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 June 30, 1999
Commission File No. 333-27665
CONTINENTAL GLOBAL GROUP, INC.
------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 31-1506889
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
CO-REGISTRANTS AND SUBSIDIARY GUARANTORS
Continental Conveyor & Equipment Company Delaware 34-1603197
Goodman Conveyor Company Delaware 34-1603196
Continental Conveyor &
Continental Global Group, Inc. Equipment Company Goodman Conveyor Company
438 Industrial Drive 438 Industrial Drive Route 178 South
Winfield, Alabama 35594 Winfield, Alabama 35594 Belton, South Carolina 29627
(205) 487-6492 (205) 487-6492 (864) 338-7793
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
As of July 31, 1999, there were 100 shares of the registrant's common stock
outstanding.
2
INDEX
CONTINENTAL GLOBAL GROUP, INC.
Page
Part I Financial Information Number
Item 1 Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Income
Three Months and Six Months ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5-13
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-18
Item 3 Quantitative and Qualitative Disclosures about Market Risk 19
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 21
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
1
4
Continental Global Group, Inc.
Condensed Consolidated Balance Sheets
June 30 December 31
1999 1998
------------- -------------
(Unaudited) (Audited)
ASSETS:
Current assets:
Cash and cash equivalents $ 20,110,157 $ 26,350,700
Accounts receivable, net 32,207,347 44,423,640
Inventories 29,673,284 32,249,917
Other current assets 1,294,894 2,273,333
------------- -------------
Total current assets 83,285,682 105,297,590
Property, plant and equipment 26,768,340 23,815,213
Less accumulated depreciation 9,401,095 8,048,953
------------- -------------
17,367,245 15,766,260
Goodwill, net 20,067,393 19,669,858
Deferred financing costs 4,029,243 4,289,194
Other assets 790,959 734,389
------------- -------------
$ 125,540,522 $ 145,757,291
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Notes payable $ 4,601,245 $ 2,661,508
Trade accounts payable 24,736,324 40,522,707
Accrued compensation and employee benefits 4,975,940 5,342,206
Accrued interest on senior notes 3,300,000 3,300,000
Other accrued liabilities 4,453,870 8,115,497
Current maturities of long-term obligations 1,172,303 1,095,106
------------- -------------
Total current liabilities 43,239,682 61,037,024
Senior notes 120,000,000 120,000,000
Other long-term obligations, less current maturities 3,522,723 2,226,461
Stockholder's equity (deficit):
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 (40,638,539) (36,203,815)
Accumulated other comprehensive loss (2,577,032) (3,296,067)
------------- -------------
(41,221,883) (37,506,194)
------------- -------------
$ 125,540,522 $ 145,757,291
============= =============
See notes to condensed consolidated financial statements.
2
5
Continental Global Group, Inc.
Condensed Consolidated Statements of Income
Three months ended June 30 Six months ended June 30
1999 1998 1999 1998
------------------------------ ------------------------------
(Unaudited) (Unaudited)
Net sales $ 50,814,569 $ 60,560,222 $ 115,534,373 $ 117,651,497
Cost of products sold 43,653,548 50,311,937 99,026,562 96,900,604
------------------------------ ------------------------------
Gross profit 7,161,021 10,248,285 16,507,811 20,750,893
Operating expenses:
Selling and engineering 3,988,029 4,263,081 8,009,424 8,307,238
General and administrative 2,474,602 2,246,292 4,791,118 4,220,601
Management fee (98,176) 280,019 235,016 570,352
Amortization expense 155,162 169,017 308,708 340,392
Restructuring charges 253,518 295,436 444,988 295,436
------------------------------ ------------------------------
Total operating expenses 6,773,135 7,253,845 13,789,254 13,734,019
------------------------------ ------------------------------
Operating income 387,886 2,994,440 2,718,557 7,016,874
Other expenses:
Interest expense 3,687,012 3,573,597 7,345,706 7,256,472
Interest income (186,486) (508,802) (444,816) (949,550)
Miscellaneous, net 46,590 118,904 109,034 95,015
------------------------------ ------------------------------
Total other expenses 3,547,116 3,183,699 7,009,924 6,401,937
------------------------------ ------------------------------
Income (loss) before foreign
income taxes (3,159,230) (189,259) (4,291,367) 614,937
Foreign income tax benefit -- 271,885 -- 404,861
------------------------------ ------------------------------
Net income (loss) $ (3,159,230) $ 82,626 $ (4,291,367) $ 1,019,798
============================== ==============================
See notes to condensed consolidated financial statements.
