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.
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 89%, 87%, and 83% of net sales for 2004, 2003, and 2002, 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 11%, 12%, and 16% of net sales for 2004, 2003, and 2002, respectively, manufactures and/or refurbishes axle components sold directly to the manufactured housing industry. As part of this segment, the Company also sells mounted tire and rim assemblies to the manufactured housing industry. Included in the other category is primarily the manufacture and sale of air filtration equipment for use in enclosed environments, principally in the textile industry.
Approximately 60% or $141.2 million of the Company's 2004 net sales were generated in the United States, 21% or $50.2 million in Australia, 16% or $36.3 million in the United Kingdom, and 3% or $8.0 million in other countries.
Customers
The Company's conveyor equipment business segment markets its products worldwide through a variety of marketing channels with different customer focuses. The Company sells its mining equipment and bulk conveyor equipment products and services primarily to mining companies and other end users, original equipment manufacturers and engineering contractors. The Company sells its conveyor components products to original equipment manufacturers, engineering contractors and replacement part distributors, primarily in the following industries: aggregates, such as rock, gravel, glass and cement materials; coal processing and mining; pulp, paper and forest products; above ground hard rock and mineral mining; food and grains; and environmental, sewage and waste water treatment. The Company sells its engineered systems products and services primarily to contractors and end users for applications in coal processing and mining, pulp and paper, composting systems, grain handling, cement products, open-pit mining and tunneling. The Company markets its manufactured housing products business segment directly to the manufactured housing industry in the United States.
For the years ended December 31, 2004, 2003 and 2002, 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 23%, 17%, and 20% of the Company's total net sales for 2004, 2003 and 2002, 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, 2004 was $45.6 million, an increase of $10.6 million, or 30%, from $35.0 million at December 31, 2003 and an increase of $5.2 million, or 13%, from $40.4 million at September 30, 2004. At December 31, 2004, backlog in the domestic operations of the Company's conveyor equipment segment was $21.5 million, an increase of $2.4 million from September 30, 2004, and backlog in the foreign operations of the Company's conveyor equipment segment was $24.1 million, an increase of $2.8 million from September 30, 2004. Management believes that in excess of 90% of the backlog at December 31, 2004 will be shipped in 2005. As of February 28, 2005, backlog had increased to $77.6 million, an increase of $32.0 million, or 70%, from December 31, 2004.
Employees
As of December 31, 2004, the Company had approximately 1,200 employees, approximately 730 of whom were located in the United States. Approximately 180 of the employees at the Company's Winfield, Alabama facility are represented by The United Steelworkers of America Union and are covered by a three year collective bargaining agreement that expires in 2007. Approximately 80 production employees at the Company's Australian subsidiary are covered by collective bargaining agreements that expire in 2006. Approximately 220 of the production employees at the Company's United Kingdom and South African facilities are covered by annual collective bargaining agreements that expire in 2005 and negotiations for new agreements are underway. The Company has not experienced any work stoppages since 1971 and believes its relations with its employees are good.
Environmental and Health and Safety Matters
The Company is subject to a variety of environmental standards imposed by federal, state, local and foreign environmental laws and regulations. The Company is also subject to the federal Occupational Health and Safety Act and similar foreign and state laws. The Company periodically reviews its procedures and policies for compliance with environmental and health and safety laws and regulations and believes that it is in substantial compliance with all such material laws and regulations applicable to its operations. Historically the costs of compliance with environmental, health and safety requirements have not been material to the Company.
Item 2.
Item 2. Properties
The Company conducts its operations through the following primary facilities:
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(1) Lease expires in December 2013. (2) Leased on a month to month lease. (3) Expires in August 2008. The Company has an option to purchase at market value at the end of the lease term. (4) Expires in May 2005.
In addition to the foregoing facilities, the Company has a number of leased warehouses and field sales offices in various locations throughout the United States and Australia. The Company believes that substantially all of its property and equipment is in a condition appropriate for its operations and that it has sufficient capacity to meet its current operational needs. Each of the Company-owned United States facilities is subject to a mortgage securing payment of indebtedness under the Revolving Credit Facility. In addition, the Company's owned facilities in Australia are subject to mortgage securing payment of indebtedness under the Australian Revolving Credit Facility. See Note E, "Financing Arrangements," to the Consolidated Financial Statements.
Item 3.
Item 3. Legal Proceedings
In August and September 2003, Continental Conveyor & Equipment Company was served as one of fifty-eight known and unknown defendants in nineteen separate actions pending in various state courts in the State of Alabama alleging various contract, tort and warranty claims. All claims in such actions arose out of alleged injuries and deaths occurring at the Jim Walters Resources No. 5 Mine which occurred on September 23, 2001. The plaintiffs in such actions do not allege a particular set of actions or omissions by Continental Conveyor & Equipment Company that give rise to the claims, nor is there a specific amount of damages sought. The Company believes that these claims are without merit and intends to vigorously defend all claims. The Company considers such claims to be the type of claims that arise in the normal course of its business. While it is not feasible to predict the outcome of these matters with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on the Company's financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended December 31, 2004.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company is a direct wholly-owned subsidiary of N.E.S. Investment Co. There is no established public trading market for the Company's common stock. As of March 15, 2005, the Company had one stockholder. The Company paid no dividends in 2004 or 2003. See Note E, "Financing Arrangements", to the Consolidated Financial Statements, Part II, Item 8, for limitations on dividends.
Item 6.
Item 6. Selected Financial Data
The following table presents selected financial and operating data of the Company for each of the five years in the period ended December 31, 2004. The data should be read in conjunction with the Consolidated Financial Statements and related Notes included in this report on Form 10-K.
(1) In 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," and as a result no longer amortizes goodwill. Net loss in 2002 includes a non-cash goodwill impairment write-down recorded as a cumulative effect of change in accounting principle of $3,850. Net loss for 2001 and 2000 includes goodwill amortization expense, net of tax, of $431.
(2) Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, unusual and non-recurring gains or losses, and accounting changes. Adjusted EBITDA is not a measure of performance under generally accepted accounting principles ("GAAP"). While Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flows from operating, investing and financing activities and other income or cash flow statement data prepared in accordance with GAAP or as a measure of profitability or liquidity, management understands that Adjusted EBITDA is customarily used as an indication of a company's ability to incur and service debt. Adjusted EBITDA is calculated as follows for the years ending December 31:
(3) Earnings consist of income before income taxes and accounting change plus fixed charges. Fixed charges consist of interest expense, amortization of deferred financing costs and one-third of rent expense from operating leases, which management believes is a reasonable approximation of an interest factor. Earnings were inadequate to cover fixed charges in the years ended December 31, 2003, 2002, 2001 and 2000 by $12,629, $8,689, $8,413, and $11,200, respectively.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The following table sets forth, on a comparative basis, certain income statement data as a percentage of net sales for the fiscal years ended December 31, 2004, 2003, and 2002.
Year ended December 31 ------------------------------------------------ 2004 2003 2002
Net sales 100.0% 100.0% 100.0% Cost of products sold 83.1 86.3 83.9 Gross profit 16.9 13.7 16.1 SG&A expenses 10.9 11.7 11.8 Management fee 0.3 0.2 0.3 Amortization expense - - 0.1 Restructuring charges 0.1 - 0.3 Operating income 5.6 1.8 3.6
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net Sales Net sales increased $41.4 million, or 21%, from $194.3 million in 2003 to $235.7 million in 2004. During 2004, the Company received significant steel price increases from its vendors requiring the Company to increase selling prices on its products in order to recover these increased costs. The Company passed these steel price increases along to its customers in the form of additional sales surcharges and sales price increases. These increased selling prices along with increased sales volume contributed to the improved sales results. Net sales in the domestic operations of the Company's conveyor equipment segment increased $24.9 million due to increased sales volume and increased selling prices in the mining equipment and conveyor components business areas. This increase in sales volume was due primarily to the improved market conditions in the coal industry creating higher demand for coal which resulted in increased capital spending by the Company's major customers in the coal industry. Net sales in the foreign operations of the Company's conveyor equipment segment increased $14.5 million. Changes in foreign currency translation rates resulted in $10.2 million of this increase. Adjusted for variations in foreign currency translation rates, net sales in Australia increased $9.8 million due to improved market conditions in the coal industry and significant shipments on a major contract in the second quarter of 2004. Net sales in the United Kingdom decreased $6.7 million (after adjustments for foreign currency fluctuations) due to decreased sales of engineered systems contracts, primarily to the tunneling industry, offset partially by an increase in the more profitable standard manufactured products business. Net sales in South Africa increased $1.2 million, adjusted for foreign currency fluctuations, due to improved market conditions in the coal industry. Net sales in the Company's manufactured housing segment increased $2.1 million due to improved market conditions in the manufactured housing industry in the fourth quarter of 2004 combined with a change in the product mix with more sales of new manufactured products which have a higher selling price than refurbished products. Net sales in the Company's other segment decreased $0.1 million.
Gross Profit Gross profit increased $13.2 million, or 49%, from $26.7 million in 2003 to $39.9 million in 2004. This increase in gross profit is the result of a $7.0 million increase due to increased sales volume combined with a $6.2 million increase due to improved margins. Gross profit in the domestic operations of the Company's conveyor equipment segment increased $7.8 million ($5.0 million due to increased volume and $2.8 million due to improved margins). This increase in gross profit resulted from a more favorable product mixture in the mining
equipment business area and increased sales volume in the higher margin conveyor components business area. In addition, the increased sales volumes contributed to a more efficient utilization of overhead expenses which improved the gross profit margins. Gross profit in the foreign operations of the Company's conveyor equipment segment increased $5.3 million, of which $1.3 million resulted from increases in foreign currency translation rates. The remaining increase was primarily attributable to increases in Australia and the United Kingdom of $1.5 million and $2.0 million, respectively. The increase in Australia was primarily attributable to improved profit margins due to the increased sales volume which resulted in more efficient utilization of overhead expenses. The increase in the United Kingdom primarily resulted from a more favorable mixture of the higher margin standard manufactured products business. In addition, during the third quarter of 2003, the estimated cost to complete two large conveyor systems contracts in the United Kingdom was increased, resulting in a decrease in gross profit in 2003 of $0.6 million. Gross profit in the Company's manufactured housing segment increased $0.2 million while gross profit in the Company's other segment decreased $0.1 million.
