ITEM 1. BUSINESS
GENERAL
Continental Global Group, Inc. (hereinafter referred to as 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.
While the Company primarily manages its operations on a geographical basis, the Company operates in two principal business segments: conveyor equipment and mobile home products. The conveyor equipment business, which comprised approximately 84.6%, 84.9%, and 83.4% of net sales for 1999, 1998, and 1997, 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, monitoring 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 mobile home products business, which comprised approximately 14.3%, 14.0%, and 15.5% of net sales for 1999, 1998, and 1997, respectively, manufactures and/or refurbishes axle components for the mobile home industry. As part of this segment, the Company also sells mounted tires and rims to the mobile home 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 69.2% or $146.5 million of the Company's 1999 net sales were produced in the United States, 18.5% or $39.2 million in Australia, and 12.3% or $26.0 million in other countries.
ACQUISITIONS
On August 6, 1998, the Company completed the purchase of assets and assumption of liabilities constituting a majority of the operations of Huwood International ("Huwood"), a U.K. belt conveyor business and a division of FKI, Plc. Huwood generated revenues of approximately $13,800,000 for the fiscal year ended March 31, 1998. The purchase price for the net assets was approximately $4,966,000. 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. The operations of the Company's existing U.K. facilities were merged with the Huwood operations.
The Company will continue to search for strategic acquisitions that add complementary product lines, expand its technological capabilities, broaden its geographic reach or otherwise support its business strategy and presently is in discussions with other potential acquisition candidates. There can be no assurance that the Company will be able to identify other desirable acquisition candidates or that the Company will be successful in consummating any acquisition on terms favorable to the Company, if at all.
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 manufactures and engineering contractors. The Company sells its conveyor components products to original equipment manufactures, 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 mobile home products business segment directly to mobile home manufacturers in the United States.
For the year ended December 31, 1999, sales to the Company's largest customer, A.T. Massey Group, constituted approximately 11.6% of the Company's total net sales. Sales to A.T. Massey Group were to 22 different mining properties in the United States. Net sales to the Company's top five conveyor equipment customers represented approximately 21.6% of the Company's total net sales for 1999. 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, 1998, sales to A.T. Massey Group constituted approximately 13.0% of the Company's total net sales and sales to MIM Holdings were approximately 12.2% of the Company's total net sales. For the year ended December 31, 1997, sales to A.T. Massey Group constituted approximately 13.1% 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, 1999, was $29.7 million, a decrease of $17.1 million, or 37% from $46.8 million at December 31, 1998. The decrease is primarily attributable to a $16.6 million reduction in backlog at the Company's Australian operations. The Company expects to ship in excess of 95% of the backlogs in 2000.
EMPLOYEES
As of December 31, 1999, the Company had approximately 1,260 employees, approximately 830 of whom were located in the United States. Approximately 180 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 140 of the production employees at the Company's United Kingdom and South African facilities are covered by a collective bargaining agreement that expires in 2000. Approximately 50 of the Company's production employees in Australia are covered by a collective bargaining arrangement expiring in 2001. 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's subsidiaries.
ITEM 2.
ITEM 2. PROPERTIES
The Company conducts its operations through the following primary facilities:
APPROXIMATE SQUARE PRINCIPAL OWNED/ LOCATION FOOTAGE FUNCTION LEASED
UNITED STATES: Winfield, Alabama 220,000 Headquarters, Owned manufacturing Belton, South Carolina 191,000 Administration, Owned manufacturing Salyersville, Kentucky 111,000 Manufacturing Owned Pueblo, Colorado 75,600 Manufacturing Owned Eatonton, Georgia 22,000 Administration, Leased(1) manufacturing
AUSTRALIA: Gosford, New South Wales 8,765 Administration, Leased(2) engineering, and sales Somersby, New South Wales 42,000 Manufacturing Owned MacKay, Queensland 32,000 Manufacturing, and Leased(3) installation support Minto, New South Wales 22,173 Manufacturing Owned
ENGLAND Gateshead, UK 234,810 Administration, Leased(4) engineering, sales, and manufacturing
SOUTH AFRICA Alrode, South Africa 24,456 Administration, Leased(5) manufacturing
- -----------
(1) Expires in October 2003. The Company holds an option to buy such property at the end of the lease term. (2) Expires in April 2000. The Company will move to Somersby upon expiration. (3) Current lease is month to month and the Company is looking for smaller premises. (4) Expires in August 2003 with option to renew for additional five years with option to purchase at market value. (5) Expires in May 2000. The Company is negotiating extension of lease.
