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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 December 31, 1997
COMMISSION FILE NUMBER: 0-27992
ELAMEX, S.A. DE C.V.
(Exact name of Registrant as specified in its charter)
MEXICO Not Applicable
(State or other jurisdiction (I.R.S.Employer Identification No.)
of incorporation or organization)
Avenida Insurgentes No. 4145-B Ote. 32340
Cd. Juarez, Chihuahua Mexico City, (Zip code)
(Address of principal executive offices)
(915) 774-8252
(Registrant's telephone number including area code, in El Paso,TX)
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
Class I Common Stock, no par value
Name of exchange on which registered
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 non-affiliates of the
registrant as of March 3, 1998 was: $23,255,400.
The number of shares of Class I Common Stock of the registrant outstanding as of
March 3, 1998 was: 7,373,500
DOCUMENTS INCORPORATED BY REFERENCE
Item 14 incorporates by reference exhibits to the registrant's registration
statement on Form S-1, file number 333-01768.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
PART I
References in this form 10-K to "Elamex" or the "Company" are to Elamex,S.A. de
C.V.and its subsidiaries, collectively,and references to "Elamex, S.A. de C.V.
"are solely to Elamex,S.A. de C.V. In this form 10-K, references to "$" and
"U.S.dollars"are to United States dollars and references to "Ps$" and "Pesos"
are to Mexican pesos.
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. Although functioning as an
independent contractor, the Company operates as a manufacturing arm for its
customers, offering a rapid and cooperative response to the customers' needs.
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 OEMs customers are primarily 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 United States
("U.S.") dollars and financing is obtained in the same currency based on
contracts with its 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, the El Paso International
Airport, and rail truck depots in El Paso, Texas. Elamex currently operates or
directs operations in 21 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, real
estate, and later labor, was provided to foreign companies. These companies
managed the production for export, or the enhancement of their own imports into
Mexico for subsequent export. Elamex's business has evolved from the early
Maquiladora concept to its present state, which includes management by Elamex
itself, 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
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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.
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 OEMs
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 and increased customer satisfaction due to the reduction
of an additional cost to the OEMs. Elamex believes that the ability to provide
these procurement advantages reinforces the strategic relationship between the
OEMs and the 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 benefited 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 Electronic Circuits ("IPC"), approximately 42% of
the contract manufacturing industry's sales in 1997 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 are generally lower than 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. and Canadian demand for electronics
contract manufacturing will grow from expenditures of approximately $27.2
billion in 1996 to approximately $104.2 billion by 2001, an average annual
growth rate of approximately 31%, and that the worldwide electronics contract
manufacturing industry will grow from expenditures of $59.8 billion in 1996 to
approximately $178 billion by 2001, an average annual growth rate of
approximately 24%. As indicated by IPC, market trends served by The Electronics
Manufacturing Service Industry ("EMSI"), growth in communication technologies
will continue to generate new products that will help generate growth from
markets outside the computer industry. 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.
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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, SMT on flexible boards, and the assembly and testing of SMT
boards and other technologies. The Company's 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, fiber optic cables
and connectors, and the refurbishment of telephones. Elamex's work for the
medical industry includes assembly surgery sets and medical products packaging.
Many of these operations are conducted in special clean rooms.
Approximately 28% of Elamex's net sales in 1997 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 72% of
Elamex's net sales during 1997, 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 majority of
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 into the United States.
As an independent-contractor-manufacturing-arm of its customers, Elamex
combines stringent quality control, sophisticated inventory management and
cost-effective assembly techniques for the benefit of its customers. 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 OEMs 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 "total manufacturing
solution" to 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 a "total
manufacturing solution" relationship 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 73% of Elamex's net sales for 1997 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
4
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. The SMT process 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's capabilities include 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. Elamex and the customer jointly
determine the size of an assembly line. 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 life cycle 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 Company's business is materially dependent on its ability to
manufacture products of uniformly high quality. The Company has established
quality processes under International Standards Organization certification 9002
("ISO 9002"), is Quality Standard 9000 ("QS 9000") compliant, and 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
and maintain 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. Contracts with Elamex's five
largest customers for 1997 accounted for approximately 58% of Elamex's committed
contract revenues. Approximately 19%, 14% and 10% of the Company's net sales for
1997 were derived from sales to a manufacturer of home appliance consumer
products, a manufacturer of PBX telecommunication equipment, switchboards, and
fiber-optic cable connections, and a manufacturer of consumer products,
respectively. Approximately 18%, 16% and 14% of the Company's net sales in 1996
were derived from sales to a manufacturer of home appliance consumer products, a
flexible and rigid circuit boards/component assembly customer, and a printed
circuit boards & cables OEM, respectively. Approximately 23%, 18% and 16% of the
5
Company's net sales for 1995 were derived from sales to, a flexible and rigid
circuit boards/component assembly customer, a manufacturer of home appliance
consumer products, and a printed circuit boards & cables OEM, respectively.
Certain of the Company's contracts contain pricing mechanisms that are based on
the Company's costs.
Elamex, in conjunction with another company, 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.
The U.S. Department of Defense has qualified Elamex for manufacturing
military and aerospace specification 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,
and is QS 9000 compliant at all of its facilities where Elamex manages the labor
force.
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. In addition to the efforts of its sales force, Elamex
may pursue the growth through selective acquisitions.
Competition
The electronics assembly and the contract manufacturing industries are
comprised of a large number of companies, several of which have achieved
substantial market share. Several of Elamex's competitors have significantly
higher sales, primarily those manufacturers of high volume computer components
where sales volume can be high. Elamex also faces competition from current and
prospective customers who evaluate Elamex's 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.
6
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 U.S. and Canada. These benefits enable Elamex to manufacture
goods from imports into Mexico and to return the finished product to the U.S.
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, 1997 was approximately
$187.9 million, compared to order backlog at December 31, 1996 of approximately
$157.9 million. Backlog consists of firm purchase orders, commitments and
forecasts which are to be filled within the next 12 months. However, since
orders and commitments may be rescheduled, increased or canceled, backlog is not
necessarily 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 U.S., with the larger part
coming from the U.S. Elamex believes that it is not materially dependent on any
one supplier or group of suppliers; it purchased less than 5% of its supplies
from its largest vendor in 1997. 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 do even
though it may be smaller.
7
Employees
Elamex had 5,251 employees at December 31, 1997, of which 256 were
employees subcontracted from Elamex de Torreon. There are 21 active facilities
currently used by Elamex in its manufacturing operations. Three hundred seventy
nine employees in four facilities are covered by collective bargaining
agreements; all other employees of the Company at the remaining seventeen
facilities are not. Elamex believes that its labor relations are good in all of
its facilities.
Thirty-one 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 contracted services to Elamex. The purpose
of this arrangement is to provide these employees U.S. dollar-denominated
salaries and U.S.-style employee benefits. Under the contract, the Company pays
to the corporation an amount equal to the salary and benefits provided to the
executives by the 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 U.S., a requirement of its participation in the
Maquiladora program. Such laws and regulations may impose joint and several
liabilities 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 a 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 U.S. 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.
Exchange Rates
The following table sets forth, for the periods indicated, the high,
low, average and period-end 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.
8
YEAR ENDED DECEMBER 31, HIGH(1) LOW(1) AVERAGE (2) PERIOD END(1)
----------------------- ------- ------ ----------- ------------
1990 Ps$2.95 Ps$2.68 Ps$2.84 Ps$2.95
1991 3.07 2.95 3.01 3.07
1992 3.14 3.06 3.08 3.12
1993 3.16 3.02 3.11 3.11
1994 5.00 3.11 3.35 5.00
1995 8.05 5.00 6.44 7.69
1996 8.05 7.33 7.60 7.86
1997 8.24 7.78 7.93 8.13
1998 (through February 27) 8.56 8.11 8.13 8.56
- ------------------
SOURCE: Ciemex-Wefa Group
(1) Monthly rates at market close.
