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, 2003
[ ] 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.
(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 [ ] No [x]
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]
Indicate by check mark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act).
Yes [ ] No [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2004 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 June 30, 2004, there were 100 shares of the registrant's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
CONTINENTAL GLOBAL GROUP, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item Page
Number 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 14
8 Financial Statements and Supplementary Data 15
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 46
9A Controls and Procedures 46
PART III
10 Directors and Executive Officers of the Registrant 46
11 Executive Compensation 48
12 Security Ownership of Certain Beneficial Owners and Management 49
13 Certain Relationships and Related Transactions 49
14 Principal Accountant Fees and Services 50
PART IV
15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 51
Signatures 52
Index of Exhibits
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 (i) Continental Conveyor & Equipment Pty. Ltd. ("CCE Pty.
Ltd."), an Australian holding company that owns all of the capital stock of four
Australian operating companies; (ii) Continental Conveyor Ltd., a U.K. operating
company; and (iii) Continental MECO (Pty.) Ltd., a South African operating
company. In July 2001, the Company acquired certain assets in Alabama from
Lippert Tire & Axle, Inc ("Lippert acquisition"). 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 87%, 83%, and 90% of net sales for 2003, 2002, and 2001,
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 12%, 16%, and 9% of net sales for 2003, 2002, and 2001,
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.
Approximately 59% or $114.3 million of the Company's 2003 net sales were
generated in the United States, 20% or $39.1 million in the United Kingdom, 18%
or $35.3 million in Australia, and 3% or $5.6 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, 2003, 2002 and 2001, 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 17%, 20%, and 31% of the Company's total net sales for
2003, 2002 and 2001, 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.
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, 2003 was $35.0 million, a decrease of $7.1 million, or
17%, from $42.1 million at December 31, 2002 and a decrease of $2.5 million, or
7%, from $37.5 million at September 30, 2003. At December 31, 2003, backlog in
the domestic operations of the Company's conveyor equipment segment was $11.0
million, a decrease of $1.9 million from September 30, 2003, and backlog in the
foreign operations of the Company's conveyor equipment segment was $24.0
million, a decrease of $0.6 million from September 30, 2003. Management believes
that approximately 95% of the backlog will be shipped in 2004.
2
Employees
As of December 31, 2003, the Company had approximately 1,200 employees,
approximately 680 of whom were located in the United States. Approximately 140
of the employees at the Company's Winfield, Alabama facility are represented by
The United Steelworkers of America Union and are covered by a three year
collective bargaining agreement that expires in 2007. Approximately 90
production employees at the Company's Australian subsidiary are covered by
collective bargaining agreements that expire in 2006. Approximately 260 of the
production employees at the Company's United Kingdom and South African
facilities are covered by annual collective bargaining agreements that expire in
2004 and negotiations for new agreements are underway. 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 Owned/
Location Square Footage Principal Function Leased
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 Owned
Phil Campbell, Alabama 47,000 Administration, manufacturing Owned
Australia:
Somersby, New South Wales 49,655 Administration, engineering, Owned
sales, and manufacturing
Mackay, Queensland 19,800 Manufacturing, and installation Leased(1)
support
Minto, New South Wales 23,024 Manufacturing Owned
England
Gateshead, UK 186,000 Administration, engineering, Leased(2)
sales, and manufacturing
South Africa
Alrode, South Africa 24,456 Administration, engineering, Leased(3)
sales, and manufacturing
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(1) The lease expires in December 2013.
(2) Expires in August 2008. The Company has an option to purchase at market
value at the end of the lease term.
(3) Expires in 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
In August and September 2003, Continental Conveyor & Equipment Company was
served as one of fifty-eight known and unknown defendants in nineteen separate
actions pending in various state courts in the State of Alabama alleging various
contract, tort and warranty claims. All claims in such actions arose out of
alleged injuries and deaths occurring at the Jim Walters Resources No. 5 Mine
which occurred on September 23, 2001. The plaintiffs in such actions do not
allege a particular set of actions or omissions by Continental Conveyor &
Equipment Company that give rise to the claims, nor is there a specific amount
of damages sought. The Company believes that these claims are without merit and
intends to vigorously defend all claims. The Company considers such claims to be
the type of claims that arise in the normal course of its business. While it is
not feasible to predict the outcome of these matters with certainty, management
is of the opinion that their ultimate disposition should not have a material
adverse effect on the Company's financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended December 31, 2003.
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
June 30, 2004, the Company had one stockholder. The Company paid no dividends in
2003 or 2002. 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, 2003. The
data should be read in conjunction with the Consolidated Financial Statements
and related Notes included in this report on Form 10-K.
2003 2002 2001 2000 1999
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(Data in 000's, except ratios)
Income Statement Data:
Net sales $ 194,341 $ 184,976 $192,711 $168,178 $213,997
Gross profit 26,676 29,774 30,155 26,526 31,764
Operating income 3,475 6,645 7,698 3,592 5,316
Interest expense 15,280 15,407 15,787 15,826 15,225
Loss before cumulative effect of change in
accounting principle (12,633) (8,692) (6,916) (13,114) (8,728)
Net loss (1) (12,633) (12,542) (6,916) (13,114) (8,728)
Other Data:
Depreciation and amortization 2,221 2,283 2,884 3,077 3,550
Cash flows from operating activities (5,394) (1,560) 268 (6,458) (12,261)
Cash flows from investing activities (688) (1,227) (2,452) (1,373) (2,939)
Cash flows from financing activities 1,249 (6,283) 21 6,519 6,999
Adjusted EBITDA (2) 4,857 8,814 9,619 6,671 9,134
Ratio of earnings to fixed charges (3) - - - - -
Balance Sheet Data:
Cash and cash equivalents 851 5,635 14,672 16,942 18,300
Total assets 87,763 89,667 108,772 110,136 122,903
Senior Notes in default 120,000 - - - -
Long-term debt, including current portion 2,916 122,887 123,557 124,722 126,028
Stockholder's equity (deficit) (94,275) (82,721) (68,845) (61,063) (45,878)
(1) In 2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets," and as a result no
longer amortizes goodwill. Net loss in 2002 includes a non-cash goodwill
impairment write-down recorded as a cumulative effect of change in
accounting principle of $3,850. Net loss for 2001, 2000, and 1999 includes
goodwill amortization expense, net of tax, of $431, $431, and $439,
respectively.
(2) Adjusted EBITDA represents earnings before interest, taxes, depreciation,
amortization, and accounting changes. Adjusted EBITDA is not a measure of
performance under generally accepted accounting principles ("GAAP"). While
Adjusted EBITDA should not be considered in isolation or as a substitute
for net income, cash flows from operating, investing and financing
activities and other income or cash flow statement data prepared in
accordance with GAAP or as a measure of profitability or liquidity,
management understands that Adjusted EBITDA is customarily used as an
indication of a company's ability to incur and service debt. Adjusted
EBITDA is calculated as follows for the years ending December 31:
2003 2002 2001 2000 1999
----------- ------------ ------------ ----------- ------------
Net loss $ (12,633) $ (12,542) $ (6,916) $ (13,114) $ (8,728)
Interest expense, net 15,265 15,220 15,148 14,794 14,312
Income tax expense (benefit) 4 3 (1,497) 1,914 -
Depreciation expense 2,195 2,166 2,250 2,467 2,932
Amortization expense 26 117 634 610 618
Accounting changes - 3,850 - - -
----------- ------------ ------------ ----------- ------------
Adjusted EBITDA $ 4,857 $ 8,814 $ 9,619 $ 6,671 $ 9,134
=========== ============ ============ =========== ============
(3) Earnings consist of income before income taxes and accounting changes 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, 2003, 2002, 2001, 2000 and 1999 by $12,629,
$8,689, $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, 2003,
2002, and 2001.
Year ended December 31
---------------------------------------------------
2003 2002 2001
Net sales 100.0% 100.0% 100.0%
Cost of products sold 86.3 83.9 84.4
Gross profit 13.7 16.1 15.6
SG&A expenses 11.7 11.8 11.0
Management fee 0.2 0.3 0.3
Amortization expense - 0.1 0.3
Restructuring charges - 0.3 -
Operating income 1.8 3.6 4.0
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net Sales
Net sales increased $9.3 million, or 5%, from $185.0 million in 2002 to $194.3
million in 2003. Net sales in the domestic operations of the Company's conveyor
equipment segment decreased $4.6 million. This decrease primarily resulted from
a $5.2 million decrease in the engineered systems business due to the shipment
of a significant project in 2002 which did not recur in 2003. After a period of
lower capital spending by the Company's major customers in the coal industry,
net sales in the domestic mining equipment business increased $1.4 million. Net
sales in the domestic conveyor components business decreased $0.8 million. Net
sales in the foreign operations of the Company's conveyor equipment segment
increased $19.6 million. Changes in foreign currency translation rates resulted
in $10.8 million of this increase. Adjusted for the effects of foreign currency
fluctuations, net sales in the Company's Australian and United Kingdom
subsidiaries increased $5.5 million and $3.3 million, respectively. The increase
in Australia resulted from increased sales of conveyor equipment for new mining
projects. The increase in the United Kingdom was due to increased sales of
engineered system contracts, primarily to the tunneling industry, offset by
reduced sales of standard manufactured products. Net sales in the Company's
manufactured housing segment decreased $5.7 million, or 19%, due to the decrease
by the Company's customers in the production and shipment of manufactured homes.
Based upon the Manufactured Housing Institute's economic report for December
2003, production and shipment of new manufactured homes in 2003 was down 22%
from 2002.
Gross Profit
Gross profit decreased $3.1 million, or 10%, from $29.8 million in 2002 to $26.7
million in 2003. Gross profit in the domestic operations of the Company's
conveyor equipment segment decreased $1.8 million. Approximately $1.4 million of
the decrease was due to a decline in profit margins in the mining equipment
business which primarily resulted from the Company's inability to pass through
raw material price increases, predominantly in steel and steel-related products,
beginning in the second half of 2002. The balance of the gross profit decrease
in the domestic conveyor equipment operations was largely due to lower sales
volume in the engineered systems business area. Gross profit in the foreign
operations of the Company's conveyor equipment segment decreased $0.9 million.
