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 DECEMBER 29, 2001
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 February 12, 2002, 10,067,295 shares of the
registrant's common stock, par value $.0001 per share, were outstanding.
XETEL CORPORATION
INDEX
<Table>
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements (unaudited)
Balance Sheets as of December 29, 2001 and March 31, 2001 3
Statements of Operations for the three and nine months ended
December 29, 2001 and December 30, 2000 4
Statements of Cash Flows for the nine months ended
December 29, 2001 and December 30, 2000 5
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 16
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
</Table>
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
XETEL CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
December 29, March 31,
2001 2001
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 415 $ 1,744
Trade accounts receivable, net 17,110 41,202
Inventories, net 31,334 49,856
Federal income tax receivable 1,633 --
Deferred tax asset -- 1,077
Prepaid expenses and other 878 1,505
------------- -------------
Total current assets 51,370 95,384
Property and equipment, net 7,384 7,133
------------- -------------
TOTAL ASSETS 58,754 $ 102,517
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 22,967 $ 32,019
Current portion of long-term debt 10,598 --
Accrued expenses and other liabilities 7,998 4,947
------------- -------------
Total current liabilities 41,563 36,966
Deferred income taxes 143 143
Long-term debt, net of current portion 606 34,329
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value, 4,000,000 shares authorized,
none issued and outstanding -- --
Common stock, $0.0001 par value, 25,000,000 shares authorized,
10,073,291 and 9,938,066 shares issued and 10,067,295 and
9,932,070 shares outstanding, respectively 1 1
Additional paid in capital 23,203 23,001
Retained earnings (deficit) (6,762) 8,077
------------- -------------
Total stockholders' equity 16,442 31,079
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 58,754 $ 102,517
============= =============
</Table>
The accompanying notes are an integral part of these financial statements. 3
XETEL CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
December 29, December 30, December 29, December 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $ 12,331 $ 52,064 $ 67,801 $ 141,480
Cost of sales 19,400 46,644 75,470 128,198
------------ ------------ ------------ ------------
GROSS PROFIT (LOSS) (7,069) 5,420 (7,669) 13,282
Selling, general and administrative
expenses 1,861 2,346 6,605 6,186
Recoveries, net -- (1,719) -- (2,781)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (8,930) 4,793 (14,274) 9,877
Other expense, net (294) (640) (1,179) (1,612)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (9,224) 4,153 (15,453) 8,265
Provision (benefit) for income taxes -- 1,522 (614) 3,083
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (9,224) $ 2,631 $ (14,839) $ 5,182
============ ============ ============ ============
Basic earnings (loss) per share $ (0.92) $ 0.27 $ (1.48) $ 0.54
============ ============ ============ ============
Basic weighted average shares
outstanding 10,065 9,795 10,007 9,633
============ ============ ============ ============
Diluted earnings (loss) per share $ (0.92) $ 0.26 $ (1.48) $ 0.52
============ ============ ============ ============
Diluted weighted average
shares outstanding 10,065 10,197 10,007 9,978
============ ============ ============ ============
</Table>
The accompanying notes are an integral part of these financial statements. 4
XETEL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
Nine Months Ended
----------------------------
December 29, December 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (14,839) $ 5,182
Adjustments to reconcile net income
to net cash (used in) provided
by operating activities:
Deferred income taxes 1,077 1,161
Depreciation and amortization 1,758 1,451
Deferred compensation -- 21
(Gain) loss on disposal of equipment 26 (28)
Changes in assets and liabilities:
Trade accounts receivable 24,092 (7,565)
Inventories 18,522 (29,400)
Prepaid expenses and other (1,006) (5,300)
Trade accounts payable (7,319) 11,456
Accrued expenses and other liabilities 3,051 7,079
------------ ------------
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 25,362 (15,943)
Cash flows from investing activities:
Purchases of property and equipment (741) (1,824)
Proceeds from sale of equipment 36 91
------------ ------------
CASH USED IN INVESTING ACTIVITIES (705) (1,733)
Cash flows from financing activities:
Net borrowings (repayments) under debt
agreements (26,188) 14,760
Proceeds from stock options exercised 55 466
Proceeds from stock issued under
employee stock purchase plan 147 137
------------ ------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (25,986) 15,363
Decrease in cash and cash equivalents (1,329) (2,313)
Cash and cash equivalents, beginning of period 1,744 7,398
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 415 $ 5,085
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment financed through notes
payable $ 325 $ --
Conversion of accounts payable to note payable $ 1,733 $ --
Property and equipment financed by capital lease $ 1,005 $ --
</Table>
The accompanying notes are an integral part of these financial statements. 5
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 1. THE COMPANY AND DESCRIPTION OF BUSINESS ACTIVITIES
XeTel Corporation (the "Company") provides comprehensive and customized
electronics manufacturing solutions to original equipment manufacturers
primarily in the networking, telecommunications and computer industries. The
Company incorporates advanced prototype services and complex electronics
manufacturing assembly capabilities, together with materials and supply base
management, advanced testing, systems integration services and order
fulfillment, to provide turnkey solutions for its customers.
The Company has sustained losses from operations and negative cash flows
during the three and nine months ended December 29, 2001. The Company may
require additional financing in connection with its business. The Company may
seek additional funds from time to time through public or private debt or equity
offerings or obtain further bank or lease financing. The need for funding and
the cost of and access to additional funds, are dependent on the Company's
future operating results, the resolution of the inventory issues as discussed in
Note 7, as well as external conditions. If the Company is unable to (i) obtain
adequate financing, (ii) resolve customer inventory issues, (iii) remain in
compliance with the terms of the borrowing agreements, (iv) reach satisfactory
terms with the Credit Facility lender and equipment lessors and other secured
creditors, (v) reach agreements to procure required materials and services on
satisfactory terms and (vi) reduce or eliminate operating losses, the Company
may be forced to seek protection from its creditors under the U.S. bankruptcy
code or pursue the sale of the Company.
