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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: July 02, 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 August 17, 1999 was:
6,866,100
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<TABLE>
<CAPTION>
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
TABLE OF CONTENTS
<S> <C> <C>
Page No.
PART I FINANCIAL INFORMATION
Item 1 Consolidated Condensed Balance Sheets as of
July 02, 1999 (unaudited) and December 31, 1998.........................1
Consolidated Condensed Statement of Earnings for the Twenty-six and
Thirteen Week Periods Ended July 02, 1999 (unaudited) and June 28,
1998 (unaudited)........................................................2
Consolidated Condensed Statements of Cash Flows for the Twenty-six
Week Periods ended July 02, 1999 (unaudited) and June 28, 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........................................11
Item 4 Submission of Matters to a Vote of Security Holders....................11
Item 5 Other Information......................................................11
Item 6 Exhibits and Reports on Form 8-K.......................................11
SIGNATURES......... ..........................................................12
</TABLE>
<PAGE>
<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)
<S> <C> <C>
July 02, December 31,
1999 1998
(unaudited)
----------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 11,158,388 5,697,035
Receivables
Trade accounts, net 15,625,501 15,578,310
Other receivables 2,743,359 2,146,325
Related party note receivable 7,992 6,218,141
----------------- ----------------
Total receivables 18,376,852 23,942,776
Inventories, net 15,304,981 14,331,006
Refundable income taxes 484,423 1,590,554
Prepaid expenses 835,036 836,854
----------------- ----------------
Total current assets 46,159,680 46,398,225
Property, plant and equipment, net 33,709,570 34,739,087
Other assets, net 486,733 531,292
----------------- ----------------
$ 80,355,983 81,668,604
================= ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 8,866,602 8,875,526
Accrued expenses 3,183,016 3,026,020
Current obligations of capital leases 173,469 463,800
Taxes payable 1,698,812 614,476
Deferred income taxes, net 2,619,450 6,144,184
----------------- ----------------
Total current liabilities 16,541,349 19,124,006
Other liabilities 408,991 347,032
Deferred income taxes, net 853,166 664,309
----------------- ----------------
Total liabilities 17,803,506 20,135,347
Minority Interest 2,203,968 2,441,365
Stockholders' equity:
Common stock, 22,500,000 shares authorized, 7,400,000 shares
issued and 6,866,100 outstanding. 35,060,468 35,060,468
Retained earnings 27,806,173 26,549,556
Treasury stock (2,518,132) (2,518,132)
----------------- ----------------
Total stockholders' equity 60,348,509 59,091,892
----------------- ----------------
Commitments and contingencies - -
$ 80,355,983 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)
<S> <C> <C> <C> <C>
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------------- --------------------------------
July 02, June 28, July 02, June 28,
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
-------------- ---------------- -------------- --------------
Net sales $ 32,195,276 30,667,807 63,695,983 58,973,565
Cost of sales 28,735,459 26,734,363 57,317,731 51,842,901
-------------- ---------------- -------------- --------------
Gross Profit
3,459,817 3,933,444 6,378,252 7,130,664
Operating expenses:
General and administrative 1,954,298 1,955,746 3,873,756 3,947,308
Selling 429,508 432,312 920,075 743,464
Research and development 453,547 496,019 1,003,145 989,621
-------------- ---------------- -------------- --------------
Total operating expenses 2,837,353 2,884,077 5,796,976 5,680,393
-------------- ---------------- -------------- --------------
Operating income (expense) 622,464 1,049,367 581,276 1,450,271
Other income (expense):
Interest income 215,233 252,594 491,656 483,390
Interest expense (129,303) (44,996) (209,797) (89,457)
Other, net 308,260 79,011 518,024 420,121
-------------- ---------------- -------------- --------------
Total other income 394,190 286,609 799,883 814,054
-------------- ---------------- -------------- --------------
Income before income taxes and minority interest 1,016,654 1,335,976 1,381,159 2,264,325
Income tax provision 251,644 378,149 525,875 656,654
-------------- ---------------- -------------- --------------
Income before minority interest 765,010 957,827 855,284 1,607,671
Minority interest 37,089 - 401,333 -
-------------- ---------------- -------------- --------------
Net income $ 802,099 957,827 1,256,617 1,607,671
============== ================ ============== ==============
Basic and diluted income per common share $ 0.12 0.13 0.18 0.22
Weighted average shares outstanding 6,866,100 7,365,865 6,866,100 7,367,042
============== ================ ============== ==============
<FN>
See accompanying notes to unaudited consolidated condensed financial statements.
