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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: October 01, 1999
----------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _______________
Commission file number: 0-27992
ELAMEX, S.A. de C.V.
(Exact name of registrant as specified in its charter)
Mexico Not Applicable
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
Avenida Insurgentes No. 4145-B Ote.
Cd. Juarez, Chihuahua Mexico C.P. 32340
(Address of principal executive offices) (Zip code)
(915) 774-8252
Registrant's telephone number, including area code
in El Paso, Texas
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 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 |_|
The number of shares of Class I Common Stock, no par value of the
Registrant outstanding as of November 15, 1999 was:
6,866,100
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<PAGE>
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Balance Sheets as of
October 01, 1999 (unaudited) and December 31, 1998 ........ 1
Consolidated Condensed Statement of Earnings
for the Thirteen and Thirty-nine Week Periods
Ended October 01, 1999 (unaudited) and
September 27, 1998 (unaudited) ............................ 2
Consolidated Condensed Statements of Cash Flows
for the Thirty-nine Week Periods ended
October 01, 1999 (unaudited) and
September 27, 1998 (unaudited) ............................ 3
Notes to unaudited Consolidated Condensed
Financial Statements ...................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 8
Item 3. Qualitative and Quantitative Disclosures About Market
Risk ...................................................... 11
PART II. OTHER INFORMATION
Item 3. Defaults upon Senior Securities ........................... 12
Item 4. Submission of Matters to a Vote of Security Holders ....... 12
Item 5. Other Information ......................................... 12
Item 6. Exhibits and Reports on Form 8-K .......................... 12
SIGNATURES ............................................................... 13
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In U. S. Dollars)
October 01, December 31,
1999 1998
(Unaudited)
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 4,380,103 5,697,035
Receivables
Trade accounts, net 28,582,719 15,578,310
Other receivables 3,227,922 2,146,325
Related party note receivable -- 6,218,141
------------ ------------
Total receivables 31,810,641 23,942,776
------------ ------------
Inventories, net 20,285,314 14,331,006
Refundable income taxes 944,446 1,590,554
Prepaid expenses 2,438,659 836,854
------------ ------------
Total current assets 59,859,163 46,398,225
Property, plant and equipment, net 51,316,240 34,739,087
Goodwill 10,072,779 --
Other assets, net 595,584 531,292
------------ ------------
$121,843,766 81,668,604
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 21,678,810 --
Accounts payable 19,453,220 8,875,526
Accrued expenses 6,745,884 3,026,020
Current installments of long-term debt 598,000 --
Current obligations of capital leases 95,803 463,800
Taxes payable 590,203 614,476
Deferred income taxes, net 4,659,900 6,144,184
Due to related parties -- --
------------- -------------
Total current liabilities 53,821,820 19,124,006
Long-term debt, excluding current installments 2,955,000 --
Capital lease obligations, excluding current
obligations -- --
Other liabilities 440,866 347,032
Deferred income taxes, net 2,186,639 664,309
------------- -------------
Total liabilities 59,404,325 20,135,347
Minority Interest 1,747,796 2,441,365
Stockholders' equity:
Preferred stock, authorized 50,000,000
shares, none issued or outstanding -- --
Common stock, 22,500,000 authorized,
7,400,000 shares issued and
6,866,100 outstanding 35,060,468 35,060,468
Retained earnings 28,149,309 26,549,556
Treasury stock (2,518,132) (2,518,132)
------------- -------------
Total stockholders' equity 60,691,645 59,091,892
------------- -------------
Commitments and contingencies -- --
$ 121,843,766 81,668,604
============= =============
See accompanying notes to unaudited consolidated condensed financial statements.
