UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________
Commission File No. 333-27665
CONTINENTAL GLOBAL GROUP, INC.
Exact Name of Registrant as Specified in its Charter)
Delaware 31-1506889
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(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
CO-REGISTRANTS AND SUBSIDIARY GUARANTORS
Continental Conveyor & Equipment Company Delaware 34-1603197
Goodman Conveyor Company Delaware 34-1603196
Continental Conveyor & Equipment
Continental Global Group, Inc. Company Goodman Conveyor Company
438 Industrial Drive 438 Industrial Drive Route 178 South
Winfield, Alabama 35594 Winfield, Alabama 35594 Belton, South Carolina 29627
(205) 487-6492 (205) 487-6492 (864) 338-7793
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [x]
Indicate by check mark if the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [ ] No [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 2003 was $-0-.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. As of March 15, 2003, there
were 100 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
CONTINENTAL GLOBAL GROUP, INC.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Item
Number Page
Number
PART I
1 Business 1
2 Properties 4
3 Legal Proceedings 5
4 Submission of Matters to a Vote of Security Holders 5
PART II
5 Market for Registrant's Common Stock and Related Stockholder Matters 5
6 Selected Financial Data 6
7 Management's Discussion and Analysis of Financial Condition and Results of Operations 7
7A Quantitative and Qualitative Disclosures about Market Risk 14
8 Financial Statements and Supplementary Data 15
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 45
PART III
10 Directors and Executive Officers of the Registrant 45
11 Executive Compensation 47
12 Security Ownership of Certain Beneficial Owners and Management 48
13 Certain Relationships and Related Transactions 48
14 Controls and Procedures 49
PART IV
15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 50
Signatures 51
Certifications 53
Index of Exhibits 55
PART I
Item 1. Business
General
Continental Global Group, Inc. (hereinafter referred to as the "Company"),
through its subsidiaries, is primarily engaged in the manufacture and
distribution of bulk material handling and replacement equipment, primarily for
use in the mining industry. The Company is a holding company organized under the
Delaware General Corporation law and conducts all of its business through its
direct and indirect operating subsidiaries. The Company's direct operating
subsidiaries are Continental Conveyor and Equipment Company ("Continental") and
Goodman Conveyor Company ("Goodman"). The Company also owns indirectly all of
the capital stock of (i) Continental Conveyor & Equipment Pty. Ltd. ("CCE Pty.
Ltd."), an Australian holding company that owns all of the capital stock of four
Australian operating companies; (ii) Continental Conveyor Ltd., a U.K. operating
company; and (iii) Continental MECO (Pty.) Ltd., a South African operating
company. In July 2001, the Company acquired certain assets in Alabama from
Lippert Tire & Axle, Inc ("Lippert acquisition"). The Company's existing
Alabama operations of its manufactured housing products segment have been
combined with the Lippert operations.
While the Company primarily manages its operations on a geographical basis, the
Company operates in two principal business segments: conveyor equipment and
manufactured housing products. The conveyor equipment business, which comprised
approximately 83.5%, 90.5%, and 87.9% of net sales for 2002, 2001, and 2000,
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 16.0%, 8.9%, and 10.8% of net sales for 2002, 2001, and 2000,
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 67.3% or $124.6 million of the Company's 2002 net sales were
generated in the United States, 17.5% or $32.4 million in the United Kingdom,
13.0% or $24.0 million in Australia, and 2.2% or $4.0 million in other
countries.
1
Customers
The Company's conveyor equipment business segment markets its products worldwide
through a variety of marketing channels with different customer focuses. The
Company sells its mining equipment and bulk conveyor equipment products and
services primarily to mining companies and other end users, original equipment
manufacturers and engineering contractors. The Company sells its conveyor
components products to original equipment manufacturers, engineering contractors
and replacement part distributors, primarily in the following industries:
aggregates, such as rock, gravel, glass and cement materials; coal processing
and mining; pulp, paper and forest products; above ground hard rock and mineral
mining; food and grains; and environmental, sewage and waste water treatment.
The Company sells its engineered systems products and services primarily to
contractors and end users for applications in coal processing and mining, pulp
and paper, composting systems, grain handling, cement products, open-pit mining
and tunneling. The Company markets its manufactured housing products business
segment directly to the manufactured housing industry in the United States.
For the years ended December 31, 2002, 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 19.5%, 30.5%, and 21.6% of the Company's total net
sales for 2002, 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.
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, 2002, was $42.1 million, an increase of $0.8 million, or
2% from $41.3 million at December 31, 2001. Backlog at the Company's foreign
subsidiaries increased by $4.9 million and backlog at the Company's domestic
subsidiaries decreased by $4.1 million. The Company expects to ship
approximately 95% of its backlog in 2003.
2
Employees
As of December 31, 2002, the Company had approximately 1,200 employees,
approximately 700 of whom were located in the United States. Approximately 150
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 2006. Approximately 90
production employees at the Company's Australian subsidiary are covered by
collective bargaining agreements; one of these agreements, covering 45
employees, expires in 2003. Approximately 230 of the production employees at the
Company's United Kingdom and South African facilities are covered by annual
collective bargaining agreements that expire in 2003. The Company expects
negotiations for new agreements to begin in the second quarter of 2003. The
Company has not experienced any work stoppages since 1971 and believes its
relations with its employees are good.
Environmental and Health and Safety Matters
The Company is subject to a variety of environmental standards imposed by
federal, state, local and foreign environmental laws and regulations. The
Company is also subject to the federal Occupational Health and Safety Act and
similar foreign and state laws. The Company periodically reviews its procedures
and policies for compliance with environmental and health and safety laws and
regulations and believes that it is in substantial compliance with all such
material laws and regulations applicable to its operations. Historically the
costs of compliance with environmental, health and safety requirements have not
been material to the Company.
3
Item 2. Properties
The Company conducts its operations through the following primary facilities:
Approximate Owned/
Location Square Footage Principal Function Leased
United States:
Winfield, Alabama 220,000 Headquarters, manufacturing Owned
Belton, South Carolina 191,000 Administration, manufacturing Owned
Salyersville, Kentucky 111,000 Manufacturing Owned
Pueblo, Colorado 75,600 Manufacturing Owned
Eatonton, Georgia 22,000 Manufacturing, warehouse Leased(1)
Phil Campbell, Alabama 47,000 Administration, manufacturing Owned
Australia:
Somersby, New South Wales 49,655 Administration, engineering, Owned
sales, and manufacturing
Mackay, Queensland 32,000 Manufacturing, and installation Leased(2)
support
Minto, New South Wales 23,024 Manufacturing Owned
England
Gateshead, UK 234,810 Administration, engineering, Leased(3)
sales, and manufacturing
South Africa
Alrode, South Africa 24,456 Administration, engineering, Leased(4)
sales, and manufacturing
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(1) Expires in October 2003. The Company holds an option to buy such
property at the end of the lease term.
(2) Current lease is month to month.
(3) Expires in August 2003 with option to renew for additional five years
with option to purchase at market value.
(4) 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 F,
"Financing Arrangements," to the Consolidated Financial Statements.
4
Item 3. Legal Proceedings
The Company is not a party to any pending legal proceeding which it believes
could have a material adverse effect upon its results of operations or financial
condition, or to any other pending legal proceedings other than ordinary,
routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 2002, N.E.S. Investment Co., the
Company's sole stockholder, by written consent, elected all members of the
Company's Board of Directors. See Part III, Item 10.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company is a direct wholly-owned subsidiary of N.E.S. Investment Co. There
is no established public trading market for the Company's common stock. As of
March 15, 2003, the Company had one stockholder. The Company paid no dividends
in 2002 or 2001. See Note F, "Financing Arrangements", to the Consolidated
Financial Statements, Part II, Item 8, for limitations on dividends.
5
Item 6. Selected Financial Data
The following table presents selected financial and operating data of the
Company for each of the five years in the period ended December 31, 2002. The
data should be read in conjunction with the Consolidated Financial Statements
and related Notes included in this report on Form 10-K.
2002 2001 2000 1999 1998
--------------------------------------------------------------
(Data in 000's, except ratios)
Income Statement Data:
Net sales $ 184,976 $192,711 $168,178 $213,997 $253,873
Gross profit 29,774 30,155 26,526 31,764 42,936
Operating income 6,645 7,698 3,592 5,316 14,331
Interest expense 15,407 15,787 15,826 15,225 14,658
Income (loss) before cumulative effect of
change in accounting principle (8,692) (6,916) (13,114) (8,728) 1,175
Net income (loss) (1) (12,542) (6,916) (13,114) (8,728) 1,175
Other Data:
Depreciation and amortization 2,283 2,884 3,077 3,550 3,393
Operating cash flows (1,560) 268 (6,458) (12,261) 8,592
EBITDA (2) 9,454 10,090 7,152 10,240 18,912
Ratio of earnings to fixed charges (3) - - - - 1.08
Balance Sheet Data:
Cash and cash equivalents 5,635 14,672 16,942 18,300 26,351
Total assets 89,667 108,772 110,136 122,903 145,757
Long-term debt, including current portion 122,887 123,557 124,722 126,028 123,322
Stockholder's equity (deficit) (82,721) (68,845) (61,063) (45,878) (37,506)
(1) In 2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets," and as a result no
longer amortizes goodwill. Net loss in 2002 includes a non-cash goodwill
impairment write-down recorded as a cumulative effect of change in
accounting principle of $3,850. Net income (loss) for 2001, 2000, 1999,
and 1998 includes goodwill amortization expense, net of tax, of $431,
$431, $439, and $463, respectively.
(2) EBITDA represents earnings before interest, taxes, depreciation,
amortization, accounting changes, extraordinary items, restructuring
charges, and bond repurchase expenses. EBITDA is not a measure of
performance under generally accepted accounting principles ("GAAP").
