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 December 28, 1996,
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-27482
XETEL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2310781
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2525 BROCKTON DRIVE
AUSTIN, TEXAS 78758
(Address of principal executive offices, including zip code)
(512) 435-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such other shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ x ] No [ ]
Number of shares outstanding of the issuer's common stock, $0.0001 par value,
as of February 3, 1997: 8,798,810.
2
XETEL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Balance Sheet as of December 28, 1996 and March 30, 1996 .......... 3
Statement of Operations for the three and nine months ended
December 28, 1996 and December 30, 1995 ........................ 4
Statement of Changes in Stockholders' Equity for the nine
months ended December 28, 1996 ................................. 5
Statement of Cash Flows for the three and nine months ended
December 28, 1996 and December 30, 1995 ........................ 6
Notes to Financial Statements ..................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 13
Signatures ........................................................ 13
Item 6. Exhibits and Reports on Form 8-K .................................. 14
3
XETEL CORPORATION
BALANCE SHEET
IN THOUSANDS, EXCEPT SHARE DATA
ASSETS
December 28, March 30,
1996 1996
-------- --------
(unaudited)
Current assets:
Cash and cash equivalents $ 6,768 $ 5,142
Trade accounts receivable, net of
allowance for doubtful accounts
of $240 and $240, respectively 12,012 19,547
Inventories 10,234 14,721
Prepaid expenses and other 1,241 1,220
-------- --------
Total current assets 30,255 40,630
Property and equipment, net 5,670 4,488
Land held for investment 38 38
Intangible assets 1,004 --
-------- --------
Total assets $ 36,967 $ 45,156
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 7,706 $ 14,601
Accrued federal income tax -- 2,674
Accrued expenses and other liabilities 2,739 2,795
-------- --------
Total current liabilities 10,445 20,070
Deferred income taxes 164 164
Long term debt 74 --
Commitments (Note 8)
Stockholders' equity:
Common stock, $0.0001 par value,
25,000,000 shares authorized,
8,791,560 and 8,542,168 shares
issued and 8,772,810 and 8,523,418
shares outstanding, respectively 20,930 19,430
Retained earnings 5,691 5,547
Deferred compensation (337) (55)
-------- --------
Total stockholders' equity 26,284 24,922
-------- --------
Total liabilities and
stockholders' equity $ 36,967 $ 45,156
======== ========
The accompanying notes are an integral part of these financial statements.
4
XETEL CORPORATION
STATEMENT OF OPERATIONS
IN THOUSANDS, EXCEPT SHARE DATA
(UNAUDITED)
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
December 28, December 30, December 28, December 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
Net sales $ 17,979 $ 33,416 $ 66,370 $ 83,046
Cost of sales 17,007 29,15 61,635 72,470
------------ ------------ ------------ ------------
Gross profit 972 4,261 4,735 10,576
Selling, general and administrative
expenses 1,596 1,557 4,729 4,115
------------ ------------ ------------ ------------
(Loss) income from operations (624) 2,704 6 6,461
Other income (expense), net 84 (202) 218 (531)
------------ ------------ ------------ ------------
(Loss) income before income taxes (540) 2,502 224 5,930
(Benefit) provision for income taxes (206) 901 80 2,135
------------ ------------ ------------ ------------
Net (loss) income $ (334) $ 1,601 $ 144 $ 3,795
============ ============ ============ ============
Net (loss) income per share $ (0.04) $ 0.22 $ 0.02 $ 0.52
============ ============ ============ ============
Weighted average 8,773 7,337 9,332 7,338
============ ============ ============ ============
shares outstanding
The accompanying notes are an integral part of these financial statements.
