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, 1998
Commission File No. 333-27665
CONTINENTAL GLOBAL GROUP, INC.
------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 31-1506889
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
CO-REGISTRANTS AND SUBSIDIARY GUARANTORS
Continental Conveyor & Equipment Company Delaware 34-1603197
Goodman Conveyor Company Delaware 34-1603196
Continental Conveyor & Equipment
Continental Global Group, Inc. Company
438 Industrial Drive 438 Industrial Drive
Winfield, Alabama 35594 Winfield, Alabama 35594
(205) 487-6492 (205) 487-6492
Goodman Conveyor Company
Route 178 South
Belton, South Carolina 29627
(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 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, 1998, there were 100 shares of the registrant's common stock
outstanding.
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INDEX
CONTINENTAL GLOBAL GROUP, INC.
Part I Financial Information Page Number
Item 1 Financial Statements (Unaudited)............................................1
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997....................................2
Condensed Consolidated Statements of Income
Three Months and Nine Months ended September 30, 1998 and 1997..............3
Condensed Consolidated Statements of Cash Flows
Nine Months ended September 30, 1998 and 1997...............................4
Notes to Condensed Consolidated Financial Statements.....................5-12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................13-17
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K...........................................18
Signature.............................................................................19
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
1
4
Continental Global Group, Inc.
Condensed Consolidated Balance Sheets
September 30 December 31
1998 1997
-------------------- --------------------
(Unaudited) (Audited)
ASSETS:
Current assets:
Cash and cash equivalents $ 29,544,245 $ 30,882,733
Accounts receivable, net 32,806,178 30,458,953
Inventories 31,606,707 27,572,559
Other current assets 1,311,057 1,198,425
-------------------- --------------------
Total current assets 95,268,187 90,112,670
Property, plant and equipment 23,382,680 19,530,408
Less accumulated depreciation 7,723,202 6,289,081
-------------------- --------------------
15,659,478 13,241,327
Goodwill, net 19,571,934 20,713,078
Deferred financing costs 4,419,169 4,809,097
Other assets 1,267,775 848,611
-------------------- --------------------
$ 136,186,543 $ 129,724,783
==================== ====================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Notes payable $ 5,611,734 $ 455,743
Trade accounts payable 20,329,290 18,874,057
Accrued compensation and employee benefits 5,563,160 6,030,950
Accrued interest on senior notes 6,600,000 3,300,000
Other accrued liabilities 7,192,895 7,166,645
Current maturities of long-term obligations 1,111,503 1,181,715
-------------------- --------------------
Total current liabilities 46,408,582 37,009,110
Senior notes 120,000,000 120,000,000
Other long-term obligations, less current maturities 7,859,523 8,688,529
Stockholder's equity:
Common stock, no par value, authorized 1,500 shares, issued and outstanding
100 shares at stated value of $5 per share
500 500
Paid-in capital 1,993,188 1,993,188
Accumulated deficit (36,497,613) (35,456,724)
Accumulated other comprehensive income (3,577,637) (2,509,820)
-------------------- --------------------
(38,081,562) (35,972,856)
-------------------- --------------------
$ 136,186,543 $ 129,724,783
==================== ====================
See notes to condensed consolidated financial statements.
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Continental Global Group, Inc.
Condensed Consolidated Statements of Operations
Three months ended September 30 Nine months ended September 30
1998 1997 1998 1997
------------------- -------------------- ------------------- --------------------
(Unaudited) (Unaudited)
Net sales $ 56,150,528 $ 52,969,560 $173,802,025 $ 150,482,473
Cost of products sold 46,662,822 41,846,711 143,563,426 120,621,062
------------------- -------------------- ------------------- --------------------
Gross profit 9,487,706 11,122,849 30,238,599 29,861,411
Operating expenses:
Selling and engineering 4,173,852 3,377,020 12,481,090 9,774,879
General and administrative 2,088,160 1,763,752 6,308,761 4,911,561
Management fee 299,186 193,270 869,538 1,296,262
Amortization expense 168,491 163,879 508,883 415,905
Restructuring charge 298,752 - 594,188 -
------------------- -------------------- ------------------- --------------------
Total operating expenses 7,028,441 5,497,921 20,762,460 16,398,607
------------------- -------------------- ------------------- --------------------
Operating income 2,459,265 5,624,928 9,476,139 13,462,804
Other expenses:
Interest expense, net 3,336,376 3,137,751 9,643,298 7,741,501
Miscellaneous, net 57,023 122,679 152,038 238,000
------------------- -------------------- ------------------- --------------------
Total other expenses 3,393,399 3,260,430 9,795,336 7,979,501
------------------- -------------------- ------------------- --------------------
Income (loss) before foreign
income taxes (934,134) 2,364,498 (319,137) 5,483,303
Foreign income taxes (benefit) (316,212) 328,642 (721,073) 167,046
------------------- -------------------- ------------------- --------------------
Net income (loss) $ (617,922) $ 2,035,856 $ 401,876 $ 5,316,257
=================== ==================== =================== ====================
See notes to condensed consolidated financial statements.