(2) Average of monthly 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 the international
airport, rail and truck depots in El Paso Texas. Below are Elamex's
manufacturing facilities:
LOCATION SQUARE FEET ACTIVITY LEASED/OWNED
-------- ----------- -------- ------------
Cd. Juarez 28,311 Industrial Bag, Packaging Material Manufacturing Leased
Cd. Juarez 80,280 Electronic Equipment Assembly and Electronic Circuit Mfg. Leased(1)
Cd. Juarez 90,848 Electronic Circuit Manufacturing Leased
Cd. Juarez 45,351 Battery Chargers Leased
Cd. Juarez 58,841 Medical Product Assembly Owned(2)
Cd. Juarez 50,000 Medical Product Assembly Owned
Cd. Juarez 43,034 Avionics Product Assembly Owned
Cd. Juarez 64,866 Electromechanical Product Assembly Leased(1)
Cd. Juarez 54,754 Auto Part Assembly Leased(3)
Cd. Juarez 67,038 Electronic Equipment Assembly Owned
Cd. Juarez 40,263 Telephone Repair Leased
Cd. Juarez 94,145 Plastic Injection Molding Leased
Chihuahua 47,834 Smoke Alarm Assembly Owned(4)
Delicias 54,507 Electronic Circuit Manufacturing Leased
Nuevo Laredo 60,658 Telephone Repair and Auto Part Assembly Owned
Nuevo Laredo 43,917 Telephone Repair Leased(1)
Guadalajara 10,000 Testing of Electronic Semiconductors Leased
Torreon 55,845 Assembly of Shotgun Parts Owned
Tijuana 55,647 Electromechanical Product Assembly Leased
Tijuana 13,778 Electromechanical Product Assembly Leased
Monterrey 22,098 Electromechanical Product Assembly Leased
Praxedis 11,517 Electromechanical Product Assembly Leased
=============
Total 1,093,532
=============
- ------------------
(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) Facility currently being sublet to a third party.
(4) Facility currently leased to a third party.
9
Item 3. Legal Proceedings
The Company is a party to various claims, actions and complaints, the
ultimate disposition of which, in the opinion of management will not have a
material adverse effect on the business or financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On April 24, 1997 the stockholders of Elamex, S.A. de C.V. at a general
ordinary annual stockholders meeting approved: (i) the business report on
Elamex, S.A. de C.V. for 1996 fiscal year; (ii) the presentation of audited
financial statements as of December 31, 1996 and the report by the statutory
auditor; (iii) the proposal for application of Net Income; (iv) the election of
Board of Directors, Secretary and Statutory Auditor; and (v) the ratification of
the appointment of KPMG Peat Marwick LLP as independent auditors of Elamex, S.A.
de C.V. for the fiscal year ending December 31, 1997.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 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 following table sets forth, for the period stated, the high and low
closing sales prices for the Common Stock as reported on the NASDAQ National
Market Systems.
CLOSING SALES PRICE
PERIOD HIGH LOW
March 20, 1996 - March 31, 1996 9 1/8 8 7/8
April 1, 1996 - June 30, 1996 10 3/8 8 7/8
July 1, 1996 - September 30, 1996 9 7/8 8
October 1, 1996 - December 31, 1996 10 1/2 8 7/8
January 1, 1997 - March 31, 1997 11 3/4 9
April 1, 1997 - June 30, 1997 9 3/4 7 1/2
July 1, 1997 - September 30, 1997 12 1/4 9 1/2
October 1, 1997 - December 31, 1997 11 3/8 7 1/2
The Company currently intends to follow a policy of retaining earnings,
if any, for use in the development of 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 March
13, 1998, there were approximately 1,009 beneficial holders of the Company's
Common Stock.
10
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.
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 U.S. 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 such holder for more than one year has held the Common Stock.
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
11
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 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 Financial Data
Although the Company is a Mexican company 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, 1993, 1994, 1995,
1996, and 1997. 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 Form 10-K.
The selected consolidated financial data presented below under the
captions "Income Statement Data" for each of the years in the five-year period
ended December 31, 1997 and "Balance Sheet Data" as of December 31, 1993, 1994,
1995, 1996, and 1997, 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,
1997, and 1996, and for each of the years in the three-year period ended
December 31, 1997, and the report thereon, are included elsewhere in this Form
10-K.
12
These historical results are not necessarily indicative of the results
to be expected in the future.
YEAR ENDED DECEMBER 31,
1993 1994 1995 1996 1997
(In thousands, except per share amounts)
INCOME STATEMENT DATA:
Net sales..................................... $70,244 $84,816 $97,544 $118,919 $131,772
Gross profit.................................. 9,524 10,210 14,972 18,683 17,683
Operating income.............................. 2,617 2,748 8,788 10,366 8,956
Other income (expense)........................ (821) (460) (852) 136 1,326
Income tax provision (1)...................... 622 743 1,727 2,575 2,898
Net income.................................... $1,173 $1,545 $6,209 $7,927 $7,383
Net income (loss) per share (2)............... $(0.03) $0.23 $1.20 $1.15 $1.00
EBITDA (4).................................... 4,613 4,703 11,206 13,315 13,965
BALANCE SHEET DATA:
Current assets................................ $19,659 $23,360 $30,586 $38,955 $45,399
Property, plan and equipment, net............. 22,582 22,684 24,023 28,611 28,503
Total assets.................................. 43,259 46,783 55,110 67,976 74,645
Short-debt and current maturities of
long-term debt................................ 12,017 2,830 5,257 564 496
Long-term debt excluding current maturities.. 8,603 16,176 15,212 923 654
Total stockholders' equity.................... $13,336 $14,495 $23,196 $49,864 $57,032
- ----------------------
(1) 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.
(2) 1997 and 1996 net income per share of Common Stock was calculated by
dividing net income by the weighted average number of shares of common
stock outstanding which was approximately 7.4 million and 6.9 million
shares, respectively. 1995 and previous years' net income 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.
(3) Does not include redeemable Preferred Stock and redeemable Common Stock
as of December 31, 1993, and 1994 of $3,406 and $3,792, respectively.
(4) EDITDA as defined under "Liquidity and Capital Resources."
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 was acquired by Accel, S.A. de C.V. and certain other
investors in May 1990 and is controlled by Accel, S.A. de C.V. at present;
however, the internal 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 a Mexican corporation 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.
13
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 mirroring the
situation as to appreciation of the dollar, 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 26, 1996, the Mexican government signed a pact with labor
and business representatives called the Alliance for Economic Growth (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 to increase by 17% effective December 1996. Also, over the
12 months following execution of the Alliance, utility charges were to increase
an average of approximately 20%. Under the Alliance the Mexican government has
attempted 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.
Throughout the course of 1997, the pact made in the "Alliance" has been
honored. Utility charges increased in 1997 by an average of 16%. The minimum
wage was increased by 14.27% on January 1, 1998 as published on December 23,
1997 in the "Official Daily Gazette".
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, 1997 and 1996. 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/Peso revenues or costs, with the exception of regular treasury operations
to cover operating requirements for up to 30 days.
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
14
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.
Statutory employee profit sharing was $38,410 or an effective rate of
0.37% of income before taxes, for the year ended December 31, 1997, compared to
$159,731 or an effective rate of 1.52% of income before taxes, for the year
ended December 31, 1996 and $120,474 or an effective rate of 1.52% of income
before taxes, for the year ended December 31, 1995.
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,
1995 1996 1997
---- ---- ----
% % %
Net sales 100.0 100.0 100.0
Cost of sales 84.7 84.3 86.6
Gross profit 15.3 15.7 13.4
Selling, general and administrative 6.3 7.0 6.6
expenses
Operating income 9.0 8.7 6.8
Other income (expense) (0.9) 0.1 1.0
Income before taxes 8.1 8.8 7.8
Income tax provision 1.8 2.2 2.2
Net income 6.4 6.7 5.6
1997 COMPARED TO 1996
NET SALES increased 11% to $131.8 million in 1997 from $118.9 million in 1996.
The increase was attributable to increased dollar volume of assembly and turnkey
sales to existing customers, the purchase of Eurotech (see "Acquisitions"), and,
to a lesser extent, an expansion of business from new customers in 1997.
GROSS PROFIT decreased by $1.0 million, or 5.4%, to $17.7 million in 1997
compared to $18.7 million for the prior year. Gross profit as a percentage of
net sales ("gross margin") decreased to 13.4% in 1997 from 15.7% in 1996 due
primarily to general Mexican inflation pressures and Peso appreciation during
the first six months of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased 5.0% to $8.7 million, or
6.6% of net sales, for the year ended December 31, 1997, as compared to $8.3
million, or 7.0% of net sales, for the year ended December 31, 1996. This
increase resulted in part from an increase in the administrative manufacturing
infrastructure and wage inflation without peso depreciation.