While EBITDA should not be considered in isolation or as a substitute for
net income, cash flows from operating, investing and financing activities
and other income or cash flow statement data prepared in accordance with
GAAP or as a measure of profitability or liquidity, management understands
that EBITDA is customarily used as an indication of a company's ability
to incur and service debt. EBITDA is calculated as follows for the years
ending December 31:
2002 2001 2000 1999 1998
----------- ------------ ------------ ----------- ------------
Net income (loss) $ (12,542) $ (6,916) $ (13,114) $ (8,728) $ 1,175
Interest expense, net 15,220 15,148 14,794 14,312 13,090
Income tax expense (benefit) 3 (1,497) 1,914 - 127
Depreciation expense 2,166 2,250 2,467 2,932 2,729
Amortization expense 117 634 610 618 664
Accounting changes 3,850 - - - -
Restructuring charges 640 - 481 1,106 1,127
Bond repurchase expenses - 471 - - -
----------- ------------ ------------ ----------- ------------
EBITDA $ 9,454 $ 10,090 $ 7,152 $ 10,240 $ 18,912
=========== ============ ============ =========== ============
(3) Earnings consist of income before income taxes and accounting changes plus
fixed charges. Fixed charges consist of interest expense, amortization of
deferred financing costs and one-third of rent expense from operating
leases, which management believes is a reasonable approximation of an
interest factor. Earnings were inadequate to cover fixed charges in the
years ended December 31, 2002, 2001, 2000 and 1999 by $8,689, $8,413,
$11,200, and $8,728, respectively.
6
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
The following table sets forth, on a comparative basis, certain income statement
data as a percentage of net sales for the fiscal years ended December 31, 2002,
2001, and 2000.
Year ended December 31
---------------------------------------------------
2002 2001 2000
Net sales 100.0% 100.0% 100.0%
Cost of products sold 83.9 84.4 84.2
Gross profit 16.1 15.6 15.8
SG&A expenses 11.8 11.0 12.8
Management fee 0.3 0.3 0.2
Amortization expense 0.1 0.3 0.4
Restructuring charge 0.3 - 0.3
Operating income 3.6 4.0 2.1
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Sales
Net sales decreased $7.7 million, or 4%, from $192.7 million in 2001 to $185.0
million in 2002. Net sales in the domestic operations of the Company's conveyor
equipment segment decreased $29.8 million due to continued lower capital
spending by the Company's major customers in the coal industry. Net sales in the
foreign operations of the conveyor equipment segment increased $9.9 million.
This increase was attributable to increases in sales in the Company's Australian
and United Kingdom subsidiaries of $5.9 million and $5.0 million, respectively,
offset by a decrease in sales of $1.0 million in the South African subsidiary.
The increases in sales in Australia and the United Kingdom resulted from the
shipment of new mining and tunneling projects. Net sales in the Company's
manufactured housing segment increased $12.4 million due to the acquisition from
Lippert Tire & Axle Inc. in July 2001 and shipments to new customers. Net sales
in the Company's other segment decreased $0.2 million.
Gross Profit
Gross profit decreased $0.4 million, or 1%, from $30.2 million in 2001 to $29.8
million in 2002. Gross profit in the domestic operations of the Company's
conveyor equipment segment decreased $7.1 million due to lower sales volume.
Gross profit in the foreign operations of the conveyor equipment segment
increased $4.9 million due to higher sales volume and improved margins in the
Company's Australian subsidiary. Gross profit in the manufactured housing
segment increased $1.8 million due to increased sales and improved margins
resulting from the Lippert acquisition and the subsequent consolidation in the
fourth quarter of 2001 of the existing operations into the acquired facility.
SG&A Expenses
SG&A expenses increased $0.6 million, or 3%, from $21.3 million in 2001 to $21.9
million in 2002. The increase primarily resulted from increases in the foreign
subsidiaries due to higher marketing and insurance costs.
7
Operating Income
Operating income decreased $1.1 million, or 14%, from $7.7 million in 2001 to
$6.6 million in 2002. The decrease resulted from the $0.4 million decrease in
gross profit combined with the $0.6 million increase in SG&A expenses and a $0.6
million increase in restructuring charges, offset by a $0.5 million decrease in
amortization expense. The decrease in amortization expense resulted from a
change in the method of accounting for goodwill due to the Company's adoption on
January 1, 2002 of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets".
Restructuring Charges
The Company incurred restructuring charges of approximately $0.6 million in 2002
related to changes in staffing and production requirements in its domestic
operations. These charges consist primarily of severance costs associated with a
reduction in personnel. As part of this restructuring, during 2003 the Company
plans to discontinue the manufacturing operations in certain of its domestic
facilities and merge these operations with other existing facilities. The
Company expects the additional cost of this restructuring to be approximately
$0.5 million. These charges consist primarily of severance and relocation costs
and will be expensed as incurred. As of December 31, 2002, the Company has paid
less than $0.1 million of the charges incurred to date.
The Company incurred restructuring charges of approximately $0.5 million in 2000
related to reductions in office staff and facilities in its Australian
subsidiary and the consolidation of facilities in the United Kingdom following
the August 1998 acquisition of Huwood International. All accruals for these
restructuring charges have been fully utilized.
Goodwill
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets" effective January 1, 2002. Under
SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives
are no longer amortized but are subject to annual impairment tests. Other
intangible assets will continue to be amortized over their useful lives.
Goodwill and other intangibles that have indefinite lives will be tested for
impairment at least annually, using a two step process. The first step
identifies if there is impairment using a fair-value-based test and the second
step determines the amount of the impairment. The Company engaged the assistance
of independent valuation experts to perform the initial analysis as of January
1, 2002 as well as the annual impairment test. The impairment tests were
conducted using a discounted cash flow valuation model, incorporating an
appropriate discount rate for the risks associated with the reporting unit.
Based on findings from the initial impairment test as of January 1, 2002, the
Company concluded that the carrying value of its Australian reporting unit (part
of the Company's conveyor equipment segment) exceeded its estimated fair value
and the Company recorded a non-cash impairment write-down for goodwill of
approximately $3.9 million. This transition adjustment was reported as a
cumulative effect of a change in accounting principle. If the Company had
adopted SFAS No. 142 on January 1, 2000, net loss for the years ended December
31, 2001 and 2000 would have been approximately $6.5 million and $12.7 million,
respectively. The results of the annual impairment test completed in the fourth
quarter of 2002 indicated that there was no further impairment.
8
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 $3.7 million, or 14%, from $26.5 million in 2000 to $30.2
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 $1.4 million. Gross profit in the
Company's United Kingdom and South African subsidiaries increased $3.9 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 $0.2 million, or 1%, from $21.5 million in 2000 to $21.3
million in 2001. The decrease was 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 was the result of the
$3.7 million increase in gross profit combined with reductions in SG&A expenses
and restructuring charges of $0.2 million and $0.4 million, respectively, offset
by an increase in management fees of $0.2 million.
Liquidity and Capital Resources
Net cash provided by (used in) operating activities was $(1.6), $0.3 million,
and $(6.5) million for the years ending December 31, 2002, 2001, and 2000,
respectively. The decrease in operating cash flows from 2001 to 2002 is
primarily the result of the increase in the net loss. Net cash used in operating
activities in 2002 resulted from the current year net loss of $12.5 million
offset by significant non-cash expenses of $7.1 million and a net decrease in
operating assets of $3.8 million. Net cash provided by operating activities in
2001 represents the net loss of $6.9 million offset by significant non-cash
expenses of $2.9 million and a net decrease in operating assets of $4.3 million.
Net cash used in 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.
9
Net cash used in investing activities was $1.2 million, $2.5 million, and $1.4
million for the years ending December 31, 2002, 2001 and 2000, respectively. Net
cash used in investing activities in 2002 and 2000 represents net purchases of
property, plant, and equipment. Net cash used in investing activities in 2001
includes net purchases of property, plant, and equipment of $0.9 million and the
acquisition from Lippert Tire & Axle for $1.6 million.
Net cash provided by (used in) financing activities was $(6.3) million, $0.02
million, and $6.5 million for the years ending December 31, 2002, 2001, and
2000, respectively. Net cash used in financing activities in 2002 resulted from
a net decrease in borrowings on notes payable of $5.4 million and principal
payments on long-term obligations of $0.9 million. Borrowings on notes payable
at the Company's domestic subsidiaries decreased $6.4 million while borrowings
on notes payable at the Company's foreign subsidiaries increased $1.0 million.
Net cash provided by financing activities in 2001 represents a net increase in
borrowings on notes payable of $1.05 million offset by principal payments on
long-term obligations of $1.03 million. 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.
The Company's primary capital requirements consist of capital expenditures and
debt service. The Company utilizes cash on hand and its available credit
facilities to satisfy these requirements. The Company anticipates that capital
expenditures in 2003 will approximate those made in 2002. The Company
anticipates that its debt service requirements in 2003 (not including principal
obligations under the Company's credit facilities) will be approximately $16.0
million. In addition, as of December 31, 2002, the Company's domestic and
foreign credit facilities had outstanding principle balances of approximately
$8.1 million and $3.2 million, respectively.
At December 31, 2002, the Company was in violation of certain of its covenants
under the domestic credit facility, but it has received a waiver of these
violations through the facility's maturity date. The Company's domestic credit
facility matures on June 30, 2003. The Company has maintained a credit facility
with its primary domestic bank since 1989 and is currently in negotiations with
the bank to extend the facility. Although no assurance can be given regarding
the Company's ability to enter into a new or revised facility, the Company
expects to finalize negotiations for an extension to the credit facility in the
second quarter of 2003. Failure to successfully complete negotiations of an
extension to its domestic credit facility could materially impact the Company's
ability to meet its debt service requirements.
The credit facility of the Company's United Kingdom subsidiary matured on
December 31, 2002 but the Company continues to operate under the existing
facility while negotiating the terms of a new credit facility. The credit
facility of the Company's Australian facility matures on August 31, 2003 and the
Company expects to finalize negotiations for a new agreement in the second
quarter of 2003.
At December 31, 2002, the Company had cash and cash equivalents of approximately
$5.6 million and approximately $10.0 million available for use under its
domestic credit facility, representing approximately $15.6 million of liquidity.