Gross profit as a percentage of net sales increased from 13.7% in 2003 to 16.9% in 2004. This increase primarily resulted from improved margins due to increased sales volume in the Company's conveyor equipment segment.
SG&A Expenses SG&A expenses increased $3.0 million, or 13%, from $22.8 million in 2003 to $25.8 million in 2004. SG&A expenses in the domestic operations of the Company's conveyor equipment segment increased $1.6 million primarily due to increased selling expenses which resulted from increased sales. SG&A expenses in the foreign operations of the Company's conveyor equipment segment increased $0.7 million due to increases in foreign currency translation rates. SG&A expenses in the Company manufactured housing segment increased $0.2 million due to higher administrative expenses. Corporate SG&A expenses increased $0.5 million due to higher insurance and personnel costs.
Operating Income Operating income increased $9.6 million, or more than 200%, from $3.5 million in 2003 to $13.1 million in 2004. This increase resulted from the $13.2 million increase in gross profit, offset by the $3.0 million increase in SG&A expenses, a $0.5 million increase in management fees, and a $0.1 million increase in restructuring charges.
Interest Expense, Net Interest expense decreased $8.4 million, or 55%, from $15.3 million in 2003 to $6.9 million in 2004. This decrease resulted from the reduction of interest on the Company's Senior Notes. On October 4, 2004, the Company completed a restructuring of its 11% Senior Notes due 2007 which was accounted for according to Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". According to the provisions of SFAS No. 15, all interest payments on the Company's newly issued Series A and Series B Notes due 2008 are recorded as a reduction of outstanding indebtedness rather than interest expense. Interest expense related to the 11% Senior Notes due 2007 decreased $9.0 million from $13.2 million in 2003 to $4.2 million in 2004. During 2004 and 2003, the Company paid interest of $3.2 million and $14.7 million, respectively. Interest paid in 2004 does not include payments of $3.1 million related to the Company's New Series A and Series B Notes, which were recorded as a reduction in the balance of outstanding indebtedness. Refer to the Liquidity and Capital Resources section for further discussion of future interest payments.
Miscellaneous Expense (Income) Miscellaneous expense (income) decreased $1.7 million, from expense of $0.8 million in 2003 to income of $0.9 million in 2004. Miscellaneous expense (income) in 2004 included debt restructuring expenses of $2.6 million and the gain on debt restructuring of $(3.4) million, which are both non-recurring items.
Net Income (Loss) Net income (loss) increased $16.5 million, from a loss of $12.6 million in 2003 to income of $3.9 million in 2004. This increase resulted from the $9.6 million increase in operating income, combined with decreases in interest expense and miscellaneous expense (income) of $8.4 million and $1.7 million, respectively, and partially offset by an increase in income tax expense of $3.2 million.
Restructuring Charges The Company incurred restructuring charges of approximately $0.2 million, $0.1 million, and $0.6 million in 2004, 2003 and 2002, respectively, related to changes in staffing and production requirements in its domestic operations. These charges consist primarily of severance costs associated with a reduction in personnel which occurred in 2002 and 2003. As part of this restructuring, in 2002 the Company developed a plan to discontinue the manufacturing operations in certain of its domestic facilities and merge these operations with other existing facilities. The process of merging the domestic operations began in 2003 and continued throughout 2004. As of December 31, 2004, the Company has paid approximately $0.5 million of the charges incurred to date, with the majority of the remainder expected to be paid by 2008. Due to increases in the Company's domestic backlog, the Company does not expect any further consolidation at this time.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net Sales Net sales increased $9.3 million, or 5%, from $185.0 million in 2002 to $194.3 million in 2003. Net sales in the domestic operations of the Company's conveyor equipment segment decreased $4.6 million. This decrease primarily resulted from a $5.2 million decrease in the engineered systems business due to the shipment of a significant project in 2002 which did not recur in 2003. After a period of lower capital spending by the Company's major customers in the coal industry, net sales in the domestic mining equipment business increased $1.4 million. Net sales in the domestic conveyor components business decreased $0.8 million. Net sales in the foreign operations of the Company's conveyor equipment segment increased $19.6 million. Changes in foreign currency translation rates resulted in $10.8 million of this increase. Adjusted for the effects of foreign currency fluctuations, net sales in the Company's Australian and United Kingdom subsidiaries increased $5.5 million and $3.3 million, respectively. The increase in Australia resulted from increased sales of conveyor equipment for new mining projects. The increase in the United Kingdom was due to increased sales of engineered system contracts, primarily to the tunneling industry, offset by reduced sales of standard manufactured products. Net sales in the Company's manufactured housing segment decreased $5.7 million, or 19%, due to the decrease by the Company's customers in the production and shipment of manufactured homes. Based upon the Manufactured Housing Institute's economic report for December 2003, production and shipment of new manufactured homes in 2003 was down 22% from 2002.
Gross Profit Gross profit decreased $3.1 million, or 10%, from $29.8 million in 2002 to $26.7 million in 2003. Gross profit in the domestic operations of the Company's conveyor equipment segment decreased $1.8 million. Approximately $1.4 million of the decrease was due to a decline in profit margins in the mining equipment business which primarily resulted from the Company's inability to pass through raw material price increases, predominantly in steel and steel-related products, beginning in the second half of 2002. The balance of the gross profit decrease in the domestic conveyor equipment operations was largely due to lower sales volume in the engineered systems business area. Gross profit in the foreign operations of the Company's conveyor equipment segment decreased $0.9 million. Changes in foreign currency translation rates resulted in a $1.0 million increase in gross profit at the foreign subsidiaries. Adjusted for the effects of foreign currency fluctuations, gross profit in the Company's Australian subsidiary increased $0.4 million while gross profit in the Company's United Kingdom subsidiary decreased $2.3 million. The increase in the Australian subsidiary was due to increased sales volume. The decrease in the United Kingdom primarily resulted from lower profit margins in complete conveyor systems and
reduced sales volume of the higher margin standard manufactured products business. Gross profit in the Company's manufactured housing segment decreased $0.4 million due to the decrease in net sales.
Gross profit as a percentage of net sales decreased from 16.1% in 2002 to 13.7% in 2003. This decline primarily resulted from the decreased profit margins in the United Kingdom combined with the lower margins on mining equipment business in the Company's domestic operations.
SG&A Expenses SG&A expenses increased $0.9 million, or 4%, from $21.9 million in 2002 to $22.8 million in 2003. SG&A expenses in the domestic operations of the Company's conveyor equipment segment decreased $0.8 million, primarily due to a $0.5 million decrease in selling expenses which resulted from reduced sales personnel and related expenses and a $0.3 million decline in administrative expenses. SG&A expenses in the foreign operations of the Company's conveyor equipment segment increased $1.4 million. Of this increase in the foreign operations, $1.2 million resulted from changes in the foreign currency translation rates and the remaining $0.2 million increase primarily resulted from increased administrative expenses. Corporate SG&A expenses increased $0.5 million due to higher personnel and insurance expenses. SG&A expenses in the Company's other segment decreased $0.2 million.
Operating Income Operating income decreased $3.1 million, or 47%, from $6.6 million in 2002 to $3.5 million in 2003. This decrease resulted from the $3.1 million decrease in gross profit combined with the $0.9 million increase in SG&A expenses, offset by decreases in management fees, amortization expense, and restructuring charges of $0.2 million, $0.1 million, and $0.6 million, respectively.
Liquidity and Capital Resources
Net cash provided by (used in) operating activities was $1.9 million, $(5.4) million, and $(1.6) million for the years ended December 31, 2004, 2003, and 2002, respectively. The increase in operating cash flows from 2003 to 2004 is primarily the result of the increase in the Company's net income. Net cash provided by operations in 2004 resulted from the current year net income of $3.9 million combined with non-cash expenses of $6.6 million and offset by a net increase in operating assets of $8.6 million. The net increase in operating assets in 2004 was primarily caused by an increase in accounts receivable due to increased net sales. Net cash used in operating activities in 2003 resulted from the net loss of $12.6 million offset by significant non-cash expenses of $3.2 million and a net decrease in operating assets of $4.0 million. Net cash used in operating activities in 2002 resulted from the net loss of $12.5 million offset by significant non-cash expenses of $7.1 million and a net decrease in operating assets of $3.8 million.
Net cash used in investing activities was $0.7 million, $0.7 million, and $1.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. Net cash used in investing activities represents net purchases of property, plant, and equipment for all years.
Net cash provided by (used in) financing activities was $(1.2) million, $1.2 million, and $(6.3) million for the years ended December 31, 2004, 2003, and 2002, respectively. Net cash used in financing activities in 2004 resulted from principal payments on long-term obligations of $4.4 million and payments of additional consideration to bondholders of $14.1 million, offset by a net increase in borrowings on notes payable of $2.9 million and proceeds from long-term obligations of $14.4 million. Principal payments on long-term obligations included $3.1 million in interest payments on the New Series A and Series B Notes recorded as a reduction in the outstanding indebtedness balance. The Payment of additional consideration to bondholders of $14.1 million was equivalent to $15.50 per every $120 in Old Notes tendered in the debt restructuring. Proceeds from long-term obligations primarily included a $10.0 million note payable to N.E.S. Investment Co. used to partially fund the
additional consideration payment to bondholders and a $3.8 million increase in a term loan with Bank one. Borrowings on notes payable at the Company's domestic subsidiaries increased $4.1 million in 2004 while borrowings on notes payable at the Company's foreign subsidiaries decreased $1.2 million in 2004.
