiscal quarter Yes No
$3,000,000.00 per fiscal quarter in the aggregate. ending ______, equal $______ in the aggregate.
- ------------------------------------------------------------------------------------------------------------------------
(ii) No losses* for more than two (2) consecutive For the fiscal quarter ending _________, there Yes No
fiscal quarters. is/is not a loss; for the immediately preceding
fiscal quarter there was/was not a loss.
- ------------------------------------------------------------------------------------------------------------------------
(iii) No Losses* for any two (2) consecutive fiscal Quarterly losses for the fiscal quarter ending Yes No
quarters which exceed $4,000,000.00 in the aggregate. ____, equal $___ in the aggregate and quarterly
losses for the immediately preceding fiscal
quarter end, equal $________ in the aggregate.
- ------------------------------------------------------------------------------------------------------------------------
(iv) Additional Indebtedness, Liens and capital For fiscal year: ________________, Yes No
leases are limited to $1,500,000.00 in the aggregate debt for borrowed money = $_____________,
for fiscal year 1997 and $2,000,000.00 in the Plus capital lease payments = $______________,
aggregate for fiscal year 1998. Plus Other Indebtedness = $______________.
Equals Total of: $ ______________
========================================================================================================================
</TABLE>
EXHIBIT C Page 1 of 3 Pages
<PAGE> 6
THE ABOVE SUMMARY REPRESENTS SOME OF THE COVENANTS AND AGREEMENTS CONTAINED IN
THE AGREEMENT AND DOES NOT IN ANY WAY RESTRICT OR MODIFY THE TERMS AND
CONDITIONS OF THE AGREEMENT. IN CASE OF CONFLICT BETWEEN THIS EXHIBIT C AND
THE AGREEMENT, THE AGREEMENT SHALL CONTROL.
The undersigned hereby certifies that the above information and computations
are true and correct and not misleading as of the date hereof, and that since
the date of the Borrower's most recent Compliance Certificate (if any):
[ ] No default or Event of Default has occurred under the
Agreement during the current Reporting Period, or been discovered from a prior
period, and not reported.
[ ] A default or Event of Default (as described below) has
occurred during the current Reporting Period or has been discovered from a
prior period and is being reported for the first time and:
[ ] was cured on ___________________________________.
[ ] was waived by Bank in writing on _______________.
[ ] is continuing.
Description of Event of Default:
-----------------------------------------------
- --------------------------------------------------------------------------------
.
- -------------------------------------------------------------------------------
Executed this day of , 19 .
------------------------- ------------------------- ---
BORROWER: XETEL CORPORATION
SIGNATURE:
---------------------------------------------------------------------
NAME:
--------------------------------------------------------------------------
TITLE: (Chief Financial Officer or President)
-------------------------------------------------------------------------
ADDRESS:
-----------------------------------------------------------------------
EXHIBIT C Page 2 of 3 Pages
<PAGE> 7
EXHIBIT B
REQUEST FOR LOAN
LETTERHEAD OF BORROWER
Texas Commerce Bank National Association
700 Lavaca
P.O. Box 550
Austin, Texas 78701-0001
Fax No. (512) 479-2211
Re: Request for Revolving Loan under Agreement
Attention: RALPH T. BEASLEY
Gentlemen:
This letter confirms our oral or telephonic request of
_________________________, 19____, for a Revolving Loan in accordance with that
certain Credit Agreement (as amended, restated and supplemented from time to
time, the "Agreement") dated as of August 23,1996 between you and us. Any term
defined in the Agreement and used in this letter has the same meaning as in the
Agreement.
The proposed Revolving Loan is to be in the amount of
$________________________________ and is to be made on ____
____________________, 19_____, which is a Business Day. The proposed Revolving
Loan should bear interest at the (check one:) [ ] LIBOR Rate; or [ ] the Prime
Rate. The proceeds of the proposed Revolving Loan should be (check one:) [ ]
deposited into account number ________________ with the Bank; or [ ]
____________________________________________________
________________________________________________________________________________
___________.
The undersigned hereby certifies that:
(1) The representations and warranties made by the Borrower or by
any other Person in the Agreement and the other Loan Documents
are true and correct on and as of this date as though made on
this date.
(2) The proposed Revolving Loan complies with all applicable
provisions of the Agreement.
(3) No Event of Default has occurred and is continuing.