NOTE 2. BASIS OF PRESENTATION
These interim financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). All adjustments have been made to the accompanying
interim financial statements which are, in the opinion of the Company's
management, necessary for a fair presentation of the Company's operating results
and include all adjustments of a normal recurring nature. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. It is recommended that these
interim financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the year ended March 31, 2001. The results of operations for any
interim period are not necessarily indicative of the results of operations for
the entire year. Certain reclassifications have been made in the prior period
financial statements to conform with the current period presentation.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard, or SFAS, No. 141, "Business
Combinations." SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business combinations
that were initiated prior to July 1, 2001. The purchase method of accounting is
required to be used for all business combinations initiated after June 30, 2001.
SFAS No. 141 also defines the criteria for identifying intangible assets for
recognition apart from goodwill. The Company has adopted SFAS No. 141 effective
July 1, 2001.
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 discontinues amortization of acquired goodwill
and instead requires annual impairment testing. Separable intangible assets will
be amortized over their useful economic lives and tested for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." Intangible assets with an indefinite useful economic
life will not be amortized until the life of the asset is determined to be
finite. The Company must adopt SFAS No. 142 by April 1, 2002. However, the
Company does not believe adoption of SFAS No. 142 will have a material impact on
its future earnings or financial position.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The statement is effective for financial statements for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not
expected to have an impact on the Company's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the
fundamental provisions of existing generally accepted accounting principles with
respect to the recognition and measurement of long-lived asset impairment
contained in SFAS No. 121. However, SFAS No. 144 provides new guidance intended
to address certain significant implementation issues associated with SFAS No.
121, including expanded guidance with respect to appropriate cash flows to be
used to determine whether recognition of any long-lived asset impairment is
required, and if required,
6
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
how to measure the amount of the impairment. SFAS No. 144 also requires that any
net assets to be disposed of by sale be reported at the lower of carrying value
or fair market value less cost to sell, and expands the reporting of
discontinued operations to include any component of an entity with operations
and cash flows that can be clearly distinguished from the rest of the entity.
SFAS No. 144 is effective for financial statements issued for years beginning
after December 15, 2001, and interim periods within those fiscal years. The
Company is currently evaluating the impact, if any, of SFAS No. 144 on its
future earnings and financial position.
NOTE 4. TRADE ACCOUNTS RECEIVABLE, NET
Trade accounts receivable, net consist of the following (in thousands):
<Table>
<Caption>
DECEMBER 29, MARCH 31,
2001 2001
------------- -------------
(UNAUDITED)
Accounts receivable ............................... $ 18,166 $ 41,382
Less: allowance for doubtful accounts ............. (1,056) (180)
------------- -------------
17,110 $ 41,202
============= =============
</Table>
NOTE 5. INVENTORIES, NET
Inventories, net consist of the following (in thousands):
<Table>
<Caption>
DECEMBER 29, MARCH 31,
2001 2001
------------- -------------
(UNAUDITED)
Raw materials ..................................... $ 28,777 $ 42,319
Work in progress .................................. 2,504 7,981
Finished goods .................................... 3,767 301
Less: allowance for obsolete inventory ............ (3,714) (745)
------------- -------------
31,334 $ 49,856
============= =============
</Table>
NOTE 6. NOTES PAYABLE AND LONG-TERM DEBT
As of December 29, 2001, the Company had a three-year revolving credit
facility for $19.5 million that was entered into on March 31, 2000 (the "Credit
Facility"). There was $8.3 million outstanding under the Credit Facility at
December 29, 2001. The Company was eligible to borrow an additional $1.8 million
at December 29, 2001 pursuant to the Credit Facility's borrowing formula. Loans
under the Credit Facility, which bear interest at prime (4.75% at December 29,
2001) plus 0.75%, are collateralized by certain of the Company's assets. As a
result of an agreement entered into on February 13, 2002 to repay the
outstanding balance of the Credit Facility by March 20, 2002, the borrowings
under the Credit Facility have been classified as short-term.
In October 2001, the Company borrowed more money than it was allowed under
the Credit Facility's borrowing formula (the "Over-advance") and determined that
it was in violation of a financial covenant in the loan agreement as of
September 29, 2001. In late October, the Company and its lender amended the
credit facility effective as of October 15, 2001. The amendment (i) reduced the
total credit facility from $35 million to $19.5 million, (ii) allowed the
Company to exceed the borrowing limitations under the credit facility by $2.255
million as of October 15, 2001, $1.3 million after the close of business on
October 29, 2001, $1.2 million after the close of business on November 5, 2001,
$0.7 million after the close of business on November 12, 2001, $0.4 million
after the close of business on November 19, 2001, and after November 26, 2001,
the Company must conform to the borrowing limitations of the credit facility,
(iii) reduced the amount of inventory included in the borrowing formula by $1
million per week beginning on November 13, 2001 for certain inventory as defined
in the amendment, (iv) required the Company to retain a turnaround consulting
firm in November 2001, (v) required the Company to pay certain amendment fees to
the lender and (vi) waived the Company's requirement to comply with the
financial covenant through November 19, 2001, in anticipation of revising the
credit agreement with new financial covenants if necessary. On November 20,
2001, the Company and the lender further amended the Credit Facility to
eliminate certain financial covenants. The amendment also reduced the
availability under the borrowing agreement by not less that $3.0 million applied
against the collateral availability limitations.
