<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 26, 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)
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 [ ]
Number of shares outstanding of the issuer's common stock, $0.0001 par value,
as of November 4, 1998: 9,149,950.
<PAGE> 2
XETEL CORPORATION
INDEX
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
Balance Sheet as of September 26, 1998 and March 28, 1998..........................................................3
Statement of Operations for the three and six months ended September 26, 1998 and September 27, 1997...............4
Statement of Cash Flows for the three and six months ended September 26, 1998 and September 27, 1997...............5
Notes to Interim Financial Statements..............................................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................7
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders................................................................12
ITEM 5. Other Information..................................................................................................12
ITEM 6. Exhibits and Reports on Form 8-K...................................................................................14
Signatures..................................................................................................................15
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
XETEL CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS September 26, March 28,
1998 1998
----------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,352 $ 7,239
Trade accounts receivable, net of
allowance for doubtful accounts
of $240 and $240, respectively 23,386 22,887
Inventories 19,995 18,061
Prepaid expenses and other 1,236 927
----------- -----------
Total current assets 51,969 49,114
Property and equipment, net 8,634 8,955
Goodwill
630 737
----------- -----------
Total assets $ 61,233 $ 58,806
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 12,689 $ 19,396
Notes payable and current portion
of long term debt 13,407 5,800
Accrued expenses and other liabilities 4,045 2,965
----------- -----------
Total current liabilities 30,141 28,161
Deferred income taxes 234 234
Long term debt 2,417 2,667
Commitments (Note 7)
Stockholders' equity:
Common stock, $0.0001 par value,
25,000,000 shares authorized,
9,085,797 and 8,998,896 shares
issued and 9,079,799 and 8,936,400
shares outstanding, respectively 21,593 21,142
Retained earnings 7,069 6,625
Deferred compensation (221) (23)
----------- -----------
Total stockholders' equity 28,441 27,744
----------- -----------
Total liabilities and
stockholders' equity $ 61,233 $ 58,806
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE> 4
XETEL CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -------------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 36,211 $ 22,722 $ 80,518 $ 47,189
Cost of sales 34,824 21,002 76,061 43,173
------------ ------------ ------------ ------------
Gross profit 1,387 1,720 4,457 4,016
Selling, general and
administrative expenses 1,552 1,630 3,339 3,255
------------ ------------ ------------ ------------
Income (loss) from operations (165) 90 1,118 761
Other (expense) income, net (222) 8 (402) 71
------------ ------------ ------------ ------------
Income (loss) before
income taxes (387) 98 716 832
Provision (benefit) for
income taxes (147) 37 272 316
------------ ------------ ------------ ------------
Net income (loss) $ (240) $ 61 $ 444 $ 516
============ ============ ============ ============
Basic earnings (loss)
per share $ (0.03) $ 0.01 $ 0.05 $ 0.06
============ ============ ============ ============
Basic weighted average
shares outstanding 9,062 8,821 9,035 8,816
============ ============ ============ ============
Diluted earnings (loss)
per share $ (0.03) $ 0.01 $ 0.05 $ 0.05
============ ============ ============ ============
Diluted weighted
average shares outstanding 9,062 9,662 9,615 9,661
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
XETEL CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------- ----------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (240) $ 61 $ 444 $ 516
Adjustments to reconcile net income to net
cash (used for) provided by operating
activities:
Depreciation and amortization 735 723 1,449 1,370
Loss (gain) on disposal of equipment -- 14 (8) 15
Change in operating assets and liabilities:
Decrease (increase) in--
Trade accounts receivable 1,280 135 (499) (266)
Inventories 1,778 (2,956) (1,934) (4,623)
Prepaid expenses and other (317) (159) (309) 570
(Decrease) increase in--
Trade accounts payable (7,489) 2,436 (6,707) 2,879
Accrued expenses and other liabilities 47 470 1,080 522
----------- --------- ------- -------
Cash (used for) provided by operating activities (4,206) 724 (6,484) 983
----------- --------- ------- -------
Cash flows from investing activities:
Proceeds from sale of equipment -- -- 9 399
Purchases of property and equipment (429) (759) (974) (3,861)
----------- --------- ------- -------
Cash used for investing activities (429) (759) (965) (3,462)
Cash flows from financing activities:
Net borrowings under debt agreements 4,782 281 7,357 1,958
Cash proceeds from stock issued under
employee stock purchase plan -- -- 154 --
Proceeds from stock options exercised -- 8 51 37
----------- --------- ------- -------
Cash provided by financing activities 4,782 289 7,562 1,995
----------- --------- ------- -------
Increase (decrease) in cash and cash equivalents 147 254 113 (484)
Cash and cash equivalents, beginning of period 7,205 6,294 7,239 7,032
----------- --------- ------- -------
Cash and cash equivalents, end of period $ 7,352 $ 6,548 $ 7,352 $ 6,548
=========== ========= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 BUSINESS
XeTel provides advanced design and prototype services, manufactures
sophisticated surface mount assemblies and supplies turnkey electronic
manufacturing 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 comprehensive electronic manufacturing solutions for its
customers.
