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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 333-43523
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ELGIN NATIONAL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3908410
(State or other
jurisdiction of (I.R.S. Employer
incorporation or
organization) Identification No.)
2001 Butterfield Road, Suite 1020, Downers Grove, Illinois 60515-1050
(Address of principal executive offices)
Telephone Number: 630-434-7243
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
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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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) [_] Yes [X] No
As of March 27, 2003, there were outstanding 6,408.3 shares of Class A
Common Stock and 19,951.7 shares of Preferred Stock. As of June 28, 2002, 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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ELGIN NATIONAL INDUSTRIES, INC.
TABLE OF CONTENTS
Page
Item Number
---- - ------
PART I
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............................ 36
11. EXECUTIVE COMPENSATION.................. 37
12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT........ 39
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.......................... 40
PART IV
14. CONTROLS AND PROCEDURES................. 41
15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K.... 41
PART I
ITEM 1. BUSINESS
Overview
Elgin National Industries, Inc., incorporated in 1962, was a publicly traded
company listed on the NYSE until it was taken private in 1988 through the
leveraged acquisition of stock of Elgin National Industries, Inc. by The
Jupiter Corporation ("Jupiter"), a private diversified holding company. In
September 1993, an investor group led by institutional investors and Senior
Management (consisting of Fred C. Schulte, Charles D. Hall and Wayne J. Conner)
formed ENI Holding Corp. ("ENI"), and ENI acquired the capital stock of Elgin
National Industries, Inc. from Jupiter in a leveraged buyout. Through the years
Elgin National Industries, Inc. has had strategic acquisitions and divestitures
assisting the company in reducing leverage and, Management believes, focusing
on strengthening its businesses. In 2001 Elgin National Industries, Inc.
acquired Leland Powell Fasteners, Inc.,("Leland"), a manufacturer of specialty
fasteners located in Martin, Tennessee to further strengthen its Manufactured
Products Segment.
On November 5, 1997, ENI and Elgin National Industries, Inc. completed a
recapitalization intended to retire certain existing indebtedness, redeem the
equity interests of outside institutional investors, merge Elgin National
Industries, Inc. into ENI and vest (directly or indirectly) in Senior
Management ownership of all of the issued and outstanding capital stock of the
surviving entity. The components of the recapitalization were (i) the offering
of $85,000,000 11% Senior Notes due 2007 (the "Offering"), (ii) ENI using part
of the proceeds of the Offering to repurchase all of the common stock,
preferred stock and common stock warrants of ENI not owned by Senior
Management; (iii) Elgin National Industries, Inc. using part of the proceeds of
the Offering to retire all senior subordinated indebtedness, including the
payment of prepayment fees; (iv) Elgin National Industries, Inc. merging into
ENI, with ENI remaining as the surviving entity; (v) following such merger, ENI
changing its name to Elgin National Industries, Inc. (items (iv) and (v)
resulting in the entity referred to herein as the "Company" or "Elgin"); and
(vi) the Company and certain of its subsidiaries entering into an amended
senior credit facility (the "Senior Credit Facility") (the matters described at
items (i) through (vi) above being the "Recapitalization Transactions."
Operating Businesses
The Company owns and operates a diversified group of middle-market
manufactured products and engineering services businesses. The Company focuses
on operating businesses with leading positions in niche markets, consistent
operating profitability, diverse customer bases, efficient production
capabilities and broad product lines serving stable industries. The Company is
comprised of two operating segments. Through its Manufactured Products Segment,
Elgin is a leading manufacturer and supplier of custom-designed, highly
engineered products used by a wide variety of customers in the industrial
equipment, durable goods, mining, mineral processing and electric utility
industries. Through its Engineering Services Segment, Elgin provides design,
engineering, procurement and construction management services for mineral
processing and bulk materials handling systems used in the mining, mineral
processing, electric utility and the rail and marine transportation industries.
The Manufactured Products Segment is comprised of Ohio Rod Products Company
("Ohio Rod"), Tabor Machine Company ("Tabor"), Norris Screen and Manufacturing
Inc. ("Norris"), Centrifugal and Mechanical Industries ("CMI"), Centrifugal
Services, Inc. ("CSI"), Mining Controls, Inc. ("Mining Controls"), Chandler
Products ("Chandler"), Clinch River Corporation ("Clinch") Vanco International,
Inc. ("Vanco"), Leland Powell Fasteners, Inc. ("Leland") and Best Metal
Finishing Inc. ("Best Metal"). The Engineering Services Segment is comprised of
Roberts & Schaefer Company ("R&S") and Transervice, Inc., and Soros Associates,
Inc. ("Soros").
Manufactured Products Segment
The Manufactured Products Segment, through its eleven business units,
manufactures and markets products used primarily in the industrial equipment,
durable goods, mining, mineral processing and electric utility
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industries. The businesses within the Manufactured Products Segment consist of
original equipment manufacturers ("OEM"), suppliers of after-market parts and
services and manufacturers of components used by original equipment
manufacturers. These businesses have supplied their customers with quality
products and services for an average of over 40 years. The Manufactured
Products Segment has a broad and diverse customer base, with no single customer
accounting for more than 10% of the Segment's sales in 2002.
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, 2002, were $93.6 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. The Engineering Services Segment
continues to diversify into markets, which include electric utility,
aggregates, industrial minerals, base metals and precious metals. Today, the
Engineering Services Segment has a broad, well-balanced customer base within
these industries and derived approximately 80% of its net sales from customers
outside the coal-mining industry during 2002. Net sales for the Engineering
Services Segment for the year ended December 31, 2002 were $55.4 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. The
Engineering Services Segment also has 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 plants and for handling multiple commodities at rail terminals,
storage facilities, marine terminals and ports. These systems consist of
loading and unloading equipment to remove the material from or place it into
the transportation vehicle (trucks, trains, ships or barges) and multiple
conveying systems to move material to or from stockpiles.
2
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, 2002 was $17.9 million.
Management believes that targeting projects in the range of $1 million to
$25 million gives the Engineering Services Segment two strategic advantages.
First, this is a niche of the mineral processing and material handling markets
that generally does not attract larger firms, permitting the Engineering
Services Segment to compete with smaller, local and regional contractors that
may lack the Engineering Services Segment's experience and capabilities.
Second, by maintaining a larger portfolio of smaller projects, the Engineering
Services Segment is better able to manage the risk inherent in its business.
The Engineering Services Segment has a broad and diversified customer base,
having executed projects in the electric utility, aggregates, industrial
minerals and base metal industries. The Engineering Services Segment has also
been successful in further diversifying their markets to include international
work. During 2002, approximately 29% of the net sales of the Engineering
Services Segment were from international projects.
The Engineering Services Segment markets its services through internal
marketing and sales groups principally located in Chicago, Salt Lake City and
Brisbane, Australia. 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.
Generally, the Engineering Services Segment competes with a large number of
specialty engineering firms on the basis of quality of work performed, strength
of reputation, responsiveness to customer needs, price and ability to meet
deadlines, and the Engineering Services Segment seeks to differentiate itself
from its competitors with respect to each of these factors.
Supplies
The Company acquires substantially all of its raw materials from outside
sources. The basic raw materials primarily used in the Manufactured Products
Segment are flat sheet metal, coiled wire or rod and various forms of stainless
steel materials. Additionally, the Manufactured Products Segment acquires
circuit breakers, components, transformer cores, motor drive units and
purchased finished goods from outside sources. The Company subcontracts certain
fabrication work to other suppliers. The Company is dependent on the ability of
such fabrication suppliers for timely delivery, performance and quality
specifications. The Engineering Services Segment sources many different types
of components in the construction of plant facilities, which in certain cases
are sold directly to the Company's customer by the selected supplier. These
include equipment such as vibrating screens, centrifuge dryers, flotation units
and other finished products. The Company believes there are numerous sources of
supply for the different materials used in its operations.
Employees
As of December 31, 2002, the Company had approximately 690 employees.
