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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: MARCH 31, 2004
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 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 14, 2004 was:
7,502,561
================================================================================
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
March 31, 2004 and December 31, 2003....................... 3
Unaudited Consolidated Condensed Statements of Operations
for the Three Months ended March 31, 200 and the thirteen
weeks ended April 4, 2003.................................. 4
Unaudited Consolidated Condensed Statements of Cash Flows
for the Three Months ended March 31, 2004 and the
thirteen weeks ended April 4, 2003......................... 5
Notes to Unaudited Consolidated Condensed Financial
Statements................................................. 6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
Item 3.Qualitative and Quantitative Disclosures about Market
Risk....................................................... 13
Item 4.Controls and Procedures.................................... 13
PART II. OTHER INFORMATION
Item 1.Legal Proceedings.......................................... 13
Item 2.Changes in Securities and use of Proceeds.................. 13
Item 3.Defaults upon Senior Securities............................ 13
Item 4.Submission of Matters to a Vote of Security Holders........ 13
Item 5.Other Information.......................................... 14
Item 6.Exhibits and Reports on Form 8-K........................... 14
SIGNATURES.............................................................. 15
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)
MARCH 31, 2004 DECEMBER 31, 2003
----------------------- -------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,551 $ 2,299
Receivables:
Trade accounts receivable, net 8,064 7,400
Other receivables, net 1,165 854
----------------------- -------------------------
9,229 8,254
Inventories, net 8,959 7,921
Income taxes receivable from Accel 579 579
Other taxes receivable 931 499
Prepaid expenses 1,021 1,024
----------------------- -------------------------
Total current assets 22,270 20,576
Property, plant and equipment, net 39,876 39,956
Investment and loans to unconsolidated joint venture 913 864
Investment in unconsolidated subsidiary in bankruptcy - -
Goodwill, net 3,707 3,707
Deferred income taxes 729 885
Other assets, net 1,327 1,415
----------------------- -------------------------
$ 68,822 $ 67,403
======================= =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 4,983 $ 5,282
Current portion of capital lease obligations 1,077 1,051
Accounts payable 9,342 6,251
Accrued expenses 6,831 6,543
Taxes payable 108 108
----------------------- -------------------------
Total current liabilities 22,341 19,235
Long-term debt, excluding current portion 1,746 1,827
Capital lease obligations, excluding current obligations 15,052 15,313
----------------------- -------------------------
Total liabilities 39,139 36,375
----------------------- -------------------------
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
issued and 7,510,762 outstanding 36,963 36,963
Deficit (4,733) (3,388)
Treasury stock, 542,101 shares at cost for 2004 and 2003 (2,547) (2,547)
----------------------- -------------------------
Total stockholders' equity 29,683 31,028
----------------------- -------------------------
$ 68,822 $ 67,403
======================= =========================
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)
THREE MONTHS ENDED THIRTEEN WEEKS ENDED
MARCH 31, 2004 APRIL 4, 2003
----------------------------- -----------------------------
Net sales $ 19,780 $ 39,428
Cost of sales 15,146 34,754
----------------------------- -----------------------------
Gross profit 4,634 4,674
----------------------------- -----------------------------
Operating expenses:
General and administrative 1,199 1,945
Selling 1,628 1,744
Distribution 2,163 2,218
Goodwill impairment - 3,580
----------------------------- -----------------------------
Total operating expenses 4,990 9,487
----------------------------- -----------------------------
Operating loss (356) (4,813)
----------------------------- -----------------------------
Other expense:
Interest expense (520) (844)
Equity in losses of unconsolidated joint venture (376) (172)
Other, net (24) (10)
----------------------------- -----------------------------
Total other expense (920) (1,026)
----------------------------- -----------------------------
Loss before income taxes (1,276) (5,839)
Income tax provision (benefit) 69 (403)
----------------------------- -----------------------------
Net loss $ (1,345) $ (5,436)
============================= =============================
Net loss per share, basic and diluted $ (0.18) $ (0.72)
============================= =============================
