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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: OCTOBER 3, 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 DRIVE
EL PASO, TX 7991
(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 November 14, 2003 was:
7,781,060
================================================================================
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
October 3, 2003 and December 31, 2002............................ 3
Unaudited Consolidated Condensed Statements of Operations
for the Thirteen and Thirty-nine Weeks ended October 3,
2003 and September 27, 2002....................................... 4
Unaudited Consolidated Condensed Statements of Cash Flows
for the Thirty-nine Weeks ended October 3, 2003 and
September 27, 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........ 16
Item 4. Controls and Procedures........................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 17
Item 2. Changes in Securities and use of Proceeds......................... 17
Item 3. Defaults upon Senior Securities................................... 17
Item 4. Submission of Matters to a Vote of Security Holders............... 18
Item 5. Other Information................................................. 18
Item 6. Exhibits and Reports on Form 8-K.................................. 18
SIGNATURES.................................................................. 19
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)
(UNAUDITED)
OCTOBER 3, 2003 DECEMBER 31, 2002
-------------------- ---------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,924 $ 8,919
Restricted cash 1,500
Receivables:
Trade accounts receivable, net 17,071 17,120
Other receivables, net 1,638 1,655
-------------------- ---------------------
18,709 18,775
Inventories, net 13,753 14,018
Refundable income taxes 1,302 2,495
Prepaid expenses 1,325 1,420
Deferred income taxes 478 279
-------------------- ---------------------
Total current assets 40,991 45,906
Property, plant and equipment, net 70,115 69,979
Investment in unconsolidated joint venture 1,651 2,669
Goodwill, net 8,247 11,827
Deferred income taxes 1,375 1,932
Other assets, net 1,902 2,188
-------------------- ---------------------
$ 124,281 $ 134,501
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 20,735 $ 8,939
Current portion of capital lease obligations 1,029 971
Accounts payable 18,477 16,442
Accrued expenses 5,627 5,977
Taxes payable 78
-------------------- ---------------------
Total current liabilities 45,868 32,407
Long-term debt, excluding current portion 8,019 20,133
Capital lease obligations, excluding current obligations 15,713 16,296
-------------------- ---------------------
Total liabilities 69,600 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(including
shares in escrow) issued for 2003 and 2002 and 7,789,261
outstanding for 2003 and 2002, respectively 36,963 36,963
Retained earnings 20,265 31,220
Treasury stock, 542,101 and 533,900 shares at cost for 2003 and
2002, respectively (2,547) (2,518)
-------------------- ---------------------
Total stockholders' equity 54,681 65,665
-------------------- ---------------------
$ 124,281 $ 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 THIRTY-NINE WEEKS ENDED
OCTOBER 3, 2003 SEPTEMBER 27, 2002 OCTOBER 3,2003 SEPTEMBER 27, 2002
----------------- -------------------- ---------------- --------------------
Net sales $ 38,455 $ 37,580 $ 119,283 $ 91,296
Cost of sales 36,117 33,153 106,905 82,767
----------------- -------------------- ---------------- --------------------
Gross profit 2,338 4,427 12,378 8,529
----------------- -------------------- ---------------- --------------------
Operating expenses:
General and administrative 1,448 1,972 5,595 5,079
Selling 1,719 1,686 5,178 2,140
Distribution 2,490 1,913 7,039 1,913
Goodwill impairment 3,580
----------------- -------------------- ---------------- --------------------
Total operating expenses 5,657 5,571 21,392 9,132
----------------- -------------------- ---------------- --------------------
Operating loss (3,319) (1,144) (9,014) (603)
----------------- -------------------- ---------------- --------------------
Other (expense) income:
Interest income - 46 14 487
Interest expense (873) (970) (2,597) (1,367)
Equity in loss of unconsolidated joint venture (496) (276) (1,018) (729)
Gain on sale of certain shelter operations - 1,680
Other, net 18 (274) 844 (559)
----------------- -------------------- ---------------- --------------------
Total other expense (1,351) (1,474) (1,077) (2,168)
----------------- -------------------- ---------------- --------------------
Loss before income taxes and cumulative
effect of change in accounting principle (4,670) (2,618) (10,091) (2,771)
Income tax provision (benefit) 1,069 (384) 864 534
----------------- -------------------- ---------------- --------------------
Loss before cumulative effect
of change in accounting principle (5,739) (2,234) (10,955) (3,305)
Cumulative effect of change in accounting
principle, net of tax - - 853
----------------- -------------------- ---------------- --------------------
Net loss (5,739) (2,234) (10,955) (4,158)
Other comprehensive loss, net of income
tax benefit $ (139) $ (139)
----------------- -------------------- ---------------- --------------------
Comprehensive loss $ (5,739) $ (2,373) $ (10,955) $ (4,297)
================= ==================== ================ ====================
Net loss per share, basic and diluted before
cumulative effect of change in accounting
principle $ (0.76) $ (0.30) $ (1.46) $ (0.47)
Cumulative effect of change in accounting
principle net of tax (0.12)
----------------- -------------------- ---------------- --------------------
Net loss per share, basic and diluted $ (0.76) $ (0.30) $ (1.46) $ (0.59)
================= ==================== ================ ====================
Shares used to compute net loss per share,
basic and diluted 7,502,561 7,510,762 7,506,127 7,080,987
================= ==================== ================ ====================
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)