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Continental Global Group, Inc.
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30
1998 1997
--------------------- ----------------------
(Unaudited)
Operating activities:
Net income $ 401,876 $ 5,316,257
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for depreciation and amortization 2,432,152 1,984,568
Changes in operating assets and liabilities (1,361,478) 739,194
--------------------- ----------------------
Net cash provided by operating activities 1,472,550 8,040,019
Investing activities:
Purchases of property, plant, and equipment (net) (2,239,651) (1,140,703)
Purchase of BCE, net of notes to seller (7,189,125)
Purchase of Hewitt-Robins (12,908,366)
Purchase of Tufkon (697,673)
Purchase of Huwood (3,689,729) -
--------------------- ----------------------
Net cash used in investing activities (5,929,380) (21,935,867)
Financing activities:
Proceeds from issuance of senior notes 120,000,000
Deferred financing costs (5,108,474)
Net increase (decrease) in borrowings on notes payable
5,550,288 (11,862,060)
Proceeds from long-term obligations 345,085 4,702,324
Principal payments on long-term obligations (910,747) (17,917,838)
Distributions for income taxes (1,442,765) (2,405,906)
Payment to former shareholders of BCE (2,927,300)
Dividends (40,000,000)
--------------------- ----------------------
Net cash provided by financing activities 3,541,861 44,480,746
Effect of exchange rates on cash (423,519) (134,292)
--------------------- ----------------------
Increase (decrease) in cash and cash equivalents (1,338,488) 30,450,606
Cash and cash equivalents at beginning of period 30,882,733 1,022,033
--------------------- ----------------------
Cash and cash equivalents at end of period $ 29,544,245 $ 31,472,639
===================== ======================
See notes to condensed consolidated financial statements.
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Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1998
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, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes of Continental Global
Group, Inc. and subsidiaries for the year ended December 31, 1997, included in
the Form 10-K filed by the Company on March 27, 1998.
B. ACQUISITION
On August 6, 1998, the Company completed the purchase of assets and assumption
of liabilities constituting a majority of the operations of Huwood International
(Huwood), a U.K. belt conveyor business and a division of FKI, Plc. Huwood
generated revenues of approximately $13,800,000 for the fiscal year ended March
31, 1998. The purchase price for the net assets was approximately $4,998,000.
The purchase price allocation has been based upon preliminary estimates which
may be revised at a later date. The transaction was accounted for as a purchase
and accordingly, the results of operations since the date of acquisition have
been included in the condensed consolidated financial statements. The operations
of the Company's existing U.K. facilities will be merged with the Huwood
operations.(See Note F)
C. 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.
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D. ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income",
which establishes new rules for the reporting and display of comprehensive
income and its components. Statement 130 requires the Company's foreign currency
translation adjustments to be included in other comprehensive income and the
disclosure of total comprehensive income. The Company adopted Statement 130 in
the first quarter of 1998 with no impact on net income or stockholder's equity.
The components of comprehensive income for the three month and nine month
periods ended September 30, 1998 and 1997 are as follows:
Three months ended September 30 Nine months ended September 30
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------------
Net income (loss) $ (617,922) $ 2,035,856 $ 401,876 $ 5,316,257
Other comprehensive income:
Foreign currency translation
adjustment (384,116) (173,967) (1,067,817) (588,012)
---------------- ---------------- ---------------- ----------------
Comprehensive income (loss) $(1,002,038) $ 1,861,889 $ (665,941) $ 4,728,245
================ ================ ================ ================
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted in years
beginning after June 15, 1999. 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 does not
anticipate that the adoption of the new Statement will have a material effect on
earnings or the financial position of the Company.