3
6
Continental Global Group, Inc.
Condensed Consolidated Statements of Cash Flows
Six months ended June 30
1999 1998
----------------------------
(Unaudited)
Operating activities:
Net income (loss) $ (4,291,367) $ 1,019,798
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision for depreciation and amortization 1,746,742 1,571,520
Amortization of deferred financing costs 259,951 259,953
Gain on disposal of assets (81,417) (88,275)
Changes in operating assets and liabilities (3,217,973) (9,177,491)
------------ ------------
Net cash used in operating activities (5,584,064) (6,414,495)
------------ ------------
Investing activities:
Purchases of property, plant, and equipment (2,834,896) (1,550,099)
Proceeds from sale of property, plant, and equipment 237,744 141,600
------------ ------------
Net cash used in investing activities (2,597,152) (1,408,499)
------------ ------------
Financing activities:
Net increase in borrowings on notes payable 1,995,266 5,562,017
Proceeds from long-term obligations 1,600,000 358,497
Principal payments on long-term obligations (502,360) (584,467)
Distributions for income taxes (1,426,199) (1,125,599)
------------ ------------
Net cash provided by financing activities 1,666,707 4,210,448
Effect of exchange rate changes on cash 273,966 (307,289)
------------ ------------
Decrease in cash and cash equivalents (6,240,543) (3,919,835)
Cash and cash equivalents at beginning of period 26,350,700 30,882,733
------------ ------------
Cash and cash equivalents at end of period $ 20,110,157 $ 26,962,898
============ ============
See notes to condensed consolidated financial statements.
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Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1999
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 six month periods ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes of Continental Global Group,
Inc. and subsidiaries for the year ended December 31, 1998, included in the Form
10-K filed by the Company on March 31, 1999.
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 61% and 58% of
inventories at June 30, 1999 and December 31, 1998, 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 $2,101,000 and $2,103,000 at June 30, 1999
and December 31, 1998, respectively.
D. FINANCING ARRANGEMENTS
During the second quarter of 1999, the Company's United States operations
purchased a manufacturing facility previously leased in Colorado for $1,600,000.
The purchase was financed through a term note bearing an interest rate of
7.445%.
In July 1999, the Company's Australian subsidiary renegotiated its revolving
credit facility. The new agreement provides for a term loan of approximately
$4.5 million (Australian dollars). These proceeds were used to pay the
outstanding balance of the BCE seller notes and for working capital.
5
8
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1999
E. RESTRUCTURING CHARGES
The Company incurred restructuring charges of approximately $445,000 in the
first six months of 1999 related to plans executed in 1998 to close a
manufacturing facility in Australia and merge its operations with other existing
facilities and to consolidate its facilities in the United Kingdom following the
acquisition of Huwood International (Huwood). The charges consist primarily of
severance and relocation costs. To date, the Company has incurred and paid total
restructuring charges of approximately $1,572,000 related to these plans. In
addition to the severance and relocation costs expensed to date, the Company
anticipates that an additional cost associated with the restructuring of
approximately $315,000 will be incurred in the remainder of 1999. These costs
will be expensed as incurred.
F. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three and six month
periods ended June 30, 1999 and 1998 are as follows:
Three months ended June 30 Six months ended June 30
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net income (loss) $(3,159,230) $ 82,626 $(4,291,367) $ 1,019,798
Other comprehensive income:
Foreign currency translation
adjustment 476,683 (954,582) 719,035 (683,701)
----------- ----------- ----------- -----------
Comprehensive income (loss) $(2,682,547) $ (871,956) $(3,572,332) $ 336,097
=========== =========== =========== ===========
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.