THIRTY-NINE WEEKS ENDED
OCTOBER 3, 2003 SEPTEMBER 27, 2002
----------------- --------------------
Cash flows from operating activities:
Net loss $ (10,955) $ (4,158)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 4,605 1,634
Gain on sale of certain Shelter operations (1,680)
Cumulative effect of change in accounting principle - goodwill impairment 853
Provision for doubtful trade accounts receivable 162
Goodwill impairment loss 3,580
Provision for excess and obsolete inventory 28 215
Equity in loss of unconsolidated joint venture 1,019 729
Deferred income tax benefit 358 540
Change in operating assets and liabilities net of effects from
acquisition of Franklin in 2002:
Restricted cash (1,500)
Trade accounts receivable 49 2,364
Other receivables (12) 429
Inventories 237 (3,217)
Refundable income taxes 1,193 1,033
Prepaid expenses 95 351
Other assets 286 2
Accounts payable 2,034 1,018
Accrued expenses (350) (1,649)
Taxes payable (78) (45)
----------------- --------------------
Net cash (used in) provided by operating activities (1,091) 261
----------------- --------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (4,861) (1,628)
Proceeds from sale of certain Shelter operations 1,800
Investment in joint venture (950)
Business acquisition, net of cash acquired (497)
Repayment of related party note receivable 3,000
----------------- --------------------
Net cash used in investing activities (3,061) (75)
----------------- --------------------
Cash flows from financing activities:
Proceeds from notes payable and long term-debt 3,596 2,276
Payments of notes payable and long term-debt (3,856) (11,356)
Principal repayments of capital lease obligations (583)
----------------- --------------------
Net cash used in financing activities (843) (9,080)
----------------- --------------------
Net decrease in cash and cash equivalents (4,995) (8,894)
Cash and cash equivalents, beginning of period 8,919 16,850
----------------- --------------------
Cash and cash equivalents, end of period $ 3,924 $ 7,956
================= ====================
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 October 3, 2003, the results of operations for
the thirteen and thirty-nine weeks ended October 3, 2003 and September 27, 2002
and cash flows for the thirty-nine weeks ended October 3, 2003 and September 27,
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 and thirty-nine weeks ended October
3, 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 thirty-nine weeks ended October 3, 2003 includes six more days
than the thirty-nine weeks ended September 27, 2002.
Certain prior year amounts have been reclassified to conform to the 2003
financial statement presentation.
(2) 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. During
the second and third quarter of 2003, 38,210 and 25,020 options respectively,
were forfeited due to the resignation of one of the awarded executives during
the second quarter and two awarded executives during the third quarter.
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 10 100,000 $5.35
7,500 $6.00 10 $5.35
The Company accounts for these plans under APB Opinion No. 25, under which
compensation cost of $35 thousand and $188 thousand have been recognized for the
thirteen and thirty-nine weeks ended October 3, 2003. Additional compensation
expense of $160 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
income (loss) and income (loss) per share would have been adjusted to the
following proforma amounts:
6
13 Weeks ended 39 Weeks ended
October 3, 2003 September 27, 2002 October 3, 2003 September 27, 2002
(In thousands of U.S. dollars)
Net loss as reported $ (5,739) $ (2,234) $ (10,955) $ (3,305)
Stock based employee compensation expense included
in reported net loss 35 244 188 244
Total stock-based employee compensation expense
determined under fair value based method (45) (321) (237) (321)
----------------------------------------------------------------------------
Pro forma net loss $ (5,749) $ (2,311) $ (11,004) $ (3,382)
============================================================================
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, 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 as based on an analysis of these options
using the Black-Scholes method, the Company believes the fair value of the
options is zero.
(3) 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". 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 and the identification of reporting
units for purposes of assessing potential impairments of goodwill. SFAS No. 142
also requires the Company to perform 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.
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. ("Precision") in 1999. The
primary 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 $3.7 million was recorded during the third quarter of 2002
as a result of the acquisition of Franklin. The Company currently anticipates
the need to test the Precision goodwill of approximately $4.5 million for
impairment during the quarter ended December 31, 2003 due to changes in
circumstances regarding the operation and liquidity of the subsidiary.
(4) ACQUISITION AND DISPOSITION OF ASSETS
The sale of certain assets, effective at the close of business on July 4, 2003,
was made to TECMA Group LLC, a private contract, shelter and manufacturing
services provider headquartered in El Paso, Texas. The transaction included the
sale of five Shelter Services customer contracts, miscellaneous assets and stock
of five newly created Companies. Substantially all Shelter Services operations
personnel related to these contracts were transferred to the buyer. Proceeds
from the disposition of these operations of $1.8 million were received in full
on July 11, 2003. In connection with the disposition the Company transferred
assets with a book value of $120 thousand to the buyer and recorded a gain of
$1.7 million. The Company incurred other costs of approximately $575 thousand
associated with the sale, which were included in operating expenses in the
second quarter.
