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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: April 04, 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 May 14, 1999 was:
6,866,100
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<PAGE>
<TABLE>
<CAPTION>
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Consolidated Condensed Balance Sheets as of
April 04, 1999 (Unaudited) and December 31, 1998...............................1
Consolidated Condensed Statements of Earnings for the thirteen weeks
ended April 04, 1999 (Unaudited) and March 29, 1998 (Unaudited)................2
Consolidated Condensed Statements of Cash Flows for the thirteen weeks
ended April 04, 1999 (Unaudited) and March 29, 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............................................7
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
</TABLE>
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In U. S. Dollars)
April 04, December 31,
1999 1998
(Unaudited)
---------------- ----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ $
1,390,168 5,697,035
Receivables
Trade accounts, less allowance for doubtful accounts 16,056,504 15,578,310
Other receivables 4,134,634 2,146,325
Related party note receivable 7,576,869 6,218,141
---------------- ----------------
Total receivables 27,768,007 23,942,776
Inventories, net 15,572,831 14,331,006
Refundable income tax 2,104,884 1,590,554
Prepaid expenses 1,446,542 836,854
---------------- ----------------
Total current assets 48,282,432 46,398,225
Property, plant and equipment, net 34,345,349 34,739,087
Other assets, net 499,113 531,292
================ ================
$ 83,126,894 $ 81,668,604
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 9,133,302 $ 8,875,526
Accrued expenses 3,891,275 3,016,967
Current obligations of capital leases 300,246 463,800
Taxes payable 622,585 614,476
Deferred income tax, net 6,140,539 6,144,184
Due to related parties 137,429 9,053
---------------- ----------------
Total current liabilities 20,225,376 19,124,006
Other liabilities 384,742 347,032
Deferred income tax, net 664,309 664,309
---------------- ----------------
Total liabilities 21,274,427 20,135,347
Minority Interest 2,306,057 2,441,365
Stockholders' equity:
Preferred stock, authorized 50,000,000 shares, none issued
or outstanding - -
Common stock, 22,400,000 authorized and 7,400,000 shares
issued and 6,866,100 shares outstanding. 35,060,468 35,060,468
Retained earnings 27,004,074 26,549,556
Treasury stock, 533,900 shares at cost (2,518,132) (2,518,132)
---------------- ----------------
Total stockholders' equity 59,546,410 59,091,892
---------------- ----------------
$ 83,126,894 $ 81,668,604
================ ================
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
1
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<TABLE>
<CAPTION>
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Condensed Statements of Earnings
(In U. S. Dollars)
13 weeks ended
------------------------------------
April 04, March 29,
1999 1998
(Unaudited) (Unaudited)
----------------- ----------------
<S> <C> <C>
Net sales $ 31,500,707 $ 28,305,758
Cost of sales 28,582,272 25,108,538
----------------- ----------------
Gross Profit 2,918,435 3,197,220
----------------- ----------------
Operating expenses:
General and administrative 1,919,458 1,991,562
Selling 490,567 311,152
Research and development 549,598 493,602
----------------- ----------------
Total operating expenses 2,959,623 2,796,316
----------------- ----------------
Operating (loss) income (41,188) 400,904
----------------- ----------------
Other income, net:
Interest income 276,423 230,796
Interest expense (80,494) (44,461)
Other, net 209,764 341,110
----------------- ----------------
Total other income 405,693 527,445
----------------- ----------------
Income before income taxes and minority interest 364,505 928,349
Income tax provision 274,231 278,505
----------------- ----------------
Income before minority interest 90,274 649,844
Minority interest 364,244 -
----------------- ----------------
Net income $ 454,518 $ 649,844
================= ================
Basic and diluted net income per common share $ 0.07 $ 0.09
Weighted average shares outstanding 6,866,100 7,376,977
================= ================
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In U. S. Dollars)
13 weeks ended
------------------------------------
April 04, March 29,
1999 1998
(Unaudited) (Unaudited)
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 454,518 $ 649,844
