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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 4, 2003
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)
1800 NORTHWESTERN DR.
EL PASO, TX 79912
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(915) 298-3061
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
The number of shares of Class I Common Stock, no par value of the Registrant
outstanding as of May 19, 2003 was:
7,789,261
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1
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Condensed Balance Sheets as of April 4, 2003 and December 31, 2002............3
Unaudited Consolidated Condensed Statements of Operations for the Thirteen Weeks ended
April 4, 2003 and March 29, 2002.....................................................................4
Unaudited Consolidated Condensed Statements of Cash Flows for the Thirteen Weeks ended
April 4, 2003 and March 29, 2002.....................................................................5
Notes to Unaudited Consolidated Condensed Financial Statements.......................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............11
Item 3. Qualitative and Quantitative Disclosures about Market Risk..........................................14
Item 4. Controls and Procedures.............................................................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................16
Item 2. Changes in Securities and use of Proceeds...........................................................16
Item 3. Defaults upon Senior Securities.....................................................................16
Item 4. Submission of Matters to a Vote of Security Holders.................................................16
Item 5. Other Information...................................................................................16
Item 6. Exhibits and Reports on Form 8-K....................................................................16
SIGNATURES ....................................................................................................17
CERTIFICATIONS ....................................................................................................18
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
APRIL 4, 2003 DECEMBER 31, 2002
(UNAUDITED)
------------------ ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,584 $ 8,919
Receivables:
Trade accounts receivable, net 16,942 17,120
Other receivables, net 1,254 1,655
------------------ ---------------------
18,196 18,775
------------------ ---------------------
Inventories, net 14,847 14,018
Refundable income taxes 1,552 2,495
Prepaid expenses 1,866 1,420
Deferred income taxes 337 279
------------------ ---------------------
Total current assets 43,382 45,906
Property, plant and equipment, net 70,505 69,979
Investment in unconsolidated joint venture 2,497 2,669
Goodwill, net 8,247 11,827
Deferred income taxes 2,533 1,932
Other assets, net 2,077 2,188
------------------ ---------------------
$ 129,241 $ 134,501
================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 9,123 $ 8,939
Current portion of capital lease obligations 1,009 971
Accounts payable 19,252 16,442
Accrued expenses 5,681 5,977
Taxes payable 78 78
------------------ ---------------------
Total current liabilities 35,143 32,407
Long-term debt, excluding current portion 17,912 20,133
Capital lease obligations, excluding current obligations 15,957 16,296
------------------ ---------------------
Total liabilities 69,012 68,836
------------------ ---------------------
Commitments and contingencies
- -
Stockholders' equity:
Preferred stock, no par, 50,000,000 shares authorized, none issued or
outstanding Common stock, 22,400,000 shares authorized, 8,323,161 and 7,400,000
issued and 7,789,261 (Including shares in escrow) and 6,866,100 outstanding for
2003 and 2002, respectively 36,963 36,963
Retained earnings 25,784 31,220
Treasury stock, 533,900 shares at cost (2,518) (2,518)
------------------ ---------------------
Total stockholders' equity 60,229 65,665
------------------ ---------------------
$ 129,241 $ 134,501
================== =====================
See Notes to Unaudited Consolidated Condensed Financial Statements
3
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE DATA)
(UNAUDITED)
THIRTEEN WEEKS ENDED
APRIL 4, 2003 MARCH 29, 2002
------------------------------------
Net sales $ 39,428 $ 26,386
Cost of sales 34,754 24,188
------------------------------------
Gross profit 4,674 2,198
------------------------------------
Operating expenses:
General and administrative 1,945 1,570
Selling 1,744 266
Distribution 2,218
Goodwill impairment 3,580
------------------------------------
Total operating expenses 9,487 1,836
------------------------------------
Operating (loss) income (4,813) 362
------------------------------------
Other (expense) income:
Interest income 14 184
Interest expense (858) (181)
Equity in loss of unconsolidated joint venture (172) (377)
Other, net (10) (84)
------------------------------------
Total other expense (1,026) (458)
------------------------------------
Loss before income taxes and cumulative effect of change in accounting
principle (5,839) (96)
Income tax (benefit) provision (403) 148