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
7
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 U.S. dollars, except per share data)
Thirty-nine Weeks Ended
Oct 3, 2003 Sep 27, 2002
------------- --------------
Net sales $ 119,283 $ 113,233
Gross profit 12,378 12,994
Net loss (10,955) (9,347)
Net loss per share (1.46) (1.24)
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.
(5) NOTES PAYABLE AND LONG TERM DEBT
Debt agreements for Precision contain a number of affirmative and negative
covenants, including limitations on additional borrowings and maintenance of
certain financial ratios. Precision is not in compliance with certain of these
covenants as of and for the quarter ended October 3, 2003. The $8.2 million debt
matures in March 2004 and has been classified as current in the accompanying
balance sheet included in the consolidated condensed financial statements. The
Company has not guaranteed nor is it otherwise liable for the bank debt of
Precision. The Company currently does not intend to guarantee the bank
indebtedness of Precision or otherwise provide any support or collateral for
this obligation. The Company also currently does not intend to fund any future
cash flow requirements for Precision. Based on current information, the Company
does not believe that Precision will generate sufficient cash flow to fund its
short-term liquidity requirements, including the ability to repay the
indebtedness due to the bank or for Precision to be in compliance with the
covenants under the loan agreement. The loan agreement provides that the bank
may declare the loan to be in default and may pursue all of the remedies,
including the acceleration of all obligations under the loan agreement and the
exercise of it remedies which include the foreclosure of collateral and other
assets. Precision has pledged all of its assets as collateral for its
obligations under the loan agreement. Alternatively, the bank might take lesser
actions, such as restricting additional borrowing or calling for principal
reductions. Increased interest rates can be applied to Precision when it is in
default of the loan agreement. Precision intends to negotiate with the bank in
an attempt to avoid a default under the loan agreement and the exercise by the
bank of its rights under the loan agreement. In the event Precision is not
successful in its negotiations, Precision will be required to take such actions
are as necessary to protect the interests of all of its creditors which could
include the filing for protection from creditors under Chapter 11 of the U.S.
bankruptcy laws.
The accompanying consolidated financial statements include the accounts of
Precision, which have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. Such Precision financial information does not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
Precision be unable to continue as a going concern.
(6) SEGMENT REPORTING
The Company's reportable segments are 1) Shelter Services, 2) Metal Stamping and
3) Food Products (Acquired in the 3rd Quarter of 2002).
The Shelter Services segment provides shelter, assembly and real estate services
throughout Mexico and also provides assembly services, primarily to the Food
Products segment. Certain assets and contracts related to Shelter Services were
sold as of July 4, 2003 (See note 4).
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.
8
The following table presents net sales and net income (loss) by segment in
thousands of U.S.dollars:
UNALLOCATED
SHELTER METAL FOOD CORPORATE
SERVICES STAMPING PRODUCTS AND OTHER INTER-SEGMENT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED OCTOBER 3, 2003
Sales $ 4,851 $ 18,746 $ 19,058 $ (4,200) $ 38,455
Net loss
(2,322) (1,848) (720) (849) (5,739)
- -----------------------------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED SEPTEMBER 27, 2002
Sales $ 8,079 $ 18,518 $ 13,713 $ $ (2,730) $ 37,580
Net ( loss) income
(368) 205 (1,219) (852) (2,234)
- -----------------------------------------------------------------------------------------------------------------------------
THIRTY-NINE WEEKS ENDED OCTOBER 3, 2003
Sales $ 21,960 $ 54,917 $ 54,374 $ $ (11,968) $119,283
Net loss
(1,432) (1,989) (1,948) (5,586) (10,955)
- -----------------------------------------------------------------------------------------------------------------------------
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2002
Sales $ 23,954 $ 56,359 $ 13,713 $ $ (2,730) $ 91,296
(Loss) income before cumulative effect of
change in accounting principle (832) 531 (1,219) (1,785) (3,305)
- -----------------------------------------------------------------------------------------------------------------------------
(7) INVENTORIES
Inventories consist of the following:
OCTOBER 3, 2003 DECEMBER 31, 2002
(In Thousands of U.S. Dollars)
Raw materials $ 4,834 $ 4,519
Packaging supplies 1,535 2,096
Work-in-process 996 1,622
Finished goods 7,277 6,792
--------------- ------------------
Sub total 14,642 15,029
Less reserve for excess and obsolete inventory (889) (1,011)
--------------- ------------------
Total $ 13,753 $ 14,018
=============== ==================
(8) FOREIGN CURRENCY
Included in "other, net" in the accompanying unaudited consolidated condensed
statements of operations are foreign exchange losses of $95 thousand and $7
thousand for the thirteen weeks ended October 3, 2003, and September 27, 2002,
respectively and $211 thousand and $265 thousand for the thirty-nine weeks ended
October 3, 2003, and September 27, 2002, respectively.
