<PAGE>
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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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 333-43523
Elgin National Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3908410
(State or other jurisdiction (I.R.S. Employer
of 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, 2000, 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.
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<PAGE>
ELGIN NATIONAL INDUSTRIES, INC.
Table of Contents
<TABLE>
<CAPTION>
Page
Item Number
- ---- ------
PART I
<S> <C>
1.BUSINESS.............................................................. 1
2.PROPERTIES............................................................ 4
3.LEGAL PROCEEDINGS..................................................... 4
4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... 5
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.............................................................. 5
6. SELECTED FINANCIAL DATA.............................................. 5
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ 7
7A. MARKET RISK......................................................... 13
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 14
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................. 35
PART III
10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 35
11.EXECUTIVE COMPENSATION............................................... 36
12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 38
13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 39
PART IV
14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..... 40
</TABLE>
-ii-
<PAGE>
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. In
1994, Elgin National Industries, Inc. acquired K&M Inc. in order to broaden
Mining Controls' customer base into the heavy industrial and electric utility
markets. Later that same year, Soros Associates, Inc. was acquired to
strengthen the Engineering Services Segment's technical expertise in the
development of marine port facilities. In 1995, Elgin National Industries,
Inc. sold the assets constituting Ohio Rod's bicycle spoke and nipple product
line and the stock of GC Thorsen, Inc. and at the end of 1996, the stock of
American Fastener Corporation was sold. The foregoing acquisitions and
divestitures assisted Elgin National Industries, Inc. in reducing leverage
and, Management believes, focusing on strengthening its businesses.
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").
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") and Vanco
International, Inc. ("Vanco"). The Engineering Services Segment is comprised
of Roberts & Schaefer Company ("R&S") and Soros Associates, Inc. ("Soros").
1
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Manufactured Products Segment
The Manufactured Products Segment, through its nine 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 38 years. Representative end-users of the
products of the Manufactured Products Segment include Consolidation Coal,
General Electric, Mack Truck, American Electric Power and R B & W Logistics.
The Manufactured Products Segment has a broad and diverse customer base, with
no single customer accounting for more than 5% of the Segment's sales in 1999.
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, 1999, were $77.3 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
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 80% of its net sales from customers
outside the coal-mining industry during 1999. Net sales for the Engineering
Services Segment for the year ended December 31, 1999 were $73.0 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 power
2
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plants and for handling multiple commodities at rail terminals, storage
facilities, marine terminals and ports. These systems consist of loading and
uploading 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, 1999 was $64.0
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 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 1999,
approximately 19% 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 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, motors 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
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Employees
As of December 31, 1999, the Company had approximately 650 employees.
Approximately 22 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:
<TABLE>
<CAPTION>
APPROXIMATE
PRINCIPAL OWNED/ SQUARE
BUSINESS LOCATION FUNCTION LEASED FOOTAGE
- -------- ------------------ ------------- ------ -----------
<S> <C> <C> <C> <C>
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
Vanco....................... Waukegan, IL Distribution Leased 78,000
R & S....................... Chicago, IL & Office Leased 16,200
Salt Lake City, UT Office Leased 25,267
Soros....................... Chicago, IL Office Leased 5,800
</TABLE>
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 affect the Company's business,
financial condition, results of operations and debt service capability.
4
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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 38 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 affect 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, 1999. The Company did not
pay any dividends in the years ended December 31, 1999 and 1998.
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, 1995, 1996, 1997, 1998 and 1999 was 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.
5
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<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
------------------------------------------------
1995(a) 1996 1997 1998 1999
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.................... $126,839 $135,651 $139,615 $156,054 $150,307
Cost of sales................ 102,654 100,119 102,744 118,390 110,917
-------- -------- -------- -------- --------
Gross profit............... 24,185 35,532 36,871 37,664 39,390
Selling, general and
administrative expenses..... 19,891 21,226 21,840 22,100 25,114
Amortization expense......... 3,052 3,085 3,447 2,128 779
-------- -------- -------- -------- --------
Operating income........... 1,242 11,221 11,584 13,436 13,497
Other expenses (income):
Interest expense, net....... 4,807 3,340 3,471 8,190 7,844
Gain on the sale of product
line....................... (2,520)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes....................... (1,045) 7,881 8,113 5,246 5,653
Provision for income taxes... 124 3,191 3,187 2,141 2,519
-------- -------- -------- -------- --------
Income (loss) from continuing
operations.................. (1,169) 4,690 4,926 3,105 3,134
Income from discontinued
operations, net of income
taxes (b)................... 876 174 122
-------- -------- -------- -------- --------
Income (loss) before
extraordinary items......... (293) 4,864 5,048 3,105 3,134
Extraordinary gain (loss) on
early extinguishment of
debt, net of income tax (c). (582) 380
-------- -------- -------- -------- --------
Net income (loss)............ $ (293) $ 4,864 $ 4,466 $ 3,105 $ 3,514
======== ======== ======== ======== ========
Other Financial Data:
Gross margin %............... 19.1% 26.2% 26.4% 24.2% 26.2%
Depreciation and amortization
(d)......................... $ 5,497 $ 5,382 $ 5,569 $ 4,417 $ 3,149
Capital expenditures (d)..... 1,501 1,739 1,974 4,215 2,600
Net cash provided by
operating activities........ 142 17,506 1,008 5,388 7,602
Net cash provided by (used
in) investing activities.... 24,478 1,935 (1,948) (3,939) (8,506)
Net cash used in financing
activities.................. (22,285) (10,785) (714) (805) (3,376)
Operating Unit Data:
Net Sales:
Manufactured Products
Segment.................... $ 74,859 $ 78,952 $ 78,592 $ 82,097 $ 77,312
Engineering Services
Segment.................... 51,980 56,699 61,023 73,957 72,995
-------- -------- -------- -------- --------
Total Net Sales............ $126,839 $135,651 $139,615 $156,054 $150,307
======== ======== ======== ======== ========
Balance Sheet Data (e):
Cash and cash equivalents.... $ 2,335 $ 10,991 $ 9,337 $ 9,981 $ 5,701
Working capital less cash and
cash equivalents............ 16,515 5,129 13,898 15,834 7,140
Property, plant and
equipment, net.............. 14,707 13,741 13,582 15,344 15,754
Total assets................. 95,294 95,914 100,351 103,710 106,704
Total debt................... 37,676 26,891 85,751 85,439 81,059
Redeemable preferred stock
and redeemable preferred
stock units................. 32,714 35,380 13,226 14,152 15,080
Stockholder's deficit........ (4,470) (2,272) (31,860) (29,400) (26,532)
</TABLE>
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(a) The Company's 1995 performance was adversely affected by a loss of
approximately $7.8 million on a single turnkey project of the Engineering
Services Segment that was completed in that year, and which resulted in
significant operating and control changes in the Engineering Services
Segment.
(b) Income from discontinued operations is comprised of earnings of GC
Thorsen, Inc. (sold in 1995), American Fastener Corporation (sold in
1996), along with the associated gain on the sale of those businesses, net
of income taxes.
(c) 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.
(d) Excludes depreciation, amortization and capital expenditures related to
discontinued operations and extraordinary gain or loss.
