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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31st, 1995 0-27992
ELAMEX, S.A. de C.V.
(Exact name of registrant as specified in its charter)
Mexico Not Applicable
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Avenida Insurgentes No. 4145-B Ote.
Cd. Juarez, Chihuahua Mexico C.P. 32340
(Address of principal executive offices) (zip code)
Registrant telephone number, including area code: (915) 774-8252
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of exchange on which registered
Class I Common Stock, no par value Nasdaq National Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant as of April 8, 1996 was: $28,350,000.00
The number of shares of Class I Common Stock of the Registrant
outstanding as of April 8, 1996 was: 7,400,000
DOCUMENTS INCORPORATED BY REFERENCE
Item 14 incorporates by reference exhibits to the Registrant's
registration statement on Form S-1, file number 333-01768.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in any amendment to this Form 10-K.
[X]
References in this Form 10-K to "Elamex" or the "Company" are to
Elamex, S.A. de C.V. and its subsidiaries, collectively, and references to
"Elamex, S.A. de C.V". are solely to Elamex, S.A. de C.V. Effective January 1,
1993, the Mexican Congress approved the establishment of a new currency unit,
the New Peso, which replaced the Peso at a rate of one New Peso per one thousand
Pesos. Beginning January 1, 1996, the name of the currency unit was changed from
New Peso to Peso without adjusting its value. In this Form 10-K, references to
"$" and "U.S. dollars" are to United States dollars and references to "Nps.",
"Ps", "New Pesos" and "Pesos" are to Mexican Pesos after the changes described
above.
Item 1. Business
Elamex is a leading contract manufacturer located in Mexico, delivering
high-quality finished goods to Original Equipment Manufacturers ("OEMs") based
in North America pursuant to manufacturing contracts. The Company focuses on the
effective management of assembly processes, which range from assembly-only
services managed by the customer or by Elamex to full materials procurement and
assembly contracts that are referred to in the industry as "turnkey" contracts.
The Company frequently works with customers from product design and prototype
stages through ongoing production, and provides manufacturing services for
successive product generations.
Elamex's OEM customers are U.S. and Canadian companies, mainly in the
electronics industry, as well as in the electromechanical, avionics and medical
industries. The Company's revenues are in U.S. dollars and it obtains financing
in U.S. dollars based on contracts with such U.S. and Canadian customers
providing for payment in U.S. dollars. The Company's headquarters and certain of
its manufacturing facilities are located within nine miles of the U.S. border
and El Paso's airport, rail depots and truck depots. Elamex currently operates
or directs operations at 12 manufacturing facilities. The Company prepares
financial statements in U.S. dollars in conformity with generally accepted
accounting principles applicable in the U.S. ("U.S. GAAP") and also maintains
certain financial information in conformity with generally accepted accounting
principles applicable in Mexico ("Mexican GAAP").
The Company was a pioneer in Mexico's Border Industrialization Program,
usually referred to as the Maquiladora program, in which, originally, land and
real estate, and later labor, were provided to foreign companies that themselves
managed the production of products for export, or the enhancement of their own
imports into Mexico for subsequent export. Elamex's business has evolved from
the early Maquiladora concept of supplying real estate and labor for foreign
managers to include the additional capacity to provide both management of
assembly services and turnkey manufacturing services. Elamex, S.A. de C.V. is
the successor pursuant to the merger, effective October 1, 1995, of Elamex
Internacional, S.A. de C.V. ("Elamex Internacional") with and into Elamex, S.A.
de C.V. The predecessor of Elamex, S.A. de C.V. was formed in 1990, when Accel,
S.A. de C.V. ("Accel"), a public company listed on the Mexican Stock Exchange,
indirectly acquired a majority interest in the Company's operations.
Industry Background
During the early 1980s, the commercialization of the personal computer
began to fuel substantial growth in the electronics industry and, with it, the
growth of contract manufacturers. At about the same time, significant advances
were made in commercial manufacturing technology as Surface Mount Technology
("SMT") began to replace Pin Through-Hole ("PTH") technology as the preferred
method for the assembly of circuit boards. SMT provided OEMs with significant
cost savings while at the same time increasing the performance of their
products. Many of the benefits of SMT, especially those relating to cost
reduction, were passed along to customers. The Company believes these benefits
have helped to sustain the double digit percentage growth rate of the
electronics industry into the 1990s.
-2-
OEMs originally utilized contract manufacturing sources primarily to
reduce labor costs in the production of electronic assemblies and to provide
additional manufacturing capacity in times of peak demand. These early contract
manufacturers typically were employed on an assembly basis in which the OEM
provided the circuit and production designs, procured all components, frequently
managed the production process and performed the final product testing. As
contract manufacturers began to perform more management services, the
relationship between OEMs and contract manufacturers became more strategic in
nature, with the two now linked in a closer relationship in order to quickly
deliver cost-effective, high-quality products to the marketplace. The practice
of contract manufacturers providing management services has evolved into turnkey
manufacturing, in which the contract manufacturer performs the procurement
function and manages the assembly process. In Elamex's experience, procurement
generates lower margins than assembly work, and Elamex believes the same is true
for other contract manufacturers. However, Elamex has also found that parts and
equipment procurement creates other advantages, such as greater control over the
manufacturing process by the contract manufacturer and increased customer
satisfaction due to the reduction of an additional cost to the OEM. Elamex
believes that the ability to provide these procurement advantages reinforces the
strategic relationship between OEM and contract manufacturer.
The Company believes that the strategic use of contract manufacturers
has provided significant benefits to contract manufacturers and to OEMs.
Contract manufacturers have benefitted from the economies of scale resulting
from larger and more frequent orders from OEMs, as well as from the strategic
and operational benefits arising from the stability of longer-term
relationships. OEMs have been able to reduce costs and increase flexibility
through the use of contract manufacturers.
The contract manufacturing industry is characterized by a high degree
of customer and market concentration. According to the Institute for
Interconnecting and Packaging Electrical Circuits, approximately 45% of the
contract manufacturing industry's sales in 1994 were to the computer industry.
While the Company does not currently perform a significant amount of
manufacturing for the computer industry, it has found that margins on computer
products it has manufactured are generally lower than those for other products
the Company manufactures. The Company believes that the two largest customers of
the average contract manufacturer account for in excess of 45% of sales for such
contract manufacturer.
The industry is also expected to grow significantly. Technology
Forecasters, Inc. estimates that U.S.-Canadian demand for electronics contract
manufacturing will grow from expenditures of approximately $16 billion in 1994
to approximately $51 billion by 1999, an average annual growth rate of
approximately 26%, and that the worldwide electronics contract manufacturing
industry will grow from expenditures of $35 billion in 1994 to approximately $95
billion by 1999, an average annual growth rate of approximately 22%. The Company
believes that the integration of digital and wireless technologies into new
products will help generate growth from several markets outside of the computer
industry, such as telecommunications, industrial electronics and medical
instrumentation. In addition to growth directly relating to the electronics
industry, the Company believes that further growth for contract manufacturing
will come from an increasing need for OEMs to reduce product time to market and
to manage more complex product designs, inventories and component procurements.
Manufacturing Services
Elamex is a contract manufacturer in the electronics industry, as well
as the electromechanical, avionics and medical industries. Elamex's work for the
electronics and avionics industries includes the assembly of printed circuit
boards with SMT, including SMT on flexible boards, plastic over-molding of SMT
boards and other technologies. Its work for the electromechanical industry
includes the manufacture of such electrical devices as switchboard components,
outlet strips, smoke detectors, automatic timer switches and other devices that
are not based on complex electronic circuitry, and the refurbishment of
telephones. Elamex has recently begun assembling fiber optic cables and
connectors.
-3-
Elamex's work for the medical industry includes assembly of tube assemblies and
surgery sets and the manufacture of microbiological test equipment. Many of
these operations are conducted in special clean rooms.
Approximately 30.5% of Elamex's net sales in 1995 were derived from
assembly projects, in which Elamex provides manufacturing services, while the
customer retains responsibility for parts procurement and, in some cases, direct
management of Elamex's employees. Turnkey projects, which accounted for 69.5% of
Elamex's net sales during 1995, are those in which Elamex is responsible for
manufacturing and delivering the completed product. All turnkey projects involve
manufacturing and assembly services and materials procurement. In these
projects, Elamex buys raw materials from U.S. and worldwide suppliers, and then
performs the required assembly work using those raw materials. The finished
products are returned to the United States and the import duty, if any, is paid
only on the value added during assembly plus the value of foreign content. When
finished products are delivered from the United States to other countries, the
customer pays the import duty, if any, imposed by such other country. Under The
North America Free Trade Agreement ("NAFTA"), most products produced by Elamex
are duty-free.
In many respects, Elamex is a manufacturing arm of its customers,
combining stringent quality control, sophisticated inventory management and
cost-effective assembly techniques. The Company's manufacturing operations are
structured to incorporate the complex design specifications of its customers'
products and to respond rapidly to their design changes. Prior to commencing a
manufacturing project, Elamex works closely with the OEM to determine the
manufacturing operations and the organization, selection and training of the
work force, with particular emphasis on sophisticated training techniques. In
establishing a "virtual company" relationship with its OEM customers, the
Company provides expertise in managing the work force available at its
facilities, assisting its customers with accounting and management functions,
and handling customs, warehousing and other matters inherent in manufacturing in
Mexico. In a further effort to create "virtual company" relationships with its
customers, the Company has improved communications and information reporting
using electronic data interchange with its customers. Elamex maintains a
microwave link across the border to El Paso, Texas, and as a result it can be
reached through telephone numbers in the El Paso area code; this system also
functions for electronic data interchange, fully integrating the Company into
the U.S. telephone system.
Approximately 82.0% of Elamex's net sales for 1995 were derived from
the manufacture of electronic products. Over the last three decades, continuous
advances have been made in the design of electronic components and in
interconnection technologies. Prior to the 1980s, manufacturers developed the
technique of PTH technology. In PTH assembly, electrical components such as
integrated circuits are attached to printed circuit boards by means of pins or
leads that are inserted into pre-drilled holes and soldered to the electrical
circuits on the boards. As electronic devices required greater numbers of
components with increasing functional density and more interconnections,
manufacturers developed SMT. SMT eliminates the need for holes in the printed
circuit board, permitting a higher number of leads than PTH and finer
lead-to-lead spacings ("pitch"). This technology also allows components to be
placed on both sides of a board. Both factors substantially reduce board size.
SMT requires the use of more expensive automated assembly equipment and
substantially more engineering expertise than PTH. Elamex has adopted SMT as the
primary means of electronic assembly for a number of major products, including
personal computers, computer peripheral products, communications equipment,
navigational control systems, automotive sensors and audio mixing boards. The
Company also produces complex wire cable assemblies, plastic over-molded SMT
printed circuit boards and fiber optic cables and connectors.
Elamex customizes its assembly lines for each customer by assigning a
separate workforce, team leaders, supervisors, production engineers, managers
and quality control personnel to each project. Elamex analyzes the customer's
proposed production process, including the original process if applicable, and
proposes improvements whenever possible. Assembly lines are customized to the
customer's needs before manufacturing begins. The size of an assembly line is
jointly determined by Elamex and the
-4-
customer. The customer generally provides some of the equipment, particularly
for specialized testing and other customer-specific work, while Elamex provides
the assembly services and generic equipment. Some customers provide materials
used in the production process, while others contract for turnkey projects
involving procurement. Final manufacturing inspection may be performed at the
customer's plant or by Elamex in "dock to stock" arrangements. Additionally,
many products manufactured by Elamex are in the early stages of their product
lifecycle and, therefore, may require ongoing design or engineering changes.
Responsiveness to customers, particularly with respect to engineering changes
once manufacturing has commenced, is a crucial component of Elamex's
manufacturing approach.
The Elamex business is materially dependent on Elamex's ability to
produce products of uniformly high quality. The Company has established quality
processes under International Standards Organization certification ISO 9002,
military specifications of the U.S. Department of Defense and Good Manufacturing
Practices certifications. Where appropriate, Elamex also works to achieve this
objective using specialized "pick and place" automated equipment. To implement
these quality goals, Elamex employs a large staff of professional engineers.
Customers and Markets
The Company has attempted to balance its marketing efforts and
manufacturing services between OEMs of industrial and professional products and
those of consumer electronics products. Elamex customers are a diverse group of
United States, Canadian and multinational OEMs, including Polaroid Corp., Black
& Decker Corp., Xircom, Inc., Motorola, Texas Instruments, JBL
Professional/Harman International, Lockheed Martin, Adtran and Siemens Rolm.
Contracts with Elamex's five largest customers for 1995 accounted for
approximately 69% of Elamex's committed contract revenues. Approximately 23%,
18% and 16% of the Company's net sales for 1995 were derived from sales to
Polaroid Corp., a manufacturer of photographic consumer products, Black & Decker
Corp., a manufacturer of home appliance consumer products, and Xircom, Inc., a
manufacturer of computer products, respectively, and approximately 24%, 17% and
16% of the Company's net sales 1994 were derived from sales to Polaroid Corp.,
Black & Decker Corp., and Xircom, Inc., respectively. Certain of the Company's
contracts contain pricing mechanisms that are based on the Company's costs.
Elamex and O.F. Mossberg & Sons ("Mossberg") are parties to a
manufacturing contract pursuant to which Elamex has agreed to manufacture
shotgun components and safe deposit boxes. Due to the Mexican government's
regulation of the manufacture of firearms, this contract is performed by Elamex
de Torreon S.A. de C.V. ("Elamex de Torreon"), a company beneficially owned by
certain of the Company's officers and directors, under contract to Elamex.
Elamex has been qualified by the U.S. Department of Defense for
manufacturing military and aerospace specifications products. To serve a larger
base of customers in Europe as well as in the United States, Elamex has been
certified under ISO 9002, one of the highest total quality control standards in
the world, at all of its facilities where it manages its labor force.
The Company's primary customers include Polaroid Corp., Xircom, Inc.,
Black & Decker Corp., ADC Telecommunications, Inc. and Intermatic, Inc.
-5-
The chart below sets forth the Company's OEM customers by industry, the
application for which Elamex manufactures products for such customers and the
products and services provided by the Company.