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9
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1999
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
mobile home 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 mobile home products business manufactures and/or refurbishes axle
components sold directly to mobile home manufacturers. As part of this segment
the Company also sells mounted tires and rims to the mobile home industry.
Included in the other category is primarily the manufacture and sale of air
filtration equipment for use in enclosed environments, principally in the
textile industry. The manufacturing requirements for these products are
generally compatible with conveyor equipment production and thus maximize
utilization of the Company's manufacturing facilities for its primary products.
Three months ended June 30 Six months ended June 30
1999 1998 1999 1998
----------------------------------------------------
(in thousands) (in thousands)
Net sales:
Conveyor equipment $ 42,072 $ 50,596 $ 97,420 $ 98,435
Mobile home products 8,053 9,255 16,923 17,873
Other 690 709 1,191 1,343
--------- --------- --------- ---------
Total net sales $ 50,815 $ 60,560 $ 115,534 $ 117,651
========= ========= ========= =========
Segment operating income:
Conveyor equipment $ 882 $ 3,674 $ 3,846 $ 7,999
Mobile home products (21) 257 113 422
Other (1) 54 6 129
--------- --------- --------- ---------
Total segment operating income 860 3,985 3,965 8,550
Management fee (98) 280 235 570
Amortization expense 155 169 309 340
Restructuring charges 254 295 445 295
Corporate expense 161 247 257 328
--------- --------- --------- ---------
Total operating income 388 2,994 2,719 7,017
Interest expense 3,687 3,574 7,346 7,256
Interest income (187) (509) (445) (949)
Miscellaneous, net 47 118 109 95
--------- --------- --------- ---------
Income (loss) before foreign income taxes $ (3,159) $ (189) $ (4,291) $ 615
========= ========= ========= =========
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10
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1999
I. 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 June 30, 1999 and December
31, 1998 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
----------- ------------ ------------- ------------ ---------
June 30, 1999:
Current assets:
Cash and cash equivalents $ 19,054 $ 975 $ 81 $ -- $ 20,110
Accounts receivable, net (15) 16,008 17,891 (1,676) 32,208
Inventories -- 23,586 6,087 -- 29,673
Other current assets 105 1,232 3,644 (3,686) 1,295
--------- --------- --------- --------- ---------
Total current assets 19,144 41,801 27,703 (5,362) 83,286
Property, plant, and equipment,
net -- 8,275 9,092 -- 17,367
Goodwill, net -- 11,765 8,302 -- 20,067
Investment in subsidiaries 60,009 12,993 3,406 (76,408) --
Deferred financing costs 4,029 -- -- -- 4,029
Other assets 167 14,755 566 (14,697) 791
--------- --------- --------- --------- ---------
Total assets $ 83,349 $ 89,589 $ 49,069 $ (96,467) $ 125,540
========= ========= ========= ========= =========
Current liabilities:
Notes payable $ -- $ 1,523 $ 3,078 $ -- $ 4,601
Trade accounts payable 389 9,616 20,880 (6,149) 24,736
Accrued compensation and
employee benefits -- 3,744 1,232 -- 4,976
Accrued interest 3,300 -- -- -- 3,300
Other accrued liabilities 119 2,740 1,595 -- 4,454
Current maturities of long-
term obligations -- 192 980 -- 1,172
--------- --------- --------- --------- ---------
Total current liabilities 3,808 17,815 27,765 (6,149) 43,239
Series B Senior Notes 120,000 -- -- -- 120,000
Other long-term obligations -- 1,703 14,082 (12,262) 3,523
Stockholder's equity (deficit) (40,459) 70,071 7,222 (78,056) (41,222)
--------- --------- --------- --------- ---------
Total liabilities and
stockholder's equity (deficit) $ 83,349 $ 89,589 $ 49,069 $ (96,467) $ 125,540
========= ========= ========= ========= =========
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11
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1999
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ -------------- ------------ ---------
December 31, 1998:
Current assets:
Cash and cash equivalents $ 19,969 $ 684 $ 5,698 $ -- $ 26,351
Accounts receivable, net 292 20,556 25,593 (2,017) 44,424
Inventories -- 24,869 7,381 -- 32,250
Other current assets 38 1,782 4,682 (4,229) 2,273
--------- --------- --------- --------- ---------
