10-Q 1 l84469ae10-q.txt CONTINENTAL GLOBAL GROUP, INC. 1 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 September 30, 2000 Commission File No. 333-27665 CONTINENTAL GLOBAL GROUP, INC. ------------------------------ (Exact Name of Registrant as Specified in its Charter)

(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 the number of shares outstanding of each of the issuer's classes of common stock as of the latest practical date. As of October 31, 2000, there were 100 shares of the registrant's common stock outstanding. 2 INDEX CONTINENTAL GLOBAL GROUP, INC.

3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) 1 4 Continental Global Group, Inc. Condensed Consolidated Balance Sheets

See notes to condensed consolidated financial statements. 2 5 Continental Global Group, Inc. Condensed Consolidated Statements of Operations

See notes to condensed consolidated financial statements. 3 6 Continental Global Group, Inc. Condensed Consolidated Statements of Cash Flows

See notes to condensed consolidated financial statements. 4 7 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 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 and nine month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes of Continental Global Group, Inc. and subsidiaries for the year ended December 31, 1999, included in the Form 10-K filed by the Company on March 30, 2000. B. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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 67% and 62% of inventories at September 30, 2000 and December 31, 1999, 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 $1,527,000 at September 30, 2000 and December 31, 1999. D. STOCKHOLDER'S EQUITY In the third quarter of 2000, the Board of Directors approved an amendment to the certificate of incorporation which increased the number of shares which the Company is authorized to issue to 5,000,000 shares with a par value of $0.01. At September 30, 2000, the Company had issued and outstanding 100 shares. 5 8 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 E. RESTRUCTURING CHARGES The Company incurred restructuring charges of approximately $212,000 and $821,000 in the first nine months of 2000 and 1999, respectively, related to its Australian and United Kingdom subsidiaries. Total restructuring charges incurred to date total approximately $2,445,000. In 1998, the Company executed a plan to close certain Australian manufacturing facilities and merge the operations with other existing facilities; in 1999 and 2000, the Company made further reductions in office staff and facilities. In the United Kingdom, following the acquisition of Huwood International (Huwood) in August 1998, the Company consolidated its existing operations and facilities into the Huwood operations. These restructuring charges consist primarily of severance costs for approximately 220 employees and relocation costs. As of September 30, 2000, the Company's Australian and United Kingdom subsidiaries have paid all of the charges incurred to date. F. COMPREHENSIVE LOSS The components of comprehensive loss for the three and nine month periods ended September 30, 2000 and 1999 are as follows:

G. INCOME TAXES The Company and its domestic subsidiaries are Subchapter S Corporations for United States income tax purposes. Accordingly, the Company's United States income is included in the income tax returns of the stockholder. Under the terms of the Tax Payment Agreement, the Company makes distributions to the stockholder for payment of income taxes. Effective October 6, 2000, the Company elected C Corporation status for United States income tax purposes, which election will have no impact on cash flow, taxable income or existing deferred tax assets and liabilities of the Company. Tax distributions previously due to the stockholder (along with historical net deferred tax liabilities of approximately $1.5 million) under the terms of the Tax Payment Agreement will now be reflected in the financial statements of the Company in future periods. The Company's United States income will now be subject to tax at the corporate level and income tax payments will be made directly to taxing authorities. 6 9 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 The Company has subsidiaries located in Australia, the United Kingdom, and South Africa, which are subject to income taxes in their respective countries. 7 10 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 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, monitoring 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 tires and rims 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.