Shares used to compute net loss per share, basic and
diluted 7,502,561 7,510,762
============================= =============================
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)
THREE MONTHS ENDED THIRTEEN WEEKS ENDED
------------------------------ --------------------------------
MARCH 31, 2004 APRIL 4, 2003
------------------------------ --------------------------------
Cash flows from operating activities:
Net loss $ (1,345) $ (5,436)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 811 1,488
Provision for doubtful trade accounts receivable 25
Goodwill impairment loss - 3,580
Provision for excess and obsolete inventory 28
Equity in loss of unconsolidated joint venture 376 172
Deferred income tax expense (benefit) 156 (659)
Change in operating assets and liabilities:
Trade accounts receivable (664) 178
Other receivables (336) 401
Inventories (1,038) (857)
Refundable income taxes (132) 943
Prepaid expenses 3 (446)
Other assets 88 111
Accounts payable 2,791 2,810
Accrued expenses 288 (296)
------------------------------ --------------------------------
Net cash provided by operating activities 1,023 2,017
------------------------------ --------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (731) (2,014)
Investment in unconsolidated joint venture (425)
------------------------------ --------------------------------
Net cash used in investing activities (1,156) (2,014)
------------------------------ --------------------------------
Cash flows from financing activities:
Proceeds from notes payable and long term-debt - 245
Payments of notes payable and long term-debt (380) (2,244)
Principal repayments of capital lease obligations (235) (339)
------------------------------ --------------------------------
Net cash used in financing activities (615) (2,338)
------------------------------ --------------------------------
Net decrease in cash and cash equivalents (748) (2,335)
Cash and cash equivalents, beginning of period 2,299 8,919
------------------------------ --------------------------------
Cash and cash equivalents, end of period $ 1,551 $ 6,584
============================== ================================
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 2003
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 March 31, 2004, the results of operations for
the three months ended March 31, 2004 and the thirteen weeks ended April 4, 2003
and cash flows for the three months ended March 31, 2004 and the thirteen weeks
ended April 4, 2003. The consolidated condensed balance sheet as of December 31,
2003 is derived from the December 31, 2003 audited consolidated financial
statements. The results of operations for the three months ended March 31, 2004
are not necessarily indicative of the results to be expected for the entire
year.
For the year 2003 the Company closed the 13 weeks periods ending on a Friday,
except that the first quarter started on January 1, and the fourth quarter ended
on December 31. For 2004 the Company closes its quarterly reporting period on
the last calendar day of each quarter. As a result, the three months ended March
31, 2004 has 4 fewer days than the thirteen weeks ended April 4, 2003.
Certain amounts presented in the December 31, 2003 and April 4, 2003 financial
statements have been reclassed to conform to the March 31, 2004 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 has been recognized for the three months ended
March 31, 2004. Additional compensation expense of $91 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 pro forma amounts:
6
March 31, 2004 April 4, 2003
(In thousands of U.S. dollars)
Net loss as reported $ (1,345) $ (5,436)
Stock based employee compensation expense included in
reported net loss, net of tax 35 77
Total stock-based employee compensation expense determined
under fair value based method, net of tax (45) (118)
------------------------------------------
Pro forma net loss $ (1,355) $ (5,477)
==========================================
Loss per shares Basic and Diluted:
As reported $ (0.18) $ (0.72)
==========================================
Pro forma $ (0.18) $ (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, 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 pro forma compensation expense
has been recorded in connection with this plan because analysis of these options
using the Black-Scholes method indicates that the fair value of the options is
zero.
(3) GOODWILL
The Company recorded a goodwill impairment of $3.6 million during the first
quarter of 2003, 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. As a consequence of circumstances encountered in the
fourth quarter of 2003 that indicated that its carrying value may not be
recoverable and the voluntary petition for reorganization under Chapter 11 of
the U.S. Bankruptcy code filed by Precision, the Company tested the value of
Precision's goodwill in December 2003 and recognized full impairment it's
remaining value.