Changes in foreign currency translation rates resulted in a $1.0 million
increase in gross profit at the foreign subsidiaries. Adjusted for the effects
of foreign currency fluctuations, gross profit in the Company's Australian
subsidiary increased $0.4 million while gross profit in the Company's United
Kingdom subsidiary decreased $2.3 million. The increase in the Australian
7
subsidiary was due to increased sales volume. The decrease in the United Kingdom
primarily resulted from lower profit margins in complete conveyor systems and
reduced sales volume of the higher margin standard manufactured products
business. Gross profit in the Company's manufactured housing segment decreased
$0.4 million due to the decrease in net sales.
Gross profit as a percentage of net sales decreased from 16.1% in 2002 to 13.7%
in 2003. This decline primarily resulted from the decreased profit margins in
the United Kingdom combined with the lower margins on mining equipment business
in the Company's domestic operations.
SG&A Expenses
SG&A expenses increased $0.9 million, or 4%, from $21.9 million in 2002 to $22.8
million in 2003. SG&A expenses in the domestic operations of the Company's
conveyor equipment segment decreased $0.8 million, primarily due to a $0.5
million decrease in selling expenses which resulted from reduced sales personnel
and related expenses and a $0.3 million decline in administrative expenses. SG&A
expenses in the foreign operations of the Company's conveyor equipment segment
increased $1.4 million. Of this increase in the foreign operations, $1.2 million
resulted from changes in the foreign currency translation rates and the
remaining $0.2 million increase primarily resulted from increased administrative
expenses. Corporate SG&A expenses increased $0.5 million due to higher personnel
and insurance expenses. SG&A expenses in the Company's other segment decreased
$0.2 million.
Operating Income
Operating income decreased $3.1 million, or 47%, from $6.6 million in 2002 to
$3.5 million in 2003. This decrease resulted from the $3.1 million decrease in
gross profit combined with the $0.9 million increase in SG&A expenses, offset by
decreases in management fees, amortization expense, and restructuring charges of
$0.2 million, $0.1 million, and $0.6 million, respectively.
Restructuring Charges
The Company incurred restructuring charges of approximately $0.1 million and
$0.6 million in 2003 and 2002 related to changes in staffing and production
requirements in its domestic operations. These charges consist primarily of
severance costs associated with a reduction in personnel which occurred in 2002
and 2003. As part of this restructuring, in 2002 the Company developed a plan to
discontinue the manufacturing operations in certain of its domestic facilities
and merge these operations with other existing facilities. The process of
merging the domestic operations began in 2003. As of December 31, 2003, the
Company has paid approximately $0.2 million of the charges incurred to date,
with the majority of the remainder to be paid by 2008. However, in the fourth
quarter of 2003, the Company hired a third-party consultant to re-evaluate the
restructuring plan and make further recommendations. These recommendations are
currently under review by the Company's management and board of directors. The
additional cost of this restructuring has not been determined.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Sales
Net sales decreased $7.7 million, or 4%, from $192.7 million in 2001 to $185.0
million in 2002. Net sales in the domestic operations of the Company's conveyor
equipment segment decreased $29.8 million due to continued lower capital
spending by the Company's major customers in the coal industry. Net sales in the
foreign operations of the conveyor equipment segment increased $9.9 million.
This increase was attributable to increases in sales in the Company's Australian
and United Kingdom subsidiaries of $5.9 million and $5.0 million, respectively,
offset by a decrease in sales of $1.0 million in the South African subsidiary.
The increases in sales in Australia and the United Kingdom resulted from the
shipment of new mining and tunneling projects. Net sales in the Company's
manufactured housing segment increased $12.4 million due to the acquisition from
8
Lippert Tire & Axle Inc. in July 2001 and shipments to new customers. Net sales
in the Company's other segment decreased $0.2 million.
Gross Profit
Gross profit decreased $0.4 million, or 1%, from $30.2 million in 2001 to $29.8
million in 2002. Gross profit in the domestic operations of the Company's
conveyor equipment segment decreased $7.1 million due to lower sales volume.
Gross profit in the foreign operations of the conveyor equipment segment
increased $4.9 million due to higher sales volume and improved margins in the
Company's Australian subsidiary. Gross profit in the manufactured housing
segment increased $1.8 million due to increased sales and improved margins
resulting from the Lippert acquisition and the subsequent consolidation in the
fourth quarter of 2001 of the existing operations into the acquired facility.
SG&A Expenses
SG&A expenses increased $0.6 million, or 3%, from $21.3 million in 2001 to $21.9
million in 2002. The increase primarily resulted from increases in the foreign
subsidiaries due to higher marketing and insurance costs.
Operating Income
Operating income decreased $1.1 million, or 14%, from $7.7 million in 2001 to
$6.6 million in 2002. The decrease resulted from the $0.4 million decrease in
gross profit combined with the $0.6 million increase in SG&A expenses and a $0.6
million increase in restructuring charges, offset by a $0.5 million decrease in
amortization expense. The decrease in amortization expense resulted from a
change in the method of accounting for goodwill due to the Company's adoption on
January 1, 2002 of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets".
Liquidity and Capital Resources
Net cash provided by (used in) operating activities was $(5.4) million, $(1.6)
million, and $0.3 million for the years ended December 31, 2003, 2002, and 2001,
respectively. The decrease in operating cash flows from 2002 to 2003 is
primarily the result of the increase in the Company's loss before income taxes
and cumulative effect of change in accounting principle. Net cash used in
operating activities in 2003 resulted from the current year net loss of $12.6
million offset by significant non-cash expenses of $3.2 million and a net
decrease in operating assets of $4.0 million. Net cash used in operating
activities in 2002 resulted from the net loss of $12.5 million offset by
significant non-cash expenses of $7.1 million and a net decrease in operating
assets of $3.8 million. Net cash provided by operating activities in 2001
represents the 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 investing activities was $0.7 million, $1.2 million, and $2.5
million for the years ended December 31, 2003, 2002 and 2001, respectively. Net
cash used in investing activities in 2003 and 2002 represents net purchases of
property, plant, and equipment. 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 provided by (used in) financing activities was $1.2 million, $(6.3)
million, and $0.02 million for the years ended December 31, 2003, 2002, and
2001, respectively. Net cash provided by financing activities in 2003 resulted
from a net increase in borrowings on notes payable of $1.8 million offset by
principal payments on long-term obligations of $0.6 million. Borrowings on notes
payable at the Company's domestic subsidiaries increased $1.1 million and
borrowings on notes payable at the Company's foreign subsidiaries increased $0.7
million. Net cash used in financing activities in 2002 resulted from a net
decrease in borrowings on notes payable of $5.4 million and principal payments
on long-term obligations of $0.9 million. Borrowings on notes payable at the
Company's domestic subsidiaries decreased $6.4 million while borrowings on notes
9
payable at the Company's foreign subsidiaries increased $1.0 million. 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.
The Company's primary capital requirements consist of capital expenditures and
debt service. The Company utilizes cash on hand and its available credit
facilities to satisfy these requirements. The Company anticipates that capital
expenditures in 2004, which will be primarily for maintenance capital, will
approximate those made in 2003. In addition to the Company's debt service
requirements for interest expense, as of December 31, 2003, the Company's
domestic and foreign credit facilities had outstanding principal balances of
approximately $9.2 million and $4.8 million, respectively.
The Company has incurred recurring losses which totaled approximately $12.6
million, $12.5 million, and $6.9 million during the years ended December 31,
2003, 2002 and 2001, respectively, and has a working capital deficiency of
approximately $121.6 million at December 31, 2003. The recurring losses are
primarily the result of substantial debt service obligations because the Company
is highly leveraged and its current cash flows from operations have been
insufficient to service the interest expense on its existing debt obligations.
The Company was not in compliance with certain covenants under its revolving
credit facilities as of December 31, 2003, resulting in a cross default under
the terms of the Company's Senior Notes. In addition, the Company failed to make
its $6.6 million semi-annual interest payment for the Senior Notes due on April
1, 2004. Following expiration of the 30-day grace period provided for in the
indenture, the Senior Notes were in default and the Company has subsequently
received a notice of default from the Trustee for the Senior Notes. However, on
April 26, 2004, the Company entered into a forbearance agreement with the
holders of a majority interest ("Majority Holders") of the Senior Notes which
instructed the Trustee for the Senior Notes to refrain from taking any action
with respect to the default prior to May 31, 2004. On May 27, 2004, June 14,
2004, and July 13, 2004, this agreement was amended to extend the forbearance
agreement until July 23, 2004.
The Company has been negotiating with the Majority Holders for a restructuring
of the Senior Notes. The restructuring would provide for an exchange of new
notes and a cash payment for all of the outstanding Senior Notes. The
restructuring agreement has not been finalized and the Company cannot assure
that it will be able to enter into a restructuring agreement or successfully
complete a restructuring.
On May 1, 2004, June 1, 2004, June 15, 2004 and July 13, 2004, the Company and
Bank One, N.A. entered into forbearance agreements under which Bank One has
agreed not to exercise its rights with respect to the defaults, including the
right to demand payment, under the revolving credit facility for a stated period
while the Company negotiates a possible restructuring of its Senior Notes. On
July 12, 2004, the Company received a commitment letter from Bank One for a
waiver of the covenant violations and an extension of the revolving credit
facility. The extension is contingent upon the completion of a restructuring of
the Company's Senior Notes. The Company is currently in discussions with the
lenders under its existing foreign revolving credit facilities to extend such
credit facilities that have matured or are expiring in 2004.
The credit facility of the Company's United Kingdom subsidiary matured on March
31, 2004. The subsidiary was not in compliance with its debt covenants at
December 31, 2003. However, the subsidiary's principal lender has continued to
allow the subsidiary to borrow under the facility to date at a reduced line of
2.25 million British pounds sterling. The subsidiary is currently in
negotiations for a new agreement. The credit facility of the Company's
Australian subsidiary also matured on March 31, 2004. The subsidiary's principal
lender has continued to allow the subsidiary to borrow under the facility to
date and the subsidiary is currently in negotiations for a new agreement.
