UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended March 31, 2003
Commission File No. 333-27665
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
Continental Conveyor & Equipment
Continental Global Group, Inc. Company Goodman Conveyor Company
438 Industrial Drive 438 Industrial Drive Route 178 South
Winfield, Alabama 35594 Winfield, Alabama 35594 Belton, South Carolina 29627
(205) 487-6492 (205) 487-6492 (864) 338-7793
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
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 twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
As of April 30, 2003, there were 100 shares of the registrant's common stock
outstanding.
INDEX
CONTINENTAL GLOBAL GROUP, INC.
Page
Part I Financial Information Number
Item 1 Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 2
Condensed Consolidated Statements of Operations
Three Months ended March 31, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows
Three Months ended March 31, 2003 and 2002 4
Notes to Condensed Consolidated Financial Statements 5-13
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 14-18
Item 3 Quantitative and Qualitative Disclosures about Market Risk 19
Item 4 Controls and Procedures 19
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 22
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
1
Continental Global Group, Inc.
Condensed Consolidated Balance Sheets
March 31 December 31
2003 2002
-------------------- --------------------
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 4,405,599 $ 5,635,042
Accounts receivable, net 29,184,176 25,634,100
Inventories 26,531,610 27,752,503
Deferred income taxes 5,158 25,893
Other current assets 2,303,564 1,959,369
-------------------- --------------------
Total current assets 62,430,107 61,006,907
Property, plant and equipment 29,169,082 28,681,527
Less accumulated depreciation 16,468,158 15,800,206
-------------------- --------------------
12,700,924 12,881,321
Goodwill 13,294,618 13,155,269
Deferred financing costs 2,079,609 2,209,584
Other assets 404,859 414,400
-------------------- --------------------
$ 90,910,117 $ 89,667,481
==================== ====================
Liabilities and Stockholder's Equity (Deficit):
Current liabilities:
Notes payable $ 13,285,061 $ 11,285,602
Trade accounts payable 20,652,741 20,039,041
Accrued compensation and employee benefits 4,434,766 4,974,168
Accrued interest on senior notes 6,600,000 3,300,000
Other accrued liabilities 5,935,848 6,696,110
Current maturities of long-term obligations 1,077,607 1,010,032
-------------------- --------------------
Total current liabilities 51,986,023 47,304,953
Pension obligations 2,750,636 2,645,640
Deferred income taxes 577,549 561,420
Senior notes 120,000,000 120,000,000
Other long-term obligations, less current maturities 1,910,665 1,876,928
Stockholder's equity (deficit):
Common stock, $0.01 par value, authorized 5,000,000 shares,
issued and outstanding 100 shares 1 1
Paid-in capital 1,993,687 1,993,687
Accumulated deficit (81,441,892) (77,654,146)
Accumulated other comprehensive loss (6,866,552) (7,061,002)
-------------------- --------------------
(86,314,756) (82,721,460)
-------------------- --------------------
$ 90,910,117 $ 89,667,481
==================== ====================
See notes to condensed consolidated financial statements.
2
Continental Global Group, Inc.
Condensed Consolidated Statements of Operations
Three months ended March 31
2003 2002
------------------- -------------------
(Unaudited)
Net sales $ 42,572,936 $ 45,543,631
Cost of products sold 36,626,640 37,599,581
------------------- -------------------
Gross profit 5,946,296 7,944,050
Operating expenses:
Selling and engineering 3,212,954 3,418,076
General and administrative 2,552,816 2,114,618
Management fee 36,009 147,765
Amortization expense 6,591 29,814
Restructuring charges 14,005 -
------------------- -------------------
Total operating expenses 5,822,375 5,710,273
------------------- -------------------
Operating income 123,921 2,233,777
Other expenses:
Interest expense 3,730,757 3,801,504
Interest income (9,156) (52,971)
Miscellaneous, net 190,066 32,282
------------------- -------------------
Total other expenses 3,911,667 3,780,815
------------------- -------------------
Loss before income taxes and cumulative effect of change in
accounting principle (3,787,746) (1,547,038)
Income tax benefit - (340,518)
------------------- -------------------
Loss before cumulative effect of change in accounting
principle (3,787,746) (1,206,520)
Cumulative effect of change in accounting principle - (3,850,000)
------------------- -------------------
Net loss $ (3,787,746) $ (5,056,520)
=================== ===================
See notes to condensed consolidated financial statements.
3
Continental Global Group, Inc.