Total current assets 20,299 47,891 43,354 (6,246) 105,298
Property, plant, and equipment,
net -- 6,109 9,657 -- 15,766
Goodwill, net -- 11,921 7,749 -- 19,670
Investment in subsidiaries 58,709 11,892 2,697 (73,298) --
Deferred financing costs 4,289 -- -- -- 4,289
Other assets 192 12,895 476 (12,829) 734
--------- --------- --------- --------- ---------
Total assets $ 83,489 $ 90,708 $ 63,933 $ (92,373) $ 145,757
========= ========= ========= ========= =========
Current liabilities:
Notes payable $ -- $ 307 $ 2,662 $ (307) $ 2,662
Trade accounts payable 409 13,079 30,971 (3,936) 40,523
Accrued compensation and
employee benefits -- 4,128 1,214 -- 5,342
Accrued interest 3,300 -- -- -- 3,300
Other accrued liabilities 171 4,675 3,297 (28) 8,115
Current maturities of long-
term obligations -- 147 948 -- 1,095
--------- --------- --------- --------- ---------
Total current liabilities 3,880 22,336 39,092 (4,271) 61,037
Series B Senior Notes 120,000 -- -- -- 120,000
Other long-term obligations -- 194 14,062 (12,030) 2,226
Stockholder's equity (deficit) (40,391) 68,178 10,779 (76,072) (37,506)
--------- --------- --------- --------- ---------
Total liabilities and
stockholder's equity (deficit) $ 83,489 $ 90,708 $ 63,933 $ (92,373) $ 145,757
========= ========= ========= ========= =========
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Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1999
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Summarized consolidating income statements for the three months and six months
ended June 30, 1999 and 1998, respectively, for the Company, the guarantor
subsidiaries, and the non-guarantor, foreign subsidiaries are as follows (in
thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ --------
Three months ended June 30, 1999:
Net sales $ -- $ 35,400 $ 15,498 $ (83) $ 50,815
Cost of products sold -- 28,715 15,022 (83) 43,654
-------- -------- -------- -------- --------
Gross profit -- 6,685 476 -- 7,161
Total operating expenses 174 3,911 2,688 -- 6,773
-------- -------- -------- -------- --------
Operating income (loss) (174) 2,774 (2,212) -- 388
Interest expense 3,445 90 152 -- 3,687
Interest income (187) -- -- -- (187)
Miscellaneous, net -- 27 20 -- 47
-------- -------- -------- -------- --------
Income (loss) before foreign income
taxes (3,432) 2,657 (2,384) -- (3,159)
Foreign income taxes -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ (3,432) $ 2,657 $ (2,384) $ -- $ (3,159)
======== ======== ======== ======== ========
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ --------
Three months ended June 30, 1998:
Net sales $ -- $ 43,901 $ 16,788 $ (129) $ 60,560
Cost of products sold -- 35,431 15,010 (129) 50,312
-------- -------- -------- -------- --------
Gross profit -- 8,470 1,778 -- 10,248
Total operating expenses 258 4,256 2,740 -- 7,254
-------- -------- -------- -------- --------
Operating income (loss) (258) 4,214 (962) -- 2,994
Interest expense 3,445 (265) 394 -- 3,574
Interest income (509) -- -- -- (509)
Miscellaneous, net 141 78 (101) -- 118
-------- -------- -------- -------- --------
Income (loss) before foreign income
taxes (3,335) 4,401 (1,255) -- (189)
Foreign income taxes -- -- (272) -- (272)
-------- -------- -------- -------- --------
Net income (loss) $ (3,335) $ 4,401 $ (983) $ -- $ 83
======== ======== ======== ======== ========
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Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1999
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ --------
Six months ended June 30, 1999:
Net sales $ -- $ 77,330 $ 38,401 $ (197) $ 115,534
Cost of products sold -- 61,609 37,614 (197) 99,026
--------- --------- --------- --------- ---------
Gross profit -- 15,721 787 -- 16,508
Total operating expenses 278 8,223 5,288 -- 13,789
--------- --------- --------- --------- ---------
Operating income (loss) (278) 7,498 (4,501) -- 2,719
Interest expense 6,887 29 430 -- 7,346
Interest income (445) -- -- -- (445)
Miscellaneous, net -- 80 29 -- 109
--------- --------- --------- --------- ---------
Income (loss) before foreign income
taxes (6,720) 7,389 (4,960) -- (4,291)
Foreign income taxes -- -- -- -- --
========= ========= ========= ========= =========
Net income (loss) $ (6,720) $ 7,389 $ (4,960) $ -- $ (4,291)
========= ========= ========= ========= =========