The Company's remaining goodwill as of March 31, 2004 is $3.7 million and it is
related only to the acquisition of Franklin during the third quarter of 2002.
The Company completed its annual impairment test during the first quarter of
2004 and determined that there was no impairment of goodwill to be recorded.
(4) SEGMENT REPORTING
The Company's reportable segments are 1) Shelter Services, 2) Metal Stamping,
and 3) Food Services. The Shelter Services segment provides shelter and assembly
services in Mexico for non-electronics manufacturing services companies. Certain
assets and contracts related to Shelter Services were sold as of July 4, 2003.
The Metal Stamping segment consists of Precision, the subsidiary located in
Louisville, Kentucky. Precision provides metal and stamping services primarily
to the appliance and automotive sectors.
The Metal Stamping segment, Precision was deconsolidated effective December 19,
2003. As a consequence of voluntary filing for protection under Chapter 11 of
the U.S. Federal Bankruptcy Code as of December 19, 2003, the investment in
Precision is recognized in accordance with the equity method of accounting.
The Food Services segment, Franklin, operates a retail nut and foodservice nut
packaging and marketing company, located in El Paso, Texas and a candy
manufacturing and packaging facility in Juarez, Mexico. The accounting policies
for the segments are the same as for Elamex taken as a whole. Corporate expenses
are not allocated to any of the segments and are presented separately.
Inter-segment adjustments are related primarily to inter-segment sales at cost
in the normal course of business.
7
The following table presents net sales and net income (loss) by segment in
thousands of U.S.dollars:
UNALLOCATED
SHELTER METAL FOOD CORPORATE INTER-
SERVICES STAMPING SERVICES AND OTHER SEGMENT TOTAL
-----------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2004
Net sales $ 3,954 $ - $ 19,196 $ - $ (3,370) $ 19,780
Net loss (505) - (367) (473) (1,345)
- ---------------------------------------------------------------------------------------------------------------------------
13 WEEKS ENDED APRIL 4, 2003
Net sales $ 8,627 $ 18,153 $ 16,651 $ $ 4,003) $ 39,428
Net loss (30) 21 (1,288) (4,139) (5,436)
- ---------------------------------------------------------------------------------------------------------------------------
(5) INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2004 2003
(In Thousands of U.S. Dollars)
Raw materials $ 1,912 $ 1,841
Packaging supplies 2,294 2,140
Work-in-process 210 260
Finished goods 5,083 4,220
-------------- --------------
Sub total 9,499 8,461
Less reserve for excess and obsolete inventory (540) (540)
-------------- --------------
Total $ 8,959 $ 7,921
============== ==============
(6) FOREIGN CURRENCY
Included in "other, net" in the accompanying unaudited consolidated condensed
statements of operations are foreign exchange losses of $21 thousand and $97
thousand for the three months ended March 31, 2004, and the thirteen weeks ended
April 4, 2003, respectively.
Assets and liabilities denominated in Mexican pesos are summarized as follows:
March 31, December 31,
2004 2003
-------------- --------------
(In Thousands of U.S. Dollars)
Cash and cash equivalents $ 186 $ -
Other receivables 1,006 864
Prepaid expenses and refundable taxes 1,308 1,282
Other assets, net 5 5
Accounts payable (504) (189)
Accrued expenses and other liabilities (529) (546)
-------------- --------------
Net foreign currency position $ 1,472 $ 1,416
============== ==============
(7) 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 Company's Mexican subsidiaries are each required to pay an alternative
minimum asset tax if the asset tax calculation is greater than income taxes
payable for the year. Asset taxes are calculated at 1.8% of assets less certain
liabilities and can be carried forward for up to 10 years as credits against
future income taxes payable. Before any asset tax carry forwards can be applied,
all net operating losses must first be utilized. Mexican companies have the
option to defer the asset tax four years forward and determine the higher of the
taxes comparing the current income tax calculation and the four year old asset
tax calculation increased by the effects of inflation. Some of the Company's
subsidiaries have elected this option. The total asset tax paid by the Company's
subsidiaries for the three months ended March 31, 2004 and the thirteen weeks
ended April 4, 2003 was approximately $434 thousand and $260 thousand,
respectively. In addition, the overall tax expense for the three months ended
8
March 31, 2004 was greater than that for the thirteen weeks ended April 4, 2003
primarily due to the recording of a valuation allowance against deferred tax
assets generated during the three months ended March 31, 2004.
