ITEM 1. BUSINESS
GENERAL
Continental Global Group, Inc. (hereinafter referred to as the "Company"), through its subsidiaries, is primarily engaged in the manufacture and distribution of bulk material handling and replacement equipment, primarily for use in the mining industry. The Company is a holding company organized under the Delaware General Corporation law and conducts all of its business through its direct and indirect operating subsidiaries. The Company's direct operating subsidiaries are Continental Conveyor and Equipment Company ("Continental") and Goodman Conveyor Company ("Goodman"). The Company also owns indirectly all of the capital stock of Continental Conveyor & Equipment Pty. Ltd. ("CCE Pty. Ltd."), an Australian holding company that owns all of the capital stock of four Australian operating companies. The Company also owns indirectly all of the capital stock of Continental Conveyor Ltd., a U.K. operating company, and Continental MECO (Pty.) Ltd., a South African operating company. During 1998, the Company purchased the majority of the assets and assumed certain liabilities constituting a majority of the operations of Huwood International ("Huwood"), a U.K. belt conveyor business. The operations of the Company's existing U.K. facilities were merged with the Huwood operations. During 2001, the Company acquired certain assets in Alabama from Lippert Tire & Axle, Inc. The Company's existing Alabama operations of its manufactured housing products segment have been combined with the Lippert operations.
While the Company primarily manages its operations on a geographical basis, the Company operates in two principal business segments: conveyor equipment and manufactured housing products. The conveyor equipment business, which comprised approximately 90.5%, 87.9%, and 84.7% of net sales for 2001, 2000, and 1999, respectively, markets its products in four main business areas. The mining equipment business area includes the design, manufacture and testing (and, outside the United States, installation and maintenance) of complete belt conveyor systems and components for mining application primarily in the coal industry. The conveyor components business area manufactures and sells components for conveyor systems primarily for resale through distributor networks. The engineered systems business area uses specialized project management and engineering skills to combine mining equipment products, purchased equipment, steel fabrication and other outside services for sale as complete conveyor equipment systems that meet specific customer requirements. The bulk conveyor equipment business area designs and manufactures a complete range of conveyor equipment sold to transport bulk materials, such as cement, lime, food products and industrial waste.
The Company's manufactured housing products business, which comprised approximately 8.9%, 10.8%, and 14.2% of net sales for 2001, 2000, and 1999, respectively, manufactures and/or refurbishes axle components sold directly to the manufactured housing industry. As part of this segment, the Company also sells mounted tire and rim assemblies to the manufactured housing industry. Included in the other category is primarily the manufacture and sale of air filtration equipment for use in enclosed environments, principally in the textile industry. The manufacturing requirements for these products are generally compatible with conveyor equipment production and thus maximize utilization of the Company's manufacturing facilities for its primary products.
Approximately 73.8% or $142.3 million of the Company's 2001 net sales were generated in the United States, 14.2% or $27.4 million in the United Kingdom, 9.4% or $18.0 million in Australia, and 2.6% or $5.0 million in other countries.
CUSTOMERS
The Company's conveyor equipment business segment markets its products worldwide through a variety of marketing channels with different customer focuses. The Company sells its mining equipment and bulk conveyor equipment products and services primarily to mining companies and other end users, original equipment manufacturers and engineering contractors. The Company sells its conveyor components products to original equipment manufacturers, engineering contractors and replacement part distributors, primarily in the following industries: aggregates, such as rock, gravel, glass and cement materials; coal processing and mining; pulp, paper and forest products; above ground hard rock and mineral mining; food and grains; and environmental, sewage and waste water treatment. The Company sells its engineered systems products and services primarily to contractors and end users for applications in coal processing and mining, pulp and paper, composting systems, grain handling, cement products, open-pit mining and tunneling. The Company markets its manufactured housing products business segment directly to the manufactured housing industry in the United States.
For the years ended December 31, 2001 and 2000, the Company did not have sales to any single customer which exceeded 10% of the Company's total net sales. Net sales to the Company's top five conveyor equipment customers represented approximately 30.5% and 21.6% of the Company's total net sales for 2001 and 2000, respectively. Although the Company has preferred supplier arrangements with a number of its major customers pursuant to which the Company and such customers effectively operate on a long-term basis, such arrangements generally are not governed by long-term contracts and may be terminated by either party at any time. A substantial portion of the Company's sales is on a project by project basis.
For the year ended December 31, 1999, sales to the Company's largest customer, Massey Energy Company, constituted approximately 11.4% of the Company's total net sales.
COMPETITION
The Company faces strong competition throughout the world in all of its product lines. The various markets in which the Company competes are fragmented into a large number of competitors, many of which are smaller businesses that operate in relatively specialized or niche areas. In addition, a number of the Company's competitors have financial and other resources greater than those of the Company. Competitive considerations vary for each business area, but generally include quality, price, reliability, availability and service.
SUPPLIERS
The primary raw materials used by the Company to produce its products are steel and miscellaneous purchased parts such as bearings, electric motors and gear reducers. All materials are readily available in the marketplace. The Company is not dependent upon any single supplier for any materials essential to its business or that are not otherwise commercially available. The Company has been able to obtain an adequate supply of raw materials and no shortage of raw materials is currently anticipated.
BACKLOG
Backlog at December 31, 2001, was $41.3 million, an increase of $5.5 million, or 15% from $35.8 million at December 31, 2000. Backlog at the Company's foreign subsidiaries increased by $10.6 million and backlog at the Company's domestic subsidiaries decreased by $5.1 million. The Company expects to ship approximately 90% of its backlog in 2002.
EMPLOYEES
As of December 31, 2001, the Company had approximately 1,270 employees, approximately 800 of whom were located in the United States. Approximately 200 of the employees at the Company's Winfield, Alabama facility are represented by The United Steelworkers of America Union and are covered by a four year collective bargaining agreement that expires in 2002. Approximately 190 of the production employees at the Company's United Kingdom and South African facilities are covered by annual collective bargaining agreements that expire in 2002. The Company expects negotiations for new agreements to begin in the second quarter of 2002. The Company has not experienced any work stoppages since 1971 and believes its relations with its employees are good.
ENVIRONMENTAL AND HEALTH AND SAFETY MATTERS
The Company is subject to a variety of environmental standards imposed by federal, state, local and foreign environmental laws and regulations. The Company is also subject to the federal Occupational Health and Safety Act and similar foreign and state laws. The Company periodically reviews its procedures and policies for compliance with environmental and health and safety laws and regulations and believes that it is in substantial compliance with all such material laws and regulations applicable to its operations. Historically the costs of compliance with environmental, health and safety requirements have not been material to the Company.
ITEM 2.
