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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| 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 31, 2003 0-27992
ELAMEX, S.A. DE C.V.
(Exact name of Registrant as specified in its charter)
Mexico APPLICABLE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 NORTHWESTERN DR. 79912
EL PASO, TX (zip code)
(Address of principal executive offices)
(915) 298-3061
(Registrant's telephone number including area code, in El Paso, TX)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No _X_
The aggregate market value of the voting stock (based upon the closing price of
the NASDAQ National Market on July 3, 2003 of $3.36) held by non-affiliates of
the registrant on that date was approximately $10,699,221.
The number of shares of Class I Common Stock of the registrant outstanding as of
March 10, 2004 was: 7,510,762.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the registrant's 2004 Annual Meeting of Stockholders is
incorporated by reference into part III of this form 10-K
WEBSITE ACCESS TO COMPANY'S REPORTS
Elamex's internet website is www.elamex.com. Our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to section 13(a) or 15(d) of the
Exchange Act are available free of charge through our website as soon as
reasonably practicable after they are electronically filed with, or furnished
to, the Securities and Exchange Commission.
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TABLE OF CONTENTS
PAGE #
PART I
ITEM 1. BUSINESS............................................................................................. 3
ITEM 2. PROPERTIES........................................................................................... 8
ITEM 3. LEGAL PROCEEDINGS.................................................................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................. 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................................................. 9
ITEM 6. SELECTED FINANCIAL DATA.............................................................................. 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................................ 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.......................................... 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................................... 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................................................. 44
ITEM 9A. CONTROLS AND PROCEDURES.............................................................................. 44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................................... 44
ITEM 11. EXECUTIVE COMPENSATION............................................................................... 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.............................................................................................. 46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................... 46
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................................................... 46
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...................................... 46
SIGNATURES........................................................................................... 47
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PART I
REFERENCES IN THIS FORM 10-K TO ELAMEX OR THE COMPANY ARE TO ELAMEX, S.A. DE
C.V. AND ITS SUBSIDIARIES, COLLECTIVELY, AND REFERENCES TO ELAMEX, S.A. DE C.V.
ARE SOLELY TO ELAMEX, S.A. DE C.V. IN THIS FORM 10-K, REFERENCES TO $ AND U.S.
DOLLARS ARE TO UNITED STATES DOLLARS AND REFERENCES TO PS$ AND PESOS ARE TO
MEXICAN PESOS.
ITEM 1. BUSINESS
GENERAL
Elamex is a Mexican company with manufacturing operations and real estate
holdings in Mexico and the United States. The Company is involved in the
production of food items related to its candy manufacturing and nut packaging
operations, and metal and plastic parts for the appliance and automotive
industries. The Company was established in 1973 as a contract manufacturing
company in Juarez, Mexico.
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 Mexico
Stock Exchange, acquired a majority interest in Elamex. Elamex was registered as
a public company and began trading its stock on NASDAQ in March 1996. Elamex
prepares financial statements in conformity with accounting principles generally
accepted in the United States of America (U.S. GAAP) and also maintains certain
financial and tax information in conformity with accounting principles generally
accepted in Mexico (Mexican GAAP). As a NASDAQ company Elamex is subject to the
United States Securities and Exchange Commission and NASDAQ rules and
regulations.
BUSINESS SEGMENTS AND SERVICES
FOOD SERVICES
In July 2002 Elamex acquired 100% of Franklin Connections, LP (Franklin), a
general line candy manufacturer and a retail/food service nut packing company.
Candy manufacturing is conducted in a world-class dedicated candy manufacturing
plant of approximately 180,000 square feet located in Juarez, Mexico. Nut
packaging is conducted in Franklin's approximately 185,000 square foot packaging
plant in El Paso, Texas. Franklin also offers third party logistic services,
utilizing part of its 239,000 square foot main warehouse also located in El
Paso, Texas. Additionally, Franklin, through its Sunrise Confections Division
offers both contract manufacturing and shelter services for U.S. candy companies
who market the candy produced in Franklin's candy manufacturing plant.
SHELTER SERVICES
Effective at the close of business on July 4, 2003, the Company sold certain
Shelter Services operations to TECMA Group LLC, a private contract, shelter and
manufacturing services provider headquartered in El Paso, Texas. The transaction
included the sale of five Shelter Services customer contracts, miscellaneous
assets and stock of five newly created companies. Substantially all Shelter
Services operations personnel related to these contracts were transferred to the
buyer.
Prior to the sale in July 2003 Elamex provided specialized manufacturing
services in Mexico through its Shelter Services Division. Under the shelter
business model, Elamex provided labor and other administrative services,
dedicated or shared manufacturing space, and production management. It also
provided limited procurement services. Subsequent to the sale Shelter Services
are now limited to services provided to a Franklin affiliate.
Additionally Elamex owns and leases approximately 582 thousand square feet of
manufacturing space in Mexico, which is either utilized by Franklin or rented to
third parties.
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METAL STAMPING
The Metal Stamping segment consists solely of Precision Tool, Die and Machine
Company ("Precision"), our wholly owned subsidiary located in Louisville,
Kentucky. Precision manufactures metal parts (metal stampings) and powder paints
metal parts primarily for the U.S. appliance and automotive industries. This
operation has three manufacturing facilities with a combined square footage of
approximately 390,000. Precision is registered under both ISO 9002 and QS 9000,
and is engaged in Six Sigma quality initiatives. Elamex acquired Precision in
July 1999.
On December 19, 2003, Precision voluntarily filed for protection under Chapter
11 of the Federal Bankruptcy Code in the U.S. Bankruptcy Court to implement a
restructuring of its debt. Elamex was authorized by its Board of Directors to
sell Precision. Any sale will be subject to the approval of the U.S. Bankruptcy
Court. As a consequence of seeking protection under bankruptcy laws, the Company
no longer controls Precision's operations as of December 19, 2003 and the
Company's investment in Precision is recognized in accordance with the equity
method of accounting.
QUALCORE
Elamex also has a 50.1% investment in Qualcore, S. de R.L. de C.V. ("Qualcore"),
a joint venture company, which manufactures plastics parts and metal parts
(metal stamping and powder painting capabilities) with General Electric de
Mexico (GE de Mexico). Qualcore is jointly managed with GE de Mexico and the
investment in the joint venture is recorded under the equity method. Qualcore's
customers are Mexican companies engaged in the manufacturing of appliances and
automotive parts for products primarily destined for export to the United
States. Qualcore operates a 116,000 square foot manufacturing facility
constructed in the year 2000. It is located in Celaya, Mexico, a city
approximately 200 miles northwest of Mexico City. Qualcore is registered to ISO
9002 and is also engaged in Six Sigma quality initiatives.
INDUSTRY BACKGROUND
In the mid-1970's Mexico's Maquiladora program allowed OEMs, willing to partner
with Mexican-owned manufacturing companies to access Mexico's low-cost labor
base in a free-trade environment. Under this program, raw materials could be
imported in-bond, transformed into a finished component or product and exported
without duty. Two distinct manufacturing programs grew from this environment:
shelter services and contract manufacturing, both of which are offered by
Elamex.
Shelter services has offered shared or dedicated manufacturing facilities, hires
and trains manufacturing personnel and provides other related administrative
services. Production management is typically handled by the OEM. The OEM also
provides materials and equipment. Shelter service costs are typically billed by
the hour. Contract manufacturing is a natural expansion of shelter services.
Contract manufacturing generally includes labor management and oversight,
materials procurement and management, control of production processes, customs
management, as well as shared and/or dedicated facilities and manufacturing
administrative services. In contract manufacturing arrangements, the contract
manufacturer normally assumes greater pricing risks due to manufacturing costs,
quality and delivery. Elamex's breadth of services and range of third party
quality certifications, such as ISO 9002, ANSI-J-STD-001 and GIDEP (General
Industry Data Exchange Program), have given it a significant market advantage.
The elimination of prohibitions on foreign business ownership and the initiation
of the North American Free Trade Agreement (NAFTA) encouraged the migration of
large numbers of multinational competitors. Elamex's competitive advantage
increased. In response to this, Elamex began a service diversification program
by vertically integrating in component-level markets, such as plastics and metal
stamping, both through acquisition and joint venture.
The appliance and automotive industries began a strong migration to Mexico in
the 1990s. Companies in these industries looked for specialized business
arrangements such as joint ventures, alliances and multi-year business
guarantees, in order to secure capacity from high quality Mexican-based
suppliers. Qualcore was the result of this particular business model used to
meet the perceived needs of these companies. It also appeared that there was a
strong need for regional U.S. support in some of these same commodities.
Elamex's acquisition of Precision in 1999 was to expand supplier arrangements
with existing customers by offering U.S. based production and also to expand its
industry penetration through the addition of new customers with both U.S. and
Mexican manufacturing needs. This strategy was intended to provide significant
benefits to OEM customers seeking to consolidate their supply base.
In 2000, increasing consolidation in the electronic manufacturing industry (EMS)
prompted Elamex to divest itself of its EMS operation.