15
Of the Company's aggregate cost of sales and selling, general and
administrative expenses in 1997, approximately 28.1% were incurred in Pesos,
compared to approximately 30.3% in 1996.
OPERATING INCOME decreased by 13.6% to $9.0 million, or 6.8% of net sales,
during the year ended December 31, 1997 from $10.4 million, or 8.7% of net
sales, during the year ended December 31, 1996, as a result of the above
factors. The most significant of which were inflationary pressures without peso
depreciation as described under "Gross Profit" and "Selling, General and
Administrative Expenses" above.
OTHER INCOME (EXPENSE). Interest and other expenses increased to $1.3 million,
or 1.0% of net sales, for the year ended December 31, 1997, from $0.1 million or
0.1% of net sales, for the year ended December 31, 1996. This increase resulted
principally from the interest gained due to excess of cash flows, decrease of
expense from debt, and a gain of $0.5 million from the sale of a building.
1996 COMPARED TO 1995
NET SALES increased 22% to $118.9 million in 1996 from $97.5 million in 1995.
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 1996.
GROSS PROFIT increased by $3.7 million, or 24.8%, to $18.7 million in 1996
compared to $15.0 million for the prior year. Gross profit as a percentage of
net sales ("gross margin") increased to 15.7% in 1996 from 15.3% in 1995 due
primarily to a shift in the Company's sales mix toward higher assembly-only
services rather than turnkey services. 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased 34.5% to $8.3 million, or
7.0% of net sales, in the year ended December 31, 1996, as compared to $6.2
million, or 6.3% of net sales, in the year ended December 31, 1995. This
increase resulted in part from the additional cost involved of a public company,
an increase in the administrative manufacturing infrastructure and the
reinforcement of the supply chain management processes.
Of the Company's aggregate cost of sales and selling, general and
administrative expenses in 1996, approximately 30.3% was incurred in Pesos,
compared to approximately 29.7% in 1995. This decrease was due to the
devaluation of the Peso during 1995 and the change in sales mix during the
period.
OPERATING INCOME increased by 18.0% to $10.4 million, or 8.7% of net sales,
during the year ended December 31, 1996 and from $8.8 million, or 9.0% of net
sales, during the year ended December 31, 1995, as a result of the above
factors, the most significant of which were changes in the sales mix, turnkey
operations, and the economies of scale described under "Gross Profit" and
"Selling, General and Administrative Expenses" above.
OTHER INCOME (EXPENSE). Interest and other expenses decreased by $1.0 million to
$0.1 million, or 0.1% of net sales, in the year ended December 31, 1996, from
$(0.9) million or (0.9)% of net sales, in the year ended December 31, 1995. This
decrease resulted principally from lower rates and decreased borrowings during
the period as a result of the public offering proceeds, partially offset by less
interest income on short-term investments.
16
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 is 34%. 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 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, the Mexican company that incurred
the losses can utilize tax net operating loss carryforwards. The amounts of the
Company's asset tax and net operating loss carryforwards at December 31, 1997
and 1996 are set forth in Note 7 to the Consolidated Financial Statements.
The Mexican asset tax is a 1.8% tax on assets, computed by recognizing
certain effects of inflation, and by reducing the asset base by the amount of
certain liabilities. The asset tax operates like an alternative minimum tax in
the U.S.
The Company's effective tax rate was 13.8% in 1993, 32.5% in 1994,
21.8% in 1995, 24.5% in 1996 and 28.2% in 1997.
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 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
The Company's working capital (defined as inventory plus trade and
other accounts receivable, minus accounts payable) needs remained substantially
leveled for the year. At December 31, 1997, the Company had working capital of
$24.6 million compared to $23.3 million at December 31, 1996. This increase was
due to a net effect on reduction in inventories and accounts payable, and an
increase in receivables associated with an increase in sales.
For the year ended December 31, 1997, the company had net cash provided
by operating activities of $13.7 million which consists of net income of $7.4
million plus depreciation and amortization of $4.1 million, deferred income
taxes of $2.8 million, decrease of inventories of $3.7 million and accrued and
other liabilities of $1.6 million offset by a decrease in accounts payable of
$4.5 million and other miscellaneous reductions.
In 1997 EBITDA was $13.9 or 10.6% of net sales, and capital
expenditures were $7.8 million. EBITDA in 1997 increased 4.5% over 1996. In 1996
EBITDA was $13.3 million. EBITDA is defined by the Company as net income before
interest, income taxes, depreciation and amortization. EBITDA is presented in
17
this discussion of liquidity and capital resource because it is a widely
accepted financial indicator of the Company's ability to incur and service debt.
However, EBITDA should not be considered in isolation as a substitute for net
income or cash flow data prepared in accordance with generally accepted
accounting principles or as measure of the Company's profitability or liquidity.
In addition, this measure of EBITDA might not be comparable to measures as
defined and reported by other companies.
The Company had the following lines of credit and outstanding borrowings at
December 31, 1997:
Amount Interest
Lender of Class of Securities Type Outstanding Rate Maturity Date
- ----------------------------- ---- ----------- ---- -------------
Comerica Bank $10 million Line of Credit - 9.00% May 1, 1999
Bank of America $10 million Line of Credit - 8.81% December 15, 1999
Confia, S.A. $2 million Line of Credit - 9.31% June 25, 1998
Norwest Bank El Paso $5 million Line of Credit - 8.25% December 6, 2002
AT&T Capital Capital Lease $245,825 3.50% January 9, 2000
GE Financial Capital Lease 904,827 7.92% December 15, 1999
----------------
Total $1,150,652
================
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 and credit agreements.
The Company has entered into a certain capital lease transaction to
lease machinery and equipment with an original cost of approximately $1.7
million and the related accumulated depreciation of $280,000 at December 31,
1997. The future minimum rental payments under this equipment lease and other
capital leases are $553,626 in 1998, $578,263 in 1999 and $103,672 in 2000. See
Note 6 to the Consolidated Financial Statements for further information
regarding operating lease commitments.
ACQUISITIONS
On July 1, 1997, the Company completed the acquisition of a Mexican
plastic molding and metal stamping plant based in Cd. Juarez, Mexico, through an
asset based transaction. This acquisition expands the Company's plastic molding
injection capacity and adds metal stamping and powder coat painting
capabilities. The plastic operation generated sales of $3.1 million during the
six months ended December 31, 1997.
As mentioned in the "Notes to Consolidated Financial Statements,"in
January 1998, the Company agreed to purchase 2,525,000 shares of Series A 9%
Cumulative Convertible Preferred Stock ("Preferred Stock") of Optimag, Inc.
("Optimag"), a California corporation. Optimag was formed to develop,
manufacture, and market optical inspection stations and electrical test
equipment to companies that produce disk drive heads, magnetic media, and
optical heads and optical media. The company expects to advance $2.5 million
18
during 1998 by acquiring Preferred Stock. Approximately $1.3 million will be
expensed during fiscal year 1998 as research and development. Elamex expects
Optimag to have profitable operations in 1999.
MAJOR CUSTOMERS
During the thirteen weeks ended on September 28, 1997 the last
significant shipments were made to two of the Company's major customers. For the
year ended 1996, these customers accounted for 16% and 14% of total sales. For
the year ended 1997, sales to these customers represented 9% and 6% of total
sales. The reduction of revenue from these two customers was compensated by the
start up of new projects and increased sales to existing customers.
YEAR 2000 ISSUE
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and is developing an implementation plan to resolve the issue. The Year 2000
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Year 2000 is a problem if the Company's
programs that have time-sensitive software recognizes a date using "00"as the
year 1900 rather then the year 2000. This could result in a major system failure
or miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, that currently is in process,
the Year 2000 problem will not pose significant operational problems for the
Company's computer systems as so modified and converted. The Company has
purchased and is in the process of implementing a new Enterprises Resource
Planning software by JDEdwards which encompasses the Finance, Distribution,
Manufacturing and Advanced Scheduling/Planning areas which is Year 2000
compliant. This system was purchased in order to enhance the performance of the
previously mentioned areas, as well as, the information provided for managerial
decisions and customer satisfaction.
FORWARD LOOKING COMMENTS
This form 10-K includes forward-looking statements that involve risks
and uncertainties, including, but not limited to, risks associated with the
company's future growth and profitability, the ability of the Company to
continue to increase sales to existing customers and to new customers and the
effects of competitive and general economic conditions.