1
<PAGE>
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In U. S. Dollars)
<TABLE>
<CAPTION>
13 Weeks ended 39 Weeks ended
---------------------------------------------------------------------------------------
October 01, 1999 September 27, 1998 October 01, 1999 September 27, 1998
(unaudited) (unaudited) (unaudited) (unaudited)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 48,456,405 30,757,355 112,152,388 89,730,920
------------ ---------- ----------- ----------
Cost of sales 44,232,229 27,146,426 101,549,960 78,989,327
------------ ---------- ----------- ----------
Gross Profit 4,224,176 3,610,929 10,602,428 10,741,593
------------ ---------- ----------- ----------
Operating expenses:
General and administrative 3,122,526 1,528,330 6,996,282 5,475,638
Selling 466,642 479,730 1,386,717 1,223,194
Research and development 224,512 284,242 1,227,657 1,273,863
------------ ---------- ----------- ----------
Total operating expenses 3,813,680 2,292,302 9,610,656 7,972,695
------------ ---------- ----------- ----------
Operating income (loss) 410,496 1,318,627 991,772 2,768,898
------------ ---------- ----------- ----------
Other income (expense):
Interest income 88,686 258,315 580,342 741,705
Interest expense (516,914) (42,706) (726,711) (132,163)
Other, net (147,605) 625,898 370,419 1,046,019
------------ ---------- ----------- ----------
Total other income (expense) (575,833) 841,507 224,050 1,655,561
------------ ---------- ----------- ----------
Income before income taxes
and minority interest (165,337) 2,160,134 1,215,822 4,424,459
Income tax provision 16,125 1,479,486 542,000 2,136,140
------------ ---------- ----------- ----------
Income before minority interest (181,462) 680,648 673,822 2,288,319
Minority interest 524,598 -- 925,931 --
------------ ---------- ----------- ----------
Net income $ 343,136 680,648 1,599,753 2,288,319
============ ========== =========== ==========
Basic and diluted income
per common share $ 0.05 0.09 0.23 0.31
Weighted average shares
outstanding 6,866,100 7,350,000 6,866,100 7,361,219
============ ========== =========== ==========
</TABLE>
2
<PAGE>
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In U. S. Dollars)
<TABLE>
<CAPTION>
39 Weeks Ended
---------------------------------
October 01, September 27,
1999 1998
(unaudited) (unaudited)
---------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,599,753 2,288,319
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,025,209 3,144,539
Allowance for doubtful trade accounts receivable (247,825) 167,849
Gain on sale of minority interest in plastics division -- (651,345)
Minority interest (930,035) 22,240
Allowance for excess and obsolete inventory 214,731 (413,848)
Deferred income taxes (benefit) expense (2,411,270) 526,450
Loss on disposal of equipment 158,275 163,438
Change in operating assets and liabilities, net of acquisition:
Trade accounts receivable (2,430,033) (2,525,401)
Other receivables (492,462) (2,077,501)
Inventories (2,315,820) 189,461
Prepaid expenses and refundable income taxes (508,384) (168,446)
Other assets 376,552 205,822
Accounts payable (111,839) 6,618,569
Accrued expenses and taxes payable 2,955,866 (1,585,560)
Other liabilities 93,834 40,603
Net cash provided by operating activities (23,448) 5,945,189
Cash flows from investing activities:
Proceeds from sale of investment security -- 2,080,000
Purchase of property, plant and equipment (5,771,358) (7,691,603)
Proceeds from sale of equipment 152,971 --
Business acquisition, net of cash acquired (19,852,562) --
Proceeds from sale of minority interest in plastics division, net -- 3,198,000
Advances to related party 6,218,141 --
Net cash used by investing activities (19,252,808) (2,413,603)
Cash flows from financing activities:
Net increase (decrease) in notes payable 18,378,810 --
Repayment of long-term debt (287,955) --
Principal repayments of capital lease obligations (367,997) (346,111)
Purchase of treasury stock -- (222,953)
Minority interest contribution 236,466 --
Issue of warrant -- 50,000
Net cash used by financing activities 17,959,324 (519,064)
Net (decrease) increase in cash and cash equivalents (1,316,932) 3,012,522
Cash and cash equivalents, beginning of period 5,697,035 13,597,581
Cash and cash equivalents, end of period $ 4,380,103 16,610,103
============ ============
</TABLE>
3
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
(1) General
The accompanying consolidated condensed financial statements of Elamex,
S.A. de C.V., and subsidiaries ("Elamex" or the "Company") are unaudited and
certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. While the management of the Company believes
that the disclosures presented are adequate to make the information presented
not misleading, interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes included in the
Company's 1998 annual report on Form 10-K.
