<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 JUNE 26, 1999,
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 of Incorporation) (I.R.S. Employer ID 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 [ ]
As of the close of business on August 6, 1999, 9,287,557 shares of the
registrant's common stock, par value $.0001 per share, were outstanding.
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XETEL CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements (unaudited)
Balance Sheet as of June 26, 1999 and March 27, 1999 3
Statement of Operations for the three months ended
June 26, 1999 and June 27, 1998 4
Statement of Cash Flows for the three months ended
June 26, 1999 and June 27, 1998 5
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 14
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
XETEL CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 26, March 27,
1999 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,364 $ 7,330
Trade accounts receivable, net 18,144 14,940
Inventories 14,011 19,065
Prepaid expenses and other 1,807 1,833
------------ ------------
Total current assets 41,326 43,168
Property and equipment, net 6,899 7,233
Deferred tax asset 2,200 2,200
------------ ------------
TOTAL ASSETS $ 50,425 $ 52,601
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 11,267 $ 12,816
Notes payable and current portion of
long-term debt 10,400 10,600
Accrued expenses and other liabilities 3,373 4,081
------------ ------------
Total current liabilities 25,040 27,497
Deferred income taxes 183 183
Long-term debt 2,042 2,167
Commitments
Stockholders' equity:
Common stock, $0.0001 par value, 25,000,000
shares authorized, 9,274,557 and 9,212,700
shares issued and 9,268,559 and 9,206,702
shares outstanding, respectively 21,950 21,818
Retained earnings 1,326 1,087
Deferred compensation (116) (151)
------------ ------------
Total stockholders' equity 23,160 22,754
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 50,425 $ 52,601
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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XETEL CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
June 26, June 27,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 31,992 $ 44,308
Cost of sales 29,759 41,238
------------ ------------
GROSS PROFIT 2,233 3,070
Selling, general and administrative expenses 1,619 1,787
------------ ------------
INCOME FROM OPERATIONS 614 1,283
Other expense, net (228) (179)
------------ ------------
INCOME BEFORE INCOME TAXES 386 1,104
Provision for income taxes 147 420
------------ ------------
NET INCOME $ 239 $ 684
============ ============
Basic earnings per share $ 0.03 $ 0.08
============ ============
Basic weighted average shares outstanding 9,255 9,008
============ ============
Diluted earnings per share $ 0.02 $ 0.07
============ ============
Diluted weighted average shares outstanding 9,625 9,695
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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XETEL CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
June 26, June 27,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 239 $ 684
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 505 695
Provision for deferred compensation 35 19
Gain on disposal of equipment (1) (8)
Changes in operating assets and
liabilities:
Trade accounts receivable (3,204) (1,779)
Inventories 5,054 (3,712)
Prepaid expenses and other 26 8
Trade accounts payable (1,549) 781
Accrued expenses and other
liabilities (708) 1,035
----------- -----------
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 397 (2,277)
Cash flows from investing activities:
Purchases of property and equipment (171) (545)
Proceeds from sale of equipment 1 8
----------- -----------
CASH USED IN INVESTING ACTIVITIES (170) (537)
Cash flows from financing activities:
Net (repayments) borrowings under debt
agreements (325) 2,575
Proceeds from stock options exercised 2 51
Cash proceeds from stock issued under
employee stock purchase plan 130 154
----------- -----------
CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (193) 2,780
Increase (decrease) in cash and cash
equivalents 34 (34)
Cash and cash equivalents, beginning of
period 7,330 7,239
----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 7,364 $ 7,205
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BUSINESS
XeTel Corporation (the "Company") provides comprehensive and customized
manufacturing solutions to original equipment manufacturers primarily in the
computer, networking and telecommunications industries. The Company incorporates
advanced design and prototype services and complex electronics manufacturing
assembly capabilities together with materials management, advanced testing,
systems integration and order fulfillment services to provide turnkey 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 the 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
of a normal recurring nature considered necessary to present fairly the
financial position, results of their operations and cash flows for those periods
presented. The results of operations for the period ended June 26, 1999 are not
necessarily indicative of the results that may be expected for any other interim
period of for the fiscal year ending April 1, 2000. The accompanying financial
statements should be read in conjunction with the financial statements and notes
thereto for the fiscal year ended March 27, 1999 as presented in the Company's
10K filed with the SEC.