OEM Customer End Use OEM Application Elamex Products and Services
------------ ------- --------------- -----------------------------
ADC Telecommunications Telecommunications PBX Telecommunications PBX/Switchboards & fiber optic
equipment cable connection
Adtran Data Communications Cable/telephone communications Printed circuit boards
systems
American Sensors Commercial Smoke detectors Printed circuit boards & final
assembly
ASO Corporation Medical Flexible bandages Bandage packaging
AT&T Telecommunications Telephones Telephone equipment repair
Austin Innovations Commercial Pet trainers Printed circuit boards & final
assembly
Becton Dickinson Medical Medical kits Surgical kits and catheters,
packaging
Black & Decker Commercial Power tool battery chargers Printed circuit boards & final
assembly
Honeywell Commercial Home and building controls Printed circuit boards
Infopak Computer Palmtop computers Printed circuit boards & computer
assembly
Intermatic Commercial Electronic timers, powerstrips, Printed circuit boards & final
sensors assembly
JBL Professional/Harman Commercial Sound Mixers Printed circuit boards & final
International assembly
Lockheed Martin Military/Aerospace Military products Printed circuit boards & cables
Motorola Commercial Semiconductors Semiconductors/mark test &
packing
O.F. Mossberg & Sons Commercial Pump action shotguns Fabrication of shotgun components
& safe deposit boxes
Polaroid Commercial Instant & industrial photographic Flexible and rigid circuit
cameras boards/component assembly
Siemens/Rolm Systems Telecommunications PBX Telecommunications Switchboard repair
equipment
Texas Instruments Industrial Motor control circuits Printed circuit boards
Automotive Automotive control devices Flexible printed circuit boards
(transducers)
Commercial Transponders for toll systems Printed circuit boards
Texas Microsystems Computer Motherboards and VGAs Printed circuit boards
Venusa Medical Intravenous kits Intravenous kit assembly
Viskase Commercial Food products Casing of food products
Xircom Computer LAN adapters Printed circuit boards & cables
Zoom Telephonics Data Communications Communications products Printed circuit boards
Sales and Marketing
The Company has pursued the diversification of its market segments and
customer base and sought relationships with leading OEMs in the markets it
serves. The Company's principal sources of new business originate from the
growth of existing relationships, referrals and direct sales through senior
management and direct sales personnel. Sales personnel, supported by the
executive staff, identify and attempt to develop relationships with potential
OEM customers who meet a certain profile, which includes financial stability,
industry leadership, need for technology and assembly-driven manufacturing,
anticipated unit volume growth and long-term relationship potential. Elamex also
conducts seminars to introduce potential customers to the benefits of contract
manufacturing in Mexico.
-6-
Competition
The electronics assembly and manufacturing industry is comprised of a
large number of companies, several of which have achieved substantial market
shares. Several of these competitors have sales substantially larger than
Elamex, including several manufacturers of computer components, where sales
volume can be high. Elamex also faces competition from current and prospective
customers who evaluate their capabilities against the merits of manufacturing
products internally. Elamex competes with various companies, depending on the
type of service or geographic area. Certain of Elamex's competitors, including
SCI Systems, Inc. and Solectron Corporation and divisions of International
Business Machines Corp., Inc. have substantially greater resources than Elamex.
The Company believes that the primary bases of competition in its
targeted markets are time to market, capability, price, manufacturing quality,
advanced manufacturing technology and reliable delivery. Elamex believes that it
generally competes favorably with respect to each of these factors. To remain
competitive, the Company must continue to provide technologically advanced
manufacturing services, maintain world-class quality levels, offer flexible
delivery schedules, deliver reliable finished products and compete favorably on
the basis of price.
Effect of NAFTA
The Company believes that NAFTA is having an overall positive effect on
its business. NAFTA eliminates import duties and reduces other restrictions on
imports into the United States and Canada. These benefits enable Elamex to
manufacture goods from imports into Mexico and to return the finished product to
the United States and Canada, without paying significant duties. Moreover, the
Company believes that NAFTA has the general effect of encouraging growth in
industries for which Elamex provides manufacturing services, and will permit the
Company's customers to increase their sales in the Mexican market.
Backlog
The Company's order backlog at December 31, 1995 was approximately
$115.2 million, compared to order backlog at December 31, 1994 of approximately
$93.9 million. Backlog consists of firm purchase orders and commitments which
are to be filled within the next 12 months. However, since orders and
commitments may be rescheduled, increased or canceled, backlog is not a
meaningful indicator of future financial performance.
Suppliers
The Company uses numerous suppliers of electronic components and other
materials for its operations. Although the Company has a general policy against
procuring components without a customer commitment to pay for them, it must do
so on occasion. While the Company will work with customers and suppliers to
minimize the impact of any component shortages or allocations, component
shortages and allocations have had, and are expected to have from time to time,
short-term adverse effects on Company sales.
Raw Materials
Raw materials consist of electronic commodities, including integrated
circuits, transistors and other solid state elements, printed circuit boards and
other circuit elements, as well as components for electromechanical and medical
assembly, many of which are provided by customers. Virtually all raw materials
supplied by Elamex are purchased in Asia and the United States, with the larger
part coming from Asia. Elamex believes that it is not materially dependent on
any one supplier or group of suppliers; it purchased less than a combined amount
of 16% of supplies from its two largest vendors in 1995.
-7-
Certain vendors operate at full capacity from time to time and allocate their
products among customers. Elamex believes that larger companies generally
command larger allocations; however because of its large-scale purchases of
these products, Elamex also believes that it sometimes has greater bargaining
power for particular products than its customers even though it may be smaller.
Employees
Elamex had 3,865 employees at December 31, 1995, 311 were employees
subcontracted from Elamex de Torreon. In 12 active facilities currently used by
Elamex in its manufacturing operations, 174 employees in four facilities are
covered by collective bargaining agreements; all other employees of the Company
at the remaining eight facilities are not. Elamex believes that its labor
relations are good in all of its facilities.
Twenty-five of the Company's executives and senior managers who are
citizens or residents of the United States are employees of a U.S. corporation
owned by such executives, and provide services to Elamex under a contract
between such corporation and Elamex. The purpose of this arrangement is to
provide to U.S.-resident employees U.S. dollar-denominated salaries and
U.S.-style employee benefits. Under such contract, the Company pays to such
corporation an amount equal to the salary and benefits provided to such
executives by such corporation.
Environmental Compliance
The Company's operations are subject to the Mexican General Law of
Ecological Stabilization and Environmental Protection (the "Ecological Law") and
the regulations promulgated thereunder. In accordance with the Ecological Law,
companies engaged in industrial activities are subject to the regulatory
jurisdiction of the Secretaria del Medio Ambiente, Recursos Naturales y Pesca
(the "Ministry of the Environment, Natural Resources and Fishing"). Since
September 1990, each such company has been required to file several semi-annual
reports regarding its production facilities and to comply with the Ecological
Law and the regulations thereunder, with respect to its environmental protection
controls and the disposition of industrial waste. The Company is licensed to
handle radioactive materials, which are presently used in the manufacture of
smoke alarms, and complies with both U.S. and Mexican standards relating to the
handling of such materials. In addition, the Company is subject to U.S.
environmental laws and regulations as a consequence of the return to the United
States of hazardous wastes generated by the Company that are derived from
materials imported from the United States, a requirement of its participation in
the Maquiladora program. Such laws and regulations may impose joint and several
liability on certain statutory classes of persons for the costs of investigation
and remediation of contaminated properties regardless of fault or the legality
of the original disposal. These persons include the present and former owner or
operator of a contaminated property and companies that generated, disposed of,
or arranged for the disposal of hazardous substances found at the property.
Mexican environmental laws and regulations have become increasingly
stringent over the last decade. This trend is likely to continue and may be
influenced by the environmental agreement entered into by Mexico, the United
States and Canada in connection with NAFTA. The Company believes that its
policies with respect to environmental matters in Mexico currently exceed the
standards set forth in the Ecological Law. The Company is committed to
maintaining high standards of environmental protection controls.
-8-
Exchange rates
The following table sets forth, for the periods indicated, the high,
low, average and period-end and free market rates for the purchase and sale of
U.S. dollars (presented in each case as the average between such purchase and
sale rates), expressed in nominal Pesos per U.S. dollar:
Year ended High Low Average (1) Period end
December 31, ---- --- ----------- ----------
- ------------
1990 Ps$.2.96 Ps$.2.69 Ps$2.86 Ps$.2.96
1991 3.09 2.94 3.03 3.08
1992 3.14 3.06 3.09 3.12
1993 3.24 3.09 3.11 3.11
1994 5.75 3.11 3.48 5.00
1995 8.14 5.27 6.53 7.74
1996 (through April 12) 7.70 7.33 7.52 (2) 7.50
- ------
Source: Until November 5, 1993, the average of the buy and sell rates
on the relevant date as published by Banco de Mexico.
Commencing November 8, 1993, the noon buying rate for Mexican
Pesos reported by the Federal Reserve Bank of New York.
(1) Average of month-end rates.
(2) Average of daily rates.
Item 2. Properties
The Company's Ciudad Juarez facilities (including its headquarters) are
located only a short distance from the U.S. border and El Paso's airport and
rail and truck depots. Set forth below are Elamex's principal manufacturing
facilities:
Location Square Feet Activity Leased/Owned
- -------- ----------- -------- ------------
Cd. Juarez 80,280 Electronic Equipment Assembly and Leased(1)
Electronic Circuit Manufacturing
Cd. Juarez 88,897 Electromechanical Part Assembly Leased
Cd. Juarez 44,909 Electronic Circuit Manufacturing Leased
Cd. Juarez 58,841 Medical Product Assembly Owned(2)
Cd. Juarez 43,034 Avionics Product Assembly Owned
Cd. Juarez 64,866 Electromechanical Product Assembly Leased(1)
Cd. Juarez 67,038 Medical Product Assembly Owned
Cd. Juarez 40,263 Electronic Equipment Assembly Leased
Delicias 26,804 Electromechanical Product Assembly Leased
Nuevo Laredo 60,658 Telephone Repair and Auto Part Assembly Owned
Nuevo Laredo 43,917 Telephone Repair Leased(2)
Guadalajara(3) 57,246 Testing of Electronic Semiconductors Owned
Torreon 55,845 Assembly of shotgun parts Leased(4)
Total 732,598
- -------
(1) Leased from a company controlled by Federico Barrio, a Director of the
Company.
(2) A customer who leases this facility has an option under the lease to
purchase the facility at fair market value.
(3) Asset available for sale or lease.
(4) Leased from Accel and subject to certain purchase options.
-9-
The Company holds options to purchase from Accel the Torreon facility
listed above and a second facility in Ciudad Chihuahua; the option exercise
price for each facility will be the fair market value determined by an
independent appraiser. The options expire in December, 1997. The Company intends
to exercise such options to purchase the facilities in 1996.
Item 3. Legal Proceedings
To the Company's knowledge there are no pending legal proceedings which
are material to the Company to which it is a party or to which any of its
property is subject.
Item 4. Submission of Matters to a Vote of Security Holders
On December 15, 1995, the stockholders of Elamex, S.A. de C.V., at an
extraordinary stockholders meeting, approved an amendment and restatement of the
bylaws of Elamex, S.A. de C.V. which included the following: (i) elimination of
par value of all shares; (ii) a transfer of all the variable capital of Elamex,
S.A. de C.V. to fixed capital (5,000,000 shares); (iii) authorization for
issuance of up to 3,000,000 shares of common stock constituting fixed capital
(for the offering); (iv) authorization of 15,000,000 shares constituting
variable capital (which will be held by Elamex, S.A. de C.V. as treasury stock
and is expected to be sold, from time to time, at the market price prevailing at
such time as authorized by the Board of Directors); (v) and a provision
requiring a motion at each annual stockholders' meeting to allow the
stockholders to designate up to 15% of each year's net profits as reserved for
repurchase and cancellation of publicly-traded common shares outstanding.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters
The Company's Class I Common Stock, no par value ("Common Stock") has
been traded on The Nasdaq National Market under symbol ELAMF since March 20,
1996; the price has fluctuated between a low of 8 7/8 per share to a high of 9
7/8 per share. An over-allotment option covering 100,000 shares held by
Fonlyser, S.A. de C.V. was exercised on April 19, 1996. The option was granted
in conjunction with the public offering.
The Company currently intends to follow a policy of retaining earnings,
if any, for use in the development of its business and to finance growth. The
Company has never paid cash dividends on its Common Stock and has no plans to do
so in the foreseeable future. Certain of the Company's existing bank credit
lines impose limitations on the amount of dividends that Elamex may pay.
Specifically, one limits the amount of dividends that may be declared, without
the consent of the lender, to the prior year's net profits. Another credit
agreement permits payment of dividends only if the Company has complied with all
of its covenants and other obligations under such credit agreement. As of April
1, 1996, there were approximately 25 record holders of the Company's Common
Stock.
Also, on April 18, 1996 at the Company's annual stockholders meeting,
$897,406 was reserved for the stock repurchase fund.
The Mexican Law of Commercial Companies ("Ley General de Sociedades
Mercantiles") requires that at least 5% of the Company's net income each year
(after profit sharing and other deductions required by law) be allocated to a
legal reserve fund, which is not thereafter available for distribution except as
a stock dividend until the amount of such fund equals 20% of the Company's
historical capital stock. The Company may also maintain additional reserves.
Mexican corporations usually pay dividends out of earnings (including retained
earnings) after an allocation to the legal and other reserves and prior approval
by a general stockholders' meeting.
-10-
Taxation of Dividends
United States Federal Income Taxes
Dividends (other than certain dividends paid on a pro rata basis in
additional Common Stock) paid by the Company with respect to Common Stock out of
current or accumulated earnings and profits ("E&P") to a United States holder
will be treated as ordinary income to such holder. United States corporations
that hold Common Stock will not be entitled to the dividends received deduction
generally available for dividends received from United States corporations (and
certain non-United States corporations). To the extent a distribution exceeds
E&P, it will be treated first as a return of such holder's basis to the extent
thereof, and then as gain from the sale of a capital asset. Such capital gain
will be long term if the Common Stock has been held by such holder for more than
one year.
Dividends generally will constitute foreign source "passive income" or,
in the case of certain United States holders, "financial services income" for
U.S. foreign tax credit purposes.
Dividends paid in Mexican Pesos will be included in gross income of a
United States holder in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the date of receipt of the distribution, whether or
not the Pesos are in fact converted into U.S. dollars at that time. If Pesos are
converted into U.S. dollars on the day they are received by a United States
holder, such holder generally should not be required to recognize foreign
currency gain or loss in respect of the dividend income. United States holders
should consult their own tax advisors regarding the treatment of any foreign
currency gain or loss on any Pesos which are not converted into U.S. dollars on
the day the Pesos are received by such holders.
Distributions of additional Common Stock to United States holders with
respect to their pre-distribution holdings of Common Stock ("old Common Stock")
that are made as part of a pro rata distribution to all stockholders of the
Company generally will not be subject to U.S. federal income tax (except with
respect to cash received in lieu of fractional shares of Common Stock). The
basis of the Common Stock so received will be determined by allocating the
United States holders' adjusted basis in the old Common Stock between the old
Common Stock and the Common Stock so received.
A holder of Common Stock that is, with respect to the United States,
not a United States holder (a "non-United States holder") will not be subject to
U.S. federal income or withholding tax on dividends paid with respect to the
Common Stock, unless such dividends are effectively connected with the conduct
by the holder of a trade or business in the United States.
Mexican Income Taxes
Mexican income tax law requires that Mexican corporations must pay
income tax on taxable income for each fiscal year. Mexican corporations must
maintain an account called the cuenta de utilidad fiscal neta or "previously
taxed net earnings account" ("CUFIN", from the Spanish initials). In its CUFIN
the Mexican corporation records the balance of the tax profits from previous
years, on which income tax has already been paid plus dividends received from
Mexican corporations. The CUFIN account balance is subject to restatement for
inflation.
Whenever a Mexican corporation pays dividends to its stockholders, if
the amount maintained in the CUFIN balance exceeds the dividend payment to be
made, neither the Mexican corporation nor the stockholders will have to pay
Mexican income tax on such dividend payment. Therefore, for Mexican tax
purposes, dividend payments made by the Company to United States holders will
not generally be subject to imposition of Mexican income taxes. However, if the
Mexican corporation's CUFIN balance
-11-
is less than the dividend payment, then the Mexican corporation must pay income
tax of 34% of 1.515 times the amount which exceeds such balance.