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, 1999, NES Group, Inc., the Company's sole stockholder, by written consent, re-elected all members of the Company's Board of Directors.
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 NES Group, Inc. There is no established public trading market for the Company's common stock. As of March 15, 2000, the Company had one stockholder. The Company paid no dividends in 1999 or 1998. 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, 1999. 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 as described in Note B of Notes to Consolidated Financial Statements.
(2) Reflects the acquisitions during 1997 of BCE, Hewitt-Robins, and MECO as described in Note B of Notes to Consolidated Financial Statements.
(3) Includes extraordinary gain on early extinguishment of debt of $932.
(4) EBITDA represents earnings before extraordinary items, interest, taxes, depreciation, amortization, and restructuring charges. 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.
(5) 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 year ended December 31, 1999, by $8,728.
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, 1999, 1998, and 1997.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Sales - ---------
Net sales decreased $40.4 million, or 16%, from $252.1 million in 1998 to $211.7 million in 1999. Net sales in the conveyor equipment segment decreased by $34.9 million. The decrease in the conveyor equipment segment primarily resulted from a decrease in domestic conveyor equipment sales of $16.3 million and a decrease in sales at the Australian subsidiary of $21.9 million, partially offset by increased sales in the United Kingdom and South African subsidiaries of $3.3 million. The decrease in domestic conveyor sales is the result of reduced capital purchases in the U.S. coal industry that the Company believes were significantly related to excessive coal inventory levels. The sales decrease in Australia is due to the completion of major projects in the first quarter of 1999 that started in the second quarter of 1998. The Company believes that the increase in sales in the United Kingdom is primarily attributable to the impact of the acquisition of Huwood. Net sales in the Company's mobile home products segment and other segment decreased by $4.9 million and $0.6 million, respectively. The decrease in the mobile home products segment is attributable to regional softness in the mobile home market.
Gross Profit - ------------
Gross profit decreased $11.1 million, or 26%, from $42.9 million in 1998 to $31.8 million in 1999. Gross profit in the conveyor equipment segment decreased by $10.1 million and gross profit in the mobile home products segment and other segment decreased by $0.8 million and $0.2 million, respectively. While gross profit margins as a percentage of sales in the Company's domestic conveyor equipment operations showed a small improvement, gross profit decreased by $3.0 million primarily due to decreased sales volume caused by reduced capital purchases in the U.S. coal industry. Gross profit in the foreign conveyor equipment operations declined by $7.1 million, primarily in the Australian operation, in part due to lower sales volume and competitive market conditions, and primarily due to lower margins resulting from subcontract cost overruns on major fixed-price contracts in 1999.
SG&A Expenses - -------------
Selling, general, and administrative expenses decreased $1.6 million, or 6%, from $25.9 million in 1998 to $24.3 million in 1999. This decrease is the result of the favorable impact of the restructuring initiatives in the foreign subsidiaries combined with a reduction in domestic manpower that occurred in the third quarter of 1999.
Operating Income - ----------------
Operating income decreased $9.0 million, or 63%, from $14.3 million in 1998 to $5.3 million in 1999. The decrease is the result of the $11.1 million decrease in gross profit, offset by the $1.6 million decrease in SG&A expenses and a $0.5 million decrease in management fees. Management fees are calculated as 5% of the Company's Adjusted EBITDA earnings (earnings before interest and estimated taxes, depreciation, amortization, and miscellaneous expense or income) under the terms of the Management Agreement with Nesco, Inc.