Condensed Consolidated Statements of Cash Flows
Three months ended March 31
2003 2002
---------------------- ---------------------
(Unaudited)
Operating activities:
Net loss $ (3,787,746) $ (5,056,520)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for depreciation and amortization 560,250 573,760
Amortization of deferred financing costs 129,975 129,976
Cumulative effect of change in accounting principle - 3,850,000
Deferred income taxes - (340,518)
Loss on disposal of assets 15,119 8,968
Changes in operating assets and liabilities 159,501 6,285,067
---------------------- ---------------------
Net cash provided by (used in) operating activities (2,922,901) 5,450,733
---------------------- ---------------------
Investing activities:
Purchases of property, plant, and equipment (89,847) (156,946)
Proceeds from sale of property, plant, and equipment 20,547 15,174
---------------------- ---------------------
Net cash used in investing activities (69,300) (141,772)
---------------------- ---------------------
Financing activities:
Net increase (decrease) in borrowings on notes payable 1,905,105 (4,347,091)
Principal payments on long-term obligations (143,085) (247,636)
---------------------- ---------------------
Net cash provided by (used in) financing activities 1,762,020 (4,594,727)
Effect of exchange rate changes on cash 738 (24,383)
---------------------- ---------------------
Increase (decrease) in cash and cash equivalents (1,229,443) 689,851
Cash and cash equivalents at beginning of period 5,635,042 14,671,806
---------------------- ---------------------
Cash and cash equivalents at end of period $ 4,405,599 $ 15,361,657
====================== =====================
See notes to condensed consolidated financial statements.
4
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
A. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. For further information, refer to the consolidated
financial statements and footnotes of Continental Global Group, Inc. and
subsidiaries for the year ended December 31, 2002, included in the Form 10-K
filed by the Company on March 31, 2003.
Certain amounts from the prior year financial statements have been reclassified
to conform to current year presentation.
In the fourth quarter of 2002, the Company recorded a non-cash impairment
write-down for goodwill of $3,850,000 in accordance with the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets". The Company has restated the
results of operations for the three months ended March 31, 2002 to reflect this
goodwill impairment as of January 1, 2002. This transition adjustment has been
reported as a cumulative effect of a change in accounting principle.
B. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
C. 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 65% and 63% of
inventories at March 31, 2003 and December 31, 2002, respectively, is determined
using the last-in, first-out (LIFO) method with the remainder determined using
the first-in, first-out (FIFO) method. Had the FIFO method of inventory (which
approximates replacement cost) been used to cost all inventories, inventories
would have increased by approximately $1,457,000 at March 31, 2003 and December
31, 2002.
5
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
D. Warranty Costs
The Company's products are generally covered by warranties against defects in
material and workmanship for periods up to two years from the date of sale or
installation of the product. The Company records a provision for estimated
warranty cost based on actual experience and continuously assesses the adequacy
of its product warranty accrual and makes adjustments as needed. A summary of
accrued warranty costs follows:
2003
-----------------
Balance as of January 1 $ 1,678,002
Warranties issued during the period 200,548
Settlements made during the period (415,065)
Effect of exchange rate changes 12,180
-----------------
Balance as of March 31 $ 1,475,665
=================
E. Restructuring Charges
The Company incurred additional restructuring charges of approximately $14,000
for the three months ended March 31, 2003 related to changes in staffing and
production requirements in its domestic operations. These charges consist
primarily of relocation costs associated with the merger of certain domestic
facilities. Total restructuring charges incurred to date pertaining to the
actions started by the Company in 2002 are approximately $654,000. As part of
this restructuring, during 2003, the Company plans to discontinue the
manufacturing operations in certain of its domestic facilities and merge these
operations with other existing facilities. The Company expects the additional
cost of this restructuring to be approximately $500,000. These charges consist
primarily of severance and relocation costs and will be expensed as incurred. As
of March 31, 2003, the Company has paid approximately $82,000 of the charges
incurred to date.
F. Comprehensive Loss
The components of comprehensive loss for the three months ended March 31, 2003
and 2002 are as follows:
Three months ended
March 31
2003 2002
-----------------------------------
Net loss $ (3,787,746) $ (5,056,520)
Other comprehensive income (loss):
Foreign currency translation adjustment 151,187 223,874
Change in fair value of derivative hedge (net of tax) 43,263 -
-----------------------------------
Comprehensive loss $ (3,593,296) $ (4,832,646)
===================================
6
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
G. Income Taxes
Income taxes are provided using the liability method in accordance with FASB
Statement No. 109, "Accounting for Income Taxes". For tax reporting purposes,
the Company is included in the consolidated federal tax return of N.E.S.