5
XETEL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
IN THOUSANDS
(unaudited)
Total
Common Stock Deferred Retained Stockholders'
Shares Amount Comp Earnings Equity
-------- -------- -------- -------- --------
Balance, March 30, 1996 8,523 $ 19,430 $ (55) $ 5,547 $ 24,922
Stock options exercised 43 55 -- -- 55
Amortization of deferred
compensation -- -- 12 -- 12
Net income -- -- -- 144 144
Acquisition - XeTel Dallas 207 1,448 (294) -- 1,154
Other -- (3) -- -- (3)
-------- -------- -------- -------- --------
Balance, December 28, 1996 8,773 $ 20,930 $ (337) $ 5,691 $ 26,284
======== ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
6
XETEL CORPORATION
STATEMENT OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
Three Months Ended Nine Months Ended
--------------------------- -----------------------------
December 28, December 30, December 28, December 30,
1996 1995 1996 1995
------------ ------------- ---------- ----------
Cash flows from operating activities:
Net (loss) income $ (334) $ 1,601 $ 144 $ 3,795
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 533 331 1,453 974
(Gain) loss on disposal of equipment (7) -- (20) 94
Changes in operating assets and liabilities:
(Increase) decrease in --
Trade accounts receivable 1,450 (865) 7,823 (4,687)
Inventories 716 (867) 4,790 (9,911)
Prepaid expenses and other 31 44 86 --
Increase (decrease) in --
Trade accounts payable (360) (1,970) (6,979) 4,118
Accrued expenses and other liabilities 186 3,584 (2,988) 5,587
---------- ---------- ---------- ----------
Cash provided by (used in) operating activities 2,215 1,858 4,309 (30)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (391) (409) (1,025) (1,889)
Acquisition, net of cash acquired - XeTel Dallas -- -- (18) --
Acquisition, net of cash acquired - XeTel West (1,631) -- (1,631) --
---------- ---------- ---------- ----------
Cash used in investing activities (2,022) (409) (2,674) (1,889)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Net borrowings under debt agreements (31) (221) (61) 3,140
Proceeds from stock options exercised 1 11 55 39
Other -- -- (3) --
---------- ---------- ---------- ----------
Cash provided by financing activities (30) (210) (9) 3,179
---------- ---------- ---------- ----------
Increase in cash and cash equivalents 163 1,239 1,626 1,260
Cash and cash equivalents, beginning of period 6,605 1,343 5,142 1,322
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 6,768 $ 2,582 $ 6,768 $ 2,582
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 BUSINESS
As of December 28, 1996, XeTel Corporation ("XeTel" or the "Company") was a 49%
owned subsidiary of Rohm USA, Inc. ("Rohm"), a wholly-owned subsidiary of Rohm
Co. Ltd., Japan. XeTel provides advanced design and prototype services,
manufactures sophisticated surface mount assemblies and supplies turnkey
solutions to original equipment manufacturers primarily in the
telecommunications, networking, industrial and computer industries. XeTel
incorporates its design and prototype services and assembly capabilities
together with materials management, advanced testing, systems integration and
order fulfillment services, to provide turnkey solutions for its customers.
NOTE 2 BASIS OF PRESENTATION
The accompanying financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules or regulations.
In the opinion of management, the financial statements reflect all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the financial position, operating results, and cash flows for
those periods presented. These financial statements should be read in
conjunction with the financial statements, and notes thereto, for the fiscal
year ended March 30, 1996 as presented in the Company's 10-K filed with the
SEC.
NOTE 3 ACQUISITIONS
In July 1996, the Company acquired Maxtron Corporation located in Dallas,
Texas. The fair value of the assets acquired, excluding cash, amounted to
approximately $1 million. The cost in excess of net assets acquired amounted to
approximately $637,000 and will be amortized as goodwill over a five-year
period. The Company may have to pay additional contingent consideration upon
the achievement of certain performance goals. This transaction was accounted
for under the purchase method of accounting with the results of operations from
the acquired business included in the Company's results of operations from the
acquisition date forward.
In December 1996, the Company acquired the manufacturing operations of SBE,
Inc. located in San Ramon, California for approximately $1.6 million in cash.
The fair value of the assets acquired amounted to approximately $1.2 million.