Restructuring Charges - ---------------------
The Company incurred restructuring charges of approximately $1,106,000 and $1,127,000 in 1999 and 1998, respectively, related to its Australian and United Kingdom subsidiaries. In 1998, the Company executed a plan to close certain Australian manufacturing facilities and merge the operations with other existing facilities; in 1999, the Company made further reductions in office staff and facilities. In the United Kingdom, following the acquisition of Huwood in August 1998, the Company consolidated its existing operations and facilities into the Huwood operations. These restructuring charges consist primarily of severance of approximately 210 employees and relocation costs. As of December 31, 1999, the Company's Australian and United Kingdom subsidiaries have paid approximately $2,151,000 of the charges incurred to date. The Company anticipates that an additional cost for relocation of $129,000 will be incurred in 2000. These costs will be expensed as paid.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales - ---------
Net sales increased $38.6 million, or 18%, from $213.5 million in 1997 to $252.1 million in 1998. Net sales in 1998 include a full year's results from Hewitt-Robins and MECO, which were acquired on April 1, 1997 and October 17, 1997, respectively, and the current year's results from Huwood, which was acquired on August 6, 1998. These acquisitions accounted for $28.0 million of this increase. The Company's Australian subsidiary contributed $14.5 million of the increase due to the substantial completion of several large contracts during 1998. Net sales at the Company's other foreign subsidiaries increased $5.6 million. This increase was partially offset by a sales decrease of $12.1 million in the Company's domestic conveyor equipment business due to capital spending reductions by certain key customers in the mining equipment business area. Sales in the Company's mobile home products segment increased by $2.2 million and sales in the Company's other business segment increased by $0.4 million.
Gross Profit - ------------
Gross profit decreased $0.2 million, or 1%, from $43.1 million in 1997 to $42.9 million in 1998. The acquisitions of Hewitt-Robins, MECO, and Huwood resulted in an increase of $4.8 million. Gross profit at the Company's domestic conveyor equipment operations decreased $3.4 million due to reduced sales volumes. Gross profit at the Company's foreign operations decreased $1.7 million. This decrease in profit margin was primarily due to lower margins on major contracts in the Company's Australian operations. Gross profit in the Company's mobile home products and other business segments increased by $0.1 million.
SG&A Expenses - -------------
Selling, general, and administrative expenses increased $5.0 million, or 24%, from $20.9 million in 1997 to $25.9 million in 1998. The acquisitions of Hewitt-Robins, MECO and Huwood accounted for $4.0 million of the increase. SG&A expenses at the Company's foreign subsidiaries increased by $0.8 million due to the increase in sales. Of the remaining increase, $0.1 million is attributable to the Company's mobile home products business segment and $0.2 million is attributable to corporate expenses at Continental Global, parent company.
Operating Income - ----------------
Operating income decreased $5.7 million, or 29%, from $20.0 million in 1997 to $14.3 million in 1998. The decrease is the result of the $0.2 million decrease in gross profit, combined with an increase in SG&A expenses of $5.0 million, an increase in amortization expense of $0.1 million, and restructuring charges of $1.1 million. This was offset by a decrease in management fees of $0.7 million attributable to Adjusted EBITDA earnings. The restructuring charges relate to the Company's Australian subsidiary and the consolidation of facilities in the United Kingdom.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $(12.3) million, $8.6 million, and $10.2 million for the years ending December 31, 1999, 1998, and 1997, respectively. The decrease in operating cash flows from 1998 to 1999 is primarily the result of the current year net loss and a net decrease in operating assets and liabilities. The significant changes in operating assets in 1999 and 1998, specifically accounts receivable, inventories and accounts payable, are the result of significantly higher 1998 fourth quarter sales at the Company's Australian subsidiary. The decrease in operating cash flows from 1997 to 1998 is due to lower net income resulting from increased operating expenses and decreased margins.
Net cash used in investing activities was $2.9 million, $7.9 million, and $22.7 million for the years ending December 31, 1999, 1998 and 1997, respectively. Net cash used in investing activities in 1999 represents net purchases of property, plant, and equipment. Investing activities in 1998 include the acquisition of Huwood for $5.0 million and net purchases of property, plant, and equipment for $2.9 million. The net cash used in investing activities in 1997 is the result of the acquisitions of BCE for $7.2 million, Hewitt-Robins for $12.9 million, and Tufkon for $0.7 million. The acquisition of MECO resulted in an increase in cash of $1.5 million, net of notes issued. The balance of expenditures for investing activities in 1997, $3.4 million, represents net purchases of property, plant, and equipment.
Net cash provided by (used in) financing activities was $7.0 million, $(4.9) million, and $41.7 million for the years ending December 31, 1999, 1998, and 1997, respectively.