(e) Includes the balance sheet data of discontinued operations.
6
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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
eleven 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
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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)
<TABLE>
<CAPTION>
For the Fiscal Year Ended December 31,
-----------------------------------------
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................... $139.6 100.0% $156.1 100.0% $150.3 100.0%
Cost of sales....................... 102.7 73.6 118.4 75.8 110.9 73.8
Gross profit........................ 36.9 26.4 37.7 24.2 39.4 26.2
Selling, general & administrative
expenses........................... 21.8 15.6 22.1 14.2 25.1 16.7
Amortization expense................ 3.4 2.4 2.1 1.4 0.8 0.5
Operating income.................... 11.7 8.4 13.5 8.6 13.5 9.0
Interest expense, net............... 3.5 2.5 8.2 5.2 7.9 5.2
Income from continuing operations
before income taxes................ 8.2 5.9 5.3 3.4 5.6 3.8
Provision for income taxes.......... 3.2 2.3 2.2 1.4 2.5 1.7
Income from continuing operations... 5.0 3.6 3.1 2.0 3.1 2.1
Income from discontinued operations,
net of income taxes................ 0.1 0.1
Income before extraordinary item.... 5.1 3.7 3.1 2.0 3.1 2.1
Extraordinary item, net of income
taxes.............................. (0.6) (0.5) 0.4 0.2
Net income.......................... 4.5 3.2 3.1 2.0 3.5 2.3
</TABLE>
Manufactured Products Segment
(dollars in millions)
<TABLE>
<CAPTION>
For the Fiscal Year Ended December
31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................ $78.6 100.0% $82.1 100.0% $77.3 100.0%
Cost of sales............................ 51.5 65.5 54.3 66.2 50.6 65.4
Gross profit............................. 27.1 34.5 27.8 33.8 26.7 34.6
</TABLE>
Engineering Services Segment
(dollars in millions)
<TABLE>
<CAPTION>
For the Fiscal Year Ended December
31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................ $61.0 100.0% $74.0 100.0% $73.0 100.0%
Cost of sales............................ 51.3 84.0 64.1 86.6 60.3 82.6
Gross profit............................. 9.7 16.0 9.9 13.4 12.7 17.4
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales: Net sales for the Manufactured Products Segment for the year
ended December 31, 1999 decreased $4.8 million, or 5.8%, to $77.3 million from
$82.1 million for the corresponding period in 1998. Decreased sales of
powertrain fasteners, centrifugal dryers, high voltage equipment and
industrial capital equipment were partially offset with increased steel
fabrication sales.
Net sales for the Engineering Services Segment for the year ended December
31, 1999 decreased $1.0 million, or 1.3%, to $73.0 million from $74.0 million
for the corresponding period in 1998 due primarily to decreased sales of
smaller engineering jobs with sales less than $1.0 million. In 1999 the
Engineering Services
8
<PAGE>
Segment had $14.5 million in sales from smaller jobs compared to $18.8 million
for 1998. This decrease was partially offset with increased sales on larger
projects with sales over $1.0 million. For the year ended December 31, 1999,
sales of $58.5 million were reported on fifteen larger projects, exceeding
sales of $55.2 million reported on sixteen larger projects for the
corresponding period in 1998.
Cost of Sales: Cost of sales for the Manufactured Products Segment for the
year ended December 31, 1999 decreased $3.7 million, or 6.9%, to $50.6 million
from $54.3 million for the corresponding period in 1998 primarily due to an
overall decreased sales level. The Manufactured Products Segment's cost of
sales as a percentage of net sales decreased to 65.4% for the year ended
December 31, 1999 from 66.2% for the corresponding period in 1998 primarily
due to lower costs as a percentage of sales on fastener sales and screen and
related parts sales, partially offset with higher costs on centrifugal dryer
sales.
Cost of sales for the Engineering Services Segment for the year ended
December 31, 1999 decreased $3.8 million, or 5.8%, to $60.3 million from $64.1
million for the corresponding period in 1998. 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
decreased $2.2 million primarily due to favorable closeouts on some larger
projects. As a percentage of net sales, the Engineering Services Segment's
cost of sales decreased to 82.6% for the year ended December 31, 1999 from
86.6% for the corresponding period in 1998.
Gross Profit: Gross profit for the Manufactured Products Segment for the
year ended December 31, 1999 decreased $1.1 million, or 3.7%, to $26.7 million
from $27.8 million for the corresponding period in 1998 due to the decreased
sales level, partially offset with lower costs as a percentage of sales. The
Manufactured Products Segment's gross profit as a percentage of net sales
increased to 34.6% for the year ended December 31, 1999 from 33.8% for the
corresponding period in 1998. The increase in the gross profit was primarily
due to increased margins on fastener sales and screen and screen parts sales,
partially offset with a lower gross profit margin earned on centrifugal dryer
sales.
Gross profit of the Engineering Services Segment for the year ended
December 31, 1999 increased $2.8 million, or 27.9%, to $12.7 million from $9.9
million for the corresponding period in 1998 primarily due to a reduction of
the cost of sales of $1.6 million due to a settlement of a lawsuit described
above and due to higher margins earned on larger projects. As a percentage of
net sales, the Engineering Services Segment's gross profit increased to 17.4%
for the year ended December 31, 1999 from 13.4% for the corresponding period
in 1998.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses of the Company of $25.1 million for the year ended
December 31, 1999 increased $3.0 million in comparison to $22.1 million for
the corresponding period in 1998 primarily due to higher proposal costs, an
increased provision for receivables and higher professional fees within the
Engineering Services Segment. The Manufactured Products Segment incurred
increased warranty costs and higher costs related to the sales efforts of
centrifugal dryers. Selling, general and administrative expenses as a
percentage of net sales increased to 16.7% for the year ended December 31,
1999 from 14.2% for the corresponding period in 1998 due to decreased net
sales.
Amortization Expense: Amortization expense of the Company for the year
ended December 31, 1999 decreased $1.3 million, or 63.4%, to $0.8 million from
$2.1 million for the corresponding period in 1998. The decrease in
amortization expense resulted from the completion of the non-compete
amortization in 1998.
Operating Income: Operating income of the Company for the year ended
December 31, 1999 of $13.5 million approximated the operating income for the
corresponding period in 1998 for the reasons discussed above. Operating income
as a percentage of net sales increased to 9.0% for the year ended December 31,
1999 from 8.6% for the corresponding period in 1998.
Interest Income: Interest income of the Company for the year ended December
31, 1999 increased $0.1 million or 11.2%. This increase was due to interest
received on a lawsuit settlement described above, partially offset with
decreased interest bearing deposits.
9
<PAGE>
Interest Expense Interest expense of the Company for the year ended
December 31, 1999 decreased $0.2 million or 2.4% due to the decreased debt
outstanding and a slightly lower interest rate compared to 1998.
Income from Continuing Operations Before Income Taxes: Income from
continuing operations before income taxes for the year ended December 31, 1999
increased $0.3 million, or 7.8%, to $5.6 million from $5.3 million for the
corresponding period in 1998 for the reasons discussed above. Income from
continuing operations, before income taxes, as a percentage of net sales was
3.8% for the year ended December 31, 1999 compared to 3.4% for the year ended
1998.