Investment Co. However, for financial reporting purposes, the Company's tax
provision has been calculated on a stand-alone basis. The Company's effective
tax rate differs from the statutory rate in the United States due to losses
incurred without a corresponding tax benefit.
The Company has subsidiaries located in Australia, the United Kingdom, and South
Africa, which are subject to income taxes in their respective countries.
H. Segment Information
While the Company primarily manages its operations on a geographical basis, the
Company operates in two principal business segments: conveyor equipment and
manufactured housing products. The conveyor equipment business markets its
products in four main business areas. The mining equipment business area
includes the design, manufacture and testing (and, outside the United States,
installation and maintenance) of complete belt conveyor systems and components
for mining application primarily in the coal industry. The conveyor components
business area manufactures and sells components for conveyor systems primarily
for resale through distributor networks. The engineered systems business area
uses specialized project management and engineering skills to combine mining
equipment products, purchased equipment, steel fabrication and other outside
services for sale as complete conveyor equipment systems that meet specific
customer requirements. The bulk conveyor equipment business area designs and
manufactures a complete range of conveyor equipment sold to transport bulk
materials, such as cement, lime, food products and industrial waste.
7
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
H. Segment Information (Continued)
The Company's manufactured housing products business manufactures and/or
refurbishes axle components sold directly to the manufactured housing industry.
As part of this segment the Company also sells mounted tire and rim assemblies
to the manufactured housing industry. Included in the other category is
primarily the manufacture and sale of air filtration equipment for use in
enclosed environments, principally in the textile industry. The manufacturing
requirements for these products are generally compatible with conveyor equipment
production and thus maximize utilization of the Company's manufacturing
facilities for its primary products.
Three months ended
March 31
2003 2002
--------------------------------------
(in thousands)
Net sales:
Conveyor equipment $ 36,695 $ 38,004
Manufactured housing products 5,668 7,214
Other 210 326
--------------------------------------
Total net sales $ 42,573 $ 45,544
======================================
Segment operating income:
Conveyor equipment $ 333 $ 2,210
Manufactured housing products 184 382
Other 77 35
--------------------------------------
Total segment operating income 594 2,627
Management fee 36 148
Amortization expense 7 30
Restructuring charges 14 -
Corporate expense 413 215
--------------------------------------
Total operating income 124 2,234
Interest expense 3,731 3,802
Interest income (9) (53)
Miscellaneous, net 190 32
--------------------------------------
Loss before income taxes $ (3,788) $ (1,547)
======================================
8
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
I. Guarantor and Non-Guarantor Subsidiaries
The Company's domestic subsidiaries, Continental Conveyor & Equipment Company
(CCE) and Goodman Conveyor Company (GCC), and certain of its Australian
subsidiaries, all of which are wholly owned, are the guarantors of the Senior
Notes. The guarantees are full, unconditional, and joint and several. Separate
financial statements of these guarantor subsidiaries are not presented as
management has determined that they would not be material to investors. The
Company's United Kingdom and South African subsidiaries are not guarantors of
the Senior Notes.
Summarized consolidating balance sheets as of March 31, 2003 and December 31,
2002 for the Company, the guarantor subsidiaries, and the non-guarantor
subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
March 31, 2003: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 2,605 $ 1,799 $ 2 $ - $ 4,406
Accounts receivable, net - 21,159 8,025 - 29,184
Inventories - 21,904 4,628 - 26,532
Deferred income taxes 81 - 298 (374) 5
Other current assets 395 1,125 788 (5) 2,303
-------------------------------------------------------------------------------
Total current assets 3,081 45,987 13,741 (379) 62,430
Property, plant, and
equipment, net - 8,487 4,214 - 12,701
Goodwill - 12,627 668 - 13,295
Investment in subsidiaries 60,009 18,787 - (78,796) -
Deferred financing costs 2,079 - - - 2,079
Other assets 10,389 1,770 - (11,754) 405
-------------------------------------------------------------------------------
Total assets $ 75,558 $ 87,658 $ 18,623 $ (90,929) $ 90,910
===============================================================================
Current liabilities:
Notes payable $ - $ 10,338 $ 3,554 $ (607) $ 13,285
Trade accounts payable 330 13,674 6,654 (5) 20,653
Accrued compensation and
employee benefits - 3,511 924 - 4,435
Accrued interest 6,600 - - - 6,600
