UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 333-27665
CONTINENTAL GLOBAL GROUP, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 31-1506889
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
CO-REGISTRANTS AND SUBSIDIARY GUARANTORS
Continental Conveyor & Equipment Company Delaware 34-1603197
Goodman Conveyor Company Delaware 34-1603196
Continental Conveyor &
Continental Global Group, Inc. Equipment Company Goodman Conveyor Company
438 Industrial Drive 438 Industrial Drive Route 178 South
Winfield, Alabama 35594 Winfield, Alabama 35594 Belton, South Carolina 29627
(205) 487-6492 (205) 487-6492 (864) 338-7793
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (sec. 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]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 2002 was $-0-.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
As of March 15, 2002, there were 100 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
CONTINENTAL GLOBAL GROUP, INC.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item
Number Page
Number
PART I
1 Business 1
2 Properties 4
3 Legal Proceedings 5
4 Submission of Matters to a Vote of Security Holders 5
PART II
5 Market for Registrant's Common Stock and Related Stockholder Matters 5
6 Selected Financial Data 6
7 Management's Discussion and Analysis of Financial Condition and Results of Operations 7
7A Quantitative and Qualitative Disclosures about Market Risk 13
8 Financial Statements and Supplementary Data 14
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 43
PART III
10 Directors and Executive Officers of the Registrant 43
11 Executive Compensation 45
12 Security Ownership of Certain Beneficial Owners and Management 46
13 Certain Relationships and Related Transactions 46
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 47
Signatures 48
Index of Exhibits 50
PART I
ITEM 1. BUSINESS
GENERAL
Continental Global Group, Inc. (hereinafter referred to as the "Company"),
through its subsidiaries, is primarily engaged in the manufacture and
distribution of bulk material handling and replacement equipment, primarily for
use in the mining industry. The Company is a holding company organized under the
Delaware General Corporation law and conducts all of its business through its
direct and indirect operating subsidiaries. The Company's direct operating
subsidiaries are Continental Conveyor and Equipment Company ("Continental") and
Goodman Conveyor Company ("Goodman"). The Company also owns indirectly all of
the capital stock of Continental Conveyor & Equipment Pty. Ltd. ("CCE Pty.
Ltd."), an Australian holding company that owns all of the capital stock of four
Australian operating companies. The Company also owns indirectly all of the
capital stock of Continental Conveyor Ltd., a U.K. operating company, and
Continental MECO (Pty.) Ltd., a South African operating company. During 1998,
the Company purchased the majority of the assets and assumed certain liabilities
constituting a majority of the operations of Huwood International ("Huwood"), a
U.K. belt conveyor business. The operations of the Company's existing U.K.
facilities were merged with the Huwood operations. During 2001, the Company
acquired certain assets in Alabama from Lippert Tire & Axle, Inc. The Company's
existing Alabama operations of its manufactured housing products segment have
been combined with the Lippert operations.
While the Company primarily manages its operations on a geographical basis, the
Company operates in two principal business segments: conveyor equipment and
manufactured housing products. The conveyor equipment business, which comprised
approximately 90.5%, 87.9%, and 84.7% of net sales for 2001, 2000, and 1999,
respectively, markets its products in four main business areas. The mining
equipment business area includes the design, manufacture and testing (and,
outside the United States, installation and maintenance) of complete belt
conveyor systems and components for mining application primarily in the coal
industry. The conveyor components business area manufactures and sells
components for conveyor systems primarily for resale through distributor
networks. The engineered systems business area uses specialized project
management and engineering skills to combine mining equipment products,
purchased equipment, steel fabrication and other outside services for sale as
complete conveyor equipment systems that meet specific customer requirements.
The bulk conveyor equipment business area designs and manufactures a complete
range of conveyor equipment sold to transport bulk materials, such as cement,
lime, food products and industrial waste.
The Company's manufactured housing products business, which comprised
approximately 8.9%, 10.8%, and 14.2% of net sales for 2001, 2000, and 1999,
respectively, manufactures and/or refurbishes axle components sold directly to
the manufactured housing industry. As part of this segment, the Company also
sells mounted tire and rim assemblies to the manufactured housing industry.
Included in the other category is primarily the manufacture and sale of air
filtration equipment for use in enclosed environments, principally in the
textile industry. The manufacturing requirements for these products are
generally compatible with conveyor equipment production and thus maximize
utilization of the Company's manufacturing facilities for its primary products.
Approximately 73.8% or $142.3 million of the Company's 2001 net sales were
generated in the United States, 14.2% or $27.4 million in the United Kingdom,
9.4% or $18.0 million in Australia, and 2.6% or $5.0 million in other countries.
1
CUSTOMERS
The Company's conveyor equipment business segment markets its products worldwide
through a variety of marketing channels with different customer focuses. The
Company sells its mining equipment and bulk conveyor equipment products and
services primarily to mining companies and other end users, original equipment
manufacturers and engineering contractors. The Company sells its conveyor
components products to original equipment manufacturers, engineering contractors
and replacement part distributors, primarily in the following industries:
aggregates, such as rock, gravel, glass and cement materials; coal processing
and mining; pulp, paper and forest products; above ground hard rock and mineral
mining; food and grains; and environmental, sewage and waste water treatment.
The Company sells its engineered systems products and services primarily to
contractors and end users for applications in coal processing and mining, pulp
and paper, composting systems, grain handling, cement products, open-pit mining
and tunneling. The Company markets its manufactured housing products business
segment directly to the manufactured housing industry in the United States.
For the years ended December 31, 2001 and 2000, the Company did not have sales
to any single customer which exceeded 10% of the Company's total net sales. Net
sales to the Company's top five conveyor equipment customers represented
approximately 30.5% and 21.6% of the Company's total net sales for 2001 and
2000, respectively. Although the Company has preferred supplier arrangements
with a number of its major customers pursuant to which the Company and such
customers effectively operate on a long-term basis, such arrangements generally
are not governed by long-term contracts and may be terminated by either party at
any time. A substantial portion of the Company's sales is on a project by
project basis.
For the year ended December 31, 1999, sales to the Company's largest customer,
Massey Energy Company, constituted approximately 11.4% of the Company's total
net sales.
COMPETITION
The Company faces strong competition throughout the world in all of its product
lines. The various markets in which the Company competes are fragmented into a
large number of competitors, many of which are smaller businesses that operate
in relatively specialized or niche areas. In addition, a number of the Company's
competitors have financial and other resources greater than those of the
Company. Competitive considerations vary for each business area, but generally
include quality, price, reliability, availability and service.
SUPPLIERS
The primary raw materials used by the Company to produce its products are steel
and miscellaneous purchased parts such as bearings, electric motors and gear
reducers. All materials are readily available in the marketplace. The Company is
not dependent upon any single supplier for any materials essential to its
business or that are not otherwise commercially available. The Company has been
able to obtain an adequate supply of raw materials and no shortage of raw
materials is currently anticipated.
BACKLOG
Backlog at December 31, 2001, was $41.3 million, an increase of $5.5 million, or
15% from $35.8 million at December 31, 2000. Backlog at the Company's foreign
subsidiaries increased by $10.6 million and backlog at the Company's domestic
subsidiaries decreased by $5.1 million. The Company expects to ship
approximately 90% of its backlog in 2002.
2
EMPLOYEES
As of December 31, 2001, the Company had approximately 1,270 employees,
approximately 800 of whom were located in the United States. Approximately 200
of the employees at the Company's Winfield, Alabama facility are represented by
The United Steelworkers of America Union and are covered by a four year
collective bargaining agreement that expires in 2002. Approximately 190 of the
production employees at the Company's United Kingdom and South African
facilities are covered by annual collective bargaining agreements that expire in
2002. The Company expects negotiations for new agreements to begin in the second
quarter of 2002. The Company has not experienced any work stoppages since 1971
and believes its relations with its employees are good.
ENVIRONMENTAL AND HEALTH AND SAFETY MATTERS
The Company is subject to a variety of environmental standards imposed by
federal, state, local and foreign environmental laws and regulations. The
Company is also subject to the federal Occupational Health and Safety Act and
similar foreign and state laws. The Company periodically reviews its procedures
and policies for compliance with environmental and health and safety laws and
regulations and believes that it is in substantial compliance with all such
material laws and regulations applicable to its operations. Historically the
costs of compliance with environmental, health and safety requirements have not
been material to the Company.
3
ITEM 2. PROPERTIES
The Company conducts its operations through the following primary facilities:
APPROXIMATE SQUARE OWNED/ LEASED
LOCATION FOOTAGE PRINCIPAL FUNCTION
UNITED STATES:
Winfield, Alabama 220,000 Headquarters, manufacturing Owned
Belton, South Carolina 191,000 Administration, manufacturing Owned
Salyersville, Kentucky 111,000 Manufacturing Owned
Pueblo, Colorado 75,600 Manufacturing Owned
Eatonton, Georgia 22,000 Manufacturing, warehouse Leased(1)
Phil Campbell, Alabama 47,000 Administration, manufacturing Leased(2)
AUSTRALIA:
Somersby, New South Wales 42,000 Administration, engineering, Owned
sales, and manufacturing
Mackay, Queensland 32,000 Manufacturing, and installation Leased(3)
support
Minto, New South Wales 22,173 Manufacturing Owned
ENGLAND
Gateshead, UK 234,810 Administration, engineering, Leased(4)
sales, and manufacturing
SOUTH AFRICA
Alrode, South Africa 24,456 Administration, engineering, Leased(5)
sales, and manufacturing
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(1) Expires in October 2003. The Company holds an option to buy such property
at the end of the lease term.
(2) Expires in July 2002. The Company holds four successive one-year options
to renew the lease and an option to buy such property under certain
conditions during the term of each successive lease.
(3) Current lease is month to month.
(4) Expires in August 2003 with option to renew for additional five years
with option to purchase at market value.
(5) Expires in May 2003. The Company has an option to renew for two years
until May 2005.
In addition to the foregoing facilities, the Company has a number of leased
warehouses and field sales offices in various locations throughout the United
States and Australia. The Company believes that substantially all of its
property and equipment is in a condition appropriate for its operations and that
it has sufficient capacity to meet its current operational needs. Each of the
Company-owned United States facilities is subject to a mortgage securing payment
of indebtedness under the Revolving Credit Facility. In addition, the Company's
owned facilities in Australia are subject to mortgage securing payment of
indebtedness under the Australian Revolving Credit Facility. See Note E,
"Financing Arrangements," to the Consolidated Financial Statements.
4
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding which it believes
could have a material adverse effect upon its results of operations or financial
condition, or to any other pending legal proceedings other than ordinary,
routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 2001, N.E.S. Investment Co., the Company's
sole stockholder, by written consent, elected all members of the Company's Board
of Directors. See Part III, Item 10.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a direct wholly-owned subsidiary of N.E.S. Investment Co. There
is no established public trading market for the Company's common stock. As of
March 15, 2002, the Company had one stockholder. The Company paid no dividends
in 2001 or 2000. See Note E, "Financing Arrangements", to the Consolidated
Financial Statements, Part II, Item 8, for limitations on dividends.
5
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial and operating data of the
Company for each of the five years in the period ended December 31, 2001. The
data should be read in conjunction with the Consolidated Financial Statements
and related Notes included in this report on Form 10-K.
2001 2000 1999 1998 (1) 1997 (2)
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(Data in 000's, except ratios)
INCOME STATEMENT DATA:
Net sales $ 192,711 $ 168,178 $ 213,997 $ 253,873 $ 215,673
Gross profit 29,787 26,526 31,764 42,936 43,112
Operating income 7,698 3,592 5,316 14,331 20,013
Interest expense 15,787 15,826 15,225 14,658 12,308
Net income (loss) (6,916) (13,114) (8,728) 1,175 7,838
OTHER DATA:
Depreciation and amortization 2,884 3,077 3,550 3,393 2,708
Operating cash flows 268 (6,458) (12,261) 8,592 10,176
EBITDA (3) 10,090 7,152 10,240 18,912 22,868
Ratio of earnings to fixed charges (4) -- -- -- 1.08 1.64
BALANCE SHEET DATA:
Cash and cash equivalents 14,672 16,942 18,300 26,351 30,883
Total assets 109,940 110,136 122,903 145,757 129,725
Long-term debt, including current
portion 123,557 124,722 126,028 123,322 129,870
Stockholder's equity (deficit) (68,845) (61,063) (45,878) (37,506) (35,973)
(1) Reflects the acquisition during 1998 of Huwood.