Provision for Income Taxes: Provision for income taxes for the year ended
December 31, 1999 increased $0.3 million or 17.7% to $2.5 million from $2.2
million the year ended December 31, 1998. The Company's effective tax rate
increased to 44.0% in 1999 from 40.8% in 1998 primarily due to higher foreign
and state taxes.
Income from Continuing Operations: Income from continuing operations of the
Company for the year ended December 31, 1999 of $3.1 million approximated
income from continuing operations for the corresponding period in 1998 for the
reasons discussed above. Income from continuing operations as a percentage of
net sales increased to 2.1% for the year ended December 31, 1999 from 2.0% for
the corresponding period in 1998.
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.
Net Income: The net income for the Company for the year ended December 31,
1999 increased $0.4 million, or 13.2%, to $3.5 million from $3.1 million for
the year ended December 31, 1998 for the reasons discussed above. Net income
as a percentage of net sales increased to 2.3% for the year ended December 31,
1999 from 2.0% for the corresponding year ended 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales: Net sales for the Manufactured Products Segment for the year
ended December 31, 1998 increased $3.5 million, or 4.5%, to $82.1 million from
$78.6 million for the corresponding period in 1997. Increased machine sales at
CSI and increased specialty fasteners at Ohio Rod were partially offset with
decreased steel fabrication sales at Clinch.
Net sales for the Engineering Services Segment for the year ended December
31, 1998 increased $13.0 million, or 21.2%, to $74.0 million from $61.0
million for the corresponding period in 1997 due primarily to increased size
of some larger projects in process. For the year ended December 31, 1998,
sales of $55.2 million were reported on sixteen larger projects, exceeding
sales of $42.0 million reported on sixteen larger projects for the
corresponding period in 1997.
Cost of Sales: Cost of sales for the Manufacturing Products Segment for the
year ended December 31, 1998 increased $2.8 million, or 5.6%, to $54.3 million
from $51.5 million for the corresponding period in 1997 primarily due to an
overall increased sales level and increased costs of steel fabrication,
partially offset by improved operating efficiencies at CSI and Chandler due to
their increased sales level. The Manufactured Products Segment's cost of sales
as a percentage of net sales increased to 66.2% for the year ended December
31, 1998 from 65.5% for the corresponding period in 1997.
Cost of sales for the Engineering Services Segment for the year ended
December 31, 1998 increased $12.8 million, or 24.9%, to $64.1 million from
$51.3 million for the corresponding period in 1997 primarily due to the
increased sales level. As a percentage of net sales, the Engineering Services
Segment's cost of sales increased to 86.6% for the year ended December 31,
1998 from 84.0% for the corresponding period in 1997 due to increased costs on
the larger projects in 1998.
10
<PAGE>
Gross Profit: Gross profit for the Manufactured Products Segment for the
year ended December 31, 1998 increased $0.7 million, or 2.3%, to $27.8 million
from $27.1 million for the corresponding period in 1997 due to the increased
sales level, partially offset with a higher costs as a percentage of sales.
The Manufactured Products Segment's gross profit as a percentage of net sales
decreased to 33.8% for the year ended December 31, 1998 from 34.5% for the
corresponding period in 1997. The decrease in the gross profit was primarily
due to decreased margins on screen sales at Tabor and industrial capital
equipment at Mining Controls.
Gross profit of the Engineering Services Segment for the year ended
December 31, 1998 increased $0.2 million, or 1.7%, to $9.9 million from $9.7
million for the corresponding period in 1997 primarily due to increased
project activity. As a percentage of net sales, the Engineering Services
Segment's gross profit decreased to 13.4% for the year ended December 31, 1998
from 16.0% for the corresponding period in 1997 primarily due to increased
sales of larger projects involving procurement and construction management
services, which typically earn a lower profit margin than smaller projects.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses of the Company of $22.1 million for the year ended
December 31, 1998 increased $0.3 million in comparison to $21.8 million for
the corresponding period in 1997. Selling, general and administrative expenses
as a percentage of net sales decreased to 14.2% for the year ended December
31, 1998 from 15.6% for the corresponding period in 1997 due to increased net
sales. Higher selling costs reported by the Engineering Services Segment were
partially offset by decreased selling costs within the Manufactured Products
Segment and decreased corporate costs.
Amortization Expense: Amortization expense of the Company for the year
ended December 31, 1998 decreased $1.3 million, or 38.3%, to $2.1 million from
$3.4 million for the corresponding period in 1997. The decrease in
amortization expense resulted from the completion of the non-compete
amortization in 1998 and the accelerated amortization in 1997 of an
acquisition intangible arising in the 1993 leveraged buy-out. The acceleration
of the amortization was due to the completion of the Recapitalization
Transactions.
Operating Income: Operating income of the Company for the year ended
December 31, 1998 increased $1.8 million, or 16.0%, to $13.5 million from
$11.7 million for the corresponding period in 1997 for the reasons discussed
above. Operating income as a percentage of net sales increased to 8.6% for the
year ended December 31, 1998 from 8.4% for the corresponding period in 1997.
Interest Income: Interest income of the Company for the year ended December
31, 1998 increased $0.6 million, or 113.9% from the prior year to $1.1 million
due to a higher balance of interest bearing deposits.
Interest Expense: Interest expense of the Company for the year ended
December 31, 1998 increased $5.3 million, or 133.1%, from the prior year to
$9.3 million. The increased interest expense was due to the issuance of the
$85.0 million 11% Senior Notes in November, 1997. The increased interest
expense was partially offset by a lower interest rate compared to 1997.
Income from Continuing Operations Before Income Taxes: Income from
continuing operations before income taxes for the year ended December 31, 1998
decreased $2.9 million, or 35.3%, to $5.3 million from $8.2 million for the
corresponding period in 1997 for the reasons discussed above. Income from
continuing operations, before income taxes, as a percentage of net sales
decreased to 3.4% for the year ended December 31, 1998 from 5.9% for the year
ended 1997.
Provision for Income Taxes: Provision for income taxes decreased to $2.2
million for the year ended December 31, 1998 from $3.2 million for the year
ended December 31, 1997. Taxes decreased in 1998 due to a lower earnings
level. Company's effective tax rate increased to 40.8% in 1998 from 39.3% in
1997.
Income from Continuing Operations: Income from continuing operations of the
Company for the year ended December 31, 1998 decreased $1.9 million, or 37.0%,
to $3.1 million from $5.0 million for the corresponding period in 1997 for the
reasons discussed above. Income from continuing operations as a percentage of
net sales decreased to 2.0% for the year ended December 31, 1998 from 3.6% for
the corresponding period in 1997.
11
<PAGE>
Income from Discontinued Operations, Net of Income Taxes: Income from
discontinued operations, net of income taxes, for the year ended December 31,
1997 of $0.1 million related to American Fastener Corporation, which was sold
on December 31, 1996, and included an estimated gain. In 1997, the final
purchase price adjustment for the sale of American Fastener resulted in the
addition of $0.1 million gain. There was no income from discontinued
operations in 1998.