E. 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 70% and 66% of
inventories at September 30, 1998 and December 31, 1997, respectively, is
determined using the last-in, first-out (LIFO) method with the remainder
determined using the first-in, first-out (FIFO) method. Had the FIFO method of
inventory (which approximates replacement cost) been used to cost all
inventories, inventories would have increased by approximately $2,167,000 and
$2,140,000 at September 30,1998 and December 31,1997, respectively.
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9
F. RESTRUCTURING CHARGE
The Company incurred a restructuring charge of approximately $594,000 in the
second and third quarters of 1998 related to its Australian subsidiary and the
consolidation of facilities in the United Kingdom following the acquisition of
Huwood. The Company has executed a plan to close a manufacturing facility in
Australia and merge its operations with other existing facilities. The charge
consists primarily of severance costs and relocation expenses. As of September
30, 1998, the Company has paid approximately $396,000 of these expenses. In
addition to the severance and relocation costs expensed to date, the Company
anticipates that an additional cost for relocation of $87,000 will be incurred
in the fourth quarter. These costs will be expensed as incurred. During the
third and fourth quarters, as a result of the acquisition of Huwood, the
Company's existing U.K. operations will be consolidated with the Huwood
operations. The Company estimates that the cost of consolidating the U.K
facilities will be approximately $500,000 of which approximately $141,000 was
incurred in the third quarter.
These costs are being expensed as incurred.
G. INCOME TAXES
The Company and its domestic subsidiaries have elected Subchapter S Corporation
Status for United States income tax purposes. Accordingly, the Company's United
States operations are not subject to income taxes as separate entities. The
Company's United States income is included in the income tax returns of the
stockholder. Under the terms of the Tax Payment Agreement with the stockholder,
the Company makes distributions to the stockholder for payment of income taxes.
The Company has subsidiaries located in Australia, the United Kingdom, and South
Africa, which are subject to income taxes in their respective countries. For the
nine months ended September 30, 1998 and 1997, the Company recorded foreign
income tax expense (benefit) of approximately $(721,000) and $167,000,
respectively, primarily related to its Australian subsidiary. Pre-tax income
(loss) attributable to foreign operations was approximately $(3,623,000) and
$69,000 for the nine month periods ended September 30, 1998 and 1997,
respectively.
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10
H. 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 only guarantors of the $120 million Series B Senior Notes. The guarantees
are full, unconditional, and joint and several. Separate financial statements of
these guarantor subsidiaries are not presented as management has determined that
they would not be material to investors.
The Company's foreign subsidiaries are not guarantors of the Series B Senior
Notes. Summarized consolidating balance sheets as of September 30, 1998 and
December 31, 1997 for the Company, the guarantor subsidiaries, and the
non-guarantor, foreign subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
--------------- --------------- --------------- -------------- ---------------
September 30, 1998:
Current assets:
Cash and cash equivalents $ 26,766 $ 2,457 $ 321 $ - $ 29,544
Accounts receivable, net 1,707 19,076 14,812 (2,789) 32,806
Inventories - 25,882 5,684 41 31,607
Other current assets 70 1,827 512 (1,098) 1,311
--------------- --------------- --------------- -------------- ---------------
Total current assets 28,543 49,242 21,329 (3,846) 95,268
Property, plant, and
equipment, net - 5,995 9,665 - 15,660
Goodwill - 12,001 7,571 - 19,572
Investment in subsidiaries 53,648 11,593 - (65,241) -
Deferred financing costs 4,419 - - - 4,419
Other assets 204 13,056 880 (12,872) 1,268
--------------- --------------- --------------- -------------- ---------------
Total assets $ 86,814 $ 91,887 $ 39,445 $ (81,959) $ 136,187
=============== =============== =============== ============== ===============
Current liabilities:
Notes payable $ - $ 1,707 $ 5,612 $ (1,707) $ 5,612
Trade accounts payable 377 13,714 10,080 (3,842) 20,329
Accrued compensation and
employee benefits - 4,401 - - 5,563
Accrued interest 6,600 - 1,162 - 6,600
Other accrued liabilities 179 3,983 3,031 - 7,193
Current maturities of
long-term obligations - 187 925 - 1,112
--------------- --------------- --------------- -------------- ---------------
Total current liabilities 7,156 23,992 20,810 (5,549) 46,409
Series B Senior Notes 120,000 - - - 120,000
