<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ______________________
Commission file number 333-27665
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CONTINENTAL GLOBAL GROUP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-1506889
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
CO-REGISTRANTS AND SUBSIDIARY GUARANTORS
Continental Conveyor & Equipment Company Delaware 34-1603197
Goodman Conveyor Company Delaware 34-1603196
---------------
<TABLE>
<S> <C> <C>
Continental Conveyor
Continental Global Group, Inc. & Equipment Company Goodman Conveyor Company
438 Industrial Drive 438 Industrial Drive Route 178, South
Winfield, Alabama 35594 Winfield, Alabama 35594 P. O. Box 866 Belton, South Carolina 29627
(205) 487-6492 (205) 487-6492 (864) 338-7793
</TABLE>
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (sec. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1998 was $-0-.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of March 15, 1998, there were 100 shares of the
registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 2
CONTINENTAL GLOBAL GROUP, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER NUMBER
PART I
<S> <C> <C>
1 Business
2 Properties........................................................................................... 3
3 Legal Proceedings.................................................................................... 7
4 Submission of Matters to a Vote of Security Holders.................................................. 8
PART II
5 Market for Registrant's Common Stock and Related Stockholder Matters................................. 8
6 Selected Financial Data.............................................................................. 9
7 Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................................10
8 Financial Statements and Supplementary Data..........................................................14
9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...........................................................................................35
PART III
10 Directors and Executive Officers of the Registrant...................................................35
11 Executive Compensation...............................................................................37
12 Security Ownership of Certain Beneficial Owners and Management.......................................38
13 Certain Relationships and Related Transactions.......................................................38
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................40
Signatures...........................................................................................41
Index of Exhibits....................................................................................42
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Continental Global Group, Inc. (hereinafter referred to as the
"Company") is a newly formed 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 operating subsidiaries are
Continental Conveyor and Equipment Company ("Continental") and Goodman Conveyor
Company ("Goodman"). The Company also owns indirectly all of the capital stock
of Continental Conveyor & Equipment Pty. Ltd. ("CCE Pty. Ltd."), an Australian
holding company that during 1997 acquired all of the capital stock of BCE
Holdings Pty. Ltd. (BCE). BCE is an Australian holding company which owns all of
the capital stock of four Australian operating companies. During 1997, the
Company also acquired the MECO Belts Group from Joy Technologies Inc., comprised
of certain U.S. operations now being conducted by Goodman and three foreign
operating companies, one in England, Continental FSW Ltd., one in South Africa,
Continental MECO (Proprietary) Ltd, and the third in Australia, MECO McCallum
Pty Ltd., which operates as a subsidiary of CCE Pty. Ltd.
The Company's core business is the conveyor equipment business which
comprised approximately 83.3% of net sales for 1997. This conveyor equipment
business is further divided into four main business areas. The Mining Equipment
business area is principally engaged in the design, manufacture and testing
(and, outside the United States, installation, monitoring and maintenance) of
complete belt conveyor systems and components for mining applications primarily
in the coal industry. The Conveyor Components business area manufactures and
sells components for conveyor systems. 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 into complete Conveyor Equipment systems that meet specific customer
requirements. The Bulk Conveyor Equipment business area designs and manufactures
a complete range of Conveyor Equipment used to transport bulk materials, such as
cement, lime, food products and industrial waste
The Company also manufactures and/or refurbishes (i) axle components
for the mobile home industry and (ii) air filtration equipment for use in
enclosed environments, principally in the textile industry. The manufacturing
requirements for these products are generally compatible with conveyor equipment
production and thus maximize utilization of the Company's manufacturing
facilities for its primary products.
Approximately 78.0% or $166.6 million of the Company's 1997 net sales
were made in the United States, 19.5% or $41.6 million were made in Australia,
the remaining 2.5% or $5.3 million were made in other countries.
ACQUISITIONS
In January 1997, the Company acquired BCE, which, through its
subsidiaries, is a major manufacturer and supplier of Conveyor Equipment in
Australia. The BCE acquisition broadened the Company's product line by adding
large ball bearing idler-rollers preferred by certain equipment users and not
previously offered by the Company. In addition, the BCE Acquisition enhanced the
Company's manufacturing, engineering and service capabilities, as well as its
customer base, in
<PAGE> 4
Australia, enabling the Company to better serve the Australian and Pacific Rim
markets and to cultivate and/or strengthen relationships with major mining
companies that are headquartered or have significant operations in Australia.
On April 1, 1997, the Company acquired from W.S. Tyler Incorporated
("Tyler") substantially all of the assets used by Hewitt-Robins in connection
with the conveyor components manufacturing business currently conducted at
facilities in Pueblo, Colorado, and West Caldwell, New Jersey. The assets
acquired in the Hewitt-Robins Acquisition are used in the manufacture of idlers
in the United States.
The purchase price for the Hewitt-Robins acquisition was $12.6 million
in cash plus the assumption of approximately $1.1 million of liabilities. In
connection with the acquisition the Company entered into a one-year lease with
two one-year renewal options relating to the Pueblo, Colorado facility with
Tyler and intends to move the West Caldwell operations to the Pueblo facility
and to other Company facilities. In addition, the Company agreed to severance
obligations relating to the termination of certain employees as a result of the
acquisition. Tyler agreed not to compete in the manufacturing, sale or
distribution of idlers anywhere in the world for a period of five years from the
closing of the transaction.
On October 17, 1997, the Company completed the acquisition of the MECO
Belts Group from Joy Technologies Inc., a subsidiary of Harnischfeger
Industries. MECO Belts is an international conveyor equipment business with
operations in the United States, United Kingdom, South Africa, and Australia.
The purchase price was approximately $7,200,000, including the issuance of a
note payable for $5,244,000, plus the assumption of approximately $5,000,000 of
liabilities.
The Company will continue to search for strategic acquisitions that add
complementary product lines, expand its technological capabilities, broaden its
geographic reach or otherwise support its business strategy and presently is in
discussions with other potential acquisition candidates. There can be no
assurance that the Company will be able to identify other desirable acquisition
candidates or that the Company will be successful in consummating any
acquisition on terms favorable to the Company, if at all.
CUSTOMERS
The Company markets its products worldwide through a variety of
marketing channels with different customer focuses. The Company sells its Mining
Equipment and Bulk Conveyor Equipment products and services primarily to mining
companies and other end-users, original equipment manufactures and engineering
contractors. The Company sells its Conveyor Components products to original
equipment manufactures, engineering contractors and replacement part
distributors to a diverse group of customers, 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 Engineered Systems' products and services primarily
to contractors and end users for applications in coal processing and mining,
pulp and paper, composting systems,
<PAGE> 5
grain handling, cement products, open-pit mining and tunneling.
For the year ended December 31, 1997, the Company's sales to A. T.
Massey Group constituted approximately 13.1% of the Company's total net sales.
Sales to this customer were to 24 different mining properties. Net sales to the
Company's top five Conveyor Equipment customers represented approximately 35.3%
of the Company's total net sales for 1997. Although the Company has preferred
supplier arrangements with a number of it's 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 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, 1997, was $56.7 million, an increase of $23.2
million, or 69.3% from $33.5 million at December 31, 1996. The increase is
attributable principally to the acquisitions of BCE, Hewitt-Robins and the MECO
Belts Group, which had combined backlogs of $32.5 million at December 31, 1997.
The backlogs of the Company's remaining businesses declined by $9.3 million,
primarily due to timing of shipments in the fourth quarters of 1996 and 1997 to
mining equipment customers, to $24.2 million. In excess of 95% of the backlogs
are expected to ship in 1998.
EMPLOYEES
As of December 31, 1997, the Company had approximately 1,402 employees,
approximately 943 of whom were located in the United States. Approximately 227
of the employees at the Company's Winfield facility are represented by The
Aluminum, Brick and Glass Worker International Union and are covered by a three
year collective bargaining agreement that expires May 15, 1998.
<PAGE> 6
Approximately 94 of the production employees at two to the Company's Australian
facilities are covered by collective bargaining agreements which are due to
expire in 1998 and 1999, respectively. Approximately 45 and 35 of the Company's
production employees in England and South Africa respectively are covered by
collective bargaining arrangements. The Company has not experienced any work
stoppages since 1971 in the United States 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 also is subject to the federal Occupational Health and Safety Act and
similar foreign and state laws. The Company periodically reviews its procedures
and policies for compliance with environmental and health and safety laws and
regulations and believes that it is in substantial compliance with all such
material laws and regulations applicable to its operations. Historically the
costs of compliance with environmental, health and safety requirements have not
been material to the Company's Subsidiaries.