19
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with accounting principles generally
accepted in the United States of America.
KPMG Peat Marwick LLP
El Paso, Texas
February 25, 1998
20
ELAMEX, S. A. DE C.V. AND SUBSIDIARIES
Consolidated Balance Sheets
(In U.S. Dollars)
December 31,
Assets 1997 1996
---- ----
Current assets:
Cash and cash equivalents $ 13,597,581 6,269,825
Receivables (note 5):
Trade accounts, less allowance for doubtful accounts
of $450,480 in 1997 and $525,029 in 1996 14,343,265 13,944,948
Other receivables, net 1,872,747 2,047,019
----------- -----------
Total receivables 16,216,012 15,991,967
----------- -----------
Investment security 2,080,000 -
Inventories, net (note 3) 12,696,705 16,200,149
Prepaid expenses 809,109 492,933
----------- -----------
Total current assets 45,399,407 38,954,874
Property, plant and equipment, net (notes 4 and 5) 28,503,121 28,610,719
Other assets, net 742,644 410,460
----------- -----------
$ 74,645,172 67,976,053
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,337,223 8,886,613
Accrued expenses 3,854,638 2,292,682
Current obligations of capital leases (note 6) 496,190 564,216
Taxes payable 1,306,126 1,286,132
Deferred income taxes (note 7) 3,581,899 1,379,783
Due to related parties (note 12) 45,480 86,743
----------- -----------
Total current liabilities 13,621,556 14,496,169
Capital lease obligations, excluding current obligations (note 6) 654,462 923,273
Other liabilities 258,988 212,403
Deferred income taxes (note 7) 3,078,486 2,480,399
----------- -----------
Total liabilities 17,613,492 18,112,244
----------- -----------
Stockholders' equity (notes 8 and 9):
Preferred stock, authorized 50,000,000 shares, none
issued or outstanding - -
Common stock, authorized 22,400,000 shares, 7,400,000
issued and, 7,381,500 and 7,400,000 shares outstanding
at December 31, 1997 and 1996, respectively 35,010,468 35,010,468
Retained earnings 22,236,212 14,853,341
Treasury stock, 18,500 shares at cost (215,000) -
----------- -----------
Total stockholders' equity 57,031,680 49,863,809
----------- -----------
Commitments and contingencies (notes 6, 9 and 13) - -
$ 74,645,172 67,976,053
========== ==========
See accompanying notes to consolidated financial statements.
21
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In U. S. Dollars)
Years ended December 31,
1997 1996 1995
Net sales $ 131,771,731 118,918,913 97,543,581
Cost of sales 114,088,518 100,236,384 82,571,960
----------- ----------- ----------
Gross profit 17,683,213 18,682,529 14,971,621
------------ ------------ ----------
Operating expenses:
General and administrative 7,977,783 7,630,870 5,560,356
Selling 749,739 685,544 622,811
-------------- -------------- ------------
Total operating expenses 8,727,522 8,316,414 6,183,167
------------- ------------- -----------
Operating income 8,955,691 10,366,115 8,788,454
------------- ------------ -----------
Other income (expense):
Interest income 680,673 255,362 965,341
Interest expense (223,207) (944,003) (2,359,451)
Other, net 868,051 825,076 541,799
------------- ------------ ------------
Total other income (expense) 1,325,517 136,435 (852,311)
------------- ------------ ------------
Income before income taxes 10,281,208 10,502,550 7,936,143
Income tax provision (note 7) 2,898,337 2,575,079 1,727,000
------------- ------------- -----------
Net income $ 7,382,871 7,927,471 6,209,143
============= ============= ===========
Net income per common share $ 1.00 1.15 1.20
Weighted average shares outstanding 7,395,532 6,880,548 5,000,000
See accompanying notes to consolidated financial statements.
22
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In U. S. Dollars)
Total
Shares Common Retained Treasury Stockholders'
Outstanding Stock Earnings Stock Equity
Balances at December 31,
1994 4,240,796 $ 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 common
stock (4,240,796) (16,270,459) - - (16,270,459)
Issuance of common stock 5,000,000 16,270,459 - - 16,270,459
Accretion of redemption
premium on redeemable
common stock - - (226,438) - (226,438)
----------- ----------- ----------- ------------ ------------
Balances at December 31,
1995 5,000,000 16,270,459 6,925,870 - 23,196,329
Net income - - 7,927,471 - 7,927,471
Proceeds from sale of-
common stock, net 2,400,000 18,740,009 - - 18,740,009
--------- ---------- ------------- ------------ ----------
Balances at December 31,
1996 7,400,000 35,010,468 14,853,341 - 49,863,809
Net income - - 7,382,871 - 7,382,871
Purchase of common stock (18,500) - - (215,000) (215,000)
----------- ---------- ------------- ------------ -----------
Balances at December 31,
1997 7,381,500 $ 35,010,468 22,236,212 (215,000) 57,031,680
========= ========== ========== ============ ==========
See accompanying notes to consolidated financial statements.
23
Consolidated Statements of Cash Flows
(In U. S. Dollars)
Years ended December 31,
1997 1996 1995
---- ---- ----
Cash flows provided by operating activities:
Net income $ 7,382,871 7,927,471 6,209,143
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,141,694 2,948,887 2,417,583
Allowance for doubtful trade accounts receivable (74,549) 376,400 (45,103)
Allowance for excess and obsolete inventory (180,178) 426,358 608,777
Deferred income taxes, net 2,800,203 2,495,775 1,364,407
Gain on disposal of property, plant and equipment (330,711) - (2,414)
Change in assets and liabilities:
Trade accounts receivable (323,768) 539,370 (3,040,022)
Other receivables 174,272 (1,215,279) (63,526)
Inventories 3,683,622 (5,268,325) (3,093,396)
Prepaid expenses (316,176) 193,833 (438,953)
Other assets (332,184) (224,071) 39,396
Accounts payable (4,549,390) 1,751,670 (99,007)
Accrued expenses, related parties, and
taxes payable 1,540,687 901,562 723,468
Other liabilities 46,585 30,439 (33,486)
------------- ------------- -----------
Net cash provided by operating
activities 13,662,978 10,884,090 4,546,867
---------- ---------- ---------
Cash flows used by investing activities:
Purchase of investment security (2,080,000) - -
Purchase of property, plant and equipment (3,897,517) (7,221,541) (3,572,668)
Purchase of plastics operating assets (3,868,903) - -
Proceeds from disposal of property, plant and equipment 4,063,035 - 16,771
------------ ----------- -----------
Net cash used by investing activities (5,783,385) (7,221,541) (3,555,897)
----------- ----------- ---------
Cash flows provided (used) by financing activities:
Net increase (decrease) in notes payable - (2,000,000) 2,000,000
Proceeds from issuance of long-term debt - - 8,394,341
Repayment of long-term debt - (17,722,233) (8,366,666)
Principal repayments of capital lease obligations (620,158) (565,555) (564,988)
Proceeds from financing of equipment through capital
leases 283,321 1,306,427 -
Purchase of treasury stock (215,000) - -
Proceeds from capital contributions - - 2,718,428
Redemption of redeemable common stock - - (4,018,444)
Proceeds from sale of stock, net - 18,740,009 -
------------- ------------ ----------
Net cash provided (used) by financing
activities (551,837) (241,352) 162,671
------------ ------------ ----------
Net increase in cash and cash equivalents 7,327,756 3,421,197 1,153,641
Cash and cash equivalents, beginning of year 6,269,825 2,848,628 1,694,987
----------- ----------- ---------
Cash and cash equivalents, end of year $ 13,597,581 6,269,825 2,848,628
========== =========== =========
See accompanying notes to consolidated financial statements.
24
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(In U.S. Dollars)
(1) Organization and Basis of Presentation
Company Background
Elamex, S.A. de C.V. and its subsidiaries ("Elamex" or the "Company") are
Mexican companies, incorporated under the laws of Mexico. Elamex provides
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, Monterrey, Tijuana, and Delicias,
Mexico. Although the organizational structure of Elamex changed during
1995, the business has operated under the control of substantially the same
investor group since May 1990.
The Company is a subsidiary of Accel, S.A. de C.V. ("Accel") which owns
approximately 51% of the Company's issued and outstanding common shares at
December 31, 1997. 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
was 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.