At December 31, 2003, the Company had cash and cash equivalents of approximately
$0.9 million and approximately $6.4 million available for use under its domestic
credit facility, representing approximately $7.3 million of liquidity. At this
time the ability of the Company to successfully extend its domestic and foreign
10
revolving credit facilities maturing in 2004 and to restructure the terms of the
Senior Notes is uncertain and subject to substantial risk. In the event that the
Company is not successful in the restructuring of its Senior Notes, the Company
may seek to implement the restructuring of its Senior Notes through a plan of
reorganization under Chapter 11 of the Bankruptcy Code.
The Company did not have any material purchase obligations at December 31, 2003.
The table below summarizes the Company's contractual payments under debt
agreements, capital leases, and operating leases as of December 31, 2003:
Payments due by period
---------------------------------------------------------------
Less than
(dollars in thousands) Total 1 year 1 - 3 years 3 - 5 years
--------------- --------------- --------------- ---------------
Notes payable $ 13,960 $ 13,960 $ - $ -
Senior Notes in default 120,000 120,000 - -
Other long-term debt obligations 2,417 2,417 - -
Capital leases 577 159 366 52
Operating leases 2,465 696 1,002 767
Pension obligations 1,043 1,043 - -
--------------- --------------- --------------- ---------------
Total $ 140,462 $ 138,275 $ 1,368 $ 819
=============== =============== =============== ===============
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 increases to stockholder's equity of approximately
$0.8 million and $0.4 million for the years ended December 31, 2003 and 2002,
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. The Company evaluates its estimates
on an on-going basis. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Our significant accounting policies are described in Note B to
the consolidated financial statements included in Item 8 of this Form 10-K.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
Revenue Recognition
The Company recognizes revenue, other than from long-term contracts of its
foreign subsidiaries, at the time of shipment. On long-term contracts of its
foreign subsidiaries, revenues are accounted for using the percentage of
completion method based on the cost of partial shipments and on the ratio of
11
actual costs incurred to date to the estimated total costs to complete. Net
sales include external freight billed to customers with the related costs
incurred recorded in cost of sales.
Warranty Costs
New manufactured products sold are generally covered by a warranty for periods
ranging from six months to two years. Goods purchased for resale normally carry
the warranty of the respective manufacturer. The Company records a warranty
reserve for estimated costs to satisfy warranty obligations. The Company's
estimate of costs to service its warranty obligations is based on historical
experience and expectation of future conditions. To the extent the Company
experiences changes in warranty claims activity or costs associated with
servicing those claims, its warranty accrual is adjusted accordingly.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
based upon its evaluations of the probability of collection. The Company
evaluates the allowance for doubtful accounts based on the length of time the
receivables are past due, historical collection experience, and customer
credit-worthiness. In cases where the Company is aware of circumstances that may
affect the collectibility of accounts receivable from a specific customer, the
Company may record a specific allowance against the amount due from such
customer.
Inventories
The Company's inventories consists of raw material, manufactured and purchased
parts, and work in process. Since inventory records are maintained on a job
order basis, it is not practical to segregate inventories into their major
classes. The value of a portion of the inventories is determined using the
last-in, first-out ("LIFO") method with the remainder determined using the
first-in, first-out ("FIFO") method. The Company provides allowances for excess
and obsolete inventory based on the age and quality of its products.
Goodwill
The Company accounts for its goodwill under SFAS No. 142, "Goodwill and Other
Intangible Assets," and accordingly performs annual impairment tests of
goodwill. The goodwill impairment test is a two-step process, which requires
management to make judgments in determining what assumptions to use in the
calculation. The first step of the process consists of estimating the fair value
of each reporting unit to determine if there is impairment and the second step
of the process consists of determining the amounts of the impairment. The
Company engages the assistance of independent valuation experts to assist in
performing the annual impairment test.
The Company uses the combination of two valuation methodologies, a market
approach and an income approach to develop its estimate of the fair value of the
reporting units. These two methodologies use a number of factors and estimates
that depend on, among other factors, projected future operating results and
future cash flows, estimated cash flow periods, terminal values based on
anticipated growth rates, discount rates, and market place data of comparable
companies.
The results of the annual impairment tests completed in the fourth quarters of
2003 and 2002 indicated that there was no impairment. Changes in any of the
assumptions underlying these estimates may result in a future impairment of
goodwill.
Employee Benefit Plans
The Company accounts for its defined benefit pension plan using Statement of
Financial Accounting Standards No. 87, ("SFAS No. 87"). Annual pension benefits
under the Company's defined benefit plan are calculated by third party actuaries
using standard actuarial methodologies. Significant assumptions used in the
valuation of pension benefits include expected return on plan assets, discount
12
rate, and any plan amendments. As a result of declines in interest rates and the
market value of the Company's defined benefit pension plan assets in recent
years, the Company has an additional minimum pension liability at December 31,
2003 of $1.8 million. This additional liability has had no impact on earnings.
For further details regarding the Company's defined benefit pension plan, see
Note G to the consolidated financial statements.
Deferred Taxes
Deferred income taxes reflect the timing differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Tax credits are recognized as a reduction
of income tax expense in the year the credit arises. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount more
likely than not to be realized. At December 31, 2003, the Company had a
valuation allowance of approximately $12.7 million against its deferred tax
assets.
New Accounting Pronouncements
There are no new accounting pronouncements that have not been adopted which
impact the Company.
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.
In addition, the Company's future results of operations, financial condition,
liquidity and capital resources could be materially adversely affected by, among
other things, economic and political uncertainties or prolonged economic
recession.
13
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, 2003 and 2002.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
Fair
Value,
As of December 31, 2003: 2004 2005 2006 2007 2008 Thereafter Total 12/31/03
- ------------------------------------------------------------------------------------------------------------
Long-Term Obligations,
including current
portion and Senior
Notes in default
Fixed Rate $ 122,401 $ - $ - $ - $ - $ - $ 122,401 $ 26,413
Average interest rate 11%
Variable Rate $ 16 $ - $ - $ - $ - $ - $ 16 $ 16
Average interest rate 12%
Fair
Value,
As of December 31, 2002: 2003 2004 2005 2006 2007 Thereafter Total 12/31/02
- ------------------------------------------------------------------------------------------------------------
Long-Term Obligations,
including current
portion
Fixed Rate $ 921 $ 1,668 $ 95 $- $ 120,000 $ - $ 122,684 $ 68,779
Average interest rate 11% 11% 11% 11% 11%
Variable Rate $ 12 $ 12 $- $- $- $ - $ 24 $ 24
Average interest rate 19% 19%
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.
14
Item 8. Financial Statements and Supplemental Data
The Report of Independent Registered Public Accounting Firm and the Consolidated
Financial Statements of Continental Global Group, Inc. for each of the three
years in the period ended December 31, 2003 are included herein.
15
Report of Independent Registered Public Accounting Firm
To the Stockholder
Continental Global Group, Inc.
We have audited the accompanying consolidated balance sheets of Continental
Global Group, Inc. as of December 31, 2003 and 2002, 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, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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, 2003 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with U.S. generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
Continental Global Group, Inc. will continue as a going concern. As more fully
described in Note A, the Company has incurred recurring losses, has a working
capital deficiency, has not complied with certain covenants of its revolving
credit facilities, and does not have the ability to make the required interest
payment on the Senior Notes. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note A. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
As explained in Note C to the financial statements, effective January 1, 2002,
the Company changed its method of accounting for goodwill.
/s/ Ernst & Young LLP
Cleveland, Ohio
June 7, 2004, except for the fourth
and sixth paragraphs of Note A
and the eigth paragraph of Note E,
as to which the date is July 13, 2004
16
Continental Global Group, Inc.
Consolidated Balance Sheets
December 31
-----------------------------------------
2003 2002
Assets:
Current assets:
Cash and cash equivalents $ 850,727 $ 5,635,042
Accounts receivable, less allowance for doubtful accounts of
$987,873 in 2003 and $1,053,588 in 2002 32,225,793 25,634,100
Inventories 24,534,307 27,752,503
Deferred income taxes 264,770 25,893
Other current assets 942,179 1,959,369
-------------------- --------------------
Total current assets 58,817,776 61,006,907
Property, plant and equipment 32,269,483 28,681,527
Less accumulated depreciation 19,355,298 15,800,206
-------------------- --------------------
12,914,185 12,881,321
Goodwill 13,863,527 13,155,269
Deferred financing costs 1,689,682 2,209,584
Other assets 477,631 414,400
-------------------- --------------------
$ 87,762,801 $ 89,667,481
==================== ====================
Liabilities and Stockholder's Equity (Deficit):
Current liabilities:
Notes payable $ 13,960,369 $ 11,285,602
Trade accounts payable 24,703,137 20,039,041
Accrued compensation and employee benefits 7,422,648 4,974,168
Accrued interest on senior notes 3,300,000 3,300,000
Other accrued liabilities 8,520,662 6,696,110
Current maturities of long-term obligations 2,546,055 1,010,032
Senior Notes in default 120,000,000 -
-------------------- --------------------
Total current liabilities 180,452,871 47,304,953
Pension obligations 340,836 2,645,640
Deferred income taxes 874,783 561,420
Senior Notes - 120,000,000
Other long-term obligations, less current maturities 369,449 1,876,928
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 (90,287,074) (77,654,146)
Accumulated other comprehensive loss (5,981,752) (7,061,002)
-------------------- --------------------
(94,275,138) (82,721,460)
-------------------- --------------------
$ 87,762,801 $ 89,667,481
==================== ====================
See notes to consolidated financial statements.
17
Continental Global Group, Inc.