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ --------
Six months ended June 30, 1998:
Net sales $ -- $ 87,003 $ 31,150 $ (502) $ 117,651
Cost of products sold -- 70,068 27,334 (502) 96,900
--------- --------- --------- --------- ---------
Gross profit -- 16,935 3,816 -- 20,751
Total operating expenses 351 8,297 5,086 -- 13,734
--------- --------- --------- --------- ---------
Operating income (loss) (351) 8,638 (1,270) -- 7,017
Interest expense 6,889 (404) 771 -- 7,256
Interest income (949) -- -- -- (949)
Miscellaneous, net -- 160 (65) -- 95
--------- --------- --------- --------- ---------
Income (loss) before foreign income
taxes (6,291) 8,882 (1,976) -- 615
Foreign income taxes -- -- (405) -- (405)
========= ========= ========= ========= =========
Net income (loss) $ (6,291) $ 8,882 $ (1,571) $ -- $ 1,020
========= ========= ========= ========= =========
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Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1999
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Summarized consolidating cash flow statements for the six months ended June 30,
1999 and 1998, respectively, for the Company, the guarantor subsidiaries, and
the non-guarantor, foreign subsidiaries are as follows (in thousands):
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ --------
Six months ended June 30, 1999:
Net cash provided by (used in)
operating activities $ (6,215) $ 9,931 $ (7,013) $ (2,287) $ (5,584)
Investing activities:
Purchases of property, plant, and
equipment -- (2,767) (68) -- (2,835)
Proceeds from sale of property,
plant, and equipment -- 23 215 -- 238
Investment in subsidiaries (1,300) -- 1,300 -- --
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities (1,300) (2,744) 1,447 -- (2,597)
-------- -------- -------- -------- --------
Financing activities:
Net increase in borrowings on notes
payable -- 1,216 472 307 1,995
Proceeds from long-term
obligations -- 1,600 -- -- 1,600
Principal payments on long-term
obligations -- (47) (455) -- (502)
Distributions for income taxes -- (1,426) -- -- (1,426)
Distributions for interest on senior
notes 6,600 (6,600) -- -- --
Intercompany loan activity -- (1,639) (322) 1,961 --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 6,600 (6,896) (305) 2,268 1,667
Effect of exchange rate changes on
cash -- -- 254 19 273
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents (915) 291 (5,617) -- (6241)
Cash and cash equivalents at
beginning of period 19,969 684 5,698 -- 26,351
======== ======== ======== ======== ========
Cash and cash equivalents at end of
period $ 19,054 $ 975 $ 81 $ -- $ 20,110
======== ======== ======== ======== ========
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Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1999
I. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Combined Combined
The Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Total
-------- ------------ ------------- ------------ --------
Six months ended June 30, 1998:
Net cash provided by (used in)
operating activities $ (8,476) $ 4,149 $ (4,681) $ 2,594 $ (6,414)
Investing activities:
Purchases of property, plant, and
equipment -- (508) (1,042) -- (1,550)
Proceeds from sale of property,
plant, and equipment -- 5 136 -- 141
-------- -------- -------- -------- --------
Net cash used in investing
activities -- (503) (906) -- (1,409)
-------- -------- -------- -------- --------
Financing activities:
Net increase in borrowings on notes
payable -- 2,493 5,562 (2,493) 5,562
Proceeds from long-term
obligations -- -- 358 -- 358
Principal payments on long-term
obligations -- (58) (526) -- (584)
Distributions for income taxes (124) (1,002) -- -- (1,126)
Distributions for interest on senior
notes 6,575 (6,575) -- -- --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities 6,451 (5,142) 5,394 (2,493) 4,210
Effect of exchange rate changes on
cash -- -- (206) (101) (307)
-------- -------- -------- -------- --------
Decrease in cash and cash (2,025) (1,496) (399) -- (3,920)
equivalents
Cash and cash equivalents at
beginning of period 28,073 2,322 488 -- 30,883
======== ======== ======== ======== ========
Cash and cash equivalents at end of
period $ 26,048 $ 826 $ 89 $ -- $ 26,963
======== ======== ======== ======== ========
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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 29, 1999.