(2) Reflects the acquisitions during 1997 of BCE, Hewitt-Robins, and MECO.
(3) EBITDA represents earnings before extraordinary items, interest, taxes,
depreciation, amortization, restructuring charges, and bond repurchase
expenses. EBITDA has been included because the Company uses it as one
means of analyzing its ability to service its debt, the Company's lenders
use it for the purpose of analyzing the Company's performance with
respect to the credit agreement and the Indenture, and the Company
understands that it is used by certain investors as a measure of a
Company's historical ability to service debt.
(4) Earnings consist of income before income taxes plus fixed charges. Fixed
charges consist of interest expense, amortization of deferred financing
costs and one-third of rent expense from operating leases, which
management believes is a reasonable approximation of an interest factor.
Earnings were inadequate to cover fixed charges in the years ended
December 31, 2001, 2000 and 1999 by $8,413, $11,200, and $8,728,
respectively.
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, on a comparative basis, certain income statement
data as a percentage of net sales for the fiscal years ended December 31, 2001,
2000, and 1999.
Year ended December 31
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2001 2000 1999
Net sales 100.0% 100.0% 100.0%
Cost of products sold 84.5 84.2 85.2
Gross profit 15.5 15.8 14.8
SG&A expenses 10.9 12.8 11.3
Management fee 0.3 0.2 0.2
Amortization expense 0.3 0.4 0.3
Restructuring charge -- 0.3 0.5
Operating income 4.0 2.1 2.5
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NET SALES
Net sales increased $24.5 million, or 15%, from $168.2 million in 2000 to $192.7
million in 2001, primarily due to an increase in sales volume. Net sales in the
Company's domestic operations of the conveyor equipment segment increased $16.7
million primarily due to increased spending by the Company's mining equipment
customers for replacement equipment and capital projects. Net sales in the
Company's foreign operations of the conveyor equipment segment increased $9.8
million, primarily due to increases in the Company's United Kingdom and South
African subsidiaries of $8.6 million and $1.4 million, respectively. The
increase in the United Kingdom resulted from increases in sales of standard
manufactured products and complete conveyor systems. The increase in South
Africa was due to an increase in the standard manufactured products business.
Net sales in the Company's manufactured housing segment decreased $0.9 million,
or 5% from $18.1 million in 2000 to $17.2 million in 2001. While production and
shipments in the manufactured housing industry decreased 23% from 2000 to 2001,
sales in the Company's manufactured housing segment were favorably impacted as a
result of the acquisition from Lippert Tire & Axle Inc. in July 2001. Net sales
in the Company's other segment decreased $1.1 million.
7
GROSS PROFIT
Gross profit increased $3.3 million, or 12%, from $26.5 million in 2000 to $29.8
million in 2001. Gross profit in the domestic operations of the conveyor
equipment segment increased $2.0 million primarily due to the increased sales
volume in the mining equipment business. Gross profit in the foreign operations
of the conveyor equipment segment increased $1.0 million. Gross profit in the
Company's United Kingdom and South African subsidiaries increased $3.5 million
and $0.2 million, respectively, due to the increase in sales volume and improved
profit margins. This was offset by a decrease in gross profit in the Company's
Australian subsidiary of $2.7 million. As a result of a physical inventory
conducted by the Company's Australian subsidiary in July 2001, the Company
incurred a charge to cost of products sold of approximately $0.8 million; in the
fourth quarter, due to the bankruptcy of a large insurance company, the Company
wrote off approximately $0.5 million of a previously approved claim which the
Company may not be able to collect. The decline in gross profit in Australia was
also a result of lower margins on contracts. Gross profit in the manufactured
housing segment increased $0.6 million due to improved profit margins resulting
from the acquisition in July 2001 and the subsequent consolidation of the
existing operations into the acquired facility. Gross profit in the Company's
other segment decreased $0.3 million.
SG&A EXPENSES
SG&A expenses decreased $0.6 million, or 3%, from $21.5 million in 2000 to $20.9
million in 2001. The decrease is primarily the result of the favorable impact of
the restructuring initiatives in the foreign operations of the Company's
conveyor equipment segment.
OPERATING INCOME
Operating income increased $4.1 million, or 114%, from $3.6 million in 2000 to
$7.7 million in 2001. The increase in operating income is the result of the $3.3
million increase in gross profit combined with reductions in SG&A expenses and
restructuring charges of $0.6 million and $0.4 million, respectively, offset by
an increase in management fees of $0.2 million.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET SALES
Net sales decreased $45.8 million, or 21%, from $214.0 million in 1999 to $168.2
million in 2000. The Company's domestic operations of the conveyor equipment
segment accounted for $8.9 million of the decrease due to lower capital spending
by the Company's major customers in the coal industry. Net sales in the foreign
operations of the conveyor equipment segment decreased $24.7 million, primarily
due to a decrease in sales of $21.0 million at the Company's Australian
subsidiary. This decrease was primarily due to the completion of major projects
in 1999 that were not repeated in 2000, combined with the soft market in the
coal industry. Net sales in the Company's United Kingdom and South African
subsidiaries decreased $3.7 million. Net sales in the Company's manufactured
housing products segment decreased $12.2 million due to the decrease by its
customers in the production and shipment of manufactured homes. This decrease in
the production and shipment of manufactured homes is primarily the result of
excess finished home inventory and the negative impact that the tight credit
market has had on the purchase of new manufactured homes.
8
GROSS PROFIT
Gross profit decreased $5.2 million, or 16%, from $31.7 million in 1999 to $26.5
million in 2000. Gross profit in the Company's domestic conveyor equipment
segment decreased $4.1 million due to lower sales volume. Gross profit in the
United Kingdom and South African operations decreased $2.7 million due to lower
sales volumes and lower margins on project contracts. This decrease was
favorably offset by a $2.3 million increase in gross profit in the Australian
operations due to improved margins. The improved margins were the result of the
restructuring initiatives combined with the completion of the major projects in
1999 and a greater concentration on value added products. Gross profit in the
manufactured housing products segment decreased $0.7 million due to the lower
sales volume.
SG&A EXPENSES
SG&A expenses decreased $2.8 million, or 12%, from $24.3 million in 1999 to
$21.5 million in 2000. The decrease primarily occurred in the Company's conveyor
equipment segment due to the favorable impact of the restructuring initiatives
in the foreign subsidiaries and the reduction in domestic manpower that occurred
in the third quarter of 1999.
OPERATING INCOME
Operating income decreased $1.7 million, or 32%, from $5.3 million in 1999 to
$3.6 million in 2000. The decrease is the result of the $5.2 million decrease in
gross profit, offset by the favorable reduction of $2.8 million in SG&A
expenses, $0.1 million in management fees, and $0.6 million in restructuring
charges.
RESTRUCTURING CHARGES
In 1998, the Company executed a plan to close certain Australian manufacturing
facilities and merge the operations with other existing facilities; in 1999 and
2000, the Company made further reductions in office staff and facilities. In the
United Kingdom, following the acquisition of Huwood International (Huwood) in
August 1998, the Company consolidated its existing operations and facilities
into the Huwood operations. In connection with these plans, the Company incurred
restructuring charges of approximately $0.5 million and $1.1 million in 2000 and
1999, respectively, related to its Australian and United Kingdom subsidiaries.
Total restructuring charges incurred to date total approximately $2.7 million.
These restructuring charges consisted primarily of severance of approximately
220 employees and relocation costs. As of December 31, 2001, all accruals for
restructuring charges have been fully utilized.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $0.3 million, $(6.5)
million, and $(12.3) million for the years ending December 31, 2001, 2000, and
1999, respectively. The increase in operating cash flows from 2000 to 2001 is a
direct result of the decrease in the net loss. Net cash provided by operating
activities in 2001 represents the current year net loss of $6.9 million offset
by significant non-cash expenses of $2.9 million and a net decrease in operating
assets of $4.3 million. Net cash used in operating activities in 2000 represents
the net loss offset by significant non-cash expenses, such as depreciation,
amortization, deferred income taxes, and provisions for doubtful accounts. Net
cash used in operating activities in 1999 was the result of the net loss and a
net increase in operating assets.
Net cash used in investing activities was $2.5 million, $1.4 million, and $2.9
million for the years ending December 31, 2001, 2000 and 1999, respectively. Net
cash used in investing activities in 2001 includes net purchases of property,
plant, and equipment of $0.9 million and the acquisition from Lippert Tire &
Axle for $1.6 million. Net cash used in investing activities in 2000 and 1999
represents net purchases of property, plant, and equipment.
9
Net cash provided by financing activities was $0.02 million, $6.5 million, and
$7.0 million for the years ending December 31, 2001, 2000, and 1999,
respectively. Net cash provided by financing activities in 2001 represents a net
increase in borrowings on notes payable of $1.05 million offset by principal
payments on long-term obligations of $1.03 million.
Net cash provided by financing activities in 2000 was the result of a $7.4
million net increase in borrowings on notes payable and $0.7 million in proceeds
from long-term obligations, offset by $1.6 million of principal payments on
long-term obligations. The Company's domestic subsidiaries account for $6.3
million of the net increase in borrowings on notes payable. The proceeds from
long-term obligations were used for the construction of a new idler line at the
Company's domestic operations.
Net cash provided by financing activities in 1999 primarily represented a net
increase in borrowings on notes payable of $6.0 million and proceeds from
long-term obligations of $5.5 million, offset by principal payments on long-term
obligations of $3.2 million. The Company's domestic subsidiaries accounted for
$5.8 million of the net increase in borrowings on notes payable. The proceeds
from long-term obligations included a note payable of $1.6 million that was used
for the purchase of a previously leased manufacturing facility in Colorado, a
note payable of approximately $0.9 million that was used for the construction of
a new idler line at the Company's domestic operations, and a term loan of
approximately $2.9 million at the Company's Australian subsidiary. The proceeds
of the term loan in Australia were used to pay the outstanding balance of the
BCE Seller Notes for approximately $2.1 million, and the balance for working
capital. The Company also paid distributions for income taxes under the Tax
Payment Agreement of $1.3 million, $1.2 million of which was for 1998 income
taxes.
The Company's primary capital requirements consist of capital expenditures and
debt service. The Company expects current financial resources (working capital)
and funds from operations to be adequate to meet anticipated cash requirements.
In 2002, the Company anticipates capital expenditures of approximately $2.2
million for new and replacement equipment. At December 31, 2001, the Company had
cash and cash equivalents of approximately $14.7 million and approximately $10.7
million available for use under its domestic credit facility, representing
approximately $25.4 million of liquidity.
INTERNATIONAL OPERATIONS
The Company transacts business in a number of countries throughout the world and
has facilities in the United States, Australia, the United Kingdom, and South
Africa. As a result, the Company is subject to business risks inherent in
non-U.S. operations, including political and economic uncertainty, import and
export limitations, exchange controls and currency fluctuations. The Company
believes that the risks related to its foreign operations are mitigated by the
relative political and economic stability of the countries in which its largest
foreign operations are located. As the U.S. dollar strengthens and weakens
against foreign currencies in which the Company transacts business, its
financial results will be affected. The principal foreign currencies in which
the Company transacts business are the Australian dollar, the British pound
sterling, and the South African rand. The fluctuation of the U.S. dollar versus
other currencies resulted in decreases to stockholder's equity of approximately
$0.9 million and $2.1 million for the years ended December 31, 2001 and 2000,
respectively.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. Our significant accounting policies
are described in Note B to the consolidated financial statements included in
Item 8 of this Form 10-K.