Net cash provided by financing activities in 1999 primarily represents 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 account for $5.8 million of the net increase in borrowings on notes payable. The proceeds from long-term obligations include 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 net cash used in financing activities in 1998 is primarily a result of the Company's reduction in long-term obligations of $6.4 million. This includes payment in full of the promissory note payable to Joy Technologies, Inc. in the amount of $5.2 million. The Company also paid distributions for income taxes under the Tax Payment Agreement of $0.7 million. This was offset by a net increase in borrowings on notes payable of $2.2 million.
The net cash provided by financing activities of $41.7 million in 1997 is the result of the issuance of $120.0 million of senior notes. At the time of the debt offering, the Company paid dividends to its sole stockholder in the amount of $40.0 million and paid financing fees in the amount of $5.2 million. In connection with the BCE acquisition in 1997, $2.9 million was paid to former shareholders of BCE. The Company reduced its borrowings on notes payable and long-term obligations by $12.9 million and $18.8 million, respectively. The Company received proceeds from long-term obligations of $4.8 million. The Company paid distributions to fund the payment of income taxes under the Tax Payment Agreement in the amount of $3.3 million.
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 2000, the Company anticipates capital expenditures of approximately $2.7 million for new and replacement equipment. At December 31, 1999, the Company had cash and cash equivalents of $18.3 million and a credit facility line with $19.8 million available for use.
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 (decreases) to stockholder's equity of approximately $0.5 million and $(0.8) million for the years ended December 31, 1999 and 1998, respectively.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expended approximately $1.1 million in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its computer applications and those of its suppliers and vendors throughout the Year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" which, as amended by FASB Statement 137, is required to be adopted no later than January 1, 2001. Statement 133 requires all derivatives to be recognized as either assets or liabilities in the balance sheet and be measured at fair value. The Company is currently evaluating Statement 133 and because the Company expects to have a minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a material effect on earnings or the financial position of 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.
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, 1999 and 1998.
Interest Rate Sensitivity Principal Amount by Expected Maturity Average Interest Rate
(DOLLARS IN THOUSANDS)
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, 1999 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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Cleveland, Ohio March 28, 2000
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, 1999
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 a Subchapter S Corporation owned 100% by NES Group, Inc.
Prior to January 1, 1997, CCE and GCC were limited partnerships under common control by NES Group, Inc., 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. ACQUISITIONS
On August 6, 1998, the Company completed the purchase of assets and assumption of liabilities constituting a majority of the operations of Huwood International (Huwood), a U.K. belt conveyor business and a division of FKI, Plc. Huwood generated revenues of approximately $13,800,000 for the fiscal year ended March 31, 1998. The purchase price for the net assets was approximately $4,966,000. 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. The operations of the Company's existing U.K. facilities have been merged with the Huwood operations.
On October 17, 1997, the Company completed the acquisition of the MECO Belts Group (MECO Belts) from Joy Mining Machinery, a subsidiary of Harnischfeger Industries. MECO Belts is an international conveyor equipment company with operations in the United States, United Kingdom, South Africa, and Australia. The purchase price was approximately $7,200,000, including the issuance of a note payable for $5,244,000, plus the assumption of approximately $5,000,000 of liabilities. The Company has recorded approximately $100,000 of goodwill related to the acquisition. The results of operations since the date of acquisition have been included in the consolidated financial statements. The transaction was accounted for as a purchase.
On August 8, 1997, the Company acquired substantially all of the assets of the Tufkon Conveyor Components Division of Wyko, Inc. The purchase price for Tufkon was approximately $698,000 in cash. The Company has recorded approximately $350,000 of goodwill related to the acquisition. The results of operations since the date of acquisition have been included in the consolidated financial statements. The transaction was accounted for as a purchase.