Adjustments to reconcile net income to net cash (used) provided
by operating activities:
Depreciation and amortization 1,123,937 1,024,561
Allowance for doubtful trade accounts receivable 31,560 106,886
Minority interest in gain of consolidated subsidiaries (364,244) -
Allowance for excess and obsolete inventory 43,407 (207,226)
Deferred income tax benefit (3,646) (62,746)
Loss on disposal of equipment 42,442 104,844
Change in operating assets and liabilities:
Trade account receivable (509,754) (227,564)
Other receivables (1,988,309) (865,962)
Inventories (1,285,232) 2,279,230
Prepaid expenses and refundable income tax (1,124,018) (588,612)
Other assets 44,433 216,468
Accounts payable 257,776 2,025,220
Accrued expenses, related parties and taxes payable (347,934) 435,356
Other liabilities 37,710 (33,290)
----------------- ----------------
Net cash (used) provided by operating activities (3,587,354) 4,857,009
----------------- ----------------
Cash flows from investing activities:
Proceeds from sale of investment security - 686,400
Purchase of property, plant and equipment (885,404) (1,377,845)
Proceeds from sale of equipment 100,509 -
----------------- ----------------
Net cash used in investing activities (784,895) (691,445)
----------------- ----------------
Cash flows from financing activities:
Principal repayments of capital lease obligations (163,554) (113,393)
Purchase of treasury stock - (54,340)
Minority interest 228,936 -
----------------- ----------------
Net cash provided by (used in) financing activities 65,382 (167,733)
----------------- ----------------
Net (decrease) increase in cash and cash equivalents (4,306,867) 3,997,831
Cash and cash equivalents, beginning of period 5,697,035 13,597,581
----------------- ----------------
Cash and cash equivalents, end of period $ 1,390,168 $ 17,595,412
================= ================
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</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 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 April 04, 1999 and the results of operations and cash
flows for each of the thirteen weeks ended April 04, 1999 and March 19, 1998.
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 and the cash flows for the thirteen-week period ended
April 04, 1999 are not necessarily indicative of the results to be expected
for the entire year.
(2) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
April 04, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Raw materials $ 12,974,080 $ 12,377,208
Work-in-process 222,645 602,679
Finished goods 3,497,519 2,429,125
--------------- ---------------
16,694,245 15,409,012
Reserve for excess and obsolete inventory (1,121,413) (1,078,006)
--------------- ---------------
$ 15,572,832 $ 14,331,006
=============== ===============
</TABLE>
(3) Foreign Currency Translation
Included in "other, net" on the accompanying consolidated condensed
statements of operations are foreign exchange losses of $4,913 and $45,957 for
the thirteen week periods ended April 04, 1999 and March 29, 1998,
respectively. Assets and liabilities denominated in pesos are summarized as
follows in U. S. dollars:
<TABLE>
<CAPTION>
April 04, December 31,
1999 1998
---------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 344,524 $ 177,459
Other receivables 2,518,110 878,101
Prepaid expenses 2,673,136 1,851,550
Other assets, net 265,895 212,967
Accounts payable (719,241) (355,023)
Accrued expenses and other liabilities (1,551,657) (1,190,945)
---------------- --------------
Net non-U.S. currency position $ 3,530,767 $ 1,574,109
================ ==============
</TABLE>
4
<PAGE>
Elamex, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
(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.
Preferred Stock purchases are based on Optimag meeting certain performance
targets.
The Company has consolidated the operations of this investment. As of
April 04, 1999 and March 29, 1998, $0.5 million has been expensed for both
thirteen week periods. As of April 04, 1999, the Company has purchased
2,733,164 shares of Preferred Stock for $1.00 per share, convertible into
common stock 1 for 1.
During 1999, the Company agreed to commit additional funding to Optimag
for up to a total of $1,000,000. Funding will be provided in five tranches of
$200,000 each, subject to achievement of certain performance objectives. The
first tranch was paid January 19, 1999 and was matched by Optimag management
(one time only) for the same approximate amount.
