10-K405 1 d10k405.txt FORM 10-K405 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 333-43523 ----------------- ELGIN NATIONAL INDUSTRIES, INC. (Exact name of registrant as specified in its charter)
Delaware 36-3908410 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
2001 Butterfield Road, Suite 1020, Downers Grove, Illinois 60515-1050 (Address of principal executive offices) Telephone Number: 630-434-7243 Registrant's telephone number, including area code Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None ----------------- 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. [X] Yes [_] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (SS 229.405 of this chapter) 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] As of March 20, 2002, there were outstanding 6,408.3 shares of Class A Common Stock and 19,951.7 shares of Preferred Stock. The aggregate market value of the voting stock held by non-affiliates of the registrant is $0 because all voting stock is held by an affiliate of the registrant. ================================================================================ PART I ITEM 1. BUSINESS Overview Elgin National Industries, Inc., incorporated in 1962, was a publicly traded company listed on the NYSE until it was taken private in 1988 through the leveraged acquisition of stock of Elgin National Industries, Inc. by The Jupiter Corporation ("Jupiter"), a private diversified holding company. In September 1993, an investor group led by institutional investors and Senior Management (consisting of Fred C. Schulte, Charles D. Hall and Wayne J. Conner) formed ENI Holding Corp. ("ENI"), and ENI acquired the capital stock of Elgin National Industries, Inc. from Jupiter in a leveraged buyout. Through the years Elgin National Industries, Inc. has had strategic acquisitions and divestitures assisting the company in reducing leverage and, Management believes, focusing on strengthening its businesses. In 2001 Elgin National Industries, Inc. acquired Leland Powell Fasteners, Inc., ("Leland"), a manufacturer of specialty fasteners located in Martin, Tennessee to further strengthen its Manufactured Products Segment. On November 5, 1997, ENI and Elgin National Industries, Inc. completed a recapitalization intended to retire certain existing indebtedness, redeem the equity interests of outside institutional investors, merge Elgin National Industries, Inc. into ENI and vest (directly or indirectly) in Senior Management ownership of all of the issued and outstanding capital stock of the surviving entity. The components of the recapitalization were (i) the offering of $85,000,000 11% Senior Notes due 2007 (the "Offering"), (ii) ENI using part of the proceeds of the Offering to repurchase all of the common stock, preferred stock and common stock warrants of ENI not owned by Senior Management; (iii) Elgin National Industries, Inc. using part of the proceeds of the Offering to retire all senior subordinated indebtedness, including the payment of prepayment fees; (iv) Elgin National Industries, Inc. merging into ENI, with ENI remaining as the surviving entity; (v) following such merger, ENI changing its name to Elgin National Industries, Inc. (items (iv) and (v) resulting in the entity referred to herein as the "Company" or "Elgin"); and (vi) the Company and certain of its subsidiaries entering into an amended senior credit facility (the "Senior Credit Facility") (the matters described at items (i) through (vi) above being the "Recapitalization Transactions"). In January 2001 the Senior Credit Facility was further amended to increase the borrowing capacity. This allowed the Company to acquire Leland. Operating Businesses The Company owns and operates a diversified group of middle-market manufactured products and engineering services businesses. The Company focuses on operating businesses with leading positions in niche markets, consistent operating profitability, diverse customer bases, efficient production capabilities and broad product lines serving stable industries. The Company is comprised of two operating segments. Through its Manufactured Products Segment, Elgin is a leading manufacturer and supplier of custom-designed, highly engineered products used by a wide variety of customers in the industrial equipment, durable goods, mining, mineral processing and electric utility industries. Through its Engineering Services Segment, Elgin provides design, engineering, procurement and construction management services for mineral processing and bulk materials handling systems used in the mining, mineral processing, electric utility and the rail and marine transportation industries. The Manufactured Products Segment is comprised of Ohio Rod Products Company ("Ohio Rod"), Tabor Machine Company ("Tabor"), Norris Screen and Manufacturing Inc. ("Norris"), Centrifugal and Mechanical Industries ("CMI"), Centrifugal Services, Inc. ("CSI"), Mining Controls, Inc. ("Mining Controls"), Chandler Products ("Chandler"), Clinch River Corporation ("Clinch") Vanco International, Inc. ("Vanco"), Leland Powell Fasteners, Inc. ("Leland"), Precision Screw & Bolt Inc. ("Precision") and Best Metal Finishing Inc. ("Best Metal"). The Engineering Services Segment is comprised of Roberts & Schaefer Company ("R&S") and Soros Associates, Inc. ("Soros"). 1 Manufactured Products Segment The Manufactured Products Segment, through its twelve business units, manufactures and markets products used primarily in the industrial equipment, durable goods, mining, mineral processing and electric utility industries. The businesses within the Manufactured Products Segment consist of original equipment manufacturers ("OEM"), suppliers of after-market parts and services and manufacturers of components used by original equipment manufacturers. These businesses have supplied their customers with quality products and services for an average of over 40 years. The Manufactured Products Segment has a broad and diverse customer base, with no single customer accounting for more than 10% of the Segment's sales in 2001. The Manufactured Products Segment products primarily include specialty fasteners, various types of centrifuges, incline and horizontal vibrating screen systems of varying sizes and capacities, specialty high and low voltage electrical power distribution equipment, electrical switch gear equipment, power factor control and harmonic correction equipment, underground lighting and electrical connectors and custom fabrication. The Manufactured Products Segment also sells after-market parts and services. Net sales for the Manufactured Products Segment for the year ended December 31, 2001, were $99.1 million. Products are sold through in-house sales personnel, as well as independent sales representatives, supported by engineer and technical services support personnel. The Manufactured Products Segment sells its products primarily based on product quality and overall customer service. The Manufactured Products Segment can usually respond to custom or small orders quickly and efficiently, minimizing their competition. The Manufactured Products Segment does have competition with larger manufacturers particularly during periods of excess capacity at their production facilities, as well as small regional shops and independent suppliers. Engineering Services Segment The Engineering Services Segment provides design, engineering, procurement and construction management services principally to the mining, mineral processing, electric utility and rail and marine transportation industries. Depending upon the needs of the client, these services are provided on either an unbundled (i.e. task-specific) basis or a full project turnkey basis. Historically, the Engineering Services Segment provided its services primarily to the United States coal mining industry. Over the past ten years, the Engineering Services Segment has diversified into markets which include electric utility, aggregates, industrial minerals, base metals and precious metals. Today, the Engineering Services Segment has a broad, well-balanced customer base within these industries and derived approximately 90% of its net sales from customers outside the coal-mining industry during 2001. Net sales for the Engineering Services Segment for the year ended December 31, 2001 were $92.5 million. The Engineering Services Segment provides engineering services including evaluating the feasibility of the customer's proposal (from both a cost and engineering standpoint), translating the customer's concept to a workable design, or providing bankable feasibility studies, detailed engineering drawings and extensive engineering support in effecting the realization of a design. In turnkey projects, the Engineering Services Segment performs all service activities necessary for project completion, including design, subcontracting, equipment procurement, construction management and startup. The Engineering Services Segment also provides equipment procurement on behalf of its customers, involving the designation and sourcing of equipment to meet the customer's requirements. Typical mineral processing facilities designed and built by the Engineering Services Segment include coal preparation plants, gold processing plants, copper processing plants and aggregate and crushed rock processing plants. They also have a special expertise in offshore terminals, involving bulk loading and unloading at open sea. The Engineering Services Segment also designs bulk materials handling systems for coal-fired electric 2 power plants and for handling multiple commodities at rail terminals, storage facilities, marine terminals and ports. These systems consist of loading and unloading equipment to remove the material from or place it into the transportation vehicle (trucks, trains, ships or barges) and multiple conveying systems to move material to or from stockpiles. The Engineering Services Segment provides its services, ranging from engineering only services to turnkey project completion, primarily to the mining, mineral processing, electric utility and rail and marine transportation industries, with a diversified customer base including a number of leading domestic and international mining companies, electric utility companies and transportation companies. Engineering only services range in size from under $10,000 to several hundred thousand dollars. The Engineering Services Segment's turnkey services include full project responsibility for the design and construction of mineral processing and bulk material handling facilities. The Engineering Services Segment focuses on turnkey projects of less than $25 million, with most such projects significantly smaller. Total backlog for the Engineering Services Segment at December 31, 2001 was $44.3 million. Management believes that targeting projects in the range of $1 million to $25 million gives the Engineering Services Segment two strategic advantages. First, this is a niche of the mineral processing and material handling markets that generally does not attract larger firms, permitting the Engineering Services Segment to compete with smaller, local and regional contractors that may lack the Engineering Services Segment's experience and capabilities. Second, by maintaining a larger portfolio of smaller projects, the Engineering Services Segment is better able to manage the risk inherent in its business. The Engineering Services Segment has a broad and diversified customer base, having executed projects in the electric utility, aggregates, industrial minerals and base metal industries. The Engineering Services Segment has also been successful in further diversifying their markets to include international work. During 2001, approximately 35% of the net sales of the Engineering Services Segment were from international projects. The Engineering Services Segment markets its services through internal marketing and sales groups principally located in Chicago and Salt Lake City. Their management and engineering staff participate in the process to adequately price and successfully bid on projects. The Engineering Services Segment also secures projects through partnering or joint bidding arrangements with larger engineering and construction firms or architectural engineers, particularly in the case of international projects. In such arrangements, the Engineering Services Segment will assume specific responsibility for a particular component of a larger project. Primary competitors of the Engineering Services Segment include Watkins Construction Company (coal, limestone and material handling), Industrial Resources, Inc. (coal processing and material handling), and Svedala Industries (coal and limestone handling). Generally, the Engineering Services Segment competes with a large number of specialty engineering firms on the basis of quality of work performed, strength of reputation, responsiveness to customer needs, price and ability to meet deadlines, and the Engineering Services Segment seeks to differentiate itself from its competitors with respect to each of these factors. Supplies The Company acquires substantially all of its raw materials from outside sources. The basic raw materials primarily used in the Manufactured Products Segment are flat sheet metal, coiled wire or rod and various forms of stainless steel materials. Additionally, the Manufactured Products Segment acquires circuit breakers, components, transformer cores, motor drive units and purchased finished goods from outside sources. The Company subcontracts certain fabrication work to other suppliers. The Company is dependent on the ability of such fabrication suppliers for timely delivery, performance and quality specifications. The Engineering Services Segment sources many different types of components in the construction of plant facilities, which in certain cases are sold directly to the Company's customer by the selected supplier. These include equipment such as vibrating screens, centrifuge dryers, flotation units and other finished products. The Company believes there are numerous sources of supply for the different materials used in its operations. 3 Employees As of December 31, 2001, the Company had approximately 780 employees. Approximately 23 employees of the Company at CMI's St. Louis, Missouri facility are represented by District 8 of the International Association of Machinists and Aerospace Workers ("IAM") and are covered by a contract between CMI and the IAM effective from March 1, 1998 through February 28, 2003. Approximately eight employees of TranService, Inc., a wholly owned subsidiary of the Company, are represented by the United Mine Workers of America ("UMWA") and are covered by the National Bituminous Coal Wage Agreement expiring on December 31, 2002. The Company believes that its relations with its employees are generally good. ITEM 2. PROPERTIES The Company and its businesses conduct operations from the following primary facilities:
Approximate Principal Owned/ Square Business Location Function Leased Footage -------- ------------------ ------------- ------ ----------- Elgin Downers Grove, IL Headquarters Leased 6,470 Ohio Rod Versailles, IN Manufacturing Owned 93,350 Chandler Products Euclid, OH Manufacturing Owned 88,000 Mining Controls Beckley, WV Manufacturing Owned 44,925 CMI St. Louis, MO Manufacturing Owned 63,295 CSI Raleigh, IL Manufacturing Owned 16,166 Leased 18,245 Tabor Bluefield, WV Manufacturing Owned 44,000 Norris Princeton, WV Manufacturing Owned 12,700 Clinch River Cedar Bluff, VA Manufacturing Owned 56,300 Precision Cleveland, OH Manufacturing Leased 24,450 Vanco Batavia, IL Distribution Leased 30,890 R & S Chicago, IL & Office Leased 16,200 Salt Lake City, UT Office Leased 25,267 Soros Chicago, IL Office Leased 5,800 Leland Martin, Tenn Manufacturing Owned 92,000
ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are involved in legal proceedings from time to time in the ordinary course of its business. As of the date of this filing, neither the Company nor any of its subsidiaries are a party to any lawsuit or proceeding which, individually or in the aggregate, in the opinion of management, is reasonably likely to have a material adverse effect on the financial condition, results of operation or cash flow of the Company. In early 1999 the Company settled a lawsuit relating to an engineering contract claim. The Company received approximately $1.8 million in this settlement. This settlement was reflected in the Company's 1999 financial statements. In connection with the 1993 leveraged buyout of the Company, The Jupiter Corporation (the former ultimate parent entity of the Company) agreed to indemnify the Company against various claims and ongoing litigation and assumed the defense of such litigation. The litigation includes a wrongful death product liability claim against R&S in connection with an accident at a work site. Although the Company believes that Jupiter and its insurance carrier are performing on the indemnity obligations, there can be no assurance that they will continue to do so or that the Company would successfully recover on the indemnity in the event of an adverse judgment against R&S or adverse outcomes in any other proceeding. In any such case, the Company would bear the cost of defense and any adverse judgment. One or more such adverse judgments could materially and adversely effect the Company's business, financial condition, results of operations and debt service capability. 4 Environmental The Company is subject to a variety of foreign, federal, state and local governmental regulations related to the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous materials used in its manufacturing processes. The Company has not historically incurred any material adverse effect on its business, financial condition, results of operations or cash flow as a result of the Company's compliance with U.S. federal, state, provincial, local or foreign environmental laws or regulations or remediation costs. Some risk of environmental liability and other costs is inherent, however, in the nature of the businesses conducted by the Manufactured Products Segment, which have been in operation for an average of over 40 years and have performed little invasive testing at their sites. In addition, businesses previously operated by the Company have been sold. There can be no assurance that future identification of contamination at its current or former sites or at third party-owned sites where waste generated by the Company has been disposed of would not have a material adverse effect on the Company's business, results of operations, financial condition or debt service capability. Any failure by the Company to obtain required permits for, or adequately restrict the discharge of, hazardous substances under present or future regulations could subject the Company to substantial liability. Such liability could have a material adverse effect on the Company's business, financial condition, results of operations and debt service capability. The Company has been named as a potentially responsible party by the New York Department of Environmental Conservation for clean-up costs at the Company's former manufacturing facility in Orangeburg, New York. The Company has obtained the agreement of its former ultimate parent entity to indemnify it against losses, damages and costs arising out of such action. Although the Company believes that the indemnitor has performed its obligations on this site to date, there can be no assurance that it will continue to do so or that the Company would successfully recover on the indemnity. In such a case, the Company would bear the cost of any remediation, which costs could be significant and materially and adversely effect the Company's business, financial condition, results of operations and debt service capability. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public offering market for the outstanding common equity of the Company and 100% of its outstanding common equity is beneficially owned by Senior Management. The ability of the Company to pay dividends is governed by restrictive covenants contained in the indenture governing its publicly-held debt as well as restrictive covenants contained in the Company's Senior Credit Facility. As a result of these restrictive covenants, the Company was limited in the amount of dividends it was allowed to pay on December 31, 2001. The Company did not pay any dividends in the years ended December 31, 2001 and 2000. ITEM 6. SELECTED FINANCIAL DATA The following table presents selected historical financial information of the Company, as of the dates and for the periods indicated. The historical financial data as of December 31, 1997, 1998, 1999, 2000 and 2001 was 5 derived from the audited consolidated financial statements of the Company. The selected financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's audited consolidated financial statements and notes thereto. Selected Financial Data
Fiscal Year Ended December 31, --------------------------------------------- 1997 1998 1999 2000 -------- -------- -------- -------- (dollars in thousands) Statement of Operations Data: Net sales....................................................................... $139,615 $156,054 $150,307 $163,370 Cost of sales................................................................... 102,744 118,390 110,917 124,378 -------- -------- -------- -------- Gross profit................................................................. 36,871 37,664 39,390 38,992 Selling, general and administrative expenses.................................... 21,840 22,100 25,114 24,063 Amortization expense............................................................ 3,447 2,128 779 775 -------- -------- -------- -------- Operating income............................................................. 11,584 13,436 13,497 14,154 Other expenses: Interest expense, net........................................................ 3,471 8,190 7,844 7,676 -------- -------- -------- -------- Income from continuing operations before income taxes........................... 8,113 5,246 5,653 6,478 Provision for income taxes...................................................... 3,187 2,141 2,519 2,605 -------- -------- -------- -------- Income from continuing operations............................................... 4,926 3,105 3,134 3,873 Income from discontinued operations, net of income taxes (a).................... 122 -------- -------- -------- -------- Income before extraordinary items............................................... 5,048 3,105 3,134 3,873 Extraordinary gain (loss) on early extinguishment of debt, net of income tax (b) (582) 380 -------- -------- -------- -------- Net income...................................................................... $ 4,466 $ 3,105 $ 3,514 $ 3,873 ======== ======== ======== ======== Other Financial Data: Gross margin %.................................................................. 26.4% 24.2% 26.2% 23.9% Depreciation and amortization................................................... $ 5,569 $ 4,417 $ 3,149 $ 3,182 Capital expenditures............................................................ 1,974 4,215 2,600 4,337 Net cash provided by operating activities....................................... 1,008 5,388 7,602 10,674 Net cash provided by (used in) investing activities............................. (1,948) (3,939) (8,506) (6,395) Net cash provided by (used in) financing activities............................. (714) (805) (3,376) (6,959) Operating Unit Data: Net Sales: Manufactured Products Segment................................................ $ 78,592 $ 82,097 $ 77,312 $ 80,036 Engineering Services Segment................................................. 61,023 73,957 72,995 83,334 -------- -------- -------- -------- Total Net Sales........................................................... $139,615 $156,054 $150,307 $163,370 ======== ======== ======== ======== Balance Sheet Data: Cash and cash equivalents....................................................... $ 9,337 $ 9,981 $ 5,701 $ 3,021 Working capital less cash and cash equivalents.................................. 13,898 15,834 7,140 10,219 Property, plant and equipment, net.............................................. 13,582 15,344 15,754 17,935 Total assets.................................................................... 100,351 103,710 106,704 112,464 Total debt...................................................................... 85,751 85,439 81,059 74,100 Redeemable preferred stock and redeemable preferred stock units................. 13,226 14,152 15,080 16,006 Stockholder's deficit........................................................... (31,860) (29,400) (26,532) (23,305)
2001 -------- Statement of Operations Data: Net sales....................................................................... $191,551 Cost of sales................................................................... 149,988 -------- Gross profit................................................................. 41,563 Selling, general and administrative expenses.................................... 24,307 Amortization expense............................................................ 1,631 -------- Operating income............................................................. 15,625 Other expenses: Interest expense, net........................................................ 8,810 -------- Income from continuing operations before income taxes........................... 6,815 Provision for income taxes...................................................... 3,309 -------- Income from continuing operations............................................... 3,506 Income from discontinued operations, net of income taxes (a).................... -------- Income before extraordinary items............................................... 3,506 Extraordinary gain (loss) on early extinguishment of debt, net of income tax (b) -------- Net income...................................................................... $ 3,506 ======== Other Financial Data: Gross margin %.................................................................. 21.7% Depreciation and amortization................................................... $ 4,604 Capital expenditures............................................................ 4,440 Net cash provided by operating activities....................................... 5,619 Net cash provided by (used in) investing activities............................. (24,780) Net cash provided by (used in) financing activities............................. 16,140 Operating Unit Data: Net Sales: Manufactured Products Segment................................................ $ 99,080 Engineering Services Segment................................................. 92,471 -------- Total Net Sales........................................................... $191,551 ======== Balance Sheet Data: Cash and cash equivalents....................................................... $ Working capital less cash and cash equivalents.................................. 12,381 Property, plant and equipment, net.............................................. 22,070 Total assets.................................................................... 137,746 Total debt...................................................................... 91,234 Redeemable preferred stock and redeemable preferred stock units................. 16,933 Stockholder's deficit........................................................... (20,445)
-------- (a) Income from discontinued operations is comprised of earnings of American Fastener Corporation (sold in 1996), along with the associated gain on the sale of the business, net of income taxes. (b) In 1997 the loss on the early extinguishment of debt resulted from the retirement of subordinated debt from proceeds of the Senior Notes and included amortization of the remaining financing costs and a prepayment penalty. In 1999 the gain on early extinguishment of debt resulted from the repurchase of the Company's senior notes net of amortization of related finance costs. 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Elgin owns and operates a diversified group of middle-market industrial manufacturing and engineering services businesses. The Company focuses on operating businesses with leading positions in niche markets, consistent profitability, diverse customer bases, efficient production capabilities and broad product lines serving stable industries. The Company is comprised of fourteen business units that are organized into two operating segments. Through its Manufactured Products Segment, Elgin is a leading manufacturer and supplier of custom-designed, highly engineered products used by a wide variety of customers in the industrial equipment, durable goods, mining, mineral processing and electric utility industries. Through its Engineering Services Segment, Elgin provides design, engineering, procurement and construction management services for mineral processing and bulk materials handling systems used in the mining, mineral processing, electric utility and the rail and marine transportation industries. Variability of Revenues and Cash Flows The Engineering Services Segment's project base is typically comprised of over 100 projects in process each year. At any given time, this project base includes a substantial majority of small projects (which the Company defines as producing less than $1.0 million in annual sales) as well as a number of larger projects (which the Company defines as producing $1.0 million or more in annual sales). The Company's revenues from these larger projects tend to fluctuate from year to year depending on the number of such projects in process and the respective status of each project. In addition, these larger projects often extend over more than one year, causing potential fluctuations in revenues and cash flows. The Company uses the percentage of completion method of accounting for its engineering services contracts. Under this method of accounting, the degree of completion of each contract is generally determined by comparing the costs incurred to date to the total costs anticipated for the entire contract, taking into account the current estimates of cost to complete the contract. Revenue is recognized on each contract as a percentage of the total contract revenue in proportion to the degree of the project's completion. Management routinely reviews total estimated costs to complete each contract and revises the estimated gross margin on the contract accordingly. Losses are recognized in full in the period in which they are determined. Cash flows can vary significantly from period to period, depending on the terms of the larger contracts then in force. In some contracts, the customers provide full or partial advance cash payments prior to performance by the Company. In other contracts, receipts follow disbursements in varying degrees. As a result, reported operating income of the Engineering Services Segment for any period is not necessarily indicative of cash flow for that period. 7 Results of Operations The following tables set forth, for the periods indicated, amounts derived from the Company's consolidated statements of operations and related percentages of net sales. There can be no assurance that the trends in operating results will continue in the future. Company Consolidated (dollars in millions)
For the Fiscal Year Ended December 31, ---------------------------------------- 1999 2000 2001 ------------ ------------ ------------ Net sales............................................ $150.3 100.0% $163.4 100.0% $191.5 100.0% Cost of sales........................................ 110.9 73.8 124.4 76.1 150.0 78.3 Gross profit......................................... 39.4 26.2 39.0 23.9 41.5 21.7 Selling, general & administrative expenses........... 25.1 16.7 24.0 14.7 24.3 12.7 Amortization expense................................. 0.8 0.5 0.8 0.5 1.6 0.8 Operating income..................................... 13.5 9.0 14.2 8.7 15.6 8.2 Interest expense, net................................ 7.9 5.2 7.7 4.7 8.8 4.6 Income from continuing operations before income taxes 5.6 3.8 6.5 4.0 6.8 3.6 Provision for income taxes........................... 2.5 1.7 2.6 1.6 3.3 1.7 Income before extraordinary item..................... 3.1 2.1 3.9 2.4 3.5 1.9 Extraordinary item, net of income taxes.............. 0.4 0.2 Net income........................................... 3.5 2.3 3.9 2.4 3.5 1.9
Manufactured Products Segment (dollars in millions)
For the Fiscal Year Ended December 31, ------------------------------------- 1999 2000 2001 ----------- ----------- ----------- Net sales.... $77.3 100.0% $80.0 100.0% $99.1 100.0% Cost of sales 50.6 65.4 52.4 65.5 69.2 69.8 Gross profit. 26.7 34.6 27.6 34.5 29.9 30.2
Engineering Services Segment (dollars in millions)
For the Fiscal Year Ended December 31, ------------------------------------- 1999 2000 2001 ----------- ----------- ----------- Net sales.... $73.0 100.0% $83.4 100.0% $92.4 100.0% Cost of sales 60.3 82.6 72.0 86.3 80.8 87.4 Gross profit. 12.7 17.4 11.4 13.7 11.6 12.6