On April 1, 1997, the Company acquired substantially all of the assets of the Hewitt-Robins Conveyor Components Division of W.S. Tyler, Incorporated, a manufacturer of idlers (Hewitt-Robins). The purchase price for Hewitt-Robins, after working capital adjustments, was approximately $12,900,000 in cash plus assumption of approximately $1,100,000 of liabilities. The Company has recorded approximately $12,100,000 of goodwill related to the acquisition. The results of operations since the date of acquisition have been included in the consolidated financial statements. The transaction was accounted for as a purchase.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
B. ACQUISITIONS -- CONTINUED
On January 7, 1997, the Company purchased the assets of BCE Holding Company Pty. Ltd. in Australia (BCE), a major manufacturer and supplier of conveyor equipment. The purchase price was $11,946,000. In addition, the Company contributed $3,512,000 in capital to BCE after the acquisition. Financing consisted of an advance on the revolving credit line of approximately $6,800,000, an addition to the existing term loan of approximately $4,500,000, and approximately $4,800,000 in seller financing. The Company has recorded approximately $9,600,000 of goodwill related to the acquisition. The results of operations since the date of acquisition have been included in the consolidated financial statements. The transaction was accounted for as a purchase.
C. 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.
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 62% and 58% of inventories at December 31, 1999 and 1998, 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 $1,527,000 and $2,103,000 at December 31, 1999 and 1998, respectively.
GOODWILL Goodwill is being amortized on a straight-line basis, primarily over 40 years. The balance of accumulated amortization of goodwill was approximately $1,610,000 and $1,378,000 at December 31, 1999 and 1998, respectively. The ongoing value and remaining useful life of goodwill are subject to periodic evaluation and the Company currently expects the carrying amounts to be fully recoverable. If events and circumstances indicate that goodwill might be impaired, an undiscounted cash flow methodology would be used to determine whether an impairment loss should be recognized.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
C. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
RESTRUCTURING CHARGES The Company incurred restructuring charges of approximately $1,106,000 and $1,127,000 in 1999 and 1998, respectively, related to its Australian and United Kingdom subsidiaries. In 1998, the Company executed a plan to close certain Australian manufacturing facilities and merge the operations with other existing facilities; in 1999, the Company made further reductions in office staff and facilities. In the United Kingdom, following the acquisition of Huwood in August 1998, the Company consolidated its existing operations and facilities into the Huwood operations. These restructuring charges consist primarily of severance of approximately 210 employees and relocation costs. As of December 31, 1999, the Company's Australian and United Kingdom subsidiaries have paid approximately $2,151,000 of the charges incurred to date. The Company anticipates that an additional cost for relocation of $129,000 will be incurred in 2000. These costs will be expensed as paid.
INCOME TAXES The Company and its domestic subsidiaries have elected Subchapter S Corporation Status for United States income tax purposes. Accordingly, the Company's United States operations are not subject to income taxes as separate entities. The Company's United States income is included in the income tax returns of the stockholder. Under the terms of the Tax Payment Agreement with the stockholder, the Company makes monthly distributions to the stockholder for payment of income taxes.
The Company has subsidiaries located in Australia, the United Kingdom, and South Africa which are subject to income taxes in their respective countries. For the years ended December 31, 1998 and 1997, the Company recorded foreign income tax expense of $127,166 and $343,342, respectively, related to its United Kingdom and Australian subsidiaries. Pre-tax income (loss) attributable to foreign operations was approximately $(8,891,000), $(3,093,000) and $633,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company's Australian subsidiary paid income taxes of approximately $150,000, $450,000 and $2,063,000 for the years ended December 31, 1999, 1998 and 1997, 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 other comprehensive income (loss). The effect on the statements of operations of transaction gains and losses is insignificant for all years presented.
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 generally accepted accounting principles 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.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
C. SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" which, as amended by FASB Statement 137, is required to be adopted in years beginning after June 15, 2000. Statement 133 requires all derivatives to be recognized as either assets or liabilities in the balance sheet and be measured at fair value. The Company is currently evaluating Statement 133 and because the Company expects to have a minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a material effect on earnings or the financial position of the Company.
RECLASSIFICATIONS Certain amounts from the prior year financial statements have been reclassified to conform to current year presentation.
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, 1999 and 1998 are as follows:
Depreciation expense for the years ended December 31, 1999, 1998, and 1997, was $2,931,686, $2,729,062, and $2,123,699, 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.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
E. FINANCING ARRANGEMENTS
Long-term obligations consist of the following:
Maturities of long-term obligations are as follows:
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.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
E. FINANCING ARRANGEMENTS -- CONTINUED
During the second quarter of 1999, the Company's United States operations purchased a manufacturing facility previously leased in Colorado for $1,600,000. The purchase was financed through a term note bearing an interest rate of 7.445% with a maturity date of May 1, 2004. The note is secured by the property. The Company's United States operations also financed the purchase of equipment for production of a new idler. This note payable bears an interest rate of 8.845%, matures on November 27, 2004, and is secured by the equipment.