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of the financial
position as of October 01, 1999, the results of operations for the thirteen and
thirty-nine week periods ended October 01, 1999 and September 27, 1998 and cash
flows for the thirty-nine week periods ended October 01, 1999 and September 27,
1999. The consolidated condensed balance sheet as of December 31, 1998 is
derived from the December 31, 1998 audited consolidated financial statements.
The results of operations for the thirty-nine week periods ended October 01,
1999 are not necessarily indicative of the results to be expected for the entire
year.
(2) Inventories
Inventories consist of the following:
October 01, December 31,
1999 1998
------------ ------------
Raw materials $ 15,797,230 $ 12,377,208
Work-in-process 1,780,847 602,679
Finished goods 4,082,225 2,429,125
------------ ------------
21,660,302 15,409,012
Reserve for excess and obsolete inventory (1,374,988) (1,078,006)
------------ ------------
$ 20,285,314 $ 14,331,006
============ ============
(3) Foreign Currency Translation
Included in "other, net" on the accompanying consolidated condensed
statements of earnings are foreign exchange gains (losses) of $3,043 and $27,984
for the thirteen and thirty-nine week periods ended October 01, 1999, and
$73,596 and ($284,889) for the thirteen and thirty-nine week periods ended
September 27, 1998.
4
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
Assets and liabilities denominated in pesos are summarized as follows in U. S.
dollars:
October 01, December 31,
1999 1998
----------- -----------
Cash and cash equivalents $ 383,288 $ 177,459
Other receivables 228,699 878,101
Prepaid expenses 3,031,127 1,851,550
Other assets, net 204,326 212,967
Accounts payable (1,350,888) (355,023)
Accrued expenses and other
liabilities (2,240,187) (1,190,945)
----------- -----------
Net non-U.S. currency position $ 256,365 $ 1,574,109
=========== ===========
(4) Research and Development
In January 1998, the Company signed a Preferred Stock Purchase Agreement
to purchase 2,525,000 shares of Series A 9% Cumulative Convertible Preferred
Stock ("Preferred Stock") of Optimag, Inc. ("Optimag"), a California
corporation. Optimag was formed to develop, manufacture, and market optical
inspection stations and electrical test equipment to companies that produce disk
drive heads, magnetic media, and optical heads and optical media.
The Company has consolidated the operations of this investment. As of
October 01, 1999 and September 27, 1998, $1.2 million and $ 1.3 million have
been expensed respectively for both thirty-nine week periods. As of October 01,
1999, the Company has purchased 2,733,164 shares of Preferred Stock for $1.00
per share, convertible into common stock 1 for 1, subsequently, the Company sold
its shares in Optimag on October 15, 1999 for $2.3 million plus an earnout to be
paid based upon sales for Calendar Year 2000.
(5) Acquisition of Precision Tool, Die, and Machine Company
On July 27, 1999, Elamex, S.A. de C.V. (the "Company") consummated the
purchase of all of the common stock of Precision Tool, Die & Machine Company,
Inc., a Kentucky corporation ("Precision"). The Company acquired the stock from
the shareholders of the privately held company for U.S. $20.3 million in cash.
The purchase price was determined through arm's length negotiations between the
Company and such shareholders. None of the shareholders of Precision had any
pre-existing relationship with the Company or any of its affiliates, directors,
officers or associates.
The purchase price was financed with cash on hand of the Company in the
amount of U.S. $5.3 million and a loan agreement with General Electric Capital
Corporation and Comerica Bank. Under such loan agreement ("the Facility") the
Company borrowed U.S. $15.0 million. The Facility allows the Company to borrow
up to 83.33% of a borrowing base reflecting the value of the Precision shares
plus certain accounts receivable. The Facility extends through February 01, 2000
with an option to renew for an additional 6 months and bears interest at a
floating rate of LIBOR + 3% per annum until February 01, 2001, then LIBOR + 3.5%
thereafter. The Facility provides an option to the Company to borrow subsequent
amounts in multiples of $2.5 million to a maximum of U.S. $20.0 million.