If the Company distributes stock dividends to United States holders, or
pays a dividend in cash and such payment is to be used by the United States
holders for a capital subscription or for reinvestment in the Company's stock,
and either such transaction by the United States holders occurs within 30 days
following the date of the dividend payment, there will be no Mexican tax
consequences for such United States holders, so long as the Company does not
reduce its capital stock liquidity. If the Company reduces its capital stock and
the balance of its CUFIN plus its capital contributions restated for inflation
is less than the amount of such stock reduction, the Company will be required to
pay income tax on such excess. Tax must also be paid on the excess, if any, of
the shareholder's equity over the sum of the CUFIN, the capital contributions
restated for inflation and the taxable amount determined as previously
indicated. In this case the taxable basis cannot be greater than the total
amount of the capital reduction.
Item 6. Selected Consolidated Financial Data
Although the Company is located in Mexico, its functional currency is
the U.S. dollar, which is the principal currency in which it conducts business.
The Company prepares consolidated financial statements in U.S. dollars in
conformity with U.S. GAAP and also maintains certain financial information in
conformity with Mexican GAAP. Except as otherwise stated herein, all monetary
amounts in this report have been presented in U.S. dollars.
The following table sets forth selected consolidated financial data of
the Company as of and for each of the years ended December 31, 1991, 1992,
1993,1994 and 1995. Each of the Company's fiscal quarters is comprised of 13
weeks and ends on a Sunday, except for the first quarter, which starts on
January 1, and the fourth quarter which ends on December 31. This table is
qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements, related Notes thereto and other financial
data included elsewhere in this Prospectus.
The selected consolidated financial data presented below under the
captions "Income Statement Data" and "Balance Sheet Data" as of December 31,
1993, 1994, and 1995, and for each of the years in the four-year period ended
December 31, 1995, set forth below, have been derived from consolidated
financial statements of Elamex, S.A. de C.V. and subsidiaries, which financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The consolidated financial statements as of December 31,
1995, and 1994, and for each of the years in the three-year period ended
December 31, 1995, and the report thereon, are included elsewhere in this Form
10-K. The selected consolidated financial data as of December 31, 1991 and 1992,
and for the period ended December 31, 1991, set forth below, have been derived
from unaudited financial data of predecessor entities. These historical results
are not necessarily indicative of the results to be expected in the future.
-12-
Year ended December 31,
1991 1992 1993 1994 1995
-------- -------- ---- ---- ----
(in thousands, except per share amounts)
Income Statement Data:
Net sales $50,900 $60,221 $70,244 $84,816 $97,544
Gross profit 8,339 6,977 9,524 10,210 14,972
Operating income 3,026 980 2,617 2,748 8,788
Interest expense and other, net 1,317 769 821 460 852
Income taxes 142 256 622 743 1,727
Net income (loss) $1,567 $(45) $1,173 $1,545 $6,209
Net income (loss) per share $0.05 $(0.27) $(0.03) $0.23 $1.20
Balance Sheet Data:
Current assets $11,442 $16,227 $19,659 $23,360 $30,586
Property, plant and equipment, 22,686 22,211 22,582 22,684 24,023
net.
Total assets 35,401 39,718 43,259 46,783 55,110
Short-term debt and current
maturities of long-term debt 1,611 4,959 12,017 2,830 5,257
Long-term debt, excluding current
maturities 8,114 7,433 8,603 16,176 15,212
Total stockholders' equity $10,527 $9,160 $13,336 $14,495 $23,196
- ------
The Selected Consolidated Financial Data as of December 31, 1991, and
1992 and for the year ended December 31, 1991 have been derived from
unaudited financial data. Amounts from separate predecessor entities
are included in the Selected Consolidated Financial Data. All material
intercompany balances and transactions have been eliminated.
The 1993 amount includes the cumulative effect of a change in
accounting principle amounting to $375,000 resulting from the adoption
of the Financial Accounting Standards Board's Statement of Financial
Standards No. 109 Accounting for Income Taxes ("FAS 109") in 1993.
Net income (loss) per share of Common Stock was calculated by dividing
net income (loss) by the number of shares of Common Stock outstanding
as of December 31, 1995, which was 5 million shares, after deducting
the amount attributable to the rights of senior securities.
Does not include redeemable Preferred Stock and redeemable Common Stock
as of December 31, 1991, 1992, 1993, and 1994 of $8,651, $9,485,
$3,406, $3,792 .
-13-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Introduction
General
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Form 10-K. The Company has been controlled by substantially the same investors
since its purchase in May 1990; however, the organizational structure has
changed during this period. Elamex, S.A. de C.V. is the successor pursuant to
the merger, effective October 1, 1995 (the "Effective Date"), of Elamex
Internacional with and into Elamex, S.A. de C.V.
Although the Company is located in Mexico, its functional currency is
the U.S. dollar, which is the principal currency in which it conducts business.
The Company prepares Consolidated Financial Statements in U.S. dollars in
conformity with U.S. GAAP and maintains certain financial information in
accordance with Mexican GAAP.
Exchange Rates; Inflation
The Company's results of operations are generally affected by changes
in the exchange rate between Pesos and U.S. dollars as follows: In the case of
an appreciation of value of the U.S. dollar against the Peso, the Company
generally experiences a benefit because its revenues are denominated in U.S.
dollars and certain of its costs and expenses are denominated in Pesos. This
benefit will be reduced by relative inflation in the Peso versus the U.S.
dollar, as well as by inflation within Mexico and by competitive pressures from
the Company's customers. In the case of a depreciation of the U.S. dollar
against the Peso, the Company generally experiences a detriment for the same
reason, and this detriment will similarly be reduced by relative inflation in
the U.S. dollar against the Peso and increased pricing by the Company.
On October 29, 1995, the Mexican government signed a pact with labor
and business representatives called the Alliance for Economic Recovery (the
"Alliance"). The Alliance defines a macroeconomic policy designed to support
Mexico's economic recovery and promote future growth. By its provisions, the
minimum wage rate was increased by 10% effective December 4, 1995. An additional
12% rise in the minimum wage rate became effective on April 1, 1996. Also, over
the 14 months following execution of the Alliance, utility charges will increase
an average of 26%. Under the Alliance the Mexican government will attempt to
boost the economy by providing tax incentives for new business investments,
while utilizing wage and price controls to contain inflation. As part of the
Alliance the Mexican government has committed to maintaining a free flotation
system for the Peso in the international currency markets. The Alliance also
calls for development of social and rural programs. The impact of the Alliance
on the Company or the Mexican economy cannot be accurately predicted
Certain Accounting Policies
Direct manufacturing contract costs related to initial manufacturing
layout and setup for new contracts ("Initial Manufacturing Expenses") are
expensed in the current period when such costs are not considered significant.
When such costs are considered significant, the portion of such costs expended
for capital equipment are capitalized and are amortized using the straight-line
method during the length of the applicable contract. No manufacturing contract
costs have been capitalized for the year ended December 31, 1995. In addition,
labor costs required to achieve normal productivity levels are expensed in the
period incurred. Commencing in 1995, the Company also adopted a policy of not
engaging in futures contracts with the purpose of hedging U.S. dollar/New Peso
revenues or costs, with the exception of regular treasury operations to cover
operating requirements for up to 30 days.
-14-
Statutory Employee Profit Sharing
All Mexican companies are required to pay their employees, in addition
to their agreed compensation benefits, profit sharing in an aggregate amount
equal to 10% of net income, calculated for employee profit sharing purposes, of
the individual corporation employing such employees. All of Elamex's employees
are employed by its subsidiaries, each of which pays profit sharing in
accordance with its respective net income for profit sharing purposes. Tax
losses do not affect employee profit sharing. Statutory employee profit sharing
expense is reflected in the Company's cost of goods sold and selling, general
and administrative expenses, depending upon the function of the employees to
whom profit sharing payments are made. The Company's net income on a
consolidated basis as shown in the Consolidated Financial Statements is not a
meaningful indication of net income of the Company's subsidiaries for profit
sharing purposes or of the amount of employee profit sharing.
Results of Operations
General
The following table sets forth income statement data as a percentage of
net sales, derived from audited Consolidated Financial Statements included
elsewhere herein, for each period indicated, unless otherwise indicated.
Percentage of Net Sales
Year Ended December 31,
-----------------------
1993(1) 1994 1995
------- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 86.4 88.0 84.7
Gross profit 13.6 12.0 15.3
Selling, general and administrative expenses 9.8 8.8 6.3
Operating income 3.7 3.2 9.0
Interest and other expenses, net 1.2 0.5 0.9
Income before taxes 2.6 2.7 8.1
Income taxes 0.9 0.9 1.8
Net income (loss) 1.7 1.8 6.4
- ------
(1) Other than Net sales, percentages do not add to 100% due to rounding.
1995 Compared to 1994
Net Sales. Net sales increased 15% to $97.5 million in 1995 from $84.8 million
1994. The increase was attributable principally to increased dollar volume of
turnkey sales to existing customers, and, to a lesser extent, an expansion of
business from new customers in 1995.
Gross Profit. Gross profit increased by $4.8 million, or 46.6%, to $14.9 million
in 1995 compared to $10.2 million for the prior year. Gross profit as a
percentage of net sales ("gross margin") increased to 15.3% in 1995 from 12.0%
in 1994 due primarily to a shift in the Company's sales mix toward turnkey
services with substantially greater revenue from the assembly component of
turnkey services than the turnkey services provided by Elamex in prior periods;
the assembly component is the higher-margin component of turnkey services, while
materials procurement is the lower-margin component. Better utilization of the
Company's manufacturing facilities also contributed to the increased gross
margin, as manufacturing overhead increased at a lower rate than net sales.
-15-
Statutory employee profit sharing was $120,474 or an effective rate of
1.52% of income before taxes, for the year ended December 31, 1995, compared to
$185,923 or an effective rate of 8.13% of income before taxes, for the year
ended December 31, 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 17.1% to $6.2 million, or 6.3% of net sales,
in the year ended December 31, 1995, as compared to $7.5 million, or 8.8% of net
sales, in the year ended December 31, 1994. This decrease resulted in part from
an increase in net sales that was achieved with essentially the same personnel
as in 1994, in addition to a depreciation of the Mexican peso; from December 18,
1994 through December 31, 1995, the U.S. dollar appreciated 128%, measured in
value against the Peso. By December 31, 1995, the beneficial effects of the
devaluation were partially offset by increases in wages and other costs in
Mexico affected by inflation, which were incurred by the Company during 1995.
Of the Company's aggregate cost of sales and selling, general and
administrative expenses in 1995, approximately 29.7% was incurred in Pesos,
compared to approximately 39.9% in 1994. This decrease was due to the
devaluation of the Peso during 1995 and the change in sales mix during the
period.
Operating Income. Operating income increased by 219.9% to $8.8 million, or 9.0%
of net sales, during the year ended December 31, 1995 and from $2.7 million, or
3.2% of net sales, during the year ended December 31, 1994, as a result of the
above factors, the most significant of which were changes in turnkey operations,
the devaluation of the Peso and the economies of scale described under "-Gross
Profit" and "-Selling, General and Administrative Expenses" above.
Interest, Net, and Other Expenses. Interest and other expenses increased by $0.4
million to $0.9 million, or 0.9% of net sales, in the year ended December 31,
1995, from $0.5 million or 0.5% of net sales, in the year ended December 31,
1994. This increase resulted principally from higher rates and increased
borrowings required to support the Company's working capital growth needs during
the period, offset by interest increases on deposits, principally in Mexican
banks, during a period of high Mexican interest rates.
1994 Compared to 1993
Net Sales. Net sales increased 20.7% to $84.8 million in 1994 from $70.2 million
in 1993. The increase was attributable principally to increased volume in
turnkey sales to existing customers, and, to a lesser extent, an increase in
assembly sales to existing customers and an expansion of business from new
customers.
Gross Profit. Gross profit increased by $0.7 million, or 7.2%, to $10.2 million
in 1994 compared to $9.5 million for the prior year. Gross profit as a
percentage of net sales decreased to 12.0% in 1994 from 13.6% in 1993 due
primarily to a shift in the Company's sales mix toward turnkey services, which
generally have lower margins. The change in gross margin resulting from this
shift in product mix was partially offset by the effect of higher utilization of
manufacturing overhead. In addition, at December 31, 1994 the Company had
approximately $0.9 million reserved for excess and obsolete inventory. A
significant portion of this inventory was raw material inventory that had been
purchased for a contract with a customer that subsequently instructed Elamex not
to manufacture the goods that were to have been assembled using such inventory.
The Company reserved approximately $650,000 in respect to such inventory.
Nevertheless, Elamex believes that the customer may eventually reinstate its
order in whole or in part.
Statutory employee profit sharing was $186,000, or an effective rate of
8.1% of income before taxes, for 1994, compared to $85,400, or an effective rate
of 4.8% of income before taxes, for 1993
-16-
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 8.0% to $7.5 million, or 8.8% of net sales in
1994, compared to $6.9 million, or 9.8% of net sales, in 1993. This decrease as
a percentage of net sales reflects the continued growth of the Company's
business, which allowed fixed costs to be spread over a larger base of business,
and the Company's on-going efforts to control costs. The increased expenditure
for selling, general and administrative expenses occurred due to the addition of
personnel in the project coordination department and additional engineering
personnel to handle existing and planned growth in turnkey sales through 1995
and into 1996.
Of the Company's aggregate cost of sales and selling, general and
administrative expenses in 1994, approximately 39.9% was incurred in Pesos,
compared to approximately 45.9% in 1993, principally due to the change in sales
mix toward turnkey sales and also due to devaluation of the Peso in late 1994.
These percentages were computed by dividing (i) payroll costs paid in Pesos for
the relevant period plus total other expenditures for the relevant period
multiplied by the actual percentage of Peso costs computed for the year ended
December 31, 1995 by (ii) total expenditures for the relevant period.
Operating Income. Operating income increased by 5% to $2.7 million, or 3.2% of
net sales, in 1994 from $2.6 million, or 3.7% of net sales, in 1993, as a result
of the above factors. Operating income as a percentage of net sales decreased
principally due to the changes in sales mix described under "-Gross Profit"
above, partially offset by the economies of scale described under "-Gross
Profit" and "-Selling, General and Administrative Expenses" above.
Interest and Other Expenses. Interest and other expenses decreased by $0.4
million to $0.5 million, or 0.5% of net sales, in 1994, from $0.8 million or
1.2% of net sales, in 1993. Although interest expense increased slightly in
1994, this increase was offset by foreign exchange gains, creating a net
reduction in this item.
Income Tax; Assets Tax
Under Mexican tax law as presently in effect, Mexican companies must
pay the greater of the income tax or the assets tax. The corporate income tax
rate was 35% in 1992 and the first nine months of 1993, and was reduced to 34%
commencing October 31, 1993. For income tax purposes, taxpayers may deduct
certain expenses and recognize certain effects of inflation and exchange rate
gains or losses, but these deductions are for different amounts than expenses
recognized for financial reporting under U.S. GAAP. For income tax purposes, tax
losses, updated to recognize the effects of inflation, may be carried forward to
the ten years succeeding the year of the loss.
Previously paid assets tax, adjusted for inflation, may be used to
offset income taxes that exceed the assets tax due for the year for ten years
following the payment of the tax. In addition, tax net operating loss
carryforwards can be utilized by the Mexican company that incurred the losses.