The costs, including acquisition costs, in excess of assets acquired amounted
to approximately $433,000 and will be amortized as goodwill over a five-year
period. The companies have also entered into a long term purchasing agreement
under which SBE, Inc. will purchase contract manufacturing services from XeTel.
The transaction was accounted for under the purchase method of accounting with
the results of operations from the acquired manufacturing operations included
in the Company's results from the acquisition date forward.
NOTE 4 NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
outstanding common stock and common equivalent shares, which includes preferred
stock and stock options, and gives effect to certain adjustments described
below. Common equivalent shares are not included in the per share calculation
where the effect of their inclusion would be antidilutive, except that, in
conformity with the SEC requirements, stock options issued during the
twelve-month period prior to the filing of the Company's initial public
offering have been included in the calculation as if they were outstanding for
all periods, using the treasury stock method.
NOTE 5 INVENTORIES
Inventories consist of the following (in thousands):
December 28, March 30,
1996 1996
------- -------
Raw materials $ 6,278 $11,037
Work in progress 3,676 3,396
Finished goods 280 288
------- -------
$10,234 $14,721
======= =======
8
As of December 28, 1996 and March 30, 1996, the Company had allowances for
obsolete raw materials (principally printed circuit board assembly components)
of $490,000 and $490,000, respectively. Cost of sales for the three and nine
months ended December 28, 1996 and December 30, 1995 include provisions to the
allowance for obsolete materials of $11,000, $42,000, $93,000 and $316,000,
respectively.
NOTE 6 PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following (in thousands):
December 28, March 30,
1996 1996
---------- ----------
Machinery and equipment $ 13,916 $ 11,397
Furniture and fixtures 335 334
Leasehold improvements 409 405
---------- ----------
14,660 12,136
Less: Accumulated depreciation
and amortization (8,990) (7,648)
---------- ----------
$ 5,670 $ 4,488
========== ==========
NOTE 7 NOTES PAYABLE AND LONG-TERM DEBT
The Company has (i) a revolving line of credit for $3 million from Rohm, (ii)
an equipment financing facility for $4 million from a financial services
company, and (iii) a revolving credit facility for $7 million from a commercial
bank. There were no outstanding balances under the Rohm or commercial bank
revolving lines of credit.
The line of credit from Rohm is secured by certain equipment, bears interest at
LIBOR plus 1.25%, is payable on demand and expires March 31, 1997. 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
bank facility bears interest at LIBOR plus 1.25% or 1.75% and/or prime (such
rate determined based upon the amounts and period of loans), matures August
1998 and is secured by certain assets of the Company. The bank facility
requires the payment of a monthly commitment fee equal to one-eighth of one
percent (1/8%) on the unused balance, and borrowings are limited based upon
certain collateral availability requirements.
The equipment financing facility, the master lease agreements, the bank
facility and the revolving line of credit contain certain restrictions which
including maintenance of a minimum level of tangible net worth and other
operating and financial ratios.
Interest paid totaled $5,900, $12,500, $206,000 and $541,000 for the three and
nine months ended December 28, 1996 and December 30, 1995, respectively.
NOTE 8 LEASE COMMITMENTS
XeTel leases its operating facilities and certain manufacturing and office
equipment under noncancellable operating leases. Rental expense under all
operating leases was approximately $395,000, $1,011,000, $188,000 and $562,000
during the three and nine months ended December 28, 1996 and December 30, 1995,
respectively. Future noncancellable minimum rental payments under all operating
leases with initial terms of greater than one year are $407,000 in the
remainder of 1997, $2,257,000 in 1998, $2,289,000 in 1999, $2,237,000 in 2000,
$2,140,000 in 2001 and an aggregate of $6,835,000 thereafter. As of December
28, 1996, Rohm has guaranteed rental payments of $615,000 related to the lease
of the Company's operating facilities.
NOTE 9 RELATED PARTY TRANSACTIONS
In addition to the debt arrangements and the operating facility lease guarantee
described in Notes 7 and 8, the Company has transactions with certain divisions
of Rohm Corporation, a wholly-owned subsidiary of Rohm, during the normal
course of business. Purchases from such divisions were $113,000, $434,000,
$233,000 and $690,000 for the three and nine months ended December 28, 1996 and
December 30, 1995, respectively. Accounts payable to such divisions were
$54,000 and $141,000 as of December 28, 1996 and March 30, 1996, respectively.