<PAGE> 7
ITEM 2. PROPERTIES
The Company conducts its operations through the following primary
facilities:
<TABLE>
<CAPTION>
Approximate
LOCATION Square Footage Principal Function Owned /Leased
<S> <C> <C> <C>
United States:
Winfield, Alabama 220,000 Headquarters; manufacturing Owned
Belton, South, Carolina 191,000 Administration; manufacturing Owned
Salyersville, Kentucky 111,000 Manufacturing Owned
Pueblo, Colorado 75,600 Manufacturing Leased(1)
Eatonton, Georgia 22,000 Administration; Manufacturing Leased(2)
AUSTRALIA:
Gosford, New South Wales 8,765 Administration; engineering; Leased(3)
and sales
Somersby, New South Wales 42,000 Manufacturing Owned
MacKay, Queensland 32,000 Manufacturing; Installation Leased(4)
support
Geelong, Victoria 21,000 Manufacturing Owned
Wollongong, New South Wales 4,000 Manufacturing; engineering Leased(5)
Mento, New South Wales 22,173 Manufacturing Owned
ENGLAND
Wakefield, UK 19,170 Administration, engineering, Leased(6)
sales, and manufacturing
Wigan, UK 53,520 Manufacturing Leased(7)
SOUTH AFRICA
Alrode, South Africa 24,456 Administration, manufacturing Leased(8)
</TABLE>
- -----------
(1) Expires in April, 1998. The Company holds an option to renew such lease for
two one-year terms and has exercised its option to renew for the first one
year term.
(2) Expires in October, 2003. The Company holds an option to buy such property
at the end of the lease term.
(3) Expires in April, 2000
(4) Current lease has expired and the Company is in negotiation for an extended
term lease.
(5) Expires in April, 1998 and the Company is in negotiation for an extension
of the lease term.
(6) Current lease term is on a month to month basis and is being re-negotiated
for an extended term with additional space.
(7) Expires in March, 1998. The manufacturing operation will be incorporated
into the Wakefield facility
(8) Expires in February, 1999
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's United States facilities is subject to a mortgage securing payment of
indebtedness under the Revolving Credit Facility. In addition, The Company's
Somersby and Geelong Facilities in Australia are subject to mortgages securing
payment of indebtedness under the Australian Revolving Credit Facility.
See Note E "Financing Arrangements", to the Consolidated Financial Statements,
Part II, Item 8.
<PAGE> 8
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceeding
which it believes could have a material adverse effect upon its results of
operations or financial condition, or to any other pending legal proceedings
other than ordinary, routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1997, NES Group, Inc.,
the Company's sole shareholder, by written consent, re-elected all members of
the Company's Board of Directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company is a direct wholly-owned subsidiary of NES Group,
Inc. There is no established public trading market for the Company's common
stock. As of March 15, 1998, the Company had one shareholder. The Company paid
cash dividends once during fiscal 1997 in the amount of $ 40 million. The
Company paid no dividends in 1996. See Note E "Financing Arrangements," to the
Consolidated Financial Statements, Part II, Item 8, for limitations on
dividends.
<PAGE> 9
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, 1997. The
data should be read in conjunction with the consolidated financial statements
and related notes included in this report on Form 10-K.
<TABLE>
<CAPTION>
1997 (1) 1996 1995 1994 1993
----------------------------------------------------------------
(Data in 000's)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 213,517 $ 143,524 $ 153,231 $ 114,025 $ 84,778
Gross profit 43,112 28,808 28,283 19,740 16,470
Operating income 20,013 12,037 14,422 4,942 5,030
Interest expense 11,979 2,889 2,506 1,493 1,214
Net income 7,838 9,872(2) 11,785 3,615 3,731
OTHER DATA:
Depreciation and amortization 2,708 1,012 894 766 594
EBITDA (3) 22,868 12,841 15,185 5,874 5,539
Ratio of earnings to fixed charges (4) 1.65 3.69 4.96 3.00 3.50
BALANCE SHEET DATA:
Cash and cash equivalents 30,883 1,022 295 1,856 7,405
Total assets 129,725 46,499 46,195 40,870 35,543
Long-term debt, including current
portion 129,870 14,143 16,837 10,605 11,616
Owner's equity (deficit) (35,973) 1,994 (3,862) 8,877 6,448
<FN>
(1) Reflects the acquisitions during 1997 of BCE, Hewitt-Robins, and MECO as
described in Note B of Notes to Consolidated Financial Statements.
(2) Includes extraordinary gain on early extinguishment of debt of $932.
(3) EBITDA represents earnings before extraordinary items, interest, taxes,
depreciation, and amortization.
(4) Earnings consist of income before income taxes plus fixed charges. Fixed
charges consist of interest expense, amortization of deferred financing
costs and one-third of rent expense from operating leases, which management
believes is a reasonable approximation of an interest factor.
</TABLE>
<PAGE> 10
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, 1997,
1996, and 1995.
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of products sold 79.8 79.9 81.5
Gross profit 20.2 20.1 18.5
SG&A expenses 9.7 9.4 7.6
Management fee 0.8 2.2 1.4
Amortization expense 0.3 0.1 0.1
Operating income 9.4 8.4 9.4
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales
- ---------
Net sales increased $70.0 million, or 49%, from $143.5 million in 1996 to $213.5
million in 1997. Current year acquisitions of BCE, Hewitt-Robins, and MECO
account for $58.9 million of this increase. Net sales in the Company's conveyor
equipment business increased by $12.9 million due to increased volumes which
resulted from new projects from existing mining equipment customers which were
completed in 1997. Net sales in the Company's other businesses, primarily mobile
home products, decreased by $1.8 million. Net sales pursuant to preferred
supplier arrangements were $46.2 million, or approximately 21.2% of net sales,
in 1997, compared to $45.0 million, or approximately 31.4% of net sales, in
1996.
Gross Profit
- ------------
Gross profit increased $14.3 million, or 50%, from $28.8 million in 1996 to
$43.1 million in 1997. Current year acquisitions increased gross profit by $10.3
million. Gross profit in the Company's conveyor equipment business increased by
$3.0 million due to increased sales volumes and $1.7 million as a result of
increased margins. The increase is partially offset by a decrease in the mobile
home products business of $0.7 million.
SG&A Expenses
- -------------
Selling, general, and administrative expenses, which do not include management
fees, (SG&A expenses), increased $7.4 million, or 55%, from $13.4 million in
1996 to $20.8 million in 1997. Current year acquisitions resulted in increased
SG&A expenses of $6.6 million. SG&A expenses in the Company's conveyor equipment
business increased by $0.4 million due to additional employee costs. The
remaining increase of $0.4 million is attributable to corporate expenses at
Continental Global (parent company).
<PAGE> 11
Operating Income
- ----------------
Operating income increased $8.0 million, or 66%, from $12.0 million in 1996 to
$20.0 million in 1997. The increase is the result of the $14.3 million increase
in gross profit, offset by the $7.4 million increase in SG&A expenses, a $1.5
million decrease in management fees, and a $0.4 million increase in amortization
expense. The decrease in management fees is the result of a change in the
management agreement that defines the limitation of management fees. The
increase in amortization expense is the result of increased goodwill related to
the current year acquisitions of BCE, Hewitt-Robins, and MECO.
Impact of Year 2000
- -------------------
As the Year 2000 approaches, the Company is aware of the issues associated with
the programming code in existing computer systems. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. A company-wide taskforce has been assembled to review all systems to
ensure that they do not malfunction as a result of the Year 2000 and the Company
will utilize both internal and external resources to identify, correct or
reprogram, and test the systems for the Year 2000 compliance. In this process,
the Company expects to both replace some systems and upgrade others. While the
current cost of this effort is still being evaluated, the Company does not
expect the cost to be material.
The Company expects to complete its Year 2000 activities within a timeframe that
will enable its information systems to function without significant disruption
in Year 2000. In addition, the Company's Year 2000 compliance strategy includes
obtaining assurances from third parties that are critical to its business, such
as customers and vendors, regarding their Year 2000 compliance. Failure of the
Company or such third parties to achieve Year 2000 compliance can result in
disruption of the Company's operations that could have a material adverse effect
on the Company's financial condition or results of operations.
INTERNATIONAL OPERATIONS
- ------------------------
The Company transacts business in a number of countries throughout the world and
has facilities in the United States, Australia, the United Kingdom, and South
Africa. As a result, the Company is subject to business risks inherent in
non-U.S. operations, including political and economic uncertainty, import and
export limitations, exchange controls and currency fluctuations. The Company
believes that the risks related to its foreign operations are mitigated by the
relative political and economic stability of the countries in which its largest
foreign operations are located. As the U.S. dollar strengthens and weakens
against foreign currencies in which the Company transacts business, its
financial results will be affected. The principal foreign currencies in which
the Company transacts business are the Australian dollar, the British pound
sterling, and the South African rand. The Company estimates that the
strengthening of the U.S. dollar versus other currencies in 1997, primarily the
Australian dollar, resulted in a charge to owner's equity of approximately $2.5
million. Financial information with respect to foreign operations is contained
in Note J to the Financial Statements of this Annual Report on Form 10-K and is
incorporated herein by reference.
