<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
DECEMBER 31ST, 1996 0-27992
ELAMEX, S.A. DE C.V.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MEXICO NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
AVENIDA INSURGENTES NO. 4145-B OTE.
Cd. JAUREZ, CHIHUAHUA MEXICO C.P. 32340
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT TELEPHONE NUMBER, INCLUDING AREA CODE: (915) 774-8252
IN EL PASO, TEXAS
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of exchange on which registered
CLASS I COMMON STOCK, NO PAR VALUE NASDAQ NATIONAL MARKET
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 3, 1997 was: $37,583,437.50
The number of shares of Class I Common Stock of the registrant outstanding
as of March 3, 1997 was:
7,400,000
DOCUMENTS INCORPORATED BY REFERENCE
Item 14 incorporates by reference exhibits to the registrant's registration
statement on Form S-1, file number 333-01768.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in any amendment to this Form 10-K. [X]
<PAGE>
REFERENCES IN THIS FORM 10-K TO "ELAMEX" OR THE "COMPANY" ARE TO ELAMEX,
S.A. DE C.V. AND ITS SUBSIDIARIES, COLLECTIVELY, AND REFERENCES TO "ELAMEX,
S.A. DE C.V". ARE SOLELY TO ELAMEX, S.A. DE C.V. EFFECTIVE JANUARY 1, 1993, THE
MEXICAN CONGRESS APPROVED THE ESTABLISHMENT OF A NEW CURRENCY UNIT, THE NEW
PESO, WHICH REPLACED THE PESO AT A RATE OF ONE NEW PESO PER ONE THOUSAND PESOS.
BEGINNING JANUARY 1, 1996, THE NAME OF THE CURRENCY UNIT WAS CHANGED FROM NEW
PESO TO PESO WITHOUT ADJUSTING ITS VALUE. IN THIS FORM 10-K, REFERENCES TO "$"
AND "U.S. DOLLARS" ARE TO UNITED STATES DOLLARS AND REFERENCES TO "NPS.", "PS",
"NEW PESOS" AND "PESOS" ARE TO MEXICAN PESOS AFTER THE CHANGES DESCRIBED ABOVE.
ITEM 1. BUSINESS
Elamex is a leading contract manufacturer located in Mexico, delivering
high-quality finished goods to Original Equipment Manufacturers ("OEMs") based
in North America pursuant to manufacturing contracts. Although functioning as
independent contractor, the Company operates in material respects as a
manufacturing arm of 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 OEM 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 U.S. dollars and it obtains
financing in U.S. dollars based on contracts with such U.S. and Canadian
customers providing for payment in U.S. dollars. The Company's headquarters and
certain of its manufacturing facilities are located within nine miles of the
U.S. border and the international's airport, rail and truck depots in El Paso
Texas. Elamex currently operates or directs operations at 17 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, were provided to foreign companies. This 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 of supplying real estate and labor for foreign managers to
its present status 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 benefits of SMT, especially those relating to cost
reduction, were passed along to customers. The Company believes these benefits
have helped to sustain the
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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 OEM
provided the circuit and production designs, procured all components,
frequently managed the production process and performed the final product
testing. As contract manufacturers began to perform more management services,
the relationship between OEMs and contract manufacturers became more strategic
in nature, with the two now linked in a closer relationship in order to quickly
deliver cost-effective, high-quality products to the marketplace. The practice
of contract manufacturers providing management services has evolved into
turnkey manufacturing, in which the contract manufacturer performs the
procurement function and manages the assembly process. In Elamex's experience,
procurement generates lower margins than assembly work, and Elamex believes the
same is true for other contract manufacturers. However, Elamex has also found
that parts and equipment procurement creates other advantages, such as greater
control over the manufacturing process and increased customer satisfaction due
to the reduction of an additional cost to the OEM. Elamex believes that the
ability to provide these procurement advantages reinforces the strategic
relationship between the OEM 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 Technology Forecasters, Inc.,
approximately 50% of the contract manufacturing industry's sales in 1995 were
to the computer industry. While the Company does not currently perform a
significant amount of manufacturing for the computer industry, it has found
that margins on computer products it has manufactured are generally lower than
those for other products the Company manufactures. The Company believes that
the two largest customers of the average contract manufacturer account for in
excess of 45% of sales for such contract manufacturer.
The industry is also expected to grow significantly. Technology
Forecasters, Inc. estimates that U.S.-Canadian demand for electronics contract
manufacturing will grow from expenditures of approximately $22 billion in 1995
to approximately $63 billion by 1999, an average annual growth rate of
approximately 30%, and that the worldwide electronics contract manufacturing
industry will grow from expenditures of $46 billion in 1995 to approximately
$117 billion by 1999, an average annual growth rate of approximately 26%. The
Company believes that the integration of digital and wireless technologies into
new products will help generate growth from several markets outside of the
computer industry, such as telecommunications, industrial electronics and
medical instrumentation. In addition to growth directly relating to the
electronics industry, the Company believes that further growth for contract
manufacturing will come from an increasing need for OEMs to reduce product time
to market and to manage more complex product designs, inventories and component
procurements.
MANUFACTURING SERVICES
Elamex is a contract manufacturer in the electronics industry, as well as
the electromechanical, avionics and medical industries. Elamex's work for the
electronics and avionics industries includes the assembly of printed circuit
boards with SMT, including SMT on flexible boards, plastic over-molding of SMT
boards and other technologies. 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
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surgery sets and band aid packaging. Many of these operations are conducted in
special clean rooms.
Approximately 28.5% of Elamex's net sales in 1996 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
71.5% of Elamex's net sales during 1996, 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 OEM to determine the manufacturing operations and the
organization, selection and training of the work force, with particular
emphasis on sophisticated training techniques. In establishing a "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 77.1% of Elamex's net sales for 1996 were derived from the
manufacture of electronic products. Over the last three decades, continuous
advances have been made in the design of electronic components and in
interconnection technologies. Prior to the 1980s, manufacturers developed the
technique of PTH technology. In PTH assembly, electrical components such as
integrated circuits are attached to printed circuit boards by means of pins or
leads that are inserted into pre-drilled holes and soldered to the electrical
circuits on the boards. As electronic devices required greater numbers of
components with increasing functional density and more interconnections,
manufacturers developed SMT. SMT eliminates the need for holes in the printed
circuit board, permitting a higher number of leads than PTH and finer
lead-to-lead spacings ("pitch"). This technology also allows components to be
placed on both sides of a board. Both factors substantially reduce board size.
SMT requires the use of more expensive automated assembly equipment and
substantially more engineering expertise than PTH. Elamex has adopted SMT as
the primary means of electronic assembly for a number of major products,
including personal computers, computer peripheral products, communications
equipment, navigational control systems, automotive sensors and audio mixing
boards. The Company also produces complex wire cable assemblies, plastic
over-molded SMT printed circuit boards and fiber optic cables and connectors.
Elamex customizes its assembly lines for each customer by assigning a
separate workforce, team leaders, supervisors, production engineers, managers
and quality control personnel to each project. Elamex analyzes the customer's
proposed production process, including the original process if applicable, and
proposes improvements whenever possible. Assembly lines are customized to the
customer's needs before manufacturing begins. The size of an assembly line is
jointly determined by Elamex and the customer. The customer generally provides
some of the equipment, particularly for specialized testing and other
customer-specific work, while Elamex provides the assembly services and generic
equipment. Some
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customers provide materials used in the production process, while others
contract for turnkey projects involving procurement. Final manufacturing
inspection may be performed at the customer's plant or by Elamex in "dock to
stock" arrangements. Additionally, many products manufactured by Elamex are in
the early stages of their product lifecycle and, therefore, may require ongoing
design or engineering changes. Responsiveness to customers, particularly with
respect to engineering changes once manufacturing has commenced, is a crucial
component of Elamex's manufacturing approach.
The Company's business is materially dependent on it's ability to produce
products of uniformly high quality. The Company has established quality
processes under International Standards Organization certification ISO 9002,
military specifications of the U.S. Department of Defense and Good
Manufacturing Practices certifications. Where appropriate, Elamex also works to
achieve this objective using specialized "pick and place" automated equipment.
To implement 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, including Black & Decker Corp.,
Polaroid Corp., Xircom, Inc., Texas Instruments, Motorola, JBL
Professional/Harman International, Lockheed Martin, Adtran and Siemens Rolm.
Contracts with Elamex's five largest customers for 1996 accounted for
approximately 66% of Elamex's committed contract revenues. Approximately 18%,
16% and 14% of the Company's net sales for 1996 were derived from sales to
Black & Decker Corp., a manufacturer of home appliance consumer products,
Polaroid Corp., a manufacturer of photographic consumer products and Xircom,
Inc., a manufacturer of computer products, respectively, and approximately 23%,
18% and 16% of the Company's net sales 1995 were derived from sales to Polaroid
Corp., Black & Decker Corp., and Xircom, Inc., respectively. Certain of the
Company's contracts contain pricing mechanisms that are based on the Company's
costs.
Elamex and O.F. Mossberg & Sons ("Mossberg") are parties to a
manufacturing contract pursuant to which Elamex has agreed to manufacture
shotgun components and safe deposit boxes. Due to the Mexican government's
regulation of the manufacture of firearms, this contract is performed by Elamex
de Torreon S.A. de C.V. ("Elamex de Torreon"), a company beneficially owned by
certain of the Company's officers and directors, under contract to Elamex.
Elamex has been qualified by the U.S. Department of Defense for
manufacturing military and aerospace specifications products. To serve a larger
base of customers in Europe as well as in the United States, Elamex has been
certified under ISO 9002, one of the highest total quality control standards in
the world, at all of its facilities where Elamex manages the labor force.
The Company's primary customers include Black & Decker Corp., Polaroid
Corp., Xircom, Inc., ADC Telecommunications, Inc. and Texas Instruments.
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The chart below sets forth the Company's OEM customers by industry, the
application for which Elamex manufactures products for such customers and the
products and services provided by the Company.