Accounts receivable from such divisions were not significant.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion in this document contains trend analysis and other forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results could differ materially from those projected in the
forward-looking statements throughout this document as a result of the risk
factors set forth below and other risks described in the Company's other filed
SEC documents such as those associated with the Company's initial public
offering and Form 10-K filing.
OVERVIEW
XeTel was founded in 1984. In 1986, Rohm acquired a controlling interest in the
Company. Since its inception, the Company has manufactured surface mount
assemblies and performed other manufacturing services for original equipment
manufacturers ("OEMs") in the electronics industry. In a number of cases, such
services were and may be rendered during periods in which customers experience
fluctuations in demand for their products. During such periods, the Company's
net sales and operating results were and are subject to significant
fluctuations that often were and are tied to the market demand for its
customers' products and their need to utilize independent manufacturers to
maintain sufficient product supply to meet such demand. In addition, in the
past, the Company's customer base was more highly concentrated within the
computer industry. Due to intense competitive pressures within the computer
industry, as well as fluctuations in overall demand and lower production
volumes, the Company generally experienced lower gross margins. In an effort to
achieve greater stability and higher gross margins, the Company made a
strategic decision in 1993 to reduce its dependence on the computer industry
and expand its service offerings in order to establish long-term relationships
with targeted customers in the telecommunications, networking, industrial and
instrumentation segments of the electronics industry.
The development and growth of the Company's business generally has followed the
trend by OEMs in the electronics industry to outsource certain of their
manufacturing requirements. Recognizing the benefits offered by using
independent manufacturers, OEMs in the electronics industry have increasingly
relied on independent manufacturers not only as a source of additional
manufacturing capacity during periods of fluctuating demand, but as the primary
source for their manufacturing and assembly needs. In addition, the Company has
developed competencies in additional areas where it can add value to its
customers' requirements, such as design, prototype, systems integration and
order fulfillment and has sought to use such competencies to forge long-term
relationships as a single source provider of turnkey solutions for its
customers. In July 1996, XeTel acquired an independent contract manufacturer in
Dallas, Texas. In December 1996, XeTel acquired the manufacturing operations of
an original equipment manufacturer in San Ramon, California. These acquisitions
were designed to further establish and expand long-term relationships with
OEM's of advanced electronic products in targeted geographic areas.
The Company has and continues to focus certain of its resources to establish
capabilities in design, prototype and other manufacturing services and to
expand and diversify its customer base. The Company has reduced its role as a
source of additional capacity for OEMs during periods of fluctuating product
demand and has positioned itself to provide a more comprehensive set of
services within the electronics manufacturing services industry. This shift in
strategic focus, combined with improved materials management processes and the
establishment of dedicated customer teams, have enabled the Company to offer
additional services to support its customers' products throughout their life
cycles. XeTel holds an ISO 9002 and BABT certification and in its assembly
operations, has developed capabilities in next-stage technologies such as ball
grid array.
RISK FACTORS
Fluctuations in Operating Results. XeTel's operating results are affected by a
number of factors, including timing of orders from and shipments to major
customers, availability of materials and components, volume of orders relative
to the Company's capacity, timing of expenditures in anticipation of future
sales, 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 also can 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 typically is scheduled for delivery within 120 days. In the
absence of substantial backlog, quarterly sales and operating results depend on
the volume and timing of bookings received during the quarter which can be
difficult to forecast. Backlog fluctuations affect the Company's ability to
plan production and inventory levels, which could lead to fluctuations in
operating results. Variations in the size and delivery schedules of purchase
orders received by the Company, as well as 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. The
Company believes that backlog may not be a meaningful indicator of future
operating results.
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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. Results of operations in any period should not be considered
indicative of the results for any future period, and fluctuations in operating
results may result in fluctuations in the price of the Company's common stock.