ITEM 2. PROPERTIES
The Company conducts its operations through the following primary facilities:
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(1) Expires in October 2003. The Company holds an option to buy such property at the end of the lease term. (2) Expires in July 2002. The Company holds four successive one-year options to renew the lease and an option to buy such property under certain conditions during the term of each successive lease. (3) Current lease is month to month. (4) Expires in August 2003 with option to renew for additional five years with option to purchase at market value. (5) Expires in May 2003. The Company has an option to renew for two years until May 2005.
In addition to the foregoing facilities, the Company has a number of leased warehouses and field sales offices in various locations throughout the United States and Australia. The Company believes that substantially all of its property and equipment is in a condition appropriate for its operations and that it has sufficient capacity to meet its current operational needs. Each of the Company-owned United States facilities is subject to a mortgage securing payment of indebtedness under the Revolving Credit Facility. In addition, the Company's owned facilities in Australia are subject to mortgage securing payment of indebtedness under the Australian Revolving Credit Facility. See Note E, "Financing Arrangements," to the Consolidated Financial Statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceeding which it believes could have a material adverse effect upon its results of operations or financial condition, or to any other pending legal proceedings other than ordinary, routine litigation incidental to its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 2001, N.E.S. Investment Co., the Company's sole stockholder, by written consent, elected all members of the Company's Board of Directors. See Part III, Item 10.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company is a direct wholly-owned subsidiary of N.E.S. Investment Co. There is no established public trading market for the Company's common stock. As of March 15, 2002, the Company had one stockholder. The Company paid no dividends in 2001 or 2000. See Note E, "Financing Arrangements", to the Consolidated Financial Statements, Part II, Item 8, for limitations on dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial and operating data of the Company for each of the five years in the period ended December 31, 2001. The data should be read in conjunction with the Consolidated Financial Statements and related Notes included in this report on Form 10-K.
(1) Reflects the acquisition during 1998 of Huwood.
(2) Reflects the acquisitions during 1997 of BCE, Hewitt-Robins, and MECO.
(3) EBITDA represents earnings before extraordinary items, interest, taxes, depreciation, amortization, restructuring charges, and bond repurchase expenses. EBITDA has been included because the Company uses it as one means of analyzing its ability to service its debt, the Company's lenders use it for the purpose of analyzing the Company's performance with respect to the credit agreement and the Indenture, and the Company understands that it is used by certain investors as a measure of a Company's historical ability to service debt.
(4) Earnings consist of income before income taxes plus fixed charges. Fixed charges consist of interest expense, amortization of deferred financing costs and one-third of rent expense from operating leases, which management believes is a reasonable approximation of an interest factor. Earnings were inadequate to cover fixed charges in the years ended December 31, 2001, 2000 and 1999 by $8,413, $11,200, and $8,728, respectively.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, on a comparative basis, certain income statement data as a percentage of net sales for the fiscal years ended December 31, 2001, 2000, and 1999.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NET SALES Net sales increased $24.5 million, or 15%, from $168.2 million in 2000 to $192.7 million in 2001, primarily due to an increase in sales volume. Net sales in the Company's domestic operations of the conveyor equipment segment increased $16.7 million primarily due to increased spending by the Company's mining equipment customers for replacement equipment and capital projects. Net sales in the Company's foreign operations of the conveyor equipment segment increased $9.8 million, primarily due to increases in the Company's United Kingdom and South African subsidiaries of $8.6 million and $1.4 million, respectively. The increase in the United Kingdom resulted from increases in sales of standard manufactured products and complete conveyor systems. The increase in South Africa was due to an increase in the standard manufactured products business. Net sales in the Company's manufactured housing segment decreased $0.9 million, or 5% from $18.1 million in 2000 to $17.2 million in 2001. While production and shipments in the manufactured housing industry decreased 23% from 2000 to 2001, sales in the Company's manufactured housing segment were favorably impacted as a result of the acquisition from Lippert Tire & Axle Inc. in July 2001. Net sales in the Company's other segment decreased $1.1 million.
GROSS PROFIT Gross profit increased $3.3 million, or 12%, from $26.5 million in 2000 to $29.8 million in 2001. Gross profit in the domestic operations of the conveyor equipment segment increased $2.0 million primarily due to the increased sales volume in the mining equipment business. Gross profit in the foreign operations of the conveyor equipment segment increased $1.0 million. Gross profit in the Company's United Kingdom and South African subsidiaries increased $3.5 million and $0.2 million, respectively, due to the increase in sales volume and improved profit margins. This was offset by a decrease in gross profit in the Company's Australian subsidiary of $2.7 million. As a result of a physical inventory conducted by the Company's Australian subsidiary in July 2001, the Company incurred a charge to cost of products sold of approximately $0.8 million; in the fourth quarter, due to the bankruptcy of a large insurance company, the Company wrote off approximately $0.5 million of a previously approved claim which the Company may not be able to collect. The decline in gross profit in Australia was also a result of lower margins on contracts. Gross profit in the manufactured housing segment increased $0.6 million due to improved profit margins resulting from the acquisition in July 2001 and the subsequent consolidation of the existing operations into the acquired facility. Gross profit in the Company's other segment decreased $0.3 million.
SG&A EXPENSES SG&A expenses decreased $0.6 million, or 3%, from $21.5 million in 2000 to $20.9 million in 2001. The decrease is primarily the result of the favorable impact of the restructuring initiatives in the foreign operations of the Company's conveyor equipment segment.
OPERATING INCOME Operating income increased $4.1 million, or 114%, from $3.6 million in 2000 to $7.7 million in 2001. The increase in operating income is the result of the $3.3 million increase in gross profit combined with reductions in SG&A expenses and restructuring charges of $0.6 million and $0.4 million, respectively, offset by an increase in management fees of $0.2 million.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
NET SALES Net sales decreased $45.8 million, or 21%, from $214.0 million in 1999 to $168.2 million in 2000. The Company's domestic operations of the conveyor equipment segment accounted for $8.9 million of the decrease due to lower capital spending by the Company's major customers in the coal industry. Net sales in the foreign operations of the conveyor equipment segment decreased $24.7 million, primarily due to a decrease in sales of $21.0 million at the Company's Australian subsidiary. This decrease was primarily due to the completion of major projects in 1999 that were not repeated in 2000, combined with the soft market in the coal industry. Net sales in the Company's United Kingdom and South African subsidiaries decreased $3.7 million. Net sales in the Company's manufactured housing products segment decreased $12.2 million due to the decrease by its customers in the production and shipment of manufactured homes. This decrease in the production and shipment of manufactured homes is primarily the result of excess finished home inventory and the negative impact that the tight credit market has had on the purchase of new manufactured homes.
GROSS PROFIT Gross profit decreased $5.2 million, or 16%, from $31.7 million in 1999 to $26.5 million in 2000. Gross profit in the Company's domestic conveyor equipment segment decreased $4.1 million due to lower sales volume. Gross profit in the United Kingdom and South African operations decreased $2.7 million due to lower sales volumes and lower margins on project contracts. This decrease was favorably offset by a $2.3 million increase in gross profit in the Australian operations due to improved margins. The improved margins were the result of the restructuring initiatives combined with the completion of the major projects in 1999 and a greater concentration on value added products. Gross profit in the manufactured housing products segment decreased $0.7 million due to the lower sales volume.
