-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KD5LJnJDZwbP8l6qxNvpXkljna9phZuDq8zP8ie7dxjzhJzCkA/FJFxeYIFNIW0M fBfkothzOg8VFA5f0uFNXg== 0001009302-98-000002.txt : 19980401 0001009302-98-000002.hdr.sgml : 19980401 ACCESSION NUMBER: 0001009302-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELAMEX SA DE CV CENTRAL INDEX KEY: 0001009302 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS & ACCESSORIES [3670] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27992 FILM NUMBER: 98580516 BUSINESS ADDRESS: STREET 1: AVENIDA INSURGENTES NO 4145-B OTE STREET 2: CD JUAREZ CHICHUAHUA CITY: MEXICO CP 32340 STATE: O5 BUSINESS PHONE: 9157748000 10-K 1 ANNUAL REPORT 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 2 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. 3 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.
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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.
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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 EX-27 2 FDS --
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 13,598 0 16,216 0 12,697 46,142 43,307 14,804 74,645 13,622 3,992 0 0 34,796 22,236 74,646 131,772 131,772 114,089 8,728 0 0 0 10,281 2,898 7,383 0 0 0 7,383 1.00 1.00
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