7
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In July 2001, the Company issued approximately $1.7 million of trade drafts
to a financial company. The proceeds from this transaction were used to pay a
product supplier. The trade drafts matured in late October 2001. Due to the
liquidity issues noted herein, the Company was unable to pay these trade drafts
when due. On November 1, 2001, the Company entered into a Collateral Security
Agreement that extended the maturity of the trade drafts until January 23, 2002
in exchange for granting the financial company a security interest in certain of
the Company's fixed assets and the payment of certain fees. In January 2002, the
Company failed to repay the trade drafts when due and entered into an agreement
to extend the maturity of the trade drafts until February 20, 2002.
During fiscal 2002, the Company has entered into certain capital leases to
finance the purchase of property and equipment. Total capital lease obligations
were $0.9 million as of December 29, 2001, of which $0.3 million is classified
as a current liability.
NOTE 7. COMMITMENTS AND CONTINGENCIES
One previous customer refused to accept liability for a majority of the
$7.5 million in inventory purchased on the customer's behalf by the Company,
resulting in the Company filing a lawsuit against the customer in July 2001. On
November 15, 2001, the Company entered into a settlement agreement with this
customer which called for, among other items (i) a cash payment to the Company
which reduced the carrying value of the inventory on hand, (ii) the sale of
certain inventory to the former customer and (iii) the Company's retention of
the remainder of the inventory. The Company expects inventory retained to be
realizable and accordingly has not reflected any losses related to the
transaction in the financial statements as of December 29, 2001. The Company
intends to liquidate the inventory by (i) utilizing the inventory for other
customer requirements, (ii) returning it to suppliers and/or (iii) selling it to
third parties, which may result in a gain or a loss.
The Company also has approximately $17 million of inventory on hand for a
current customer and, as a result of a decrease in demand requirements from this
customer, has been working with this customer to have it purchase a large
portion of this inventory. As a result of the Company's negotiations with the
customer and certain vendors, the Company entered into a settlement agreement on
February 12, 2002. As a result of the settlement agreement, the Company recorded
a loss of $1.6 million for the quarter ended December 29, 2001 related to
write-downs of this inventory to its estimated realizable value.
Due to its existing financial condition, the Company has violated certain
financial covenants, and is delinquent in payments due, under operating lease
agreements for equipment used primarily in the production of finished goods.
Based on the events of default, the lessor has the contractual right to enter
the Company's facilities and take possession of the leased equipment, which
could significantly impact the Company's results of operations. The Company is
currently in discussions with the lessors in order to resolve the default
issues. Although the Company has not received any information indicating that
the lessors plan to pursue their rights and remedies under the agreements with
respect to these violations, there can be no assurance that any or all of the
lessors will not elect to pursue such rights and remedies in the future.
During November 2001, a patent infringement lawsuit was filed by the
Lemelson Foundation against the Company and alleges violations of patents used
in the manufacturing of integrated circuits. The lawsuit is in its early stages
and the Company is currently investigating the claims filed against it. No
estimate of potential loss, if any, is currently possible and, accordingly, no
accrual associated with the litigation has been recognized in the results of
operations for the three and nine months ended December 29, 2001.
On February 1, 2002, the Company was served with a property tax warrant by
the tax authorities of Travis County, Texas. The warrant was issued as a result
of the Company's delinquency for calendar year 2001 property taxes (due no later
than January 31, 2002) totaling approximately $0.8 million. The property tax
warrant levied fines and penalties of approximately $0.2 million against the
Company. During February 2002, XeTel made a payment of approximately $0.7
million against its property tax liability and negotiated payment arrangements
intended to satisfy the remaining tax obligations by May 2002.
NOTE 8. INCOME TAXES
As a result of the Company's loss from operations during this fiscal year,
a net tax benefit of $614,000 and a related tax receivable of approximately $1.6
million were recorded. The Company has taxable income for U.S. Federal tax
purposes in the applicable carryback periods to apply against a portion of the
current period loss. Additionally, a full valuation allowance for the future tax
benefits and related to deferred tax assets of approximately $1.1 million was
provided due to the uncertainty of generating future taxable income to utilize
these assets.
8
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 9. EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the related period. Diluted EPS is similar to basic EPS except
that the weighted average number 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):
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
------------------------------ ------------------------------
DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Basic earnings per share:
Weighted average shares outstanding ....... 10,065 9,795 10,007 9,633
============= ============= ============= =============
Net income (loss) ......................... $ (9,224) $ 2,631 $ (14,839) $ 5,182
============= ============= ============= =============
Basic earnings (loss) per share ........... $ (0.92) $ 0.27 $ (1.48) $ 0.54
============= ============= ============= =============
Diluted earnings per share:
Weighted average shares outstanding ....... 10,065 9,795 10,007 9,633
Common stock equivalents:
Stock options ............................. -- 402 -- 345
------------- ------------- ------------- -------------
10,065 10,197 10,007 9,978
============= ============= ============= =============
Net income (loss) ......................... $ (9,224) $ 2,631 $ (14,839) $ 5,182
============= ============= ============= =============
Diluted earnings (loss) per share ......... $ (0.92) $ 0.26 $ (1.48) $ 0.52
============= ============= ============= =============
</Table>
Options to purchase 1,711,290 and 812,625 shares of common stock at
December 29, 2001 and December 30, 2000, respectively, but were not included in
the computation of diluted EPS because the exercise of such options would be
anti-dilutive.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our financial statements and
related notes included elsewhere in this filing. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including the risks discussed in
"Risk Factors that May Affect Future Results, Financial Condition and Market
Price of Securities" set forth elsewhere in this Quarterly Report on Form 10-Q.
All percentage amounts and ratios were calculated using the underlying data
in thousands. Operating results for the three and nine month periods ended
December 29, 2001 are not necessarily indicative of the results that may be
expected for the full fiscal year.