Due to the foregoing factors, among others, the Company's operating results in
some quarters may be below the expectations of stock market analysts and
investors. In such event, there could be an immediate and significant adverse
effect on the trading price of the common stock.
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 the nine months ended December 28, 1996. The
loss of, or a significant curtailment of purchases by, one or more of these
customers, or any other significant customer of the Company, would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company anticipates that a significant portion of
its sales will continue to be concentrated in a small number of customers for
the foreseeable future.
Unavailability of Components and Materials. Components and material used by
XeTel in producing surface mount assemblies and turnkey solutions are purchased
by XeTel from approved suppliers of its customers. Any failure on the part of
suppliers to deliver required components to the Company or any failure of such
components to meet performance requirements could impair the Company's ability
to meet scheduled shipment dates and could delay sales of systems by the
Company's customers and thereby adversely affect the Company's business,
financial condition and results of operations. The Company has experienced
shortages of certain types of electronic components, and may experience
shortages of certain electronic components that are in short supply generally
within the electronics industry. Component shortages or price fluctuations, to
the extent not absorbed by customers under their 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.
During the nine months ended December 28, 1996, certain major customers reduced
significant orders with the Company due to orders which did not materialize and
efforts to rebalance inventories. Significant or numerous cancellations,
reductions or delays in orders by customers, or inability by customers to pay
for services provided by the Company or to pay for components and materials
purchased by the Company on such customer's behalf, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Management of Growth and Expansion. The Company's design, prototype, assembly
and turnkey solutions businesses and multi-site locations have grown 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 one or
more regional centers which will increase the Company's fixed costs and will
require additional personnel. A continuing period of rapid growth, including
geographic expansions, could place a significant strain on the Company's
management, operations and other resources. The Company's ability to manage its
growth will require it to manage its existing resources more efficiently, to
continue to invest in its operations, including its financial and management
information systems and internal process controls, and to retain, motivate and
manage its employees. If the Company's management is unable to manage growth
effectively, the quality of the Company's services and its ability to retain
key personnel could be materially and adversely affected, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
RESULTS OF OPERATIONS
Net sales for the nine months ended December 28, 1996 decreased 20.1% to $66.4
million from $83.0 million for the corresponding period of the prior year. Net
sales for the three months ended December 28, 1996 decreased 46.2% to $18.0
million from $33.4 million for the same prior year period. Lower sales were
primarily attributable to cancellations and rescheduled orders from certain
major telecommunications and networking customers.
Gross profit for the nine months ended December 28, 1996 decreased 55.2% to
$4.7 million from $10.6 million in the comparable prior year period. Gross
profit for the three months ended December 28, 1996 decreased 77.2% to $1.0
million from $4.3 million in the third quarter of fiscal 1996. Gross profit is
defined as net sales less cost of sales. Cost of sales consists of direct
labor, direct material and manufacturing
11
overhead (which includes manufacturing and process engineering expenses). Gross
margin (gross profit as a percentage of net sales) decreased to 7.1% for the
first nine months of the 1997 fiscal year from 12.7% for the comparable prior
year period. Gross margin decreased to 5.4% for the third quarter of the 1997
fiscal year from 12.6% for the comparable prior year period. The decrease in
the Company's gross margin reflects the effects of lower sales levels and the
lower absorption of fixed costs. On October 14, 1996, the Company announced a
reduction in force of approximately 7% of its workforce. The Company believes
this action, together with other cost saving measures were necessary to bring
expenses more in line with revenues. Management intends to continue to expand
the range of services it provides and focus on market opportunities where its
capabilities in rendering value added services in a cost effective manner can
improve productivity, product yields and utilization.