Approximately 12 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
3
IAM effective from March 1, 1998 through March 31, 2003. CMI and IAM signed a
new contract that will be effect from April 1, 2003 through March 31, 2006.
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, 2006. The Company believes that its relations with its employees
are generally good.
ITEM 2. PROPERTIES
The Company and its businesses conduct operations from the following primary
facilities:
Approximate
Principal Owned/ Square
Business Location Function Leased Footage
-------- ------------------- ------------- ------ -----------
Elgin Downers Grove, IL Headquarters Leased 6,470
Ohio Rod Versailles, IN Manufacturing Owned 93,350
Chandler Products Euclid, OH Manufacturing Owned 88,000
Mining Controls Beckley, WV Manufacturing Owned 44,925
CMI St. Louis, MO Manufacturing Owned 63,295
CSI Raleigh, IL Manufacturing Owned 16,166
Leased 18,245
Tabor Bluefield, WV Manufacturing Owned 44,000
Norris Princeton, WV Manufacturing Owned 12,700
Clinch River Cedar Bluff, VA Manufacturing Owned 56,300
Vanco Batavia, IL Distribution Leased 30,890
R & S Chicago, IL & Office Leased 16,200
Salt Lake City, UT Office Leased 25,267
R & S Australia Brisbane, Australia Office Leased 1,400
Soros Chicago, IL Office Leased 5,800
Leland Martin, Tenn Manufacturing Owned 92,000
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in legal proceedings from time
to time in the ordinary course of its business. As of the date of this filing,
neither the Company nor any of its subsidiaries are a party to any lawsuit or
proceeding which, individually or in the aggregate, in the opinion of
management, is reasonably likely to have a material adverse effect on the
financial condition, results of operation or cash flow of the Company.
In connection with the 1993 leveraged buyout of the Company, The Jupiter
Corporation (the former ultimate parent entity of the Company) agreed to
indemnify the Company against various claims and ongoing litigation and assumed
the defense of such litigation. The litigation includes a wrongful death
product liability claim against R&S in connection with an accident at a work
site. Although the Company believes that Jupiter and its insurance carrier are
performing on the indemnity obligations, there can be no assurance that they
will continue to do so or that the Company would successfully recover on the
indemnity in the event of an adverse judgment against R&S or adverse outcomes
in any other proceeding. In any such case, the Company would bear the cost of
defense and any adverse judgment. One or more such adverse judgments could
materially and adversely effect the Company's business, financial condition,
results of operations and debt service capability.
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,
4
state, provincial, local or foreign environmental laws or regulations or
remediation costs. Some risk of environmental liability and other costs is
inherent, however, in the nature of the businesses conducted by the
Manufactured Products Segment, which have been in operation for an average of
over 40 years and have performed little invasive testing at their sites. In
addition, businesses previously operated by the Company have been sold. There
can be no assurance that future identification of contamination at its current
or former sites or at third party-owned sites where waste generated by the
Company has been disposed of would not have a material adverse effect on the
Company's business, results of operations, financial condition or debt service
capability. Any failure by the Company to obtain required permits for, or
adequately restrict the discharge of, hazardous substances under present or
future regulations could subject the Company to substantial liability. Such
liability could have a material adverse effect on the Company's business,
financial condition, results of operations and debt service capability.
The Company has been named as a potentially responsible party by the New
York Department of Environmental Conservation for clean-up costs at the
Company's former manufacturing facility in Orangeburg, New York. The Company
has obtained the agreement of its former ultimate parent entity to indemnify it
against losses, damages and costs arising out of such action. Although the
Company believes that the indemnitor has performed its obligations on this site
to date, there can be no assurance that it will continue to do so or that the
Company would successfully recover on the indemnity. In such a case, the
Company would bear the cost of any remediation, which costs could be
significant and materially and adversely effect the Company's business,
financial condition, results of operations and debt service capability.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public offering market for the outstanding common
equity of the Company and 100% of its outstanding common equity is beneficially
owned by Senior Management.
The ability of the Company to pay dividends is governed by restrictive
covenants contained in the indenture governing its publicly-held debt as well
as restrictive covenants contained in the Company's Senior Credit Facility. As
a result of these restrictive covenants, the Company was limited in the amount
of dividends it was allowed to pay on December 31, 2002. The Company did not
pay any dividends in the years ended December 31, 2002, 2001 and 2000.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial information of
the Company, as of the dates and for the periods indicated. The historical
financial data as of December 31, 1998, 1999, 2000, 2001 and 2002 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
Selected Financial Data
Fiscal Year Ended December 31,
------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(dollars in thousands)
Statement of Operations Data:
Net sales................................................................ $156,054 $150,307 $163,370 $191,551 $149,000
Cost of sales............................................................ 118,390 110,917 124,378 149,988 116,730
-------- -------- -------- -------- --------
Gross profit.......................................................... 37,664 39,390 38,992 41,563 32,270
Selling, general and administrative expenses............................. 22,485 25,507 24,419 24,850 27,007
Goodwill amortization.................................................... 1,743 386 419 1,088
-------- -------- -------- -------- --------
Operating income...................................................... 13,436 13,497 14,154 15,625 5,263
Other expenses:
Interest expense, net................................................. 8,190 7,844 7,676 8,810 8,747
-------- -------- -------- -------- --------
Income (loss) before income taxes........................................ 5,246 5,653 6,478 6,815 (3,484)
Provision (benefit) for income taxes..................................... 2,141 2,519 2,605 3,309 (1,501)
-------- -------- -------- -------- --------
Income (loss) before extraordinary items................................. 3,105 3,134 3,873 3,506 (1,983)
Extraordinary gain on early extinguishment of debt, net of income tax (a) 380
-------- -------- -------- -------- --------
Net income (loss)........................................................ $ 3,105 $ 3,514 $ 3,873 $ 3,506 $ (1,983)
======== ======== ======== ======== ========
Other Financial Data:
Gross margin %........................................................... 24.2% 26.2% 23.9% 21.7% 21.7%
Depreciation and amortization............................................ $ 4,417 $ 3,149 $ 3,182 $ 4,604 $ 3,707
Capital expenditures..................................................... 4,215 2,600 4,337 4,440 3,572
Net cash provided by (used in) operating activities...................... 5,388 7,602 10,674 5,619 (2,598)
Net cash provided by (used in) investing activities...................... (3,939) (8,506) (6,395) (24,780) (3,497)
Net cash provided by (used in) financing activities...................... (805) (3,376) (6,959) 16,140 6,095
Operating Unit Data:
Net Sales:...............................................................
Manufactured Products Segment......................................... $ 82,097 $ 77,312 $ 80,036 $ 99,080 $ 93,562
Engineering Services Segment.......................................... 73,957 72,995 83,334 92,471 55,438
-------- -------- -------- -------- --------
Total Net Sales.................................................... $156,054 $150,307 $163,370 $191,551 $149,000
======== ======== ======== ======== ========
Balance Sheet Data:
Cash and cash equivalents................................................ $ 9,981 $ 5,701 $ 3,021 $ $
Working capital less cash and cash equivalents........................... 15,834 7,140 10,219 12,381 18,150
Property, plant and equipment, net....................................... 15,344 15,754 17,935 22,070 22,441
Total assets............................................................. 103,710 106,704 112,464 137,746 124,617
Total debt............................................................... 85,439 81,059 74,100 91,234 97,329
Redeemable preferred stock and redeemable preferred stock units.......... 14,152 15,080 16,006 16,933 17,860
Stockholder's deficit.................................................... (29,400) (26,532) (23,305) (20,445) (23,074)
- --------
(a)In 1999 the gain on early extinguishment of debt resulted from the
repurchase of the Company's senior notes net of amortization of related
finance costs.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Elgin owns and operates a diversified group of middle-market industrial
manufacturing and engineering services businesses. The Company focuses on
operating businesses with leading positions in niche markets, consistent
profitability, diverse customer bases, efficient production capabilities and
broad product lines serving stable industries. The Company is comprised of
thirteen business units that are organized into two operating segments. Through
its Manufactured Products Segment, Elgin is a leading manufacturer and supplier
of custom-designed, highly engineered products used by a wide variety of
customers in the industrial equipment, durable goods, mining, mineral
processing and electric utility industries. Through its Engineering Services
Segment, Elgin provides design, engineering, procurement and construction
management services for mineral processing and bulk materials handling systems
used in the mining, mineral processing, electric utility and the rail and
marine transportation industries.
