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, 2002
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 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, 2002, there were 100 shares of the registrant's common stock
outstanding.
INDEX
CONTINENTAL GLOBAL GROUP, INC.
Page
Part I Financial Information Number
Item 1 Financial Statements (Unaudited) 1
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 2
Condensed Consolidated Statements of Operations
Three Months and Six Months ended June 30, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 2002 and 2001 4
Notes to Condensed Consolidated Financial Statements 5-14
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 15-18
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
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
1
Continental Global Group, Inc.
Condensed Consolidated Balance Sheets
June 30 December 31
2002 2001
-------------------- --------------------
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 11,970,860 $ 14,671,806
Accounts receivable, net 28,105,194 32,050,919
Inventories 29,392,549 26,572,726
Other current assets 2,425,812 1,745,684
-------------------- --------------------
Total current assets 71,894,415 75,041,135
Property, plant and equipment 27,587,255 26,142,796
Less accumulated depreciation 14,686,591 13,048,973
-------------------- --------------------
12,900,664 13,093,823
Goodwill, net 17,393,182 16,799,894
Deferred financing costs 2,469,535 2,729,487
Deferred income taxes 880,788 718,862
Other assets 377,345 388,705
-------------------- --------------------
$ 105,915,929 $ 108,771,906
==================== ====================
Liabilities and Stockholder's Equity (Deficit):
Current liabilities:
Notes payable $ 17,017,452 $ 16,306,471
Trade accounts payable 18,801,281 18,895,554
Accrued compensation and employee benefits 5,225,656 5,136,280
Accrued interest on senior notes 3,300,000 3,300,000
Deferred income taxes 1,087,029 1,235,922
Other accrued liabilities 7,775,530 9,185,735
Current maturities of long-term obligations 1,105,415 1,298,522
-------------------- --------------------
Total current liabilities 54,312,363 55,358,484
Senior notes 120,000,000 120,000,000
Other long-term obligations, less current maturities 2,111,922 2,258,082
Stockholder's equity (deficit):
Common stock, $0.01 par value, authorized 5,000,000 shares,
issued and outstanding 100 shares 1 1
Paid-in capital 1,993,687 1,993,687
Accumulated deficit (67,562,204) (65,111,800)
Accumulated other comprehensive loss (4,939,840) (5,726,548)
-------------------- --------------------
(70,508,356) (68,844,660)
-------------------- --------------------
$ 105,915,929 $ 108,771,906
==================== ====================
See notes to condensed consolidated financial statements.
2
Continental Global Group, Inc.
Condensed Consolidated Statements of Operations
Three months ended June 30 Six months ended June 30
2002 2001 2002 2001
----------------------------------- -----------------------------------
(Unaudited) (Unaudited)
Net sales $ 46,102,465 $ 51,792,316 $ 91,646,096 $ 90,855,539
Cost of products sold 37,678,619 42,868,350 75,278,200 74,730,823
----------------------------------- -----------------------------------
Gross profit 8,423,846 8,923,966 16,367,896 16,124,716
Operating expenses:
Selling and engineering 3,376,215 3,081,624 6,794,291 6,077,663
General and administrative 2,267,449 2,115,030 4,382,067 4,279,386
Management fee 166,657 214,301 314,422 344,591
Amortization expense 30,127 145,996 59,941 293,775
----------------------------------- -----------------------------------
Total operating expenses 5,840,448 5,556,951 11,550,721 10,995,415
----------------------------------- -----------------------------------
Operating income 2,583,398 3,367,015 4,817,175 5,129,301
Other expenses:
Interest expense 3,869,386 4,073,562 7,670,890 7,939,558
Interest income (51,257) (174,849) (104,228) (403,995)
Miscellaneous, net 9,153 622,631 41,435 830,345
----------------------------------- -----------------------------------
Total other expenses 3,827,282 4,521,344 7,608,097 8,365,908
----------------------------------- -----------------------------------
Loss before income taxes (1,243,884) (1,154,329) (2,790,922) (3,236,607)
Income tax benefit - (488,739) (340,518) (931,240)
----------------------------------- -----------------------------------
Net loss $ (1,243,884) $ (665,590) $ (2,450,404) $ (2,305,367)
=================================== ===================================
See notes to condensed consolidated financial statements.
3
Continental Global Group, Inc.