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Net Sales: Net sales for the Manufactured Products Segment for the year ended December 31, 2001 increased $19.1 million, or 23.8%, to $99.1 million from $80.0 million for the corresponding period in 2000. The increased sales level was due to the inclusion of an entire year's sales from Leland, acquired in January 2001 and Precision, acquired in October 2000 as well as increased sales of centrifugal dryers, starters and industrial capital equipment, partially offset with decreased fastener sales. Net sales for the Engineering Services Segment for the year ended December 31, 2001 increased $9.1 million, or 11.0%, to $92.4 million from $83.3 million for the corresponding period in 2000 due primarily to 8 increased sales of larger engineering jobs with sales greater than $1.0 million. In 2001 the Engineering Services Segment had $80.1 million in sales from fifteen larger jobs compared to $69.7 million from seventeen jobs for 2000. This increase was partially offset with decreased sales on smaller projects with sales less than $1.0 million. For the year ended December 31, 2001 sales of smaller engineering jobs totaled $12.3 million compared to $13.6 million for the corresponding period in 2000. Cost of Sales: Cost of sales for the Manufactured Products Segment for the year ended December 31, 2001 increased $16.8 million, or 31.9%, to $69.2 million from $52.4 million for the corresponding period in 2000 due to the increased sales level. The Manufactured Products Segment's cost of sales as a percentage of net sales increased to 69.8% for the year ended December 31, 2001 from 65.5% for the corresponding period in 2000 due to lower margins earned on fastener sales and sales of manufactured screens. Cost of sales for the Engineering Services Segment for the year ended December 31, 2001 increased $8.8 million, or 12.4%, to $80.8 million from $72.0 million for the corresponding period in 2000 due to the higher sales level and lower margins earned on smaller jobs with less than $1.0 million in sales, partially offset with higher margins earned on the larger projects due to cost savings realized on a few larger jobs. As a percentage of net sales, the Engineering Services Segment's cost of sales increased to 87.4% for the year ended December 31, 2001 from 86.3% for the corresponding period in 2000. Gross Profit: Gross profit for the Manufactured Products Segment for the year ended December 31, 2001 increased $2.3 million, or 8.4%, to $29.9 million from $27.6 million for the corresponding period in 2000 due to the increased sales level. The Manufactured Products Segment's gross profit as a percentage of net sales decreased to 30.2% for the year ended December 31, 2001 from 34.5% for the corresponding period in 2000 due to the lower margins earned on fastener sales and manufactured screens sales. Gross profit of the Engineering Services Segment for the year ended December 31, 2001 increased $0.2 million, or 2.2%, to $11.6 million from $11.4 million for the corresponding period in 2000 due to the higher sales level in the year ended December 31, 2001. As a percentage of net sales, the Engineering Services Segment's gross profit decreased to 12.6% for the year ended December 31, 2001 from 13.7% for the corresponding period in 2000 due to the lower margins earned on smaller jobs, partially offset with higher margins realized on larger projects. Selling, General and Administrative Expenses: Selling, general and administrative expenses of the Company of $24.3 million for the year ended December 31, 2001 represented an increase of $0.3 million in comparison to $24.0 million for the corresponding period in 2000 primarily due to the inclusion of Leland's expenses, acquired in January 2001 and higher employee related costs at Corporate, offset with a reversal of a bad debt provision on a note that was paid in full and the recovery of legal costs upon the settlement of a lawsuit within the Engineering Services Segment. Amortization Expense: Amortization expense of $1.6 million for the year ended December 31, 2001 increased $0.8 million from $0.8 million for the year ended December 31, 2000. The increased amortization expense was due to higher goodwill amortization due to the acquisitions of Precision, acquired in October 2000 and Leland, acquired in January 2001, and higher amortization of financing costs due to amending the Company's Senior Credit Facility in January 2001. Operating Income: Operating income of the Company for the year ended December 31, 2001 of $15.6 million was $1.4 million higher than the operating income of $14.2 million for the corresponding period in 2000 for the reasons discussed above. Operating income as a percentage of net sales decreased to 8.2% for the year ended December 31, 2001 from 8.7% for the corresponding period in 2000. Interest Income: Interest income of the Company for the year ended December 31, 2000 of $0.7 million decreased $0.1 million or 12.8% from $0.8 million for the year ended December 31, 2000. This decrease was due to decreased interest bearing deposits in 2001. 9 Interest Expense: Interest expense of the Company for the year ended December 31, 2001 of $9.6 million increased $1.1 million or 12.0% from $8.5 million for the corresponding period in 2000 due to the increased debt outstanding. Income from Continuing Operations Before Income Taxes: Income from continuing operations before income taxes for the year ended December 31, 2001 increased $0.3 million, or 5.2%, to $6.8 million from $6.5 million for the corresponding period in 2000 for the reasons discussed above. Income from continuing operations, before income taxes, as a percentage of net sales was 3.6% for the year ended December 31, 2001 compared to 4.0% for the year ended 2000. Provision for Income Taxes: Provision for income taxes for the year ended December 31, 2001 increased $0.7 million to $3.3 million from $2.6 million the year ended December 31, 2000. The Company's effective tax rate increased to 49% in 2001 from 40% in 2000 primarily due to a higher percentage on nondeductible expenses and an adjustment to deferred income taxes. Net Income: The net income for the Company for the year ended December 31, 2001 decreased $0.4 million, or 10.3%, to $3.5 million from $3.9 million for the year ended December 31, 2000 for the reasons discussed above. Net income as a percentage of net sales decreased to 1.8% for the year ended December 31, 2001 from 2.4% for the corresponding year ended 2000. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Net Sales: Net sales for the Manufactured Products Segment for the year ended December 31, 2000 increased $2.7 million, or 3.5%, to $80.0 million from $77.3 million for the corresponding period in 1999. Increased sales of screen and screen parts, industrial capital equipment and electronic components were partially offset with decreased sales of specialty fasteners and decreased steel fabrication sales. Net sales for the Engineering Services Segment for the year ended December 31, 2000 increased $10.3 million, or 14.2%, to $83.3 million from $73.0 million for the corresponding period in 1999 due primarily to increased sales of larger engineering jobs with sales greater than $1.0 million. In 2000 the Engineering Services Segment had $69.7 million in sales from seventeen larger jobs compared to $58.5 million from fifteen jobs for 1999. This increase was partially offset with decreased sales on smaller projects with sales less than $1.0 million. For the year ended December 31, 2000 sales of smaller engineering jobs totaled $13.6 million compared to $14.5 million for the corresponding period in 1999. Cost of Sales: Cost of sales for the Manufactured Products Segment for the year ended December 31, 2000 increased $1.8 million, or 3.6%, to $52.4 million from $50.6 million for the corresponding period in 1999 primarily due to an overall increased sales level. The Manufactured Products Segment's cost of sales as a percentage of net sales increased slightly to 65.5% for the year ended December 31, 2000 from 65.4% for the corresponding period in 1999. Cost of sales for the Engineering Services Segment for the year ended December 31, 2000 increased $11.7 million, or 19.3%, to $72.0 million from $60.3 million for the corresponding period in 1999. The cost of sales for the year ended December 31, 1999 included a reduction of approximately $1.6 million due to the favorable settlement of a lawsuit relating to an engineering contract claim. Without the effect of this settlement the cost of sales would have increased $10.1 million primarily due to favorable closeouts on some larger projects in 1999. As a percentage of net sales, the Engineering Services Segment's cost of sales increased to 86.3% for the year ended December 31, 2000 from 82.6% for the corresponding period in 1999. Gross Profit: Gross profit for the Manufactured Products Segment for the year ended December 31, 2000 increased $0.9 million, or 3.3%, to $27.6 million from $26.7 million for the corresponding period in 1999 due to the increased sales level. The Manufactured Products Segment's gross profit as a percentage of net sales 10 decreased slightly to 34.5% for the year ended December 31, 2000 from 34.6% for the corresponding period in 1999. Gross profit of the Engineering Services Segment for the year ended December 31, 2000 decreased $1.3 million, or 10.2%, to $11.4 million from $12.7 million for the corresponding period in 1999 primarily due to a reduction of the cost of sales of $1.6 million in 1999 due to a settlement of a lawsuit described above and due to higher margins earned on larger projects and to favorable closeouts on some larger projects in 1999, partially offset with the higher sales level in the year ended December 31, 2000. As a percentage of net sales, the Engineering Services Segment's gross profit decreased to 13.7% for the year ended December 31, 2000 from 17.4% for the corresponding period in 1999. Selling, General and Administrative Expenses: Selling, general and administrative expenses of the Company of $24.1 million for the year ended December 31, 2000 represented a decrease of $1.0 million in comparison to $25.1 million for the corresponding period in 1999 primarily due to lower proposal costs, a decreased provision for receivables within the Engineering Services Segment and higher pension income at Corporate. Amortization Expense: Amortization expense of $0.8 million for the year ended December 31, 2000 approximated the amortization expense in 1999. Operating Income: Operating income of the Company for the year ended December 31, 2000 of $14.2 million was $0.7 million higher than the operating income of $13.5 million for the corresponding period in 1999 for the reasons discussed above. Operating income as a percentage of net sales decreased to 8.7% for the year ended December 31, 2000 from 9.0% for the corresponding period in 1999. Interest Income: Interest income of the Company for the year ended December 31, 2000 of $0.9 million decreased $0.3 million or 30.0% from $1.2 million for the year ended December 31, 1999. This decrease was due to interest received on a lawsuit settlement described above in 1999 along with decreased interest bearing deposits in 2000. Interest Expense: Interest expense of the Company for the year ended December 31, 2000 of $8.5 million decreased $0.6 million or 5.9% from $9.1 million for the corresponding period in 1999 due to the decreased debt outstanding. Income from Continuing Operations Before Income Taxes: Income from continuing operations before income taxes for the year ended December 31, 2000 increased $0.8 million, or 14.6%, to $6.5 million from $5.7 million for the corresponding period in 1999 for the reasons discussed above. Income from continuing operations, before income taxes, as a percentage of net sales was 4.0% for the year ended December 31, 2000 compared to 3.8% for the year ended 1999. Provision for Income Taxes: Provision for income taxes for the year ended December 31, 2000 increased $0.1 million to $2.6 million from $2.5 million the year ended December 31, 1999. The Company's effective tax rate decreased to 40% in 2000 from 44% in 1999 primarily due to lower foreign and state taxes. Income before Extraordinary Item: Income before extraordinary item for the year ended December 31, 2000 of $3.9 million increased $0.8 million or 23.6% from $3.1 million for the corresponding period in 1999 for the reasons discussed above. Income before extraordinary item as a percentage of net sales increased to 2.4% for the year ended December 31, 2000 from 2.1% for the corresponding period in 1999. Extraordinary Item, Net of Income Taxes: The extraordinary item of $0.4 million for the year ended December 31, 1999 was the gain on the early extinguishment of debt that resulted from the repurchase of $11.1 million in Senior Notes at a discount, partially offset with amortization of the remaining financing costs related to the notes repurchased. 11 Net Income: The net income for the Company for the year ended December 31, 2000 increased $0.4 million, or 10.2%, to $3.9 million from $3.5 million for the year ended December 31, 1999 for the reasons discussed above. Net income as a percentage of net sales increased to 2.4% for the year ended December 31, 2000 from 2.3% for the corresponding year ended 1999. Liquidity and Capital Resources Net cash provided by operating activities for the year ended December 31, 2001 was $5.6 million, due to $6.6 million generated from net income and non-cash charges, partially offset with $1.0 million net cash used by operating assets and liabilities. Cash flows from operations for any specific period are often materially affected by the timing and amounts of payments on contracts of the Engineering Services Segment, and the timing of payments by such Segment for products and services. Cash used in investing activities for the year ended December 31, 2001 of $24.8 million consisted of $4.4 million for capital expenditures including $1.6 million relating to the construction of a plating facility and $2.8 million in accordance with the Company's regular practice of upgrading and maintaining its equipment base and facilities and $20.4 million for the stock acquisition of Leland on January 18, 2001. Leland is a manufacturer of specialty fasteners located in Martin, Tennessee. Leland has 51 employees and has been in business since 1968. On January 18, 2001 the Company amended its Senior Credit Facility to increase the borrowing capacity of the revolver loan up to $23.0 million (less any outstanding letters of credit) based on a monthly variable borrowing base. The Company's letters of credit totaled $3.3 million as of December 31, 2001 of which $3.0 million mature within one year and the remaining $0.3 million mature within two years. In addition the Senior Credit Facility was amended to include a $12.0 million term loan. Both the revolver and the term loan have a maturity of January 18, 2005. The term loan requires quarterly principal payments of $750,000 beginning on March 31, 2001 as well as an additional annual payment based on an excess cash flow calculation for the previous year. The increased debt capacity of the amended Senior Credit Facility allowed the Company to acquire Leland in January. Cash provided by financing activities for 2001 was $16.1 million which included borrowings of $12.0 million on the term loan, $7.3 million on the revolver and $0.1 million on a loan for the construction of a plating facility in Osgood, Indiana. The construction loan has additional available credit of $1.0 million. This plating facility is scheduled to be completed during the second quarter of 2002. Total capital expenditures relating to the plating facility is expected to be approximately $2.0 million in 2002. Offsetting these borrowings was cash used for debt issuance costs on the amended credit facility of $1.0 million and the repayment of debt of $2.3 million. The Company's liquidity requirements, both long term (over one year) and short term, are for working capital, capital expenditures and debt service. The primary source for meeting these needs has been funds provided by operations. Based on current and planned operations the Company believes that funds provided by operations, along with cash on hand, and available credit will be adequate to meet its anticipated debt service requirements, working capital needs and capital expenditures. The Company has the following contractual cash obligations outstanding as of December 31, 2001: Contractual Cash Obligations
Payments Due by Period --------------------------------------- Less than 1-3 4-5 After 5 Total 1 Year Years Years Years ------- --------- ------ ------ ------- (dollars in thousands) Long Term Debt........................ $91,150 $3,050 $6,100 $8,050 $73,950 Operating Leases...................... 7,485 1,984 3,484 1,901 116 ------- ------ ------ ------ ------- Total Contractual Cash Obligations. $98,635 $5,034 $9,584 $9,951 $74,066 ======= ====== ====== ====== =======
12 Backlog The Company's backlog consists primarily of that portion of contracts for the Engineering Services Segment that have been awarded but not performed and also includes open orders for the Manufactured Products Segment. Backlog at December 31, 2001 was $55.9 million. Approximately $11.6 million relates to the Manufactured Products Segment, with the remainder of $44.3 million relating to the Engineering Services Segment. Within the Engineering Services Segment's backlog at December 31, 2001, $21.1 million relates to two engineering, procurement and construction management projects of material handling systems, and $4.1 million relates to the engineering and construction management of a coal preparation plant. A majority of the current backlog is expected to be realized within the next twelve months. Inflation Historically, general inflation has had only a minor affect on the operations of the Company and its internal and external sources for liquidity and working capital, and the Company has generally been able to increase prices to reflect cost increases. Safe Harbor Statements herein regarding the Company's ability to meet its liquidity requirements and the anticipated benefits from the Company's capital expenditures, and the Company's expected realization of current backlog constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Act of 1934. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Further, statements herein regarding the Company's performance in future periods are subject to risks relating to, deterioration of relationships with, or the loss of material customers or suppliers, possible product liability claims, decreases in demand for the Company's products, and adverse changes in general market and industry conditions. Management believes these forward looking statements are reasonable; however, undue reliance should not be placed on such forward looking statements, which are based on current expectations. ITEM 7A. MARKET RISK In 2001, approximately 19% of the Company's net sales were attributable to products sold or services provided outside of the United States. In 2001, the majority of the Company's foreign sales were to companies located in Puerto Rico, Venezuela, Egypt, Australia, and Poland. A portion of these net sales and cost of sales is derived from international operations which are conducted in foreign currencies. Changes in the value of these foreign currencies relative to the U.S. dollar could adversely affect the Company's business, financial condition, results of operation and debt service capability. The majority of the Company's foreign sales and costs are denominated in U.S. dollars. With respect to transactions denominated in foreign currencies, the Company attempts to mitigate foreign exchange risk by contractually shifting the burden of the risk of currency fluctuations to the other party in the transactions. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements of Elgin National Industries, Inc.