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries and related expenses, marketing and promotional expenses, and sales
commissions paid to direct sales personnel and independent sales representative
organizations. SG&A expenses for the nine months ended December 28, 1996
increased 14.9% to $4.7 million from $4.1 million in the corresponding period
in fiscal 1996. SG&A expenses represented 7.1% of net sales for the nine months
ended December 28, 1996 as compared to 5.0% for the nine months ended December
30, 1995. SG&A expenses for the three months ended December 28, 1996 remained
relatively flat at $1.6 million as compared to the corresponding period in
fiscal 1996. SG&A expenses represented 8.9% of net sales for the three months
ended December 28, 1996 as compared to 4.7% for the three months ended December
30, 1995. Higher SG&A expenses were primarily attributable to increased public
company related expenses and additional general and administrative expenses
associated with newly acquired businesses.
Other income (expense), net for the nine months ended December 28, 1996
reflected income of $218,000 compared to an expense of $531,000 in the
corresponding period in fiscal 1996. Other income (expense), net for the three
months ended December 28, 1996 reflected income of $84,000 compared to $202,000
of expense in the corresponding period in fiscal 1996. The change was due to
interest earned from an increase in cash and cash equivalents and a decrease in
interest paid resulting from the payment of amounts outstanding under the
revolving line of credit and notes payable to Rohm with a portion of the
proceeds from the Company's initial public offering, effective February 14,
1996.
The provision for income taxes of $80,000 and $2.1 million reflects an
effective tax rate of 35.7% and 36.0% for the nine months ended December 28,
1996 and December 30, 1995, respectively. The benefit for income taxes of
$206,000 and the provision for income taxes of $901,000 reflects an effective
tax rate of 38.1% and 36.0% for the three months ended December 28, 1996 and
December 30, 1995, respectively. The higher effective tax rate for the three
months ended December 28, 1996 was primarily due to the increased effect of
permanent tax differences due to lower income before income taxes as compared
to the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Since 1986 when Rohm acquired a controlling interest in the Company, XeTel has
financed its business through cash generated by operations and a line of credit
and other borrowings provided by Rohm. In February 1996, the Company made an
initial public offering of its common stock. Net proceeds to the Company from
the offering were $14.8 million.
During the prior fiscal year, additional borrowings were made from Rohm for
working capital and capital equipment. The Company used a portion of the net
proceeds of its initial public offering, effective February 14, 1996, to repay
all amounts outstanding under the revolving line of credit and notes payable to
Rohm. No amounts were outstanding to Rohm as of December 28, 1996 and March 30,
1996.
Net cash provided by operating activities during the three and nine months
ended December 28, 1996 was $2.2 million and $4.3 million resulting primarily
from cash provided by a decrease in inventory and accounts receivable offset by
cash used by decreases in accounts payable, accrued expenses and other
liabilities. Net cash provided by operating activities was $1.9 million for the
three months ended December 30, 1995 and net cash used by operating activities
was $30,000 for the nine months ended December 30, 1995.
Capital expenditures during the three and nine months ended December 28, 1996
and December 30, 1995 were $0.4 million, $1.0 million, $0.4 million and $1.9
million, respectively. Management anticipates that capital expenditures in each
of its 1997 and 1998 fiscal years will exceed the level of capital expenditures
made in fiscal 1996. The Company's expenditures on research and development for
the three and nine months ended December 28, 1996 and December 30, 1995 were
$44,000, $135,000, $49,000 and $126,000, respectively.
As of December 28, 1996 and March 30, 1996, the Company's primary source of
liquidity consisted of cash and cash equivalents of $6.8 million and $5.1
million, respectively. Working capital was $19.8 million and $20.6 million as
of December 28, 1996 and March 30, 1996, respectively.
The Company has (i) a revolving line of credit for $3 million from Rohm, (ii)
an equipment financing facility for $4 million from a financial services
company, and (iii) a revolving credit facility for $7 million from a commercial
bank. There were no outstanding balances under the Rohm or commercial bank
revolving lines or credit.
12
The line of credit from Rohm is secured by certain equipment, bears interest at
LIBOR plus 1.25%, is payable on demand and expires March 31, 1997. 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
bank facility bears interest at LIBOR plus 1.25% or 1.75% and/or prime (such
rate determined based upon the amounts and period of loans), matures August
1998 and is secured by certain assets of the Company. The bank facility
requires the payment of a monthly commitment fee equal to one-eighth of one
percent (1/8%) on the unused balance, and borrowings are limited based upon
certain collateral availability requirements.