8 11 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 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 $120 million Senior Notes. The guarantees are full, unconditional, and joint and several. Separate financial statements of these guarantor subsidiaries are not presented as management has determined that they would not be material to investors. The Company's United Kingdom and South African subsidiaries are not guarantors of the Senior Notes. The Australian subsidiaries became guarantors of the Senior Notes effective September 23, 1999. Prior to this date, CCE and GCC were the only guarantors of the Senior Notes. The 1999 operations and cash flows of the Company's guarantor Australian subsidiaries are included in the "Combined Guarantor Subsidiaries" column in the following consolidating financial statements. Summarized consolidating balance sheets as of September 30, 2000 and December 31, 1999 for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

9 12 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)

10 13 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED) Summarized consolidating statements of operations for the three months and nine months ended September 30, 2000 and 1999, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

11 14 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)

12 15 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED) Summarized consolidating cash flow statements for the nine months ended September 30, 2000 and 1999, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

13 16 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)

J. NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," which summarizes the staff's views regarding the application of generally accepted accounting principles to selected revenue recognition issues and is effective for the fourth quarter of 2000. The Company is currently evaluating the impact SAB 101 may have on the Company's results of operations but does not anticipate it will have a material effect on earnings or the financial position of the Company. In June 1998, the FASB issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" which, as amended by FASB Statement 137, is required to be adopted no later than January 1, 2001. Statement 133 requires all derivatives to be recognized as either assets or liabilities in the balance sheet and be measured at fair value. The Company is currently evaluating Statement 133 and because the Company expects to have a minimal use of derivatives, management 14 17 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2000 does not anticipate that the adoption of the new Statement will have a material effect on earnings or the financial position of the Company. 15 18 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 30, 2000. GENERAL The Company believes it is a leading international manufacturer and supplier of conveyor equipment for use in the coal mining industry. The Company estimates it has the largest share of the United States market for idlers used in above ground conveyor equipment and a significant share of the United States underground coal mining conveyor equipment market. The Company is an international conveyor equipment manufacturer and in addition to operations in the United States has manufacturing operations in Australia, the United Kingdom, and South Africa. 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 and nine months ended September 30, 2000 and 1999.

THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999: NET SALES Net sales for the quarter decreased $6.1 million, or 13%, from $46.7 million in 1999 to $40.6 million in 2000. Net sales in the Company's domestic operations decreased $2.3 million due to the decrease in the Company's manufactured housing products segment of $3.1 million, offset by increases in the conveyor equipment segment of $0.7 million and other segment of $0.1 million. Net sales in the manufactured housing products segment decreased due to the decrease by its customers in the production and shipment of manufactured homes caused by the excess finished home inventory and the tight credit market. Net sales in the foreign operations of the conveyor equipment segment decreased $3.8 million due to a decrease of $3.2 million from the Australian subsidiary caused by the completion of major projects in 1999 that were not repeated in 2000 and a decrease of $0.6 million from the Company's United Kingdom and South Africa subsidiaries. While net sales in the Australian subsidiary decreased year over year, net sales for the quarter ending September 30, 2000 was the third consecutive quarter of increased sales. GROSS PROFIT 16 19 Gross profit decreased $0.4 million, or 5%, from $7.3 million in 1999 to $6.9 million in 2000. Gross profit in the Company's domestic operations of the conveyor equipment segment and the South African subsidiary decreased $0.6 and $0.1 million, respectively due to reduced sales volume. Despite a decrease in net sales of $3.2 million by the Company's Australian subsidiary, gross profit increased $0.5 million due to improved margins. Gross profit in the Company's manufactured housing products segment decreased $0.2 Million due to reduced sales volume. Overall gross profit as a percentage of sales increased from 15.8% in 1999 to 17.1% in 2000. This increase is primarily due to a favorable change in the mixture of domestic and foreign sales combined with the increase, in gross profit as a percent of sales, in the foreign operations. Domestic sales, which had a higher gross profit percentage than foreign sales, were 73% of total sales in 2000 as compared to 68% in 1999. The gross profit margin on domestic sales remained substantially the same period over period while the gross profit percent in the foreign operations increased from 7.2% in 1999 to 12.5% in 2000 due to the reduction in low margin project business in Australia. SG&A EXPENSES SG&A expenses decreased $0.5 million, or 9%, from $5.7 million in 1999 to $5.2 million in 2000. The decease primarily occurred in the Company's conveyor equipment segment due to the favorable impact of the restructuring initiatives in the foreign subsidiaries OPERATING INCOME Operating income increased $0.5 million, or 50%, from $1.0 million in 1999 to $1.5 million in 2000. This improvement in operating income is the result of the $0.5 million reduction in SG&A expenses and a $0.4 million decrease in restructuring charges offset by the $0.4 million decrease in gross profit. NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999: NET SALES Net sales decreased $39.3 million, or 24%, from $162.2 million in 1999 to $122.9 million in 2000. The Company's domestic operations of the conveyor equipment segment accounted for $7.6 million of the decrease due to the lower capital spending by the Company's major customers in the coal industry. Net sales in the foreign operations of the conveyor equipment segment deceased $23.3 million, primarily due to a decrease in sales of $21.4 million at the Company's Australian subsidiary. This decrease was primarily due to the completion of major projects in 1999 that were not repeated in 2000, combined with the soft market in the coal industry. Net sales in the Company's manufactured housing products segment decreased $8.4 million due to the decrease by its customers in the production and shipment of manufacturedm homes. This decrease in the production and shipment of manufactured homes is primarily the result of excess finished home inventory and the negative impact the tight credit market has had on the purchase of new manufactured homes. The Company does not expect sales in the manufactured housing products segment to improve in 2001. GROSS PROFIT Gross profit decreased $4.0 million, or 17%, from $23.9 million in 1999 to $19.9 million in 2000. Gross profit in the Company's domestic conveyor equipment segment decreased $3.9 million due to lower sales volume. Gross profit in the United Kingdom and South Africa operations decreased $0.6 million due to lower sales volumes and lower margins on project contracts. This decrease was favorably offset by a $0.8 million increase in gross profit in the Australian operations due to improved margins with the completion to the major projects in 1999. Gross profit in the manufactured housing products segment decreased $0.3 million due to the lower sales volume. 17 20 Gross profit as a percentage of sales increased from 14.7% in 1999 to 16.2% in 2000. This increase is primarily due a favorable change in the mixture of domestic and foreign sales. Domestic sales, which had a higher gross profit percentage than foreign sales, were 76% of total sales in 2000 as compared to 67% in 1999. SG&A EXPENSES SG&A expenses decreased $2.0 million, or 11%, from $18.5 million in 1999 to $16.5 million in 2000. The decrease primarily occurred in the Company's conveyor equipment segment due to the favorable impact of the restructuring initiatives in the foreign subsidiaries and the reduction in domestic manpower that occurred in the third quarter of 1999. OPERATING INCOME Operating income decreased $1.3 million, or 35%, from $3.7 million in 1999 to $2.4 million in 2000. The decrease is the result of the $4.0 million decrease in gross profit, offset by the $2.0 million decrease in SG&A expenses, a $0.1 million decrease in management fees, and a $0.6 million decrease in restructuring charges. RESTRUCTURING CHARGES The Company incurred restructuring charges of approximately $0.2 million and $0.8 million in