(8) 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 three months ended
March 31, 2004 and for the thirteen weeks ended April 4, 2003 were 7,510,762.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company reports and analyzes its operations based on the markets the Company
serves. The Company's reportable segments are 1) Shelter Services, 2) Metal
Stamping and 3) Food Services.
SHELTER SERVICES SEGMENT
The Shelter Services segment provides shelter and assembly services in Mexico
for non-electronics manufacturing services companies. Under the
contract-manufacturing model, Elamex provides labor and administrative services.
Under the assembly business model, Elamex provides shared manufacturing space,
production management and may also provide material procurement services. In
July 2003 Elamex sold most of its Mexican shelter service operations. Shelter
services are now limited to a Franklin affiliate. In addition to providing
shelter services, this group owns and leases buildings to third parties in
Mexico.
METAL STAMPING SEGMENT
The Metal Stamping segment is composed solely of Precision Tool, Die and Machine
Company ("Precision"), our wholly owned subsidiary located in Louisville,
Kentucky. It provides metal and stamping services primarily to the appliance and
automotive sectors.
On December 19, 2003, Precision filed for protection under U.S. federal
bankruptcy laws. Precision revenues and expenses are consolidated through
December 19, 2003. Commencing on that date, Elamex accounts for Precision under
the equity method of accounting. In view of the problems associated with
manufacturing in this industry, and of the overall strategy and financial
condition of Elamex, the Company made strategic decisions in the fourth quarter
of 2003 to refrain from extending additional internal funding to Precision, and
to engage a firm to sell its interest in Precision.
FOOD SERVICES SEGMENT
The Food Services segment is the Franklin business, which operates a retail nut
and foodservice nut packaging and marketing business, located in El Paso, Texas
and a candy manufacturing and packaging facility located in Juarez, Mexico. This
business was acquired in July 2002.
Upon the culmination of actions initiated in 2003, the Elamex business
operations will primarily be limited in the near-term future to those of
Franklin, its general-line candy manufacturer and retail / food service nut
packing company. Franklin sales and gross profits have grown impressively since
Franklin entered the business of manufacturing and distributing candy in 2001.
Franklin operations include candy manufacturing and nut processing. Franklin
sales and distribution services are directed to the food service industry and to
retailers and wholesalers of candies and nuts. Franklin gained substantial
market share in sales of candy to mass-market retailers in 2003, and improved
market penetration to the retail grocery industry. Franklin is progressively
de-emphasizing sales to customers that purchase bulk candies and bag them for
resale to retailers ("rebaggers"). By eliminating the middleman, gross profit
margins on sales to retailers are significantly higher than on sales to
rebaggers. In addition to making candy for sales through its own distribution
channels, Franklin makes candy on a contract-manufacturing basis for other candy
producers.