10
Management believes the most significant accounting estimates inherent in the
preparation of the Company's financial statements include estimates associated
with determination of its liability related to warranty expense, collectibility
of accounts receivable, inventory valuations, pension benefits, and certain
benefits provided to current employees. A number of internal and external
factors affect our estimates such as historical experience, current and expected
economic conditions, product mix and, with pension benefits, actuarial
techniques. The Company continually re-evaluates these significant factors and
makes adjustments where facts and circumstances dictate. Historically, actual
results have not significantly deviated from those determined using the
estimates described above.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Adoption of SFAS 133 did not have a material effect on the earnings
or financial position of the Company. In accordance with the transition
provisions in SFAS 133, the Company recorded the previously unrecognized fair
market value of a foreign currency forward contract. The effect of the
adjustment to record the fair value of the foreign currency forward contract was
recognized in accumulated other comprehensive income at the date of adoption.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets". The provisions of SFAS No. 141 are effective for all business
combinations accounted for by the purchase method that are completed after
June 30, 2001. SFAS No. 142 is effective January 1, 2002 and applies to all
goodwill and other intangible assets recognized in the Company's statement of
financial position at that date, regardless of when those assets were initially
recognized. Under SFAS No. 142, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject to annual
impairment tests. Other intangible assets will continue to be amortized over
their useful lives. The transition provisions in SFAS No. 142 provide that
goodwill and intangible assets with indefinite lives acquired in a business
combination completed after June 30, 2001 will not be amortized.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS No. 142 is expected to result in a decrease
in net loss of approximately $0.6 million per year.
During 2002, the Company will perform the first of the required impairment tests
under SFAS No. 142 of goodwill and indefinite lived intangible assets as of
January 1, 2002. The Company's current policy for measuring goodwill impairment
is based upon an analysis of undiscounted cash flows. Under SFAS No. 142,
goodwill must be assigned to reporting units and measured for impairment based
upon the fair values of the reporting units. The Company has not yet determined
its reporting units under SFAS No. 142 and what the effect of these new
impairment tests will be on its consolidated financial position or results of
operations.
11
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", was issued. This statement, which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", provides a single accounting model for long-lived assets to be
disposed of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, the statement significantly changes the
criteria that would have to be met to classify an asset as held-for-sale. This
distinction is important because assets held-for-sale are stated at the lower of
their fair values or carrying amounts and depreciation is no longer recognized.
The Company's adoption of this statement effective January 1, 2002 did not
have a material effect on the Company's consolidated financial position, results
of operations or cash flows.
CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
federal securities laws. As a general matter, forward-looking statements are
those focused upon future plans, objectives or performance as opposed to
historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters that are not historical in nature.
Such forward looking statements are subject to uncertainties and factors
relating to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the control of the Company,
that could cause actual results of the Company to differ materially from those
matters expressed in or implied by such forward-looking statements.
12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following tables provide information about the Company's financial
instruments that are sensitive to changes in interest rates. The tables present
principal cash flows and related weighted-average interest rates by expected
maturity dates for debt obligations as of December 31, 2001 and 2000.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Fair
Value,
As of December 31, 2001: 2002 2003 2004 2005 2006 Thereafter Total 12/31/01
- ---------------------------------------------------------------------------------------------------------------------
Long-Term Obligations,
including current
portion
Fixed Rate $ 1,146 $ 441 $ 1,666 $ 95 $ -- $ 120,000 $ 123,348 $56,308
Average interest rate 11% 11% 11% 11% 11% 11%
Variable Rate $ 7 $ 8 $ 10 $ -- $ -- $ -- $ 25 $ 25
Average interest rate 14% 14% 14%
Fair
Value,
As of December 31, 2000: 2001 2002 2003 2004 2005 Thereafter Total 12/31/00
- ---------------------------------------------------------------------------------------------------------------------
Long-Term Obligations,
including current
portion
Fixed Rate $ 1,628 $ 404 $ 441 $ 1,664 $ 95 $ 120,000 $ 124,232 $43,753
Average interest rate 11% 11% 11% 11% 11% 11%
Variable Rate $ 10 $ 11 $ 13 $ 15 $ -- $ -- $ 49 $ 49
Average interest rate 15% 15% 15% 15%
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents as well as
interest paid on its debt. To mitigate the impact of fluctuations in U.S.
interest rates, the Company generally borrows on a long-term basis to maintain a
debt structure that is fixed rate in nature.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures and sells its
products in the United States, Australia, the United Kingdom, and South Africa.
As a result, the Company's financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company distributes its products.
The Company's operating results are exposed to changes in exchange rates between
the U.S. dollar and the Australian dollar, the British pound sterling, and the
South African rand.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Report of Independent Auditors and the Consolidated Financial Statements of
Continental Global Group, Inc. for each of the three years in the period ended
December 31, 2001 are included herein.
14
Report of Independent Auditors
To the Stockholder
Continental Global Group, Inc.
We have audited the accompanying consolidated balance sheets of Continental
Global Group, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholder's equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Continental Global
Group, Inc. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 25, 2002
15
Continental Global Group, Inc.
Consolidated Balance Sheets
December 31
-------------------------------
2001 2000
ASSETS:
Current assets:
Cash and cash equivalents $ 14,671,806 $ 16,941,949
Accounts receivable, less allowance for doubtful
accounts of $885,851 in 2001 and $1,551,947 in 2000 32,050,919 28,468,042
Inventories 26,572,726 28,076,134
Other current assets 1,745,684 632,012
------------- -------------
Total current assets 75,041,135 74,118,137
Property, plant and equipment 26,142,796 26,162,365
Less accumulated depreciation 13,048,973 11,575,056
------------- -------------
13,093,823 14,587,309
Goodwill 16,799,894 17,922,783
Deferred financing costs 2,729,487 3,249,389
Deferred income taxes 1,887,102 --
Other assets 388,705 258,437
------------- -------------
$ 109,940,146 $ 110,136,055
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Notes payable $ 16,306,471 $ 15,630,900
Trade accounts payable 18,895,554 17,463,905
Accrued compensation and employee benefits 5,136,280 4,516,525
Accrued interest on senior notes 3,300,000 3,300,000
Deferred income taxes 2,404,162 1,594,089
Other accrued liabilities 9,185,735 3,531,118
Current maturities of long-term obligations 1,298,522 1,931,676
------------- -------------
Total current liabilities 56,526,724 47,968,213
Deferred income taxes -- 440,894
Senior notes 120,000,000 120,000,000
Other long-term obligations, less current maturities 2,258,082 2,790,135
Stockholder's equity (deficit):
Common stock, $0.01 par value, authorized 5,000,000 shares,
issued and outstanding 100 shares 1 1
Paid-in capital 1,993,687 1,993,687
Accumulated deficit (65,111,800) (58,195,967)
Accumulated other comprehensive loss (5,726,548) (4,860,908)
------------- -------------
(68,844,660) (61,063,187)
------------- -------------
$ 109,940,146 $ 110,136,055
============= =============
See notes to consolidated financial statements.
16
Continental Global Group, Inc.
Consolidated Statements of Operations
Years ended December 31
-------------------------------------------------
2001 2000 1999
Net sales $ 192,710,850 $ 168,178,263 $ 213,996,868
Cost of products sold 162,924,304 141,652,633 182,232,667
------------- ------------- -------------
Gross profit 29,786,546 26,525,630 31,764,201
Operating expenses:
Selling and engineering 12,272,096 12,572,872 14,980,861
General and administrative 8,625,535 8,919,150 9,276,131
Management fee 556,933 350,978 466,615
Amortization expense 634,068 609,629 618,533
Restructuring charge -- 481,192 1,106,345
------------- ------------- -------------
Total operating expenses 22,088,632 22,933,821 26,448,485
------------- ------------- -------------
Operating income 7,697,914 3,591,809 5,315,716
Other expenses:
Interest expense 15,786,984 15,825,845 15,225,465
Interest income (638,791) (1,032,425) (913,975)
Miscellaneous, net 963,205 (1,961) (267,499)
------------- ------------- -------------
Total other expenses 16,111,398 14,791,459 14,043,991
------------- ------------- -------------
Loss before income taxes (8,413,484) (11,199,650) (8,728,275)
Income taxes (1,497,651) 1,914,731 --
------------- ------------- -------------
Net loss $ (6,915,833) $ (13,114,381) $ (8,728,275)
============= ============= =============
See notes to consolidated financial statements.
17
Continental Global Group, Inc.
Consolidated Statements of Stockholder's Equity (Deficit)
Accumulated
Other
Common Paid-in Accumulated Comprehensive
Stock Capital Deficit Income (Loss) Total
----------- ------------ --------------- ---------------- ---------------
Balance at December 31, 1998 $ 500 $ 1,993,188 $ (36,203,815) $ (3,296,067) $ (37,506,194)
Comprehensive income (loss):
Net loss - - (8,728,275) - (8,728,275)
Foreign currency
translation adjustment - - - 506,090 506,090
---------------
Total comprehensive loss (8,222,185)
Distributions for income taxes - - (149,496) - (149,496)
----------- ------------ --------------- ---------------- ---------------
Balance at December 31, 1999 500 1,993,188 (45,081,586) (2,789,977) (45,877,875)
Comprehensive loss:
Net loss - - (13,114,381) - (13,114,381)
Foreign currency
translation adjustment - - - (2,070,931) (2,070,931)
---------------
Total comprehensive loss (15,185,312)
Change in par value of stock (499) 499 - - -
----------- ------------ --------------- ---------------- ---------------
Balance at December 31, 2000 1 1,993,687 (58,195,967) (4,860,908) (61,063,187)
Comprehensive loss:
Net loss - - (6,915,833) - (6,915,833)
Cumulative effect upon
adoption of SFAS 133,
net of tax - - - 55,736 55,736
Unrealized losses on cash
flow hedges, net of tax - - - (176,612) (176,612)
Reclassification into
earnings - - - 120,876 120,876
Foreign currency
translation adjustment - - - (865,640) (865,640)
---------------
Total comprehensive loss (7,781,473)
----------- ------------ --------------- ---------------- ---------------
Balance at December 31, 2001 $ 1 $ 1,993,687 $ (65,111,800) $ (5,726,548) $ (68,844,660)
=========== ============ =============== ================ ===============
See notes to consolidated financial statements.
18
Continental Global Group, Inc.
Consolidated Statements of Cash Flows
Years ended December 31
---------------------------------------------------
2001 2000 1999
Operating activities:
Net loss $ (6,915,833) $(13,114,381) $ (8,728,275)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization 2,883,820 3,076,778 3,550,219
Amortization of deferred financing costs 519,902 519,902 519,903
Deferred income taxes (1,502,074) 1,885,591 --
Provision for doubtful accounts 1,004,071 1,617,501 383,223
Loss (gain) on disposal of assets (18,161) 6,867 (450,868)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (5,370,516) (966,740) 14,179,184
Decrease (increase) in inventories 2,162,960 2,515,947 1,170,026
Decrease (increase) in other assets (1,175,723) 1,185,269 485,303
Increase (decrease) in accounts payable and other
current liabilities 8,679,654 (3,184,710) (23,370,152)
------------ ------------ ------------
Net cash provided by (used in) operating activities 268,100 (6,457,976) (12,261,437)
------------ ------------ ------------
Investing activities:
Purchases of property, plant, and equipment (957,761) (1,494,957) (4,030,367)
Proceeds from disposals of PP&E 112,851 122,397 1,091,350
Acquisition of business (1,606,806) -- --
------------ ------------ ------------
Net cash used in investing activities (2,451,716) (1,372,560) (2,939,017)
------------ ------------ ------------
Financing activities:
Net increase in borrowings on notes payable 1,046,982 7,377,782 6,000,950
Proceeds from long-term obligations -- 775,887 5,516,166
Principal payments on long-term obligations (1,026,035) (1,634,659) (3,212,088)
Distributions for income taxes -- -- (1,305,562)
------------ ------------ ------------
Net cash provided by financing activities 20,947 6,519,010 6,999,466
Effect of exchange rate changes on cash (107,474) (46,135) 149,898
------------ ------------ ------------
Decrease in cash and cash equivalents (2,270,143) (1,357,661) (8,051,090)
Cash and cash equivalents at beginning of year 16,941,949 18,299,610 26,350,700
------------ ------------ ------------
Cash and cash equivalents at end of year $ 14,671,806 $ 16,941,949 $ 18,299,610
============ ============ ============
See notes to consolidated financial statements.