The amounts of the Company's assets tax and net operating loss carryforwards at
December 31, 1995 are set forth in Note 8 to the Consolidated Financial
Statements.
The Mexican assets tax was a 2% tax on assets for 1994 and prior years,
and a 1.8% tax on assets for 1995 and later years, computed by recognizing
certain effects of inflation, and by reducing the asset base by the amount of
certain liabilities. The assets tax operates like an alternative minimum tax.
The Company's effective tax rate was 121% in 1992 (principally due to
imposition of the assets tax as the Company relied on net operating loss
carryforwards to reduce its income tax to an amount that was less than the
assets tax), 13.8% in 1993, 32.5% in 1994 and 21.8% in 1995.
Accel files consolidated Mexican federal income tax returns, which
include Elamex. Consequently, Accel and Elamex have entered into a tax sharing
agreement providing for the allocation
-17-
of taxes and tax benefits to the Company. Under such agreement Elamex will pay
Accel an amount equal to the Mexican Federal monthly estimated income tax or
assets tax (whichever applies), proportionate to Accel's direct or indirect
percentage of ownership of the capital stock of Elamex, S.A. de C.V. and its
subsidiaries. The amount Elamex must pay under this agreement will not exceed
the amount Elamex would be liable to pay in taxes if each entity in the Elamex
group filed separate tax returns.
Liquidity and Capital Resources
Since its inception, the Company has financed its growth through both
cash flow from operations and borrowings. The Company has experienced
significantly increased working capital needs as its business has grown and its
mix has shifted toward more turnkey projects requiring purchases of materials by
the Company. At December 31, 1995, the Company had working capital (defined as
inventory and accounts receivable minus accounts payable) of $19.9 million
compared to $14.2 million at December 31, 1994. This increase was due to growth
in accounts receivable and inventories associated with an increase in sales,
especially those related to turnkey contracts.
During the year ended December 31, 1995, the Company provided a total
of $4.5 million of cash flow from operations, consisting of net income of $6.2
million and depreciation and amortization of $2.4 million, which was offset by a
net $4.1 million use of cash reflecting increases in current assets and
decreases in current liabilities. During this period, Elamex increased its net
borrowings by $2 million and invested $3.6 million in property, plant and
equipment; Elamex also repurchased its redeemable Common Stock for $4.0 million,
which repurchase was partially funded by a $2.7 million capital contribution
from Accel.
The Company has commenced a project designed to strengthen its supply
chain management, which includes planning functions and financial systems and
controls in the area of inventory, working capital and supplier base, with the
intent to identify additional opportunities for making its supply chain more
effective, the importance of which has grown with the increase in turnkey
contracts.
The Company had the following lines of credit and outstanding
borrowings at December 31, 1995:
Lender or Class of Type Amount Interest Maturity Date
Securities ---- Outstanding as of Rate as of -------------
- ------------------ December 31, 1995 December 31, 1995
----------------- ----------------
Comerica Bank $10 million Line of
Credit $5,200,000 9.25% May 1, 1998
Bank of America $7 million Line of
N.T. & S.A. Credit - 9.06 April 23, 1996
Confia S.A. $2.2 million Line -
of Credit 9.44 January 8, 1997
AT&T Credit Term Loan 1,994,342
Corporation 13.64 August 30, 1999
Bancomer, S.A. Term Loan 4,083,333 11.0 May 26, 1999
Norwest Bank El
Paso Term Loan 4,400,000 9.25 December 15, 1999
Subordinated
Debentures 1,794,060 7.00 January 15, 2000
250,498 7.00 December 8, 1998
Total $17,722,233
- ------
Balance paid with proceeds of the Company's recent common stock
offering; credit line still open.
-18-
Average interest rate.
Balance paid with proceeds from public offering; credit line no longer
outstanding.
Effective March 19, 1996 the Company successfully completed an Initial
Public Offering of 2,400,000 shares of Class I Common Stock, no par value, the
net proceeds of which totaled approximately $18,900,000 and were used to pay
down $15,900,000 of outstanding debt and Subordinated Debentures. The remaining
$3,000,000 was used as working capital.
Under its several credit agreements, Elamex has committed to maintain:
(a) a debt service coverage ratio of 1.3, (b) a current ratio no lower than
1.25, (c) a leverage ratio (defined as the ratio of senior indebtedness to the
sum of capital plus subordinated indebtedness) no greater than 1.5 and (d)
equity plus subordinated indebtedness of no less than $18 million. The Company
may not invest in or advance significant amounts to other companies who are not
a party to one of the debt agreements. During the last three years, the Company
has been in compliance with all material covenants related to its debt
obligations.
The Company has entered into certain operating lease transactions to
lease machinery and equipment with an original cost of approximately $1.0
million in 1993 and $2 million in 1991. The future minimum rental payment under
these equipment leases is $2.3 million in 1996, $2.1 million in 1997, $1.8
million in 1998, $1.3 million in 1999 and $1.1 million in 2000. See Note 7 to
the Consolidated Financial Statements for further information regarding
operating lease commitments.
-19-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Item 8. Financial Statements and Supplementary Data
Independent Auditors' Report
The Board of Directors and Stockholders
Elamex, S.A. de C.V.:
We have audited the accompanying consolidated balance sheets of Elamex, S.A. de
C.V. and subsidiaries as of December 31, 1995 and 1994 , and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Elamex, S.A. de C.V.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in notes 2 and 8 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, effective January 1, 1993.
KPMG Peat Marwick LLP
El Paso, Texas
April 9, 1996
-20-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Balance Sheets
(In U. S. Dollars)
December 31,
Assets 1995 1994
---- ----
Current assets:
Cash and cash equivalents $ 2,848,628 1,694,987
Receivables :
Trade accounts, less allowance for doubtful accounts
($148,629 and $193,732, respectively) 14,860,718 11,775,593
Other receivables 831,740 768,214
------------ ------------
Total receivables 15,692,458 12,543,807
---------- ----------
Inventories, net 11,358,182 8,873,563
Prepaid expenses 686,766 247,813
------------ ------------
Total current assets 30,586,034 23,360,170
Property, plant and equipment, net 24,022,728 22,684,253
Other assets, net 501,726 738,869
------------ ------------
$ 55,110,488 46,783,292
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 2,000,000 -
Accounts payable 7,134,943 7,233,950
Accrued expenses 1,746,074 851,809
Current installments of long-term debt 2,691,054 2,266,667
Current obligations of capital leases 565,555 563,538
Taxes payable 861,797 982,779
Due to related parties 156,124 205,939
------------ ------------
Total current liabilities 15,155,547 12,104,682
Subordinated debentures 2,044,558 2,044,558
Long-term debt, excluding current installments 12,986,621 13,383,333
Capital lease obligations, excluding current obligations 181,062 748,067
Other liabilities 181,964 215,450
Deferred income taxes, net 1,364,407 -
----------- ------------
Total liabilities 31,914,159 28,496,090
---------- ----------
Redeemable common stock - 3,792,006
---------- -----------
Stockholders' equity :
Preferred stock, authorized 50,000,000 shares, none issued
or outstanding - -
Common stock, 5,000,000 shares issued and outstanding
at December 31, 1995 16,270,459 13,552,031
Retained earnings 6,925,870 943,165
----------- ------------
Total stockholders' equity 23,196,329 14,495,196
---------- ----------
Commitments and contingencies - -
$ 55,110,488 46,783,292
========== ==========
See accompanying notes to consolidated financial statements.
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-22-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In U. S. Dollars)
Years ended December 31,
1995 1994 1993
---- ---- ----
Net sales $ 97,543,581 84,816,306 70,243,674
Cost of sales 82,571,960 74,605,956 60,719,796
---------- ---------- ----------
Gross profit 14,971,621 10,210,350 9,523,878
---------- ---------- -----------
Operating expenses:
General and administrative 5,560,356 6,658,530 6,116,568
Selling 622,811 803,918 790,565
------------ ------------ ------------
Total operating expenses 6,183,167 7,462,448 6,907,133
----------- ----------- -----------
Operating income 8,788,454 2,747,902 2,616,745
----------- ----------- -----------
Other income (expense):
Interest income 965,341 153,191 175,187
Interest expense (2,359,451) (1,689,986) (1,315,309)
Other, net 541,799 1,077,048 318,766
------------ ----------- ------------
Total other expense (852,311) (459,747) (821,356)
------------ ------------ ------------
Income before income taxes and
cumulative effect of change in
accounting principle 7,936,143 2,288,155 1,795,389
Income tax provision 1,727,000 742,902 247,059
----------- ------------ ------------
Income before cumulative effect of
change in accounting principle 6,209,143 1,545,253 1,548,330
Cumulative effect at January 1, 1993 of change
in accounting for income taxes - - 375,120
------------------ ------------------ ------------
Net income $ 6,209,143 1,545,253 1,173,210
=========== =========== ===========
Income per common share:
Income before cumulative effect of change
in accounting principle 1.20 0.23 0.04
Cumulative effect of change in accounting
principle - - (0.07)
------- ------- ------
Net income (loss) per common share
1.20 0.23 (0.03)
==== ==== ======
See accompanying notes to consolidated financial statements.
-23-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In U. S. Dollars)
Retained Total
Common Earnings Stockholders'
Stock (Deficit) Equity
------- --------- ------------
Balances at January 1, 1993 $ 10,003,365 (844,918) 9,158,447
Net income - 1,173,210 1,173,210
Redeemable preferred stock dividends - (650,000) (650,000)
Accretion of redemption premium
on preferred stock - (451,500) (451,500)
Redemption of stock (9,999,999) 786,698 (9,213,301)
Redemption premium on preferred
stock paid at redemption - (211,578) (211,578)
Issuance of common stock 13,548,665 - 13,548,665
Accretion of redemption premium
on redeemable common stock - (17,558) (17,558)
------------------ ----------- -------------
Balances at December 31, 1993 13,552,031 (215,646) 13,336,385
Net income - 1,545,253 1,545,253
Accretion of redemption premium
on redeemable common stock - (386,442) (386,442)
------------------ ---------- ------------
Balances at December 31, 1994 13,552,031 943,165 14,495,196
Net income - 6,209,143 6,209,143
Cash capital contribution 2,718,428 - 2,718,428
Redemption of stock (16,270,459) - (16,270,459)
Issuance of common stock 16,270,459 - 16,270,459
Accretion of redemption premium
on redeemable common stock - (226,438) (226,438)
------------------ ---------- ------------
Balances at December 31, 1995 $ 16,270,459 6,925,870 23,196,329
========== ========= ==========
See accompanying notes to consolidated financial statements.
-24-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In U. S. Dollars)
Years ended December 31,
1995 1994 1993
---- ---- ----
Cash flows provided (used) by operating activities:
Net income $ 6,209,143 1,545,253 1,173,210
Adjustments to reconcile net income to net cash
provided by (used) operating activities:
Depreciation and amortization 2,417,583 1,954,699 1,996,674
Allowance for doubtful trade accounts receivable (45,103) 146,241 (30,163)
Allowance for excess and obsolete inventory 608,777 647,719 214,871
Deferred income taxes, net 1,364,407 - -
(Gain) loss on disposal of equipment (2,414) 56,789 48,649
Change in assets and liabilities:
Increase in trade accounts receivable (3,040,022) (2,502,993) (2,095,569)
Increase in other receivables (63,526) (80,757) (319,018)
Increase in inventories (3,093,396) (1,661,107) (1,880,745)
(Increase) decrease in prepaid expenses (438,953) (111,611) 126,814
(Increase) decrease in other assets 39,396 111,214 (83,641)
Increase (decrease) in accounts payable (99,007) 4,079,246 (3,024,458)
Increase (decrease) in accrued expenses, related
party, and taxes payable 723,468 (270,169) 555,634
Decrease in other liabilities (33,486) (24,821) (23,856)
----------- ------------- -------------
Net cash provided (used) by operating
activities 4,546,867 3,889,703 (3,341,598)
------------ -------------- -------------
Cash flows provided (used) by investing activities:
Purchase of property, plant and equipment (3,572,668) (2,188,736) (1,444,195)
Proceeds from disposal of equipment 16,771 242,968 272,261
----------- ------------- ------------
Net cash used by investing activities (3,555,897) (1,945,768) (1,171,934)
--------- ----------- -----------
Cash flows provided (used) by financing activities:
Repayments of debt due to a related party - (191,007) (291,539)
Net increase (decrease) in notes payable 2,000,000 (10,300,000) 6,300,000
Proceeds from notes payable for reorganization - - 20,011,229
Repayment of notes payable for reorganization - - (20,011,229)
Proceeds from issuance of long-term debt 8,394,341 10,400,000 -
Repayment of long-term debt (8,366,666) (1,166,666) (583,334)
Principal repayments of capital lease obligations (564,988) (547,256) (433,962)
Payments to stockholders under reorganization - - (11,610,589)
Proceeds from issuance of subordinated debentures - - 2,044,558
Proceeds from capital contributions 2,718,428 - 9,566,031
Payments of preferred stock dividends - - (780,000)
Redemption of redeemable common stock (4,018,444) - -
Payment under reorganization agreement - - (250,000)
----------------------------------- ------------
Net cash provided (used) by financing
activities 162,671 (1,804,929) 3,961,165
------------------------------- -------------
Net increase (decrease) in cash and cash equivalents 1,153,641 139,006 (552,367)
Cash and cash equivalents, beginning of year 1,694,987 1,555,981 2,108,348
--------- ----------- -----------
Cash and cash equivalents, end of year $ 2,848,628 1,694,987 1,555,981
========= =========== ===========
Non-cash transaction -
Equipment acquired under capital lease obligations $ - - 900,531
See accompanying notes to consolidated financial statements.
-25-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Organization and Basis of Presentation
Company Formation
Elamex, S.A. de C.V. and its subsidiaries ("Elamex" or the "Company")
provide contract assembly services and turnkey manufacturing services
to customers primarily located in the United States and Canada. The
Company manufactures products mainly for companies in the electronics
industry as well as in the electromechanical, avionics, and medical
industries. All of the Company's manufacturing machinery and equipment
are located in facilities in Ciudad Juarez, Nuevo Laredo, Guadalajara,
and Delicias, Mexico. Although the organizational structure of Elamex
has changed during the period, the business has operated under the
control of substantially the same investor group since May 1990.
The Company is owned by Accel, S.A. de C.V. (Accel) and a non-bank
subsidiary of Grupo Financiero Serfin. As presented in these financial
statements, the Company was formed effective October 1, 1995 (the
"Effective Date") by means of a merger transaction between the
predecessor to Elamex and its parent holding company, Elamex
Internacional, S.A. de C.V. ("Internacional"). The merger has been
accounted for in a manner similar to a pooling of interests due to
common control of the merged entities. As part of the merger
transaction, the stock of Elamex, S.A. de C.V. was canceled and
replaced by shares issued to Internacional's stockholders proportionate
to their ownership interest. Internacional's stock was subsequently
canceled.
Under a prior agreement, further described in note 9, the Company was
obligated to repurchase 1,060,197 shares of minority-held common stock
of the Company, at a designated price. All of this redeemable common
stock was purchased by Internacional for $4,018,444 by September 1995.