Variability of Revenues and Cash Flows
The Engineering Services Segment's project base is typically comprised of
over 100 projects in process each year. At any given time, this project base
includes a substantial majority of small projects (which the Company defines as
producing less than $1.0 million in annual sales) as well as a number of larger
projects (which the Company defines as producing $1.0 million or more in annual
sales). The Company's revenues from these larger projects tend to fluctuate
from year to year depending on the number of such projects in process and the
respective status of each project. In addition, these larger projects often
extend over more than one year, causing potential fluctuations in revenues and
cash flows. The Company uses the percentage of completion method of accounting
for its engineering services contracts. Under this method of accounting, the
degree of completion of each contract is generally determined by comparing the
costs incurred to date to the total costs anticipated for the entire contract,
taking into account the current estimates of cost to complete the contract.
Revenue is recognized on each contract as a percentage of the total contract
revenue in proportion to the degree of the project's completion. Management
routinely reviews total estimated costs to complete each contract and revises
the estimated gross margin on the contract accordingly. Losses are recognized
in full in the period in which they are determined. Cash flows can vary
significantly from period to period, depending on the terms of the larger
contracts then in force. In some contracts, the customers provide full or
partial advance cash payments prior to performance by the Company. In other
contracts, receipts follow disbursements in varying degrees. As a result,
reported operating income of the Engineering Services Segment for any period is
not necessarily indicative of cash flow for that period.
7
Results of Operations
The following tables set forth, for the periods indicated, amounts derived
from the Company's consolidated statements of operations and related
percentages of net sales. There can be no assurance that the trends in
operating results will continue in the future.
Company Consolidated
(dollars in millions)
For the Fiscal Year Ended December 31,
-----------------------------------------
2000 2001 2002
------------ ------------ -------------
Net sales................................. $163.4 100.0% $191.5 100.0% $149.0 100.0%
Cost of sales............................. 124.4 76.1 150.0 78.3 116.7 78.3
Gross profit.............................. 39.0 23.9 41.5 21.7 32.3 21.7
Selling, general & administrative expenses 24.4 14.9 24.8 12.9 27.0 18.1
Goodwill amortization..................... 0.4 0.3 1.1 0.6
Operating income.......................... 14.2 8.7 15.6 8.2 5.3 3.6
Interest expense, net..................... 7.7 4.7 8.8 4.6 8.8 5.9
Income (loss) before income taxes......... 6.5 4.0 6.8 3.6 (3.5) (2.3)
Provision (benefit) for income taxes...... 2.6 1.6 3.3 1.7 (1.5) (1.0)
Net income (loss)......................... 3.9 2.4 3.5 1.9 (2.0) (1.3)
Manufactured Products Segment
(dollars in millions)
For the Fiscal Year Ended December 31,
-------------------------------------
2000 2001 2002
----------- ----------- -----------
Net sales.... $80.0 100.0% $99.1 100.0% $93.6 100.0%
Cost of sales 52.4 65.5 69.2 69.8 67.1 71.7
Gross profit. 27.6 34.5 29.9 30.2 26.5 28.3
Engineering Services Segment
(dollars in millions)
For the Fiscal Year Ended December 31,
-------------------------------------
2000 2001 2002
----------- ----------- -----------
Net sales.... $83.4 100.0% $92.4 100.0% $55.4 100.0%
Cost of sales 72.0 86.3 80.8 87.4 49.6 89.6
Gross profit. 11.4 13.7 11.6 12.6 5.8 10.4
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Sales: Net sales for the Manufactured Products Segment for the year
ended December 31, 2002 decreased $5.5 million, or 5.6%, to $93.6 million from
$99.1 million for the corresponding period in 2001. The decreased sales level
was due to decreased sales of centrifugal dryers and industrial capital
equipment, partially offset with increased fastener sales and sales of
electronic components.
8
Net sales for the Engineering Services Segment for the year ended December
31, 2002 decreased $37.0 million, or 40.0%, to $55.4 million from $92.4 million
for the corresponding period in 2001 due primarily to decreased sales of larger
engineering jobs with sales greater than $1.0 million. In 2002 the Engineering
Services Segment had $43.2 million in sales from seven larger jobs compared to
$81.1 million from fifteen jobs in 2001.
Cost of Sales: Cost of sales for the Manufactured Products Segment for the
year ended December 31, 2002 decreased $2.1 million, or 3.0%, to $67.1 million
from $69.2 million for the corresponding period in 2001 due to the decreased
sales level. The Manufactured Products Segment's cost of sales as a percentage
of net sales increased to 71.7% for the year ended December 31, 2002 from 69.8%
for the corresponding period in 2001 due to lower margins earned on centrifugal
dryer sales and steel fabrication work, along with costs associated with the
start-up of Best Metal Finishing, a plating facility which will begin
operations during the second quarter of 2003.
Cost of sales for the Engineering Services Segment for the year ended
December 31, 2002 decreased $31.2 million, or 38.5%, to $49.6 million from
$80.8 million for the corresponding period in 2001 due to the lower sales
level, partially offset with a reduction of margin on two larger projects. As a
percentage of net sales, the Engineering Services Segment's cost of sales
increased to 89.6% for the year ended December 31, 2002 from 87.4% for the
corresponding period in 2001.
Gross Profit: Gross profit for the Manufactured Products Segment for the
year ended December 31, 2002 decreased $3.4 million, or 11.4%, to $26.5 million
from $29.9 million for the corresponding period in 2001 due to the decreased
sales level. The Manufactured Products Segment's gross profit as a percentage
of net sales decreased to 28.3% for the year ended December 31, 2002 from 30.2%
for the corresponding period in 2001 due to the lower margins earned on
centrifugal dryer sales and steel fabrication work, along with costs associated
with the start-up of Best Metal Finishing.
Gross profit of the Engineering Services Segment for the year ended December
31, 2002 decreased $5.8 million, or 50.5%, to $5.8 million from $11.6 million
for the corresponding period in 2001 due to the lower sales level in the year
ended December 31, 2002. As a percentage of net sales, the Engineering Services
Segment's gross profit decreased to 10.4% for the year ended December 31, 2002
from 12.6% for the corresponding period in 2001 due to a reduction of margin on
two larger projects.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses of the Company of $27.0 million for the year ended
December 31, 2002 represented an increase of $2.2 million in comparison to
$24.8 million for the corresponding period in 2001 primarily due to non-cash
pension expense of $1.1 million incurred in 2002 compared to non-cash pension
income of $1.7 million in 2001.
Goodwill Amortization: Beginning January 1, 2002 the Company discontinued
the amortization of goodwill in accordance with the provisions of Statement of
Accounting Standards No. 142--Goodwill and Other Intangible Assets. Goodwill
amortization was $1.1 million for the year ended December 31, 2001.
Operating Income: Operating income of the Company for the year ended
December 31, 2002 of $5.3 million was $10.3 million lower than the operating
income of $15.6 million for the corresponding period in 2001 for the reasons
discussed above. Operating income as a percentage of net sales decreased to
3.6% for the year ended December 31, 2002 from 8.2% for the corresponding
period in 2001.
Interest Income: Interest income of the Company for the year ended December
31, 2002 of $0.7 million approximated interest income for the year ended
December 31, 2001.
Interest Expense: Interest expense of the Company for the year ended
December 31, 2002 of $9.5 million approximated interest expense for the year
ended December 31, 2001.