19
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
A. ORGANIZATION
Continental Global Group, Inc. (the "Company") was formed on February 4, 1997,
for the purpose of owning all of the common stock of Continental Conveyor &
Equipment Company ("CCE") and Goodman Conveyor Company ("GCC"). The Company,
which is a holding company with limited assets and operations other than its
investments in its subsidiaries, is owned 100% by N.E.S. Investment Co.
Prior to January 1, 1997, CCE and GCC were limited partnerships under common
control by NES Group, Inc. (the parent company of N.E.S. Investment Co.), the
99% limited partner. Effective January 1, 1997, NES Group, Inc., transferred its
interest in the limited partnerships to CCE and GCC. Effective February 1997,
NES Group, Inc. transferred to the Company all of the outstanding capital stock
of CCE and GCC.
B. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue from sales at the time of shipment. Net sales
include external freight billed to customers and the related costs are included
in cost of sales.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories, which consist of raw materials, manufactured and purchased parts,
and work in process are stated at the lower of cost or market. Since inventory
records are maintained on a job order basis, it is not practical to segregate
inventories into their major classes. The cost for approximately 67% and 62% of
inventories at December 31, 2001 and 2000, respectively, is determined using the
last-in, first-out ("LIFO") method with the remainder determined using the
first-in, first-out ("FIFO") method. Had the FIFO method of inventory (which
approximates replacement cost) been used to cost all inventories, inventories
would have increased by approximately $1,141,000 and $1,690,000 at December 31,
2001 and 2000, respectively. As a result of a physical inventory conducted by
the Company's Australian subsidiary in July 2001, the Company incurred a charge
in the third quarter to cost of products sold of approximately $757,000.
GOODWILL
Goodwill is being amortized on a straight-line basis, primarily over 40 years.
The balance of accumulated amortization of goodwill was approximately $2,506,000
and $2,029,000 at December 31, 2001 and 2000, respectively. The ongoing value
and remaining useful life of goodwill are subject to periodic evaluation and,
under current accounting guidance, the Company expects the carrying amounts to
be fully recoverable.
20
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
B. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment of long-lived assets and related goodwill is recognized when events
or changes in circumstances indicate that the carrying amount of the asset, or
related groups of assets, may not be recoverable and the Company's estimate of
undiscounted cash flows over the assets remaining estimated useful life is less
than the asset's carrying value. Measurement of the amount of impairment may be
based on appraisal, market values of similar assets, or estimated discounted
future cash flows resulting from the use and ultimate disposition of the asset.
STOCKHOLDER'S EQUITY
In the third quarter of 2000, the Board of Directors approved an amendment to
the certificate of incorporation which increased the number of shares which the
Company is authorized to issue to 5,000,000 shares with a par value of $0.01. At
December 31, 2001, the Company had issued and outstanding 100 shares.
RESTRUCTURING CHARGES
In 1998, the Company executed a plan to close certain Australian manufacturing
facilities and merge the operations with other existing facilities; in 1999 and
2000, the Company made further reductions in office staff and facilities. In the
United Kingdom, following the acquisition of Huwood International (Huwood) in
August 1998, the Company consolidated its existing operations and facilities
into the Huwood operations. In connection with these plans, the Company incurred
restructuring charges of approximately $481,000, and $1,106,000 in 2000 and
1999, respectively, related to its Australian and United Kingdom subsidiaries.
Total restructuring charges incurred to date total approximately $2,715,000.
These restructuring charges consisted primarily of severance of approximately
220 employees and relocation costs. As of December 31, 2001, all accruals for
restructuring charges have been fully utilized.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
approximately $635,000, $583,000, and $869,000 in advertising costs for the
years ended December 31, 2001, 2000, and 1999, respectively.
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries are translated
at current exchange rates, while revenues and expenses are translated at average
rates prevailing during the year. The effects of exchange rate fluctuations have
been reported in accumulated other comprehensive income (loss). The effect on
the statements of operations of currency transaction gains and losses was not
material for all years presented.
DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities". Adoption of SFAS 133 did not have a material effect on the earnings
or financial position of the Company. In accordance with the transition
provisions in SFAS 133, the Company recorded the previously unrecognized fair
market value of a foreign currency forward contract. The effect of the
adjustment to record the fair value of the foreign currency forward contract was
recognized in accumulated other comprehensive income at the date of adoption.
21
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
B. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED
As a result of the adoption of SFAS 133, the Company is required to recognize
all derivative financial instruments as either assets or liabilities at fair
value. Derivative instruments that are not hedges must be adjusted to fair value
through net income. Under the provisions of SFAS 133, changes in fair value of
derivative instruments that are classified as fair value hedges are offset
against changes in the fair value of the hedged assets, liabilities, or firm
commitments, through net income. Changes in the fair value of derivative
instruments that are classified as cash flow hedges are recognized in other
comprehensive income until such time as the hedged items are recognized in net
income. The ineffective portions of a derivative instrument's change in fair
value are immediately recognized in net income.
The Company uses forward exchange contracts (principally against the Australian
dollar and the U.S. dollar) to hedge certain firm sales commitments of its
foreign subsidiaries. Foreign currency forward contracts reduce the Company's
exposure to the risk that the eventual net cash inflows resulting from the sale
of products denominated in a currency other than the functional currency of the
respective business will be adversely impacted by changes in exchange rates.
COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) consists entirely of foreign
currency translation adjustments for all years presented.
USE OF 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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets". The provisions of SFAS No. 141
are effective for all business combinations accounted for by the purchase method
that are completed after June 30, 2001. SFAS No. 142 is effective January 1,
2002 and applies to all goodwill and other intangible assets recognized in the
Company's statement of financial position at that date, regardless of when those
assets were initially recognized. Under SFAS No. 142, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets will continue to be
amortized over their useful lives. The transition provisions in SFAS No. 142
provide that goodwill and intangible assets with indefinite lives acquired in a
business combination completed after June 30, 2001 will not be amortized.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
non-amortization provisions of SFAS No. 142 is expected to result in a decrease
in net loss of approximately $600,000 per year.
22
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
B. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED
During 2002, the Company will perform the first of the required impairment tests
under SFAS No. 142 of goodwill and indefinite lived intangible assets as of
January 1, 2002. The Company's current policy for measuring goodwill impairment
is based upon an analysis of undiscounted cash flows. Under SFAS No. 142,
goodwill must be assigned to reporting units and measured for impairment based
upon the fair values of the reporting units. The Company has not yet determined
its reporting units under SFAS No. 142 and what the effect of these new
impairment tests will be on its consolidated financial position or results of
operations.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", was issued. This statement, which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", provides a single accounting model for long-lived assets to be
disposed of. Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, the statement significantly changes the
criteria that would have to be met to classify an asset as held-for-sale. This
distinction is important because assets held-for-sale are stated at the lower of
their fair values or carrying amounts and depreciation is no longer recognized.
The Company's adoption of this statement effective January 1, 2002 did not
have a material effect on the Company's consolidated financial position, results
of operations or cash flows.
RECLASSIFICATIONS
Certain amounts from the prior year financial statements have been reclassified
to conform to current year presentation.
C. ACQUISITION
On July 19, 2001, the Company purchased certain assets (primarily inventory and
fixed assets) in Alabama from Lippert Tire & Axle, Inc. for a purchase price of
approximately $1,607,000. Lippert manufactured new axles and refurbished used
axles and tires for the manufactured housing industry. The existing operations
of the Company's manufactured housing products segment in Winfield, Alabama have
been merged with the acquired operations. Revenues from the acquired operations
were approximately $13,000,000 for the fiscal year ended December 31, 2000. The
transaction was accounted for as a purchase and accordingly, the results of
operations since the date of acquisition have been included in the consolidated
financial statements.
23
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
D. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. The balances of the major
classes of property, plant and equipment at December 31, 2001 and 2000 are as
follows:
2001 2000
------------- ------------
Land and improvements $ 1,036,824 $ 1,079,411
Buildings and improvements 6,461,887 6,555,863
Machinery and equipment 18,644,085 18,527,091
------------ ------------
$ 26,142,796 $ 26,162,365
============ ============
Depreciation expense for the years ended December 31, 2001, 2000, and 1999 was
$2,249,752, $2,467,149, and $2,931,686, respectively. Depreciation is primarily
computed using the straight-line method based on the expected useful lives of
the assets. The estimated useful lives for buildings and improvements range from
10 to 31.5 years; the estimated useful lives for machinery and equipment range
from 2.5 to 12.5 years. Repair and maintenance costs are expensed as incurred.
E. FINANCING ARRANGEMENTS
Long-term obligations consist of the following:
As of December 31
------------------------------
2001 2000
Senior Notes, interest at 11% payable semi-annually in
arrears, due 2007 $120,000,000 $120,000,000
Note payable by CCE for purchase of Colorado facility; interest rate of
7.445%; payable in monthly installments through 5/1/04 1,440,286 1,506,227
Note payable by CCE for idler equipment; interest rate of 8.845%;
payable in monthly installments through 6/13/05 1,165,707 1,468,527
Term loan payable by Australian subsidiary; interest rate of 7.55%;
maturity date of 6/30/02 741,675 1,257,300
Note payable by South Africa for purchase of computer system; variable
interest rate (14.0% and 14.5% at December 31, 2001 and 2000,
respectively); payable in monthly installments through 12/31/04
24,920 48,996
Obligations under capital leases 184,016 440,761
------------ ------------
123,556,604 124,721,811
Less current maturities 1,298,522 1,931,676
------------ ------------
$122,258,082 $122,790,135
============ ============
24
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
E. FINANCING ARRANGEMENTS - CONTINUED
Maturities of long-term obligations are as follows:
2002 $ 1,298,522
2003 488,042
2004 1,675,444
2005 94,596
2006 -
Thereafter 120,000,000
-------------
$ 123,556,604
=============
The $120 million 11% Senior Notes due 2007 ("Senior Notes") are registered under
the Securities Act of 1933. Interest on the notes is payable semi-annually in
arrears. The Senior Notes are redeemable at the option of the Company, in whole
or in part, any time on or after 2002 subject to certain call premiums. The
Senior Notes are guaranteed by the Company's domestic subsidiaries and certain
of its Australian subsidiaries and contain various restrictive covenants that,
among other things, place limitations on the sale of assets, payment of
dividends, and incurring additional indebtedness and restrict transactions with
affiliates.
During the second quarter of 2000, the Company's United States operations
completed the purchase of equipment for production of a new idler at a total
cost of approximately $1,705,000. The purchase was financed with a note payable
bearing an interest rate of 8.845% and maturing on June 13, 2005. The note is
secured by the equipment.
CCE, GCC and Bank One, Cleveland, NA are parties to a credit facility and
security agreement dated September 14, 1992, as amended, restated and
consolidated through March 25, 2002, ("Revolving Credit Facility") pursuant
to which Bank One has provided CCE and GCC jointly with a line of credit of $30
million. The availability under the Revolving Credit Facility is equal to the
sum of (i) 85% of eligible accounts receivable and (ii) 55% of eligible
inventory. The Revolving Credit Facility is guaranteed by the Company and
secured by a lien on substantially all of the assets of CCE and GCC. In
addition, the Revolving Credit Facility contains certain financial and other
covenants which, among other things, establish minimum debt coverage and net
working capital requirements. The Revolving Credit Facility will be fully
revolving until final maturity on June 30, 2003, and will bear interest at a
fluctuating rate based on the prime rate. At December 31, 2001, approximately
$10.7 million was available for use. At December 31, 2001 and 2000, the Company
had an outstanding balance under the Revolving Credit Facility of $14,516,217
and $12,040,346, respectively. The weighted average interest rate for this
facility was 6.7% and 9.3% in 2001 and 2000, respectively.