Other accrued liabilities 521 4,310 1,829 (724) 5,936
Current maturities of
long-term obligations - 1,001 76 - 1,077
-------------------------------------------------------------------------------
Total current liabilities 7,451 32,834 13,037 (1,336) 51,986
Pension obligation - 2,751 - - 2,751
Deferred income taxes - 10,666 - (10,089) 577
Senior Notes 120,000 - - - 120,000
Other long-term obligations - 1,728 1,031 (848) 1,911
Stockholder's equity
(deficit) (51,893) 39,679 4,555 (78,656) (86,315)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 75,558 $ 87,658 $ 18,623 $ (90,929) $ 90,910
===============================================================================
9
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
December 31, 2002: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 4,524 $ 1,109 $ 2 $ - $ 5,635
Accounts receivable, net - 16,469 9,165 - 25,634
Inventories - 23,479 4,274 - 27,753
Deferred income taxes 81 - 280 (335) 26
Other current assets 37 1,095 827 - 1,959
-------------------------------------------------------------------------------
Total current assets 4,642 42,152 14,548 (335) 61,007
Property, plant, and
equipment, net - 8,713 4,168 - 12,881
Goodwill - 12,528 627 - 13,155
Investment in subsidiaries 60,009 18,118 - (78,127) -
Deferred financing costs 2,210 - - - 2,210
Other assets 9,817 1,833 - (11,236) 414
-------------------------------------------------------------------------------
Total assets $ 76,678 $ 83,344 $ 19,343 $ (89,698) $ 89,667
===============================================================================
Current liabilities:
Notes payable $ - $ 9,536 $ 2,139 $ (389) $ 11,286
Trade accounts payable 16 12,404 7,619 - 20,039
Accrued compensation and
employee benefits 42 3,957 975 - 4,974
Accrued interest 3,300 - - - 3,300
Other accrued liabilities 564 4,247 2,613 (728) 6,696
Current maturities of
long-term obligations - 963 47 - 1,010
-------------------------------------------------------------------------------
Total current liabilities 3,922 31,107 13,393 (1,117) 47,305
Pension obligation - 2,645 - - 2,645
Deferred income taxes - 10,253 - (9,692) 561
Senior Notes 120,000 - - - 120,000
Other long-term obligations - 1,766 985 (874) 1,877
Stockholder's equity
(deficit) (47,244) 37,573 4,965 (78,015) (82,721)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 76,678 $ 83,344 $ 19,343 $ (89,698) $ 89,667
===============================================================================
10
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Summarized consolidating statements of operations for the three months ended
March 31, 2003 and 2002, respectively, for the Company, the guarantor
subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended March 31, 2003:
Net sales $ - $ 33,553 $ 9,046 $ (26) $ 42,573
Cost of products sold - 28,198 8,455 (26) 36,627
------------- ------------- --------------- ------------- -------------
Gross profit - 5,355 591 - 5,946
Total operating expenses 449 4,231 1,142 - 5,822
------------- ------------- --------------- ------------- -------------
Operating income (449) 1,124 (551) - 124
Interest expense 3,436 238 57 - 3,731
Interest income (9) - - - (9)
Miscellaneous, net 170 24 (4) - 190
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (4,046) 862 (604) - (3,788)
Income tax expense (benefit) (398) 398 - - -
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (3,648) $ 464 $ (604) $ - $ (3,788)
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended March 31, 2002:
Net sales $ - $ 37,531 $ 8,013 $ - $ 45,544
Cost of products sold - 30,603 6,997 - 37,600
------------- ------------- --------------- ------------- -------------
Gross profit - 6,928 1,016 - 7,944
Total operating expenses 226 4,460 1,024 - 5,710
------------- ------------- --------------- ------------- -------------
Operating income (loss) (226) 2,468 (8) - 2,234
Interest expense 3,441 341 20 - 3,802
Interest income (53) - - - (53)
Miscellaneous, net 5 10 17 - 32
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle (3,619) 2,117 (45) - (1,547)
Income tax expense (benefit) (1,127) 787 - - (340)
------------- ------------- --------------- ------------- -------------
Income (loss) before cumulative effect
of change in accounting principle (2,492) 1,330 (45) - (1,207)
Cumulative effect of change in
accounting principle - (3,850) - - (3,850)
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (2,492) $ (2,520) $ (45) $ - $ (5,057)
============= ============= =============== ============= =============
11
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Summarized consolidating cash flow statements for the three months ended March
31, 2003 and 2002, respectively, for the Company, the guarantor subsidiaries,
and the non-guarantor subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended March 31, 2003:
Net cash provided by (used in)
operating activities $ (744) $ (788) $ (1,396) $ 5 $ (2,923)
Investing activities:
Purchases of property, plant, and
equipment - (43) (47) - (90)
Proceeds from sale of property,
plant, and equipment - 21 - - 21