In July 1999, the Company's Australian subsidiary renegotiated its revolving credit facility. The new agreement provides for a term loan of approximately $2,900,000. These proceeds were used to pay the outstanding balance of the BCE seller notes for approximately $2,100,000 and the balance for working capital.
In the fourth quarter of 1999, the Company's South African subsidiary purchased a new computer system for approximately $82,000. The purchase was financed through a note payable maturing on December 31, 2004. The interest rate is variable and was 15.551% at December 31, 1999.
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 28, 2000, ("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, 1999, the Company had an outstanding balance under the Revolving Credit Facility of $5,768,503. The weighted average interest rate for this facility was 8.3% in 1999.
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 July 31, 2000. At December 31, 1999, approximately $1.6 million (Australian dollars) was available for use. The outstanding balance under this facility at December 31, 1999 was $944,808 (U.S.$). The weighted average interest rate for this facility was 9.5% and 8.5% in 1999 and 1998, respectively.
The Company's United Kingdom subsidiary has an overdraft facility with the HSBC Bank of 1.1 million British pounds sterling. The facility is secured by certain assets of the Subsidiary, bears interest at a fluctuating rate of 2.75% above the HSBC Bank base rate, and matures in October 2000. At December 31, 1999, approximately 2,100 pounds was available for use. The outstanding balance under this facility at December 31, 1999 was $1,773,438 (U.S.$). The weighted average interest rate for this facility was 8% and 9% in 1999 and 1998, respectively.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
E. FINANCING ARRANGEMENTS -- CONTINUED
The Company's South African subsidiary has a credit facility with the Standard Bank of South Africa of 3.0 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, 1999, approximately 2.3 million rand was available for use. The outstanding balance under this facility at December 31, 1999 was $113,750 (U.S.$). The weighted average interest rate for this facility was 18% and 22% in 1999 and 1998, respectively.
During 1999, 1998, and 1997, the Company paid interest of $14,590,746, $12,456,957, and $8,153,452, respectively.
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, CCE, GCC, and the Company's foreign 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 $189,000 and $55,000 were incurred in 1999 and 1998. The gross amount of assets recorded under capital leases and the related accumulated amortization at December 31, 1999 and 1998 are as follows:
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
F. LEASING ARRANGEMENTS -- CONTINUED
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, 1999, 1998, and 1997 was approximately $2,525,000, $2,401,000, and $1,723,000, 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:
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% and 6% in 1999 and 1998, respectively, and a weighted-average expected long-term rate of return on plan assets of 8% and 7% in 1999 and 1998, respectively.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
G. EMPLOYEE BENEFIT PLANS -- CONTINUED
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, 1999 and 1998, of the Company's defined benefit plan.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
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 $548,000, $564,000, and $452,000, in 1999, 1998 and 1997, 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, $324,000, and $302,000 in 1999, 1998 and 1997, 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 years ended December 31, 1999, 1998 and 1997 was approximately $145,000, $197,000, and $164,000, respectively, which was equal to 2.5% of eligible employees compensation in 1999 and 3% of eligible employees compensation for 1998 and 1997.
H. RELATED PARTY TRANSACTIONS
Management fees are charged by Nesco, Inc., an affiliate of NES Group, Inc., to provide general management oversight services, including legal, financial, strategic planning and business development evaluation for the benefit of the Company. Effective April 1, 1997, the Company and Nesco, Inc. entered into a new management agreement under which 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). Prior to April 1, 1997, the amount of management fees paid was based on a percentage of sales. The Company incurred management fee expenses of approximately $467,000, $933,000, and $1,668,000 for the years ended December 31, 1999, 1998, and 1997, respectively.
The subsidiaries of the Company have entered into a tax payment agreement with NES Group, Inc. providing for monthly 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, $1,922,000, and $3,295,000 for the years ended December 31, 1999, 1998, and 1997, respectively. At December 31, 1999 and 1998, the Company had an accrual for income tax payments owed to NES Group, Inc. of approximately $20,000 and $1,176,000, respectively.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
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.