NOTE 2 BASIS OF PRESENTATION
The accompanying financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules or regulations.
In the opinion of management, the financial statements reflect all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the financial position, operating results, and cash flows for
those periods presented. The results of operations for the period ended
September 26, 1998 are not necessarily indicative of the results of operations
for the fiscal year ending March 27, 1999. These financial statements should be
read in conjunction with the financial statements, and notes thereto, for the
fiscal year ended March 28, 1998 as presented in the Company's 10-K filed with
the SEC.
NOTE 3 INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 26, March 28,
1998 1998
---------- ----------
<S> <C> <C>
Raw materials $ 16,662 $ 13,944
Work in progress 2,872 3,731
Finished goods 461 386
---------- ----------
$ 19,995 $ 18,061
========== ==========
</TABLE>
As of September 26, 1998 and March 28, 1998, the Company had allowances for
obsolete raw materials (principally printed circuit board assembly components)
of $490,000 and $490,000, respectively. Cost of sales for the three and six
months ended September 26, 1998 and September 27, 1997 include provisions to
the allowance for obsolete materials of $2,000, $132,000, $126,000 and
$126,000, respectively.
NOTE 4 PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following (in thousands):
<TABLE>
<CAPTION>
September 26, March 28,
1998 1998
------------ --------
<S> <C> <C>
Machinery and equipment $ 13,764 $ 13,204
Furniture and fixtures 913 838
Leasehold improvements 3,826 3,506
--------- ---------
18,503 17,548
Less: Accumulated depreciation
and amortization (9,869) (8,593)
--------- ---------
$ 8,634 $ 8,955
========= =========
</TABLE>
<PAGE> 7
NOTE 5 NOTES PAYABLE AND LONG-TERM DEBT
The Company has (i) a revolving line of credit for $17.0 million from a
commercial bank, (ii) a term loan facility for $3.3 million, and (iii) an
equipment financing facility from a financial services company. There was $12.9
million and $5.3 million outstanding under the commercial bank line of credit
and $2.9 million and $3.3 million outstanding under the term note at September
26, 1998 and March 28, 1998, respectively. The term loan facility bears interest
at 9.2%, is secured by certain assets, and matures on August 31, 2000.
The $17.0 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 September 26, 1998, the Company was in compliance with all debt
covenants.
Interest paid totaled $165,000, $366,000, $34,000 and $57,000 for the three and
six months ended September 26, 1998 and September 27, 1997, respectively.
NOTE 6 LEASE COMMITMENTS
XeTel leases its operating facilities and certain office equipment under
noncancellable operating leases. Rental expense under all operating leases was
approximately $1.1 million, $2.1 million, $743,000 and $1.3 million during the
three and six months ended September 26, 1998 and September 27, 1997,
respectively. Future noncancellable minimum rental payments under all operating
leases with initial terms of greater than one year are $4,031,000 in 1999,
$4,022,000 in 2000, $3,785,000 in 2001, $2,909,000 in 2002, $2,089,000 in 2003
and an aggregate of $7,476,000 thereafter.
NOTE 7 RELATED PARTY TRANSACTIONS
The Company has transactions with certain divisions of Rohm Corporation, a
wholly-owned subsidiary of Rohm U.S.A., Inc. ("Rohm") a subsidiary of Rohm Co.,
Ltd., Japan, during the normal course of business. Rohm owned approximately 48%
of the Company's outstanding common stock as of September 26, 1998. Purchases
from such divisions were $40,000, $81,000, $66,000 and $136,000 for the three
and six months ended September 26, 1998 and September 27, 1997, respectively.
Accounts payable to such divisions were $26,000 and $14,000 as of September 26,
1998 and March 28, 1998, respectively. Accounts receivable from such divisions
were not significant.
ITEM 2. 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 below and other risks described in the Company's other filed
SEC documents such as those associated with the Company's initial public
offering and Form 10-K filing.
OVERVIEW
XeTel was founded in 1984. In 1986, Rohm, 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.
<PAGE> 8
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 comprehensive electronic
manufacturing 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.
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-Q and
other filings with the Securities and Exchange Commission, the 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 46%, 8% and
5%, respectively, of net sales for the six months ended September 26, 1998. 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
<PAGE> 9
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.