Other long-term obligations - 5,440 10,466 (8,046) 7,860
Stockholder's equity (deficit) (40,342) 62,455 8,169 (68,364) (38,082)
--------------- --------------- --------------- -------------- ---------------
Total liabilities and
stockholder's equity $ 86,814 $ 91,887 $ 39,445 $ (81,959) $ 136,187
=============== =============== =============== ============== ===============
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H. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
--------------- --------------- --------------- -------------- ---------------
December 31, 1997:
Current assets:
Cash and cash equivalents $ 28,073 $ 2,322 $ 488 $ - $ 30,883
Accounts receivable, net - 19,299 11,731 (571) 30,459
Inventories - 23,625 3,948 - 27,573
Other current assets 47 633 1,671 (1,153) 1,198
--------------- --------------- --------------- -------------- ---------------
Total current assets 28,120 45,879 17,838 (1,724) 90,113
Property, plant, and
equipment, net - 6,028 7,213 - 13,241
Goodwill - 12,289 8,424 - 20,713
Investment in subsidiaries 49,958 7,903 - (57,861) -
Deferred financing costs 4,809 - - - 4,809
Other assets 232 11,591 504 (11,478) 849
--------------- --------------- --------------- -------------- ---------------
Total assets $ 83,119 $ 83,690 $ 33,979 $ (71,063) $ 129,725
=============== =============== =============== ============== ===============
Current liabilities:
Notes payable $ - $ - $ 456 $ - $ 456
Trade accounts payable - 12,731 8,221 (2,078) 18,874
Accrued compensation and
employee benefits - 4,756 1,275 - 6,031
Accrued interest 3,300 - - - 3,300
Other accrued liabilities 415 3,272 3,479 - 7,166
Current maturities of
long-term obligations - 185 997 - 1,182
--------------- --------------- --------------- -------------- ---------------
Total current liabilities 3,715 20,944 14,428 (2,078) 37,009
Series B Senior Notes 120,000 - - - 120,000
Other long-term obligations - 5,586 11,922 (8,819) 8,689
Stockholder's equity (deficit) (40,596) 57,160 7,629 (60,166) (35,973)
--------------- --------------- --------------- -------------- ---------------
Total liabilities and
stockholder's equity $ 83,119 $ 83,690 $ 33,979 $ (71,063) $ 129,725
=============== =============== =============== ============== ===============
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H. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Summarized consolidating income statements for the three months and nine months
ended September 30, 1998 and 1997, respectively, for the Company, the guarantor
subsidiaries, and the non-guarantor, foreign subsidiaries are as follows (in
thousands):
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Three months ended September 30, 1998:
Net sales $ - $ 40,188 $ 16,320 $ (357) $ 56,151
Cost of products sold - 32,233 14,787 (357) 46,663
------------------------------------------------------------------------
Gross profit - 7,955 1,533 - 9,488
Total operating expenses 103 4,133 2,793 - 7,029
------------------------------------------------------------------------
Operating income (loss) (103) 3,822 (1,260) - 2,459
Interest expense, net 3,073 (120) 383 - 3,336
Miscellaneous, net - 53 4 - 57
------------------------------------------------------------------------
Income (loss) before foreign income
taxes (3,176) 3,889 (1,647) - (934)
Foreign income taxes (benefit) - - (316) - (316)
------------------------------------------------------------------------
Net income (loss) $ (3,176) $ 3,889 $ (1,331) $ - $ (618)
========================================================================
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Three months ended September 30, 1997:
Net sales $ - $ 42,965 $ 10,811 $ (806) $ 52,970
Cost of products sold - 33,967 8,686 (806) 41,847
------------------------------------------------------------------------
Gross profit - 8,998 2,125 - 11,123
Total operating expenses 272 3,986 1,240 - 5,498
------------------------------------------------------------------------
Operating income (loss) (272) 5,012 885 - 5,625
Interest expense, net 3,155 (147) 130 - 3,138
Miscellaneous, net 23 72 28 - 123
------------------------------------------------------------------------
Income (loss) before foreign income (3,450) 5,087 727 - 2,364
taxes
Foreign income taxes - - 328 - 328
------------------------------------------------------------------------
Net income (loss) $ (3,450) $ 5,087 $ 399 $ - $ 2,036
========================================================================
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Nine months ended September 30, 1998:
Net sales $ - $ 127,191 $ 47,470 $ (859) $ 173,802
Cost of products sold - 102,301 42,121 (859) 143,563
------------------------------------------------------------------------
Gross profit - 24,890 5,349 - 30,239
Total operating expenses 454 12,430 7,879 - 20,763
------------------------------------------------------------------------
Operating income (loss) (454) 12,460 (2,530) - 9,476