25
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
E. FINANCING ARRANGEMENTS - CONTINUED
The Company's Australian subsidiary has a revolving credit facility with the
National Australia Bank Limited which provides a line of credit of $3.0 million
(Australian dollars). The facility is secured by a lien on substantially all of
the assets of the BCE subsidiaries, bears interest at a fluctuating rate based
on the base rate of the National Australia Bank, and matures on June 30, 2002.
At December 31, 2001, approximately $0.2 million (Australian dollars) was
available for use. The outstanding balance under this facility was $1,429,054
and $1,783,401 (U.S.$) at December 31, 2001 and 2000, respectively. The weighted
average interest rate for this facility was 7.5% and 9.5% in 2001 and 2000,
respectively.
During 2001, the Company's United Kingdom subsidiary entered into a credit
facility with the Bank of Scotland of 3.0 million British pounds sterling. The
facility is secured by certain assets of the subsidiary, bears interest at a
fluctuating rate of 2% above the Bank of Scotland base rate, and matures on
October 31, 2002. At December 31, 2001, the entire facility was available for
use. The weighted average interest rate for this facility was 8.4% in 2001.
Prior to entering into the credit facility with the Bank of Scotland, the
subsidiary had an overdraft facility with the HSBC Bank of 1.2 million British
pounds sterling. The facility was secured by certain assets of the subsidiary,
bore interest at a fluctuating rate of 3% above the HSBC Bank base rate, and
matured on December 31, 2001. The outstanding balance under this facility was
$1,596,273 (U.S.$) at December 31, 2000. The weighted average interest rate for
this facility was 8.5% in 2000.
The Company's South African subsidiary has a credit facility with the Standard
Bank of South Africa of 4.5 million South African rand. The facility is secured
by the trade receivables of the subsidiary and bears interest at a fluctuating
rate of 1.5% above the bank's prime lending rate. The agreement continues
indefinitely until termination by either party with a minimum of three months
written notice. At December 31, 2001, approximately 0.2 million rand was
available for use. The outstanding balance under this facility was $361,200 and
$210,880 (U.S.$) at December 31, 2001 and 2000, respectively. The weighted
average interest rate for this facility was 16.3% and 16.5% in 2001 and 2000,
respectively.
During 2001, 2000, and 1999, the Company paid interest of $15,309,325,
$15,188,760, and $14,590,746, respectively.
26
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
F. LEASING ARRANGEMENTS
CCE has a capital lease for land and building with a lease term of ten years
which contains a purchase option exercisable at any time. In addition, the
Company's Australian subsidiary has numerous capital leases for certain
machinery and equipment. Amortization of these assets is included in
depreciation expense in the statement of operations. The gross amount of assets
recorded under capital leases and the related accumulated amortization at
December 31, 2001 and 2000 are as follows:
2001 2000
---------- -----------
Asset Balances:
Land $ 20,000 $ 20,000
Buildings 380,000 380,000
Machinery and Equipment 323,327 710,894
---------- ----------
$ 723,327 $1,110,894
========== ==========
Accumulated Amortization:
Buildings $ 99,524 $ 87,460
Machinery and Equipment 213,775 432,113
---------- ----------
$ 313,299 $ 519,573
========== ==========
The subsidiaries of the Company also have various leases for office space,
warehouse facilities, office equipment, and automobiles and trucks which are
accounted for as operating leases. Rent expense related to these operating
leases for the years ended December 31, 2001, 2000, and 1999 was approximately
$2,110,000, $2,072,000, and $2,525,000, respectively. Future minimum lease
payments for obligations under capital leases and for operating leases having
initial or remaining noncancelable lease terms in excess of one year are as
follows:
Capital Operating
Leases Leases
---------- ----------
2002 $ 155,391 $ 617,410
2003 40,032 420,773
2004 -- 92,591
2005 -- 10,249
2006 -- 1,287
---------- ----------
Total minimum lease payments 195,423 $1,142,310
==========
Amounts representing interest 11,407
----------
Present value of net minimum lease payments
(including current portion of $145,259) $ 184,016
==========
27
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
G. EMPLOYEE BENEFIT PLANS
CCE maintains a defined benefit plan covering all union hourly-paid employees at
its Winfield plant. The contributions of CCE are made in amounts sufficient to
fund the plan's service cost on a current basis and meet the minimum funding
requirements of the Employee Retirement Income Security Act of 1974, as amended.
Actuarial gains and losses are amortized over a 15 year period, and funding of
the initial prior service costs plus interest thereon is over a 30 year period.
The actuarial computations use the "projected unit credit cost method," which
assumed a weighted-average discount rate on benefit obligations of 7.25% in 2001
and 2000 and a weighted-average expected long-term rate of return on plan assets
of 8% in 2001 and 2000.
The following table sets forth the change in benefit obligation, change in plan
assets, funded status and amounts recognized in the Consolidated Balance Sheets
as of December 31, 2001 and 2000, of the Company's defined benefit plan.
2001 2000
------------ ------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 4,822,341 $ 4,597,614
Service cost 142,029 136,670
Interest cost 353,906 333,327
Actuarial loss (gain) 186,118 (33,221)
Benefits paid (242,554) (212,049)
----------- -----------
Benefit obligation at end of year 5,261,840 4,822,341
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year 5,247,333 5,667,003
Actual return on plan assets (219,803) (207,621)
Benefits paid (242,554) (212,049)
----------- -----------
Fair value of plan assets at end of year 4,784,976 5,247,333
----------- -----------
Funded status:
Funded status of the plan (underfunded) (476,864) 424,992
Unrecognized prior service cost (213,239) (227,455)
Unrecognized net actuarial loss (gain) 341,395 (474,130)
Unrecognized transition asset -- (2,706)
----------- -----------
Net amount recognized $ (348,708) $ (279,299)
=========== ===========
Balance sheet amounts:
Accrued benefit cost $ (476,864) $ (279,299)
Intangible asset 128,156 --
----------- -----------
Net amount recognized $ (348,708) $ (279,299)
=========== ===========
28
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
G. EMPLOYEE BENEFIT PLANS - CONTINUED
2001 2000 1999
---------- ---------- ----------
Components of net periodic benefit cost:
Service cost $ 142,029 $ 136,670 $ 140,057
Interest cost 353,906 333,327 370,638
Expected return on plan assets (409,604) 207,621 (584,057)
Amortization of prior service cost (14,216) (14,216) 44,416
Amortization of transition asset (2,706) (2,706) (2,706)
Recognized gain (loss) -- (587,603) 244,297
--------- --------- ---------
Net periodic benefit cost $ 69,409 $ 73,093 $ 212,645
========= ========= =========
CCE also maintains a defined contribution plan covering substantially all
salaried and non-union hourly employees. CCE makes annual contributions
(approximately $589,000, $520,000, and $490,000 in 2001, 2000, and 1999,
respectively) which fully fund retirement benefits. No participant contributions
to the plan are permitted. CCE also maintains a defined contribution savings and
profit sharing plan which covers substantially all salaried and non-union hourly
employees. Employees may elect to contribute up to 16% of their compensation.
CCE will match (approximately $335,000, $320,000, and $335,000 in 2001, 2000,
and 1999, respectively) a percentage of employee contributions up to 6% of each
employee's compensation.
GCC has a retirement savings plan covering all employees meeting certain
eligibility requirements. Under the terms of the plan, GCC voluntarily makes
annual cash contributions based on eligible employees' compensation. No
contribution was made for the year ended December 31, 2001. Expense for the
years ended December 31, 2000 and 1999 was approximately $134,000 and $145,000,
respectively, which was equal to 2.5% of eligible employees compensation in 2000
and 1999.
The foreign subsidiaries of the Company have various defined contribution plans
and retirement saving plans covering substantially all salaried and production
employees. For the years ended December 31, 2001, 2000, and 1999, the
subsidiaries contributed approximately $495,000, $636,000, and $761,000,
respectively, to the plans.
H. RELATED PARTY TRANSACTIONS
Management fees are charged by Nesco, Inc., an affiliate of N.E.S. Investment
Co., to provide general management oversight services, including legal,
financial, strategic planning and business development evaluation for the
benefit of the Company. Under the management agreement, the Company has agreed
to pay Nesco, Inc. fees for such services equal to 5% of the Company's Adjusted
EBITDA earnings (earnings before interest and estimated taxes, depreciation,
amortization and miscellaneous expense or income). The Company incurred
management fee expenses of approximately $557,000, $351,000, and $467,000 for
the years ended December 31, 2001, 2000, and 1999, respectively. At December 31,
2001 and 2000, the Company had a prepaid expense for overpayment of management
fees of approximately $112,000 and $131,000, respectively.
29
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
H. RELATED PARTY TRANSACTIONS - CONTINUED
Prior to electing C Corporation status for income tax purposes on October 6,
2000, the subsidiaries of the Company were parties to a tax payment agreement
with NES Group, Inc., the parent company of N.E.S. Investment Co., providing for
payments by each subsidiary to NES Group, Inc. to fund the income tax liability
attributable to the Company's operations. The Company incurred charges to
stockholder's equity for income taxes of approximately $149,000 for the year
ended December 31, 1999. At December 31, 2001 and 2000, the Company had an
accrual for income tax payments owed to NES Group, Inc. of approximately
$20,000.
I. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK
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.
Notes payable and long-term debt: The carrying amounts of the Company's
borrowings under its short-term revolving credit arrangements and variable rate
long-term debt approximate their fair value. The fair value of the Company's
Senior Notes is based on the quoted market value. The fair value of the
Company's remaining fixed rate long-term debt is based on the present value of
future cash outflows.
Foreign currency forward contract: Derivative financial instruments at December
31, 2000 included a foreign currency forward contract with a contractual amount
of approximately $1,909,000. The contract matured during 2001 and the
counterparty to the contract was a major U.S. commercial bank. The Company
entered into the foreign currency forward contract to hedge certain firm sales
commitments denominated in a foreign currency. The fair value of the Company's
foreign currency forward contract was estimated based on the quoted market price
of a comparable contract.
30
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
I. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK - CONTINUED
The carrying amounts and fair values of the Company's financial instruments at
December 31 are as follows:
2001 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
(in thousands)
Cash and cash equivalents $ 14,672 $ 14,672 $ 16,942 $ 16,942
Accounts receivable 32,051 32,051 28,468 28,468
Accounts payable (18,896) (18,896) (17,464) (17,464)
Notes payable (16,306) (16,306) (15,631) (15,631)
Long-term debt (123,373) (56,333) (124,281) (43,802)
Foreign currency forward contract -- -- -- 87
Accounts receivable from customers in the coal mining industry were
approximately 51% and 59% at December 31, 2001 and 2000, respectively. The
Company's subsidiaries perform periodic credit evaluations of their customers'
financial condition and generally do not require collateral. Credit losses
relating to customers in the coal mining industry have consistently been within
management's expectations and are comparable to losses for the portfolio as a
whole.
Provisions for credit losses were approximately $1,004,000, $1,618,000, and
$383,000 in 2001, 2000, and 1999, respectively. Accounts written off, net of
recoveries, were approximately $1,578,000, $676,000, and $491,000 in 2001, 2000,
and 1999, respectively.
J. INCOME TAXES
Effective October 6, 2000, the Company and its domestic subsidiaries elected C
Corporation status for United States income tax purposes. At that date, income
taxes were provided using the liability method in accordance with FASB Statement
No. 109, "Accounting for Income Taxes". Prior to October 6, 2000, the Company
and its domestic subsidiaries had elected Subchapter S Corporation Status for
United States income tax purposes. Accordingly, the Company's United States
operations were not subject to income taxes as separate entities. The Company's
United States income, through October 6, 2000, is included in the income tax
returns of the sole stockholder.