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Mexico has become an important manufacturer of candies for product destined to
the United States. After Canada, Mexico is the second largest exporter of
candies to the United States. Mexico currently enjoys significantly lower labor
and raw material costs when compared to those experienced by U.S. candy
companies who manufacture general line sugar candies in the U.S. In 2001, seeing
an opportunity of the lower costs in producing general line sugar candy in
Mexico, Franklin built a world-class candy manufacturing facility in Juarez,
Mexico. Currently all of the candy produced at this facility is exported to the
United States.
CUSTOMERS AND MARKETS
Elamex customers range from large U.S. mass merchandisers to multinational
OEM's. In 2003 Franklin (Food Services) accounted for $75.6 million or 48% of
Elamex's total consolidated sales of $157.3 million. Franklin's customer base is
very diversified. Its customers include some of the largest U.S. mass
merchandisers, grocery retailers, drug store chains, national and regional food
service companies; large U.S. food products companies and U.S. based candy and
confection companies. In 2003, Franklin had two major customers that accounted
for 22.5% and 11.1% of its total sales.
In 2003, Elamex's Shelter Services Division accounted for $25.7 million, or
14.9% of Elamex's total sales before elimination of sales for manufacturing
services provided to Franklin. In 2003, the Shelter Services Division recorded
$15.1 million in sales to Franklin.
During 2003 Precision accounted for $71.0 million or 45% of Elamex total
consolidated sales. Precision's main customers are a manufacturer of automotive
parts and a manufacturer of home appliances, which represented a 27% and 47%,
respectively of Precision's total sales for 2003.
Please see Note 13 of the Financial Statements for additional segment and
geographic information.
SALES AND MARKETING
Elamex's principal sources of new business come from existing relationships,
referrals and from Company employed direct sales personnel and through senior
management. Elamex companies advertise in trade journals, participate in
industry trade shows and seminars.
Once introduced to the capabilities, products and services of an Elamex company,
the sales cycle is normally six months to a year. However, once acquired
customers generally remain for extended periods of time. The selling effort for
manufacturing services requires time and extensive coordination for labor,
supplies, equipment and facilities. Keys to successful customer conversion are
technical expertise, price, product quality and customer service. Team selling,
emphasizing value added services, forms an integral part of the sales and
marketing strategies of all Elamex companies.
COMPETITION
The markets in which Elamex companies compete are large with competitors who
have substantial market shares, brand recognition and financial resources.
Elamex faces competition from current and prospective customers who evaluate
Elamex's manufacturing capabilities against the merits of manufacturing products
internally.
Elamex's Shelter Services Division competition comes primarily from Mexican
industrial real estate development companies who have established operations
providing services similar to those offered by Elamex's Shelter Services
Division in order to rent and or sale industrial buildings in Mexico. The
primary objective of these real estate companies is the profitable
commercialization of real estate rather than profitability associated with
manufacturing services. During 2001 and 2002, due primarily to the recession in
manufacturing in the United States as well as competition from China, Mexico's
border manufacturing business suffered significant reductions. This situation
has resulted in customer attrition or limited growth possibilities for companies
like Elamex engaged in providing shelter and contract manufacturing services in
Mexico.
Precision competes with both domestic and foreign owned competitors. Foreign
owned competitors are generally well capitalized, use modern equipment and are
closely aligned with other foreign owned companies doing business in the United
States. Due to cost of transportation, generally the manufacturing plants of
Precision's customers are within 500 miles of Louisville, Kentucky. Precision
attempts to distinguish itself by providing value added pre-manufacturing
services, assembly and cosmetic powder painting capabilities.
5
Although the U.S. candy and nut markets are very large, they are dominated by
large branded food companies. Currently, all of the candy produced in Franklin's
candy manufacturing plant is exported to the United States. Other U.S. based
general line candy companies have established manufacturing plants in Mexico or
acquire candy produced in Mexico.
Elamex believes that the primary basis of competition in its targeted markets
are time to market, engineering or technical capability, price, manufacturing
quality, and reliable delivery. Elamex believes that it competes favorably with
respect to each of these factors. To remain competitive, Elamex must continue to
provide world class manufacturing services, maintain high quality levels, offer
value-added products and services, offer flexible and reliable delivery
schedules, and compete favorably on price.
EFFECT OF NAFTA
Elamex believes that NAFTA continues to have a positive effect on its business.
NAFTA eliminates import duties and reduces other restrictions on certain imports
into the U.S. and Canada. These benefits enable Elamex to manufacture products
from raw materials and components imported into Mexico, then returned to the
U.S. and Canada as finished products, without paying significant duties.
BACKLOG
Backlog consists of firm purchase orders and commitments that are to be filled
within the next 12 months. However, since order and commitments may be
rescheduled, increased or canceled, Elamex does not consider backlog to be a
meaningful indicator of future financial performance.
KEY RAW MATERIALS AND SUPPLIERS
Franklin acquires nut meats from a variety of suppliers, both U.S. and foreign,
for packaging at its plant in El Paso. Franklin generally enters into purchase
contracts for a majority of its nut meats needs based on its estimated forward
sales forecasts. For its candy operations, Franklin acquires significant amounts
of sugar and corn syrup. Franklin acquires sugar from both Mexican and U.S.
suppliers, under both spot purchases and annual supply agreements.
Raw materials used by third party customers in Elamex's Shelter Services
Division are generally sourced by and owned by the customer. Elamex provides
logistical and customs support to the importation of raw materials and component
parts into Mexico and the return of finished product to the United States and
Canada.
Precision's primary raw material is steel. It purchases steel from a variety of
steel suppliers, some under master contracts associated with specific customers.
Under these contractual arrangements, changes in the price of steel are passed
through to the customer. Approximately 80% of Precision's steel purchases are
subject to such contractual arrangements. Precision orders raw materials based
on anticipated customer orders.
EMPLOYEES
Elamex had a total of 794 employees at December 31, 2003, of which 679 were
employed in Mexico in Elamex's Shelter Services Division (includes employees at
the Franklin candy manufacturing plant), and 110 were employed by Franklin in El
Paso, Texas. The Elamex corporate staff is composed of a President and Chief
Executive Officer, a Chief Financial Officer, a Corporate Controller and one
administrative staff.
Each Elamex business unit is organized with its own President, sales and
marketing, production personnel and accounting departments. The operating
businesses report to Elamex's President and Chief Executive Officer who reports
to the Chairman of the Board of Directors. The Chief Executive Officer of Elamex
is also the Chief Executive Officer of Franklin.
ENVIRONMENTAL COMPLIANCE
Elamex's operations are subject to the Mexican General Law on Ecological
Equilibrium 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 Fisheries). Since
September 1990, each such company has been
6
required to file 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 for air emissions, wastewater discharge
and the disposition of industrial waste. Elamex is licensed to handle
radioactive materials and complies with both U.S. and Mexican standards relating
to the handling of such materials. In addition, Elamex is subject to U.S.
environmental laws and regulations as a consequence of the return to the United
States of any hazardous wastes generated by Elamex that are derived from
materials imported from the U.S., a requirement of its participation in the
maquiladora program. Such laws and regulations may impose joint and several
liabilities on certain statutory classes of persons for the costs of
investigation and remediation of contaminated properties regardless of fault or
the legality of the original disposal. These persons include the present and
former owner or operator of a contaminated property and companies that
generated, disposed of, or arranged for the disposal of hazardous substances
found at a property. Elamex is not aware of any non-compliance with the
above-mentioned regulations.
Mexican environmental laws and regulations have become increasingly stringent
over the last decade. This trend is likely to continue and may be influenced by
the environmental agreement entered into by Mexico, the U.S. and Canada in
connection with NAFTA. Elamex believes that its policies with respect to
environmental matters in Mexico currently exceed the standards set forth in the
Ecological Law. Elamex is committed to maintaining high standards of
environmental protection controls.
CROSS BORDER TRANSACTIONS AND SECURITY
Except for Precision and the nut packaging business of Franklin, substantially
all of Elamex's other businesses rely on the unimpeded movement of raw materials
and finished product between the United States and Mexico. Although Elamex has
not experienced any significant delays with respect to the movement of finished
product from Mexico to the United States due to announced U.S. homeland security
measures, temporary delays at U.S. Customs entry points could be experienced in
the event of high or extreme U.S. homeland security warnings.
Franklin's candy manufacturing plant in Juarez, Mexico and its nut packaging
plant in El Paso, Texas are maintained and monitored against the highest
standards of U.S. food grade manufacturing facilities. Its plants are inspected
by appropriate government entities and trade associations. Customer inspections
are frequent. Food products coming into and out of the plants are in sealed
containers or trucks. All of Elamex's plants in Mexico have twenty-four hour
security and controlled access to production areas.
RISKS OF POTENTIAL FUTURE ACQUISITIONS AND INVESTMENTS
Elamex's business strategy may depend in the future on the successful
acquisition, integration, financing and performance of businesses. Such strategy
involves the substantial risk that we will not find suitable businesses to
acquire on terms we believe are reasonable and that the new businesses we choose
to enter will not provide the benefits we expect. Elamex's future business
prospects should therefore be considered in light of the risks, expenses,
problems and delays inherent in acquiring and integrating a new business.