Consolidated Statements of Operations
Year ended December 31
----------------------------------------------------------
2003 2002 2001
Net sales $ 194,340,515 $ 184,975,955 $ 192,710,850
Cost of products sold 167,664,729 155,201,713 162,555,442
------------------- ------------------ -------------------
Gross profit 26,675,786 29,774,242 30,155,408
Operating expenses:
Selling and engineering 12,927,482 13,085,675 12,540,052
General and administrative 9,880,673 8,816,821 8,726,441
Management fee 299,793 469,922 556,933
Amortization expense 26,361 116,651 634,068
Restructuring charges 66,796 639,909 -
------------------- ------------------ -------------------
Total operating expenses 23,201,105 23,128,978 22,457,494
------------------- ------------------ -------------------
Operating income 3,474,681 6,645,264 7,697,914
Other expenses:
Interest expense 15,280,049 15,407,469 15,786,984
Interest income (15,483) (187,870) (638,791)
Miscellaneous, net 838,678 114,165 963,205
------------------- ------------------ -------------------
Total other expenses 16,103,244 15,333,764 16,111,398
------------------- ------------------ -------------------
Loss before income taxes and cumulative effect of
change in accounting principle (12,628,563) (8,688,500) (8,413,484)
Income tax expense (benefit) 4,365 3,846 (1,497,651)
------------------- ------------------ -------------------
Loss before cumulative effect of change in
accounting principle (12,632,928) (8,692,346) (6,915,833)
Cumulative effect of change in accounting principle - (3,850,000) -
------------------- ------------------ -------------------
Net loss $ (12,632,928) $ (12,542,346) $ (6,915,833)
=================== ================== ===================
See notes to consolidated financial statements.
18
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 January 1, 2001 $ 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)
Comprehensive loss:
Net loss - - (12,542,346) - (12,542,346)
Foreign currency
translation adjustment - - - 445,061 445,061
Minimum pension liability
adjustment, net of tax - - - (1,779,515) (1,779,515)
---------------
Total comprehensive loss (13,876,800)
----------- ------------ --------------- ---------------- ---------------
Balance at December 31, 2002 1 1,993,687 (77,654,146) (7,061,002) (82,721,460)
Comprehensive loss:
Net loss - - (12,632,928) - (12,632,928)
Foreign currency
translation adjustment - - - 846,625 846,625
Minimum pension liability
adjustment, net of tax - - - 213,413 213,413
Unrealized gains on cash
flow hedges, net of tax - - - 145,753 145,753
Reclassification into
earnings - - - (126,541) (126,541)
---------------
Total comprehensive loss (11,553,678)
----------- ------------ --------------- ---------------- ---------------
Balance at December 31, 2003 $ 1 $ 1,993,687 $(90,287,074) $ (5,981,752) $ (94,275,138)
=========== ============ =============== ================ ===============
See notes to consolidated financial statements.
19
Continental Global Group, Inc.
Consolidated Statements of Cash Flows
Year ended December 31
---------------------------------------------------
2003 2002 2001
Operating activities:
Net loss $ (12,632,928) $ (12,542,346) $ (6,915,833)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization 2,221,376 2,283,227 2,883,820
Amortization of deferred financing costs 519,902 519,903 519,902
Cumulative effect of change in accounting principle - 3,850,000 -
Deferred income taxes - - (1,502,074)
Provision for doubtful accounts 458,112 453,738 1,004,071
Loss (gain) on disposal of assets 26,225 26,042 (18,161)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (3,997,121) 7,361,266 (5,370,516)
Decrease (increase) in inventories 4,034,911 (728,139) 2,162,960
Decrease (increase) in other assets 1,134,700 (50,606) (1,175,723)
Increase (decrease) in accounts payable and other
liabilities 2,840,807 (2,733,479) 8,679,654
---------------- ----------------- ----------------
Net cash provided by (used in) operating activities (5,394,016) (1,560,394) 268,100
---------------- ----------------- ----------------
Investing activities:
Purchases of property, plant, and equipment (PP&E) (781,090) (1,280,466) (957,761)
Proceeds from disposals of PP&E 92,701 53,943 112,851
Acquisition of business - - (1,606,806)
---------------- ----------------- ----------------
Net cash used in investing activities (688,389) (1,226,523) (2,451,716)
---------------- ----------------- ----------------
Financing activities:
Net increase (decrease) in borrowings on notes payable 1,838,409 (5,380,102) 1,046,982
Principal payments on long-term obligations (589,756) (902,671) (1,026,035)
---------------- ----------------- ----------------
Net cash provided by (used in) financing activities 1,248,653 (6,282,773) 20,947
Effect of exchange rate changes on cash 49,437 32,926 (107,474)
---------------- ----------------- ----------------
Decrease in cash and cash equivalents (4,784,315) (9,036,764) (2,270,143)
Cash and cash equivalents at beginning of year 5,635,042 14,671,806 16,941,949
---------------- ----------------- ----------------
Cash and cash equivalents at end of year $ 850,727 $ 5,635,042 $ 14,671,806
================ ================= ================
See notes to consolidated financial statements.
20
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
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.
The Company has incurred recurring losses which totaled approximately
$12,633,000, $12,542,000, and $6,916,000 during the years ended December 31,
2003, 2002 and 2001, respectively, and has a working capital deficiency of
approximately $121,635,000 at December 31, 2003. The recurring losses are
primarily the result of substantial debt service obligations because the Company
is highly leveraged and its current cash flows from operations have been
insufficient to service the interest expense on its existing debt obligations.
The Company was not in compliance with certain covenants under its revolving
credit facilities as of December 31, 2003, resulting in a cross default under
the terms of the Company's Senior Notes. In addition, the Company failed to make
its $6,600,000 semi-annual interest payment for the Senior Notes due on April 1,
2004. Following expiration of the 30-day grace period provided for in the
indenture, the Senior Notes were in default and the Company has subsequently
received a notice of default from the Trustee for the Senior Notes. However, on
April 26, 2004, the Company entered into a forbearance agreement with the
holders of a majority interest ("Majority Holders") of the Senior Notes which
instructed the Trustee for the Senior Notes to refrain from taking any action
with respect to the default prior to May 31, 2004. On May 27, 2004, June 14,
2004, and July 13, 2004, this agreement was amended to extend the forbearance
agreement until July 23, 2004.
The Company has been negotiating with the Majority Holders for a restructuring
of the Senior Notes. The restructuring would provide for an exchange of new
notes and a cash payment for all of the outstanding Senior Notes. The
restructuring agreement has not been finalized and the Company cannot assure
that it will be able to enter into a restructuring agreement or successfully
complete a restructuring.
On May 1, 2004, June 1, 2004, June 15, 2004, and July 13, 2004, the Company and
Bank One, N.A. entered into forbearance agreements under which Bank One has
agreed not to exercise its rights with respect to the defaults, including the
right to demand payment, under the revolving credit facility for a stated period
while the Company negotiates a possible restructuring of its Senior Notes. On
July 12, 2004, the Company received a commitment letter from Bank One for a
waiver of the covenant violations and an extension of the revolving credit
facility. The extension is contingent upon the completion of a restructuring of
the Company's Senior Notes. The Company is currently in discussions with the
lenders under its existing foreign revolving credit facilities to extend such
credit facilities that have matured or are expiring in 2004.
21
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
A. Organization - Continued
At this time the ability of the Company to successfully extend its domestic and
foreign revolving credit facilities maturing in 2004 and to restructure the
terms of the Senior Notes is uncertain and subject to substantial risk. In the
event that the Company is not successful in the restructuring of its Senior
Notes, the Company may seek to implement the restructuring of its Senior Notes
through a plan of reorganization under Chapter 11 of the Bankruptcy Code.
The consolidated financial statements do not include any adjustments to reflect
any possible future effects of a restructuring of the Senior Notes.
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, other than from long-term contracts of its
foreign subsidiaries, at the time of shipment. On long-term contracts of its
foreign subsidiaries, which represent less than 20% of 2003 consolidated
revenues, revenues are accounted for using the percentage of completion method
based on the cost of partial shipments and on the ratio of actual costs incurred
to date to the estimated total costs to complete. Net sales include external
freight billed to customers with the related costs incurred recorded 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.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
based upon its evaluations of the probability of collection. The Company
evaluates the allowance for doubtful accounts based on the length of time the
receivables are past due, historical collection experience, customer
credit-worthiness, and other circumstances that may impair the collectibility of
accounts receivable from specific customers.
22
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
B. Significant Accounting Policies - Continued
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 57% and 63% of
inventories at December 31, 2003 and 2002, 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 $1,316,000 and $1,457,000 at December 31,
2003 and 2002, respectively.
Impairment of Long-Lived Assets
Long-lived assets, other than goodwill, are reviewed for impairment when events
or changes in circumstances indicate that the carrying amount of the asset, or
related groups of assets, may not be recoverable. The asset would be considered
impaired when the Company's estimate of future 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.
Warranty Costs
The Company's products are generally covered by warranties against defects in
material and workmanship for periods up to two years from the date of sale or
installation of the product. The Company records a provision for estimated
warranty cost based on historical experience and expectations of future
conditions and continuously assesses the adequacy of its product warranty
accrual and makes adjustments as needed. A summary of accrued warranty costs
follows:
2003 2002 2001
----------------- ---------------- -----------------
Balance as of January 1 $ 1,678,002 $ 768,313 $ 778,003
Provision for warranties 931,835 1,293,518 810,272
Settlements made during the year (1,427,369) (420,257) (813,378)
Effect of exchange rate changes 92,933 36,428 (6,584)
----------------- ---------------- -----------------
Balance as of December 31 $ 1,275,401 $ 1,678,002 $ 768,313
================= ================ =================
Restructuring Charges
The Company incurred restructuring charges of approximately $67,000 and $640,000
in 2003 and 2002 related to changes in staffing and production requirements in
its domestic operations. These charges consist primarily of severance costs
associated with a reduction in personnel which occurred in 2002 and 2003. As
part of this restructuring, in 2002 the Company developed a plan to discontinue
the manufacturing operations in certain of its domestic facilities and merge
these operations with other existing facilities. The process of merging the
domestic operations began in 2003. As of December 31, 2003, the Company has paid
approximately $235,000 of the charges incurred to date, with the majority of the
remainder expected to be paid by 2008. However, in the fourth quarter of 2003,
the Company hired a third-party consultant to re-evaluate the restructuring plan
and make further recommendations. These recommendations are currently under
review by the Company's management and board of directors. The additional cost
of this restructuring has not been determined.
23
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
B. Significant Accounting Policies - Continued
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
approximately $613,000, $644,000, and $635,000 in advertising costs for the
years ended December 31, 2003, 2002, and 2001, respectively.
Income Taxes
The provision for income taxes is calculated in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the recognition of deferred income
taxes using the liability method. The Company's operations will be included in
the consolidated income tax returns filed by N.E.S. Investment Co. Income tax
expense in the Company's consolidated statement of operations is calculated on a
separate tax return basis as if the Company had operated as a stand-alone
entity.