<TABLE>
<CAPTION>
OEM CUSTOMER END USE OEM APPLICATION ELAMEX PRODUCTS AND SERVICES
<S> <C> <C> <C>
ADC Telecommunications Telecommunications PBX Telecommunications equipment PBX/Switchboards & fiber optic
cable connection
Adtran Data Communications Cable/telephone communications Printed circuit boards
systems
American Sensors Commercial Smoke detectors Printed circuit boards & final
assembly
ASO Corporation Medical Flexible bandages Bandage packaging
Austin Innovations Commercial Pet trainers Printed circuit boards & final
assembly
Black & Decker Commercial Power tool battery chargers Printed circuit boards & final
assembly
Clinipad Medical Medical kits Surgical kits packaging
Honeywell Commercial Home and building controls Printed circuit boards
Infopak Computer Palmtop computers Printed circuit boards & computer
assembly
Intermatic Commercial Electronic timers, powerstrips, Printed circuit boards & final
sensors assembly
JBL Professional/Harman Commercial Sound Mixers Printed circuit boards & final
International assembly
Lockheed Martin Military/Aerospace Military products Printed circuit boards & cables
Lucent Technologies Telecommunications Telephones Telephone equipment repair
Motorola Commercial Semiconductors Semiconductors/mark test & packing
M. Stephens Manufacturing Commercial Electric connectors boxes Painting, polishing assembly and
packaging of Electric connector
boxes
Nintendo of America Commercial Video Game System Printed circuit boards and final
assembly
O.F. Mossberg & Sons Commercial Pump action shotguns Fabrication of shotgun components
& safe deposit boxes
Plantronics Telecommunications Telecommunications equipment Printed circuit boards
Polaroid Commercial Instant & industrial photographic Flexible and rigid circuit
cameras boards/component assembly
Siemens/Rolm Systems Telecommunications PBX Telecommunications equipment Switchboard repair
Sunflower Commercial Marketing of promotional products Packaging of promotional products
Texas Instruments Industrial Motor control circuits Printed circuit boards
Automotive Automotive control devices Flexible printed circuit boards
(transducers)
Commercial Transponders for toll systems Printed circuit boards
Texas Microsystems Computer Motherboards and VGAs Printed circuit boards
Venusa Medical Intravenous kits Intravenous kit assembly
Viskase Commercial Food products Casing of food products
Xircom Computer LAN adapters Printed circuit boards & cables
Zoom Telephonics Data Communications Communications products Printed circuit boards
</TABLE>
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
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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 it's 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 shares. 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.
EFFECT OF NAFTA
The Company believes that NAFTA is having an overall positive effect on
its business. NAFTA eliminates import duties and reduces other restrictions on
imports into the United States and Canada. These benefits enable Elamex to
manufacture goods from imports into Mexico and to return the finished product
to the United States and Canada, without paying significant duties. Moreover,
the Company believes that NAFTA has the general effect of encouraging growth in
industries for which Elamex provides manufacturing services, and will permit
the Company's customers to increase their sales in the Mexican market.
BACKLOG
The Company's order backlog at December 31, 1996 was approximately $147.9
million, compared to order backlog at December 31, 1995 of approximately $115.2
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
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Raw materials consist of electronic commodities, including integrated
circuits, transistors and other solid state elements, printed circuit boards
and other circuit elements, as well as components for electromechanical and
medical assembly, many of which are provided by customers. Virtually all raw
materials supplied by Elamex are purchased in Asia and the United States, with
the larger part coming from the United States. Elamex believes that it is not
materially dependent on any one supplier or group of suppliers; it purchased
less than 6% of its supplies from its largest vendor in 1996. Certain vendors
operate at full capacity from time to time and allocate their products among
customers. Elamex believes that larger companies generally command larger
allocations; however, because of its large-scale purchases of these products,
Elamex also believes that it sometimes has greater bargaining power for
particular products than its customers even though it may be smaller.
EMPLOYEES
Elamex had 5,040 employees at December 31, 1996, of which 264 were
employees subcontracted from Elamex de Torreon. In 15 active facilities
currently used by Elamex in its manufacturing operations, 291 employees in four
facilities are covered by collective bargaining agreements; all other employees
of the Company at the remaining eleven facilities are not. Elamex believes that
its labor relations are good in all of its facilities.
Twenty-nine 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 to U.S.-resident 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 United States, a requirement of its
participation in the Maquiladora program. Such laws and regulations may impose
joint and several liability on certain statutory classes of persons for the
costs of investigation and remediation of contaminated properties regardless of
fault or the legality of the original disposal. These persons include the
present and former owner or operator of a contaminated property and companies
that generated, disposed of, or arranged for the disposal of hazardous
substances found at a property.
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Mexican environmental laws and regulations have become increasingly
stringent over the last decade. This trend is likely to continue and may be
influenced by the environmental agreement entered into by Mexico, the United
States and Canada in connection with NAFTA. The Company believes that its
policies with respect to environmental matters in Mexico currently exceed the
standards set forth in the Ecological Law. The Company is committed to
maintaining high standards of environmental protection controls.
EXCHANGE RATES
The following table sets forth, for the periods indicated, the high, low,
average and period-end and free market rates for the purchase and sale of U.S.
dollars (presented in each case as the average between such purchase and sale
rates), expressed in nominal Pesos per U.S. dollar.
<TABLE>
<CAPTION>
YEAR ENDED HIGH(1) LOW(1) AVERAGE (2) PERIOD END(1)
DECEMBER 31, ------- ------ ----------- -------------
- ------------
<C> <C> <C> <C> <C>
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 (through March 3).......... 7.97 7.74 7.82 7.97
- ------
</TABLE>
SOURCE: Ciemex Wefa Group
(1) Daily rate at market close.
(2) Average of daily rates.
ITEM 2. PROPERTIES
The Company's Ciudad Juarez facilities (including its headquarters) are
located only a short distance from the U.S. border and the international
airport, rail and truck depots in El Paso Texas. Set forth below are Elamex's
principal manufacturing facilities:
<TABLE>
<CAPTION>
LOCATION SQUARE FEET ACTIVITY LEASED/OWNED
-------- ----------- -------- ------------
<S> <C> <C> <C>
Cd. Juarez 80,280 Electronic Equipment Assembly and Electronic Circuit Leased(1)
Manufacturing
Cd. Juarez 88,897 Electromechanical Part Assembly Leased
Cd. Juarez 44,909 Electronic Circuit Manufacturing Leased
Cd. Juarez 58,841 Medical Product Assembly Owned(2)
Cd. Juarez 43,034 Avionics Product Assembly Owned
Cd. Juarez 64,866 Electromechanical Product Assembly Leased(1)
Cd. Juarez 67,038 Medical Product Assembly Owned
Cd. Juarez 40,263 Electronic Equipment Assembly Leased
Delicias 26,804 Electromechanical Product Assembly Leased
Nuevo Laredo 60,658 Telephone Repair and Auto Part Assembly Owned
Nuevo Laredo 43,917 Telephone Repair Leased(1)
Guadalajara 57,246 Testing of Electronic Semiconductors Owned(3)
Torreon 55,845 Assembly of shotgun parts Owned
Tijuana 55,647 Electromechanical product assembly Leased
Tijuana 13,778 Electromechanical product assembly Leased
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Monterrey 22,098 Electromechanical product assembly Leased
Praxedis 11,517 Electromechanical product assembly Leased
------
Total 835,638
</TABLE>
- -------
(1) Leased from a company controlled by Federico Barrio, a Director of the
Company.
(2) A customer who leases this facility has an option under the lease to
purchase the facility at fair market value.
(3) Asset available for sale or lease.
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 18, 1996 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 1995 fiscal year;(ii) the presentation of audited
financial statements as of December 31, 1995 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, 1996;
On February 24, 1997 the stockholders of Elamex, S.A. de C.V. at an
extraordinary stockholders meeting approved the merger of Kronos, Inc., formerly
a wholly owned subsidiary of the Company, into Elamex, S.A. de C.V., effective
December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Company's Class I Common Stock, no par value ("Common Stock") has been
traded on The Nasdaq National Market under symbol ELAMF since March 20, 1996.
The 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 14, 1997 11 3/4 9
10
<PAGE>
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 21, 1997, there were approximately 1,098 beneficial holders of the
Company's Common Stock.
Also, on April 18, 1996 at the Company's annual stockholders meeting,
$897,406 was reserved for the stock repurchase fund.
The Mexican Law of Commercial Companies ("LEY GENERAL DE SOCIEDADES
MERCANTILES") requires that at least 5% of the Company's net income each year
(after profit sharing and other deductions required by law) be allocated to a
legal reserve fund, which is not thereafter available for distribution except
as a stock dividend until the amount of such fund equals 20% of the Company's
historical capital stock. The Company may also maintain additional reserves.
TAXATION OF DIVIDENDS
UNITED STATES FEDERAL INCOME TAXES
Dividends (other than certain dividends paid on a pro rata basis in
additional Common Stock) paid by the Company with respect to Common Stock out
of current or accumulated earnings and profits ("E&P") to a United States
holder will be treated as ordinary income to such holder. United States
corporations that hold Common Stock will not be entitled to the dividends
received deduction generally available for dividends received from United
States corporations (and certain non-United States corporations). To the extent
a distribution exceeds E&P, it will be treated first as a return of such
holder's basis to the extent thereof, and then as gain from the sale of a
capital asset. Such capital gain will be long term if the Common Stock has been
held by such holder for more than one year.
Dividends generally will constitute foreign source "passive income" or, in
the case of certain United States holders, "financial services income" for U.S.
foreign tax credit purposes.
Dividends paid in Mexican Pesos will be included in gross income of a
United States holder in a U.S. dollar amount calculated by reference to the
exchange rate in effect on the date of receipt of the distribution, whether or
not the Pesos are in fact converted into U.S. dollars at that time. If Pesos
are converted into U.S. dollars on the day they are received by a United States
holder, such holder generally should not be required to recognize foreign
currency gain or loss in respect of the dividend income. United States holders
should consult their own tax advisors regarding the treatment of any foreign
currency gain or loss on any Pesos which are not converted into U.S. dollars on
the day the Pesos are received by such holders.