SG&A EXPENSES SG&A expenses decreased $2.8 million, or 12%, from $24.3 million in 1999 to $21.5 million in 2000. The decrease primarily occurred in the Company's conveyor equipment segment due to the favorable impact of the restructuring initiatives in the foreign subsidiaries and the reduction in domestic manpower that occurred in the third quarter of 1999.
OPERATING INCOME Operating income decreased $1.7 million, or 32%, from $5.3 million in 1999 to $3.6 million in 2000. The decrease is the result of the $5.2 million decrease in gross profit, offset by the favorable reduction of $2.8 million in SG&A expenses, $0.1 million in management fees, and $0.6 million in restructuring charges.
RESTRUCTURING CHARGES In 1998, the Company executed a plan to close certain Australian manufacturing facilities and merge the operations with other existing facilities; in 1999 and 2000, the Company made further reductions in office staff and facilities. In the United Kingdom, following the acquisition of Huwood International (Huwood) in August 1998, the Company consolidated its existing operations and facilities into the Huwood operations. In connection with these plans, the Company incurred restructuring charges of approximately $0.5 million and $1.1 million in 2000 and 1999, respectively, related to its Australian and United Kingdom subsidiaries. Total restructuring charges incurred to date total approximately $2.7 million. These restructuring charges consisted primarily of severance of approximately 220 employees and relocation costs. As of December 31, 2001, all accruals for restructuring charges have been fully utilized.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $0.3 million, $(6.5) million, and $(12.3) million for the years ending December 31, 2001, 2000, and 1999, respectively. The increase in operating cash flows from 2000 to 2001 is a direct result of the decrease in the net loss. Net cash provided by operating activities in 2001 represents the current year net loss of $6.9 million offset by significant non-cash expenses of $2.9 million and a net decrease in operating assets of $4.3 million. Net cash used in operating activities in 2000 represents the net loss offset by significant non-cash expenses, such as depreciation, amortization, deferred income taxes, and provisions for doubtful accounts. Net cash used in operating activities in 1999 was the result of the net loss and a net increase in operating assets.
Net cash used in investing activities was $2.5 million, $1.4 million, and $2.9 million for the years ending December 31, 2001, 2000 and 1999, respectively. Net cash used in investing activities in 2001 includes net purchases of property, plant, and equipment of $0.9 million and the acquisition from Lippert Tire & Axle for $1.6 million. Net cash used in investing activities in 2000 and 1999 represents net purchases of property, plant, and equipment.
Net cash provided by financing activities was $0.02 million, $6.5 million, and $7.0 million for the years ending December 31, 2001, 2000, and 1999, respectively. Net cash provided by financing activities in 2001 represents a net increase in borrowings on notes payable of $1.05 million offset by principal payments on long-term obligations of $1.03 million.
Net cash provided by financing activities in 2000 was the result of a $7.4 million net increase in borrowings on notes payable and $0.7 million in proceeds from long-term obligations, offset by $1.6 million of principal payments on long-term obligations. The Company's domestic subsidiaries account for $6.3 million of the net increase in borrowings on notes payable. The proceeds from long-term obligations were used for the construction of a new idler line at the Company's domestic operations.
Net cash provided by financing activities in 1999 primarily represented a net increase in borrowings on notes payable of $6.0 million and proceeds from long-term obligations of $5.5 million, offset by principal payments on long-term obligations of $3.2 million. The Company's domestic subsidiaries accounted for $5.8 million of the net increase in borrowings on notes payable. The proceeds from long-term obligations included a note payable of $1.6 million that was used for the purchase of a previously leased manufacturing facility in Colorado, a note payable of approximately $0.9 million that was used for the construction of a new idler line at the Company's domestic operations, and a term loan of approximately $2.9 million at the Company's Australian subsidiary. The proceeds of the term loan in Australia were used to pay the outstanding balance of the BCE Seller Notes for approximately $2.1 million, and the balance for working capital. The Company also paid distributions for income taxes under the Tax Payment Agreement of $1.3 million, $1.2 million of which was for 1998 income taxes.
The Company's primary capital requirements consist of capital expenditures and debt service. The Company expects current financial resources (working capital) and funds from operations to be adequate to meet anticipated cash requirements. In 2002, the Company anticipates capital expenditures of approximately $2.2 million for new and replacement equipment. At December 31, 2001, the Company had cash and cash equivalents of approximately $14.7 million and approximately $10.7 million available for use under its domestic credit facility, representing approximately $25.4 million of liquidity.
INTERNATIONAL OPERATIONS
The Company transacts business in a number of countries throughout the world and has facilities in the United States, Australia, the United Kingdom, and South Africa. As a result, the Company is subject to business risks inherent in non-U.S. operations, including political and economic uncertainty, import and export limitations, exchange controls and currency fluctuations. The Company believes that the risks related to its foreign operations are mitigated by the relative political and economic stability of the countries in which its largest foreign operations are located. As the U.S. dollar strengthens and weakens against foreign currencies in which the Company transacts business, its financial results will be affected. The principal foreign currencies in which the Company transacts business are the Australian dollar, the British pound sterling, and the South African rand. The fluctuation of the U.S. dollar versus other currencies resulted in decreases to stockholder's equity of approximately $0.9 million and $2.1 million for the years ended December 31, 2001 and 2000, respectively.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our significant accounting policies are described in Note B to the consolidated financial statements included in Item 8 of this Form 10-K.
Management believes the most significant accounting estimates inherent in the preparation of the Company's financial statements include estimates associated with determination of its liability related to warranty expense, collectibility of accounts receivable, inventory valuations, pension benefits, and certain benefits provided to current employees. A number of internal and external factors affect our estimates such as historical experience, current and expected economic conditions, product mix and, with pension benefits, actuarial techniques. The Company continually re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". Adoption of SFAS 133 did not have a material effect on the earnings or financial position of the Company. In accordance with the transition provisions in SFAS 133, the Company recorded the previously unrecognized fair market value of a foreign currency forward contract. The effect of the adjustment to record the fair value of the foreign currency forward contract was recognized in accumulated other comprehensive income at the date of adoption.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". The provisions of SFAS No. 141 are effective for all business combinations accounted for by the purchase method that are completed after June 30, 2001. SFAS No. 142 is effective January 1, 2002 and applies to all goodwill and other intangible assets recognized in the Company's statement of financial position at that date, regardless of when those assets were initially recognized. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The transition provisions in SFAS No. 142 provide that goodwill and intangible assets with indefinite lives acquired in a business combination completed after June 30, 2001 will not be amortized.
The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of SFAS No. 142 is expected to result in a decrease in net loss of approximately $0.6 million per year.