Assets and liabilities denominated in Mexican pesos are summarized as follows:
October 3, 2003 December 31, 2002
------------------- ------------------
(In Thousands of U.S. Dollars)
Cash and cash equivalents $ 124 $ 262
Other receivables 1,233 1,032
Prepaid expenses and refundable taxes 2,279 1,705
Other assets, net 5 26
Accounts payable (104) (477)
Accrued expenses and other liabilities (537) (1,264)
------------------- ------------------
Net foreign currency position $ 3,000 $ 1,284
=================== ==================
9
(9) 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 provision (benefit) for the thirteen weeks ended October 3,
2003 and September 27, 2002 was $1.1 million and $(384) thousand, respectively,
and $864 thousand and $534 thousand for the thirty-nine weeks ended October 3,
2003 and September 27, 2002, 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.
In addition SFAS No. 109, "Accounting for Income Taxes," requires that a
valuation allowance be established when it is "more likely than not" that all or
a portion of deferred tax assets will not be realized. A review of all available
positive and negative evidence needs to be considered, including a company's
performance, the market environment in which the company operates, the
utilization of past tax credits, length of carryback and carryforward periods,
and existing contracts or sales backlog that will result in future profits,
among other factors. As a result of the review undertaken for the third quarter
of 2003, the Company concluded that it was appropriate to increase the valuation
allowance for most of the net deferred tax assets arising from its operations in
Mexico. As a result, the valuation allowances for deferred tax assets in Mexico
increased approximately $2.1 million, resulting in additional income tax expense
for the quarter ended October 3, 2003. The total valuation allowance for Mexico
deferred tax assets as of the end of the third quarter 2003 was $6.5 million.
(10) EARNINGS PER SHARE
Earnings per share ("EPS"), is computed in accordance with the Financial
Accounting Standards Board's Statement, or SFAS No. 128, Earnings per share.
SFAS No. 128 requires dual presentation of basic and diluted earnings per share.
Basic EPS includes no dilution and it is computed by dividing net income by
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in our earnings,
such as common stock equivalents that may be issuable upon exercise of
outstanding common stock options. The average number of shares used to calculate
basic and diluted income per share were 7,502,561 for the thirteen weeks ended
October 3, 2003 and for the thirteen weeks ended September 27, 2002 were
7,510,762. The average number of shares used to calculate basic and diluted loss
per share, were 7,506,127 and 7,080,987 for the thirty-nine weeks ended October
3, 2003 and September 27, 2002, respectively.
(11) NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 improves financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when
a derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in FIN No. 45, and (4) amends certain
other existing pronouncements. Those changes will result in more consistent
reporting of contracts as either derivatives or hybrid instruments. In general,
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 has not had a material impact on the Company's financial
position or results of operations.
In May 2003, the FASB issued Statement No. 150 ("SFAS 150"), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. In general this statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective for
interim periods beginning after June 15, 2003. The adoption of this statement
has not had a material impact on the Company's financial position or results of
operations.
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:
10
UNALLOCATED
SHELTER METAL FOOD CORPORATE
SERVICES(2) STAMPING PRODUCTS(1) AND OTHER INTER-SEGMENT TOTAL
- -----------------------------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED OCTOBER 3, 2003
Net Sales $ 4,851 $ 18,746 $ 19,058 $ (4,200) $ 38,455
Gross profit (loss) 251 (2,011) 4,098 2,338
Operating expenses 202 754 4,317 $ 384 5,657
Other expense (1) (179) (706) (465) (1,351)
- -----------------------------------------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED SEPTEMBER 27, 2002
Net sales $ 8,079 $ 18,518 $ 13,713 $ (2,730) $ 37,580
Gross profit 498 1,178 2,751 4,427
Operating expenses 459 793 3,774 $ 545 5,571
Other expense (261) (224) (824) (165) (1,474)
- -----------------------------------------------------------------------------------------------------------------------------
THIRTY-NINE WEEKS ENDED OCTOBER 3, 2003
Net sales $ 21,960 $ 54,917 $ 54,374 $ (11,968) $119,283
Gross profit (loss) 1,424 (589) 11,543 12,378
Operating expenses 1,652 1,990 12,719 $ 5,031 21,392
Other income (expense) 1,705 (527) (1,609) (646) (1,077)
- -----------------------------------------------------------------------------------------------------------------------------
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2002
Net sales $ 23,954 $ 56,359 $ 13,713 $ (2,730) 91,296
Gross profit 2,150 3,628 2,751 8,529
Operating expenses 1,528 2,229 3,774 $ 1,601 9,132
Other expense (271) (701) (824) (372) (2,168)
- -----------------------------------------------------------------------------------------------------------------------------
(1) Acquired June 28, 2002.
(2) Certain assets and contracts related to this segment were sold as of July 4, 2003.
GENERAL
NET SALES
Net sales for the thirteen weeks ended October 3, 2003 increased 2% to $38.5
million from $37.6 million for the comparable period in 2002. Net sales for the
thirty-nine weeks ended October 3, 2003 increased 31% to $119.3 million from
$91.3 million for the comparable period in 2002.
Sales for Shelter Services for the thirteen weeks ended October 3, 2003
decreased 40% to $4.9 million from $8.1 million for the same period in the prior
year. Net sales for the thirty-nine weeks ended October 3, 2003 decreased 8% to
$22 million from $24 million for the same period in the prior year. The decrease
in the thirteen and thirty-nine week periods was primarily due to the sale of
certain customer's contracts as of July 4, 2003.