Distributions of additional Common Stock to United States holders with
respect to their pre-distribution holdings of Common Stock ("old Common Stock")
that are made as part of a pro rata distribution to all stockholders of the
Company generally will not be subject to U.S. federal income tax
11
<PAGE>
(except with respect to cash received in lieu of fractional shares of Common
Stock). The basis of the Common Stock so received will be determined by
allocating the United States holders' adjusted basis in the old Common Stock
between the old Common Stock and the Common Stock so received.
A holder of Common Stock that is, with respect to the United States, not a
United States holder (a "non-United States holder") will not be subject to U.S.
federal income or withholding tax on dividends paid with respect to the Common
Stock, unless such dividends are effectively connected with the conduct by the
holder of a trade or business in the United States.
MEXICAN INCOME TAXES
Mexican income tax law requires that Mexican corporations must pay income
tax on taxable income for each fiscal year. Mexican corporations must maintain
an account called the CUENTA DE UTILIDAD FISCAL NETA or "previously taxed net
earnings account" ("CUFIN", from the Spanish initials). In its CUFIN the
Mexican corporation records the balance of the tax profits from previous years,
on which income tax has already been paid plus dividends received from Mexican
corporations. The CUFIN account balance is subject to restatement for
inflation.
Whenever a Mexican corporation pays dividends to its stockholders, if the
amount maintained in the CUFIN balance exceeds the dividend payment to be made,
neither the Mexican corporation nor the stockholders will have to pay Mexican
income tax on such dividend payment. Therefore, for Mexican tax purposes,
dividend payments made by the Company to United States holders will not
generally be subject to imposition of Mexican income taxes. However, if the
Mexican corporation's CUFIN balance is less than the dividend payment, then the
Mexican corporation must pay income tax of 34% of 1.515 times the amount which
exceeds such balance.
If the Company distributes stock dividends to United States holders, or
pays a dividend in cash and such payment is to be used by the United States
holders for a capital subscription or for reinvestment in the Company's stock,
and either such transaction by the United States holders occurs within 30 days
following the date of the dividend payment, there will be no Mexican tax
consequences for such United States holders, so long as the Company does not
reduce its capital stock liquidity. If the Company reduces its capital stock
and the balance of its CUFIN plus its capital contributions restated for
inflation is less than the amount of such stock reduction, the Company will be
required to pay income tax on such excess. Tax must also be paid on the excess,
if any, of the shareholder's equity over the sum of the CUFIN, the capital
contributions restated for inflation and the taxable amount determined as
previously indicated. In this case the taxable basis cannot be greater than the
total amount of the capital reduction.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Although the Company is 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.
12
<PAGE>
The following table sets forth selected consolidated financial data of the
Company as of and for each of the years ended December 31, 1992, 1993, 1994,
1995 and 1996. 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 four-year period
ended December 31, 1996 and "Balance Sheet Data" as of December 31, 1993, 1994,
1995 and 1996, 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, 1996, and
1995, and for each of the years in the three-year period ended December 31,
1996, and the report thereon, are included elsewhere in this Form 10-K. The
selected consolidated financial data as of December 31, 1992 have been derived
from unaudited financial data of predecessor entities. These historical results
are not necessarily indicative of the results to be expected in the future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1992 (1) 1993 1994 1995 1996
-------- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $60,221 $70,244 $84,816 $97,544 $118,919
Gross profit............ 6,977 9,524 10,210 14,972 18,683
Operating income........ 980 2,617 2,748 8,788 10,366
EBITDA 2,717 4,613 4,703 11,206 13,315
Other income (expense).. (769) (821) (460) (852) 136
Income tax provision(2). 256 622 743 1,727 2,575
Net income (loss)....... $(45) $1,173 $1,545 $6,209 $7,927
Net income (loss) per $(0.27) $(0.03) $0.23 $1.20 $1.15
share (3)
BALANCE SHEET DATA:
Current assets.......... $16,227 $19,659 $23,360 $30,586 $38,955
Property, plant and 22,211 22,582 22,684 24,023 28,611
equipment, net.
Total assets............ 39,718 43,259 46,783 55,110 67,976
Short-term debt and current
maturities of long-term debt 4,959 12,017 2,830 5,257 564
Long-term debt, excluding
current maturities.... 7,433 8,603 16,176 15,212 923
Total stockholders' equity (4) $9,160 $13,336 $14,495 $23,196 $49,864
</TABLE>
- ------
(1) The Selected Consolidated Financial Data as of December 31, 1992 have been
derived from unaudited financial data. Amounts from separate predecessor
entities are included in the Selected Consolidated Financial Data. All material
intercompany balances and transactions have been eliminated.
(2) 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.
(3) 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 6.9 million shares, 1995 and previous years' net income
(loss) per share of common stock was calculated by dividing net income (loss) 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.
13
<PAGE>
(4) Does not include redeemable Preferred Stock and redeemable Common Stock as
of December 31, 1992, 1993, and 1994 of $9,485, $3,406 and $3,792,
respectively.
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.
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 increased by 17% effective December 1996. Also, over the
12 months following execution of the Alliance, utility charges will increase an
average of approximately 20%. Under the Alliance the Mexican government will
attempt to boost the economy by providing tax incentives for new business
investments, while utilizing wage and price controls to contain inflation. As
part of the Alliance the Mexican government has committed to maintaining a free
flotation system for the Peso in the international currency markets. The
Alliance also calls for development of social and rural programs. The impact of
the Alliance on the Company or the Mexican economy cannot be accurately
predicted.
CERTAIN ACCOUNTING POLICIES
Direct manufacturing contract costs related to initial manufacturing
layout and setup for new contracts ("Initial Manufacturing Expenses") are
expensed in the current period when such costs are not considered significant.
When such costs are considered significant, the portion of such costs expended
for
14
<PAGE>
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, 1996 and 1995. In
addition, labor costs required to achieve normal productivity levels are
expensed in the period incurred. Commencing in 1995, the Company also adopted a
policy of not engaging in futures contracts with the purpose of hedging U.S.
dollar/New Peso revenues or costs, with the exception of regular treasury
operations to cover operating requirements for up to 30 days.
STATUTORY EMPLOYEE PROFIT SHARING
All Mexican companies are required to pay their employees, in addition to
their agreed compensation benefits, profit sharing in an aggregate amount equal
to 10% of net income, calculated for employee profit sharing purposes, of the
individual corporation employing such employees. All of Elamex's employees are
employed by its subsidiaries, each of which pays profit sharing in accordance
with its respective net income for profit sharing purposes. Tax losses do not
affect employee profit sharing. Statutory employee profit sharing expense is
reflected in the Company's cost of goods sold and selling, general and
administrative expenses, depending upon the function of the employees to whom
profit sharing payments are made. The Company's net income on a consolidated
basis as shown in the Consolidated Financial Statements is not a meaningful
indication of net income of the Company's subsidiaries for profit sharing
purposes or of the amount of employee profit sharing.
Statutory employee profit sharing was $159,731 or an effective rate of
1.52% of income before taxes, for the year ended December 31, 1996, compared to
$120,474 or an effective rate of 1.52% of income before taxes, for the year
ended December 31, 1995 and $185,923 or an effective rate of 8.13% of income
before taxes, for the year ended December 31, 1994.
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,
1994 1995 1996
---- ---- ----
Net sales................................ 100.0% 100.0% 100.0%
Cost of sales............................ 88.0 84.7 84.3
Gross profit............................. 12.0 15.3 15.7
Selling, general and
administrative expenses............. 8.8 6.3 7.0
Operating income......................... 3.2 9.0 8.7
Other income (expense)................... (0.5) (0.9) 0.1
Income before taxes...................... 2.7 8.1 8.8
Income tax provision..................... 0.9 1.8 2.2
Net income (loss)........................ 1.8 6.4 6.7
1996 COMPARED TO 1995
NET SALES. 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
15
<PAGE>
extent, an expansion of business from new customers in 1996.
GROSS PROFIT. 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. 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.
OPERATING INCOME. Operating income increased by 18.0% to $10.4 million, or 8.7%
of net sales, during the year ended December 31, 1996 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, for the year ended December 31, 1996, from
$(0.9) million or (0.9)% of net sales, for 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.
1995 COMPARED TO 1994
NET SALES. Net sales increased 15% to $97.5 million in 1995 from $84.8
million in 1994. The increase was attributable principally to increased
dollar volume of turnkey sales to existing customers, and, to a lesser
extent, an expansion of business from new customers in 1995.
GROSS PROFIT. Gross profit increased by $4.8 million, or 46.6%, to $14.9 million
in 1995 compared to $10.2 million for the prior year. Gross profit as a
percentage of net sales ("gross margin") increased to 15.3% in 1995 from 12.0%
in 1994 due primarily to a shift in the Company's sales mix toward turnkey
services with substantially greater revenue from the assembly component of
turnkey services than the turnkey services provided by Elamex in prior periods;
the assembly component is the higher-margin component of turnkey services, while
materials procurement is the lower-margin component. Better utilization of the
Company's manufacturing facilities also contributed to the increased gross
margin, as manufacturing overhead increased at a lower rate than net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 17.1% to $6.2 million, or 6.3% of net sales,
in the year ended December 31, 1995, as compared to $7.5 million, or 8.8% of net
sales, in the year ended December 31, 1994. This decrease resulted in part from
an increase in net sales that was achieved with essentially the same personnel
as in 1994, in addition to a depreciation of the Mexican peso; from December 18,
1994 through December 31, 1995, the U.S. dollar
16
<PAGE>
appreciated 128%, measured in value against the Peso. By December 31, 1995, the
beneficial effects of the devaluation were partially offset by increases in
wages and other costs in Mexico affected by inflation, which were incurred by
the Company during 1995.
Of the Company's aggregate cost of sales and selling, general and
administrative expenses in 1995, approximately 29.7% was incurred in Pesos,
compared to approximately 39.9% in 1994. This decrease was due to the
devaluation of the Peso during 1995 and the change in sales mix during the
period.