RESULTS OF OPERATIONS
Net sales for the three months ended September 26, 1998 increased 59% to $36.2
million from $22.7 million in the prior year's second quarter. The higher sales
levels primarily represent increased shipments to the Company's major customers
in the computer segment of the electronics market.
Net sales for the six months ended September 26, 1998 increased 71% to $80.5
million from $47.2 million for the comparable year period. The higher sales
were mainly attributable to increased shipments to major customers in the
computer segment of the electronics market.
<PAGE> 10
Gross profit for the three months ended September 26, 1998 decreased 19% to
$1.4 million from $1.7 million in the comparable year period. 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 3.8% for the second quarter of fiscal 1999 from 7.6%
for the comparable year period. The decrease in gross profit and gross margin
on higher sales mainly reflects a change in product mix towards higher material
content programs and increased fixed expenses associated with strategic
investments to update and expand facilities and to upgrade equipment
capabilities offered to customers.
Gross profit for the six months ended September 26, 1998 increased 11% to $4.5
million from $4.0 million in the comparable year period. The increase in gross
profit primarily resulted from higher sales levels which provided increased
coverage of fixed expenses. Gross margin decreased to 5.5% versus 8.5% for the
comparable year period. The decrease in gross margin during the first six
months primarily represented changes in product mix towards higher material
content customer programs and increased costs relating to facility and
equipment upgrades.
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 the three months ended September 26, 1998
decreased to $1.5 million compared to $1.6 million in the corresponding period
last year. SG&A expenses represented 4.3% of net sales for the three months
ended September 26, 1998 compared to 7.2% for the three months ended September
27, 1997. The decrease in SG&A expenses as a percentage of sales reflects the
effects of cost controls and higher sales levels.
SG&A expenses remained relatively flat at $3.3 million for the six months ended
September 26, 1998 and September 27, 1997. SG&A expenses represented 4.1% of
net sales for the six months ended September 26, 1998 compared to 6.9% of sales
in the prior year as a result of higher sales and firm cost control.
Other (expense) income, net for the three months ended September 26, 1998
reflected expense of $222,000 compared to income of $8,000 in the corresponding
period in fiscal 1998. Other (expense) income, net for the six months ended
September 26, 1998 was a net expense of $402,000 compared to income of $71,000
in the corresponding prior year period. The change in other (expense) income is
mainly due to interest expense incurred on borrowings under the term note and
revolving line of credit.
The benefit for income taxes of $147,000 and the provision for income taxes of
$37,000 for the three months ended September 26, 1998 and September 27, 1997,
respectively, reflect an effective tax rates of 38.0% and 37.8%. The provision
for income taxes of $272,000 and $316,000 for the six months ended September
26, 1998 and September 27, 1997, respectively, reflects an effective tax rate
of 38%.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $21.8 million and $21.0 million as of September 26, 1998
and March 28, 1998, respectively. In addition to the Company's working capital
as of September 26, 1998, which includes cash and cash equivalents of $7.4
million, the Company has $8.8 million available from unused credit facilities.
Net cash used for operating activities during the three and six months ended
September 26, 1998 was $4.2 million and $6.5 million on increased sales levels.
Net cash provided by operating activities was $724,000 and 983,000 during the
three and six month periods ended September 27, 1997.
Capital expenditures during the three and six months ended September 26, 1998
and September 27, 1997 were $429,000, $974,000, $759,000 and $3.9 million,
respectively. The decrease in capital expenditures was primarily due to capital
investments made in the prior year associated with the Company's new
manufacturing and administrative facilities in Austin, Texas.
The bank facility bears interest at LIBOR plus 1.25% or 1.75% and/or prime
(such rate determined based upon the amounts and period of loans), matures
August 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 1%
(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 its working capital, together with cash flows from
operations and financing facilities, will be sufficient to meet operating and
capital requirements through its 1999 fiscal year end.
<PAGE> 11
BACKLOG
The Company's backlog as of September 26, 1998 was approximately $73.4 million
compared to approximately $114.8 million as of June 27, 1998 and $112.3 million
at March 28, 1998. 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 operating results. See
"Variability of Customer Requirements" and "Fluctuations in Operating Results."
EMPLOYEES
As of September 26, 1998, the Company had 670 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.
YEAR 2000 COMPLIANCE
Many currently installed systems and software products are coded to accept only
two digit entries in the date code field. These date codes fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result computer systems and/or software used by many companies will
need to be upgraded to comply with such "Year 2000" requirements.
