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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, 2005
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 &
Continental Global Group, Inc. Equipment 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, 2005, 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, 2005 and December 31, 2004 2
Condensed Consolidated Statements of Operations
Three Months ended March 31, 2005 and 2004 3
Condensed Consolidated Statements of Cash Flows
Three Months ended March 31, 2005 and 2004 4
Notes to Condensed Consolidated Financial Statements 5-15
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 16-22
Item 3 Quantitative and Qualitative Disclosures about Market Risk 23
Item 4 Controls and Procedures 23
Part II Other Information
Item 1 Legal Proceedings 24
Item 6 Exhibits 24
Signatures 25
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
1
Continental Global Group, Inc.
Condensed Consolidated Balance Sheets
March 31 December 31
2005 2004
-------------------- --------------------
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 659,063 $ 887,256
Accounts receivable, net 48,737,619 39,633,378
Inventories 33,008,103 28,551,137
Deferred income taxes 712,641 483,170
Other current assets 1,305,587 2,578,873
-------------------- --------------------
Total current assets 84,423,013 72,133,814
Property, plant and equipment 33,256,491 33,281,329
Less accumulated depreciation 21,346,302 21,174,697
-------------------- --------------------
11,910,189 12,106,632
Goodwill 13,942,990 13,980,994
Deferred financing costs 1,039,804 1,169,780
Other assets 826,091 835,481
-------------------- --------------------
$ 112,142,087 $ 100,226,701
==================== ====================
Liabilities and Stockholder's Equity (Deficit):
Current liabilities:
Notes payable $ 20,461,451 $ 17,220,041
Trade accounts payable 31,308,480 30,218,195
Accrued compensation and employee benefits 6,963,314 6,342,288
Accrued interest on senior notes 590,150 295,075
Other accrued liabilities 10,362,393 8,684,898
Income taxes payable 2,497,595 1,391,024
Current maturities of long-term obligations 9,979,992 9,454,247
-------------------- --------------------
Total current liabilities 82,163,375 73,605,768
Pension obligations 1,307,550 1,232,550
Deferred income taxes 3,016,729 2,971,644
Senior notes 97,463,061 97,463,061
Note payable to N.E.S. Investment Company 10,433,973 10,208,973
Other long-term obligations, less current maturities 4,806,603 4,931,102
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 (83,134,626) (86,426,940)
Accumulated other comprehensive loss (5,908,266) (5,753,145)
-------------------- --------------------
(87,049,204) (90,186,397)
-------------------- --------------------
$ 112,142,087 $ 100,226,701
==================== ====================
See notes to condensed consolidated financial statements.
2
Continental Global Group, Inc.
Condensed Consolidated Statements of Operations
Three months ended March 31
2005 2004
------------------- -------------------
(Unaudited)
Net sales $ 65,054,714 $ 50,003,856
Cost of products sold 52,492,226 42,275,108
------------------- -------------------
Gross profit 12,562,488 7,728,748
Operating expenses:
Selling and engineering 3,687,878 3,225,927
General and administrative 3,175,027 2,763,155
Management fee 309,802 109,360
Amortization expense 6,590 6,590
Restructuring charges 2,490 115,457
------------------- -------------------
Total operating expenses 7,181,787 6,220,489
------------------- -------------------
Operating income 5,380,701 1,508,259
Other expense (income):
Interest expense, net 1,092,789 3,830,169
Miscellaneous expense (income) 66,996 (100,181)
------------------- -------------------
Total other expenses 1,159,785 3,729,988
------------------- -------------------
Income (loss) before income taxes 4,220,916 (2,221,729)
Income tax expense 928,602 -
------------------- -------------------
Net income (loss) $ 3,292,314 $ (2,221,729)
=================== ===================
See notes to condensed consolidated financial statements.
3
Continental Global Group, Inc.
Condensed Consolidated Statements of Cash Flows
Three months ended March 31
2005 2004
------------------ -----------------
(Unaudited)
Operating activities:
Net income (loss) $ 3,292,314 $ (2,221,729)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision for depreciation and amortization 505,540 569,580
Amortization of deferred financing costs 129,976 129,976
Deferred income taxes (177,969) -
Non-cash interest paid in-kind 225,000 -
Gain on disposal of assets (528) (3,093)
Changes in operating assets and liabilities (7,570,410) 525,874
------------------ -----------------
Net cash used in operating activities (3,596,077) (999,392)
------------------ -----------------
Investing activities:
Purchases of property, plant, and equipment (406,839) (125,820)
Proceeds from sale of property, plant, and equipment 1,778 5,915
------------------ -----------------
Net cash used in investing activities (405,061) (119,905)
------------------ -----------------
Financing activities:
Net increase in borrowings on notes payable 3,415,730 1,324,459
Proceeds from long-term obligations 778,100 -
Principal payments on long-term obligations (405,319) (153,145)
------------------ -----------------
Net cash provided by financing activities 3,788,511 1,171,314
Effect of exchange rate changes on cash (15,566) 30,615
------------------ -----------------
Increase (decrease) in cash and cash equivalents (228,193) 82,632
Cash and cash equivalents at beginning of period 887,256 850,727
------------------ -----------------
Cash and cash equivalents at end of period $ 659,063 $ 933,359
================== =================
See notes to condensed consolidated financial statements.
4
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
A. Organization and 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, 2005
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005. For further information, refer to the consolidated
financial statements and footnotes of Continental Global Group, Inc. and
subsidiaries for the year ended December 31, 2004, included in the Company's
Form 10-K.
Certain amounts from the prior year financial statements have been reclassified
to conform to current year presentation.
The Company was not in compliance with certain covenants under its revolving
credit facilities as of December 31, 2003 or the subsequent quarters through
September 30, 2004, resulting in a cross default under the terms of the
Company's Senior Notes. In addition, the Company failed to make its $6,600,000
semi-annual interest payment for the Senior Notes due on April 1, 2004.
Following expiration of the 30-day grace period provided for in the indenture,
the Senior Notes were in default and the Company received a notice of default
from the Trustee for the Senior Notes. However, on April 26, 2004, the Company
entered into a forbearance agreement with the holders of a majority interest
("Majority Holders") of the Senior Notes which instructed the Trustee for the
Senior Notes to refrain from taking any action with respect to the default.