During 2002, the Company will perform the first of the required impairment tests under SFAS No. 142 of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company's current policy for measuring goodwill impairment is based upon an analysis of undiscounted cash flows. Under SFAS No. 142, goodwill must be assigned to reporting units and measured for impairment based upon the fair values of the reporting units. The Company has not yet determined its reporting units under SFAS No. 142 and what the effect of these new impairment tests will be on its consolidated financial position or results of operations.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", was issued. This statement, which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. This distinction is important because assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The Company's adoption of this statement effective January 1, 2002 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES
This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters that are not historical in nature. Such forward looking statements are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by such forward-looking statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following tables provide information about the Company's financial instruments that are sensitive to changes in interest rates. The tables present principal cash flows and related weighted-average interest rates by expected maturity dates for debt obligations as of December 31, 2001 and 2000.
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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Report of Independent Auditors and the Consolidated Financial Statements of Continental Global Group, Inc. for each of the three years in the period ended December 31, 2001 are included herein.
Report of Independent Auditors
To the Stockholder Continental Global Group, Inc.
We have audited the accompanying consolidated balance sheets of Continental Global Group, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholder's equity (deficit), and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Continental Global Group, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio March 25, 2002
Continental Global Group, Inc.
Consolidated Balance Sheets
See notes to consolidated financial statements.
Continental Global Group, Inc.
Consolidated Statements of Operations
See notes to consolidated financial statements.
Continental Global Group, Inc.
Consolidated Statements of Stockholder's Equity (Deficit)
See notes to consolidated financial statements.
Continental Global Group, Inc.
Consolidated Statements of Cash Flows
See notes to consolidated financial statements.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
A. ORGANIZATION
Continental Global Group, Inc. (the "Company") was formed on February 4, 1997, for the purpose of owning all of the common stock of Continental Conveyor & Equipment Company ("CCE") and Goodman Conveyor Company ("GCC"). The Company, which is a holding company with limited assets and operations other than its investments in its subsidiaries, is owned 100% by N.E.S. Investment Co.
Prior to January 1, 1997, CCE and GCC were limited partnerships under common control by NES Group, Inc. (the parent company of N.E.S. Investment Co.), the 99% limited partner. Effective January 1, 1997, NES Group, Inc., transferred its interest in the limited partnerships to CCE and GCC. Effective February 1997, NES Group, Inc. transferred to the Company all of the outstanding capital stock of CCE and GCC.
B. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
REVENUE RECOGNITION The Company recognizes revenue from sales at the time of shipment. Net sales include external freight billed to customers and the related costs are included in cost of sales.
CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
INVENTORIES Inventories, which consist of raw materials, manufactured and purchased parts, and work in process are stated at the lower of cost or market. Since inventory records are maintained on a job order basis, it is not practical to segregate inventories into their major classes. The cost for approximately 67% and 62% of inventories at December 31, 2001 and 2000, respectively, is determined using the last-in, first-out ("LIFO") method with the remainder determined using the first-in, first-out ("FIFO") method. Had the FIFO method of inventory (which approximates replacement cost) been used to cost all inventories, inventories would have increased by approximately $1,141,000 and $1,690,000 at December 31, 2001 and 2000, respectively. As a result of a physical inventory conducted by the Company's Australian subsidiary in July 2001, the Company incurred a charge in the third quarter to cost of products sold of approximately $757,000.
GOODWILL Goodwill is being amortized on a straight-line basis, primarily over 40 years. The balance of accumulated amortization of goodwill was approximately $2,506,000 and $2,029,000 at December 31, 2001 and 2000, respectively. The ongoing value and remaining useful life of goodwill are subject to periodic evaluation and, under current accounting guidance, the Company expects the carrying amounts to be fully recoverable.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
B. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
IMPAIRMENT OF LONG-LIVED ASSETS Impairment of long-lived assets and related goodwill is recognized when events or changes in circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable and the Company's estimate of undiscounted cash flows over the assets remaining estimated useful life is less than the asset's carrying value. Measurement of the amount of impairment may be based on appraisal, market values of similar assets, or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset.
STOCKHOLDER'S EQUITY In the third quarter of 2000, the Board of Directors approved an amendment to the certificate of incorporation which increased the number of shares which the Company is authorized to issue to 5,000,000 shares with a par value of $0.01. At December 31, 2001, the Company had issued and outstanding 100 shares.
RESTRUCTURING CHARGES In 1998, the Company executed a plan to close certain Australian manufacturing facilities and merge the operations with other existing facilities; in 1999 and 2000, the Company made further reductions in office staff and facilities. In the United Kingdom, following the acquisition of Huwood International (Huwood) in August 1998, the Company consolidated its existing operations and facilities into the Huwood operations. In connection with these plans, the Company incurred restructuring charges of approximately $481,000, and $1,106,000 in 2000 and 1999, respectively, related to its Australian and United Kingdom subsidiaries. Total restructuring charges incurred to date total approximately $2,715,000. These restructuring charges consisted primarily of severance of approximately 220 employees and relocation costs. As of December 31, 2001, all accruals for restructuring charges have been fully utilized.
ADVERTISING EXPENSE The cost of advertising is expensed as incurred. The Company incurred approximately $635,000, $583,000, and $869,000 in advertising costs for the years ended December 31, 2001, 2000, and 1999, respectively.
FOREIGN CURRENCY TRANSLATION The assets and liabilities of the Company's foreign subsidiaries are translated at current exchange rates, while revenues and expenses are translated at average rates prevailing during the year. The effects of exchange rate fluctuations have been reported in accumulated other comprehensive income (loss). The effect on the statements of operations of currency transaction gains and losses was not material for all years presented.
DERIVATIVE FINANCIAL INSTRUMENTS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". Adoption of SFAS 133 did not have a material effect on the earnings or financial position of the Company. In accordance with the transition provisions in SFAS 133, the Company recorded the previously unrecognized fair market value of a foreign currency forward contract. The effect of the adjustment to record the fair value of the foreign currency forward contract was recognized in accumulated other comprehensive income at the date of adoption.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
B. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DERIVATIVE FINANCIAL INSTRUMENTS - CONTINUED As a result of the adoption of SFAS 133, the Company is required to recognize all derivative financial instruments as either assets or liabilities at fair value. Derivative instruments that are not hedges must be adjusted to fair value through net income. Under the provisions of SFAS 133, changes in fair value of derivative instruments that are classified as fair value hedges are offset against changes in the fair value of the hedged assets, liabilities, or firm commitments, through net income. Changes in the fair value of derivative instruments that are classified as cash flow hedges are recognized in other comprehensive income until such time as the hedged items are recognized in net income. The ineffective portions of a derivative instrument's change in fair value are immediately recognized in net income.
The Company uses forward exchange contracts (principally against the Australian dollar and the U.S. dollar) to hedge certain firm sales commitments of its foreign subsidiaries. Foreign currency forward contracts reduce the Company's exposure to the risk that the eventual net cash inflows resulting from the sale of products denominated in a currency other than the functional currency of the respective business will be adversely impacted by changes in exchange rates.
COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income (loss) consists entirely of foreign currency translation adjustments for all years presented.
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". The provisions of SFAS No. 141 are effective for all business combinations accounted for by the purchase method that are completed after June 30, 2001. SFAS No. 142 is effective January 1, 2002 and applies to all goodwill and other intangible assets recognized in the Company's statement of financial position at that date, regardless of when those assets were initially recognized. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The transition provisions in SFAS No. 142 provide that goodwill and intangible assets with indefinite lives acquired in a business combination completed after June 30, 2001 will not be amortized.
The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of SFAS No. 142 is expected to result in a decrease in net loss of approximately $600,000 per year.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
B. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NEW ACCOUNTING PRONOUNCEMENTS - CONTINUED During 2002, the Company will perform the first of the required impairment tests under SFAS No. 142 of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company's current policy for measuring goodwill impairment is based upon an analysis of undiscounted cash flows. Under SFAS No. 142, goodwill must be assigned to reporting units and measured for impairment based upon the fair values of the reporting units. The Company has not yet determined its reporting units under SFAS No. 142 and what the effect of these new impairment tests will be on its consolidated financial position or results of operations.
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", was issued. This statement, which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS No. 121, the statement significantly changes the criteria that would have to be met to classify an asset as held-for-sale. This distinction is important because assets held-for-sale are stated at the lower of their fair values or carrying amounts and depreciation is no longer recognized. The Company's adoption of this statement effective January 1, 2002 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
RECLASSIFICATIONS Certain amounts from the prior year financial statements have been reclassified to conform to current year presentation.
C. ACQUISITION
On July 19, 2001, the Company purchased certain assets (primarily inventory and fixed assets) in Alabama from Lippert Tire & Axle, Inc. for a purchase price of approximately $1,607,000. Lippert manufactured new axles and refurbished used axles and tires for the manufactured housing industry. The existing operations of the Company's manufactured housing products segment in Winfield, Alabama have been merged with the acquired operations. Revenues from the acquired operations were approximately $13,000,000 for the fiscal year ended December 31, 2000. The transaction was accounted for as a purchase and accordingly, the results of operations since the date of acquisition have been included in the consolidated financial statements.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
D. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. The balances of the major classes of property, plant and equipment at December 31, 2001 and 2000 are as follows:
2001 2000 ------------- ------------
Land and improvements $ 1,036,824 $ 1,079,411 Buildings and improvements 6,461,887 6,555,863 Machinery and equipment 18,644,085 18,527,091 ------------ ------------ $ 26,142,796 $ 26,162,365 ============ ============
Depreciation expense for the years ended December 31, 2001, 2000, and 1999 was $2,249,752, $2,467,149, and $2,931,686, respectively. Depreciation is primarily computed using the straight-line method based on the expected useful lives of the assets. The estimated useful lives for buildings and improvements range from 10 to 31.5 years; the estimated useful lives for machinery and equipment range from 2.5 to 12.5 years. Repair and maintenance costs are expensed as incurred.
E. FINANCING ARRANGEMENTS
Long-term obligations consist of the following:
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
E. FINANCING ARRANGEMENTS - CONTINUED
Maturities of long-term obligations are as follows:
2002 $ 1,298,522 2003 488,042 2004 1,675,444 2005 94,596 2006 - Thereafter 120,000,000 ------------- $ 123,556,604 =============
The $120 million 11% Senior Notes due 2007 ("Senior Notes") are registered under the Securities Act of 1933. Interest on the notes is payable semi-annually in arrears. The Senior Notes are redeemable at the option of the Company, in whole or in part, any time on or after 2002 subject to certain call premiums. The Senior Notes are guaranteed by the Company's domestic subsidiaries and certain of its Australian subsidiaries and contain various restrictive covenants that, among other things, place limitations on the sale of assets, payment of dividends, and incurring additional indebtedness and restrict transactions with affiliates.
During the second quarter of 2000, the Company's United States operations completed the purchase of equipment for production of a new idler at a total cost of approximately $1,705,000. The purchase was financed with a note payable bearing an interest rate of 8.845% and maturing on June 13, 2005. The note is secured by the equipment.
CCE, GCC and Bank One, Cleveland, NA are parties to a credit facility and security agreement dated September 14, 1992, as amended, restated and consolidated through March 25, 2002, ("Revolving Credit Facility") pursuant to which Bank One has provided CCE and GCC jointly with a line of credit of $30 million. The availability under the Revolving Credit Facility is equal to the sum of (i) 85% of eligible accounts receivable and (ii) 55% of eligible inventory. The Revolving Credit Facility is guaranteed by the Company and secured by a lien on substantially all of the assets of CCE and GCC. In addition, the Revolving Credit Facility contains certain financial and other covenants which, among other things, establish minimum debt coverage and net working capital requirements. The Revolving Credit Facility will be fully revolving until final maturity on June 30, 2003, and will bear interest at a fluctuating rate based on the prime rate. At December 31, 2001, approximately $10.7 million was available for use. At December 31, 2001 and 2000, the Company had an outstanding balance under the Revolving Credit Facility of $14,516,217 and $12,040,346, respectively. The weighted average interest rate for this facility was 6.7% and 9.3% in 2001 and 2000, respectively.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
E. FINANCING ARRANGEMENTS - CONTINUED
The Company's Australian subsidiary has a revolving credit facility with the National Australia Bank Limited which provides a line of credit of $3.0 million (Australian dollars). The facility is secured by a lien on substantially all of the assets of the BCE subsidiaries, bears interest at a fluctuating rate based on the base rate of the National Australia Bank, and matures on June 30, 2002. At December 31, 2001, approximately $0.2 million (Australian dollars) was available for use. The outstanding balance under this facility was $1,429,054 and $1,783,401 (U.S.$) at December 31, 2001 and 2000, respectively. The weighted average interest rate for this facility was 7.5% and 9.5% in 2001 and 2000, respectively.
During 2001, the Company's United Kingdom subsidiary entered into a credit facility with the Bank of Scotland of 3.0 million British pounds sterling. The facility is secured by certain assets of the subsidiary, bears interest at a fluctuating rate of 2% above the Bank of Scotland base rate, and matures on October 31, 2002. At December 31, 2001, the entire facility was available for use. The weighted average interest rate for this facility was 8.4% in 2001. Prior to entering into the credit facility with the Bank of Scotland, the subsidiary had an overdraft facility with the HSBC Bank of 1.2 million British pounds sterling. The facility was secured by certain assets of the subsidiary, bore interest at a fluctuating rate of 3% above the HSBC Bank base rate, and matured on December 31, 2001. The outstanding balance under this facility was $1,596,273 (U.S.$) at December 31, 2000. The weighted average interest rate for this facility was 8.5% in 2000.