------------------------------------
Loss before cumulative effect
of change in accounting principle (5,436) (244)
Cumulative effect of change in accounting principle, net of tax - (853)
------------------------------------
Net loss $ (5,436) $ (1,097)
====================================
Net loss per share, basic and diluted before
cumulative effect of change in accounting principle $ (0.72) $ (0.04)
====================================
Net loss per share, basic and diluted $ (0.72) $ (0.16)
====================================
Shares used to compute net loss per share, basic and diluted 7,510,762 6,866,100
====================================
See Notes to Unaudited Consolidated Condensed Financial Statements
4
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
APRIL 4, 2003 MARCH 29, 2002
-------------------------------------------------
Cash flows from operating activities:
Net loss $ (5,436) $ (1,097)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 1,488 770
Cumulative effect of change in accounting principle - goodwill impairment 853
Goodwill impairment loss 3,580
Provision for excess and obsolete inventory 28 -
Equity in loss of unconsolidated joint venture 172 377
Deferred income tax benefit (659) (246)
Change in operating assets and liabilities:
Trade accounts receivable 178 873
Other receivables 401 (486)
Inventories (857) (272)
Refundable income taxes 943 258
Prepaid expenses (446) 13
Other assets 111 16
Accounts payable 2,810 833
Accrued expenses (296) (628)
Taxes payable - 278
-------------------------------------------------
Net cash provided by operating activities 2,017 1,542
-------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,014) (188)
Issuance of related party note receivable (2,000)
-------------------------------------------------
Net cash used in investing activities (2,014) (2,188)
-------------------------------------------------
Cash flows from financing activities:
Proceeds from notes payable and long term-debt 245 961
Payments of notes payable and long term-debt (2,244) (389)
Principal repayments of capital lease obligations (339)
-------------------------------------------------
Net cash (used in) provided by financing activities (2,338) 572
-------------------------------------------------
Net decrease in cash and cash equivalents (2,335) (74)
Cash and cash equivalents, beginning of period 8,919 16,850
-------------------------------------------------
Cash and cash equivalents, end of period $ 6,584 $ 16,776
=================================================
See Notes to Unaudited Consolidated Condensed Financial Statements
5
ELAMEX S.A. DE C.V. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS OF U. S. DOLLARS)
(1) GENERAL
The accompanying unaudited interim 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 accounting
principles generally accepted in the United States of America have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
While management of the Company believes that the disclosures presented are
adequate to make the information presented not misleading, the unaudited interim
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and notes included in the Company's 2002
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 unless otherwise stated) necessary for a fair presentation
of the financial position as of April 4, 2003, the results of operations for the
thirteen weeks ended April 4, 2003 and March 29, 2002 and cash flows for the
thirteen weeks ended April 4, 2003 and March 29, 2002. The consolidated
condensed balance sheet as of December 31, 2002 is derived from the December 31,
2002 audited consolidated financial statements. The results of operations for
the thirteen weeks ended April 4, 2003 are not necessarily indicative of the
results to be expected for the entire year.
The Company closes the 13 weeks periods ending on a Friday, except that the
first quarter starts on January 1, and the fourth quarter ends on December 31.
As a result, the thirteen weeks ended April 4, 2003 includes six more days than
the thirteen weeks ended March 29, 2002.
(2) GOODWILL
In June 2001, the Financial Accounting Standard Board ("FASB") issued Statement
of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other
Intangible Assets". This statement is effective for all fiscal quarters of
fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among
other things, the discontinuance of amortization of goodwill and intangible
assets with indefinite lives. In addition, the standard includes provisions for
the reclassification of certain existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential
impairments of goodwill. SFAS No. 142 also requires the Company to do an annual
goodwill impairment test.
The Company engaged an independent company to assist in the valuation of an
operating entity with assigned goodwill. The fair value of the operating entity
was determined using a discounted cash flow model. Based on the analysis
performed the Company completed its implementation analysis of goodwill arising
from prior acquisitions and recorded an impairment charge of $853 thousand in
the first quarter of 2002, which was recorded as a cumulative effect of change
in accounting principle in the first quarter of 2002.