</FN>
</TABLE>
2
<PAGE>
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In U. S. Dollars)
<TABLE>
<CAPTION>
<S> <C> <C>
Twenty-six Weeks Ended
-------------------------------------
July 02, June 28,
1999 1998
(unaudited) (unaudited)
----------------- ----------------
Cash flows from operating activities:
Net income $ 1,256,617 1,607,671
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,368,903 2,056,450
Allowance for doubtful trade accounts receivable (146,547) 167,844
Minority interest (401,333) -
Allowance for excess and obsolete inventory 64,548 (326,304)
Deferred income taxes (benefit) expense (3,335,877) 469,269
Loss on disposal of equipment 146,587 163,438
Change in operating assets and liabilities:
Trade accounts receivable 99,356 (1,999,539)
Other receivables (597,034) (1,729,534)
Related party note receivable 6,210,149 -
Inventories (1,038,523) 2,324,427
Prepaid expenses and refundable income taxes 1,107,949 (1,875,420)
Other assets 69,739 33,804
Accounts payable (8,924) 1,805,147
Accrued expenses and taxes payable 1,241,332 260,518
Other liabilities 61,959 43,965
----------------- ----------------
Net cash provided by operating activities 7,098,901 3,001,736
----------------- ----------------
Cash flows from investing activities:
Proceeds from sale of investment security - 2,080,000
Purchase of property, plant and equipment (1,622,658) (2,208,965)
Proceeds from sale of equipment 111,505 -
----------------- ----------------
Net cash used by investing activities (1,511,153) (128,965)
----------------- ----------------
Cash flows from financing activities:
Principal repayments of capital lease obligations (290,331) (268,753)
Purchase of treasury stock - (222,953)
Minority interest contribution 163,936 -
----------------- ----------------
Net cash used by financing activities (126,395) (491,706)
----------------- ----------------
Net increase in cash and cash equivalents 5,461,353 2,381,065
Cash and cash equivalents, beginning of period 5,697,035 13,597,581
----------------- ----------------
Cash and cash equivalents, end of period $ 11,158,388 15,978,646
================= ================
<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 July 02, 1999, the results of operations for the thirteen and
twenty-six week periods ended July 02, 1999 and June 28, 1998 and cash flows for
the twenty-six week periods ended July 02, 1999 and June 28, 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 twenty-six week periods ended July 02, 1999 are not
necessarily indicative of the results to be expected for the entire year.
(2) Inventories
Inventories consist of the following:
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<S> <C> <C>
July 02, December 31,
1999 1998
--------------- ---------------
Raw materials $ 11,545,857 $ 12,377,208
Work-in-process 438,390 602,679
Finished goods 4,463,241 2,429,125
--------------- ---------------
16,447,488 15,409,012
Reserve for excess and obsolete inventory (1,142,507) (1,078,006)
--------------- ---------------
$ 15,304,981 $ 14,331,006
=============== ===============
</TABLE>
(3) Foreign Currency Translation
Included in "other, net" on the accompanying consolidated condensed
statements of earnings are foreign exchange gains of $35,354 and $30,441 for the
thirteen and twenty-six week periods ended July 02, 1999, and $119,701 and
$73,744 for the thirteen and twenty-six week periods ended June 28, 1998. Assets
and liabilities denominated in pesos are summarized as follows in U. S. dollars:
<TABLE>
<CAPTION>
<S> <C> <C>
July 02, December 31,
1999 1998
---------------- ----------------
Cash and cash equivalents $ 294,920 $ 177,459
Other receivables 1,684,364 878,101
Prepaid expenses 2,311,613 1,851,550
Other assets, net 300,652 212,967
Accounts payable (914,371) (355,023)
Accrued expenses and other liabilities (1,937,077) (1,190,945)
---------------- ----------------
Net non-U.S. currency position $ 1,740,101 $ 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 July
02, 1999 and June 28, 1998, $0.9 million and $1.1 million has been expensed
respectively for both twenty-six week periods. As of July 02, 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 approximately the same 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 38% for the twenty-six
weeks ended July 02, 1999. The effective tax rate for the thirteen weeks ended
July 02, 1999 approximated 25%. The actual effective tax rate for the year ended
December 31, 1999 may differ from that used to estimate taxes on July 02, 1999.