Basis of Presentation
These financial statements and accompanying notes are prepared in U.S.
dollars, the functional and reporting currency of Elamex. The
consolidated financial statements include the financial position as of
December 31, 1995 and 1994 and results of operations for the three
years ended December 31, 1995 of:
o Elamex Internacional, S.A. de C.V. (formerly Bujes de Bronce)
whose assets and liabilities were merged into Elamex on the
Effective Date.
o Elamex, S.A. de C.V. (formerly known as Kronoservices, S.A. de
C.V.), a wholly-owned subsidiary of Internacional prior to the
Effective Date (note 9).
o Servicios Administrativos Elamex, S.A. de C.V. (Servicios) a
wholly-owned subsidiary of Internacional prior to the
Effective Date; now wholly owned by Elamex.
o Kronos, Inc., a subsidiary of Internacional prior to the
Effective Date and now wholly-owned by Elamex (note 9).
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America and all monetary amounts are presented in U.S. dollars. All
material intercompany transactions have been eliminated.
-26-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Organization and Basis of Presentation, Continued
Management Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make
certain estimates that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Actual results could differ from
those estimates.
Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and
investments purchased with an original maturity of three months or less
to be cash equivalents. Cash includes deposits in Mexican banks,
denominated in Mexican Pesos, of approximately $73,000 and $180,000, at
December 31, 1995 and 1994, respectively, and deposits denominated in
U.S. dollars of approximately $2,426,000 and $515,000 in December 31,
1995 and 1994, respectively, in U.S. banks. The Company had
approximately $350,000 and $1,000,000 of short-term repurchase
agreements, denominated in U.S. dollars, deposited in offshore branches
of U.S. and Mexican banks at December 31, 1995 and 1994, respectively.
Foreign Currency Translation
The functional currency of the Company is the U.S. dollar, the currency
of the primary economic environment in which the Company operates.
Gains and losses on foreign currency transactions and translation of
balance sheet amounts are reflected in net income. Included in "other"
on the accompanying consolidated statements of operations are foreign
exchange gains (losses) of $238,545, $950,004, and $(66,395) for the
years ended December 31, 1995, 1994, and 1993, respectively. Assets and
liabilities of the Company are denominated in U.S. dollars except for
certain cash deposits in Mexican banks, certain Mexican tax receivables
and payables, and certain trade payables and accrued expenses. Certain
balance sheet amounts (primarily inventories, property, plant and
equipment, accumulated depreciation, prepaid expenses, and common
stock) denominated in other than U.S. dollars are translated at the
rates in effect at the time the relevant transaction was recorded and
all other assets and liabilities are translated at rates effective as
of the end of the related periods. Revenues and expenses denominated in
other than U.S. dollars are translated at weighted-average exchange
rates for the relevant period the transaction was recorded. Assets and
liabilities denominated in Pesos are summarized as follows in U.S.
dollars at the translation rate published in the Diario Oficial de la
Federacion (the "Official Gazette of the Federation"), which is the
approximate rate at which a receivable or payable can be settled as of
each period-end:
1995 1994
---- ----
Cash and cash equivalents $ 73,000 180,000
Other receivables 585,491 613,566
Prepaid expenses 363,796 131,795
Other assets, net 42,905 23,951
Accounts payable (101,662) (110,376)
Accrued expenses (961,973) (1,665,346)
Other liabilities (598,257) (215,450)
---------- ----------
Net foreign currency position $ (596,700) (1,041,860)
========== =========
-27-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Summary of Significant Accounting Policies, Continued
Foreign Currency Translation, Continued
In addition, the Company has recorded a net deferred tax liability
pursuant to FAS 109, Accounting for Income Taxes (note 8). The recorded
amount of $1,364,407 represents the net dollar denominated value of
amounts provided for temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis.
Foreign Exchange Instruments
Occasionally, the Company enters into forward exchange contracts to
hedge foreign currency transactions. This hedging minimizes the impact
of foreign exchange rate movements on the Company's operating results.
As of December 31, 1994, the Company had an outstanding commitment to
sell $3,000,000 U.S. dollars for Mexican Pesos at an exchange price of
approximately $3.50 pesos to the U.S. dollar. The market exchange rate
at December 31, 1994 was approximately $5.00 pesos to the U.S. dollar.
The forward contract to purchase Mexican Pesos was specifically
designated by management and is effective as a hedge. The Company was
contractually obligated to purchase Pesos to meet future payroll
obligations and the Company had sufficiently large disincentives for
nonperformance of payroll obligations for the transaction to qualify as
a hedge transaction. The loss of approximately $1,060,000 on this
contract, is recorded in cost of sales and general and administrative
expenses in the accompanying consolidated statement of operations for
the year ended December 31, 1995. The Company had no open hedge
contracts at December 31, 1995.
Effective January 1995, the Company has adopted a policy of not
engaging in futures contracts with the purpose of hedging U.S.
dollar/Peso revenues or costs, with the exception of regular treasury
operations to cover operating requirements for up to thirty days.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Inventory cost
includes material, labor, and overhead. Inventory reserves, which are
charged to cost of sales, are provided for excess inventory, obsolete
inventory, and for differences between inventory cost and its net
realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Plant and equipment under capital leases
are stated at the present value of minimum lease payments. Depreciation
and amortization are calculated using the straight-line method over the
shorter of related lease terms or estimated useful lives of the assets.
The policy of the Company is to charge amounts expended for maintenance
and repairs to expense and to capitalize expenditures for major
replacements and betterments.
Contract Rights
Included in other assets, at amortized cost, are purchased contract
rights to manufacture selected products. The purchased contract rights
are amortized on a straight-line basis over the expected life of the
contract. Contract rights were purchased for $855,256 and accumulated
amortization of these contract rights was $719,501 and $556,595 at
December 31, 1995 and 1994, respectively.
-28-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Summary of Significant Accounting Policies, Continued
Earnings per Share
Earnings per share of common stock was calculated by dividing net
income by the number of common shares outstanding as of the Effective
Date, 5,000,000, after deducting amounts attributable to the rights of
senior securities in the amounts of $226,438, $386,442, and $1,330,636
for the years ended December 31, 1995, 1994, and 1993 respectively.
Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (FAS 109) and
has reported the cumulative effect of that change in the method of
accounting for income taxes since that time. FAS 109 requires the asset
and liability method of accounting for income taxes. Under the asset
and liability method of FAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
FAS 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
Provision for taxes is made based upon the applicable tax laws of
Mexico. In conformity with FAS 109, deferred tax assets and liabilities
are not provided for differences related to assets and liabilities that
are remeasured from Pesos into U.S. dollars using historical exchange
rates and that result from indexing for Mexican purposes or exchange
rate changes.
Revenue Recognition
Turnkey contract sales are recognized at the time the order is shipped.
Sales from contract assembly services are recognized over the contract
period and billed weekly as services are provided.
Employees' Statutory Profit Sharing
Aprovision, when material, for deferred employees' statutory profit
sharing is computed on income subject to statutory profit sharing which
differs from net income, due to certain differences in the recognition
of income and expenses for statutory profit sharing and book purposes.
Postretirement Benefits
Employees are entitled to certain benefits upon retirement after
fifteen years or more of service (seniority premiums), in accordance
with the Mexican Federal Labor Law. The benefits are accrued as a
liability and recognized as expense during the year in which services
are rendered.
-29-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Summary of Significant Accounting Policies, Continued
Fiscal Year
The Company uses thirteen-week quarters ending on a Sunday except that
the first quarter starts on January 1 and the fourth quarter ends on
December 31.
Accounting for Asset Impairment
During March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of (FAS 121). The Company is required to adopt FAS 121 in the
fiscal year beginning January 1, 1996. FAS 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of FAS 121 is not expected to have a material
adverse impact on the Company's financial position or the results of
its operations at the time of adoption.
Accounting for Stock-Based Compensation
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (FAS 123). The Company is required to adopt
FAS 123 upon issuance of shares under stock-based compensation plans.
FAS 123 defines the fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee
stock compensation plans. However, it also allows an entity to continue
to measure compensation costs for those plans using the intrinsic value
based method of accounting. The statement also requires that an
employer's financial statements include certain disclosures about
stock-based employee compensation arrangements regardless of the method
used to account for them. The Company has not issued any shares under
their Executive Phantom Stock Plan (note 11). However, the Company does
not believe FAS 123 will have any significant impact on its financial
statements at the time of adoption.
Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires disclosures about the
fair value of certain financial instruments for which it is practicable
to estimate that value. The fair value of a financial instrument is
generally the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced
sale or liquidation.
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, and short-term
debt, approximated fair value as of December 31, 1995 because of the
relatively short maturity of these instruments. The carrying value of
long-term debt, including the current portion, approximated the fair
value as of December 31, 1995, as interest on a significant portion of
debt floats with market rates and based upon quoted market prices for
the same or similar debt issues.
The fair value of amounts due from related parties and subordinated
debentures are not practicably estimable as these transactions are not
directly governed by market conditions and rates.
-30-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Inventories
Inventories consist of the following:
1995 1994
---- ----
Raw materials $ 8,717,922 8,822,045
Work-in-process 2,286,032 541,392
Finished goods 1,825,595 372,716
---------- ---------
12,829,549 9,736,153
Reserve for excess and obsolete inventory (1,471,367) (862,590)
------------ ----------
11, 358,182 8,873,563
=========== =========
The reserve for excess and obsolete inventory is charged against cost
of sales and was increased by $608,777 and $647,719 for the years ended
December 31, 1995 and 1994, respectively.
Property, Plant and Equipment
A summary of property, plant and equipment, all of which is located in
Mexico, is as follows:
Estimated
Useful Lives
(Years) 1995 1994
------------ ---- ----
Land - $ 4,711,793 4,711,793
Buildings 20 10,556,598 10,452,855
Machinery and equipment 3 - 10 16,678,864 13,642,502
Leasehold improvements 5 755,357 529,820
Vehicles 5 111,400 92,718
------------ ------------
32,814,012 29,429,688
Less accumulated depreciation
and amortization 8,791,284 6,745,435
----------- -----------
$ 24,022,728 22,684,253
============ ==========
Included in property, plant and equipment is $3,371,054 of machinery
and equipment under capital leases and $2,460,524 and $2,091,764 in
related accumulated amortization at December 31, 1995 and 1994,
respectively.
-31-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Notes Payable
At December 31, 1995, Elamex had available short-term credit facilities
with two banks. One revolving line of credit available for up to
$7,000,000 bears interest at LIBOR plus 3.125% at the date of funding
(9.06% at December 31, 1995), and matures on April 23, 1996. At
December 31, 1995, the Company had drawn $2,000,000 on this credit
facility, resulting in availability of $5,000,000. The Company
anticipates renewing this credit facility upon maturity. The line is
secured by selected eligible accounts receivable. The other line of
credit, for up to $2,000,000, had an adjusted interest rate of 9.44% at
December 31, 1995. The availability under this line of credit is
reduced by a letter of credit of $200,000. The line is secured by
certain equipment. Promissory notes under the lines of credit are
renewable, with adjusted interest rates, and are due 90 days or 180
days after issuance. Interest on the promissory notes is payable at
each note maturity. As discussed in note 15, the Company paid notes
payable outstanding at December 31, 1995 during the first quarter of
1996.
Long-Term Debt
All long-term debt is denominated in U.S. dollars and consists of the
following at December 31:
1995 1994
---- ----
Note payable to bank, adjusted interest
rate of 11% at December 31, 1995,
payable in semi-annual principal
installments of $583,333, plus interest,
due May 26, 1999. Secured by stock of
Subsidiaries and Elamex de Torreon, S.A.
de C.V., a related entity. The bank
holds a trust guaranty in the land and
buildings of three locations. $ 4,083,333 5,250,000
Note payable to bank, interest at prime
plus 1/2% (9.25% at December 31, 1995),
payable in quarterly principal
installments of $275,000, plus interest,
due December 15, 1999. The bank holds a
trust guaranty in the land and building
of three locations. $ 4,400,000 5,500,000
Committed revolving notes payable on a
$10 million committed line of credit to
a bank, interest at prime plus 1/2%
(9.25% average rate at December 31,
1995) due upon expiration of term notes
which are renewable at the option of the
Company in 180-day intervals through May
1, 1998. Secured by trade accounts
receivable. Commitment fees of 1/4% of
unfunded balance are due quarterly. $ 5,200,000 4,900,000
Note payable to a financing corporation,
interest at 13.64%, payments of $56,222,
including principal, are payable monthly
through August 30, 1999. Secured by
certain equipment. $ 1,994,342 -
---------- ---------
Total long-term debt 15,677,675 15,650,000
Less current installments 2,691,054 2,266,667
----------- ----------
Long-term debt, excluding current $12,986,621 13,383,333
installments =========== ==========
-32-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Long-Term Debt, Continued
As of December 31, 1995, the remaining aggregate maturities of
long-term debt are: $2,691,054 in 1996; $2,754,420 in 1997; $8,026,317
in 1998; and $2,205,884 in 1999. These debt agreements place certain
restrictions on the payment of dividends and use of proceeds from
disposition of collateralized fixed assets, limits investments or
advances in other companies, limits the incurrence of debt, and
requires the Company to maintain certain financial ratios and insurance
coverage. Interest payments on the notes payable and long-term debt
were $2,085,530, $1,267,235, and $986,686 for the years ended December
31, 1995, 1994, and 1993, respectively.
As discussed in note 15, the Company paid approximately $13,700,000 of
its outstanding long-term debt during the first quarter of 1996. The
long-term debt which was not paid-off represents the note payable to a
financing corporation, due August 30, 1999. The remaining aggregate
payments due on this note payable at December 31, 1995 are: $424,387 in
1996; $487,753 in 1997; $559,651 in 1998, and $522,551 in 1999.
Leases
The Company utilizes certain machinery and equipment and occupies
certain buildings under lease arrangements which expire at various
dates from 1996 through 1999, some of which have renewal options for
additional periods. Rental expense for certain manufacturing and
warehouse facilities, mainly for operating lease agreements, aggregated
$1,689,425, $2,114,578, and $2,219,399 for the years ended December 31,
1995, 1994, and 1993, respectively. Interest payments on capital leases
were $90,599, $146,357, and $155,636, respectively.
Future minimum lease obligations at December 31, 1995 for assets under
capital leases and for rental commitments under non-cancelable
operating leases having an initial or remaining term in excess of one
year are as follows:
Capital Operating
Year ended December 31, Leases Leases
----------------------- ------ --------
1996 $ 570,816 $2,323,575
1997 167,504 2,124,363
1998 47,217 1,832,541
1999 - 1,304,190
2000 - 1,082,639
-------- ---------
Total minimum obligations 785,537 $8,667,308
=========
Less amounts representing interest
(3.5% to 13.25%) 38,920
--------
Present value of net minimum lease obligations 746,617
Less current obligations under capital leases 565,555
-------
Capital lease obligations, excluding current
obligations $181,062
========
-33-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Leases, Continued
The Company leases manufacturing facilities to unrelated parties under
operating lease agreements which expire in 1999. The Company pays
certain taxes on the properties and provides for its general
maintenance. Included in property, plant and equipment at December 31,
1995 and 1994 is the cost of the land and the building of $1,717,505
and the related accumulated depreciation of $210,607 and $174,876,
respectively.
Rental income was $501,370, $300,047, and $336,792 for the years ended
December 31, 1995, 1994, and 1993, respectively. The future minimum
rental income to be received under these operating leases in the
following years are: $633,040 in 1996, $445,138 in 1997; $105,600 in
1998; and $17,600 in 1999.