An assessment of internal changes required has been performed and the Company
has determined that it will be necessary to upgrade its network operating
systems, test equipment, electronic mail systems, custom reports and PC BIOS so
that its computer systems will be Year 2000 compliant. These modifications and
replacements are being and will continue to be made in conjunction with the
Company's overall information systems initiatives. In addition, the Company is
contacting third-party vendors and customers to ensure that any of their
products that are incorporated into the Company's products or currently in use
by the Company can adequately deal with the change in century. Areas being
addressed include major third-party suppliers of components of the Company's
products as well as full reviews of the Company's manufacturing equipment,
telephone and voice mail systems, security systems and other office support
systems. The Company has also initiated formal communications with significant
suppliers and customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
issues. No significant information technology initiatives have been deferred by
the Company as a result of its Year 2000 project.
Since 1998, the Company has made Year 2000 compliance a priority in purchasing
and installation decisions. The Company's information systems department has
adopted a Year 2000 compliance program to assess and address any Year 2000
issues which remain related to the Company's information technology systems and
equipment. The following is a table showing the Company's status of the Year
2000 program based on management's assessment:
YEAR 2000 COMPLIANCE PROGRAM STATUS
AS OF SEPTEMBER 26, 1998
<TABLE>
<CAPTION>
Percent Estimated
Phase Complete Completion Date
- ----- -------- ---------------
<S> <C> <C>
Assessment of internal changes required 100% Complete
Major supplier readiness risk assessment 50% June 1999
Upgrades of commercial and internal
applications/products 40% June 1999
</TABLE>
As of September 26, 1998, the Company has spent approximately $35,000 of the
currently estimated $85,000 total cost of the program. Costs incurred and
expected to be incurred consist primarily of the cost of Company personnel
involved in updating applications and operating systems and the costs of
software updates and patches (many of which are provided free of charge from the
vendors). Such expenses are being funded through operating cash flows. The
Company has utilized the Company's internal technology personnel, and intends to
continue to use such personnel, to address Year 2000 issues, rather than
contract with third-party consultants.
Based on available information, the Company does not believe any material
exposure to significant business interruption exists as a result of Year 2000
compliance issues, or that the cost of remedial actions will have a material
adverse effect on its business, financial condition or results of operations.
Accordingly, and as the program is on schedule to be completed during the summer
of 1999, the Company has not formulated a worse case scenario or adopted any
formal contingency plan in the event its Year 2000 project is not completed in a
timely manner.
With respect to products manufactured by the Company based on third-party
designs, there can be no assurance that such products contain all necessary date
code changes necessary to ensure Year 2000 compliance. Although the Company has
not experienced any Year 2000-related product liability claims or lawsuits to
date, production of products that are not Year 2000 compliant may entail the
risk of such claims and lawsuits. The Company's defense against any future
lawsuits, regardless of their merit, could result in substantial expense to the
Company as well as the diversion of management time and attention. In addition,
Year 2000 product liability claims, regardless of the merit or eventual outcome
of such claims, could affect the Company's business reputation and its ability
to retain existing customers or attract new customers which, in turn, could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company believes that the purchasing patterns of customers and potential
customers may be significantly affected by Year 2000 issues. Many companies are
expending significant resources to correct, patch or replace their current
software systems to achieve Year 2000 compliance. These expenditures may result
in reduced funds available to develop new products and purchase services such as
those offered by the Company.
Significant uncertainty still exists as to the global implications of the Year
2000 issue. Costs of defending and resolving Year 2000-related disputes,
reductions in product development programs by customers or the failure of the
Company to adequately resolve internal Year 2000 compliance issues could result
in a material adverse effect on the Company's business, operating results and
financial condition.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of stockholders held on August 11, 1998 in
Austin, Texas, the Company's stockholders voted on the following matters.
1. Election of Directors. All directors proposed by management were elected.
<TABLE>
<CAPTION>
Name of Nominee Votes in Favor Votes Against Abstentions
--------------- -------------- ------------- -----------
<S> <C> <C> <C>
Angelo A. DeCaro, Jr. (Class III Director) 8,231,926 321,783 10,740
Ronald W. Guire (Class III Director) 8,327,216 227,039 10,194
</TABLE>
Broker non-votes amounted to 1,723,261
2. Approval of an amendment to the 1997 Stock Incentive Plan (the "1997 Plan")
to increase the number of shares of Common Stock available for issuance under
the 1997 Plan by an additional 500,000 shares to 2,412,100 shares. The
amendment was approved.