<PAGE> 12
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales
- ---------
Net sales decreased $9.7 million, or 6.3%, from $153.2 million in 1995 to $143.5
million in 1996. This decrease was primarily due to a reduction of $13.4 million
attributable to lower sales in the Engineered Systems and Mining Equipment
business areas. Engineered Systems sales in 1995 included sales related to a
major dam project which were not repeated in 1996. The balance of the decrease
primarily occurred in the Conveyor Components business area. The aggregate
decrease was partially offset by a $0.6 million increase in Bulk Conveyor
Equipment sales and a $4.0 million increase attributable to sales from the
Company's Australian subsidiary, which in 1995 was part of a joint venture which
was terminated in 1996. Net sales pursuant to preferred supplier arrangements
were $45.0 million, or approximately 31.4% of 1996 net sales compared to $45.0
million, or 29.4% of net sales, in 1995.
Gross Profit
- ------------
Gross profit increased $0.5 million, or 1.9%, from $28.3 million in 1995 to
$28.8 million in 1996 due to an increase in the Company's gross profit margin
(expressed as a percentage of net sales) from 18.5% in 1995 to 20.1% in 1996.
The increase in gross profit margin resulted from reduced warranty expenses and
margin improvements in the Mining Equipment, Bulk Conveyor Equipment, Engineered
Systems and Other Products business areas.
SG&A Expenses
- -------------
SG&A expenses, which do not include management fees ("SG&A Expenses"), increased
$1.8 million, or 15.4%, from $11.7 million in 1995 to $13.5 million in 1996.
This increase consisted primarily of $0.8 million of expenses related to the
Company's Australian Subsidiary, and expenses related to the BCE Acquisition and
the Company's Australian subsidiary, increased travel expenses for United
States-based salespeople, and increased research and development and sales
support services.
Operating Income
- ----------------
Operating income decreased $2.4 million, or 16.5%, from $14.4 million in 1995 to
$12.0 million in 1996 due to the increase in SG&A Expenses of $1.8 million and
an increase in management fees of $1.1 million, which was partially offset by
the increase in gross profit of $0.5 million.
Extraordinary Item
- ------------------
The extraordinary gain of $0.9 million in 1996 resulted from the early
extinguishment of a subordinated promissory note with a carrying value of $1.4
million.
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
<PAGE> 13
statements include, without limitation, statements regarding the Company's Year
2000 compliance program. 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $10.5 million, $9.9 million, and
$10.6 million for the years ending December 31, 1997, 1996, and 1995,
respectively. The increase from 1996 to 1997 is the result of higher operating
income due to acquisitions and increased sales. The decline from 1995 to 1996 is
the result of lower net income due to lower net sales, partially offset by a
decrease in net operating assets.
Net cash used in investing activities was $22.7 million, $0.6 million, and $0.8
million for the years ending December 31, 1997, 1996 and 1995, respectively. The
significant increase in 1997 is the result of the acquisitions of BCE for $7.2
million, Hewitt-Robins for $12.9 million, and Tufkon for $0.7 million. The
acquisition of MECO resulted in an increase in cash of $1.5 million, net of
notes issued. The balance of expenditures for investing activities, $3.4 million
in 1997 and $0.6 million in 1996, and $0.8 million in 1995, represents net
purchases of property, plant, and equipment.
Net cash provided by (used in) financing activities was $41.7 million, $(8.6)
million, and $(11.3) million for the years ending December 31, 1997, 1996, and
1995, respectively. The net cash provided by financing activities in 1997 is the
result of the issuance of $120.0 million of senior notes. At the time of the
debt offering, the Company paid dividends to its sole stockholder in the amount
of $40.0 million and paid financing fees in the amount of $5.2 million. In
connection with the BCE acquisition in 1997, $2.9 million was paid to former
shareholders of BCE. The Company reduced its borrowings on notes payable and
long-term obligations by $12.9 million and $18.8 million, respectively. The
Company received proceeds from long-term obligations of $4.8 million. The
Company paid distributions to NESCO, Inc. to fund the payment of income taxes in
the amount of $3.3 million.
Net cash used in financing activities in 1996 represents a reduction of
borrowings on notes payable and long-term obligations of $1.9 million and $2.6
million, respectively, and distributions paid for income taxes in the amount of
$4.1 million.
In 1995, the Company had net increases in borrowings on notes payable and
long-term obligations of $7.0 million and $6.2 million, respectively. The
Company received equity contributions in the amount of $0.2 million and paid
dividends to its sole owner of $20.0 million. The Company also paid
distributions of $4.7 million for income taxes.
The Company's primary capital requirements consist of capital expenditures and
debt service. The Company expects current financial resources (working capital)
and funds from continuing operations to be adequate to meet current cash
requirements. In 1998, the Company anticipates capital expenditures of
approximately $4.9 million for new and replacement equipment. At December 31,
1997, the Company had cash and cash equivalents of $30.9 million and an unused
credit facility line of $30.0 million.
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Report of Independent Auditors and the consolidated financial statements of
Continental Global Group, Inc. for each of the three years in the period ended
December 31, 1997 are included herein.
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
To the Stockholder
Continental Global Group, Inc.
We have audited the accompanying consolidated balance sheets of Continental
Global Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, owner's equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Continental Global
Group, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
March 18, 1998
Cleveland, Ohio
<PAGE> 16
Continental Global Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------
1997 1996
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 30,882,733 $ 1,022,033
Accounts receivable, less allowance for doubtful accounts of
$267,666 in 1997 and $529,450 in 1996 30,458,953 17,789,662
Inventories 27,572,559 20,536,315
Other current assets 1,198,425 1,097,211
-----------------------------------------
Total current assets 90,112,670 40,445,221
Property, plant and equipment 19,530,408 9,844,508
Less accumulated depreciation 6,289,081 4,944,877
-----------------------------------------
13,241,327 4,899,631
Goodwill 20,713,078 735,548
Deferred financing costs 4,809,097 -
Other assets 848,611 418,484
-----------------------------------------
$ 129,724,783 $ 46,498,884
=========================================
LIABILITIES AND OWNER'S EQUITY (DEFICIT):
Current liabilities:
Notes payable $ 455,743 $ 12,394,541
Trade accounts payable 18,874,057 10,942,282
Accrued compensation and employee benefits 6,030,950 3,927,214
Other accrued liabilities 10,466,645 3,098,074
Current maturities of long-term obligations 1,181,715 2,557,771
-----------------------------------------
Total current liabilities 37,009,110 32,919,882
Senior notes 120,000,000 -
Other long-term obligations, less current maturities 8,688,529 11,585,314
Owner's equity (deficit):
Partner's capital - 1,993,688
Stockholder's equity (deficit):
Common stock, no par value, authorized 1,500 shares, issued and
outstanding 100 shares at stated value of $5 per share 500 -
Paid-in Capital 1,993,188 -
Retained deficit (37,966,544) -
-----------------------------------------
(35,972,856) 1,993,688
-----------------------------------------
$ 129,724,783 $ 46,498,884
=========================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 17
Continental Global Group, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Net sales $ 213,517,026 $ 143,524,007 $ 153,230,968
Cost of products sold 170,404,976 114,716,416 124,948,185
---------------------------------------------------------
Gross profit 43,112,050 28,807,591 28,282,783
Operating expenses:
Selling and engineering 13,658,329 9,666,060 8,248,260
General and administrative 7,187,870 3,807,465 3,421,735
Management fee 1,668,489 3,186,751 2,102,412
Amortization of goodwill 584,051 110,763 88,617
---------------------------------------------------------
Total operating expenses 23,098,739 16,771,039 13,861,024
---------------------------------------------------------
Operating income 20,013,311 12,036,552 14,421,759
Other expenses:
Interest expense 11,979,266 2,889,398 2,506,060
Miscellaneous, net (147,240) 207,410 130,415
---------------------------------------------------------
Total other expenses 11,832,026 3,096,808 2,636,475
---------------------------------------------------------
Income before extraordinary item and foreign
income taxes 8,181,285 8,939,744 11,785,284
Foreign income taxes 343,342 - -
---------------------------------------------------------
Income before extraordinary item 7,837,943 8,939,744 11,785,284
Extraordinary item - gain on extinguishment of
debt - 932,145 -
---------------------------------------------------------
Net income $ 7,837,943 $ 9,871,889 $ 11,785,284
=========================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 18
Continental Global Group, Inc.