9
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 (1) STAMPING (2) SERVICES AND OTHER SEGMENT TOTAL
-------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2004
Net sales $ 3,954 $ - $ 19,196 $(3,370) $ 19,780
Gross profit 359 - 4,275 4,634
Operating expenses 238 - 4,119 633 4,990
Other (expense) income (36) - (523) (361) (920)
Net loss (505) - (367) (473) (1,345)
- ---------------------------------------------------------------------------------------------------------------------
13 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)
Net (loss) income (30) 21 (1,288) (4,139) (5,436)
- ---------------------------------------------------------------------------------------------------------------------
(1) Certain assets and contracts related to this segment were sold as of
July 4, 2003
(2) Segment deconsolidated effective December 19, 2003
NET SALES
Net sales for the three months ended March 31, 2004 decreased $19.6 million, or
49.7%, to $19.8 million, from $39.4 million for the comparable period in 2003.
The exclusion of Precision from the consolidation is the largest reason for the
decrease. Additionally, the sale of a portion of the Shelter Services business
in the second quarter of 2002 caused a comparative decrease.
Sales for Food Services for the three months ended March 31, 2004 increased 15%
to $19.2 million from $16.7 million for the same period in the prior year. The
growth results principally from increase in the sale of candy distributed for
sale to retailers and wholesalers, a relatively new product line compared to the
segment's nut business. Contract manufacturing of candy is also a relatively new
line of business resulting in increased sales for the segment.
Sales for Shelter Services for the three months ended March 31, 2004 decreased
53.5% to $4.0 million from $8.6 million for the same period in the prior year.
The decrease in the three months periods was primarily due to the sale of
certain customer's contracts as of July 4, 2003.
GROSS PROFIT
Gross profit for the three months ended March 31, 2004 was $4.6 million or 23.2%
of net sales, compared to $4.7 million or 11.9% of net sales for the same period
of the prior year.
Gross profit for Food Services segment for the three months ended March 31, 2004
increased 38.7% to $4.3 million from $3.1 million for the same period in the
prior year. As a percentage of net sales, the rate increased to 22.4% in 2004
from 18.6% in 2003. The increase in gross profit was primarily the result of
operating at higher capacity in its candy manufacturing operations and
continuing to emphasize migration of candy product sales from bulk to packaged
quantities.
Gross profit for Shelter Services for the three months ended March 31, 2004
decreased 38.8% to $359 thousand from $587 thousand for the same period in the
prior year. As described above, comparative net sales decreased 53.5%. As a
percentage of net sales, the rate increased to 10.0% in 2004 from 7.0% in 2003.
The changes are due primarily to the sale of certain customer contracts as of
July 4, 2003.
OPERATING EXPENSES
Operating expenses decreased to $5.0 million for the three months ended March
31, 2004, compared to $9.5 million, for the same period of the prior year. As a
percentage of net sales, the rate was 25.3% in 2004 and 24.1% in 2003.
10
Operating expenses for Food Services for the three months ended March 31, 2004
were $4.1 million compared to $4.2 million for the same period in the prior
year. As a percentage of net sales, the rate was 21.4% in 2004 and 25.1% in
2003. Net sales increased while operating expenses decreased, thereby reducing
operating expenses as a percentage of net sales. Reductions in operating costs
are attributable to management initiatives to reduce costs.
Operating expenses for Shelter Services for the three months ended March 31,
2004 decreased 47.9% to $238 thousand from $457 thousand for the same period in
the prior year. The decrease was primarily attributable to the decrease of
administrative and selling expenses due to the sale of certain Shelter Services
operations. As a percentage of net sales, the rate declined to 5.0% in 2004 from
5.8% in 2003.
The Metal Stamping segment is not included in the consolidation in 2004. For the
thirteen weeks ended March 31, 2003, operating expenses totaled $4.2 million. As
a percentage of net sales, the year-ago rate was 3.8%, which is low relative to
the other segments. Because operating expenses for this segment were a small
percentage of net sales, the exclusion of this segment from the 2004
consolidation caused the increase in consolidated operating expenses as a
percentage of net sales.
Operating expenses for Corporate for the three months ended March 31, 2004
decreased 84.6% to $633 thousand from $4.1 million for the same period in the
prior year. The decrease was primarily due to goodwill impairment of $3.6
million recorded in first quarter of 2003. The first quarter of 2004 does not
include any charge for impairment.