Net cash provided by financing activities in 2003 resulted from a net increase in borrowings on notes payable of $1.8 million offset by principal payments on long-term obligations of $0.6 million. Borrowings on notes payable at the Company's domestic subsidiaries increased $1.1 million and borrowings on notes payable at the Company's foreign subsidiaries increased $0.7 million. Net cash used in financing activities in 2002 resulted from a net decrease in borrowings on notes payable of $5.4 million and principal payments on long-term obligations of $0.9 million. Borrowings on notes payable at the Company's domestic subsidiaries decreased $6.4 million while borrowings on notes payable at the Company's foreign subsidiaries increased $1.0 million.
The Company's primary capital requirements consist of capital expenditures and debt service. The Company utilizes cash on hand and its available credit facilities to satisfy these requirements. The Company anticipates that capital expenditures in 2005 will be approximately $3 million, which will include expenditures to improve productivity and for maintenance capital. In addition to the Company's debt service requirements for interest expense, as of December 31, 2004, the Company's domestic and foreign credit facilities had outstanding principal balances of approximately $13.3 million and $3.9 million, respectively.
The Company was not in compliance with certain covenants under its revolving credit facilities as of December 31, 2003 or the subsequent ending quarters through September 30, 2004, resulting in a cross default under the terms of the Company's Senior Notes. In addition, the Company failed to make its $6.6 million semi-annual interest payment for the Senior Notes due on April 1, 2004. Following expiration of the 30-day grace period provided for in the indenture, the Senior Notes were in default and the Company received a notice of default from the Trustee for the Senior Notes. Accordingly, the Senior Notes were recorded as current liabilities in the consolidated balance sheet as of December 31, 2003. However, on April 26, 2004, the Company entered into a forbearance agreement with the holders of a majority interest ("Majority Holders") of the Senior Notes which instructed the Trustee for the Senior Notes to refrain from taking any action with respect to the default prior to May 31, 2004. On May 27, 2004, June 14, 2004 and July 13, 2004, this agreement was amended to extend the forbearance agreement until July 23, 2004.
On July 22, 2004, the Company entered into a restructuring agreement with the Majority Holders of the Senior Notes pursuant to which the Company agreed to commence an offer to exchange new notes and a cash payment for all of the outstanding Senior Notes. The restructuring agreement extended the forbearance agreement with the Majority Holders until the restructuring was consummated or the restructuring agreement was terminated.
On August 5, 2004, the Company commenced an offer to exchange (i) cash in the aggregate amount of $17.5 million, (ii) 9% Series A Senior Secured Notes due 2008 in the aggregate principal amount of $65 million, and (iii) 13% Series B Senior Secured Notes due 2008 in the aggregate principal amount of $10 million, for all of its outstanding 11% Senior Notes due 2007 in the aggregate principal amount of $120 million and all interest accrued thereon. The exchange offer was made exclusively to holders of the 11% Senior Notes due 2007.
On May 1, 2004, June 1, 2004, June 15, 2004, July 13, 2004, July 29, 2004 and August 31, 2004, the Company and Bank One, N.A. entered into forbearance agreements under which Bank One agreed not to exercise its rights with respect to the defaults, including the right to demand payment, under the revolving credit facility for a stated period while the Company negotiated a restructuring of its Senior Notes. On July 12, 2004, the Company received a commitment letter from Bank One for a waiver of the covenant violations and an extension of the revolving credit facility. On October 4, 2004, the Company's wholly-owned subsidiaries, CCE and GCC entered into a Second Amended and Restated Credit Facility and Security Agreement (the "Credit Agreement") with Bank One, N.A. The
Credit Agreement extends the Company's revolving credit facility with Bank One until July 31, 2006.
On October 4, 2004, the Company completed the exchange offer with respect to its outstanding 11% Senior Notes due 2007 (the "Old Notes") and entered into an Indenture by and among the Company, two of its wholly-owned subsidiaries, CCE and GCC (collectively, the "Subsidiary Guarantors") and Wells Fargo Bank, National Association, as trustee (the "Indenture"). Tenders with respect to Old Notes representing approximately $109.3 million or 91% of the $120 million of Old Notes outstanding principal amount were received by Wells Fargo Bank, N.A., which acted as depositary in the exchange offer. All Old Notes that were validly tendered were accepted for exchange. According to the terms of the exchange offer, on October 4, 2004, the Company issued approximately $59.2 million of 9% New Series A Notes due 2008 and approximately $9.2 million of 13% New Series B Notes due 2008. In addition, the Company made a cash payment as additional consideration to the Series A and Series B bondholders of approximately $14.1 million, or $15.50 for every $120 of Old Notes tendered. In October 2005, the Series A and Series B bondholders will receive cash of approximately $1.8 million, or $2.00 for every $120 of Old Notes tendered.
According to the terms of the Indenture, the New Series A Notes will mature on October 1, 2008. Interest will accrue at the rate of 9% per annum and will be payable semiannually in arrears, in cash, on each April 1 and October 1 until maturity. Interest accrued on the New Series A Notes from April 1, 2004, as if the New Series A Notes had been issued on such date. The Company paid interest of approximately $2.7 million on October 4, 2004 related to the Series A Notes. The New Series B Notes will also mature on October 1, 2008. Interest will accrue at the rate of 13% per annum and will be payable semiannually in arrears, in kind, on each April 1 and October 1 until maturity. However, the Company has the right to make interest payment on the New Series B Notes in cash at the same rate and on the same terms as the New Series A Notes. The Company has assumed the interest will be paid in cash at a rate of 9% in all calculations involving the interest payments on the Series B Notes in these consolidated financial statements. Interest accrued on the New Series B Notes from April 1, 2004, as if the New Series B Notes had been issued on such date. The Company paid interest of approximately $0.4 million on October 4, 2004 related to the Series B Notes. The New Series A and Series B Notes are jointly and severally guaranteed by the Subsidiary Guarantors and secured by substantially all of the assets of the Subsidiary Guarantors.
The cash payment made on October 4, 2004 as additional consideration to the Series A and Series B bondholders was funded by new subordinated indebtedness to N.E.S. Investment Company in the amount of $10 million and additional borrowings from the Company's revolving line of credit. The note payable to N.E.S. Investment Company accrues interest at a rate of 9%, payable in kind, compounded annually. The additional consideration to be paid by the Company in October 2005 to the Series A and Series B bondholders will be funded with an additional $2 million of subordinated indebtedness to N.E.S. Investment Company.
The debt exchange was accounted for according to Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". According to the requirements of SFAS No. 15, in the fourth quarter of 2004, the Company recorded a gain on the exchange of bonds of approximately $3.4 million, representing the difference between the future cash outlays of the Series A and Series B Notes and the carrying value of the Old Notes. All cash payments as additional consideration to Series A and Series B bondholders and interest payments on the New Series A and Series B Notes will be recorded as a reduction in the balance of outstanding indebtedness throughout the terms of the Series A and Series B Notes, and accordingly, the Company will not recognize any interest expense in the income statement related to the New Series A and Series B Notes.
Because the debt exchange meets the definition of a troubled debt restructuring, U.S. generally accepted accounting principles require that the Company follow the provisions of SFAS No. 15. However, the Company believes that additional
information is necessary in order to keep the consolidated financial statements from being misleading. The Company accrued interest expense on the $120 million Old Notes during the first quarter of 2004. Beginning in the second quarter of 2004, under the provisions of SFAS No. 15, the Company accrued interest expense related to its Senior Notes only on the approximately $10.7 million of Old Notes not tendered. All payments related to the New Series A and Series B Notes were recorded as a reduction in the balance of the Senior Notes. In future periods, the Company will not record any of the interest payments on the Series A and Series B Notes as interest expense in the statement of operations but rather as a reduction of the debt balance on the balance sheet. If the restructuring of the Company's Senior Notes had not occurred, the Company's interest expense for the year ended December 31, 2004 would have been approximately $8.8 million higher than reported. In addition, the Company would not have incurred debt restructuring expenses of approximately $2.6 million, and the Company would not have recorded a gain on debt restructuring of approximately $3.4 million, which are both included in miscellaneous expense (income) in the consolidated statement of operations.
The following table compares the Company's results of operations as presented in the consolidated statement of operations to the results which would have been reported if the Company had not completed the debt restructuring:
Year ended December 31, 2004 ------------------ ------------------- Pro-forma With debt Without debt restructuring restructuring ------------------ -------------------
Operating income, as reported $ 13,104,310 $ 13,104,310 Other expenses: Interest expense, net 6,908,598 15,667,188 Miscellaneous, net (930,840) (116,467) ------------------ ------------------- Total other expenses 5,977,758 15,550,721 ------------------ -------------------
Income (loss) before income taxes $ 7,126,552 $ (2,446,411) ================== ===================
The outstanding indebtedness has been classified as short and long-term liabilities as of December 31, 2004 based upon the payment terms of the new debt. The following table summarizes the reduction in the balance of the Senior Notes based upon the payment requirements over the terms of the Series A and Series B Notes:
Balance at December 31, 2004 of Senior Notes, including current portion of $7,967,604 $ 105,430,665 October 2005 payment as additional consideration (1,821,166) Interest payments on Series A Notes, 2004-2008 (21,307,650) Interest payments on Series B Notes, 2004-2008 (3,278,099) Maturity of outstanding 11% Senior Notes due 2007 (10,730,000) --------------- Maturity of Series A and Series B Notes due 2008 $ 68,293,750 ===============
At December 31, 2004, the Company had cash and cash equivalents of approximately $0.9 million and approximately $9.9 million available for use under its domestic credit facility, representing approximately $10.8 million of liquidity. With the completion of the debt exchange in October 2004, the Company has reduced its annual debt service requirements related to interest payments by approximately $4.8 million. Annual debt service on the New Series A and Series B Notes due 2008 combined with the outstanding Senior Notes due 2007 is approximately $7.3 million, a decrease of $5.9 million from $13.2 million prior to the debt exchange. In order to partially fund the cash payments as additional consideration to the Series A and Series B bondholders, the Company increased
the balance of a term loan with Bank One by approximately $3.8 million and entered into a subordinated promissory note with N.E.S. Investment Company in the amount of $10 million. The annual debt service requirements for interest related to these debt instruments are approximately $0.2 million in cash and $0.9 million in kind. In October 2005, the Company will make a cash payment as additional consideration to the Series A and Series B bondholders for approximately $2 million, funded by an increase in the subordinated promissory note with N.E.S. Investment Company and increasing the annual debt service requirements by approximately $0.2 million in kind. The Company expects current financial resources, existing lines of credit, and funds from operations to be adequate to meet anticipated cash requirements.