The Company completed its annual impairment test during the first quarter of
2003 and reported an impairment of goodwill of $3.6 million. The goodwill
affected by the impairment analysis is that recorded at the time of the
acquisition of Precision Tool, Die and Machine Co. in 1999. The primarily reason
for the impairment was an increase in required capital expenditures necessary to
replace aging equipment and new capital for business expansion. After
impairment, goodwill remaining on the books is approximately $8.2 million of
which $3.8 million was recorded during the third quarter of 2002 as a result of
the acquisition of Mt. Franklin Holdings.
(3) SEGMENT REPORTING
The Company's reportable segments are 1) Shelter Services (Previously Contract
Manufacturing), 2) Metal Stamping and 3) Food Products (Acquired in the 3rd
Quarter of 2002).
The Shelter Services segment provides shelter and assembly services throughout
Mexico for non-electronics manufacturing services companies.
6
The Metal Stamping segment is the Precision, Tool, Die and Machine subsidiary
located in Louisville, Kentucky. It provides metal and stamping services
primarily to the appliance and automotive sectors.
The Food Products segment, which is Mt. Franklin Holdings LLC. operates a retail
nut and foodservice nut packaging and marketing company, whose operations are
located in El Paso, Texas and a candy manufacturing and packaging facility in
Juarez, Mexico
The following table presents net sales and net income (loss) by segment:
UNALLOCATED
SHELTER METAL FOOD CORPORATE INTER- TOTAL
SERVICES STAMPING SERVICES AND OTHER SEGMENT
- ----------------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED APRIL 4, 2003
Sales $ 8,627 $ 18,153 $ 16,651 $(4,003) $ 39,428
Net (loss) income (30) 21 (1,288) (4,139) (5,436)
- ----------------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED MARCH 29, 2002
Sales $ 7,726 $ 18,660 $ 26,386
Loss before cumulative effect of
change in accounting principle 120 203 (567) (244)
- ----------------------------------------------------------------------------------------------------------------
(4) INVENTORIES
Inventories consist of the following:
APRIL 4, 2003 DECEMBER 31, 2002
(In Thousands of U.S. Dollars)
Raw materials 4,961 4,519
Packaging supplies 2,224 2,096
Work-in-process 1,741 1,622
Finished goods 6,825 6,792
---------------- ----------------
Sub total 15,751 15,029
Less reserve for excess and
obsolete inventory (904) (1,011)
---------------- ----------------
Total 14,847 14,018
================ ================
7
(5) FOREIGN CURRENCY
Included in "other, net" in the accompanying unaudited consolidated condensed
statements of operations are foreign exchange losses of $97 thousand and $32
thousand for the thirteen weeks ended April 4, 2003, and March 29, 2002,
respectively.
Assets and liabilities denominated in Mexican pesos are summarized as follows
in thousands of U. S. dollars:
December 31,
April 4, 2003 2002
---------------- -----------------
(In Thousands of U.S. Dollars)
Cash and cash equivalents $ 141 $ 262
Other receivables 981 1,032
Prepaid expenses and refundable taxes 1,737 1,705
Other assets, net 27 26
Accounts payable (313) (477)
Accrued expenses and other liabilities (1,035) (1,264)
---------------- -----------------
Net foreign currency position $ 1,538 $ 1,284
================ =================
(6) INCOME TAXES
In accordance with SFAS No. 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. The tax (benefit) provision for the thirteen weeks ended April 4, 2003
and March 29, 2002 was $(403) thousand and $148 thousand respectively. The
primary difference between the overall effective tax rate and the statutory
rates of 34% for Mexico and 35% for the U.S. are currency and inflation gains
and losses for Mexican tax purposes, Mexican asset tax and non-deductible
goodwill impairment expense in the U.S.
(7) ACQUISITION
On July 18, 2002, Elamex USA, Corp. ("Elamex USA"), a wholly owned Delaware
subsidiary of Elamex, completed the acquisition of Mt. Franklin Holdings, LLC
("Franklin"), Franklin Food Products LLC and the merger of Reprop Corporation
with and into Elamex USA. The effective closing date for tax and accounting
purposes was the close of business on June 28, 2002.