Assuming the Company is able to successfully negotiate extensions of its credit
facilities, the Company expects current financial resources (working capital and
available bank borrowings) and anticipated funds from operations to be adequate
to meet current cash requirements.
10
The table below summarizes the Company's contractual payments under debt
agreements, capital leases, operating leases, and material purchase obligations
as of December 31, 2002:
Payments due by period
---------------------------------------------------------------
Less than
(dollars in thousands) Total 1 year 1 - 3 years 3 - 5 years
--------------- --------------- --------------- ---------------
Notes payable $ 11,286 $ 11,286 $ - $ -
Senior Notes 120,000 - - 120,000
Other long-term debt obligations 2,708 933 1,775 -
Capital leases 179 77 74 28
Operating leases 787 584 198 5
Purchase obligations 2,053 1,779 274 -
--------------- --------------- --------------- ---------------
Total $ 137,013 $ 14,659 $ 2,321 $ 120,033
=============== =============== =============== ===============
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 $0.4 million and $(0.9) million for the years ended December 31,
2002 and 2001, respectively.
Critical Accounting Policies
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. The Company evaluates its estimates
on an on-going basis. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Our significant accounting policies are described in Note B to
the consolidated financial statements included in Item 8 of this Form 10-K.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
Revenue Recognition
The Company recognizes revenue 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.
11
Warranty Costs
New manufactured products sold are generally covered by a warranty for periods
ranging from six months to two years. Goods purchased for resale normally carry
the warranty of the respective manufacturer. The Company records a warranty
reserve for estimated costs to satisfy warranty obligations. The Company's
estimate of costs to service its warranty obligations is based on historical
experience and expectation of future conditions. To the extent the Company
experiences changes in warranty claims activity or costs associated with
servicing those claims, its warranty accrual is adjusted accordingly.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
based upon its evaluations of the probability of collection. The Company
evaluates the allowance for doubtful accounts based on the length of time the
receivables are past due, historical collection experience, and customer
credit-worthiness. In cases where the Company is aware of circumstances that may
impair the collectibility of accounts receivable from a specific customer, the
Company may record a specific allowance against the amount due from such
customer.
Inventories
The Company's inventories consists of raw material, manufactured and purchased
parts, and work in process. Since inventory records are maintained on a job
order basis, it is not practical to segregate inventories into their major
classes. The value of a portion of the inventories is determined using the
last-in, first-out ("LIFO") method with the remainder determined using the
first-in, first-out ("FIFO") method. The Company provides allowances for excess
and obsolete inventory based on the age and quality of its products.
Employee Benefit Plans
The Company accounts for it's defined benefit pension plan using Statement of
Financial Accounting Standards No. 87, ("SFAS No. 87"). Annual pension benefits
under the Company's defined benefit plan are calculated by third party actuaries
using standard actuarial methodologies. Significant assumptions used in the
valuation of pension benefits include expected return on plan assets, discount
rate, and any plan amendments. As a result of continuing declines in interest
rates and the market value of the Company's defined benefit pension plan assets,
the Company was required to increase the minimum pension liability at December
31, 2002 by $1.9 million. This adjustment did not impact current earnings. For
further details regarding the Company's defined benefit pension plan, see Note H
to the consolidated financial statements.
Deferred Taxes
Deferred income taxes reflect the timing differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Tax credits are recognized as a reduction
of income tax expense in the year the credit arises. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount more
likely than not to be realized. At December 31, 2002, the Company had a
valuation allowance of approximately $8.3 million against its deferred tax
assets.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," that requires the recognition of
the fair value of the liability for closure and removal costs associated with
the resulting legal obligations upon retirement or removal of any tangible
long-lived assets be recognized in the period in which it is incurred. The
initial recognition of the liability will be capitalized as part of the asset
cost and depreciated over its estimated useful life. The Company adopted this
Statement effective January 1, 2003. The adoption of this Statement is not
expected to have a significant impact on the Company's financial condition or
results of operations.
12
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company adopted this Statement effective January 1, 2003. The effect
of adoption had no impact on the Company's financial condition or results of
operations.
Cautionary Statement for Safe Harbor Purposes
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
federal securities laws. As a general matter, forward-looking statements are
those focused upon future plans, objectives or performance as opposed to
historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters that are not historical in nature.
Such forward looking statements are subject to uncertainties and factors
relating to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the control of the Company,
that could cause actual results of the Company to differ materially from those
matters expressed in or implied by such forward-looking statements.
In addition, the Company's future results of operations, financial condition,
liquidity and capital resources could be materially adversely affected by, among
other things, the economic and political uncertainties relating to the war in
Iraq and the risk of prolonged economic recession resulting from such
hostilities.
13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The following tables provide information about the Company's financial
instruments that are sensitive to changes in interest rates. The tables present
principal cash flows and related weighted-average interest rates by expected
maturity dates for debt obligations as of December 31, 2002 and 2001.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------
Fair
Value,
As of December 31, 2002: 2003 2004 2005 2006 2007 Thereafter Total 12/31/02
- ------------------------------------------------------------------------------------------------------------
Long-Term Obligations,
including current
portion
Fixed Rate $ 921 $ 1,668 $ 95 $- $ 120,000 $ - $ 122,684 $ 68,779
Average interest rate 11% 11% 11% 11% 11%
Variable Rate $ 12 $ 12 $- $- $- $ - $ 24 $ 24
Average interest rate 19% 19%
Fair
Value,
As of December 31, 2001: 2002 2003 2004 2005 2006 Thereafter Total 12/31/01
- ---------------------------------------------------------------------------------------------------------
Long-Term Obligations,
including current
portion
Fixed Rate $ 1,146 $ 441 $ 1,666 $ 95 $- $ 120,000 $ 123,348 $56,308
Average interest rate 11% 11% 11% 11% 11% 11%
Variable Rate $ 7 $ 8 $ 10 $ - $ - $ - $ 25 $ 25
Average interest rate 14% 14% 14%
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents as well as
interest paid on its debt. To mitigate the impact of fluctuations in U.S.
interest rates, the Company generally borrows on a long-term basis to maintain a
debt structure that is fixed rate in nature.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures and sells its
products in the United States, Australia, the United Kingdom, and South Africa.
As a result, the Company's financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company distributes its products.
The Company's operating results are exposed to changes in exchange rates between
the U.S. dollar and the Australian dollar, the British pound sterling, and the
South African rand.
14
Item 8. Financial Statements and Supplemental Data
The Report of Independent Auditors and the Consolidated Financial Statements
of Continental Global Group, Inc. for each of the three years in the period
ended December 31, 2002 are included herein.
15
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, 2002 and 2001, 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, 2002. 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, 2002 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
As explained in Note D to the financial statements, effective January 1, 2002,
the Company changed its method of accounting for goodwill.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 28, 2003
16
Continental Global Group, Inc.
Consolidated Balance Sheets
December 31
-----------------------------------------
2002 2001
Assets:
Current assets:
Cash and cash equivalents $ 5,635,042 $ 14,671,806
Accounts receivable, less allowance for doubtful accounts of
$1,053,588 in 2002 and $885,851 in 2001 25,634,100 32,050,919
Inventories 27,752,503 26,572,726
Deferred income taxes 25,893 -
Other current assets 1,959,369 1,745,684
-------------------- --------------------
Total current assets 61,006,907 75,041,135
Property, plant and equipment 28,681,527 26,142,796
Less accumulated depreciation 15,800,206 13,048,973
-------------------- --------------------
12,881,321 13,093,823
Goodwill 13,155,269 16,799,894
Deferred financing costs 2,209,584 2,729,487
Deferred income taxes - 718,862
Other assets 414,400 388,705
-------------------- --------------------
$ 89,667,481 $ 108,771,906
==================== ====================
Liabilities and Stockholder's Equity (Deficit):
Current liabilities:
Notes payable $ 11,285,602 $ 16,306,471
Trade accounts payable 20,039,041 18,895,554
Accrued compensation and employee benefits 4,974,168 4,659,416
Accrued interest on senior notes 3,300,000 3,300,000
Deferred income taxes - 1,235,922
Other accrued liabilities 6,696,110 9,185,735
Current maturities of long-term obligations 1,010,032 1,298,522
-------------------- --------------------
Total current liabilities 47,304,953 54,881,620
Pension obligations 2,645,640 476,864
Deferred income taxes 561,420 -
Senior notes 120,000,000 120,000,000
Other long-term obligations, less current maturities 1,876,928 2,258,082
Stockholder's equity (deficit):
Common stock, $0.01 par value, authorized 5,000,000 shares,
issued and outstanding 100 shares 1 1
Paid-in capital 1,993,687 1,993,687
Accumulated deficit (77,654,146) (65,111,800)
Accumulated other comprehensive loss (7,061,002) (5,726,548)
-------------------- --------------------
(82,721,460) (68,844,660)
-------------------- --------------------
$ 89,667,481 $ 108,771,906
==================== ====================
See notes to consolidated financial statements.
17
Continental Global Group, Inc.
Consolidated Statements of Operations
Year ended December 31
----------------------------------------------------------
2002 2001 2000
Net sales $ 184,975,955 $ 192,710,850 $ 168,178,263
Cost of products sold 155,201,713 162,555,442 141,652,633
------------------- ------------------ -------------------
Gross profit 29,774,242 30,155,408 26,525,630
Operating expenses:
Selling and engineering 13,085,675 12,540,052 12,572,872
General and administrative 8,816,821 8,726,441 8,919,150
Management fee 469,922 556,933 350,978
Amortization expense 116,651 634,068 609,629
Restructuring charges 639,909 - 481,192
------------------- ------------------ -------------------
Total operating expenses 23,128,978 22,457,494 22,933,821
------------------- ------------------ -------------------
Operating income 6,645,264 7,697,914 3,591,809
Other expenses:
Interest expense 15,407,469 15,786,984 15,825,845
Interest income (187,870) (638,791) (1,032,425)
Miscellaneous, net 114,165 963,205 (1,961)
------------------- ------------------ -------------------
Total other expenses 15,333,764 16,111,398 14,791,459
------------------- ------------------ -------------------
Loss before income taxes and cumulative effect of
change in accounting principle (8,688,500) (8,413,484) (11,199,650)
Income tax expense (benefit) 3,846 (1,497,651) 1,914,731
------------------- ------------------ -------------------
Loss before cumulative effect of change in
accounting principle (8,692,346) (6,915,833) (13,114,381)
Cumulative effect of change in accounting principle (3,850,000) - -
------------------- ------------------ -------------------
Net loss $ (12,542,346) $ (6,915,833) $ (13,114,381)
=================== ================== ===================
See notes to consolidated financial statements.