Several times in 2004, this agreement was amended to extend the forbearance
agreement until July 23, 2004.
On July 22, 2004, the Company entered into a restructuring agreement with the
Majority Holders of the Senior Notes pursuant to which the Company agreed to
commence an offer to exchange new notes and a cash payment for all of the
outstanding Senior Notes. The restructuring agreement extended the forbearance
agreement with the Majority Holders until the restructuring was consummated or
the restructuring agreement was terminated.
On August 5, 2004, the Company commenced an offer to exchange (i) cash in the
aggregate amount of $17,500,000, (ii) 9% Series A Senior Secured Notes due 2008
in the aggregate principal amount of $65,000,000, and (iii) 13% Series B Senior
Secured Notes due 2008 in the aggregate principal amount of $10,000,000, for all
of its outstanding 11% Senior Notes due 2007 in the aggregate principal amount
of $120,000,000 and all interest accrued thereon. The exchange offer was made
exclusively to holders of the 11% Senior Notes due 2007.
5
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
A. Organization and Basis of Presentation (Continued)
Several times through August 31, 2004, the Company and Bank One, N.A. entered
into forbearance agreements under which Bank One agreed not to exercise its
rights with respect to the defaults, including the right to demand payment,
under the revolving credit facility for a stated period while the Company
negotiated a restructuring of its Senior Notes. On July 12, 2004, the Company
received a commitment letter from Bank One for a waiver of the covenant
violations and an extension of the revolving credit facility. On October 4,
2004, the Company's wholly-owned subsidiaries, CCE and GCC entered into a Second
Amended and Restated Credit Facility and Security Agreement (the "Credit
Agreement") with Bank One, N.A. The Credit Agreement extends the Company's
revolving credit facility with Bank One until July 31, 2006.
On October 4, 2004, the Company completed the exchange offer with respect to its
outstanding 11% Senior Notes due 2007 (the "Old Notes") and entered into an
Indenture by and among the Company, two of its wholly-owned subsidiaries, CCE
and GCC (collectively, the "Subsidiary Guarantors") and Wells Fargo Bank,
National Association, as trustee (the "Indenture"). Tenders with respect to Old
Notes representing approximately $109,270,000 or 91.06% of the $120,000,000 of
Old Notes outstanding principal amount were received by Wells Fargo Bank, N.A.,
which acted as depositary in the exchange offer. All Old Notes that were validly
tendered were accepted for exchange. According to the terms of the exchange
offer, on October 4, 2004, the Company issued $59,187,917 of 9% New Series A
Notes due 2008 and $9,105,833 of 13% New Series B Notes due 2008. In addition,
the Company made a cash payment as additional consideration to the Series A and
Series B bondholders of approximately $14,114,000, or $15.50 for every $120 of
Old Notes tendered. In October 2005, the Series A and Series B bondholders will
receive cash of approximately $1,821,000, or $2.00 for every $120 of Old Notes
tendered.
According to the terms of the Indenture, the New Series A Notes will mature on
October 1, 2008. Interest will accrue at the rate of 9% per annum and will be
payable semiannually in arrears, in cash, on each April 1 and October 1 until
maturity. Interest accrued on the New Series A Notes from April 1, 2004, as if
the New Series A Notes had been issued on such date. The Company paid interest
of $2,663,457 on October 4, 2004 related to the Series A Notes. The New Series B
Notes will also mature on October 1, 2008. Interest will accrue at the rate of
13% per annum and will be payable semiannually in arrears, in kind, on each
April 1 and October 1 until maturity. However, the Company has the right to make
interest payment on the New Series B Notes in cash at the same rate and on the
same terms as the New Series A Notes. The Company has assumed the interest will
be paid in cash at a rate of 9% in all calculations involving the interest
payments on the Series B Notes in these condensed consolidated financial
statements. Interest accrued on the New Series B Notes from April 1, 2004, as if
the New Series B Notes had been issued on such date. The Company paid interest
of $409,763 on October 4, 2004 related to the Series B Notes. The New Series A
and Series B Notes are jointly and severally guaranteed by the Subsidiary
Guarantors and secured by substantially all of the assets of the Subsidiary
Guarantors.
6
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
A. Organization and Basis of Presentation (Continued)
The cash payment made on October 4, 2004 as additional consideration to the
Series A and Series B bondholders was funded by new subordinated indebtedness to
N.E.S. Investment Company in the amount of $10,000,000 and additional borrowings
from the Company's revolving line of credit. The note payable to N.E.S.
Investment Company accrues interest at a rate of 9%, payable in kind, compounded
annually. The additional consideration to be paid by the Company in October 2005
to the Series A and Series B bondholders will be funded with an additional
$2,000,000 of subordinated indebtedness to N.E.S. Investment Company.
The debt exchange was accounted for according to Statement of Financial
Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings". According to the requirements of SFAS No. 15, in
the fourth quarter of 2004, the Company recorded a gain on the exchange of bonds
of approximately $3,392,000, representing the difference between the future cash
outlays of the Series A and Series B Notes and the carrying value of the Old
Notes. All cash payments as additional consideration to Series A and Series B
bondholders and interest payments on the New Series A and Series B Notes will be
recorded as a reduction in the balance of outstanding indebtedness throughout
the terms of the Series A and Series B Notes, and accordingly, the Company will
not recognize any interest expense in the income statement related to the New
Series A and Series B Notes.
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 64% of
inventories at March 31, 2005 and December 31, 2004, respectively, is determined
using the last-in, first-out (LIFO) method with the remainder determined using
the first-in, first-out (FIFO) method. Had the FIFO method of inventory (which
approximates replacement cost) been used to cost all inventories, inventories
would have increased by approximately $5,484,000 and $5,184,000 at March 31,
2005 and December 31, 2004, respectively.