The unaudited proforma combined historical results, as if Franklin had been
acquired at the beginning of fiscal 2002, are estimated in the following table:
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
Thirteen Weeks Ended
April 4, 2003 March 29, 2002
-----------------------------------------
Net sales $ 39,428 $ 37,524
Gross profit (loss) 4,674 3,709
Net (loss) income (5,436) (3,822)
Net (loss) income per share (0.72) (0.51)
The above proforma results include adjustments to give effect to intercompany
sales, depreciation and other purchase price adjustments. The proforma results
are not necessarily indicative of the operating results that would have occurred
had the acquisition been consummated as of the beginning of the periods
presented, nor are they necessarily indicative of future operating results.
8
(8) EARNINGS PER SHARE
Basic and diluted net loss per common share ("EPS") for the thirteen weeks ended
April 4, 2003 and March 29, 2002 were calculated using the weighted average
number of common shares outstanding during each period. The weighted average
number of common shares outstanding for the thirteen weeks ended April 4, 2003
and March 29, 2002 were 7,510,762 and 6,866,100 respectively. Dilutive stock
options for the thirteen weeks ended April 4, 2003 of 270,730 have not been
included in the computation of diluted net loss per share as their effect would
be antidilutive. There were no dilutive stock options for the thirteen weeks
ended March 29, 2002.
(9) STOCK OPTION PLAN
On April 19, 2002, the shareholders approved the issuance of up to 850,000
Elamex stock options and authorized the Board of Directors to establish the
terms and conditions of the grant of the stock options.
On July 19, 2002, the Board of Directors of the Company granted 200,000 stock
options at $2.00 per share and 70,730 stock options at $6.00 per share.
The following table summarizes information concerning currently outstanding and
exercisable options:
OPTIONS EXERCISE LIFE IN NUMBER STOCK
OUTSTANDING PRICE YEARS EXERCISABLE PRICE
AT GRANT
DATE
200,000 $2.00 10 50,000 $5.35
70,730 $6.00 10 $5.35
The Company accounts for these plans under APB Opinion No. 25, under which
compensation cost of $77 thousand has been recognized for the thirteen weeks
ended April 4, 2003. Additional compensation expense of $272 thousand will be
expensed in the future in connection with these options. Had compensation cost
for these plans been determined consistent with SFAS No. 123, "Accounting for
Stock Based Compensation", the Company's net loss and loss per share would have
been adjusted to the following proforma amounts:
13 Weeks Ended
April 4, 2003
------------------- ------------------ -------------------
Net Loss:
As reported: $(5,436)
Proforma: $(5,477)
Loss per share Basic and Diluted:
As reported $(0.72)
Proforma $(0.73)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model using the following assumptions; risk free
interest rate of 2.68%; expected dividend yield of 0.0%; expected life of 5
years and expected volatility of 61%.
In addition to the above, Franklin Connections a subsidiary of the Company has
an options plan in shares of the subsidiary. There are 50,000 options
outstanding under this plan with an exercise price of $12.87. No compensation
expense has been recorded in connection with this plan, and the Company believes
the fair value of the options is zero.
9
(10) NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This statement requires, among other things, that gains and losses on the early
extinguishments of debt be classified as extraordinary only if they meet the
criteria for extraordinary treatment set forth in Accounting Principles Board
Opinion No. 30. Implementation of this statement on January 1, 2003 did not have
a significant impact on the consolidated financial statements of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." It requires recording costs associated with
exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before an actual
liability has been incurred. Implementation of this statement on January 1, 2003
did not have a significant impact on the consolidated financial statements of
the Company.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of this interpretation were
adopted by the Company on December 31, 2002. The initial recognition and initial
measurement requirements of this interpretation were adopted on January 1, 2003
and the expanded disclosures did not have a material impact on the Company's
financial position or results of operations.