Income Before Extraordinary Item: The Company's income before extraordinary
item for the year ended December 31, 1998 decreased $2.0 million, or 38.5%, to
$3.1 million from $5.1 million for the corresponding period in 1997 for the
reasons discussed above. Income before extraordinary item, net of income
taxes, as a percentage of net sales decreased to 2.0% for the year ended
December 31, 1998 from 3.7% for the corresponding period in 1997.
Extraordinary Item, Net of Income Taxes: The extraordinary item of $0.6
million for the year ended December 31, 1997 was the loss on the early
extinguishment of debt that resulted from retirement of subordinated debt from
proceeds of the Senior Note and included amortization of the remaining
financing costs and a prepayment penalty.
Net Income: The net income for the Company for the year ended December 31,
1998 decreased $1.4 million, or 30.5%, to $3.1 million from $4.5 million for
the year ended December 31, 1997 for the reasons discussed above. Net income
as a percentage of net sales decreased to 2.0% for the year ended December 31,
1998 from 3.2% for the corresponding year ended 1997.
Liquidity and Capital Resources
Net cash provided by operating activities for the year ended December 31,
1999 was $7.6 million, due primarily to $6.3 million generated from net income
and non-cash charges. There was also $1.3 million net cash provided 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, 1999 of
$8.5 million consisted of $2.6 million for capital expenditures in accordance
with the Company's regular practice of upgrading and maintaining its equipment
base and facilities, notes receivable issued to officers of $4.2 million, and
$1.7 million net of cash acquired of $0.5 million for the stock acquisition of
Vanco International, Inc. ("Vanco") on September 30, 1999 from Video Display
Corporation. Vanco, located in Waukegan, Illinois sources, packages and
distributes product in primarily three markets--electronic OEM, electronic
distributors/dealers and sound audio and CB distributors/dealers.
Cash used in financing activities for 1999 of $3.4 million included $10.1
for the repurchase of Senior Notes and $0.3 million of scheduled debt
repayments, partially offset with $7.0 million in borrowings on the Company's
Senior Credit Facility.
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, will be adequate to
meet its anticipated debt service requirements, working capital needs and
capital expenditures. The Company has a Senior Credit Facility to provide a
$20.0 million revolving line of credit, subject to borrowing base limitations.
The term is for a three-year period which expires on November 5, 2000. At
December 31, 1999, there were $7.0 million of borrowings under the Senior
Credit Facility (excluding $3.8 million in outstanding letters of credit and
excluding payment and performance bonds).
12
<PAGE>
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, 1999 was $72.7 million. Approximately $8.7 million relates to the
Manufactured Products Segment, with the remainder relating to the Engineering
Services Segment. Within the Engineering Services Segment's backlog at
December 31, 1999, $13.1 million relates to the engineering and procurement of
a limestone preparation system, $8.2 million relates to the engineering and
procurement of an unloading and blending facility, and $7.9 million relates to
the engineering, procurement of a crushing facility. A majority of the current
backlog is expected to be realized within the next twelve months.
Year 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. The Company has experienced no significant disruptions
in mission critical information technology and non-information technology
systems and believes those systems successfully responded to the Year 2000
date change. The cost of the Year 2000 readiness program was approximately
$0.4 million. The Company is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems, or the
products and services of third parties. The Company will continue to monitor
its mission critical computer applications and those of suppliers and venders
throughout the year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
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 1999, approximately 13% of the Company's net sales were attributable to
products sold or services provided outside of the United States. In 1999, the
majority of the Company's foreign sales were to Poland, Trinidad, and Egypt. 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
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements of Elgin National Industries, Inc.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants--Ernst and Young, L.L.P................ 15
Report of Independent Accountants--PricewaterhouseCoopers L.L.P.......... 16
Consolidated Balance Sheets as of December 31, 1999 and December 31,
1998.................................................................... 17
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997........................................................... 18
Consolidated Statements of Changes in Common Stockholder's Deficit for
the years ended December 31, 1999, 1998 and 1997 ....................... 19
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................................... 20
Notes to Consolidated Financial Statements............................... 21
</TABLE>
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
Elgin National Industries, Inc.
We have audited the balance sheets of Elgin National Industries, Inc. and
Subsidiary Companies as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in common stockholder's deficit and
cash flows for the years then ended. 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,
1999 and 1998 and the consolidated results of their operations and their cash
flows for the years then ended, 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
statements, taken as a whole, presents fairly in all material respects the
information set therein.
Ernst & Young LLP
Chicago, Illinois
March 3, 2000
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Elgin National Industries, Inc.
In our opinion, the consolidated statements of income, stockholder's
deficit and cash flows for the year ended December 31, 1997 present fairly, in
all material respects, the results of operations and cash flows of Elgin
National Industries, Inc. and Subsidiary Companies for the year ended December
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above. We have not audited the consolidated financial
statements of Elgin National Industries, Inc. and Subsidiary Companies for any
period subsequent to December 31, 1997.
Pricewaterhouse Coopers
Chicago, Illinois
March 3, 2000
16
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(in thousands except share data)
<TABLE>
<CAPTION>
Assets 1999 1998
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 5,701 $ 9,981
Accounts receivable, net................................. 27,425 27,389
Inventories, net......................................... 14,492 13,880
Prepaid expenses and other assets........................ 891 1,318
Deferred income taxes.................................... 3,322 2,811
-------- --------
Total current assets................................... 51,831 55,379
Property, plant and equipment, net......................... 15,754 15,344
Loans receivable to related parties........................ 7,833 3,633
Other assets............................................... 23,686 21,067
Goodwill and intangibles................................... 7,600 8,287
-------- --------
Total assets........................................... $106,704 $103,710
======== ========
<CAPTION>
Liabilities and Common Stockholder's Deficit
--------------------------------------------
<S> <C> <C>
Current liabilities:
Current portion of long-term debt........................ $ 7,109 $ 330
Accounts payable......................................... 21,074 18,402
Accrued expenses......................................... 10,807 10,832
-------- --------
Total current liabilities.............................. 38,990 29,564
Long-term debt less current portion........................ 73,950 85,109
Other liabilities.......................................... 2,194 1,728
Deferred income taxes...................................... 3,022 2,557
-------- --------
Total liabilities...................................... 118,156 118,958
-------- --------
Redeemable preferred stock units........................... 11,834 11,106
-------- --------
Redeemable preferred stock................................. 3,246 3,046
-------- --------
Common stockholder's deficit:
Common stock, Class A par value $.01 per share;
authorized 23,678 shares; 6,408 issued and outstanding
as of December 31, 1999 and 1998
Retained deficit......................................... (26,532) (29,400)
-------- --------
Total common stockholder's deficit..................... (26,532) (29,400)
-------- --------
Total liabilities and stockholder's deficit............ $106,704 $103,710
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $150,307 $156,054 $139,615
Cost of sales.................................... 110,917 118,390 102,744
-------- -------- --------