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 66% and 72% at December 31, 1999 and 1998, 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 $383,000, $586,000, and $168,000 in 1999, 1998, and 1997, respectively. Accounts written off, net of recoveries, were approximately $491,000, $53,000, and $437,000 in 1999, 1998, and 1997, respectively.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
J. SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. Statement 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of Statement 131 did not affect results of operations or financial position, but did affect the disclosure of segment information.
While the Company primarily manages its operations on a geographical basis, the Company operates in two principal business segments: conveyor equipment and mobile home products. The conveyor equipment business, which comprised approximately 84.6%, 84.9%, and 83.4% of net sales for 1999, 1998, and 1997, 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, monitoring 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 mobile home products business manufactures and/or refurbishes axle components sold directly to mobile home manufacturers. As part of this segment the Company also sells mounted tires and rims to the mobile home 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 fee, 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 C. The Company's reportable segments are business units that offer different products and services. 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, 1999
J. SEGMENT INFORMATION -- CONTINUED
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
J. SEGMENT INFORMATION -- CONTINUED
GEOGRAPHIC AREA DATA
Net sales are attributed to countries based on the location of the subsidiary where the sale occurs.
In 1999, sales to the Company's largest customer were approximately $24.5 million, or 11.6%, of the Company's total net sales. In 1998, sales to the Company's two largest customers were approximately $32.7 million and $30.8 million, respectively, or 13.0% and 12.2%, of the Company's total net sales. In 1997, sales to the Company's largest customer were approximately $27.9 million, or 13.1%, of the Company's total net sales. Sales to these customers are reported in the net sales for the Conveyor Equipment business segment.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
K. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
Effective September 23, 1999, 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. Prior to this date, CCE and GCC were the only 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. The 1999 operations and cash flows of the Company's guarantor Australian subsidiaries are included in the "Combined Guarantor Subsidiaries" column in the following summarized consolidating financial statements.
Summarized consolidating balance sheets for 1999 and 1998 and consolidating statements of operations and cash flow statements for 1999, 1998, and 1997 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, 1999
K. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES -- CONTINUED
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
K. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES -- CONTINUED
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
K. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES -- CONTINUED
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
K. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES -- CONTINUED
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
K. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES -- CONTINUED
L. 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.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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:
Name Age Position with the Company
C. Edward Bryant, Jr. 65 President and Chief Executive Officer Jimmy L. Dickinson 57 Vice President and Chief Financial Officer Jerry R. McGaha 61 Senior Vice President of Sales and Engineering Edward F. Crawford 60 Director Donald F. Hastings 71 Director Joseph L. Mandia 58 Director Robert J. Tomsich 69 Director John R. Tomsich 33 Director James W. Wert 53 Director
Set forth below is a brief description of the business experience of each director and executive officer of the Company.
Mr. Bryant has served as President and Chief Executive Officer of the Company since its inception. Mr. Bryant has also served as President and Chief Executive Officer of Continental Conveyor & Equipment Company since 1982 and as Chairman of the Board of Directors of CCE Pty. Ltd. since 1996.
Mr. 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 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. 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. Mandia has served as a Director of the Company since its inception. Mr. Mandia has also served as Group Vice President of Nesco, Inc. since 1988.
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. 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.
PART III
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, 2000:
All of the Company's issued and outstanding capital stock is owned by NES Group, Inc. 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.
TAX PAYMENT AGREEMENT
The Company, Continental, and Goodman (each, a "Subsidiary") have entered into a tax payment agreement with NES Group, Inc. ("Tax Payment Agreement") providing for monthly payments by each Subsidiary to NES Group, Inc. in an amount equal to the greater of (i) the total federal, state, local, and, under certain circumstances, foreign income tax liability attributable to such Subsidiary's operations for the monthly period, determined on an annualized basis, and (ii) one-twelfth the total federal, state, local, and, under certain circumstances, foreign income tax liability attributable to such Subsidiary's operations for the year. The tax rates applied to such income are to be based on the maximum individual federal, state, local, and foreign income tax rates imposed by Section 1 of the Internal Revenue Code of 1986, as amended, and by the equivalent provisions of state, local, and foreign income tax laws. These tax payments will not recognize any future carry-forward or carry-back tax benefits to the Company, Continental, or Goodman. Future direct and indirect Subsidiaries of the Company shall also become parties to the Tax Payment Agreement.