EXCHANGE RATES
Generally, all of Elamex's customer revenues are invoiced and collected in U.S.
dollars. A significant amount of Elamex's Shelter Services Division expenses are
related to labor and related services paid in Mexican Pesos, generally at spot
market rates. Elamex also maintains certain monetary assets and liabilities in
Mexican Pesos. At any one time, the Company may have a net monetary asset
position, which is exposed to Mexican Peso devaluation. The Company does not
enter into foreign exchange contracts to protect itself against a devaluation of
the Mexican Peso against the U.S. dollar. See Note 2 to the Consolidated
Financial Statements included elsewhere in item 8 of this Form 10-K.
The following table sets forth, for the periods indicated, the high, low,
average and period-end free market rates for the purchase and sale of U.S.
dollars (presented in each case as the average between such purchase and sale
rates), expressed in nominal Pesos per U.S. dollar.
7
YEAR ENDED DECEMBER 31, HIGH (1) LOW (1) AVERAGE (2) PERIOD END (1)
1999(*) Ps$ 10.60 Ps$ 9.24 Ps$ 9.56 Ps$ 9.52
2000(*) 10.08 9.18 9.46 9.64
2001(*) 9.98 8.94 9.34 9.17
2002(*) 10.36 9.02 9.61 10.36
2003(*) 11.34 10.30 10.78 11.20
The exchange rate as of March 25, 2004 was $11.03 (*)
SOURCE: Ciemex-Wefa Group and
(1) Monthly rates at market close.
(2) Average of monthly rates. (*) Official exchange rate by the Bank of Mexico.
ITEM 2. PROPERTIES
Elamex's Juarez, Mexico facilities are located only a short distance from the
U.S. border and the international airport, rail and truck depots in El Paso
Texas. Below are Elamex's manufacturing facilities, either owned or leased from
third parties and their approximate size:
SQUARE
LOCATION FEET ACTIVITY SEGMENT LEASED/OWNED
Cd. Juarez 57,450 Medical product assembly Shelter Services Owned (1)
Cd. Juarez 50,000 Electromechanical product assembly Shelter Services Owned (1)
Cd. Juarez 43,034 Medical product assembly Shelter Services Owned (1)
Cd. Juarez 67,541 Medical, military products Shelter Services Owned
Cd. Juarez 180,000 Confectionary production Food Services Leased (2)
Chihuahua 47,835 Available Shelter Services Owned
Nuevo Laredo 80,155 Automotive products assembly Shelter Services Owned (1)
Torreon 55,845 Assembly of shotgun parts Shelter Services Owned (1)
El Paso, TX 185,000 Nut processing and packaging Food Services Owned (3)
El Paso, TX 239,000 Distribution center Food Services Leased (3)
-----------
Total 1,005,860
===========
(1) Elamex owned facility currently being leased to a third party, which does
not utilize Elamex manufacturing services.
(2) Used by Franklin Connections. Leased from Franklin Inmobiliarios, S.A. de
C.V., a related party.
(3) Leased or owned by Franklin.
ITEM 3. LEGAL PROCEEDINGS
Elamex is involved in various claims and lawsuits incidental to its business. In
the opinion of management the ultimate liability there under, if any, will not
have a material adverse effect on the business or financial position of Elamex.
The bankruptcy filing by Precision involves intensive legal proceedings under
the supervision of the Federal Bankruptcy Court. The parties to these
proceedings have been limited to Precision and its creditors. No claims of
wrongdoing have been made before the Court and no claims have been filed against
any entities in the consolidated group of companies other than Precision.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Elamex's Common Stock, is traded on the NASDAQ National Market system under the
symbol ELAM. 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 System.
CLOSING SALES PRICE
PERIOD HIGH LOW
January 1, 2002 - March 31, 2002 5 3/10 4 3/20
April 1, 2002 - June 30, 2002 5 1/2 4 7/8
July 1, 2002 - September 30, 2002 5 6/16 4 3/5
October 1, 2002 - December 31, 2002 5 2/5 4 1/2
January 1, 2003 - April 4, 2003 5 4 1/5
April 5, 2003 - July 4, 2003 4 3 1/5
July 5, 2003 - October 3, 2003 3 4/5 3 10/91
October 4, 2003 - December 31, 2003 3 12/25 2 2/5
Elamex currently intends to follow a policy of retaining earnings, if any, for
use in the development of business and to finance growth. Elamex has never paid
cash dividends on its Common Stock and has no plans to do so in the foreseeable
future. As of March 10, 2004, there were approximately 723 beneficial holders of
Elamex's Common Stock.
The Mexican Law of Commercial Companies (Ley General De Sociedades Mercantiles)
requires that at least 5% of Elamex'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 Elamex's historical capital stock.
Elamex 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 Elamex with respect to Common Stock out of current or
accumulated earnings and profits (E&P) to an U.S. holder will be treated as
ordinary income to such holder. United States corporations that hold Common
Stock will not be entitled to the dividends received deduction generally
available for dividends received from United States corporations (and certain
non-United States corporations). To the extent a distribution exceeds E&P, it
will be treated first as a return of such holder's basis to the extent thereof,
and then as gain from the sale of a capital asset. Such capital gain will be
long term if such holder has held the Common Stock for more than one year.
Dividends generally will constitute foreign source passive income or, in the
case of certain United States holders, financial service income for U.S. foreign
tax credits 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 Elamex generally
will not be subject to U.S. federal income tax (except with respect to cash
received in lieu of fractional shares of Common Stock). The basis of the Common
Stock so received will be determined by allocating the United States holders'
adjusted basis in the old
9
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 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 (CUFIN) or previously taxed
net earnings account. In its CUFIN the Mexican Corporation records the balance
of the taxed profits from previous years, on which income tax has already been
paid plus dividends received from Mexican corporations. The CUFIN account
balance is restated each year 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 Elamex 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 35% of 1.5385 times the amount in 2003, 2002 and 2001, which
exceeds such balance.
Beginning in 1999, Mexican law allows Corporations to pay tax currently on their
Mexican earnings at a rate of 32% in 1999 and 30% in 2000 and after, to the
extent those earnings are reinvested in the Company (i.e. not paid out in
dividends). The undistributed, untaxed earnings are taxed at a rate of 3% for
1999 and 5% for 2000 and thereafter when they are distributed to the
shareholders as a dividend. The Company can elect out of this treatment and
instead choose to be taxed at a current rate of 35% (with no deferral). The
Company has not elected out of this treatment and thus will pay the additional
tax when those earnings are distributed in the future.
The tax law enacted January 1, 2002 eliminated the option to defer the payment
of 5% of taxable income and reduces the 35% tax rate to 34% in 2003, 33% in 2004
and 32% thereafter.
If Elamex 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 Elamex'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 Elamex does not reduce its capital stock
liquidity. If Elamex 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, Elamex will be required to pay income tax on such excess. Tax
must also be paid on the excess, if any, of the shareholder's equity over the
sum of the CUFIN, the capital contributions restated for inflation and the
taxable amount determined as previously indicated. In this case the taxable
basis cannot be greater than the total amount of the capital reduction.
ITEM 6. SELECTED FINANCIAL DATA
Although Elamex is a Mexican company, its functional currency is the U.S.
dollar, which is the principal currency in which it conducts business. Elamex
prepares consolidated financial statements in U.S. dollars in conformity with
U.S. GAAP and also maintains certain financial and tax information in conformity
with Mexican GAAP. Except as otherwise stated herein, all monetary amounts in
this report have been presented in U.S. dollars.
The following table sets forth selected consolidated financial data of Elamex as
of and for each of the years ended December 31, 1999, 2000, 2001, 2002, and
2003. Each of Elamex's fiscal quarters is comprised of 13 weeks and ends on a
Friday, 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 and
related notes thereto and other financial data included elsewhere in this Form
10-K.
The selected consolidated financial data presented below as of and for each of
the years in the five-year period ended December 31, 2003, have been derived
from our consolidated financial statements audited by Deloitte & Touche.
10
These historical results are not necessarily indicative of the results to be
expected in the future.