Sales for Metal Stamping for the thirteen weeks ended October 3, 2003 increased
1% to $18.7 million from $18.5 million for the same period in the prior year.
Sales for the thirty-nine weeks ended October 3, 2003 decreased 3% to $54.9
million from $56.4 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. See "Liquidity and Capital Resources" for a
discussion of the material adverse effect on future net sales for the Metal
Stamping division.
Sales for Food Products for the thirteen weeks ended October 3, 2003 increased
39% to $19.1 million from $13.7 million for the same period in the prior year.
Food Products sales are made to retailers and to wholesalers, including large
companies in the food service business. This increase was due to a greater
degree to expansion of market share in sales to retailers, and also to an
increase in sales to food service. Sales for the thirty-nine weeks ended October
3, 2003 were $54.4 million. The Food Products segment was acquired at the
beginning of the third quarter of the prior year and therefore only included
thirteen weeks of sales in 2002.
11
GROSS PROFIT
Gross profit for the thirteen weeks ended October 3, 2003 was $2.3 million or 6%
of sales, compared to $4.4 million or 12% of sales for the same period of the
prior year. Gross profit for the thirty-nine weeks ended October 3, 2003 was
$12.4 million or 10% of sales, compared to $8.5 million or 9% of sales for the
same period of the prior year.
Gross profit for Shelter Services for the thirteen weeks ended October 3, 2003
decreased 50% to $251 thousand from $498 thousand for the same period in the
prior year. Gross profit for the thirty-nine weeks ended October 3, 2003
decreased 34% to $1.4 million from $2.2 million for the same period in the prior
year. The decrease was primarily due to available buildings not rented during
the first half of 2003 of approximately $400 thousand and the sale of certain
customers' contracts.
Gross (loss) profit for Metal Stamping for the thirteen weeks ended October 3,
2003 was $(2.0) million compared to $1.2 million for the same period in the
prior year. Gross (loss) profit for Metal Stamping for the thirty-nine weeks
ended October 3, 2003 was $(589) thousand compared to $3.6 million for the same
period in the prior year. The decrease in gross profit was caused primarily by
an increase in material cost of $1.9 million and $54 thousand for the thirteen
and thirty-nine weeks period respectively, an increase in labor costs of
approximately $830 thousand and $1.5 million for the thirteen and thirty-nine
weeks period respectively, increase in factory overhead of approximately $380
thousand and $790 thousand for the thirteen and thirty-nine weeks period
respectively, and an increase in depreciation expense of approximately $240
thousand and $660 thousand for the thirteen and thirty-nine weeks period
respectively. These increases were mainly due to start-up of new product lines
and the break down of two press machines in this quarter.
Gross profit for Food Products segment for the thirteen weeks ended October 3,
2003 increased 49% to $4.1 million from $2.8 million for the same period in the
prior year. Gross profit for the thirty-nine weeks ended October 3, 2003 was
$11.5 million compared to $2.8 million for the same period in the prior year
which included only thirteen weeks of activity.
OPERATING EXPENSES
Operating expenses increased to $5.7 million for the thirteen weeks ended
October 3, 2003, compared to $5.6 million for the same period of the prior year.
Operating expenses increased to $21.4 million for the thirty-nine weeks ended
October 3, 2003 from $9.1 million for the same period in the prior year due
mainly to the acquisition of the Food Products segment at the beginning of the
third quarter of 2002.
Operating expenses for Shelter Services for the thirteen weeks ended October 3,
2003 decreased 56% to $202 thousand from $459 thousand for the same period in
the prior year. The decrease was primarily due to the decrease of administrative
and selling expenses due to the sale of certain Shelter operations. Operating
expenses for the Thirty-nine weeks increased 8% to $1.7 million from $1.5
million recorded in the same period of the prior year. The increase was
primarily due to recognition of exit costs of $575 thousand during second
quarter of 2003, partially offset by a decrease in administrative and selling
expenses.
Operating expenses for Metal Stamping for the thirteen weeks ended October 3,
2003 decreased 5% to $754 thousand from $793 thousand for the same period in the
prior year. Operating expenses for the thirty-nine weeks ended October 3, 2003
decreased 11% to $2 million from $2.2 million for the same period in the prior
year. The primary reason for the decrease was the cancellation of allowance for
doubtful accounts for approximately $200 thousand during the second quarter of
2003.
Operating expenses for Food Products for the thirteen weeks ended October 3,
2003 were $4.3 million compared to $3.8 million for the same period in the prior
year. The increase was primarily due to an increase in distribution expenses of
approximately $577 thousand. Operating expenses for the thirty-nine weeks ended
October 3, 2003 were $12.7 million and $3.8 million for the thirty-nine weeks
ended September 27, 2002. The increase is primarily due to the fact that only 13
weeks of operations are included in the 2002 period due to the acquisition of
the Food Products segment at the beginning of the third quarter of 2002.