7
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
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 historical experience and expectations of future
conditions and continuously assesses the adequacy of its product warranty
accrual and makes adjustments as needed. A summary of accrued warranty costs
follows:
2005 2004
----------------- -----------------
Balance as of January 1 $ 1,634,049 $ 1,275,401
Provision for warranties 283,522 173,864
Settlements made during the period (77,296) (61,765)
Effect of exchange rate changes (15,034) 7,885
----------------- -----------------
Balance as of March 31 $ 1,825,241 $ 1,395,385
================= =================
E. Restructuring Charges
The Company incurred restructuring charges of approximately $2,000 and $115,000
in the first three months of 2005 and 2004, respectively, related to changes in
staffing and production requirements in its domestic operations. These charges
consist primarily of severance costs associated with a reduction in personnel
which occurred in 2002 and 2003. As part of this restructuring, in 2002 the
Company developed a plan to discontinue the manufacturing operations in certain
of its domestic facilities and merge these operations with other existing
facilities. The process of merging the domestic operations began in 2003 and
continued throughout 2004. As of March 31, 2005, the Company has paid
approximately $604,000 of the charges incurred to date, with the majority of the
remainder expected to be paid by 2008. Due to increases in the Company's
domestic backlog, the Company does not expect any further consolidation at this
time.
F. Comprehensive Income (Loss)
The components of comprehensive income (loss) for the three months ended March
31 are as follows:
2005 2004
-----------------------------------
Net income (loss) $ 3,292,314 $ (2,221,729)
Other comprehensive income (loss):
Foreign currency translation adjustment (149,788) 37,077
Change in fair value of derivative hedge, net of tax (5,333) (26,823)
-----------------------------------
Comprehensive income (loss) $ 3,137,193 $ (2,211,475)
===================================
8
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
G. Employee Benefit Plans
The components of net periodic benefit cost for the three months ended March 31
are as follows:
2005 2004
----------------- -----------------
Service cost $ 53,857 $ 55,386
Interest cost 128,347 122,237
Expected return on plan assets (146,479) (127,960)
Amortization of prior service cost 11,161 11,161
Recognized loss 14,898 14,933
----------------- -----------------
Net periodic benefit cost $ 61,784 $ 75,757
================= =================
H. Income Taxes
Income taxes are provided using the liability method in accordance with
SFAS No. 109, "Accounting for Income Taxes". For tax reporting purposes,
the Company is included in the consolidated federal tax return of N.E.S.
Investment Co. However, for financial reporting purposes, the Company's tax
provision has been calculated on a stand-alone basis.
The Company has subsidiaries located in Australia, the United Kingdom, and South
Africa, which are subject to income taxes in their respective countries.
The Company's effective income tax rate is less than the statutory rate
primarily due to a favorable income tax benefit for interest payments on the New
Series A and Series B Notes due 2008 which are recorded as a reduction of the
outstanding indebtedness for financial reporting purposes. In addition, the
Company has not recognized income tax expense in certain of its foreign
subsidiaries due to the reversal of an income tax valuation allowance.
9
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
I. 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.
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.
Three months ended
March 31
2005 2004
--------------------------------------
(in thousands)
Net sales:
Conveyor equipment $ 57,486 $ 44,368
Manufactured housing products 7,440 5,481
Other 129 155
--------------------------------------
Total net sales $ 65,055 $ 50,004
======================================
Segment operating income:
Conveyor equipment $ 5,717 $ 2,025
Manufactured housing products 350 103
Other 31 57
--------------------------------------
Total segment operating income 6,098 2,185
Management fee 310 109
Amortization expense 7 7
Restructuring charges 2 115
Corporate expense 398 446
--------------------------------------
Total operating income 5,381 1,508
Interest expense, net 1,093 3,830
Miscellaneous expense (income) 67 (100)
--------------------------------------
Income (loss) before income taxes $ 4,221 $(2,222)
======================================
10
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
J. Guarantor and Non-Guarantor Subsidiaries
The Company's domestic subsidiaries, Continental Conveyor & Equipment Company
(CCE) and Goodman Conveyor Company (GCC), both of which are wholly owned, are
the guarantors of the New Series A and Series B 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 Australian, United Kingdom and
South African subsidiaries are not guarantors of the New Series A and Series B
Notes.
Summarized consolidating balance sheets as of March 31, 2005 and December 31,
2004 for the Company, the guarantor subsidiaries, and the non-guarantor
subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
March 31, 2005: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 61 $ 489 $ 109 $ - $ 659
Accounts receivable, net - 24,481 24,257 - 48,738
Inventories - 25,831 7,177 - 33,008
Deferred income taxes 81 117 515 - 713
Other current assets 14,121 1,890 1,306 (16,012) 1,305
-------------------------------------------------------------------------------
Total current assets 14,263 52,808 33,364 (16,012) 84,423
Property, plant, and
equipment, net - 5,782 6,128 - 11,910
Goodwill - 10,986 2,957 - 13,943
Investment in subsidiaries 60,009 34,977 - (94,986) -
Deferred financing costs 1,040 - - - 1,040
Other assets 300 5,694 124 (5,292) 826
-------------------------------------------------------------------------------
Total assets $ 75,612 $ 110,247 $ 42,573 $ (116,290) $ 112,142
===============================================================================
Current liabilities:
Notes payable $ - $ 14,904 $ 7,472 $ (1,914) $ 20,462
Trade accounts payable 24 14,461 18,812 (1,989) 31,308
Accrued compensation and
employee benefits - 4,119 2,844 - 6,963
Accrued interest 590 - - - 590
Other accrued liabilities 3,574 3,747 5,146 (2,105) 10,362
Income taxes payable - 16,357 - (13,859) 2,498
Current maturities of
long-term obligations 7,968 548 1,464 - 9,980
-------------------------------------------------------------------------------
Total current liabilities 12,156 54,136 35,738 (19,867) 82,163
Pension obligation - 1,307 - - 1,307
Deferred income taxes 247 1,988 782 - 3,017
Senior notes 97,463 - - - 97,463
N/P to N.E.S. Investment Co. 10,434 - - - 10,434
Other long-term obligations - 4,292 3,045 (2,530) 4,807
Stockholder's equity
(deficit) (44,688) 48,524 3,008 (93,893) (87,049)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 75,612 $ 110,247 $ 42,573 $ (116,290) $ 112,142
===============================================================================
11
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
J. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
December 31, 2004: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 12 $ 509 $ 366 $ - $ 887
Accounts receivable, net - 16,281 23,353 - 39,634
Inventories - 22,418 6,133 - 28,551
Deferred income taxes 81 - 519 (117) 483
Other current assets 13,024 2,154 2,518 (15,117) 2,579
-------------------------------------------------------------------------------
Total current assets 13,117 41,362 32,889 (15,234) 72,134
Property, plant, and
equipment, net - 5,770 6,337 - 12,107
Goodwill - 10,986 2,995 - 13,981
Investment in subsidiaries 60,009 34,977 - (94,986) -
Deferred financing costs 1,170 - - - 1,170
Other assets 300 4,922 126 (4,513) 835
-------------------------------------------------------------------------------
Total assets $ 74,596 $ 98,017 $ 42,347 $ (114,733) $ 100,227
===============================================================================
Current liabilities:
Notes payable $ - $ 13,297 $ 5,971 $ (2,048) $ 17,220
Trade accounts payable 72 9,806 22,348 (2,008) 30,218
Accrued compensation and
employee benefits 717 3,149 2,476 - 6,342
Accrued interest 295 - - - 295
Other accrued liabilities 2,485 3,440 4,203 (1,443) 8,685
Income taxes payable - 14,355 - (12,964) 1,391
Current maturities of
long-term obligations 7,967 596 891 - 9,454
-------------------------------------------------------------------------------
Total current liabilities 11,536 44,643 35,889 (18,463) 73,605
Pension obligation - 1,233 - - 1,233
Deferred income taxes 247 1,933 792 - 2,972
Senior notes 97,463 - - - 97,463
N/P to N.E.S. Investment Co. 10,209 - - - 10,209
Other long-term obligations - 4,417 3,097 (2,583) 4,931
Stockholder's equity
(deficit) (44,859) 45,791 2,569 (93,687) (90,186)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 74,596 $ 98,017 $ 42,347 $ (114,733) $ 100,227
===============================================================================
12
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
J. Guarantor and Non-Guarantor Subsidiaries (Continued)
Summarized consolidating statements of operations for the three months ended
March 31, 2005 and 2004, 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, 2005:
Net sales $ - $ 44,179 $ 20,876 $ - $ 65,055
Cost of products sold - 34,728 17,764 - 52,492
------------- ------------- --------------- ------------- -------------
Gross profit - 9,451 3,112 - 12,563
Total operating expenses 68 4,507 2,607 - 7,182
------------- ------------- --------------- ------------- -------------
Operating income (loss) (68) 4,944 505 - 5,381
Interest expense, net 650 276 167 - 1,093
Miscellaneous expense (income) 6 111 (50) - 67
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (724) 4,557 388 - 4,221
Income tax expense (benefit) (895) 1,824 - - 929
------------- ------------- --------------- ------------- -------------
Net income $ 171 $ 2,733 $ 388 $ - $ 3,292
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended March 31, 2004:
Net sales $ - $ 37,324 $ 12,688 $ (8) $ 50,004
Cost of products sold - 30,830 11,453 (8) 42,275
------------- ------------- --------------- ------------- -------------
Gross profit - 6,494 1,235 - 7,729
Total operating expenses 353 4,570 1,298 - 6,221
------------- ------------- --------------- ------------- -------------
Operating income (loss) (353) 1,924 (63) - 1,508
Interest expense, net 3,430 272 128 - 3,830
Miscellaneous income - (92) (8) - (100)
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (3,783) 1,744 (183) - (2,222)
Income tax expense (benefit) (695) 695 - - -
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (3,088) $ 1,049 $ (183) $ - $ (2,222)
============= ============= =============== ============= =============
13
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
J. Guarantor and Non-Guarantor Subsidiaries (Continued)
Summarized consolidating cash flow statements for the three months ended March
31, 2005 and 2004, 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, 2005:
Net cash provided by (used in)
operating activities $ 49 $ (1,202) $ (2,443) $ - $ (3,596)
Investing activities:
Purchases of property, plant, and
equipment - (254) (153) - (407)
Proceeds from sale of property,
plant, and equipment - 1 1 - 2
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (253) (152) - (405)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase in borrowings
on notes payable - 1,607 1,809 - 3,416
Proceeds from long-term obligations - - 778 - 778
Principal payments on long-term
obligations - (172) (233) - (405)
------------- ------------- --------------- ------------- -------------
Net cash provided by financing
activities - 1,435 2,354 - 3,789
Exchange rate changes on cash - - (16) - (16)
------------- ------------- --------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents 49 (20) (257) - (228)
Cash and cash equivalents at beginning
of period 12 509 366 - 887
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 61 $ 489 $ 109 $ - $ 659
============= ============= =============== ============= =============
14
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2005
J. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended March 31, 2004:
Net cash provided by (used in)
operating activities $ (61) $ (1,231) $ 293 $ - $ (999)
Investing activities:
Purchases of property, plant, and
equipment - (55) (71) - (126)
Proceeds from sale of property,
plant, and equipment - 6 - - 6
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (49) (71) - (120)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase (decrease) in
borrowings on notes payable - 1,797 (473) - 1,324
Principal payments on long-term
obligations - (130) (23) - (153)
Intercompany loan activity - (377) 377 - -
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities - 1,290 (119) - 1,171
Exchange rate changes on cash - (28) 58 - 30
------------- ------------- --------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents (61) (18) 161 - 82
Cash and cash equivalents at beginning
of period 114 734 3 - 851
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 53 $ 716 $ 164 $ - $ 933
============= ============= =============== ============= =============
15
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 for
the year ended December 31, 2004.
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. The assets and liabilities of the Company's foreign
subsidiaries are translated at current exchange rates, while revenues and
expenses are translated at average rates prevailing during the year.
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,
2005 and 2004.
Three months ended March
31
--------------------------
2005 2004
Net sales 100.0% 100.0%
Cost of products sold 80.7 84.5
Gross profit 19.3 15.5
SG&A expenses 10.5 12.0
Management fee 0.5 0.2
Restructuring charges - 0.3
Operating income 8.3 3.0
Three months ended March 31, 2005, compared to three months ended March 31,
2004:
Net Sales
Net sales increased $15.1 million, or 30%, from $50.0 million in 2004 to $65.1
million in 2005. Net sales in the domestic operations of the Company's conveyor
equipment segment increased $13.4 million due to increased sales volumes and
sales price increases in all business areas of the conveyor equipment segment.
