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 26, 1998,
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-27482
XETEL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2310781
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2105 GRACY FARMS LANE
AUSTIN, TEXAS 78758
(Address of principal executive offices, including zip code)
(512) 435-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [ x ] No [ ]
Number of shares outstanding of the issuer's common stock, $0.0001 par value as
of February 5, 1999: 9,212,700
2
XETEL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
Balance Sheet as of December 26, 1998 and March 28, 1998..................................................3
Statement of Operations for the three and nine months ended December 26, 1998 and December 27, 1997.......4
Statement of Cash Flows for the three and nine months ended December 26, 1998 and December 27, 1997.......5
Notes to Interim Financial Statements.....................................................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....................7
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities....................................................................................12
ITEM 6. Exhibits and Reports on Form 8-K.........................................................................13
Signatures........................................................................................................14
3
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM FINANCIAL STATEMENTS
XETEL CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
December 26, March 28,
1998 1998
---------- ----------
(unaudited)
Current assets:
Cash and cash equivalents $ 7,309 $ 7,239
Trade accounts receivable, net of
allowance for doubtful accounts
of $240 and $240, respectively 18,478 22,887
Inventories 19,430 18,061
Prepaid expenses and other 1,222 927
---------- ----------
Total current assets 46,439 49,114
Property and equipment, net 8,259 8,955
Goodwill 576 737
---------- ----------
Total assets $ 55,274 $ 58,806
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 12,920 $ 19,396
Notes payable and current portion
of long term debt 6,405 5,800
Accrued expenses and other liabilities 5,122 2,965
---------- ----------
Total current liabilities 24,447 28,161
Deferred income taxes 234 234
Long term debt 2,292 2,667
Commitments (Note 6)
Stockholders' equity:
Common stock, $0.0001 par value,
25,000,000 shares authorized,
9,143,950 and 8,998,896 shares
issued and 9,137,952 and 8,936,400
shares outstanding, respectively 21,729 21,142
Retained earnings 6,758 6,625
Deferred compensation (186) (23)
---------- ----------
Total stockholders' equity 28,301 27,744
---------- ----------
Total liabilities and
stockholders' equity $ 55,274 $ 58,806
========== ==========
The accompanying notes are an integral part of
these financial statements.
4
XETEL CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Nine Months Ended
-------------------------- --------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales $ 30,590 $ 27,772 $ 111,108 $ 74,961
Cost of sales 29,308 26,842 105,369 70,015
---------- ---------- ---------- ----------
Gross profit 1,282 930 5,739 4,946
Selling, general and administrative
expenses 1,606 1,536 4,945 4,790
---------- ---------- ---------- ----------
(Loss) income from operations (324) (606) 794 156
Other (expense) income, net (177) (20) (579) 50
---------- ---------- ---------- ----------
(Loss) income before income taxes (501) (626) 215 206
(Benefit) provision for income taxes (190) (238) 81 78
---------- ---------- ---------- ----------
Net (loss) income $ (311) $ (388) $ 134 $ 128
========== ========== ========== ==========
Basic (loss) earnings per share $ (0.03) $ (0.04) $ 0.01 $ 0.01
========== ========== ========== ==========
Basic weighted average shares
outstanding 9,118 8,840 9,062 8,824
========== ========== ========== ==========
Diluted (loss) earnings per share $ (0.03) $ (0.04) $ 0.01 $ 0.01
========== ========== ========== ==========
Diluted weighted average shares
outstanding 9,118 8,840 9,450 9,558
========== ========== ========== ==========
The accompanying notes are an integral part of
these financial statements.