OPERATING INCOME. Operating income increased by 219.9% to $8.8 million, or 9.0%
of net sales, during the year ended December 31, 1995 and from $2.7 million, or
3.2% of net sales, during the year ended December 31, 1994, as a result of the
above factors, the most significant of which were changes in turnkey operations,
the devaluation of the Peso and the economies of scale described under "-Gross
Profit" and "-Selling, General and Administrative Expenses" above.
OTHER INCOME (EXPENSE). Interest and other expenses increased by $0.4 million to
$(0.9) million, or (0.9)% of net sales, in the year ended December 31, 1995,
from $(0.5) million or (0.5)% of net sales, in the year ended December 31, 1994.
This increase resulted principally from higher rates and increased borrowings
required to support the Company's working capital growth needs during the
period, offset by interest increases on deposits, principally in Mexican banks,
during a period of high Mexican interest rates.
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, tax net operating loss
carryforwards can be utilized by the Mexican company that incurred the losses.
The amounts of the Company's asset tax and net operating loss carryforwards at
December 31, 1996 and 1995 are set forth in Note 7 to the Consolidated
Financial Statements.
The Mexican asset tax was a 2% tax on assets for 1994 and prior years, and
a 1.8% tax on assets for 1995 and later years, computed by recognizing certain
effects of inflation, and by reducing the asset base by the amount of certain
liabilities. The asset tax operates like an alternative minimum tax in the U.S.
The Company's effective tax rate was 121% in 1992 (principally due to
imposition of the assets tax as the Company relied on net operating loss
carryforwards to reduce its income tax to an amount that was less than the
assets tax), 13.8% in 1993, 32.5% in 1994, 21.8% in 1995 and 24.5% in 1996.
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
17
<PAGE>
In recent years the Company has experienced significantly increased
working capital needs as its business has grown and there has been an increase
in the number of turnkey projects requiring purchases of materials by the
Company. At December 31, 1996, the Company had working capital (defined as
inventory plus trade and other accounts receivable minus accounts payable) of
$23.3 million compared to $19.9 million at December 31, 1995. This increase was
due to growth in inventories and accounts receivable associated with an
increase in sales, especially those related to turnkey contracts.
During the year ended December 31, 1996, the Company had gross operating
activities of $14.1 million, which consisted of net income of $7.9 million plus
depreciation and amortization of $2.9 million in addition to deferred taxes and
allowances of $3.3 million. This flow of activities financed an increase in
accounts receivable of $0.7 million and inventories of $5.3 million, which were
offset by a net increase in trade payables and accrued expenses of $2.7
million, resulting in net cash provided by operations of $10.9 million. The
increases in accounts receivable and inventories were due to the Company's
increased net sales during the period. Cash provided by operations plus
proceeds from financing of equipment of $1.3 million and proceeds from its
initial public offering of approximately $18.7 million allowed the Company to
pay down $20.3 million of indebtedness and to invest $7.2 million in property,
plant and equipment.
In 1996 EBITDA was $13.3 or 11.2% of net sales, and capital expenditures
were $7.2 million. EBITDA in 1996 increased 18.8% over 1995. In 1995 EBITDA was
$11.2 million. EBITDA is defined by the Company as net income before interest,
income taxes, depreciation and amortization. EBITDA is presented in 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, 1996:
<TABLE>
<CAPTION>
LENDER OR CLASS OF TYPE AMOUNT INTEREST MATURITY DATE
SECURITIES ---- OUTSTANDING AS OF RATE AS OF -------------
- ---------- DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C> <C> <C>
Comerica Bank $10 million Line of
Credit - 8.75% May 1, 1999
Bank of America N.T. & $10 million Line of
S.A. Credit - 8.63 December 15, 1999
Confia S.A......(1) $2.2 million Line of
Credit 9.13 January 8, 1997
Norwest Bank El Paso $5 million Line of
Credit - 8.25 December 6, 2001
Amplicon Financial $1.3 million capital
lease 1,306,427 7.92 December 15, 1999
---------
Total......... $1,306,427
</TABLE>
- ------
(1) Line of credit under renewal.
Effective March 19, 1996 the Company successfully completed an Initial
Public Offering of 2,400,000 shares of Class I Common Stock, no par value, the
net proceeds of which totaled approximately $18,700,000 and were used to pay
down $15,900,000 of outstanding debt and Subordinated Debentures. The remaining
$2,800,000 was used as working capital.
18
<PAGE>
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 $1.3 million in
1996. The future minimum rental payments under this equipment lease and other
capital leases are $658,167 in 1997, $509,981 in 1998 and $490,663 in 1999. See
Note 6 to the Consolidated Financial Statements for further information
regarding operating lease commitments.
19
<PAGE>
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with accounting principles generally
accepted in the United States of America.
KPMG Peat Marwick LLP
El Paso, Texas
February 27, 1997
20
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Consolidated Balance Sheets
(In U. S. Dollars)
<TABLE>
<CAPTION>
DECEMBER 31,
------------
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,269,825 2,848,628
Receivables (note 5):
Trade accounts, less allowance for doubtful accounts
($525,029 in 1996 and $148,629 in 1995) 13,944,948 14,860,718
Other receivables 2,047,019 831,740
---------- ----------
Total receivables 15,991,967 15,692,458
---------- ----------
Inventories, net (note 3) 16,200,149 11,358,182
Prepaid expenses 492,933 686,766
---------- ----------
Total current assets 38,954,874 30,586,034
Property, plant and equipment, net (notes 4 and 5) 28,610,719 24,022,728
Other assets, net 410,460 501,726
---------- ----------
$ 67,976,053 55,110,488
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (note 5) $ - 2,000,000
Accounts payable 8,886,613 7,134,943
Accrued expenses 2,292,682 1,746,074
Current installments of long-term debt (note 5) - 2,691,054
Current obligations of capital leases (note 6) 564,216 565,555
Taxes payable 1,286,132 861,797
Deferred income taxes (note 7) 1,379,783 -
Due to related parties (note 12) 86,743 156,124
---------- ------------
Total current liabilities 14,496,169 15,155,547
Subordinated debentures (note 12) - 2,044,558
Long-term debt, excluding current installments (note 5) - 12,986,621
Capital lease obligations, excluding current obligations (note 6) 923,273 181,062
Other liabilities 212,403 181,964
Deferred income taxes (note 7) 2,480,399 1,364,407
---------- -----------
Total liabilities 18,112,244 31,914,159
---------- ----------
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 and,
5,000,000 shares issued and outstanding in 1996 and 1995,
respectively 35,010,468 16,270,459
Retained earnings 14,853,341 6,925,870
---------- -----------
Total stockholders' equity 49,863,809 23,196,329
---------- ----------
Commitments and contingencies (notes 6, 9 and 13) - -
$ 67,976,053 55,110,488
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Consolidated Statements of Earnings
(In U. S. Dollars)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $ 118,918,913 97,543,581 84,816,306
Cost of sales 100,236,384 82,571,960 74,605,956
----------- ---------- ----------
Gross profit 18,682,529 14,971,621 10,210,350
------------ ---------- ----------
Operating expenses:
General and administrative 7,630,870 5,560,356 6,658,530
Selling 685,544 622,811 803,918
-------------- ------------ ------------
Total operating expenses 8,316,414 6,183,167 7,462,448
------------- ----------- -----------
Operating income 10,366,115 8,788,454 2,747,902
------------ ----------- -----------
Other income (expense):
Interest income 255,362 965,341 153,191
Interest expense (944,003) (2,359,451) (1,689,986)
Other, net 825,076 541,799 1,077,048
-------------- ------------ -----------
Total other income (expense) 136,435 (852,311) (459,747)
-------------- ------------ -------------
Income before income taxes 10,502,550 7,936,143 2,288,155
Income tax provision (note 7) 2,575,079 1,727,000 742,902
------------- ----------- ------------
Net income $ 7,927,471 6,209,143 1,545,253
============= =========== ===========
Net income per common share
(note 14) $ 1.15 1.20 0.23
==== ==== ====
Weighted average shares outstanding 6,880,548 5,000,000 5,000,000
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In U. S. Dollars)
Retained Total
Common Earnings Stockholders'
Stock (Deficit) Equity
----- --------- ------
<S> <C> <C> <C>
Balances at December 31, 1993 $ 13,552,031 (215,646) 13,336,385
Net income - 1,545,253 1,545,253
Accretion of redemption premium
on redeemable common stock - (386,442) (386,442)
-------------- ---------- ------------
Balances at December 31, 1994 13,552,031 943,165 14,495,196
Net income - 6,209,143 6,209,143
Cash capital contribution 2,718,428 - 2,718,428
Redemption of common stock (16,270,459) - (16,270,459)
Issuance of common stock 16,270,459 - 16,270,459
Accretion of redemption premium
on redeemable common stock - (226,438) (226,438)
-------------- ---------- ------------
Balances at December 31, 1995 16,270,459 6,925,870 23,196,329
Net income - 7,927,471 7,927,471
Proceeds from sale of common
stock, net 18,740,009 - 18,740,009
-------------- ---------- ------------
Balances at December 31, 1996 $ 35,010,468 14,853,341 49,863,809
============== ========== ============
See accompanying notes to consolidated financial statements.