Gross profit................................. 39,390 37,664 36,871
Selling, general and administrative expenses..... 25,114 22,100 21,840
Amortization expense............................. 779 2,128 3,447
-------- -------- --------
Operating income............................. 13,497 13,436 11,584
Other expenses (income)
Interest income................................ (1,215) (1,093) (511)
Interest expense............................... 9,059 9,283 3,982
-------- -------- --------
Income from continuing operations before income
taxes........................................... 5,653 5,246 8,113
Provision for income taxes....................... 2,519 2,141 3,187
-------- -------- --------
Income from continuing operations................ 3,134 3,105 4,926
Discontinued operations
Gain on sale of discontinued operations (less
applicable income taxes of $78)............... 122
-------- -------- --------
Income before extraordinary item................. 3,134 3,105 5,048
-------- -------- --------
Extraordinary gain (loss) on early extinguishment
of debt, net of tax of $239, $0 and $(366),
respectively.................................... 380 (582)
-------- -------- --------
Net income....................................... $ 3,514 $ 3,105 $ 4,466
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER'S DEFICIT
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands except share data)
<TABLE>
<CAPTION>
Total
Common Retained Stockholder's
Stock (Deficit) Deficit
------ --------- -------------
<S> <C> <C> <C>
Balance as of December 31, 1996................. $ $ (3,791) $ (3,791)
Net income for the year ended December 31, 1997. 4,466 4,466
Redeemable preferred stock dividends (173,946
shares at $8.47 per share; 19,952 shares at
$10.00 per share).............................. (1,672) (1,672)
Redeemable preferred stock unit dividend
equivalent..................................... (727) (727)
Repurchase Class B and C common stock........... (30,136) (30,136)
--- -------- --------
Balance as of December 31, 1997................. (31,860) (31,860)
--- -------- --------
Net income for the year ended December 31, 1998. 3,105 3,105
Redeemable preferred stock dividends (19,952
shares at $10.00 per share).................... (199) (199)
Redeemable preferred stock unit dividend
equivalent, net of tax of $281................. (446) (446)
--- -------- --------
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)
=== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 3,514 $ 3,105 $ 4,466
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 2,370 2,289 2,122
Amortization................................... 779 2,128 4,095
Provision (benefit) for deferred income taxes.. 235 (234)
Provision for doubtful accounts and notes
receivable.................................... 907 95 111
Provision for inventories...................... 332 570 419
Gain on sale of American Fastener Corporation.. (200)
Gain on the early retirement of debt........... (619)
Income from pension overfunding................ (1,174) (1,125) (757)
Gain on the disposal of assets................. (20) (112) (16)
Changes in assets and liabilities:
Accounts receivable............................ 54 (129) (7,578)
Inventories.................................... (50) (953) (1,015)
Prepaid expenses and other assets.............. (1,766) 169 (2,393)
Accounts payable, accrued expenses, and other
liabilities................................... 3,040 (415) 1,754
------- ------- --------
Net cash provided by operating activities.... 7,602 5,388 1,008
------- ------- --------
Cash flows from investing activities:
Proceeds from the sale of assets................. 41 276 26
Purchase of property, plant and equipment........ (2,600) (4,215) (1,974)
Issuance of notes receivable to related parties.. (4,200)
Business acquired, net of cash................... (1,747)
------- ------- --------
Net cash used by investing activities........ (8,506) (3,939) (1,948)
------- ------- --------
Cash flows from financing activities:
Repurchase of redeemable preferred stock......... (24,553)
Repurchase of common stock....................... (31,655)
Debt issuance costs.............................. (493) (3,366)
Borrowings on long-term debt..................... 7,000 85,000
Repayments of long-term debt..................... (10,376) (312) (26,140)
------- ------- --------
Net cash used in financing activities........ (3,376) (805) (714)
------- ------- --------
Net (decrease) increase in cash.................... (4,280) 644 (1,654)
Cash and cash equivalents at beginning of period... 9,981 9,337 10,991
------- ------- --------
Cash and cash equivalents at end of period......... $ 5,701 $ 9,981 $ 9,337
======= ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
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. Repurchase of Stock Owned by Outside Institutional Investors and Merger of
ENI Holding Corp. with Elgin National Industries, Inc.
On November 5, 1997 the Company issued $85,000,000 of 11.0% Senior Notes
("the Senior Notes"), part of the proceeds of which was used to repurchase or
retire (a) all common stock, preferred stock (all of which was redeemable) and
common stock warrants not owned by Senior Management, representing
approximately 68% of the total equity of the Company for the aggregate
purchase price of $56,208,000 and (b) the senior subordinated indebtedness of
its subsidiary, Elgin National Industries, Inc., by payment of $20,777,000
representing the aggregate amount of principal outstanding on such senior
subordinated debt and all accrued interest thereon and prepayment fees. The
cost of early extinguishment of the senior subordinated debt includes
amortization of the remaining financing cost of $648,000 and prepayment
penalty of $300,000 and is reflected net of taxes as an extraordinary item on
the accompanying consolidated statements of income. Effective immediately
after repurchase and redemption, Elgin National Industries, Inc. merged into
ENI Holding Corp., with ENI Holding Corp. being the surviving corporation. ENI
Holding Corp. then changed the name of the surviving corporation to Elgin
National Industries, Inc.
3. 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
21
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(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 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, 1999 and 1998 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:
22
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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) Adoption of Accounting Principles
The Company will implement the provisions of Statement of Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which will be effective for fiscal years
beginning after June 15, 2000. 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. Management believes the adoption of SFAS No. 133 will not have a
material effect on the Company.
(l) Reclassification
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation.
4. Accounts Receivable
Accounts receivable consist of:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Trade accounts........................................... $ 9,558 $10,075
------- -------
Construction contracts:
Billed................................................. 13,782 13,813
Costs and estimated earnings in excess of billings on
contracts............................................. 2,307 1,042
Retainage due upon completion of contracts............. 2,040 2,619
------- -------
18,129 17,474
------- -------
Other receivables........................................ 399 441
------- -------
28,086 27,990
Less allowance for doubtful accounts..................... 661 601
------- -------
$27,425 $27,389
======= =======
</TABLE>
Billings exceeded related costs and gross profit recognized on certain
contracts by $11,094,000 and $10,126,000 as of December 31, 1999 and 1998,
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, 1999 will be collected in 2000.
23
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A significant portion of the Company's business activity is concentrated
within the coal mining industry. Accounts receivable at December 31, 1999 and
1998 from companies within the coal mining industry were $17,306,000 and
$10,686,000, respectively.
5. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Finished goods........................................... $ 9,177 $ 8,465
Work-in-process.......................................... 1,495 1,635
Raw materials............................................ 5,324 5,822
------- -------
15,996 15,922
Less excess and obsolete reserve......................... 1,504 2,042
------- -------
$14,492 $13,880
======= =======
</TABLE>
6. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Land..................................................... $ 1,926 $ 1,817
Buildings and improvements............................... 7,282 6,286
Machinery and equipment.................................. 19,476 18,279
------- -------
28,684 26,382
Less accumulated depreciation............................ 12,930 11,038
------- -------
$15,754 $15,344
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
was $2,370,000, $2,289,000 and $2,122,000, respectively.