The table below summarizes the Company's contractual payments under debt agreements, capital leases, operating leases, and material purchase obligations as of December 31, 2004:
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. The principal foreign currencies in which the Company transacts business are the Australian dollar, the British pound sterling, and the South African rand. As the U.S. dollar strengthens and weakens against these foreign currencies, the Company's financial results will be affected. As discussed previously, the Company's net sales for the year ended December 31, 2004 increased by approximately $10.2 million over the prior year due to changes in foreign currency translation rates, primarily the strengthening of the Australian dollar and the British pound sterling against the U.S. dollar. The fluctuation of the U.S. dollar versus other currencies also resulted in foreign currency translation gains included in the accumulated other comprehensive loss component of stockholder's equity (deficit) of approximately $0.4 million and $0.8 million for the years ended December 31, 2004 and 2003, respectively.
Critical Accounting Policies
Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company evaluates its estimates on an on-going basis. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the
circumstances. Our significant accounting policies are described in Note B to the consolidated financial statements included in Item 8 of this Form 10-K.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
Revenue Recognition The Company recognizes revenue, other than from long-term contracts of its foreign subsidiaries, at the time of shipment. On long-term contracts of its foreign subsidiaries, revenues are accounted for using the percentage of completion method based on the cost of partial shipments and on the ratio of actual costs incurred to date to the estimated total costs to complete. Net sales include freight invoiced to customers with the related costs incurred recorded in cost of sales.
Warranty Costs New manufactured products sold are generally covered by a warranty for periods ranging from six months to two years. Goods purchased for resale normally carry the warranty of the respective manufacturer. The Company records a warranty reserve for estimated costs to satisfy warranty obligations. The Company's estimate of costs to service its warranty obligations is based on historical experience and expectation of future conditions. To the extent the Company experiences changes in warranty claims activity or costs associated with servicing those claims, its warranty accrual is adjusted accordingly.
Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses based upon its evaluations of the probability of collection. The Company evaluates the allowance for doubtful accounts based on the length of time the receivables are past due, historical collection experience, and customer credit-worthiness. In cases where the Company is aware of circumstances that may affect the collectibility of accounts receivable from a specific customer, the Company may record a specific allowance against the amount due from such customer.
Inventories The Company's inventories consists of raw material, manufactured and purchased parts, and work in process. Since inventory records are maintained on a job order basis, it is not practical to segregate inventories into their major classes. The value of a portion of the inventories is determined using the last-in, first-out ("LIFO") method with the remainder determined using the first-in, first-out ("FIFO") method. The Company provides allowances for excess and obsolete inventory based on the age and quality of its products.
Goodwill The Company accounts for its goodwill under SFAS No. 142, "Goodwill and Other Intangible Assets," and accordingly performs annual impairment tests of goodwill. The goodwill impairment test is a two-step process, which requires management to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit to determine if there is impairment and the second step of the process consists of determining the amount of the impairment. The Company engages the assistance of independent valuation experts to assist in performing the annual impairment test.
The Company uses the combination of two valuation methodologies, a market approach and a discounted cash flow approach to develop its estimate of the fair value of the reporting units. These two methodologies use a number of factors and estimates that depend on, among other factors, projected future operating results and future cash flows, estimated cash flow periods, terminal values based on anticipated growth rates, discount rates, and market place data of comparable companies.
The results of the annual impairment tests completed in the fourth quarters of 2004 and 2003 indicated that there was no impairment. Changes in any of the assumptions underlying these estimates could result in a future impairment of goodwill.
Employee Benefit Plans The Company accounts for its defined benefit pension plan using 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 declines in interest rates and the market value of the Company's defined benefit pension plan assets in recent years, the Company has an additional minimum pension liability at December 31, 2004 of $2.4 million. This additional liability has had no impact on earnings. For further details regarding the Company's defined benefit pension plan, see Note G to the consolidated financial statements.
Deferred Taxes Deferred income taxes reflect the timing differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Tax credits are recognized as a reduction of income tax expense in the year the credit arises. A valuation allowance is established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. At December 31, 2004, the Company had a valuation allowance of approximately $4.2 million against its deferred tax assets. Should the Company continue to generate pre-tax income in future periods, portions of the valuation allowance may be reversed against the current period domestic federal tax expense (to the extent that the allowance is available to be reversed), resulting in higher net income for that period.
New Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 151, "Inventory Costs," in November 2004. SFAS No. 151 amends Accounting Research Bulletin (ARB) No. 43 and requires idle facility expense, excessive spoilage, double freight and rehandling costs to be treated as current period charges regardless of whether they meet the ARB No. 43 criteria of "so abnormal". In addition, SFAS No. 151 requires fixed overhead costs to be allocated to conversion costs based upon the normal capacity of the production facility. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company has not determined the impact the adoption will have on its results of operations or financial condition.
Cautionary Statement for Safe Harbor Purposes
This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters that are not historical in nature. Such forward looking statements are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by such forward-looking statements.
In addition, the Company's future results of operations, financial condition, liquidity and capital resources could be materially adversely affected by, among other things, economic and political uncertainties or prolonged economic recession.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The following tables provide information about the Company's financial instruments that are sensitive to changes in interest rates. The tables present principal cash flows and related weighted-average interest rates by expected maturity dates for debt obligations as of December 31, 2004 and 2003.
The Company's interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash equivalents as well as interest paid on its debt. To mitigate the impact of fluctuations in U.S. interest rates, the Company generally borrows on a long-term basis to maintain a debt structure that is fixed rate in nature.
A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions. The Company manufactures and sells its products in the United States, Australia, the United Kingdom, and South Africa. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are exposed to changes in exchange rates between the U.S. dollar and the Australian dollar, the British pound sterling, and the South African rand.
Item 8.
Item 8. Financial Statements and Supplemental Data
The Report of Independent Registered Public Accounting Firm and the Consolidated Financial Statements of Continental Global Group, Inc. for each of the three years in the period ended December 31, 2004 are included herein.
Report of Independent Registered Public Accounting Firm
To the Stockholder Continental Global Group, Inc.
We have audited the accompanying consolidated balance sheets of Continental Global Group, Inc. as of December 31, 2004 and 2003, 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, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and 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, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
As explained in Note C to the financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill.
/s/ Ernst & Young LLP
Cleveland, Ohio March 18, 2005
Continental Global Group, Inc.
Consolidated Balance Sheets
See notes to consolidated financial statements.
Continental Global Group, Inc.
Consolidated Statements of Operations
See notes to consolidated financial statements.
Continental Global Group, Inc.
Consolidated Statements of Stockholder's Equity (Deficit)
See notes to consolidated financial statements.
Continental Global Group, Inc.
Consolidated Statements of Cash Flows
See notes to consolidated financial statements.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
A. Organization and Basis of Presentation
Continental Global Group, Inc. (the "Company") was formed on February 4, 1997, for the purpose of owning all of the common stock of Continental Conveyor & Equipment Company ("CCE") and Goodman Conveyor Company ("GCC"). The Company, which is a holding company with limited assets and operations other than its investments in its subsidiaries, is owned 100% by N.E.S. Investment Co.
Prior to January 1, 1997, CCE and GCC were limited partnerships under common control by NES Group, Inc. (the parent company of N.E.S. Investment Co.), the 99% limited partner. Effective January 1, 1997, NES Group, Inc., transferred its interest in the limited partnerships to CCE and GCC. Effective February 1997, NES Group, Inc. transferred to the Company all of the outstanding capital stock of CCE and GCC.
The Company was not in compliance with certain covenants under its revolving credit facilities as of December 31, 2003 or the subsequent ending quarters through September 30, 2004, resulting in a cross default under the terms of the Company's Senior Notes. In addition, the Company failed to make its $6,600,000 semi-annual interest payment for the Senior Notes due on April 1, 2004. Following expiration of the 30-day grace period provided for in the indenture, the Senior Notes were in default and the Company received a notice of default from the Trustee for the Senior Notes. Accordingly, the Senior Notes were recorded as current liabilities in the consolidated balance sheet as of December 31, 2003. However, on April 26, 2004, the Company entered into a forbearance agreement with the holders of a majority interest ("Majority Holders") of the Senior Notes which instructed the Trustee for the Senior Notes to refrain from taking any action with respect to the default prior to May 31, 2004. On May 27, 2004, June 14, 2004 and July 13, 2004, this agreement was amended to extend the forbearance agreement until July 23, 2004.
On July 22, 2004, the Company entered into a restructuring agreement with the Majority Holders of the Senior Notes pursuant to which the Company agreed to commence an offer to exchange new notes and a cash payment for all of the outstanding Senior Notes. The restructuring agreement extended the forbearance agreement with the Majority Holders until the restructuring was consummated or the restructuring agreement was terminated.
On August 5, 2004, the Company commenced an offer to exchange (i) cash in the aggregate amount of $17,500,000, (ii) 9% Series A Senior Secured Notes due 2008 in the aggregate principal amount of $65,000,000, and (iii) 13% Series B Senior Secured Notes due 2008 in the aggregate principal amount of $10,000,000, for all of its outstanding 11% Senior Notes due 2007 in the aggregate principal amount of $120,000,000 and all interest accrued thereon. The exchange offer was made exclusively to holders of the 11% Senior Notes due 2007.