NOTE 3 TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable, net consist of the following (in thousands):
<TABLE>
<CAPTION>
June 26, March 27,
1999 1999
---------- ----------
(unaudited)
<S> <C> <C>
Trade accounts receivable $ 21,612 $ 18,408
Less: allowance for doubtful accounts (3,468) (3,468)
---------- ----------
$ 18,144 $ 14,940
========== ==========
</TABLE>
NOTE 4 INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 26, March 27,
1999 1999
---------- ----------
(unaudited)
<S> <C> <C>
Raw materials $ 10,816 $ 15,262
Work in progress 3,076 3,584
Finished goods 119 219
---------- ----------
$ 14,011 $ 19,065
========== ==========
</TABLE>
6
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XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
As of June 26, 1999 and March 27, 1999, the Company had an allowances for
obsolete raw materials (principally printed circuit board components) for both
periods of $3,031,000. Cost of sales for the three months ended June 26, 1999
and June 27, 1998 include provisions to the allowance for obsolete materials of
$0 and $130,000, respectively.
NOTE 5 EARNINGS PER COMMON SHARE
Basic earnings per share (EPS) is based on the weighted effect of all common
shares issued and outstanding, and is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
during the period. Diluted EPS is similar to basic EPS except that the weighted
average of common shares outstanding is increased to include the number of
common share equivalents, when inclusion is dilutive. 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. The following table sets forth the computation of basic and diluted
earnings per share (unaudited, in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
June 26, June 27,
1999 1998
------------ ------------
<S> <C> <C>
Basic earnings per share:
Weighted average shares outstanding 9,255 9,008
============ ============
Net income $ 239 $ 684
============ ============
Basic earnings per share $ 0.03 $ 0.08
============ ============
Diluted earnings per share:
Weighted average shares outstanding 9,255 9,008
Common stock equivalents: stock options 370 687
------------ ------------
9,625 9,695
============ ============
Net income $ 239 $ 684
============ ============
Diluted earnings per share $ 0.02 $ 0.07
============ ============
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this document contains trend analyses 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 that involve risks and uncertainties, such as statements concerning:
growth and future operating results; developments in our markets and strategic
focus; new products and services and product technologies and future economic,
business and regulatory conditions. Such forward-looking statements are
generally accompanied by words such as "plan", "estimate," "expect," "believe,"
"should," "would," "could," "anticipate," "may" or other words that convey
uncertainty of future events or outcomes. These forward-looking statements and
other statements made elsewhere in this report are made in reliance on the
Private Securities Litigation Reform Act of 1995. 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 elsewhere.
All percentage amounts and ratios were calculated using the underlying data in
thousands. Operating results for the three-month period ended June 26, 1999, are
not necessarily indicative of the results that may be expected for the full
fiscal year.
OVERVIEW
Founded in 1984, the Company Corporation offers highly customized and
comprehensive electronics manufacturing solutions to Fortune 500 and emerging
original equipment manufacturers primarily in the computer, networking and
telecommunications industries. The Company provides advanced design and
prototype services, manufactures sophisticated surface mount assemblies and
supplies turnkey solutions to original equipment manufacturers. The Company
incorporates design and prototype services and assembly capabilities, together
with materials and supply base management, advanced testing, system integration
and order fulfillment services to provide total solutions for its customers. The
Company employs approximately 490 people and is headquartered in Austin, Texas
with manufacturing services operations in Austin and Dallas, Texas and San
Ramon, California.
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 and additional reports, proxy statements and other information filed
with the Commission may be read or copied at the following public reference
rooms of the Commission: 450 Fifth Street, NW., Room 1024, Washington DC 20549;
7 World Trade Center, Suite 1300, New York, New York 10048; and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies can be requested by writing
to the Commission and paying a duplicating fee at prescribed rates. Please call
the Commission's toll-free number, 1-800-SEC-0330, for further information on
the operation of the public reference rooms. Commission filings, including the
Prospectus, are also available on the Commission's internet website,
http://www.sec.gov.
FLUCTUATIONS IN OPERATING RESULTS. The Company'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.