Income Taxes
As discussed in note 2, the Company adopted FAS 109 as of January 1,
1993. The cumulative effect of this change in accounting for income
taxes of $375,120, determined as of January 1, 1993, is reported
separately in the consolidated statement of operations for the year
then ended.
Mexican tax legislation requires that companies pay a tax calculated as
the greater of tax resulting from taxable income or tax on the total
value of certain assets less certain liabilities (assets tax). Taxes
resulting from net income are calculated using Mexican tax regulations
which define deductibility of expenses and recognize certain effects of
inflation.
The tax provision differs from the expected tax rate of 34% in 1995 and
1994 and 35% in 1993 on taxable income as follows:
1995 1994 1993
---- ---- ----
Statutory tax rate 34.0% 34.0% 35.0%
Foreign currency gains or losses not
subject to income taxes (1.0)% (14.1)% 1.3%
Kronos income not subject to tax (i) (1.2)% (10.2)% (40.4)%
Non-deductible expenses 2.1% 3.5% 4.7%
Inflation and currency exchange rate
gains or losses on monetary items
for tax purposes only (ii) (2.7)% (1.1)% (16.6)%
Inflation and currency exchange rate
portion of depreciation expense for
tax purposes only 2.4% (4.3)% (7.6)%
Deferred income tax valuation reserve
adjustment (iii) (11.8)% 24.7% 37.4%
------ ----- ----
21.8% 32.5% 13.8%
==== ==== =====
-34-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Income Taxes, Continued
Significant items impacting the Company's effective tax rate include:
(i) Kronos, Inc. is a British Virgin Islands Corporation and its income
is not subject to income taxes; (ii) under Mexican tax laws, inflation
and currency exchange rate adjustments are required for income tax
purposes; and (iii) in prior years, the Company generated net operating
loss carryforwards which could not be utilized due to the tax structure
of the Company. The Company, effective in 1995, was permitted to file a
consolidated income tax return which resulted in the expectation that
the Company would realize these deferred tax assets and thereby reduced
the valuation reserve for these deferred income tax assets.
The income tax provision (benefit) includes the following:
1995 1994 1993
---- ---- ----
Current tax provision $ 363,000 742,902 622,179
Deferred tax provision (benefit) 1,364,000 - (375,120)
--------- ------- ---------
Total provision for
income taxes $1,727,000 742,902 247,059
========== ======= =======
Total income taxes paid were $379,000, $449,000, and $386,000 in
December 31, 1995, 1994, and 1993, respectively.
The tax effect of significant temporary differences representing
deferred tax assets and liabilities are as follows:
1995 1994
---- ----
Current deferred tax assets:
Assets tax carryforwards $ 981,623 -
Net operating loss carryforwards 4,181,765 2,729,759
Other, net 249,960 287,252
---------- ----------
5,413,348 3,017,011
Current deferred tax liabilities -
Inventories (5,413,348)(3,017,011)
----------- ----------
Net current deferred tax asset $ - -
=========== =========
Non-current deferred tax assets:
Assets tax carryforwards $ 77,292 1,434,960
Net operating loss carryforwards - 1,232,042
---------- ----------
77,292 2,667,002
Valuation allowance - (1,239,388)
---------- -----------
77,292 1,427,614
Non-current deferred tax liabilities -
Property, plant and equipment, principally
due to differences in useful lives (1,441,699)(1,427,614)
----------- ----------
Net non-current deferred tax liability $(1,364,407) -
============ ==========
-35-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Income Taxes, Continued
Avaluation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. A
reserve for certain deferred tax assets, resulting from certain assets
tax carryforwards and net operating loss carryforwards, of $-0-,
$1,239,388, and $670,602, has been provided at December 31, 1995, 1994,
and 1993, respectively. During the year ended December 31, 1995, the
reserve recorded at December 31, 1994 was reversed as a result of the
generation of deferred tax liabilities available to offset deferred tax
assets and expectation of future realizability of deferred tax assets.
The assets tax paid, adjusted for inflation, may be used to offset
income taxes that exceed the assets tax due for the year, for ten years
following the payment of the tax. These assets tax carryforwards as of
December 31, 1995 expire as follows, if not previously utilized to
offset taxable income:
1999 $ 63,000
2000 89,000
2001 53,000
2002 138,000
2003 213,000
2004 193,000
2005 310,000
----------
$ 1,059,000
============
At December 31, 1995, certain of the Mexican companies within the
consolidation had tax net operating loss carryforwards that can be
utilized only by the Mexican company which incurred the losses. These
net operating loss carryforwards may be adjusted for inflation. These
tax net operating loss carryforwards, as adjusted for inflation, expire
as follows, if not previously utilized to offset taxable income:
2001 $ 544,000
2002 683,000
2003 547,000
2004 2,061,000
2005 347,000
----------
$ 4,182,000
============
The Company has received authorization to file a consolidated tax
return with its majority stockholder commencing in 1995. Effective for
1995, a tax sharing agreement has been entered into between the
majority stockholder, Accel S.A. de C.V., and Elamex whereby Elamex
agrees to transfer monthly an amount equal to its estimated payment,
less credits, which would be required by the Mexican tax authority
calculated as if they were filing a separate return for such year. The
majority stockholder further agrees to reimburse Elamex for use of any
of Elamex's tax benefits at the time Elamex would otherwise realize the
benefit.
-36-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Redeemable Stock - Preferred and Common
Effective December 9, 1993, the stockholders of Kronos, Inc. and
Kronoservices, S.A. de C.V. restructured their operations. As part of
the restructuring, Kronoservices changed its name to Elamex, S.A. de
C.V. and transferred the operations of Kronos, Inc. to Elamex, S.A. de
C.V. during 1993 and 1994. A change in ownership did not occur and
these transactions were recorded at historical carrying amounts.
As part of the December 9, 1993 restructuring, Elamex, through its
subsidiaries, borrowed $20,011,229 from a bank. These funds were paid
to its stockholders to redeem their preferred and common stock and pay
dividends, and reinvested by the stockholders as follows:
Redemption Reinvestment
---------- ------------
Minority-held Elamex redeemable common stock $ 1,842,661 -
Minority-held Elamex redeemable preferred stock 3,339,405 -
Elamex Internacional's individual stockholders
holding of Elamex redeemable preferred stock 6,428,523 -
-----------
Payments to stockholders 11,610,589 -
Reinvestment in Elamex common stock by
minority stockholder - 3,388,006
Reinvestment in Elamex common stock by
Elamex Internacional's individual
stockholders - 6,178,025
-----------
Total equity reinvestment - 9,566,031
-----------
Subordinated debentures:
Minority stockholders - 1,794,060
Other stockholders - 250,498
----------
Total subordinated debentures - 2,044,558
Elamex Internacional for Elamex common stock 7,370,640 7,370,640
--------- ---------
18,981,229 18,981,229
Preferred stock dividends and payment under
redemption agreement 1,030,000 -
--------- ---------
$20,011,229 18,981,229
=========== ==========
Effective December 9, 1993, all of the redeemable preferred stock (12%
cumulative) $100 par value, was redeemed by the Company. The stock
consisted of 30,000 Class A shares, 16,500 Class B shares and 18,500
Class C shares. Dividends of $650,000 were accrued through October 31,
1993. The provisions of the Class B and Class C shares included a
premium to be paid upon redemption and $451,500 of the premium was
accreted through the redemption date. An additional premium of $211,578
was also paid upon redemption. The total paid for the redemption was
approximately $9,767,928.
-37-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Redeemable Stock - Preferred and Common, Continued
An agreement was entered into as part of the December 9, 1993
restructuring whereby Elamex was required, if and when its
minority-held common stock was distributed to individuals, to
repurchase up to 1,060,197 shares of common stock upon the death,
disability or, under certain conditions, upon an involuntary
termination of certain individuals. This agreement was formalized and
revised on March 9, 1995 whereby Elamex was obligated to repurchase
these shares of minority-held common stock over the next six years. The
repurchase of these redeemable shares was accelerated and by September
1995, all minority-held stock was purchased by Internacional for
$4,018,444. The repurchase of the minority held stock was paid for by a
loan from Elamex to Internacional of $1,300,016 and a capital
contribution from Accel to Internacional of $2,718,428.
A summary of these transactions follows:
Redeemable Redeemable
Preferred Common
Stock Stock
----- -----
-
Balances at January 1, 1993 $9,484,850
-
Preferred stock dividends 650,000
Payment of Preferred stock dividends (780,000) -
Accretion of redemption premium on
preferred stock -
451,500
Redemption of preferred stock (9,767,928) -
Redemption premium on preferred stock
paid upon redemption 211,578
Cash payment under redemption agreement (250,000) -
Issuance of common stock
- 3,388,006
Accretion of redemption premium on
redeemable common stock - 17,558
-----------
Balances at December 31, 1993 - 3,405,564
Accretion of redemption premium on
redeemable common stock - 386,442
----------- ----------
- 3,792,006
Balances at December 31, 1994
Accretion of redemption premium on
redeemable common stock - 226,438
Redemption of common stock - (4,018,444)
(September 1995) ------------ ----------
Balances at December 31, 1995 $ - -
============= ==========
-38-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Stockholders' Equity
In connection with the December 9, 1993 reorganization of the Company
as discussed in note 9, the Company completed the following
stockholders' equity transactions:
o The Company authorized and issued, effective December 9, 1993,
for $13,548,665, 4,239,796 shares of Elamex's approximately
$3.20 (ten Mexican Pesos, based upon the effective exchange
rate at that time) par value common shares. A total of
4,240,796 shares were outstanding at December 31, 1993 and
1994. Elamex may legally authorize an unlimited amount of
common shares upon stockholder approval.
o The Company redeemed $9,999,999 of common stock on the books
of Kronos for $9,213,301, effective December 9, 1993.
A summary of the reorganization transactions follows:
Issuance of common stock of Elamex $ 13,548,665
Issuance of redeemable common stock of Elamex 3,388,006
-----------
16,936,671
Issuance of subordinated debentures (note 13) 2,044,558
-----------
$ 18,981,229
==============
Redemption of preferred stock of Kronos $ 9,767,928
Redemption of common stock of Kronos 9,999,999
Discount on redemption of common stock (786,698)
------------
$ 18,981,229
==============
As part of the merger transaction between Internacional and Elamex on
October 1, 1995, the stock of Elamex, S.A. de C.V. was cancelled and
replaced by 5,000,000 shares issued to Internacional's stockholders
proportionate to their ownership interest; Internacional's stock was
cancelled. The merged corporation is organized under the laws of Mexico
as a sociedad anomina de capital variable.
-39-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Stockholders' Equity, Continued
Under the bylaws and Mexican law, the capital stock of Elamex, S.A. de
C.V. must consist of fixed capital and may have, in addition thereto,
variable capital. Stockholders holding shares representing variable
capital common stock may require the Company, with a notice of at least
three months prior to December 31 of the prior year, to redeem those
shares at a price equal to the lesser of either (i) 95% of the market
price, based on the average of trading prices in the stock exchange
where it is listed during the thirty trading days preceding the end of
the fiscal year in which the redemption is to become effective or (ii)
the book value of the Company's shares as approved at the meeting of
stockholders for the latest fiscal year prior to the redemption date.
Although the variable capital common stock is redeemable by the terms
described above, such shares have been classified as a component of
stockholders' equity in the consolidated balance sheets. Management
believes the variable common stock represents permanent capital because
the timing and pricing mechanisms through which a stockholder would
exercise the option to redeem are such that a stockholder, from an
economic standpoint, would not exercise this option. At the time a
stockholder is required to give notice of redemption, the stockholder
will not be able to know at what price the shares would be redeemed and
would not expect the present value of the future redemption payment to
equal or exceed the amount which would be received by the stockholder
in an immediate public sale.
Dividends paid by Mexican companies which exceed earnings and profits,
as defined by the Mexican tax law, are subject to an effective 34% tax
rate payable by the Company. No dividends on common stock were paid by
the Mexican companies in 1995, 1994, or 1993.
The Mexican Law requires that at least 5% of the Company's net income
each year (after profit sharing and other deductions required by law)
be allocated to a legal reserve fund, which is not thereafter available
for distribution, except as a stock dividend, until the amount of such
fund equals 20% of the Company's historical capital stock. The legal
reserve fund at December 31, 1995 was approximately $29,800 (229,000
Pesos). An additional allocation may be made to the legal reserve at
the annual stockholders' meeting. Retained earnings available for
dividends under Mexican law at December 31, 1995 was $6,896,070.
However, debt agreements place certain restrictions on the payment of
dividends (note 6).
Common Stock Offering
On December 15, 1995, the stockholders of Elamex, S.A. de C.V., at an
extraordinary stockholders meeting, approved an amendment and
restatement of the bylaws of Elamex, S.A. de C.V. which included the
following: (i) elimination of par value of all shares; (ii) a transfer
of all the variable capital of Elamex, S.A. de C.V. to fixed capital
(5,000,000 shares); (iii) authorization for issuance of up to 3,000,000
shares of common stock constituting fixed capital (for the offering);
(iv) authorization of 15,000,000 shares constituting variable capital
(which will be held by Elamex, S.A. de C.V. as treasury stock and is
expected to be sold, from time to time, at the market price prevailing
at such time as authorized by the Board of Directors); (v) and a
provision requiring a motion at each annual stockholders' meeting to
allow the stockholders to designate up to 15% of each year's net
profits as reserved for repurchase and cancellation of publicly-traded
common shares outstanding.
-40-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Stockholders' Equity, Continued
Common Stock Purchase Restrictions and Preemptive Rights
Any person who seeks to acquire ownership of 15% or more of the total
outstanding shares of the Company's common stock must receive written
consent from the Company's Board of Directors. Should shares in excess
of 15% be acquired without permission, the purchaser will be subject to
liquidated damages which will be used by the Company to repurchase
stock in excess of the 15% ownership limitation. In addition, in the
event that the Company issues additional shares, existing stockholders
will have preemptive rights to subscribe for new shares, except when
shares are issued in connection with a merger or for the conversion of
convertible debentures. The 15,000,000 shares of variable capital
authorized on December 15, 1995 are not subject to preemptive rights.
Preferred Stock
As part of the December 15, 1995 amendment and restatement of the
Company's bylaws, the Company's Board of Directors, at its discretion,
can issue up to an aggregate of 50,000,000 shares of preferred stock in
one or more series. The Board may attach any preferences, rights,
qualifications, limitations, and restrictions to the shares of each
series issued, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, and liquidation preferences. The
shares may be issued at no par value or at a par value determined by
the Board of Directors. No shares of preferred stock have been issued
as of December 31, 1995.
Executive Phantom Stock Plan
During 1995, the Company adopted an Executive Phantom Stock Plan (the
"Plan") which offers certain key executives of the Company and related
entities long-term incentives in addition to their current
compensation. Participants receive benefits expressed in shares of
common stock, but which are not actual shares of common stock ("Phantom
Stock Shares"). The Company will keep a record of the amount of Phantom
Stock Shares held by each Participant. Each Participant will be
credited with dollar amounts equal to dividends paid on issued and
outstanding common stock, and such amounts accrue interest at the
short-term money market rate published by the Chase Manhattan Bank,
N.A. The accrual of dividends and interest ceases to a Participant upon
termination of the Participant's employment with the Company. The Plan
provides that the number of Phantom Stock Shares awarded be determined
by a committee of the Board of Directors charged with administering the
Plan and the aggregate number of Phantom Stock Shares awarded for any
year shall in no event exceed 10% of the number of the Company's issued
and outstanding common shares as of the end of such year. As of
December 31, 1995, there were no Participants in the Plan and no
Phantom Stock Shares had been issued under this Plan.