Condensed Consolidated Statements of Cash Flows
Six months ended June 30
2002 2001
---------------------- ---------------------
(Unaudited)
Operating activities:
Net loss $ (2,450,404) $ (2,305,367)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for depreciation and amortization 1,156,837 1,417,924
Amortization of deferred financing costs 259,952 259,951
Deferred income taxes (340,518) (931,240)
Loss (gain) on disposal of assets 16,494 (236)
Changes in operating assets and liabilities (912,468) (248,716)
---------------------- ---------------------
Net cash used in operating activities (2,270,107) (1,807,684)
---------------------- ---------------------
Investing activities:
Purchases of property, plant, and equipment (416,602) (412,446)
Proceeds from sale of property, plant, and equipment 28,937 62,132
---------------------- ---------------------
Net cash used in investing activities (387,665) (350,314)
---------------------- ---------------------
Financing activities:
Net increase in borrowings on notes payable 488,419 1,990,108
Principal payments on long-term obligations (517,317) (536,258)
---------------------- ---------------------
Net cash provided by (used in) financing activities (28,898) 1,453,850
Effect of exchange rate changes on cash (14,276) (5,975)
---------------------- ---------------------
Decrease in cash and cash equivalents (2,700,946) (710,123)
Cash and cash equivalents at beginning of period 14,671,806 16,941,949
---------------------- ---------------------
Cash and cash equivalents at end of period $ 11,970,860 $ 16,231,826
====================== =====================
See notes to condensed consolidated financial statements.
4
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
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 six-month period ended June 30, 2002
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. For further information, refer to the consolidated
financial statements and footnotes of Continental Global Group, Inc. and
subsidiaries for the year ended December 31, 2001, included in the Form 10-K
filed by the Company on March 29, 2002.
Certain amounts from the prior year financial statements have been reclassified
to conform to current year presentation. These reclassifications had no impact
on operating income or net loss.
B. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
C. Derivative Instruments
At June 30, 2002, the Company is party to a foreign currency forward contract
maturing during 2002. The counterparty to the contract is a major U.S.
commercial bank. Management believes that losses related to credit risk is
remote. The Company entered into the foreign currency forward contract to hedge
certain firm sales commitments denominated in a foreign currency. The fair value
of the Company's foreign currency forward contract is estimated based on the
quoted market price of a comparable contract.
The fair value of the forward contract is included in other current assets on
the June 30, 2002 balance sheet. There was no hedge ineffectiveness recognized
in the statement of operations during the current quarter. Based on the maturity
of the contract and the nature of the hedging relationship, the unrecognized
amounts in accumulated other comprehensive loss will be reclassified into the
statement of operations during 2002 at the time the firm commitment is
recognized.
5
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
D. Inventories
Inventories, which consist of raw materials, manufactured and purchased parts,
and work in process, are stated at the lower of cost or market. Since inventory
records are maintained on a job order basis, it is not practical to segregate
inventories into their major classes. The cost for approximately 66% and 67% of
inventories at June 30, 2002 and December 31, 2001, respectively, is determined
using the last-in, first-out (LIFO) method with the remainder determined using
the first-in, first-out (FIFO) method. Had the FIFO method of inventory (which
approximates replacement cost) been used to cost all inventories, inventories
would have increased by approximately $1,140,000 at June 30, 2002 and December
31, 2001.
E. Comprehensive Loss
The components of comprehensive loss for the three months and six months ended
June 30, 2002 and 2001 are as follows:
Three months ended June 30 Six months ended June 30
2002 2001 2002 2001
---------------------------------- ---------------------------------
Net loss $ (1,243,884) $ (665,590) $ (2,450,404) $ (2,305,367)
Other comprehensive income (loss):
Foreign currency translation
adjustment 542,066 478,038 765,940 (1,002,458)
Change in fair value of derivative
hedge (net of tax) 20,768 - 20,768 -
---------------------------------- ---------------------------------
Comprehensive loss $ (681,050) $ (187,552) $ (1,663,696) $ (3,307,825)
================================== =================================
F. Income Taxes
Income taxes are provided using the liability method in accordance with FASB
Statement No. 109, "Accounting for Income Taxes". For tax reporting purposes,
the Company is included in the consolidated federal tax return of N.E.S.
Investment Co. However, for financial reporting purposes, the Company's tax
provision has been calculated on a stand-alone basis.
The Company has subsidiaries located in Australia, the United Kingdom, and South
Africa, which are subject to income taxes in their respective countries.
6
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
G. Segment Information
While the Company primarily manages its operations on a geographical basis, the
Company operates in two principal business segments: conveyor equipment and
manufactured housing products. The conveyor equipment business markets its
products in four main business areas. The mining equipment business area
includes the design, manufacture and testing (and, outside the United States,
installation and maintenance) of complete belt conveyor systems and components
for mining application primarily in the coal industry. The conveyor components
business area manufactures and sells components for conveyor systems primarily
for resale through distributor networks. The engineered systems business area
uses specialized project management and engineering skills to combine mining
equipment products, purchased equipment, steel fabrication and other outside
services for sale as complete conveyor equipment systems that meet specific
customer requirements. The bulk conveyor equipment business area designs and
manufactures a complete range of conveyor equipment sold to transport bulk
materials, such as cement, lime, food products and industrial waste.
The Company's manufactured housing products business manufactures and/or
refurbishes axle components sold directly to the manufactured housing industry.
As part of this segment the Company also sells mounted tire and rim assemblies
to the manufactured housing industry. During 2001, the Company acquired certain
assets in Alabama from Lippert Tire & Axle, Inc. The Company's existing Alabama
operations of its manufactured housing products segment have been combined with
the Lippert operations. 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.