YEAR ENDED DECEMBER 31,
(In thousands of dollars, except per share amount)
(b) (c) (d) (e) (f)
2003 2002 2001 2000 1999
INCOME STATEMENT DATA:
Net sales ............................................ $ 157,250 $ 134,269 $ 131,984 $ 174,664 $ 160,051
Gross profit ......................................... 17,914 14,127 2,106 2,580 14,789
Operating (loss) income .............................. (29,111) (1,293) (21,448) (12,402) 1,449
Other (expense) income ............................... (3,078) (4,432) 704 23,127 2,272
Income tax provision (benefit) ....................... 2,419 (561) (3,362) (3,203) 245
Net (loss) income .................................... $ (34,608) $ (6,017) $ (11,030) $ 17,381 $ 4,336
Basic and diluted net (loss) income per share (a).... $ (4.61) $ (0.84) $ (1.61) $ 2.53 $ 0.63
BALANCE SHEET DATA:
Current assets $ 20,876 $ 45,306 $ 45,251 $ 76,775 $ 63,884
Property, plant and equipment, net 39,956 69,979 38,582 55,108 52,875
Total assets 67,703 134,501 101,501 142,368 127,224
Notes payable and current portion of long-term debt... 5,282 8,939 2,569 5,424 4,364
Current portion of capital lease obligations.......... 1,051 971
Long-term debt excluding current portion 1,827 20,133 16,286 24,307 26,455
Capital lease obligations, excluding current portion.. 15,313 16,296
Total stockholders' equity ........................... $ 31,028 $ 65,665 $ 69,400 $ 80,772 $ 63,428
OTHER DATA:
Net cash provided by (used in) operating activities... $ 2,237 $ (1,611) $ (14,541) $ (8,217) $ (2,088)
Net cash (used in) provided by investing activities... (5,879) (10,540) 1,327 23,931 (19,849)
Net cash (used in) provided by financing activities... $ (2,978) $ 4,220 $ 5,707 $ 1,479 $ 23,404
(a) Net (loss) income per share of Common Stock was calculated by dividing net
(loss) income by the weighted average number of shares of common stock
outstanding, which was approximately 7.5 million, 7.2 million, 6.9 million,
6.9 million, and 6.9 million, respectively.
(b) Financial information for 2003 was affected by the deconsolidation of the
Metal Stamping Segment as of December 19, 2003 and the sale of certain
shelter operations in July 2003.
(c) Financial information for 2002 was affected by the acquisition of Franklin
beginning July 2002.
(d) Financial information for 2001 was affected by the deconsolidation of
Qualcore beginning in July 2001.
(e) Financial information for 2000 was affected by the sale of EMS operation in
May 2000.
(f) Financial information for 1999 was affected by the acquisition of Precision
in June 1999.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing in Item 8 of this Form 10-K.
RESULTS OF OPERATIONS
GENERAL
The Company reports and analyzes its operations based on the markets the Company
serves. The Company's reportable segments are 1) Shelter Services, 2) Metal
Stamping and 3) Food Services.
The Shelter Services segment provides shelter and assembly services in Mexico
for non-electronics manufacturing services companies. Under the
contract-manufacturing model, Elamex provides labor and administrative services.
Under the assembly business model, Elamex provides shared manufacturing space,
production management and may also provide material procurement services.
The Metal Stamping segment is composed solely of Precision Tool, Die and Machine
Company ("Precision"), our wholly owned subsidiary located in Louisville,
Kentucky. It provides metal and stamping services primarily to the appliance and
automotive sectors. On December 19, 2003, Precision filed for protection under
U.S. federal bankruptcy laws. Precision revenues and expenses are consolidated
through December 19, 2003. Commencing on that date, Elamex accounts for
Precision under the equity method of accounting.
The Food Services segment is the Franklin business, which operates a retail nut
and foodservice nut packaging and marketing business, located in El Paso, Texas
and a candy manufacturing and packaging facility located in Juarez, Mexico. This
business was acquired in July 2002.
OPERATIONS OVERVIEW
For the year ended December 31, 2003, Elamex and subsidiaries reported a net
loss of $34.6 million. Of that amount, $26.9 million is attributable to
Precision, $3.0 million is attributable to Qualcore S. de R.L. de C.V.
("Qualcore"), $1.9 million is attributable to our Shelter Services companies
("Shelter"), and $2.6 million is attributable to Franklin Connections LP
("Franklin").
PRECISION
On December 19, 2003, Elamex announced that Precision filed for protection under
federal bankruptcy laws. Elamex acquired Precision in 1999. Precision
experienced net losses and sales decreases in 2001 and 2002 because of a
combination of adverse business conditions, including a depressed national
economy and from the inability to gain pricing control. In 2003 operating losses
surged, reducing liquidity and triggering conditions of default under credit
agreements.
Precision broadened its product lines in 2003 by undertaking the manufacture of
new products with greater complexity and substantially higher unit value.
Although the profit potential of these new products was attractive,
manufacturing costs and problems far exceeded expectations during this first
year of production. Precision launched this product-line expansion during a year
in which it had begun using a new manufacturing accounting module, a critical
step in its ongoing implementation of an enterprise software system.
Implementation problems in the costing module delayed the recognition of
production problems.
Prior to 2003 Precision had difficulties in its efforts to comply with some
terms of its borrowing agreements. The primary lending bank waived loan covenant
violations as of December 31, 2002, and those occurring prior to the date on
which the company recognized the need to record an adverse inventory adjustment
of $2.1 million in the third quarter 2003 financial statements. The combined
operating losses through November 2003 caused a critical liquidity problem and
caused conditions of default under the terms of bank loans.
In view of the problems associated with manufacturing in this industry, and of
the overall strategy and financial condition of Elamex, the Company made
strategic decisions in the fourth quarter of 2003 to refrain from extending
additional internal funding to Precision, and to engage a firm to sell its
interest in Precision.
12
Generally accepted accounting principles require an evaluation of impairment of
long-lived assets under circumstances such as those encountered by Precision in
the fourth quarter. The results of an independent valuation dictated the fourth
quarter recognition of an impairment charge of $13.2 million for long-lived
assets other than goodwill, plus an impairment charge of $4.5 million for
goodwill. This reduction of goodwill is in addition to a $3.6 million goodwill
impairment charge in the first quarter of 2003. Precision's 2003 net loss,
inclusive of these expenses, reduced Elamex's investment in Precision to zero.
Because the investment in Precision is now recorded under the equity method of
accounting and because Elamex does not guarantee any of the debt of Precision,
Elamex does not expect to record any further losses in connection with
Precision.
QUALCORE
Despite year-ago expectations of a turnaround, Elamex continued to experience
disappointing results in 2003 from its joint venture investment in Qualcore.
This Mexican manufacturing operation struggles in its efforts to gain volume in
an environment in which the manufacture of competing goods has been shifting to
Asia for cost reasons. After a series of disappointing losses, Elamex and its
venture partner have reached a firm decision to sell Qualcore, and are actively
pursuing its sale.
SHELTER
In July 2003 Elamex sold most of its Mexican shelter service operations,
realizing a gain of $1.7 million. Shelter services are now limited to a Franklin
affiliate. In addition to providing shelter services, this group owns and leases
buildings to third parties in Mexico.
FRANKLIN
Upon the culmination of actions initiated in 2003, the Elamex business
operations will primarily be limited in the near-term future to those of
Franklin, its general-line candy manufacturer and retail / food service nut
packing company. Franklin sales and gross profits have grown impressively since
Franklin entered the business of manufacturing and distributing candy in 2001.
Through the end of 2003 Franklin has yet to report a profit on combined nut and
candy operations, but the trends reflect good progress toward achieving planned
revenue levels and market share objectives. Gross profit margins have improved
while operating costs have decreased as a percentage of sales.
Franklin operations include candy manufacturing and nut processing. Franklin
sales and distribution services are directed to the food service industry and to
retailers and wholesalers of candies and nuts. Franklin gained substantial
market share in sales of candy to mass-market retailers in 2003, and improved
market penetration to the retail grocery industry. Franklin is progressively
de-emphasizing sales to customers that purchase bulk candies and bag them for
resale to retailers ("rebaggers"). By eliminating the middleman, gross profit
margins on sales to retailers are significantly higher than on sales to
rebaggers. In addition to making candy for sales through its own distribution
channels, Franklin makes candy on a contract-manufacturing basis for other candy
producers.
2003 COMPARED TO 2002
Management's discussion and analysis is based on the results of operations by
segment as presented in the following table (in thousands):
UNALLOCATED
SHELTER METAL FOOD SERVICES CORPORATE INTER-
SERVICES (4) STAMPING (1) (2) AND OTHER SEGMENT(3) TOTAL
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003
Net Sales (3) $ 25,677 $ 70,988 $ 75,648 $ (15,063) $ 157,250
Gross profit (loss) 1,706 (1,022) 17,230 17,914
Operating expenses 2,039 16,209 17,522 $ 11,255 47,025
Other (expense) income 1,735 (1,073) (2,318) (1,422) (3,078)
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002
Net Sales $ 31,677 $ 75,279 $ 33,180 $ (5,867) $ 134,269
Gross profit 2,513 3,714 7,900 14,127
Operating expenses 2,014 3,139 8,164 $ 2,103 15,420
Other (expense) income (239) (1,244) (1,672) (1,277) (4,432)
- ------------------------------------------------------------------------------------------------------------------------
(1) Segment deconsolidated effective December 19, 2003
(2) Acquired at the beginning of the third quarter of 2002
(3) Includes sale between segments in the normal course of business
(4) Certain shelter operations were sold in July 2003
13
NET SALES
Net sales increased 17% to $157.3 million for the year ended December 31, 2003
from $134.3 million for prior year.
Sales for Shelter Services decreased 19% to $25.7 million for the current year
from $31.7 million for the prior year. The decrease was primarily due to the
sale of certain customer's contracts at the end of the second quarter. Sales
also decreased due to available buildings that were not rented until the second
and the third quarter of 2003.