18
Continental Global Group, Inc.
Consolidated Statements of Stockholder's Equity (Deficit)
Accumulated
Other
Common Paid-in Accumulated Comprehensive
Stock Capital Deficit Income (Loss) Total
----------- ------------ --------------- ---------------- ---------------
Balance at December 31, 1999 $ 500 $ 1,993,188 $ (45,081,586) $ (2,789,977) $ (45,877,875)
Comprehensive loss:
Net loss - - (13,114,381) - (13,114,381)
Foreign currency
translation adjustment - - - (2,070,931) (2,070,931)
---------------
Total comprehensive loss (15,185,312)
Change in par value of stock (499) 499 - - -
----------- ------------ --------------- ---------------- ---------------
Balance at December 31, 2000 1 1,993,687 (58,195,967) (4,860,908) (61,063,187)
Comprehensive loss:
Net loss - - (6,915,833) - (6,915,833)
Cumulative effect upon
adoption of SFAS 133, net
of tax - - - 55,736 55,736
Unrealized losses on cash
flow hedges, net of tax - - - (176,612) (176,612)
Reclassification into
earnings - - - 120,876 120,876
Foreign currency
translation adjustment - - - (865,640) (865,640)
---------------
Total comprehensive loss (7,781,473)
----------- ------------ --------------- ---------------- ---------------
Balance at December 31, 2001 1 1,993,687 (65,111,800) (5,726,548) (68,844,660)
Comprehensive loss:
Net loss - - (12,542,346) - (12,542,346)
Foreign currency
translation adjustment - - - 445,061 445,061
Minimum pension liability
adjustment - - - (1,779,515) (1,779,515)
---------------
Total comprehensive loss (13,876,800)
----------- ------------ --------------- ---------------- ---------------
Balance at December 31, 2002 $ 1 $ 1,993,687 $ (77,654,146) $ (7,061,002) $ (82,721,460)
=========== ============ =============== ================ ===============
See notes to consolidated financial statements.
19
Continental Global Group, Inc.
Consolidated Statements of Cash Flows
Year ended December 31
---------------------------------------------------
2002 2001 2000
Operating activities:
Net loss $ (12,542,346) $ (6,915,833) $ (13,114,381)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for depreciation and amortization 2,283,227 2,883,820 3,076,778
Amortization of deferred financing costs 519,903 519,902 519,902
Cumulative effect of change in accounting principle 3,850,000 - -
Deferred income taxes - (1,502,074) 1,885,591
Provision for doubtful accounts 453,738 1,004,071 1,617,501
Loss (gain) on disposal of assets 26,042 (18,161) 6,867
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 7,361,266 (5,370,516) (966,740)
Decrease (increase) in inventories (728,139) 2,162,960 2,515,947
Decrease (increase) in other assets (50,606) (1,175,723) 1,185,269
Increase (decrease) in accounts payable and other
liabilities (2,733,479) 8,679,654 (3,184,710)
---------------- ----------------- ----------------
Net cash provided by (used in) operating activities (1,560,394) 268,100 (6,457,976)
---------------- ----------------- ----------------
Investing activities:
Purchases of property, plant, and equipment (PP&E) (1,280,466) (957,761) (1,494,957)
Proceeds from disposals of PP&E 53,943 112,851 122,397
Acquisition of business - (1,606,806) -
---------------- ----------------- ----------------
Net cash used in investing activities (1,226,523) (2,451,716) (1,372,560)
---------------- ----------------- ----------------
Financing activities:
Net increase (decrease) in borrowings on notes payable (5,380,102) 1,046,982 7,377,782
Proceeds from long-term obligations - - 775,887
Principal payments on long-term obligations (902,671) (1,026,035) (1,634,659)
---------------- ----------------- ----------------
Net cash provided by (used in) financing activities (6,282,773) 20,947 6,519,010
Effect of exchange rate changes on cash 32,926 (107,474) (46,135)
---------------- ----------------- ----------------
Decrease in cash and cash equivalents (9,036,764) (2,270,143) (1,357,661)
Cash and cash equivalents at beginning of year 14,671,806 16,941,949 18,299,610
---------------- ----------------- ----------------
Cash and cash equivalents at end of year $ 5,635,042 $ 14,671,806 $ 16,941,949
================ ================= ================
See notes to consolidated financial statements.
20
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
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. Allowances for doubtful accounts are maintained for estimated
losses resulting from the inability of customers to make required payments.
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 63% and 68% of
inventories at December 31, 2002 and 2001, 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 $1,457,000 and $1,141,000 at December 31,
2002 and 2001, 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 of 2001 to cost of products sold of approximately $757,000.
21
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
B. Significant Accounting Policies - Continued
Impairment of Long-Lived Assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." This Statement addresses the conditions under which an
impairment charge should be recorded related to long-lived assets to be held and
used, except goodwill, and those to be disposed of by sale or otherwise.
Long-lived assets, other than goodwill, are reviewed for impairment when events
or changes in circumstances indicate that the carrying amount of the asset, or
related groups of assets, may not be recoverable. The asset would be considered
impaired when the Company's estimate of future undiscounted cash flows over the
assets remaining estimated useful life is less than the asset's carrying value.
Measurement of the amount of impairment may be based on appraisal, market values
of similar assets, or estimated discounted future cash flows resulting from the
use and ultimate disposition of the asset.
Warranty Costs
The Company's products are generally covered by warranties against defects in
material and workmanship for periods up to two years from the date of sale or
installation of the product. The Company records a provision for estimated
warranty cost based on actual experience and continuously assesses the adequacy
of its product warranty accrual and makes adjustments as needed. A summary of
accrued warranty costs follows:
2002 2001
----------------- ----------------
Balance as of January 1 $ 768,313 $ 778,003
Warranties issued during the year 1,293,518 810,272
Settlements made during the year (420,257) (813,378)
Effect of exchange rate changes 36,428 (6,584)
----------------- ----------------
Balance as of December 31 $ 1,678,002 $ 768,313
================= ================
Restructuring Charges
The Company incurred restructuring charges of approximately $640,000 in 2002
related to changes in staffing and production requirements in its domestic
operations. These charges consist primarily of severance costs associated with a
reduction in personnel. As part of this restructuring, during 2003 the Company
plans to discontinue the manufacturing operations in certain of its domestic
facilities and merge these operations with other existing facilities. The
Company expects the additional cost of this restructuring to be approximately
$500,000. These charges consist primarily of severance and relocation costs and
will be expensed as incurred. As of December 31, 2002, the Company has paid
approximately $25,000 of the charges incurred to date.
The Company incurred restructuring charges of approximately $481,000 in 2000
related to reductions in office staff and facilities in its Australian
subsidiary and the consolidation of facilities in the United Kingdom following
the August 1998 acquisition of Huwood International. All accruals for these
restructuring charges have been fully utilized.
22
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
B. Significant Accounting Policies - Continued
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
approximately $644,000, $635,000, and $583,000 in advertising costs for the
years ended December 31, 2002, 2001, and 2000, 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 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.
The Company recognizes all derivative financial instruments as either assets or
liabilities at fair value. Derivative instruments that are not hedges are
adjusted to fair value through 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.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss at December 31 consisted of the following:
2002 2001 2000
---------------- ----------------- ----------------
Foreign currency translation adjustments $ (5,281,487) $ (5,726,548) $ (4,860,908)
Minimum pension liability adjustments (1,779,515) - -
---------------- ----------------- ----------------
$ (7,061,002) $ (5,726,548) $ (4,860,908)
================ ================= ================
23
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
B. Significant Accounting Policies - Continued
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," that requires the recognition of
the fair value of the liability for closure and removal costs associated with
the resulting legal obligations upon retirement or removal of any tangible
long-lived assets be recognized in the period in which it is incurred. The
initial recognition of the liability will be capitalized as part of the asset
cost and depreciated over its estimated useful life. The Company adopted this
Statement effective January 1, 2003. The adoption of this Statement is not
expected to have a significant impact on the Company's financial condition or
results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The Company adopted this Statement effective January 1, 2003. The effect
of adoption had no impact on the Company's financial condition or results of
operations.
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.
24
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
D. Goodwill and Other Intangibles
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective January 1, 2002. Under SFAS No. 142, goodwill and intangible assets
deemed to have indefinite lives are no longer amortized but are subject to
annual impairment tests. Other intangible assets will continue to be amortized
over their useful lives.
Goodwill and other intangibles that have indefinite lives will be tested for
impairment at least annually, using a two step process. The first step
identifies if there is impairment using a fair-value-based test and the second
step determines the amount of the impairment. The Company engaged the assistance
of independent valuation experts to perform the initial analysis as of January
1, 2002 as well as the annual impairment test. The impairment tests were
conducted using a discounted cash flow valuation model, incorporating an
appropriate discount rate for the risks associated with the reporting unit.
Based on findings from the initial impairment test as of January 1, 2002, the
Company concluded that the carrying value of its Australian reporting unit (part
of the Company's conveyor equipment segment) exceeded its estimated fair value
and the Company recorded a non-cash impairment write-down for goodwill of
$3,850,000. This transition adjustment was reported as a cumulative effect of a
change in accounting principle. The results of the annual impairment test
completed in the fourth quarter of 2002 indicated that there was no further
impairment.