7
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
G. Segment Information (Continued)
Three months ended June 30 Six months ended June 30
2002 2001 2002 2001
-------------------------------------------------------------------
(in thousands) (in thousands)
Net sales:
Conveyor equipment $ 37,428 $ 48,459 $ 75,432 $ 84,532
Manufactured housing products 8,444 3,037 15,658 5,579
Other 230 296 556 745
-------------------------------------------------------------------
Total net sales $ 46,102 $ 51,792 $ 91,646 $ 90,856
===================================================================
Segment operating income:
Conveyor equipment $ 2,433 $ 3,970 $ 4,644 $ 6,289
Manufactured housing products 541 (6) 923 -
Other 21 (5) 55 12
-------------------------------------------------------------------
Total segment operating income 2,995 3,959 5,622 6,301
Management fee 167 214 314 345
Amortization expense 30 146 60 294
Corporate expense 215 232 431 533
-------------------------------------------------------------------
Total operating income 2,583 3,367 4,817 5,129
Interest expense 3,869 4,073 7,671 7,939
Interest income (51) (175) (104) (404)
Miscellaneous, net 9 623 41 830
-------------------------------------------------------------------
Loss before income taxes $ (1,244) $ (1,154) $ (2,791) $ (3,236)
===================================================================
8
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
H. Guarantor and Non-Guarantor Subsidiaries
The Company's domestic subsidiaries, Continental Conveyor & Equipment Company
(CCE) and Goodman Conveyor Company (GCC), and certain of its Australian
subsidiaries, all of which are wholly owned, are the guarantors of the Senior
Notes. The guarantees are full, unconditional, and joint and several. Separate
financial statements of these guarantor subsidiaries are not presented as
management has determined that they would not be material to investors. The
Company's United Kingdom and South African subsidiaries are not guarantors of
the Senior Notes.
Summarized consolidating balance sheets as of June 30, 2002 and December 31,
2001 for the Company, the guarantor subsidiaries, and the non-guarantor
subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
June 30, 2002: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 11,067 $ 902 $ 2 $ - $ 11,971
Accounts receivable, net - 20,359 7,764 (18) 28,105
Inventories - 25,568 3,824 - 29,392
Other current assets 218 1,392 1,170 (354) 2,426
-------------------------------------------------------------------------------
Total current assets 11,285 48,221 12,760 (372) 71,894
Property, plant, and
equipment, net - 9,003 3,898 - 12,901
Goodwill, net - 16,767 626 - 17,393
Investment in subsidiaries 60,009 18,094 - (78,103) -
Deferred financing costs 2,470 - - - 2,470
Deferred income taxes 9,099 - - (8,218) 881
Other assets 64 1,978 30 (1,695) 377
-------------------------------------------------------------------------------
Total assets $ 82,927 $ 94,063 $ 17,314 $ (88,388) $ 105,916
===============================================================================
Current liabilities:
Notes payable $ - $ 16,226 $ 1,012 $ (221) $ 17,017
Trade accounts payable 91 13,899 4,820 (9) 18,801
Accrued compensation and
employee benefits - 4,444 782 - 5,226
Accrued interest 3,300 - - - 3,300
Deferred income taxes - 1,440 - (353) 1,087
Other accrued liabilities 522 11,283 4,540 (8,569) 7,776
Current maturities of
long-term obligations - 1,096 9 - 1,105
-------------------------------------------------------------------------------
Total current liabilities 3,913 48,388 11,163 (9,152) 54,312
Senior Notes 120,000 - - - 120,000
Other long-term obligations - 2,002 1,260 (1,150) 2,112
Stockholder's equity
(deficit) (40,986) 43,673 4,891 (78,086) (70,508)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 82,927 $ 94,063 $ 17,314 $ (88,388) $ 105,916
===============================================================================
9
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
H. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
December 31, 2001: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 12,548 $ 1,518 $ 606 $ - $ 14,672
Accounts receivable, net - 23,107 8,949 (5) 32,051
Inventories - 23,816 2,756 - 26,572
Other current assets 107 1,991 318 (670) 1,746
-------------------------------------------------------------------------------
Total current assets 12,655 50,432 12,629 (675) 75,041
Property, plant, and
equipment, net - 9,433 3,661 - 13,094
Goodwill, net - 16,232 568 - 16,800
Investment in subsidiaries 60,009 17,132 - (77,141) -
Deferred financing costs 2,729 - - - 2,729
Deferred income taxes 7,262 - - (6,543) 719
Other assets 35 2,466 55 (2,167) 389
-------------------------------------------------------------------------------
Total assets $ 82,690 $ 95,695 $ 16,913 $ (86,526) $ 108,772
===============================================================================
Current liabilities:
Notes payable $ - $ 15,948 $ 898 $ (540) $ 16,306
Trade accounts payable 227 14,081 4,630 (42) 18,896
Accrued compensation and
employee benefits - 4,201 935 - 5,136
Accrued interest 3,300 - - - 3,300
Deferred income taxes - 1,564 - (328) 1,236
Other accrued liabilities 658 10,057 5,802 (7,331) 9,186
Current maturities of
long-term obligations - 1,284 15 - 1,299
-------------------------------------------------------------------------------
Total current liabilities 4,185 47,135 12,280 (8,241) 55,359