Consolidated Statements of Owner's Equity (Deficit)
<TABLE>
<CAPTION>
Partners' Retained
Capital Common Paid-in Earnings
(Deficiency) Stock Capital (Deficit) Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $ 8,877,469 $ $ $ $ 8,877,469
Net income 11,785,284 - - - 11,785,284
Contributions 155,622 - - - 155,622
Dividend (20,000,000) (20,000,000)
Distributions for income taxes (4,680,460) - - - (4,680,460)
---------------------------------------------------------------------------
Balance at December 31, 1995 (3,862,085) - - - (3,862,085)
Net income 9,871,889 - - - 9,871,889
Distributions for income taxes (4,121,559) - - - (4,121,559)
Equity adjustment for foreign
currency translation 105,443 - - - 105,443
---------------------------------------------------------------------------
Balance at December 31, 1996 1,993,688 - - - 1,993,688
Transfer of Partners' Capital and
formation of Continental
Global Group, Inc. (1,993,688) 500 1,993,188 - 0
Net income - - - 7,837,943 7,837,943
Dividend (40,000,000) (40,000,000)
Distributions for income taxes - - - (3,294,667) (3,294,667)
Equity adjustment for foreign
currency translation - - - (2,509,820) (2,509,820)
---------------------------------------------------------------------------
Balance at December 31, 1997 $ 0 $ 500 $1,993,188 $(37,966,544) $(35,972,856)
===========================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 19
Continental Global Group, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Operating activities:
Net income $ 7,837,943 $ 9,871,889 $ 11,785,284
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain on extinguishment of debt - (932,145) -
Provision for depreciation and amortization 2,707,750 1,012,154 893,852
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (864,734) 657,816 (4,276,665)
(Increase) decrease in inventories 1,448,743 (59,156) (2,660,009)
(Increase) decrease in other assets 824,961 (224,311) 5,443
Increase (decrease) in accounts payable and
other current liabilities (1,495,596) (453,670) 4,802,188
---------------------------------------------------------
Net cash provided by operating activities 10,459,067 9,872,577 10,550,093
---------------------------------------------------------
Investing activities:
Purchases of property, plant, and equipment (net) (3,405,666) (617,981) (793,731)
Purchase of CCE Pty, less cash acquired - 20,153 -
Purchase of BCE, net of notes to seller (7,189,125) - -
Purchase of Hewitt-Robins (12,894,890) - -
Purchase of Tufkon (697,673) - -
Purchase of MECO, less cash acquired and net of
notes issued 1,507,506 - -
---------------------------------------------------------
Net cash used in investing activities (22,679,848) (597,828) (793,731)
---------------------------------------------------------
Financing activities:
Proceeds from issuance of senior notes 120,000,000 - -
Deferred financing costs (5,199,024) - -
Net increase (decrease) in borrowings on notes
payable (12,859,918) (1,907,738) 6,974,533
Proceeds from long-term obligations 4,833,069 - 6,412,507
Principal payments on long-term obligations (18,803,055) (2,556,702) (180,097)
Distributions for income taxes (3,294,667) (4,121,559) (4,680,460)
Payment to former shareholders of BCE (2,927,300) - -
Partnership contributions - - 155,622
Dividends (40,000,000) - (20,000,000)
---------------------------------------------------------
Net cash provided by (used in) financing activities 41,749,105 (8,585,999) (11,317,895)
Effect of exchange rate on cash 332,376 38,586 -
---------------------------------------------------------
Increase (decrease) in cash and cash equivalents 29,860,700 727,336 (1,561,533)
Cash and cash equivalents at beginning of year 1,022,033 294,697 1,856,230
---------------------------------------------------------
Cash and cash equivalents at end of year $ 30,882,733 $ 1,022,033 $ 294,697
=========================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 20
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
A. ORGANIZATION
Continental Global Group, Inc. (the "Company") was formed on February 4, 1997,
for the purpose of owning all of the common stock of Continental Conveyor &
Equipment Company ("CCE") and Goodman Conveyor Company ("GCC"). The Company,
which is a holding company with limited assets and operations other than its
investments in its subsidiaries, is a Subchapter S Corporation owned 100% by NES
Group, Inc.
Prior to January 1, 1997, CCE and GCC were limited partnerships under common
control by NES Group, Inc., the 99% limited partner. Effective January 1, 1997,
NES Group, Inc., transferred its interest in the limited partnerships to CCE and
GCC. Effective February 1997, NES Group, Inc. transferred to the Company all of
the outstanding capital stock of CCE and GCC.
B. ACQUISITIONS
In February 1996, CCE purchased the remaining 50% interest in CCE Pty. Ltd., a
joint venture in Australia at a cost of approximately $670,000, and currently
owns 100%. The acquisition was accounted for as a purchase. As of December 31,
1996, CCE Pty. Ltd. had total assets of $1,854,000, total liabilities of
$1,632,000, and net assets of $222,000.
On January 7, 1997, the Company purchased the assets of BCE Holding Company Pty.
Ltd. in Australia (BCE), a major manufacturer and supplier of conveyor equipment
with net sales in 1996 of $32.6 million. The purchase price was $11,946,000. In
addition, the Company contributed $3,512,000 in capital to BCE after the
acquisition. Financing consisted of an advance on the revolving credit line of
approximately $6,800,000, an addition to the existing term loan of approximately
$4,500,000, and approximately $4,800,000 in seller financing. The Company has
recorded approximately $9,600,000 of goodwill related to the acquisition. The
results of operations since the date of acquisition have been included in the
consolidated financial statements. The transaction was accounted for as a
purchase.
On April 1, 1997, the Company acquired substantially all of the assets of the
Hewitt-Robins Conveyor Components Division of W.S. Tyler, Incorporated, a
manufacturer of idlers (Hewitt-Robins). The purchase price for Hewitt-Robins,
after working capital adjustments, was approximately $12,900,000 in cash plus
assumption of approximately $1,100,000 of liabilities. The Company has recorded
approximately $12,100,000 of goodwill related to the acquisition. The results of
operations since the date of acquisition have been included in the consolidated
financial statements. The transaction was accounted for as a purchase.
<PAGE> 21
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
B. ACQUISITIONS - CONTINUED
On August 8, 1997, the Company acquired substantially all of the assets of the
Tufkon Conveyor Components Division of Wyko, Inc. The purchase price for Tufkon
was approximately $698,000 in cash. The Company has recorded approximately
$350,000 of goodwill related to the acquisition. The results of operations since
the date of acquisition have been included in the consolidated financial
statements and are not material. The transaction was accounted for as a
purchase.
On October 17, 1997, the Company completed the acquisition of the MECO Belts
Group (MECO Belts) from Joy Mining Machinery, a subsidiary of Harnischfeger
Industries. MECO Belts is an international conveyor equipment company with
operations in the United States, United Kingdom, South Africa, and Australia.
The purchase price was approximately $7,200,000, including the issuance of a
note payable for $5,244,000, plus the assumption of approximately $5,000,000 of
liabilities. The Company has recorded approximately $100,000 of goodwill related
to the acquisition. The results of operations since the date of acquisition have
been included in the consolidated financial statements. The transaction was
accounted for as a purchase.
The following unaudited pro forma income statement information for the Company
for 1997 and 1996 is presented as though BCE, Hewitt-Robins and MECO Belts were
acquired on January 1, 1996 (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Net sales $ 243,142 $ 229,493
Operating income 19,173 18,446
Net income 6,650 12,444
</TABLE>
The unaudited pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the results that would have
occurred had the acquisitions actually occurred on January 1, 1996.
C. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
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 generally recognizes revenue from sales at the time of shipment
rather than at the time a contract is awarded.
<PAGE> 22
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
C. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories, which consist of raw materials, manufactured and purchased parts,
and work in process are stated at the lower of cost or market. Since inventory
records are maintained on a job order basis, it is not practical to segregate
inventories into their major classes. The cost for approximately 66% and 77% of
inventories at December 31, 1997 and 1996, 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 $2,140,000 and $2,220,000 at December 31,
1997 and 1996, respectively.
GOODWILL
Goodwill is being amortized on a straight-line basis, primarily over 40 years.
The balance of accumulated amortization of goodwill was $788,990 and $248,362 at
December 31, 1997 and 1996, respectively. The ongoing value and remaining useful
life of goodwill are subject to periodic evaluation and the Company currently
expects the carrying amounts to be fully recoverable. If events and
circumstances indicate that goodwill might be impaired, an undiscounted cash
flow methodology would be used to determine whether an impairment loss should be
recognized.
INCOME TAXES
The Company and its domestic subsidiaries have elected Subchapter S Corporation
Status for United States income tax purposes. Accordingly, the Company's United
States operations are not subject to income taxes as separate entities. The
Company's United States income is included in the income tax returns of the
stockholder. Under the terms of the Tax Payment Agreement with the stockholder,
the Company makes monthly distributions to the stockholder for payment of income
taxes.
The Company has subsidiaries located in Australia, the United Kingdom and South
Africa which are subject to income taxes in their respective countries. For the
year ended December 31, 1997, the Company recorded foreign income tax expense of
$343,342 related to its Australian subsidiary. The Company did not record
foreign income tax expense related to its subsidiaries in the United Kingdom and
South Africa because these subsidiaries have operating loss carryforwards which
offset any current year tax expense. Pre-tax income attributable to foreign
operations was $643,127 for the year ended December 31, 1997.