The following table reflects the consolidated results adjusted as though the
adoption of SFAS No. 142 had occurred on January 1, 2000:
Year ended December 31
2002 2001 2000
-------------------------------------------------------
Reported net loss $ (12,542,346) $ (6,915,833) $ (13,114,381)
Goodwill amortization, net of tax - 430,997 431,015
-------------------------------------------------------
Adjusted net loss (12,542,346) (6,484,836) (12,683,366)
Cumulative effect of change in accounting principle 3,850,000 - -
-------------------------------------------------------
Adjusted loss before cumulative effect of a change
in accounting principle $ (8,692,346) $ (6,484,836) $ (12,683,366)
=======================================================
The carrying amounts and related accumulated amortization balances of the
Company's other intangible assets as of December 31, 2002 and 2001 are listed
below:
December 31, 2002 December 31, 2001
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------------- ----------------- ---------------- -----------------
Amortized intangible assets $ 496,022 $ (388,802) $ 486,848 $ (264,976)
Other intangible assets 289,502 - 138,386 -
25
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
D. Goodwill and Other Intangibles - Continued
The change in goodwill reflected on the balance sheet from December 31, 2001 to
December 31, 2002 resulted from the impairment write-down of $3,850,000 and
foreign currency translation. All of the Company's goodwill relates to the
conveyor equipment segment. Other intangible assets consist primarily of
intangible assets related to a minimum pension liability for the Company's
pension plan. Estimated amortization expense related to other intangible assets
for each of the next five fiscal years is:
2003 $ 26,360
2004 26,360
2005 26,360
2006 17,116
2007 4,176
----------------
Total $ 100,372
================
E. 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, 2002 and 2001 are as
follows:
2002 2001
----------------- -----------------
Land and improvements $ 1,115,896 $ 1,036,824
Buildings and improvements 6,844,542 6,461,887
Machinery and equipment 20,721,089 18,644,085
----------------- -----------------
$28,681,527 $26,142,796
================= =================
Depreciation expense for the years ended December 31, 2002, 2001, and 2000 was
$2,166,576, $2,249,752, and $2,467,149, respectively. Depreciation is primarily
computed using the straight-line method based on the expected useful lives of
the assets. The estimated useful lives for buildings and improvements range from
10 to 39 years; the estimated useful lives for machinery and equipment range
from 2.5 to 12.5 years. Repair and maintenance costs are expensed as incurred.
26
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
F. Financing Arrangements
Long-term obligations consist of the following:
As of December 31
----------------------------------
2002 2001
Senior Notes, interest at 11% payable semi-annually in arrears, due 2007 $120,000,000 $120,000,000
Note payable by CCE for purchase of Colorado facility; interest rate of
7.445%; payable in monthly installments through 5/1/04 1,369,192 1,440,286
Note payable by CCE for idler equipment; interest rate of 8.845%;
payable in monthly installments through 6/13/05 834,426 1,165,707
Term loan payable by Australian subsidiary; interest rate of 5.09%;
maturity date of 8/31/03 480,250 741,675
Note payable by South African subsidiary for purchase of computer
system; variable interest rate (18.5% and 14.0% at December 31, 2002
and 2001, respectively); payable in monthly installments through
12/31/04 23,773 24,920
Obligations under capital leases 179,319 184,016
----------------- ----------------
122,886,960 123,556,604
Less current maturities 1,010,032 1,298,522
----------------- ----------------
$121,876,928 $122,258,082
================= ================
Maturities of long-term obligations are as follows:
2003 $ 1,010,032
2004 1,718,437
2005 129,852
2006 20,215
2007 120,008,424
------------------
$122,886,960
==================
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.
27
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
F. Financing Arrangements - Continued
CCE, GCC and Bank One, Cleveland, NA are parties to a credit facility and
security agreement dated July 25, 2002, ("Revolving Credit Facility") pursuant
to which Bank One has provided CCE and GCC jointly with a line of credit of $26
million. The availability under the Revolving Credit Facility is equal to the
sum of (i) 85% of eligible accounts receivable and (ii) 55% of eligible
inventory. The Revolving Credit Facility is guaranteed by the Company and
secured by a lien on substantially all of the assets of CCE and GCC. In
addition, the Revolving Credit Facility contains certain financial and other
covenants which, among other things, establish minimum debt coverage and net
working capital requirements. The Company was in violation of certain of these
covenants at December 31, 2002 but has received a waiver of these violations
through the facility's maturity date. 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, 2002, approximately
$10.0 million was available for use. At December 31, 2002 and 2001, the Company
had an outstanding balance under the Revolving Credit Facility of $8,074,381 and
$14,516,217, respectively. The weighted average interest rate for this facility
was 4.7% and 6.7% in 2002 and 2001, respectively. There were approximately
$1,485,000 and $2,273,000 of letters of credit outstanding at December 31, 2002
and 2001, respectively.
The Company's Australian subsidiary has a revolving credit facility with the
National Australia Bank Limited which provides a line of credit of $2.8 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 August 31, 2003.
At December 31, 2002, approximately $0.2 million (Australian dollars) was
available for use. The outstanding balance under this facility was $1,459,837
and $1,429,054 (U.S.$) at December 31, 2002 and 2001, respectively. The weighted
average interest rate for this facility was 11.1% and 7.5% in 2002 and 2001,
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. The facility
matured on December 31, 2002 but the Company continues to operate under the
existing facility while negotiating the terms of a new credit facility. At
December 31, 2002, 2.2 million pounds was available for use. The outstanding
balance under this facility was $1,276,661 (U.S.$) at December 31, 2002. The
facility was unused at December 31, 2001. The weighted average interest rate for
this facility was 6.0% and 8.4% in 2002 and 2001, respectively.
The Company's South African subsidiary has a credit and overdraft facility with
the Standard Bank of South Africa of 5.5 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, 2002, approximately 1.4
million rand was available for use. The outstanding balance under this facility
was $474,723 and $361,200 (U.S.$) at December 31, 2002 and 2001, respectively.
The weighted average interest rate for this facility was 18.0% and 16.3% in 2002
and 2001, respectively.
During 2002, 2001, and 2000, the Company paid interest of $14,901,698,
$15,309,325, and $15,188,760, respectively.
28
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
G. 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, 2002 and 2001 are as follows:
2002 2001
----------------- -----------------
Asset Balances:
Land $ 20,000 $ 20,000
Buildings 380,000 380,000
Machinery and Equipment 329,665 323,327
----------------- -----------------
$ 729,665 $ 723,327
================= =================
Accumulated Amortization:
Buildings $ 111,587 $ 99,524
Machinery and Equipment 158,754 213,775
----------------- -----------------
$ 270,341 $ 313,299
================= =================
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, 2002, 2001, and 2000 was approximately
$2,032,000, $2,110,000, and $2,072,000, respectively. Future minimum lease
payments for obligations under capital leases and for operating leases having
initial or remaining noncancelable lease terms in excess of one year are as
follows:
Capital Operating
Leases Leases
--------------- ---------------
2003 $ 84,442 $ 583,655
2004 44,410 162,766
2005 40,891 35,730
2006 24,105 5,258
2007 10,043 -
--------------- ---------------
Total minimum lease payments 203,891 $ 787,409
===============
Amounts representing interest 24,572
---------------
Present value of net minimum lease payments
(including current portion of $76,986) $ 179,319
===============
29
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
H. 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 6.75% and
7.25% in 2002 and 2001, respectively, and a weighted-average expected long-term
rate of return on plan assets of 8% in 2002 and 2001.
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, 2002 and 2001, of the Company's defined benefit plan.
2002 2001
------------------- -------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 5,261,840 $ 4,822,341
Service cost 175,383 142,029
Interest cost 419,914 353,906
Amendments 507,974 -
Actuarial loss 553,183 186,118
Benefits paid (231,414) (242,554)
------------------- -------------------
Benefit obligation at end of year 6,686,880 5,261,840
------------------- -------------------
Change in plan assets:
Fair value of plan assets at beginning of year 4,784,976 5,247,333
Actual return on plan assets (512,322) (219,803)
Benefits paid (231,414) (242,554)
------------------- -------------------
Fair value of plan assets at end of year 4,041,240 4,784,976
------------------- -------------------
Funded status:
Funded status of the plan (underfunded) (2,645,640) (476,864)
Unrecognized prior service cost 278,202 (213,239)
Unrecognized net actuarial loss 1,779,515 341,395
------------------- -------------------
Net amount recognized $ (587,923) $ (348,708)
=================== ===================
Balance sheet amounts:
Accrued benefit cost $ (2,645,640) $ (476,864)
Intangible asset 278,202 128,156
Accumulated other comprehensive loss 1,779,515 -
------------------- -------------------
Net amount recognized $ (587,923) $ (348,708)
=================== ===================
30
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
H. Employee Benefit Plans - Continued
The components of net periodic benefit cost for the years ended December 31 are
as follows:
2002 2001 2000
------------------- ------------------- -------------------
Service cost $ 175,383 $ 142,029 $ 136,670
Interest cost 419,914 353,906 333,327
Expected return on plan assets (372,615) (409,604) 207,621
Amortization of prior service cost 16,533 (14,216) (14,216)
Amortization of transition asset - (2,706) (2,706)
Recognized gain (loss) - - (587,603)
------------------- ------------------- -------------------
Net periodic benefit cost $ 239,215 $ 69,409 $ 73,093
=================== =================== ===================
CCE also maintains a defined contribution plan covering substantially all
salaried and non-union hourly employees. CCE expenses annual contributions
(approximately $588,000, $589,000, and $520,000, in 2002, 2001, and 2000,
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 $329,000, $335,000, and $320,000, in 2002, 2001,
and 2000, 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, 2002 and 2000 was approximately $41,000 and
$134,000, respectively, which was equal to 1% and 2.5% of eligible employees
compensation in 2002 and 2000, respectively. No contribution was made for the
year ended December 31, 2001.
The foreign subsidiaries of the Company have various defined contribution plans
and retirement saving plans covering substantially all salaried and production
employees. For the years ended December 31, 2002, 2001, and 2000, the
subsidiaries contributed approximately $601,000, $495,000, and $636,000,
respectively, to the plans.
In 2002, the Company implemented a Phantom Stock Plan (the "Plan") whereby
officers and certain employees may be granted phantom stock units, which vest
over a certain period of time as determined for each grant. As of December 31,
2002, no phantom stock had been granted under the Plan.