Sincerely,
XETEL CORPORATION
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
EXHIBIT B Page 1 of 1
First Amendment, Xetel Corporation, April 3, 1997
<PAGE> 8
ANNEX I
LOAN DOCUMENTS
"Loan Documents" includes, but is not limited to, the following:
1. Agreement
2. Revolving Note; Term Note
3. [ ] Assignment covering:
[ ] Life insurance
[ ] Deposit account
[ ] Other (specify)
4. Borrowing Base Report
5. Compliance Certificate
6. [x] Security Agreements, in Proper Form, covering:
[x] Accounts
[ ] Equipment
[x] Inventory
[ ] Securities
[ ] Secured note
[ ] Certificate of deposit or deposit account
[ ] Partnership interest
[ ] Rights under contract
[ ] Other (specify)
7. [ ] Deed of Trust
8. [ ] Title Insurance Policy
9. [x] Financing Statements
10. [ ] Guaranty by:
11. [x] Certificate of Account Status
12. [ ] Opinion of Borrower' Counsel
13. [x] Certified Copies of Organizational and Authority Documents
14. [x] Insurance policies and certificates
15. [ ] Subordination Agreement covering: [ ] debt to:
[ ] lien of:
16. [x] Financial Statements of: Borrower
17. [x] UCC search
18. [ ] Regulation U Purpose Statement (U-1)
Loan Documents - ANNEX I Page 1 of 1
First Amendment, Xetel Corporation, April 3, 1997
<PAGE> 1
EXHIBIT 10.34
SECOND AMENDMENT TO CREDIT AGREEMENT
(Borrowing Base)
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (Borrowing Base)(this
"Amendment") dated effective as of November 21, 1997 (the "Effective Date"), is
by and between XETEL CORPORATION ("Borrower"), and TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, a national banking association whose principal office is located
in Houston, Texas (the "Bank").
PRELIMINARY STATEMENT
The Bank and the Borrower have entered into a Credit Agreement (with
Borrowing Base) dated as of August 23, 1996 as amended by First Amendment dated
April 15, 1997 (the "Credit Agreement"). The "Agreement", as used in the
Credit Agreement, shall also refer to the Credit Agreement as amended by this
Amendment. All capitalized terms defined in the Credit Agreement and not
otherwise defined herein shall have the same meanings herein as in the Credit
Agreement. The Bank and the Borrower have agreed to amend the Credit Agreement
to the extent set forth herein, and in order to, among other things, renew,
modify and increase the amount of the Advance/Term Note.
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the Bank and the Borrower hereby agree as
follows:
Section 1. Advance/Term Note. Section 1.1.B of the Credit Agreement
is amended by substituting the following for the Section 1.1.B of the Credit
Agreement:
"ADVANCE TERM NOTE 1.1.B Bank agrees to renew, modify and increase an
advance loan converting to a term loan on the Advance Termination Date
(as defined in the Advance/Term Note) in the original amount of
$2,500,000.00 to $3,250,000.00 ("Advance/Term Loan" or "Advance/Term
Loans") to Borrower as evidenced by a promissory note in Proper Form
in the original principal amount of $3,250,000.00 dated November 21,
1997 and maturing August 31, 2000 (together with any and all renewals,
extensions, modifications and replacements thereof and substitutions
therefor, the "Advance/Term Note"), which is given in renewal,
modification and increase of that certain promissory note dated April
15, 1997 in the original principal amount of $2,500,000.00 (including
all prior notes of which said note represents a renewal, extension,
modification, increase, substitution, rearrangement or replacement
thereof, the "Renewed A/T Note"). The parties hereto agree that there
is as of the Effective Date an outstanding principal balance of
$1,999,999.99 under the Advance/Term Note leaving a balance as of the
Effective Date of $1,250,000.01 under the Advance/Term Note available
for Advance/Term Loans subject to the terms and conditions of this
Agreement. The Advance/Term Loans shall be for the purpose of
financing Borrower's leasehold improvements."
Section 2. The Credit Agreement is amended by adding a new Section
1.6 to read as follows:
"CONFIRMATION OF SECURITY INTERESTS 1.6. Borrower confirms and
ratifies each of the liens, security interests and other interests
granted in each and all security agreements executed in connection
with, related to, or securing the Revolving Note and the Renewed A/T
Note as extending to and securing the Loans and the Notes including
but not limited to each of those interests and liens described in the
following listed Security Agreements. Borrower further agrees and
acknowledges that the terms "secured indebtedness" and "indebtedness
secured hereby" as used in any security agreement including any
supplemental security agreements executed in connection with or
related to, or securing the Renewed Note, or any other indebtedness of
Borrower to Bank, including but not limited to the following security
agreements executed by Borrower and delivered to Bank: Security
Agreement - Accounts dated August 23, 1996; Security Agreement - dated
August 23, 1996, including any Supplemental Security Agreements
supplementing any of the foregoing, and any other security agreements
previously executed by Borrower and delivered to Bank and not released
by Bank and all security agreements executed as of the Effective Date
(each and all "Security Agreements") include, but are not limited to,
each and all indebtedness of all character and kind related to or
evidenced by the Revolving Note, the Renewed A/T Note, the
Advance/Term Note and related to the Loan Documents."