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. 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 International (Huwood)
in the United Kingdom, which now establishes the Company as the leading
manufacturer and supplier of conveyor equipment for use in coal mining in the
United Kingdom.
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 six month periods
ended June 30, 1999 and 1998.
Three months ended Six months ended
June 30 June 30
---------------------------------------------
1999 1998 1999 1998
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 85.9 83.1 85.7 82.4
Gross profit 14.1 16.9 14.3 17.6
SG&A expenses 12.7 10.7 11.1 10.6
Management fee (0.2) 0.5 0.2 0.5
Amortization expense 0.3 0.3 0.3 0.3
Restructuring charges 0.5 0.5 0.4 0.2
Operating income 0.8 4.9 2.3 6.0
Three months ended June 30, 1999, compared to three months ended June 30, 1998:
Net Sales
- ---------
Net sales for the quarter decreased by $9.7 million, or 16%, from $60.5 million
in 1998 to $50.8 million in 1999. Net sales in the conveyor equipment segment
decreased by $8.5 million and net sales in the mobile home products segment
decreased by $1.2 million. The decrease in the conveyor equipment segment
primarily resulted from a decrease in domestic conveyor sales of $7.2 million
and a decrease in net sales at the Australian subsidiary of $4.1 million,
partially offset by an increase in net sales at the United Kingdom subsidiary of
$2.7 million. The decrease in domestic conveyor sales is the result of reduced
capital purchases in the coal industry. The decrease in sales in Australia is
due to the completion of major projects in the first quarter of 1999 that
started in the second quarter of 1998. The increase in sales in the United
Kingdom is primarily the result of the
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August 1998 acquisition of Huwood. The decrease in sales in the mobile home
products segment is attributable to softness in the regional mobile home market.
Gross Profit
- ------------
Gross profit for the quarter decreased by $3.0 million, or 29%, from $10.2
million in 1998 to $7.2 million in 1999. Gross profit in the conveyor equipment
segment accounted for $2.7 million of the decrease and gross profit in the
mobile home products segment decreased by $0.3 million. Gross profit in the
Company's domestic conveyor equipment operations decreased $1.4 million
primarily due to decreased sales volume caused by reduced capital purchases in
the coal industry. Gross profit in the Company's foreign conveyor equipment
operations decreased $1.3 million primarily due to additional cost increases on
major contracts in Australia and lower margins on engineered conveyor systems in
the United Kingdom subsidiary. The decrease in the mobile home products segment
was due to reduced volume.
SG&A Expenses
- -------------
SG&A expenses for the quarter decreased by less than 1% from 1998 to 1999 and
were approximately $6.5 million in both years.
Operating Income
- ----------------
Operating income for the quarter decreased by $2.5 million, or 86%, from $2.9
million in 1998 to $0.4 million in 1999. The decrease is the result of the $3.0
million decrease in gross profit offset by a decrease in management fees of $0.3
million and a decrease in restructuring charges of $0.2 million.