In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The enhanced disclosures required by SFAS No. 148 are included in these
financial statements. The Company accounts for stock-based employee compensation
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and does not plan to change to the
fair value based method.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements," addresses consolidation by business
enterprises of variable interest entities. Under current practice, two
enterprises generally have been included in consolidated financial statements
because one enterprise controls the other through voting interests. This
interpretation defines the concept of "variable interests" and requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse the risks among the
parties involved. This interpretation applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company does not believe the adoption of
this interpretation will have a material impact on its financial position or
results of operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Management's discussion and analysis is based on the results of operations by
segment as presented in the following table:
Unallocated
Shelter Metal Food Corporate Inter-
Services Stamping Services and other segment Total
------------------------------------------------------------------------
THIRTEEN WEEKS ENDED APRIL 4, 2003
Net sales $ 8,627 $ 18,153 $ 16,651 $ (4,003) $ 39,428
Gross profit 587 972 3,115 4,674
Operating expenses 457 735 4,181 4,114 9,487
Other (expense) income 8 (198) (885) 49 (1,026)
- ----------------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED MARCH 29, 2002
Net sales $ 7,726 $ 18,660 $ 26,386
Gross profit (loss) 908 1,290 2,198
Operating expenses 615 709 $ 512 1,836
Other (expense) income (19) (246) (193) (458)
- ----------------------------------------------------------------------------------------------------------------
GENERAL
NET SALES
Net sales for the thirteen weeks ended April 4, 2003 increased 49% to $39.4
million from $26.4 million for the comparable period in 2002.
Sales for Shelter Services for the thirteen weeks ended April 4, 2003 increased
12% to $8.6 million from $7.7 million for the same period in the prior year.
This increases was primarily due to an increase in existing customers' orders
resulting from an increase in their operations.
Sales for Metal Stamping for the thirteen weeks ended April 4, 2003 decreased 3%
to $18.1 million from $18.7 million for the same period in the prior year. The
decrease was primarily due to decreases in customers' orders resulting from a
decrease of demand in the appliances industry.
The newly acquired Food Services segment contributed sales of $16.7 million for
the thirteen weeks ended April 4, 2003.
GROSS PROFIT
Gross profit increased to $4.7 million or 11.9% of sales for the thirteen weeks
ended April 4, 2003, as compared to $2.2 million or 8.3% of sales for the same
period of the prior year.
Gross profit for Shelter Services for the thirteen weeks ended April 4, 2003
decreased 35% to $587 thousand from $908 thousand for the same period in the
prior year. The decrease was primarily due to available buildings not rented
during the first quarter of 2003.
Gross profit for Metal Stamping for the thirteen weeks ended April 4, 2003
decreased 25% to $972 thousand from $1.3 million for the same period in the
prior year primarily due to an increase in fringe benefit costs, utilities and
depreciation expense.
Gross profit contributed by the Food Services segment was $3.1 million for the
thirteen weeks ended April 4, 2003.
11
OPERATING EXPENSES
Operating expenses increased to $9.5 million for the thirteen weeks ended April
4, 2003, compared to $1.8 million for the same period of the prior year. The
primary reasons for the increase are the addition of the Food Service segment
beginning July 2002, and goodwill impairment related to Precision in 2003.
Operating expenses for Shelter Services for the thirteen weeks ended April 4,
2003 decreased 26% to $457 thousand from $615 thousand for the same period in
the prior year. This decrease was primarily due to a decrease in selling
expenses of $96 thousand and a decrease in depreciation of $40 thousand.
Operating expenses for Metal Stamping for the thirteen weeks ended April 4, 2003
increased slightly to $735 thousand from $709 thousand for the same period in
the prior year. The increase was primarily due to an increase in administrative
expenses.
Operating expenses incurred by Food Services segment were $4.2 million for the
thirteen weeks ended April 4, 2003.
Operating expenses for Corporate for the thirteen weeks ended April 4, 2003
increased 704% to $4.1 million from $512 thousand for the same period in the
prior year. The increase was primarily due to goodwill impairment of $3,580
thousand and stock compensation expense of $77 thousand recorded during the
first quarter of 2003.
OTHER (EXPENSE) INCOME
Other expense for the thirteen weeks ended April 4, 2003 was $1.0 million,
compared to $458 thousand in the same period of the prior year.
Other expense for Shelter Services for the thirteen weeks ended April 4, 2003
decreased from an expense of $19 thousand to an income of $8 thousand, primarily
due to $82 thousand of interest income in tax refunds received in 2003 partially
offset by an increase in translation losses of $40 thousand.
Other expense for Metal Stamping for the thirteen weeks ended April 4, 2003
decreased to $198 thousand from $246 thousand for the same period in the prior
year primarily due to disposal of fixed assets recorded in first quarter of 2002
of $60 thousand, partially offset by an increase in interest expense of $15
thousand.