OVERVIEW
We were founded in 1984 and, since our inception, have manufactured surface
mount assemblies and performed other manufacturing services for original
equipment manufacturers, or OEMs, in the electronics industry. The development
and growth of our business have generally followed the trend by OEMs in the
electronics industry to outsource all or a portion of their manufacturing
requirements. In view of this trend, we have developed a range of electronics
manufacturing services including product development support and advanced
prototyping, materials procurement and supply base management, complex surface
mount assembly, total system assembly and integration, manufacturing in various
production volumes, advanced test engineering and testing, and after-market
support. We have sought to forge long-term relationships with our customers to
serve as a single-source provider of comprehensive electronics manufacturing
services.
In recent years we have implemented strategies to diversify our customer
base, improve profitability, advance our manufacturing technologies and
capabilities, broaden our service offerings and expand our manufacturing
capacity. We have continued to adopt advanced technologies, such as flip-chip
and micro-ball grid array, in advance of the continuing emergence and commercial
introduction of more complex electronics devices. In addition, we expanded into
high growth markets requiring low- to moderate-volume, highly complex
manufacturing solutions, and reorganized our service offerings by establishing
dedicated service centers and broadening our services in total system assembly,
systems integration and order fulfillment.
In the quarter ended December 29, 2001, we derived approximately 24% of our
net sales from telecommunications OEMs, 49% of our net sales from networking
OEMs, 8% of our net sales from computer OEMs and 19% of our net sales from OEMs
in other industry sectors. The percentage of net sales derived from our largest
customer was 20%, 13%, 33% and 32% of net sales, respectively, in the third
quarter of fiscal 2002, the second quarter of fiscal 2002, the first quarter of
fiscal 2002 and the fourth quarter of fiscal 2001.
Our results of operations are affected by the level of capacity utilization
of our manufacturing facilities, direct and indirect labor costs, 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 and declined in periods of low volume and low capacity
utilization. Margins also vary based on the type of services we provide.
10
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, historical
statements of operations data for the three and nine month periods ended
December 29, 2001 and December 30, 2000.
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED ENDED
------------------------------- -------------------------------
DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Net sales ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales .................................... 157.3 89.6 111.3 90.6
------------- ------------- ------------- -------------
Gross profit (loss) .............................. (57.3) 10.4 (11.3) 9.4
Selling, general and administrative expenses ..... 15.1 4.5 9.8 4.4
Recoveries, net .................................. 0.0 (3.3) 0.0 (2.0)
------------- ------------- ------------- -------------
Income (loss) from operations .................... (72.4) 9.2 (21.1) 7.0
Other expense, net ............................... (2.4) (1.2) (1.7) (1.1)
------------- ------------- ------------- -------------
Income (loss) before income taxes ................ (74.8) 8.0 (22.8) 5.9
Provision for income taxes ....................... 0.0 (2.9) 0.9 (2.2)
------------- ------------- ------------- -------------
Net income (loss) ................................ (74.8)% 5.1% (21.9) 3.7%
============= ============= ============= =============
</Table>
NET SALES
Net sales for the quarter ended December 29, 2001 were $12.3 million,
reflecting a decrease of 76% from our net sales in the comparable quarter period
of fiscal 2001 of $52.1 million. Sales to our three largest customers during the
quarter ended December 29, 2001 represented 20%, 9% and 7% of total net sales,
with 5 other customers each accounting for more than 5% of net sales during the
recent quarter. Sales to our three largest customers during the quarter ended
December 30, 2000 represented 21%, 14% and 9% of total net sales, with no other
customer accounting for more than 5% of net sales during the quarter.
Net sales for the nine-month period ended December 29, 2001, were $67.8
million, which reflected a decrease of 52% from net sales of $141.5 million in
the comparable nine-month period of the prior fiscal year.
The lower sales levels for the three month period ended December 29, 2001,
as compared to the third quarter of fiscal 2001, reflected reduced customer
demand in our primary telecommunications and networking markets.
COST OF SALES AND GROSS PROFIT
Cost of sales consists of material costs, direct labor, direct material and
manufacturing overhead (which includes manufacturing and process engineering
expenses). Gross profit is affected by, among other factors, the level of sales,
mix of services, component costs and the level of capacity utilization at our
facilities.
Gross profit (loss) for the quarter ended December 29, 2001 was $(7.1)
million versus $5.4 million for the quarter ended December 30, 2000. Our gross
margin percentage, which represents our gross profit as a percentage of net
sales, decreased to (57.3)% in the third quarter of fiscal 2002, versus 10.4% in
the third quarter of fiscal 2001.
Gross profit (loss) for the nine months ended December 29, 2001 was $(7.7)
million versus $13.3 million for the nine months ended December 30, 2000. Gross
margin for the first nine months of fiscal 2002 was (11.3)% of net sales versus
9.4% in the comparable period of fiscal 200.
The decrease in gross margin percentage from the prior year was due
primarily to lower sales volume resulting from decreased demand for our
services, increased facility, equipment and capacity costs that were added since
last year, and inventory write-offs totaling approximately $4 million in the
third quarter of fiscal 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative, or SG&A, expenses consist primarily of
salaries and related expenses, marketing and promotional expenses, outside
services, travel and entertainment, provision for bad debts and sales
commissions paid to direct sales personnel and independent sales representative
organizations.
11
SG&A expenses were $1.9 million, or 15.1% of net sales, in the quarter
ended December 29, 2001 versus $2.3 million, or 4.5% of net sales, in the
comparable quarter of fiscal 2001. The decrease in SG&A expense was attributable
to a reduction in our work force and other cost reduction measures that we
implemented in view of the continuing soft demand for manufactured services.
SG&A expenses were $6.6 million in the first nine months of fiscal 2002
versus $6.2 million in the comparable period in fiscal 2001. SG&A expenses as a
percentage of net sales increased to 9.8% for the first nine months of fiscal
2002, from 4.4% in the comparable prior year period, primarily as a result of
lower sales levels.