OTHER (EXPENSE) INCOME
Other expense for the three months ended March 31, 2004 was $920 thousand,
compared to $1.0 million for the same operating period of the prior year.
Other expense for Food Products for the three months ended March 31, 2004
decreased to $523 thousand from $885 thousand for the same period in the prior
year. The decrease was primarily due to a decrease in intercompany interest
expenses as a result of capitalization of intercompany debt.
Other expense for Shelter Services for the three months ended March 31, 2004 was
$36 thousand as compared to income of $8 thousand for the same period in the
prior year.
Other expense for Corporate for the three months ended March 31, 2004 increased
to $361 thousand from income of $49 thousand for the same period in the prior
year. The increase in other expense was primarily due to an increase in losses
of unconsolidated joint venture with General Electric of $204 thousand and a
decrease in intercompany interest income of approximately $254 thousand.
TAXES
The tax provision for the three months ended March 31, 2004 was $69 thousand and
compared to a tax benefit of $403 thousand for the same period in the prior
year.
The Company's Mexican subsidiaries are each required to pay an alternative
minimum asset tax if the asset tax calculation is greater than income taxes
payable for the year. Asset taxes are calculated at 1.8% of assets less certain
liabilities and can be carried forward for up to 10 years as credits against
future income taxes payable. Before any asset tax carry forwards can be applied,
all net operating losses must first be utilized. Mexican companies have the
option to defer the asset tax four years forward and determine the higher of the
taxes comparing the current income tax calculation and the four year old asset
tax calculation increased by the effects of inflation. Some of the Company's
subsidiaries have elected this option. The total asset tax paid by the Company's
subsidiaries for the three months ended March 31, 2004 and the thirteen weeks
ended April 4, 2003 was approximately $434 thousand and $260 thousand,
respectively. In addition, the overall tax expense for the three months ended
March 31, 2004 was greater than that for the thirteen weeks ended April 4, 2003
primarily due to the recording of a valuation allowance against deferred tax
assets generated during the three months ended March 31, 2004.
GOODWILL
The Company recorded a goodwill impairment of $3.6 million during the first
quarter of 2003, 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. As a consequence of circumstances encountered in the
fourth quarter of 2003 that indicated that its carrying value may not be
recoverable and the voluntary petition for reorganization under Chapter 11 of
the U.S. Bankruptcy code filed by Precision, the Company tested the value of
Precision's goodwill in December 2003 and recognized full impairment it's
remaining value.
11
The Company's remaining goodwill as of March 31, 2004 is $3.7 million and it is
related only to the acquisition of Franklin during the third quarter of 2002.
The Company completed its annual impairment test during the first quarter of
2004 and determined that there was no impairment of goodwill to be recorded.
The Company's remaining goodwill as of March 31, 2004 is $3.7 million and it is
related only to the acquisition of Franklin during the third quarter of 2002.
The Company completed its annual impairment test during the first quarter of
2004 and determined that there was no impairment of goodwill to be recorded.
NET LOSS AND LOSS PER SHARE
Net loss for the three months ended March 31, 2004 was $1.3 million compared to
a net loss of $5.4 million for the same period of 2003. For the three months
ended March 31, 2004 basic and diluted net loss per share was $0.18, which
compares with a loss per share of $0.72 for the same period of the prior year.
The weighted average number of shares used to calculate basic and diluted income
per share were 7,502,561 for the three months ended March 31, 2004 and the
weighted average number of shares used for the three months ended April 4, 2003
were 7,510,762.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital (defined as current assets minus current
liabilities) as of March 31, 2004 decreased to a negative $71 thousand as
compared to a positive $1.3 million as of December 31, 2003.
For the three months ended March 31, 2004 the net cash provided by operating
activities was approximately $1.0 million.
Net cash used in investing activities was approximately $1.2 million for the
three months ended March 31, 2004, due to the acquisition of equipment and
investment in unconsolidated joint venture with General Electric.