The Precision acquisition was accounted for as a purchase. The excess of
purchase price over the fair value of net assets acquired was $10.2 million,
and is being amortized on a straight line basis over 20 years. Amortization
expense during the thirteen weeks ended October 1, 1999 was $0.1 million. The
purchase price was financed with cash on hand of the Company in the amount of
U.S. $5.3 million plus loans from General Electric Capital Corporation and
Comerica Bank.
5
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
In connection with the acquisition of Precision, the Company assumed and
incurred certain debt. The terms and outstanding borrowings of this debt as of
October 01, 1999 are as follows:
<TABLE>
<CAPTION>
Amount Interest
Lender Type of Borrowing Outstanding Rate Minority Date
- ------ ----------------- ----------- ---- -------------
<S> <C> <C> <C> <C>
Bank One $3 million Line of Credit $2.45 million Prime-3/4% October 25, 1999
Bank One $4 million Line of Credit $ 4.0 million Prime -1/4% February 25, 2000
G.E. Capital Bridge Loan $7.61 million LIBOR + 300 February 1, 2000
Basis Points
Comerica Bridge Loan $7.61 million LIBOR + 300 February 1, 2000
Basis Points
Industrial Revenue Bonds Term Loan $3.55 million 5.67% March 31, 2007
</TABLE>
Proforma results of operations for the thirty-nine week periods ended
October 1, 1999 and September 27, 1998 as though the companies had combined at
the beginning of the periods presented are as follows:
Thirty-nine weeks Thirty-nine weeks ended
ended October 1, 1999 September 27, 1998
--------------------- ------------------
Net Sales 144,857,768 134,832,000
Net Income 1,451,016 2,014,890
Basic and diluted income per
common share 0.21 0.27
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
(6) Income Tax
The Company has applied Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. Under SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences of temporary
differences between the financial carrying amounts of assets and liabilities and
their respective tax bases. Deferred tax assets are also recognized for the
estimated future effects of tax loss carryforwards. Deferred tax assets are
reduced by any tax benefit, the realization of which is not considered to be
more likely than not.
In accordance with SFAS 109, the Company has calculated taxes based on its
operations subject to tax in Mexico as well as its operations subject to tax in
the U.S., resulting in an overall effective tax rate for the thirty-nine weeks
ended October 10, 1999 of approximately 45%. The primary differences between the
overall effective tax rate and the statutory rates of 35% for both Mexico and
the U.S. are currency and inflationary gains and losses in Mexico and
non-deductible goodwill in the U.S. In addition, the Company has established a
valuation allowance to offset the tax benefit associated with Optimag's tax loss
carryforwards in the U.S., as realization of these benefits are not considered
more likely than not at this time.
6
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
(7) Earnings per Share
Basic and diluted income per common share ("EPS") for the thirteen and
thirty-nine weeks ended October 01, 1999 and September 27, 1998 were calculated
using the weighted average number of common shares outstanding. The weighted
average number of common shares outstanding for the thirteen and thirty-nine
week periods ended October 01, 1999 were 6,866,100, and the weighted average
number of shares used to determine EPS were 7,350,000 and 7,361,219 for the
thirteen and thirty-nine week periods ended September 27, 1998, respectively.
The Company has no dilutive securities.
(8) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities and is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Given the Company's current operations and policies, the adoption of SFAS 133 is
not expected to have a material impact on the financial statements of the
Company.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use and is effective for financial statements with fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 has not had a
material impact on the Company's financial statements.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities (SOP 98-5). SOP 98-5 requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred and is effective for financial statements issued for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-5 has not had a
material impact on the Company's financial statements.