9
(Loss) Income Before Income Taxes: The Company incurred a loss before
income taxes of $3.5 million for the year ended December 31, 2002, compared to
income before income taxes of $6.8 million for the year ended December 31,
2001, for the reasons discussed above. Loss before income taxes, as a
percentage of net sales was 2.3% for the year ended December 31, 2002 compared
to income before income taxes of 3.6% for the year ended 2001.
(Benefit) Provision for Income Taxes: Benefit for income taxes for the year
ended December 31, 2002 was $1.5 million, compared to a provision of $3.3
million for the year ended December 31, 2001. The Company's effective tax rate
decreased to 43% in 2002 from 49% in 2001 primarily due to an adjustment to
deferred income taxes in 2001.
Net (Loss) Income: The Company had a net loss of $2.0 million for the year
ended December 31, 2002, compared to net income of $3.5 million for the year
ended December 31, 2001. This decrease of $5.5 million was due to the reasons
discussed above. Net loss as a percentage of net sales was 1.3% for the year
ended December 31, 2002 compared to net income as a percentage of sales of 1.8%
for the corresponding year ended 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Net Sales: Net sales for the Manufactured Products Segment for the year
ended December 31, 2001 increased $19.1 million, or 23.8%, to $99.1 million
from $80.0 million for the corresponding period in 2000. The increased sales
level was due to the inclusion of an entire year's sales from Leland, acquired
in January 2001 and Precision, acquired in October 2000 as well as increased
sales of centrifugal dryers, starters and industrial capital equipment,
partially offset with decreased fastener sales.
Net sales for the Engineering Services Segment for the year ended December
31, 2001 increased $9.1 million, or 11.0%, to $92.4 million from $83.3 million
for the corresponding period in 2000 due primarily to increased sales of larger
engineering jobs with sales greater than $1.0 million. In 2001 the Engineering
Services Segment had $80.1 million in sales from fifteen larger jobs compared
to $69.7 million from seventeen jobs for 2000. This increase was partially
offset with decreased sales on smaller projects with sales less than $1.0
million. For the year ended December 31, 2001 sales of smaller engineering jobs
totaled $12.3 million compared to $13.6 million for the corresponding period in
2000.
Cost of Sales: Cost of sales for the Manufactured Products Segment for the
year ended December 31, 2001 increased $16.8 million, or 31.9%, to $69.2
million from $52.4 million for the corresponding period in 2000 due to the
increased sales level. The Manufactured Products Segment's cost of sales as a
percentage of net sales increased to 69.8% for the year ended December 31, 2001
from 65.5% for the corresponding period in 2000 due to lower margins earned on
fastener sales and sales of manufactured screens.
Cost of sales for the Engineering Services Segment for the year ended
December 31, 2001 increased $8.8 million, or 12.4%, to $80.8 million from $72.0
million for the corresponding period in 2000 due to the higher sales level and
lower margins earned on smaller jobs with less than $1.0 million in sales,
partially offset with higher margins earned on the larger projects due to cost
savings realized on a few larger jobs. As a percentage of net sales, the
Engineering Services Segment's cost of sales increased to 87.4% for the year
ended December 31, 2001 from 86.3% for the corresponding period in 2000.
Gross Profit: Gross profit for the Manufactured Products Segment for the
year ended December 31, 2001 increased $2.3 million, or 8.4%, to $29.9 million
from $27.6 million for the corresponding period in 2000 due to the increased
sales level. The Manufactured Products Segment's gross profit as a percentage
of net sales decreased to 30.2% for the year ended December 31, 2001 from 34.5%
for the corresponding period in 2000 due to the lower margins earned on
fastener sales and manufactured screens sales.
10
Gross profit of the Engineering Services Segment for the year ended December
31, 2001 increased $0.2 million, or 2.2%, to $11.6 million from $11.4 million
for the corresponding period in 2000 due to the higher sales level in the year
ended December 31, 2001. As a percentage of net sales, the Engineering Services
Segment's gross profit decreased to 12.6% for the year ended December 31, 2001
from 13.7% for the corresponding period in 2000 due to the lower margins earned
on smaller jobs, partially offset with higher margins realized on larger
projects.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses of the Company of $24.8 million for the year ended
December 31, 2001 represented an increase of $0.4 million in comparison to
$24.4 million for the corresponding period in 2000 primarily due to the
inclusion of Leland's expenses, acquired in January 2001, higher amortization
of financing costs due the amending the Company's Senior Credit Facility and
higher employee related costs at Corporate, offset with a reversal of a bad
debt provision on a note that was paid in full and the recovery of legal costs
upon the settlement of a lawsuit within the Engineering Services Segment.
Goodwill Amortization: Goodwill amortization of $1.1 million for the year
ended December 31, 2001 increased $0.7 million from $0.4 million for the year
ended December 31, 2000. The increased amortization expense was due to higher
goodwill amortization due to the acquisitions of Precision, acquired in October
2000 and Leland, acquired in January 2001.
Operating Income: Operating income of the Company for the year ended
December 31, 2001 of $15.6 million was $1.4 million higher than the operating
income of $14.2 million for the corresponding period in 2000 for the reasons
discussed above. Operating income as a percentage of net sales decreased to
8.2% for the year ended December 31, 2001 from 8.7% for the corresponding
period in 2000.
Interest Income: Interest income of the Company for the year ended December
31, 2000 of $0.7 million decreased $0.1 million or 12.8% from $0.8 million for
the year ended December 31, 2000. This decrease was due to decreased interest
bearing deposits in 2001.
Interest Expense: Interest expense of the Company for the year ended
December 31, 2001 of $9.6 million increased $1.1 million or 12.0% from $8.5
million for the corresponding period in 2000 due to the increased debt
outstanding.
Income from Before Income Taxes: Income before income taxes for the year
ended December 31, 2001 increased $0.3 million, or 5.2%, to $6.8 million from
$6.5 million for the corresponding period in 2000 for the reasons discussed
above. Income before income taxes, as a percentage of net sales was 3.6% for
the year ended December 31, 2001 compared to 4.0% for the year ended 2000.
Provision for Income Taxes: Provision for income taxes for the year ended
December 31, 2001 increased $0.7 million to $3.3 million from $2.6 million the
year ended December 31, 2000. The Company's effective tax rate increased to 49%
in 2001 from 40% in 2000 primarily due to a higher percentage on nondeductible
expenses and an adjustment to deferred income taxes.
Net Income: The net income for the Company for the year ended December 31,
2001 decreased $0.4 million, or 10.3%, to $3.5 million from $3.9 million for
the year ended December 31, 2000 for the reasons discussed above. Net income as
a percentage of net sales decreased to 1.8% for the year ended December 31,
2001 from 2.4% for the corresponding year ended 2000.
Liquidity and Capital Resources
Net cash used in operating activities for the year ended December 31, 2002
of $2.6 million was used to decrease accounts payable and accrued expenses and
to increase prepaid expenses and other assets. These uses
11
were partially offset with cash generated from the net loss adjusted for
non-cash charges and decreased accounts receivable and inventories. 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, 2002 of
$3.5 million consisted of $3.6 million for capital expenditures including $2.8
million relating to the construction of the facilities and capital equipment to
be used at Best Metal Finishing and $0.8 million in accordance with the
Company's regular practice of upgrading and maintaining its equipment base and
facilities, partially offset with $0.1 million of proceeds from the sale of
equipment.
Cash provided by financing activities for 2002 was $6.1 million which
included borrowings of $8.3 million on the revolver and $1.1 million on a loan
for the construction of Best Metal Finishing. Best Metal Finishing is scheduled
to begin operations during the second quarter of 2003. Offsetting these
borrowings was cash used for the repayment of debt of $3.3 million.
The Company's liquidity requirements, both long term (over one year) and
short term, are primarily for debt service, working capital needs and capital
expenditures. The recent decline in the cash flow generated by the Company's
business during the year ended December 31, 2002 has resulted in the Company's
liquidity being constrained at year-end. The Company anticipates that with
improved operating results, funds provided from future operations and funds
available under the new Senior Credit Facility should be sufficient to meet its
anticipated debt service requirements, working capital needs and capital
expenditures.