On May 1, 2004, June 1, 2004, June 15, 2004, July 13, 2004, July 29, 2004 and August 31, 2004, the Company and Bank One, N.A. entered into forbearance agreements under which Bank One agreed not to exercise its rights with respect to the defaults, including the right to demand payment, under the revolving credit facility for a stated period while the Company negotiated a restructuring of its Senior Notes. On July 12, 2004, the Company received a commitment letter from Bank One for a waiver of the covenant violations and an extension of the revolving credit facility. On October 4, 2004, the Company's wholly-owned subsidiaries, CCE and GCC entered into a Second Amended and Restated Credit Facility and Security Agreement (the "Credit Agreement") with Bank One, N.A. The Credit Agreement extends the Company's revolving credit facility with Bank One until July 31, 2006.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
A. Organization and Basis of Presentation (Continued)
On October 4, 2004, the Company completed the exchange offer with respect to its outstanding 11% Senior Notes due 2007 (the "Old Notes") and entered into an Indenture by and among the Company, two of its wholly-owned subsidiaries, CCE and GCC (collectively, the "Subsidiary Guarantors") and Wells Fargo Bank, National Association, as trustee (the "Indenture"). Tenders with respect to Old Notes representing approximately $109,270,000 or 91.06% of the $120,000,000 of Old Notes outstanding principal amount were received by Wells Fargo Bank, N.A., which acted as depositary in the exchange offer. All Old Notes that were validly tendered were accepted for exchange. According to the terms of the exchange offer, on October 4, 2004, the Company issued $59,187,917 of 9% New Series A Notes due 2008 and $9,105,833 of 13% New Series B Notes due 2008. In addition, the Company made a cash payment as additional consideration to the Series A and Series B bondholders of approximately $14,114,000, or $15.50 for every $120 of Old Notes tendered. In October 2005, the Series A and Series B bondholders will receive cash of approximately $1,821,000, or $2.00 for every $120 of Old Notes tendered.
According to the terms of the Indenture, the New Series A Notes will mature on October 1, 2008. Interest will accrue at the rate of 9% per annum and will be payable semiannually in arrears, in cash, on each April 1 and October 1 until maturity. Interest accrued on the New Series A Notes from April 1, 2004, as if the New Series A Notes had been issued on such date. The Company paid interest of $2,663,457 on October 4, 2004 related to the Series A Notes. The New Series B Notes will also mature on October 1, 2008. Interest will accrue at the rate of 13% per annum and will be payable semiannually in arrears, in kind, on each April 1 and October 1 until maturity. However, the Company has the right to make interest payment on the New Series B Notes in cash at the same rate and on the same terms as the New Series A Notes. The Company has assumed the interest will be paid in cash at a rate of 9% in all calculations involving the interest payments on the Series B Notes in these consolidated financial statements. Interest accrued on the New Series B Notes from April 1, 2004, as if the New Series B Notes had been issued on such date. The Company paid interest of $409,763 on October 4, 2004 related to the Series B Notes. The New Series A and Series B Notes are jointly and severally guaranteed by the Subsidiary Guarantors and secured by substantially all of the assets of the Subsidiary Guarantors.
The cash payment made on October 4, 2004 as additional consideration to the Series A and Series B bondholders was funded by new subordinated indebtedness to N.E.S. Investment Company in the amount of $10,000,000 and additional borrowings from the Company's revolving line of credit. The note payable to N.E.S. Investment Company accrues interest at a rate of 9%, payable in kind, compounded annually. The additional consideration to be paid by the Company in October 2005 to the Series A and Series B bondholders will be funded with an additional $2,000,000 of subordinated indebtedness to N.E.S. Investment Company.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
A. Organization and Basis of Presentation (Continued)
The debt exchange was accounted for according to Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". According to the requirements of SFAS No. 15, in the fourth quarter of 2004, the Company recorded a gain on the exchange of bonds of approximately $3,392,000, representing the difference between the future cash outlays of the Series A and Series B Notes and the carrying value of the Old Notes. All cash payments as additional consideration to Series A and Series B bondholders and interest payments on the New Series A and Series B Notes will be recorded as a reduction in the balance of outstanding indebtedness throughout the terms of the Series A and Series B Notes, and accordingly, the Company will not recognize any interest expense in the income statement related to the New Series A and Series B Notes.
Because the debt exchange meets the definition of a troubled debt restructuring, U.S. generally accepted accounting principles require that the Company follow the provisions of SFAS No. 15. However, the Company believes that additional information is necessary in order to keep the consolidated financial statements from being misleading. The Company accrued interest expense on the $120 million Old Notes during the first quarter of 2004. Beginning in the second quarter of 2004, under the provisions of SFAS No. 15, the Company accrued interest expense related to its Senior Notes only on the $10,730,000 of Old Notes not tendered. All payments related to the New Series A and Series B Notes were recorded as a reduction in the balance of the Senior Notes. In future periods, the Company will not record any of the interest payments on the Series A and Series B Notes as interest expense in the statement of operations but rather as a reduction of the debt balance on the balance sheet. In addition, the Company incurred debt restructuring expenses of approximately $2,578,000 and recorded a gain on debt restructuring of approximately $3,392,000, which are both included in miscellaneous expense (income) in the consolidated statement of operations.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
B. Significant Accounting Policies
Principles of Consolidation The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Revenue Recognition The Company recognizes revenue, other than from long-term contracts of its foreign subsidiaries, at the time of shipment. On long-term contracts of its foreign subsidiaries, which represent less than 10% of 2004 consolidated revenues, revenues are accounted for using the percentage of completion method based on the cost of partial shipments and on the ratio of actual costs incurred to date to the estimated total costs to complete. Net sales include freight invoiced to customers with the related costs incurred recorded in cost of sales.
Cash Equivalents The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts for estimated losses based upon its evaluations of the probability of collection. The Company evaluates the allowance for doubtful accounts based on the length of time the receivables are past due, historical collection experience, customer credit-worthiness, and other circumstances that may impair the collectibility of accounts receivable from specific customers.
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 64% and 57% of inventories at December 31, 2004 and 2003, 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 $5,184,000 and $1,316,000 at December 31, 2004 and 2003, respectively.
Impairment of Long-Lived Assets Long-lived assets, other than goodwill, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable. The asset would be considered impaired when the Company's estimate of future undiscounted cash flows over the assets remaining estimated useful life is less than the asset's carrying value. Measurement of the amount of impairment may be based on appraisal, market values of similar assets, or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
B. Significant Accounting Policies (Continued)
Warranty Costs The Company's products are generally covered by warranties against defects in material and workmanship for periods up to two years from the date of sale or installation of the product. The Company records a provision for estimated warranty cost based on historical experience and expectations of future conditions and continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. A summary of accrued warranty costs follows:
Restructuring Charges The Company incurred restructuring charges of approximately $203,000, $67,000 and $640,000 in 2004, 2003 and 2002, respectively, related to changes in staffing and production requirements in its domestic operations. These charges consist primarily of severance costs associated with a reduction in personnel which occurred in 2002 and 2003. As part of this restructuring, in 2002 the Company developed a plan to discontinue the manufacturing operations in certain of its domestic facilities and merge these operations with other existing facilities. The process of merging the domestic operations began in 2003 and continued throughout 2004. As of December 31, 2004, the Company has paid approximately $536,000 of the charges incurred to date, with the majority of the remainder expected to be paid by 2008. Due to increases in the Company's domestic backlog, the Company does not expect any further consolidation at this time.
Advertising Expense The cost of advertising is expensed as incurred. The Company incurred approximately $506,000, $613,000, and $644,000 in advertising costs for the years ended December 31, 2004, 2003, and 2002, respectively.
Income Taxes The provision for income taxes is calculated in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred income taxes using the liability method. The Company's operations will be included in the consolidated income tax returns filed by N.E.S. Investment Co. Income tax expense in the Company's consolidated statement of operations is calculated on a separate tax return basis as if the Company had operated as a stand-alone entity.
Foreign Currency Translation The assets and liabilities of the Company's foreign subsidiaries are translated at current exchange rates, while revenues and expenses are translated at average rates prevailing during the year. The effects of exchange rate fluctuations have been reported in accumulated other comprehensive loss. The effect on the statements of operations of currency transaction gains and losses was not material for all years presented.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
B. Significant Accounting Policies (Continued)
Derivative Financial Instruments The Company recognizes all derivative financial instruments as either assets or liabilities at fair value. Derivative instruments that are not hedges are adjusted to fair value through earnings. Changes in the fair value of derivative instruments that are classified as fair value hedges are offset against changes in the fair value of the hedged assets, liabilities, or firm commitments, through earnings. Changes in the fair value of derivative instruments that are classified as cash flow hedges are recognized in other comprehensive income until such time as the hedged items are recognized in earnings. The ineffective portions of a derivative instrument's change in fair value are immediately recognized in earnings.
The Company uses forward exchange contracts (principally against the Australian dollar and the U.S. dollar) to hedge certain firm sales commitments of its foreign subsidiaries. Foreign currency forward contracts reduce the Company's exposure to the risk that the eventual net cash inflows resulting from the sale of products denominated in a currency other than the functional currency of the respective business will be adversely impacted by changes in exchange rates.
Accumulated Other Comprehensive Loss Accumulated other comprehensive loss at December 31 consisted of the following:
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 The Financial Accounting Standards Board issued SFAS No. 151, "Inventory Costs," in November 2004. SFAS No. 151 amends Accounting Research Bulletin (ARB) No. 43 and requires idle facility expense, excessive spoilage, double freight and rehandling costs to be treated as current period charges regardless of whether they meet the ARB No. 43 criteria of "so abnormal". In addition, SFAS No. 151 requires fixed overhead costs to be allocated to conversion costs based upon the normal capacity of the production facility. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company has not determined the impact the adoption will have on its results of operations or financial condition.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
C. Goodwill and Other Intangibles
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives.
Goodwill and other intangibles that have indefinite lives will be tested for impairment at least annually, using a two step process. The first step identifies if there is impairment using a fair-value-based test and the second step determines the amount of the impairment. The Company engaged the assistance of independent valuation experts to perform the initial analysis as of January 1, 2002 as well as the annual impairment tests. The impairment tests were conducted using both a discounted cash flow valuation model, incorporating an appropriate discount rate for the risks associated with the reporting unit, and a market approach based on comparable public companies guidelines. Based on findings from the initial impairment test as of January 1, 2002, the Company concluded that the carrying value of its Australian reporting unit (part of the Company's conveyor equipment segment) exceeded its estimated fair value and the Company recorded a non-cash impairment write-down for goodwill of $3,850,000. This transition adjustment was reported as a cumulative effect of a change in accounting principle. The results of the annual impairment tests completed in the fourth quarter of 2004, 2003, and 2002 indicated that there was no further impairment.