5
XETEL CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended Nine Months Ended
-------------------------- --------------------------
December 26, December 27, December 26, December 27,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Cash flows from operating activities:
Net (loss) income $ (311) $ (388) $ 134 $ 128
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Depreciation and amortization 740 657 2,189 2,027
(Gain) loss on disposal of equipment (40) 19 (48) 35
Change in operating assets and liabilities:
Decrease (increase) in--
Trade accounts receivable 4,908 (2,092) 4,409 (2,359)
Inventories 565 (1,048) (1,369) (5,671)
Prepaid expenses and other 14 (121) (295) 449
Increase (decrease) in--
Trade accounts payable 231 2,539 (6,476) 5,418
Accrued expenses and other liabilities 1,077 (531) 2,157 (9)
---------- ---------- ---------- ----------
Cash provided by (used for) operating activities 7,184 (965) 701 18
---------- ---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of equipment 129 9 138 408
Purchases of property and equipment (365) (1,137) (1,340) (4,998)
---------- ---------- ---------- ----------
Cash used for investing activities (236) (1,128) (1,202) (4,590)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Net (repayments) borrowings under debt agreements (7,127) 1,250 230 3,208
Cash proceeds from stock issued under
employee stock purchase plan 136 253 290 253
Proceeds from stock options exercised -- 25 51 62
---------- ---------- ---------- ----------
Cash (used for) provided by financing activities (6,991) 1,528 571 3,523
---------- ---------- ---------- ----------
(Decrease) increase in cash and cash equivalents (43) (565) 70 (1,049)
Cash and cash equivalents, beginning of period 7,352 6,548 7,239 7,032
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ 7,309 $ 5,983 $ 7,309 $ 5,983
========== ========== ========== ==========
The accompanying notes are an integral part of
these financial statements.
6
XETEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 BUSINESS
XeTel provides advanced design and prototype services, manufactures
sophisticated surface mount assemblies and supplies turnkey electronic
manufacturing solutions to original equipment manufacturers primarily in the
telecommunications, networking and computer industries. XeTel incorporates its
design and prototype services and assembly capabilities together with materials
management, advanced testing, systems integration services and order fulfillment
to provide comprehensive electronic manufacturing solutions for its customers.
NOTE 2 BASIS OF PRESENTATION
The accompanying financial statements have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules or regulations.
In the opinion of management, the financial statements reflect all adjustments,
consisting only of normal recurring adjustments necessary for a fair
presentation of the financial position, operating results, and cash flows for
those periods presented. The results of operations for the period ended December
26, 1998 are not necessarily indicative of the results that may be expected for
any other interim period or for the fiscal year ending March 27, 1999. These
financial statements should be read in conjunction with the financial
statements, and notes thereto, for the fiscal year ended March 28, 1998 as
presented in the Company's 10-K filed with the SEC.
NOTE 3 INVENTORIES
Inventories consist of the following (in thousands):
December 26, March 28,
1998 1998
---------- ----------
Raw materials $ 16,048 $ 13,944
Work in progress 3,115 3,731
Finished goods 267 386
---------- ----------
$ 19,430 $ 18,061
========== ==========
As of December 26, 1998 and March 28, 1998, the Company had allowances for
obsolete raw materials (principally printed circuit board assembly components)
of $490,000 and $490,000, respectively. Cost of sales for the three and nine
months ended December 26, 1998 and December 27, 1997 include provisions to the
allowance for obsolete materials of $1,000, $133,000, $0 and $126,000,
respectively.
NOTE 4 PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following (in thousands):
December 26, March 28,
1998 1998
---------- ----------
Machinery and equipment $ 13,747 $ 13,204
Furniture and fixtures 937 838
Leasehold improvements 3,978 3,506
---------- ----------
18,662 17,548
Less: Accumulated depreciation
and amortization (10,403) (8,593)
---------- ----------
$ 8,259 $ 8,955
========== ==========
7
NOTE 5 NOTES PAYABLE AND LONG-TERM DEBT
The Company has (i) a revolving line of credit for $17.0 million from a
commercial bank, (ii) a term loan facility for $3.3 million from a commercial
bank, and (iii) an equipment financing facility from a financial services
company. There was $5.9 million and $5.3 million outstanding under the
commercial bank line of credit and $2.8 million and $3.3 million outstanding
under the term note at December 26, 1998 and March 28, 1998, respectively. The
term loan facility bears interest at 9.2%, is secured by certain assets, and
matures on August 31, 2000.