-41-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Major Customers
The Company has agreements which provide for the sale of its assembly
services and turnkey manufacturing at established prices. The Company's
business is dependent on one- to five-year agreements which are subject
to termination or renewal.
Certain customers accounted for significant percentages of the
Company's total sales during the periods ended as follows:
December 31,
Customer Products and Services 1995 1994 1993
-------- --------------------- ---- ---- ----
Polaroid Corp. Flexible and rigid circuit boards/
component assembly 23% 24% 28%
Black and Decker Printed circuit boards and final
assembly 18% 17% 12%
Xircom Printed circuit boards and cable 16% 16% 6%
Lockheed Martin Printed circuit boards and cable 1% 3% 11%
Related Party Transactions
The Company engages in various transactions in the ordinary course of
business with its stockholders and other related parties. A summary of
significant related party transactions follows:
o As part of the 1993 reorganization and recapitalization
discussed in notes 1 and 10, the Company issued approximately
$2,045,000 of subordinated debentures to certain stockholders
of the Company. Interest at 7% is payable semi-annually and
principal is payable $300,000 on January 15, 1997, $300,000 on
January 15, 1998, $250,498 on December 8, 1998, $600,000 on
January 15, 1999, and $594,060 on January 15, 2000. Principal
is subject to acceleration under certain circumstances,
including a public offering of the Company's common stock
(note 15).
o The Company acquired the right to manufacture selected
products in 1991 from a stockholder in exchange for a note
payable. Monthly installments of $28,000, including principal
and interest at 11%, were paid through July 1994 for these
rights. The Company paid approximately $189,000 and $297,000
in principal and $7,000 and $39,000 in interest on this debt
during 1994 and 1993, respectively.
o The Company also leases a manufacturing facility from this
stockholder, which resulted in rent expense of approximately
$234,000, $238,000, and $251,000 at December 31, 1995, 1994,
and 1993, respectively.
o The Company leases three manufacturing facilities from
companies which are owned by a related party. Included in rent
expense are rental payments under these leases of
approximately $833,000, $968,000, and $828,000 during December
31, 1995, 1994, and 1993, respectively.
-42-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Related Party Transactions, Continued
o Elamex de Torreon, S.A. de C.V., a Mexican company owned by
affiliates of Elamex, exclusively provides assembly services
under the direction of Elamex to a customer of Elamex. Under a
manufacturing contract between Elamex and the Mexican company,
the Mexican company is required to submit its budget annually
to the Board of Directors of Elamex for approval. At December
31, 1995, 1994, and 1993, the Mexican company had sales to
Elamex of $1,834,711, $2,678,720, and $2,302,242,
respectively. Elamex had a payable to the Mexican company of
$53,629 and $82,110, at December 31, 1995 and 1994,
respectively.
o A U.S. corporation owned by certain executives and senior
management of the Company exclusively provides professional
services to Elamex. Under the service agreement, the U.S,
corporation is obligated to submit its annual budget to the
Board of Directors of Elamex for approval. At December 31,
1995, 1994, and 1993, this company provided services to Elamex
for $2,207,941, $2,335,727, and $1,766,578, respectively.
Elamex had payables to this company of $102,495 and $123,829,
at December 31, 1995 and 1994, respectively.
o The Company paid consulting fees, consisting of tax advice and
return preparation, and other administration services, of
approximately $280,000, $191,000, and $174,000 during December
31, 1995, 1994, and 1993, respectively, to companies which are
related parties.
o The Company purchases insurance through an insurance broker
that is a related party. Premiums paid approximated $175,000,
$362,000, and $232,000 for the years ended December 31, 1995,
1994, and 1993, respectively.
Commitments and Contingencies
The Mexican Federal Labor Law requires a severance payment for all
permanent employees that are terminated by the employer. This payment
is calculated on the basis of ninety days pay for termination anytime
during the first year of employment, with an additional twelve days pay
per year for each year of service thereafter. While most of the
Company's Mexican assembly labor is hired under temporary labor
contracts during the first two months of employment, the labor force is
changed to permanent labor contracts after this period. The Company has
agreements with many of its contract-assembly customers which require
that the customers pay the severance costs incurred in the event that
assembly contracts are terminated prior to their scheduled completion.
In management's opinion, any severance costs incurred upon the
termination of any manufacturing contracts would not be material.
Seniority premiums to which employees are entitled upon retirement
after fifteen years or more of service, in accordance with the Mexican
Federal Labor Law, are recognized as expense during the year in which
services are rendered, based on actuarial computations. Included in
other liabilities is approximately $181,962 and $215,000 as of December
31, 1995 and 1994, respectively, which fully accrued for these
seniority obligations. No significant seniority payments have been made
through October 1, 1995.
At December 31, 1995, the Company has an obligation to purchase
inventory held by suppliers valued at approximately $1,300,000.
-43-
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
Subsequent Events
Public Offering
Effective March 19, 1996, the Company completed a public offering of
2,400,000 shares of Class I, no par value, common stock. The shares are
traded on the NASDAQ National Market. The total common stock
outstanding after the offering is 7,400,000 shares. Upon completion of
the offering, Accel remained as the majority stockholder; accordingly,
Accel has the ability to elect a substantial majority of the Company's
directors, subject to certain limitations, and will continue to control
the Company.
The net proceeds from the public offering, which totaled $18,900,000,
net of expenses of $2,700,000, were used to pay-down approximately
$15,900,000 of outstanding debt and subordinated debentures.
Pro Forma Information and Supplementary Earnings per Share
The following is pro forma data for the year ended December 31, 1995 as
if the receipt of proceeds from the public offering occurred effective
January 1, 1995. The financial data, as adjusted, assumes that net
proceeds of $18,900,000 were used to retire outstanding debt of
approximately $15,900,000, that net cash remaining, after the paydown
of debt, was approximately $3,000,000, and that debt issue costs of
approximately $65,000 were written-off. Pro forma amounts have not been
audited. Pro forma earnings per share are computed assuming 7,400,000
shares of common stock were outstanding since January 1, 1995.
The following table sets forth certain items from the statement of
operations adjusted to give effect to the sale of common stock and
application of proceeds therefrom, as if the sale of common stock
occurred at January 1, 1995:
For the Year ended
December 31, 1995
(unaudited)
-------------------
Actual As Adjusted
------ -----------
Total other income (expense) $ (852,000) 640,000
Income before income taxes $ 7,936,000 9,428,000
Net income $ 6,209,000 7,194,000
Common shares outstanding 5,000,000 7,400,000
Income per common share $ 1.20 0.94
-44-
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable
Item 10. Executive Officers of the Registrant
The names, ages and positions of the Director and executive officers of
the Company as of April 18, 1996 are as follows:
Name Age Position
---- --- --------
Eloy S. Vallina 58 Chairman of the Board of Directors
Federico Barrio 59 Vice Chairman of the Board of Directors
Jesus Alvarez-Morodo 49 Vice Chairman of the Board of Directors
Hector M. Raynal 42 President, Chief Executive Officer and Director
Salvador Almeida 39 Vice President-Finance, Chief Financial Officer
and Secretary
Timothy A. Graves 42 Vice President-Sales and Marketing
David R. Crawford 59 Vice President-Manufacturing Operations
Wayne Rout 52 Vice President-Materials
Jesus E. Vallina 47 Director
Rafael Vallina 36 Director
Eduardo L. Gallegos 54 Director
Robert J. Whetten 53 Director
Jerry Neely 59 Director
Antonio Elias 47 Director
Charles H. Dodson 65 Director
Tomas de Leon 42 Statutory Auditor
Eloy S. Vallina
Mr. Vallina has been Chairman of the Board of Accel and its
predecessor, Grupo Chihuahua, S.A. de C.V., since its inception in 1979. Mr.
Vallina has continued as Chairman of Ponderosa Industrial, S.A. de C.V. since
its spin-off by Grupo Chihuahua. He is also chairman of Kleentex Corp., and an
Advisory Director of Norwest Bank El Paso. Mr. Vallina was Chairman of Banco
Comercial Mexicano, later Multibanco Comermex, one of Mexico's largest
commercial banks at that time, from 1971 until its expropriation in 1982. He
graduated with a B.A. in Business Administration from the Instituto Tecnologico
y de Estudios Superiores de Monterrey.
Federico Barrio
Mr. Barrio has been Vice Chairman of the Board of Elamex and its
predecessor companies, or has held the functionally equivalent position, for 22
years and was a founding stockholder of the Elamex business. He is a partner in
Constructora Lintel, a major developer of industrial and commercial buildings in
Ciudad Juarez, and he has been Constructora Lintel's President since 1983. He
has also been an Advisory Director of Norwest Bank El Paso since 1991. He has a
B.S. in Industrial Engineering from the Chihuahua Technological Institute and an
M.B.A. degree from the University of Chihuahua. Mr. Barrio was former Dean of
Juarez Technological Institute and has 26 years of experience in industrial
development and general contracting.
Jesus Alvarez-Morodo
Mr. Alvarez-Morodo has been Vice Chairman of the Board of Elamex since
1995 and President and CEO of Accel since 1992. He has been a director of Elamex
since 1990. Mr. Alvarez-Morodo has held various positions with Accel, and its
predecessor, Grupo Chihuahua and its subsidiaries since 1982, including Vice
-45-
President from 1989 to 1992. He graduated from the Universidad Iberoamericana
with a B.S. in Electromechanical Engineering and from the Sloan School of
Management, M.I.T. with an M.S. degree in Management.
Hector M. Raynal
Mr. Raynal has been President and Chief Executive Officer of Elamex
since January, 1995. In 1994 he was the Director General of Pondercel S.A. de
C.V., a pulp and paper manufacturer. From 1990 to 1994 Mr. Raynal directed the
paper unit at Pondercel, and served as a director, vice president and secretary
of Pondercel's U.S. marketing subsidiary. Mr. Raynal has held various positions
with Accel and Grupo Chihuahua since 1983. He received a B.S. and M.S. in
Electrical Engineering and an M.B.A from Stanford University.
Salvador Almeida
Mr. Almeida has been Vice President-Finance & Chief Financial Officer
of Elamex since 1990. Mr. Almeida has held various positions with Accel and
Grupo Chihuahua since 1980. He is also a director on the Ciudad Juarez regional
board of Banca Serfin. He received a B.S. in Chemical Engineering and an M.S. in
Engineering Administration from New Mexico State University.
Timothy A. Graves
Mr. Graves has been Vice President-Sales and Marketing of Elamex since
1993. From 1989 to 1993 he was Vice President of Sales and Marketing/Program
Manager at Comptronix Corp. He received a B.S. in Corporate Finance from the
University of Alabama. Mr. Graves has 12 years of experience in contract
electronics manufacturing.
David R. Crawford
Mr. Crawford has been Vice President Manufacturing Operations of Elamex
since August 1995. From 1987 to 1995 he was Director of Operations of the Allen
Bradley Business Unit Electronic Components, a subsidiary of Rockwell
International Corporation. Mr. Crawford has 35 years of experience in electronic
assembly and components manufacturing from major manufacturing companies in the
area. He received a B.S. from Purdue University.
Wayne Rout
Mr. Rout has been Vice President-Materials for Elamex since 1988. Mr.
Rout has 28 years of experience in manufacturing and materials. Mr. Rout has a
B.S. degree from Brigham Young University. Mr. Rout holds the APICS, NAPM and
IMMS certifications.
Jesus E. Vallina
Mr. Vallina has been Director of Public Relations of Accel and its
predecessor, Grupo Chihuahua, for the past 20 years. He is President of
Constructora Inmobiliaria Las Americas, S.A. de C.V., and a Director of Kleentex
Corp. He is also an Advisory Director of Norwest Bank El Paso. Mr. Vallina is a
graduate of the University of Texas at El Paso, where he received a degree in
Business Administration. Mr. Vallina is the brother of Eloy Vallina and cousin
of Rafael Vallina.
Rafael Vallina
Mr. Vallina has been President of Implyex Corp. since 1990, and
President of Tableros y Chapas del Norte since 1992. He is also President of
Triplay Maderas y Derivadas, and of Kintitsu. He has been a director
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of Elamex since 1994. Mr. Vallina is a Certified Public Accountant with a degree
from the Instituto Technologico y de Estudios Superiores de Monterrey. Mr.
Vallina is a cousin of Eloy Vallina and Jesus Vallina.
Eduardo L. Gallegos
Mr. Gallegos has been with Accel and its predecessor, Grupo Chihuahua,
for 23 years. He has been President of Esvamex, S.A. de C.V. since 1985. Mr.
Gallegos graduated as a Certified Public Accountant from the Instituto
Tecnologico y de Estudios Superiores de Monterrey, and has studied at the
American Management Association, Stanford Alumni Association, Advanced
Management College and Instituto de Administracion Cientifica de las Empresas.
Robert J. Whetten
Mr. Whetten has been a Director of Elamex since 1994. He also has been
President and Chief Executive Officer of Norwest Bank El Paso since 1991. Mr.
Whetten has 20 years of banking experience in the United States and Latin
America. He received a B.A. in Finance and a Master of Public Administration
from Brigham Young University.
Antonio L. Elias
Mr. Elias has been the Senior Vice President, Advanced Projects Group,
at Orbital Sciences Corporation ("OSC") since 1989. Mr. Elias joined OSC in 1986
as Chief Engineer, becoming Vice President for Engineering in 1988 and Corporate
Vice President in 1989. From 1980 to 1986 he was Assistant Professor of
Aeronautics and Astronautics at the Massachusetts Institute of Technology. Mr.
Elias obtained a B.S., M.S., E.A.A. and Ph.D. in Aeronautics and Astronautics
from the Massachusetts Institute of Technology.
Jerry W. Neely
Mr. Neely is Director and Chairman of the Executive Committee of Smith
International, Inc. Mr. Neely retired as President / Chairman in 1988. He held
several positions at Smith International, Inc. from 1966 to 1988. He serves on
the Boards of Norris Cancer Hospital and All Coast Forest Products, is a Trustee
of The University of Southern California, Past Chairman of Petroleum Equipment
Supplies Association and Past Chairman of The Young Presidents Organization. Mr.
Neely received a B.S. in Industrial Management/Business Administration from the
University of Southern California.
Charles H. Dodson
Mr. Dodson was owner of Elamex for 17 years in addition to being
Chairman of the Board and Chief Executive Officer. Mr. Dodson has remained a
Director of Elamex since its acquisition by Accel. He has also been Vice
President of Nafta Ventures, Inc. since 1994.
Tomas de Leon
Mr. de Leon has been Elamex's statutory auditor since 1988. He has also
been a partner in KPMG Cardenas Dosal, S.C. since 1988. Mr. de Leon is a member
of the Mexican Institute of Public Accountants and has obtained a public
accounting degree from the Universidad Iberoamericana in Mexico City.
On April 18, 1996 a new Board of Directors was appointed, which included Mr.