23
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In U. S. Dollars)
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
Cash flows provided by operating activities:
Net income $ 7,927,471 6,209,143 1,545,253
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,948,887 2,417,583 1,954,699
Allowance for doubtful trade accounts receivable 376,400 (45,103) 146,241
Allowance for excess and obsolete inventory 426,358 608,777 647,719
Deferred income taxes, net 2,495,775 1,364,407 -
(Gain) loss on disposal of equipment - (2,414) 56,789
Change in assets and liabilities:
Trade accounts receivable 539,370 (3,040,022) (2,502,993)
Other receivables (1,215,279) (63,526) (80,757)
Inventories (5,268,325) (3,093,396) (1,661,107)
Prepaid expenses 193,833 (438,953) (111,611)
Other assets (224,071) 39,396 111,214
Accounts payable 1,751,670 (99,007) 4,079,246
Accrued expenses, related
parties, and taxes payable 901,562 723,468 (270,169)
Other liabilities 30,439 (33,486) (24,821)
------------- ----------- -------------
Net cash provided by operating
activities 10,884,090 4,546,867 3,889,703
------------- ----------- -------------
Cash flows used by investing activities:
Purchase of property, plant and equipment (7,221,541) (3,572,668) (2,188,736)
Proceeds from disposal of equipment - 16,771 242,968
------------- ----------- -------------
Net cash used by investing activities (7,221,541) (3,555,897) (1,945,768)
------------- ----------- -------------
Cash flows provided (used) by financing activities:
Repayments of debt due to a related party - - (191,007)
Net increase (decrease) in notes payable (2,000,000) 2,000,000 (10,300,000)
Proceeds from issuance of long-term debt - 8,394,341 10,400,000
Repayment of long-term debt (17,722,233) (8,366,666) (1,166,666)
Principal repayments of capital lease obligations (565,555) (564,988) (547,256)
Proceeds from financing of equipment 1,306,427 - -
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 (241,352) 162,671 (1,804,929)
------------- ----------- -------------
Net increase in cash and cash equivalents 3,421,197 1,153,641 139,006
Cash and cash equivalents, beginning of year 2,848,628 1,694,987 1,555,981
------------- ----------- -------------
Cash and cash equivalents, end of year $ 6,269,825 2,848,628 1,694,987
============= =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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, 1996. 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, 1996 and 1995 and results of operations for the three
years ended December 31, 1996 of:
- Elamex Internacional, S.A. de C.V., whose assets and
liabilities were merged into Elamex on the Effective Date.
- Elamex, S.A. de C.V., a wholly-owned subsidiary of Internacional
prior to the Effective Date.
- 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.
- 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 and all monetary amounts are presented in U.S. dollars. All
material intercompany transactions have been eliminated.
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.
25
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(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 $957,000 and $73,000,
at December 31, 1996 and 1995, respectively, and deposits denominated
in U.S. dollars of approximately $2,801,000 and $2,426,000 at
December 31, 1996 and 1995, respectively, in U.S. banks. The Company
had approximately $2,512,000 and $350,000 of short-term repurchase
agreements, denominated in U.S. dollars, deposited in U.S. banks and
offshore branches of Mexican banks at December 31, 1996 and 1995,
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 of $437,845, $238,545, and $950,004 for
the years ended December 31, 1996, 1995, and 1994, 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 FEDERACIUN (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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash and cash equivalents $ 957,000 73,000
Other receivables 1,634,700 585,491
Prepaid expenses 218,142 363,796
Other assets, net 26,064 42,905
Accounts payable (1,542,331) (101,662)
Accrued expenses and other liabilities (2,206,667) (1,560,230)
---------- ---------
Net foreign currency position $ (913,092) (596,700)
=========== ==========
</TABLE>
In addition, the Company has recorded a net deferred tax liability
pursuant to FAS 109, ACCOUNTING FOR INCOME TAXES (note 7). The
recorded amount of $3,860,182 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.
26
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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, 1996 or 1995. However, as
of 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.
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, 1996 and 1995 was approximately $451,000 and
$471,000, 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.
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, 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 and 1994 was calculated by
dividing net income by the number of common shares outstanding as of
the Effective Date, 5,000,000, after deducting amounts attributable
to the rights of senior securities in the amounts of $226,438, and
$386,442 for the years ended December 31, 1995, and 1994,
respectively.
27
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES
The Company accounts for income taxes under the asset and liability
method, as required by STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 109, ACCOUNTING FOR INCOME TAXES (FAS 109). Under the asset and
liability method of FAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
FAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
Provision for taxes is made based upon the applicable tax laws of Mexico.
In conformity with FAS 109, deferred tax assets and liabilities are
not provided for differences related to assets and liabilities that
are remeasured from pesos into U.S. dollars using historical exchange
rates and that result from indexing for Mexican purposes or exchange
rate changes.
REVENUE RECOGNITION
Turnkey contract sales are recognized at the time the order is shipped.
Sales from contract assembly services are recognized over the
contract period and billed weekly as services are provided.
EMPLOYEES' STATUTORY PROFIT SHARING
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.
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.
ACCOUNTING FOR ASSET IMPAIRMENT
The Company adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF (FAS 121), effective January 1, 1996. FAS
121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. The adoption
of FAS 121 did not have a material adverse impact on the Company's
financial position or the results of its operations.
28
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company is required to adopt STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS NO. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (FAS 123),
upon issuance of shares under stock-based compensation plans. FAS 123
defines the fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to
measure compensation costs for those plans using the intrinsic value
based method of accounting. The statement also requires that an
employer's financial statements include certain disclosures about
stock-based employee compensation arrangements regardless of the
method used to account for them.
FINANCIAL INSTRUMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 107, DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosures about the
fair value of certain financial instruments for which it is
practicable to estimate that value. The fair value of a financial
instrument is generally the amount at which the instrument could be
exchanged in a current transaction between willing parties, other
than in a forced sale or liquidation.
The carrying amounts of financial instruments, including cash and cash
equivalents, receivables, accounts payable, accrued expenses, taxes
payable, and amounts due to related parties, approximated fair value
as of December 31, 1996 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 1996.
Accordingly, the carrying value of capital lease obligations
approximated the fair value as of December 31, 1996.
(3) INVENTORIES
Inventories consist of the following:
1996 1995
---- ----
Raw materials $ 12,998,270 8,717,922
Work-in-process 3,138,189 2,286,032
Finished goods 1,961,415 1,825,595
----------- -----------
18,097,874 12,829,549
Less reserve for excess and
obsolete inventory 1,897,725 1,471,367
----------- -----------
$ 16,200,149 11,358,182
========== ==========
The reserve for excess and obsolete inventory is charged against cost of
sales and was increased by $426,358 and $608,777 for the years ended
December 31, 1996 and 1995, respectively.
29
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(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) 1996 1995
---------------- ---- ----
Land - $ 5,211,096 4,711,793
Buildings 20 13,197,575 10,556,598
Machinery and equipment 3 - 10 19,963,535 16,678,864
Leasehold improvements 5 1,386,811 755,357
Vehicles 5 148,630 111,400
Construction-in-progress - 127,906 -
----------- ----------
40,035,553 32,814,012
Less accumulated depreciation
and amortization 11,424,834 8,791,284
---------- -----------
$ 28,610,719 24,022,728
========== ==========
Included in property, plant and equipment is $2,206,676 and $3,371,054 of
machinery and equipment under capital leases and $729,358 and
$2,460,524 in related accumulated amortization at December 31, 1996
and 1995, respectively.
(5) NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 1996, the Company had a $2,200,000 short-term credit
facility, with a bank, with an adjusted interest rate of LIBOR, plus
3 to 5%. The availability has been reduced by a letter of credit for
$200,000. The line is secured by certain equipment. 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. The facility matured on
January 8, 1997 and is in the process of being renewed.
At December 31, 1995, the Company had $2,000,000 outstanding on one
credit facility. At December 31, 1995, the note bore interest at
LIBOR plus 3.125%. The Company paid off the note during the first
quarter of 1996.
As more fully described in note 9, the Company completed a public
offering of 2,400,000 shares of its Class I common stock on March 19,
1996. The net proceeds of the offering were used during the first
quarter of 1996 to pay-off substantially all of the Company's
outstanding debt.
30
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(5) NOTES PAYABLE AND LONG-TERM DEBT, CONTINUED
All long-term debt is denominated in U.S. dollars and consists of the
following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable to bank, paid in full during
first quarter of 1996 and not renewed. $ - 4,083,333
Note payable to bank, under 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, 1996 was
$5,000,000. The line of credit matures on December 6,
2001 and is secured by a trust guaranty in certain
properties. - 4,400,000
Revolving notes payable on a $10,000,000 line of
credit to a bank, interest at prime plus 1/2% due
upon expiration of term notes which are renewable at
the option of the Company in 180 day intervals
through May 1, 1999. Secured by trade accounts
receivable. Commitment fees of 1/4% of
unfunded balance are due quarterly. - 5,200,000
Note payable to a financing corporation, paid
in full during first quarter of 1996 and not
renewed. - 1,994,342
------------- -----------
Total long-term debt - 15,677,675
Less current installments - 2,691,054
------------- -----------
Long-term debt, excluding current installments $ - 12,986,621
============= ==========
In addition to the above short and long-term credit facilities
available, the Company originated a $10,000,000 line of credit with
a bank in December 1996. 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
unfunded balance are due quarterly.
In December 1996, the Company entered into a capital lease obligation
in which a standby letter of credit, for an amount up to $650,000,
was issued by a bank, as a security to the lessor, as part of the
lease agreement.
Interest payments on the notes payable and long-term debt were $857,104,
$2,085,530, and $1,267,235 for the years ended December 31, 1996,
1995, and 1994, 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, 1996.
31
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(6) LEASES
The Company utilizes certain machinery and equipment and occupies certain
buildings under lease arrangements which expire at various dates from
1997 through 2001, some of which have renewal options for additional
periods. Rental expense for certain manufacturing and warehouse
facilities, mainly for operating lease agreements, aggregated
$2,406,815, $1,689,425, and $2,114,578 for the years ended December
31, 1996, 1995, and 1994, respectively. Interest payments on capital
leases were $33,160, $90,599, and $146,357, respectively.
Future minimum lease obligations at December 31, 1996 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
----------------------- ------ ---------
<S> <C> <C>
1997 $ 658,167 2,311,600
1998 509,981 2,019,778
1999 490,663 1,465,203
2000 - 1,193,753
2001 - 232,550
------------- ---------
Total minimum obligations $ 1,658,811 7,222,884
=========
Less amounts representing interest
(approximately 7.92%) 171,322
---------
Present value of net minimum lease obligations 1,487,489
Less current obligations under capital leases 564,216
Capital lease obligations, excluding current
obligations $ 923,273
==========
</TABLE>
The Company leases manufacturing facilities to unrelated parties under
operating lease agreements which expire in 1999. The Company pays
certain taxes on the properties and provides for general maintenance.