The $17.0 million line of credit bears interest at LIBOR plus 1.25% or 1.75%,
depending on certain financial ratios, and/or prime (such rate determined based
upon the amounts and period of loans), matures on August 31, 1999 and is secured
by certain assets of the Company. The facility requires payment of a commitment
fee equal to one-eighth of 1% (1/8%) on the unused balance, and borrowings are
limited based upon certain collateral availability requirements The equipment
financing facility provides for the leasing of equipment over a five-year period
commencing on the date of acceptance of such equipment. All equipment leased to
date under this facility has qualified for operating lease treatment.
The financing facilities contain certain restrictions which include maintenance
of a minimum level of tangible net worth and other operating and financial
ratios. At December 26, 1998, the Company was in compliance with all debt
covenants.
Interest paid totaled $218,000, $584,000, $100,000 and $157,000 for the three
and nine months ended December 26, 1998 and December 27, 1997, respectively.
NOTE 6 LEASE COMMITMENTS
XeTel leases its operating facilities and certain office equipment under
noncancellable operating leases. Rental expense under all operating leases was
approximately $1.1 million, $3.2 million, $790,000 and $2.1 million during the
three and nine months ended December 26, 1998 and December 27, 1997,
respectively. Future noncancellable minimum rental payments under all operating
leases with initial terms of greater than one year are $4,038,000 in 1999,
$4,044,000 in 2000, $3,807,000 in 2001, $2,931,000 in 2002, $2,111,000 in 2003
and an aggregate of $7,490,000 thereafter.
NOTE 7 RELATED PARTY TRANSACTIONS
The Company has transactions with certain divisions of Rohm Corporation, a
wholly-owned subsidiary of Rohm U.S.A., Inc. ("Rohm") a subsidiary of Rohm Co.,
Ltd., Japan, during the normal course of business. Rohm owned approximately 47%
of the Company's outstanding common stock as of December 26, 1998. Purchases
from such divisions were $40,000 , $121,000, $35,000 and $171,000 for the three
and nine months ended December 26, 1998 and December 27, 1997, respectively.
Accounts payable to such divisions were $24,000 and $14,000 as of December 26,
1998 and March 28, 1998, respectively. Accounts receivable from such divisions
were not significant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this document contains trend analysis and other forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Actual results could differ materially from those projected in the
forward-looking statements throughout this document as a result of the risk
factors set forth below and other risks described in the Company's other filed
SEC documents such as those associated with the Company's initial public
offering and Form 10-K filing.
OVERVIEW
XeTel was founded in 1984. In 1986, Rohm, a diversified electronics company,
acquired a controlling interest in the Company. Since its inception, the Company
has manufactured surface mount assemblies and performed other manufacturing
services for OEMs in the electronics industry. In a number of cases, such
services were rendered during periods in which customers were experiencing
fluctuations in demand for their products. During such periods, the Company's
net sales and operating results were and are subject to significant fluctuations
that often were and are tied to the market demand for its customers' products,
competitive factors and the customers' need to utilize independent manufacturers
to maintain sufficient product supply to meet such demand.
Annual and/or quarterly gross margins and operating results are also affected by
the level of capacity utilization of manufacturing facilities, indirect labor
and selling, general and administrative expenses. Accordingly, gross margins and
operating income margins have generally improved during periods of high volume
and high capacity utilization. XeTel generally has idle capacity and reduced
operating margins during periods of lower volume.