Sales for Metal Stamping decreased 6% to $71.0 million for the current year from
$75.3 million for the prior year. The decrease was mainly due to decreases in
customers' orders resulting from a slowdown in end-market demand in the major
appliances industry during the year, also due to the deconsolidation of this
segment after Precision voluntarily filed for protection under federal
bankruptcy laws on December 19, 2003.
Sales for Food Service were $75.6 million for the year ended December 31, 2003
compared to $33.2 million for the six-month period subsequent to the acquisition
of this segment in 2002. The $42.4 million (127.7%) increase was caused
primarily by the comparison of year and six-month periods. The rate of growth
results principally from increase in the sale of candy distributed for sale in
the retail market, a relatively new product line compared to the segment's nut
business. Contract manufacturing of candy is also a relatively new line of
business resulting in increased sales for the segment.
GROSS PROFIT
Gross profit increased 27% to $17.9 million for year ended December 31, 2003
from $14.1 million in prior year.
Gross profit for Shelter Services decreased 32% to $1.7 million in 2003 from
$2.5 million in 2002. The decrease was primarily due to the sale of certain
customers' contracts at the end of the second quarter, gross profit also
decreased due to available buildings that were not rented until the second and
the third quarter of 2003.
Gross profit for Metal Stamping decreased from $3.7 million in 2002 to a gross
loss of $1 million in 2003. Decreases in sales adversely affected production
efficiency, thereby reducing gross profit. Additionally, gross margins were
adversely affected by a high level of start-up costs and low efficiencies
associated with new product lines and breakdown of machines during the third
quarter. Problems with implementation of new cost accounting software delayed
the recognition of production problems.
Gross profit for Food Services was $17.2 million for the year ended December 31,
2003 compared to $7.9 million for the six-month period subsequent to the
acquisition of this segment in 2002. The $9.3 million (117.7%) increase was
caused primarily by the comparison of year and six-month periods. The increase
in gross profit is attributable to the increase in sales. Franklin overall gross
profit rate was 22.8% in 2003, as compared to 23.8% for the six-month period
subsequent to the acquisition of this segment in 2002.
OPERATING EXPENSES
Operating expenses increased to $47 million for the year ended December 31, 2003
from $15.4 million in the prior year.
Operating expenses for Shelter Services were $2.0 million for each of the years
ended December 31, 2003 and 2002. Exit costs associated with the sale of certain
customers contracts in the second quarter of 2003 generated expenses totaling
$575 thousand. These costs were partially offset with a decrease of general and
administrative expenses of approximately $550 thousand in 2003.
Operating expenses for Metal Stamping increased to $16.2 million for the year
ended December 31, 2003 from $3.1 million recorded in the prior year. The
increase was primarily due to an impairment of long-lived assets of $13.2
million recorded in the fourth quarter.
Operating expenses for Food Services were $17.5 million for the year ended
December 31, 2003 compared to $8.2 million recorded for the six-month period
subsequent to the acquisition of this segment in 2002.
Operating expenses for Corporate increased to $11.3 million for the year ended
December 31, 2003 from $2.1 million in the prior year. The increase was
primarily due to impairment of Precision goodwill of $3.6 million and $4.5
million in the first and fourth quarters of 2003, respectively. The provision of
a $1.2 million reserve against notes receivable from Qualcore also contributed
to the increase in operating expenses.
14
OTHER (EXPENSE) INCOME
Other expense for the year ended December 31, 2003 decreased to $3.1 million
from $4.4 million in 2002.
Other income for Shelter Services for the year ended December 31, 2003 was $1.7
million compared to other expense of $239 thousand recorded in 2002. The
increase of other income was primarily due to a gain on the sale of certain
customers contracts of $1.7 million recorded in the second quarter of 2003.
Other expense for Metal Stamping decreased to $1.1 million for the year ended
December 31, 2003 from $1.2 million in 2002. The decrease was primarily due to a
recognition of loss in fixed assets of approximately $429 thousand in 2002 not
incurred in 2003, partially offset by the recognition of $278 thousand of losses
after the deconsolidation of the segment in the fourth quarter of 2003.
Other expenses for Food Services were $2.3 million for the year ended December
31, 2003 compared to $1.7 million recorded in the six-month period subsequent to
the acquisition of this segment in 2002.
Other expenses for Corporate increased to $1.4 million for the year ended
December 31, 2003 from $1.3 million recorded in 2002. The increase was primarily
due to an increase in losses of unconsolidated joint venture of $704 thousand.
In 2002 an expense of approximately $563 thousand was recorded in connection
with the permanent impairment of securities.
2002 COMPARED TO 2001
Management's discussion and analysis of operations for the years ended December
31, 2002 and 2001 is based on the results of operations by segment for the years
ended December 31, 2002 and 2001, after consideration of the proforma effects on
prior periods of the deconsolidation of our joint venture effective in the third
quarter of 2001. The following tables present those proforma effects by segment
(in thousands):
Food Unallocated Qualcore
Shelter Metal Services Corportate Inter- Proforma Adjustments
Services Stamping (1) and other Segment Total (4) Total
-----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002
Net sales (2) $ 31,677 $ 75,279 $ 33,180 $ (5,867) $ 134,269 $ 134,269
Gross profit 2,513 3,714 7,900 14,127 14,127
Operating expenses 2,014 3,139 8,164 $ 2,103 15,420 15,420
Other (expense) income (239) (1,244) (1,672) (152) (3,307) $ (1,125) (4,432)
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001
Net sales $ 46,717 $ 78,770 $ (2,142) $ 123,345 $ 8,639 $ 131,984
Gross profit (loss) 2,738 3,859 6,597 (4,491) 2,106
Operating expenses (3) 5,531 3,869 $ 6,670 16,070 7,484 23,554
Other (expense) income (1,035) (1,716) 5,515 2,764 (2,060) 704
- -----------------------------------------------------------------------------------------------------------------------------
(1) Newly acquired segment in 2002
(2) Includes sales between segments in the normal course of business
(3) Includes restructuring costs reported in year 2001
(4) Proforma effects of deconsolidation of Qualcore through June 30, 2001
NET SALES
Net sales increased 9% to $134.3 million for the year ended December 31, 2002
from $123.3 million for prior year.
Sales for Shelter Services decreased 32% from $46.7 million in the prior year to
$31.7 million for the current year. The decrease was primarily due to
termination of contracts with customers that moved their operations to the far
east and quality customers that became independent by providing manufacturing
services internally.
Sales for Metal Stamping decreased 4% to $75.3 million for the year ended
December 31, 2002 from $78.8 million for prior year. The decrease was primarily
due to decreases in tooling sales of $700 thousand and a decrease in customers'
orders due to the economic conditions in the United States of the automotive and
appliance industries.
The Food Services segment contributed sales of $33.2 million in 2002 for the
period subsequent to its acquisition.
15
GROSS PROFIT
Gross profit excluding Qualcore increased by 114% or $7.5 million to $14.1
million in 2002 from $6.6 million in 2001.
Gross profit for Shelter Services was $2.5 million in 2002 and $2.7 million in
2001, a decrease of $225 thousand or 8%, this decrease was primarily due to
termination of contracts with certain customers that moved their operations to
the far east and Qualcore customers that became independent by providing
manufacturing services internally.
Gross profit for Metal Stamping decreased $145 thousand to $3.7 million in 2002
from $3.9 million in 2001. The decrease of 4% was primarily due to an increase
in the reserve for obsolete material of approximately $485 thousand, partially
offset by a decrease in labor and other expenses.
Gross profit contributed by the Food Services segment was $7.9 million in 2002
for the period subsequent to its acquisition.
OPERATING EXPENSES
Operating expenses excluding Qualcore decreased $650 thousand to $15.4 million
in 2002 from $16.1 million in 2001, a decrease of 4%.
Operating expenses for Shelter Services decreased $3.5 million to $2 million in
2002 from $5.5 million in 2001, a decrease of 64%. The decrease was primarily
due to the restructuring charges, mainly severance and related costs of $2.6
million recorded during 2001 and a decrease in selling and administrative
expenses of $964 thousand.
Operating expenses for Metal Stamping decreased $730 thousand to $3.1 million in
2002 from $3.9 million in 2001, this decrease of 19% was primarily due to
restructuring charges of $286 thousand recorded during 2001 and decrease in
amortization of goodwill of $482 thousand.
Operating expenses incurred by Food Services segment were $8.2 million in 2002
for the period subsequent to its acquisition.
Operating expenses for Corporate decreased $4.6 million to $2.1 million in 2002
from $6.7 million in 2001. This decrease of 68% was primarily due to $3.2
million of restructuring charges recorded during 2001 and reduction of
administrative expenses of $1.1 million resulting from the reduction of
approximately 30 full time employees and associated costs.
OTHER INCOME (EXPENSE)
Other income excluding Qualcore decreased $6.1 million to an expense of $3.3
million in 2002 from income of $2.8 million recorded in 2001.
Other income for Corporate decreased $5.7 million from an income of $5.5 million
in 2001 to an expense of $152 thousand in 2002. The decrease was primarily due
to the permanent impairment in investment securities of $563 thousand in 2002,
recognition of gain of sale of the EMS operation and earn-out from the sale of
Optimag of $2.6 million during 2001, decrease of Inter-company interest income
of $1.7 million, translation loss expense of $240 thousand recorded in 2002 and
other income of $468 recorded during 2001.
