10-Q 1 l87914ae10-q.txt CONTINENTAL GLOBAL GROUP 10-Q 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 March 31, 2001 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 Global Group, Inc. Continental Conveyor & Goodman Conveyor Company Company Equipment Route 178 South 438 Industrial Drive 438 Industrial Drive Belton, South Carolina 29627 Winfield, Alabama 35594 Winfield, Alabama 35594 (864) 338-7793 (205) 487-6492 (205) 487-6492

(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 April 30, 2001, 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

4 7 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2001 A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes of Continental Global Group, Inc. and subsidiaries for the year ended December 31, 2000, included in the Form 10-K filed by the Company on April 2, 2001. 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. DERIVATIVE INSTRUMENTS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was issued in June 1998 by the Financial Accounting Standards Board, as amended by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of Effective Date of SFAS 133" and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." Adoption of SFAS 133 did not have a material effect on earnings or financial position of the Company. In accordance with the transition provisions in SFAS 133, the Company recorded the previously unrecognized fair market value of a foreign currency forward contract. The effect of the adjustment to record the fair value of the foreign currency forward contract was entirely offset by the adjustment to other comprehensive income at the date of adoption. Accordingly, the net cumulative-effect adjustment to net loss was zero. As a result of the adoption of SFAS 133, the Company is required to recognize all derivative financial instruments as either assets or liabilities at fair value. Derivative instruments that are not hedges must be adjusted to fair value through net income. Under the provisions of SFAS 133, changes in fair value of derivative instruments that are classified as fair value hedges are offset against changes in the fair value of the hedged assets, liabilities, or firm commitments, through net income. Changes in the fair value of derivative instruments that are classified as cash flow hedges are recognized in other comprehensive income until such time as the hedged items are recognized in net income. The ineffective portions of a derivative instrument's change in fair value are immediately recognized in net income. 5 8 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2001 C. DERIVATIVE INSTRUMENTS (Continued) The Company uses forward exchange contracts (principally against the Australian dollar and the U.S. dollar) to hedge certain firm sales commitments of its foreign subsidiaries. Foreign currency forward contracts reduce the Company's exposure to the risk that the eventual net cash inflows resulting from the sale of products denominated in a currency other than the functional currency of the respective business will be adversely impacted by changes in exchange rates. At March 31, 2001, the Company is party to a foreign currency forward contract maturing during 2001. The counterparty to the contract is a major U.S. commercial bank. Management believes that losses related to credit risk is remote. The Company entered into the foreign currency forward contract to hedge certain firm sales commitments denominated in a foreign currency. The fair value of the Company's foreign currency forward contract is estimated based on the quoted market price of a comparable contract. The fair value of the forward contract is included in other accrued liabilities on the March 31, 2001 balance sheet. There was no hedge ineffectiveness recognized in the statement of operations during the current quarter. Based on the maturity of the contract and the nature of the hedging relationship, the unrecognized amounts in accumulated other comprehensive loss will be reclassified into the statement of operations during 2001 at the time the firm commitment is recognized. D. INVENTORIES Inventories, which consist of raw materials, manufactured and purchased parts, and work in process, are stated at the lower of cost or market. Since inventory records are maintained on a job order basis, it is not practical to segregate inventories into their major classes. The cost for approximately 64% and 62% of inventories at March 31, 2001 and December 31, 2000, 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 $1,682,000 and $1,690,000 at March 31, 2001 and December 31, 2000, respectively. 6 9 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2001 E. RESTRUCTURING CHARGES The Company incurred restructuring charges of approximately $44,000 in the first three months of 2000 related to its Australian and United Kingdom subsidiaries. Total restructuring charges incurred to date total approximately $2,715,000. 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 of approximately 220 employees and relocation costs. As of March 31, 2001, the Company's Australian and United Kingdom subsidiaries have paid approximately $2,576,000 of the charges incurred to date. F. COMPREHENSIVE LOSS The components of comprehensive loss for the three months ended March 31, 2001 and 2000 are as follows:

G. INCOME TAXES Effective October 6, 2000, the Company and its domestic subsidiaries elected C Corporation status for United States income tax purposes. Since that date, income taxes have been provided using the liability method in accordance with FASB Statement No. 109, "Accounting for Income Taxes". Prior to October 6, 2000, the Company and its domestic subsidiaries had elected Subchapter S Corporation Status for United States income tax purposes. Accordingly, the Company's United States operations were not subject to income taxes as separate entities. The Company's United States income, through October 6, 2000, was included in the income tax returns of the sole stockholder. For tax reporting purposes, the Company will be 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. 7 10 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2001 H. SEGMENT INFORMATION While the Company primarily manages its operations on a geographical basis, the Company operates in two principal business segments: conveyor equipment and manufactured housing products. The conveyor equipment business markets its products in four main business areas. The mining equipment business area includes the design, manufacture and testing (and, outside the United States, installation and maintenance) of complete belt conveyor systems and components for mining application primarily in the coal industry. The conveyor components business area manufactures and sells components for conveyor systems primarily for resale through distributor networks. The engineered systems business area uses specialized project management and engineering skills to combine mining equipment products, purchased equipment, steel fabrication and other outside services for sale as complete conveyor equipment systems that meet specific customer requirements. The bulk conveyor equipment business area designs and manufactures a complete range of conveyor equipment sold to transport bulk materials, such as cement, lime, food products and industrial waste. 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) March 31, 2001 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. Summarized consolidating balance sheets as of March 31, 2001 and December 31, 2000 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) March 31, 2001 I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)

10 13 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2001 I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED) Summarized consolidating statements of operations for the three months ended March 31, 2001 and 2000, 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) March 31, 2001 I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED) Summarized consolidating cash flow statements for the three months ended March 31, 2001 and 2000, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

12 15 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2001 I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)