Other expense for Food Services for the thirteen weeks ended April 4, 2003 of
$885 is primarily interest expense.
Other income for Corporate for the thirteen weeks ended April 4, 2003 increased
to $49 thousand from an expense of $193 thousand for the same period in the
prior year. The increase was primarily due to a decrease in loss of
unconsolidated joint venture of $205 thousand and an increase in interest income
of $70 mainly due to inter-company loans, partially offset by translation losses
of $33 thousand recorded during 2003.
TAXES
Tax (benefit) provision for the thirteen weeks ended April 4, 2003 and March 29,
2002 were $(403) thousand and $148 thousand respectively.
The primary difference between the overall effective tax rate and the statutory
rates of 34% for Mexico and 35% for the U.S. are currency and inflation gains
and losses for Mexican tax purposes, Mexican asset tax and non-deductible
goodwill impairment expense in the U.S.
GOODWILL
The Company engaged an independent company to assist in the valuation of an
operating entity with assigned goodwill. The fair value of the operating entity
was determined using a discounted cash flow model. Based on the analysis
performed the Company completed its implementation analysis of goodwill arising
from prior acquisitions and recorded an impairment charge of $853 thousand in
the first quarter of 2002, which was recorded as a cumulative effect of change
in accounting principle in the first quarter of 2002.
12
The Company completed its annual impairment test during the first quarter of
2003 and reported an impairment of goodwill of $3.6 million. The goodwill
affected by the impairment analysis is that recorded at the time of the
acquisition of Precision Tool, Die and Machine Co. in 1999. The primarily reason
for the impairment was an increase in required capital expenditures necessary to
replace aging equipment and new capital for business expansion. After
impairment, goodwill remaining on the books is approximately $8.2 million of
which $3.8 million was recorded during the third quarter of 2002 as a result of
the acquisition of Mt. Franklin Holdings.
NET LOSS AND LOSS PER SHARE
Net loss for the thirteen weeks ended April 4, 2003 was $5.4 million compared to
a net loss of $1.1 million for the same period of 2002. For the thirteen weeks
ended April 4, 2003 basic and diluted net loss per share was $0.72, which
compares with a loss per share of $0.16 for the same period of the prior year.
The average number of shares used to calculate basic and diluted losses per
share were 7,510,762 and 6,866,100 for the thirteen weeks ended April 4, 2003
and March 29, 2002 respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital (defined as current assets minus current
liabilities) as of April 4, 2003 decreased to $8.2 million as compared to $13.5
million as of December 31, 2002.
For the thirteen weeks ended April 4, 2003 the net cash provided by operating
activities was $2.0 million.
The net cash used in investing activities was $2.0 million for the thirteen
weeks ended April 4, 2003, due to the acquisition of equipment.
The net cash used in financing activities was $2.3 million for the thirteen
weeks ended April 4, 2003 from net payments on notes payable and long term debt
and capital leases.
Management intends to fund current operations and activities of the Company
through existing working capital, cash and available credit facilities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
On December 12, 2001, the SEC issued FR-60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies." FR-60 is an intermediate step to
alert companies to the need for greater investor awareness of the sensitivity of
financial statements to the methods, assumptions, and estimates underlying their
preparation, including the judgments and uncertainties affecting the application
of those policies, and the likelihood that materially different amounts would be
reported under different conditions or using different assumptions.
Please refer to the Company's annual report on Form 10-K for the year ended
December 31, 2002 for a summary of the Company's more critical accounting
policies.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This statement requires, among other things, that gains and losses on the early
extinguishments of debt be classified as extraordinary only if they meet the
criteria for extraordinary treatment set forth in Accounting Principles Board
Opinion No. 30. Implementation of this statement on January 1, 2003 did not have
a significant impact on the consolidated financial statements of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." It requires recording costs associated with
exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before an actual
liability has been incurred. Implementation of this statement on January 1, 2003
did not have a significant impact on the consolidated financial statements of
the Company.
13
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of this interpretation were
adopted by the Company on December 31, 2002. The initial recognition and initial
measurement requirements of this interpretation were adopted on January 1, 2003
and the expanded disclosures did not have a material impact on the Company's
financial position or results of operations.