Six months ended June 30, 1999, compared to six months ended June 30, 1998:
Net Sales
- ---------
Net sales for the six month period decreased by $2.1 million, or 2%, from $117.6
million in 1998 to $115.5 million in 1999. Net sales in the domestic conveyor
equipment business decreased by $8.3 million while net sales in the foreign
conveyor equipment business increased by $7.3 million. Net sales in the mobile
home products segment decreased by $0.9 million. The remaining decrease of $0.2
million is due to decreases in the other segment. The decrease in domestic
conveyor sales is the result of reduced capital purchases in the coal industry.
The increase in foreign conveyor business is due to sales increases of $2.3
million in Australia and $5.0 million in the United Kingdom. The increase in the
United Kingdom is primarily the result of the August 1998 acquisition of Huwood.
The decrease in the mobile home products segment was caused by softness in the
regional mobile home market.
Gross Profit
- ------------
Gross profit for the six month period decreased by $4.2 million, or 20%, from
$20.7 million in 1998 to $16.5 million in 1999. Gross profit in the conveyor
equipment segment decreased by $3.8 million and gross profit in the mobile home
products segment and other segment decreased $0.3 million and $0.1 million,
respectively. Gross profit in the Company's domestic conveyor equipment
operations decreased $0.8 million primarily due to decreased sales volume caused
by reduced capital purchases in the coal industry. Gross profit in the Company's
foreign conveyor equipment operations decreased $3.0 million primarily due to
lower margins on major contracts in Australia.
SG&A Expenses
- -------------
SG&A expenses for the six month period increased by $0.3 million, or 2%, from
$12.5 million in 1998 to $12.8 million in 1999. The increase occurred in the
conveyor equipment segment and is primarily the result of increased engineering
expenses in the domestic conveyor business and increased general and
administrative expenses in the foreign conveyor business.
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Operating Income
- ----------------
Operating income for the six month period decreased by $4.3 million, or 61%,
from $7.0 million in 1998 to $2.7 million in 1999. The decrease is the result of
the $4.2 million decrease in gross profit, the $0.3 million increase in SG&A
expenses, and a $0.1 million increase in restructuring charges, offset by a
decrease in management fees of $0.3 million. The decrease in management fees
is attributable to lower operating income.
Restructuring Charges
- ---------------------
The Company incurred restructuring charges of approximately $0.4 million in the
first six months of 1999 related to plans executed in 1998 to close a
manufacturing facility in Australia and merge its operations with other
existing facilities and to consolidate its facilities in the United Kingdom
following the acquisition of Huwood. The charges consist primarily of severance
and relocation costs. To date, the Company has incurred and paid total
restructuring charges of approximately $1.6 million related to these plans. In
addition to the severance and relocation costs expensed to date, the Company
anticipates that an additional cost associated with the restructuring of
approximately $0.3 million will be incurred in the remainder of 1999. These
costs will be expensed as incurred.
Backlog
- -------
Backlog at June 30, 1999 was $32.0 million, a decrease of $4.4 million, or 12%,
from $36.4 million at March 31, 1999. The decrease is primarily due to reduced
domestic backlog due to reduced capital purchases in the coal industry.
Management believes that approximately 95% of the backlog will be shipped in
1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $5.6 million and $6.4 million for the
six months ending June 30, 1999 and 1998, respectively. Net cash used in
operating activities in 1999 is attributable to a net loss of $4.3 million and a
net increase in operating assets of $3.2 million, offset by depreciation and
amortization of $2.0 million. Net cash used in operating activities in 1998
resulted primarily from net income of $1.0 million, increased by depreciation
and amortization of $1.8 million, offset by a net increase in operating assets
of $9.2 million.
Net cash used in investing activities was $2.6 million and $1.4 million for the
six months ending June 30, 1999 and 1998, respectively. The net cash used in
investing activities represents net purchases of property, plant, and equipment
for both years. The net purchases of property, plant, and equipment in 1999
include the purchase of a manufacturing facility at the Company's operations in
Colorado for $1.6 million. This facility was previously leased.