Page ---- Report of Independent Accountants--Ernst & Young L.L.P............................................. 15 Consolidated Balance Sheets as of December 31, 2001 and December 31, 2000.......................... 16 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999............. 17 Consolidated Statements of Changes in Common Stockholder's Deficit for the years ended December 31, 2001, 2000 and 1999.............................................................................. 18 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999......... 19 Notes to Consolidated Financial Statements......................................................... 20
14 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder Elgin National Industries, Inc. We have audited the consolidated balance sheets of Elgin National Industries, Inc. and Subsidiary Companies as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in common stockholder's deficit and cash flows for each of the three years in the period ended December 31, 2001. Our audit also included the financial schedule listed in the index at Item 14(b). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Elgin National Industries, Inc. and Subsidiary Companies as of December 31, 2001 and 2000 and the consolidated results of their operations and their cash flows for each of the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule when considered in relation to the basic financial statements, taken as a whole, presents fairly in all material respects the information set therein. ERNST & YOUNG LLP Chicago, Illinois February 15, 2002 15 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 (in thousands except share data)
ASSETS 2001 2000 ------ -------- -------- Current assets: Cash and cash equivalents....................................................... $ $ 3,021 Accounts receivable, net........................................................ 37,292 29,072 Inventories, net................................................................ 18,359 15,838 Prepaid expenses and other assets............................................... 345 2,202 Deferred income taxes........................................................... 3,542 3,251 -------- -------- Total current assets........................................................ 59,538 53,384 Property, plant and equipment, net................................................. 22,070 17,935 Loans receivable to related parties................................................ 7,833 7,833 Other assets....................................................................... 26,717 24,789 Goodwill and intangibles........................................................... 21,588 8,523 -------- -------- Total assets................................................................ $137,746 $112,464 ======== ======== LIABILITIES AND COMMON STOCKHOLDER'S DEFICIT -------------------------------------------- Current liabilities: Short-term debt................................................................. $ 134 $ Current portion of long-term debt............................................... 3,050 50 Accounts payable................................................................ 32,032 29,326 Accrued expenses................................................................ 11,941 10,768 -------- -------- Total current liabilities................................................... 47,157 40,144 Long-term debt less current portion................................................ 88,050 74,050 Other liabilities.................................................................. 2,273 2,153 Deferred income taxes.............................................................. 3,778 3,416 -------- -------- Total liabilities........................................................... 141,258 119,763 -------- -------- Redeemable preferred stock units................................................... 13,288 12,561 -------- -------- Redeemable preferred stock......................................................... 3,645 3,445 -------- -------- Common stockholder's deficit: Common stock, Class A par value $.01 per share; authorized 23,678 shares; 6,408 shares issued and outstanding as of December 31, 2001 and 2000................ Retained deficit................................................................ (20,445) (23,305) -------- -------- Total common stockholder's deficit.......................................... (20,445) (23,305) -------- -------- Total liabilities and stockholder's deficit................................. $137,746 $112,464 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 16 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
2001 2000 1999 -------- -------- -------- Net sales............................................................. $191,551 $163,370 $150,307 Cost of sales......................................................... 149,988 124,378 110,917 -------- -------- -------- Gross profit....................................................... 41,563 38,992 39,390 Selling, general and administrative expenses.......................... 24,307 24,063 25,114 Amortization expense.................................................. 1,631 775 779 -------- -------- -------- Operating income................................................... 15,625 14,154 13,497 Other expenses (income) Interest income.................................................... (741) (850) (1,215) Interest expense................................................... 9,551 8,526 9,059 -------- -------- -------- Income before income taxes............................................ 6,815 6,478 5,653 Provision for income taxes............................................ 3,309 2,605 2,519 -------- -------- -------- Income before extraordinary item...................................... 3,506 3,873 3,134 -------- -------- -------- Extraordinary gain on early extinguishment of debt, net of tax of $239 380 -------- -------- -------- Net income............................................................ $ 3,506 $ 3,873 $ 3,514 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 17 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER'S DEFICIT For the Years Ended December 31, 2001, 2000 and 1999 (in thousands except share data)
Total Common Retained Stockholder's Stock (Deficit) Deficit ------ --------- ------------- Balance as of December 31, 1998......................................... $ $(29,400) $(29,400) Net income for the year ended December 31, 1999......................... 3,514 3,514 Redeemable preferred stock dividends (19,952 shares at $10.00 per share) (200) (200) Redeemable preferred stock unit dividend equivalent, net of tax of $281. (446) (446) ----- -------- -------- Balance as of December 31, 1999......................................... (26,532) (26,532) ----- -------- -------- Net income for the year ended December 31, 2000......................... 3,873 3,873 Redeemable preferred stock dividends (19,952 shares at $10.00 per share) (200) (200) Redeemable preferred stock unit dividend equivalent, net of tax of $281. (446) (446) ----- -------- -------- Balance as of December 31, 2000......................................... (23,305) (23,305) ----- -------- -------- Net income for the year ended December 31, 2001......................... 3,506 3,506 Redeemable preferred stock dividends (19,952 shares at $10.00 per share) (200) (200) Redeemable preferred stock unit dividend equivalent, net of tax of $281. (446) (446) ----- -------- -------- Balance as of December 31, 2001......................................... $ $(20,445) $(20,445) ===== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 18 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001, 2000 and 1999 (in thousands)
2001 2000 1999 -------- ------- -------- Cash flows from operating activities: Net income.............................................................. $ 3,506 $ 3,873 $ 3,514 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................................ 2,973 2,407 2,370 Amortization........................................................ 1,631 775 779 Provision for deferred income taxes................................. 352 746 235 (Recovery) provision for doubtful accounts and notes receivable..... (593) 356 907 Provision for inventories........................................... 392 256 332 Gain on the early retirement of debt................................ (619) Income from pension overfunding..................................... (1,747) (1,427) (1,174) Loss (gain) on the disposal of assets............................... 45 (5) (20) Changes in assets and liabilities: Accounts receivable................................................. (5,248) (1,644) 54 Inventories......................................................... 109 (1,340) (50) Prepaid expenses and other assets................................... 1,696 (987) (1,766) Accounts payable, accrued expenses, and other liabilities........... 2,503 7,664 3,040 -------- ------- -------- Net cash provided by operating activities........................ 5,619 10,674 7,602 -------- ------- -------- Cash flows from investing activities: Proceeds from the sale of assets........................................ 36 20 41 Purchase of property, plant and equipment............................... (4,440) (4,337) (2,600) Issuance of notes receivable to related parties......................... (4,200) Business acquired, net of cash.......................................... (20,376) (2,078) (1,747) -------- ------- -------- Net cash used by investing activities............................ (24,780) (6,395) (8,506) -------- ------- -------- Cash flows from financing activities: Debt issuance costs..................................................... (994) Borrowings on short-term debt........................................... 134 Borrowings on long-term debt............................................ 19,300 150 7,000 Repayments of long-term debt............................................ (2,300) (7,109) (10,376) -------- ------- -------- Net cash provided by (used in) financing activities.............. 16,140 (6,959) (3,376) -------- ------- -------- Net decrease in cash....................................................... (3,021) (2,680) (4,280) Cash and cash equivalents at beginning of period........................... 3,021 5,701 9,981 -------- ------- -------- Cash and cash equivalents at end of period................................. $ 0 $ 3,021 $ 5,701 ======== ======= ========
The accompanying notes are an integral part of the consolidated financial statements. 19 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Company Elgin National Industries, Inc. (''the Company'') owns and operates a diversified group of middle-market industrial manufacturing and engineering services businesses. The Company is organized into two operating segments. Through its Manufactured Products Segment, the Company manufactures and supplies custom-designed, highly engineered products used by a wide variety of customers in the industrial equipment, durable goods, mining, mineral processing and electric utility industries, primarily within the United States. Through its Engineering Services Segment, the Company provides design, engineering, procurement and construction management services for mineral processing and bulk materials handling systems used in the mining, mineral processing, electric utilities and the rail and marine transportation industries, both within the United States and internationally. 2. Summary of Significant Accounting Policies The significant accounting policies of the Company are summarized below: (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. (b) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Revenue Recognition Revenues earned through manufactured products are recognized upon shipment to the customer. Revenues earned through engineering services are recognized on the percentage-of-completion method measured by comparing costs incurred to date with total estimated costs on each project. The lengths of the Company's construction contracts vary, but are typically longer than one year. However, in accordance with industry practice, contract-related assets and liabilities are classified as current in the accompanying consolidated balance sheets. Contract costs include direct material and engineering costs along with indirect costs related to contract performance. Favorable adjustments to these cost estimates are made and recognized in income over the remaining contract period. Unfavorable adjustments are recorded as soon as they are apparent. Estimated losses on uncompleted contracts are provided in full within the period in which such losses are determinable. (d) Accounts Receivable Credit evaluations of customers are ongoing and collateral, or other security is generally not required on accounts receivable. An allowance for doubtful accounts is maintained at a level management believes is sufficient to cover potential credit losses. (e) Inventories Inventories are valued at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) and the average cost bases. 