During 2004, the Company received significant steel price increases from its
vendors requiring the Company to increase selling prices on its products
beginning in March 2004 in order to recover these increased costs. The increase
in sales volume was due primarily to the improved market conditions in the coal
industry creating higher demand for coal which resulted in increased capital
spending by the Company's major customers in the coal industry. Net sales in the
foreign operations of the Company's conveyor equipment segment decreased $0.3
million from $21.2 million in 2004 to $20.9 million in 2005. This decrease in
sales is net of a $0.7 million increase due to changes in foreign currency
translation rates; adjusted for variations in foreign currency translation
16
rates, net sales in the foreign operations decreased $1.0 million. Net sales by
the Australian subsidiary increased $2.0 million (after adjustments for foreign
currency fluctuations) due to improved market conditions in the coal industry.
Adjusted for variations in foreign currency translation rates, net sales by the
United Kingdom subsidiary decreased $3.2 million due to decreased sales of
engineered systems contracts, primarily to the tunneling industry, offset
partially by an increase in the more profitable standard manufactured products
business. Net sales by the South African subsidiary increased $0.2 million
(after adjustments for foreign currency fluctuations) due to improved market
conditions in the coal industry. Net sales in the Company's manufactured housing
segment increased $2.0 million or 36% due to improved market conditions in the
manufactured housing industry, combined with a change in the product mix with
more sales of new manufactured products which have a higher selling price than
refurbished products.
Gross Profit
Gross profit increased $4.9 million, or 64%, from $7.7 million in 2004 to $12.6
million in 2005. This increase in gross profit is the result of a $3.2 million
increase due to increased sales volume combined with a $1.7 million increase due
to improved margins. Gross profit in the domestic operations of the Company's
conveyor equipment segment increased $3.8 million ($3.0 million due to increased
volume and $0.8 million due to improved margins). The increased sales volumes
contributed to a more efficient utilization of overhead expenses which improved
the gross profit margins in the domestic conveyor equipment segment. Gross
profit in the foreign operations of the Company's conveyor equipment segment
increased $0.8 million, of which $0.1 million resulted from increases in foreign
currency translation rates. The remaining increase in gross profit in the
foreign operation was due to increases in Australia, United Kingdom and South
Africa of $0.4 million, $0.2 million and $0.1 million respectively. Both
operations in Australia and South Africa realized increased gross profit as a
result of higher sales volume and more favorable utilization of overhead
expenses. In the United Kingdom, gross profit increased due to a more favorable
mixture of higher margin standard manufactured products business and more
profitable engineered systems in the mining industry as opposed to less
profitable engineered systems in the tunneling industry. Gross profit in the
Company's manufactured housing segment increased $0.3 million due to increased
sales volume and increased selling prices.
Gross profit as a percentage of net sales increased from 15.5% in 2004 to 19.3%
in 2005. This increase primarily resulted from improved margins due to increased
sales volume in the Company's conveyor equipment segment.
SG&A Expenses
SG&A expenses increased $0.9 million, or 15%, from $6.0 million in 2004 to $6.9
million in 2005. SG&A expenses in the domestic operations of the Company's
conveyor equipment segment increased $0.6 million primarily due to increased
selling expenses which resulted from increased sales. SG&A expenses in the
foreign operations of the Company's conveyor equipment segment increased $0.3
million, of which $0.1 million was due to increases in foreign currency
translation rates.
Operating Income
Operating income increased $3.9 million, from $1.5 million in 2004 to $5.4
million in 2005. This increase resulted from the $4.9 million increase in gross
profit combined with a $0.1 million decrease in restructuring charges, partially
offset by the $0.9 million increase in SG&A expenses and a $0.2 million increase
in management fees.
17
Interest Expense, Net
Interest expense decreased $2.7 million, from $3.8 million in 2004 to $1.1
million in 2005. This decrease resulted from the reduction of interest on the
Company's Senior Notes. On October 4, 2004, the Company completed a
restructuring of its 11% Senior Notes due 2007 which was accounted for according
to Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructurings". On April 1, 2005, the
Company made a $3.1 million semi-annual interest payment on the newly issued
Series A and Series B Notes due 2008. All interest payments on the Series A and
Series B Notes will be recorded as a reduction of outstanding indebtedness
rather than interest expense. Interest expense related to the 11% Senior Notes
due 2007 decreased $3.0 million from $3.3 million in 2004 to $0.3 million in
2005.
Income Tax Expense
The Company recorded income tax expense of $0.9 million in 2005 due to the
increase in income and the loss of all domestic tax attributes in the fourth
quarter of 2004 due to the recognition of cancellation of indebtedness income
which resulted from the restructuring of the Company's Senior Notes.
The Company's effective income tax rate is less than the statutory rate
primarily due to a favorable income tax benefit for interest payments on the New
Series A and Series B Notes due 2008 which are recorded as a reduction of the
outstanding indebtedness for financial reporting purposes. In addition, the
Company has not recognized income tax expense in certain of its foreign
subsidiaries due to the reversal of an income tax valuation allowance.
Net Income (Loss)
Net income (loss) increased $5.5 million, from a loss of $2.2 million in 2004 to
income of $3.3 million in 2005. This increase resulted from the $3.9 million
increase in operating income, combined with the $2.7 million decrease in
interest expense, offset by a $0.2 million increase in miscellaneous expense
(income) and a $0.9 million increase in income tax expense.
Restructuring Charges
The Company incurred restructuring charges of approximately $2,000 and $115,000
in the first three months of 2005 and 2004, respectively, related to changes in
staffing and production requirements in its domestic operations. These charges
consist primarily of severance costs associated with a reduction in personnel
which occurred in 2002 and 2003. As part of this restructuring, in 2002 the
Company developed a plan to discontinue the manufacturing operations in certain
of its domestic facilities and merge these operations with other existing
facilities. The process of merging the domestic operations began in 2003 and
continued throughout 2004. As of March 31, 2005, the Company has paid
approximately $604,000 of the charges incurred to date, with the majority of the
remainder expected to be paid by 2008. Due to increases in the Company's
domestic backlog, the Company does not expect any further consolidation at this
time.