The equipment financing facility, the master lease agreements, the bank
facility and the revolving line of credit contain certain restrictions which
including maintenance of a minimum level of tangible net worth and other
operating and financial ratios.
Interest paid totaled $5,900, $12,200, $206,000 and $541,000 for the three and
nine months ended December 28, 1996 and December 30, 1995, respectively.
The Company believes that its working capital, together with cash generated
from operations and proceeds from available lines of credit, will be sufficient
to satisfy anticipated sales growth and investment in manufacturing facilities
and equipment through its 1997 fiscal year end. On October 2, 1996, the Company
signed an agreement to lease a new manufacturing facility in Austin comprised
of 92,500 square feet with a planned relocation in the first fiscal quarter of
1998.
BACKLOG
The Company's backlog as of December 28, 1996 was approximately $58.4 million
compared to approximately $40.5 million at September 28, 1996, $40.1 at June
29, 1996 and $80.7 million as of March 30, 1996. Backlog consists of purchase
orders received by the Company and commitments under scheduled releases, both
of which generally specify delivery dates within twelve months. Variations in
the size and delivery schedules of purchase orders received by the Company, as
well as changes in customers' delivery requirements or the rescheduling or
cancellation of orders and commitments, has resulted in the past and may result
in substantial fluctuation in backlog from period to period. The Company
believes, although there can be no assurance, that backlog may not be a
meaningful indicator of future operating results. See "Variability of Customer
Requirements" and "Fluctuations in Operating Results."
ACQUISITIONS
In July 1996, the Company acquired Maxtron Corporation located in Dallas,
Texas. Maxtron is a contract manufacturer focusing on high complexity, custom
assemblies. In December 1996, the Company acquired the manufacturing operations
of SBE, Inc. located in San Ramon, California. Under the asset purchase
agreement related to the SBE, Inc. transaction, the Company has acquired all
manufacturing activities, including production. The companies have entered into
a long term purchasing agreement under which SBE, Inc. will purchase contract
manufacturing services from XeTel. The Company believes these recent
acquisitions will further establish and expand long-term relationships with
OEM's of advanced electronic products in targeted geographic areas. However, no
assurance can be given that such expansion will have a positive effect on the
Company's operating results.
In October of 1996, construction began on a new 92,500 square foot
manufacturing facility in Austin, Texas to be leased by the Company over a
twelve-year term. The Company plans on subleasing the existing space currently
utilized by Austin manufacturing operations.
EMPLOYEES
As of December 28, 1996, the Company had 532 full-time employees supplemented
from time to time by part-time employees. The employees are not represented by
a union. The Company believes its employee relations to be satisfactory.
13
ITEM 3. LEGAL PROCEEDINGS
To the Company's knowledge, there are no pending legal proceedings to which it
is a party or to which any of its property is subject that are material to the
Company or its business.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
XETEL CORPORATION
(Registrant)
Date: February 3, 1997 By: /s/ Angelo A. DeCaro, Jr.
-------------------------------
Angelo A. DeCaro, Jr.
President and Chief Executive
Officer
Date: February 3, 1997 /s/ Richard S. Chilinski
-------------------------------
Richard S. Chilinski
Vice President,
Chief Financial Officer
and Assistant Secretary
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Description
Number
3.2(1) Second Restated Certificate of Incorporation.
3.3(1) Restated Bylaws of the Registrant, as amended.
3.4(1) Registration Rights, dated June 18, 1986 among
the Registrant Rohm Corporation, Julian C. Hart,
David W. Gault and Emory C. Garth.
4.1(1) Reference is made to Exhibits 3.2 and 3.3.
4.2(1) Specimen Common Stock certificate.
10.1(1) Company's 1992 Stock Option Plan.