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 loss. The effect on the
statements of operations of currency transaction gains and losses was not
material for all years presented.
Derivative Financial Instruments
The Company recognizes all derivative financial instruments as either assets or
liabilities at fair value. Derivative instruments that are not hedges are
adjusted to fair value through earnings. Changes in the 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 earnings. 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 earnings. The ineffective
portions of a derivative instrument's change in fair value are immediately
recognized in earnings.
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.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss at December 31 consisted of the following:
2003 2002 2001
---------------- ----------------- ----------------
Foreign currency translation adjustments $ (4,434,862) $ (5,281,487) $ (5,726,548)
Minimum pension liability adjustments (net of tax) (1,566,102) (1,779,515) -
Change in fair value of cash flow hedges (net of
tax) 19,212 - -
---------------- ----------------- ----------------
$ (5,981,752) $ (7,061,002) $ (5,726,548)
================ ================= ================
24
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
B. Significant Accounting Policies - Continued
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
There are no new accounting pronouncements that have not been adopted which
impact the Company.
C. Goodwill and Other Intangibles
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective January 1, 2002. Under SFAS No. 142, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but are subject to
annual impairment tests. Other intangible assets will continue to be amortized
over their useful lives.
Goodwill and other intangibles that have indefinite lives will be tested for
impairment at least annually, using a two step process. The first step
identifies if there is impairment using a fair-value-based test and the second
step determines the amount of the impairment. The Company engaged the assistance
of independent valuation experts to perform the initial analysis as of January
1, 2002 as well as the annual impairment tests. The impairment tests were
conducted using both a discounted cash flow valuation model, incorporating an
appropriate discount rate for the risks associated with the reporting unit, and
a market approach based on comparable public companies guidelines. Based on
findings from the initial impairment test as of January 1, 2002, the Company
concluded that the carrying value of its Australian reporting unit (part of the
Company's conveyor equipment segment) exceeded its estimated fair value and the
Company recorded a non-cash impairment write-down for goodwill of $3,850,000.
This transition adjustment was reported as a cumulative effect of a change in
accounting principle. The results of the annual impairment tests completed in
the fourth quarter of 2003 and 2002 indicated that there was no further
impairment.
The following table reflects the consolidated results adjusted as though the
adoption of SFAS No. 142 had occurred on January 1, 2001:
Year ended December 31
2003 2002 2001
-------------------------------------------------------
Reported net loss $ (12,632,928) $ (12,542,346) $ (6,915,833)
Goodwill amortization, net of tax - - 430,997
-------------------------------------------------------
Adjusted net loss (12,632,928) (12,542,346) (6,484,836)
Cumulative effect of change in accounting principle - 3,850,000 -
-------------------------------------------------------
Adjusted loss before cumulative effect of a change
in accounting principle $ (12,632,928) $ (8,692,346) $ (6,484,836)
=======================================================
25
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
C. Goodwill and Other Intangibles - Continued
The carrying amounts and related accumulated amortization balances of the
Company's other intangible assets as of December 31 are listed below:
2003 2002
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------------- ----------------- ---------------- -----------------
Amortized intangible assets $ 506,468 $ (425,608) $ 496,022 $ (388,802)
Other intangible assets 276,659 - 289,502 -
The change in goodwill reflected on the balance sheet from December 31, 2002 to
December 31, 2003 resulted from foreign currency translation adjustments. All of
the Company's goodwill relates to the conveyor equipment segment. Other
intangible assets consist primarily of intangible assets related to a minimum
pension liability for the Company's pension plan. Estimated amortization expense
related to other intangible assets for each of the next five fiscal years is:
2004 $ 26,360
2005 26,360
2006 17,117
2007 4,176
2008 4,176
----------------
Total $ 78,189
================
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, 2003 and 2002 are as
follows:
2003 2002
----------------- -----------------
Land and improvements $ 1,283,233 $ 1,115,896
Buildings and improvements 7,303,338 6,844,542
Machinery and equipment 23,682,912 20,721,089
----------------- -----------------
$ 32,269,483 $ 28,681,527
================= =================
Depreciation expense for the years ended December 31, 2003, 2002, and 2001 was
$2,195,015, $2,166,576, and $2,249,752, 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 39 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.
26
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
E. Financing Arrangements
Long-term obligations consist of the following:
As of December 31
----------------------------------
2003 2002
Senior Notes, interest at 11% payable semi-annually in arrears, due
2007, in default as of December 31, 2003 $ 120,000,000 $ 120,000,000
Note payable by CCE for purchase of Colorado facility; interest rate of
7.445%; payable in monthly installments with $1,255,336 due on 5/1/04 1,292,547 1,369,192
Note payable by CCE for idler equipment; interest rate of 8.845%;
payable in monthly installments through 6/13/05 472,009 834,426
Term loan payable by Australian subsidiary; interest rate of 8.25%;
maturity date of 3/28/04 637,075 480,250
Note payable by South African subsidiary for purchase of computer
system; variable interest rate (11.55% and 18.5% at December 31, 2003 and
2002, respectively); payable in monthly installments through
12/31/04 15,732 23,773
Obligations under capital leases 498,141 179,319
----------------- ----------------
122,915,504 122,886,960
Less current maturities, including Senior Notes in default as of
December 31, 2003 122,546,055 1,010,032
----------------- ----------------
$ 369,449 $ 121,876,928
================= ================
Maturities of long-term obligations are as follows:
2004 $ 122,546,055
2005 131,993
2006 193,715
2007 41,094
2008 2,647
------------------
$ 122,915,504
==================
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 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.
As of December 31, 2003, the Company was in violation and continues to be in
violation of certain financial covenants in its domestic and foreign revolving
credit facilities, as more fully described below. The failure to comply with
these agreements after consideration of a 60-day grace period represents an
event of default under the Senior Notes. Accordingly, the Senior Notes have been
recorded as current liabilities in the December 31, 2003 Consolidated Balance
Sheet.
27
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
E. Financing Arrangements - Continued
The Company has not made its April 1, 2004 interest payment of $6,600,000. On
May 25, 2004 and June 4, 2004, the Company received notices of events of default
pertaining to its failure to pay its required interest payment and its failure
to file its Form 10-K for the year ended December 31, 2003 and Form 10-Q for the
three months ended March 31, 2004 with the Securities and Exchange Commission
within the required filing periods.
CCE, GCC and Bank One, Cleveland, NA are parties to a credit facility and
security agreement dated July 25, 2002, as amended August 12, 2003, ("Revolving
Credit Facility") pursuant to which Bank One has provided CCE and GCC jointly
with a line of credit of $26 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 various restrictive
covenants including financial covenants related to debt coverage and tangible
net worth. The Company was in violation of certain of these covenants pertaining
to debt coverage, tangible net worth, advances to subsidiaries, and delivery of
audited financial statements at December 31, 2003. As described in Note A, the
Company and Bank One have entered into forbearance agreements under which Bank
One has agreed not to exercise its rights with respect to the defaults,
including the right to demand payment, under the Revolving Credit Facility for a
stated period of time while the Company restructures its Senior Notes. These
agreements also extend the maturity date of the Company's 7.445% Note Payable
due May 1, 2004 to July 31, 2004. In addition, the Company could be required to
pay fees up to 1% of the maximum amount available under the Revolving Credit
Facility.
The Revolving Credit Facility matures on July 31, 2004, and bears interest at a
fluctuating rate based on the prime rate. At December 31, 2003, approximately
$6.4 million was available for use. At December 31, 2003 and 2002, the Company
had an outstanding balance under the Revolving Credit Facility of $9,144,546 and
$8,074,381, respectively. The weighted average interest rate for this facility
was 4.1% and 4.7% in 2003 and 2002, respectively. There were approximately
$3,474,000 and $1,485,000 of letters of credit outstanding at December 31, 2003
and 2002, respectively.
On July 12, 2004, the Company received a commitment letter from Bank One for a
waiver of the covenant violations and an extension of the revolving credit
facility through July 31, 2006. The extension is contingent upon the completion
of a restructuring of the Company's Senior Notes. The commitment letter provides
for a $30 million revolving line of credit and a $5 million secured term loan
with a maturity date of July 31, 2006.
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 matured on March 31, 2004.
However, the subsidiary's principal lender has continued to allow the subsidiary
to borrow under the facility to date. At December 31, 2003, approximately $0.1
million (Australian dollars) was available for use. The outstanding balance
under this facility was $2,153,409 and $1,459,837 (U.S.$) at December 31, 2003
and 2002, respectively. The weighted average interest rate for this facility was
11.3% and 11.1% in 2003 and 2002, respectively.
28
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
E. Financing Arrangements - Continued
At December 31, 2003, the Company's United Kingdom subsidiary had a revolving
credit facility with the Bank of Scotland of 3.3 million British pounds
sterling; in January 2004, the facility was reduced to 2.25 million British
pounds sterling. The facility is secured by certain assets of the subsidiary,
bears interest at a fluctuating rate of 2.1% above the Bank of Scotland base
rate, and matured on March 31, 2004. The subsidiary was not in compliance with
its debt covenants at December 31, 2003; however, the subsidiary's principal
lender has continued to allow the subsidiary to borrow under the facility to
date. At December 31, 2003, approximately 2.1 million British pounds was
available for use. The outstanding balance under this facility was $2,070,234
and $1,276,661 (U.S.$) at December 31, 2003 and 2002, respectively. The weighted
average interest rate for this facility was 5.9% and 6.0% in 2003 and 2002,
respectively.
The Company's South African subsidiary has a credit and overdraft facility with
the Standard Bank of South Africa of 6.0 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, 2003, approximately 2.1
million rand was available for use. The outstanding balance under this facility
was $592,180 and $474,723 (U.S.$) at December 31, 2003 and 2002, respectively.
The weighted average interest rate for this facility was 11.5% and 18.0% in 2003
and 2002, respectively.
During 2003, 2002, and 2001, the Company paid interest of $14,745,103,
$14,901,698, and $15,309,325, respectively.