20 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Summary of Significant Accounting Policies, continued (f) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is computed principally using the straight-line and double declining-balance methods over the estimated useful lives of the related assets which range from 3 to 30 years. Maintenance and repair costs are charged to earnings as incurred. Costs of major improvements are capitalized. (g) Goodwill and Intangibles The excess of cost over fair value of the net assets acquired is reflected in the consolidated financial statements as goodwill and is being amortized using the straight-line method over a period of twenty years. The Company assesses recoverability of goodwill based on an evaluation of undiscounted projected cash flows of the acquired business through the remaining amortization period. If an impairment exists, the amount of such impairment is calculated based on the difference between the carrying value and the estimated fair value of the asset. Intangibles consist primarily of financing and acquisition costs and are being amortized using the straight-line method over a period of three to ten years. (h) Income Taxes Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at December 31, 2001 and 2000 based on tax rates applicable to the periods in which the differences are expected to affect taxable earnings. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. (i) Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. (j) Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value. Long-term debt: The fair values for long-term debt is based on quoted market prices, except current portion which approximates book value. (k) Shipping Costs The Company classifies shipping costs incurred to physically move product from the seller's place of business to the buyer's designated location as selling costs. Shipping costs were $717,000, $648,000 and $609,000 for the years ended December 31, 2001, 2000 and 1999 respectively. 21 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Summary of Significant Accounting Policies, continued (l) Adoption of Accounting Principles Effective January 1, 2001, the Company adopted the provisions of Statement of Accounting Standards No. 133, ''Accounting for Derivative Instruments and Hedging Activities'' ("SFAS No. 133"). SFAS No. 133 requires all derivatives to be recognized in the statement of financial position as either assets or liabilities and measured at fair value. In addition, all hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. The adoption of SFAS No. 133 did not have any effect on the Company. In June 2001, the Financial Accounting Standards Board issued Statements of Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 31, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of approximately $660,000 per year. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. (m) Reclassification Certain amounts in the 2000 and 1999 financial statements have been reclassified to conform to the 2001 presentation. 3. Accounts Receivable Accounts receivable consist of:
December 31, --------------- 2001 2000 ------- ------- (in thousands) Trade accounts..................................................... $13,374 $ 9,046 ------- ------- Construction contracts: Billed.......................................................... 17,767 16,578 Costs and estimated earnings in excess of billings on contracts. 2,622 468 Retainage due upon completion of contracts...................... 3,767 3,527 ------- ------- 37,530 20,573 ------- ------- Other receivables.................................................. 445 313 ------- ------- 37,975 29,932 Less allowance for doubtful accounts............................... 683 860 ------- ------- $37,292 $29,072 ======= =======
22 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Accounts Receivable, continued Billings exceeded related costs and gross profit recognized on certain contracts by $12,808,000 and $16,762,000 as of December 31, 2001 and 2000, respectively. These amounts are classified as current liabilities in the accompanying consolidated balance sheets. It is estimated that the majority of the retainage due upon completion of contracts at December 31, 2001 will be collected in 2002. A significant portion of the Company's business activity is concentrated within the coal mining industry. Accounts receivable at December 31, 2001 and 2000 from companies within the coal mining industry were $21,998,000 and $17,300,000, respectively. 4. Inventories Inventories consist of:
December 31, --------------- 2001 2000 ------- ------- (in thousands) Finished goods.................. $10,990 $10,168 Work-in-process................. 2,387 1,356 Raw materials................... 6,744 5,916 ------- ------- 20,121 17,440 Less excess and obsolete reserve 1,762 1,602 ------- ------- $18,359 $15,838 ======= =======
5. Property, Plant and Equipment Property, plant and equipment, at cost, consist of:
December 31, --------------- 2001 2000 ------- ------- (in thousands) Land......................... $ 2,260 $ 2,176 Buildings and improvements... 12,044 9,645 Machinery and equipment...... 25,500 21,181 ------- ------- 39,804 33,002 Less accumulated depreciation 17,734 15,067 ------- ------- $22,070 $17,935 ======= =======
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was $2,973,000, $2,407,000 and $2,370,000, respectively. 23 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 6. Goodwill and Intangibles The components of goodwill and intangibles are as follows:
December 31, --------------- 2001 2000 ------- ------- (in thousands) Goodwill....................... $23,159 $ 9,457 Financing and acquisition costs 4,787 3,793 ------- ------- 27,946 13,250 Less accumulated amortization.. 6,358 4,727 ------- ------- $21,588 $ 8,523 ======= =======
Goodwill increased $13,702,000 in 2001 due to the acquisition of Leland Powell Fasteners, Inc. Amortization expense, including amounts related to the early extinguishment of debt, was $1,631,000, $775,000 and $1,164,000, for the years ended December 31, 2001, 2000 and 1999, respectively. 7. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of:
December 31, --------------- 2001 2000 ------- ------- (in thousands) Accounts payable--trade............................................. $15,121 $12,126 Accounts payable--other............................................. 4,103 438 Billings on contracts in excess of costs and gross profit recognized 12,808 16,762 Accrued payroll and commissions..................................... 4,103 3,220 Other accruals...................................................... 7,838 7,548 ------- ------- $43,973 $40,094 ======= =======
24 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Income Taxes The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to a significant portion of the deferred tax liability and deferred tax asset of which their approximate tax effect are as follows:
December 31, ---------------- 2001 2000 ------- ------- (in thousands) Accounts receivable................... $ 221 $ 440 Inventories........................... 653 487 Accrued expenses...................... 2,084 2,200 Intangibles........................... 1,303 1,668 Redeemable preferred stock units...... 4,673 4,300 State net operating loss carry forward 584 124 ------- ------- Total deferred tax asset........... 9,518 9,219 ------- ------- Prepaid pension....................... (9,370) (8,734) Property plant & equipment............ (384) (650) ------- ------- Total deferred tax liability....... (9,754) (9,384) ------- ------- Net deferred tax (liability) asset.... $ (236) $ (165) ======= =======
The components of the provision (benefit) for income taxes are:
Years Ended December 31, ----------------------- 2001 2000 1999 ------ ------ ------ (in thousands) Current Federal. $2,051 $1,761 $2,133 State... 803 354 468 Foreign. 103 25 209 Deferred Federal. 541 381 (43) State... (189) 84 (9) ------ ------ ------ $3,309 $2,605 $2,758 ====== ====== ======
Allocation of the provision for income taxes in the 2001, 2000 and 1999 consolidated statements of income include the following:
Years Ended December 31, ------------------------ 2001 2000 1999 ------ ------ ------ (in thousands) Continuing operations.. $3,309 $2,605 $2,519 Extraordinary gain--tax 239 ------ ------ ------ $3,309 $2,605 $2,758 ====== ====== ======
25 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Income Taxes, continued The Company's effective tax rates of 49%, 40% and 44% for the years ended December 31, 2001, 2000 and 1999, respectively, differ from the statutory federal tax rate of 34% as follows:
Years Ended December 31, ------------------------ 2001 2000 1999 ------ ------ ------ (in thousands) Income before income taxes.......... $6,815 $6,478 $6,272 ====== ====== ====== Statutory federal income tax........ $2,317 $2,203 $2,133 State taxes, net of federal benefit. 376 234 309 Foreign sales corporation income tax 59 65 47 Adjustment to deferred income tax... 425 Other items......................... 132 103 269 ------ ------ ------ $3,309 $2,605 $2,758 ====== ====== ======
The Company made cash payments for income taxes totalling $1,501,000, $2,704,000 and $2,022,000 during the years ended December 31, 2001, 2000 and 1999, respectively. 9. Short-Term Debt Short-term debt consists of a construction loan for the construction of a plating facility in Osgood, Indiana. The construction loan has a maximum principal balance of $1,200,000 with an outstanding principal balance of $134,000 on December 31, 2001. The maturity of the construction loan is May 1, 2002 upon which time the loan will be converted to a twenty year amortizing mortgage loan. This loan is a variable rate loan with interest equal to prime with a floor of 7% and a lifetime cap of 10%. 10. Long-Term Debt Long-term debt consists of:
Interest Rate at December 31, December 31, Year of --------------- Type of Issue 2001 Maturity 2001 2000 ------------- ---------------- -------- ------- ------- (in thousands) Fixed rate: Senior notes................. 11.00% 2007 $73,950 $73,950 Mortgage payable............. 0.00% 2003 100 150 Variable rate: Term loan.................... 2005 9,750 Revolver loan................ 2005 7,300 ------- ------- Total long-term debt............ 91,100 74,100 Less current maturities......... 3,050 50 ------- ------- Total non-current long-term debt $88,050 $74,050 ======= =======
Under the terms of a Bank Credit Agreement the Company has the revolver loan with a borrowing capacity of up to $23,000,000 (less any outstanding letters of credit) based upon a monthly variable borrowing base. At December 31, 2001, the Company's available borrowing base of $23,000,000 less the outstanding letters of credit of $3,298,000 resulted in an available portion of the revolving credit facility of $19,702,000. In addition, the 26 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Long-Term Debt, continued Bank Credit Agreement includes a term loan with a principal balance of $9,750,000 as of December 31, 2001. The term loan requires quarterly principal payments of $750,000. Both the revolver loan and term loan have interest rates tied to a pricing grid. At December 31, 2001 the revolver and term loan interest is either at (a) the greater of (i) the interest rate per annum announced from time to time by the Agent at its principal office as its then prime rate, or (ii) the Federal Funds Effective Rate plus 0.5% per annum ("Base Rate") plus a margin or the Euro Rate plus a margin. Both the revolver and the term loan portions of the Bank Credit Agreement have a maturity of January 18, 2005. The Company's assets are pledged under the terms of the Bank Credit Agreement as of December 31, 2001. The Bank Credit Agreement contains certain restrictive covenants, which, among other things, limit the amount of indebtedness, limit the payment of dividends and require the maintenance of certain financial ratios. Annual principal payments on long-term debt at December 31, 2001 were as follows (in thousands):
Revolver Senior Term Mortgage Loan Notes loan loan Total -------- ------- ------ -------- ------- 2002............... $3,000 $ 50 $ 3,050 2003............... 3,000 50 3,050 2004............... 3,000 3,000 2005............... $7,300 750 8,050 2006............... 2007 and thereafter $73,950 73,950 ------ ------- ------ ---- ------- $7,300 $73,950 $9,750 $100 $91,100 ====== ======= ====== ==== =======
Along with scheduled principal repayments, the term loan requires an additional principal payment after the end of each year based on an excess cash flow calculation. Under the terms of the senior notes, the Company is required to make only interest payments until the senior notes maturity in 2007. The senior notes may be redeemed, in whole or in part, at any time on or after November 1, 2002 at the option of the Company, at the redemption prices as detailed below, being equal to a percentage of the principal amount of the notes being redeemed, plus accrued and unpaid interest and specified liquidated damages, if any, to the date of redemption.