31
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
I. 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 $470,000, $557,000, and $351,000, for
the years ended December 31, 2002, 2001, and 2000, respectively. At December 31,
2002 and 2001, the Company had a prepaid expense for overpayment of management
fees of approximately $123,000 and $112,000, respectively.
Prior to electing C Corporation status for income tax purposes on October
6, 2000, the subsidiaries of the Company were parties to a tax payment agreement
with NES Group, Inc., the parent company of N.E.S. Investment Co., providing for
payments by each subsidiary to NES Group, Inc. to fund the income tax liability
attributable to the Company's operations. At December 31, 2002 and 2001, the
Company had an accrual for income tax payments owed to NES Group, Inc. of
approximately $20,000.
J. 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.
32
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
J. 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:
2002 2001
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ---------------- ----------------- -----------------
(in thousands)
Cash and cash equivalents $ 5,635 $ 5,635 $ 14,672 $ 14,672
Accounts receivable 25,634 25,634 32,051 32,051
Accounts payable (20,039) (20,039) (18,896) (18,896)
Notes payable (11,286) (11,286) (16,306) (16,306)
Long-term debt (122,708) (68,803) (123,373) (56,333)
Accounts receivable from customers in the coal mining industry were
approximately 42% and 51% of net accounts receivable at December 31, 2002 and
2001, 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 $454,000, $1,004,000, and
$1,618,000 in 2002, 2001, and 2000, respectively. Accounts written off, net of
recoveries, were approximately $342,000, $1,578,000, and $676,000 in 2002, 2001,
and 2000, respectively.
K. 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.
The Company has subsidiaries located in Australia, the United Kingdom, and South
Africa which are subject to income taxes in their respective countries. In 2002,
the Company's United Kingdom subsidiary paid income taxes of approximately
$5,000; during 2000, the Company's Australian subsidiary paid income taxes of
approximately $72,000. The Company did not pay any income taxes during the year
ended December 31, 2001.
33
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
K. Income Taxes - Continued
Income (loss) before income taxes consists of the following:
For the Year Ending December 31
2002 2001 2000
--------------------- -------------------- --------------------
Domestic $ (8,788,660) $ (4,030,236) $ (4,439,936)
Foreign 100,160 (4,383,248) (6,759,714)
--------------------- -------------------- --------------------
$ (8,688,500) $ (8,413,484) $ (11,199,650)
===================== ==================== ====================
Income taxes are summarized as follows:
December 31, December 31, December 31,
2002 2001 2000
------------------- ------------------ -------------------
Current:
Domestic:
Federal $ - $ - $ -
State and local - - -
Foreign 3,846 4,423 29,140
------------------- ------------------ -------------------
3,846 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
------------------- ------------------ -------------------
$ 3,846 $ (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. At December 31, 2002,
the Company had operating loss carryforwards of approximately $14,100,000 in the
United States which begin expiring in 2020. Additionally, the Company had
operating loss carryforwards of approximately $14,800,000 pertaining to its
foreign subsidiaries that may be carried forward indefinitely.
34
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
K. Income Taxes - Continued
Significant components of the Company's deferred income taxes at December 31,
2002 and 2001 are as follows:
2002 2001
---------------- -----------------
Deferred tax assets:
Operating accruals $ 2,035,005 $ 809,855
Net operating loss carryforwards 10,409,340 9,903,387
Valuation allowance (8,333,199) (7,128,393)
---------------- -----------------
4,111,146 3,584,849
Deferred tax liabilities:
Inventories (2,637,561) (2,039,932)
Property, plant, and equipment and goodwill (2,009,112) (2,061,977)
---------------- -----------------
(4,646,673) (4,101,909)
---------------- -----------------
Net deferred tax liability $ (535,527) $ (517,060)
================ =================
A reconciliation of income taxes computed at the statutory rate to the effective
rate follows:
December 31, December 31, December 31,
2002 2001 2000
----------------- ----------------- -----------------
Income taxes at the United States statutory rate (35.0)% (35.0)% (35.0)%
State income taxes, net of federal benefit - (2.3) 2.1
Losses without tax benefits 34.4 18.3 21.8
S corporation income not subject to U.S. income tax - - 13.3
Cumulative effect of deferred income taxes on date of conversion
to C corporation - - 14.7
Other - net 0.6 1.2 0.2
----------------- ----------------- -----------------
0.0% (17.8)% 17.1%
================= ================= =================
35
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
L. 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 83.5%, 90.5%, and 87.9% of net sales for 2002, 2001, and 2000,
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.
36
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
L. Segment Information - Continued
Year ended December 31
2002 2001 2000
------------------ ----------------- -----------------
(in thousands)
Net sales:
Conveyor equipment $ 154,473 $ 174,413 $ 147,816
Manufactured housing products 29,633 17,198 18,145
Other 870 1,100 2,217
------------------ ----------------- -----------------
Total net sales $ 184,976 $ 192,711 $ 168,178
================== ================= =================
Depreciation and amortization:
Conveyor equipment $ 2,023 $ 2,136 $ 2,354
Manufactured housing products 137 109 106
Other 6 5 7
Amortization expense 117 634 610
------------------ ----------------- -----------------
Total depreciation and amortization $ 2,283 $ 2,884 $ 3,077
================== ================= =================
Segment operating income (loss):
Conveyor equipment $ 7,058 $ 9,702 $ 6,134
Manufactured housing products 1,862 291 (229)
Other 68 (147) 184
------------------ ----------------- -----------------
Segment operating income 8,988 9,846 6,089
Management fee 470 557 351
Amortization expense 117 634 610
Restructuring charge 640 - 481
Corporate expense 1,116 957 1,055
------------------ ----------------- -----------------
Total operating income 6,645 7,698 3,592
Interest expense 15,407 15,787 15,826
Interest income (187) (639) (1,032)
Miscellaneous, net 114 963 (2)
------------------ ----------------- -----------------
Loss before income taxes $ (8,689) $ (8,413) $ (11,200)
================== ================= =================
Segment assets:
Conveyor equipment $ 75,902 $ 80,219 $ 85,483
Manufactured housing products 6,482 5,374 4,180
Other 431 572 837
------------------ ----------------- -----------------
Total segment assets 82,815 86,165 90,500
Corporate assets 6,852 22,607 19,636
------------------ ----------------- -----------------
Total assets $ 89,667 $ 108,772 $ 110,136
================== ================= =================
Capital expenditures:
Conveyor equipment $ 1,012 $ 898 $ 1,460
Manufactured housing products 267 56 35
Other 1 4 -
------------------ ----------------- -----------------
Total capital expenditures $ 1,280 $ 958 $ 1,495
================== ================= =================
37
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
L. Segment Information - Continued
Geographic Area Data
Year ended December 31
2002 2001 2000
------------------ ------------------ -----------------
(in thousands)
Net sales:
United States $ 124,588 $ 142,276 $ 127,815
Australia 23,974 18,037 18,192
United Kingdom 32,437 27,417 18,815
Other countries 3,977 5,005 3,626
Eliminations - transfers - (24) (270)
------------------ ------------------ -----------------
Total net sales $ 184,976 $ 192,711 $ 168,178
================== ================== =================
Operating income (loss):
United States $ 5,958 $ 11,518 $ 9,607
Australia 349 (4,090) (2,367)
United Kingdom 493 635 (3,003)
Other countries (190) (403) (692)
Eliminations 35 38 47
------------------ ------------------ -----------------
Total operating income $ 6,645 $ 7,698 $ 3,592
================== ================== =================
Long lived assets:
United States $ 7,213 $ 7,764 $ 8,005
Australia 2,721 2,757 3,599
United Kingdom 2,667 2,376 2,657
Other countries 280 197 326
------------------ ------------------ -----------------
Total long lived assets $ 12,881 $ 13,094 $ 14,587
================== ================== =================
Net sales are attributed to countries based on the location of the subsidiary
where the sale occurs.
In 2002, 2001 and 2000, the Company did not have sales to any single customer
which exceeded 10% of the Company's total net sales.