Neely and Mr. Elias elected as new members of the Board of Directors.
Item 11. Executive Compensation
During the year ended December 31, 1995, Elamex paid, either directly
or through a related company, MTI Services Corporation ("MTI"), an aggregate of
$679,806 to all of its Directors and officers as a group for services in all
capacities and an additional $161,500 in respect of a discretionary compensation
plan. During such
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year, the Company, through MTI, set aside or accrued an aggregate of $8,494 to
provide pension, retirement or similar benefits for its directors and officers
pursuant to existing plans, consisting solely of a 401(k) plan for its
U.S.-based officers and Directors.
Twenty-five of the Company's executives and senior managers who are
citizens or residents of the United States are employees of MTI, a U.S.
corporation owned by such executives, and provide services to MTI under a
contract between MTI and Elamex. The purpose of this arrangement is to provide
to U.S. resident employees U.S. dollar-denominated salaries and U.S.-style
employee benefits. Under such contract, the Company pays to MTI an amount equal
to the salary and benefits provided to such executives by MTI.
Item 12. Security ownership of certain beneficial owners and management
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock's of April 8, 1996 by (i) each person
who is known to the Company to own beneficially more than 5% of the outstanding
Common Stock of the Company, (ii) each director individually and (iii) all
directors and executive offices as a group.
Name and Address of Number of Shares Percent of Total
Beneficial Owner Beneficially Owned
---------------- ------------------ ----------------
Accel, S.A. de C.V. 3,777,500 51.05%
Avenida Zarco No. 2401
31020 Chihuahua, Chih. Mexico
Eloy S. Vallina (1) 3,777,500 51.05
Avenida Zarco No. 2401
31020 Chihuahua, Chih. Mexico
Fonlyser, S.A. de C.V. 472,500 (3) 6.39
Av. Insurgentes Sur No. 1931-Piso 12
Colonia Guadalupe Inn
Mexico, D.F. 01020
Banca Serfin S.A. (2) 472,500 (3) 6.39
Prolongacion Paseo de la Reforma No. 500
Colonia Lomas de Santa Fe
Mexico, D.F. 01020
- ------
(1) Mr. Vallina directly owns 15,790,908 shares, or 54.98%, of the outstanding
common stock of Accel. In addition, Mr. Vallina controls companies that
hold 3,335,419 shares, or 11.6%, of the outstanding common stock of Accel.
(2) Banca Serfin S.A., a wholly-owned subsidiary of Grupo Financiero Serfin,
S.A. de C.V., beneficially owns a majority of the outstanding common stock
of Fonlyser, S.A. de C.V.
(3) On April 19, 1996 the over-allotment option granted in the public offering
was exercised in the amount of 100,000 shares, reducing the beneficial
ownership of Fonlyser, S.A. de C.V. and Banca Serfin, S.A. to 372,500
shares or 5.03%.
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Item 13. Certain Transactions
The Company was formed on the Effective Date in the merger transaction
described below. The Company has been operated by substantially the same
investors since its purchase in May 1990; however, the organizational structure
has changed during this period. The Company consists of the former Elamex
Internacional, whose assets and liabilities were merged with and into Elamex,
S.A. de C.V. on the Effective Date.
Effective December 9, 1993, the stockholders of Kronos, Inc. ("Kronos")
and its subsidiaries and the stockholders of Kronoservices, S.A. de C.V., which
were substantially the same persons and entities, restructured the operations of
those companies. Kronoservices, S.A. de C.V. changed its name to Elamex, S.A. de
C.V., which was chosen as a name easily identified by customers and already
associated with the operations of related companies. As of December 31, 1993,
the operations of Kronos, constituting substantially all of its assets, were
transferred to Elamex, S.A. de C.V. Substantially all remaining Kronos assets
were transferred in 1994.
Prior to November 16, 1993, Accel held 55% of the common stock of
Elamex Internacional, and the Selling Stockholder held the other 45%. Such
stockholders and, indirectly, a company controlled by Messrs. Barrio and Dodson,
the two founders of the Elamex business, each held preferred stock in Kronos, an
80%-owned subsidiary of Elamex Internacional. Kronos was the intermediate
holding company for the Elamex business. As of November 16, 1993, the
stockholders, in effect, canceled all of the preferred stock and $1.1 million of
accumulated dividends and redemption premiums in exchange for additional common
stock and, in addition, two of the stockholders received $2.0 million of
five-year Subordinated Debentures bearing interest at 7% per annum. At the same
time, the Elamex corporate structure was modified by, in effect, replacing
Kronos with Elamex, S.A. de C.V., a Mexican directly held subsidiary of Elamex
Internacional, which was the issuer of such Subordinated Debentures. Using a
portion of the net proceeds of the public offering the Subordinated Debentures
were recently prepaid. Elamex Internacional was merged with and into Elamex,
S.A. de C.V. on October 1, 1995.
As part of the November 16, 1993 transaction, Accel and Fonlyser, S.A.
de C.V. (the "Selling Stockholder") entered into a stockholders' agreement (the
"Stockholders' Agreement") providing that each would be required, in effect, to
make a bid to buy the shares of Common Stock held by the other, with the party
submitting the higher bid being required to buy the low bidder's shares at such
high bid price, and the low bidder being required to sell all of its shares at
such price, subject to certain limitations. In anticipation of the Company's
recent public offering, Accel and the Selling Stockholder entered into an
agreement (the "Modification Agreement"), pursuant to which they agreed to waive
their respective rights under the Stockholders' Agreement and to terminate such
agreement. In addition, Accel agreed not to sell any shares of Common Stock in
the public offering and to permit the Selling Stockholder to sell its shares
offered herein. Accel and the Selling Stockholder further agreed that the
Selling Stockholder would make available to the underwriters for the public
offering the entire amount of shares required for the underwriters'
over-allotment option, and that the Selling Stockholder would also sell to
Accel, at book value, the number of shares of Common Stock required for Accel to
maintain ownership of approximately 51% of the shares outstanding. Accel also
agreed to take all actions necessary to see that Elamex redeems within thirty
days of the public offering $250,498 of Subordinated Debentures then held by the
Selling Stockholder. Accordingly, the Selling Stockholder (i) sold to Accel, at
book value, the number of shares of Common Stock then held by it and not offered
in the public offering and required for Accel to maintain ownership of
approximately 51% of the shares outstanding, and (ii) thereafter, set aside and
provided the entire amount of shares then held by it and required for the
Underwriters' over-allotment option. The over-allotment option was subsequently
exercised in the amount of 100,000 shares.
On March 9, 1995, Elamex, S.A. de C.V. entered into an agreement
whereby it was obligated to purchase, or cause to be repurchased, over a six
year period, 1,060,197 shares of its Common Stock from a company controlled by
Messrs. Barrio and Dodson for an aggregate purchase price of approximately $3.8
million (to be adjusted by 8.5% per annum). In July and September, 1995, Elamex
Internacional purchased all such shares for approximately $4.0 million, or $3.79
per share. After giving effect to the change in the amount of
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outstanding shares of Elamex, S.A. de C.V. effected in connection with the
merger of Elamex Internacional with and into Elamex, S.A. de C.V., such purchase
price would have been $4.02 per share.
Elamex, S.A. de C.V. and Mossberg are parties to a manufacturing
contract pursuant to which Elamex has agreed to manufacture shotgun components
and safe deposit boxes. The manufacture of firearms and their components are
highly regulated activities in Mexico that may not be conducted by companies
with non-Mexican ownership. In order to comply with Mexican regulations, Elamex
de Torreon acts as a subcontractor to Elamex for this contract. Elamex de
Torreon is owned by Bielas, Ensambles y Articulos Reciclables, S.A. de C.V.
("Bielas"), whose stock is held by members of the Board of Directors who are
citizens of Mexico. Elamex de Torreon, which holds a permit from the Mexican
Department of National Defense to manufacture the shotgun components, performs
the manufacturing required under the Mossberg contract, including the provision
of facilities and employees, under contract to Elamex which supervises the work
performed by Elamex de Torreon. The manufacturing facility used by Elamex de
Torreon is owned by Accel and leased to Elamex de Torreon. The initial term of
the lease has approximately one year to run with an option exercisable by the
lessee to extend for four additional years, while the Mossberg contract runs for
approximately two years from the date hereof. Elamex pays Elamex de Torreon its
out-of-pocket costs to fulfill the contract (i.e., the cost of rent under the
lease and the compensation of employees) plus up to 2%. The stockholders of
Elamex de Torreon have agreed not to interfere with performance of the foregoing
arrangements, or permit them to be modified, in either case without Elamex's
consent, so long as the Mossberg contract is in effect. Accel has granted
Elamex, and Elamex has granted to Mossberg, an option to purchase the
manufacturing facility where the Mossberg contract is performed from Accel for a
price determined by appraisers appointed by each party to represent fair market
value. The options expire on the expiration of the lease. In addition, the
Company holds options to purchase from Accel the Torreon facility listed under
"Business-Facilities" and a second facility in Ciudad Chihuahua; the option
exercise price for each facility will be the value determined by an independent
appraiser. The Company intends to exercise such options to purchase these
facilities in 1996. The options expire in December 1997.
In addition, on September 30, 1995, Elamex entered into an agreement
with Bielas, a company whose stock is held by five members of the Company's
Board of Directors: Messrs. Eloy Vallina, Jesus Vallina, Gallegos, Barrio and
Alvarez-Morodo. The agreement provides that Elamex will acquire the stock of
Elamex de Torreon for $10,000 if: (i) the law prohibiting non-Mexican ownership
of firearms manufacturers is repealed; (ii) the Department of National Defense
authorizes acquisition of Elamex de Torreon by Elamex; or (iii) the Mossberg
contract is terminated. This option is subject to a prior option, made on
January 15, 1994 and granted by Elamex, Bielas, and several affiliated
companies, to Mossberg, under which Mossberg has the option to purchase the
shares of Elamex de Torreon for $10,000.
Accel is the parent corporation of both Elamex and Esvamex, S.A. de
C.V. ("Esvamex"). Esvamex and Elamex are parties to a consulting agreement of
indefinite duration under which Esvamex provides administrative, accounting, tax
and financial services to Elamex. In return, Elamex pays Esvamex $15,950 monthly
subject to renegotiation as circumstances may require. The Company believes that
this amount is the fair market value of the services it receives from Esvamex.
At the time he became President and Chief Executive Officer of the
Company, Mr. Raynal moved from Ciudad Chihuahua to Ciudad Juarez. At that time,
the Company guaranteed a $150,000 loan to Mr. Raynal by a bank, the proceeds of
which were used to purchase a home in Ciudad Juarez.
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Item 14. Exhibits and Financial Statement Schedules.
(a) Financial Statements
(i) The consolidated balance sheets of Elamex, S.A. de C.V. and
its subsidiaries as of December 31, 1995 and 1994 and the
related statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended
December 31, 1995 are filed in Item 8 of this report.
(ii) Financial statement schedule, valuation and qualifying
accounts and reserves and report thereon included on page
53.
(b) The following exhibits are filed as part of this report:
Exhibit Description
Number
------ -----------
3 Estatutos Sociales (By-Laws) of the Registrant (including
English translation).*
10.1 Modification Agreement Between Fonlyser, S.A. and Accel,
S.A. de C.V., with a translation in English, and subsequent
modification letter, with a translation in English.*
10.2 Credit Agreement with Confia, S.A., with a summary in
English, and renewal letter, with a translation in English.*
10.3 Revolving Credit Agreement with Comerica Bank.*
10.4 Contract for the Opening of Credit with Bancomer, S.A., with
a summary of subsequent modifications in English.*
10.5 Tax Sharing Agreement between Accel, S.A. de C.V. and Elamex
S.A. de C.V.*
10.6 Lease of Elamex de Juarez Plant #3, with a translation in
English.*
10.7 Lease of Elamex de Juarez Plant #4, with a translation in
English.*
10.8 Lease of Elamex de Juarez Plant #5, with a translation in
English.*
10.9 Lease of Elamex de Juarez Plant #9.*
10.10 Lease of Elamex de Nuevo Laredo Plant.*
10.11 Lease of Elamex de Torreon Plant.*
10.12 Executive Phantom Stock Plan.*
21 Subsidiaries of the Registrant.*
99 Financial statement schedule, valuation and qualifying
accounts and reserves and report thereon included on page
53.
* Filed as an exhibit to the Company's Registration Statement on Form S-1, file
No. 333-01768
(c) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
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Independent Auditors' Report
The Board of Directors and Stockholders Elamex, S.A. de C.V.:
Under date of April 9, 1996, we reported on the consolidated balance sheets of
Elamex, S.A. de C.V. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995,
which are included in Item 8 of Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the Form 10-K. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The audit report on the consolidated financial statements of Elamex, S.A. de
C.V. and subsidiaries referred to above contains an explanatory paragraph that
states that the Company adopted Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, effective January 1, 1993.
KPMG Peat Marwick LLP
El Paso, Texas
April 9, 1996
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EXHIBIT 99
Elamex & Subsidiaries
Valuation and qualifying accounts and reserves
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance Charged to Charged to Balance
Beginning Cost and Other at End
of Year Expenses Accounts Deductions of Year
------- -------- -------- ---------- -------
Allowance for doubtful accounts
For the year ended:
December 31, 1995 194 160 - 205 (a) 149
December 31, 1994 47 294 - 147 (a) 194
December 31, 1993 77 165 - 195 (a) 47
Allowance for material obsolescence
For the year ended:
December 31, 1995 863 608 - - 1,471
December 31, 1994 215 648 - - 863
December 31, 1993 - 215 - - 215
- ---------
(a) Uncollectible accounts written off
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Ciudad Juarez,
Chihuahua, Mexico on ____________, 1996.
ELAMEX, S.A. de C.V.
By: /s/ SALVADOR ALMEIDA
--------------------
Salvador Almeida
Vice President of Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on April ___, 1996 by the following persons on behalf of
the registrant in the capacities indicated.
Signature Title Date
- --------- ----- -----
/s/ ELOY S. VALLINA Chairman of the Board of Directors
- -------------------
Eloy S. Vallina
/s/ FEDERICO BARRIO Vice Chairman of the Board of Directors
- -------------------
Federico Barrio
/s/ JESUS ALVAREZ-MORODO Vice Chairman of the Board of Directors
- ------------------------
Jesus Alvarez-Morodo
/s/ HECTOR M. RAYNAL President, Chief Executive Officer and
- -------------------- Director (Principal Executive Officer)
Hector M. Raynal
/s/ JESUS E. VALLINA Director
- --------------------
Jesus E. Vallina
/s/ RAFAEL VALLINA Director
- ------------------
Rafael Vallina
/s/ EDUARDO L. GALLEGOS Director
- -----------------------
Eduardo L. Gallegos
/s/ ISAURO ALFARO Director
- -----------------
Isauro Alfaro
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Signature Title Date
- --------- ----- -----
/s/ ROBERT J. WHETTEN Director
- ---------------------
Robert J. Whetten
/s/ JERRY NEELY Director
- ----------------
Jerry Neely
/s/ CHARLES H. DODSON Director
- ---------------------
Charles H. Dodson
/s/ ANTONIO ELIAS Director
- -----------------
Antonio Elias
/s/ SALVADOR ALMEIDA Vice President-Finance and Chief
- -------------------- Financial Officer (Principal Financial
Salvador Almeida Officer)
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