The Company's South African subsidiary has a credit facility with the Standard Bank of South Africa of 4.5 million South African rand. The facility is secured by the trade receivables of the subsidiary and bears interest at a fluctuating rate of 1.5% above the bank's prime lending rate. The agreement continues indefinitely until termination by either party with a minimum of three months written notice. At December 31, 2001, approximately 0.2 million rand was available for use. The outstanding balance under this facility was $361,200 and $210,880 (U.S.$) at December 31, 2001 and 2000, respectively. The weighted average interest rate for this facility was 16.3% and 16.5% in 2001 and 2000, respectively.
During 2001, 2000, and 1999, the Company paid interest of $15,309,325, $15,188,760, and $14,590,746, respectively.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
F. LEASING ARRANGEMENTS
CCE has a capital lease for land and building with a lease term of ten years which contains a purchase option exercisable at any time. In addition, the Company's Australian subsidiary has numerous capital leases for certain machinery and equipment. Amortization of these assets is included in depreciation expense in the statement of operations. The gross amount of assets recorded under capital leases and the related accumulated amortization at December 31, 2001 and 2000 are as follows:
2001 2000 ---------- -----------
Asset Balances: Land $ 20,000 $ 20,000 Buildings 380,000 380,000 Machinery and Equipment 323,327 710,894 ---------- ---------- $ 723,327 $1,110,894 ========== ==========
Accumulated Amortization: Buildings $ 99,524 $ 87,460 Machinery and Equipment 213,775 432,113 ---------- ---------- $ 313,299 $ 519,573 ========== ==========
The subsidiaries of the Company also have various leases for office space, warehouse facilities, office equipment, and automobiles and trucks which are accounted for as operating leases. Rent expense related to these operating leases for the years ended December 31, 2001, 2000, and 1999 was approximately $2,110,000, $2,072,000, and $2,525,000, respectively. Future minimum lease payments for obligations under capital leases and for operating leases having initial or remaining noncancelable lease terms in excess of one year are as follows:
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
G. EMPLOYEE BENEFIT PLANS
CCE maintains a defined benefit plan covering all union hourly-paid employees at its Winfield plant. The contributions of CCE are made in amounts sufficient to fund the plan's service cost on a current basis and meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended. Actuarial gains and losses are amortized over a 15 year period, and funding of the initial prior service costs plus interest thereon is over a 30 year period. The actuarial computations use the "projected unit credit cost method," which assumed a weighted-average discount rate on benefit obligations of 7.25% in 2001 and 2000 and a weighted-average expected long-term rate of return on plan assets of 8% in 2001 and 2000.
The following table sets forth the change in benefit obligation, change in plan assets, funded status and amounts recognized in the Consolidated Balance Sheets as of December 31, 2001 and 2000, of the Company's defined benefit plan.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
G. EMPLOYEE BENEFIT PLANS - CONTINUED
CCE also maintains a defined contribution plan covering substantially all salaried and non-union hourly employees. CCE makes annual contributions (approximately $589,000, $520,000, and $490,000 in 2001, 2000, and 1999, respectively) which fully fund retirement benefits. No participant contributions to the plan are permitted. CCE also maintains a defined contribution savings and profit sharing plan which covers substantially all salaried and non-union hourly employees. Employees may elect to contribute up to 16% of their compensation. CCE will match (approximately $335,000, $320,000, and $335,000 in 2001, 2000, and 1999, respectively) a percentage of employee contributions up to 6% of each employee's compensation.
GCC has a retirement savings plan covering all employees meeting certain eligibility requirements. Under the terms of the plan, GCC voluntarily makes annual cash contributions based on eligible employees' compensation. No contribution was made for the year ended December 31, 2001. Expense for the years ended December 31, 2000 and 1999 was approximately $134,000 and $145,000, respectively, which was equal to 2.5% of eligible employees compensation in 2000 and 1999.
The foreign subsidiaries of the Company have various defined contribution plans and retirement saving plans covering substantially all salaried and production employees. For the years ended December 31, 2001, 2000, and 1999, the subsidiaries contributed approximately $495,000, $636,000, and $761,000, respectively, to the plans.
H. RELATED PARTY TRANSACTIONS
Management fees are charged by Nesco, Inc., an affiliate of N.E.S. Investment Co., to provide general management oversight services, including legal, financial, strategic planning and business development evaluation for the benefit of the Company. Under the management agreement, the Company has agreed to pay Nesco, Inc. fees for such services equal to 5% of the Company's Adjusted EBITDA earnings (earnings before interest and estimated taxes, depreciation, amortization and miscellaneous expense or income). The Company incurred management fee expenses of approximately $557,000, $351,000, and $467,000 for the years ended December 31, 2001, 2000, and 1999, respectively. At December 31, 2001 and 2000, the Company had a prepaid expense for overpayment of management fees of approximately $112,000 and $131,000, respectively.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
H. RELATED PARTY TRANSACTIONS - CONTINUED
Prior to electing C Corporation status for income tax purposes on October 6, 2000, the subsidiaries of the Company were parties to a tax payment agreement with NES Group, Inc., the parent company of N.E.S. Investment Co., providing for payments by each subsidiary to NES Group, Inc. to fund the income tax liability attributable to the Company's operations. The Company incurred charges to stockholder's equity for income taxes of approximately $149,000 for the year ended December 31, 1999. At December 31, 2001 and 2000, the Company had an accrual for income tax payments owed to NES Group, Inc. of approximately $20,000.
I. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value.
Notes payable and long-term debt: The carrying amounts of the Company's borrowings under its short-term revolving credit arrangements and variable rate long-term debt approximate their fair value. The fair value of the Company's Senior Notes is based on the quoted market value. The fair value of the Company's remaining fixed rate long-term debt is based on the present value of future cash outflows.
Foreign currency forward contract: Derivative financial instruments at December 31, 2000 included a foreign currency forward contract with a contractual amount of approximately $1,909,000. The contract matured during 2001 and the counterparty to the contract was a major U.S. commercial bank. The Company entered into the foreign currency forward contract to hedge certain firm sales commitments denominated in a foreign currency. The fair value of the Company's foreign currency forward contract was estimated based on the quoted market price of a comparable contract.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
I. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF RISK - CONTINUED
The carrying amounts and fair values of the Company's financial instruments at December 31 are as follows:
Accounts receivable from customers in the coal mining industry were approximately 51% and 59% at December 31, 2001 and 2000, respectively. The Company's subsidiaries perform periodic credit evaluations of their customers' financial condition and generally do not require collateral. Credit losses relating to customers in the coal mining industry have consistently been within management's expectations and are comparable to losses for the portfolio as a whole.
Provisions for credit losses were approximately $1,004,000, $1,618,000, and $383,000 in 2001, 2000, and 1999, respectively. Accounts written off, net of recoveries, were approximately $1,578,000, $676,000, and $491,000 in 2001, 2000, and 1999, respectively.