Backlog
Backlog at March 31, 2005 was $82.3 million, an increase of $36.7 million, or
80%, from $45.6 million at December 31, 2004. At March 31, 2005, backlog in the
domestic operations of the Company's conveyor equipment segment was $56.1
million, an increase of $34.6 million from December 31, 2004, and backlog in the
foreign operations of the Company's conveyor equipment segment was $26.2
million, an increase of $2.1 million from December 31, 2004. Management believes
that approximately 95% of the backlog will be shipped in 2005.
18
Liquidity and Capital Resources
Net cash used in operating activities was $3.6 million and $1.0 million for the
three months ended March 31, 2005 and 2004, respectively. Net cash used in
operating activities in 2005 resulted from net income of $3.3 million, combined
with non-cash expenses of $0.7 million, and offset by a net increase in
operating assets and liabilities of $7.6 million. The net increase in operating
assets primarily resulted from increased accounts receivable and inventory
balances at the Company's domestic subsidiaries. The increase in accounts
receivable resulted from increased sales in the first quarter of 2005 compared
to the fourth quarter of 2004. The increase in inventory resulted from increased
production to support the increased backlog in the domestic operations. Net cash
used in operating activities in 2004 resulted from a net loss of $2.2 million
offset by non-cash expenses of $0.7 million and a net decrease in operating
assets and liabilities of $0.5 million.
Net cash used in investing activities was $0.4 million and $0.1 million for the
three months ended March 31, 2005 and 2004, respectively, and represents net
purchases of property, plant, and equipment for both years.
Net cash provided by financing activities was $3.8 million and $1.2 million for
the three months ended March 31, 2005 and 2004, respectively. Net cash provided
by financing activities in 2005 resulted from a net increase in borrowings on
notes payable of $3.4 million combined with proceeds from long-term obligations
of $0.8 million, partially offset by principal payments on long-term obligations
of $0.4 million. Net borrowings on notes payable in the domestic subsidiaries
increased $1.6 million and net borrowings on notes payable in the foreign
subsidiaries increased $1.8 million. Proceeds from long-term obligations
represent additional proceeds on the Australian subsidiary's term loan with
National Australia Bank of 1,000,000 Australian dollars. Net cash provided by
financing activities in 2004 resulted from a net increase in borrowings on notes
payable of $1.3 million offset by principal payments on long-term obligations of
$0.1 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 2005 will be approximately $3.0 million, which will include
expenditures to improve productivity and for maintenance capital. In addition to
the Company's debt service requirements for interest expense, as of March 31,
2005, the Company's domestic and foreign credit facilities had outstanding
principal balances of approximately $14.9 million and $5.6 million,
respectively.
The Company was not in compliance with certain covenants under its revolving
credit facilities as of December 31, 2003 or the subsequent quarters through
September 30, 2004, resulting in a cross default under the terms of the
Company's Senior Notes. In addition, the Company failed to make its $6.6 million
semi-annual interest payment for the Senior Notes due on April 1, 2004.
Following expiration of the 30-day grace period provided for in the indenture,
the Senior Notes were in default and the Company received a notice of default
from the Trustee for the Senior Notes. However, on April 26, 2004, the Company
entered into a forbearance agreement with the holders of a majority interest
("Majority Holders") of the Senior Notes which instructed the Trustee for the
Senior Notes to refrain from taking any action with respect to the default.
Several times in 2004, this agreement was amended to extend the forbearance
agreement until July 23, 2004.
On July 22, 2004, the Company entered into a restructuring agreement with the
Majority Holders of the Senior Notes pursuant to which the Company agreed to
commence an offer to exchange new notes and a cash payment for all of the
outstanding Senior Notes. The restructuring agreement extended the forbearance
19
agreement with the Majority Holders until the restructuring was consummated or
the restructuring agreement was terminated.
On August 5, 2004, the Company commenced an offer to exchange (i) cash in the
aggregate amount of $17.5 million, (ii) 9% Series A Senior Secured Notes due
2008 in the aggregate principal amount of $65 million, and (iii) 13% Series B
Senior Secured Notes due 2008 in the aggregate principal amount of $10 million,
for all of its outstanding 11% Senior Notes due 2007 in the aggregate principal
amount of $120 million and all interest accrued thereon. The exchange offer was
made exclusively to holders of the 11% Senior Notes due 2007.
Several times through August 31, 2004, the Company and Bank One, N.A. entered
into forbearance agreements under which Bank One agreed not to exercise its
rights with respect to the defaults, including the right to demand payment,
under the revolving credit facility for a stated period while the Company
negotiated a restructuring of its Senior Notes. On July 12, 2004, the Company
received a commitment letter from Bank One for a waiver of the covenant
violations and an extension of the revolving credit facility. On October 4,
2004, the Company's wholly-owned subsidiaries, CCE and GCC entered into a Second
Amended and Restated Credit Facility and Security Agreement (the "Credit
Agreement") with Bank One, N.A. The Credit Agreement extends the Company's
revolving credit facility with Bank One until July 31, 2006.
On October 4, 2004, the Company completed the exchange offer with respect to its
outstanding 11% Senior Notes due 2007 (the "Old Notes") and entered into an
Indenture by and among the Company, two of its wholly-owned subsidiaries, CCE
and GCC (collectively, the "Subsidiary Guarantors") and Wells Fargo Bank,
National Association, as trustee (the "Indenture"). Tenders with respect to Old
Notes representing approximately $109.3 million or 91% of the $120 million of
Old Notes outstanding principal amount were received by Wells Fargo Bank, N.A.,
which acted as depositary in the exchange offer. All Old Notes that were validly
tendered were accepted for exchange. According to the terms of the exchange
offer, on October 4, 2004, the Company issued approximately $59.2 million of 9%
New Series A Notes due 2008 and approximately $9.1 million of 13% New Series B
Notes due 2008. In addition, the Company made a cash payment as additional
consideration to the Series A and Series B bondholders of approximately $14.1
million, or $15.50 for every $120 of Old Notes tendered. In October 2005, the
Series A and Series B bondholders will receive cash of approximately $1.8
million, or $2.00 for every $120 of Old Notes tendered.