<PAGE> 23
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
C. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign subsidiaries are translated
at the 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 as a separate component of owner's equity
(deficit).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement 130, Reporting Comprehensive Income.
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, adoption in 1998 will have no
impact on the Company's net income or owner's equity. Statement 130 requires the
Company's foreign currency translation adjustments, which currently are reported
in owner's equity, to be included in other comprehensive income and the
disclosure of total comprehensive income.
In June 1997, the FASB issued Statement 131, Disclosures about Segments of an
Enterprise and Related Information. Statement 131 establishes standards for the
way that public business enterprises report financial and descriptive
information about its reporting operating segments. The Company has not
determined the impact on the Company's financial statement disclosure. Statement
131 is effective for the Company's financial statements for the year ending
December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997 and 1996, the carrying value of cash and cash equivalents,
accounts receivable and long-term debt approximated fair value.
RECLASSIFICATIONS
Certain amounts from the prior year financial statements have been reclassified
to conform to current year presentation.
<PAGE> 24
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
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, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
Land and improvements $ 600,245 $ 91,865
Buildings and improvements 4,844,362 3,132,320
Machinery and equipment 14,085,801 6,620,323
------------------------------
$ 19,530,408 $ 9,844,508
==============================
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996, and 1995, was
$2,123,699, $901,391, and $805,235, respectively. Depreciation is computed using
the straight-line method based on the expected useful lives of the assets. The
estimated useful lives for buildings and improvements range from 10 to 31.5
years; the estimated useful lives for machinery and equipment range from 3 to
12.5 years.
E. FINANCING ARRANGEMENTS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------------------
1997 1996
<S> <C> <C>
Series B Senior Notes, interest at 11%, payable semi-annually in
arrears, due 2007 $120,000,000 $ -
Promissory note payable to Joy Technologies, Inc., due
October 16, 1999, with interest payable in quarterly
installments beginning December 31, 1998 at prime rate 5,244,000 -
BCE Seller Notes, interest at 7%, payable monthly, due
February 2002 3,200,610 -
Term loan to bank, interest at 10% - 12,628,576
Subordinated secured promissory note, interest at 7% - 300,000
Subordinated note payable to an affiliate, interest at prime rate
plus 1% - 350,000
Note payable by CCE Pty Ltd 188,667 267,398
Obligations under capital leases 1,236,967 597,111
----------------------------------
129,870,244 14,143,085
Less current maturities 1,181,715 2,557,771
----------------------------------
$128,688,529 $ 11,585,314
==================================
</TABLE>
<PAGE> 25
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
E. FINANCING ARRANGEMENTS - CONTINUED
Maturities of long-term obligations are as follows:
<TABLE>
<S> <C>
1998 $ 1,181,715
1999 6,441,174
2000 1,029,588
2001 972,875
2002 199,471
Thereafter 120,045,421
================
$129,870,244
================
</TABLE>
On April 1, 1997, the Company issued $120 million of 11% Series A Notes due
2007. On September 3, 1997, the Company completed an exchange of all the Series
A Notes for 11% Series B Senior Notes due 2007 ("Series B Notes" or "Senior
Notes"). The terms of the Series B Notes are the same as the Series A Notes
except that the Series B Notes have been registered under the Securities Act of
1933, as amended. Interest on the notes is payable semi-annually in cash in
arrears. The Senior Notes are redeemable at the option of the Company, in whole
or in part, any time on or after 2002 subject to certain call premiums. The
Senior Notes are guaranteed by the domestic subsidiaries of the Company 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. The proceeds
of the Senior Notes were utilized as follows:
<TABLE>
<S> <C>
Gross proceeds of Series A Notes $ 120,000,000
Dividend to stockholder (40,000,000)
Repayment of notes payable (18,876,684)
Repayment of term loan (16,459,711)
Repayment of subordinated notes (650,000)
Acquisition of Hewitt-Robins (12,894,890)
Fees (5,199,024)
==================
Excess cash from proceeds $ 25,919,691
==================
</TABLE>
CCE, GCC and Bank One, Cleveland, NA are parties to a credit facility and
security agreement dated September 14, 1992, as amended, restated and
consolidated through March 28, 1997, ("Revolving Credit Facility") pursuant to
which Bank One has provided CCE and GCC jointly with a line of credit of $30
million. The Revolving Credit Facility is guaranteed by the Company and secured
by a lien on substantially all of the assets of CCE and GCC. In addition, the
Revolving Credit Facility contains certain financial and other covenants which,
among other things, establish minimum debt coverage and net working capital
requirements. The Revolving Credit Facility will be fully revolving until final
maturity on March 28, 2000, and will bear interest at a fluctuating rate based
on the prime rate. At December 31, 1997, the Revolving Credit Facility was
unused.
<PAGE> 26
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
E. FINANCING ARRANGEMENTS - CONTINUED
The Company's Australian subsidiary has a revolving credit facility with the
National Australia Bank Limited which provides a line of credit of $6.2 million
(Australian dollars). The facility is guaranteed by the Company and secured by a
lien on substantially all of the assets of the BCE subsidiaries. The facility
expires on November 30, 1999, and bears interest at a fluctuating rate based on
the base rate of the National Australia Bank. At December 31, 1997,
approximately $2.9 million (Australian dollars) was available for use.
The Company's United Kingdom subsidiary has an overdraft facility with the
Midland Bank of 250,000 British pounds. The facility is secured by certain
assets of the Subsidiary and bears interest at a fluctuating rate based on the
Midland Bank base rate. At December 31, 1997, the facility was unused.
The Company's South African subsidiary has a credit facility with the Standard
Bank of Johannesburg for 981,000 South African rand. The facility is secured by
certain assets of the subsidiary and bears interest at a fluctuating rate of
1.5% above the Standard Bank of Johannesburg's prime lending rate. At December
31, 1997, approximately 315,000 rand was available for use.
During 1996, GCC negotiated an early extinguishment of the subordinated secured
promissory note that resulted in an extraordinary gain of $932,145. A new,
$500,000 subordinated secured promissory note was issued in full settlement of
previous obligations. This note was paid in full in 1997.
During 1997, 1996, and 1995, the Company paid interest of $8,153,452,
$2,844,422, and $2,384,514, respectively. Interest income of approximately
$597,000 relates primarily to earnings from the proceeds of the Series B Senior
Notes and has been included in miscellaneous, net.
<PAGE> 27
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
F. LEASING ARRANGEMENTS
CCE has a capital lease for land and building with a lease term of ten years
which contains a purchase option exercisable at any time. In addition, CCE, GCC,
and the Company's Australian subsidiary have numerous capital leases for certain
machinery and equipment. Amortization of these assets is included in
depreciation expense in the income statement. The gross amount of assets
recorded under capital leases and the related accumulated amortization at
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------
<S> <C> <C>
Asset Balances:
Buildings $ 400,000 $ 400,000
Machinery and Equipment 1,520,714 504,950
----------------------------------
$ 1,920,714 $ 904,950
==================================
Accumulated Amortization:
Buildings $ 51,270 $ 39,206
Machinery and Equipment 456,168 207,644
----------------------------------
$ 507,438 $ 246,850
==================================
</TABLE>
Future minimum lease payments for obligations under capital leases are as
follows:
<TABLE>
<S> <C>
1998 $ 335,088
1999 294,414
2000 249,228
2001 192,515
2002 120,301
Thereafter 45,421
===============
Total $ 1,236,967
===============
</TABLE>
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, 1997, 1996, and 1995 was approximately
$1,723,000, $1,262,000, and $1,365,000, respectively. Future minimum lease
payments for operating leases having initial or remaining noncancelable lease
terms in excess of one year are as follows:
<TABLE>
<S> <C>
1998 $ 466,940
1999 227,778
2000 163,746
2001 56,556
2002 11,569
==============
Total $ 926,589
==============
</TABLE>
<PAGE> 28
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
G. EMPLOYEE BENEFIT PLANS
CCE maintains a defined benefit plan covering all union hourly-paid employees at
its Winfield plant. The contributions of CCE are made in amounts sufficient to
fund the plan's service cost on a current basis and meet the minimum funding
requirements of the Employee Retirement Income Security Act of 1974, as amended.
Actuarial gains and losses are amortized over a 15 year period, and funding of
the initial past service costs plus interest thereon is over a 30 year period.
The actuarial computations use the "projected unit credit cost method," which
assumed a discount rate on benefit obligations of 8.0% in both 1997 and 1996 and
an expected long-term rate of return on plan assets of 8.0% in both 1997 and
1996.