(6) Earnings per Share
Basic and diluted income per common share ("EPS") for the thirteen and
twenty-six weeks ended July 02, 1999 and June 28, 1998 were calculated using the
weighted average number of common shares outstanding. The weighted average
number of common shares outstanding for the thirteen and twenty-six week period
ended July 02, 1999 were 6,866,100, and the weighted average number of shares
used to determine EPS at June 28, 1998 were 7,365,865 and 7,367,042 for the
thirteen and twenty-six week period respectively. The Company has no dilutive
securities.
(7) 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.
5
<PAGE>
Elamex, S.A. de C.V. and Subsidiaries
Notes to unaudited Consolidated Condensed Financial Statements
(In U.S. Dollars)
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.
(8) Subsequent Events
On July 27, 1999, the Company consummated the purchase of 100 percent of
the common stock of Precision Tool, Die & Machine Company, Inc. ("Precision"), a
Louisville, Kentucky supplier of metal stamping products and engineering
services for the automotive, appliance and industrial controls systems company
for $20.3 million in cash ("Precision"). Precision operates two facilities with
a combined square footage of 206,000 square feet in Louisville, Kentucky. The
facilities are both ISO 9002 and QS 9000 registered. Major customers for
Precision include General Electric, Whirlpool, Trane and Johnson Controls.
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 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>
<S> <C> <C> <C> <C>
Thirteen Weeks Ended Twenty-six Weeks Ended
July 02, June 28, July 02, June 28,
1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales..................................... 89.3 87.2 90.0 87.9
Gross profit...................................... 10.7 12.8 10.0 12.1
Selling, general and administrative expenses...... 7.4 7.8 7.5 8.0
Research and development.......................... 1.4 1.6 1.6 1.7
Operating income ................................. 1.9 3.4 0.9 2.5
Other income ..................................... 1.2 0.9 1.3 1.4
Income before income taxes and minority interest.. 3.2 4.4 2.2 3.8
Income tax provision.............................. 0.8 1.2 0.8 1.1
Income before minority interest................... 2.4 3.1 1.3 2.7
Minority interest................................. 0.1 - 0.6 -
Net income ....................................... 2.5 3.1 2.0 2.7
</TABLE>
Net Sales for the thirteen weeks ended July 02, 1999 increased 4.9% to
$32.2 million from $30.7 million for the comparable period in 1998. Net sales
for the twenty-six weeks ended July 02, 1999 increased 8.0% to $63.7 million
from $59.0 million for the same 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 fluctuations in demand from certain customers. For the thirteen and
twenty-six week periods ended July 02, 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 decreased 11.4% to $3.5 million or 10.7% as a percentage of
sales for the thirteen weeks ended July 02, 1999, as compared to $3.9 million or
12.8% as a percentage of sales for the same period of the prior year. Gross
profit decreased 10.9% to $6.4 million for the twenty-six weeks ended July 02,
1999 from $7.1 million for the same period in 1998. The Gross Margin decrease
was due to an increase in overhead expenses. In addition, 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 were $2.4 million for
the thirteen weeks ended July 02, 1999 and June 28, 1998. SG&A Expenses
decreased as a percentage of sales to 7.4% for the thirteen weeks ended July 02,
1999, compared to 7.8% for the thirteen weeks ended the same period in 1998.
Research and Development (R&D) represents in absolute dollars and as a
percentage of net sales, $0.5 million and 1.4%, 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. 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 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.
Operating Income decreased by 40.7% to $0.6 million, or 1.9% of net sales
and by 59.9% to $0.6 million, or 0.9% of net sales for the thirteen and twenty
six week periods ended July 02, 1999, from $1.0 million, or 3.4% of net sales
and $1.5 million, or 2.5% of net sales for the thirteen and twenty-six week
periods ended June 28, 1998 respectively. The decrease in operating income as a
percentage of sales was a result of the gross profit decrease for the thirteen
and twenty-six week periods, the increase in selling expenses for the twenty-six
week periods, which reflects additional staffing and infrastructure in the sales
and marketing areas and which was minimally offset by the decrease in SG&A
expenses as a percentage of sales for both the thirteen and twenty-six week
periods.