Operating expenses for Corporate for the thirteen weeks ended October 3, 2003
decreased 30% to $384 thousand from $545 thousand for the same period in the
prior year. Operating expenses for the thirty-nine weeks ended October 3, 2003
increased to $5 million from $1.6 million for the same period in the prior year.
The increase was primarily due to goodwill impairment of $3.6 million.
12
OTHER (EXPENSE) INCOME
Other expense for the thirteen weeks ended October 3, 2003 was $1.4 million,
compared to $1.5 million in the same period of the prior year. Other expense for
the thirty-nine weeks ended October 3, 2003 was $1.1 million as compared to an
expense of $2.2 million for the same period in the prior year.
Other expense for Shelter Services for the thirteen weeks ended October 3, 2003
was $1 thousand as compared to $261 thousand for the same period in the prior
year. Other income for the thirty-nine weeks ended October 3, 2003 was $1.7
million as compared to an expense of $271 thousand for the same period in the
prior year. The primary reason for the increase was the recognition of a gain on
the sale of five shelter contracts, miscellaneous assets and stock of five newly
created companies of approximately $1.7 million.
Other expense for Metal Stamping for the thirteen weeks ended October 3, 2003
decreased to $179 thousand from $224 thousand for the same period in the prior
year. Other expense for the thirty-nine weeks ended October 3, 2003 decreased to
$527 thousand from $701 thousand for the same period in the prior year. The
primary reason for the decrease was due to a loss on the disposal of fixed
assets recorded in the first and second quarter of 2002 and a decrease in
interest expense as result of a decrease in interest rates.
Other expense for Food Products for the thirteen weeks ended October 3, 2003
decreased to $706 thousand from $824 thousand for the same period in the prior
year. Other expense for the thirty-nine weeks ended October 3, 2003 was $1.6
million and for the thirty-nine weeks ended September 27, 2002 the Food Products
segment incurred in other expenses of $824 thousand from its inception. During
the second quarter of 2003 this segment recorded a gain of $750 thousand
resulting from a settlement of a customer contract breach.
Other expense for Corporate for the thirteen weeks ended October 3, 2003
increased to $465 thousand from an expense of $165 thousand for the same period
in the prior year. The increase was primarily due to an increase in loss of
unconsolidated joint venture of $220 thousand and a decrease in interest income
of $113 mainly due to a reduction in inter-company loans. Other expense for the
thirty-nine weeks ended October 3, 2003 increased to $646 thousand from an
expense of $372 thousand for the same period in the prior year. The increase was
primarily due to an increase in loss of unconsolidated joint venture of $289.
TAXES
The tax provision for the thirteen weeks ended October 3, 2003 was $1.1 million
and compared to a tax benefit of $384 thousand for the same period in the prior
year. The tax provision for the thirty-nine weeks ended October 3, 2003 and
September 27, 2002 was $864 thousand and $534 thousand respectively.
The Company has increased the valuation allowance for most of its remaining
deferred tax assets in the Mexican entities and recognized a $2.1 million charge
during the current quarter. In previous reporting periods, we had provided
valuation allowances for future tax benefits resulting from asset tax credit
carry forwards and certain net operating losses in Mexico where the Company
believed future realizability was in doubt. SFAS No. 109 requires a valuation
allowance be established when it is "more likely than not" that all or a portion
of deferred tax assets will not be realized. The Company increased its valuation
allowance with respect to net operating losses in Mexico in the third quarter of
2003 based upon several factors, including the sale of certain Shelter
operations in Mexico, continuing market conditions, the absence of material
growth in revenues in Mexico and other related factors. The Company believes it
is more likely than not that the remaining net deferred tax assets would be
realized within the ten-year net operating loss carry forward periods.
Other differences 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
13
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 ("Precision") 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 $3.7 million was recorded during the third quarter of 2002
as a result of the acquisition of Franklin.
The Company currently anticipates the need to test Precision goodwill for
impairment during the quarter ended December 31, 2003 due to changes in
circumstances regarding the operation and liquidity of the subsidiary.
Management expects that the amount of the impairment to be recorded could be as
much as $4.5 million, which is the entire balance of goodwill related to
Precision.
NET LOSS AND LOSS PER SHARE
Net loss for the thirteen weeks October 3, 2003 was $5.7 million compared to a
net loss of $2.4 million for the same period of 2002. For the thirteen weeks
ended October 3, 2003 basic and diluted net loss per share was $0.76, which
compares with a loss per share of $0.30 for the same period of the prior year.
The average number of shares used to calculate basic and diluted income per
share were 7,502,561 for the thirteen weeks ended October 3, 2003 and the
average number of shares used for the thirteen weeks ended September 27, 2002
were 7,510,762. Net loss for the thirty-nine weeks ended October 3, 2003 was
$11.0 million compared to a net loss of $4.3 million for the same period of
2002. For the thirty-nine weeks ended October 3, 2003 basic and diluted net loss
per share was $1.46, which compares with a loss per share of $0.59 for the same
period of the prior year. The average number of shares used to calculate basic
and diluted loss per share, were 7,506,127 and 7,080,987 for the thirty-nine
weeks ended October 3, 2003 and September 27, 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital (defined as current assets minus current
liabilities) as of October 3, 2003 decreased to a negative $4.9 million as
compared to a positive $13.5 million as of December 31, 2002. A line of credit
with an outstanding amount of $8.2 million, associated with the Metal Stamping
segment is now classified as a current liability since it is scheduled to mature
in March 2004.