29
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
F. Leasing Arrangements
The Company's subsidiaries have numerous capital leases for certain machinery
and equipment. Amortization of these assets is included in depreciation expense
in the statement of operations. Capital lease obligations of approximately
$401,000 and $146,000 were incurred in 2003 and 2002, respectively. The gross
amount of assets recorded under capital leases and the related accumulated
amortization at December 31, 2003 and 2002 are as follows:
2003 2002
----------------- -----------------
Asset Balances:
Land $ - $ 20,000
Buildings - 380,000
Machinery and Equipment 658,491 329,665
----------------- -----------------
$ 658,491 $ 729,665
================= =================
Accumulated Amortization:
Buildings $ - $ 111,587
Machinery and Equipment 90,820 158,754
----------------- -----------------
$ 90,820 $ 270,341
================= =================
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, 2003, 2002, and 2001 was approximately
$2,535,000, $2,032,000, and $2,110,000, 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
--------------- ---------------
2004 $ 159,006 $ 695,583
2005 157,593 523,961
2006 208,036 478,552
2007 49,145 458,554
2008 3,168 308,571
--------------- ---------------
Total minimum lease payments 576,948 $ 2,465,221
===============
Amounts representing interest 78,807
---------------
Present value of net minimum lease payments
(including current portion of $128,692) $ 498,141
===============
30
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
G. Employee Benefit Plans
CCE maintains a defined benefit plan covering all union hourly-paid employees at
its Winfield plant. The actuarial computations use the "projected unit credit
cost method" and a measurement date of December 31. 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 following table sets
forth the accumulated benefit obligation, change in benefit obligation, change
in plan assets, funded status and amounts recognized in the Consolidated Balance
Sheets as of December 31, 2003 and 2002, of the Company's defined benefit plan.
2003 2002
------------------- -------------------
Accumulated benefit obligation $ 7,506,886 $ 6,686,880
=================== ===================
Change in benefit obligation:
Benefit obligation at beginning of year $ 6,686,880 $ 5,261,840
Service cost 186,868 175,383
Interest cost 441,605 419,914
Amendments - 507,974
Actuarial loss 438,887 553,183
Benefits paid (247,354) (231,414)
------------------- -------------------
Benefit obligation at end of year 7,506,886 6,686,880
------------------- -------------------
Change in plan assets:
Fair value of plan assets at beginning of year 4,041,240 4,784,976
Actual return on plan assets 895,067 (512,322)
Benefits paid (247,354) (231,414)
------------------- -------------------
Fair value of plan assets at end of year 4,688,953 4,041,240
------------------- -------------------
Funded status:
Funded status of the plan (underfunded) (2,817,933) (2,645,640)
Unrecognized prior service cost 261,669 278,202
Unrecognized net actuarial loss 1,566,102 1,779,515
------------------- -------------------
Net amount recognized $ (990,162) $ (587,923)
=================== ===================
Balance sheet amounts:
Accrued benefit cost $(2,817,933) $ (2,645,640)
Intangible asset 261,669 278,202
Accumulated other comprehensive loss 1,566,102 1,779,515
------------------- -------------------
Net amount recognized $ (990,162) $ (587,923)
=================== ===================
31
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
G. Employee Benefit Plans - Continued
The components of net periodic benefit cost for the years ended December 31 are
as follows:
2003 2002 2001
------------------- ------------------- -------------------
Service cost $ 186,868 $ 175,383 $ 142,029
Interest cost 441,605 419,914 353,906
Expected return on plan assets (313,271) (372,615) (409,604)
Amortization of prior service cost 16,533 16,533 (14,216)
Amortization of transition asset - - (2,706)
Recognized loss 70,504 - -
------------------- ------------------- -------------------
Net periodic benefit cost $ 402,239 $ 239,215 $ 69,409
=================== =================== ===================
The weighted-average assumptions used to determine benefit obligations at
December 31 were:
2003 2002
---------------- ---------------
Discount rate 6.25% 6.75%
Expected long-term return on plan assets 8.00 8.00
The weighted-average assumptions used to determine the net periodic benefit cost
for the years ended December 31 were:
2003 2002 2001
----------------- ---------------- -----------------
Discount rate 6.75% 7.25% 7.25%
Expected long-term return on plan assets 8.00 8.00 8.00
To determine the expected long-term rate of return on plan assets, the Company
considered the long-term investment objectives of the plan, the target asset
allocation of the pension portfolio, as well as the future expectations for
returns for each asset category. This resulted in the selection of the 8.00%
expected long-term rate of return on plan assets assumption for 2003 and 2002.
The Company's investment policies and strategies for plan assets are to achieve
the greatest return consistent with the fiduciary character of the plan and to
maintain a level of liquidity that is sufficient to meet the need for timely
payment of benefits. The goals of the investment manager include minimizing risk
and achieving growth in principal value so that the purchasing power of such
value is maintained with respect to the rate of inflation. The Company has
established target asset allocations for plan assets of 60% equity securities
and 40% fixed income securities. The Company's defined benefit pension plan
weighted-average asset allocations at December 31, by asset category, are as
follows:
Asset Category: 2003 2002
----------------- ----------------
Equity securities 68% 59%
Debt securities 18 21
Guaranteed income fund 14 20
----------------- ----------------
Total 100% 100%
================= ================
32
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
G. Employee Benefit Plans - Continued
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. The Company expects
to contribute approximately $2,477,000 to its pension plan in 2004.
CCE also maintains a defined contribution plan covering substantially all
salaried and non-union hourly employees. CCE expenses annual contributions
(approximately $571,000, $588,000, and $589,000 in 2003, 2002, and 2001,
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 100% of their compensation.
CCE will match (approximately $297,000, $329,000, and $335,000, in 2003, 2002,
and 2001, 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. Expense for
the year ended December 31, 2002 was approximately $41,000, which was equal to
1% of eligible employee compensation in 2002. No contribution was made for the
years ended December 31, 2003 and 2001.
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, 2003, 2002, and 2001, the
subsidiaries contributed approximately $824,000, $601,000, and $495,000,
respectively, to the plans.
In 2002, the Company implemented a Phantom Stock Plan (the "Plan") whereby
officers and certain employees may be granted phantom stock units, which vest
over a certain period of time as determined for each grant. At December 31,
2003, the Company had an accrual for the value of vested phantom stock units
granted for approximately $42,000.
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 $300,000, $470,000, and $557,000, for
the years ended December 31, 2003, 2002, and 2001, respectively. At December 31,
2003, the Company had an accrual for management fees owed to Nesco, Inc. of
approximately $177,000. At December 31, 2002, the Company had a prepaid expense
for overpayment of management fees of approximately $123,000.
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. At December 31, 2003 and 2002, the
Company had an accrual for income tax payments owed to NES Group, Inc. of
approximately $20,000.
33
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
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, 2003 included a foreign currency forward contract with a contractual amount
of $180,000. The contract matured during January 2004 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 and was included in other current assets on the balance
sheet.
The carrying amounts and fair values of the Company's financial instruments at
December 31 are as follows:
2003 2002
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ---------------- ---------------- ----------------
(in thousands)
Cash and cash equivalents $ 851 $ 851 $ 5,635 $ 5,635
Accounts receivable 32,226 32,226 25,634 25,634
Accounts payable (24,703) (24,703) (20,039) (20,039)
Notes payable (13,960) (13,960) (11,286) (11,286)
Long-term debt, including current maturities and
Senior Notes in default at December 31, 2003 (122,417) (26,429) (122,708) (68,803)
Foreign currency forward contract 30 30 - -
Accounts receivable from customers in the coal mining industry were
approximately 36% and 42% of net accounts receivable at December 31, 2003 and
2002, 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 $458,000, $454,000 and
$1,004,000 in 2003, 2002, and 2001, respectively. Accounts written off, net of
recoveries, were approximately $645,000, $342,000, and $1,578,000 in 2003, 2002,
and 2001, respectively.
34
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
J. Income Taxes
Income taxes are provided using the liability method in accordance with SFAS No.
109, "Accounting for Income Taxes." 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.
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's United Kingdom subsidiary paid income taxes of approximately $4,000
and $5,000 in 2003 and 2002, respectively. The Company did not pay any income
taxes during the year ended December 31, 2001.
Income (loss) before income taxes for the years ended December 31 consists of
the following:
2003 2002 2001
--------------------- -------------------- --------------------
Domestic $ (10,018,995) $ (8,788,660) $ (4,030,236)
Foreign (2,609,568) 100,160 (4,383,248)
--------------------- -------------------- --------------------
$ (12,628,563) $ (8,688,500) $ (8,413,484)
===================== ==================== ====================
Income taxes for the years ended December 31 are summarized as follows:
2003 2002 2001
------------------- ------------------ -------------------
Current:
Domestic:
Federal $ - $ - $ -
State and local - - -
Foreign 4,365 3,846 4,423
------------------- ------------------ -------------------
4,365 3,846 4,423
Deferred:
Domestic:
Federal - - (1,314,314)
State and local - - (187,760)
Foreign - - -
------------------- ------------------ -------------------
- - (1,502,074)
------------------- ------------------ -------------------
$ 4,365 $ 3,846 $ (1,497,651)
=================== ================== ===================
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. At December 31, 2003, the
Company had operating loss carryforwards of approximately $22,900,000 in the
United States which begin expiring in 2020. Additionally, the Company had
operating loss carryforwards of approximately $17,500,000 pertaining to its
foreign subsidiaries that may be carried forward indefinitely. The Company has
established a valuation allowance of approximately $12,700,000 at December 31,
2003 due to the uncertainty of realizing certain tax attribute carryforwards and
other deferred tax assets. Based upon management's assessment, it is more likely
than not that the net deferred tax assets will not be realized.