Included in property, plant and equipment at December 31, 1996 is the
cost of the land and buildings of $4,421,961 and the related
accumulated depreciation of $611,337.
Rental income was $644,187, $501,370, and $300,047 for the years ended
December 31, 1996, 1995, and 1994, respectively. The future minimum
rental income to be received under these operating leases in the
following years is: $674,274 in 1997; $368,330 in 1998; and $220,583
in 1999.
32
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(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.
The tax provision differs from the expected tax rate of 34% in 1996,
1995, and 1994 on taxable income as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
Foreign currency gains or losses not
subject to income taxes (1.4)% (1.0)% (14.1)%
Kronos losses (income) not subject to tax (i) 0.4% (1.2)% (10.2)%
Non-deductible expenses 1.7% 2.1% 3.5%
Inflation and currency exchange rate
gains or losses on monetary items
for tax purposes only (ii) (15.1)% (2.7)% (1.1)%
Inflation and currency exchange rate
portion of depreciation expense for
tax purposes only 0.5% 2.4% (4.3)%
Deferred income tax valuation reserve
adjustment (iii) 4.4% (11.8)% 24.7%
--- ---- ----
24.5% 21.8% 32.5%
==== ==== ====
</TABLE>
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 that may expire unused, due mainly to changes in
Mexican tax law which occurred during 1996, and the expectation, in
1995, that previously reserved net operating loss carryforwards could
be realized in future years due to permission from Mexican taxing
authorities to file consolidated tax returns effective in 1995.
The income tax provision includes the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current tax provision $ 79,303 363,000 742,902
Deferred tax provision 2,495,776 1,364,000 -
--------- --------- -------
Total provision for income taxes $ 2,575,079 1,727,000 742,902
========= ========= =======
</TABLE>
Total income taxes paid were $352,000, $379,000, and $449,000 in December
31, 1996, 1995, and 1994, respectively.
33
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(7) INCOME TAXES, CONTINUED
The tax effect of significant temporary differences representing deferred
tax assets and liabilities is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current deferred tax assets:
Assets tax carryforwards $ 1,410,364 981,623
Net operating loss carryforwards 5,014,846 4,181,765
Other, net 222,448 249,960
----------- ----------
6,647,658 5,413,348
Valuation allowance (458,747) -
----------- ----------
Net current deferred tax assets 6,188,911 5,413,348
Current deferred tax liabilities:
Inventories (7,193,934) (5,413,348)
Other (374,760) -
----------- ----------
Net current deferred tax (liability) $ (1,379,783) -
=========== ==========
Non-current deferred tax assets -
Assets tax carryforwards $ - 77,292
Non-current deferred tax liabilities -
Property, plant and equipment, principally
due to differences in useful lives (2,480,399) (1,441,699)
--------- ---------
Net non-current deferred tax liability $ (2,480,399) (1,364,407)
========== =========
</TABLE>
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 asset tax carryforwards of $458,747
has been provided at December 31, 1996. 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, 1996 expire as follows, if not previously utilized to
offset income taxes:
1999 $ 82,000
2000 110,000
2001 67,000
2002 173,000
2003 266,000
2004 241,000
2005 432,000
2006 39,000
----------
$ 1,410,000
==========
34
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(7) INCOME TAXES, CONTINUED
At December 31, 1996, 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 1,600,000
2003 1,926,000
2004 7,571,000
2005 953,000
2006 2,700,000
-----------
$ 14,750,000
===========
The Company received authorization to file a consolidated tax return with
its majority stockholder commencing in 1995. Effective for 1995, a
tax sharing agreement entered into between the majority stockholder,
Accel S.A. de C.V., and Elamex whereby Elamex agrees to transfer
monthly an amount equal to its estimated payment, less credits, which
would be required by the Mexican tax authority calculated as if they
were filing a separate return for such year. The majority stockholder
further agrees to reimburse Elamex for use of any of Elamex's tax
benefits at the time Elamex would otherwise realize the benefit.
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. No dividends on common stock were paid by
the Mexican companies in 1996, 1995, or 1994.
(8) REDEEMABLE STOCK - PREFERRED AND COMMON
Effective December 9, 1993, the stockholders of Kronos, Inc. and
Kronoservices, S.A. de C.V. restructured their operations. As part
of the restructuring, Kronoservices changed its name to Elamex,
S.A. de C.V. and transferred the operations of Kronos, Inc. to
Elamex, S.A. de C.V. during 1993 and 1994. A change in ownership
did not occur and these transactions were recorded at historical
carrying amounts.
An agreement was entered into as part of the December 9, 1993
restructuring whereby Elamex was required, if and when its
minority-held common stock was distributed to individuals, to
repurchase up to 1,060,197 shares of common stock upon the death,
disability or, under certain conditions, upon an involuntary
termination of certain individuals. This agreement was formalized and
revised on March 9, 1995 whereby Elamex was obligated to repurchase
these shares of minority-held common stock over the next six years.
The repurchase of these redeemable shares was accelerated and by
September 1995, all minority held stock was purchased by
Internacional for $4,018,444, 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.
35
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(9) STOCKHOLDERS' EQUITY
COMMON STOCK
As part of the merger transaction between Elamex 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 ANUMINA 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.
On April 18, 1996, at the annual stockholders' meeting, the Company's
stockholders voted to designate $897,406 of 1995's net profits as
reserved for repurchase and cancellation of publicly-traded common
shares outstanding.
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.
Changes in common stock outstanding are as follows:
COMMON STOCK
Shares Amount
Balance at December 31, 1993 4,240,796 $ 13,552,031
--------- ----------
Balance at December 31, 1994 4,240,796 13,552,031
Cash capital contribution - 2,718,428
Redemption of common stock (4,240,796) (16,270,459)
Common stock issued 5,000,000 16,270,459
--------- ----------
Balance at December 31, 1995 5,000,000 16,270,459
Common stock issued 2,400,000 18,740,009
--------- ----------
Balance at December 31, 1996 7,400,000 $ 35,010,468
========= ==========
36
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(9) STOCKHOLDERS' EQUITY, CONTINUED
COMMON STOCK
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, 1996, 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, 1996 and 1995 was approximately
$329,000 (2,125,000 pesos) and $29,800 (229,000 pesos), respectively.
The Company anticipates an additional allocation will be made at its
annual stockholders' meeting in April 1997 of approximately $396,000
(3,152,000 pesos). Retained earnings available for dividends under
Mexican law at December 31, 1996 was $14,524,341 (114,099,000 pesos).
However, debt agreements place certain restrictions on the payment of
dividends (note 5).
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.
37
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(9) STOCKHOLDERS' EQUITY, CONTINUED
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, 1996.
(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 will keep a record of the amount of Phantom Stock Shares held
by each Participant. Each Participant will be credited with dollar
amounts equal to dividends paid on issued and outstanding common
stock, and such amounts accrue interest at the short-term money
market rate published by the Chase Manhattan Bank, N.A. The Plan
provides that the number of Phantom Stock Shares awarded be
determined by a committee of the Board of Directors charged with
administering the Plan and the aggregate number of Phantom Stock
Shares awarded for any year shall in no event exceed 10% of the
number of the Company's issued and outstanding common shares as of
the end of such year. As of December 31, 1996, there were eight
participants in the Plan, 22,687 Phantom Stock Shares had been issued
and the Company recognized an obligation under the Plan of
approximately $218,000.
38
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(11) MAJOR CUSTOMERS
The Company has agreements which provide for the sale of its assembly
services and turnkey manufacturing at established prices. The
Company's business is dependent on one- to five-year agreements which
are subject to termination or renewal.
Certain customers accounted for significant percentages of the Company's
total sales during the periods ended as follows:
DECEMBER 31
CUSTOMER PRODUCTS AND SERVICES 1996 1995 1994
-------- --------------------- ---- ---- ----
A Printed circuit boards and final
assembly 18% 18% 17%
B Flexible and rigid circuit boards/
component assembly 16% 23% 24%
C Printed circuit boards and cables 14% 16% 16%
D PBX/switchboards and fiber optic
cable connections 11% 7% 6%
Although the Company does not anticipate any significant changes with
respect to sales to these customers, the termination of any of these
agreements could have a material effect on the Company's financial
position and results of operations.
(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:
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.
The Company leased a manufacturing facility from a stockholder,
which resulted in rent expense of approximately $88,000,
$234,000, and $238,000 at December 31, 1996, 1995, and 1994,
respectively.
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.
39
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(12) RELATED PARTY TRANSACTIONS, CONTINUED
The Company leases three manufacturing facilities from companies
which are owned by a related party. Included in rent expense are
rental payments under these leases of approximately $900,000,
$833,000, and $968,000 during December 31, 1996, 1995, and 1994,
respectively.
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,
1996, 1995, and 1994, the Mexican company had sales to Elamex of
$1,618,000, $1,835,000, and $2,679,000, respectively. Elamex had
a payable to the Mexican company of $62,000 and $54,000, at
December 31, 1996 and 1995, respectively.
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, 1996, 1995,
and 1994, this company provided services to Elamex for
$2,852,000, $2,208,000, and $2,336,000, respectively. Elamex had
payables to this company of $212,000 and $102,000 at December 31,
1996 and 1995, respectively.
The Company paid consulting fees, consisting of tax advice and
return preparation, and other administration services, of
approximately $213,000, $280,000, and $191,000 during December
31, 1996, 1995, and 1994, respectively, to companies which are
related parties.
The Company purchases insurance through an insurance broker that
is a related party. Premiums paid approximated $306,000,
$175,000, and $362,000 for the years ended December 31, 1996,
1995, and 1994, 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.
40
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(13) COMMITMENTS AND CONTINGENCIES, CONTINUED
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 $212,000 and $182,000 as of
December 31, 1996 and 1995, respectively, which fully accrues for
these estimated seniority obligations. No significant seniority
payments have been made through December 31, 1996.
At December 31, 1996, the Company has an obligation to purchase
inventory held by suppliers valued at approximately $1,300,000.