ITEM 5. OTHER INFORMATION
Stockholder Proposals
Proposals of stockholders intended to be presented at the Company's 1999 annual
meeting of stockholders must be received at the Company's principal executive
offices not later than March 14, 1999 in order to be considered for inclusion in
the Company's proxy statement and form of proxy relating to the 1999 annual
meeting. Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange
Act of 1934, if a stockholder who intends to present a proposal at the 1999
annual meeting of stockholders does not notify the Company of such proposal on
or prior to May 26, 1999, then management proxies would be allowed to use their
discretionary voting authority to vote on the proposal when the proposal is
raised at the annual meeting, even though there is no discussion of the proposal
in the 1999 proxy statement.
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Description
Number
10.38 First Amendment to Credit Agreement between the Registrant and
Chase Bank of Texas.
10.39 Amendment No. 1 to 1997 Stock Incentive Plan.
11.1 Computation of Earnings per Share.
27.1 Financial Data Schedule
(b REPORTS ON FORM 8-K
During the fiscal quarter ended September 26, 1998 no current
reports on Form 8-K were filed.
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 10, 1998 By: /s/ Angelo A. DeCaro, Jr.
----------------------------
Angelo A. DeCaro, Jr.
President and Chief Executive
Officer and Director
(Principal Executive Officer)
Date: November 10, 1998 /s/ Richard S. Chilinski
----------------------------
Richard S. Chilinski
Vice President,
Chief Financial Officer
and Assistant Secretary
(Principal Financial and
Accounting Officer)
<PAGE> 14
INDEX TO EXHIBITS
Exhibit Description
Number
10.38 First Amendment to Credit Agreement between the Registrant and
Chase Bank of Texas.
10.39 Amendment No. 1 to 1997 Stock Incentive Plan.
11.1 Computation of Earnings per Share.
27.1 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.38
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("Amendment" or "First Amendment")
executed October ____, 1998 to be effective as of September 24, 1998 ("Effective
Date"), is between XETEL CORPORATION ("Borrower") and CHASE BANK OF TEXAS,
NATIONAL ASSOCIATION ("Bank," formerly Texas Commerce Bank National
Association).
PRELIMINARY STATEMENT. Borrower and Bank entered into a Amendment and
Restatement of Credit Agreement dated as of June 25, 1998 (as amended by this
and prior amendments, "Credit Agreement" or "Agreement"). In this Amendment, all
capitalized terms defined in the Credit Agreement and not otherwise defined
herein have the same meanings as in the Credit Agreement, and each Section,
Exhibit and similar reference is to the Credit Agreement as amended. Borrower
and Bank have agreed to amend the Credit Agreement to the extent set forth
herein, and in order to, among other things, modify the revolving Commitment and
various covenants and conditions of lending.
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, Borrower and Bank agree as follows:
1. REVOLVING CREDIT NOTE. Section 1.1.A is amended to read as follows:
"REVOLVING CREDIT NOTE 1.1.A-1 Subject to the terms and conditions hereof,
Bank agrees to make loans ("REVOLVING LOANS") to Borrower from time to time
before the Termination Date, not to exceed at any one time outstanding the
lesser of the Borrowing Base or $17,000,000.00 (the "COMMITMENT"), such
amount also subject to reduction in respect of L/C Obligations as provided
hereinafter. Borrower has the right to borrow, repay and reborrow. Loans may
only be used for supporting Borrower's accounts receivable and inventory.
Chapter 346 of the Texas Finance Code (which governs certain revolving loan
accounts) will not apply to this Agreement, the Revolving Note, any
Revolving Loan or L/C Obligation. Revolving Loans will be evidenced by, and
will bear interest and be payable as provided in, Borrower's $17,000,000.00
Revolving Credit Note dated the Effective Date (together with any and all
renewals, extensions, modifications and replacements thereof and
substitutions therefor, the "REVOLVING NOTE"), given to renew and increase
Borrower's $10,000,000.00 revolving promissory note dated April 15, 1997
(including all prior notes of which said note represents a renewal,
extension, modification, increase, substitution, rearrangement or
replacement thereof, a "Renewed Note"). "TERMINATION DATE" means the earlier
of: (a) August 31, 1999; or (b) the date specified by Bank pursuant to
Section 6.1 hereof.
"LETTER OF CREDIT SUB-LIMIT 1.1.A-2:
"(a) Subject to the approval of Bank in Bank's sole discretion, Bank may
issue commercial or standby letters of credit ("Letters of Credit") before
the Termination Date for the account of Borrower and in favor of such
Person(s) designated by Borrower. Each Letter of Credit shall expire no
later than the Termination Date. Borrower shall request each Letter of
Credit using Bank's then standard form of application for the type requested
("Application"), presented in form and substance satisfactory to Bank, not
less than 2 business days before the requested issuance date, and shall pay
the fees quoted by the Bank for such issuance. Borrower authorizes Bank to
advance Revolving Loans under the Revolving Note, in Bank's sole discretion
and without notice to Borrower, to make payment on any L/C Obligation.