In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The enhanced disclosures required by SFAS No. 148 are included in these
financial statements. The Company accounts for stock-based employee compensation
in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and does not plan to change to the
fair value based method.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements," addresses consolidation by business
enterprises of variable interest entities. Under current practice, two
enterprises generally have been included in consolidated financial statements
because one enterprise controls the other through voting interests. This
interpretation defines the concept of "variable interests" and requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse the risks among the
parties involved. This interpretation applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company does not believe the adoption of
this interpretation will have a material impact on its financial position or
results of operations.
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.
Elamex's functional currency is the U.S. dollar and it is exposed to the risk of
currency fluctuations of the Mexican peso against the U.S. dollar. Elamex's
currency fluctuation risk management objective is to limit the impact of
currency fluctuations. Elamex has adopted a policy of not engaging in futures
contracts with the purpose of hedging U.S. dollar/Mexican peso revenues or
costs, with the exception of regular treasury operations to cover operating
requirements for up to thirty days. A peso devaluation of 10% would result in a
translation loss of $140 thousand with the Company's existent asset monetary
position of $1,538 thousand Mexican Pesos.
Elamex and certain of its subsidiaries are exposed to some market risk due to
the floating interest rate under its revolving lines of credit, notes payable
and long-term debt. Floating-rate obligations aggregated $27.0 million at April
4, 2003, inclusive of amounts borrowed under short-term and long-term credit
facilities. A 1.0 % increase in interest rates would result in a $270 thousand
annual increase in interest expense on the existing principal balance. The
Company has determined
14
that it is not necessary to participate in interest rate-related derivative
financial instruments because it currently does not expect significant
short-term increases in interest rates charged under its borrowings.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
it is able to collect the information it is required to disclose in the reports
it files with the Securities and Exchange Commission (SEC), and to process,
summarize and disclose this information within the time periods specified in the
rules of the SEC. Based on their evaluation of the Company's disclosure controls
and procedures which took place as of a date within 90 days of the filing date
of this report, the Chief Executive and Chief Financial Officers believe that
these controls and procedures are effective to ensure that the Company is able
to collect, process and disclose the information it is required to disclose in
the reports it files with the SEC within the required time periods.
The Company also maintains a system of internal controls designed to provide
reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (1) to permit preparation of financial statements in conformity with
generally accepted accounting principles, and (2) to maintain accountability for
assets; access to assets is permitted only in accordance with management's
general or specific authorization; and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's internal controls
by the Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
15
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
Not applicable.
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
there under. 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 therefore; 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.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1. Exhibits
99.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
2. Reports on Form 8-K during the quarter ended April 4, 2003.
A Form 8-K was filed on May 2, 2003, under item 9, incorporating by
reference the Company's April 30, 2003 press release reporting a change in
leadership at Franklin Connections, LP, the Company's wholly owned candy
manufacturing and nut processing subsidiary.
A Form 8-K was filed on April 4, 2003, under Item 5, incorporating by
reference the Company's April 1, 2003, press release setting forth the
Company's fourth-quarter 2002 earnings.
16
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.
ELAMEX, S.A. de C.V.
Date: May 19, 2003 By: /s/ Richard P. Spencer
-------------------------------------
Richard P. Spencer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(DULY AUTHORIZED OFFICER)
Date: May 19, 2003 By: /s/ Thomas J. Benson
-------------------------------------
Thomas J. Benson
VICE- PRESIDENT OF FINANCE AND
CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER)
17
CERTIFICATIONS
I, Thomas J. Benson, Vice-President of Finance and Chief Financial Officer of
Elamex, S.A. de C.V., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elamex, S.A. de C.V.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 19, 2003 By: /s/ Thomas J. Benson
-------------------------------------
Thomas J. Benson
VICE-PRESIDENT OF FINANCE AND
CHIEF FINANCIAL OFFICER
18
CERTIFICATIONS (CONTINUED)
I, Richard P. Spencer, President and Chief Executive Officer of Elamex, S.A. de
C.V., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Elamex, S.A. de C.V.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 19, 2003 By: /s/ Richard P. Sp
-------------------------------------
Richard P. Spencer
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
19