Section 3. The Borrower hereby represents and warrants to the Bank
that after giving effect to the execution and delivery of this Amendment: (a)
the representations and warranties set forth in the Credit Agreement are true
and correct on the date hereof as though made on and as of such date; and (b)
no Event of Default, or event which with passage of time, the giving of notice
or both would become an Event of Default, has occurred and is continuing as of
the date hereof.
Section 4. This Amendment shall become effective as of the Effective
Date upon its execution and delivery by each of the parties named in the
signature lines below.
Section 5. The Borrower further acknowledges that each of the other
Loan Documents is in all other respects ratified and confirmed, and all of the
rights, powers and privileges created thereby or thereunder are ratified,
extended, carried forward and remain in full force and effect except as the
Credit Agreement is amended by this Amendment.
Section 6. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed an original and all of which taken
together shall constitute but one and the same agreement.
Section 7. This Amendment shall be included within the definition of
"Loan Documents" as used in the Agreement.
Section 8. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND AS APPLICABLE, THE LAWS OF
THE UNITED STATES OF AMERICA.
Second Amendment, Xetel Corporation, November 21, 1997
<PAGE> 2
THIS WRITTEN AMENDMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE A "LOAN
AGREEMENT" AS DEFINED IN SECTION 26.02(a) OF THE TEXAS BUSINESS & COMMERCE
CODE, AND REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed effective as of the Effective Date.
BORROWER: XETEL CORPORATION
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Address:
---------------------------
BANK: TEXAS COMMERCE BANK
NATIONAL ASSOCIATION
By:
--------------------------------
Name:
------------------------------
Title:
----------------------------
Second Amendment, Xetel Corporation, November 21, 1997
<PAGE> 1
EXHIBIT 10.35
March 27, 1998
Xetel Corporation
2525 Brockton Drive
Austin, TX 78758
Att: Mr. Rich Chilinski
LETTER OF COMMITMENT
Dear Mr. Chilinski:
General Electric Capital Corporation and its Nominee's Copelco
Capital, Inc. and The CIT Group/Equipment Financing, Inc., (the "Lessors") are
pleased to submit the following commitment to Xetel Corporation (the "Lessee")
to enter into a lease (the "Lease") of the equipment acceptable to the Lessor
based on the Lessor's sole discretion (the "Equipment"). This letter of
Commitment replaces the letter of even date previously provided to you.
The economics of the commitment are summarized in this letter which
include the relevant assumptions on which the lease rates for this transaction
are based. These assumptions and the following general conditions, are,
therefore, an essential part of our commitment and the lease rates quoted
herein are specifically based on these assumptions and the terms of this
commitment.
FINANCIAL TERMS
Transaction: Single Investor Guideline Tax Lease
Lessee: XeTel Corporation
Lessor A: GE Capital or one of its wholly owned
subsidiaries or assignees
Lessor B: Copelco Capital, Inc.
Lessor C: The CIT Group/Equipment Financing, Inc.
Capitalized Lessor A's Cost: $2,640,000.00
Capitalized Lessor B's Cost: $2,250,000.00
Capitalized Lessor C's Cost: $2,300,000.00
Basic Lease Term: Sixty (60) months
Lease Rate Factor(s): (1)April-June 1.6947%
(2)July-Sept 1.6849%
(3)Oct-Dec 1.6760
<PAGE> 2
Note: The Lease Rate Factor(s) are based on
an assumption that, at the time of the
funding, the then most recent weekly average
of 5 year Treasury Note rates will be 5.47%.
If this is not the case, then the Lease Rate
Factors will be adjusted accordingly.
Lease Commencement Date: The date of execution by Lessee of the
Certificate of Acceptance for the Equipment.
Basic Term Commencement Date: The first day of the month following the
Lease Commencement Date, unless the Lease
Commencement Date is the first day of a
calendar month; in which case the Basic Term
Commencement Date shall be the Lease
Commencement.
Basic Term Rentals: Each such payment would be equal to the
Original Acquisition Cost multiplied by the
Lease Rate Factor with applicable taxes paid
monthly in advance.
Interim Period: The period from and including the Lease
Commencement Date to the Basic Term
Commencement Date.