(14) NET INCOME PER SHARE (UNAUDITED)
PRO FORMA INFORMATION AND SUPPLEMENTARY NET INCOME PER SHARE
The following is pro forma data for the year ended December 31, 1996 as
if the receipt of proceeds from the public offering occurred
effective January 1, 1996. The financial data, as adjusted, assumes
that net proceeds of approximately $18,700,000 were used to retire
outstanding debt of approximately $15,900,000, and that interest on
the debt was not incurred during 1996. Pro forma amounts have not
been audited. Pro forma net income per share is computed assuming
7,322,221 shares of common stock is the weighted average number of
shares outstanding at December 31, 1996.
<TABLE>
<CAPTION>
For the Year ended
December 31, 1996
(UNAUDITED)
-----------------------------
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
Total other income (expense) $ 136,435 469,271
Income before income taxes $ 10,502,550 10,835,386
Net income $ 7,927,471 8,147,143
Weighted average common shares outstanding 6,880,548 7,322,221
Net income per common share $ 1.15 1.11
</TABLE>
41
<PAGE>
ELAMEX, S.A. de C.V. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In U.S. Dollars)
(15) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 QUARTERS 1995 QUARTERS
-------------------------------------- ------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
--- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 25,337 30,925 30,496 32,161 24,947 24,131 23,981 24,484
Gross profit 3,853 5,243 5,399 4,187 3,609 3,626 3,414 4,322
Net income 1,445 2,018 2,320 2,144 (c) 906 2,061 1,974 1,268
Net income per common
share (a), (b) $ 0.27 0.27 0.31 0.29 0.17 0.39 0.38 0.25
</TABLE>
(a) For 1995, net income per share of common stock is calculated by
dividing net income by the number of common shares outstanding at each
quarter end, after deducting the amounts attributable to the rights of
senior securities.
(b) For 1996, net income per share of common stock is calculated by
dividing net income by the weighted average number of common shares
outstanding at each quarter end.
(c) The income tax provision decreased in the fourth quarter due to more
favorable inflation/devaluation gain/loss on tax loss carryovers than
previously projected.
42
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the Director and executive
officers of the Company as of March 3, 1997 are as follows:
NAME AGE POSITION
---- --- --------
Eloy S. Vallina 59 Chairman of the Board of Directors
Federico Barrio 60 Vice Chairman of the Board of Directors
Jesus Alvarez-Morodo 50 Vice Chairman of the Board of
Directors Officer and Secretary
HEctor M. Raynal 43 President, Chief Executive Officer
and Director
Timothy A. Graves 43 Vice President-Sales and Marketing
David R. Crawford 60 Vice President-Manufacturing Operations
Wayne Rout 53 Vice President-Materials
Jesus E. Vallina 48 Director
Rafael Vallina 37 Director
Eduardo L. Gallegos 55 Director
Robert J. Whetten 54 Director
Jerry Neely 60 Director
Antonio Elias 48 Director
Charles H. Dodsont 66 Director
Tomas de Leon 43 Statutory Auditor
ELOY S. VALLINA
Mr. Vallina has been Chairman of the Board of Accel and its predecessor,
Grupo Chihuahua, S.A. de C.V., since its inception in 1979. Mr. Vallina has
continued as Chairman of Ponderosa Industrial, S.A. de C.V. since its spin-off
by Grupo Chihuahua. He is also chairman of Kleentex Corp., and an Advisory
Director of Norwest Bank El Paso. Mr. Vallina was Chairman of Banco Comercial
Mexicano, later Multibanco Comermex, one of Mexico's largest commercial banks
at that time, from 1971 until its expropriation in 1982. He graduated with a
B.A. in Business Administration from the Instituto TecnolUgico 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 23
years and was a founding stockholder of the Elamex business. He is a partner in
Constructora Lintel, a major developer of industrial and commercial buildings
in Ciudad Juarez, and he has been Constructora Lintel's President since 1983.
He has also been an Advisory Director of Norwest Bank El Paso since 1991. He
has a B.S. in Industrial Engineering from the Chihuahua Technological Institute
and an M.B.A. degree from the University of Chihuahua. Mr. Barrio was former
Dean of Juarez Technological Institute and has 27 years of experience in
industrial development and general contracting.
43
<PAGE>
JESUS ALVAREZ-MORODO
Mr. Alvarez-Morodo has been Vice Chairman of the Board of Elamex since
1995 and President and CEO of Accel since 1992. He has been a director of
Elamex since 1990. Mr. Alvarez-Morodo has held various positions with Accel,
and its predecessor, Grupo Chihuahua and its subsidiaries since 1982, including
Vice President from 1989 to 1992. He graduated from the Universidad
Iberoamericana with a B.S. in Electromechanical Engineering and from the Sloan
School of Management, M.I.T. with an M.S. degree in Management.
HECTOR M. RAYNAL
Mr. Raynal has been President and Chief Executive Officer of Elamex
since January, 1995. In 1994 he was the Director General of Pondercel S.A.
de C.V., a pulp and paper manufacturer. From 1990 to 1994 Mr. Raynal
directed the paper unit at Pondercel, and served as a director, vice
president and secretary of Pondercel's U.S. marketing subsidiary. Mr. Raynal
has held various positions with Accel and Grupo Chihuahua since 1983.
He received a B.S. and M.S. in Electrical Engineering and an M.B.A from
Stanford University.
TIMOTHY A. GRAVES
Mr. Graves has been Vice President-Sales and Marketing of Elamex since
1993. From 1989 to 1993 he was Vice President of Sales and Marketing/Program
Manager at Comptronix Corp. He received a B.S. in Corporate Finance from the
University of Alabama. Mr. Graves has 13 years of experience in contract
electronics manufacturing.
DAVID R. CRAWFORD
Mr. Crawford has been Vice President Manufacturing Operations of Elamex
since August 1995. From 1987 to 1995 he was Director of Operations of the Allen
Bradley Business Unit Electronic Components, a subsidiary of Rockwell
International Corporation. Mr. Crawford has 36 years of experience in
electronic assembly and components manufacturing from major manufacturing
companies in the area. He received a B.S. from Purdue University.
WAYNE ROUT
Mr. Rout has been Vice President-Materials for Elamex since 1988.
Mr. Rout has 29 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 21 years. He is President of
Constructora Inmobiliaria Las Americas, S.A. de C.V., and a Director of
Kleentex Corp. He is also an Advisory Director of Norwest Bank El Paso. Mr.
Vallina is a graduate of the University of Texas at El Paso, where he received
a degree in Business Administration. Mr. Vallina is the brother of Eloy Vallina
and cousin of Rafael Vallina.
RAFAEL VALLINA
Mr. Vallina has been President of Implyex Corp. since 1990, and President
of Tableros y Chapas del Norte since 1992. He is also President of Triplay
Maderas y Derivadas, and of Kintitsu. He has been a director of Elamex
44
<PAGE>
since 1994. Mr. Vallina is a Certified Public Accountant with a degree from the
Instituto TechnolUgico y de Estudios Superiores de Monterrey. Mr. Vallina is a
cousin of Eloy Vallina and Jesus Vallina.
EDUARDO L. GALLEGOS
Mr. Gallegos has been with Accel and its predecessor, Grupo Chihuahua, for
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
TecnolUgico y de Estudios Superiores de Monterrey, and has studied at the
American Management Association, Stanford Alumni Association, Advanced
Management College and Instituto de AdministraciUn CientIfica de las Empresas.
ROBERT J. WHETTEN
Mr. Whetten has been a Director of Elamex since 1994. He was President
and Chief Executive Officer of Norwest Bank El Paso. Mr. Whetten has 21
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 has been on a leave of absence while
completing a mission service for his church in a foreign country.
ANTONIO L. ELIAS
Mr. Elias has been the Senior Vice President, Advanced Projects Group,
at Orbital Sciences Corporation ("OSC") since 1989. Mr. Elias joined OSC
in 1986 as Chief Engineer, becoming Vice President for Engineering in
1988 and Corporate Vice President in 1989. From 1980 to 1986 he was Assistant
Professor of Aeronautics and Astronautics at the Massachusetts Institute of
Technology. Mr. Elias obtained a B.S., M.S., E.A.A. and Ph.D. in Aeronautics
and Astronautics from the Massachusetts Institute of Technology.
JERRY W. NEELY
Mr. Neely is Director and Chairman of the Executive Committee of Smith
International, Inc. Mr. Neely retired as President / Chairman in 1988. He held
several positions at Smith International, Inc. from 1966 to 1988. He serves
on the Boards of Norris Cancer Hospital and All Coast Forest Products, is a
Trustee of The University of Southern California, Past Chairman of Petroleum
Equipment Supplies Association and Past Chairman of The Young Presidents
Organization. Mr. Neely received a B.S. in Industrial Management/Business
Administration from the University of Southern California.
CHARLES H. DODSON
Mr. Dodson was owner of Elamex for 17 years in addition to being Chairman
of the Board and Chief Executive Officer. Mr. Dodson has remained a Director of
Elamex since its acquisition by Accel. He has also been Vice President of Nafta
Ventures, Inc. since 1994.
TOMO S DE LEUN
Mr. de LeUn has been Elamex's statutory auditor since 1988. He has also
been a partner in KPMG Co rdenas Dosal, S.C. since 1988. Mr. de LeUn is a
member of the Mexican Institute of Public Accountants and has obtained a
public accounting degree from the Universidad Iberoamericana in Mexico City.
45
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
During the year ended December 31, 1996, Elamex paid, either directly
or through a related company, MTI Services Corporation ("MTI"), an aggregate of
$1,129,192 to all of its Directors and officers as a group for services in all
capacities and an additional $139,600 in respect of a discretionary compensation
plan. During such year, the Company, through MTI, set aside or accrued an
aggregate of $9,499 to provide pension, retirement or similar benefits for its
directors and officers pursuant to existing plans, consisting solely of a 401(k)
plan for its U.S.-based officers and Directors.