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (22) (47) - (69)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase (decrease) in
borrowings on notes payable - 705 1,200 - 1,905
Principal payments on long-term
obligations - (125) (18) - (143)
Intercompany loan activity (1,175) 925 250 - -
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities (1,175) 1,505 1,432 - 1,762
Exchange rate changes on cash - (5) 11 (5) 1
------------- ------------- --------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents (1,919) 690 - - (1,229)
Cash and cash equivalents at beginning
of period 4,524 1,109 2 - 5,635
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 2,605 $ 1,799 $ 2 $ - $ 4,406
============= ============= =============== ============= =============
12
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2003
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended March 31, 2002:
Net cash provided by (used in)
operating activities $ (395) $ 3,648 $ 2,194 $ 4 $ 5,451
Investing activities:
Purchases of property, plant, and
equipment - (33) (124) - (157)
Proceeds from sale of property,
plant, and equipment - 9 6 - 15
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (24) (118) - (142)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase (decrease) in
borrowings on notes payable - (4,413) 66 - (4,347)
Principal payments on long-term
obligations - (239) (9) - (248)
Intercompany loan activity - 676 (676) - -
------------- ------------- --------------- ------------- -------------
Net cash used in financing activities - (3,976) (619) - (4,595)
Exchange rate changes on cash - 1 (21) (4) (24)
------------- ------------- --------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents (395) (351) 1,436 - 690
Cash and cash equivalents at beginning
of period 12,548 1,518 606 - 14,672
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 12,153 $ 1,167 $ 2,042 $ - $ 15,362
============= ============= =============== ============= =============
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes included in the Company's Form 10-K dated
March 31, 2003.
General
The Company, through its subsidiaries, is primarily engaged in the manufacture
and distribution of bulk material handling and replacement equipment, primarily
for use in the mining industry. The Company is a holding company organized under
the Delaware General Corporation law and conducts all of its business through
its direct and indirect operating subsidiaries. The Company's direct operating
subsidiaries are Continental Conveyor and Equipment Company and Goodman Conveyor
Company. The Company also owns indirectly all of the capital stock of
Continental Conveyor & Equipment Pty. Ltd., an Australian holding company that
owns all of the capital stock of four Australian operating companies. The
Company also owns indirectly all of the capital stock of Continental Conveyor
Ltd., a U.K. operating company, and Continental MECO (Pty.) Ltd., a South
African operating company. During 2001, the Company acquired certain assets in
Alabama from Lippert Tire & Axle, Inc. The Company's existing Alabama operations
of its manufactured housing products segment have been combined with the Lippert
operations.
Results of Operations
The following table sets forth, on a comparative basis, selected income
statement data as a percentage of net sales for the three months ended March 31,
2003 and 2002.
Three months ended
March 31
--------------------------
2003 2002
Net sales 100.0% 100.0%
Cost of products sold 86.0 82.6
Gross profit 14.0 17.4
SG&A expenses 13.5 12.1
Management fee 0.1 0.3
Amortization expense - 0.1
Restructuring charges 0.1 -
Operating income 0.3 4.9
Three months ended March 31, 2003, compared to three months ended March 31,
2002:
Net Sales
- ---------
Net sales for the quarter decreased $2.9 million, or 6%, from $45.5 million in
2002 to $42.6 million in 2003. Net sales in the domestic operations of the
Company's conveyor equipment segment decreased $2.3 million. Management believes
that this decrease is primarily attributable to continued lower capital spending
by the Company's major customers in the coal industry. Net sales in the foreign
operations of the Company's conveyor equipment segment increased $1.0 million
due primarily to changes in the foreign currency translation rates. Adjusting
for the effect of foreign currency exchange, net sales decreased in the
Company's United Kingdom and Australian operations while net sales increased
slightly in the South African operations. The reduced sales in the United
Kingdom was the result of a volume decrease in the standard manufactured
products business. Sales in the Company's Australian operations decreased
primarily due to timing differences on the receipt of orders and shipment of its
backlog. Net sales in the Company's manufactured housing segment decreased $1.5
million, or 21%, due to the decrease by the Company's customers in the
production and shipment of manufactured homes. Based upon the Manufactured
Housing Institute's economic report, quarter over quarter production and
shipment of manufactured homes is down 28% through February. Net sales in the
Company's other segment decreased $0.1 million.