10.2(1) Form of Indemnification Agreement between the
Registrant and each of its directors and certain
executive officers.
10.3(1) Lease Agreement dated September 22, 1992 between
Mellon Bank, N.A., Trustee for the Consolidation
Retirement Trust for the LTV Corporation and
Affiliates (the "LTV Trust"), as Landlord, and
the Registrant, as Tenant.
10.4(1) First Amendment to Lease Agreement effective
April 1, 1994 between the LTV Trust, as Landlord,
and the Registrant, as Tenant.
10.5(1) Amended and Restated Guaranty of Lease effective
April 1, 1994 between Rohm USA, Inc., as
Guarantor, and the LTV Trust, as Landlord.
10.6(1) Waiver of Right of First Refusal dated May 2,
1994 by the Registrant, as Tenant, and the LTV
Trust, as Landlord.
10.7(1) Security Agreement dated October 14, 1992 between
the Registrant and Rohm Corporation.
10.8(1) $570,000 Secured Promissory Note issued October
14, 1992 by the Registrant in favor of Rohm
Corporation.
10.9(1) $110,000 Secured Promissory Note issued October
22, 1992 by the Registrant in favor of Rohm
Corporation.
10.10(1) Security Agreement dated November 4, 1992 between
Rohm Corporation, as Secured Party, and the
Registrant.
10.11(1) $6,500,000 Secured Promissory Note issued
November 4, 1992 by the Registrant in favor of
Rohm Corporation.
10.12(1) $722,000 Secured Promissory Note issued March 1,
1993 by the Registrant in favor of Rohm
Corporation.
10.13(1) Security Agreement dated May 17, 1995 between
Rohm U.S.A., Inc., as Secured Party, and the
Registrant, as Debtor.
10.14(1) $2,500,000 Secured Promissory Note issued May 17,
1995 by the Registrant in favor of Rohm U.S.A.,
Inc.
10.15(1) Security Agreement dated August 16, 1995 between
Rohm U.S.A., Inc., as Secured Party, and the
Registrant, as Debtor.
10.17(1) $1,155,000 Secured Promissory Note issued August
16, 1995 by the Registrant in favor of Rohm USA,
Inc.
10.18(1) Manufacturing Services Agreement dated November
18, 1994 between Primary Access and the
Registrant.
10.19(1) Consent Agreement dated March 29, 1995 between
Primary Access Corporation and the Registrant, as
the Consenting Party.
10.20(1) Manufacturing Services Agreement February 22,
1989 between Motorola, Inc., MOS Memory Products
Division and the Registrant, and letter from
Motorola, Inc., Fast Static RAM Module Division
related thereto.
10.21(1) Mobile Communication Standard Terms and
Conditions dated August 5, 1994 for Westinghouse
Electric.
10.22(2) Master Lease Agreement between XeTel Corporation
and General Electric Capital Corporation.
10.23(2) $3,000,000 Promissory Note between XeTel
Corporation and Rohm USA, Inc.
10.24(3) $7,000,000 Promissory Note between XeTel
Corporation and Texas Commerce Bank National
Association
10.25(3) Lease Agreement between XeTel Corporation and
Braker Phase III, Ltd.
11.1 Computation of Net Income (Loss) per Share.
24.1(1) Power of Attorney (see page II-4 of the
Registration Statement as filed on November 20,
1995).
24.2(1) Assistant Secretary's Certificate of Resolutions
of the Board of Directors.
27.1 Financial Data Schedule
(1) Incorporated by reference to the like-numbered
exhibits previously filed with Registrant's Registration
Statement on Form S-1, No. 33-99632 filed with the
Securities and Exchange Commission on February 14, 1996.
(2) Incorporated by reference to the like-numbered
exhibits previously filed with the Registrant's 1996 Form
10-K.
(3) Incorporated by reference to the like-numbered
exhibits previously filed with the Registrant's September
1996 Form 10-Q.
(b) Reports on Form 8-K
During the fiscal quarter ended December 28, 1996 no current reports on
Form 8-K were filed.