8
In an effort to achieve greater stability and higher gross margins, the Company
made the strategic decision in 1993 to reduce its dependence on the computer
industry and expand its service offerings in order to establish long-term
relationships with targeted customers in diversified markets. With the addition
of new management personnel in 1993, including a new President in September
1993, the Company focused certain of its resources to establish capabilities in
product design and prototype, improve materials management processes,
restructure the Company's management organization, establish dedicated customer
teams, and to expand and diversify its customer base. The Company has reduced
its role as a source of additional capacity for OEMs during periods of
fluctuating product demand and has positioned itself to provide a more
comprehensive set of services within the electronics manufacturing services
industry.
The development and growth of the Company's business has generally followed the
trend by OEMs in the electronics industry to outsource certain of their
manufacturing requirements. Recognizing the benefits offered by using
independent manufacturers, OEMs in the electronics industry have increasingly
relied on independent manufacturers not only as a source of additional
manufacturing capacity during periods of fluctuating demand, but as the primary
source for their manufacturing and assembly needs. In addition, the Company has
developed competencies in additional areas where it can add value to its
customers' requirements, such as design, prototype, systems integration and
order fulfillment and has sought to use such competencies to forge long-term
relationships as a single source provider of comprehensive electronic
manufacturing solutions for its customers. During fiscal 1997, XeTel acquired
two full-service manufacturing services centers in Dallas, Texas and San Ramon,
California to further establish and expand its long-term relationships with
OEM's of advanced electronic products.
RISK FACTORS
The following summary of risk factors relevant to an investment in shares of the
Company's common stock is derived, in part, from the section captioned "Risk
Factors" in the prospectus of the Company dated February 13, 1996 (the
"Prospectus"), as filed with the Securities and Exchange Commission (the
"Commission") pursuant to the initial registration of shares of common stock of
the Company under the Securities Act of 1933, as amended (the "Securities Act").
This discussion does not purport to be complete and is subject to, and qualified
by, the discussion of risk factors set forth in the Prospectus. A copy of the
Prospectus may be inspected without charge at the Commission's principal offices
in Washington, D.C. and copies of all or any part thereof may be obtained from
such office upon payment of prescribed fees. The Commission also maintains a
World Wide Website which provides online access to reports, proxy and
information statements and other information regarding registrants that they
file electronically with the Commission (including the Company) at the address
http:// www.sec.gov.
Fluctuations in Operating Results. XeTel's operating results are affected by a
number of factors, including timing of orders from and shipments to major
customers, availability of materials and components, the volume of orders
relative to the Company's capacity, timing of expenditures in anticipation of
future sales, the gain or loss of significant customers, variations in the mix
between consignment and component purchase arrangements with customers,
variations in the demand for products in the industries served by the Company
and general economic conditions. Operating results can also be significantly
influenced by the development and introduction of new products or technologies
by the Company's customers, or such customer's competitors, which may materially
and adversely affect the demand for the Company's services. The Company's
customers generally require short delivery cycles, and a substantial portion of
the Company's backlog is typically scheduled for delivery within 120 days. In
the absence of substantial backlog, quarterly sales and operating results depend
on the volume and timing of bookings received during the quarter which can be
difficult to forecast. Backlog fluctuations affect the Company's ability to plan
production and inventory levels, which could lead to fluctuations in operating
results. Variations in the size and delivery schedules of purchase orders
received by the Company, changes in customers' delivery requirements, or the
rescheduling or cancellation of orders and commitments, may result in
substantial fluctuations in backlog from period to period. Accordingly, the
Company believes that backlog may not be a meaningful indicator of future
operating results.
A significant portion of the Company's expenses is relatively fixed in nature
and planned expenditures are based in part on anticipated orders. The inability
to adjust expenditures quickly enough to compensate for a decline in net sales
may magnify the adverse impact of such decline in the Company's results of
operations. Due to the factors noted above and elsewhere in this Form 10-Q and
other filings with the Securities and Exchange Commission, the Company's future
earnings and stock price may be subject to significant volatility, particularly
on a quarterly basis. Past financial performance should not be considered a
reliable indicator of future performance and investors should not use historical
trends to anticipate results or trends in future periods. Any shortfall in
revenue and earnings from the levels anticipated by securities analysts could
have an immediate and significant effect on the trading price of the Company's
common stock in any given period. Also, the Company participates in a highly
dynamic industry which often results in volatility of the Company's common stock
price.