Senior Notes 120,000 - - - 120,000
Other long-term obligations - 2,240 1,107 (1,089) 2,258
Stockholder's equity
(deficit) (41,495) 46,320 3,526 (77,196) (68,845)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 82,690 $ 95,695 $ 16,913 $ (86,526) $ 108,772
===============================================================================
10
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
H. Guarantor and Non-Guarantor Subsidiaries (Continued)
Summarized consolidating statements of operations for the three months and six
months ended June 30, 2002 and 2001, respectively, for the Company, the
guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in
thousands):
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended June 30, 2002:
Net sales $ - $ 36,426 $ 9,676 $ - $ 46,102
Cost of products sold - 29,503 8,175 - 37,678
------------- ------------- --------------- ------------- -------------
Gross profit - 6,923 1,501 - 8,424
Total operating expenses 225 4,595 1,021 - 5,841
------------- ------------- --------------- ------------- -------------
Operating income (loss) (225) 2,328 480 - 2,583
Interest expense 3,439 421 9 - 3,869
Interest income (51) - - - (51)
Miscellaneous, net (5) 19 (5) - 9
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (3,608) 1,888 476 - (1,244)
Income tax expense (benefit) (710) 710 - - -
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (2,898) $ 1,178 $ 476 $ - $ (1,244)
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended June 30, 2001:
Net sales $ - $ 42,125 $ 9,667 $ - $ 51,792
Cost of products sold - 34,645 8,223 - 42,868
------------- ------------- --------------- ------------- -------------
Gross profit - 7,480 1,444 - 8,924
Total operating expenses 245 4,389 923 - 5,557
------------- ------------- --------------- ------------- -------------
Operating income (loss) (245) 3,091 521 - 3,367
Interest expense 3,442 580 51 - 4,073
Interest income (175) - - - (175)
Miscellaneous, net 480 148 (5) - 623
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (3,992) 2,363 475 - (1,154)
Income tax expense (benefit) (1,595) 1,107 - - (488)
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (2,397) $ 1,256 $ 475 $ - $ (666)
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Six months ended June 30, 2002:
Net sales $ - $ 73,957 $ 17,689 $ - $ 91,646
Cost of products sold - 60,106 15,172 - 75,278
------------- ------------- --------------- ------------- -------------
Gross profit - 13,851 2,517 - 16,368
Total operating expenses 451 9,055 2,045 - 11,551
------------- ------------- --------------- ------------- -------------
Operating income (loss) (451) 4,796 472 - 4,817
Interest expense 6,880 762 29 - 7,671
Interest income (104) - - - (104)
Miscellaneous, net - 29 12 - 41
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (7,227) 4,005 431 - (2,791)
Income tax expense (benefit) (1,837) 1,496 - - (341)
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (5,390) $ 2,509 $ 431 $ - $ (2,450)
============= ============= =============== ============= =============
11
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
H. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Six months ended June 30, 2001:
Net sales $ - $ 74,747 $ 16,109 $ - $ 90,856
Cost of products sold - 61,027 13,704 - 74,731
------------- ------------- --------------- ------------- -------------
Gross profit - 13,720 2,405 - 16,125
Total operating expenses 559 8,675 1,762 - 10,996
------------- ------------- --------------- ------------- -------------
Operating income (loss) (559) 5,045 643 - 5,129
Interest expense 6,883 955 101 - 7,939
Interest income (404) - - - (404)
Miscellaneous, net 700 139 (9) - 830
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (7,738) 3,951 551 - (3,236)
Income tax expense (benefit) (3,093) 2,162 - - (931)
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (4,645) $ 1,789 $ 551 $ - $ (2,305)
============= ============= =============== ============= =============
Summarized consolidating cash flow statements for the six months ended June 30,
2002 and 2001, respectively, for the Company, the guarantor subsidiaries, and
the non-guarantor subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Six months ended June 30, 2002:
Net cash provided by (used in)
operating activities $ (7,381) $ 4,574 $ 529 $ 8 $ (2,270)
Investing activities:
Purchases of property, plant, and
equipment - (222) (195) - (417)
Proceeds from sale of property,
plant, and equipment - 17 12 - 29
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (205) (183) - (388)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase in borrowings on notes
payable - 130 358 - 488
Principal payments on long-term
obligations - (503) (14) - (517)
Distributions for interest on
senior notes 5,900 (5,900) - - -
Intercompany loan activity - 1,252 (1,252) - -
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities 5,900 (5,021) (908) - (29)
Exchange rate changes on cash - 36 (42) (8) (14)
------------- ------------- --------------- ------------- -------------
Decrease in cash and cash equivalents (1,481) (616) (604) - (2,701)
Cash and cash equivalents at beginning
of period 12,548 1,518 606 - 14,672
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 11,067 $ 902 $ 2 $ - $ 11,971
============= ============= =============== ============= =============
12
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
H. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Six months ended June 30, 2001:
Net cash provided by (used in)
operating activities $ (7,166) $ 6,347 $ (989) $ - $ (1,808)
Investing activities:
Purchases of property, plant, and
equipment - (295) (117) - (412)
Proceeds from sale of property,
plant, and equipment - 47 15 - 62
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (248) (102) - (350)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase in borrowings on notes
payable - 1,155 835 - 1,990
Principal payments on long-term
obligations - (515) (21) - (536)
Distributions for interest on
senior notes 6,374 (6,374) - - -
Intercompany loan activity - (293) 293 - -
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities 6,374 (6,027) 1,107 - 1,454
Exchange rate changes on cash - 4 (10) - (6)
------------- ------------- --------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents (792) 76 6 - (710)
Cash and cash equivalents at beginning
of period 16,257 565 120 - 16,942
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 15,465 $ 641 $ 126 $ - $ 16,232
============= ============= =============== ============= =============
I. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 was effective January 1, 2002 and applies to all goodwill
and other intangible assets recognized in the Company's statement of financial
position, regardless of when those assets were initially recognized. Under SFAS
No. 142, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized but are subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives.
13
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2002
I. New Accounting Pronouncements (Continued)
On January 1, 2002, the Company adopted SFAS No. 142. This Statement requires
goodwill and other intangibles that have indefinite lives to be tested for
impairment at least annually, using a two step process. The first step
identifies if there is impairment using a fair-value-based test and the second
step determines the amount of the impairment. Step one, which was completed in
the second quarter of 2002, indicated potential impairment and, therefore, step
two is in process to determine the amount of the impairment. Based on findings
from step one, the Company expects to record a non-cash impairment write-down
related to the goodwill from the acquisition of the Company's Australian
subsidiary, which is part of the Company's conveyor equipment segment. This
transition adjustment will be reported as a cumulative effect of a change in
accounting principle and will be recorded upon completion of the step two
analysis.
The following table reflects the consolidated results adjusted as though the
adoption of SFAS No. 142 had occurred in the first quarter of 2001:
Three months ending Six months ending
June 30 June 30
2002 2001 2002 2001
-------------------------------------------------------------------
Reported net loss $ (1,243,884) $ (665,590) $ (2,450,404) $ (2,305,367)
Goodwill amortization, net of tax - 97,075 - 195,809
-------------------------------------------------------------------
Adjusted net loss $ (1,243,884) $ (568,515) $ (2,450,404) $ (2,109,558)
===================================================================
The carrying amounts and related accumulated amortization balances of the
Company's other intangible assets as of June 30, 2002 and December 31, 2001 are
listed below:
June 30, 2002 December 31, 2001
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------------- ----------------- ---------------- -----------------
Amortized intangible assets $ 491,726 $ (328,368) $ 486,848 $ (264,976)
Unamortized intangible assets 139,430 - 138,386 -
The change in goodwill reflected on the balance sheet from December 31, 2001 to
June 30, 2002 resulted entirely from foreign currency translation. Unamortized
intangible assets consist primarily of intangible assets related to a minimum
pension liability for the Company's pension plan. Estimated amortization expense
related to other intangible assets for each of the next five fiscal years is:
2002 $ 113,146
2003 27,810
2004 26,360
2005 26,360
2006 17,117
----------------
Total $ 210,793
================
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes included in the Company's Form 10-K dated
March 28, 2002.
General
The Company, through its subsidiaries, is primarily engaged in the manufacture
and distribution of bulk material handling and replacement equipment, primarily
for use in the mining industry. The Company is a holding company organized under
the Delaware General Corporation law and conducts all of its business through
its direct and indirect operating subsidiaries. The Company's direct operating
subsidiaries are Continental Conveyor and Equipment Company and Goodman Conveyor
Company. The Company also owns indirectly all of the capital stock of (i)
Continental Conveyor & Equipment Pty. Ltd., an Australian holding company that
owns all of the capital stock of four Australian operating companies; (ii)
Continental Conveyor Ltd., a U.K. operating company; and (iii) Continental MECO
(Pty.) Ltd., a South African operating company. In July 2001, the Company
acquired certain assets in Alabama from Lippert Tire & Axle, Inc ("Lippert
acquisition"). The Company's existing Alabama operations of its manufactured
housing products segment have been combined with the Lippert operations.
Results of Operations
The following table sets forth, on a comparative basis, selected income
statement data as a percentage of net sales for the three months and six months
ended June 30, 2002 and 2001.