J. SUBSEQUENT EVENTS On April 3, 2001, the Company extended an Offer to Purchase up to $54,000,000, or 45%, of its outstanding 11% Series B Senior Notes due 2007 for a cash payment of $380 per $1,000 principal amount of Notes tendered (plus any accrued and unpaid interest on the Notes to their date of purchase). On April 30, 2001, the Company issued a Supplement to the Offer to Purchase which increased the cash payment to $425 per $1,000 principal amount of Notes tendered (plus any accrued and unpaid interest on the Notes to their date of purchase). The Supplement also decreased the maximum amount of Notes that the Company will accept to $48,000,000, or 40%. The offer expires on May 14, 2001. The Company plans to finance the purchase with cash on hand and the issuance of a term note payable. 13 16 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 28, 2001. GENERAL The Company, through its subsidiaries, is primarily engaged in the manufacture and distribution of bulk material handling and replacement equipment, primarily for use in the mining industry. The Company is a holding company organized under the Delaware General Corporation law and conducts all of its business through its direct and indirect operating subsidiaries. The Company's direct operating subsidiaries are Continental Conveyor and Equipment Company and Goodman Conveyor Company. The Company also owns indirectly all of the capital stock of Continental Conveyor & Equipment Pty. Ltd., an Australian holding company that owns all of the capital stock of four Australian operating companies. The Company also owns indirectly all of the capital stock of Continental Conveyor Ltd., a U.K. operating company, and Continental MECO (Pty.) Ltd., a South African operating company. During 1998, the Company purchased the majority of the assets and assumed certain liabilities constituting a majority of the operations of Huwood International, a U.K. belt conveyor business. The operations of the Company's existing U.K. facilities were merged with the Huwood operations. RESULTS OF OPERATIONS The following table sets forth, on a comparative basis, selected income statement data as a percentage of net sales for the three months ended March 31, 2001 and 2000. Three months ended March 31 -------------------------- 2001 2000 Net sales 100.0% 100.0% Cost of products sold 81.7 84.2 Gross profit 18.3 15.8 SG&A expenses 13.1 13.6 Management fee 0.3 0.2 Amortization expense 0.4 0.4 Restructuring charges - 0.1 Operating income 4.5 1.5 THREE MONTHS ENDED MARCH 31, 2001, COMPARED TO THREE MONTHS ENDED MARCH 31, 2000: Net Sales --------- Net sales for the quarter decreased $3.3 million, or 8%, from $42.2 million in 2000 to $38.9 million in 2001. The decrease in net sales is primarily the result of a decrease of $3.7 million in the Company's manufactured housing segment. This reduction in net sales is due to the decrease by the Company's customers in the production and shipment of manufactured homes as a result of excess finished home inventory and the tight credit market. This decline in net sales was offset by a small increase in net sales in the Company's domestic and foreign conveyor equipment segments of $0.4 million and $0.3 million, respectively. Net sales in the Company's other business decreased by $0.3 million. 14 17 GROSS PROFIT Gross profit increased $0.4 million, or 6%, from $6.7 million in 2000 to $7.1 million in 2001. Gross profit in the Company's domestic and foreign operations of the conveyor equipment segment increased by $0.2 million and $0.4 million, respectively. The improvement in the Company's domestic gross profit was due to increased sales volume in the conveyor equipment segment while the increase in the gross profit of the foreign operations was due to improved margins resulting from a more favorable mixture of manufactured products. Gross profit in the Company's manufactured housing products segment decreased by $0.2 million due to lower sales volume. SG&A EXPENSES SG&A expenses decreased $0.6 million, or 11%, from $5.7 million in 2000 to $5.1 million in 2001. Approximately $0.5 million of the decrease occurred in the foreign operations of the Company's conveyor equipment segment due to the favorable impact of the restructuring initiatives. OPERATING INCOME Operating income increased $1.1 million, or 157%, from $0.7 million in 2000 to $1.8 million in 2001. This increase is primarily the result of the $0.4 million increase in gross profit and the $0.6 million reduction in SG&A expenses. BACKLOG Backlog at March 31, 2001 was $53.0 million, an increase of $17.2 million, or 48%, from $35.8 million at December 31, 2000. The increase is attributable to a $14.0 million increase in the Company's domestic operations of the conveyor equipment segment and a $3.2 million increase in the Company's foreign operations of the conveyor equipment segment. Management believes that approximately 95% of the backlog will be shipped in 2001. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $0.8 million and $2.5 million for the three months ending March 31, 2001 and 2000, respectively. Net cash provided by operating activities in 2001 resulted from a net loss of $1.6 million, offset by non-cash expenses such as depreciation, amortization, and deferred income taxes of $0.4 million and a net decrease in operating assets and liabilities of $2.0 million. Net cash provided by operating activities in 2000 resulted primarily from a net loss of $3.0 million, offset by depreciation and amortization of $1.0 million and a net decrease in operating assets and liabilities of $4.5 million. Net cash used in investing activities was $0.1 million and $0.2 million for the three months ending March 31, 2001 and 2000, respectively. The net cash used in investing activities represents net purchases of property, plant, and equipment for both years. Net cash provided by (used in) financing activities was $(0.6) million and $3.0 million for the three months ending March 31, 2001 and 2000, respectively. Net cash used in financing activities in 2001 represents a net decrease in borrowings on notes payable of $0.3 million and principal payments on long-term obligations of $0.3 million. Net cash provided by financing activities in 2000 resulted from a net increase in borrowings on notes payable of $3.5 million, offset by principal payments on long-term obligations of $0.5 million. 15 18 On April 3, 2001, the Company extended an Offer to Purchase up to $54.0 million, or 45%, of its outstanding 11% Series B Senior Notes due 2007 for a cash payment of $380 per $1,000 principal amount of Notes tendered (plus any accrued and unpaid interest on the Notes to their date of purchase). On April 30, 2001, the Company issued a Supplement to the Offer to Purchase which increased the cash payment to $425 per $1,000 principal amount of Notes tendered (plus any accrued and unpaid interest on the Notes to their date of purchase). The Supplement also decreased the maximum amount of Notes that the Company will accept to $48.0 million, or 40%. The offer expires on May 14, 2001. The Company plans to finance the purchase with cash on hand and the issuance of a term note payable. At March 31, 2001, the Company had cash and cash equivalents of approximately $17.1 million and approximately $13.0 million available for use under its domestic credit facility, representing approximately $30.1 million of liquidity. Assuming that the Company purchases $48.0 million, or 40%, of the Notes, and including the April 1, 2001 payment of interest paid on the Notes, the Company, at March 31, 2001, would have had cash and cash equivalents of $4.0 million and approximately $5.8 million available for use under the domestic credit facility, representing approximately $9.8 million of liquidity. 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 decreases to stockholder's equity of approximately $1.7 million and $0.9 million for the three months ended March 31, 2001 and 2000, 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. 16 19 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. The Company entered into a foreign currency forward contract to reduce the Company's exposure to the risk that the eventual net cash inflows resulting from the sale of products denominated in a currency other than the businesses functional currency will be adversely impacted by changes in the exchange rate of the Australian dollar. 17 20 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Refer to the index of exhibits. (b) On April 3, 2001, the Company filed an 8-K related to the Offer to Purchase outstanding Senior Notes. 18 21 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: April 14, 2001 19 22 Continental Global Group, Inc. Form 10-Q Index of Exhibits

20 23 Continental Global Group, Inc. Form 10-Q Index of Exhibits (Continued) 10.1 (f) Letter of Amendment, dated as of March 29, 2001, to the Revolving Credit Facility, dated as of September 14, 1992, among Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Bank One, Cleveland, NA. (Filed as Exhibit 10.1(f) to the Company's Form 10-K for the year ended December 31, 2000, and is incorporated herein by reference.) 10.2 Management Agreement, dated as of April 1, 1997, between Continental Global Group, Inc. * and Nesco, Inc.

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. 21

CONTINENTAL GLOBAL GROUP INC 10-Q