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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 by the Company 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 15%, 11% and
9%, respectively, of net sales for its three months ended June 26, 1999. For the
three months ended June 27, 1998, the Company's three largest customers
accounted for approximately 55%, 10% and 3%, 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 the
Company in producing surface mount assemblies and turnkey solutions are
purchased by the Company from approved suppliers of its customers. Any failure
on the part of these 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 customer supplied
or 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, have adversely affected the Company's business, financial
condition and results of operations in the past and
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could have a material adverse effect on the Company's business, financial
condition and results of operations in the future.
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 and acquisitions, 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. The Company began a Year 2000 data assessment project in
fiscal 1998 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
calendar 1999 as described below. 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
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items in the Company's statement of operations.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
June 26, June 27,
1999 1998
---------- ----------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 93.0 93.1
---------- ----------
Gross margin 7.0 6.9
Selling, general and administrative expenses 5.1 4.0
---------- ----------
Income from operations 1.9 2.9
Other expense, net (0.7) (0.4)
---------- ----------
Income before income taxes 1.2 2.5
Provision for income taxes 0.5 0.9
---------- ----------
Net income 0.7% 1.6%
========== ==========
</TABLE>
10
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NET SALES
Net sales for the first quarter ended June 26, 1999 was $32.0 million, 27.8%
below sales in the comparable prior year period of $44.0 million. Sales to new
customers partially offset the insourcing of a major program representing 55% of
sales in the first quarter of last year.
GROSS PROFIT
Gross profit is affected by, among other factors, the level of sales, product
mix, component costs and the level of capacity utilization at the Company's
facilities. Primarily as a result of lower sales levels, gross profit for the
three months ended June 26, 1999 decreased to $2.2 million from $3.1 million for
the three months ended June 27, 1998. The Company's gross margin, gross profit
as a percentage of net sales, was at 7.0% in the first quarter of fiscal 2000,
versus 6.9% in the first quarter of fiscal 1999. This increase in margin
reflected actions taken to achieve aggressive targets in cost management and
manufacturing efficiency, as well as, a favorable product mix change.
OPERATING EXPENSES
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 totaled $1.6 million in the first fiscal quarter
versus $1.8 million in the comparable prior year period mainly as a result of
continuing cost management and controls. SG&A expenses represented 5.1% of net
sales for the three months ended June 26, 1999 compared to 4.0% for the three
months ended June 27, 1998 mainly as a result of the lower sales level.
OTHER EXPENSE, NET
Other expense, net for the three months ended June 26, 1999 increased to
$228,000 compared to $179,000 for the three months ended June 27, 1998. The
change in other expense, net was due to increased interest expense incurred on
the Company's outstanding debt.
INCOME TAXES
The provision for income taxes of $147,000 reflects an effective tax rate of
38.0% for the three months ended June 26, 1999 the same effective tax rate for
the three month period ended June 27, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal year 2000, the Company generated $397,000 in
cash flows from operating activities. Cash flows from operating activities
resulted primarily from the Company's net income and lower inventory levels
which offset other changes in operating working capital.
Working capital was $16.3 million and $15.7 million at June 26, 1999 and March
27, 1999 respectively. In addition to the Company's working capital as of June
26, 1999, which included cash and cash equivalents of $7.4 million, the Company
also had approximately $11 million available from unused credit facilities.
Capital expenditures during the three months ended June 26, 1999 and 1998 were
$171,000 and $545,000, respectively. Management anticipates capital expenditures
in fiscal 2000 will approximate the level of capital expenditures made in fiscal
1999. The decrease in capital expenditures was primarily due to certain capital
investments made in the prior year associated with the relocation of the
manufacturing and administrative facilities in Austin, Texas.
The Company's expenditures on research and development remained stable for the
three months ended June 26, 1999 and June 27, 1998 at $45,617 and $46,027,
respectively.
The Company does not hold or issue derivative financial instruments in the
normal course of business.
During the quarter, the Company had $36 million in credit lines and equipment
financing facilities, as follows: (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
($4 million unused at June 26, 1999). There was $9.9 million and $10.1
outstanding under the commercial bank line of credit and $2.5 million and $2.7
outstanding under the term note at June 26, 1999 and March 27, 1999,
respectively.