35
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
J. Income Taxes - Continued
Significant components of the Company's deferred income taxes at December 31 are
as follows:
2003 2002
---------------- -----------------
Deferred tax assets:
Operating accruals $ 2,132,730 $ 2,035,005
Net operating loss carryforwards 14,647,485 10,409,340
Valuation allowance (12,658,216) (8,333,199)
---------------- -----------------
4,121,999 4,111,146
Deferred tax liabilities:
Inventories (1,949,214) (2,009,112)
Property, plant, and equipment and goodwill (2,782,798) (2,637,561)
---------------- -----------------
(4,732,012) (4,646,673)
---------------- -----------------
Net deferred tax liability $ (610,013) $ (535,527)
================ =================
A reconciliation of income taxes computed at the statutory rate to the effective
rate for the years ended December 31 follows:
2003 2002 2001
----------------- ----------------- -----------------
Income taxes at the United States statutory rate (35.0)% (35.0)% (35.0)%
State income taxes, net of federal benefit (3.9) (5.1) (2.3)
Losses without tax benefits 38.5 39.5 18.3
Other - net 0.4 0.6 1.2
----------------- ----------------- -----------------
0.0% 0.0% (17.8)%
================= ================= =================
36
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
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 87%, 83%, and 90% of net sales for 2003, 2002, and 2001,
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 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.
37
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
K. Segment Information - Continued
Year ended December 31
2003 2002 2001
------------------ ----------------- -----------------
(in thousands)
Net sales:
Conveyor equipment $ 169,524 $ 154,473 $ 174,413
Manufactured housing products 23,944 29,633 17,198
Other 873 870 1,100
------------------ ----------------- -----------------
Total net sales $ 194,341 $ 184,976 $ 192,711
================== ================= =================
Depreciation and amortization:
Conveyor equipment $ 2,060 $ 2,023 $ 2,136
Manufactured housing products 134 137 109
Other 1 6 5
Amortization expense 26 117 634
------------------ ----------------- -----------------
Total depreciation and amortization $ 2,221 $ 2,283 $ 2,884
================== ================= =================
Segment operating income (loss):
Conveyor equipment $ 3,777 $ 7,058 $ 9,702
Manufactured housing products 1,421 1,862 291
Other 277 68 (147)
------------------ ----------------- -----------------
Segment operating income 5,475 8,988 9,846
Management fee 300 470 557
Amortization expense 26 117 634
Restructuring charge 67 640 -
Corporate expense 1,607 1,116 957
------------------ ----------------- -----------------
Total operating income 3,475 6,645 7,698
Interest expense 15,280 15,407 15,787
Interest income (15) (187) (639)
Miscellaneous, net 839 114 963
------------------ ----------------- -----------------
Loss before income taxes $ (12,629) $ (8,689) $ (8,413)
================== ================= =================
Segment assets:
Conveyor equipment $ 79,580 $ 75,902 $ 80,219
Manufactured housing products 5,885 6,482 5,374
Other 361 431 572
------------------ ----------------- -----------------
Total segment assets 85,826 82,815 86,165
Corporate assets 1,937 6,852 22,607
------------------ ----------------- -----------------
Total assets $ 87,763 $ 89,667 $ 108,772
================== ================= =================
Capital expenditures:
Conveyor equipment $ 770 $ 1,012 $ 898
Manufactured housing products 11 267 56
Other - 1 4
------------------ ----------------- -----------------
Total capital expenditures $ 781 $ 1,280 $ 958
================== ================= =================
38
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
K. Segment Information - Continued
Geographic Area Data
Year ended December 31
2003 2002 2001
------------------ ------------------ -----------------
(in thousands)
Net sales:
United States $ 114,332 $ 124,588 $ 142,276
Australia 35,348 23,974 18,037
United Kingdom 39,089 32,437 27,417
Other countries 5,817 3,977 5,005
Eliminations - transfers (245) - (24)
------------------ ------------------ -----------------
Total net sales $ 194,341 $ 184,976 $ 192,711
================== ================== =================
Operating income (loss):
United States $ 5,020 $ 5,958 $ 11,518
Australia 746 349 (4,090)
United Kingdom (2,080) 493 635
Other countries (254) (190) (403)
Eliminations 43 35 38
------------------ ------------------ -----------------
Total operating income $ 3,475 $ 6,645 $ 7,698
================== ================== =================
Long lived assets:
United States $ 6,448 $ 7,213 $ 7,764
Australia 3,282 2,721 2,757
United Kingdom 2,819 2,667 2,376
Other countries 365 280 197
------------------ ------------------ -----------------
Total long lived assets $ 12,914 $ 12,881 $ 13,094
================== ================== =================
Net sales are attributed to countries based on the location of the subsidiary
where the sale occurs.
The Company did not have sales to any single customer which exceeded 10% of the
Company's total net sales in 2003, 2002 and 2001.
39
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
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 2003 and 2002 and consolidating
statements of operations and cash flow statements for 2003, 2002, and 2001 for
the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are
as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
December 31, 2003: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 114 $ 734 $ 3 $ - $ 851
Accounts receivable, net - 17,951 14,338 (63) 32,226
Inventories - 19,925 4,609 - 24,534
Deferred income taxes 81 - 372 (188) 265
Other current assets 51 647 2,061 (1,817) 942
-------------------------------------------------------------------------------
Total current assets 246 39,257 21,383 (2,068) 58,818
Property, plant, and
equipment, net - 8,182 4,732 - 12,914
Goodwill - 13,031 832 - 13,863
Investment in subsidiaries 60,009 21,520 - (81,529) -
Deferred financing costs 1,690 - - - 1,690
Other assets 12,285 2,023 - (13,830) 478
-------------------------------------------------------------------------------
Total assets $ 74,230 $ 84,013 $ 26,947 $ (97,427) $ 87,763
===============================================================================
Current liabilities:
Notes payable $ - $ 11,298 $ 3,393 $ (731) $ 13,960
Trade accounts payable 34 12,922 11,810 (63) 24,703
Accrued compensation and
employee benefits 42 6,006 1,375 - 7,423
Accrued interest 3,300 - - - 3,300
Other accrued liabilities 878 5,737 4,441 (2,535) 8,521
Current maturities of
long-term obligations - 2,456 90 - 2,546
Senior Notes in default 120,000 - - - 120,000
-------------------------------------------------------------------------------
Total current liabilities 124,254 38,419 21,109 (3,329) 180,453
Pension obligation - 341 - - 341
Deferred income taxes - 12,860 - (11,985) 875
Other long-term obligations - 196 1,131 (958) 369
Stockholder's equity
(deficit) (50,024) 32,197 4,707 (81,155) (94,275)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 74,230 $ 84,013 $ 26,947 $ (97,427) $ 87,763
===============================================================================
40
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
L. Guarantor and Non-Guarantor Subsidiaries - Continued
Combined Combined
Guarantor Non-Guarantor
December 31, 2002: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 4,524 $ 1,109 $ 2 $ - $ 5,635
Accounts receivable, net - 16,469 9,165 - 25,634
Inventories - 23,479 4,274 - 27,753
Deferred income taxes 81 - 280 (335) 26
Other current assets 37 1,095 827 - 1,959
-------------------------------------------------------------------------------
Total current assets 4,642 42,152 14,548 (335) 61,007
Property, plant, and
equipment, net - 8,713 4,168 - 12,881
Goodwill - 12,528 627 - 13,155
Investment in subsidiaries 60,009 18,118 - (78,127) -
Deferred financing costs 2,210 - - - 2,210
Other assets 9,817 1,833 - (11,236) 414
-------------------------------------------------------------------------------
Total assets $ 76,678 $ 83,344 $ 19,343 $ (89,698) $ 89,667
===============================================================================
Current liabilities:
Notes payable $ - $ 9,536 $ 2,139 $ (389) $ 11,286
Trade accounts payable 16 12,404 7,619 - 20,039
Accrued compensation and
employee benefits 42 3,957 975 - 4,974
Accrued interest 3,300 - - - 3,300
Other accrued liabilities 564 4,247 2,613 (728) 6,696
Current maturities of
long-term obligations - 963 47 - 1,010
-------------------------------------------------------------------------------
Total current liabilities 3,922 31,107 13,393 (1,117) 47,305
Pension obligation - 2,645 - - 2,645
Deferred income taxes - 10,253 - (9,692) 561
Senior Notes 120,000 - - - 120,000
Other long-term obligations - 1,766 985 (874) 1,877
Stockholder's equity
(deficit) (47,244) 37,573 4,965 (78,015) (82,721)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 76,678 $ 83,344 $ 19,343 $ (89,698) $ 89,667
===============================================================================
41
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
L. Guarantor and Non-Guarantor Subsidiaries - Continued
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2003:
Net sales $ - $ 149,680 $ 44,906 $ (245) $ 194,341
Cost of products sold - 125,581 42,329 (245) 167,665
------------------------------------------------------------------------
Gross profit - 24,099 2,577 - 26,676
Total operating expenses 1,434 16,899 4,868 - 23,201
------------------------------------------------------------------------
Operating income (loss) (1,434) 7,200 (2,291) - 3,475
Interest expense 13,731 1,200 349 - 15,280
Interest income (15) - - - (15)
Miscellaneous, net 473 607 (241) - 839
------------------------------------------------------------------------
Income (loss) before income taxes (15,623) 5,393 (2,399) - (12,629)
Income tax expense (benefit) (2,294) 2,294 4 - 4
------------------------------------------------------------------------
Net income (loss) $ (13,329) $ 3,099 $ (2,403) $ - $ (12,633)
========================================================================
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2002:
Net sales $ - $ 148,561 $ 36,415 $ - $ 184,976
Cost of products sold - 123,391 31,811 - 155,202
------------------------------------------------------------------------
Gross profit - 25,170 4,604 - 29,774
Total operating expenses 1,151 17,712 4,266 - 23,129
------------------------------------------------------------------------
Operating income (loss) (1,151) 7,458 338 - 6,645
Interest expense 13,759 1,541 107 - 15,407
Interest income (187) - - - (187)
Miscellaneous, net 13 126 (25) - 114
------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (14,736) 5,791 256 - (8,689)
Income tax expense (benefit) (2,436) 2,436 3 - 3
------------------------------------------------------------------------
Income (loss) before cumulative effect
of change in accounting principle (12,300) 3,355 253 - (8,692)
Cumulative effect of change in
accounting principle - (3,850) - - (3,850)
------------------------------------------------------------------------
Net income (loss) $ (12,300) $ (495) $ 253 $ - $ (12,542)
========================================================================
42
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
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 28,213 (19) 162,556
------------------------------------------------------------------------
Gross profit - 25,946 4,209 - 30,155
Total operating expenses 1,005 17,512 3,940 - 22,457
------------------------------------------------------------------------
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, 2003:
Net cash provided by (used in)
operating activities $ (14,785) $ 8,332 $ 1,068 $ (9) $ (5,394)
Investing activities:
Purchases of property, plant and
equipment - (454) (327) - (781)
Proceeds from disposals of PP&E - 90 3 - 93
------------------------------------------------------------------------
Net cash used in investing activities - (364) (324) - (688)
Financing activities:
Net increase in borrowings on notes
payable - 1,257 581 - 1,838
Principal payments on long-term
obligations - (512) (77) - (589)
Distributions for interest on
senior notes 10,550 (10,550) - - -
Intercompany loan activity (175) 1,415 (1,240) - -
------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 10,375 (8,390) (736) - 1,249
Exchange rate changes on cash - 47 (7) 9 49
------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (4,410) (375) 1 - (4,784)
Cash and cash equivalents at beginning
of year 4,524 1,109 2 - 5,635
------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 114 $ 734 $ 3 $ - $ 851
========================================================================
43
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
L. Guarantor and Non-Guarantor Subsidiaries - Continued
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2002:
Net cash provided by (used in)
operating activities $ (14,449) $ 13,191 $ (303) $ 1 $ (1,560)
Investing activities:
Purchases of property, plant and
equipment - (736) (544) - (1,280)
Proceeds from disposals of PP&E - 36 17 - 53
------------------------------------------------------------------------
Net cash used in investing activities - (700) (527) - (1,227)
Financing activities:
Net increase (decrease) in
borrowings on notes payable - (6,559) 1,179 - (5,380)
Principal payments on long-term
obligations - (874) (29) - (903)
Distributions for interest on
senior notes 6,550 (6,550) - - -
Intercompany loan activity (125) 1,119 (994) - -
------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 6,425 (12,864) 156 - (6,283)
Exchange rate changes on cash - (36) 70 (1) 33
------------------------------------------------------------------------
Decrease in cash and cash equivalents (8,024) (409) (604) - (9,037)
Cash and cash equivalents at beginning
of year 12,548 1,518 606 - 14,672
------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 4,524 $ 1,109 $ 2 $ - $ 5,635
========================================================================
44
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2003
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
senior notes 10,223 (10,223) - - -
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
========================================================================
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.