The Company has the following contractual cash obligations outstanding as of
December 31, 2002:
Contractual Cash Obligations
Payments Due by Period
------------------------------------------
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
-------- --------- ------- ------- -------
(dollars in thousands)
Long Term Debt........................ $ 97,329 $2,984 $19,312 $74,025 $1,008
Operating Leases...................... 5,188 1,785 2,739 584 80
-------- ------ ------- ------- ------
Total Contractual Cash Obligations. $102,517 $4,769 $22,051 $74,609 $1,088
======== ====== ======= ======= ======
On February 10, 2003, the Company and its subsidiaries entered into a new
Loan and Security Agreement to increase its borrowing capacity. Proceeds from
the new Senior Credit Facility were used to repay and retire all amounts
outstanding under the then existing Senior Credit Facility. The new Senior
Credit Facility includes three term loans, Term Loan A, Term Loan, B and Term
Loan C, having original principal amounts of $7,500,000, $2,500,000 and
$15,000,000, respectively. The new Senior Credit Facility also includes a
revolver loan with a commitment amount of $27,500,000 subject to borrowing base
and other restrictions, as well as restrictions under the Company's Indenture.
Term Loan A will require monthly principal payments of $0.1 million beginning
May 2003. Term Loan B will require monthly principal payments of $0.1 million
beginning in May 2003. Term C does not require current principal repayments.
The Company's assets are pledged under the terms of the new Senior Credit
Facility.
12
Upon entering into the new Loan and Security Agreement, based upon the new
term loan agreements, contractual obligations after February 10, 2003 will be
as follows:
Contractual Cash Obligations
Payments Due by Period
-----------------------------------------
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
-------- --------- ------ ------- -------
(dollars in thousands
Long Term Debt........................ $100,179 $1,405 $3,616 $91,425 $3,733
Operating Leases...................... 5,188 1,785 2,739 584 80
-------- ------ ------ ------- ------
Total Contractual Cash Obligations. $105,367 $3,190 $6,355 $92,009 $3,813
======== ====== ====== ======= ======
Backlog
The Company's backlog consists 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, 2002 was $28.7 million. Approximately $10.8 million relates to the
Manufactured Products Segment, with the remaining amount of $17.9 million
relating to the Engineering Services Segment. Within the Engineering Services
Segment's backlog at December 31, 2002, $6.5 million relates to two
engineering, procurement and construction management projects for the upgrade
of coal preparation plants, and $2.3 million relates to a turnkey project for a
cement distribution terminal. A majority of the current backlog is expected to
be realized within the next twelve months.
Inflation
Historically, general inflation has had only a minor affect on the
operations of the Company and its internal and external sources for liquidity
and working capital, and the Company has generally been able to increase prices
to reflect cost increases.
Safe Harbor
Statements herein regarding the Company's ability to meet its liquidity
requirements and the anticipated benefits from the Company's capital
expenditures, and the Company's expected realization of current backlog
constitute forward-looking statements within the meaning of the Securities Act
of 1933 and the Securities Act of 1934. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. Further, statements herein regarding the Company's
performance in future periods are subject to risks relating to, deterioration
of relationships with, or the loss of material customers or suppliers, possible
product liability claims, decreases in demand for the Company's products, and
adverse changes in general market and industry conditions. Management believes
these forward looking statements are reasonable; however, undue reliance should
not be placed on such forward looking statements, which are based on current
expectations.
ITEM 7A. MARKET RISK
In 2002, approximately 13% of the Company's net sales were attributable to
products sold or services provided outside of the United States. In 2002, the
majority of the Company's foreign sales were to companies located in Puerto
Rico and Australia. A portion of these net sales and cost of sales is derived
from international operations which are conducted in foreign currencies.
Changes in the value of these foreign currencies relative to the U.S. dollar
could adversely affect the Company's business, financial condition, results of
operation and debt service capability. The majority of the Company's foreign
sales and costs are denominated in U.S. dollars. With respect to transactions
denominated in foreign currencies, the Company attempts to mitigate foreign
exchange risk by contractually shifting the burden of the risk of currency
fluctuations to the other party in the transactions.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements of Elgin National Industries, Inc.
Page
----
Report of Independent Auditors--Ernst & Young LLP.................................................. 15
Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001.......................... 16
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000......... 17
Consolidated Statements of Changes in Common Stockholder's Deficit for the years ended December 31,
2002, 2001 and 2000.............................................................................. 18
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000......... 19
Notes to Consolidated Financial Statements......................................................... 20
14
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder
Elgin National Industries, Inc.
We have audited the consolidated balance sheets of Elgin National
Industries, Inc. and Subsidiary Companies as of December 31, 2002 and 2001, and
the related consolidated statements of operations, changes in common
stockholder's deficit and cash flows for each of the three years in the period
ended December 31, 2002. Our audit also included the financial schedule listed
in the index at Item 15b. 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,
2002 and 2001 and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule when considered
in relation to the basic financial statements, taken as a whole, presents
fairly in all material respects the information set therein.
As discussed in Note 7 to the consolidated financial statements, in the year
ended December 31, 2002, the Company changed its method of accounting for
goodwill.
ERNST & YOUNG LLP
Chicago, Illinois
February 20, 2003
15
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(in thousands except share data)
ASSETS 2002 2001
------ -------- --------
Current assets:
Accounts receivable, net........................................................ $ 23,196 $ 37,292
Inventories, net................................................................ 16,711 18,359
Prepaid expenses and other assets............................................... 2,801 345
Deferred income taxes........................................................... 3,797 3,542
-------- --------
Total current assets........................................................ 46,505 59,538
Property, plant and equipment, net................................................. 22,441 22,070
Loans receivable from related parties.............................................. 10,268 9,521
Other assets....................................................................... 26,408 27,622
Goodwill........................................................................... 18,995 18,995
-------- --------
Total assets................................................................ $124,617 $137,746
======== ========
LIABILITIES AND COMMON STOCKHOLDER'S DEFICIT
--------------------------------------------
Current liabilities:
Short-term debt................................................................. $ $ 134
Current portion of long-term debt............................................... 2,984 3,050
Accounts payable................................................................ 16,120 32,032
Accrued expenses................................................................ 9,251 11,941
-------- --------
Total current liabilities................................................... 28,355 47,157
Long-term debt less current portion................................................ 94,345 88,050
Other liabilities.................................................................. 2,323 2,273
Deferred income taxes.............................................................. 4,808 3,778
-------- --------
Total liabilities........................................................... 129,831 141,258
-------- --------
Redeemable preferred stock units................................................... 14,016 13,288
-------- --------
Redeemable preferred stock......................................................... 3,844 3,645
-------- --------
Common stockholder's deficit:
Common stock, Class A par value $.01 per share; authorized 23,678 shares; 6,408
shares issued and outstanding as of December 31, 2002 and 2001
Retained deficit................................................................ (23,074) (20,445)
-------- --------
Total common stockholder's deficit.......................................... (23,074) (20,445)
-------- --------
Total liabilities and stockholder's deficit................................. $124,617 $137,746
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
16
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands)
2002 2001 2000
-------- -------- --------
Net sales................................... $149,000 $191,551 $163,370
Cost of sales............................... 116,730 149,988 124,378
-------- -------- --------
Gross profit............................. 32,270 41,563 38,992
Selling, general and administrative expenses 27,007 24,850 24,419
Goodwill amortization....................... 1,088 419
-------- -------- --------
Operating income......................... 5,263 15,625 14,154
Other expenses (income)
Interest income.......................... (768) (741) (850)
Interest expense......................... 9,515 9,551 8,526
-------- -------- --------
(Loss) income before income taxes........... (3,484) 6,815 6,478
(Benefit) provision for income taxes........ (1,501) 3,309 2,605
-------- -------- --------
Net (loss) income........................... $ (1,983) $ 3,506 $ 3,873
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
17