J. INCOME TAXES
Effective October 6, 2000, the Company and its domestic subsidiaries elected C Corporation status for United States income tax purposes. At that date, income taxes were provided using the liability method in accordance with FASB Statement No. 109, "Accounting for Income Taxes". Prior to October 6, 2000, the Company and its domestic subsidiaries had elected Subchapter S Corporation Status for United States income tax purposes. Accordingly, the Company's United States operations were not subject to income taxes as separate entities. The Company's United States income, through October 6, 2000, is included in the income tax returns of the sole stockholder.
For tax reporting purposes, the Company is included in the consolidated federal tax return of N.E.S. Investment Co. However, for financial reporting purposes, the Company's tax provision has been calculated on a stand-alone basis.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
J. INCOME TAXES - CONTINUED
The Company has subsidiaries located in Australia, the United Kingdom, and South Africa which are subject to income taxes in their respective countries. The Company did not pay any income taxes during the year ended December 31, 2001. The Company's Australian subsidiary paid income taxes of approximately $72,000 and $150,000 during the years ended December 31, 2000 and 1999, respectively.
Income (loss) before income taxes consists of the following:
For the Year Ending December 31 2001 2000 1999 ------------- ------------- -------------
Domestic $ (4,030,236) $ (4,439,936) $ 162,750 Foreign (4,383,248) (6,759,714) (8,891,025) ------------ ------------ ------------ $ (8,413,484) $(11,199,650) $ (8,728,275) ============ ============ ============
Income taxes are summarized as follows:
December 31, December 31, 2001 2000 ------------------- ------------------ Current: Domestic: Federal $ -- $ -- State and local -- -- Foreign 4,423 29,140 ----------- ----------- 4,423 29,140 Deferred: Domestic: Federal (1,314,314) 1,612,268 State and local (187,760) 230,323 Foreign -- 43,000 ----------- ----------- (1,502,074) 1,885,591 ----------- ----------- $(1,497,651) $ 1,914,731 =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Where the Company has determined that it is more likely than not that the deferred tax assets will not be realized, a valuation allowance has been established. The valuation allowance pertains to the deferred tax assets resulting from the net operating loss carryforwards of the Company's foreign subsidiaries. The net operating losses of the Company's domestic subsidiaries may be carried forward for a period of twenty years, and the net operating losses of the foreign subsidiaries may be carried forward indefinitely.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
J. INCOME TAXES - CONTINUED
Significant components of the Company's deferred income taxes at December 31, 2001 and 2000 are as follows:
A reconciliation of income taxes computed at the statutory rate to the effective rate follows:
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
K. SEGMENT INFORMATION
While the Company primarily manages its operations on a geographical basis, the Company operates in two principal business segments: conveyor equipment and manufactured housing products. The conveyor equipment business, which comprised approximately 90.5%, 87.9%, and 84.7% of net sales for 2001, 2000, and 1999, respectively, markets its products in four main business areas. The mining equipment business area includes the design, manufacture and testing (and, outside the United States, installation and maintenance) of complete belt conveyor systems and components for mining application primarily in the coal industry. The conveyor components business area manufactures and sells components for conveyor systems primarily for resale through distributor networks. The engineered systems business area uses specialized project management and engineering skills to combine mining equipment products, purchased equipment, steel fabrication and other outside services for sale as complete conveyor equipment systems that meet specific customer requirements. The bulk conveyor equipment business area designs and manufactures a complete range of conveyor equipment sold to transport bulk materials, such as cement, lime, food products and industrial waste.
The Company's manufactured housing products business manufactures and/or refurbishes axle components sold directly to the manufactured housing industry. As part of this segment the Company also sells mounted tire and rim assemblies to the manufactured housing industry. Included in the other category is primarily the manufacture and sale of air filtration equipment for use in enclosed environments, principally in the textile industry. The manufacturing requirements for these products are generally compatible with conveyor equipment production and thus maximize utilization of the Company's manufacturing facilities for its primary products.
The Company evaluates performance and allocates resources based on operating income before restructuring charges and allocation of management fees, amortization and corporate expenses. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies under Note B. The reportable segments are each managed separately because they manufacture and distribute distinct products.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
K. SEGMENT INFORMATION - CONTINUED
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
K. SEGMENT INFORMATION - CONTINUED
GEOGRAPHIC AREA DATA
Net sales are attributed to countries based on the location of the subsidiary where the sale occurs.
In 2001 and 2000, the Company did not have sales to any single customer which exceeded 10% of the Company's total net sales. In 1999, sales to the Company's largest customer were approximately $24.5 million, or 11.4%, of the Company's total net sales. Sales to this customer are reported in the net sales for the Conveyor Equipment business segment.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Company's domestic subsidiaries, Continental Conveyor & Equipment Company (CCE) and Goodman Conveyor Company (GCC), and certain of its Australian subsidiaries, all of which are wholly owned, are the guarantors of the Senior Notes. The guarantees are full, unconditional, and joint and several. Separate financial statements of these guarantor subsidiaries are not presented as management has determined that they would not be material to investors. The Company's United Kingdom and South African subsidiaries are not guarantors of the Senior Notes.
Summarized consolidating balance sheets for 2001 and 2000 and consolidating statements of operations and cash flow statements for 2001, 2000, and 1999 for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2001
L. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
M. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any pending legal proceeding which it believes could have a material adverse effect upon its results of operations or financial condition, or to any other pending legal proceedings other than ordinary, routine litigation incidental to its business.
At December 31, 2001, approximately 38% of the Company's employees are covered by a collective bargaining agreement; approximately 30% of the Company's employees are covered by a collective bargaining agreement which expires in 2002.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the directors and executive officers of the Company, as of December 31, 2001:
Set forth below is a brief description of the business experience of each director and executive officer of the Company.
Mr. Bryant has served as President and Chief Executive Officer of the Company since its inception. Mr. Bryant has also served as President and Chief Executive Officer of Continental Conveyor & Equipment Company since 1982 and as Chairman of the Board of Directors of CCE Pty. Ltd. since 1996.
Mr. Smothers has served as Vice President of the Company since October 2001 and has also served as Vice President of Continental Conveyor & Equipment Company since August 1999 and Executive Vice President since October 2001. In addition to the foregoing, Mr. Smothers served as Director of International Sales and Manager of Systems Engineering of Continental Conveyor & Equipment Company from 1992 through 1999 and Managing Director of CCE Pty. Ltd. in 1999.
Mr. Dickinson has served as Vice President and Chief Financial Officer of the Company since its inception. Mr. Dickinson has also served as Vice President of Finance of Continental Conveyor & Equipment Company since 1973 and as a Director of CCE Pty. Ltd. since 1996.
Mr. McGaha has served as Senior Vice President of Sales and Engineering of the Company since its inception. Mr. McGaha has also served as Senior Vice President of Sales and Engineering of Continental Conveyor & Equipment Company since 1996 and as a Director of CCE Pty. Ltd. since 1996. In addition to the foregoing, Mr. McGaha was Vice President of Sales and Engineering of Continental Conveyor & Equipment Company from 1990 to 1996.