RECOVERIES, NET
Recoveries totaling $1.7 and $2.8 million in the fiscal quarter and nine
month period ended December 30, 2000 were realized from a work out plan and
forbearance agreement with a customer. The work out plan and forbearance
agreement was entered into with the customer at the end of fiscal year 1999. As
a result of the work out plan, we recovered substantially all of the fiscal 1999
principal amounts reserved. The work out plan also called for the issuance of
warrants to acquire shares of the customer's common stock and the recovery of
amounts due us in the form of interest. These warrants were sold in February
2001 with the net proceeds from the sale applied to the recoveries, net amount
in the fourth quarter of fiscal 2001.
OTHER EXPENSE, NET
Other expense, net for the quarter ended December 29, 2001 decreased to
$0.3 million compared to $0.6 million for the quarter ended December 30, 2000.
Other expense, net for the nine months ended December 29, 2001 decreased to $1.2
million compared to $1.6 million for the nine months ended December 30, 2000.
The decline in fiscal 2002 was due to decreased interest expense incurred on
lower borrowings in fiscal 2002.
INCOME TAXES
The provision for income taxes was $0.0 and $1.5 million for the quarter
ended December 29, 2001 and December 30, 2000, respectively. The (benefit)
provision for income taxes was $(0.6) and $3.1 million for the nine months ended
December 29, 2001 and December 30, 2000, respectively. We have taxable income
for U.S. Federal tax purposes in the applicable carryback periods to apply
against a portion of the current year loss. We have provided a full valuation
allowance for the future tax benefits related to deferred tax assets of
approximately $1.1 million due to the uncertainty of generating future taxable
income to utilize these assets.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital was $9.8 million at December 29, 2001, compared to
$58.4 million at March 31, 2001, and included cash and cash equivalents of $0.4
million. Net cash provided by operating activities was $25.4 million for the
nine months ended December 29, 2001. Cash flows provided by operating activities
during the nine months ended December 29, 2001 primarily resulted from
reductions in inventories and accounts receivable. These cash flows were
partially offset by reductions of trade payables, increases in prepaid expenses
and the net operating loss.
Accounts receivable have been reduced by approximately $24.1 million since
March 31, 2001. However, primarily due to negative general economic conditions,
our customers have slowed their payments, resulting in the number of days sales
outstanding to increase from an average of 96 days at September 29, 2001 to 118
days at December 29, 2001 (using the count-back method). In several instances we
have worked out payment plans or entered into forbearance agreements with
current and former customers extending their payment terms to us. Other than one
former customer that filed bankruptcy in August 2001, these customers are
generally in compliance with the terms of the revised payment plans.
Capital expenditures during the nine months ended December 29, 2001 were
$0.7 million. Management anticipates that capital expenditures in fiscal 2002
will decrease from the level of capital expenditures made in fiscal 2001.
As of December 29, 2001, we had a three-year revolving credit facility for
$19.5 million that was entered into on March 31, 2000. There was $8.3 million
outstanding under the revolving credit facility at December 29, 2001. We were
eligible to borrow an additional $1.8 million at December 29, 2001 pursuant to
the revolving credit facility's borrowing formula. Loans under the revolving
credit facility, which bear interest at prime (4.75% at December 29, 2001) plus
0.75%, are collateralized by certain of our assets. As a result of an agreement
entered into on February 13, 2002, we have agreed to repay the outstanding
balance of the credit facility by March 20, 2002, and, as a result, the
borrowings under the credit facility have been classified as short-term.
12
In October 2001, we borrowed more money than was allowed under the terms of
our bank credit facility borrowing formula (the "Over-advance") and determined
that we were in violation of a financial covenant in the loan agreement as of
September 29, 2001. In late October, we entered into an amendment to the credit
facility to: (i) reduce the total credit facility from $35 million to $19.5
million, (ii) permit us to exceed the borrowing limitations under the credit
facility by $2.255 million as of October 15, 2001, $1.3 million after the close
of business on October 29, 2001, $1.2 million after the close of business on
November 5, 2001, $0.7 million after the close of business on November 12, 2001,
$0.4 million after the close of business on November 19, 2001, and after
November 26, 2001, we must conform to the borrowing limitations of the credit
facility, (iii) reduce the amount of inventory included in the borrowing formula
by $1 million per week beginning on November 13, 2001 for certain inventory as
defined in the amendment, (iv) require us to retain a turnaround consulting firm
in November 2001, (v) require us to pay certain amendment fees to the lender and
vi) waive our requirement to comply with the financial covenant through November
19, 2001, in anticipation of revising the credit agreement with new financial
covenants if necessary. On November 20, 2001, we entered into a further
amendment of the credit facility to eliminate certain financial covenants. The
amendment also reduced the availability under the borrowing agreement by not
less that $3.0 million applied against the collateral availability limitations.
In July 2001, we issued approximately $1.7 million of trade drafts to a
financial company. The proceeds from this transaction were used to pay a product
supplier. The trade drafts matured in late October 2001. Due to our liquidity
issues noted herein, we were unable to pay these trade drafts when due. On
November 1, 2001, we entered into a Collateral Security Agreement that extended
the maturity of the trade drafts until January 23, 2002 in exchange for granting
the financial company a security interest in certain of our fixed assets and the
payment of certain fees. In January 2002, we failed to repay the trade drafts
when due and entered into an agreement to extend the maturity of the trade
drafts until February 20, 2002.
During fiscal 2002, we entered into certain capital leases to finance the
purchase of property and equipment. Total capital lease obligations were $0.9
million as of December 29, 2001, of which $0.3 million is classified as a
current liability. In addition, as of December 29, 2001, we have future
operating lease payment commitments of approximately $23 million under existing
equipment and facility lease agreements. Rental expense under existing operating
leases was $3.4m during the nine month period ended December 29, 2001.