(9) Subsequent Events
The Company sold its shares in Optimag on October 15, 1999 for $2.3
million plus an earnout to be paid based upon sales for Calendar Year 2000.
7
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
General
The following table sets forth statements of earnings data as a percentage
of net sales, derived from the unaudited consolidated condensed financial
statements included elsewhere herein, for each period presented, unless
otherwise indicated.
Percentage of Net Sales
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------- -----------------------
October 01, September 27, October 01, September 27,
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales ..................... 100% 100% 100% 100%
Cost of sales ................. 91.3% 88.3% 90.5% 88.0%
Gross profit .................. 8.7% 11.7% 9.5% 12.0%
Selling, general and
administrative expenses ..... 7.4% 6.6% 7.4% 7.5%
Research and development ...... 0.5% 0.9% 1.1% 1.4%
Operating income .............. 0.8% 4.3% 0.9% 3.1%
Other income .................. -1.2% 2.7% 0.2% 1.8%
Income before income taxes and
minority interest ........... -0.3% 7.0% 1.1% 4.9%
Income tax provision .......... 0.0% 4.8% 0.5% 2.4%
Income before minority interest -0.4% 2.2% 0.6% 2.6%
Minority interest ............. 1.1% 0.0% 0.8% 0.0%
Net income .................... 0.7% 2.2% 1.4% 2.6%
</TABLE>
Net Sales for the thirteen weeks ended October 01, 1999 increased 57.5% to
$48.5 million from $30.8 million for the comparable period in 1998. Net sales
for the thirty-nine weeks ended October 01, 1999 increased 25.0% to $112.2
million from $89.7 million for the same period in 1998. The increase is
primarily due to the acquisition of Precision Tool, Die, and Machine Company in
July, 1999 and from new projects. For the thirteen and thirty-nine week periods
ended October 01, 1999, the Company's assembly sales decreased slightly, as
opposed to turnkey sales that increased in slight proportion compared to the
same period of 1998.
Gross Profit increased 17.0% to $4.2 million or 8.7% as a percentage of
sales for the thirteen weeks ended October 01, 1999, as compared to $3.6 million
or 11.7% as a percentage of sales for the same period of the prior year. Gross
profit decreased 1.3% to $10.6 million for the thirty-nine weeks ended October
01, 1999 from $10.7 million for the same period in 1998. The Gross Margin
decrease for the thirty-nine weeks was due to an increase in overhead expenses,
increase in the value of the peso during the period combined with domestic
inflation, and a change in product mix.
Selling, General and Administrative (SG&A) Expenses were $3.6 million for
the thirteen weeks ended October 01, 1999 and $2.0 million for the thirteen
weeks ended September 27, 1998. SG&A expenses increased as a percentage of sales
to 7.4% for the thirteen weeks ended October 01, 1999, compared to 6.5% for the
thirteen weeks ended the same period in 1998. This increase was driven by the
consolidation of Precision's operations, an exchange rate impact on peso
denominated expenses, and incremental operating and depreciation expenses coming
from an expanded computer system infrastructure and additional staffing in the
sales and marketing area. For the thirty-nine week periods ended October 01,
1999 and September 27, 1998, SG&A expenses were $8.4 million and $6.7 million
respectively, holding steady at approximately 7.5% as a percentage of sales.
Research and Development (R&D) represents in absolute dollars and as a
percentage of net sales, $0.2 million and 0.5%, respectively for the thirteen
weeks ended October 1, 1999. These are directly attributed to expenses incurred
by Optimag, Inc. ("Optimag"), a California corporation, in developing optical
stations and electrical test equipment for companies that produce disk drive
heads, magnetic media, and optical media. The Company sold its shares in Optimag
on October 15, 1999 for $2.3 million plus an earnout to be paid based upon sales
for Calendar Year 2000.