Interest expense, net 9,013 (524) 1,154 - 9,643
Miscellaneous, net - 213 (61) - 152
------------------------------------------------------------------------
Income (loss) before foreign income (9,467) 12,771 (3,623) - (319)
taxes
Foreign income taxes (benefit) - (721) - (721)
------------------------------------------------------------------------
Net income (loss) $ (9,467) $ 12,771 $ (2,902) $ - $ 402
========================================================================
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H. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Nine months ended September 30, 1997:
Net sales $ - $ 125,805 $ 26,224 $ (1,547) $ 150,482
Cost of products sold - 100,351 21,817 (1,547) 120,621
------------------------------------------------------------------------
Gross profit - 25,454 4,407 - 29,861
Total operating expenses 367 12,153 3,878 - 16,398
------------------------------------------------------------------------
Operating income (loss) (367) 13,301 529 - 13,463
Interest expense, net 6,269 1,024 449 - 7,742
Miscellaneous, net 23 204 11 - 238
------------------------------------------------------------------------
Income (loss) before foreign income (6,659) 12,073 69 - 5,483
taxes
Foreign income taxes - - 167 - 167
------------------------------------------------------------------------
Net income (loss) $ (6,659) $ 12,073 $ (98) $ - $ 5,316
========================================================================
Summarized consolidating cash flow statements for the nine months ended
September 30, 1998 and 1997, respectively, for the Company, the guarantor
subsidiaries, and the non-guarantor, foreign subsidiaries are as follows (in
thousands):
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Nine months ended September 30, 1998:
Net cash provided by (used in)
operating activities $ (7,339) $ 10,500 $ (3,443) $ 1,755 $ 1,473
Investing activities:
Purchases of property, plant, and
equipment (net) - (763) (1,477) - (2,240)
Purchase of Huwood - - (3,690) - (3,690)
Investment in Subsidiaries (3,690) - 3,690 -
------------------------------------------------------------------------
Net cash used in investing activities (3,690) (763) (1,477) - (5,930)
Financing activities:
Net increase in borrowings on
notes payable - 1,707 5,550 (1,707) 5,550
Proceeds from long-term obligations - - 345 - 345
Principal payments on long-term
obligations - (144) (839) 73 (910)
Distributions for income taxes (178) (1,265) - - (1,443)
Distributions for interest on
senior notes 9,900 (9,900) - - -
------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 9,722 (9,602) 5,056 (1,634) 3,542
Effect of exchange rates on cash - - (303) (121) (424)
Increase (decrease) in cash and cash
equivalents (1,307) 135 (167) - (1,339)
Cash and cash equivalents at
beginning of period 28,073 2,322 488 - 30,883
------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 26,766 $ 2,457 $ 321 $ - $ 29,544
========================================================================
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H. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------------------------------------------------------------------
Nine months ended September 30, 1997:
Net cash provided by (used in)
operating activities $ (2,606) $ 13,249 $ (2,603) $ - $ 8,040
Investing activities:
Purchases of property, plant, and
equipment (net) - (1,124) (17) - (1,141)
Purchase of BCE, net of notes to - (7,189) - - (7,189)
seller
Purchase of Hewitt-Robins - (12,908) - - (12,908)
Purchase of Tufkon - (698) - - (698)
Investment in subsidiaries (49,567) 44,456 5,111 - -
------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (49,567) 22,537 5,094 - (21,936)
Financing activities:
Proceeds from issuance of senior 120,000 - - - 120,000
notes
Deferred financing costs (5,108) - - - (5,108)
Net decrease (increase) in
borrowings on notes payable - (12,204) 342 - (11,862)
Proceeds from long-term obligations - 4,471 231 - 4,702
Principal payments on long-term
obligations - (17,918) - - (17,918)
Distributions for income taxes 2,909 (5,315) - - (2,406)
Distributions for interest on 3,800 (3,800) - - -
senior notes
Payment to former shareholders of - - (2,927) - (2,927)
BCE
Dividends paid (40,000) - - - (40,000)
------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 81,601 (34,766) (2,354) - 44,481
Effect of exchange rates on cash - - (134) - (134)
------------------------------------------------------------------------
Increase in cash and cash equivalents 29,428 1,020 3 - 30,451
Cash and cash equivalents at
beginning of period - 1,020 2 - 1,022
------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 29,428 $ 2,040 $ 5 $ - $ 31,473
========================================================================
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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 27, 1998.