In January 1999, the Company settled with a company (claimant) which had
a claim against the management of Optimag. The settlement consisted of payment
of $25,000 to the claimant immediately and $125,000 lump sum two years from the
date of settlement. Additionally, a 2% royalty was agreed to be paid to the
claimant on the first $15,000,000 in Optimag sales.
(5) Income Tax
Pursuant to Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, the Company has estimated income taxes using an
expected effective tax rate for the twelve months ended December 31. The
expected effective tax rate is based on taxable income subject to Mexican
income tax, which includes currency and inflationary gains and losses for its
Mexican operations and on U.S. taxable income for its U.S. operations. The
Company has recorded a valuation allowance for the entire tax effect of
Optimag's net operating loss resulting in an effective tax rate of 75% for the
three months ended April 04, 1999. The actual effective tax rate for the year
ended December 31, 1999 may differ from that used to estimate taxes on April
04, 1999.
(6) Earnings per Share
Basic Earnings per share ("EPS") for the thirteen weeks ended April 04,
1999 and March 29, 1998 were calculated using the weighted average number of
common shares outstanding. The weighted average number of common shares
outstanding for the thirteen week period ended April 04, 1999 was 6,866,100,
and the weighted average number of shares used to determine EPS at March 29,
1998 was 7,376,977. The Company has no dilutive securities.
(7) Joint Venture
On July 14, 1998, the Company formed a Joint Venture (JV) with General
Electric International Mexico, S.A. de C.V. (GE) to produce plastic molding and
stamped metal components in Cd. Juarez, Mexico. The Company contributed its
plastic molding and stamped metal operations to the JV in exchange for 51%
interest in the JV. GE paid approximately $3,500,000 to the Company in exchange
for a 49% interest. In connection with the JV, GE received a three-year warrant
to purchase up to 6.3% of Elamex' common stock exercisable at $7.81 per share
subject to anti-dilution provisions. GE also received the right to select a
representative on the Company's Board. The warrant was valued at $50,000. The JV
began with a $10,000,000 commitment of business from GE expected to increase
over the next year. The Company recognized a gain on the sale of its interest of
the plastics molding and stamped metal operations of $774,505, which is included
in other income. A majority of the Board members of the JV are Elamex Board
members. The Company has consolidated the operations of the JV.
5
<PAGE>
Elamex, S.A. de C.V. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
(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,
1999. 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 Company does not expect the adoption of
SOP 98-1 to have a material impact on its 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 Company does not expect the adoption of
SOP 98-5 to have a material impact on its financial statements.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
General
The following table sets forth statement 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.
<TABLE>
<CAPTION>
Percentage of Net Sales
Thirteen weeks ended
April 04, March 29,
1999 1998
(unaudited) (unaudited)
<S> <C> <C>
Net sales........................................... 100.0% 100.0%
Cost of sales....................................... 90.7 88.7
Gross profit........................................ 9.3 11.3
Selling, general and administrative expenses........ 7.7 8.1
Research and development............................ 1.7 1.7
Operating income (loss) ............................ (0.1) 1.4
Other income ....................................... 1.3 1.9
Income before income taxes and minority interest.... 1.2 3.3
Income tax provision................................ 0.9 1.0
Income before minority interest..................... 0.3 2.3
Minority interest................................... 1.2 -
Net income ......................................... 1.4 2.3
</TABLE>
Net Sales for the thirteen weeks ended April 04, 1999 increased 11.3%
to $31.5 million from $28.3 million for the comparable period in 1998. The
increase is primarily due to the transitioning of new projects from ramp-up
status to full production and also due to increase in various other projects.
For the thirteen weeks ended April 04, 1999, the Company's assembly sales were
constant, as opposed to turnkey sales that increased as compared to the same
period of 1998.