On February 1, 2002, we were served with a property tax warrant by the tax
authorities of Travis County, Texas. The warrant was issued as a result of our
delinquency for calendar year 2001 property taxes (due no later than January 31,
2002) totaling approximately $0.8 million. The property tax warrant levied fines
and penalties of approximately $0.2 million against us. During February 2002, we
made a payment of approximately $0.7 million against the property tax liability
and negotiated payment arrangements intended to satisfy the remaining tax
obligations by May 2002.
At December 29, 2001, our liquidity was negatively impacted by high levels
of inventory and, to a lesser extent, accounts receivable. One previous customer
refused to accept liability for a majority of the $7.5 million in inventory that
we purchased on its behalf, which resulted in our filing of a lawsuit against
this customer in July 2001. On November 15, 2001, we entered into a settlement
agreement with this customer which called for, among other items i) a cash
payment to us which reduced the carrying value of the inventory on hand, ii) the
sale of certain inventory to the former customer and iii) our retention of the
remainder of the inventory. We expect the inventory retained to be realizable
and accordingly we have not reflected any losses related to the transaction in
our financial statements as of December 29, 2001. We intend to liquidate the
inventory by i) utilizing the inventory for other customer requirements, ii)
returning it to suppliers and/or iii) selling it to third parties, which may
result in a gain or a loss.
We also have approximately $17 million of inventory on hand for a current
customer and, as a result of a decrease in demand requirements from this
customer, have been working with this customer to have it purchase a large
portion of this inventory from us. As a result of our negotiations with the
customer and certain vendors, we entered into a settlement agreement with the
customer on February 12, 2002. As a result of the settlement agreement, we
wrote-down the inventory to its estimated realizable value of $1.6 million in
the quarter ended December 29, 2001.
Due to our limited cash resources, we have violated certain financial
covenants, and are delinquent in payments due, under operating lease agreements
for equipment used primarily in the production of finished goods. Based on these
events of default, the lessors have the contractual right to enter our
facilities and take possession of the leased equipment, which could
significantly impact the our results of operations. We are currently in
discussions with the equipment lessors to resolve these default issues. Although
we have not received any information indicating that the lessors plan to pursue
their rights and remedies under the agreements with
13
respect to these violations, there can be no assurance that any or all of the
lessors will not elect to pursue such rights and remedies in the future.
During November 2001, a patent infringement lawsuit was filed by the
Lemelson Foundation against us and alleges violations of patents used in the
manufacturing of integrated circuits. The lawsuit is in its early stages and we
are currently investigating the claims filed against us. No estimate for
potential loss, if any, is currently possible and, accordingly, no accrual
associated with the litigation has been recognized in the results of operations
for the three and nine months ended December 29, 2001.
Our reduced borrowing capability has also caused us to delay payment to
many lessors, suppliers and other creditors. We are in discussions with our
lessors about temporary rent abatements and lease restructurings; however, few
agreements have been reached to date and there is no assurance that new
arrangements will be accomplished. As a result of delayed rental payments, we
received one default notice and may receive others while we attempt to work out
revised payment terms. We have also been working with our suppliers to reach
satisfactory payment terms in order to procure goods and services and to date
have been generally able to secure such goods and services.
As noted in our Annual Report on Form 10-K for the fiscal year ended March
31, 2001, we have implemented plans to improve our liquidity by (i) reducing new
materials purchases, (ii) requesting certain customers to either purchase
inventories in excess of short-term manufacturing requirements or to prepay our
purchases of inventories on their behalf and (iii) reducing accounts receivable
through increased collections efforts. While we believe that we will be able to
achieve our plans, there can be no assurance that our objectives will be met.
Certain of our equipment operating leases contain covenants and restrictions,
which, among other things, require maintenance of minimum financial ratios. At
December 29, 2001, we were not in compliance with these lease covenants. As
noted above, although we are in discussions with our lessors to restructure our
lease obligations; however, no agreements have been reached to date and there
can be no assurance that the new arrangements will be accomplished.
We may require additional financing in connection with our business. We may
seek additional funds from time to time through public or private debt or equity
offerings or obtain further bank or lease financing or off-balance sheet
financing. Our need for funding and the cost of and access to additional funds
are dependent on our future operating results, the resolution of the inventory
issues noted above, and other external conditions. If we are unable to (i)
obtain adequate financing, (ii) resolve customer inventory issues, (iii) remain
in compliance with the terms of our loan agreement, (iv) reach satisfactory
terms with our facility and equipment lessors, (v) reach agreements to procure
required materials and services on satisfactory terms and (vi) reduce or
eliminate our operating losses, we may be forced to seek protection from our
creditors under the U.S. bankruptcy code or pursue the sale of our company or
assets.
At December 29, 2001 and March 31, 2001, we did not have any relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, we are not
materially exposed to any financing, liquidity, market or credit risk that could
arise if we had engaged in such relationships. We do engage in transactions with
Rohm Corporation, our largest shareholder, to purchase certain inventory items.
We believe that these transactions were on terms no less favorable than would
have been obtained from unaffiliated third parties.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, management evaluates its estimates,
including those related to revenue recognition, product returns, bad debts,
inventories, income taxes, warranty obligations, and contingencies and
litigation. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements. We recognize revenue and profit when title and risk of loss is
transferred and collectability of the
14
resulting receivable is reasonably assured. We make provision for estimated
sales returns and discounts based upon historical experience. We maintain
allowances for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required. We provide for
the estimated cost of product warranties at the time revenue is recognized.