14
Gross Profit
- ------------
Gross profit for the quarter decreased $2.0 million, or 25%, from $7.9 million
in 2002 to $5.9 million in 2003. Gross profit in the domestic operations of the
Company's conveyor equipment segment decreased $1.4 million due to decreased
sales volume and lower margins in the mining equipment business which primarily
resulted from the Company's inability to pass through raw material price
increases occurring in the second half of 2002. Gross profit in the foreign
operations of the Company's conveyor equipment segment decreased $0.4 million
primarily due to reduced margins in the United Kingdom operations and the
decreased sales volume in the Australian operations. The reduced margins in the
United Kingdom resulted from lower sales of the higher margin standard
manufactured products business and lower gross margin in its complete conveyor
systems. Gross profit in the Company's manufactured housing segment decreased
$0.2 million primarily due to lower sales.
Gross profit as a percentage of net sales decreased from 17.4% in 2002 to 14.0%
in 2003. This decline was primarily attributable to the lower margins on mining
equipment business in the Company's domestic operations of the conveyor
equipment segment and the decreased profit margins in the United Kingdom.
SG&A Expenses
- -------------
SG&A expenses for the quarter increased $0.2 million, or 4%, from $5.5 million
in 2002 to $5.7 million in 2003. SG&A expenses in the domestic operations of the
Company's conveyor equipment segment decreased $0.3 million due to decreased
selling expenses which resulted from lower sales. SG&A expenses in the foreign
operations of the Company's conveyor equipment segment increased $0.4 million.
Of this increase in the foreign operations, $0.3 million resulted from changes
in foreign currency translation rates and $0.1 million resulted from increased
administrative costs. Corporate expenses increased $0.1 million due to higher
insurance costs and increased personnel expenses.
Operating Income
- ----------------
Operating income for the quarter decreased $2.1 million from $2.2 million in
2002 to $0.1 million in 2003. The decrease in operating income resulted from the
$2.0 million decrease in gross profit, combined with the $0.2 million increase
in SG&A expenses, partially offset by a $0.1 million decrease in management
fees.
Restructuring Charges
- ---------------------
The Company incurred additional restructuring charges of less than $0.1 million
for the three months ended March 31, 2003 related to changes in staffing and
production requirements in its domestic operations. These charges consist
primarily of relocation costs associated with the merger of certain domestic
facilities. Total restructuring charges incurred to date pertaining to the
actions started by the Company in 2002 are approximately $0.7 million. As part
of this restructuring, during 2003, the Company plans to discontinue the
manufacturing operations in certain of its domestic facilities and merge these
operations with other existing facilities. The Company expects the additional
cost of this restructuring to be approximately $0.5 million. These charges
consist primarily of severance and relocation costs and will be expensed as
incurred. As of March 31, 2003, the Company has paid approximately $0.1 million
of the charges incurred to date.
15
Cumulative Effect of Change in Accounting Principle
- ---------------------------------------------------
In the fourth quarter of 2002, the Company recorded a non-cash impairment
write-down for goodwill of approximately $3.9 million in accordance with the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets". The Company
has restated the results of operations for the three months ended March 31, 2002
to reflect this goodwill impairment as of January 1, 2002. This transition
adjustment has been reported as a cumulative effect of a change in accounting
principle.
Backlog
- -------
Backlog at March 31, 2003 was $52.7 million, an increase of $10.6 million, or
25%, from $42.1 million at December 31, 2002. The increase was attributable to
an increase of $7.3 million in the domestic operations of the Company's conveyor
equipment segment and an increase of $3.3 million in the foreign operations of
the Company's conveyor equipment segment. Management believes that approximately
95% of the backlog will be shipped in 2003.
Liquidity and Capital Resources
Net cash provided by (used in) operating activities was $(2.9) million and $5.5
million for the three months ending March 31, 2003 and 2002, respectively. Net
cash used in operating activities resulted from a net loss of $3.8 million
offset by non-cash expenses of $0.7 million and a net decrease in operating
assets and liabilities of $0.2 million. Net cash provided by operating
activities in 2002 resulted from a net loss of $5.0 million offset by non-cash
expenses of $4.2 million and a net decrease in operating assets and liabilities
of $6.3 million. The decrease in cash from operations from 2002 to 2003 was
primarily the result of the increase in the loss before the cumulative effect of
change in accounting principle combined with a lower net decrease in operating
assets and liabilities. The net decrease in operating assets and liabilities in
2002 was primarily due to a decrease in receivables at the Company's domestic
operations which resulted from lower sales in the first quarter of 2002 compared
to the fourth quarter of 2001.