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDER'S DEFICIT
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands except share data)
Total
Common Retained Stockholder's
Stock (Deficit) Deficit
------ --------- -------------
Balance as of December 31, 1999......................................... $ $(26,532) $(26,532)
--- -------- --------
Net income for the year ended December 31, 2000......................... 3,873 3,873
Redeemable preferred stock dividends (19,952 shares at $10.00 per share) (200) (200)
Redeemable preferred stock unit dividend equivalent, net of tax of $281. (446) (446)
--- -------- --------
Balance as of December 31, 2000......................................... (23,305) (23,305)
--- -------- --------
Net income for the year ended December 31, 2001......................... 3,506 3,506
Redeemable preferred stock dividends (19,952 shares at $10.00 per share) (200) (200)
Redeemable preferred stock unit dividend equivalent, net of tax of $281. (446) (446)
--- -------- --------
Balance as of December 31, 2001......................................... (20,445) (20,445)
--- -------- --------
Net loss for the year ended December 31, 2002........................... (1,983) (1,983)
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, 2002......................................... $ $(23,074) $(23,074)
=== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
18
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001 and 2000
(in thousands)
2002 2001 2000
-------- -------- -------
Cash flows from operating activities:
Net (loss) income....................................................... $ (1,983) $ 3,506 $ 3,873
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 3,138 2,973 2,407
Goodwill amortization............................................... 1,088 364
Amortization of finance costs....................................... 569 543 411
Provision for deferred income taxes................................. 1,056 352 746
Provision (Recovery) for doubtful accounts and notes receivable..... 306 (593) 356
Provision for inventories........................................... 248 392 256
Expense (income) from pension overfunding........................... 1,076 (1,747) (1,427)
(Gain) loss on the disposal of assets............................... (12) 45 (5)
Changes in assets and liabilities:
Accounts receivable................................................. 13,790 (5,248) (1,644)
Inventories......................................................... 1,400 109 (1,340)
Prepaid expenses and other assets................................... (3,634) 1,696 (987)
Accounts payable, accrued expenses, and other liabilities........... (18,552) 2,503 7,664
-------- -------- -------
Net cash (used in) provided by operating activities.............. (2,598) 5,619 10,674
-------- -------- -------
Cash flows from investing activities:
Proceeds from the sale of assets........................................ 75 36 20
Purchase of property, plant and equipment............................... (3,572) (4,440) (4,337)
Business acquired, net of cash.......................................... (20,376) (2,078)
-------- -------- -------
Net cash used by investing activities............................ (3,497) (24,780) (6,395)
-------- -------- -------
Cash flows from financing activities:
Debt issuance costs..................................................... (994)
Borrowings on short-term debt........................................... 134
Borrowings on long-term debt............................................ 9,361 19,300 150
Repayments of long-term debt............................................ (3,266) (2,300) (7,109)
-------- -------- -------
Net cash provided by (used in) financing activities.............. 6,095 16,140 (6,959)
-------- -------- -------
Net decrease in cash....................................................... 0 (3,021) (2,680)
Cash and cash equivalents at beginning of period........................... 0 3,021 5,701
-------- -------- -------
Cash and cash equivalents at end of period................................. $ 0 $ 0 $ 3,021
======== ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
19
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Company
Elgin National Industries, Inc. ("the Company") owns and operates a
diversified group of middle-market industrial manufacturing and engineering
services businesses. The Company is organized into two operating segments.
Through its Manufactured Products Segment, the Company manufactures and
supplies custom-designed, highly engineered products used by a wide variety of
customers in the industrial equipment, durable goods, mining, mineral
processing and electric utility industries, primarily within the United States.
Through its Engineering Services Segment, the Company provides design,
engineering, procurement and construction management services for mineral
processing and bulk materials handling systems used in the mining, mineral
processing, electric utilities and the rail and marine transportation
industries, both within the United States and internationally.
2. Summary of Significant Accounting Policies
The significant accounting policies of the Company are summarized below:
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
(b) Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(c) Revenue Recognition
Revenues earned through manufactured products are recognized upon shipment
to the customer. Revenues earned through engineering services are recognized on
the percentage-of-completion method measured by comparing costs incurred to
date with total estimated costs on each project. The lengths of the Company's
construction contracts vary, but are typically longer than one year. However,
in accordance with industry practice, contract-related assets and liabilities
are classified as current in the accompanying consolidated balance sheets.
Contract costs include direct material and engineering costs along with
indirect costs related to contract performance. Favorable adjustments to these
cost estimates are made and recognized in income over the remaining contract
period. Unfavorable adjustments are recorded as soon as they are apparent.
Estimated losses on uncompleted contracts are provided in full within the
period in which such losses are determinable.
(d) Accounts Receivable
Credit evaluations of customers are ongoing and collateral, or other
security is generally not required on accounts receivable. An allowance for
doubtful accounts is maintained at a level management believes is sufficient to
cover potential credit losses. Accounts receivable are charged to the allowance
for doubtful accounts when we have determined that the receivable will not be
collected. Accounts receivable balances are determined to be delinquent when
the amount is past due based on the contractual terms with the customer.
20
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies, continued
(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
The excess of cost over fair value of the net assets acquired is reflected
in the consolidated financial statements as goodwill. Effective January 1,
2002, goodwill is no longer amortized, but is subject to annual impairment
tests. If an impairment exists, the amount of such impairment is calculated
based on the difference between the carrying value and the estimated fair value
of the asset.
(h) Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at December 31, 2002 and 2001 based on tax rates
applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
(i) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(j) Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable: The carrying amounts reported
in the balance sheet for accounts receivable and accounts payable
approximate their fair value.
Long-term debt: The fair values for long-term debt is based on quoted
market prices, except current portion which approximates book value.
(k) Shipping Costs
The Company classifies shipping costs incurred to physically move product
from the seller's place of business to the buyer's designated location as
selling costs. Shipping costs were $751,000, $717,000 and $648,000 for the
years ended December 31, 2002, 2001 and 2000 respectively.
21
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of Significant Accounting Policies, continued
(l) Reclassification
Certain amounts in the 2001 and 2000 financial statements have been
reclassified to conform to the 2002 presentation.
3. Accounts Receivable
Accounts receivable consist of:
December 31,
---------------
2002 2001
------- -------
(in thousands)
Trade accounts..................................................... $11,595 $13,374
------- -------
Construction contracts:
Billed.......................................................... 10,257 17,767
Costs and estimated earnings in excess of billings on contracts. 392 2,622
Retainage due upon completion of contracts...................... 1,486 3,767
------- -------
23,730 37,530
------- -------
Other receivables.................................................. 311 445
------- -------
24,041 37,975
Less allowance for doubtful accounts............................... 845 683
------- -------
$23,196 $37,292
======= =======
Billings exceeded related costs and gross profit recognized on certain
contracts by $5,142,000 and $12,808,000 as of December 31, 2002 and 2001,
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, 2002 will be collected in 2003.
A significant portion of the Company's business activity is concentrated
within the coal mining industry. Accounts receivable at December 31, 2002 and
2001 from companies within the coal mining industry were $9,084,000 and
$21,998,000, respectively.
4. Inventories
Inventories consist of:
December 31,
---------------
2002 2001
------- -------
(in thousands)
Finished goods.......................... $10,655 $10,990
Work-in-process......................... 2,007 2,387
Raw materials........................... 5,569 6,744
------- -------
18,231 20,121
Less excess and obsolete reserve........ 1,520 1,762
------- -------
$16,711 $18,359
======= =======
22
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Property, Plant and Equipment
Property, plant and equipment, at cost, consist of:
December 31,
---------------
2002 2001
------- -------
(in thousands)
Land.................................... $ 2,266 $ 2,260
Buildings and improvements.............. 13,289 12,044
Machinery and equipment................. 27,726 25,500
------- -------
43,281 39,804
Less accumulated depreciation........... 20,840 17,734
------- -------
$22,441 $22,070
======= =======
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $3,138,000, $2,973,000 and $2,407,000, respectively.