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 1999 under the Management Agreement was $466,615. 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 28, 2000, are included in Item 8.
Report of Independent Auditors.
Consolidated Balance Sheets at December 31, 1999 and 1998.
Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999.
Consolidated Statements of Stockholder's Equity (Deficit) for each of the three years in the period ended December 31, 1999.
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes to 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, 2000.
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
Exhibit Number Description of Exhibit - --------- ----------------------
3.1 Certificate of Incorporation of Continental Global Group, Inc., * as currently in effect.
3.2 By-Laws of Continental Global Group, Inc., as currently in * effect.
3.3 Certificate of Incorporation of Continental Conveyor & * Equipment Company, as currently in effect.
3.4 By-Laws of Continental Conveyor & Equipment Company, as * currently in effect.
3.5 Certificate of Incorporation of Goodman Conveyor Company, as * currently in effect.
3.6 By-Laws of Goodman Conveyor Company, as currently in effect. *
4.1 Indenture, dated as of April 1, 1997, among Continental * Global Group, Inc., Continental Conveyor & Equipment Company, Goodman Conveyor Company, and the Trustee (containing, as exhibits, specimens of the Series A Notes and the Series B Notes).
10.1
(a) Revolving Credit Facility, dated as of September 14, 1992, as * amended by Amendments I, II, and III, among Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Bank One, Cleveland, NA.
(b) Amendment IV, dated as of December 31, 1998, to the Revolving Credit Facility, dated as of September 14, 1992, among Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Bank One, Cleveland, NA. (Filed as Exhibit 10.1 (b) to the Company's Form 10-Q for the quarter ended March 31, 1999, and is incorporated herein by reference.)
(c) Letter of Amendment, dated as of July 26, 1999, to the Revolving Credit Facility, dated as of September 14, 1992, among Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Bank One, Cleveland, NA. (Filed as Exhibit 10.1 (c) to the Company's Form 10-Q for the quarter ended June 30, 1999, and is incorporated herein by reference.)
(d) Letter of Amendment, dated as of November 4, 1999, to the Revolving Credit Facility, dated as of September 14, 1992, among Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Bank One, Cleveland, NA. (Filed as Exhibit 10.1 (d) to the Company's Form 10-Q for the quarter ended September 30, 1999, and is incorporated herein by reference.)
(e) Amendment VI, dated as of March 28, 2000, to the Revolving Credit Facility, dated as of September 14, 1992, among Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Bank One, Cleveland, NA.
10.2 Asset Purchase Agreement, dated as of March 3, 1997, among * Continental Conveyor & Equipment Company, Process Technology Holdings, Inc., and W.S. Tyler Incorporated, relating to the Hewitt-Robins acquisition
Continental Global Group, Inc.
Form 10-K
Index of Exhibits (Continued)
10.3 Management Agreement, dated as of April 1, 1997, between Continental * Global Group, Inc. and Nesco, Inc.
10.4 Tax Payment Agreement, dated as of April 1, 1997, among Continental * Global Group, Inc., Continental Conveyor & Equipment Company, Goodman Conveyor Company, and NES Group, Inc.
10.5 World Wide Purchase and Sale Agreement dated as of October 17, 1997, by and among Continental Conveyor International Inc., Joy Technologies, Inc., and certain affiliates of Joy Technologies Inc. (The "Purchase Agreement"). (All exhibits to the Purchase Agreement have been omitted, and Registrant will furnish supplementally to the Commission, upon request, a copy of any omitted exhibit.) (Filed as Exhibit 2.0 to Form 8-K filed November 3, 1997, and is incorporated herein by reference.)
10.6 Credit Facility, dated as of July 18, 1999, among Continental Conveyor & Equipment Pty. Ltd. and its subsidiaries and the National Australia Bank Limited.
12 Statement regarding computation of ratio of earnings to fixed charges
21 Subsidiaries of registrant
27 Financial Data Schedule (filed electronically only)
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed under the Securities Act of 1933.