Concentration of Customers. The Company's customer base is highly concentrated.
The Company's three largest customers accounted for approximately 39%, 7% and
7%, respectively, of net sales for the nine months ended December 26, 1998. The
Company anticipates that a significant portion of its sales will continue to be
concentrated in a relatively small number of customers for the foreseeable
future. In addition, the Company's objective is to develop new and expand
existing relationships with leading and emerging OEM's in the electronics
industry. Such emerging growth and technology companies tend to have limited
operating histories, and also may have changes in
9
management and limited capitalization. As a result, the Company may experience
difficulties in maintaining long-term relationships with these customers and in
receiving payment for services rendered to them. To the extent that any
significant customers of the Company terminate their relationship with the
Company, or the Company is unable, for any reason, to receive payment for its
services, the Company's business, financial condition and results of operations
likely would be materially and adversely affected.
Unavailability of Components and Materials. Components and material used by
XeTel in producing surface mount assemblies and turnkey solutions are purchased
by XeTel from approved suppliers of its customers. Any failure on the part of
suppliers to deliver required components to the Company or any failure of such
components to meet performance requirements could impair the Company's ability
to meet scheduled shipment dates and could delay sales of systems by the
Company's customers and thereby adversely affect the Company's business,
financial condition and results of operations. The Company has in the past
experienced shortages of certain types of electronic components, and may
experience shortages of certain electronic components that are in short supply
generally within the electronics industry. Component shortages or price
fluctuations, to the extent not absorbed by customers under its agreements with
the Company, could have a material adverse effect on the Company's business,
financial condition and results of operations. Certain components used in a
number of the Company's customer programs are obtained from a single source.
Variability of Customer Requirements; Absence of Long-Term Purchase Orders. The
level and timing of purchase orders placed by the Company's customers are
affected by a number of factors, including variation in demand for the
customer's products, customer attempts to manage inventory and changes in the
customer's manufacturing strategies. Many of such factors are outside of the
control of the Company. The Company typically does not obtain long-term purchase
orders or commitments, but instead works with its customers to develop
nonbinding forecasts of the future volume of orders. Based on such nonbinding
forecasts, the Company makes commitments regarding the level of business that it
will seek and accept, the timing of production schedules and the levels and
utilization of personnel and other resources. Generally, customers may cancel,
reduce or delay purchase orders and commitments without penalty, except for
payment for services rendered, materials purchased or procured and, in certain
circumstances, charges associated with such cancellation, reduction or delay.
Significant or numerous cancellations, reductions or delays in orders by
customers, or inability by customers to pay for services provided by the Company
or to pay for components and materials purchased by the Company on such
customer's behalf, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Management of Growth and Expansion. The Company's design, prototype, assembly
and turnkey solutions business and multi-site locations have grown rapidly in
recent years. This growth has increased the Company's fixed costs and required
it to hire additional personnel. Furthermore, the Company plans to establish
additional regional manufacturing services centers which will increase the
Company's fixed costs and will require additional personnel. A continuing period
of rapid growth, including geographic expansions, could place a significant
strain on the Company's management, operations and other resources. The
Company's ability to manage its growth will require it to manage its existing
resources more efficiently, to continue to invest in its operations, including
its financial and management information systems and internal process controls,
and to retain, motivate and manage its employees. If the Company's management is
unable to manage growth effectively, the quality of the Company's services and
its ability to retain key personnel could be materially and adversely affected,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
Year 2000 Compliance. In fiscal 1998, the Company began a year 2000 data
assessment project to address all necessary code changes, testing and
implementation for all of its systems. Many of the Company's business and
operating systems are currently year 2000 compliant, and therefore, the Company
is undertaking additional efforts to identify and modify those systems which may
not be year 2000 compliant. Anticipated spending for the year 2000 date
conversion project will be expensed as incurred or new software will be
capitalized and amortized over the software's useful life and is not expected to
have a significant impact on the Company's results of operations. Project
completion is planned during calendar 1999 as described below. The costs of the
project and the date on which the Company believes it will complete the year
2000 modifications are based on management's best estimates, which are derived
utilizing numerous assumptions of future events, including the continuous
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties. In addition, there can be no
assurance that the systems of other companies on which the Company's systems
rely will be converted on a timely basis or that such failure by another company
to convert would not have an adverse effect on the Company's systems.