Operating Income decreased by 68.9% to $0.4 million, or 0.8% of net sales
and by 64.1% to $1.0 million, or 0.9% of net sales for the thirteen and
thirty-nine week periods ended October 01, 1999, from $1.3 million, or 4.3% of
net sales and $2.8 million, or 3.1% of net sales for the thirteen and
thirty-nine week periods ended September 27, 1998 respectively. The decrease in
operating income as a percentage of sales was a result of the gross profit
decrease for the thirteen and thirty-nine week periods, consolidation of
Precision's operations, an exchange rate impact on peso denominated expenses,
and incremental operating and depreciation expenses coming from an expanded
computer systems and ERP infrastructure.
8
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
Income tax provision decreased to $0.02 million for the thirteen weeks
ended October 01, 1999 compared to $1.5 million for the thirteen weeks ended
September 27, 1998. Similarly, the income tax provision decreased to $0.54
million for the thirty-nine weeks ended October 01, 1999 compared to $2.1
million for the thirty-nine weeks ended September 27, 1998. The decrease in the
income tax provision reflects the Company's decrease in pre-tax earnings for
each period, resulting from the consolidation of Precision's results, an
exchange rate impact on peso-denominated expenses, incremental operating and
depreciation expenses coming from an expanded computer systems and ERP
infrastructure, and inflationary effects in Mexico.
Liquidity and Capital Resources
The Company's working capital (defined as inventory plus trade and other
accounts receivable, minus accounts payable) showed an increase for this period.
As of December 31, 1998, the Company had working capital of $29.4 million
compared to $32.6 million at October 01, 1999. This increase was due to
increases in receivables and inventories which were partially offset by a
corresponding increase in accounts payable, all of them related mainly to the
Precision acquisition.
For the thirty-nine weeks ended October 1, 1999, the Company had net cash
provided by operating activities of $6.2 million. This was primarily funded by
net income of $1.6 million, depreciation and amortization of $4.0 million, a
decrease in related party receivables of $6.2 million, accrued expenses and
taxes payable of $2.9 million. This increase was partially offset by a deferred
income tax benefit of $2.4 million, increases in accounts receivable of $2.4
million, inventories of $2.3 million, and prepaid expenses and refundable income
taxes of $0.5 million.
Cash provided by operating activities partially financed additions of $5.8
million in property, plant, and equipment, and in investment of $19.8 million in
the Precision acquisition. Cash provided by financing activities included an
increase of $18.4 million in notes payable, which was partially offset by
repayments of $0.4 million in capital lease obligations and $0.3 million in long
term debt.
The Company had the following lines of credit and outstanding borrowings
as of October 01, 1999:
<TABLE>
<CAPTION>
Amount Interest
Lender of Class of Securities Type Outstanding Rate Maturity Date
- ----------------------------- ---- ----------- ---- -------------
<S> <C> <C> <C> <C>
Bank of America $10 million Line of Credit -- 8.31% December 15, 1999
GE Financial Capital Lease $0.10 million 7.92% December 15, 1999
Bank One $3 million Line of Credit $2.45 million Prime-3/4% October 25, 1999
Bank One $4 million Line of Credit $ 4.0 million Prime -1/4% February 25, 2000
G.E. Capital Bridge Loan $7.61 million LIBOR + 300 February 1, 2000
Basic Points
Comerica Bridge Loan $7.61 million LIBOR + 300 February 1, 2000
Basic Points
Industrial Revenue Bonds Term Loan $3.55 million 5.67% March 31, 2007
--------------
Total $25.32 million
==============
</TABLE>
Under its several credit agreements, the Company may not invest in or
advance significant amounts to other companies who are not a party to one of the
debt agreements. During the last three years, the Company has been in compliance
with all material covenants related to its debt obligations and credit
agreements. The Company intends to take out its short term debt with long term
borrowing.
On July 27, 1999, the Company consummated the purchase of all of the
common stock of Precision Tool, Die & Machine Company, Inc., a Kentucky
corporation ("Precision"). The Company acquired the stock from the shareholders
of the privately held company for U.S. $20.3 million in cash. The purchase price
was determined through arm's length negotiations between the Company and such
shareholders. None of the shareholders of Precision had any pre-existing
relationship with the Company or any of its affiliates, directors, officers or
associates.