6. Other Assets
Other assets consist of:
December 31,
---------------
2002 2001
------- -------
(in thousands)
Prepaid pension cost.................... $23,187 $24,263
Financing costs......................... 2,025 2,594
Other assets............................ 1,196 765
------- -------
$26,408 $27,622
======= =======
7. Goodwill
In June 2001, the Financial Accounting Standards Board issued Statements of
Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and
Other Intangible Assets. Under the new rules, goodwill is no longer amortized
and is subject to annual impairment tests, or more frequent testing if
circumstances indicate that goodwill may be impaired.
The Company has two reporting segments, Manufactured Products and
Engineering Services, goodwill was allocated to these segments as follows:
December 31, 2002
-----------------
(In thousands)
Engineering Services.................... $ 500
Manufactured Products................... 18,495
-------
Total................................ $18,995
=======
23
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Goodwill, continued
The proforma impact of eliminating goodwill amortization on the consolidated
statements of operations for the years ended December 31, 2001 and 2000 are as
follows:
2001 2000
------ ------
(in thousands)
Reported net income..................... $3,506 $3,873
Goodwill amortization, net of tax....... 650 251
------ ------
Adjusted net income.................. $4,156 $4,124
====== ======
Goodwill increased $13,702,000 in 2001 due to the acquisition of Leland
Powell Fasteners, Inc. Amortization expense for goodwill was $1,088,000 and
$419,000 for the years ended December 31, 2001 and 2000, respectively.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of:
December 31,
---------------
2002 2001
------- -------
(in thousands)
Accounts payable--trade................. $ 7,558 $15,121
Accounts payable--other................. 3,420 4,103
Billings on contracts in excess of
costs and gross profit Recognized..... 5,142 12,808
Accrued payroll and commissions......... 2,113 4,103
Other accruals.......................... 7,138 7,838
------- -------
$25,371 $43,973
======= =======
9. Income Taxes
The types of temporary differences between the tax basis of assets and
liabilities and their financial reporting amounts that give rise to a
significant portion of the deferred tax liability and deferred tax asset of
which their approximate tax effect are as follows:
December 31,
-----------------
2002 2001
-------- -------
(in thousands)
Accounts receivable..................... $ 281 $ 221
Inventories............................. 536 653
Accrued expenses........................ 2,070 2,084
Intangibles............................. 637 1,303
Redeemable preferred stock units........ 5,045 4,673
State net operating loss carry forward.. 910 584
-------- -------
Total deferred tax asset............. 9,479 9,518
-------- -------
Prepaid pension......................... (10,115) (9,370)
Property plant & equipment.............. (375) (384)
-------- -------
Total deferred tax liability......... (10,490) (9,754)
-------- -------
Net deferred tax (liability) asset...... $ (1,011) $ (236)
======== =======
24
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes, continued
State net operating loss carry forwards begin to expire in the year ended
December 31, 2019.
The components of the provision (benefit) for income taxes are:
Years Ended December 31,
-----------------------
2002 2001 2000
------- ------ ------
(in thousands)
Current
Federal. $(2,324) $2,051 $1,761
State... (275) 803 354
Foreign. 42 103 25
Deferred
Federal. 1,244 541 381
State... (188) (189) 84
------- ------ ------
$(1,501) $3,309 $2,605
======= ====== ======
The Company's effective tax rates of 43%, 49% and 40% for the years ended
December 31, 2002, 2001 and 2000, respectively, differ from the statutory
federal tax rate of 34% as follows:
Years Ended December 31,
----------------------
2002 2001 2000
------- ------ ------
(in thousands)
Income before income taxes.......... $(3,484) $6,815 $6,478
======= ====== ======
Statutory federal income tax........ $(1,185) $2,317 $2,203
State taxes, net of federal benefit. (182) 376 234
Foreign sales corporation income tax 41 59 65
Adjustment to deferred income tax... 425
Other items......................... (175) 132 103
------- ------ ------
$(1,501) $3,309 $2,605
======= ====== ======
The Company made cash payments for income taxes totalling $103,000,
$1,501,000 and $2,074,000 during the years ended December 31, 2002, 2001 and
2000, respectively.
The Company had income before taxes from foreign operations of $652,000 in
2002. Results from foreign operations were immaterial in 2001 and 2000.
10. Short-Term Debt
Short-term debt consisted of a construction loan for the construction of a
plating facility in Osgood, Indiana. The construction loan had a maximum
principal balance of $1,200,000 with an outstanding principal balance of
$134,000 on December 31, 2001. This loan was a variable rate loan with interest
equal to prime with a floor of 7% and a lifetime cap of 10%. The maturity of
the construction loan was July 1, 2002 upon which time the loan was converted
to a twenty year amortizing mortgage loan.
25
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Long-Term Debt
Long-term debt consists of:
December 31,
---------------
Interest Rate at
December 31, Year of
Type of Issue 2002 Maturity 2002 2001
------------- ---------------- -------- ------- -------
(in thousands)
Fixed rate:
Senior notes................. 11.00% 2007 $73,950 $73,950
Mortgage payable............. 0.00% 2003 50 100
Variable rate:
Term loan.................... 2005 6,550 9,750
Revolver loan................ 2005 15,600 7,300
Mortgage loan................ 2022 1,179
------- -------
Total long-term debt............ 97,329 91,100
Less current maturities......... 2,984 3,050
------- -------
Total non-current long-term debt $94,345 $88,050
======= =======
Annual principal payments on long-term debt at December 31, 2002 were as
follows (in thousands):
Revolver Senior Term Mortgage
Loan Notes loan Loans Total
- -------- ------- ------ -------- -------
2003............... $2,911 $ 73 $ 2,984
2004............... 2,911 39 2,950
2005............... $15,600 728 34 16,362
2006............... 36 36
2007............... $73,950 39 73,989
2008 and thereafter 1,008 1,008
------- ------- ------ ------ -------
$15,600 $73,950 $6,550 $1,229 $97,329
======= ======= ====== ====== =======
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 at the option of the Company, at
the redemption prices as detailed below, being equal to a percentage of the
principal amount of the notes being redeemed, plus accrued and unpaid interest
and specified liquidated damages, if any, to the date of redemption.
Year Percentage
---- ----------
2003............... 103.667%
2004............... 101.833%
2005 and thereafter 100.000%
In addition, in the event of a Change of Control, each holder of the senior
notes will have the right to require the Company to make an offer to purchase
such holder's notes, in whole or in part, at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, to the date of purchase.
The senior notes contain certain restrictive covenants, which, among other
things, limit the ability of the Company to incur additional indebtedness and
make certain restricted payments, grant liens upon its assets, sell certain
assets, merge or consolidate.
26
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIlDATED FINANCIAL STATEMENTS--(Continued)
11. Long-Term Debt, continued
The senior notes are unsecured obligations and are guaranteed by the
Company's material domestic subsidiaries.
The variable rate mortgage loan has an interest rate equal to prime with a
floor of 7% and a lifetime cap of 10%.
Under the terms of a Bank Credit Agreement the Company had the revolver loan
with a borrowing capacity of up to $23,000,000 (less any outstanding letters of
credit) based upon a monthly variable borrowing base. At December 31, 2002, the
Company's available borrowing base of $21,123,000 less the outstanding balance
of $15,600,000 and letters of credit of $1,742,000 resulted in an unused
portion of the revolving credit facility of $3,781,000.
In addition, the Bank Credit Agreement included a term loan with a principal
balance of $6,550,000 as of December 31, 2002. The term loan required quarterly
principal payments of $728,000. Both the revolver loan and term loan had
interest rates tied to a pricing grid. At December 31, 2002 the revolver and
term loan interest was either at (a) the greater of (i) the interest rate per
annum announced from time to time by the Agent at its principal office as its
then prime rate, or (ii) the Federal Funds Effective Rate plus 0.5% per annum
("Base Rate") plus a margin or the Euro Rate plus a margin. Both the revolver
and the term loan portions of the Bank Credit Agreement had a maturity of
January 18, 2005.