For the thirty-nine weeks ended October 3, 2003 the net cash used in operating
activities was $1.1 million.
The net cash used in investing activities was $3.1 million for the thirty-nine
weeks ended October 3, 2003, due to the acquisition of equipment partially
offset by proceeds from sale of certain shelter operations.
The net cash used in financing activities was $843 thousand for the thirty-nine
weeks ended October 3, 2003 due to the net payments on notes payable and long
term debt and capital leases.
Debt agreements for Precision contain a number of affirmative and negative
covenants, including limitations on additional borrowings and maintenance of
certain financial ratios. Precision is not in compliance with certain of these
covenants as of and for the quarter ended October 3, 2003. The $8.2 million debt
matures in March 2004 and has been classified as current in the accompanying
balance sheet included in the consolidated condensed financial statements. The
Company has not guaranteed nor is it otherwise liable for the bank debt of
Precision. The Company currently does not intend to guarantee the bank
indebtedness of Precision or otherwise provide any support or collateral for
this obligation. The Company also currently does not intend to fund any future
cash flow requirements for Precision. Based on current information, the Company
does not believe that Precision will generate sufficient cash flow to fund its
short-term liquidity requirements, including the ability to repay the
indebtedness due to the bank or for Precision to be in compliance with the
covenants under the loan agreement. The loan agreement provides that the bank
may declare the loan to be in default and may pursue all of the remedies,
including the acceleration of all obligations under the loan agreement and the
exercise of it remedies which include the foreclosure of collateral and other
assets. Precision has pledged all of its assets as collateral for its
obligations under the loan agreement. Alternatively, the bank might take lesser
actions, such as restricting additional borrowing or calling for principal
reductions. Increased interest rates can be applied to Precision when it is in
default of the loan agreement. Precision intends to negotiate
14
with the bank in an attempt to avoid a default under the loan agreement and the
exercise by the bank of its rights under the loan agreement. In the event
Precision is not successful in its negotiations, Precision will be required to
take such actions are as necessary to protect the interests of all of its
creditors which could include the filing for protection from creditors under
Chapter 11 of the U.S. bankruptcy laws.
The accompanying consolidated financial statements include the accounts of
Precision, which have been prepared on a going concern basis, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. Such Precision financial information does not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
Precision be unable to continue as a going concern.
The Company anticipates the need to test the value of Precision's long-lived
assets for impairment in the fourth quarter of 2003. Events in the third quarter
and the accompanying changes in liquidity indicate that the carrying amount of
these assets may not be recoverable. Management expects that an impairment
charge for long-lived assets may be needed. The Company's total investment in
Precision is $18.5 million, including the value of goodwill and the investment
in this subsidiary. This total investment is at risk of loss as a result of the
matters discussed herein. If such loss were to occur, it would have a material
effect on the financial results of the Company.
Management intends to fund current operations and activities of the Company,
other than for Precision, through existing working capital, cash, available
credit facilities and refinancing of certain short -term debt.
NASDAQ LISTING
On November 28, 2003 the Company announced that it had received a notice from
NASDAQ Listing Qualifications relating to the late filing of the Company's Form
10-Q report with the Securities and Exchange Commission (SEC) for the third
quarter ended October 3, 2003. The Company was notified by NASDAQ that it had
not received the Company's Form 10-Q for the period ended October 3, 2003 as
required by Marketplace Rule 4310 (c)(14) and that its securities will be
delisted from The NASDAQ Stock Market at the opening of business on December 5,
2003 unless the Company requested a hearing in accordance with the Marketplace
Rule 4800 Series. The Company has been granted a hearing on December 22, 2003
and there is a stay on the delisting of the Company's securities pending the
NASDAQ's decision. The Company anticipates that the filing of this Form 10-Q
will allow the Company to continue with the listing of its common stock on the
NASDAQ National Market.
In addition, the filing of a bankruptcy action by any issuer could also affect
the listing of securities under the NASDAQ rules. NASDAQ has interpreted this
rule to include the filing of bankruptcy by a significant subsidiary. There is a
risk that if Precision is required to file for protection under the bankruptcy
rules that NASDAQ may take action to delist the Company's securities. If NASDAQ
takes such action, the Company will request a hearing from NASDAQ in an attempt
to avoid delisting.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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 critical accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" . SFAS No. 149 improves financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when
a derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in FIN No. 45, and (4) amends certain
other existing pronouncements. Those changes will result in more consistent
reporting of contracts as either derivatives or hybrid instruments. In general,
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 has not had a material impact on the Company's financial
position or results of operations.
In May 2003, the FASB issued Statement No. 150 ("SFAS 150"), "ACCOUNTING FOR
CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITY." SFAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. In general this statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective for
interim periods beginning after June 15, 2003. The adoption of this statement
has not had a material impact on the Company's financial position or results of
operations.
15
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.