For tax reporting purposes, the Company is included in the consolidated federal
tax return of N.E.S. Investment Co. However, for financial reporting purposes,
the Company's tax provision has been calculated on a stand-alone basis.
31
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
J. INCOME TAXES - CONTINUED
The Company has subsidiaries located in Australia, the United Kingdom, and South
Africa which are subject to income taxes in their respective countries. The
Company did not pay any income taxes during the year ended December 31, 2001.
The Company's Australian subsidiary paid income taxes of approximately $72,000
and $150,000 during the years ended December 31, 2000 and 1999, respectively.
Income (loss) before income taxes consists of the following:
For the Year Ending December 31
2001 2000 1999
------------- ------------- -------------
Domestic $ (4,030,236) $ (4,439,936) $ 162,750
Foreign (4,383,248) (6,759,714) (8,891,025)
------------ ------------ ------------
$ (8,413,484) $(11,199,650) $ (8,728,275)
============ ============ ============
Income taxes are summarized as follows:
December 31, December 31,
2001 2000
------------------- ------------------
Current:
Domestic:
Federal $ -- $ --
State and local -- --
Foreign 4,423 29,140
----------- -----------
4,423 29,140
Deferred:
Domestic:
Federal (1,314,314) 1,612,268
State and local (187,760) 230,323
Foreign -- 43,000
----------- -----------
(1,502,074) 1,885,591
----------- -----------
$(1,497,651) $ 1,914,731
=========== ===========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Where the Company has
determined that it is more likely than not that the deferred tax assets will not
be realized, a valuation allowance has been established. The valuation allowance
pertains to the deferred tax assets resulting from the net operating loss
carryforwards of the Company's foreign subsidiaries. The net operating losses of
the Company's domestic subsidiaries may be carried forward for a period of
twenty years, and the net operating losses of the foreign subsidiaries may be
carried forward indefinitely.
32
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
J. INCOME TAXES - CONTINUED
Significant components of the Company's deferred income taxes at December 31,
2001 and 2000 are as follows:
2001 2000
------------- -------------
Deferred tax assets:
Operating accruals $ 601,151 $ 1,444,814
Net operating loss carryforwards 9,903,387 6,540,731
Valuation allowance (7,128,393) (5,872,527)
------------ ------------
3,376,145 2,113,018
Deferred tax liabilities:
Inventories (2,036,095) (2,084,637)
Property, plant, and equipment (1,857,110) (2,063,364)
------------ ------------
(3,893,205) (4,148,001)
------------ ------------
Net deferred tax liability $ (517,060) $ (2,034,983)
============ ============
A reconciliation of income taxes computed at the statutory rate to the effective
rate follows:
December 31, December 31,
2001 2000
-------------- ------------
Income taxes at the United States statutory rate (35.0)% (35.0)%
State income taxes, net of federal benefit (2.3) 2.1
Effective tax rate differential of earnings outside the U.S. 18.3 21.8
Cumulative effect of deferred income taxes on date of conversion
to C corporation -- 14.7
S corporation income not subject to U.S. income tax -- 13.3
Other - net 1.2 0.2
------- -----
(17.8)% 17.1%
======= =====
33
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
K. SEGMENT INFORMATION
While the Company primarily manages its operations on a geographical basis, the
Company operates in two principal business segments: conveyor equipment and
manufactured housing products. The conveyor equipment business, which comprised
approximately 90.5%, 87.9%, and 84.7% of net sales for 2001, 2000, and 1999,
respectively, markets its products in four main business areas. The mining
equipment business area includes the design, manufacture and testing (and,
outside the United States, installation and maintenance) of complete belt
conveyor systems and components for mining application primarily in the coal
industry. The conveyor components business area manufactures and sells
components for conveyor systems primarily for resale through distributor
networks. The engineered systems business area uses specialized project
management and engineering skills to combine mining equipment products,
purchased equipment, steel fabrication and other outside services for sale as
complete conveyor equipment systems that meet specific customer requirements.
The bulk conveyor equipment business area designs and manufactures a complete
range of conveyor equipment sold to transport bulk materials, such as cement,
lime, food products and industrial waste.
The Company's manufactured housing products business manufactures and/or
refurbishes axle components sold directly to the manufactured housing industry.
As part of this segment the Company also sells mounted tire and rim assemblies
to the manufactured housing industry. Included in the other category is
primarily the manufacture and sale of air filtration equipment for use in
enclosed environments, principally in the textile industry. The manufacturing
requirements for these products are generally compatible with conveyor equipment
production and thus maximize utilization of the Company's manufacturing
facilities for its primary products.
The Company evaluates performance and allocates resources based on operating
income before restructuring charges and allocation of management fees,
amortization and corporate expenses. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies under Note B. The reportable segments are each managed
separately because they manufacture and distribute distinct products.
34
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
K. SEGMENT INFORMATION - CONTINUED
Year ended December 31
2001 2000 1999
--------- --------- ---------
(in thousands)
Net sales:
Conveyor equipment $ 174,413 $ 147,816 $ 181,329
Manufactured housing products 17,198 18,145 30,312
Other 1,100 2,217 2,356
--------- --------- ---------
Total net sales $ 192,711 $ 168,178 $ 213,997
========= ========= =========
Depreciation and amortization:
Conveyor equipment $ 2,713 $ 2,914 $ 3,368
Manufactured housing products 118 106 121
Other 5 7 10
Corporate amortization 48 50 51
--------- --------- ---------
Total depreciation and amortization $ 2,884 $ 3,077 $ 3,550
========= ========= =========
Segment operating income (loss):
Conveyor equipment $ 9,702 $ 6,134 $ 7,738
Manufactured housing products 291 (229) 171
Other (147) 184 119
--------- --------- ---------
Segment operating income 9,846 6,089 8,028
Restructuring charge -- 481 1,106
Management fee 557 351 467
Amortization expense 634 610 619
Corporate expense 957 1,055 520
--------- --------- ---------
Total operating income 7,698 3,592 5,316
Interest expense 15,787 15,826 15,225
Interest income (639) (1,032) (914)
Miscellaneous, net 963 (2) (267)
--------- --------- ---------
Income (loss) before income taxes $ (8,413) $ (11,200) $ (8,728)
========= ========= =========
Segment assets:
Conveyor equipment $ 80,939 $ 85,483 $ 95,949
Manufactured housing products 5,374 4,180 4,891
Other 572 837 873
--------- --------- ---------
Total segment assets 86,885 90,500 101,713
Corporate assets 23,055 19,636 21,190
--------- --------- ---------
Total assets $ 109,940 $ 110,136 $ 122,903
========= ========= =========
Capital expenditures:
Conveyor equipment $ 898 $ 1,460 $ 3,951
Manufactured housing products 56 35 56
Other 4 -- 23
--------- --------- ---------
Total capital expenditures $ 958 $ 1,495 $ 4,030
========= ========= =========
35
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
K. SEGMENT INFORMATION - CONTINUED
GEOGRAPHIC AREA DATA
Year ended December 31
2001 2000 1999
--------- --------- ----------
(in thousands)
Net sales:
United States $ 142,276 $ 127,815 $ 149,000
Australia 18,037 18,192 39,223
United Kingdom 27,417 18,815 21,105
Other countries 5,005 3,626 4,994
Eliminations - transfers (24) (270) (325)
--------- --------- ---------
Total net sales $ 192,711 $ 168,178 $ 213,997
========= ========= =========
Operating income (loss):
United States $ 11,518 $ 9,607 $ 13,670
Australia (4,090) (2,367) (6,407)
United Kingdom 635 (3,003) (1,542)
Other countries (403) (692) (432)
Eliminations 38 47 27
--------- --------- ---------
Total operating income $ 7,698 $ 3,592 $ 5,316
========= ========= =========
Long lived assets:
United States $ 7,764 $ 8,005 $ 8,224
Australia 2,757 3,599 4,882
United Kingdom 2,376 2,657 3,165
Other countries 197 326 431
--------- --------- ---------
Total long lived assets $ 13,094 $ 14,587 $ 16,702
========= ========= =========
Net sales are attributed to countries based on the location of the subsidiary
where the sale occurs.
In 2001 and 2000, the Company did not have sales to any single customer which
exceeded 10% of the Company's total net sales. In 1999, sales to the Company's
largest customer were approximately $24.5 million, or 11.4%, of the Company's
total net sales. Sales to this customer are reported in the net sales for the
Conveyor Equipment business segment.
36
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Company's domestic subsidiaries, Continental Conveyor & Equipment Company
(CCE) and Goodman Conveyor Company (GCC), and certain of its Australian
subsidiaries, all of which are wholly owned, are the guarantors of the Senior
Notes. The guarantees are full, unconditional, and joint and several. Separate
financial statements of these guarantor subsidiaries are not presented as
management has determined that they would not be material to investors. The
Company's United Kingdom and South African subsidiaries are not guarantors of
the Senior Notes.