Gross Profit decreased 9.4% to $2.9 million or 9.3% as a percentage of
sales, for the thirteen weeks ended April 04, 1999, as compared to $3.2 million
or 11.3% as a percentage of sales, for the same period of the prior year. The
Gross Margin decrease was due to an increase in operating expenses for the
ramp-up projects, primarily resulting from a labor wage increase effective at
the end of the 4th Quarter of 1998. In addition to the above, the Company's
sales mix changed to include a greater percentage of projects with higher levels
of material content.
Selling, General and Administrative (SG&A) Expenses increased 4.2% to
$2.4 million for the thirteen weeks ended April 04, 1999, compared to $2.3
million for the same period of the prior year. SG&A Expenses decreased as a
percentage of sales to 7.7% for the thirteen weeks ended April 04, 1999,
compared to 8.1% for the thirteen weeks ended the same period in 1998. The
increase in SG&A Expenses reflects additional staffing and infrastructure in the
sales and marketing areas.
Research and Development (R&D) represents in absolute dollars and as a
percentage of net sales, $0.5 million and 1.7%, respectively. 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.
Three beta units that were in the field undergoing Beta evaluations at three
leading OEMs in the magnetic head business have been sold and verbal commitments
have been received for five additional units. The Company has committed to make
additional investments of up to $1.0 million during 1999, subject to Optimag's
achieving certain performance objectives. In addition, several players in the
industry have expressed interest in participating in the equity funding of the
Company.
7
<PAGE>
Operating Income decreased by 110.3% to ($0.04) million, or (0.1%) of
net sales, for the thirteen weeks ended April 04, 1999, from $0.4 million, or
1.4% of net sales, for the thirteen weeks ended March 29, 1998. The decrease in
operating income as a percentage of sales was a result of the gross profit
decrease and the increase of SG&A Expenses previously mentioned and R&D
Expenses.
Income tax provision decreased to $0.3 million, or 0.9% of net sales
for the thirteen weeks ended April 04, 1999, from $0.3 million or 1.0% of net
sales for the thirteen weeks ended March 29, 1998. The estimated effective tax
rate for the thirteen weeks ended April 04, 1999 was 75% and for March 29, 1998
was 30%. The difference between the effective tax rate and the statutory tax
rate of 35% for 1999, is caused primarily by accrued liabilities for expenses
deductible in future periods offset by a valuation allowance established for net
operating losses generated by Optimag of approximately $1.1 million, negative
inflationary effects, and the non-deductible expenses.
Liquidity and Capital Resources
The Company's working capital (defined as inventory plus trade and
other accounts receivable, minus accounts payable) needs showed an increase for
this period. At December 31, 1998, the Company had working capital of $29.4
million compared to $34.4 million at April 04, 1999. This increase was due to an
increase in other receivables as well as in inventories.
For the thirteen weeks ended April 04, 1999, the Company had net cash
used by operating activities of $3.3 million which consists of net income of
$0.5 million plus depreciation and amortization of $1.1 million, an increase of
inventories of $1.3 million, a decrease in accrued and other liabilities of $2.3
million, a decrease in accounts payable of $0.02 million, and other
miscellaneous reductions of $0.04 million, offset by an increase in receivables
of $2.4 million and prepaid expenses and prepaid income taxes of $3.3 million.
Cash used by operating activities partially financed additions of $0.8
million of property, plant, and equipment. It also provided cash for the
repayment of capital lease obligations.