The carrying amounts and related accumulated amortization balances of the Company's other intangible assets as of December 31 are listed below:
The change in goodwill reflected on the balance sheet from December 31, 2003 to December 31, 2004 resulted from foreign currency translation adjustments. All of the Company's goodwill relates to the conveyor equipment segment. Other intangible assets consist primarily of intangible assets related to a minimum pension liability for the Company's pension plan. Estimated amortization expense related to other intangible assets for each of the next five fiscal years is:
2005 $ 26,360 2006 17,116 2007 4,176 2008 4,176 2009 2,672 ---------------- Total $ 54,500 ================
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
D. Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. The balances of the major classes of property, plant and equipment at December 31, 2004 and 2003 are as follows:
2004 2003 ------------------ ----------------
Land and improvements $ 1,323,266 $ 1,283,233 Buildings and improvements 7,559,753 7,303,338 Machinery and equipment 24,398,310 23,682,912 ------------------ ---------------- $ 33,281,329 $ 32,269,483 ================== ================
Depreciation expense for the years ended December 31, 2004, 2003, and 2002 was $2,270,946, $2,195,015, and $2,166,576, 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.
E. Financing Arrangements
Long-term obligations consist of the following:
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
E. Financing Arrangements (Continued)
Maturities of long-term obligations are as follows:
2005 $ 9,454,247 2006 10,819,428 2007 17,028,192 2008 84,737,135 2009 18,381 ------------------ $ 122,057,383 ==================
On October 4, 2004, the Company completed an exchange offer with respect to its outstanding 11% Senior Notes due 2007 (the "Old Notes") and entered into an Indenture by and among the Company, two of its wholly-owned subsidiaries, CCE and GCC (collectively, the "Subsidiary Guarantors") and Wells Fargo Bank, National Association, as trustee (the "Indenture"). Tenders with respect to Old Notes representing approximately $109,270,000 or 91.06% of the $120,000,000 of Old Notes outstanding principal amount were received by Wells Fargo Bank, N.A., which acted as depositary in the exchange offer. All Old Notes that were validly tendered were accepted for exchange. According to the terms of the exchange offer, on October 4, 2004, the Company issued $59,187,917 of 9% New Series A Notes due 2008 and $9,105,833 of 13% New Series B Notes due 2008.
The Old Notes are registered under the Securities Act of 1933. Interest of 11% on the notes is payable semi-annually in arrears. The Old Notes are redeemable at the option of the Company, in whole or in part, any time subject to certain call premiums. The Old Notes are guaranteed by the Company's domestic 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.
According to the terms of the Indenture, the New Series A Notes will mature on October 1, 2008. Interest will accrue at the rate of 9% per annum and will be payable semiannually in arrears, in cash, on each April 1 and October 1 until maturity. Interest accrued on the New Series A Notes from April 1, 2004, as if the New Series A Notes had been issued on such date. The Company paid interest of $2,663,457 on October 4, 2004 related to the Series A Notes. The New Series B Notes will also mature on October 1, 2008. Interest will accrue at the rate of 13% per annum and will be payable semiannually in arrears, in kind, on each April 1 and October 1 until maturity. However, the Company has the right to make interest payments on the New Series B Notes in cash at the same rate and on the same terms as the New Series A Notes. The Company has assumed the interest will be paid in cash at a rate of 9% in all calculations involving the interest payments on the Series B Notes in these consolidated financial statements. Interest accrued on the New Series B Notes from April 1, 2004, as if the New Series B Notes had been issued on such date. The Company paid interest of $409,763 on October 4, 2004 related to the Series B Notes. The New Series A and Series B Notes are jointly and severally guaranteed by the Subsidiary Guarantors and secured by substantially all of the assets of the Subsidiary Guarantors.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
E. Financing Arrangements (Continued)
The debt exchange was accounted for according to Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". According to the requirements of SFAS No. 15, in the fourth quarter of 2004, the Company recorded a gain on the exchange of bonds of approximately $3,392,000, representing the difference between the future cash outlays of the Series A and Series B Notes and the carrying value of the Old Notes. All cash payments as additional consideration to Series A and Series B bondholders and interest payments on the New Series A and Series B Notes will be recorded as a reduction in the balance of outstanding indebtedness throughout the terms of the Series A and Series B Notes, and accordingly, the Company will not recognize any interest expense in the income statement related to the New Series A and Series B Notes.
The outstanding indebtedness has been classified as short and long-term liabilities as of December 31, 2004 based upon the payment terms of the new debt. The following table summarizes the reduction in the balance of the Senior Notes based upon the payment requirements over the terms of the Series A and Series B Notes:
Balance at December 31, 2004 of Senior Notes, including current portion of $7,967,604 $ 105,430,665 October 2005 payment as additional consideration (1,821,166) Interest payments on Series A Notes, 2004-2008 (21,307,650) Interest payments on Series B Notes, 2004-2008 (3,278,099) Maturity of outstanding 11% Senior Notes due 2007 (10,730,000) ---------------- Maturity of Series A and Series B Notes due 2008 $ 68,293,750 ================
The new subordinated indebtedness to N.E.S. Investment Company in the amount of $10,000,000 was used to partially fund the cash payment made on October 4, 2004 as additional consideration to the Series A and Series B bondholders. The note payable to N.E.S. Investment Company accrues interest at a rate of 9%, payable in kind, compounded annually. The additional consideration to be paid by the Company in October 2005 to the Series A and Series B bondholders will be funded with an additional $2,000,000 of subordinated indebtedness to N.E.S. Investment Company.
On October 4, 2004, CCE and GCC entered into a Second Amended and Restated Credit Facility and Security Agreement ("Credit Agreement") with Bank One, N.A., pursuant to which Bank One has provided CCE and GCC jointly with a line of credit of $30 million. The availability under the Credit Agreement is equal to the sum of (i) 85% of eligible accounts receivable and (ii) 55% of eligible inventory. The Credit Agreement is guaranteed by the Company and secured by a lien on substantially all of the assets of CCE and GCC. In addition, the Credit Agreement contains various restrictive covenants including financial covenants related to debt coverage and minimum net worth and requires the Company to pay a monthly unused commitment fee equal to 1/4% of the average daily availability. The Credit Agreement matures on July 31, 2006, and bears interest at a fluctuating rate based on the prime rate. At December 31, 2004, approximately $9.9 million was available for use. At December 31, 2004 and 2003, the Company had an outstanding balance under the Credit Agreement of $13,296,896 and $9,144,546, respectively. The weighted average interest rate for this facility was 4.4% and 4.1% in 2004 and 2003, respectively. There were approximately $2,685,000 and $3,474,000 of letters of credit outstanding at December 31, 2004 and 2003, respectively.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
E. Financing Arrangements (Continued)
The Credit Agreement also provided for an increase in CCE's secured term loan with Bank One to a principal balance of $5 million. The term loan bears interest at a rate of prime plus 1/2% and matures on July 31, 2006. Principal and interest payments are made monthly with a balloon payment due at maturity.
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 Australian subsidiary, bears interest at a fluctuating rate based on the base rate of the National Australia Bank, and matures on December 31, 2005. At December 31, 2004, the facility was not utilized. The outstanding balance under this facility was $2,153,409 (U.S.$) at December 31, 2003. The weighted average interest rate for this facility was 7.9% and 11.3% in 2004 and 2003, respectively.
The Company's United Kingdom subsidiary has a revolving credit facility with the Bank of Scotland of 2.25 million British pounds sterling. The facility is secured by certain assets of the subsidiary, bears interest at a fluctuating rate of 2.1% above the Bank of Scotland base rate, and matures on December 31, 2005. At December 31, 2004, approximately 0.6 million British pounds was available for use. The outstanding balance under this facility was $3,263,183 and $2,070,234 (U.S.$) at December 31, 2004 and 2003, respectively. The weighted average interest rate for this facility was 6.5% and 5.9% in 2004 and 2003, respectively.
The Company's South African subsidiary has a credit 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, 2004, approximately 1.8 million rand was available for use. The outstanding balance under this facility was $659,962 and $592,180 (U.S.$) at December 31, 2004 and 2003, respectively. The weighted average interest rate for this facility was 10.5% and 11.5% in 2004 and 2003, respectively.
During 2004, 2003, and 2002, the Company paid interest of $3,175,467, $14,745,103, and $14,901,698, respectively. Interest paid in 2004 does not include payments of $3,073,220 related to the Company's New Series A and Series B Notes, which were recorded as a reduction in the balance of outstanding indebtedness.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
F. Leasing Arrangements
The Company's subsidiaries have numerous capital leases for certain machinery and equipment. Amortization of these assets is included in depreciation expense in the statement of operations. Capital lease obligations of approximately $381,000 and $401,000 were incurred in 2004 and 2003, respectively. The gross amount of assets recorded under capital leases and the related accumulated amortization at December 31, 2004 and 2003 are as follows:
2004 2003 ----------------- ----------------- Asset Balances: Buildings $ 49,513 $ - Machinery and Equipment 1,043,525 658,491 ----------------- ----------------- $ 1,093,038 $ 658,491 ================= =================
Accumulated Amortization: Buildings $ 20,631 $ - Machinery and Equipment 234,545 90,820 ----------------- ----------------- $ 255,176 $ 90,820 ================= =================
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, 2004, 2003, and 2002 was approximately $2,765,000, $2,535,000, and $2,032,000, 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 -------------- --------------
2005 $ 275,886 $ 1,361,133 2006 287,574 1,263,841 2007 173,800 1,162,509 2008 97,599 921,350 2009 21,773 580,982 -------------- -------------- Total minimum lease payments 856,632 $ 5,289,815 ============== Amounts representing interest 113,235 -------------- Present value of net minimum lease payments (including current portion of $228,962) $ 743,397 ==============
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
G. Employee Benefit Plans
CCE maintains a defined benefit plan covering all union hourly-paid employees at its Winfield plant. The actuarial computations use the "projected unit credit cost method" and a measurement date of December 31. Actuarial gains and losses are amortized over a 15 year period, and funding of the initial prior service costs plus interest thereon is over a 30 year period. The following table sets forth the accumulated benefit obligation, change in benefit obligation, change in plan assets, funded status and amounts recognized in the Consolidated Balance Sheets as of December 31, 2004 and 2003, of the Company's defined benefit plan.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
G. Employee Benefit Plans (Continued)
The components of net periodic benefit cost for the years ended December 31 are as follows:
The weighted-average assumptions used to determine benefit obligations at December 31 were:
2004 2003 ---------------- ------------- Discount rate 6.00% 6.25% Expected long-term return on plan assets 8.00 8.00
The weighted-average assumptions used to determine the net periodic benefit cost for the years ended December 31 were:
2004 2003 2002 ----------- ----------- --------- Discount rate 6.25% 6.75% 7.25% Expected long-term return on plan assets 8.00 8.00 8.00
To determine the expected long-term rate of return on plan assets, the Company considered the long-term investment objectives of the plan, the target asset allocation of the pension portfolio, as well as the future expectations for returns for each asset category. This resulted in the selection of the 8.00% expected long-term rate of return on plan assets assumption for 2004 and 2003.