7. Goodwill and Intangibles
The components of goodwill and intangibles are as follows:
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
(in
thousands)
<S> <C> <C>
Goodwill................................................... $7,759 $7,363
Financing and acquisition costs............................ 4,192 4,112
------ ------
11,951 11,475
Less accumulated amortization.............................. 4,351 3,188
------ ------
$7,600 $8,287
====== ======
</TABLE>
24
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amortization expense, including amounts related to the early extinguishment
of debt, was $1,164,000, $2,128,000 and $4,095,000, for the years ended
December 31, 1999, 1998 and 1997, respectively.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Accounts payable--trade................................. $ 9,596 $ 7,918
Accounts payable--other................................. 384 358
Billings on contracts in excess of costs and gross
profit recognized 11,094 10,126
Accrued payroll and commissions......................... 3,229 3,348
Other accruals.......................................... 7,578 7,484
------- -------
$31,881 $29,234
======= =======
</TABLE>
9. 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:
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------ ------
(in
thousands)
<S> <C> <C>
Accounts receivable...................................... $ 209 $ (272)
Inventories.............................................. 540 818
Accrued expenses......................................... 2,302 1,867
Intangibles.............................................. 1,935 2,176
Redeemable preferred stock units......................... 3,927 3,555
State net operating loss carry forward................... 271 398
------ ------
Total deferred tax asset............................. 9,184 8,542
------ ------
Prepaid pension.......................................... (8,145) (7,693)
Property plant & equipment............................... (739) (595)
------ ------
Total deferred tax liability......................... (8,884) (8,288)
------ ------
Net deferred tax asset .................................. $ 300 $ 254
====== ======
</TABLE>
The components of the provision (benefit) for income taxes are:
<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1999 1998 1997
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Current
Federal.......................................... $2,133 $2,015 $2,142
State............................................ 468 253 575
Foreign.......................................... 209 107 38
Deferred
Federal.......................................... (43) (192) 118
State............................................ (9) (42) 26
------ ------ ------
$2,758 $2,141 $2,899
====== ====== ======
</TABLE>
25
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Allocation of the provision for income taxes in the 1999, 1998 and 1997
consolidated statements of income include the following:
<TABLE>
<CAPTION>
Years Ended December
31,
--------------------
1999 1998 1997
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Continuing operations.............................. $2,519 $2,141 $3,187
Discontinued operations--gain on sale of
discontinued operations........................... 78
Extraordinary gain (loss)--tax..................... 239 (366)
------ ------ ------
$2,758 $2,141 $2,899
====== ====== ======
</TABLE>
The Company's effective tax rates of 44%, 41% and 39% for the years ended
December 31, 1999, 1998 and 1997, respectively, differ from the statutory
federal tax rate of 34% as follows:
<TABLE>
<CAPTION>
Years Ended December
31,
--------------------
1999 1998 1997
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Income before income taxes.......................... $6,272 $5,246 $7,365
====== ====== ======
Statutory federal income tax........................ $2,133 $1,784 $2,504
State taxes, net of federal benefit................. 289 167 455
Foreign sales corporation income tax................ 47 45 88
Other items......................................... 289 145 (148)
------ ------ ------
$2,758 $2,141 $2,899
====== ====== ======
</TABLE>
The Company made cash payments for income taxes totalling $2,022,000,
$2,307,000 and $3,201,000 during the years ended December 31, 1999, 1998 and
1997, respectively.
10. Long-Term Debt
Long-term debt consists of:
<TABLE>
<CAPTION>
Interest Rate at December 31,
December 31, Year of ---------------
Type of Issue 1999 Maturity 1999 1998
------------- ---------------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Fixed rate:
Senior notes................. 11.00% 2007 $73,950 $85,000
Notes payable................ 6.00% 2000 109 439
Variable rate:
Revolver loan................ 8.00% 2000 7,000
------- -------
Total long-term debt........... 81,059 85,439
Less current maturities........ 7,109 330
------- -------
Total non-current long-term
debt.......................... $73,950 $85,109
======= =======
</TABLE>
Under the terms of the Bank Credit Agreement, the revolver loan has a
borrowing capacity of up to $20,000,000 (less any outstanding letters of
credit) based upon a monthly variable borrowing base. At December 31, 1999,
the Company's available borrowing base of $15,896,000 less their outstanding
letters of credit of
26
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$3,760,000 resulted in an available portion of the revolving credit facility
of $12,136,000, of which $7,000,000 was outstanding. The revolver interest was
at either (a) the greater of Federal Funds Rate plus 0.5% or the bank's
reference rate, or (b) LIBOR plus 1.5%. A commitment fee of 3/10% per annum on
unused borrowable money under the revolving loan and a 1.5% per annum fee for
outstanding letters of credit is payable to the bank quarterly.
The Company's accounts receivable and inventory are pledged under the terms
of the Bank Credit Agreement.
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, 1999 were as
follows (in thousands):
<TABLE>
<CAPTION>
Senior Notes Revolver
Notes payable loan Total
------- ------- -------- -------
<S> <C> <C> <C> <C>
2000..................................... $109 $7,000 $ 7,109
2001.....................................
2002.....................................
2003.....................................
2004.....................................
2005 and thereafter...................... $73,950 73,950
------- ---- ------ -------
$73,950 $109 $7,000 $81,059
======= ==== ====== =======
</TABLE>
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.
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002........................................................... 105.500%
2003........................................................... 103.667%
2004........................................................... 101.833%
2005 and thereafter............................................ 100.000%
</TABLE>
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.
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.
27
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's interest expense for the years ended December 31, 1999, 1998
and 1997 was $9,059,000, $9,283,000 and $4,282,000, respectively. The Company
made cash payments for interest totalling $9,218,000, $9,283,000 and
$2,964,000, respectively, during 1999, 1998 and 1997.
The weighted average interest rate on short term borrowings for 1999 was
7.97%.
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 $66,269,000, and $86,289,000 at December 31, 1999 and December 31,
1998, 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 $4,560,000 and
$3,832,000 at December 31, 1999 and 1998, respectively. The redeemable
preferred stock units accrue at 10% per annum. Principal and accrued dividend
equivalent amounts were $11,834,000 and $11,106,000 at December 31, 1999 and
1998, 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,
1999. 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 $1,251,000 and $1,051,000 as of
December 31, 1999 and 1998, 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 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 and the Uruguay Round General Agreement on
Tariffs and Trade ("GATT").
28
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The change in the benefit obligation is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Projected benefit obligation at beginning of year....... $21,926 $18,203
Service cost--benefits earned during the period......... 1,106 916
Interest cost on projected benefit obligation........... 1,231 1,181
Actuarial (gains) losses................................ (2,041) 4,074
Benefit payments........................................ (2,155) (2,448)
------- -------
Projected benefit obligation at end of year............. $20,067 $21,926
------- -------
</TABLE>
The change in plan assets is as follows for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Fair value of plan assets at beginning of year.......... $43,051 $39,858
Actual return on plan assets............................ 5,869 5,641
Employer contributions..................................
Benefit payments........................................ (2,155) (2,448)
------- -------
Fair value of plan assets at end of year................ $46,765 $43,051
------- -------
</TABLE>
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Plan assets in excess of projected benefit
obligations.......................................... $22,929 $21,125
Unrecognized amounts:
Prior service cost.................................. (127) 91
Net gain............................................ (3,006) (2,097)
------- -------
Prepaid pension cost.................................. $19,796 $19,119
------- -------
</TABLE>
Prepaid pension cost included in other assets at December 31, 1999 and
1998, was $21,090,000 and $19,916,000, respectively. Pension costs included in
other liabilities at December 31, 1999 and 1998, was $1,294,000 and $797,000,
respectively.