RESULTS OF OPERATIONS
Net sales for the three months ended December 26, 1998 increased 10% to $30.6
million from $27.8 million in the prior year's third quarter. The higher sales
levels primarily represent increased shipments to the Company's major customers
in the networking and computer segments of the electronics market.
Net sales for the nine months ended December 26, 1998 increased 48% to $111.1
million from $75.0 million for the comparable year period. The higher sales were
mainly attributable to increased shipments to major customers in the networking
and computer segments of the electronics market.
10
Gross profit for the three months ended December 26, 1998 increased to $1.3
million from $.9 million in the comparable year period. Gross profit is defined
as net sales less cost of sales. Cost of sales consists of direct labor, direct
material and manufacturing overhead (which includes manufacturing and process
engineering expenses). Gross margin (gross profit as a percentage of net sales)
increased to 4.2% for the third quarter of fiscal 1999 from 3.3% for the
comparable year period. The increase in gross profit and gross margin mainly
reflects sales gains associated with the addition of several new customers.
Gross profit for the nine months ended December 26, 1998 increased to $5.7
million from $4.9 million in the comparable year period. The increase in gross
profit primarily resulted from higher sales levels which provided increased
coverage of fixed expenses. Gross margin decreased to 5.2% versus 6.6% for the
comparable year period. The decrease in gross margin during the first nine
months primarily represented changes in product mix towards higher material
content customer programs and increased costs relating to facility and equipment
upgrades.
Selling, general and administrative ("SG&A") expenses consist primarily of
salaries and related expenses, marketing and promotional expenses, and sales
commissions paid to direct sales personnel and independent sales representative
organizations. SG&A expenses for the three months ended December 26, 1998
remained relatively flat at $1.6 million compared to $1.5 million in the
corresponding period last year. SG&A expenses represented 5.3% of net sales for
the three months ended December 26, 1998 compared to 5.5% for the three months
ended December 27, 1997. The decrease in SG&A expenses as a percentage of sales
reflects the effects of cost controls and higher sales levels.
SG&A expenses for the nine month period increased slightly to $4.9 million from
$4.8 million in the comparable nine month period. SG&A expenses represented 4.5%
of net sales compared to 6.4% of sales in the prior year as a result of higher
sales and firm cost control.
Other (expense) income, net for the three months ended December 26, 1998
reflected expense of $177,000 compared to expense of $20,000 in the
corresponding period in fiscal 1998. Other (expense) income, net for the nine
months ended December 26, 1998 was a net expense of $579,000 compared to income
of $50,000 in the corresponding prior year period. The change in other (expense)
income is mainly due to interest expense incurred on borrowings under the term
note and revolving line of credit.
The benefit for income taxes of $190,000 and $238,000 for the three months ended
December 26, 1998 and December 27, 1997, respectively, reflect an effective tax
rates of 38%. The provision for income taxes of $81,000 and $78,000 for the nine
months ended December 26, 1998 and December 27, 1997, respectively, reflects an
effective tax rate of 38%.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $22.0 million and $21.0 million as of December 26, 1998 and
March 28, 1998, respectively. In addition to the Company's working capital as of
December 26, 1998, which includes cash and cash equivalents of $7.3 million, the
Company has $15.7 million available from unused credit facilities.