Summarized consolidating balance sheets for 2001 and 2000 and consolidating
statements of operations and cash flow statements for 2001, 2000, and 1999 for
the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are
as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
December 31, 2001: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 12,548 $ 1,518 $ 606 $ -- $ 14,672
Accounts receivable, net -- 23,107 8,949 (5) 32,051
Inventories -- 23,816 2,756 -- 26,572
Other current assets 33 1,991 64 (342) 1,746
--------- --------- --------- --------- ---------
Total current assets 12,581 50,432 12,375 (347) 75,041
Property, plant, and
equipment, net -- 9,433 3,661 -- 13,094
Goodwill, net -- 16,232 568 -- 16,800
Investment in subsidiaries 60,009 17,132 -- (77,141) --
Deferred financing costs 2,729 -- -- -- 2,729
Deferred income taxes 7,710 -- 254 (6,077) 1,887
Other assets 35 2,466 55 (2,167) 389
--------- --------- --------- --------- ---------
Total assets $ 83,064 $ 95,695 $ 16,913 $ (85,732) $ 109,940
========= ========= ========= ========= =========
Current liabilities:
Notes payable $ -- $ 15,948 $ 898 $ (540) $ 16,306
Trade accounts payable 227 14,081 4,630 (42) 18,896
Accrued compensation and
employee benefits -- 4,201 935 -- 5,136
Accrued interest 3,300 -- -- -- 3,300
Deferred income taxes 374 2,030 -- -- 2,404
Other accrued liabilities 658 9,591 5,802 (6,865) 9,186
Current maturities of
long-term obligations -- 1,284 15 -- 1,299
--------- --------- --------- --------- ---------
Total current liabilities 4,559 47,135 12,280 (7,447) 56,527
Senior Notes 120,000 -- -- -- 120,000
Other long-term obligations -- 2,240 1,107 (1,089) 2,258
Stockholder's equity (41,495) 46,320 3,526 (77,196) (68,845)
(deficit) --------- --------- --------- --------- ---------
Total liabilities and
stockholder's equity $ 83,064 $ 95,695 $ 16,913 $ (85,732) $ 109,940
(deficit) ========= ========= ========= ========= =========
37
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
Guarantor Non-Guarantor
December 31, 2000: The Company Subsidiaries Subsidiaries Eliminations Total
----------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 16,257 $ 565 $ 120 $ -- $ 16,942
Accounts receivable, net -- 23,981 4,534 (47) 28,468
Inventories -- 23,971 4,105 -- 28,076
Other current assets 15 1,509 77 (969) 632
--------- --------- --------- --------- ---------
Total current assets 16,272 50,026 8,836 (1,016) 74,118
Property, plant, and
equipment, net -- 10,218 4,369 -- 14,587
Goodwill, net -- 17,193 730 -- 17,923
Investment in subsidiaries 60,009 17,399 -- (77,408) --
Deferred financing costs 3,249 -- -- -- 3,249
Other assets 1,424 1,951 358 (3,474) 259
--------- --------- --------- --------- ---------
Total assets $ 80,954 $ 96,787 $ 14,293 $ (81,898) $ 110,136
========= ========= ========= ========= =========
Current liabilities:
Notes payable $ -- $ 13,831 $ 3,270 $ (1,470) $ 15,631
Trade accounts payable 385 11,777 5,646 (345) 17,463
Accrued compensation and
employee benefits -- 3,954 563 -- 4,517
Accrued interest 3,300 -- -- -- 3,300
Deferred income taxes -- 1,594 -- -- 1,594
Other accrued liabilities 171 2,666 1,687 (993) 3,531
Current maturities of
long-term obligations -- 1,883 49 -- 1,932
--------- --------- --------- --------- ---------
Total current liabilities 3,856 35,705 11,215 (2,808) 47,968
Deferred income taxes -- 2,052 -- (1,611) 441
Senior Notes 120,000 -- -- -- 120,000
Other long-term obligations -- 2,747 43 -- 2,790
Stockholder's equity (42,902) 56,283 3,035 (77,479) (61,063)
(deficit) --------- --------- --------- --------- ---------
Total liabilities and
stockholder's equity $ 80,954 $ 96,787 $ 14,293 $ (81,898) $ 110,136
(deficit) ========= ========= ========= ========= =========
38
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2001:
Net sales $ -- $ 160,308 $ 32,422 $ (19) $ 192,711
Cost of products sold -- 134,362 28,581 (19) 162,924
--------- --------- --------- --------- ---------
Gross profit -- 25,946 3,841 -- 29,787
Total operating expenses 1,005 17,512 3,572 -- 22,089
--------- --------- --------- --------- ---------
Operating income (loss) (1,005) 8,434 269 -- 7,698
Interest expense 13,766 1,794 227 -- 15,787
Interest income (639) -- -- -- (639)
Miscellaneous, net 688 382 (107) -- 963
--------- --------- --------- --------- ---------
Income (loss) before income taxes (14,820) 6,258 149 -- (8,413)
Income tax expense (benefit) (5,925) 4,424 4 -- (1,497)
--------- --------- --------- --------- ---------
Net income (loss) $ (8,895) $ 1,834 $ 145 $ -- $ (6,916)
========= ========= ========= ========= =========
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2000:
Net sales $ -- $ 145,738 $ 22,441 $ (1) $ 168,178
Cost of products sold -- 119,342 22,311 (1) 141,652
--------- --------- --------- --------- ---------
Gross profit -- 26,396 130 -- 26,526
Total operating expenses 1,105 18,051 3,778 -- 22,934
--------- --------- --------- --------- ---------
Operating income (loss) (1,105) 8,345 (3,648) -- 3,592
Interest expense 13,768 1,833 225 -- 15,826
Interest income (1,032) -- -- -- (1,032)
Miscellaneous, net -- 12 (14) -- (2)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (13,841) 6,500 (3,859) -- (11,200)
Income tax expense (benefit) (1,333) 3,247 -- -- 1,914
--------- --------- --------- --------- ---------
Net income (loss) $ (12,508) $ 3,253 $ (3,859) $ -- $ (13,114)
========= ========= ========= ========= =========
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 1999:
Net sales $ -- $ 187,977 $ 26,099 $ (79) $ 213,997
Cost of products sold -- 159,019 23,293 (79) 182,233
--------- --------- --------- --------- ---------
Gross profit -- 28,958 2,806 -- 31,764
Total operating expenses 571 21,123 4,754 -- 26,448
--------- --------- --------- --------- ---------
Operating income (loss) (571) 7,835 (1,948) -- 5,316
Interest expense 13,772 1,268 185 -- 15,225
Interest income (914) -- -- -- (914)
Miscellaneous, net -- 106 (373) -- (267)
--------- --------- --------- --------- ---------
Income (loss) before foreign income (13,429) 6,461 (1,760) -- (8,728)
taxes
Foreign income taxes -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (13,429) $ 6,461 $ (1,760) $ -- $ (8,728)
========= ========= ========= ========= =========
39
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
-----------------------------------------------------------------------
Year ended December 31, 2001:
Net cash provided by (used in)
operating activities $(13,932) $ 11,975 $ 2,226 $ (1) $ 268
Investing activities:
Purchases of property, plant and
equipment -- (694) (264) -- (958)
Proceeds from disposals of PP&E -- 69 44 -- 113
Acquisition of business -- (1,607) -- -- (1,607)
-------- -------- -------- -------- --------
Net cash used in investing activities -- (2,232) (220) -- (2,452)
Financing activities:
Net increase (decrease) in
borrowings on notes payable -- 2,267 (1,220) -- 1,047
Principal payments on long-term
obligations -- (985) (41) -- (1,026)
Distributions for interest on 10,223 (10,223) -- -- --
senior notes
Intercompany loan activity -- 174 (174) -- --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 10,223 (8,767) (1,435) -- 21
Exchange rate changes on cash -- (23) (85) 1 (107)
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents (3,709) 953 486 -- (2,270)
Cash and cash equivalents at beginning
of year 16,257 565 120 -- 16,942
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
year $ 12,548 $ 1,518 $ 606 $ -- $ 14,672
======== ======== ======== ======== ========
40
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2000:
Net cash provided by (used in)
operating activities $(13,272) $ 9,055 $ (2,229) $ (12) $ (6,458)
Investing activities:
Purchases of property, plant and
equipment -- (1,268) (227) -- (1,495)
Proceeds from disposals of PP&E -- 103 19 -- 122
-------- -------- -------- -------- --------
Net cash used in investing activities -- (1,165) (208) -- (1,373)
Financing activities:
Net increase in borrowings on notes
payable -- 7,241 137 -- 7,378
Proceeds from long-term obligations -- 776 -- -- 776
Principal payments on long-term
obligations -- (1,526) (109) -- (1,635)
Distributions for interest on 12,285 (12,285) -- -- --
senior notes
Intercompany loan activity -- (2,473) 2,473 -- --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 12,285 (8,267) 2,501 -- 6,519
Exchange rate changes on cash -- (13) (45) 12 (46)
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents (987) (390) 19 -- (1,358)
Cash and cash equivalents at beginning
of year 17,244 955 101 -- 18,300
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
year $ 16,257 $ 565 $ 120 $ -- $ 16,942
======== ======== ======== ======== ========
41
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 1999:
Net cash provided by (used in)
operating activities $(12,567) $ 2,657 $ (1,742) $ (609) $(12,261)
Investing activities:
Purchases of property, plant and
equipment -- (3,331) (699) -- (4,030)
Proceeds from disposals of PP&E -- 51 1,040 -- 1,091
Investment in subsidiaries (1,300) 1,300 -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities (1,300) (1,980) 341 -- (2,939)
Financing activities:
Net increase (decrease) in
borrowings on notes payable -- 6,456 (762) 307 6,001
Proceeds from long-term obligations -- 5,434 82 -- 5,516
Principal payments on long-term
obligations -- (3,039) (173) -- (3,212)
Distributions for income taxes -- (1,306) -- -- (1,306)
Distributions for interest on 11,142 (11,142) -- -- --
senior notes
Intercompany loan activity -- (3,361) 3,011 350 --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 11,142 (6,958) 2,158 657 6,999
Exchange rate changes on cash -- 260 (62) (48) 150
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents (2,725) (6,021) 695 -- (8,051)
Cash and cash equivalents at beginning
of year 19,969 6,976 (594) -- 26,351
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
year $ 17,244 $ 955 $ 101 $ -- $ 18,300
======== ======== ======== ======== ========
M. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any pending legal proceeding which it believes
could have a material adverse effect upon its results of operations or financial
condition, or to any other pending legal proceedings other than ordinary,
routine litigation incidental to its business.
At December 31, 2001, approximately 38% of the Company's employees are covered
by a collective bargaining agreement; approximately 30% of the Company's
employees are covered by a collective bargaining agreement which expires in
2002.
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors and
executive officers of the Company, as of December 31, 2001:
Name Age Position with the Company
C. Edward Bryant, Jr. 67 President and Chief Executive Officer
James L. Smothers 45 Vice President
Jimmy L. Dickinson 59 Vice President and Chief Financial Officer
Jerry R. McGaha 63 Senior Vice President of Sales and Engineering
Joseph L. Mandia 60 Vice Chairman and Director
Edward F. Crawford 62 Director
Donald F. Hastings 73 Director
C. Wesley McDonald 61 Director
Robert J. Tomsich 71 Director
John R. Tomsich 35 Director
Milton Ward 69 Director
James W. Wert 55 Director
Set forth below is a brief description of the business experience of each
director and executive officer of the Company.
Mr. Bryant has served as President and Chief Executive Officer of the Company
since its inception. Mr. Bryant has also served as President and Chief Executive
Officer of Continental Conveyor & Equipment Company since 1982 and as Chairman
of the Board of Directors of CCE Pty. Ltd. since 1996.
Mr. Smothers has served as Vice President of the Company since October 2001 and
has also served as Vice President of Continental Conveyor & Equipment Company
since August 1999 and Executive Vice President since October 2001. In addition
to the foregoing, Mr. Smothers served as Director of International Sales and
Manager of Systems Engineering of Continental Conveyor & Equipment Company from
1992 through 1999 and Managing Director of CCE Pty. Ltd. in 1999.
Mr. Dickinson has served as Vice President and Chief Financial Officer of the
Company since its inception. Mr. Dickinson has also served as Vice President of
Finance of Continental Conveyor & Equipment Company since 1973 and as a Director
of CCE Pty. Ltd. since 1996.
Mr. McGaha has served as Senior Vice President of Sales and Engineering of the
Company since its inception. Mr. McGaha has also served as Senior Vice President
of Sales and Engineering of Continental Conveyor & Equipment Company since 1996
and as a Director of CCE Pty. Ltd. since 1996. In addition to the foregoing, Mr.
McGaha was Vice President of Sales and Engineering of Continental Conveyor &
Equipment Company from 1990 to 1996.
43
Mr. Mandia has served as Vice Chairman of the Company since January 2001 and as
a Director of the Company since its inception. Mr. Mandia served as Group Vice
President of Nesco, Inc. from 1988 to December 2000.
Mr. Crawford has served as a Director of the Company since its inception. In
addition to his service with the Company, Mr. Crawford has served as Chairman
and Chief Executive Officer and a Director of Park-Ohio Industries, Inc. since
1992.
Mr. Hastings has served as a Director of the Company since its inception. In
addition to his service with the Company, Mr. Hastings served as Chairman and
Chief Executive Officer and as Director of Lincoln Electric Company from 1992 to
1997. Since 1998, Mr. Hastings has also served as a Director of Paragon
Corporate Holdings, Inc., a sister corporation of the Company.
Mr. McDonald has served as a Director of the Company since August 2000. Prior to
his service with the Company, Mr. McDonald served as Executive Vice President of
Operations for Consol Inc. from 1985 to his retirement in 1999.
Mr. Robert Tomsich has served as a Director of the Company since its inception.
In addition, Mr. Robert Tomsich has served as President and Director of Nesco,
Inc. (including predecessors of Nesco, Inc.) since 1956. Since 1997, Mr. Tomsich
has also served as a Director of Paragon Corporate Holdings, Inc., a sister
corporation of the Company. Mr. Robert Tomsich is the father of Mr. John
Tomsich.
Mr. John Tomsich has served as a Director of the Company since its inception. In
addition, Mr. John Tomsich has served as Vice President of Nesco, Inc. since
1995 and in various other management positions with Nesco, Inc. since 1990.
Since 1997, Mr. Tomsich has also served as a Director of Paragon Corporate
Holdings, Inc., a sister corporation of the Company. Mr. John Tomsich is the son
of Mr. Robert Tomsich.