Net cash used in investing activities was $0.1 million for the three months
ending March 31, 2003 and 2002, and represents net purchases of property, plant,
and equipment for both years.
Net cash provided by (used in) financing activities was $1.8 million and $(4.6)
million for the three months ending March 31, 2003 and 2002, respectively. Net
cash provided by financing activities in 2003 resulted from a net increase in
borrowings on notes payable of $1.9 million offset by principal payments on
long-term obligations of $0.1 million. Net borrowings on notes payable under the
Company's domestic credit facility increased $0.4 million while net borrowings
on notes payable under the Company's various credit facilities at the foreign
subsidiaries increased $1.5 million. Net cash used in financing activities in
2002 represented a net decrease in borrowings on notes payable of $4.4 million
and principal payments on long-term obligations of $0.2 million. The decrease in
borrowings on notes payable was primarily due to repayments on the Company's
domestic credit facility of $4.1 million.
The Company's primary capital requirements consist of capital expenditures and
debt service. The Company utilizes cash on hand and its available credit
facilities to satisfy these requirements. The Company anticipates that capital
expenditures in 2003 will approximate those made in 2002. The Company
anticipates that its debt service requirements in 2003 (not including principal
obligations under the Company's credit facilities) will be approximately $16.0
million. In addition, as of March 31, 2003, the Company's domestic and foreign
credit facilities had outstanding principle balances of approximately $8.5
million and $4.8 million, respectively.
16
At March 31, 2003, the Company was in violation of certain of its covenants
under the domestic credit facility, but it has received a waiver of these
violations through the facility's maturity date. The Company's domestic credit
facility matures on June 30, 2003. The Company has maintained a credit facility
with its primary domestic bank since 1989 and is currently in negotiations with
the bank to extend the facility. Although no assurance can be given regarding
the Company's ability to enter into a new or revised facility, the Company
expects to finalize negotiations for an extension to the credit facility in the
second quarter of 2003. The Company needs to improve its results of operations
in line with its operating plan in order to meet its future debt service
requirements. Failure to materially improve operations or successfully complete
negotiations of an extension to its domestic credit facility could materially
impact the Company's ability to meet its future debt service requirements.
The credit facility of the Company's United Kingdom subsidiary matured on
December 31, 2002 but the Company continues to operate under the existing
facility while negotiating the terms of a new credit facility. The credit
facility of the Company's Australian facility matures on August 31, 2003 and the
Company expects to finalize negotiations for a new agreement in the second
quarter of 2003.
At March 31, 2003, the Company had cash and cash equivalents of approximately
$4.4 million and approximately $11.8 million available for use under its
domestic credit facility, representing approximately $16.2 million of liquidity.
Assuming the Company is able to improve its results of operations in line with
its operating plan and successfully negotiate extensions of its credit
facilities, the Company expects current financial resources (working capital and
available bank borrowings) and anticipated funds from operations to be adequate
to meet current cash requirements.
International Operations
The Company transacts business in a number of countries throughout the world and
has facilities in the United States, Australia, the United Kingdom, and South
Africa. As a result, the Company is subject to business risks inherent in
non-U.S. operations, including political and economic uncertainty, import and
export limitations, exchange controls and currency fluctuations. The Company
believes that the risks related to its foreign operations are mitigated by the
relative political and economic stability of the countries in which its largest
foreign operations are located. As the U.S. dollar strengthens and weakens
against foreign currencies in which the Company transacts business, its
financial results will be affected. The principal foreign currencies in which
the Company transacts business are the Australian dollar, the British pound
sterling, and the South African rand. The fluctuation of the U.S. dollar versus
other currencies resulted in increases to stockholder's equity (deficit) of
approximately $0.2 million for the three months ended March 31, 2003 and 2002.
17
Cautionary Statement for Safe Harbor Purposes
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
federal securities laws. As a general matter, forward-looking statements are
those focused upon future plans, objectives or performance as opposed to
historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters that are not historical in nature.
Such forward looking statements are subject to uncertainties and factors
relating to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the control of the Company,
that could cause actual results of the Company to differ materially from those
matters expressed in or implied by such forward-looking statements.
In addition, the Company's future results of operations, financial condition,
liquidity and capital resources could be materially adversely affected by, among
other things, the economic and political uncertainties as a result of the war in
Iraq and the risk of prolonged economic recession resulting from such
hostilities.