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 at December 31, 1997 and 1996 and
results of operations for the three years ended December 31, 1997 of:
o Elamex Internacional, S.A. de C.V., whose assets and liabilities were
merged into Elamex on the Effective Date.
o Elamex, S.A. de C.V., a wholly owned subsidiary of Internacional prior to
the Effective Date.
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,
merged into Elamex, S.A. de C.V. as of December 31, 1996.
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America.
All material intercompany transactions have been eliminated.
25
(1) 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.
(2) 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 $357,000 and $957,000,
at December 31, 1997 and 1996, respectively, and deposits denominated
in U.S. dollars of approximately $595,000 and $2,801,000 at December
31, 1997 and 1996, respectively, in U.S. banks. The Company had
approximately $12,645,000 and $2,512,000 of short-term repurchase
agreements, denominated in U.S. dollars, deposited in U.S. banks and
offshore branches of Mexican banks at December 31, 1997 and 1996,
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, net" on the accompanying consolidated statements of earnings
are foreign exchange gains (losses) of $(55,517), $437,845, and
$238,545 for the years ended December 31, 1997, 1996, and 1995,
respectively. Assets and liabilities of the Company are denominated
in U.S. dollars except for certain amounts as indicated below.
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:
1997 1996
---- ----
Cash and cash equivalents $ 356,848 957,000
Other receivables 690,906 1,634,700
Prepaid expenses 248,609 218,142
Other assets, net 80,249 26,064
Accounts payable (376,168) (1,542,331)
Accrued expenses and other liabilities (2,547,084) (2,206,667)
----------- -----------
Net foreign currency position $(1,546,640) (913,092)
=========== ===========
26
(2) Summary of Significant Accounting Policies, Continued
Foreign Currency Translation, Continued
In addition, the Company has recorded a net deferred tax liability
pursuant to Statement of Financial Accounting Standards (SFAS) No.
109, Accounting for Income Taxes (SFAS 109) (note 7). The recorded
amount of $6,660,385 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 Mexican tax basis.
Foreign Exchange Instruments
Effective January 1995, the Company 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. The Company
had no open hedge contracts at December 31, 1997 or 1996. At December
31, 1994, the Company had an outstanding commitment to sell U.S.
dollars for Mexican pesos. The Company realized a loss of
approximately $1,060,000 on this contract, which 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.
Investment Security
The investment security at December 31, 1997 consisted of a Mexican bond
denominated in U.S. dollars issued by a Mexican bank maturing March
4, 2004. The Company classifies this investment as available for sale
in accordance with SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities. Accordingly, this security is recorded at
fair value. Unrealized holding gains and losses, net of the related
tax effect, are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. Realized gains and
losses are determined on a specific identification basis. A decline
in the market value of a security available for sale below cost that
is deemed to be other than temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings
and a new cost basis for the security is established. Premiums and
discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.
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. Overhead content in ending inventory
at December 31, 1997 and 1996 was approximately $500,000 and
$451,000, respectively. 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.
27
(2) Summary of Significant Accounting Policies, Continued
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 lower of their fair value at the inception
of the lease or 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 improvements.
Net Income per Share
Net income per share of common stock for the year ended December 31, 1997
and 1996 was calculated by dividing net income by the weighted
average number of common shares outstanding for the year.
Net income per share of common stock for 1995 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 of $226,438.
Income Taxes
The Company accounts for income taxes under the asset and liability
method, as required by SFAS 109. Under the asset and liability method
of SFAS 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 SFAS 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 are made based upon the applicable tax laws of
Mexico. In conformity with SFAS 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
A provision, 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.
28
(2) Summary of Significant Accounting Policies, Continued
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.
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.
Financial Instruments
SFAS107, 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, receivables, investment available for sale, accounts
payable, accrued expenses, taxes payable, and amounts due to related
parties, approximated fair value as of December 31, 1997 because of
the relatively short maturity of these instruments. Capital lease
obligations primarily represent obligations recorded at the present
value of the minimum lease payments, at the inception of the lease
agreement, in December 1997. Accordingly, the carrying value of
capital lease obligations approximated the fair value as of December
31, 1997.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS 121, Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on
January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
Adoption of this Statement did not have a material impact on the
Company financial position or results of its operations.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS 128, Earnings Per Share, which requires companies to present
basic earnings per share and diluted earnings per share, instead of
the primary and fully diluted earnings per share that was required.
Adoption of SFAS 128 did not have an impact on previously reported
earnings per share.
29
(2) Summary of Significant Accounting Policies, Continued
New Accounting Pronouncements, Continued
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive Income,
which will be effective for the Company's 1998 fiscal year. SFAS 130
establishes standards for reporting comprehensive income and its
components in the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for
the way the Company reports information about operating segments in
the annual consolidated financial statements, as well as related
disclosures about products and services, geographic areas, and major
customers. This standard is effective for fiscal years beginning
after December 15, 1997.
Year 2000
During 1997, the Company began a corporate-wide system conversion to a
software system that is Year 2000 compliant. The conversion will
cover all significant computer applications of the Company.
Implementation of all systems is expected by September 1998. The Year
2000 issues are the result of computer programs being written using
two digits rather than four to define the applicable year. The
Company presently believes that, with the upgrades currently in
progress, the Year 2000 problem will not pose significant operational
problems.
Acquisitions
Effective July 1, 1997, the Company completed the acquisition of the
assets of Eurotech, S.A. de C.V. (Eurotech) for approximately
$3,900,000. Eurotech is a Mexican plastic molding and metal stamping
plant located in Cd. Juarez, Mexico. The acquisition of Eurotech has
been accounted for as a purchase. The acquisition price has been
allocated to tangible assets. The operating results of Eurotech have
been included in the Company's consolidated financial statements
since the date of acquisition. The assets acquisition, if it had
occurred at the beginning of the year, would not have a material
effect on the consolidated financial statements.
(3) Inventories
Inventories consist of the following:
1997 1996
---- ----
Raw materials $ 10,732,767 12,998,270
Work-in-process 1,213,553 3,138,189
Finished goods 2,467,932 1,961,415
----------- ----------
14,414,252 18,097,874
Less reserve for excess and
obsolete inventory 1,717,547 1,897,725
----------- ----------
$ 12,696,705 16,200,149
============ ==========
30
(3) Inventories, Continued
The reserve for excess and obsolete inventory is charged against cost of
sales and was increased (decreased) by $(180,178) and $426,358 for
the years ended December 31, 1997 and 1996, respectively.
(4) 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) 1997 1996
----------------- ---- ----
Land - $ 3,641,418 5,211,096
Buildings 20 11,750,832 13,197,575
Machinery and equipment 3 - 10 26,381,117 19,963,535
Leasehold improvements 5 1,307,253 1,386,811
Vehicles 5 158,997 148,630
Construction-in-progress - 67,404 127,906
----------- -----------
43,307,021 40,035,553
Less accumulated depreciation
and amortization 14,803,900 11,424,834
---------- ----------
$ 28,503,121 28,610,719
========== ==========
Included in property, plant and equipment is $1,682,000 and $2,206,676 of
machinery and equipment under capital leases and $280,000 and
$729,358 in related accumulated amortization at December 31, 1997 and
1996, respectively.
(5) Notes Payable and Long-Term Debt
At December 31, 1997, the Company had a $2,000,000 short-term credit
facility, with a bank, with an adjusted interest rate of Libor, plus
3 to 5%. Certain equipment secures the line. Promissory notes under
the line 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. At December 31, 1997 and 1996, no
balance was outstanding under this facility.
The Company has long-term credit facilities that are denominated in U.S.
dollars and consist of the following at December 31, 1997:
o Line of credit for up to $5,000,000 or 75% of appraised value of
certain properties with an adjusted interest rate of prime. The
available balance at December 31, 1997 was $5,000,000. The line of
credit matures on December 6, 2002 and is secured by a trust
guaranty in certain properties.
31
(5) Notes Payable and Long-Term Debt, Continued
o The Company has a revolving credit facility for $10,000,000 with a
bank. The revolving credit facility allows the Company to draw on
term notes payable, with adjusted interest rates of LIBOR plus 3%,
through December 15, 1999. The credit facility is secured by
eligible accounts receivable. Commitment fees of 1/8% of the
unfunded balance are due quarterly.
o Line of credit with a bank for up to $10,000,000 with an adjusted
interest rate of prime, plus 1/2%. The line of credit is secured
by eligible accounts receivable. The available balance at December
31, 1997 was $6,333,000. The line of credit expires on May 1,
1999. Commitment fees of 1/16% of the unfunded balances are due
quarterly.