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.
On February 10, 2003, the Company and its subsidiaries entered into a new
Loan and Security Agreement to increase its borrowing capacity. Proceeds from
the new Loan and Security Agreement were used to repay and retire all amounts
outstanding under the prior Bank Credit Agreement. The Loan and Security
Agreement includes three term loans, Term Loan A, Term Loan B and Term Loan C,
having original principal amounts of $7,500,000, $2,500,000 and $15,000,000,
respectively. The Loan and Security Agreement also includes a revolver loan
with a commitment amount of $27,500,000 subject to borrowing base and other
restrictions, as well as restrictions under the Company's Indenture. Term Loan
A and Term Loan B will require monthly principal payments of $104,000 and
$63,000, respectively beginning May 2003. Term C does not require current
principal repayments and is due in full on February 10, 2006. The Company's
assets are pledged under the terms of the Loan and Security Agreement. The Loan
and Security Agreement has a maturity date of February 10, 2008. Term Loan A
will accrue interest at the prime rate set by Wells Fargo's principal office
("Prime Rate") plus a margin determined by a pricing grid. Term Loan B will
accrue interest at the Prime Rate plus 3.00% per annum. Term Loan C will accrue
interest at the Prime Rate plus 4.75% per annum. The revolver loan will accrue
interest at the Prime Rate plus 1.00% per annum.
Annual principal payments on the term loan portion of the Loan and Security
Agreement will be as follows (in thousands):
Term Term Term
Loan A Loan B Loan C Total
------ ------ ------- -------
2003............... $ 500 $ 832 $ 1,332
2004............... 750 1,250 2,000
2005............... 1,125 418 1,543
2006............... 1,200 $15,000 16,200
2007............... 1,200 1,200
2008 and thereafter 2,725 2,725
------ ------ ------- -------
$7,500 $2,500 $15,000 $25,000
====== ====== ======= =======
27
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Long-Term Debt, continued
Along with scheduled principal repayments, the term loans require additional
principal payments after the end of each year based on an excess cash flow
calculation.
The Company made cash payments for interest totalling $9,522,000, $9,357,000
and $8,557,000, respectively, during 2002, 2001 and 2000.
The weighted average interest rate on current portion of the long term debt
for 2002 was 5.42%.
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 $67,934,000 and $77,184,000 at December 31, 2002 and December 31,
2001, respectively.
12. Redeemable Preferred Stock Units
In exchange for amounts owed to certain officers, the Company granted to
them redeemable preferred stock units redeemable on December 31, 2007 with an
aggregate principal value of $7,274,000 provided, that, the Company's
obligation to make a redemption payment at such time is subject to the
restrictions contained in the agreement governing the 11% senior notes due 2007.
The Company had accrued dividend equivalent amounts equal to $6,742,000 and
$6,014,000 at December 31, 2002 and 2001, respectively. The redeemable
preferred stock units accrue at 10% per annum. Principal and accrued dividend
equivalent amounts were $14,016,000 and $13,288,000 at December 31, 2002 and
2001, respectively, and will be paid in tandem with the Company's redeemable
preferred stock dividend and redemption payments.
13. 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, 2002. 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 $1,849,000 and $1,650,000 as of
December 31, 2002 and 2001, respectively.
14. 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.
28
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Pension and Profit Sharing Plans, continued
In 1995, the Company established a nonqualified supplemental employee
retirement plan ("SERP") for certain employees whose pension benefits were
limited by the Omnibus Budget Reconciliation Act of 1993, the Employee
Retirement Income Security Act ("ERISA") and the Uruguay Round General
Agreement on Tariffs and Trade ("GATT").
The following information for the years ended December 31, 2002 and 2001 has
been obtained from the actuarial computation for the years ended September 30,
2002 and 2001, respectively.
The change in the benefit obligation for the defined benefit plan is as
follows for the years ended December 31:
2002 2001
------- -------
(in thousands)
Projected benefit obligation at beginning of year $26,158 $22,994
Service cost--benefits earned during the period.. 1,058 800
Interest cost on projected benefit obligation.... 1,337 1,423
Actuarial (gains) losses......................... 866 2,243
Benefit payments................................. (797) (1,302)
Settlements...................................... (3,689)
Special Termination Benefits..................... 476
------- -------
Projected benefit obligation at end of year...... $25,409 $26,158
======= =======
The change in plan assets is as follows for the years ended December 31:
2002 2001
------- -------
(in thousands)
Fair value of plan assets at beginning of year........ $38,039 $46,112
Actual return on plan assets.......................... (2,776) (6,771)
Settlements........................................... (3,689)
Benefit payments...................................... (797) (1,302)
------- -------
Fair value of plan assets at end of year.............. $30,777 $38,039
======= =======
2002 2001
------- -------
(in thousands)
Plan assets in excess of projected benefit obligations $ 5,368 $11,881
Unrecognized amounts:
Prior service cost................................. 559 484
Net gain........................................... 15,906 10,511
------- -------
Prepaid pension cost.................................. $21,833 $22,876
======= =======
Prepaid pension cost included in other assets at December 31, 2002 and 2001,
was $23,187,000 and $24,263,000, respectively. Pension costs included in other
liabilities at December 31, 2002 and 2001, was $1,354,000 and $1,387,000,
respectively.
At December 31, 2002 and 2001, respectively, the Company's SERP projected
benefit obligation of $995,000 and $1,104,000 was not funded.
29
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Pension and Profit Sharing Plans, continued
Weighted average assumptions as of December 31:
2002 2001
---- ----
Settlement rate................... 5.00% 5.25%
Long term rate of return on assets 8.00 9.00
Rate of compensation increase..... 4.75 4.75
Components of net periodic pension expense (benefit) are as follows for the
years ended December 31:
2002 2001 2000
------- ------- -------
(in thousands)
Service cost--benefits earned during the period............. $ 1,058 $ 800 $ 1,036
Interest cost on projected benefit obligation............... 1,337 1,423 1,222
Expected return on assets................................... (4,173) (3,900) (3,538)
Additional pension expense due to settlement................ 2,420
Additional pension expense due to special termination charge 476
Net amortization of prior service cost...................... (76) (76) (76)
Net amortization of prior losses............................ 11 17
------- ------- -------
Net periodic pension expense (benefit)...................... $ 1,042 $(1,742) $(1,339)
======= ======= =======
In addition the Company makes contributions to a union-administered pension
plan for certain employees who do not participate in the Company's pension
plan. The Company's aggregate expense for this plan for the years ended
December 31, 2002, 2001 and 2000 was $43,000, $44,000 and $47,000, 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, 2002, 2001 and 2000 was $588,000,
$1,292,000 and $1,240,000, respectively.
In addition the Company established during 1995 a non-qualified profit
sharing plan for certain employees whose 401(k) benefits were also limited to
the Omnibus Budget Reconciliation Act of 1993, ERISA and GATT. The Company's
expense for this plan in 2002, 2001 and 2000 was $63,000, $55,000 and $36,000,
respectively.
15. Leases
The Company has entered into noncancellable operating leases, primarily for
office space, vehicles and equipment, that have initial or remaining terms of
more than one year.
Future minimum annual rental expenditures are as follows:
Year (in thousands)
---- --------------
2003............... $1,785
2004............... 1,581
2005............... 1,158
2006............... 431
2007............... 153
2008 and thereafter 80
------
$5,188
======
30
ELGIN NATIONAL INDUSTRIES, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Leases, continued
Rental expense for the twelve months ended December 31, 2002, 2001 and 2000
was $1,791,000, $1,966,000 and $1,941,000, respectively.
16. Related Party Transactions
At December 31, 2002 and 2001, 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, 2002, 2001 and
2000 was $285,000, $117,000 and $117,000, 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 $462,000, $330,000, and $330,000, respectively, for the years ended
December 31, 2002, 2001 and 2000.
(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.
17. 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 m