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The bank revolving credit facility bore 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 was secured
by certain assets of the Company. The bank facility required the payment of a
monthly commitment fee equal to one-eighth of one percent (1/8%) on the unused
balance, and borrowings were limited based upon certain collateral availability
requirements. The term loan facility bore 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 others,
require maintenance of a minimum level of tangible net worth and other operating
and financial ratios. At March 27, 1999, the Company did not satisfy certain
financial covenants imposed under its financing facilities. The Company received
covenants and waivers with respect to these financial covenants as of March 27,
1999 and for the fourth quarter then ended.
Subsequent to the first quarter ended June 26, 1999, the Company and its
existing primary commercial bank signed a new $20 million credit facility. This
facility replaces the previous revolving line of credit and term loan facility.
The new asset based revolving credit facility bears interest at LIBOR plus 1.75%
to 2.75% and/or prime to prime plus 0.75% depending upon certain financial
ratios, matures December 31, 1999 and is secured by certain assets of the
Company. The bank facility requires the payment of a monthly commitment fee
equal to three-eighths of one percent (3/8%) on the unused balance, and
borrowings are limited based upon certain collateral availability requirements
and financial ratios.
Management believes that the Company has sufficient resources from cash provided
from operations and available borrowings to support its operations and capital
requirements through its fiscal year 2000. However, any material acquisitions of
complementary businesses, products or technologies could require additional
equity or debt financing. There can be no assurance that such financing will be
available on acceptable terms, if at all.
BACKLOG
The Company's backlog as of June 26, 1999 was approximately $68.2 million
compared to approximately $101.6 million as of March 27, 1999. 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 in the future 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. For a discussion of these
factors affecting the Company's business and prospects, see "Item 1" "Business",
"Risk Factors", Variability of Customer Requirements and Fluctuations in
Operating Results.
EMPLOYEES
As of June 26, 1999, the Company had approximately 490 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 code 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.
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An assessment of internal changes required for Year 2000 compliance 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 continuing its discussions with third-party vendors 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 JUNE 26, 1999
<TABLE>
<CAPTION>
Phase Percent Complete Estimated Completion Date
- ----- ---------------- -------------------------
<S> <C> <C>
Assessment of internal changes
required 100% Complete
Major supplier readiness risk
assessment 80% September 1999
Upgrades of commercial and
internal applications/products 90% September 1999
</TABLE>
As of June 26, 1999, the Company has spent approximately $70,000 of the
currently estimated $80,000 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 technical 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 a 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 by September
1999, the Company has not formulated a "worst 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.
13
<PAGE> 14
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company invests its cash in money market funds or instruments which meet
high credit quality standards specified by the Company's investment policy. The
Company does not use financial instruments for trading or other speculative
purposes. The Company's financing facilities are subject to interest rate
fluctuations.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The exhibits listed in the accompanying Index to Exhibits are filed as
part of this Quarterly Report on Form 10-Q.
(b) Reports on Form 8-K
The Company did not file any report on Form 8-K during the three month
period ended June 26, 1999.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XETEL CORPORATION
Date: August 6, 1999 By: /s/ Angelo A. DeCaro, Jr.
------------------------------
Angelo A. DeCaro, Jr.
President, Chief Executive Officer and Director
(principal executive officer)
/s/ Richard S. Chilinski
--------------------------
Richard S. Chilinski
Vice President, Chief Financial Officer and Assistant Secretary
(principal financial and accounting officer)
15
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-01-2000
<PERIOD-START> MAR-27-1999
<PERIOD-END> JUN-26-1999
<CASH> 7,364
<SECURITIES> 0
<RECEIVABLES> 18,144
<ALLOWANCES> (3,468)
<INVENTORY> 14,011
<CURRENT-ASSETS> 41,326
<PP&E> 6,899
<DEPRECIATION> (10,072)
<TOTAL-ASSETS> 50,425
<CURRENT-LIABILITIES> 25,040
<BONDS> 0
0
0
<COMMON> 21,950
<OTHER-SE> 1,210
<TOTAL-LIABILITY-AND-EQUITY> 50,425
<SALES> 31,992
<TOTAL-REVENUES> 31,992
<CGS> 29,759
<TOTAL-COSTS> 31,378
<OTHER-EXPENSES> 228
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<INCOME-PRETAX> 386
<INCOME-TAX> 147
<INCOME-CONTINUING> 239
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<EPS-BASIC> .03
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