In December 1996, the Company entered into a capital lease obligation in
which a standby letter of credit, for $650,000, was issued by a bank,
as a security to the lessor, as part of the lease agreement.
Interest payments, including commitment fees, on the notes payable and
long-term debt were $78,000, $857,104, and $2,085,530 for the years
ended December 31, 1997, 1996, and 1995, respectively.
The available credit facilities place certain restrictions on the payment
of dividends and use of proceeds from disposition of collateralized
fixed assets, limit investments or advances in other companies, limit
the incurrence of debt, and require the Company to maintain certain
financial ratios and insurance coverage. The Company is in compliance
with such covenants or restrictions at December 31, 1997.
(6) Leases
The Company utilizes certain machinery and equipment and occupies certain
buildings under lease arrangements that expire at various dates from
1998 through 2003, some of which have renewal options for additional
periods. Rental expense for certain manufacturing and warehouse
facilities, mainly for operating lease agreements, aggregated
$2,786,242, $2,406,815, and $1,689,425 for the years ended December
31, 1997, 1996, and 1995, respectively. Interest payments on capital
leases were $96,473, $33,160, and $90,599 for the years ended
December 31, 1997, 1996, and 1995, respectively.
32
(6) Leases, Continued
Future minimum lease obligations at December 31, 1997 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
1998 $ 553,626 2,311,199
1999 578,263 1,746,468
2000 103,672 1,435,217
2001 - 362,553
2002 - 130,003
2003 - 65,002
-------------- ---------
Total minimum obligations $ 1,235,561 6,050,442
=========
Less amounts representing interest
(approximately 3.5% to 10%) 84,909
-------------
Present value of net minimum lease obligations 1,150,652
Less current obligations under capital leases 496,190
Capital lease obligations, excluding current
obligations $ 654,462
=============
The Company leases manufacturing facilities to unrelated parties under
operating lease agreements that expire in 1999 and 2000. The Company
pays certain taxes on the properties and provides for general
maintenance. Included in property, plant and equipment at December
31, 1997 is the cost of the land and buildings under operating lease
agreements of $4,565,586 and the related accumulated depreciation of
$901,797.
Rental income was $732,832, $644,187, and $501,370 for the years ended
December 31, 1997, 1996, and 1995, respectively. The future minimum
rental income to be received under these operating leases is:
$791,305 in 1998; $643,558 in 1999; and $362,231 in 2000.
(7) Income Taxes
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.
33
(7) Income Taxes, Continued
The tax provision differs from the expected tax rate of 34% in 1997,
1996, and 1995 on taxable income as follows:
1997 1996 1995
---- ---- ----
Statutory tax rate 34.0% 34.0% 34.0%
Foreign currency gains or losses not
subject to income taxes 0.2 (1.4) (1.0)
Kronos losses (income) not subject to tax (i) - 0.4 (1.2)
Non-deductible expenses 2.5 1.7 2.1
Inflation and currency exchange rate
gains or losses on monetary items
for tax purposes only (ii) (9.2) (15.1) (2.7)
Inflation and currency exchange rate
portion of depreciation expense for
tax purposes only 3.1 0.5 2.4
Deferred income tax valuation reserve
adjustment (iii) (2.4) 4.4 (11.8)
------ ----- ------
28.2% 24.5% 21.8%
====== ===== =====
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 (Kronos, Inc. was merged into Elamex
effective December 31, 1996); (ii) under Mexican tax laws, inflation
and currency exchange rate adjustments are required for income tax
purposes; and (iii) changes in valuation reserves for assets tax
carryforwards due to management's evaluation of realizability.
The income tax provision includes the following:
1997 1996 1995
---- ---- ----
Current tax provision $ 98,134 79,303 363,000
Deferred tax provision 2,800,203 2,495,776 1,364,000
--------- --------- ---------
Total provision for income taxes $ 2,898,337 2,575,079 1,727,000
========= ========= =========
Total income taxes paid were $224,000, $352,000, and $379,000 in the years ended December 31, 1997, 1996, and 1995,
respectively.
34
(7) Income Taxes, Continued
The tax effect of significant temporary differences representing deferred
tax assets and liabilities is as follows:
1997 1996
---- ----
Current deferred tax assets:
Assets tax carryforwards $ 1,499,681 1,410,364
Net operating loss carryforwards 1,477,921 5,014,846
Other, net (62,629) 222,448
----------- ---------
2,914,973 6,647,658
Valuation allowance (211,534) (458,747)
---------- ---------
Net current deferred tax assets 2,703,439 6,188,911
Current deferred tax liabilities:
Inventories (6,125,239) (7,193,934)
Other (160,099) (374,760)
----------- -----------
Net current deferred tax liability $(3,581,899) (1,379,783)
=========== ===========
Non-current deferred tax liability:
Property, plant and equipment, principally
due to differences in useful lives $(3,078,486) (2,480,399)
=========== ===========
A valuation 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 assets tax carryforwards of $211,534
and $458,747 has been provided at December 31, 1997 and 1996,
respectively. During the year ended December 31, 1996, a reserve was
recorded as a result of tax planning activities related to tax
reforms that provided increased net operating losses, but could also
result in possible loss of assets tax carryforwards.
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, 1997 is $1,499,681 and expire from 1999 through 2007.
35
(7) Income Taxes, Continued
At December 31, 1997, certain of the Mexican companies within the
consolidated group 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:
2002 $ 212,000
2003 171,000
2005 785,000
2006 3,171,000
2007 8,000
------------
$ 4,347,000
The Company has filed a consolidated tax return with its majority
stockholder since 1995. The tax sharing agreement entered into
between the majority stockholder, Accel S.A. de C.V., and Elamex
provides that Elamex will 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.
Dividends paid by Mexican companies which exceed earnings and profits, as
defined by the Mexican tax law, are subject to a 34% income tax,
payable by the Company, on 1.515 times the amount in excess of
earnings and profits. Dividends paid which do not exceed earnings and
profits are not currently subject to Mexican tax to either the
Company or the stockholder. The Mexican companies paid no dividends
on common stock in 1997, 1996, or 1995.
(8) Redeemable Stock - Preferred and Common
An agreement was entered into as part of a 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, including redemption premiums. The
purchase 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.
36
(9) Stockholders' Equity
Common Stock
As part of the merger transaction between Internacional and Elamex on
October 1, 1995, the stock of Elamex, S.A. de C.V. was canceled and
replaced by 5,000,000 shares issued to Internacional's stockholders
proportionate to their ownership interest; Internacional's stock was
canceled. The merged corporation was organized under the laws of
Mexico as a sociedad anomina de capital variable.
On December 15, 1995, the stockholders of Elamex, S.A. de C.V., at a
special 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), unsold shares of 600,000 were subsequently canceled; (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.
The Company designated $897,406 of 1995's net profits as a reserve for
the repurchase and cancellation of publicly-traded common shares
outstanding as approved by the Company's stockholders.
Effective March 19, 1996, the Company completed a public offering of
2,400,000 shares of Class I, no par value, common stock for proceeds
of approximately $18,700,000, net of expenses of approximately
$2,800,000. The shares are traded on the NASDAQ National Market. The
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.
During the fourth quarter of fiscal 1997, a subsidiary of the Company
purchased 18,500 shares of the Company's common stock in the open
market for an aggregate amount of $215,000. This treasury stock has
been presented in the accompanying consolidated balance sheet at cost
as a reduction of stockholders' equity.
37
(9) Stockholders' Equity, Continued
Common Stock, 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. At December 31, 1997, the Company has not issued
any of its authorized variable capital common stock. Although the
variable capital common stock is redeemable by the terms described
above, such shares would be 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.
Under Mexican Law, dividends must be declared in pesos. If dividends are
declared in the future, the Company's intent is to pay the dividends
to all stockholders in U.S. dollars, as converted from pesos as of
the date of record, unless otherwise instructed by the stockholder.