Interim Rentals: The product of the Daily Lease Rate Factor
times the Original Acquisition Cost of the
Equipment times the number of days in the
Interim Period. Interim Rent, plus
applicable taxes, would be payable on the
Basic Term Commencement Date.
Last Delivery Date: December 31, 1998
End of Lease Purchase Option: So long as no default exists hereunder and
the lease has not been earlier terminated,
Lessee may at lease expiration, upon at least
180 days prior written notice to Lessor,
purchase all (but not less than all) of the
Equipment in any Schedule for cash equal to
its then Fair Market Value (plus all
applicable taxes).
Tax Benefits: It is assumed that the Equipment is eligible
for and that Lessor will be entitled to the
following tax benefits of ownership:
(1) Depreciation Method: 200% declining
balance method over the recovery
Period, switching to straight line
method for the first taxable year
for which using the straight line
method with respect to the adjusted
basis as of the beginning of such
year will yield a larger allowance.
(2) Recovery Period: 5 Years
(3) Basis: 100% of Equipment Cost
Covenants: Covenants identical to those on the Master
Lease Agreement between GE Capital and Xetel
Corporation dated April 30, 1996.
GENERAL PROVISIONS
1. Net Lease: The Lease will be a "net lease" with the Lessee
responsible for paying rent under all circumstances. Lessee is specifically
responsible for all expenses, maintenance, insurance and taxes relating to the
purchase, lease, possession and use of the Equipment excluding, however, taxes
based solely on the net income of Lessor.
2. Tax Benefits and Indemnification: It is assumed, and Lessee
will represent to Lessor in the Lease, that Lessor will be considered the owner
of the Equipment for state law and federal income tax purposes and that the
most accelerated depreciation or cost recovery deductions on the full amount of
the Equipment Cost will be available to Lessor. Lessee shall indemnify Lessor
for loss of Tax Benefits due to Lessee's acts or omissions or breach of
representation, as well as for any reduction in Lessor's economic return
resulting from changes in Federal income tax rates after the date of this
proposal.
<PAGE> 3
3. Maintenance and Insurance: All maintenance and insurance
(fire and theft, extended coverage and liability) are the responsible for
maintaining in force property and liability insurance with companies and in
amounts and coverage's satisfactory to Lessor.
4. Warranties: All warranties, guaranties, services,
instruction, etc. made available by the manufacturer or vendor of the Equipment
will be passed on to Lessee for Lessee to enforce so long as Lessee is not in
default.
5. Documentation: It is anticipated that the Lessor's current
standard lease documentation for this type of Equipment and transaction will be
used. Any changes to this document must be approved by Lessor.
6. Transaction Costs: Lessor will be responsible for all of its
closing and transaction costs. Lessee will be responsible for all its closing
and transaction costs.
7. Commitment Fee: By signing below, Lessee acknowledges the
terms and conditions of this commitment and agrees to pay a commitment fee of
$0.00 (the "Commitment Fee"). The Commitment Fee will be applied to the
initial payment(s) of rent, except for a documentation charge of $0.00. The
Commitment Fee is not refundable and deemed earned. It shall be retained by
Lessor whether or not the Lease transaction is closed.
8. Tax Law Change: Since the commitment and its economics are
based on the provisions of the Internal Revenue Code (the "Code"), and the
regulations adopted thereunder (the "Regulations") in effect on the date of
this commitment letter, Lessor reserves the right to modify or revoke this
commitment in the event its economics are, in Lessor's judgment, adversely
affected by any amendment to the Code or the Regulations occurring after the
date of this commitment letter, but prior to the commencement date of any
Schedule to a Lease. In the event Lessor revokes this commitment, Lessee shall
repay to Lessor any progress payments, taxes and any other sums which Lessor
has paid in connection with assignment, purchase agreement or any other
document relating to the Equipment.
9. Tax Base Unavailability: Lessor reserves the right to
terminate this commitment it Lessor determines, in its sole discretion, that it
has insufficient tax base available to permit it to lease the Equipment
hereunder while preserving the net yields and cash flows on which this
commitment is premised.
If Lessor elects to terminate the commitment as provided in this
paragraph, it may offer to provide Lessee with secured loan or non-tax-oriented
lease financing up to the amount of Capitalized Lessor's Cost of the Equipment,
at Lessor's discretion.
10. Representations and Warranties: Lessee warrants and
represents that all information submitted to Lessor prior to or concurrent with
this commitment letter is true and correct.
11. Approval of Documents: All documents required hereby or
relating to Lessee's capacity and authority to enter into the Lease and to
execute the documents relating thereto, and such other documents, instruments,
certificates opinions and assurances as Lessor may request and all procedures
in connection herewith, will be subject to the approval of Lessor and its
counsel as to form and substance.