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 increased its
market share in 1997 through several acquisitions. In January 1997, the Company
consummated the acquisition of BCE Holdings Pty. Ltd. (BCE), a group of conveyor
and related equipment and service companies in Australia. On April 1, 1997, the
Company acquired Hewitt-Robins, a United States manufacturer of conveyor
components. On October 17, 1997, the Company completed the acquisition of the
MECO Belts Group (MECO) from Joy Technologies Inc., a subsidiary of
Harnischfeger Industries. MECO is an international conveyor equipment company
with operations in the United States, United Kingdom, South Africa, and
Australia. On August 6, 1998, the Company acquired Huwood in the United Kingdom,
which now establishes the Company as the leading manufacturer and supplier of
equipment for use in coal mining in the United Kingdom. The Company anticipates
that the consolidation of operations will allow it to realize approximately $2.0
million annually in cost savings from the previous combined companies' operating
expenses. The majority of these savings will result from staff reductions and
reductions in facilities costs beginning in the fourth quarter of 1998. To
accomplish these cost savings, the Company estimates there will be $0.5 million
in restructuring charges from severance and consolidation of facilities
commencing in the third quarter of 1998. Delays in the integration of existing
U.K. operations with Huwood may result in delayed or reduced cost savings.
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 and nine month periods
ended September 30, 1998 and 1997.
Three months ended September 30 Nine months ended September 30
(000's) (000's)
-------------------------------------------------------------------------------------
1998 1997 1998 1997
Net sales $56,151 100.0% $ 52,970 100.0% $173,802 100.0% $ 150,482 100.0%
Cost of products sold 46,663 83.1 41,847 79.0 143,563 82.6 120,621 80.2
Gross profit 9,488 16.9 11,123 21.0 30,239 17.4 29,861 19.8
SG&A expenses 6,263 11.2 5,141 9.7 18,790 10.8 14,686 9.7
Management fee 299 0.5 193 0.4 870 0.5 1,296 0.9
Amortization expense 168 0.3 164 0.3 509 0.3 416 0.3
Restructuring charge 299 0.5 - - 594 0.3 - -
Operating income $ 2,459 4.4 $ 5,625 10.6 9,476 5.5 $ 13,463 8.9
Three months ended September 30, 1998, compared to three months ended September
30, 1997:
Net Sales
- ---------
Net sales increased $3.2 million, or 6.0%, from $53.0 million in 1997 to $56.2
million in 1998. Net sales in the company's domestic operations decreased $2.3
million primarily due to reduced sales in
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the mining conveyor equipment business and the Company's foreign subsidiaries
increased net sales by $5.5 million primarily from the Company's MECO and Huwood
acquisitions.
Gross Profit
- ------------
Gross profit decreased $1.6 million, or 14.7%, from $11.1 million in 1997 to
$9.5 million in 1998. Gross profit decreased $1.0 million due to a decrease in
sales volume and a change in product mix in the Company's domestic operations.
Gross profit in the Company's foreign operations decreased $0.6 million due to
higher costs on completed contracts in the Australian operations.
SG&A Expenses
- -------------
Selling, engineering, general and administrative expenses, which do not include
management fees (SG&A expenses), increased $1.1 million, or 21.8%, from $5.2
million in 1997 to $6.3 million in 1998. The MECO and Huwood acquisitions
increased engineering, administrative, sales, and marketing cost $1.4 million
while the SG&A expenses in the Company's other business decreased $0.3 million.
Operating Income
- ----------------
Operating income decreased $3.1 million, or 56.3%, from $5.6 million in 1997 to
$2.5 million in 1998. The decrease is the result of the $1.6 million decrease in
gross profit together with the increase in SG&A expenses of $1.1 million, the
1998 restructuring charge of $0.3 million and the increased management fee of
$0.1 million. The restructuring charge relates to the Company's decision to
close a manufacturing facility at its Australian subsidiary and merge its
operations with other existing facilities and the consolidation of the Company's
operations in the United Kingdom as a result of the acquisition of Huwood.
Nine months ended September 30, 1998, compared to nine months ended September
30, 1997:
Net Sales
- ---------
Net sales increased $23.3 million, or 15.5%, from $150.5 million in 1997 to
$173.8 million in 1998. The sales increase was due to additional contracts
received by the Company's BCE Australian operation for $4.3 million and sales of
$4.0 million from the acquisition of Hewitt-Robins, and $24.2 million from the
acquisitions of MECO and Huwood. This increase was partially offset by a sales
decease of $9.2 million in the Company's domestic conveyor equipment business
due to spending reductions by certain key customers on project business.