According to the terms of the Indenture, the New Series A Notes will mature on
October 1, 2008. Interest will accrue at the rate of 9% per annum and will be
payable semiannually in arrears, in cash, on each April 1 and October 1 until
maturity. Interest accrued on the New Series A Notes from April 1, 2004, as if
the New Series A Notes had been issued on such date. The Company paid interest
of approximately $2.7 million on October 4, 2004 related to the Series A Notes.
The New Series B Notes will also mature on October 1, 2008. Interest will accrue
at the rate of 13% per annum and will be payable semiannually in arrears, in
kind, on each April 1 and October 1 until maturity. However, the Company has the
right to make interest payment on the New Series B Notes in cash at the same
rate and on the same terms as the New Series A Notes. The Company has assumed
the interest will be paid in cash at a rate of 9% in all calculations involving
the interest payments on the Series B Notes in these condensed consolidated
financial statements. Interest accrued on the New Series B Notes from April 1,
2004, as if the New Series B Notes had been issued on such date. The Company
paid interest of approximately $0.4 million on October 4, 2004 related to the
Series B Notes. The New Series A and Series B Notes are jointly and severally
guaranteed by the Subsidiary Guarantors and secured by substantially all of the
assets of the Subsidiary Guarantors.
20
The cash payment made on October 4, 2004 as additional consideration to the
Series A and Series B bondholders was funded by new subordinated indebtedness to
N.E.S. Investment Company in the amount of $10 million and additional borrowings
from the Company's revolving line of credit. The note payable to N.E.S.
Investment Company accrues interest at a rate of 9%, payable in kind, compounded
annually. The additional consideration to be paid by the Company in October 2005
to the Series A and Series B bondholders will be funded with an additional $2
million of subordinated indebtedness to N.E.S. Investment Company.
The debt exchange was accounted for according to Statement of Financial
Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for
Troubled Debt Restructurings". According to the requirements of SFAS No. 15, in
the fourth quarter of 2004, the Company recorded a gain on the exchange of bonds
of approximately $3.4 million, representing the difference between the future
cash outlays of the Series A and Series B Notes and the carrying value of the
Old Notes. All cash payments as additional consideration to Series A and Series
B bondholders and interest payments on the New Series A and Series B Notes will
be recorded as a reduction in the balance of outstanding indebtedness throughout
the terms of the Series A and Series B Notes, and accordingly, the Company will
not recognize any interest expense in the income statement related to the New
Series A and Series B Notes.
The outstanding indebtedness has been classified as short and long-term
liabilities as of March 31, 2005 based upon the payment terms of the new debt.
The following table summarizes the reduction in the balance of the Senior Notes
based upon the payment requirements over the terms of the Series A and Series B
Notes:
Balance at March 31, 2005 of Senior Notes, including
current portion of $7,967,604 $ 105,430,665
October 2005 payment as additional consideration (1,821,166)
Interest payments on Series A Notes, 2005-2008 (21,307,650)
Interest payments on Series B Notes, 2005-2008 (3,278,099)
Maturity of outstanding 11% Senior Notes due 2007 (10,730,000)
------------------
Maturity of Series A and Series B Notes due 2008 $ 68,293,750
==================
At March 31, 2005, the Company had cash and cash equivalents of approximately
$0.7 million and approximately $12.4 million available for use under its
domestic credit facility, representing approximately $13.1 million of liquidity.
With the completion of the debt exchange in October 2004, the Company has
reduced its annual debt service requirements related to interest payments by
approximately $4.8 million. Annual debt service on the New Series A and Series B
Notes due 2008 combined with the outstanding Senior Notes due 2007 is
approximately $7.3 million, a decrease of $5.9 million from $13.2 million prior
to the debt exchange. In order to partially fund the cash payments as additional
consideration to the Series A and Series B bondholders, the Company increased
the balance of a term loan with Bank One by approximately $3.8 million and
entered into a subordinated promissory note with N.E.S. Investment Company in
the amount of $10 million. The annual debt service requirements for interest
related to these debt instruments are approximately $0.2 million in cash and
$0.9 million in kind. In October 2005, the Company will make a cash payment as
additional consideration to the Series A and Series B bondholders for
approximately $2 million, funded by an increase in the subordinated promissory
note with N.E.S. Investment Company and increasing the annual debt service
requirements by approximately $0.2 million in kind. The Company expects current
financial resources, existing lines of credit, and funds from operations to be
adequate to meet anticipated cash requirements.
21
International Operations
The Company transacts business in a number of countries throughout the world and
has facilities in the United States, Australia, the United Kingdom, and South
Africa. As a result, the Company is subject to business risks inherent in
non-U.S. operations, including political and economic uncertainty, import and
export limitations, exchange controls and currency fluctuations. The Company
believes that the risks related to its foreign operations are mitigated by the
relative political and economic stability of the countries in which its largest
foreign operations are located. The principal foreign currencies in which the
Company transacts business are the Australian dollar, the British pound
sterling, and the South African rand. As the U.S. dollar strengthens and weakens
against these foreign currencies, the Company's financial results will be
affected. As discussed previously, the Company's net sales for the three months
ended March 31, 2005 increased by approximately $0.7 million over the
corresponding period in the prior year due to changes in foreign currency
translation rates, primarily the strengthening of the Australian dollar and the
British pound sterling against the U.S. dollar. The fluctuation of the U.S.
dollar versus other currencies also resulted in foreign currency translation
gains (losses) included in the accumulated other comprehensive income (loss)
component of stockholder's equity (deficit) of approximately $(0.15) million and
$0.04 million for the three months ended March 31, 2005 and 2004, respectively.
Cautionary Statement for Safe Harbor Purposes
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
federal securities laws. As a general matter, forward-looking statements are
those focused upon future plans, objectives or performance as opposed to
historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters that are not historical in nature.
Such forward looking statements are subject to uncertainties and factors
relating to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the control of the Company,
that could cause actual results of the Company to differ materially from those
matters expressed in or implied by such forward-looking statements.