Letters of Credit shall be issued for the purpose of [PROVIDING SUPPORT FOR
BORROWER'S OBTAINING SUPPLIER CREDIT FOR REGULAR BUSINESS OPERATIONS].
"(b) Limitations: (i) The face amount of all outstanding Letters of Credit,
plus the amount of all unreimbursed drawings or other amounts owing to Bank
under or in respect of all Letters of Credit and Applications (such sum
being the "L/C Obligations") shall not at any time exceed $3,000,000.00;
(ii) the sum of L/C Obligations and Revolving Loans outstanding at any one
time shall not exceed $17,000,000.00; and (iii) the sum of all L/C
Obligations plus Loans outstanding at any one time shall not exceed the
Borrowing Base."
2. CONFIRMATION OF SECURITY INTERESTS. No security interest, lien, or other
interest granted by Borrower, any guarantor or other person to Bank is released
or limited in connection with the execution of this Amendment. 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 Prior Credit Agreement, Renewed Notes, and Notes as extending to
and securing all, Loans, Notes and L/C Obligations 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," "indebtedness secured hereby," "Obligations" and any similar
reference used in any security agreement executed by Borrower in favor of 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 - Inventory dated August 23, 1996, 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 Advance/Term Note L/C Obligations or otherwise related to
the Loan Documents.
3. Exhibits A and C are replaced with Exhibits A and C attached hereto.
4. ASSET AUDIT. Pursuant to Section 4.5, Borrower and Bank have scheduled as
asset field audit to commence November 9, 1998, Borrower acknowledging that
execution of this amendment is premised upon Bank's reliance that such audit
will be facilitated on a timely basis.
5. In consideration for the modifications to the terms of the Commitment made by
this Amendment, Borrower agrees to pay a flat fee in the aggregate amount of
$50,000.00, of which $25,000.00 shall be due and payable upon execution of this
Amendment and $25,000.00 due and payable January 1, 1999.
6. YEAR 2000. Any reprogramming required to permit the proper functioning, in
and following the year 2000, of (i) the Borrower's and Guarantors' computer
systems and (ii) equipment containing embedded microchips (including systems and
equipment supplied by others or with which Borrower's or Guarantors' systems
interface) and the testing of all such systems and equipment, as so
reprogrammed, will be completed by January 1, 1999. The cost to Borrower and
Guarantors of such reprogramming and testing and of the reasonably foreseeable
consequences of year 2000 to the Borrowers and Guarantors (including, without
limitation, reprogramming errors and the failure of others' systems or
equipment) will not result in any Event of Default or have a material adverse
effect on Borrower or any Guarantor.
7. Borrower represents and warrants to Bank that after giving effect to 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. Borrower further acknowledges and agrees 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.
8. This Amendment shall become effective as of its Effective Date upon execution
and delivery by each of the parties named in the signature lines below, and
"Agreement" and "Credit Agreement" as used in the Credit Agreement and this
Amendment shall refer to the Credit Agreement as amended by this Amendment. This
Amendment shall be included within the definition of "Loan Documents" as used in
the Agreement. 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.
9. 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 its Effective Date.
BORROWER: CUSTOMER BANK: CHASE BANK OF TEXAS, NATIONAL
ASSOCIATION
By: By:
------------------------------- --------------------------------
Name: Name:
----------------------------- ------------------------------
Title: Title:
---------------------------- -----------------------------
Address:
--------------------------
<PAGE> 2
EXHIBIT A
BORROWING BASE REPORT
BORROWING BASE REPORT FOR PERIOD BEGINNING:__________ AND ENDING _________
("CURRENT PERIOD") REQUIRED BY THE CREDIT AGREEMENT DATED JUNE 25, 1998 BETWEEN
XETEL CORPORATION AND CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
- --------------------------------------------------------------------------------
BORROWER WILL DELIVER THIS BORROWING BASE REPORT COMPLETED IN PROPER FORM ON
EACH THURSDAY REPORTING INFORMATION AS OF THE PREVIOUS SATURDAY, AND PROVIDE
WITH EACH SUCH REPORT AN ACCOUNTS RECEIVABLE AGING AND LISTING, AND AN INVENTORY
REPORT.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Line
<S> <C> <C> <C>
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); except that with approval in
writing by Bank in its sole discretion, the percentage specified in
this item shall be higher with respect to such Account Debtors as
Borrower and Bank shall mutually specify $_____
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 $_____
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 $
=====
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 $
=====
[LINES 19-23 NEED NOT BE REPORTED IF BORROWING BASE EXCLUDING AVAILABILITY
FROM INVENTORY IS SUFFICIENT TO COVER AGGREGATE AMOUNT OF LINE 25]
19. Net book value of Inventory as of the end of the Current Period $_____
20. Less: 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 25% of the Borrowing Base at any time) =====
24. Total BORROWING BASE as of the end of the Current Period (not to exceed $
$17,000,000) (Line 12 + Line 15 + Line 18 + Line 23) =====
25. Less: Aggregate principal outstanding under Notes as end of Current Period:
Revolving Note $_____
L/C Obligations $_____
Advance/Term Note $_____
Total usage of commitment $
=====
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. "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> 3
EXHIBIT C to Agreement between XETEL CORPORATION ("Borrower")
and Chase Bank of Texas, National Association ("Bank")
dated June 25, 1998 (as may be amended, restated and supplemented in writing).