7
<PAGE>
Income tax provision decreased to $0.3 million, or 0.8% of net sales for
the thirteen weeks ended July 02, 1999, from $0.4 million or 1.2% of net sales
for the thirteen weeks ended June 28, 1998. The estimated effective tax rate for
the thirteen weeks ended July 02, 1999 was 25% and for the thirteen weeks ended
June 28, 1998 was 28%. The effective tax rate for the twenty-six weeks ended
July 02, 1999 approximated 38% compared to 29% for the same period in 1998. The
difference between the effective tax rate and the statutory tax rate of 35% for
1999, is caused primarily by inflationary effects offset by a valuation
allowance established for net operating losses generated by Optimag of
approximately $1.1 million and non-deductible expenses.
Liquidity and Capital Resources
The Company's working capital (defined as inventory plus trade and other
accounts receivable, minus accounts payable) showed a decrease for this period.
As of December 31, 1998, the Company had working capital of $29.4 million
compared to $24.8 million at July 02, 1999. This decrease was due to the
decrease in other assets for payment of a related party note, which was
partially offset by an increase in inventories.
For the twenty-six weeks ended July 02, 1999, the Company had net cash
provided by operating activities of $7.1 million. This was funded by net income
of $1.3 million, depreciation and amortization of $2.4 million, a decrease in
related parties of $6.2 million, prepaid expenses and refundable income taxes of
$1.1, and accrued expenses and taxes payable of $1.2 million. This was offset by
a deferred income tax benefit of $3.3 million, increase in other receivables of
$0.5 million, and inventories $1.0 million.
Cash provided by operating activities partially financed additions of $1.5
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 as
of July 02, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Amount Interest
Lender of Class of Securities Type Outstanding Rate Maturity Date
----------------------------- ---- ----------- ---- -------------
Bank of America $10 million Line of Credit - 8.31% December 15, 1999
Norwest Bank El Paso $5 million Line of Credit - N/A TBA
GE Financial Capital Lease 173,469 7.92% December 15, 1999
----------------
Total $173,469
================
</TABLE>
Under its several credit agreements, Elamex has committed to maintain: (a)
a debt service coverage ratio of 1.25 to 1, (b) a cash flow ratio not to be less
than 2.50, (c) a leverage ratio (defined as total liabilities divided by net
worth minus goodwill) no greater than 0.90. 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 pursuing 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.
Derived from the Company's pursuing potential acquisition candidates, 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.
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.
8
<PAGE>
Research & Development
In each of the twenty-six week periods ended July 02, 1999 and June 28,
1998, approximately $1.0 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. 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 operations
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. Our Payroll and Human Resources System has
been tested and an upgrade will be installed during the 3rd week of 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.
The Company's contingency plan for unexpected problems with software
applications consists of contracting services in advance from a programming firm
for five (5) weeks that would cover part of January and part of February, 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. The task force has concluded that the PBX system will not present
a year 2000 problem.
9
<PAGE>
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, 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 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 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.
Contingency Plan:
Contingency plans for the three critical areas detailed above will be
reviewed as 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 completed
by the end of the third quarter of 1999.
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.
10
<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
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company files three reports on Form 8-K during the quarter ended
July 02, 1999.
i) On April 30, 1999, the Company filed a Form 8-K reporting a
Change in Registrant's Certifying Accountant.
ii) On May 17, 1999, the Company filed a Form 8-K Amendment
("Amendment No. 1") to the original 8-K filed with the Commission
on April 30, 1999. The amendment was filed to incorporate
exhibits not existing in the original Form 8-K.
iii) On May 24, 1999, the Company filed a Form 8-K Amendment
("Amendment No. 2") to the original 8-K filed with the Commission
on April 30, 1999. This amendment was filed to amend Exhibit 16
(Letter re Change in Auditors) filed originally on Form 8-K
Amendment No. 1 on May 17, 1999.
11
<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: August 17, 1999 By: /s/ Hector M. Raynal
-------------------------------------
Hector M. Raynal
President and Chief Executive Officer
(Duly Authorized Officer)
Date: August 17, 1999 By: /s/ Carlos D. Martens
-------------------------------------
Carlos D. Martens
Vice-President of Finance and
Chief Financial Officer
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