As noted above, the Company has a hearing scheduled with The NASDAQ Stock
Market, Inc. on December 22, 2003 to ask that its common stock continue to be
listed for trading. The Company is hopeful that the request to allow the
Company's common stock to continue to be listed will be granted. However, there
is no assurance that the Company will be successful in this regard. In addition,
there is a risk that NASDAQ will take action to delist our common stock in the
event that Precision is required to seek protection under Chapter 11 of the
Bankruptcy Act. The delisting of our common stock could adversely affect the
price of a share of common stock and the ability of our stockholders to sell
their shares of our common stock.
As a result of the Company's failure to file its Form 10-Q in a timely manner,
the Company may be subject to inquiry or investigation by governmental
authorities, including the Securities and Exchange Commission. In the event that
the Company becomes subject to such an inquiry or investigation, the Company
will fully cooperate with such inquiry or investigation. There is a risk that
such an inquiry or investigation could result in substantial costs and divert
management attention and resources from our business, which could adversely
affect our business.
In the past, private securities class action litigation has been brought against
companies after events occurred that caused volatility in market prices. Due to
the recent announcement of the failure to timely file the Form 10-Q and the
liquidity concerns for Precision, there is a risk that private securities
litigation may be brought against the Company. There is a risk that such
litigation could result in substantial costs and divert management attention and
resources from our business, which could adversely affect our business.
There is a risk that the liquidity concerns for Precision may have an adverse
effect on the Company and its business. The Company has not guaranteed nor is it
otherwise liable for the indebtedness of Precision. However, the Company's other
customers, suppliers and creditors may be concerned that the liquidity concerns
for Precision will make the Company a less creditworthy consolidated entity with
whom to conduct business and may discontinue business with the Company or may
restrict the extension of credit. If this occurs, the Company's business and its
financial condition could be adversely affected.
The Company's stock price may become volatile, in part, due to the announcement
of its failure to timely file its Form 10-Q and the liquidity concerns for
Precision.
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 $273 thousand assuming the Company's existing $3 million
asset monetary position in 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 $28.8 million at
October 3, 2003, inclusive of amounts borrowed under short-term and long-term
credit facilities. A 1.0 % increase in interest rates would result in a $288
thousand annual increase in interest expense on the existing principal balance.
The Company has determined 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.
16
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
SEC rules. Based on their evaluation of the Company's disclosure controls and
procedures which took place at the end of the quarter, 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, with the exception of the information related
to its subsidiary Precision Tool, Die and Machine Company ("Precision").
Due to the discovery of a material inventory adjustment at Precision in November
2003 that affected the quarter ended October 3, 2003, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that the disclosure
controls and procedures applicable to Precision were not effective to ensure
that the Company is able to collect, process and disclose the information the
Company is required to disclose in the reports it files with the SEC within the
required time periods. On November 18, 2003, the Company announced that it was
unable to file its Form 10-Q without unreasonable effort or expense due to an
unexpected result in a physical inventory performed as of October 31, 2003, by
Precision. The Company recorded an adjustment of $2.1 million as a reduction to
inventory as the result of an inventory count subsequent to the quarter end to
properly reflect inventory and cost of goods sold as of October 3, 2003.
Management is currently in the process of developing improved systems and
controls to be implemented at Precision. Until such time that improved controls
are operating to the satisfaction of management, supplemental temporary methods
of assuring timely compliance with applicable reporting requirements will be
used. The primary control procedure to prevent delayed recognition of the need
for an inventory adjustment is to conduct a comprehensive physical inventory
count at the end of each quarterly reporting period until such time that more
automated inventory accounting practices produce satisfactory results on a
timely basis.
The Company also maintains a system of internal control over financial reporting
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.
Other than that noted above there were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to management's evaluation of disclosure controls and
procedures, which took place at the end of the quarter.
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
See Part I, Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations - "Liquidity and Capital Resources."
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
The Company 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
31.1 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes
Oxley Act of 2002
2. Reports on Form 8-K during the quarter ended October 3, 2003.
A Form 8-K was filed on July 24, 2003, under item 9, incorporating by the
Company's press release dated July 14, 2003, reporting a partial
divesttiture of its Shelter Services Segment.
A Form 8-K was filed on August 15, 2003, under item 9, incorporating by
reference the Company's press release dated August 6, 2003, announcing
resignation of the Company's Chief Financial Officer Thomas Benson.
A Form 8-K was filed on August 25, 2003, under Item 9, incorporating by
reference the Company's August 15, 2003, press release setting forth the
Company's second-quarter 2003 earnings.
A Form 8-K was filed on September 11, 2003, under item 9, incorporating by
reference the Company's press release dated September 3, 2003, announcing
the appointment of Sam L. Henry as the Company's new Chief Financial
Officer.
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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: December 11, 2003 By: /s/ Richard P. Spencer
--------------------------------------
Richard P. Spencer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(DULY AUTHORIZED OFFICER)
Date: December 11, 2003 By: /s/ Sam L. Henry
--------------------------------------
Sam L. Henry
VICE- PRESIDENT AND CHIEF FINANCIAL
OFFICER
(DULY AUTHORIZED OFFICER)
19