Three months ended Six months ended
June 30 June 30
-------------------------- -------------------------
2002 2001 2002 2001
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 81.7 82.8 82.1 82.3
Gross profit 18.3 17.2 17.9 17.7
SG&A expenses 12.2 10.0 12.2 11.4
Management fee 0.4 0.4 0.3 0.4
Amortization expense 0.1 0.3 0.1 0.3
Operating income 5.6 6.5 5.3 5.6
Three months ended June 30, 2002, compared to three months ended June 30, 2001:
Net Sales
- ---------
Net sales for the quarter decreased $5.7 million, or 11%, from $51.8 million in
2001 to $46.1 million in 2002. Net sales in the domestic operations of the
Company's conveyor equipment segment decreased $10.4 million primarily due to
the continued lower capital spending by the Company's major customers in the
coal industry. Net sales in the foreign operations of the Company's conveyor
equipment segment decreased $0.6 million, primarily due to a decrease at the
Company's Australian subsidiary. Net sales in the Company's manufactured housing
segment increased $5.4 million primarily due to the Lippert acquisition. Net
sales in the other segment decreased $0.1 million.
15
Gross Profit
- ------------
Gross profit for the quarter decreased $0.5 million, or 6%, from $8.9 million in
2001 to $8.4 million in 2002. Gross profit in the domestic operations of the
Company's conveyor equipment segment decreased $1.8 million due to lower sales
volume. Gross profit in the foreign operations of the Company's conveyor
equipment segment increased $0.7 million due to improved margins in the
Company's Australian and United Kingdom subsidiaries. Gross profit in the
Company's manufactured housing segment increased $0.6 million due to increased
sales and improved profit margins resulting from the Lippert acquisition and the
subsequent consolidation of the existing operations into the acquired facility.
As a result of the margin improvement in the Company's foreign operations
combined with the contribution by the Company's manufactured housing segment,
gross profit as a percentage of sales increased from 17.2% in 2001 to 18.3% in
2002.
SG&A Expenses
- -------------
SG&A expenses for the quarter increased $0.4 million, or 8%, from $5.2 million
in 2001 to $5.6 million in 2002. This increase was evenly divided between the
domestic and foreign operations of the Company's conveyor equipment segment.
Domestic sales and marketing expenses increased due to higher advertising and
travel expenses combined with increased general liability insurance costs.
Expense in the foreign operations increased due to increased marketing personnel
and was also negatively impacted by increased insurance costs. For the quarter,
domestic administrative expenses increased due to higher license and franchise
taxes as a result of the change in corporate status and due to increased other
expenses.
Operating Income
- ----------------
Operating income for the quarter decreased $0.8 million, or 23%, from $3.4
million in 2001 to $2.6 million in 2002. The decrease resulted from the $0.5
million decrease in gross profit combined with the $0.4 million increase in SG&A
expenses and partially offset by a $0.1 million decrease in amortization
expense.
Six months ended June 30, 2002, compared to six months ended June 30, 2001:
Net Sales
- ---------
Net sales for the six-month period increased $0.8 million, or 1%, from $90.8
million in 2001 to $91.6 in 2002. Net sales in the domestic operations of the
Company's conveyor equipment segment decreased $13.0 million due to lower
capital spending by the Company's major customers in the coal industry. Net
sales in the foreign operations of the Company's conveyor equipment segment
increased $3.9 million due primarily to increases at the Company's Australian
and United Kingdom subsidiaries. The sales increases in Australia and the United
Kingdom resulted from new mining projects for conveyor equipment. Net sales in
the Company's manufactured housing segment increased $10.1 million, primarily
due to the Lippert acquisition. Net sales in the other segment decreased $0.2
million.
Gross Profit
- ------------
Gross profit for the six-month period increased $0.3 million, or 2%, from $16.1
million in 2001 to $16.4 million in 2002. Gross profit in the domestic
operations of the Company's conveyor equipment segment decreased $2.4 million
due to lower sales volume. Gross profit in the foreign operations of the
Company's conveyor equipment segment increased $1.7 million due to increased
sales and improved margins at the Company's Australian subsidiary. Gross profit
in the Company's manufactured housing segment increased $1.0 million due to
increased sales and improved profit margins resulting from the Lippert
acquisition and the subsequent consolidation of the existing operations.
16
SG&A Expenses
- -------------
SG&A expenses for the six-month period increased $0.8 million, or 8%, from $10.4
million in 2001 to $11.2 million in 2002. Expenses in the domestic and foreign
operations of the Company's conveyor equipment segment increased $0.5 million
and $0.3 million, respectively. Domestic sales and marketing expenses increased
due to higher advertising and travel expenses and increases in general liability
insurance costs. The increase in the foreign operations is due to increased
marketing personnel and also from increased insurance costs.
Operating Income
- ----------------
Operating income for the six-month period decreased $0.3 million, or 6%, from
$5.1 million in 2001 to $4.8 million in 2002. This decrease primarily resulted
from the $0.8 million increase in SG&A expenses, partially offset by the $0.3
million increase in gross profit and a $0.2 million decrease in amortization
expense.