The net pension cost is comprised of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1997 1996
<S> <C> <C>
Service cost benefits earned during the period............... $ 83,739 $ 87,021
Interest cost on projected benefit obligation................ 243,004 221,332
Actual return on plan assets................................. (632,625) (401,594)
Net amortization and deferral................................ 460,658 267,702
--------------------------------
Total net periodic pension cost.............................. $ 154,776 $ 174,461
================================
</TABLE>
The actuarial computed benefit obligations and trusteed net assets are presented
below. Plan assets are stated at fair value and are composed primarily of common
stocks and money market funds.
<TABLE>
<CAPTION>
AS OF DECEMBER 31
-------------------------------
1997 1996
<S> <C> <C>
Plan assets at fair value............................................... $ 3,960,135 $ 3,470,702
Actuarial present value of accumulated and projected benefit
obligations, including vested benefits of $3,124,470 and $2,956,576
in 1997 and 1996, respectively.......................... 3,221,103 3,037,552
-------------- ----------------
Excess (deficiency) of plan assets over projected benefit
obligations.......................................................... 739,032 433,150
Unrecognized prior service costs........................................ 58,632 175,896
Unrecognized net gain................................................... (911,110) (565,010)
Unrecognized net asset.................................................. (10,824) (13,530)
============== ================
Pension asset (liability)............................................... $ (124,270) $ 30,506
============== ================
</TABLE>
<PAGE> 29
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
G. EMPLOYEE BENEFIT PLANS - CONTINUED
CCE also maintains a defined contribution plan covering substantially all
salaried and non-union hourly employees. CCE makes annual contributions
($400,000 in both 1997 and 1996) which fully fund retirement benefits. No
participant contributions to the plan are permitted. CCE also maintains a
defined contribution savings and profit sharing plan which covers substantially
all salaried and non-union hourly employees. Employees may elect to contribute
up to 16% of their compensation. CCE will match ($301,734 and $266,437 in 1997
and 1996, 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, 1997 and 1996 was $164,130 and $158,407,
respectively, which was equal to 3% of eligible employees compensation.
H. RELATED PARTY TRANSACTIONS
Management fees are charged by Nesco, Inc., an affiliate of NES Group, Inc., to
provide general management oversight services, including legal, financial,
strategic planning and business development evaluation for the benefit of the
Company. Effective April 1, 1997, the Company and Nesco, Inc. entered into a new
management agreement under which the Company has agreed to pay Nesco, Inc. fees
for such services equal to 5% of the Company's earnings before interest and
estimated taxes, depreciation, amortization and other expense (income). Prior to
April 1, 1997, the amount of management fees paid was based on a percentage of
sales. The Company incurred management fee expenses of approximately $1,668,000,
$3,187,000, and $2,102,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
The subsidiaries of the Company have entered into a tax payment agreement with
NES Group, Inc. providing for monthly payments by each subsidiary to NES Group,
Inc. to fund the income tax liability attributable to the Company's operations.
The Company paid distributions for income taxes of approximately $3,295,000,
$4,122,000, and $4,680,000 for the years ended December 31, 1997, 1996, and
1995, respectively.
I. CONCENTRATION OF RISK
Accounts receivable from customers in the coal mining industry were
approximately 56% at December 31, 1997 and 1996. Sales to one customer in 1997
constituted approximately 13.1% of the Company's total net sales. 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 $168,000 in 1997, $136,000 in
1996 and $14,000 in 1995. Accounts written-off were approximately $440,000 in
1997, $21,000 in 1996, and $24,000 in 1995.
<PAGE> 30
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
J. BUSINESS AND GEOGRAPHIC AREA DATA
The Company's core business is Conveyor Equipment, which comprised approximately
83% of net sales in 1997 and is divided into four main business areas. The
Mining Equipment business area is principally engaged in the design, manufacture
and testing (and, outside the United States, installation, monitoring and
maintenance) of complete belt conveyor systems and components for mining
applications in the coal industry. The Conveyor Components business area
manufactures and sells components for conveyor systems. 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 into complete Conveyor Equipment systems that meet
specific customer requirements. The Bulk Conveyor Equipment business area
designs and manufactures a complete range of Conveyor Equipment used to
transport bulk materials, such as cement, lime, food products and industrial
waste. The Company also manufactures and/or refurbishes (i) axle components for
the mobile home industry and (ii) air filtration equipment for use in enclosed
environments, principally in the textile industry. The manufacturing
requirements for these products are generally compatible with conveyor equipment
production and thus maximize utilization of the Company's manufacturing
facilities for its primary products.
<PAGE> 31
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
J. BUSINESS AND GEOGRAPHIC AREA DATA - CONTINUED
Approximately 78% or $166.6 million of the Company's 1997 net sales were made in
the United States, 19.5% or $41.6 million were made in Australia, and the
remaining 2.5% or $5.3 million were made in other countries. Financial data by
geographic area for 1997 is as follows in thousands (foreign operations were
immaterial prior to 1997):
<TABLE>
<S> <C>
NET SALES
United States:
Domestic $158,470
Export 9,771
Australia 41,567
Other countries 5,305
Intercompany eliminations (1,596)
===================
TOTAL NET SALES $ 213,517
===================
OPERATING INCOME
United States $ 18,122
Australia 1,548
Other countries 358
Intercompany eliminations (15)
===================
TOTAL OPERATING INCOME $ 20,013
===================
IDENTIFIABLE ASSETS
United States $166,809
Australia 25,029
Other countries 8,950
Intercompany eliminations (71,063)
===================
TOTAL ASSETS $ 129,725
===================
NET PROPERTY ADDITIONS
United States $ 1,388
Australia 2,005
Other countries 13
===================
TOTAL ADDITIONS $ 3,406
===================
DEPRECIATION AND AMORTIZATION
United States $ 1,311
Australia 1,352
Other countries 45
===================
TOTAL DEPRECIATION AND AMORTIZATION $ 2,708
===================
</TABLE>
<PAGE> 32
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
K. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Company's domestic subsidiaries, CCE and GCC, both of which are wholly
owned, are the only guarantors of the Series B 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 foreign subsidiaries are not guarantors of the Series B Senior
Notes. Summarized consolidating financial information for 1997 for the Company,
the guarantor subsidiaries, and the non-guarantor, foreign subsidiaries is as
follows (in thousands):
<TABLE>
<CAPTION>
Combined Combined
The Company Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets:
Cash and cash equivalents $ 28,073 $ 2,322 $ 488 $ - $ 30,883
Accounts receivable, net - 19,299 11,731 (571) 30,459
Inventories - 23,625 3,948 - 27,573
Other current assets 47 633 1,671 (1,153) 1,198
-------------------------------------------------------------------
Total current assets 28,120 45,879 17,838 (1,724) 90,113
Property, plant and equipment, net - 6,028 7,213 - 13,241
Goodwill - 12,289 8,424 - 20,713
Investment in subsidiary 49,958 7,903 - (57, 861) -
Other assets 5,041 11,591 504 (11,478) 5,658
-------------------------------------------------------------------
Total assets $ 83,119 $ 83,690 $ 33,979 $ (71,063) $ 129,725
===================================================================
Current liabilities:
Notes payable $ - $ - $ 456 $ - $ 456
Trade accounts payable - 12,731 8,221 (2,078) 18,874
Accrued compensation and employee
benefits 4,756 1,275 6,031
Other accrued liabilities 3,715 3,272 3,479 10,466
Current maturities of long-term
obligations 185 997 1,182
-------------------------------------------------------------------
Total current liabilities 3,715 20,944 14,428 (2,078) 37,009
Series B Senior Notes 120,000 - - - 120,000
Other long-term obligations - 5,586 11,922 (8,819) 8,689
Stockholder's equity (deficit) (40,596) 57,160 7,629 (60,166) (35,973)
===================================================================
Total liabilities and stockholder's
equity $ 83,119 $ 83,690 $ 33,979 $ (71,063) $ 129,725
===================================================================
</TABLE>
<PAGE> 33
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
K. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - CONTINUED
<TABLE>
<CAPTION>
Combined Combined
The Company Guarantor Non-Guarantor
Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ - $ 168,241 $ 46,872 $ (1,596) $ 213,517
Costs of products sold - 133,266 38,735 (1,596) 170,405
-------------------------------------------------------------------
Gross profit - 34,975 8,137 - 43,112
Total operating expenses 353 16,500 6,231 15 23,099
-------------------------------------------------------------------
Operating income (loss) (353) 18,475 1,906 (15) 20,013
Interest expense 9,403 1,408 1,171 (3) 11,979
Miscellaneous, net - (239) 92 - (147)
-------------------------------------------------------------------
Income (loss) before foreign
income taxes (9,756) 17,306 643 (12) 8,181
Foreign income taxes - - 343 - 343
===================================================================
Net income (loss) $ (9,756) $ 17,306 $ 300 $ (12) $ 7,838
===================================================================
<CAPTION>
CASH FLOWS DATA:
<S> <C> <C> <C> <C>
Net cash provided by (used in) $ (5,930) $ 17,528 $ (1,139) $ 10,459
operating activities:
Investing activities:
Purchase of property, plant and
equipment (1,388) (2,018) (3,406)
Purchase of BCE (7,189) (7,189)
Purchase of Hewitt-Robins (12,895) (12,895)
Purchase of Tufkon (698) (698)
Purchase of MECO (175) 1,683 1,508
Investments in subsidiaries (49,958) 44,423 5,535
-----------------------------------------------------------------
Net cash provided by (used in)
investing activities (49,958) 22,078 5,200 (22,680)
Financing activities:
Proceeds from issuance of senior
notes 120,000 120,000
Deferred financing costs (5,199) (5,199)
Decrease in notes payable (12,395) (465) (12,860)
Proceeds from long-term obligations 4,547 286 4,833
Principal payments on long-term
obligations (18,001) (802) (18,803)
Distributions for income taxes (3,295) (3,295)
Payment to former shareholders of
BCE (2,927) (2,927)
Distributions for interest on
senior notes 9,160 (9,160)
Dividends (40,000) (40,000)
-----------------------------------------------------------------
Net cash provided by financing activities 83,961 (38,304) (3,908) 41,749
Effect of exchange rate on cash 333 333
-----------------------------------------------------------------
Increase in cash and cash equivalents 28,073 1,302 486 29,861
Cash and cash equivalents at beginning
of year 1,020 2 1,022
-----------------------------------------------------------------
Cash and cash equivalents at end of year $ 28,073 $ 2,322 $ 488 $ 30,883
=================================================================
</TABLE>
<PAGE> 34
Continental Global Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1997
L. CONTINGENCIES
The Company is not a party to any pending legal proceeding which it believes
could have a material adverse effect upon its results of operations or financial
condition, or to any other pending legal proceedings other than ordinary,
routine litigation incidental to its business.