Gross Profit
- ------------
Gross profit increased $0.4 million, or 1.3%, from $29.8 million in 1997 to
$30.2 million in 1998. The acquisitions of Hewitt-Robins, MECO and Huwood
increased gross profit $5.0 million. Gross profit in the Company's other
conveyor equipment business decreased by $4.6 million due to a decrease in sales
volume by certain key customers and higher cost on contracts period to period on
the Company's Australian operation. Consolidated gross profit margins decreased
from 19.8% in 1997 to 17.4% in 1998, primarily due to the decreased sales
volume, change in product mix and reduced margins on contracts in the Company's
Australian operations.
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SG&A Expenses
- -------------
SG&A expense increased $4.1 million, or 27.9% from $14.7 million in 1997 to
$18.8 million in 1998. The acquisitions of Hewitt-Robins, MECO and Huwood
accounted for $4.0 million of this increase and the balance of $0.1 million is
from the Company's other operations.
Operating Income
- ----------------
Operating income decreased $4.0 million, or 29.6%, from $13.5 million in 1997 to
$9.5 million in 1998. The decrease is the result of $0.4 million increase in
gross profit offset by the increase in SG&A expenses of $4.1 million, increased
amortization expense of $0.1 million, along with a decrease in management fees
of $0.4 million and the 1998 restructuring charge of $0.6 million. The decrease
in management fees resulted from a limitation on payment of such fees under the
management agreement that became effective April 1, 1997.
Backlog
- -------
Backlog at September 30, 1998 was $80.5 million, an increase of $23.8 million,
or 42%, from $56.7 million at December 31, 1997. The increase is attributable to
increased orders in the mining conveyor equipment business area. Management
believes that approximately 70% of the backlog will be shipped in 1998.
Although there can be no guarantee of future forecasts and prospects, based on
the strength of the Company's 1998 shippable backlog, cost savings from
restructuring its Australian operations and United Kingdom operations through
the acquisition of Huwood International, the Company believes, based on current
forecasts, that net sales and operating income for the second half of 1998 will
be increased over the first half of 1998. The Company believes the fourth
quarter will be higher in both sales and operating income than the previous
quarters of 1998.
The Company's ability to achieve 1998 balance of year sales and operating income
forecasts can be effected by delays in shipment of vendor items, customer
directed changes, and other engineering and production interruptions.
IMPACT OF YEAR 2000
As the Year 2000 approaches, the Company is aware of the issues associated with
the programming code in older computer systems. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. A company-wide taskforce is reviewing all systems to ensure that they
do not malfunction as a result of the Year 2000 and the Company is utilizing
both internal and external resources to identify, correct or reprogram, and test
the systems for the Year 2000 compliance. The Company is in the process of
replacing some systems and upgrading others. While the current cost of this
effort is still being evaluated, the Company does not expect the cost to be
material.
The Company expects to complete its Year 2000 activities within a timeframe that
will enable its information systems to function without significant disruption
in Year 2000. In addition, the Company is in the process of obtaining assurances
from third parties that are critical to its business, such as customers and
vendors, regarding their Year 2000 compliance. If assurances are not received
from critical vendors regarding their Year 2000 compliance, the Company will
seek alternative sources. Failure of the Company or such third parties to
achieve Year 2000 compliance
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can result in disruption of the Company's operations that could have a material
adverse effect on the Company's financial condition or results of operations.
UNREALIZED FOREIGN CURRENCY LOSSES
The Company conducts a significant portion of its business outside the United
States in the domestic currency of Australia, the United Kingdom and South
Africa. The Company had unrealized foreign currency translation losses of $3.6
million as of September 30, 1998 due to an unfavorable change in foreign
exchange rates compared to $0.5 million for the corresponding date in 1997. The
unrealized currency translation loss results primarily from investments in the
Company's Australian operations. The financial condition of the Company may be
materially affected in future by fluctuations of the foreign currencies in which
the Company conducts its business.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.5 million and $8.0 million for
the nine months ending September 30, 1998 and 1997, respectively. Net cash
provided by operating activities in 1998 resulted primarily from net income of
$0.4 million, depreciation and amortization of $2.4 million offset by an
increase in other operating assets and liabilities of $1.3 million. Net cash
provided by operating activities in 1997 resulted primarily from net income of
$5.3 million, depreciation and amortization of $2.0 million together with a
decrease in other operating assets and liabilities of $0.7 million.