Year Percentage ---- ---------- 2002............... 105.500% 2003............... 103.667% 2004............... 101.833% 2005 and thereafter 100.000%
In addition, in the event of a Change of Control, each holder of the senior notes will have the right to require the Company to make an offer to purchase such holder's notes, in whole or in part, at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase. The senior notes contain certain restrictive covenants, which, among other things, limit the ability of the Company to incur additional indebtedness and make certain restricted payments, grant liens upon its assets, sell certain assets, merge or consolidate. 27 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Long-Term Debt, continued The senior notes are unsecured obligations and are guaranteed by the Company's material domestic subsidiaries. In 1999 the Company repurchased $11,050,000 of the senior notes at a discount of $1,004,000. The gain on early extinguishment of debt is reduced by the amortization of financing costs of $385,000, and is shown net of tax. The Company made cash payments for interest totalling $9,357,000, $8,557,000 and $9,218,000, respectively, during 2001, 2000 and 1999. The weighted average interest rate on current portion of the long term debt for 2001 was 7.76%. Based upon the Company's ability to obtain financing under similar terms, the estimated fair value of the Company's long-term debt including the current portion was $77,184,000 and $61,529,000 at December 31, 2001 and December 31, 2000, respectively. 11. Redeemable Preferred Stock Units In exchange for amounts owed to certain officers, the Company granted to them redeemable preferred stock units redeemable on December 31, 2007 with an aggregate principal value of $7,274,000 provided, that, the Company's obligation to make a redemption payment at such time is subject to the restrictions contained in the agreement governing the 11% senior notes due 2007. The Company had accrued dividend equivalent amounts equal to $6,014,000 and $5,287,000 at December 31, 2001 and 2000, respectively. The redeemable preferred stock units accrue at 10% per annum. Principal and accrued dividend equivalent amounts were $13,288,000 and $12,561,000 at December 31, 2001 and 2000, respectively, and will be paid in tandem with the Company's redeemable preferred stock dividend and redemption payments. 12. Redeemable Preferred Stock The Company has 550,000 shares of $1.00 par value redeemable preferred stock authorized with 19,952 shares issued and outstanding at December 31, 2001. The redeemable preferred stock is mandatorily redeemable at $100 per share totalling $1,995,000 for all shares currently outstanding, plus all accrued and unpaid dividends thereon on December 31, 2007 or upon the occurrence of a qualified public offering or other sale of the Company. The redeemable preferred stock has a preferential liquidation value of $100 per share and accrues cumulative preferred dividends at 10% per annum of the liquidation value. Dividends accrue cumulatively at a rate of 10% per annum. Redeemable preferred stock has no voting rights. The Company had accrued dividends of $1,650,000 and $1,450,000 as of December 31, 2001 and 2000, respectively. 13. Pension and Profit Sharing Plans The Company has a noncontributory defined benefit plan which is open to all eligible, full-time, nonunion employees and is salary related and integrated with Social Security. The Company's funding policy for the plan 28 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. Pension and Profit Sharing Plans, continued is to fund the minimum annual contribution required by applicable regulations. Pension plan assets are primarily invested in bonds, corporate notes and common stock. In 1995, the Company established a nonqualified supplemental employee retirement plan ("SERP") for certain employees whose pension benefits were limited by the Omnibus Budget Reconciliation Act of 1993, the Employee Retirement Income Security Act ("ERISA") and the Uruguay Round General Agreement on Tariffs and Trade ("GATT"). The following information for the years ended December 31, 2001 and 2000 has been obtained from the actuarial computation for the years ended September 30, 2001 and 2000, respectively. The change in the benefit obligation for the defined benefit plan is as follows for the years ended December 31:
2001 2000 ------- ------- (in thousands) Projected benefit obligation at beginning of year $22,994 $20,067 Service cost--benefits earned during the period.. 800 1,036 Interest cost on projected benefit obligation.... 1,423 1,222 Plan amendments.................................. 459 Actuarial (gains) losses......................... 2,431 1,687 Benefit payments................................. (1,302) (1,477) ------- ------- Projected benefit obligation at end of year...... $26,346 $22,994 ======= =======
The change in plan assets is as follows for the years ended December 31:
2001 2000 ------- ------- (in thousands) Fair value of plan assets at beginning of year $46,112 $42,996 Actual return on plan assets.................. (6,771) 4,593 Employer contributions........................ Benefit payments.............................. (1,302) (1,477) ------- ------- Fair value of plan assets at end of year...... $38,039 $46,112 ======= =======
2001 2000 ------- ------- (in thousands) Plan assets in excess of projected benefit obligations $11,881 $23,118 Unrecognized amounts: Prior service cost................................. 484 408 Net gain........................................... 10,511 (2,391) ------- ------- Prepaid pension cost.................................. $22,876 $21,135 ======= =======
Prepaid pension cost included in other assets at December 31, 2001 and 2000, was $24,263,000 and $22,517,000, respectively. Pension costs included in other liabilities at December 31, 2001 and 2000, was $1,387,000 and $1,382,000, respectively. 29 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 13. Pension and Profit Sharing Plans, continued At December 31, 2001 and 2000, respectively, the Company's SERP projected benefit obligation of $1,104,000 and $1,111,000 was not funded. Weighted average assumptions as of December 31:
2001 2000 ---- ---- Settlement rate................... 5.25% 6.00% Long term rate of return on assets 9.00 9.00 Rate of compensation increase..... 4.75 5.50
Components of net periodic pension benefit are as follows for the years ended December 31:
2001 2000 1999 ------- ------- ------- (in thousands) Service cost--benefits earned during the period $ 800 $ 1,036 $ 1,106 Interest cost on projected benefit obligation.. 1,423 1,222 1,231 Expected return on assets...................... (3,900) (3,538) (3,316) Net amortization of prior service cost......... (76) (76) 218 Net amortization of prior losses............... 11 17 84 ------- ------- ------- Net periodic pension benefit................... $(1,742) $(1,339) $ (677) ======= ======= =======
In addition the Company makes contributions to a union-administered pension plan for certain employees who do not participate in the Company's pension plan. The Company's aggregate expense for this plan for the years ended December 31, 2001, 2000 and 1999 was $44,000, $47,000 and $49,000, respectively. The Company has a combined 401(k) employee savings and profit sharing plan for all eligible, full time non-union employees. Contributions to the plan are based upon management's discretion. The Company's aggregate expense for these plans for the years ended December 31, 2001, 2000 and 1999 was $1,292,000, $1,240,000 and $1,036,000, respectively. In addition the Company established during 1995 a non-qualified profit sharing plan for certain employees whose 401(k) benefits were also limited to the Omnibus Budget Reconciliation Act of 1993, ERISA and GATT. The Company's expense for this plan in 2001, 2000 and 1999 was $55,000, $36,000 and $12,000, respectively. 14. Leases The Company has entered into noncancellable operating leases, primarily for office space, vehicles and equipment, that have initial or remaining terms of more than one year. Future minimum annual rental expenditures are as follows:
Year (in thousands) ---- -------------- 2002............... $1,984 2003............... 1,828 2004............... 1,656 2005............... 1,290 2006............... 611 2007 and thereafter 116 ------ $7,485 ======
30 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 14. Leases, continued Rental expense for the twelve months ended December 31, 2001, 2000 and 1999 was $1,966,000, $1,941,000 and $1,634,000, respectively. 15. Related Party Transactions At December 31, 2001 and 2000, the Company had the following outstanding notes receivable and note payable with related parties: (I) Two notes receivable from a limited partnership owned by an officer with principal due on each in the amount of $1,000,000 in December, 2007. Prepayment is required if the value to be paid under the redeemable preferred stock units at the time of payment is less than the aggregate amount of the principal and interest outstanding. Interest accrues at 5.35% and 6.31%, respectively, and is payable at the earlier of prepayment or maturity. Interest earned for each of the years ended December 31, 2001, 2000 and 1999 was $117,000. (II) Notes receivable from certain officers in the total principal amount of $1,033,000, $600,000 and $4,200,000 due in December, 2007. Interest accrues at 6.42%, 6.31% and 5.37%, respectively, per annum. Interest earned was $330,000, $330,000, and $217,000, respectively, for the years ended December 31, 2001, 2000 and 1999. (III) Subject to an offset agreement, notes receivable and a note payable in the amount of $1,603,000 with a limited partnership owned by an officer. These notes accrue interest at 5.35% annually. All notes are due in December, 2007. 16. Contingencies The Company has claims against others, and there are claims by others against it, in a variety of matters arising out of the conduct of the Company's business. The ultimate resolution of all such claims would not, in the opinion of management, have a material effect on the Company's financial position, cash flows or results of operations. In connection with the 1993 leveraged buyout of the Company, The Jupiter Corporation (''Jupiter''), the previous owner, agreed to indemnify the Company against various claims and ongoing litigation and assumed the defense of such litigation. The litigation includes a wrongful death product liability claim against one of the Company's subsidiaries in connection with an accident at a work site. Although the Company believes that Jupiter and its insurance carrier are performing on the indemnity obligations, there can be no assurance that they will continue to do so or that the Company would successfully recover on the indemnity in the event of an adverse judgement against the subsidiary or adverse outcomes in any other proceedings. In any such case, the Company would bear the cost of defense and any adverse judgment. One or more such adverse judgements could materially and adversely affect the Company's business, financial condition, results of operations and debt service capability. In early 1999 the Company settled a lawsuit relating to an engineering contract claim. The Company received approximately $1.8 million in this settlement. This settlement was reflected in the Company's 1999 financial statements. 17. Segment Information The Company operates predominantly within the United States, primarily in two industries, Manufactured Products and Engineering Services. The accounting policies of the segments are the same as those described in 31 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 17. Segment Information, continued the "Summary of Significant Accounting Policies." In accordance with the Company's method of internal reporting, corporate-headquarters costs are not allocated to the individual segments. Information about the Company by industry is presented below for the years ended December 31:
2001 2000 1999 -------- -------- -------- (In thousands) Net sales to external customers: Manufactured Products.................................................. $ 99,080 $ 80,036 $ 77,312 Engineering Services................................................... 92,471 83,334 72,995 -------- -------- -------- Total net sales to external customers.............................. $191,551 $163,370 $150,307 ======== ======== ======== Net sales to internal customers: Manufactured Products.................................................. $ 4,960 $ 3,393 $ 2,638 Engineering Services................................................... 493 227 225 -------- -------- -------- Total net sales to internal customers.............................. $ 5,453 $ 3,620 $ 2,863 ======== ======== ======== Total net sales: Manufactured Products.................................................. $104,040 $ 83,429 $ 79,950 Engineering Services................................................... 92,964 83,561 73,220 -------- -------- -------- Total net sales.................................................... 197,004 166,990 153,170 Elimination of net sales to internal customers..................... 5,453 3,620 2,863 -------- -------- -------- Total consolidated net sales....................................... $191,551 $163,370 $150,307 ======== ======== ======== Earnings before interest, taxes and amortization: Manufactured Products.................................................. $ 15,784 $ 14,543 $ 14,305 Engineering Services................................................... 6,780 4,641 4,785 -------- -------- -------- Total segment earnings before interest, taxes and amortization..... 22,564 19,184 19,090 Amortization.............................................................. (1,631) (775) (779) Interest income........................................................... 741 850 1,215 Interest expense.......................................................... (9,551) (8,526) (9,059) Corporate expenses before interest, taxes and amortization................ (5,308) (4,255) (4,814) -------- -------- -------- Consolidated income from continuing operations before income taxes.................................................... $ 6,815 $ 6,478 $ 5,653 ======== ======== ========
32 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 17. Segment Information, continued
2001 2000 1999 -------- -------- ------ (In thousands) Capital expenditures: Manufactured Products...................... $ 3,111 $ 1,535 $2,056 Engineering Services....................... 185 203 137 -------- -------- ------ Total segment capital expenditures..... 3,296 1,738 2,193 Corporate.............................. 1,144 2,599 407 -------- -------- ------ Total capital expenditures............. $ 4,440 $ 4,337 $2,600 ======== ======== ====== Depreciation: Manufactured Products...................... $ 2,581 $ 2,206 $2,160 Engineering Services....................... 189 169 184 -------- -------- ------ Total segment depreciation............. 2,770 2,375 2,344 Corporate.............................. 203 32 26 -------- -------- ------ Total depreciation..................... $ 2,973 $ 2,407 $2,370 ======== ======== ====== Assets: Manufactured Products...................... $ 64,939 $ 40,653 Engineering Services....................... 24,941 22,288 -------- -------- Total segment assets................... 89,880 62,941 Corporate and other.................... 47,866 49,523 -------- -------- Total assets........................... $137,746 $112,464 ======== ========
The following is sales information by geographic area for the years ended December 31:
2001 2000 1999 -------- -------- -------- United States $154,582 $145,178 $131,317 Foreign...... 36,969 18,192 18,990 -------- -------- -------- $191,551 $163,370 $150,307 ======== ======== ========
Foreign revenue is based on the final destination of merchandise sold. There were no sales to a single foreign country that were material to the consolidated revenues of the Company. 33 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 18. Subsidiary Guarantors The Company's payment obligations under the Senior Notes and revolver loan are fully and unconditionally guaranteed on a joint and several basis (collectively, ''Subsidiary Guarantees'') by Tabor Machine Company, Norris Screen and Manufacturing, Inc., TranService, Inc., Mining Controls, Inc., Clinch River Corporation, Centrifugal Services, Inc., Roberts & Schaefer Company, Soros Associates, Inc., Vanco International, Inc., Precision Screw & Bolt Inc., Leland Powell Fasteners, Inc., ENI International, Ltd. and Best Metal Finishing, Inc. ("the Guarantors") each a direct, wholly-owned subsidiary of the Company. The following summarized combined financial data illustrates the composition of the combined Guarantors.