Net cash provided by operating activities during the third fiscal quarter was
$7.2 million on lower sequential sales levels and $701,000 during the nine month
period ended December 26, 1998. Net cash used for operating activities and net
cash provided by operating activities was $965,000 and $18,000 during the three
and nine month periods ended December 27, 1997.
Capital expenditures during the three and nine months ended December 26, 1998
and December 27, 1997 were $365,000, $1.3 million, $1.1 million and $5.0
million, respectively. The decrease in capital expenditures was primarily due to
capital investments made in the prior year associated with the Company's new
manufacturing and administrative facilities in Austin, Texas with no comparable
capital expenditures in fiscal 1999.
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 31,
1999 and is secured by certain assets of the Company. The bank facility requires
the payment of a monthly commitment fee equal to one-eighth of 1% (1/8%) on the
unused balance, and borrowings are limited based upon certain collateral
availability requirements. The term loan facility bears interest at 9.2% with a
maturity of August 31, 2000. The equipment financing facility provides for the
leasing of equipment over a five-year period commencing on the date of
acceptance of such equipment.
The financing facilities contain certain restrictions which, among other things,
require maintenance of a minimum level of tangible net worth and other operating
and financial ratios.
The Company believes its working capital, together with cash flows from
operations and financing facilities, will be sufficient to meet operating and
capital requirements through its 1999 fiscal year end.
11
BACKLOG
The Company's backlog as of December 26, 1998 was approximately $90.3 million
compared to approximately $73.4 million as of September 26, 1998, $114.8 million
as of June 27, 1998 and $112.3 million at March 28, 1998. Backlog consists of
purchase orders received by the Company and commitments under scheduled
releases, both of which generally specify delivery dates within twelve months.
Variations in the size and delivery schedules of purchase orders received by the
Company, as well as changes in customers' delivery requirements or the
rescheduling or cancellation of orders and commitments, has resulted in the past
and may result in substantial fluctuation in backlog from period to period.
Accordingly, the Company believes that backlog may not be a meaningful indicator
of future operating results. See "Variability of Customer Requirements" and
"Fluctuations in Operating Results."
EMPLOYEES
As of December 26, 1998, the Company had 600 full-time employees supplemented
from time to time by part-time employees. The employees are not represented by a
union, and the Company believes its employee relations to be satisfactory.
The Company's success depends to an extent upon the continued services of
several key employees. The loss of certain key personnel could have a material
adverse effect on the Company. The Company's business also depends upon its
ability to continue to attract and retain senior managers and skilled employees.
Failure to do so could adversely affect the Company's operations.
YEAR 2000 COMPLIANCE
Many currently installed systems and software products are coded to accept only
two digit entries in the date code field. These date code fields will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result computer systems and/or software used by many companies will
need to be upgraded to comply with such "Year 2000" requirements.
An assessment of internal changes required has been performed and the Company
has determined that it will be necessary to upgrade its network operating
systems, test equipment, electronic mail systems, custom reports and PC BIOS so
that its computer systems will be Year 2000 compliant. These modifications and
replacements are being and will continue to be made in conjunction with the
Company's overall information systems initiatives. In addition, the Company is
contacting third-party vendors and continue to ensure that any of their products
that are incorporated into the Company's products or currently in use by the
Company can adequately deal with the change in century. Areas being addressed
include major third-party suppliers of components of the Company's products as
well as full reviews of the Company's manufacturing equipment, telephone and
voice mail systems, security systems and other office support systems. The
Company has also initiated formal communications with significant suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. No significant
information technology initiatives have been deferred by the Company as a result
of its Year 2000 project.