Other expense for Shelter Services decreased from $1 million in 2001 to $239
thousand in 2002. The decrease was primarily due to decrease in inter-company
interest expense of $1 million, partially offset by other expenses of $150
thousand and translation loss of $88 thousand recorded in 2002.
Other expense for Metal Stamping decreased from $1.7 million in 2001 to $1.2
million in 2002. This decrease was primarily due to inter-company interest
charges of $858 thousand, not charged in 2002, partially offset by an increase
in other expenses of $386 thousand.
Other expenses incurred by Food Services segment were $1.7 million in 2002 for
the period subsequent to its acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Elamex's working capital (defined as current assets, minus current liabilities)
decreased to $1.3 million as of December 31, 2003, from $12.9 million as of
December 31, 2002, a decrease of $11.6 million. As of December 31, 2002,
Precision had an outstanding balance under its revolving line of bank credit of
$9.2 million. That liability was classified in the long term liability
16
section of the consolidated balance sheet because the loan had a maturity date
that was more than 12 months from the balance sheet date. If that loan had been
classified as a current liability as of December 31, 2002, the Company's
consolidated working capital would have been $9.2 million less than the $12.1
million that was reported. Therefore, the substantial majority of the working
capital reduction in 2003 is attributable to the changes at Precision. As a
consequence of Precision's filing for protection under bankruptcy laws on
December 19, 2003, the Company no longer controls Precision's operations.
Accordingly, as of December 31, 2003 the Company's investment in Precision is
reported under the equity method of accounting rather than being consolidated
into the Company's financial statements.
The available cash for the year ended December 31, 2003 and 2002 was $2.3
million and $8.9 million, respectively.
For the year ended December 31, 2003, Elamex operating activities provided net
cash of $2.2 million. Changes in current assets and current liabilities balances
provided cash of $6.5 million, and a net loss for the year, adjusted for
non-cash items, reduced the net increase by $4.3 million.
Net cash used in investing activities for the year ended December 31, 2003, was
$5.9 million. Of this amount, $6.4 million was used to buy new equipment and
$1.2 million was invested in the joint venture with GE de Mexico. These amounts
were partially offset by $1.8 million of net cash proceeds from the sale of
certain Shelter Services operations.
Net cash used in financing activities for the year ended December 31, 2003, was
$3.0 million, which is primarily due to debt repayments of $4.8 million, offset
by additional debt incurred of $1.8 million.
Management believes that existing working capital, cash flows from operations
and available credit facilities will be sufficient to fund the Company's
operations and investment activities. The Company does not intend to fund any of
the cash requirements of Precision.
At December 31, 2003, we had contractual cash obligations to repay debt, to make
payments under leases and purchase obligations. Payments due under these
long-term obligations are as follows:
PAYMENTS DUE BY PERIOD
(In Thousands of U.S. Dollars)
Remaining in 2009 AND
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005-2006 2007-2008 THEREAFTER
Long Term Debt Obligations $ 7,109 $ 5,282 $ 1,827
Gross Capital Lease Obligation 30,409 3,198 7,775 $ 3,602 $ 15,834
Operating Leases 14,206 977 2,106 2,134 8,989
UNCONDITIONAL PURCHASE OBLIGATIONS 23,256 23,256
------------ --------------- ----------- ------------ ----------------
TOTAL CONTRACTUAL CASH OBLIGATIONS $ 74,980 $ 32,713 $ 11,708 $ 5,736 $ 24,823
============ =============== =========== ============ ================
Estimated taxes and interest to be paid in 2004 are $1.7 million and $2.1
million, respectively.
CONTROLLING SHAREHOLDER
Elamex 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. 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.
EXCHANGE RATES AND INFLATION
Although Elamex is a Mexican Corporation its functional currency is the U.S.
dollar, which is the principal currency in which it conducts business. Elamex
maintains certain financial information in accordance with Mexican GAAP, but
prepares Consolidated Financial Statements in U.S. dollars in conformity with
U.S. GAAP.
In the following cases Elamex's results of operations are generally affected by
changes in the exchange rate between Pesos and U.S. dollars. In the case of an
appreciation in value of the U.S. dollar against the Peso, Elamex 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
17
benefit will be reduced by relative inflation in the Peso versus the U.S. dollar
due to inflation within Mexico, and by competitive pressures from Elamex's
customers. In the case of a depreciation of the U.S. dollar against the Peso,
Elamex 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
Elamex.
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. Under the Alliance the Mexican
government has attempted to boost the economy by providing tax incentives for
new business investments, while utilizing wage and price controls to contain
inflation. As part of the Alliance the Mexican government has committed to
maintaining a free flotation system for the Peso in the international currency
markets. The Alliance also calls for development of social and rural programs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting policies are disclosed in Note 2 to the Consolidated Financial
Statements included in Item 8 of this Form 10-K. The more critical of these
policies are as follows:
Accrued Rebates - The Company enters into contractual agreements for rebates on
certain products with its customers. Such amounts are netted against sales and
included in accrued advertising and promotions based on management estimates at
the date the sales occur.
Prepaid Slotting Allowances - Prepaid slotting allowances consist of payments to
customers for store shelf space and distribution agreements and are amortized to
sales revenue, as required by EITF 01-09 using the straight line method over the
term of the customer contract or proportionally with sales recorded, based on
the nature of the slotting contract. Contracts generally vary in length from one
to seven years and provide for fixed payments or payments upon achievement of
sales benchmarks.
Income Taxes - The Company accounts for income taxes under the asset and
liability method, as required by SFAS No. 109. Under the asset and liability
method, 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
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 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. Provisions
for taxes are made based upon the applicable tax laws of Mexico and the United
States. In conformity with SFAS No. 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 inflation indexing for Mexican tax purposes or exchange rate
changes. 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 in the
future. The Company estimates a valuation allowance based on the historical
results of operations and expected results in each individual entity.
Revenue Recognition - For metal stamping and food products, revenues are
recognized at the time the order is shipped. For contract-manufacturing revenues
are recognized when the order is shipped for manufacturing contracts and over
the contract period for assembly services. Anticipated losses on assembly
services contracts are charged to operations as soon as they are determined.
Allowances for bad debts - The Company performs ongoing credit evaluations of
its customers and generally does not require collateral to support amounts due
for the sale of its products. The Company maintains an allowance for doubtful
accounts based on its best estimate of accounts receivable.
Impairment of Long-Lived Assets - Long-lived assets, which include property,
goodwill, intangible assets and certain other assets, comprise a significant
amount of our total assets. We make judgments and estimates in conjunction with
the carrying value of these assets, including amounts to be capitalized,
depreciation and amortization methods and useful lives. Additionally, the
carrying values of these assets are periodically reviewed for impairment or
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable. An impairment loss is recorded in the period in which it
is determined that the carrying amount is not recoverable. This requires us to
make long-term forecasts of our future revenues and costs related to the assets
subject to review. These forecasts require assumptions about demand for our
products and services, future market conditions and technological developments.
Significant and unanticipated changes to these assumptions could require a
provision for impairment in a future period.
18
Elamex does not engage in futures contracts with the purpose of hedging U.S.
dollar/Peso revenues or costs, with the exception of regular treasury operations
to cover operating requirements for up to 30 days.
Also, see section under Recent Accounting Pronouncements.
EMPLOYEE STATUTORY 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 statutory profit-sharing purposes, of the
individual corporation employing such employees. All of Elamex's Mexico based
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 and other certain adjustments for US GAAP purposes do not affect employee
statutory profit sharing. Employee statutory profit-sharing expense is reflected
in Elamex'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. Elamex's net income on a consolidated basis as shown in the Consolidated
Financial Statements is not a meaningful indication of net income of Elamex's
subsidiaries for profit-sharing purposes or of the amount of employee statutory
profit sharing.
There was no employee statutory profit-sharing expense for the years ended
December 31, 2003, 2002, and 2001.
INCOME TAX AND ASSET TAX
The Company's Mexican subsidiaries are each required to pay an alternative
minimum asset tax if the asset tax calculation is greater than income taxes
payable for the year. Asset taxes are calculated at 1.8% of assets less certain
liabilities and can be carried forward for up to 10 years as credits against
future income taxes payable. Before any asset tax carry forwards can be applied,
all net operating losses must be first utilized. Mexican companies have the
option to defer the asset tax four years forward and determine the higher of the
taxes comparing the current income tax calculation and the four year old asset
tax calculation increased by the effects of inflation. Some of the Company's
subsidiaries have elected this option. The total asset tax paid by the Company's
subsidiaries for the year ended December 31, 2003 was approximately $923
thousand.
Effective January 1, 1999, a tax rate was enacted in Mexico whereby the
corporate tax rate is 35%. An amount equal to 30% is paid on taxable earnings
reinvested in the Company and 5% on those earnings when they are distributed in
the form of dividends for the year ended December 31, 2001.