REPORTING REQUIREMENTS, FINANCIAL COVENANTS AND COMPLIANCE CERTIFICATE
FOR CURRENT REPORTING PERIOD ENDING _______, 199_ ("END DATE")
<TABLE>
<S> <C> <C>
A. REPORTING PERIOD. THIS EXHIBIT WILL BE IN PROPER FORM AND SUBMITTED AS PROVIDED IN PART B. Borrower's fiscal year ends
March 30.
===================================================================================================================================
B. Financial Reporting. Borrower will provide the following financial information within the times indicated: Compliance
==================================================================================================================== Certificate
WHEN DUE WHAT (Circle)
- ------------------------------------------------------------------------------------------------------------------------------------
(i) Within 90 days of fiscal year end Annual financial statements (balance sheet, income statement, cash flow Yes No
statement) audited (with unqualified opinion) by independent certified
public accountants satisfactory to Bank, accompanied by Compliance
Certificate.
- ------------------------------------------------------------------------------------------------------------------------------------
(ii) Within 45 days of each fiscal Unaudited interim financial statements (10-Q) accompanied by Compliance Yes No
quarter End Date, including final Certificate
quarter of fiscal year
- ------------------------------------------------------------------------------------------------------------------------------------
(iii) Within 30 days of the end of Beginning with Borrower's fiscal October 1998, unaudited interim Yes No
each month, including final month of financial statements accompanied by Compliance Certificate
fiscal year
- ------------------------------------------------------------------------------------------------------------------------------------
(iv) As provided in Exhibit A Borrowing Base Report with accounts receivable aging and listing & Yes No
inventory report
====================================================================================================================================
C. FINANCIAL COVENANTS. Borrower will comply 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: Except as specified otherwise, COMPLIANCE CERTIFICATE/ACTUAL REPORTED Compliance
each covenant will be maintained at all times For Current Reporting Period/as of the End Date (Circle)
and reported for each Reporting Period or as
of each Reporting Period End Date, as
appropriate:
- ------------------------------------------------------------------------------------------------------------------------------------
I. Maintain a Tangible Net Worth as Stockholders' Equity $_____ Yes No
adjusted of at least $24,000,000.00 plus: (a) Minus: Goodwill $_____
75% of net income after 12/31/97, added at Other Intangible Assets $_____
end of each fiscal quarter and (b) 100% of Loans/Advances to
the net increase (after deduction of Equity holders $_____
goodwill) in shareholder's equity occurring Loans to Affiliates $_____
immediately after each issuance of equity Plus: Subordinated Debt $_____
securities and merger/ acquisition = Tangible Net Worth as adjusted $_____
transaction. Please indicate requirement so
calculated below:
$
------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
II. Commencing November 21, 1998, have a Net Income $_____ Yes No
Cash Flow Coverage Ratio for the three month Plus: Depreciation $_____
period ending on the last day of each fiscal Amortization $_____
month of at least 1.75 : 1.00. Tax expense $_____
Interest Expense $_____
Lease Expense $_____
Rent Expense $_____
Minus: Federal tax cash payments $_____
Equals: Adjusted EBITAR= $
=====
Current Maturities of Long Term Debt
(for the next quarter) $_____
Plus: Interest Expense $_____
Lease Expense $_____
Rent Expense $_____
Equals: Fixed Charges $
=====
$ / $ =
------------- ------------- =======
Adjusted EBITAR Fixed Charges Cash Flow Coverage Ratio
====================================================================================================================================
D. Other Required Covenants to be maintained and to be certified.
====================================================================================================================================
REQUIRED ACTUAL REPORTED/COMPLIANCE CERTIFICATE Compliance
- ------------------------------------------------------------------------------------------------------------------------------------
(i) Additional Indebtedness, Liens and capital leases For fiscal year:______________, Yes No
are limited to $2,000,000.00 in the aggregate for each Debt for borrowed money = $_____,
fiscal year. Plus capital lease payments = $_____,
Plus Other Indebtedness = $_____.