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, 1997 and 1996 was approximately
$396,000 (3,152,000 pesos) and $329,000 (2,125,000 pesos),
respectively. The Company anticipates an additional allocation will
be made at its annual stockholders' meeting in April 1998 of
approximately $369,000 (2,977,000 pesos). Retained earnings available
for dividends under Mexican law at December 31, 1997 were $19,615,784
(158,182,000 pesos). However, debt agreements place certain
restrictions on the payment of dividends (note 5).
38
(9) 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, 1997.
(10) 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"). A participant may exercise the right to
receive payment for Phantom Stock Shares two years after the
determination date (as defined in the Plan); however, such shares
expire after ten years. Upon termination of employment for cause,
Phantom Stock Shares and accrued dividends and interest are
forfeited.
The Company keeps a record of the amount of Phantom Stock Shares held by
each participant. Each participant is 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 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. For
the years ended December 31, 1997 and 1996, the Company expensed
approximately $224,000 and $218,000, respectively, as obligations
under the Phantom Stock Plan.
39
(10) Executive Phantom Stock Plan, Continued
Transactions involving the plan are summarized as follows:
Option Shares
1997 1996
---- ----
Outstanding January 1 18,442 -
Granted 29,954 23,140
Canceled - (4,698)
Exercised - -
------- -------
Exercisable December 31 48,396 18,442
======= =======
(11) Major Customers
The Company has agreements that 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 1997 1996 1995
-------- --------------------- ---- ---- ----
A Printed circuit boards and final
assembly 19% 18% 18%
B Flexible and rigid circuit boards/
component assembly 9 16 23
C Printed circuit boards and cables 6 14 16
D PBX/switchboards and fiber optic
cable connections 14 11 7
E Assembly consumer products 10 4 -
During 1997, the Company announced the ending of its business
relationship with customers B and C. Management does not anticipate
any significant changes with respect to sales since those customers
are expected to be replaced with new sales. Notwithstanding, the
termination of any of these agreements could have a material effect
on the Company's financial position and results of operations.
40
(12) Related Party Transactions
The Company engages in various transactions in the ordinary course of
business with certain stockholders and other related parties. A
summary of significant related party transactions follows:
o As part of the reorganization and recapitalization discussed in
note 8, the Company issued approximately $2,045,000 of
subordinated debentures to certain stockholders of the Company in
1993. The principal was subject to acceleration under certain
circumstances, including a public offering of the Company's common
stock. As a result, these subordinated debentures were paid-off
during the first quarter of 1996 with the net proceeds of the
public offering.
o The Company leased a manufacturing facility from a stockholder,
which resulted in rent expense of approximately $88,000, and
$234,000 at December 31, 1996, and 1995, respectively. The
facility was not leased during 1997.
o During May 1996, the Company exercised an option to purchase from
a related party two manufacturing facilities, located in Torreon
and Chihuahua, Mexico. In management's opinion, the purchase price
of approximately $3,100,000 represents the fair market value as
determined by an independent appraiser. The Company has a
manufacturing operation at the Torreon facility and intends to
establish an operation at the Chihuahua facility.
o The Company leases three manufacturing facilities from companies
that are owned by a related party. Included in rent expense are
rental payments under these leases of approximately $831,000,
$900,000, and $833,000 during December 31, 1997, 1996, and 1995,
respectively.
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, 1997,
1996, and 1995, the Mexican company had sales to Elamex of
$1,731,000, $1,618,000, and $1,835,000, respectively. Elamex had a
payable to the Mexican company of $62,000 and $54,000, at December
31, 1996 and 1995, respectively and a receivable of $146,000 at
December 31, 1997.
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, 1997, 1996,
and 1995, this company provided services to Elamex for $2,425,000,
$2,852,000, and $2,208,000, respectively. Elamex had payables to
this company of $45,000 and $212,000 at December 31, 1997 and
1996, respectively.
41
(12) Related Party Transactions, Continued
o The Company paid consulting fees, consisting of tax advice and
return preparation, and other administration services, of
approximately $190,000, $213,000, and $280,000 during December 31,
1997, 1996, and 1995, respectively, to companies which are related
parties.
o The Company purchases insurance through an insurance broker that
is a related party. Premiums paid approximated $442,000, $306,000,
and $175,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
(13) Commitments and Contingencies
The Company is a party to various claims, actions and complaints, the
ultimate disposition of which, in the opinion of management, will not
have a material adverse effect on the operations or financial
position of the Company.
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 $258,000 and $212,000 as of
December 31, 1997 and 1996, respectively, which fully accrues for
these estimated seniority obligations. No significant seniority
payments have been made through December 31, 1997.
In January 1998, the Company agreed to purchase 2,525,000 shares of
Series A 9% Cumulative Convertible Preferred Stock ("Preferred
Stock") of Optimag, Inc. ("Optimag"), a California corporation. A
majority of the Board members of Optimag are Elamex directors.
42
(13) Commitments and Contingencies, Continued
Optimag was formed to develop, manufacture, and market optical inspection
stations and electrical test equipment to companies that produce disk
drive heads, magnetic media, and optical heads and optical media. The
Company has agreed to purchase the Preferred Stock in a three-part
transaction as follows:
o In January 1998, the Company signed the Preferred Stock Purchase
Agreement and purchased 637,500 shares of Preferred Stock for
$1.00 per share which are convertible into common stock 1 for 1.
o If certain performance targets are met after 90 days of signing,
the Company will purchase an additional 637,500 shares of
Preferred Stock at $1.00 per share.
o Upon final completion of a prototype inspection station, the
Company will purchase a final 1,250,000 shares of Preferred Stock
at $1.00 per share. After conversion to common stock, the Company
will own a minimum of 51% of the common stock.
The Company will consolidate operations of this investment.
At December 31, 1997, the Company has an obligation to purchase
inventory held by suppliers valued at approximately $1,280,000.
The Secretaria de Hacienda y Credito Publico (Mexican tax authorities)
has begun an examination of the Company's 1996 federal tax return.
The examination could result in additional income tax being assessed
on the Company. Management does not believe the outcome of this
matter will have an adverse impact on the Company's financial
position or results of operations.
(14) Selected Quarterly Financial Data (Unaudited)
(In thousands, except per share amounts)
1997 Quarters 1996 Quarters
----------------------------------------- --------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
----------------------------------------- --------------------------------------
Net sales $33,815 33,827 32,872 31,258 25,337 30,925 30,496 32,161
Gross profit 4,434 5,267 4,216 3,766 3,853 5,243 5,399 4,187
Net income 1,687 2,130 1,731 1,835 1,445 2,018 2,320 2,144 (a)
Net income
per common
share $0.23 0.29 0.23 0.25 0.27 0.27 0.31 0.29
(a) The income tax provision decreased in the fourth quarter due to
more favorable inflation/devaluation gain/loss on tax loss
carryovers than previously projected.
43
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable
Item 10. Directors and Executive Officers of the Registrant
The names, ages, and positions of the Director and executive officer
of the Company as of March 6, 1998 are as follows:
Name Age Position
- -------------------------------------------------------------------------------
Eloy S. Vallina ...... 60 Chairman of the Board of Directors
Federico Barrio ...... 61 Vice Chairman of the Board of Directors
Jesus Alvarez-Morodo . 51 Vice Chairman of the Board of Directors, Secretary
Hector M. Raynal ..... 44 President, Chief Executive Officer and Director
Carlos D. Martens .... 49 Vice President-Finance and Chief Executive Officer
Susan E. Mucha ....... 39 Vice President-Sales and Marketing
David Crawford ....... 61 Vice President-Manufacturing Operations
Wayne Rout ........... 54 Vice President-Materials
Jesus E. Vallina ..... 49 Director
Eloy Vallina Garza ... 26 Director
Eduardo L. Gallegos .. 56 Director
Robert J. Whetten .... 55 Director
Antonio L. Elias ..... 49 Director
Jerry W. Neely ....... 61 Director
Leon Reinhart ........ 55 Director
Tomas de Leon ........ 44 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. He is also chairman
of Kleentex Corp., and an Advisory Director of First National Bank of San Diego.
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 24
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
Cuidad 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 28 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
44
predecessor, Grupo Chihuahua and its subsidiaries since 1982, including Vice
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, Massachusetts Institute of Technology 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 General Director 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 a M.B.A. from Stanford University.