Net cash used in financing activities was $615 thousand for the three months
ended March 31, 2004 due to the net payments on notes payable and long term debt
and capital leases.
Management intends to fund current operations and activities of the Company,
through cash, cash provided by operations, and available credit facilities and
refinancing of certain short -term debt.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Please refer to the Company's annual report on Form 10-K for the year ended
December 31, 2003 for a summary of the Company's critical accounting policies.
FORWARD LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements that involve risks and
uncertainties, including, but not limited to, risks associated with Elamex's
future growth and profitability, the ability of Elamex to continue to increase
sales to existing customers and new customers, and the effects of competitive
and general economic conditions. These risks may cause our actual results,
levels of activity, performance or achievements to be materially different from
our future results from any future results, levels of activity, performance or
achievements expressed or implied by these forward looking statements.
All statements that relate to future events or to our future performance as
forward-looking statements. In some cases, forward-looking statements can be
identified by terms such as "may", "will", "should", "expect", "plans", "seeks",
"anticipates", "believes", "estimates", "predicts", "potential", "continue",
"seeks to continue", "intends", or other comparable terminology. Although
forward-looking statements help provide complete information about us, investors
should keep in mind that forward-looking statements are only predictions, at a
point in time, and are inherently less reliable than historical information.
There can be no assurance that Elamex's principal customers will continue to
purchase products and services from Elamex at the current levels, if at all, and
the loss of one or more major customers could have a material adverse effect on
Elamex's operating results.
We do not guarantee future results, levels of activity, performance or
achievements and we do not assume responsibility for the accuracy and
completeness of these statements. The forward-looking statements in this Form
10-Q are based on information as of the date of this report. We assume no
obligation to update any of these statements based on information after the date
of this report.
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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 $134 thousand assuming the Company's existing $1.5 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 $6.7 million at March
31, 2004, inclusive of amounts borrowed under short-term and long-term credit
facilities. A 1.0 % increase in interest rates would result in a $67 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.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, evaluated the Company's disclosure controls and procedures
(as defined in Rules 13a-1(e) and 15d-15(e) under the Securities and Exchange
Act of 1934, as amended) (the "exchange Act") as of the filing date of this Form
10-Q. Based on this evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms. During the Company's
fiscal quarter ended March 31, 2004, no change occurred in the Company's
internal control over financial reporting that has materially affected or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. See the certifications by the Company's Chief Executive
Officer and Chief Financial Officer filed as Exhibits 31.1 and 31.2 to this
Report.
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
The annual meeting of stockholders were held in Cd. Juarez, Mexico on
April 29, 2004 at 9:30 a.m. The stockholders of the Company were asked
to consider and vote on the following matters:
1) Election of Directors Eloy S. Vallina, Keith Cannon, Benito
Bucay, Eloy Vallina Garza, Richard P. Spencer, Martin W. Pitts,
Carlos Hernandez, Fernando Todd, Manuel Munoz and Statutory
Auditor Fernando Ruiz Sahagun.
2) Approval of certain reports to be rendered by the external
auditors and corporate examiners.
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The following is a summary of the voting results with respect to each of
the proposals:
Votes for Votes against Votes abstained
Proposal one 5,170,215 39,338 60,100
Proposal two 5,172,215 1,000 87,438
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 March 31, 2004.
A Form 8-K was filed on March 1, 2004, under item 12, incorporating by the
Company's press release dated February 29, 2004, announcing its financial
results for the fourth quarter and year ended December 31, 2003 and certain
other information.
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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: May 14, 2004 By: /s/ Richard P. Spencer
---------------------------------------
Richard P. Spencer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(DULY AUTHORIZED OFFICER)
Date: May 14, 2004 By: /s/ Sam L. Henry
---------------------------------
Sam L. Henry
VICE- PRESIDENT AND CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER)
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