At December 31, 1999 and 1998, respectively, the Company's SERP projected
benefit obligation of $1,731,000 and $1,437,000 was not funded.
Weighted average assumptions as of December 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Settlement rate............................................... 6.25% 5.75%
Long term rate of return on assets............................ 9.00 9.00
Rate of compensation increase................................. 5.50 5.50
</TABLE>
Components of net periodic pension cost are as follows for the years ended:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Service cost--benefits earned during the period. $1,106 $ 916 $ 809
Interest cost on projected benefit obligation... 1,231 1,181 1,127
Expected return on assets....................... (3,316) (2,899) (2,403)
Net amortization of prior service cost.......... 218 (6) (11)
Net amortization of prior losses................ 84
------ ------ ------
Net periodic pension benefit.................... $ (677) $ (808) $ (478)
------ ------ ------
</TABLE>
29
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 these plans for the years ended
December 31, 1999, 1998 and 1997 was $49,000, $56,000 and $55,000,
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, 1999, 1998 and 1997 was $1,036,000,
$1,266,000 and $1,325,000, 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, the Employee Retirement Income
Security Act and the Uruguay Round General Agreement on Tariffs and Trade
("GATT"). The Company's expense for this plan in 1999, 1998 and 1997 was
$12,000, $37,000 and $77,000, 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:
<TABLE>
<CAPTION>
Year (in thousands)
---- --------------
<S> <C>
2000....................................................... $1,450
2001....................................................... 1,172
2002....................................................... 817
2003....................................................... 678
2004....................................................... 624
2005 and thereafter........................................ 702
------
$5,443
======
</TABLE>
Rental expense for the twelve months ended December 31, 1999, 1998 and 1997
was $1,634,000, $1,453,000 and $1,422,000, respectively.
15. Related Party Transactions
At December 31, 1999 and 1998, 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 the years ended December 31, 1999, 1998 and
1997 was $117,000, $117,000 and $55,000, respectively.
(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 $217,000, $104,000, and $55,000, respectively, for the
years ended December 31, 1999, 1998 and 1997.
30
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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. Discontinued Operations
On December 31, 1996, the Company sold all the outstanding shares of its
subsidiary, American Fastener Corporation, for $3,982,000 resulting in a gain
of $123,000, net of income tax. An additional gain of $122,000, net of income
tax, was recognized in 1997 upon the final purchase price adjustment.
31
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. 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 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:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net sales to external customers:
Manufactured Products.......................... $ 77,312 $ 82,097 $ 78,592
Engineering Services........................... 72,995 73,957 61,023
-------- -------- --------
Total net sales to external customers........ $150,307 $156,054 $139,615
======== ======== ========
Net sales to internal customers:
Manufactured Products.......................... $ 2,638 $ 2,634 $ 2,891
Engineering Services........................... 225 656 941
-------- -------- --------
Total net sales to internal customers........ $ 2,863 $ 3,290 $ 3,832
======== ======== ========
Total net sales:
Manufactured Products.......................... $ 79,950 $ 84,731 $ 81,483
Engineering Services........................... 73,220 74,613 61,964
-------- -------- --------
Total net sales.............................. 153,170 159,344 143,447
Elimination of net sales to internal
customers................................... 2,863 3,290 3,832
-------- -------- --------
Total consolidated net sales................. $150,307 $156,054 $139,615
======== ======== ========
Earnings before interest, taxes and amortization:
Manufactured Products.......................... $ 14,305 $ 16,045 $ 15,537
Engineering Services........................... 4,785 3,907 4,282
-------- -------- --------
Total segment earnings before interest, taxes
and amortization............................ 19,090 19,952 19,819
Amortization..................................... (779) (2,128) (3,447)
Interest income.................................. 1,215 1,093 511
Interest expense................................. (9,059) (9,283) (3,982)
Corporate expenses before interest, taxes and
amortization.................................... (4,814) (4,388) (4,788)
-------- -------- --------
Consolidated income from continuing operations
before income taxes........................... $ 5,653 $ 5,246 $ 8,113
======== ======== ========
</TABLE>
32
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ------
<S> <C> <C> <C>
Capital expenditures:
Manufactured Products............................... $ 2,056 $ 3,821 $1,754
Engineering Services................................ 137 250 218
-------- -------- ------
Total segment capital expenditures................ 2,193 4,071 1,972
Corporate......................................... 407 144 2
-------- -------- ------
Total capital expenditures........................ $ 2,600 $ 4,215 $1,974
======== ======== ======
Depreciation:
Manufactured Products............................... $ 2,160 $ 2,030 $1,846
Engineering Services................................ 184 224 225
-------- -------- ------
Total segment depreciation........................ 2,344 2,254 2,071
Corporate......................................... 26 35 51
-------- -------- ------
Total depreciation................................ $ 2,370 $ 2,289 $2,122
======== ======== ======
Assets:
Manufactured Products............................... $ 39,228 $ 37,018
Engineering Services................................ 19,305 17,730
-------- --------
Total segment assets.............................. 58,533 54,748
Corporate and other............................... 48,171 48,962
-------- --------
Total assets...................................... $106,704 $103,710
======== ========
</TABLE>
The following is sales information by geographic area as of and for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States.................................. $131,317 $118,145 $115,466
Foreign........................................ 18,990 37,909 24,149
-------- -------- --------
$150,307 $156,054 $139,615
======== ======== ========
</TABLE>
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.
20. 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. and Vanco International, 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.
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Current assets............................................ $33,538 $31,125
Noncurrent assets......................................... 11,269 10,251
------- -------
Total assets.......................................... $44,807 $41,376
======= =======
Current liabilities....................................... $23,715 $21,585
------- -------
Total liabilities..................................... $26,501 $23,091
======= =======
</TABLE>
33
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Sales, net.................................... $110,652 $114,888 $101,014
Gross profit.................................. 22,617 20,200 20,334
Income from continuing operations before
income taxes................................. 7,193 6,663 6,837
Net income.................................... 2,863 4,073 4,307
</TABLE>
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.
34
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT MANAGEMENT
The following table sets forth information regarding the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Director
Name Age Position with the Company Since
---- --- ---------------------------------------------- --------
<C> <C> <S> <C>
Fred C. Schulte. 53 Chairman of the Board, Chief Executive Officer 1988
and Director
Charles D. Hall. 61 President, Chief Operating Officer and 1993
Director
Wayne J. Conner. 47 Vice President, Treasurer, Chief Financial 1993
Officer and Director
Lynn C. Batory.. 41 Vice President, Controller and Secretary
David Hall...... 40 Vice President of Manufacturing
Mort Maurer..... 82 Director 1998
</TABLE>
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.
35
<PAGE>
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.