Twenty-nine of the Company's executives and senior managers who are
citizens or residents of the United States are employees of MTI, a U.S.
corporation owned by such executives, and provide services to MTI under a
contract between MTI and Elamex. The purpose of this arrangement is to provide
to U.S. resident employees U.S. dollar-denominated salaries and U.S.-style
employee benefits. Under such contract, the Company pays to MTI an amount equal
to the salary and benefits provided to such executives by MTI.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock at March 21, 1997 by (i) each person who
is known to the Company to own beneficially more than 5% of the outstanding
Common Stock of the Company, (ii) each director individually and (iii) all
directors and executive officers as a group.
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF TOTAL
BENEFICIAL OWNER BENEFICIALLY OWNED ----------------
---------------- -------------------
Accel, S.A. de C.V. 3,777,500 51.05%
Avenida Zarco No. 2401
31020 Chihuahua, Chih. Mexico
Eloy S. Vallina (1) 3,777,500 51.05
Avenida Zarco No. 2401
31020 Chihuahua, Chih. Mexico
Delaware Management 440,100 5.95
One Commerce Square, 40th Floor
Philadephia, PA
- ------
(1) Mr. Vallina directly owns 142,010,600 shares, or 48.26%, of the outstanding
voting common stock of Accel. In addition, Mr. Vallina controls companies
that hold 28,751,680 shares, or 9.77%, of the outstanding voting common
stock of Accel.
ITEM 13. CERTAIN TRANSACTIONS
The Company was formed on the Effective Date in the merger transaction
described below. The Company has been operated by substantially the same
investors since its purchase in May 1990; however, the organizational structure
has changed during this period. The Company consists of the former Elamex
Internacional, whose assets and liabilities were merged with and into Elamex,
S.A. de C.V. on the Effective Date.
Effective December 9, 1993, the stockholders of Kronos, Inc. ("Kronos")
and its subsidiaries and the stockholders of Kronoservices, S.A. de C.V.,
which were substantially the same persons and entities, restructured the
operations of those companies. Kronoservices, S.A. de C.V. changed its name
to Elamex, S.A. de C.V., which was chosen as a name easily identified by
customers and already associated with the operations of related
46
<PAGE>
companies. As of December 31, 1993, the operations of Kronos,
constituting substantially all of its assets, were transferred to
Elamex, S.A. de C.V. Substantially all remaining Kronos assets were
transferred in 1994.
Prior to November 16, 1993, Accel held 55% of the common stock of
Elamex Internacional, and the Selling Stockholder held the other 45%. Such
stockholders and, indirectly, a company controlled by Messrs. Barrio and Dodson,
the two founders of the Elamex business, each held preferred stock in Kronos, an
80%-owned subsidiary of Elamex Internacional. Kronos was the intermediate
holding company for the Elamex business. As of November 16, 1993, the
stockholders, in effect, canceled all of the preferred stock and $1.1 million of
accumulated dividends and redemption premiums in exchange for additional common
stock and, in addition, two of the stockholders received $2.0 million of
five-year Subordinated Debentures bearing interest at 7% per annum. At the same
time, the Elamex corporate structure was modified by, in effect, replacing
Kronos with Elamex, S.A. de C.V., a Mexican directly held subsidiary of Elamex
Internacional, which was the issuer of such Subordinated Debentures. Using a
portion of the net proceeds of the public offering the Subordinated Debentures
were recently prepaid. Elamex Internacional was merged with and into Elamex,
S.A.
de C.V. on October 1, 1995.
As part of the November 16, 1993 transaction, Accel and Fonlyser, S.A.
de C.V. (the "Selling Stockholder") entered into a stockholders' agreement (the
"Stockholders' Agreement") providing that each would be required, in effect, to
make a bid to buy the shares of Common Stock held by the other, with the party
submitting the higher bid being required to buy the low bidder's shares at such
high bid price, and the low bidder being required to sell all of its shares at
such price, subject to certain limitations. In anticipation of the Company's
recent public offering, Accel and the Selling Stockholder entered into an
agreement (the "Modification Agreement"), pursuant to which they agreed to waive
their respective rights under the Stockholders' Agreement and to terminate such
agreement. In addition, Accel agreed not to sell any shares of Common Stock in
the public offering and to permit the Selling Stockholder to sell its shares
offered herein. Accel and the Selling Stockholder further agreed that the
Selling Stockholder would make available to the underwriters for the public
offering the entire amount of shares required for the underwriters'
over-allotment option, and that the Selling Stockholder would also sell to
Accel, at book value, the number of shares of Common Stock required for Accel to
maintain ownership of approximately 51% of the shares outstanding. Accel also
agreed to take all actions necessary to see that Elamex redeems within thirty
days of the public offering $250,498 of Subordinated Debentures then held by the
Selling Stockholder. Accordingly, the Selling Stockholder (i) sold to Accel, at
book value, the number of shares of Common Stock then held by it and not offered
in the public offering and required for Accel to maintain ownership of
approximately 51% of the shares outstanding, and (ii) thereafter, set aside and
provided the entire amount of shares then held by it and required for the
Underwriters' over-allotment option. The over-allotment option was subsequently
exercised in the amount of 100,000 shares.
On March 9, 1995, Elamex, S.A. de C.V. entered into an agreement
whereby it was obligated to purchase, or cause to be repurchased, over a six
year period, 1,060,197 shares of its Common Stock from a company controlled by
Messrs. Barrio and Dodson for an aggregate purchase price of approximately $3.8
million (to be adjusted by 8.5% per annum). In July and September, 1995, Elamex
Internacional purchased all such shares for approximately $4.0 million, or $3.79
per share. After giving effect to the change in the amount of 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,
47
<PAGE>
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 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 $15,833.33
monthly subject to renegotiation as circumstances may require. The Company
believes that this amount is the fair market value of the services it receives
from Esvamex.
At the time he became President and Chief Executive Officer of the
Company, Mr. Raynal moved from Ciudad Chihuahua to Ciudad Juarez. At that time,
the Company guaranteed a $150,000 loan to Mr. Raynal by a bank, the proceeds of
which were used to purchase a home in Ciudad Juarez.
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, 1996 and 1995
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, 1996
are filed in Item 8 of this report.
(ii) Financial statement schedule, valuation and qualifying
accounts and reserves and report thereon included on
pages 49 and 50.
48
<PAGE>
(b) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER -----------
-----
<S> <C>
3 Estatutos Sociales (By-Laws) of the Registrant (including English translation).*
10.1 Modification Agreement Between Fonlyser, S.A. and Accel, S.A. de C.V., with a translation in English,
and subsequent modification letter, with a translation in English.*
10.2 Credit Agreement with Confia, S.A., with a summary in English, and renewal letter, with a translation
in English.*
10.3 Revolving Credit Agreement with Comerica Bank.*
10.4 Contract for the Opening of Credit with Bancomer, S.A., with a summary of subsequent modifications in
English.*
10.5 Tax Sharing Agreement between Accel, S.A. de C.V. and Elamex S.A. de C.V.*
10.6 Lease of Elamex de Juarez Plant #3, with a translation in English.*
10.7 Lease of Elamex de Juarez Plant #4, with a translation in English.*
10.8 Lease of Elamex de Juarez Plant #5, with a translation in English.*
10.9 Lease of Elamex de Juarez Plant #9.*
10.10 Lease of Elamex de Nuevo Laredo Plant.*
10.11 Lease of Elamex de Torreon Plant.*
10.12 Executive Phantom Stock Plan.*
21 Subsidiaries of the Registrant.*
99 Financial statement schedule, valuation and qualifying
accounts and reserves and report thereon included on pages 49
and 50.
</TABLE>
* 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.
49
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Elamex, S.A. de C.V.:
Under date of February 27, 1997, we reported on the consolidated balance sheets
of Elamex, S.A. de C.V. and subsidiaries as of December 31, 1996 and 1995, 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, 1996,
which are included in Item 8 of the 1996 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 27, 1997
50
<PAGE>
Exhibit 99
ELAMEX & SUBSIDIARIES
Valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------------------------- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Charged to Charged to Balance
Beginning Cost and Other at End
of Year Expenses Accounts Deductions of Year
ALLOWANCE FOR DOUBTFUL ACCOUNTS
For the year ended:
December 31, 1996 149 527 151 (a) 525
-
December 31, 1995 194 (a) 149
160 - 205
December 31, 1994 47 (a) 194
294 - 147
ALLOWANCE FOR MATERIAL OBSOLESCENCE
For the year ended:
December 31, 1996 1,471 427 1,898
- -
December 31, 1995 863 1,471
608 - -
December 31, 1994 215 863
648 - -
</TABLE>
- --------------------------
(a) Uncollectible accounts written off
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Ciudad Juarez,
Chihuahua, Mexico on March 21, 1997.
ELAMEX, S.A. de C.V.
By: /s/ JORGE TORRES
------------------
Jorge Torres
TREASURER (PRINCIPAL FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on May 7, 1996 by the following persons on
behalf of the registrant in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ELOY S. VALLINA Chairman of the Board of Directors March 21, 1997
--------------------
Eloy S. Vallina
/s/ FEDERICO BARRIO Vice Chairman of the Board of Directors March 21, 1997
--------------------
Federico Barrio
/s/ JESUS ALVAREZ-MORODO Vice Chairman of the Board of Directors March 21, 1997
--------------------------
Jesus Alvarez-Morodo
/s/ HECTOR M. RAYNAL President, Chief Executive Officer and Director March 21, 1997
--------------------
(Principal Executive Officer)
Hector M. Raynal
/s/ JESUS E. VALLINA Director March 21, 1997
----------------------
Jesus E. Vallina
______________________ Director March 21, 1997
Rafael Vallina
/s/ EDUARDO L. GALLEGOS Director March 21, 1997
------------------------
Eduardo L. Gallegos
______________________ Director March 21, 1997
Robert J. Whetten
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C>
/s/ JERRY NEELY Director March 21, 1997
Jerry Neely
______________________ Director March 21, 1997
Charles H. Dodson
/s/ ANTONIO ELIAS Director March 21, 1997
Antonio Elias
</TABLE>
53