December 31, 2001 ---------------------------------------------- Combined Consolidating Consolidated Parent Guarantors Adjustments Total -------- ---------- ------------- ------------ (in thousands) Current assets..... $ 11,498 $48,040 $ 59,538 Noncurrent assets.. 93,110 11,359 $(26,261) 78,208 -------- ------- --------- -------- Total assets....... $104,608 $59,399 $(26,261) $137,746 ======== ======= ========= ======== Current liabilities $ 19,130 $35,327 $ 54,457 Total liabilities.. $106,971 $34,287 $141,258 December 31, 2000 ---------------------------------------------- Combined Consolidating Consolidated Parent Guarantors Adjustments Total -------- ---------- ------------- ------------ (in thousands) Current assets..... $ 15,539 $37,845 $ 53,384 Noncurrent assets.. 68,376 12,988 $(22,284) 59,080 -------- ------- --------- -------- Total assets....... $ 83,915 $50,833 $(22,284) $112,464 ======== ======= ========= ======== Current liabilities $ 7,904 $32,240 $ 40,144 Total liabilities.. $ 88,781 $30,982 $119,763
Year ended December 31, 2001 ---------------------------------------------- Combined Consolidating Consolidated Parent Guarantors Adjustments Total -------- ---------- ------------- ------------ (in thousands) Sales, net.................................. $ 35,534 $158,172 $ (2,155) $191,551 Gross profit................................ 18,096 23,467 41,563 Income before income tax.................... (1,286) 8,101 6,815 Net Income.................................. (198) 3,704 3,506 Cash (used) provided by operating activities 3,250 2,369 5,619 Cash (used) provided by investing activities (22,277) (2,503) (24,780) Cash (used) provided by financing activities 16,006 134 16,140 Year ended December 31, 2000 ---------------------------------------------- Combined Consolidating Consolidated Parent Guarantors Adjustments Total -------- ---------- ------------- ------------ (in thousands) Sales, net.................................. $ 37,932 $126,710 $ (1,272) $163,370 Gross profit................................ 14,749 24,243 38,992 Income before income tax.................... (2,001) 8,479 6,478 Net Income.................................. (425) 4,298 3,873 Cash (used) provided by operating activities 4,563 6,111 10,674 Cash (used) provided by investing activities (5,810) (585) (6,395) Cash (used) provided by financing activities (1,433) (5,526) (6,959)
34 ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 18. Subsidiary Guarantors, continued Year ended December 31, 1999 --------------------------------------------- Combined Consolidating Consolidated Parent Guarantors Adjustments Total ------- ---------- ------------- ------------ (in thousands) Sales, net.................................. $42,519 $109,071 $(1,283) $150,307 Gross profit................................ 16,773 22,617 39,390 Income before income tax.................... (1,540) 7,193 5,653 Net Income.................................. (2,938) 6,452 3,514 Cash (used) provided by operating activities 8,179 (577) 7,602 Cash (used) provided by investing activities (7,803) (703) (8,506) Cash (used) provided by financing activities (4,656) 1,280 (3,376)
The direct and non-direct, non-guarantor subsidiaries, in terms of assets, equity, income, and cash flows, on an individual and combined basis are inconsequential. Separate financial statements of the Guarantors are not presented because management has determined that these would not be material to investors. 19. Acquisition of Subsidiary On January 18, 2001 the Company acquired Leland Powell Fasteners, Inc. ("Leland") for $20,376,000 net of cash. Leland is a manufacturer of specialty fasteners located in Martin, Tennessee. The acquisition of Leland was accounted for as a purchase. The amount of the purchase price over the fair value of net assets acquired is reflected in the accompanying consolidated balance sheet as goodwill. The results of operations from the date of acquisition are included in the consolidated statement of income. 20. Selected Quarterly Data (unaudited)
Quarter Quarter Quarter Quarter ended ended ended ended December 31, September 30, June 30, March 31, 2001 2001 2001 2001 ------------ ------------- -------- --------- Net sales... $53,433 $43,540 $51,012 $43,566 Gross Profit 12,002 9,681 10,634 9,246 Net Income.. 1,415 530 805 756
Quarter Quarter Quarter Quarter ended ended ended ended December 31, September 30, June 30, March 31, 2000 2000 2000 2000 ------------ ------------- -------- --------- Net sales... $41,283 $40,653 $42,119 $39,315 Gross Profit 9,301 9,293 10,481 9,917 Net Income.. 990 816 1,198 869
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 35 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding the directors and executive officers of the Company:
Director Name Age Position with the Company Since ---- --- ------------------------------------------ -------- Fred C. Schulte 55 Chairman of the Board, Chief Executive Officer and Director 1988 Charles D. Hall 63 President, Chief Operating Officer and Director 1993 Wayne J. Conner 49 Vice President, Treasurer, Chief Financial Officer and Director 1993 Lynn C. Batory. 43 Vice President, Controller and Secretary David Hall..... 42 Vice President of Manufacturing Mort Maurer.... 84 Director 1998
Directors are elected for one year terms and hold office until their successors are elected and qualified. The executive officers are appointed by and serve at the discretion of the Board of Directors. A brief description of the employment history of the directors and executive officers of the Company listed above are set forth below: Fred C. Schulte is Chairman of the Board, Chief Executive Officer and a Director of the Company. Mr. Schulte joined the Company as President and CEO in 1988 in connection with the acquisition of the Company by The Jupiter Corporation. Mr. Schulte had joined The Jupiter Corporation earlier that same year. From 1986 to 1988, Mr. Schulte served as Vice President-Executive Department for Santa Fe Southern Pacific at its headquarters in Chicago. From 1976 to 1986, Mr. Schulte was employed with SF Mineral Company (a Santa Fe Southern Pacific Company) in Albuquerque, New Mexico. From 1974 to 1976, Mr. Schulte was employed by Kerr McGee Corporation where he held a number of engineering, operating and management positions in the company's Hard-Minerals Division. Prior to 1974, Mr. Schulte served for five years in the United States Air Force as a pilot and operations officer. Mr. Schulte received an Engineer of Mines degree from the Colorado School of Mines and a Master of Business Administration degree from Oklahoma City University. Charles D. Hall is President, Chief Operating Officer and a Director of the Company. Mr. Hall joined the corporate staff of the Company in 1988, serving as Vice President of Operations prior to being named President in 1997. From 1975 to 1988, Mr. Hall was employed by Ohio Rod, initially as Controller and Chief Financial Officer and then, in late 1975, as President, a position he held until 1988. Prior to joining Ohio Rod, Mr. Hall was employed by Walker China in Bedford Heights, Ohio from 1971 to 1974. Mr. Hall is the father of David Hall, the Company's Vice President of Manufacturing. Wayne J. Conner is Vice President, Chief Financial Officer, Treasurer and a Director of the Company. Mr. Conner joined the Company in 1989 as Vice President and Chief Financial Officer. From 1985 to 1989, Mr. Conner was employed by AluChem, Inc. of Cincinnati, Ohio as the Corporate Controller and Chief Financial Officer. From 1984 to 1985, Mr. Conner served as the Vice President of Finance and Administration for a start-up computer manual writing company, Comware, Incorporated. From 1976 to 1984, Mr. Conner was employed by Ohio Rod as the Controller and Chief Financial Officer. Mr. Conner began his career at the public accounting firm of Haskins and Sells. Mr. Conner is a graduate of the University of Cincinnati, College of Business Administration and is a Certified Public Accountant. 36 Lynn C. Batory is Vice President, Controller and Secretary of the Company. Ms. Batory joined the Company in 1983 as an internal auditor performing operational audits and special projects. Since then, Ms. Batory has held positions of increasing responsibility including Accounting Manager, Assistant Controller and her current position of Controller which she attained in 1988. In 1993, Ms. Batory was also named Vice President and Secretary. Prior to joining the Company, Ms. Batory was employed by NICOR, Inc. of Naperville, Illinois from 1981 to 1983 as a staff accountant providing financial support for ten mining companies and five marine transportation companies. Ms. Batory holds a Bachelor of Science degree in Accounting from the University of Houston. David Hall is Vice President of Manufacturing. Mr. Hall joined the Company in 1995, and is currently responsible for the operations of the Manufactured Products Segment. From 1984 to 1995, Mr. Hall was employed by Consolidated Industries of Lafayette, Indiana where he served in various positions of increasing responsibility including Assistant Controller, Controller, Vice President of Finance and Administration and, beginning in 1994, General Manager. Mr. Hall has a Bachelor of Science degree in Accounting from Butler University. David Hall is the son of Charles D. Hall, President, Chief Operating Officer and a director of the Company. Mort Maurer was elected in January, 1998 to serve as a director of the Company. Mr. Maurer has over 30 years executive managerial experience at large manufacturing companies, including Northrop Corporation and RCA. From 1983 to 1987, Mr. Maurer served as Vice President of Monogram Industries. Mr. Maurer currently serves as Chairman of the Board of Spaulding Composites, Inc. and since 1987, Mr. Maurer has been retained as a consultant by Nortek, Inc. Mr. Maurer holds a Master of Business Administration degree from Pepperdine University and also holds a Bachelor of Science degree in Mechanical Engineering. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation of the Company's Chief Executive Officer and for the four other most highly compensated officers of the Company having total annual salary and bonus in excess of $100,000.
All Other Annual Name and Principal Position Year Salary Bonus Compensation --------------------------- ---- -------- -------- ------------ Fred C. Schulte............................... 2001 $369,363 $294,930 $111,591 Chairman and Chief Executive Officer 2000 351,774 256,125 111,592 1999 335,023 249,555 115,182 Charles D. Hall............................... 2001 332,427 294,930 95,414 President and Chief Operating Officer 2000 316,597 256,125 97,541 1999 301,522 249,555 87,648 Wayne J. Conner............................... 2001 192,069 294,930 76,958 Vice President, Treasurer and Chief Financial 2000 182,923 256,125 84,690 1999 174,213 249,555 90,839 Lynn C. Batory................................ 2001 126,515 150,000 33,802 Vice President, Controller and Secretary 2000 119,139 133,706 12,382 1999 113,007 115,763 11,585 David Hall.................................... 2001 126,515 150,000 24,101 Vice President of Manufacturing 2000 119,139 133,706 12,382 1999 113,007 115,763 11,585
All other annual compensation reflects employer contributions to the Company's Profit Sharing Plan (as defined) and Supplemental Employee Retirement Plan (as defined), auto, membership, professional fee and travel and medical benefits and the value of term life and disability insurance premiums. 37 Profit Sharing Plan The Company maintains the Elgin National Industries, Inc. Master Savings & Profit Sharing Plan (the "Profit Sharing Plan"). Generally, all non-union employees of the Company who have completed one year of service are eligible to participate in the Profit Sharing Plan. For any plan year, the Company may make a discretionary contribution to the Profit Sharing Plan, which is allocated to participants who have completed 1,000 hours of service during the year and who are employed on the last day of the year based on their compensation for that year. Participants vest in their account balances ratably over five years (in 20 percent increments). Generally, distributions from the Profit Sharing Plan are made following termination of employment. Supplemental Employee Retirement Plan The Company maintains the Elgin National Industries, Inc. Supplemental Retirement Plan (the "Supplemental Employee Retirement Plan"). Employees are eligible for participation in this plan if they participate in the Profit Sharing Plan or the ENI Pension Plan for Employees of Elgin National Industries, Inc. and Participating Affiliates (the "Pension Plan") and have been approved for participation by the Board of Directors. The Supplemental Employee Retirement Plan provides benefits to participants whose full benefits under the Profit Sharing Plan or the Pension Plan have been limited by certain provisions of the Internal Revenue Code. Benefits under the Supplemental Plan are generally payable upon termination of employment. Pension Plan Table (a)
Years of Service ------------------------------------------ Remuneration (b) 15 20 25 30 35 ---------------- ------- ------- -------- -------- -------- $200,000.... $20,407 $27,209 $ 34,011 $ 40,814 $ 47,616 $225,000.... 23,219 30,959 38,699 46,439 54,178 $250,000.... 26,032 34,709 43,386 52,064 60,741 $300,000.... 31,657 42,209 52,761 63,314 73,866 $350,000.... 37,282 49,709 62,136 74,564 86,991 $400,000.... 42,907 57,209 71,511 85,814 100,116 $450,000.... 48,532 64,709 80,886 97,064 113,241 $500,000.... 54,157 72,209 90,261 108,314 126,366 $550,000.... 59,782 79,709 99,636 119,564 139,491 $600,000.... 65,407 87,209 109,011 130,814 152,616