Net cash used in investing activities was $5.9 million and $21.9 million for the
nine months ending September 30, 1998 and 1997, respectively. The significant
difference between 1998 and 1997 is due to the 1997 acquisitions of BCE for $7.2
million and Hewitt-Robins for $12.9 million. During 1998, the Company used $3.7
million in the acquisition of Huwood and increased the purchases of property,
plant, and equipment over 1997 by $1.1 million.
Net cash provided by financing activities was $3.5 million and $44.5 million for
the nine months ending September 30, 1998 and 1997, respectively. Net cash
provided by financing activities in 1998 represents increases in borrowings on
notes payable of $5.6 million and proceeds from long-term obligations of $0.3
million, offset by payments of long-term obligations of $0.9 million. The
Company made distributions to NES Group, Inc. of $1.4 million in 1998 for the
payment of income taxes.
Net cash provided by financing activities in 1997 is the result of the issuance
of $120.0 million of senior notes and proceeds from long-term obligations of
$4.7 million. At the time of the $120.0 million debt offering, the Company paid
dividends to its sole stockholder in the amount of $40.0 million and paid
financing fees in the amount of $5.1 million. In connection with the BCE
acquisition, $2.9 million was paid to former shareholders of BCE. The Company
reduced its borrowings on notes payable and long-term obligations by $11.9
million and $17.9 million, respectively. The Company made distributions to NES
Group, Inc. of $2.4 million in 1997 for the payment of income taxes.
The Company's primary capital requirements consist of capital expenditures and
debt service. The Company expects current financial resources and funds from
continuing operations to be adequate to meet current cash requirements. At
September 30, 1998, the Company had cash and cash equivalents of $29.5 million
and an unused credit facility of $27.3 million available for use.
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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 include, without limitation, statements
regarding the Company's Year 2000 compliance program and future prospects of the
business. 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.
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See index of exhibits
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998
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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 __, 1998
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CONTINENTAL GLOBAL GROUP, INC.
FORM 10-Q
INDEX OF EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
3.1 Certificate of Incorporation of Continental Global Group, Inc., as currently in effect *
3.2 By-Laws of Continental Global Group, Inc., as currently in effect *
3.3 Certificate of Incorporation of Continental Conveyor & Equipment Company, as currently *
in effect
3.4 By-Laws of Continental Conveyor & Equipment Company, as currently in effect *
3.5 Certificate of Incorporation of Goodman Conveyor Company, as currently in effect *
3.6 By-Laws of Goodman Conveyor Company, as currently in effect *
4.1 Indenture, dated as of April 1, 1997, among Continental Global *
Group, Inc., Continental Conveyor & Equipment Company, Goodman
Conveyor Company, and the Trustee (containing, as exhibits,
specimens of the Series A Notes and the Series B Notes)
10.1 Revolving Credit Facility, dated as of September 14, 1992, as *
amended by Amendment I, II, and III, among Continental Conveyor &
Equipment Company, Goodman Conveyor Company, and Bank One,
Cleveland, NA
10.2 Share Sale Agreement dated as of November 8, 1996, as amended by First and Second *
Supplementary Deeds, among Continental Pty. Ltd. and various Australian sellers,
relating to the BCE acquisition
10.3 Asset Purchase Agreement, dated as of March 3, 1997, among Continental Conveyor & *
Equipment Company, Process Technology Holdings, Inc., and W.S. Tyler Incorporated,
relating to the Hewitt-Robins acquisition
10.4 Management Agreement, dated as of April 1, 1997, between Continental Global Group, Inc. *
and Nesco, Inc.
10.5 Tax Payment Agreement, dated as of April 1, 1997, among Continental
Global Group, Inc., Continental Conveyor & Equipment Company,
Goodman Conveyor Company, and NES Group, Inc. *
10.6 World Wide Purchase and Sale Agreement dated as of October 17, **
1997, by and among Continental Conveyor International Inc., Joy
Technologies, Inc., and certain affiliates of Joy Technologies Inc.
(The "Purchase Agreement"). (All exhibits to the Purchase Agreement
have been omitted, and Registrant will furnish supplementally to
the Commission, upon request, a copy of any omitted exhibit.)
27 Financial Data Schedule (filed electronically only)
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed
under the Securities Act of 1933, as amended.
** Incorporated by reference from Form 8-K filed November 3, 1997, under the
Securities Exchange Act of 1934, as amended.