Backlog
- -------
Backlog at June 30, 2002 was $55.0 million, an increase of $13.7 million, or
33%, from $41.3 million at December 31, 2001 and an increase of $3.8 million or
7%, from $51.2 million at March 31, 2002. The increase from December was
attributable to an increase of $8.8 million in the foreign operations of the
Company's conveyor equipment segment and an increase of $4.9 million in the
domestic operations of the Company's conveyor equipment segment. The increase
from March was attributable to an increase of $7.2 million in the domestic
operations of the Company's conveyor equipment segment offset by a decrease of
$3.4 million in the foreign operations of the Company's conveyor equipment
segment. Management believes that approximately 75% of the backlog will be
shipped in 2002.
Liquidity and Capital Resources
Net cash used in operating activities was $2.3 million and $1.8 million for the
six months ending June 30, 2002 and 2001, respectively. The net cash used in
operating activities in 2002 resulted from a net loss of $2.5 million and a net
increase in operating assets and liabilities of $0.9 million offset by non-cash
expenses such as depreciation, amortization, and deferred income taxes of $1.1
million. The net cash used in operating activities in 2001 resulted from a net
loss of $2.3 million and a net increase in operating assets and liabilities of
$0.2 million, offset by non-cash expenses of $0.7 million.
Net cash used in investing activities was $0.4 million for the six months ending
June 30, 2002 and 2001, and represents net purchases of property, plant, and
equipment for both years.
Net cash provided by (used in) financing activities was $(0.03) million and $1.5
million for the six months ending June 30, 2002 and 2001, respectively. Net cash
used in financing activities in 2002 represents a net increase in borrowings on
notes payable of $0.49 million offset by principal payments on long-term
obligations of $0.52 million. Net cash provided by financing activities in 2001
represents a net increase in borrowings on notes payable of $2.0 million offset
by principal payments on long-term obligations of $0.5 million.
The Company's primary capital requirements consist of capital expenditures and
debt service. The Company expects current financial resources, existing lines of
credit, and funds from operations to be adequate to meet anticipated cash
requirements. At June 30, 2002, the Company had cash and cash equivalents of
approximately $12.0 million and approximately $8.7 million available for use
under its domestic credit facility, representing approximately $20.7 million of
liquidity.
17
International Operations
The Company transacts business in a number of countries throughout the world and
has facilities in the United States, Australia, the United Kingdom, and South
Africa. As a result, the Company is subject to business risks inherent in
non-U.S. operations, including political and economic uncertainty, import and
export limitations, exchange controls and currency fluctuations. The Company
believes that the risks related to its foreign operations are mitigated by the
relative political and economic stability of the countries in which its largest
foreign operations are located. As the U.S. dollar strengthens and weakens
against foreign currencies in which the Company transacts business, its
financial results will be affected. The principal foreign currencies in which
the Company transacts business are the Australian dollar, the British pound
sterling, and the South African rand. The fluctuation of the U.S. dollar versus
other currencies resulted in increases (decreases) to stockholder's equity
(deficit) of approximately $0.8 million and $(1.0) million for the six months
ended June 30, 2002 and 2001, respectively.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 was effective January 1, 2002 and applies to all goodwill
and other intangible assets recognized in the Company's statement of financial
position, regardless of when those assets were initially recognized. Under SFAS
No. 142, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized but are subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives.
On January 1, 2002, the Company adopted SFAS No. 142. This Statement requires
goodwill and other intangibles that have indefinite lives to be tested for
impairment at least annually, using a two step process. The first step
identifies if there is impairment using a fair-value-based test and the second
step determines the amount of the impairment. Step one, which was completed in
the second quarter of 2002, indicated potential impairment and, therefore, step
two is in process to determine the amount of the impairment. Based on findings
from step one, the Company expects to record a non-cash impairment write-down
related to the goodwill from the acquisition of the Company's Australian
subsidiary, which is part of the Company's conveyor equipment segment. This
transition adjustment will be reported as a cumulative effect of a change in
accounting principle and will be recorded upon completion of the step two
analysis.
Cautionary Statement for Safe Harbor Purposes
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
federal securities laws. As a general matter, forward-looking statements are
those focused upon future plans, objectives or performance as opposed to
historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters that are not historical in nature.
Such forward looking statements are subject to uncertainties and factors
relating to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the control of the Company,
that could cause actual results of the Company to differ materially from those
matters expressed in or implied by such forward-looking statements.
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The following table provides information about the Company's Senior Notes. The
table presents principal cash flows and interest rate by expected maturity date.