The Company's investment policies and strategies for plan assets are to achieve the greatest return consistent with the fiduciary character of the plan and to maintain a level of liquidity that is sufficient to meet the need for timely payment of benefits. The goals of the investment manager include minimizing risk and achieving growth in principal value so that the purchasing power of such value is maintained with respect to the rate of inflation. The Company has established target asset allocations for plan assets of 60% equity securities and 40% fixed income securities. The Company's defined benefit pension plan weighted-average asset allocations at December 31, by asset category, are as follows:
Asset Category: 2004 2003 ----------------- ---------------- Equity securities 55% 68% Debt securities 45 18 Guaranteed income fund - 14 ----------------- ---------------- Total 100% 100% ================= ================
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
G. Employee Benefit Plans (Continued)
The contributions of CCE are made in amounts sufficient to fund the plan's service cost on a current basis and meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, as amended. The Company does not expect to make any contributions to its pension plan in 2005. The Company expects to pay the following benefit payments, which reflect expected future service, as appropriate:
2005 $ 357,000 2006 425,000 2007 471,000 2008 507,000 2009 520,000 2010-2014 2,822,000
CCE also maintains a defined contribution plan covering substantially all salaried and non-union hourly employees. CCE expenses annual contributions (approximately $590,000, $571,000, and $588,000 in 2004, 2003, and 2002, respectively) which fully fund retirement benefits. No participant contributions to the plan are permitted. CCE also maintains a defined contribution savings and profit sharing plan which covers substantially all salaried and non-union hourly employees. Employees may elect to contribute up to 100% of their compensation. CCE will match (approximately $317,000, $297,000, and $329,000 in 2004, 2003, and 2002, 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, 2004 and 2002 was approximately $58,000 and $41,000, respectively, which was equal to 1.5% of eligible employee compensation in 2004 and 1% of eligible employee compensation in 2002. No contribution was made for the year ended December 31, 2003.
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, 2004, 2003, and 2002, the subsidiaries contributed approximately $929,000, $824,000, and $601,000, respectively, to the plans.
In 2002, the Company implemented a Phantom Stock Plan (the "Plan") whereby officers and certain employees may be granted phantom stock units, which vest over a certain period of time as determined for each grant. At December 31, 2004 and 2003, the Company had an accrual for the value of vested phantom stock units granted for approximately $292,000 and $42,000, respectively.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
H. Related Party Transactions
Management fees are charged by Nesco, Inc., an affiliate of N.E.S. Investment Co., to provide general management oversight services, including legal, financial, strategic planning and business development evaluation for the benefit of the Company. Under the management agreement, the Company has agreed to pay Nesco, Inc. fees for such services equal to 5% of the Company's Adjusted EBITDA earnings (earnings before interest and estimated taxes, depreciation, amortization and miscellaneous expense or income). The Company incurred management fee expenses of approximately $811,000, $300,000, and $470,000, for the years ended December 31, 2004, 2003, and 2002, respectively. At December 31, 2004 and 2003, the Company had an accrual for management fees owed to Nesco, Inc. of approximately $988,000 and $177,000, 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, 2004 and 2003, the Company had an accrual for income tax payments owed to NES Group, Inc. of approximately $20,000.
I. Fair Value of Financial Instruments and Concentration of Risk
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value.
Notes payable and long-term debt: The carrying amounts of the Company's borrowings under its short-term revolving credit arrangements and variable rate long-term debt approximate their fair value. The carrying amounts of the Company's Senior Notes at December 31, 2004 approximate their fair value due to the fact that substantially all of these notes were issued during the fourth quarter of 2004. The fair value of the Company's Senior Notes at December 31, 2003 was based on the quoted market value. The fair value of the Company's remaining fixed rate long-term debt is based on the present value of future cash outflows.
Foreign currency forward contracts: Derivative financial instruments at December 31, 2004 and 2003 included foreign currency forward contracts with contractual amounts of $210,000 and $180,000, respectively. The 2004 contracts matured during January 2005 and the 2003 contracts matured in January 2004. The counterparty to the contracts was a major U.S. commercial bank. The Company entered into the foreign currency forward contracts to hedge certain firm sales commitments denominated in a foreign currency. The fair value of the Company's foreign currency forward contracts was estimated based on the quoted market price of a comparable contract and was included in other current assets on the balance sheet.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
I. Fair Value of Financial Instruments and Concentration of Risk (Continued)
The carrying amounts and fair values of the Company's financial instruments at December 31 are as follows:
Accounts receivable from customers in the coal mining industry were approximately 42% and 36% of net accounts receivable at December 31, 2004 and 2003, 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 $751,000, $458,000, and $454,000 in 2004, 2003, and 2002, respectively. Accounts written off, net of recoveries, were approximately $507,000, $645,000, and $342,000 in 2004, 2003, and 2002, respectively.
J. Income Taxes
Income taxes are provided using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." For tax reporting purposes, the Company is included in the consolidated federal tax return of N.E.S. Investment Co. However, for financial reporting purposes, the Company's tax provision has been calculated on a stand-alone basis.
The Company has subsidiaries located in Australia, the United Kingdom, and South Africa which are subject to income taxes in their respective countries. The Company did not pay any income taxes during the year ended December 31, 2004. The Company's United Kingdom subsidiary paid income taxes of approximately $4,000 and $5,000 in 2003 and 2002, respectively.
Income (loss) before income taxes for the years ended December 31 consists of the following:
2004 2003 2002 --------------------- -------------------- --------------------
Domestic $ 4,488,465 $ (10,018,995) $ (8,788,660) Foreign 2,638,087 (2,609,568) 100,160 --------------------- -------------------- -------------------- $ 7,126,552 $ (12,628,563) $ (8,688,500) ===================== ==================== ====================
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
J. Income Taxes (Continued)
Income taxes for the years ended December 31 are summarized as follows:
2004 2003 2002 ----------------- ---------------- ----------------- Current: Domestic: Federal $ 64,887 $ - $ - State and local - - - Foreign - 4,365 3,846 ----------------- ---------------- ----------------- 64,887 4,365 3,846 Deferred: Domestic: Federal 3,346,252 - - State and local 388,926 - - Foreign (533,647) - - ----------------- ---------------- ----------------- 3,201,531 - - ----------------- ---------------- ----------------- $ 3,266,418 $ 4,365 $ 3,846 ================= ================ =================
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. At December 31, 2004, pursuant to Section 108 of the Internal Revenue Code, the Company lost all domestic tax attributes due to the recognition of cancellation of indebtedness income. At December 31, 2003, the Company had domestic net operating loss carryforwards of approximately $22,875,000. At December 31, 2004, the Company had foreign net operating loss carryforwards of approximately $15,919,000 that may be carried forward indefinitely. The Company has established a valuation allowance of approximately $4,242,000 at December 31, 2004 against certain foreign net operating loss carryforwards. This is based upon management's assessment that it is more likely than not that the carryforwards and related assets will not be realized. During 2004, the Company reversed approximately $534,000 of the valuation allowance against its net operating loss carryforward in Australia due to the continued profitability of the Australian subsidiary.
Significant components of the Company's deferred income taxes at December 31 are as follows:
2004 2003 --------------- --------------- Deferred tax assets: Operating accruals $ 2,467,770 $ 2,132,730 Net operating loss carryforwards 5,739,117 14,647,485 Valuation allowance (4,242,179) (12,658,216) --------------- --------------- 3,964,708 4,121,999
Deferred tax liabilities: Inventories (2,008,194) (1,949,214) Property, plant, and equipment (2,058,684) (1,431,167) Goodwill (3,777,328) (1,351,631) --------------- --------------- (7,844,206) (4,732,012) --------------- --------------- Net deferred tax liability $ (3,879,498) $ (610,013) =============== ===============
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
J. Income Taxes (Continued)
A reconciliation of income taxes computed at the statutory rate to the effective rate for the years ended December 31 follows:
Congress passed the American Jobs Creation Act in October 2004. The new law contains numerous changes to existing tax laws. Among other things, the Act will provide a deduction with respect to income of certain U.S. manufacturing activities and allow for favorable taxing on repatriation of certain offshore earnings. The Company has not yet determined what impact, if any, the new law may have on future results of operations and financial condition.
K. Segment Information
While the Company primarily manages its operations on a geographical basis, the Company operates in two principal business segments: conveyor equipment and manufactured housing products. The conveyor equipment business, which comprised approximately 89%, 87%, and 83% of net sales for 2004, 2003, and 2002, 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.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
K. Segment Information (Continued)
The Company evaluates performance and allocates resources based on operating income before restructuring charges and allocation of management fees, amortization and corporate expenses. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies under Note B. The reportable segments are each managed separately because they manufacture and distribute distinct products.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
K. Segment Information (Continued)
Geographic Area Data
Net sales are attributed to countries based on the location of the subsidiary where the sale occurs.