While we engage in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of component suppliers, our
warranty obligation is affected by product failure rates, material usage and
service delivery costs incurred in correcting a product failure. Should actual
product failure rates, material usage or service delivery costs differ from our
estimates, revisions to the estimated warranty liability would be required. We
write down our inventory for estimated obsolescence or unmarketable inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. We record a valuation
allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. In the event we were to determine that we would be able
to realize our deferred tax assets in the future in excess of our net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standard, or SFAS, No. 141, "Business
Combinations." SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business combinations
that were initiated prior to July 1, 2001. The purchase method of accounting is
required to be used for all business combinations initiated after June 30, 2001.
SFAS No. 141 also defines the criteria for identifying intangible assets for
recognition apartment from goodwill. We have adopted SFAS No. 141 effective July
1, 2001.
Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 discontinues amortization of acquired goodwill
and instead requires annual impairment testing. Separable intangible assets will
be amortized over their useful economic lives and tested for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to be Disposed of." Intangible assets with an indefinite useful economic
life will not be amortized until the life of the asset is determined to be
finite. We must adopt SFAS No. 142 by January 1, 2002. However, we do not
believe adoption of SFAS No. 142 will have a material impact on our future
earnings or financial position.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The statement is effective for financial statements for
fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not
expected to have an impact on our financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the
fundamental provisions of existing generally accepted accounting principles with
respect to the recognition and measurement of long-lived asset impairment
contained in SFAS No. 121. However, SFAS No. 144 provides new guidance intended
to address certain significant implementation issues associated with SFAS No.
121, including expanded guidance with respect to appropriate cash flows to be
used to determine whether recognition of any long-lived asset impairment is
required, and if required, how to measure the amount of the impairment. SFAS No.
144 also requires that any net assets to be disposed of by sale be reported at
the lower of carrying value or fair market value less cost to sell, and expands
the reporting of discontinued operations to include any component of an entity
with operations and cash flows that can be clearly distinguished from the rest
of the entity. SFAS No. 144 is effective for financial statements issued for
years beginning after December 15, 2001, and interim periods within those fiscal
years. We are currently evaluating the impact, if any, of SFAS No. 144 on our
future earnings and financial position.
BACKLOG
Our backlog at December 29, 2001 was approximately $29 million as compared
to approximately $30 million at September 29, 2001, $60 million at June 30, 2001
and approximately $125 million at March 31, 2001. Backlog consists of purchase
orders received by us and customer 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 us, as well as
changes in customers' delivery requirements
15
or the rescheduling or cancellation of orders and commitments, have resulted in
the past and may result in the future in substantial fluctuation in backlog from
period to period. Accordingly, backlog may not be a meaningful indicator of our
future net sales.
EMPLOYEES
As of December 29, 2001, we had approximately 316 full-time employees,
supplemented from time to time by part-time employees. Our employees are not
subject to a collective bargaining agreement and we believe our employee
relations to be satisfactory.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND MARKET
PRICE OF SECURITIES
Factors that could cause actual results or events to differ materially from
those anticipated by forward-looking statements set forth in the Quarterly
Report, include, but are not limited to: 1) our dependence on a limited number
of suppliers and the ability to obtain sufficient components on a timely basis;
2) the loss of any of our major customers; 3) our ability to manufacture
products for our customers on a cost-effective basis; 4) risk of price increases
associated with shortages in the availability of electronics components; 5)
working capital constraints due to customer inventory requirements or materials
shortages; 6) variability in the volume and timing of our sales; 7) significant
customers canceling their orders, changing production quantities or failing to
pay us for our services; 8) the inability to secure additional financing when
needed; 9) the expansion of our business and operations through acquisitions;
10) increased competition which may result in decreased demand or reductions in
prices for our services; 11) our dependence on certain key personnel; 12) our
dependence on the continuing trend by original equipment manufacturers (OEMs) to
outsource their electronics manufacturing services (EMS) needs; 13) design or
manufacturing defects in products we manufacture for our customers: 14) costs
associated with plant closures or relocations and 15) provisions in our charter
documents, stockholder rights plan and agreements with executives, as well as
provisions of Delaware law, which could prevent or delay a change in control of
us and may reduce the market price of our stock.
FORWARD-LOOKING STATEMENTS
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains various "forward looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 that represent our expectations or beliefs
concerning future events, including, but not limited to, statements regarding
trends in sales, profit margins and the sufficiency of our cash flow for our
future liquidity and capital resource needs. These forward-looking statements
are further qualified by important factors that could cause actual results to
differ materially from those in the forward looking statements (for these
factors, see the preceding paragraph marked "Risk Factors That May Affect Future
Results, Financial Condition and Market Price of Securities". Results actually
achieved may differ materially from expected results included in these
statements as a result of these or other factors.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We invest our cash in money market funds or other instruments which meet
high credit quality standards specified by our investment policy. We do not use
financial instruments for trading or other speculative purposes. Our credit
facilities are subject to market risk by way of interest rate fluctuations. The
carrying amount of our long-term debt approximates fair value due to the
periodic adjustments of our interest rate on the debt to current market rates.
As of December 29, 2001, our long-term debt bore interest at variable
rates, generally tied to a reference rate such as the prime rate of interest of
certain lending institutions. Accordingly, our earnings and after tax cash flow
are affected by changes in interest rates. In the event of an adverse change in
interest rates, we would seek to take actions to mitigate our risk exposure.
16
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 December 29, 2001.
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: February 19, 2002 By: /s/ Angelo A. DeCaro, Jr.
--------------------------------------
Angelo A. DeCaro, Jr.