Net cash provided by financing activities was $1.7 million and $4.2 million for
the six months ending June 30, 1999 and 1998, respectively. Net cash provided by
financing activities in 1999 represents a net increase in borrowings on notes
payable of $2.0 million and proceeds from long-term obligations of $1.6 million,
offset by principal payments on long-term obligations of $0.5 million and
distributions of $1.4 million for the payment of income taxes. The proceeds from
long-term obligations of $1.6 million were used for the purchase of the
manufacturing facility in Colorado. Net cash provided by financing activities in
1998 is the result of a net increase in borrowings on notes payable of $5.6
million and proceeds from long-term obligations of $0.3 million, offset by
principal payments on long-term obligations of $0.6 million and distributions of
$1.1 million for the payment of income taxes.
The Company's primary capital requirements consist of working capital, capital
expenditures and debt service. The Company expects current financial resources
and funds from operations to be
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19
adequate to meet anticipated cash requirements. At June 30, 1999, the Company
had cash and cash equivalents of $20.1 million and a credit facility line with
$22.4 million available.
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 Company estimates that the fluctuation
of the U.S. dollar versus other currencies, primarily the Australian dollar and
the British pound, resulted in increases (decreases) to stockholder's equity of
approximately $719,000 and $(684,000) for the six months ended June 30, 1999 and
1998, respectively.
IMPACT OF YEAR 2000
As the Year 2000 approaches, the Company is aware of the issues associated with
the programming code in existing computer systems. The issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or hardware that have
date sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company has been addressing the Year 2000 issue since mid-1997. A
company-wide taskforce was assembled to review all systems to determine whether
each system is Year 2000 compliant. The Company has utilized both internal and
external resources to identify, correct or reprogram, and test systems for the
Year 2000 compliance. The plan to resolve the problems involved four phases:
assessment, remediation, testing and implementation. In addressing the four
phases, the Company has reviewed its computer hardware and software; reviewed
its manufacturing operations for any embedded chips or software that could
effect production; reviewed the various manufactured products to determine
potential Year 2000 problems; and surveyed third party vendors to determine Year
2000 compliance.
To date, the Company has completed the assessment and remediation phases and is
substantially complete with the testing and implementation phases. The Company
expects to complete its Year 2000 activities within a timeframe that will enable
its material information systems to function without significant disruption in
Year 2000.
The costs for the Company's Year 2000 assessment, remediation, testing and
implementation is estimated to be approximately $913,000, of which $730,000 has
been expended through June 30, 1999.
The Company performed an evaluation of all domestic and international suppliers
to identify mission critical vendors. These vendors have been contacted and have
submitted written assurances that their operations will be prepared for the
millennium change and will provide an uninterrupted supply of components and
services. As a contingency plan to ensure an uninterrupted supply of
17
20
components, the Company has multiple suppliers for all critical components. The
Company currently has no other contingency plans in place in the event it does
not complete all phases of the Year 2000 program. The Company plans to evaluate
the status of completion each month in the third quarter of 1999 and determine
whether such a plan is necessary.
The information above contains certain forward-looking statements, including,
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions and adequate resources that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are advised that forward-looking statements about
the Year 2000 should be read in conjunction with the Company's disclosure under
the heading Cautionary Statement for Safe Harbor Purposes.
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. 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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding the Company's financial instruments that are sensitive to
changes in interest rates was disclosed in the Form 10-K filed by the Company on
March 31, 1999. The information disclosed has not changed materially in the
interim period since December 31, 1998.
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22
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
June 30, 1999.
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23
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: August 13, 1999
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24
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
(a) 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
(b) Amendment IV, dated as of December 31, 1998, to the Revolving ***
Credit Facility, dated as of September 14, 1992, among
Continental Conveyor & Equipment Company, Goodman Conveyor
Company, and Bank One, Cleveland, NA
(c) Letter of Amendment, dated as of July 26, 1999, to the Revolving
Credit Facility, dated as of September 14, 1992, 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.
** Incorporated by reference from Form 8-K filed November 3, 1997, under the
Securities Exchange Act of 1934.
*** Incorporated by reference from Form 10-Q filed May 14, 1999, under the
Securities Exchange Act of 1934.