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The following table provides information about the Company's Senior Notes. The
table presents principal cash flows and interest rate by expected maturity date.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
Fair
Value,
(dollars in thousands) 2003 2004 2005 2006 2007 Total 3/31/03
- ------------------------------------------------------------------------------------------------
Long-Term Obligations,
including current
portion
Fixed Rate $ - $ - $ - $ - $ 120,000 $ 120,000 $ 54,000
Average interest rate 11% 11% 11% 11% 11%
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents as well as
interest paid on its debt. To mitigate the impact of fluctuations in U.S.
interest rates, the Company generally borrows on a long-term basis to maintain a
debt structure that is fixed rate in nature.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures and sells its
products in the United States, Australia, the United Kingdom, and South Africa.
As a result, the Company's financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company distributes its products.
The Company's operating results are exposed to changes in exchange rates between
the U.S. dollar and the Australian dollar, the British pound sterling, and the
South African rand.
Item 4. Controls and Procedures
Within the 90-day period prior to the date of this report, the Company carried
out an evaluation, under the supervision of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the time of such evaluation.
19
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Refer to the index of exhibits.
(b) No reports on Form 8-K were filed during the quarter ended March
31, 2003.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ Jimmy L. Dickinson
----------------------
Jimmy L. Dickinson
Vice President and Chief Financial Officer
(As duly authorized representative and as
Principal Financial and Accounting Officer)
CONTINENTAL CONVEYOR & EQUIPMENT COMPANY
By: /s/ Jimmy L. Dickinson
----------------------
Jimmy L. Dickinson
Vice President - Finance (As duly authorized
representative and as Principal Financial and
Accounting Officer)
GOODMAN CONVEYOR COMPANY
By: /s/ J. Mark Etchberger
----------------------
J. Mark Etchberger
Controller (As duly authorized representative
and as Principal Financial and Accounting
Officer)
Date: May 14, 2003
21
CERTIFICATIONS
I, Robert W. Hale, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Continental
Global Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Robert W. Hale
-------------------------------------
Robert W. Hale
President and Chief Executive Officer
22
CERTIFICATIONS
I, Jimmy L. Dickinson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Continental
Global Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Jimmy L. Dickinson
-----------------------------------------
Jimmy L. Dickinson
Vice President and Chief Financial Officer
23
Continental Global Group, Inc.
Form 10-Q
Index of Exhibits
Exhibit
Number Description of Exhibit
3.1
(a) Certificate of Incorporation of Continental Global Group, *
Inc., as currently in effect.
(b) Certificate of Amendment of Certificate of Incorporation of
Continental Global Group, Inc. (Filed as Exhibit 3.1(b) to
the Company's Form 10-Q for the quarter ended September 30,
2000, and is incorporated herein by reference.)
3.2 By-Laws of Continental Global Group, Inc., as currently *
in effect.
3.3 Certificate of Incorporation of Continental Conveyor & *
Equipment Company, as currently in effect.
3.4 By-Laws of Continental Conveyor & Equipment Company, as *
currently in effect.
3.5 Certificate of Incorporation of Goodman Conveyor Company, *
as currently in effect.
3.6 By-Laws of Goodman Conveyor Company, as currently in effect. *
4.1 Indenture, dated as of April 1, 1997, among Continental *
Global Group, Inc., Continental Conveyor & Equipment
Company, Goodman Conveyor Company, and the Trustee
(containing, as exhibits, specimens of the Series A Notes
and the Series B Notes).
10.1 Amended and Restated Credit Facility and Security Agreement,
dated as of July 25, 2002, among Bank One, NA, Continental
Conveyor & Equipment Company, and Goodman Conveyor Company.
(Filed as Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended September 30, 2002, and is incorporated herein
by reference.)
10.2 Management Agreement, dated as of April 1, 1997, between *
Continental Global Group, Inc. and Nesco, Inc.
10.3 Employment Agreement, effective November 4, 2002, between
Continental Global Group, Inc. and Robert Hale. (Filed as
Exhibit 10.3 to the Company's Form 10-K for the year ended
December 31, 2002, and is incorporated herein by reference.)
10.4 Continental Global Group, Inc. Phantom Stock Plan dated as
of November 4, 2002. (Filed as Exhibit 10.4 to the Company's
Form 10-K for the year ended December 31, 2002, and is
incorporated herein by reference.)
Certain instruments with respect to long-term debt have not been filed as
exhibits as the total amount of securities authorized under any one of such
instruments does not exceed 10 percent of the total assets of the registrant and
its subsidiaries on a consolidated basis. The registrant agrees to furnish to
the Commission a copy of each such instrument upon request.
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed
under the Securities Act of 1933.
24