Equals Total of: $_________
- ------------------------------------------------------------------------------------------------------------------------------------
(ii) Borrower shall not make any acquisition (by stock Please indicate acquisitions and total and Yes No
purchase, asset purchase, merger or otherwise) or cash consideration here or in attachment.
divestiture if: (a) the total purchase or sales price,
as the case may be (including cash, cash equivalents,
stock issued, and indebtedness assumed), exceeds 10% of
the book value of Borrower's assets before such
acquisition or divestiture, (b) if cash consideration
exceeds $3MM, or (c) any Event of Default otherwise
would result from such acquisition or divestiture;
unless Bank in its sole discretion shall have consented
in advance in writing.
- ------------------------------------------------------------------------------------------------------------------------------------
(iii) Capital expenditures & capital lease obligations For the most recent fiscal quarter Yes No
incurred shall not exceed $750,000.00 in any fiscal ended ______________:
quarter. $___________________________
- ------------------------------------------------------------------------------------------------------------------------------------
(iv) Commencing the fiscal month ending October 24, For the most recent month
1998, Borrower shall not have a negative Income Before ended ______________:
Income Taxes for any fiscal month in excess of $___________________________
$750,000.00
====================================================================================================================================
THE ABOVE SUMMARY REPRESENTS SOME OF THE COVENANTS AND AGREEMENTS 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 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 (CFO Or President)
------------------------------------------------------ ---------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.39
XETEL CORPORATION
1997 STOCK INCENTIVE PLAN
AMENDMENT NO. 1
---------------
The XeTel Corporation 1997 Stock Incentive Plan (the "Plan") is hereby
amended, effective April 20, 1998 as follows:
1. Section V.A. of Article One is hereby amended as follows:
(i) The second sentence of such section is hereby amended in its
entirety to read as follows:
"The maximum number of shares of Common Stock reserved for
issuance over the term of the Plan shall not exceed 2,565,000 shares."
IN WITNESS WHEREOF, XeTel Corporation has caused this plan amendment
to be executed on its behalf by its duly-authorized officer effective as of
April 20, 1998, subject to stockholder approval of the amendment at the 1998
Annual Stockholders Meeting.
XETEL CORPORATION
By:
-------------------------------
Angelo A. DeCaro, Jr.
Title: President and Chief Executive Officer
<PAGE> 1
Exhibit 11.1
XETEL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
IN THOUSANDS, EXCEPT SHARE DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share:
Weighted average shares outstanding 9,062 8,821 9,035 8,816
======= ====== ====== ======
Net income $ (240) $ 61 $ 444 $ 516
======= ====== ====== ======
Basic earnings per share $ (0.03) $ 0.01 $ 0.05 $ 0.06
======= ====== ====== ======
Diluted earnings per share:
Weighted average shares outstanding 9,062 8,821 9,035 8,816
Common stock equivalents: stock options (1) (2) --- 841 580 845
------- ------ ------ ------
9,062 9,662 9,615 9,661
======= ====== ====== ======
Net income $ (240) $ $61 $ 444 $ 516
======= ====== ====== ======
Diluted earnings per share $ (0.03) $ 0.01 $ 0.05 $ 0.05
======= ====== ====== ======
</TABLE>
(1) Stock options based on the treasury stock method using average market
price.
(2) Common stock equivalents were 314,000 for the three months ended September
26, 1998. Common stock equivalents are included in the computation of diluted
weighted average shares outstanding only during periods that their inclusion
would be dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-27-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 7,352
<SECURITIES> 0
<RECEIVABLES> 23,386
<ALLOWANCES> 240
<INVENTORY> 19,995
<CURRENT-ASSETS> 51,969
<PP&E> 18,503
<DEPRECIATION> 9,869
<TOTAL-ASSETS> 61,233
<CURRENT-LIABILITIES> 30,141
<BONDS> 0
0
0
<COMMON> 21,593
<OTHER-SE> 6,848
<TOTAL-LIABILITY-AND-EQUITY> 61,233
<SALES> 36,211
<TOTAL-REVENUES> 36,211
<CGS> 34,824
<TOTAL-COSTS> 36,376
<OTHER-EXPENSES> 222
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 231
<INCOME-PRETAX> (387)
<INCOME-TAX> (147)
<INCOME-CONTINUING> (240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (240)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