38
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
M. 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 2002 and 2001 and consolidating
statements of operations and cash flow statements for 2002, 2001, and 2000 for
the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are
as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
December 31, 2002: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 4,524 $ 1,109 $ 2 $ - $ 5,635
Accounts receivable, net - 16,469 9,165 - 25,634
Inventories - 23,479 4,274 - 27,753
Deferred income taxes 81 - 280 (335) 26
Other current assets 37 1,095 827 - 1,959
-------------------------------------------------------------------------------
Total current assets 4,642 42,152 14,548 (335) 61,007
Property, plant, and
equipment, net - 8,713 4,168 - 12,881
Goodwill - 12,528 627 - 13,155
Investment in subsidiaries 60,009 18,118 - (78,127) -
Deferred financing costs 2,210 - - - 2,210
Other assets 9,817 1,833 - (11,236) 414
-------------------------------------------------------------------------------
Total assets $ 76,678 $ 83,344 $ 19,343 $ (89,698) $ 89,667
===============================================================================
Current liabilities:
Notes payable $ - $ 9,536 $ 2,139 $ (389) $ 11,286
Trade accounts payable 16 12,404 7,619 - 20,039
Accrued compensation and
employee benefits 42 3,957 975 - 4,974
Accrued interest 3,300 - - - 3,300
Other accrued liabilities 564 4,247 2,613 (728) 6,696
Current maturities of
long-term obligations - 963 47 - 1,010
-------------------------------------------------------------------------------
Total current liabilities 3,922 31,107 13,393 (1,117) 47,305
Pension obligation - 2,645 - - 2,645
Deferred income taxes - 10,253 - (9,692) 561
Senior Notes 120,000 - - - 120,000
Other long-term obligations - 1,766 985 (874) 1,877
Stockholder's equity
(deficit) (47,244) 37,573 4,965 (78,015) (82,721)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 76,678 $ 83,344 $ 19,343 $ (89,698) $ 89,667
===============================================================================
39
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
M. Guarantor and Non-Guarantor Subsidiaries - Continued
Combined Combined
Guarantor Non-Guarantor
December 31, 2001: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 12,548 $ 1,518 $ 606 $ - $ 14,672
Accounts receivable, net - 23,107 8,949 (5) 32,051
Inventories - 23,816 2,756 - 26,572
Other current assets 107 1,991 318 (670) 1,746
-------------------------------------------------------------------------------
Total current assets 12,655 50,432 12,629 (675) 75,041
Property, plant, and
equipment, net - 9,433 3,661 - 13,094
Goodwill, net - 16,232 568 - 16,800
Investment in subsidiaries 60,009 17,132 - (77,141) -
Deferred financing costs 2,729 - - - 2,729
Deferred income taxes 7,262 - - (6,543) 719
Other assets 35 2,466 55 (2,167) 389
-------------------------------------------------------------------------------
Total assets $ 82,690 $ 95,695 $ 16,913 $ (86,526) $ 108,772
===============================================================================
Current liabilities:
Notes payable $ - $ 15,948 $ 898 $ (540) $ 16,306
Trade accounts payable 227 14,081 4,630 (42) 18,896
Accrued compensation and
employee benefits - 3,724 935 - 4,659
Accrued interest 3,300 - - - 3,300
Deferred income taxes - 1,564 - (328) 1,236
Other accrued liabilities 658 10,057 5,802 (7,331) 9,186
Current maturities of
long-term obligations - 1,284 15 - 1,299
-------------------------------------------------------------------------------
Total current liabilities 4,185 46,658 12,280 (8,241) 54,882
Pension obligation 477 477
Senior Notes 120,000 - - - 120,000
Other long-term obligations - 2,240 1,107 (1,089) 2,258
Stockholder's equity
(deficit) (41,495) 46,320 3,526 (77,196) (68,845)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 82,690 $ 95,695 $ 16,913 $ (86,526) $ 108,772
===============================================================================
40
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
M. Guarantor and Non-Guarantor Subsidiaries - Continued
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2002:
Net sales $ - $ 148,561 $ 36,415 $ - $ 184,976
Cost of products sold - 123,391 31,811 - 155,202
------------------------------------------------------------------------
Gross profit - 25,170 4,604 - 29,774
Total operating expenses 1,151 17,712 4,266 - 23,129
------------------------------------------------------------------------
Operating income (loss) (1,151) 7,458 338 - 6,645
Interest expense 13,759 1,541 107 - 15,407
Interest income (187) - - - (187)
Miscellaneous, net 13 126 (25) - 114
------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (14,736) 5,791 256 - (8,689)
Income tax expense (benefit) (2,436) 2,436 3 - 3
------------------------------------------------------------------------
Income (loss) before cumulative effect
of change in accounting principle (12,300) 3,355 253 - (8,692)
Cumulative effect of change in
accounting principle - (3,850) - - (3,850)
------------------------------------------------------------------------
Net income (loss) $ (12,300) $ (495) $ 253 $ - $ (12,542)
========================================================================
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2001:
Net sales $ - $ 160,308 $ 32,422 $ (19) $ 192,711
Cost of products sold - 134,362 28,213 (19) 162,556
------------------------------------------------------------------------
Gross profit - 25,946 4,209 - 30,155
Total operating expenses 1,005 17,512 3,940 - 22,457
------------------------------------------------------------------------
Operating income (loss) (1,005) 8,434 269 - 7,698
Interest expense 13,766 1,794 227 - 15,787
Interest income (639) - - - (639)
Miscellaneous, net 688 382 (107) - 963
------------------------------------------------------------------------
Income (loss) before income taxes (14,820) 6,258 149 - (8,413)
Income tax expense (benefit) (5,925) 4,424 4 - (1,497)
------------------------------------------------------------------------
Net income (loss) $ (8,895) $ 1,834 $ 145 $ - $ (6,916)
========================================================================
41
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
M. Guarantor and Non-Guarantor Subsidiaries - Continued
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2000:
Net sales $ - $ 145,738 $ 22,441 $ (1) $ 168,178
Cost of products sold - 119,342 22,311 (1) 141,652
------------------------------------------------------------------------
Gross profit - 26,396 130 - 26,526
Total operating expenses 1,105 18,051 3,778 - 22,934
------------------------------------------------------------------------
Operating income (loss) (1,105) 8,345 (3,648) - 3,592
Interest expense 13,768 1,833 225 - 15,826
Interest income (1,032) - - - (1,032)
Miscellaneous, net - 12 (14) - (2)
------------------------------------------------------------------------
Income (loss) before income taxes (13,841) 6,500 (3,859) - (11,200)
Income tax expense (benefit) (1,333) 3,247 - - 1,914
------------------------------------------------------------------------
Net income (loss) $ (12,508) $ 3,253 $ (3,859) $ - $ (13,114)
========================================================================
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2002:
Net cash provided by (used in)
operating activities $ (14,449) $ 13,191 $ (303) $ 1 $ (1,560)
Investing activities:
Purchases of property, plant and
equipment - (736) (544) - (1,280)
Proceeds from disposals of PP&E - 36 17 - 53
------------------------------------------------------------------------
Net cash used in investing activities - (700) (527) - (1,227)
Financing activities:
Net increase (decrease) in
borrowings on notes payable - (6,559) 1,179 - (5,380)
Principal payments on long-term
obligations - (874) (29) - (903)
Distributions for interest on 6,550 (6,550) - - -
senior notes
Intercompany loan activity (125) 1,119 (994) - -
------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 6,425 (12,864) 156 - (6,283)
Exchange rate changes on cash - (36) 70 (1) 33
------------------------------------------------------------------------
Decrease in cash and cash equivalents (8,024) (409) (604) - (9,037)
Cash and cash equivalents at beginning
of year 12,548 1,518 606 - 14,672
------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 4,524 $ 1,109 $ 2 $ - $ 5,635
========================================================================
42
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
M. Guarantor and Non-Guarantor Subsidiaries - Continued
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2001:
Net cash provided by (used in)
operating activities $ (13,932) $ 11,975 $ 2,226 $ (1) $ 268
Investing activities:
Purchases of property, plant and
equipment - (694) (264) - (958)
Proceeds from disposals of PP&E - 69 44 - 113
Acquisition of business - (1,607) - - (1,607)
------------------------------------------------------------------------
Net cash used in investing activities - (2,232) (220) - (2,452)
Financing activities:
Net increase (decrease) in
borrowings on notes payable - 2,267 (1,220) - 1,047
Principal payments on long-term
obligations - (985) (41) - (1,026)
Distributions for interest on 10,223 (10,223) - - -
senior notes
Intercompany loan activity - 174 (174) - -
------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 10,223 (8,767) (1,435) - 21
Exchange rate changes on cash - (23) (85) 1 (107)
------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (3,709) 953 486 - (2,270)
Cash and cash equivalents at beginning
of year 16,257 565 120 - 16,942
------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 12,548 $ 1,518 $ 606 $ - $ 14,672
========================================================================
43
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
M. Guarantor and Non-Guarantor Subsidiaries - Continued
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Year ended December 31, 2000:
Net cash provided by (used in)
operating activities $ (13,272) $ 9,055 $ (2,229) $ (12) $ (6,458)
Investing activities:
Purchases of property, plant and
equipment - (1,268) (227) - (1,495)
Proceeds from disposals of PP&E - 103 19 - 122
------------------------------------------------------------------------
Net cash used in investing activities - (1,165) (208) - (1,373)
Financing activities:
Net increase in borrowings on notes
payable - 7,241 137 - 7,378
Proceeds from long-term obligations - 776 - - 776
Principal payments on long-term
obligations - (1,526) (109) - (1,635)
Distributions for interest on 12,285 (12,285) - - -
senior notes
Intercompany loan activity - (2,473) 2,473 - -
------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 12,285 (8,267) 2,501 - 6,519
Exchange rate changes on cash - (13) (45) 12 (46)
------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (987) (390) 19 - (1,358)
Cash and cash equivalents at beginning
of year 17,244 955 101 - 18,300
------------------------------------------------------------------------
Cash and cash equivalents at end of
year $ 16,257 $ 565 $ 120 $ - $ 16,942
========================================================================
N. 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.
44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information regarding the directors and
executive officers of the Company, as of March 15, 2003:
Name Age Position with the Company
Robert W. Hale 56 President and Chief Executive Officer
James L. Smothers 46 Vice President
Jimmy L. Dickinson 60 Vice President and Chief Financial Officer
Jerry R. McGaha 64 Senior Vice President of Sales and Engineering
Edward F. Crawford 63 Director
Donald F. Hastings 74 Director
C. Wesley McDonald 62 Director
Robert J. Tomsich 72 Director
James W. Wert 56 Director
Set forth below is a brief description of the business experience of each
director and executive officer of the Company.
Mr. Hale was appointed President and Chief Executive Officer of the Company
effective November 4, 2002. Before joining the Company, Mr. Hale had served as
President and Chief Executive Officer of Joy Global's P&H Mining Equipment
Company since 1995 and prior to that time, he served as Vice President and
General Manager of P&H Material Handling.
Mr. Smothers has served as Vice President of the Company since October 2001 and
has also served as Vice President of Continental Conveyor & Equipment Company
since August 1999 and Executive Vice President of Continental Conveyor &
Equipment Company since October 2001. In addition to the foregoing, Mr. Smothers
served as Director of International Sales and Manager of Systems Engineering of
Continental Conveyor & Equipment Company from 1992 through 1999 and Managing
Director of CCE Pty. Ltd. in 1999.
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.
45
Mr. Crawford has served as a Director of the Company since its inception.
In addition to his service with the Company, Mr. Crawford has served as Chairman
and Chief Executive Officer and a Director of Park-Ohio Industries, Inc. since
1992.
Mr. Hastings has served as a Director of the Company since its inception.
In addition to his service with the Company, Mr. Hastings served as Chairman
and Chief Executive Officer and as Director of Lincoln Electric Company from
1992 to 1997. Since 1998, Mr. Hastings has also served as a Director of Paragon
Corporate Holdings, Inc., a sister corporation of the Company.