9
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
The purchase price was financed with cash on hand of the Company in the
amount of U.S. $5.3 million and a loan agreement with General Electric Capital
Corporation and Comerica Bank. Under such loan agreement ("the Facility") the
Company borrowed U.S. $15.0 million. The Facility allows the Company to borrow
up to 83.33% of a borrowing base reflecting the value of the Precision shares
plus certain accounts receivable. The Facility extends through February 01, 2000
with an option to renew for an additional 6 months and bears interest at a
floating rate of LIBOR + 3% per annum until February 01, 2001, then LIBOR + 3.5%
thereafter. The Facility provides an option to the Company to borrow subsequent
amounts in multiples of $2.5 million to a maximum of U.S. $20.0 million. The
shares of Precision are held by Elamex, USA, Inc., a wholly owned subsidiary of
the Company.
The Company lent $6.2 million to a related party during 1998 for the
construction of a facility which the Company plans to lease from the related
party and occupy in the fourth quarter, 1999. The note receivable was paid in
full during the second quarter, 1999.
Research & Development
In each of the thirty-nine week periods ended October 01, 1999 and
September 27, 1998, approximately $1.2 million has been expensed as research and
development costs. Research and development costs are fully attributable to
expenses incurred by Optimag in developing optical stations and electrical test
equipment for companies that produce disk drive heads, magnetic media, and
optical media. Six Beta units that were in the field undergoing Beta evaluations
at several OEMs in the magnetic head business have been sold and verbal
commitments have been received for six additional units. The Company has
committed to make an additional investment of up to $1.0 million during 1999,
subject to Optimag's achieving certain performance objectives.
Year 2000 Issue
The Company's state of readiness:
The Company has formed a Year 2000 task force, consisting of team members
from various departments. The Company's Year 2000 task force is proceeding on
schedule to identify and address those software programs and embedded chips that
for IT and non-IT systems may interpret "00" as the year 1900 instead of the
year 2000. The task force is responsible for all Company locations throughout
Mexico as well as reviewing relationships with entities external to the
organization both in Mexico and abroad. An inventory of all Elamex internal
systems that are expected to be affected by the Year 2000 issue has been
completed. The task force completed most of its testing during the fourth
quarter of 1998, has developed solutions to the problems it has identified, and
will continue to test if and when there is a material change in equipment or
operating system. The task force is concentrating on three areas critical to the
operations of the Company: manufacturing and industrial facilities, information
technology infrastructure, and third-party suppliers and customers (supply chain
management).
A contingency plan has been developed. The Company has significantly
increased its inventory levels, and has reached an agreement in principal with a
programming firm for five weeks that would cover part of January and part of
February, 2000. The objective is to have available programming resources to fix
unidentified problems.
Manufacturing and Industrial Facilities
The Company believes that its industrial facilities are not Year 2000
sensitive. With regards to manufacturing equipment, the Company has identified
the equipment Elamex believes will be affected by the Year 2000 issue. The
Company has finished updating programs with Year 2000 compliant software and has
finished testing such programs for compliance.
Information Technology Infrastructure
A majority of the Company's software programs that support day-to-day
operations are commercial products. There is little reliance on internally
developed programs. As a result, Year 2000 issues have been addressed by
integrating vendor upgrades that will ensure that these software programs are
Year 2000 compliant.
10
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
Three of the most important software systems that Elamex uses are the JD
Edwards Enterprise Resource Planning ("ERP") software, Payroll and Human
Resources, and Customs. In the third Quarter of 1998, the Company completed the
installation of the Y2K compliant ERP software on which a majority of the
Company's operations are performed. Our Payroll and Human Resources System has
been tested and an upgrade was installed during August, 1999. During the fourth
Quarter of 1998, the Company tested the ERP software and Customs software for
importing and exporting purposes, and found them to be Y2K compliant.
All of the Company's systems hardware has been certified as Year 2000
compliant by its vendors. During the fourth Quarter of 1998 the Company tested
the complete network infrastructure. The results of the test helped to identify
certain problems with some personal computers used in non-critical processes.