In addition, the Company's future results of operations, financial condition,
liquidity and capital resources could be materially adversely affected by, among
other things, economic and political uncertainties or prolonged economic
recession.
22
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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
As of March 31, 2005, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There were no significant changes in the Company's internal controls
over financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
23
Part II. Other Information
Item 1. Legal Proceedings
In August and September 2003, Continental Conveyor & Equipment Company was
served as one of fifty-eight known and unknown defendants in nineteen separate
actions pending in various state courts in the State of Alabama alleging various
contract, tort and warranty claims. All claims in such actions arose out of
alleged injuries and deaths occurring at the Jim Walters Resources No. 5 Mine
which occurred on September 23, 2001. The plaintiffs in such actions do not
allege a particular set of actions or omissions by Continental Conveyor &
Equipment Company that give rise to the claims, nor is there a specific amount
of damages sought. The Company believes that these claims are without merit and
intends to vigorously defend all claims. The Company considers such claims to be
the type of claims that arise in the normal course of its business. While it is
not feasible to predict the outcome of these matters with certainty, management
is of the opinion that their ultimate disposition should not have a material
adverse effect on the Company's financial condition.
Item 6. Exhibits
Exhibits: Refer to the index of exhibits.
24
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 16, 2005
25
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). *
4.2 Supplemental Indenture, dated as of October 4, 2004, between
Continental Global Group, Inc., Continental Conveyor & Equipment
Pty., Ltd., Continental ACE Pty., Goodman Conveyor Company,
Continental Conveyor & Equipment Company, and Wells Fargo Bank,
National Association, as trustee. (Filed as Exhibit 4.2 to the
Company's Form 10-Q for the quarter ended September 30, 2004,
and is incorporated herein by reference.)
4.3 Indenture, dated October 4, 2004, among Continental Global Group,
Inc., Continental Conveyor & Equipment Company, Goodman Conveyor
Company, and Wells Fargo Bank, National Association. (Filed as
Exhibit 4.1 to Form 8-K filed by the Company on October 7, 2004,
and is incorporated herein by reference.)
4.4 9% Convertible Subordinated Promissory Note, dated October 4,
2004, from Continental Global Group, Inc. to N.E.S. Investment
Co. in the amount of $10,000,000. (Filed as Exhibit 4.3 to Form
8-K filed by the Company on October 7, 2004, and is incorporated
herein by reference.)
10.1 Second Amended and Restated Credit Facility and Security
Agreement, dated October 4, 2004, by and among Continental
Conveyor & Equipment Company, Goodman Conveyor Company, and Bank
One, N.A. (Filed as Exhibit 4.2 to Form 8-K filed by the Company
on October 7, 2004, and is incorporated herein by reference.)
10.2 Management Agreement, dated as of April 1, 1997, between
Continental Global Group, Inc. and Nesco, Inc. *
10.3 Reserved
10.4 Reserved
10.5 Reserved
Exhibit
Number Description of Exhibit
10.6 Forbearance Agreement, effective as of April 26, 2004, by and
among Continental Global Group, Inc., N.E.S. Investment Co., and
CFSC Wayland Advisers, Inc. (Filed as Exhibit 10.6 to the
Company's Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.7 Forbearance Agreement, effective as of May 1, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.7 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.8 Amendment 1, dated as of May 27, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers,
Inc. (Filed as Exhibit 10.8 to the Company's Form 10-K for the
year ended December 31, 2003, and is incorporated herein by
reference.)
10.9 Forbearance Agreement, effective as of June 1, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.9 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.10 Amendment 2, dated as of June 14, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers,
Inc. (Filed as Exhibit 10.10 to the Company's Form 10-K for the
year ended December 31, 2003, and is incorporated herein by
reference.)
10.11 Forbearance Agreement, effective as of June 15, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.11 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.12 Commitment Letter, dated as of July 12, 2004, from Bank One, NA to
Continental Conveyor & Equipment Company, Goodman Conveyor
Company, and Continental Global Group, Inc. (Filed as Exhibit
10.12 to the Company's Form 10-K for the year ended December 31,
2003, and is incorporated herein by reference.)
10.13 Amendment 3, dated as of July 13, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and Wayzata Advisers LLC.
(Filed as Exhibit 10.13 to the Company's Form 10-K for the year
ended December 31, 2003, and is incorporated herein by reference.)
10.14 Forbearance Agreement, effective as of July 13, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.14 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.15 Forbearance Agreement, effective as of July 29, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.15 to the Company's
Form 10-Q for the quarter ended June 30, 2004, and is incorporated
herein by reference.)
10.16 Forbearance Agreement, effective as of August 31, 2004, by and
among Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.16 to the Company's
Form 10-Q for the quarter ended September 30, 2004, and is
incorporated herein by reference.)
Exhibit
Number Description of Exhibit
10.17 Restructuring Agreement, dated as of July 22, 2004, by and among
Continental Global Group, Inc., N.E.S. Investment Co. and Wayzata
Investment Partners LLC. (Filed as Exhibit 99.1 to Form 8-K filed
by the Company on July 23, 2004, and is incorporated herein by
reference.)
10.18 First Amendment, dated as of July 30, 2004, to Restructuring
Agreement, dated as of July 22, 2004, by and among Continental
Global Group, Inc., N.E.S. Investment Co. and Wayzata Investment
Partners LLC. (Filed as Exhibit 99.1 to Form 8-K filed by the
Company on August 3, 2004, and is incorporated herein by
reference.)
10.19 Second Amendment, dated as of October 1, 2004, to Restructuring
Agreement, dated as of July 22, 2004, by and among Continental
Global Group, Inc., N.E.S. Investment Co. and Wayzata Investment
Partners LLC. (Filed as Exhibit 10.19 to the Company's Form 10-Q
for the quarter ended September 30, 2004, and is incorporated
herein by reference.)
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to 18, U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certain instruments with respect to long-term debt have not been filed as
exhibits as the total amount of securities authorized under any one of such
instruments does not exceed 10 percent of the total assets of the registrant and
its subsidiaries on a consolidated basis. The registrant agrees to furnish to
the Commission a copy of each such instrument upon request.
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed
under the Securities Act of 1933.