45
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
As of December 31, 2003, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There were no significant changes in the Company's internal controls
over financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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 March 15, 2004:
Name Age Position with the Company
Robert W. Hale 57 President and Chief Executive Officer
James L. Smothers 47 Vice President
Jimmy L. Dickinson 61 Vice President and Chief Financial Officer
Edward F. Crawford 64 Director
Donald F. Hastings 75 Director
C. Wesley McDonald 63 Director
Robert J. Tomsich 73 Director
James W. Wert 57 Director
Set forth below is a brief description of the business experience of each
director and executive officer of the Company.
Mr. Hale was appointed President and Chief Executive Officer of the Company
effective November 4, 2002. Before joining the Company, Mr. Hale had served as
President and Chief Executive Officer of Joy Global's P&H Mining Equipment
Company since 1995 and prior to that time, he served as Vice President and
General Manager of P&H Material Handling.
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 of Continental Conveyor &
Equipment Company 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.
46
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. 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. Wert has served as a Director of the Company since its inception. In
addition, Mr. Wert is President of Clanco Management Corporation, an investment
advisory firm located in Cleveland, Ohio. Prior to his service with the Company,
he held a number of executive management positions including Chief Financial
Officer and Chief Investment Officer over his twenty year career with KeyCorp, a
financial services company based in Cleveland, Ohio, and its predecessor,
Society Corporation. He serves on the Board of Directors of Park-Ohio Holdings,
Inc., Cleveland, Ohio, and Marlin Leasing Corporation, Philadelphia,
Pennsylvania. Since 1998, Mr. Wert has also served as a Director of Paragon
Corporate Holdings, Inc., a sister corporation of the Company.
Audit Committee Membership
The Company does not have a separately designated audit committee. The Company's
entire board of directors acts as the audit committee.
Audit Committee Financial Expert
The Company's board of directors has determined that the Company does not have
an audit committee financial expert as defined by Item 401(h) of Regulation S-K
of the Securities Exchange Act of 1934.
47
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)
Robert W. Hale, President and Chief 2003 $ 458,400 $ 250,000 $ 58,282
Executive Officer 2002 76,400 - -
Jimmy L. Dickinson, Vice President and 2003 149,985 15,978 11,824
Chief Financial Officer 2002 146,700 44,443 18,257
2001 142,410 48,869 13,990
James Smothers, Vice President 2003 156,825 15,892 10,083
2002 151,125 18,588 9,597
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, the Continental Conveyor & Equipment Retirement
Plan for Salaried and Hourly (Non-Union) Employees at Salyersville,
Kentucky, and the Continental Global Group, Inc. Phantom Stock Plan. 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 received $18,750 for serving as a director of the
Company during the year. In addition, Mr. Crawford and Mr. Wert received an
additional $37,500 for serving on a special committee. Also, the Company will
reimburse such director for their travel and other expenses incurred in
connection with attending meetings of the Board of Directors.
48
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 June 30, 2004:
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
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 2003 under the Management
Agreement was $299,793. 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.
49
Item 14. Principal Accountant Fees and Services
Audit Fees
The aggregate fees for professional services rendered by Ernst & Young LLP in
connection with the audit of the Company's annual financial statements for the
fiscal years ended December 31, 2003 and 2002, for review of the financial
information included in the Company's quarterly reports on Form 10-Q for such
fiscal years, and in connection with statutory and regulatory filings for such
fiscal years, were approximately $454,000 and $359,000, respectively.
Tax Fees
The aggregate fees for services rendered by Ernst & Young LLP in connection with
income tax compliance, tax advice and tax planning for the fiscal years ended
December 31, 2003 and 2002 were approximately $22,000 and $19,000, respectively.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services
The audit committee has considered whether the provision of non-audit services
by the auditors is compatible with maintaining the independence of the auditors.
All auditing services and permitted non-audit services (including the fees and
terms thereof) to be performed for the Company by its independent auditor must
be pre-approved by the audit committee. All audit and non-audit services
provided by the independent auditors during 2003 were approved by the audit
committee.
50
PART IV
Item 15. 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 registered public
accounting firm dated June 7, 2004, except for the fourth
and sixth paragraphs of Note A and the sixth paragraph of
Note E, as to which the date is July 13, 2004, are included
in Item 8.
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets at December 31, 2003 and 2002.
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2003.
Consolidated Statements of Stockholder's Equity (Deficit)
for each of the three years in the period ended December 31,
2003.
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2003.
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.
51
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 19th day of July, 2004.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ Robert W. Hale
Name: Robert W. Hale
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/ Robert W. Hale President and Chief Executive Officer July 19, 2004
- -----------------------------------------
Robert W. Hale (Principal Executive Officer)
/s/ Jimmy L. Dickinson Vice President and Chief Financial Officer July 19, 2004
- -----------------------------------------
Jimmy L. Dickinson (Principal Financial Officer and Principal
Accounting Officer)
/s/ Edward F. Crawford Director July 19, 2004
- -----------------------------------------
Edward F. Crawford
/s/ Donald F. Hastings Director July 19, 2004
- -----------------------------------------
Donald F. Hastings
/s/ C. Wesley McDonald Director July 19, 2004
- -----------------------------------------
C. Wesley McDonald
/s/ Robert J. Tomsich Director July 19, 2004
- -----------------------------------------
Robert J. Tomsich
/s/ James W. Wert Director July 19, 2004
- -----------------------------------------
James W. Wert
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.
52
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 Amended and Restated Credit Facility and Security Agreement,
dated as of July 25, 2002, among Bank One, NA, Continental
Conveyor & Equipment Company, and Goodman Conveyor Company.
(Filed as Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended September 30, 2002, and is incorporated herein
by reference.)
10.2 Management Agreement, dated as of April 1, 1997, between *
Continental Global Group, Inc. and Nesco, Inc.
10.3 Employment Agreement, effective November 4, 2002, between
Continental Global Group, Inc. and Robert Hale. (Filed as
Exhibit 10.3 to the Company's Form 10-K for the year ended
December 31, 2002, and is incorporated herein by reference.)
10.4 Continental Global Group, Inc. Phantom Stock Plan dated as
of November 4, 2002. (Filed as Exhibit 10.4 to the Company's
Form 10-K for the year ended December 31, 2002, and is
incorporated herein by reference.)
10.5 Second Amendment to Amended and Restated Credit Facility and
Security Agreement, effective as of August 12, 2003, by and
among Bank One, NA, Continental Conveyor & Equipment Company,
and Goodman Conveyor Company. (Filed as Exhibit 10.5 to the
Company's Form 10-Q for the quarter ended June 30, 2003, and
is incorporated herein by reference.)
10.6 Forbearance Agreement, effective as of April 26, 2004, by and
among Continental Global Group, Inc., N.E.S. Investment Co.,
and CFSC Wayland Advisers, Inc.
10.7 Forbearance Agreement, effective as of May 1, 2004, by and
among Bank One, NA, Continental Conveyor & Equipment Company,
and Goodman Conveyor Company.
10.8 Amendment 1, dated as of May 27, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers,
Inc.
10.9 Forbearance Agreement, effective as of June 1, 2004, by and
among Bank One, NA, Continental Conveyor & Equipment Company,
and Goodman Conveyor Company.
10.10 Amendment 2, dated as of June 14, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers,
Inc.
10.11 Forbearance Agreement, effective as of June 15, 2004, by and
among Bank One, NA, Continental Conveyor & Equipment Company,
and Goodman Conveyor Company.
10.12 Commitment Letter, dated as of July 12, 2004, from Bank One, NA
to Continental Conveyor & Equipment Company, Goodman Conveyor
Company, and Continental Global Group, Inc.
10.13 Amendment 3, dated as of July 13, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and Wayzata Advisers LLC.
10.14 Forbearance Agreement, effective as of July 13, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company.
12 Statement regarding computation of ratio of earnings to fixed
charges
21 Subsidiaries of registrant
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications of the Chief Executive Officer and Chief
Financial Officer pursuant to 18, U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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.