Since 1998, the Company has made Year 2000 compliance a priority in purchasing
and installation decisions. The Company's information systems department has
adopted a Year 2000 compliance program to assess and address any Year 2000
issues which remain related to the Company's information technology systems and
equipment. The following is a table showing the Company's status of the Year
2000 program based on management's assessment:
YEAR 2000 COMPLIANCE PROGRAM STATUS
AS OF DECEMBER 26, 1998
Percent Estimated
Phase Complete Completion Date
- ----- -------- ---------------
Assessment of internal changes required 100% Complete
Major supplier readiness risk assessment 75% June 1999
Upgrades of commercial and internal 70% June 1999
applications/products
As of December 26, 1998, the Company has spent approximately $45,000 of the
currently estimated $85,000 total cost of the program. Costs incurred and
expected to be incurred consist primarily of the cost of Company personnel
involved in updating applications and operating systems and the costs of
software updates and patches (many of which are provided free of charge from the
vendors). Such expenses are being funded through operating cash flows. The
Company has utilized the Company's internal technical personnel, and intends to
continue to use such personnel, to address Year 2000 issues, rather than
contract with third-party consultants.
12
Based on available information, the Company does not believe any material
exposure to significant business interruption exists as a result of Year 2000
compliance issues, or that the cost of remedial actions will have a material
adverse effect on its business, financial condition or results of operations.
Accordingly, and as the program is on schedule to be completed during the summer
of 1999, the Company has not formulated a worse case scenario or adopted any
formal contingency plan in the event its Year 2000 project is not completed in a
timely manner.
With respect to products manufactured by the Company based on third-party
designs, there can be no assurance that such products contain all necessary date
code changes necessary to ensure Year 2000 compliance. Although the Company has
not experienced any Year 2000-related product liability claims or lawsuits to
date, production of products that are not Year 2000 compliant may entail the
risk of such claims and lawsuits. The Company's defense against any future
lawsuits, regardless of their merit, could result in substantial expense to the
Company as well as the diversion of management time and attention. In addition,
Year 2000 product liability claims, regardless of the merit or eventual outcome
of such claims, could affect the Company's business reputation and its ability
to retain existing customers or attract new customers which, in turn, could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company believes that the purchasing patterns of customers and potential
customers may be significantly affected by Year 2000 issues. Many companies are
expending significant resources to correct, patch or replace their current
software systems to achieve Year 2000 compliance. These expenditures may result
in reduced funds available to develop new products and purchase services such as
those offered by the Company.
Significant uncertainty still exists as to the global implications of the Year
2000 issue. Costs of defending and resolving Year 2000-related disputes,
reductions in product development programs by customers or the failure of the
Company to adequately resolve internal Year 2000 compliance issues could result
in a material adverse effect on the Company's business, operating results and
financial condition.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Subsequent to the end of the quarterly period ended December 26, 1998, the
Company adopted a stockholder rights plan as described in the Company's Form 8-K
and Form 8-A filed with the SEC on January 5, 1999.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit Description
Number
11.1 Computation of Earnings per Share.
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
During the fiscal quarter ended December 26, 1998 no current reports on
Form 8-K were filed; however, on January 5, 1999, the Company filed a
Form 8-K announcing the adoption of a stockholder rights plan as of
December 31, 1998. The description and terms of the Rights are set
forth in a Rights Agreement dated as of December 31, 1998 between the
Company and American Stock Transfer & Trust Company, as Rights Agent
filed as an exhibit to the Company's Registration Statement on Form 8-A
filed with the SEC on January 5, 1999.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 9, 1998 By: /s/ Angelo A. DeCaro, Jr.
-------------------------------
Angelo A. DeCaro, Jr.
President and Chief Executive
Officer and Director
(Principal Executive Officer)
Date: February 9, 1998 /s/ Richard S. Chilinski
---------------------------------
Richard S. Chilinski
Vice President,
Chief Financial Officer
and Assistant Secretary
(Principal Financial and
Accounting Officer)
15
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
11.1 Computation of Earnings per Share.
27.1 Financial Data Schedule