the first nine months of 2000 and 1999, respectively, related to its Australian and United Kingdom subsidiaries. Total restructuring charges incurred to date total approximately $2.4 million. In 1998, the Company executed a plan to close certain Australian manufacturing facilities and merge the operations with other existing facilities; in 1999 and 2000, the Company made further reductions in office staff and facilities. In the United Kingdom, following the acquisition of Huwood International (Huwood) in August 1998, the Company consolidated its existing operations and facilities into the Huwood operations. These restructuring charges consist primarily of severance costs for approximately 220 employees and relocation costs. As of September 30, 2000, the Company's Australian and United Kingdom subsidiaries have paid all of the charges incurred to date. BACKLOG Backlog at September 30, 2000 was $43.7 million, an increase of $14.0 million, or 47%, from $29.7 million at December 31, 1999. The increase is attributable to a $6.9 million increase in the Company's domestic operations of the conveyor equipment segment, a $3.3 million increase at the Company's Australian subsidiary, and a $3.8 million increase at the Company's United Kingdom subsidiary. Management believes that approximately 64% of the backlog will be shipped in 2000. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $4.0 million and $7.8 million for the nine months ending September 30, 2000 and 1999, respectively. Net cash used in operating activities in 2000 resulted primarily from a net loss of $8.6 million, offset by a net decrease in operating assets of $1.9 million and depreciation and amortization of $2.7 million. Net cash used in operating activities in 1999 is primarily attributable to a net loss of $6.8 million and a net increase in operating assets of $3.8 million, offset by depreciation and amortization of $3.0 million. Net cash used in investing activities was $1.3 million and $3.3 million for the nine months ending September 30, 2000 and 1999, respectively. The net cash used in investing activities represents net purchases of property, plant, and equipment for both years. Net cash provided by financing activities was $5.0 million and $8.2 million for the nine months ending September 30, 2000 and 1999, respectively. Net cash provided by financing activities in 18 21 2000 resulted from a net increase in borrowings on notes payable of $5.5 million and proceeds from long-term obligations of $0.8 million, offset by principal payments on long-term obligations of $1.3 million. The increase in borrowings on notes payable is due to an increase of $4.2 million at the Company's domestic operations and an increase of $1.3 million at the Company's foreign operations. The proceeds from long-term obligations completed the financing for the new idler line at the Company's domestic operations which began in 1999. Net cash provided by financing activities in 1999 represents a net increase in borrowings on notes payable of $7.0 million and proceeds from long-term obligations of $5.3 million, offset by principal payments on long-term obligations of $2.7 million and distributions of $1.4 million for the payment of income taxes, $1.2 million of which was for the payment of 1998 income taxes. The proceeds from long-term obligations include $1.6 million which was used for the purchase of a previously leased manufacturing facility in Colorado. The Company's primary capital requirements consist of capital expenditures and debt service. The Company expects current financial resources (working capital) and funds from operations to be adequate to meet anticipated cash requirements. At September 30, 2000, the Company had cash and cash equivalents of $18.0 million and a domestic credit facility line with $15.1 million available for use. The Company's $4.9 million (US dollars based upon exchange rate of .5427 to 1.00) Australian credit facility, of which $4.5 million is currently being utilized, will expire on November 30, 2000. The Company is currently negotiating to refinance the outstanding amount under this facility. INTERNATIONAL OPERATIONS The Company transacts business in a number of countries throughout the world and has facilities in the United States, Australia, the United Kingdom, and South Africa. As a result, the Company is subject to business risks inherent in non-U.S. operations, including political and economic uncertainty, import and export limitations, exchange controls and currency fluctuations. The Company believes that the risks related to its foreign operations are mitigated by the relative political and economic stability of the countries in which its largest foreign operations are located. As the U.S. dollar strengthens and weakens against foreign currencies in which the Company transacts business, its financial results will be affected. The principal foreign currencies in which the Company transacts business are the Australian dollar, the British pound sterling, and the South African rand. The fluctuation of the U.S. dollar versus other currencies resulted in increases (decreases) to stockholder's equity of approximately $(2.4) million and $0.6 million for the nine months ended September 30, 2000 and 1999, 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. 19 22 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

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. 20 23 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 September 30, 2000. 21 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/ Lawrence Kukulski --------------------- Lawrence Kukulski Vice President - Finance and Administration (As duly authorized representative and as Principal Financial and Accounting Officer) Date: November 13, 2000 22 25 Continental Global Group, Inc. Form 10-Q Index of Exhibits

26 Continental Global Group, Inc. Form 10-Q Index of Exhibits (Continued)

* Incorporated by reference from Form S-4 Registration Number 333-27665 filed under the Securities Act of 1933.

CONTINENTAL GLOBAL GROUP INC 10-Q