Mr. Mandia has served as Vice Chairman of the Company since January 2001 and as a Director of the Company since its inception. Mr. Mandia served as Group Vice President of Nesco, Inc. from 1988 to December 2000.
Mr. Crawford has served as a Director of the Company since its inception. In addition to his service with the Company, Mr. Crawford has served as Chairman and Chief Executive Officer and a Director of Park-Ohio Industries, Inc. since 1992.
Mr. Hastings has served as a Director of the Company since its inception. In addition to his service with the Company, Mr. Hastings served as Chairman and Chief Executive Officer and as Director of Lincoln Electric Company from 1992 to 1997. Since 1998, Mr. Hastings has also served as a Director of Paragon Corporate Holdings, Inc., a sister corporation of the Company.
Mr. McDonald has served as a Director of the Company since August 2000. Prior to his service with the Company, Mr. McDonald served as Executive Vice President of Operations for Consol Inc. from 1985 to his retirement in 1999.
Mr. Robert Tomsich has served as a Director of the Company since its inception. In addition, Mr. Robert Tomsich has served as President and Director of Nesco, Inc. (including predecessors of Nesco, Inc.) since 1956. Since 1997, Mr. Tomsich has also served as a Director of Paragon Corporate Holdings, Inc., a sister corporation of the Company. Mr. Robert Tomsich is the father of Mr. John Tomsich.
Mr. John Tomsich has served as a Director of the Company since its inception. In addition, Mr. John Tomsich has served as Vice President of Nesco, Inc. since 1995 and in various other management positions with Nesco, Inc. since 1990. Since 1997, Mr. Tomsich has also served as a Director of Paragon Corporate Holdings, Inc., a sister corporation of the Company. Mr. John Tomsich is the son of Mr. Robert Tomsich.
Mr. Ward has served as a Director of the Company since February 2001. As a global senior executive, Mr. Ward has been actively involved in the mineral industry. Most recently he served as the Chairman, President and CEO of Cyprus AMAX Minerals Company. Prior to joining Cyprus, he was the President, Director and Chief Operating Officer of Freeport McMoran, and earlier held officer and managerial positions with other mining companies. Mr. Ward now serves as the President and CEO of Ward Resources Inc. and is pursuing mineral investments and international consulting to senior mine management. He is an advisory director of the industrial minerals internet trading company, IMINEX Inc., a member of the National Academy and the Chairman of its Committee on Technologies of the Mining Industry.
Mr. Wert has served as a Director of the Company since its inception. Prior to his service with the Company, Mr. Wert held a variety of executive management positions with KeyCorp, a financial services company based in Cleveland, Ohio, and KeyCorp's predecessor, Society Corporation. Mr. Wert served as Senior Executive Vice President and Chief Investment Officer of KeyCorp from 1995 to 1996. Prior to that time, he served as Senior Executive Vice President and Chief Financial Officer of KeyCorp for two years and Vice Chairman, Director and Chief Financial Officer of Society Corporation for four years. Since 1993, Mr. Wert has served as an outside Director, and currently serves as Chairman of the Executive and Compensation Committees of the Board of Directors, of Park-Ohio Industries, Inc. Since 1998, Mr. Wert has also served as a Director of Paragon Corporate Holdings, Inc., a sister corporation of the Company.
ITEM 11.
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.
(1) Amounts shown reflect contributions made by the Company on behalf of the named executives under the Continental Conveyor & Equipment Company Savings and Profit Sharing Plan and the Continental Conveyor & Equipment Retirement Plan for Salaried and Hourly (Non-Union) Employees at Salyersville, Kentucky. No amounts shown were received by any of the named executives.
DIRECTOR COMPENSATION
Each director of the Company not employed by the Company or any entity affiliated with the Company is entitled to receive $25,000 per year for serving as a director of the Company. In addition, the Company will reimburse such director for their travel and other expenses incurred in connection with attending meetings of the Board of Directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the outstanding equity securities of the Company as of March 15, 2002:
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPANY FORMATION AND PROCEEDS FROM THE OFFERING
The Company is a Delaware corporation formed on February 4, 1997, for the purpose of serving as a holding company for the operations conducted by Continental (including the BCE Subsidiaries) and Goodman. All of the capital stock of the Company has been issued to NES Group, Inc., which in turn, transferred to the Company all of the outstanding capital stock of Continental and Goodman. As a result, the Company is a wholly owned subsidiary of NES Group, Inc., and each of Continental and Goodman is a wholly owned subsidiary of the Company.
MANAGEMENT AGREEMENT
Effective April 1, 1997, the Company and Nesco, Inc. entered into a management agreement ("Management Agreement"), the material terms of which are summarized below. All of the outstanding capital stock of Nesco, Inc. is beneficially owned by Robert J. Tomsich. Under the Management Agreement, Nesco, Inc., has agreed to provide general management oversight services on a regular basis for the benefit of the Company, in regard to business activities involving financial results, legal issues, and long term planning relative to current operations and acquisitions. Business development services include assistance in identifying and acquiring potential acquisition candidates, including negotiations and contractual preparations in connection therewith. Financial planning includes assistance in developing banking relationships and monitoring cash investments through professional money management accounts. Under the terms of the Management Agreement, the Company has agreed to pay Nesco, Inc. a management fee for such services equal to 5% of the Company's earnings before interest and estimated taxes, depreciation, amortization, and other expense (income). The aggregate amount expensed for management fees in 2001 under the Management Agreement was $556,933. The management fee is payable in monthly installments. The Management Agreement will remain in effect until terminated by either party upon not less than 60 days written notice prior to an anniversary date of the Management Agreement.
The Company will also separately employ, as required, independent auditors, outside legal counsel, and other consulting services. Such services will be paid directly by the Company.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report:
1. Consolidated Financial Statements.
The consolidated financial statements listed below together with the report thereon of the independent auditors dated March 25, 2002, are included in Item 8.
Report of Independent Auditors.
Consolidated Balance Sheets at December 31, 2001 and 2000.
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001.
Consolidated Statements of Stockholder's Equity (Deficit) for each of the three years in the period ended December 31, 2001.
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
No consolidated financial statement schedules are presented because the schedules are not required, the information is not present, or not present in amounts sufficient to require submission of the schedules or the required information is included in the Consolidated Financial Statements.
3. Exhibits Required to be Filed by Item 601 of Regulation S-K.
The information required by this paragraph is contained in the Index of Exhibits to this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 28th day of March, 2002.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ C. Edward Bryant, Jr. -------------------------- Name: C. Edward Bryant, Jr. Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
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.
Continental Global Group, Inc.
Form 10-K
Index of Exhibits
Continental Global Group, Inc.
Form 10-K
Index of Exhibits (Continued)
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.