Mr. Ward has served as a Director of the Company since February 2001. As a
global senior executive, Mr. Ward has been actively involved in the mineral
industry. Most recently he served as the Chairman, President and CEO of Cyprus
AMAX Minerals Company. Prior to joining Cyprus, he was the President, Director
and Chief Operating Officer of Freeport McMoran, and earlier held officer and
managerial positions with other mining companies. Mr. Ward now serves as the
President and CEO of Ward Resources Inc. and is pursuing mineral investments and
international consulting to senior mine management. He is an advisory director
of the industrial minerals internet trading company, IMINEX Inc., a member of
the National Academy and the Chairman of its Committee on Technologies of the
Mining Industry.
Mr. Wert has served as a Director of the Company since its inception. Prior to
his service with the Company, Mr. Wert held a variety of executive management
positions with KeyCorp, a financial services company based in Cleveland, Ohio,
and KeyCorp's predecessor, Society Corporation. Mr. Wert served as Senior
Executive Vice President and Chief Investment Officer of KeyCorp from 1995 to
1996. Prior to that time, he served as Senior Executive Vice President and Chief
Financial Officer of KeyCorp for two years and Vice Chairman, Director and Chief
Financial Officer of Society Corporation for four years. Since 1993, Mr. Wert
has served as an outside Director, and currently serves as Chairman of the
Executive and Compensation Committees of the Board of Directors, of Park-Ohio
Industries, Inc. Since 1998, Mr. Wert has also served as a Director of Paragon
Corporate Holdings, Inc., a sister corporation of the Company.
44
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation of
the Company's Chief Executive Officer and other most highly compensated officers
of the Company having total annual salary and bonus in excess of $100,000.
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1)
Joseph L. Mandia, Vice Chairman 2001 $211,550 $ 37,300 $ 13,183
2000 211,550 35,150 --
C. Edward Bryant, Jr., 2001 239,208 67,122 8,519
President and Chief 2000 230,004 91,205 16,434
Executive Officer 1999 230,004 94,817 15,495
Jerry R. McGaha, 2001 130,440 22,197 15,518
Senior Vice President of 2000 128,520 31,459 11,742
Sales and Engineering 1999 126,660 32,217 14,483
Jimmy L. Dickinson 2001 142,410 48,869 13,990
Vice President and Chief 2000 139,260 61,285 13,779
Financial Officer 1999 138,243 64,340 11,243
James Smothers, Vice President 2001 127,600 18,706 8,208
(1) Amounts shown reflect contributions made by the Company on behalf of the
named executives under the Continental Conveyor & Equipment Company
Savings and Profit Sharing Plan and the Continental Conveyor & Equipment
Retirement Plan for Salaried and Hourly (Non-Union) Employees at
Salyersville, Kentucky. No amounts shown were received by any of the
named executives.
DIRECTOR COMPENSATION
Each director of the Company not employed by the Company or any entity
affiliated with the Company is entitled to receive $25,000 per year for serving
as a director of the Company. In addition, the Company will reimburse such
director for their travel and other expenses incurred in connection with
attending meetings of the Board of Directors.
45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the outstanding
equity securities of the Company as of March 15, 2002:
Number of Shares Title of Class Name and Address of Beneficial Owner
100 Common Stock, $0.01 par value N.E.S. Investment Co.
6140 Parkland Boulevard
Mayfield Heights, OH 44124
All of the Company's issued and outstanding capital stock is owned by N.E.S.
Investment Co., which is 100 percent beneficially owned by Mr. Robert J.
Tomsich. Mr. Tomsich may be deemed to be the beneficial owner of the Company's
capital stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPANY FORMATION AND PROCEEDS FROM THE OFFERING
The Company is a Delaware corporation formed on February 4, 1997, for the
purpose of serving as a holding company for the operations conducted by
Continental (including the BCE Subsidiaries) and Goodman. All of the capital
stock of the Company has been issued to NES Group, Inc., which in turn,
transferred to the Company all of the outstanding capital stock of Continental
and Goodman. As a result, the Company is a wholly owned subsidiary of NES Group,
Inc., and each of Continental and Goodman is a wholly owned subsidiary of the
Company.
MANAGEMENT AGREEMENT
Effective April 1, 1997, the Company and Nesco, Inc. entered into a management
agreement ("Management Agreement"), the material terms of which are summarized
below. All of the outstanding capital stock of Nesco, Inc. is beneficially owned
by Robert J. Tomsich. Under the Management Agreement, Nesco, Inc., has agreed to
provide general management oversight services on a regular basis for the benefit
of the Company, in regard to business activities involving financial results,
legal issues, and long term planning relative to current operations and
acquisitions. Business development services include assistance in identifying
and acquiring potential acquisition candidates, including negotiations and
contractual preparations in connection therewith. Financial planning includes
assistance in developing banking relationships and monitoring cash investments
through professional money management accounts. Under the terms of the
Management Agreement, the Company has agreed to pay Nesco, Inc. a management fee
for such services equal to 5% of the Company's earnings before interest and
estimated taxes, depreciation, amortization, and other expense (income). The
aggregate amount expensed for management fees in 2001 under the Management
Agreement was $556,933. The management fee is payable in monthly installments.
The Management Agreement will remain in effect until terminated by either party
upon not less than 60 days written notice prior to an anniversary date of the
Management Agreement.
The Company will also separately employ, as required, independent auditors,
outside legal counsel, and other consulting services. Such services will be paid
directly by the Company.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. Consolidated Financial Statements.
The consolidated financial statements listed below together
with the report thereon of the independent auditors dated
March 25, 2002, are included in Item 8.
Report of Independent Auditors.
Consolidated Balance Sheets at December 31, 2001 and 2000.
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2001.
Consolidated Statements of Stockholder's Equity (Deficit)
for each of the three years in the period ended December 31,
2001.
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2001.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
No consolidated financial statement schedules are presented
because the schedules are not required, the information is
not present, or not present in amounts sufficient to require
submission of the schedules or the required information is
included in the Consolidated Financial Statements.
3. Exhibits Required to be Filed by Item 601 of Regulation S-K.
The information required by this paragraph is contained in
the Index of Exhibits to this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
47
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on the 28th day of March, 2002.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ C. Edward Bryant, Jr.
--------------------------
Name: C. Edward Bryant, Jr.
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature Title Date
/s/ C. Edward Bryant, Jr. President and Chief Executive Officer March 28, 2002
- ----------------------------------------- (Principal Executive Officer)
C. Edward Bryant, Jr.
/s/ James L. Smothers Vice President March 28, 2002
- -----------------------------------------
James L. Smothers
/s/ Jimmy L. Dickinson Vice President and Chief Financial Officer March 28, 2002
- ----------------------------------------- (Principal Financial Officer and Principal
Jimmy L. Dickinson Accounting Officer)
/s/ Joseph L. Mandia Vice Chairman and Director March 28, 2002
- -----------------------------------------
Joseph L. Mandia
/s/ Edward F. Crawford Director March 28, 2002
- -----------------------------------------
Edward F. Crawford
/s/ Donald F. Hastings Director March 28, 2002
- -----------------------------------------
Donald F. Hastings
/s/ C. Wesley McDonald Director March 28, 2002
- -----------------------------------------
C. Wesley McDonald
/s/ John R. Tomsich Director March 28, 2002
- -----------------------------------------
John R. Tomsich
/s/ Robert J. Tomsich Director March 28, 2002
- -----------------------------------------
Robert J. Tomsich
/s/ Milton Ward Director March 28, 2002
- -----------------------------------------
Milton Ward
/s/ James W. Wert Director March 28, 2002
- -----------------------------------------
James W. Wert
48
Supplemental information to be furnished with reports filed pursuant to Section
15(d) of the Act by registrants which have not registered securities pursuant to
Section 12 of the Act.
No annual report to security holders covering the registrant's last fiscal year
and no proxy statement, form of proxy, or other proxy soliciting material with
respect to any annual or other meeting of security holders has been or will be
sent to security holders.
49
Continental Global Group, Inc.
Form 10-K
Index of Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
3.1
(a) Certificate of Incorporation of Continental Global Group, Inc., as currently in effect. *
(b) Certificate of Amendment of Certificate of Incorporation of Continental Global Group,
Inc. (Filed as Exhibit 3.1(b) to the Company's Form 10-Q for the quarter ended September
30, 2000, and is incorporated herein by reference.)
3.2 By-Laws of Continental Global Group, Inc., as currently in effect. *
3.3 Certificate of Incorporation of Continental Conveyor & Equipment Company, as currently *
in effect.
3.4 By-Laws of Continental Conveyor & Equipment Company, as currently in effect. *
3.5 Certificate of Incorporation of Goodman Conveyor Company, as currently in effect. *
3.6 By-Laws of Goodman Conveyor Company, as currently in effect. *
4.1 Indenture, dated as of April 1, 1997, among Continental Global
Group, Inc., Continental Conveyor & Equipment Company, Goodman *
Conveyor Company, and the Trustee (containing, as exhibits,
specimens of the Series A Notes and the Series B Notes).
10.1
(a) Revolving Credit Facility, dated as of September 14, 1992, as amended by *
Amendments I, II, and III, among Continental Conveyor & Equipment Company,
Goodman Conveyor Company, and Bank One, Cleveland, NA.
(b) Amendment IV, dated as of December 31, 1998, to the Revolving Credit Facility,
dated as of September 14, 1992, among Continental Conveyor & Equipment Company,
Goodman Conveyor Company, and Bank One, Cleveland, NA. (Filed as Exhibit 10.1
(b) to the Company's Form 10-Q for the quarter ended March 31, 1999, and is
incorporated herein by reference.)
(c) Letter of Amendment, dated as of July 26, 1999, to the Revolving Credit
Facility, dated as of September 14, 1992, among Continental Conveyor &
Equipment Company, Goodman Conveyor Company, and Bank One, Cleveland, NA.
(Filed as Exhibit 10.1 (c) to the Company's Form 10-Q for the quarter ended
June 30, 1999, and is incorporated herein by reference.)
(d) Letter of Amendment, dated as of November 4, 1999, to the Revolving Credit
Facility, dated as of September 14, 1992, among Continental Conveyor & Equipment
Company, Goodman Conveyor Company, and Bank One, Cleveland, NA. (Filed as
Exhibit 10.1 (d) to the Company's Form 10-Q for the quarter ended September 30,
1999, and is incorporated herein by reference.)
(e) Amendment VI, dated as of March 28, 2000, to the Revolving Credit Facility, dated
as of September 14, 1992, among Continental Conveyor & Equipment Company, Goodman
Conveyor Company, and Bank One, Cleveland, NA. (Filed as Exhibit 10.1(e) to the
Company's Form 10-K for the year ended December 31, 1999, and is incorporated
herein by reference.)
50
Continental Global Group, Inc.
Form 10-K
Index of Exhibits (Continued)
10.1
(f) Letter of Amendment, dated as of March 29, 2001, to the Revolving Credit
Facility, dated as of September 14, 1992, among Continental Conveyor &
Equipment Company, Goodman Conveyor Company, and Bank One, Cleveland, NA.
(Filed as Exhibit 10.1(f) to the Company's Form 10-K for the year ended
December 31, 2000, and is incorporated herein by reference.)
(g) Letter of Amendment, dated as of March 25, 2002, to the Revolving Credit
Facility, dated as of September 14, 1992, among Continental Conveyor &
Equipment Company, Goodman Conveyor Company, and Bank One, Cleveland, NA.
10.2 Management Agreement, dated as of April 1, 1997, between Continental Global *
Group, Inc. and Nesco, Inc.
12 Statement regarding computation of ratio of earnings to fixed charges
21 Subsidiaries of registrant
Certain instruments with respect to long-term debt have not been filed as
exhibits as the total amount of securities authorized under any one of such
instruments does not exceed 10 percent of the total assets of the registrant and
its subsidiaries on a consolidated basis. The registrant agrees to furnish to
the Commission a copy of each such instrument upon request.
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed
under the Securities Act of 1933.
51