The Company did not have sales to any single customer which exceeded 10% of the Company's total net sales in 2004, 2003 and 2002.
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
L. Guarantor and Non-Guarantor Subsidiaries
Effective October 4, 2004, the Company's domestic subsidiaries, Continental Conveyor & Equipment Company (CCE) and Goodman Conveyor Company (GCC), both of which are wholly owned, are the guarantors of the Senior Notes. Prior to this date, CCE, GCC, and certain of the Company's Australian subsidiaries were 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. The 2004 operations and cash flows of the Company's Australian subsidiaries are included in the "Combined Non-Guarantor Subsidiaries" column in the following summarized consolidating financial statements.
Summarized consolidating balance sheets for 2004 and 2003 and consolidating statements of operations and cash flow statements for 2004, 2003, and 2002 for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
L. Guarantor and Non-Guarantor Subsidiaries (Continued)
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
L. Guarantor and Non-Guarantor Subsidiaries (Continued)
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
L. Guarantor and Non-Guarantor Subsidiaries (Continued)
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
L. Guarantor and Non-Guarantor Subsidiaries (Continued)
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 2004
L. Guarantor and Non-Guarantor Subsidiaries (Continued)
M. Commitments and Contingencies
The Company is not a party to any pending legal proceeding which it believes could have a material adverse effect upon its results of operations or financial condition, or to any other pending legal proceedings other than ordinary, routine litigation incidental to its business.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
As of December 31, 2004, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. There were no significant changes in the Company's internal controls over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART III
Item 10.
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, 2005:
Name Age Position with the Company
Robert W. Hale 58 President and Chief Executive Officer James L. Smothers 48 Vice President Jimmy L. Dickinson 62 Vice President and Chief Financial Officer Edward F. Crawford 65 Director Donald F. Hastings 76 Director C. Wesley McDonald 64 Director Robert J. Tomsich 74 Director James W. Wert 58 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. 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.
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. Tomsich has served as a Director of the Company since its inception. In addition, Mr. Tomsich has served as President and Director of Nesco, Inc. (including predecessors of Nesco, Inc.) since 1956.
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.
Audit Committee Membership The Company does not have a separately designated audit committee. The Company's entire board of directors acts as the audit committee.
Audit Committee Financial Expert The Company's board of directors has determined that the Company does not have an audit committee financial expert as defined by Item 401(h) of Regulation S-K of the Securities Exchange Act of 1934.
Item 11.
Item 11. Executive Compensation
The following table sets forth certain information concerning compensation of the Company's Chief Executive Officer and other most highly compensated officers of the Company having total annual salary and bonus in excess of $100,000.
(1) Amounts shown reflect contributions made by the Company on behalf of the named executives under the Continental Conveyor & Equipment Company Savings and Profit Sharing Plan, the Continental Conveyor & Equipment Retirement Plan for Salaried and Hourly (Non-Union) Employees at Salyersville, Kentucky, and the Continental Global Group, Inc. Phantom Stock Plan. No amounts shown were received by any of the named executives.
Director Compensation
Each director of the Company not employed by the Company or any entity affiliated with the Company received $37,500 for serving as a director of the Company during the year. In addition, Mr. Crawford and Mr. Wert received an additional $50,000 for serving on a special committee. Also, the Company will reimburse such director for their travel and other expenses incurred in connection with attending meetings of the Board of Directors.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of the outstanding equity securities of the Company as of March 15, 2005:
All of the Company's issued and outstanding capital stock is owned by N.E.S. Investment Co., which is 100 percent beneficially owned by Mr. Robert J. Tomsich. Mr. Tomsich may be deemed to be the beneficial owner of the Company's capital stock.
Item 13.
Item 13. Certain Relationships and Related Transactions
Company Formation
The Company is a Delaware Corporation 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.
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 2004 under the Management Agreement was $810,611. 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.
Item 14.
Item 14. Principal Accountant Fees and Services
Audit Fees The aggregate fees for professional services rendered by Ernst & Young LLP in connection with the audit of the Company's annual financial statements for the fiscal years ended December 31, 2004 and 2003, for review of the financial information included in the Company's quarterly reports on Form 10-Q for such fiscal years, and in connection with statutory and regulatory filings for such fiscal years, were approximately $574,000 and $454,000, respectively.
Tax Fees The aggregate fees for services rendered by Ernst & Young LLP in connection with income tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2004 and 2003 were approximately $42,000 and $22,000, respectively.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services The audit committee has considered whether the provision of non-audit services by the auditors is compatible with maintaining the independence of the auditors.
All auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent auditor must be pre-approved by the audit committee. All audit and non-audit services provided by the independent auditors during 2004 were approved by the audit committee.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
Documents Filed as Part of this Report:
1. Consolidated Financial Statements.
The consolidated financial statements listed below together with the report thereon of the independent registered public accounting firm dated March 18, 2005 are included in Item 8.
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets at December 31, 2004 and 2003.
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2004.
Consolidated Statements of Stockholder's Equity (Deficit) for each of the three years in the period ended December 31, 2004.
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2004.
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.
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, 2005.
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:
Supplemental information to be furnished with reports filed pursuant to Section 15(d) of the Act by registrants which have not registered securities pursuant to Section 12 of the Act.
No annual report to security holders covering the registrant's last fiscal year and no proxy statement, form of proxy, or other proxy soliciting material with respect to any annual or other meeting of security holders has been or will be sent to security holders.
Continental Global Group, Inc.
Form 10-K
Index of Exhibits
Exhibit Number Description of Exhibit
3.1 (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). *
4.2 Supplemental Indenture, dated as of October 4, 2004, between Continental Global Group, Inc., Continental Conveyor & Equipment Pty., Ltd., Continental ACE Pty., Goodman Conveyor Company, Continental Conveyor & Equipment Company, and Wells Fargo Bank, National Association, as trustee. (Filed as Exhibit 4.2 to the Company's Form 10-Q for the quarter ended September 30, 2004, and is incorporated herein by reference.)
4.3 Indenture, dated October 4, 2004, among Continental Global Group, Inc., Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Wells Fargo Bank, National Association. (Filed as Exhibit 4.1 to Form 8-K filed by the Company on October 7, 2004, and is incorporated herein by reference.)
4.4 9% Convertible Subordinated Promissory Note, dated October 4, 2004, from Continental Global Group, Inc. to N.E.S. Investment Co. in the amount of $10,000,000. (Filed as Exhibit 4.3 to Form 8-K filed by the Company on October 7, 2004, and is incorporated herein by reference.)
10.1 Second Amended and Restated Credit Facility and Security Agreement, dated October 4, 2004, by and among Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Bank One, N.A. (Filed as Exhibit 4.2 to Form 8-K filed by the Company on October 7, 2004, and is incorporated herein by reference.)
10.2 Management Agreement, dated as of April 1, 1997, between Continental Global Group, Inc. and Nesco, Inc. *
10.3 Employment Agreement, effective November 4, 2002, between Continental Global Group, Inc. and Robert Hale. (Filed as Exhibit 10.3 to the Company's Form 10-K for the year ended December 31, 2002, and is incorporated herein by reference.)
10.4 Reserved
Continental Global Group, Inc.
Form 10-K
Index of Exhibits
Exhibit Number Description of Exhibit
10.5 Reserved
10.6 Forbearance Agreement, effective as of April 26, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers, Inc. (Filed as Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.)
10.7 Forbearance Agreement, effective as of May 1, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.)
10.8 Amendment 1, dated as of May 27, 2004, to Forbearance Agreement effective as of April 26, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers, Inc. (Filed as Exhibit 10.8 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.)
10.9 Forbearance Agreement, effective as of June 1, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit 10.9 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.)
10.10 Amendment 2, dated as of June 14, 2004, to Forbearance Agreement effective as of April 26, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers, Inc. (Filed as Exhibit 10.10 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.)
10.11 Forbearance Agreement, effective as of June 15, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit 10.11 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.)
10.12 Commitment Letter, dated as of July 12, 2004, from Bank One, NA to Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Continental Global Group, Inc. (Filed as Exhibit 10.12 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.)
10.13 Amendment 3, dated as of July 13, 2004, to Forbearance Agreement effective as of April 26, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co., and Wayzata Advisers LLC. (Filed as Exhibit 10.13 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.)
10.14 Forbearance Agreement, effective as of July 13, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit 10.14 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.)
10.15 Forbearance Agreement, effective as of July 29, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit 10.15 to the Company's Form 10-Q for the quarter ended June 30, 2004, and is incorporated herein by reference.)
Continental Global Group, Inc.
Form 10-K
Index of Exhibits
Exhibit Number Description of Exhibit
10.16 Forbearance Agreement, effective as of August 31, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit 10.16 to the Company's Form 10-Q for the quarter ended September 30, 2004, and is incorporated herein by reference.)
10.17 Restructuring Agreement, dated as of July 22, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co. and Wayzata Investment Partners LLC. (Filed as Exhibit 99.1 to Form 8-K filed by the Company on July 23, 2004, and is incorporated herein by reference.)
10.18 First Amendment, dated as of July 30, 2004, to Restructuring Agreement, dated as of July 22, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co. and Wayzata Investment Partners LLC. (Filed as Exhibit 99.1 to Form 8-K filed by the Company on August 3, 2004, and is incorporated herein by reference.)
10.19 Second Amendment, dated as of October 1, 2004, to Restructuring Agreement, dated as of July 22, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co. and Wayzata Investment Partners LLC. (Filed as Exhibit 10.19 to the Company's Form 10-Q for the quarter ended September 30, 2004, and is incorporated herein by reference.)
12 Statement regarding computation of ratio of earnings to fixed charges
21 Subsidiaries of registrant
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18, U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certain instruments with respect to long-term debt have not been filed as exhibits as the total amount of securities authorized under any one of such instruments does not exceed 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees to furnish to the Commission a copy of each such instrument upon request.
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed under the Securities Act of 1933.