-------- (a) The above table illustrates the estimated annual retirement benefits payable to Pension Plan and Supplemental Employee Retirement Plan participants commencing at age 65 in the form of a single life annuity, not subject to deduction for social security or other offsets. The above information is based on the current pension formula for various levels of compensation and years of service. (b) A participant's pension benefit is generally based on a percentage of his salary and bonus for the highest five years of his employment and his years of credited service. The compensation taken into account under the Pension Plan for 1997 was limited to $160,000 in accordance with Internal Revenue Code rules and such limitation may be adjusted periodically in the future in accordance with Section 401(a)(17) of the Code. Remuneration in the above table is represented as the highest consecutive five-year average salary. The above table does not reflect the current compensation limitation under Code Section 401(a)(17) for qualified pension plans, because the Supplemental Employee Retirement Plan provides benefits for compensation above the limitation. Credited service under the Pension Plan as of January 1, 2001 for the named executive officers is as follows: Mr. Schulte, 12 years; Mr. C. Hall, 27 years; Mr. Conner, 19 years; Ms. Batory, 18 years; and Mr. D. Hall, 5 years. 38 Employment and Non-Competition Agreements The Company and each of Messrs. Schulte, C. Hall and Conner entered into employment and non-competition agreements, with an initial term beginning on November 5, 1997, and ending on the fifth anniversary thereof (the "Employment Agreements"). The terms of the new employment contracts relating to base salary and related increases and annual bonuses are substantially similar to the terms of the employment agreements negotiated between Senior Management and the Selling Stockholders that were in effect prior to the Recapitalization Transactions. The term of the Employment Agreements is subject to annual renewal after the initial term unless one party gives written notice of non-renewal to the other party at least 180 days prior to the then current expiration date. Under the terms of the Employment Agreements, Mr. Schulte serves as the Chief Executive Officer and received a base salary of $369,363 for 2001, and will receive annual increases beginning in 2002 equal to the greater of the change in the applicable consumer price index or 5% per annum; Mr. C. Hall serves as the President and Chief Operating Officer and received a base salary of $332,427 for 2001, and will receive annual increases beginning in 2002 equal to the greater of the change in the applicable consumer price index or 5% per annum; and Mr. Conner serves as the Chief Financial Officer and received a base salary of $192,069 for 2001, and will receive annual increases beginning in 2002 equal to the greater of the change in the applicable consumer price index or 5% per annum. Each of the executive officers is entitled to an annual bonus for 2001 and later years of 1.5% of the Company's consolidated earnings before interest expense, taxes, amortization and the employment agreement bonuses described in this paragraph, subject to certain adjustments. The Employment Agreements contain a confidentiality covenant and a non-competition covenant that generally applies during the term of employment and for a period of 3 years thereafter. Each such Employment Agreement will terminate prior to the schedule expiration date in the event of the death or disability of the named executive officer or upon the sale by such named executive officer of his stock in the Company. In addition, the Company may terminate the employment of any of the named executive officers for cause (as defined in the agreements, generally commission of certain felonies, material breaches of duty or breaches of the non-competition restriction) and any named executive officer may terminate employment in the event the Company materially breaches the provisions of the Employment Agreement. Upon such a termination by an executive officer or termination by the Company without cause, the terminated executive officer will be entitled to continued payments and benefits for the remainder of the then current term. Upon the expiration and non-renewal of the Employment Agreement, the executive officer will receive severance payments for one year thereafter equal to the executive's base salary, subject to the executive's continued compliance with the non-competition provisions. Under each of the Employment Agreements, the Company has the obligation to maintain life insurance covering each of the named executive officers, with the proceeds thereof to be used to honor any put rights exercised by the estate of an executive officer. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Partnership Agreement. The issued and outstanding common stock of the Company is owned by SHC Investment Partnership, a Delaware general partnership (the "Partnership"). Each of Fern Limited Partnership (a Delaware limited partnership controlled by Fred C. Schulte), Charles D. Hall and Wayne J. Conner holds a 33.33% voting interest in the Partnership. The management of the Partnership is governed by a partnership agreement (the "Partnership Agreement") among Fern, Hall and Conner. The Partnership Agreement requires that partners holding 66.66% of the voting interest in the Partnership must consent to any vote cast by the Partnership in its capacity as the sole common stockholder of the Company. Pursuant to the Partnership Agreement, each partner agrees to cause the Partnership to vote in favor of the election of Schulte, Hall and Conner as directors of the Company. Because of the greater number of common shares originally contributed to the Partnership by Fern, Fern will also hold a non-voting preferred equity interest in the Partnership. This preferred equity interest is entitled to a preference in any distributions until the agreed value of the preferred interest, and all accrued interest thereon, is paid. Generally, the partners are not permitted to transfer their interests in the Partnership, although the Partnership Agreement does permit a partner to transfer to family members the right to receive revenues due on the Partnership interest. In connection with the Partnership Agreement, each of Fern, Hall and Conner have agreed to grant each other a right of first refusal with respect to 39 their respective shares of preferred stock in the Company. The outstanding preferred stock in the Company will continue to be held by Fern, Hall and Conner individually and will not be held by the Partnership. The following table sets forth certain information regarding beneficial ownership of the capital stock of the Company by (i) each stockholder expected to own beneficially more than 5% of the outstanding capital stock of the Company and (ii) each director or executive officer of the Company and all directors and executive officers as a group.
Shares of Common Shares of Preferred Stock Beneficially Stock Beneficially Owned Owned (a) ----------------- ------------------ Name Number Percent Number Percent ---- ------- ------- -------- ------- SHC Investment Partnership............................. 6,408.3 100% -- -- Fred C. Schulte........................................ 2,136.1 33 1/3% 11,621.7 58% Charles D. Hall........................................ 2,136.1 33 1/3% 4,165.0 21% Wayne J. Conner........................................ 2,136.1 33 1/3% 4,165.0 21% Lynn C. Batory......................................... -- -- -- -- David Hall............................................. -- -- -- -- Mort Maurer............................................ -- -- -- -- Directors and executive officers as a group (6 persons) 6,408.3 100% 19,951.7 100%
-------- (a) Does not include preferred stock units. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Members of Senior Management are indebted to the Company in the aggregate net amount of $7,833,000, described below. Fred C. Schulte through his affiliate Fern Limited Partnership, a Delaware limited partnership controlled by Mr. Schulte, is indebted to the Company in the amount of $1,000,000 evidenced by a promissory note originally dated September 24, 1993 from Fern Limited Partnership, and payable to the Company, bearing interest at 5.35% per annum and maturing in December, 2007, subject to certain mandatory prepayment requirements. Fern Limited Partnership is the obligor on another promissory note dated September 24, 1993 and payable to the Company in the amount of $1,603,000, bearing interest at 5.35% per annum and maturing in December, 2007. This obligation is offset by two promissory notes from the Company payable to Mr. Schulte in the aggregate amount of $1,603,000 and bearing the same 5.35% interest rate and December, 2007 maturity date. Fern Limited Partnership is also indebted to the Company in the amount of $1,000,000 evidenced by a promissory note, dated December 23, 1997 bearing interest at 6.31% per annum and maturing in December, 2007. Fred C. Schulte is indebted to the Company in the amount of $3,200,000 evidenced by a promissory note, dated June 30, 1999, bearing interest at 5.37% per annum and maturing in December, 2007. Charles D. Hall is indebted to the Company in the amount of $516,500 evidenced by a promissory note, dated September 24, 1993, bearing interest at 6.42% per annum and maturing in December, 2007, subject to certain mandatory prepayment requirements. Mr. Hall is indebted to the Company in the amount of $300,000 evidenced by a promissory note, dated December 23, 1997 bearing interest at 6.31% per annum and maturing in December, 2007. Mr. Hall is also indebted to the Company in the amount of $500,000 evidenced by a promissory note, dated June 30, 1999, bearing interest at 5.37% per annum and maturing in December, 2007. Wayne J. Conner is indebted to the Company in the amount of $516,500 evidenced by a promissory note dated September 24, 1993 bearing interest at 6.42% per annum and maturing in December, 2007, subject to certain mandatory prepayment requirements. Mr. Conner is indebted to the Company in the amount of $300,000 evidenced by a promissory note, dated December 23, 1997 bearing interest at 6.31% per annum and maturing in December, 2007. Mr. Conner is also indebted to the Company in the amount of $500,000 evidenced by a promissory note, dated June 30, 1999, bearing interest at 5.37% per annum and maturing in December, 2007. 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements See "Index to Consolidated Financial Statements of Elgin National Industries, Inc." set forth in Item 8, "Financial Statements and Supplementary Data." (b) Financial Statement Schedule Schedule II Valuation and Qualifying Accounts 42
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE Schedule I--Condensed financial information of registrant Schedule III--Real estate and accumulated depreciation Schedule IV--Mortgage loans on real estate Schedule V--Supplemental information concerning property-casualty insurance operations 41 SCHEDULE II ELGIN NATIONAL INDUSTRIES, INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions Additions Balance at Charged to Charged to Balance at Beginning Costs and other End of Description of Period Expenses accounts Deductions Period ----------- ---------- ---------- ---------- ---------- ---------- Allowance for doubtful accounts: Year ended December 31, 1999... 601 157 0 97 661 Year ended December 31, 2000... 661 356 0 157 860 Year ended December 31, 2001... 860 157 0 334 683 Reserve for inventories: Year ended December 31, 1999... 2,042 332 0 870 1,504 Year ended December 31, 2000... 1,504 256 0 158 1,602 Year ended December 31, 2001... 1,602 392 0 232 1,762
C. Exhibits (i) A list of exhibits included as part of this Form 10-K is set forth in the Index to Exhibits that immediately precedes such Exhibits, which is incorporated herein by reference. (ii) Reports on Form 8-K None 42 43 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ELGIN NATIONAL INDUSTRIES, INC. /S/ WAYNE J. CONNER By ________________________________ Wayne J. Conner Vice President, Treasurer and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Dated: March 27, 2002 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 27, 2001. ELGIN NATIONAL INDUSTRIES, INC. /S/ WAYNE J. CONNER By ________________________________ Wayne J. Conner Vice President, Treasurer and CFO (Duly Authorized Officer and Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and on the dates indicated. Signature Title Date --------- ----- ---- /S/ FRED C. SCHULTE Chairman of the Board, Chief March 27, 2002 ----------------------------- Executive Officer and Fred C. Schulte Director /S/ CHARLES D. HALL President, Chief Operating March 27, 2002 ----------------------------- Officer and Director Charles D. Hall /S/ WAYNE J. CONNER Vice President, Treasurer, March 27, 2002 ----------------------------- Chief Financial Officer and Wayne J. Conner Director /S/ LYNN C. BATORY Vice President, Controller March 27, 2002 ----------------------------- and Secretary Lynn C. Batory /S/ DAVID HALL Vice President of March 27, 2002 ----------------------------- Manufacturing David Hall INDEX TO EXHIBITS
Exhibit Footnote Number Document Description Reference ------- ---------------------------------------------------------------------------------- --------- 3.1. Certificate of Incorporation of Elgin National Industries, Inc. (2) 3.2. Bylaws of Elgin National Industries, Inc. (2) 4.1. Indenture dated November 5, 1997, between Elgin National Industries, Inc., subsidiaries and Norwest Bank Minnesota, as Trustee. (1) 4.2. Form of 11% Senior Note due 2007 (included in Exhibit 4.1). (1) 4.3. Registration Rights Agreement dated November 5, 1997, by and among Elgin National Industries, Inc., certain of its subsidiaries, and BancAmerica Robertson Stephens and CIBC Wood Gundy Securities Corp. (2) 4.4. Form of Subsidiary Guaranty (included in Exhibit 4.1). (1) 10.1. Credit Agreement dated as of September 24, 1993, as Amended and Restated as of November 5, 1997, by and among Elgin National Industries, Inc., various financial institutions, and Bank of America National Trust and Savings Association, individually and as agent. (1) 10.2. Employment and Non-Competition Agreement dated as of November 5, 1997, between Elgin National Industries, Inc. and Fred C. Schulte.* (1) 10.3. Employment and Non-Competition Agreement dated as of November 5, 1997, between Elgin National Industries, Inc. and Charles D. Hall.* (1) 10.4. Employment and Non-Competition Agreement dated as of November 5, 1997, between Elgin National Industries, Inc. and Wayne J. Conner.* (1) 10.5. The Elgin National Industries, Inc. Supplemental Retirement Plan dated as of 1995, and effective January 1, 1995.* (2) 10.6. Credit Agreement dated as of September 24, 1993, as Amended and Restated as of January 18, 2001, by and among Elgin National Industries, Inc., various financial institutions, and PNC Bank, National Association, individually and as agent. (3) 10.7. First Amendment to Credit Agreement dated as of September 24, 1993, as Amended and Restated as of January 18, 2001, and further amended as of March 1, 2001 by and among Elgin National Industries, Inc., various financial institutions, and PNC Bank, National Association, individually and as agent. (3) 10.8. Second Amended to Credit Agreement dated as of September 24, 1993, as Amended and Restated as of January 18, 2001, and further amended as of June 28, 2001 by and among Elgin National Industries, Inc., various financial institutions, and PNC Bank, National Association, individually and as agent. (3) 21 Subsidiaries of Elgin National Industries, Inc. (1)
-------- (1) Incorporated by reference to Pre-Effective Form S-4 Registration Statement of the Company (File No. 333-43523) filed with the Commission on December 30, 1997. (2) Incorporated by reference to Pre-Effective Amendment No. 1 to Form S-4 Registration Statement of the Company (File No. 333-43523) filed with the Commission on January 23, 1998. (3) Incorporated by reference to Form 10-Q of the Company (File No. 001-03771) filed with the Commission on August 10, 2001. * Management contract or compensatory plan or arrangement. 44