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
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:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
<S> <C> <C>
C. Edward Bryant, Jr. 63 President and Chief Executive Officer
Jimmy L. Dickinson 55 Vice President and Chief Financial Officer
Jerry R. McGaha 59 Senior Vice President of Sales and
Engineering
Edward F. Crawford 58 Director
Donald F. Hastings 69 Director
Joseph L. Mandia 56 Director
Robert J. Tomsich 67 Director
John R. Tomsich 31 Director
James W. Wert 51 Director
</TABLE>
Set forth below is a brief description of the business experience of
each director and executive officer of the Company.
MR. BRYANT has served as President and Chief Executive Officer of the
Company since its inception. Mr. Bryant has also served as President and Chief
Executive Officer of Continental Conveyor & Equipment Company since 1982 and as
Chairman of the Board of Directors of CCE Pty.
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, as
a Director of Continental Conveyor & Equipment Company since 1996 and as a
Director of CCE Pty. Ltd. since 1996.
MR. MCGAHA has served as Senior Vice President of Sales and Engineering
of the Company since its inception. Mr. McGaha has also served as Senior Vice
President of Sales and Engineering of Continental Conveyor & Equipment Company
since 1996 and as Director of CCE Pty. Ltd. since 1996. In addition to the
foregoing, Mr. McGaha was Vice President of Sales and Engineering of Continental
Conveyor & Equipment Company from 1990 to 1996.
MR. CRAWFORD has served as a Director of the Company since its
inception. In addition to his service with the Company, Mr. Crawford has served
as Chairman and Chief Executive Officer and a Director of Park-Ohio Industries,
Inc. since 1992.
<PAGE> 36
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 a Director of Lincoln Electric Company
from 1992 to 1997. Mr. Hastings retired from this position during 1997.
MR. MANDIA has served as a Director of the Company since its inception.
Mr. Mandia has also served as Group Vice President of NESCO, Inc. since 1988.
MR. ROBERT TOMSICH has served as a Director of the Company since its
inception. In addition, Mr. Robert Tomsich has served as President and Director
of NESCO, Inc. (including predecessors of NESCO, Inc.) since 1956. Mr. Robert
Tomsich is the father of Mr. John Tomsich.
MR. JOHN TOMSICH has served as a Director of the Company since its
inception. In addition, Mr. John Tomsich has served as Vice President of NESCO,
Inc. since 1995 and in various other management positions with NESCO, Inc. since
1990. Mr. John Tomsich is the son of Mr. Robert Tomsich.
MR. WERT has served as a Director of the Company since its inception.
Prior to his service with the Company, Mr. Wert held a variety of executive
management positions with KeyCorp, a financial services company based in
Cleveland, Ohio, and KeyCorp's predecessor, Society Corporation. Mr. Wert served
as Senior Executive Vice President and Chief Investment Officer of KeyCorp from
1995 to 1996. Prior to that time, he served as Senior Executive Vice President
and Chief Financial Officer of KeyCorp for two years and Vice Chairman, Director
and Chief Financial Officer of Society Corporation for four years. Since 1993,
Mr. Wert has served as an outside Director, and currently serves as Chairman of
the Executive and Compensation Committees of the Board of Directors, of
Park-Ohio Industries, Inc.
<PAGE> 37
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth certain information concerning
compensation of the Company's Chief Executive Officer and the other most highly
compensated officers of the Company having total annual salary and bonus in
excess of $100,000:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND OTHER ANNUAL
PRINCIPAL POSITION COMPENSATION(1)
YEAR SALARY BONUS
<S> <C> <C> <C> <C>
C. Edward Bryant, Jr., 1997 $187,344 $ 66,119 $ 15,446
President and Chief 1996 145,008 59,900 6,512
Executive Officer 1995 144,797 298,115(2) 12,234
Jerry R. McGaha, 1997 116,600 29,983 12,877
Senior Vice President of Sales 1996 107,700 25,027 5,583
and Engineering 1995 130,350 121,187(2) 8,298
Jimmy L. Dickinson 1997 125,277 27,436 10,369
Vice President and Chief 1996 109,680 25,514 5,269
Financial Officer 1995 105,240 121,577(2) 7,663
</TABLE>
(1) Amounts shown reflect contributions made by the Company on behalf of
the named executives under the Continental Conveyor & Equipment Company
Savings and Profit Sharing Plan and the Continental Conveyor &
Equipment Company Retirement Plan for Salaried and Hourly (Non-Union)
Employees at Salyersville, Kentucky. No amounts shown were received by
any of the named executives.
(2) Includes special bonuses paid by Nesco, Inc. of $250,000 to Mr. Bryant,
$100,000 to Mr. McGaha, and $100,000 to Mr. Dickinson for services
performed in connection with a financial restructuring of Continental .
See "Related Transactions - Special Bonuses Paid by Affiliate" below.
DIRECTOR COMPENSATION
Each director of the Company not employed by the Company or any entity
affiliated with the Company is entitled to receive $25,000 per year for serving
as a director of the Company. In addition, the Company will reimburse such
directors for their travel and other expenses incurred in connection with
attending meetings of the Board of Directors.
<PAGE> 38
PART III
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, 1998:
<TABLE>
<CAPTION>
NUMBER OF SHARES TITLE OF CLASS NAME AND ADDRESS OF
BENEFICIAL OWNER
<S> <C> <C>
100 Common Stock, no par value NES Group, Inc.(1)
6140 Parkland Boulevard
Mayfield Heights, OH 44124
- ----------------------------
<FN>
(1) All of the Company's issued and outstanding capital stock is owned by NES
Group, Inc. which is 100 percent beneficially owned by Mr. Robert J. Tomsich.
Mr. Tomsich may be deemed to be the beneficial owner of the Company's capital
stock.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
COMPANY FORMATION AND PROCEEDS FROM THE OFFERING.
The Company is a Delaware corporation formed on February 4,
1997, for the purpose of serving as a holding company for the operations
conducted by Continental (including the BCE Subsidiaries) and Goodman. All of
the capital stock of the Company has been issued to NES Group, Inc., which in
turn, transferred to the Company all of the outstanding capital stock of
Continental and Goodman. As a result, the Company is a wholly owned subsidiary
of NES Group, Inc., and each of Continental and Goodman is a wholly owned
subsidiary of the Company.
TAX PAYMENT AGREEMENT
The Company, Continental, and Goodman (each, a "Subsidiary")
have entered into a tax payment agreement with NES Group, Inc. ("Tax Payment
Agreement") providing for monthly payments by each Subsidiary to NES Group, Inc.
in an amount equal to the greater of (i) the total federal, state, local, and,
under certain circumstances, foreign income tax liability attributable to such
Subsidiary's operations for the monthly period, determined on an annualized
basis, and (ii) one twelfth the total federal, state, local, and, under certain
circumstances, foreign income tax liability attributable to such Subsidiary's
operations for the year. The tax rates applied to such income are to be based on
the maximum individual federal, state, local, and foreign income tax rates
imposed by Section 1 of the Internal Revenue Code of 1986, as amended, and by
the equivalent provisions of state, local, and foreign income tax laws. These
tax payments will not recognize any future carry-forward or carry-back tax
benefits to the Company, Continental, or Goodman. Future direct and indirect
Subsidiaries of the Company shall also become parties to the Tax Payment
Agreement.