The tax law enacted January 1, 2002 eliminated the option to defer the payment
of 5% of taxable income and reduces the 35% tax rate to 34% in 2003, 33% in 2004
and 32% thereafter.
The amounts of Elamex's Mexican net asset tax and tax loss carry-forwards at
December 31, 2003 and 2002 are set forth in Note 9 to the Consolidated Financial
Statements, included in Item 8 of this form 10-K. Elamex's effective tax rate
was 16.2% in 2001, 9.8% in 2002 and (7.5)% in 2003.
The primary difference between the overall effective tax rate and the statutory
rates of 34% for Mexico and 35% for the U.S. are currency and inflation gains
and losses for Mexican tax purposes, Mexican asset tax, non-deductible goodwill
impairment expense in the U.S, and changes in the Mexican and US valuation
allowances.
In addition SFAS No. 109, "Accounting for Income Taxes," requires that a
valuation allowance be established when it is "more likely than not" that all or
a portion of deferred tax assets will not be realized. A review of all available
positive and negative evidence needs to be considered, including a company's
performance, the market environment in which the company operates, the
utilization of past tax credits, length of carry back and carry forward periods,
and existing contracts or sales backlog that will result in future profits,
among other factors. For 2003, the Company concluded that it was appropriate to
increase the valuation allowance for most of the net deferred tax assets arising
from its operations in Mexico and in the United States. As a result, the
valuation allowances for deferred tax assets in Mexico and the United States
increased by approximately $2.6 million, resulting in additional income tax
expense for the third and fourth quarters of 2003, respectively. In addition,
primarily as a consequence of Precision's filing for protection under bankruptcy
laws on December 19, 2003, the Company's investment in Precision, reported under
the equity method of accounting, was reduced by an increase in the valuation
allowance against Precision's underlying deferred tax assets of $4.5 million.
The majority stockholder has filed a consolidated tax return with Elamex's
operations since 1995. The Tax Sharing Agreement entered into between the
majority stockholder, Accel, S.A. de C.V., and Elamex through 1998 provided that
Elamex transfer
19
monthly an amount equal to its estimated tax payment, less credits, split
between Accel and the Mexican tax Authority based on Accel's ownership in
Elamex. Beginning in 1999, tax law for consolidation required Elamex and its
subsidiaries to pay amounts directly to the Mexican Tax Authority (SHCP) based
on their individual tax calculations. The payments are calculated as required by
the SHCP as if Elamex and subsidiaries were filing a stand-alone income tax
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.
Elamex's U.S. subsidiaries file a consolidated U.S. income tax return and pay
their own taxes as if they had to file individual income tax returns.
ACQUISITIONS / DIVESTITURES
The sale of certain assets, effective at the close of business on July 4, 2003,
was made to TECMA Group LLC, a private contract, shelter and manufacturing
services provider headquartered in El Paso, Texas. The transaction included the
sale of five Shelter Services customer contracts, miscellaneous assets and stock
of five newly created Companies. Substantially all Shelter Services operations
personnel related to these contracts were transferred to the buyer. Elamex
received approximately $1.8 million in cash. In connection with the disposition
the Company transferred assets with a book value of $120 thousand to the buyer
and recorded a gain of $1.7 million. The Company incurred other costs of
approximately $575 thousand associated with the sale, which were included in
operating expenses in the 2003 results of operations.
On July 18, 2002, Elamex USA, Corp. ("Elamex USA"), a wholly owned Delaware
subsidiary of Elamex, completed the acquisition of Mt. Franklin Holdings, LLC
("Franklin"), Franklin Food Products LLC and the merger of Reprop Corporation
with and into Elamex USA. The effective closing date for tax and accounting
purposes was the close of business on June 28, 2002. Franklin operates a retail
nut and foodservice nut packaging and marketing company, located in El Paso,
Texas and a candy manufacturing and packaging facility located in Juarez,
Mexico. The purchase price was cash payment of US$1,445,040 and 923,161
restricted shares of the common stock of Elamex. 278,499 of these shares were
contingent and subject to escrow agreements, which required Franklin to reach
certain income levels through December 31, 2003. Franklin did not reach the
required income level, therefore the 278,499 shares in escrow will be canceled
or used for a different purpose.
The unaudited proforma combined historical results, as if Franklin had been
acquired at the beginning of fiscal 2001, are estimated in the following table:
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
---------------------- ----------------------
December 31, 2002 December 31, 2001
---------------------- ----------------------
Net sales $ 151,179 $ 170,461
Gross profit 18,077 8,693
Net loss (11,090) (23,120)
Net loss per share (1.48) (3.08)
The above proforma results include adjustments to give effect to intercompany
sales, depreciation and other purchase price adjustments. The proforma results
are not necessarily indicative of the operating results that would have occurred
if the acquisition had been consummated as of the beginning of the periods
presented, nor are they necessarily indicative of future operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). In December 2003, FIN 46 was replaced by
FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46(R)"). FIN 46(R) clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46(R) requires an enterprise to consolidate a
variable interest entity if that enterprise will absorb a majority of the
entity's expected losses, is entitled to receive a majority of the entity's
expected residual returns or both. For investments in variable interest entities
formed after December 31, 2003, the Company will be required to apply FIN 46(R)
as of January 1, 2004. As of December 31, 2003, the Company does not have any
variable interests held in special purpose entities. The Company will be
required to apply FIN 46(R) to any other investments in variable interest
entities no later than the end of the first reporting period that ends after
March 15, 2004. The Company does not expect the adoption of FIN 46(R) to have a
material impact on its financial position or results of operations.
20
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 improves financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, SFAS No. 149 (1) clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative discussed in paragraph 6(b) of SFAS No. 133, (2) clarifies when
a derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in FIN No. 45, and (4) amends certain
other existing pronouncements. Those changes will result in more consistent
reporting of contracts as either derivatives or hybrid instruments. In general,
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The adoption
of SFAS No. 149 has not had a material impact on the Company's financial
position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. In
general this statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for interim periods
beginning after June 15, 2003. The adoption of this statement did not have a
material impact on the Company's financial position or results of operations.
FORWARD LOOKING STATEMENTS
This Form 10-K includes forward-looking statements that involve risks and
uncertainties, including, but not limited to, risks associated with Elamex's
future growth and profitability, the ability of Elamex to continue to increase
sales to existing customers and new customers, and the effects of competitive
and general economic conditions. These risks may cause our actual results,
levels of activity, performance or achievements to be materially different from
our future results from any future results, levels of activity, performance or
achievements expressed or implied by these forward looking statements.
All statements that relate to future events or to our future performance as
forward-looking statements. In some cases, forward-looking statements can be
identified by terms such as "may", "will", "should", "expect", "plans", "seeks",
"anticipates", "believes", "estimates", "predicts", "potential", "continue",
"seeks to continue", "intends", or other comparable terminology. Although
forward-looking statements help provide complete information about us, investors
should keep in mind that forward-looking statements are only predictions, at a
point in time, and are inherently less reliable than historical information.
There can be no assurance that Elamex's principal customers will continue to
purchase products and services from Elamex at the current levels, if at all, and
the loss of one or more major customers could have a material adverse effect on
Elamex's operating results.
We do not guarantee future results, levels of activity, performance or
achievements and we do not assume responsibility for the accuracy and
completeness of these statements. The forward-looking statements in this Annual
Report on Form 10-K are based on information as of the date of this report. We
assume no obligation to update any of these statements based on information
after the date of this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Elamex's functional currency is the U.S. dollar and it is exposed to the risk of
currency fluctuations of the Mexican Peso against the U.S. dollar. Elamex's
currency fluctuation risk management objective is to limit the impact of
currency fluctuations. Elamex has adopted a policy of not engaging in future
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. No such items were outstanding at December 31, 2003.
Elamex and certain of its subsidiaries are exposed to some market risk due to
the floating interest rate under its revolving lines of credit, notes payable
and long-term debt. Floating-rate obligations aggregated $7.1 million at
December 31, 2003, inclusive of amounts borrowed under short-term and long-term
credit facilities. A 1.0 % increase in interest rates could result in a $70
thousand annual increase in interest expense on the existing principal balance.
The Company has determined that it is not necessary to participate in interest
rate-related derivative financial instruments because it currently does not
expect significant short-term increases in interest rates charged under its
borrowings.
21
PART III
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of 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, 2003 and 2002, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Elamex, S.A. de C.V. and
subsidiaries as of December 31, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142.