Carlos D. Martens
Mr. Martens has been Vice President and Chief Financial Officer of Elamex
since March, 1997. He has more than 20 years of multinational business and
financial experience with large conglomerates such as Grupo Empresarial G of
Guadalajara and Grupo Industrial Alfa of Monterrey as well as start-up
situations in California and Chicago. He received a B.S. in Electrical
Engineering from Escuela Superior de Ingenieria Mecanica y Electrica del
Instituto Politecnico Nacional ("ESIME"), a M.S. in Industrial Engineering and a
M.B.A. both from Stanford University.
Susan E. Mucha
Ms. Mucha has been Vice President Sales and Marketing of Elamex since 1997.
From 1995 to 1997 she was associated with Sparton Electronics Inc. as Director
of Business Development and later as Director of Strategic Planning. Ms. Mucha
has nearly 17 years of experience in the contract manufacturing industry, having
held marketing and marketing management positions at several contractors
including Flextronics International, AVEX Electronics, Inc. and SCI Systems. She
received a B.S. degree from the University of Florida and an M.A.S. degree from
the University of Alabama in Huntsville. She is on the Steering Committee of the
Institute for Interconnecting and Packaging Electronic Circuits (IPC) Electronic
Manufacturing Services Industry (EMSI) Council.
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 37 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 of Materials for Elamex since 1988. Mr.
Rout has 30 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 22 years. He is President of
Constructora Inmobiliaria Las Americas, S.A. de C.V., and 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.
45
Eloy Vallina Garza
Mr. Vallina is currently in charge of the Business Operations International
Banking of First National Bank in San Diego. He is also a director of Accel,
Almacenadora, S.A. and Copamex. Mr. Vallina is a graduate of the University of
Monterrey, where he received a B.A. in Business Administration.
Eduardo L. Gallegos
Mr. Gallegos has been with Accel and its predecessor, Grupo Chihuahua, for
24 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 served as
President and Chief Executive Officer of Norwest Bank El Paso from 1991 until
February 1996. 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. Mr. Whetten is out of the country
and does not expect to attend meetings until his return. Mr. Whetten has
consented to continue as a director while away and has agreed to resume to full
status upon his return.
Antonio L. Elias
Mr. Elias is 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 of Engineering in 1988 and Corporate Vice
President in 1989. From 1980 to 1986 he was Assistant Professor, Aeronautics and
Astronautics, at Massachusetts Institute of Technology. Mr. Elias obtained a
B.S., M.S., E.A.A. and Ph.D. in Aeronautics and Astronautics from 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 CEO 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
University of Southern California.
Leon Reinhart
Mr. Reinhart is President and CEO of First National Bank of San Diego. He
has more than 29 years of banking experience including various senior capacities
with Citibank, in the United States, Latin America and the Middle East.
46
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.
Item 11. Executive Compensation
During the year ended December 31, 1997, Elamex paid, either directly
or through a related company, MTI Services Corporation (MTI), an aggregate of
$913,684 to all of its directors and officers as a group for services in all
capacities and an additional $125,020 in respect of a discretionary compensation
plan. During such year, the Company, through MTI, set aside or accrued an
aggregate of $6,988 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.
Thirty-one 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 contracted services to Elamex. The purpose
of this arrangement is to provide these employees U.S. dollar-denominated
salaries and U.S.-style employee benefits. Under the contract, the Company pays
to the corporation an amount equal to the salary and benefits provided to the
executives by the corporation.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Name and Address of Amount of Shares Percent of
Beneficial Owner Owned Total
Eloy S. Vallina 4,051,300 54.8%
Avenida Zarco No. 2401
Chihuahua, Chih. Mexico
Accel, S. A. de C. V. 4,051,300 54.8%
Avenida Zarco No. 2401
Chihuahua, Chih. Mexico
- ---------------------
(1) Mr. Vallina directly owns 130,862,957 shares, or approximately 45%, of the
outstanding voting common stock of Accel. In addition, Mr. Vallina controls
companies that hold 46,414,851 shares, or approximately 16%, of the
outstanding voting common stock of Accel. Accel, in turn, owns
approximately 54.8% of the outstanding common stock of Elamex.
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.
47
On 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 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 Elamex de Delicias, S.A. de C.V. and leased to Elamex de
Torreon. The initial term of the lease has approximately 6 years to run with an
option exercisable by the lessee to extend for 4 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
48
either case without Elamex's consent, so long as the Mossberg contract is in
effect. Elamex de Delicias, S.A. de C.V has granted Elamex, and Elamex has
granted to Mossberg, an option to purchase the manufacturing facility where the
Mossberg contract is performed from Elamex de Delicias, S.A. de C.V 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, 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 $16,000 monthly
subject to renegotiate as circumstances may require. The Company believes that
this amount is the fair market value of the services it receives from Esvamex.
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, 1997 and 1996 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, 1997 are filed in Item 8 of this
report.
(ii) Financial statement schedule, valuation and qualifying
accounts and reserves and report thereon included on pages 51
and 52.
49
b) The following exhibits are filed as part of this report:
Exhibit
Number Description
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.*
10.5 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.*
10.12 Executive Phantom Stock Plan.*
21 Subsidiaries of the Registrant.*
99 Financial statement schedule, valuation and qualifying accounts and reserves and
report thereon included on pages 51 and 52.
* 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.
50
Independent Auditors' Report
The Board of Directors and Stockholders
Elamex, S.A. de C.V.:
Under date of February 25, 1998, we reported on the consolidated balance sheets
of Elamex, S.A. de C.V. and subsidiaries as of December 31, 1997 and 1996, 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, 1997,
which are included in Item 8 of the 1997 annual report on 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.
KPMG Peat Marwick LLP
El Paso, Texas
February 25, 1998
51
Elamex & Subsidiaries
Valuation and qualifying accounts and reserves
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance Charged to Charged to Balance at End
For the Year Beginning of Cost and Other of
Ended Year Expenses Accounts Deduction Year
----- ---- ---------- ---------- --------- ----
Allowance for doubtful accounts (b):
December 31, 1997 $525 311 - (a) 308 528
December 31, 1996 149 527 - (a) 151 525
December 31, 1995 194 160 - (a) 205 149
Allowance for material obsolescence:
December 31, 1997 $1,898 - - 180 1,718
December 31, 1996 1,471 427 - - 1,898
December 31, 1995 863 608 - - 1,471
- ----------------------------
(a) Uncollectible accounts written off
(b) Included as a reduction of trade and other receivables
52
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.
ELAMEX, S.A. DE C.V.
March 20, 1998 By:/s/ Hector M. Raynal
- -------------- -----------------------------------------------
Date Hector M. Raynal, President and Chief Executive
Officer
March 20, 1998 By:/s/ Carlos D. Martens
- -------------- -----------------------------------------------
Date Carlos D. Martens, 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 by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 20, 1998 By:/s/ Eloy S. Vallina
- -------------- ----------------------------------------------
Date Eloy S. Vallina, Chairman of the Board of
Directors
March 20, 1998 By:/s/ Jesus Alvarez-Morodo
- -------------- -----------------------------------------------
Date Jesus Alvarez-Morodo, Vice Chairman of the
Board of Directors
March 20, 1998 By:/s/ Hector M. Raynal
- -------------- -----------------------------------------------
Date Hector M. Raynal, President, Chief Executive
Officer, and Director (Principal Executive
Officer)
March 20, 1998 By:/s/ Federico Barrio
- -------------- -----------------------------------------------
Date Federico Barrio, Vice Chairman of the Board of
Directors
March 20, 1998 By:/s/ Jesus E. Vallina
- -------------- -----------------------------------------------
Date Jesus E. Vallina, Director
March 20, 1998 By:/s/ Eloy Vallina Garza
- -------------- -----------------------------------------------
Date Eloy Vallina Garza, Director
March 20, 1998 By:/s/ Eduardo L. Gallegos
- -------------- -----------------------------------------------
Date Eduardo L. Gallegos, Director
53
March 20, 1998 By:/s/ Antonio L. Elias
- -------------- -----------------------------------------------
Date Antonio L. Elias, Director
March 20, 1998 By:/s/ Jerry W. Neely
- -------------- -----------------------------------------------
Date Jerry W. Neely, Director
March 20, 1998 By:/s/ Leon Reinhart
- -------------- -----------------------------------------------
Date Leon Reinhart, Director
By:
- -------------- -----------------------------------------------
Date Robert J. Whetten, Director
54