Mr. McDonald has served as a Director of the Company since August 2000. Prior to
his service with the Company, Mr. McDonald served as Executive Vice President of
Operations for Consol Inc. from 1985 to his retirement in 1999.
Mr. Robert Tomsich has served as a Director of the Company since its inception.
In addition, Mr. Robert Tomsich has served as President and Director of Nesco,
Inc. (including predecessors of Nesco, Inc.) since 1956. Since 1997, Mr.
Tomsich has also served as a Director of Paragon Corporate Holdings, Inc., a
sister corporation of the Company.
Mr. Wert has served as a Director of the Company since its inception. In
addition, Mr. Wert is President of Clanco Management Corporation, an investment
advisory firm located in Cleveland, Ohio. Prior to his service with the Company,
he held a number of executive management positions including Chief Financial
Officer and Chief Investment Officer over his twenty year career with KeyCorp, a
financial services company based in Cleveland, Ohio, and its predecessor,
Society Corporation. He serves on the Board of Directors of Park-Ohio Holdings,
Inc., Cleveland, Ohio, and Marlin Leasing Corporation, Philadelphia,
Pennsylvania. Since 1998, Mr. Wert has also served as a Director of Paragon
Corporate Holdings, Inc., a sister corporation of the Company.
46
Item 11. Executive Compensation
The following table sets forth certain information concerning compensation of
the Company's Chief Executive Officer and other most highly compensated officers
of the Company having total annual salary and bonus in excess of $100,000.
Other Annual
Name and Principal Position Year Salary Bonus Compensation (1)
Joseph L. Mandia, Vice Chairman (2) 2002 $ 222,780 $ 38,435 $ 19,041
2001 211,550 37,300 13,183
2000 211,550 35,150 -
Robert W. Hale, President and Chief 2002 76,400 - -
Executive Officer
C. Edward Bryant, Jr., President and 2002 246,384 59,338 45,121
Chief Executive Officer (3) 2001 239,208 67,122 8,519
2000 230,004 91,205 16,434
Jerry R. McGaha, Senior Vice President 2002 135,000 20,381 17,041
of Sales and Engineering (4) 2001 130,440 22,197 15,518
2000 128,520 31,459 11,742
Jimmy L. Dickinson, Vice President and 2002 146,700 44,443 18,257
Chief Financial Officer 2001 142,410 48,869 13,990
2000 139,260 61,285 13,779
James Smothers, Vice President 2002 151,125 18,588 9,597
2001 127,600 18,706 8,208
(1) Amounts shown reflect contributions made by the Company on behalf of the
named executives under the Continental Conveyor & Equipment Company Savings
and Profit Sharing Plan 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.
(2) Effective March 1, 2003, Mr. Mandia resigned as Vice Chairman and Director
of the Company.
(3) Effective December 31, 2002, Mr. Bryant retired as President and Chief
Executive Officer of the Company.
(4) Effective March 31, 2003, Mr. McGaha retired as Senior Vice President of
Sales and Engineering.
Director Compensation
Each director of the Company not employed by the Company or any entity
affiliated with the Company received $18,750 for serving as a director of the
Company during the year. In addition, the Company will reimburse such director
for their travel and other expenses incurred in connection with attending
meetings of the Board of Directors.
47
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, 2003:
Number of Shares Title of Class Name and Address of Beneficial Owner
100 Common Stock, $0.01 par value N.E.S. Investment Co.
6140 Parkland Boulevard
Mayfield Heights, OH 44124
All of the Company's issued and outstanding capital stock is owned by N.E.S.
Investment Co., which is 100 percent beneficially owned by Mr. Robert J.
Tomsich. Mr. Tomsich may be deemed to be the beneficial owner of the Company's
capital stock.
Item 13. Certain Relationships and Related Transactions
Company Formation and Proceeds From the Offering
The Company is a Delaware corporation formed on February 4, 1997, for the
purpose of serving as a holding company for the operations conducted by
Continental (including the BCE Subsidiaries) and Goodman. All of the capital
stock of the Company has been issued to NES Group, Inc., which in turn,
transferred to the Company all of the outstanding capital stock of Continental
and Goodman. As a result, the Company is a wholly owned subsidiary of NES Group,
Inc., and each of Continental and Goodman is a wholly owned subsidiary of the
Company.
Management Agreement
Effective April 1, 1997, the Company and Nesco, Inc. entered into a management
agreement ("Management Agreement"), the material terms of which are summarized
below. All of the outstanding capital stock of Nesco, Inc. is beneficially owned
by Robert J. Tomsich. Under the Management Agreement, Nesco, Inc., has agreed to
provide general management oversight services on a regular basis for the benefit
of the Company, in regard to business activities involving financial results,
legal issues, and long term planning relative to current operations and
acquisitions. Business development services include assistance in identifying
and acquiring potential acquisition candidates, including negotiations and
contractual preparations in connection therewith. Financial planning includes
assistance in developing banking relationships and monitoring cash investments
through professional money management accounts. Under the terms of the
Management Agreement, the Company has agreed to pay Nesco, Inc. a management fee
for such services equal to 5% of the Company's earnings before interest and
estimated taxes, depreciation, amortization, and other expense (income). The
aggregate amount expensed for management fees in 2002 under the Management
Agreement was $469,922. 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.
48
Item 14. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer, with the
participation of the Company's management, have evaluated the effectiveness of
the design and operation of its' disclosure controls and procedures (as defined
in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the "Exchange
Act")) within the 90-day period preceding the filing of this report. Based upon
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that its' disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic Exchange Act filings.
There have been no significant changes to the Company's internal controls or
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
49
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed as Part of this Report:
1. Consolidated Financial Statements.
The consolidated financial statements listed below together
with the report thereon of the independent auditors dated
March 28, 2003, are included in Item 8.
Report of Independent Auditors.
Consolidated Balance Sheets at December 31, 2002 and 2001.
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2002.
Consolidated Statements of Stockholder's Equity (Deficit)
for each of the three years in the period ended December
31, 2002.
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2002.
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.
50
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 31st day of March, 2003.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ Robert W. Hale
-----------------------
Name: Robert W. Hale
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature Title Date
/s/ Robert W. Hale President and Chief Executive Officer March 31, 2003
- ----------------------------------------- (Principal Executive Officer)
Robert W. Hale
/s/ Jimmy L. Dickinson Vice President and Chief Financial Officer March 31, 2003
- ----------------------------------------- (Principal Financial Officer and Principal
Jimmy L. Dickinson Accounting Officer)
/s/ Edward F. Crawford Director March 31, 2003
- -----------------------------------------
Edward F. Crawford
/s/ Donald F. Hastings Director March 31, 2003
- -----------------------------------------
Donald F. Hastings
/s/ C. Wesley McDonald Director March 31, 2003
- -----------------------------------------
C. Wesley McDonald
/s/ Robert J. Tomsich Director March 31, 2003
- -----------------------------------------
Robert J. Tomsich
/s/ James W. Wert Director March 31, 2003
- -----------------------------------------
James W. Wert
51
Supplemental information to be furnished with reports filed pursuant to Section
15(d) of the Act by registrants which have not registered securities pursuant to
Section 12 of the Act.
No annual report to security holders covering the registrant's last fiscal year
and no proxy statement, form of proxy, or other proxy soliciting material with
respect to any annual or other meeting of security holders has been or will be
sent to security holders.
52
CERTIFICATIONS
I, Robert W. Hale, certify that:
1. I have reviewed this annual report on Form 10-K of Continental Global
Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Robert W. Hale
------------------------------------
Robert W. Hale
President and Chief Executive Officer
53
CERTIFICATIONS
I, Jimmy L. Dickinson, certify that:
1. I have reviewed this annual report on Form 10-K of Continental Global
Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Jimmy L. Dickinson
------------------------------------------
Jimmy L. Dickinson
Vice President and Chief Financial Officer
54
Continental Global Group, Inc.
Form 10-K
Index of Exhibits
Exhibit
Number Description of Exhibit
3.1
(a) Certificate of Incorporation of Continental Global Group, Inc., as currently in effect. *
(b) Certificate of Amendment of Certificate of Incorporation of Continental Global Group,
Inc. (Filed as Exhibit 3.1(b) to the Company's Form 10-Q for the quarter ended September
30, 2000, and is incorporated herein by reference.)
3.2 By-Laws of Continental Global Group, Inc., as currently in effect. *
3.3 Certificate of Incorporation of Continental Conveyor & Equipment Company, as currently *
in effect.
3.4 By-Laws of Continental Conveyor & Equipment Company, as currently in effect. *
3.5 Certificate of Incorporation of Goodman Conveyor Company, as currently in effect. *
3.6 By-Laws of Goodman Conveyor Company, as currently in effect. *
4.1 Indenture, dated as of April 1, 1997, among Continental Global *
Group, Inc., Continental Conveyor & Equipment Company, Goodman
Conveyor Company, and the Trustee (containing, as exhibits,
specimens of the Series A Notes and the Series B Notes).
10.1 Amended and Restated Credit Facility and Security Agreement, dated
as of July 25, 2002, among Bank One, NA, Continental Conveyor &
Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit
10.1 to the Company's Form 10-Q for the quarter ended September
30, 2002, and is incorporated herein by reference.)
10.2 Management Agreement, dated as of April 1, 1997, between Continental Global Group, Inc. *
and Nesco, Inc.
10.3 Employment Agreement, effective November 4, 2002, between Continental Global Group, Inc.
and Robert Hale.
10.4 Continental Global Group, Inc. Phantom Stock Plan dated as of November 4, 2002.
12 Statement regarding computation of ratio of earnings to fixed charges
21 Subsidiaries of registrant
Certain instruments with respect to long-term debt have not been filed as
exhibits as the total amount of securities authorized under any one of such
instruments does not exceed 10 percent of the total assets of the registrant and
its subsidiaries on a consolidated basis. The registrant agrees to furnish to
the Commission a copy of each such instrument upon request.
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed
under the Securities Act of 1933.
55