Interest Rate Sensitivity
Principal Amount by Expected Maturity
Average Interest Rate
Fair
Value,
(dollars in thousands) 2002 2003 2004 2005 2006 Thereafter Total 6/30/02
- ---------------------------------------------------------------------------------------------------------
Long-Term Obligations,
including current
portion
Fixed Rate $ - $ - $ - $ - $ - $ 120,000 $ 120,000 $ 54,000
Average interest rate 11% 11% 11% 11% 11% 11%
The Company's interest income and expense are most sensitive to changes in the
general level of U.S. interest rates. In this regard, changes in U.S. interest
rates affect the interest earned on the Company's cash equivalents as well as
interest paid on its debt. To mitigate the impact of fluctuations in U.S.
interest rates, the Company generally borrows on a long-term basis to maintain a
debt structure that is fixed rate in nature.
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions. The Company manufactures and sells its
products in the United States, Australia, the United Kingdom, and South Africa.
As a result, the Company's financial results could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in the foreign markets in which the Company distributes its products.
The Company's operating results are exposed to changes in exchange rates between
the U.S. dollar and the Australian dollar, the British pound sterling, and the
South African rand.
19
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, 2002.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ Jimmy L. Dickinson
Jimmy L. Dickinson
Vice President and Chief Financial Officer
(As duly authorized representative and as
Principal Financial and Accounting Officer)
CONTINENTAL CONVEYOR & EQUIPMENT COMPANY
By: /s/ Jimmy L. Dickinson
Jimmy L. Dickinson
Vice President - Finance (As duly
authorized representative and as Principal
Financial and Accounting Officer)
GOODMAN CONVEYOR COMPANY
By: /s/ J. Mark Etchberger
J. Mark Etchberger
Controller (As duly authorized
representative and as Principal Financial
and Accounting Officer)
Date: August 13, 2002
21
Continental Global Group, Inc.
Form 10-Q
Index of Exhibits
Exhibit
Number Description of Exhibit
3.1
(a) Certificate of Incorporation of Continental Global *
Group, Inc., as currently in effect.
(b) Certificate of Amendment of Certificate of
Incorporation of Continental Global Group, Inc.
(Filed as Exhibit 3.1(b) to the Company's Form 10-Q
for the quarter ended September 30, 2000, and is
incorporated herein by reference.)
3.2 By-Laws of Continental Global Group, Inc., as *
currently in effect.
3.3 Certificate of Incorporation of Continental Conveyor *
& Equipment Company, as currently in effect.
3.4 By-Laws of Continental Conveyor & Equipment Company, *
as currently in effect.
3.5 Certificate of Incorporation of Goodman Conveyor Company, *
as currently in effect.
3.6 By-Laws of Goodman Conveyor Company, as currently in effect. *
4.1 Indenture, dated as of April 1, 1997, among Continental *
Global Group, Inc., Continental Conveyor & Equipment
Company, Goodman Conveyor Company, and the Trustee
(containing, as exhibits, specimens of the Series A Notes
and the Series B Notes).
10.1
(a) Revolving Credit Facility, dated as of September 14, 1992, *
as amended by Amendments 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. (Filed as Exhibit 10.1 (b) to the Company's
Form 10-Q for the quarter ended March 31, 1999, and is
incorporated herein by reference.)
(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. (Filed as Exhibit 10.1 (c) to the Company's
Form 10-Q for the quarter ended June 30, 1999, and is incorporated
herein by reference.)
(d) Letter of Amendment, dated as of November 4, 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. (Filed as Exhibit 10.1 (d)
to the Company's Form 10-Q for the quarter ended September 30,
1999, and is incorporated herein by reference.)
(e) Amendment VI, dated as of March 28, 2000, to the Revolving Credit
Facility, dated as of September 14, 1992, among Continental
Conveyor & Equipment Company, Goodman Conveyor Company, and Bank
One, Cleveland, NA. (Filed as Exhibit 10.1 (e) to the Company's
Form 10-K for the year ended December 31, 1999, and is
incorporated herein by reference.)
Continental Global Group, Inc.
Form 10-Q
Index of Exhibits (Continued)
10.1
(f) Letter of Amendment, dated as of March 29, 2001, to the Revolving
Credit Facility, dated as of September 14, 1992, among Continental
Conveyor & Equipment Company, Goodman Conveyor Company, and Bank
One, Cleveland, NA. (Filed as Exhibit 10.1(f) to the Company's
Form 10-K for the year ended December 31, 2000, and is
incorporated herein by reference.)
(g) Letter of Amendment, dated as of March 25, 2002, to the Revolving
Credit Facility, dated as of September 14, 1992, among Continental
Conveyor & Equipment Company, Goodman Conveyor Company, and Bank
One, Cleveland, NA. (Filed as Exhibit 10.1(g) to the Company's
Form 10-K for the year ended December 31, 2001, and is
incorporated herein by
reference.)
10.2 Management Agreement, dated as of April 1, 1997, between *
Continental Global Group, Inc. and Nesco, Inc.
Certain instruments with respect to long-term debt have not been filed as
exhibits as the total amount of securities authorized under any one of such
instruments does not exceed 10 percent of the total assets of the registrant and
its subsidiaries on a consolidated basis. The registrant agrees to furnish to
the Commission a copy of each such instrument upon request.
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed
under the Securities Act of 1933.