12. No Assignment: This commitment letter shall not be assigned
by Lessee by operation of law or otherwise without the prior written consent of
Lessor.
13. Commencement of Commitment: This commitment and all of its
terms shall not commence unless and until Lessor has received your
acknowledgment hereof and the above Commitment Fee no later than April 10,
1998.
14. Termination: Lessor may terminate this commitment by written
or telegraphic notice to Lessee if:
a) There has been a material adverse change in or damage to the
business or financial condition of Lessee, any guarantor or other primary
or secondary obligor in the sole judgment of Lessor; or
b) Lessee shall fail to comply with any term or condition hereof;
or
<PAGE> 4
c) Lessee, any guarantor or other primary or secondary obligor shall
(I) apply for or consent to the appointment of a receiver, trustee or
liquidator for it or for any of its property, (ii) make a general
assignment for the benefit of creditors, (iii) be adjudicated a bankrupt or
insolvent or (iv) file or to take advantage of any bankruptcy,
reorganization, insolvency, or liquidation law or statute, or an answer
admitting the material allegations of a petition filed against it in any
proceeding under any such law, or, it applicable, if corporate action shall
be taken by Lessee, any guarantor or other primary or secondary obligor for
the purpose of effecting any of the foregoing;
d) A default or breach of any other agreement between Lessee and
Lessor shall have occurred.
15. Miscellaneous: This commitment letter sets forth the entire
agreement of the parties with respect to the subject matter hereof, and
supersedes all prior written or oral understandings with respect thereto,
provided, however, that all written and oral representations made by Lessee to
Lessor with respect to the subject matter hereof shall survive the issuance of
this commitment letter. No modification or waiver of any provision of this
commitment letter shall be effective unless the same shall be in writing signed
by the parties hereto.
16. No Reliance: Unless specifically agreed in writing by Lessor,
no third party can rely upon thus commitment letter.
17. Lessee Commitment to Enter into Transaction: If the foregoing
terms and conditions are acceptable to you, please sign and return a copy of
this commitment letter along with the Commitment Fee whereupon this letter
shall constitute our commitment to provide and your commitment to accept the
financing substantially on the terms and conditions set forth herein.
We would appreciate the opportunity to discuss this commitment in more
detail at your earliest convenience. We look forward to your early review and
response. If there are any questions, please do not hesitate to contact us at
(972)419-3200.
Very truly yours,
GE CAPITAL CORP.
By:
---------------------------
Dean L. DeBroux
Title: Senior Risk Manager
---------------------------
COMMITMENT ACCEPTED:
Xetel Corporation
By:
-------------------------
Name:
-----------------------
Title:
----------------------
<PAGE> 1
Exhibit 11.1
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
March 28, March 29, March 30,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per share:
Weighted average shares outstanding 8,863 8,709 6,673
========== ========== ==========
Net income $ 629 $ 449 $ 5,655
========== ========== ==========
Basic earnings per share $ 0.07 $ 0.05 $ 0.85
========== ========== ==========
Diluted earnings per share:
Weighted average shares outstanding 8,863 8,709 6,673
Common stock equivalents: stock options (1) 669 866 738
---------- ---------- ----------
9,532 9,575 7,411
========== ========== ==========
Net income $ 629 $ 449 $ 5,655
========== ========== ==========
Diluted earnings per share $ 0.07 $ 0.05 $ 0.76
========== ========== ==========
</TABLE>
(1) Stock options based on the treasury stock method using average market
price.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-1952 and No. 333-20331) of XeTel Corporation
of our report dated April 25, 1998 in this Annual Report on Form 10-K for the
fiscal year ended March 28, 1998.
PRICE WATERHOUSE LLP
Austin, Texas
June 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-28-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> MAR-28-1998
<CASH> 7,239
<SECURITIES> 0
<RECEIVABLES> 23,127
<ALLOWANCES> 240
<INVENTORY> 18,061
<CURRENT-ASSETS> 49,114
<PP&E> 17,548
<DEPRECIATION> 8,593
<TOTAL-ASSETS> 58,806
<CURRENT-LIABILITIES> 28,161
<BONDS> 0
0
0
<COMMON> 21,142
<OTHER-SE> 6,602
<TOTAL-LIABILITY-AND-EQUITY> 58,806
<SALES> 112,685
<TOTAL-REVENUES> 112,685
<CGS> 105,171
<TOTAL-COSTS> 111,640
<OTHER-EXPENSES> 30
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 209
<INCOME-PRETAX> 1,015
<INCOME-TAX> 386
<INCOME-CONTINUING> 629
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 629
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