President, Chief Executive Officer
and Director
(Principal Executive, Financial and
Accounting Officer)
17
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Second Restated Certificate of Incorporation (Incorporated by
reference to Exhibit 3.2 to our Registration Statement on Form
S-1 (File No. 33-99632))
3.2 -- Restated Bylaws of the Registrant, as amended (Incorporated by
reference to Exhibit 3.3 to our Registration Statement on Form
S-1 (File No. 33-99632))
3.3 -- Registration Rights Agreement, dated June 18, 1986 among the
Registrant, Rohm Corporation, Julian C. Hart, David W. Gault and
Emory C. Garth (Incorporated by reference to Exhibit 3.4 to our
Registration Statement on Form S-1 (File No. 33-99632))
4.1 -- Reference is made to Exhibits 3.1, 3.2 and 3.3
4.2 -- Specimen Common Stock certificate (Incorporated by reference
to Exhibit 4.2 to our Registration Statement on Form S-1 (File
No. 33-99632))
10.1 -- Form of Indemnification Agreement between the Registrant and
each of its directors and certain executive officers
(Incorporated by reference to Exhibit 10.2 to our Registration
Statement on Form S-1 (File No. 33-99632))
10.2 -- Manufacturing Services Agreement, dated February 22, 1989
between Motorola, Inc., MOS Memory Products Division and the
Registrant, and letter from Motorola, Inc., Fast Static RAM
Module Division related thereto (Incorporated by Reference to
Exhibit 10.20 to our Registration Statement on Form S-1 (File No.
33-99632))
10.3 -- Mobile Communication Standard Terms and Conditions Dated
August 5, 1994 for Westinghouse Electric (Incorporated by
reference to Exhibit 10.21 to our Registration Statement on Form
S-1 (File No. 33-99632))
10.4 -- Master Lease Agreement between the Registrant and General
Electric Capital Corporation (Incorporated by Reference to
Exhibit 10.22 to our Annual Report on Form 10-K for fiscal year
1996)
10.5 -- Lease Agreement between Braker Phase III, Ltd. as Landlord,
and the Registrant, as Tenant (Incorporated by Reference to
Exhibit 10.25 to our Quarterly Report on Form 10-Q for the
quarter ended September 1996)
10.6 -- Lease Agreement between Delta HP Limited, as Landlord, and the
Registrant, as Tenant (Incorporated by reference to Exhibit 10.26
to our Annual Report on Form 10-K for fiscal year 1997)
10.7 -- Letter of Commitment between the Registrant and General
Electric Capital Corporation (Incorporated by reference to
Exhibit 10.28 to our Annual Report on Form 10-K for fiscal year
1997)
10.8 -- Registrant's 1997 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.30 to our Schedule 14A for the 1997
annual meeting of stockholders)
10.9 -- Registrant's Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 10.31 to our Schedule 14A for the 1997
annual meeting of stockholders)
10.10 -- Lease Agreement between Braker Phase III, Ltd. as Landlord,
and the Registrant, as Tenant (Incorporated by reference to
Exhibit 10.32 to our Quarterly Report on Form 10-Q for the
quarter ended December 1997)
</Table>
<Table>
10.11 -- Amended Letter of Commitment between the Registrant and
General Electric Capital Corporation (Incorporated by reference
to Exhibit 10.35 to our Annual Report on Form 10-K for fiscal
year 1998)
10.12 -- Amendment No. 1 to 1997 Stock Incentive Plan (Incorporated by
reference to Exhibit 10.39 to our Quarterly Report on Form 10-Q
for the quarter ended September 1998)
10.13 -- Stockholders Rights Agreement dated December 31, 1998
(Incorporated by reference to Exhibit 10.40 to our Registration
Statement on Form 8-A filed January 1999)
10.14 -- Loan and Security Agreement between the Registrant and The CIT
Group/Business Credit, Inc, and Chase Bank as participant
(Incorporated by reference to Exhibit 10.41 to our Annual Report
on Form 10-K for fiscal year 2000)
10.15 -- Form of Change of Control Agreement between the Registrant and
certain of its executive officers (Incorporated by reference to
Exhibit 10.15 to our Quarterly Report on Form 10-Q for the
quarter ended December 30, 2000)
10.16 -- Manufacturing Agreement between Registrant and Intel Flash
Products Division (Incorporated by reference to Exhibit 10.16 to
our Quarterly Report on Form 10-Q for the quarter ended December
30, 2000)
10.17 -- Purchase Agreement between Registrant and Cielo
Communications, Inc. (Incorporated by reference to Exhibit 10.17
to our Quarterly Report on Form 10-Q for the quarter ended
December 30, 2000)
10.18 -- Master Manufacturing Agreement between Registrant and
Ericsson, Inc. (Incorporated by reference to Exhibit 10.18 to our
Quarterly Report on Form 10-Q for the quarter ended December 30,
2000)
10.19 -- Manufacturing Services Agreement between Registrant and
Pathlight Technology, Inc. (Incorporated by reference to Exhibit
10.18 to our Quarterly Report on Form 10-Q for the quarter ended
December 30, 2000)
10.20 -- Collateral Security Agreement between Registrant and Actrade,
Inc. (Incorporated by reference to Exhibit 10.20 to our Quarterly
Report on Form 10-Q for the quarter ended September 29, 2001)
10.21 -- Fourth Amendment to the Loan and Security Agreement between
Registrant and The CIT Group/Business Credit, Inc. (Incorporated
by reference to Exhibit 10.21 to our Quarterly Report on Form
10-Q for the quarter ended September 29, 2001)
10.22 -- Waiver Extension to the Fourth Amendment to the Loan and
Security Agreement between Registrant and the CIT Group/Business
Credit, Inc. (Incorporated by reference to Exhibit 10.22 to our
Quarterly Report on Form 10-Q for the quarter ended September 29,
2001)
10.23 -- Fifth Amendment to the Loan and Security Agreement between
Registrant and The CIT Group/Business Credit, Inc.
10.24 -- Addendum to Collateral Security Agreement between Registrant
and Actrade
10.25 -- Collateral Proceeds Release Agreement between Registrant and
The CIT Group/Business Credit, Inc.
</Table>