- ---------------
<PAGE> 39
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 include 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
1997 under the Management Agreement and the prior management fee arrangement was
$1,668,489. 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.
SPECIAL BONUSES PAID BY AFFILIATE.
Messrs. Bryant, McGaha, and Dickinson, the three executive
officers of the Company, received special nonrecurring bonuses in 1995 for their
efforts in connection with a financial restructuring of Continental. These
awards in the respective amounts of $250,000, $100,000, and $100,000 are
reflected in the Executive Compensation Table.
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) Documents Filed as Part of this Report:
1. Consolidated Financial Statements.
The consolidated financial statements listed
below together with the report thereon of the
independent auditors dated March 18, 1998, are
included in Item 8.
Report of Independent Auditors.
Consolidated Balance Sheets at December 31, 1997
and 1996.
Consolidated Statements of Income for each of the
three years in the period ended December 31,
1997.
Consolidated Statements of Owner's Equity
(deficit) for each of the three years in the
period ended December 31, 1997.
Consolidated Statements of Cash Flows for each of
the three years in the period ended December 31,
1997.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
All financial statement schedules for Continental
Global Group, Inc. and its subsidiaries have been
included in the consolidated financial statements
or the related footnotes, or they are either
inapplicable or not required.
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
which is incorporated herein by reference.
(b) Reports on Form 8-K.
November 3, 1997: Item 2 - Acquisition or disposition
of Assets, disclosing the purchase and assumption of
certain assets and liabilities of the MECO Belts
Group from Joy Technologies Inc. a subsidiary of
Harnischfeger Industries.
No other reports on Form 8-K were filed during the
last quarter of the period covered by this report.
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) the Securities Act
of 1994, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized on the 27th day of March, 1998.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ C. Edward Bryant, Jr.
-----------------------------------------
Name: C. Edward Bryant, Jr.
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ C. Edward Bryant, Jr President and Chief Executive Officer March 27, 1998
- ----------------------- (Principal Executive Officer)
C. Edward Bryant, Jr.
/s/ Jimmy L. Dickinson Vice President and Chief Financial Officer March 27, 1998
- ----------------------- (Principal Financial Officer and Principal
Jimmy L. Dickinson Accounting Officer)
/s/ Edward F. Crawford Director March 27, 1998
- -----------------------
Edward F. Crawford
/s/ Donald F. Hastings Director March 27, 1998
- -----------------------
Donald F. Hastings
/s/ Joseph L. Mandia Director March 27, 1998
- -----------------------
Joseph L. Mandia
/s/ John R. Tomsich Director March 27, 1998
- -----------------------
John R. Tomsich
/s/ Robert J. Tomsich Director March 27, 1998
- -----------------------
Robert J. Tomsich
/s/ James W. Wert Director March 27, 1998
- -----------------------
James W. Wert
</TABLE>
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.
<PAGE> 42
CONTINENTAL GLOBAL GROUP, INC.
FORM 10-K
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C> <C>
3.1 Certificate of Incorporation of Continental Global Group, Inc., *
as currently in effect
3.2 By-Laws of Continental Global Group, Inc., as currently in *
effect
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 Purchase Agreement, dated as of March 26, 1997, among *
Continental Global Group, Inc., Continental Conveyor & Equipment
Company, Goodman Conveyor Company, and Donaldson, Lufkin &
Jenrette Securities Corporation, as Initial Purchaser, relating to the
Series A Notes
4.3 Registration Rights Agreement, dated as of April 1, 1997, among *
Continental Global Group, Inc., Continental Conveyor & Equipment
Company, Goodman Conveyor Company, and Donaldson, Lufkin &
Jenrette Securities Corporation, as Initial Purchaser
10.1 Revolving Credit Facility, dated as of Sept. 14, 1992, as amended *
by Amendment I, II, and III, among Continental Conveyor &
Equipment Company, Goodman Conveyor Company, and Bank
One, Cleveland, NA
10.2 Share Sale Agreement dated as of November 8, 1996, as amended *
by First and Second Supplementary Deeds, among Continental Pty.
Ltd. And various Australian sellers, relating to the BCE acquisition
10.3 Asset Purchase Agreement, dated as of March 3, 1997, among *
Continental Conveyor & Equipment Company, Process Technology
Holdings, Inc., and W. S. Tyler Incorporated, relating to the Hewitt-
Robins acquisition.
10.4 Management Agreement, dated as of April 1, 1997, between *
Continental Global Group, Inc. and Nesco, Inc.
10.5 Tax Payment Agreement, dated as of April 1, 1997, among *
Continental Global Group., Inc., Continental Conveyor &
Equipment Company, Goodman Conveyor Company, and NES
Group, Inc.
12 Statement regarding computation of ratio of earnings to fixed charges
21 Subsidiaries of registrant
27 Financial Data Schedule (filed electronically only)
<FN>
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed
under the Securities Act of 1933, as amended.
</TABLE>
<PAGE> 1
Exhibit 12
Continental Global Group, Inc.
Computation of Ratio of Earnings to Fixed Charges
(In thousands, except for ratios)
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Computation of Earnings:
Income before extraordinary item and
foreign income taxes 8,181 8,940 11,785 3,616 3,731
Add:
Interest expense 11,979 (1) 2,889 2,506 1,493 1,214
Amortization of deferred financing costs
- 27 16 8 8
Portion of rent expense representative
of an interest factor 523 407 455 310 268
--------------------------------------------------------------
Earnings 20,683 12,263 14,762 5,427 5,221
==============================================================
Computation of Fixed Charges:
Interest expense 11,979 2,889 2,506 1,493 1,214
Amortization of deferred financing costs
- 27 16 8 8
Portion of rent expense representative
of an interest factor 523 407 455 310 268
--------------------------------------------------------------
Fixed Charges 12,502 3,323 2,977 1,811 1,490
==============================================================
Ratio of Earnings to Fixed Charges 1.65 3.69 4.96 3.00 3.50
==============================================================
<FN>
(1) Amortization of deferred financing costs of $390 is included in 1997
interest expense.
</TABLE>
<PAGE> 1
Exhibit 21
CONTINENTAL GLOBAL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT AT MARCH 15, 1998
<TABLE>
<CAPTION>
JURISDICTION
OF INCORPORATION
SUBSIDIARIES(1) OR ORGANIZATION PARENT COMPANY
<S> <C> <C>
Continental Conveyor & Delaware Continental Global Group, Inc.
Equipment Company
Continental Conveyor & Australia Continental Conveyor &
Equipment Pty. Ltd. Equipment Company
BCE Holdings Pty. Ltd. Australia Continental Conveyor &
Equipment Pty. Ltd.
Continental ACE Pty. Ltd. Australia BCE Holdings Pty. Ltd.
Continental ACE Services Pty. Ltd. Australia BCE Holdings Pty. Ltd.
Continental ACE Conveyor Australia BCE Holdings Pty. Ltd.
Components Pty. Ltd.
A. Crane Pty. Ltd. Australia BCE Holdings Pty. Ltd.
Continental Control Systems Pty. Ltd. Australia BCE Holdings Pty. Ltd. - 60%
Continental Conveyor &
Equipment Pty. Ltd. - 40%
Continental Conveyor Delaware Continental Conveyor &
International Inc. Equipment Company
Continental FSW Ltd. United Kingdom Continental Conveyor
International Inc.
Continental MECO (Proprietary) Ltd. South Africa Continental Conveyor
International Inc.
MECO McCallum Pty. Ltd. Australia Continental Conveyor &
Equipment Pty. Ltd.
Goodman Conveyor Company Delaware Continental Global Group, Inc.
<FN>
(1) Each of the subsidiaries listed is 100% owned by its parent company, except
for Continental Control Systems Pty. Ltd.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE
FINANCIAL STATEMENTS LISTED ON PAGES _____ OF THIS FORM 10-K AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK>0001039785
<NAME>CONTINENTAL GLOBAL GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 30,883
<SECURITIES> 0
<RECEIVABLES> 30,459
<ALLOWANCES> 268
<INVENTORY> 27,573
<CURRENT-ASSETS> 90,113
<PP&E> 19,530
<DEPRECIATION> 6,289
<TOTAL-ASSETS> 129,725
<CURRENT-LIABILITIES> 37,009
<BONDS> 120,000
0
0
<COMMON> 0
<OTHER-SE> (35,973)
<TOTAL-LIABILITY-AND-EQUITY> 129,725
<SALES> 213,517
<TOTAL-REVENUES> 213,517
<CGS> 170,405
<TOTAL-COSTS> 170,405
<OTHER-EXPENSES> 1,668
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,979
<INCOME-PRETAX> 8,181
<INCOME-TAX> 343
<INCOME-CONTINUING> 7,838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,838
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