<TABLE>
<CAPTION>
All Other
Annual
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Fred C. Schulte 1999 $325,574 $249,555 $124,631(1)
Chairman and Chief 1998 310,070 267,245 118,499(1)
Executive Officer 1997 303,876 244,414 31,252(1)
Charles D. Hall 1999 301,522 249,555 87,648(1)
President and Chief 1998 287,163 267,245 73,856(1)
Operating Officer 1997 273,489 244,414 28,699(1)
Wayne J. Conner 1999 174,213 249,555 90,839(1)
Vice President, Treasurer 1998 165,917 267,245 73,631(1)
and Chief Financial Officer 1997 158,016 244,414 16,180(1)
Lynn C. Batory 1999 113,007 115,763 11,585(2)
Vice President, Controller 1998 107,625 110,250 11,102(2)
and Secretary 1997 101,875 105,000 10,569(2)
David Hall 1999 113,007 115,763 11,585(2)
Vice President of 1998 107,625 110,250 11,102(2)
Manufacturing 1997 102,500 75,000 10,569(2)
</TABLE>
36
<PAGE>
- --------
(1) 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 benefits and the value of term
life and disability insurance premiums.
(2) Includes employer contributions to the Company's Profit Sharing Plan and
the value of life insurance premiums.
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)
<TABLE>
<CAPTION>
Remuneration (b) Years of Service
- ---------------- ------------------------------------------
15 20 25 30 35
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$200,000............................. $20,640 $27,520 $ 34,400 $ 41,280 $ 48,160
$225,000............................. 23,453 31,270 39,088 46,905 54,723
$250,000............................. 26,265 35,020 43,775 52,530 61,285
$300,000............................. 31,890 42,520 53,150 63,780 74,410
$350,000............................. 37,515 50,020 62,525 75,030 87,535
$400,000............................. 43,140 57,520 71,900 86,280 100,660
$450,000............................. 48,765 65,020 81,275 97,530 113,785
$500,000............................. 54,390 72,520 90,650 108,780 126,910
$550,000............................. 60,015 80,020 100,025 120,030 140,035
$600,000............................. 65,640 87,520 109,400 131,280 153,160
</TABLE>
(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.
37
<PAGE>
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, 1999 for the named executive officers is as follows: Mr. Schulte, 10
years; Mr. C. Hall, 25 years; Mr. Conner, 17 years; Ms. Batory 16 years;
and Mr. D. Hall, 3 years.
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 $325,574
for 1999, and will receive annual increases beginning in 2000 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 $301,522 for 1999, and will receive annual increases beginning
in 2000 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 $174,213 for 1999, and will receive annual
increases beginning in 2000 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 1999 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
38
<PAGE>
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 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.
<TABLE>
<CAPTION>
Shares of Shares of Preferred
Common Stock Stock
Beneficially Owned Beneficially Owned (a)
------------------- -------------------------
Name Number Percent Number Percent
- ---- ------ --------- ------------- -----------
<S> <C> <C> <C> <C>
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%
</TABLE>
- --------
(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% percent 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.
39
<PAGE>
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.
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
<TABLE>
<S> <C>
Schedule II Valuation and Qualifying Accounts............................... 41
</TABLE>
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
40
<PAGE>
ELGIN NATIONAL INDUSTRIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions Additions
Balance at Charged to Charged to Balance at
Beginning Costs and other End
Description of Period Expenses accounts Deductions of Period
- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended December 31,
1997................... $ 553 $111 $ 0 $ 86 $ 578
Year ended December 31,
1998................... 578 95 0 72 601
Year ended December 31,
1999................... 601 157 0 97 661
Reserve for inventories:
Year ended December 31,
1997................... $1,396 $419 $ 0 $214 $1,601
Year ended December 31,
1998................... 1,601 570 0 129 2,042
Year ended December 31,
1999................... 2,042 332 0 870 1,504
</TABLE>
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
41
<PAGE>
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 __________________________________
Name: Wayne J. Conner
Title: Vice President, Treasurer,
and Chief
Financial Officer
(Duly Authorized Officer and
Principal
Financial Officer)
Dated: March 24, 2000
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 24,
2000.
Elgin National Industries, Inc.
/s/ Wayne J. Conner
By __________________________________
Name: Wayne J. Conner
Title: Vice President, Treasurer,
and Chief
Financial Officer
(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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Fred C. Schulte Chairman of the Board, Chief March 24, 2000
____________________________________ Executive Officer and
Fred C. Schulte Director
/s/ Charles D. Hall President, Chief Operating March 24, 2000
____________________________________ Officer and Director
Charles D. Hall
/s/ Wayne J. Conner Vice President, Treasurer, March 24, 2000
____________________________________ Chief Financial Officer and
Wayne J. Conner Director
/s/ Lynn C. Batory Vice President, Controller March 24, 2000
____________________________________ and Secretary
Lynn C. Batory
/s/ David Hall Vice President of March 24, 2000
____________________________________ Manufacturing
David Hall
</TABLE>
42
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Footnote
Number Document Description Reference
------- -------------------- ---------
<C> <S> <C>
3.1 Certificate of Incorporation of Elgin National
Industries, Inc. (3)
3.2 Bylaws of Elgin National Industries, Inc. (3)
4.1 Indenture dated November 5, 1997, between Elgin National
Industries, Inc., subsidiaries and Norwest Bank
Minnesota, as Trustee. (2)
4.2 Form of 11% Senior Note due 2007 (included in Exhibit
4.1). (2)
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. (3)
4.4 Form of Subsidiary Guaranty (included in Exhibit 4.1). (2)
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. (2)
10.2 Employment and Non-Competition Agreement dated as of
November 5, 1997, between Elgin National Industries,
Inc. and Fred C. Schulte.* (2)
10.3 Employment and Non-Competition Agreement dated as of
November 5, 1997, between Elgin National Industries,
Inc. and Charles D. Hall.* (2)
10.4 Employment and Non-Competition Agreement dated as of
November 5, 1997, between Elgin National Industries,
Inc. and Wayne J. Conner.* (2)
10.5 The Elgin National Industries, Inc. Supplemental
Retirement Plan dated as of 1995, and effective January
1, 1995.* (3)
21 Subsidiaries of Elgin National Industries, Inc. (2)
27 Financial Data Schedule. (1)
(1) Filed herewith.
(2) 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.
(3) 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.
</TABLE>
- --------
* Management contract or compensatory plan or arrangement.
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,701
<SECURITIES> 0
<RECEIVABLES> 28,086
<ALLOWANCES> 661
<INVENTORY> 14,492
<CURRENT-ASSETS> 51,831
<PP&E> 28,684
<DEPRECIATION> 12,930
<TOTAL-ASSETS> 106,704
<CURRENT-LIABILITIES> 38,990
<BONDS> 73,950
15,080<F2>
0
<COMMON> (26,532)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 106,704
<SALES> 150,307
<TOTAL-REVENUES> 150,307
<CGS> 110,917
<TOTAL-COSTS> 110,917
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 907
<INTEREST-EXPENSE> 9,059
<INCOME-PRETAX> 5,653
<INCOME-TAX> 2,519
<INCOME-CONTINUING> 3,134
<DISCONTINUED> 0
<EXTRAORDINARY> 380
<CHANGES> 0
<NET-INCOME> 3,514
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1> Earnings per share is not calculated in accordance with FAS No. 128
<F2> Preferred stock-mandatory includes preferred stock units.
</FN>
</TABLE>