The task force identified potential problems with two PBX systems late in 1998.
The task force has concluded that the PBX system will not present a year 2000
problem.
Supply Chain Management
Supply chain management includes the process of identifying those
suppliers and customers that are most critical to support the operations of the
Company. In some instances Elamex uses raw materials from vendors who have been
approved by Elamex' customers. The task force has identified critical vendors
and has requested from them, in writing, their plans and progress in addressing
the Year 2000 issue, in the form of a survey. Approximately 90% of the Company's
critical vendors have satisfactorily responded to the survey. The Company's
contingency plan consists of the Company's working with its customers to follow
up with those vendors who have failed to respond or who have not responded in a
satisfactory manner. The Company is always evaluating potential vendors for
their Year 2000 readiness. In addition, the contingency plan includes using
alternate vendors as the need arises during the fourth Quarter of 1999.
Cost of Addressing the Year 2000 Issues:
The Company has invested approximately $2.9 million in the implementation
of the new ERP software. Because the software was purchased to enhance the
performance of key areas of the Company as well as improving information
available for managerial decisions and customer satisfaction, costs associated
with the implementation have been capitalized. The Company has included
approximately $0.4 million in its 1999 budget to address the Year 2000 issue.
Risks Associated with the Company's Year 2000 Issues:
Failure to properly address the Year 2000 issue can result in an
interruption of the normal business activities of the Company. Because of the
uncertainty inherent in the Year 2000 issue, and the unfinished efforts of the
task force to identify those critical customers and suppliers that are not or
will not be Year 2000 compliant, the Company is unable, at this time, to
determine the impact any Year 2000 failures will have on the Company's results
of operations, liquidity or financial condition. Nonetheless, the Company
believes that it is taking the appropriate steps to reduce its risk of possible
interruptions or failures that could adversely impact the viability of the
Company.
Forward Looking Comments
This Form 10-Q includes forward-looking statements that involve risks and
uncertainties, including, but not limited to, risks associated with the
Company's future growth and profitability, the ability of the Company to
continue to increase sales to existing customers and to new customers and the
effects of competitive and general economic conditions.
There can be no assurance that the Company's principal customers will
continue to purchase products and services from the Company at current levels,
if at all, and the loss of one or more major customers could have a material
adverse effect on the Company's results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company has financial instruments that involve market risks and
uncertainties. For information regarding the Company's exposure to market risks,
see Item 7A of the Company's Form 10-K.
11
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
PART II
OTHER INFORMATION
Item 1. Legal proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Security Holders during the period
covered by this report.
Item 5. Other Information
Elamex, S.A. de C.V. intends to provide periodic reports pursuant to
Section 13 of the Securities Exchange Act of 1934, as amended, and the rules
promulgated thereunder. It expects that its annual reports will be filed on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, or
equivalent forms, following the customary time deadlines therefor; but, as a
foreign private issuer, it is entitled to report on Form 20-F and Form 6-K and
it hereby reserves all of its rights to use such forms or their equivalent as
permitted for such an issuer under applicable laws, rules and regulations.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------ -----------
3 Estatutos Sociales (By-Laws) of the Registrant (including English
translation).*
*Filed as an exhibit to the Company's Registration Statement on Form S-1, file
No. 333-01768
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the quarter ended
October 01, 1999.
i) On July 27, 1999, the Company filed a Form 8-K reporting the
acquisition of Precision Tool, Die, and Machine Company.
<PAGE>
ELAMEX, S.A. de C.V. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
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, in Ciudad Juarez, Chihuahua, Mexico.
ELAMEX, S.A. de C.V.
Date: November 22, 1999 By: /s/ Hector M. Raynal
------------------------------------
Hector M. Raynal
President and Chief Executive Officer
(Duly Authorized Officer)
Date: November 22, 1999 By: /s/ Carlos D. Martens
------------------------------------
Carlos D. Martens
Vice-President of Finance and
Chief Financial Officer
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