Deloitte & Touche
March 25, 2004
Ciudad Juarez, Chihuahua, Mexico
22
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002 (IN THOUSANDS OF U.S. DOLLARS)
2003 2002
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 2,299 $ 8,919
Receivables:
Trade accounts receivable, net 7,400 17,120
Other receivables, net 854 1,055
--------- ---------
8,254 18,175
Inventories, net 7,921 14,018
Income taxes receivable from Accel 879 950
Other taxes receivable 499 1,545
Prepaid expenses 1,024 1,420
Deferred income taxes - 279
--------- ---------
Total current assets 20,876 45,306
Property, plant and equipment, net 39,956 69,979
Investment and loans to unconsolidated joint venture 864 3,269
Investment in unconsolidated subsidiary in bankruptcy -
Goodwill, net 3,707 11,827
Deferred income taxes 885 1,932
Other assets, net 1,415 2,188
--------- ---------
$ 67,703 $ 134,501
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 5,282 $ 8,939
Current portion of capital lease obligations 1,051 971
Accounts payable 6,551 16,442
Accrued expenses 6,543 5,977
Taxes payable 108 78
--------- ---------
Total current liabilities 19,535 32,407
Long-term debt, excluding current portion 1,827 20,133
Capital lease obligations, excluding current obligations 15,313 16,296
--------- ---------
Total liabilities 36,675 68,836
--------- ---------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, no par, 50,000,000 shares authorized,
none issued or outstanding
Common stock, 22,400,000 shares authorized, 8,323,161
issued and 7,510,762 and 7,789,261(including shares in escrow)
outstanding for 2003 and 2002, respectively 36,963 36,963
(Deficit) retained earnings (3,388) 31,220
Treasury stock, 542,101 and 533,900 shares at cost for 2003 and
2002, respectively (2,547) (2,518)
--------- ---------
Total stockholders' equity 31,028 65,665
--------- ---------
$ 67,703 $ 134,501
========= =========
See accompanying notes to the consolidated financial statements
23
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE DATA)
2003 2002 2001
------------------ ------------------ ------------------
Net sales $ 157,250 $ 134,269 $ 131,984
Cost of sales 139,336 120,142 129,878
------------------ ------------------ ------------------
Gross profit 17,914 14,127 2,106
------------------ ------------------ ------------------
Operating expenses:
General and administrative 9,198 7,092 9,373
Selling 7,009 4,179 1,265
Distribution 9,463 4,149
Impairment of long lived assets 13,235
Goodwill impairment 8,120
Restructuring charges 12,916
------------------ ------------------ ------------------
Total operating expenses 47,025 15,420 23,554
------------------ ------------------ ------------------
Operating loss (29,111) (1,293) (21,448)
------------------ ------------------ ------------------
Other (expense) income:
Interest income 14 506 1,280
Interest expense (3,517) (2,280) (2,098)
Equity in losses of unconsolidated affiliates (2,107) (1,125) (1,464)
Gain on sale of certain shelter operations 1,680
Gain on sale of subsidiaries 2,612
Other, net 852 (1,533) 374
------------------ ------------------ ------------------
Total other (expense) income (3,078) (4,432) 704
------------------ ------------------ ------------------
Loss before income taxes, minority interest and cumulative
effect of change in accounting principle (32,189) (5,725) (20,744)
Income tax provision (benefit) 2,419 (561) (3,362)
------------------ ------------------ ------------------
Loss before minority interest and cumulative effect
of change in accounting principle (34,608) (5,164) (17,382)
Minority interest 6,352
------------------ ------------------ ------------------
Loss before cumulative effect of change in accounting
principle (34,608) (5,164) (11,030)
Cumulative effect of change in accounting principle, net of
tax (853)
------------------ ------------------ ------------------
Net loss (34,608) (6,017) (11,030)
Other comprehensive income (loss), net of income tax benefit 379 (342)
------------------ ------------------ ------------------
Comprehensive loss $ (34,608) $ (5,638) $ (11,372)
================== ================== ==================
Net loss per share, basic and diluted before
cumulative effect of change in accounting principle $ (4.61) $ (0.72) $ (1.61)
Cumulative effect of change in accounting principle, net of
tax (0.12)
------------------ ------------------ ------------------
Net loss per share, basic and diluted $ (4.61) $ (0.84) $ (1.61)
================== ================== ==================
Shares used to compute net loss per share, basic and diluted 7,505,257 7,188,431 6,866,100
================== ================== ==================
See accompanying notes to the consolidated financial statements
24
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS OF U.S. DOLLARS)
COMMON STOCK ACCUMULATED
--------------------------- (DEFICIT) OTHER TOTAL
SHARES AMOUNT RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
OUTSTANDING EARNINGS STOCK LOSS EQUITY
--------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 6,866,100 $ 35,060 $ 48,267 $ (2,518) $ (37) $ 80,772
Net loss (11,030) (11,030)
Unrealized loss on investment securities (342) (342)
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 6,866,100 35,060 37,237 (2,518) (379) 69,400
Common stock issued in purchase
acquisition 923,161 2,865 2,865
Common stock under escrow agreement (278,499) (962) (962)
Net loss (6,017) (6,017)
Permanent impairment on investment
securities 379 379
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 7,510,762 36,963 31,220 (2,518) - 65,665
Treasury stock (29) (29)
Net loss (34,608) (34,608)
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 7,510,762 $ 36,963 $ (3,388) $ (2,547) $ - $ 31,028
================================================================================
See accompanying notes to the consolidated financial statements
25
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS OF U.S. DOLLARS)
2003 2002 2001
------------------ ------------------ ------------------
Cash flows from operating activities:
Net loss $ (34,608) $ (6,017) $ (11,030)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 6,085 4,750 4,409
Gain on sale of certain shelter operations (1,680)
Gain on sale of subsidiaries (2,612)
Cumulative effect of change in accounting principle -
goodwill impairment 853
Provision for doubtful trade accounts receivable 1,294 141 1,364
Goodwill impairment loss 8,120
Provision for excess and obsolete inventory 1,176
Equity in loss of unconsolidated affiliates 2,107 1,125 1,464
Permanent impairment on investment securities 563
Deferred income tax expense (benefit) 1,326 (548) (4,062)
Minority interest in losses of joint venture (6,352)
Losses on disposal-impairment of property, plant and
equipment 13,235 613 6,106
Change in operating assets and liabilities, net of effects
from deconsolidation of Precision in 2003, acquisition
of Franklin in 2002 and deconsolidation of Joint Venture
in 2001:
Trade accounts receivable 1,719 2,642 2,204
Other receivables (901) 1,777 885
Inventories 1,013 (4,167) 3,493
Refundable income taxes 1,117 870 (64)
Prepaid expenses 396 (304) 742
Other assets (71) (4,686) (126)
Accounts payable 1,671 839 (7,320)
Accrued expenses 1,384 (1,192) (2,824)
Taxes payable 30 11 (770)
Other liabilities - (57) (48)
------------------ ------------------ ------------------
Net cash provided by (used in) operating activities 2,237 (1,611) (14,541)
------------------ ------------------ ------------------
Cash flows from investing activities:
Proceeds from sale of investment security 1,945
Purchases of property, plant and equipment (6,433) (6,237) (4,424)
Investment in joint venture (1,175) (1,550) (1,300)
Cash effects of deconsolidation of affiliates (71) (1,506)
Acquisition of Franklin, net of cash acquired (2,753)
Proceeds from sale of subsidiaries 1,800 2,612
Issuance of related party note receivable (3,000)
Repayment of related party note receivable 7,000
------------------ ------------------ ------------------
Net cash (used in) provided by investing activities (5,879) (10,540) 1,327
------------------ ------------------ ------------------
Cash flows from financing activities:
Proceeds from notes payable and long term-debt 1,839 7,795 11,633
Payments of notes payable and long term-debt (3,912) (3,124) (5,926)
Principal repayments of capital lease obligations (905) (451)
------------------ ------------------ ------------------
Net cash (used in) provided by financing activities (2,978) 4,220 5,707
------------------ ------------------ ------------------
Net decrease in cash and cash equivalents (6,620) (7,931) (7,507)
Cash and cash equivalents, beginning of year 8,919 16,850 24,357
------------------ ------------------ ------------------
Cash and cash equivalents, end of year $ 2,299 $ 8,919 $ 16,850
================== ================== ==================
See accompanying notes to the consolidated financial statements
26
ELAMEX, S.A. DE C.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS OF U.S. DOLLARS)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
2003 2002 2001
------------------ ------------------ ------------------
Interest paid, net of amounts capitalized of $136, $106 and
$92 for 2003, 2002 and 2001, respectively $ 2,709 $ 3,826 $ 1,124
================== ================== ==================
Income taxes paid $ 823 $ 393 $ 632
================== ================== ==================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCIAL ACTIVITIES:
The Company discontinued consolidation of its joint venture (Qualcore) as of
June 30, 2001. In conjunction with the deconsolidation, assets and liabilities
removed from the consolidated balance sheet were as follows:
Assets removed net of cash $ 20,298
Liabilities removed 21,804
------------------
Net cash effect of deconsolidation $ 1,506
==================
Debt incurred to refinance existing debt $ 2,841
------------------
Debt capitalized as equity in the joint
venture $ 9,023
==================
The Company purchased Franklin in 2002. In conjunction with the acquisition, the
fair value of assets acquired and liabilities assumed were as follows:
Fair value of assets acquired $ 37,569
Liabilities assumed (32,913)
Common stock issued, net of amounts in escrow (1,903)
------------------
Net cash paid $ 2,753
==================
The Company discontinued consolidation of its Metal Stamping Segment (Precision)
as of December 19, 2003. In conjunction with the deconsolidation, assets and
liabilities removed from the consolidated balance sheet were as follows:
Assets removed net of cash $ 32,198
Liabilities removed