The Company had the following lines of credit and outstanding
borrowings at April 04, 1999:
<TABLE>
<CAPTION>
Amount Interest
Lender of Class of Securities Type Outstanding Rate Maturity Date
<S> <C> <C> <C> <C>
Comerica Bank $10 million Line of Credit - 6.9375% April 30, 1999
Bank of America $10 million Line of Credit - 8.06% December 15, 1999
Nations Bank $10 million Line of Credit - N/A Processing Renewal
Citibank, S.A. $2 million Line of Credit - N/A Processing Renewal
Norwest Bank El Paso $5 million Line of Credit - N/A Processing Renewal
GE Financial Capital Lease 300,246 7.92% December 15, 1999
----------------
Total $300,246
================
</TABLE>
Under its several credit agreements, Elamex has committed to maintain:
(a) a debt service coverage ratio of 1.3, (b) a current ratio no lower than
1.25, (c) a leverage ratio (defined as the ratio of senior indebtedness to the
sum of capital plus subordinated indebtedness) no greater than 1.7 and (d)
equity plus subordinated indebtedness of no less than $18 million. 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 is currently persuing potential acquisition candidates
which, if successful, would be financed with a combination of cash and debt.
Such acquisitions could result in a material decrease in the Company's
liquidity.
8
<PAGE>
Research & Development
As of April 04, 1999 and March 29, 1998, approximately $0.5 million has
been expensed as research and development costs. Research and development cost
are fully attributable expenses incurred by Optimag, in developing optical
stations and electrical test equipment for companies that produce disk drive
heads, magnetic media, and optical media. Three beta units that were in the
field undergoing Beta evaluations at three leading OEMs in the magnetic head
business have been sold and verbal commitments have been received for five
additional units. The Company has committed to make additional investment of
up to $1.0 million during 1999, subject to Optimag's achieving certain
performance objectives. In addition, several players in the industry have
expressed interest in participating in the equity funding of the Company.
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 the 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 major change in
equipment or operating system. A contingency plan will then be developed when a
reasonable assessment of a worst case scenario can be determined.
The task force is concentrating on three areas critical to the
viability of the Company: manufacturing and industrial facilities, information
technology infrastructure, and third-party suppliers and customers (supply chain
management).
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 is currently updating programs with Year 2000 compliant software and
testing such programs for compliance. The testing phase is near completion.
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, most Year 2000 issues have been or will be
addressed by integrating vendor upgrades that will ensure that these software
programs are Year 2000 compliant.
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. Even though the Payroll and Human Resource
system upgrade has been tested for the compliance, it has not been installed
permanently since currently we are in the process of evaluating the possibility
of replacing the application with a more robust and functional one. If we decide
to maintain our current Payroll system it should be upgraded by the 2nd Quarter
1999; and otherwise the new application should be installed by the 3rd Quarter
of 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.
9
<PAGE>
The Company's contingency plan for unexpected problems with software
applications consists of contracting services in advance from a programming firm
for four (4) weeks that would cover part of January and part of February of
2000. The objective is to have available programming resources to fix
unidentified problems. In fulfillment of the contingency plan, Elamex has
already identified firms that the Company believes will meet its needs and is
negotiating an arrangement with one of them.
A majority 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. Further testing has shown that the equipment will not present a
problem during year 2000.
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 78% of the Company's
critical vendors have satisfactorily responded to the survey. The Company's
contingency plant 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, and to identify alternate vendors that will be Year 2000
compliant. In addition, the contingency plan includes using alternate vendors as
the need arises during the second and third 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, or a failure in, 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 necessary steps to reduce its risk of
possible interruptions or failures that could adversely impact the viability of
the Company.
Contingency Plan:
Contingency plans for the three critical areas detailed above will be
developed once the testing phase is completed for each area. At that point, the
Company feels that it can reasonably determine the extent of its worst case
scenario for each area and develop plans accordingly to mitigate the risks
inherent in the Year 2000 issue. Contingency plans are expected to be in place
by the end of the second quarter of 1999.
10
<PAGE>
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.
11
<PAGE>
PART II
OTHER INFORMATION
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
(b) No reports on Form 8-K were filed during the period covered by this
report.
12
<PAGE>
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: May 14, 1998 By: /s/ Hector M. Raynal
Hector M. Raynal
President and Chief Executive Officer
(Duly Authorized Officer)
Date: May 14, 1998 By: /s/Carlos D. Martens
Carlos D. Martens
Vice-President of Finance and
Chief Financial Officer
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