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, 2004
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 [ ] No [x]
Indicate by check mark if the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). Yes [ ] No [x]
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, 2004, 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, 2004 and December 31, 2003 2
Condensed Consolidated Statements of Operations
Three Months and Six Months ended June 30, 2004 and 2003 3
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 2004 and 2003 4
Notes to Condensed Consolidated Financial Statements 5-14
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 15-20
Item 3 Quantitative and Qualitative Disclosures about Market Risk 21
Item 4 Controls and Procedures 21
Part II Other Information
Item 1 Legal Proceedings 22
Item 3 Defaults upon Senior Securities 22
Item 6 Exhibits and Reports on Form 8-K 22
Signatures 23
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
1
Continental Global Group, Inc.
Condensed Consolidated Balance Sheets
June 30 December 31
2004 2003
-------------------- --------------------
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 849,487 $ 850,727
Accounts receivable, net 43,174,097 32,225,793
Inventories 27,023,610 24,534,307
Deferred income taxes 358,330 264,770
Other current assets 1,485,958 942,179
-------------------- --------------------
Total current assets 72,891,482 58,817,776
Property, plant and equipment 32,058,100 32,269,483
Less accumulated depreciation 19,867,423 19,355,298
-------------------- --------------------
12,190,677 12,914,185
Goodwill 13,636,270 13,863,527
Deferred financing costs 1,429,731 1,689,682
Other assets 452,787 477,631
-------------------- --------------------
$ 100,600,947 $ 87,762,801
==================== ====================
Liabilities and Stockholder's Equity (Deficit):
Current liabilities:
Notes payable $ 15,432,243 $ 13,960,369
Trade accounts payable 34,130,279 24,703,137
Accrued compensation and employee benefits 5,420,261 7,422,648
Accrued interest on senior notes 9,900,000 3,300,000
Other accrued liabilities 9,083,276 8,520,662
Current maturities of long-term obligations 2,169,601 2,546,055
Senior notes in default 120,000,000 120,000,000
-------------------- --------------------
Total current liabilities 196,135,660 180,452,871
Pension obligations 640,836 340,836
Deferred income taxes 791,769 874,783
Other long-term obligations, less current maturities 638,706 369,449
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 (92,977,840) (90,287,074)
Accumulated other comprehensive loss (6,621,872) (5,981,752)
-------------------- --------------------
(97,606,024) (94,275,138)
-------------------- --------------------
$ 100,600,947 $ 87,762,801
==================== ====================
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
2004 2003 2004 2003
----------------------------------- ------------------------------------
(Unaudited) (Unaudited)
Net sales $ 67,110,319 $ 57,010,585 $ 117,114,175 $ 99,583,521
Cost of products sold 56,653,147 48,817,808 98,928,255 85,444,448
----------------------------------- ------------------------------------
Gross profit 10,457,172 8,192,777 18,185,920 14,139,073
Operating expenses:
Selling and engineering 3,443,933 3,335,664 6,669,860 6,548,618
General and administrative 2,777,769 2,475,205 5,540,924 5,028,021
Management fee 236,593 144,203 345,953 180,212
Amortization expense 6,590 6,590 13,180 13,181
Restructuring charges 58,081 43,919 173,538 57,924
--------------------------------------------------------------------------
Total operating expenses 6,522,966 6,005,581 12,743,455 11,827,956
--------------------------------------------------------------------------
Operating income 3,934,206 2,187,196 5,442,465 2,311,117
Other expenses:
Interest expense, net 3,977,649 3,906,156 7,807,818 7,627,757
Miscellaneous, net 425,594 332,623 325,413 522,689
----------------------------------- ------------------------------------
Total other expenses 4,403,243 4,238,779 8,133,231 8,150,446
----------------------------------- ------------------------------------
Net loss $ (469,037) $ (2,051,583) $ (2,690,766) $ (5,839,329)
=================================== ====================================
See notes to condensed consolidated financial statements.
3
Continental Global Group, Inc.
Condensed Consolidated Statements of Cash Flows
Six months ended June 30
2004 2003
---------------------- ---------------------
(Unaudited)
Operating activities:
Net loss $ (2,690,766) $ (5,839,329)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for depreciation and amortization 1,130,651 1,112,901
Amortization of deferred financing costs 259,951 259,951
Loss (gain) on disposal of assets (3,845) 36,957
Changes in operating assets and liabilities 482,930 (5,932,611)
---------------------- ---------------------
Net cash used in operating activities (821,079) (10,362,131)
---------------------- ---------------------
Investing activities:
Purchases of property, plant, and equipment (312,601) (240,848)
Proceeds from sale of property, plant, and equipment 6,644 55,179
---------------------- ---------------------
Net cash used in investing activities (305,957) (185,669)
---------------------- ---------------------
Financing activities:
Net increase in borrowings on notes payable 1,441,491 7,938,839
Principal payments on long-term obligations (318,262) (292,369)
---------------------- ---------------------
Net cash provided by financing activities 1,123,229 7,646,470
Effect of exchange rate changes on cash 2,567 32,282
---------------------- ---------------------
Decrease in cash and cash equivalents (1,240) (2,869,048)
Cash and cash equivalents at beginning of period 850,727 5,635,042
---------------------- ---------------------
Cash and cash equivalents at end of period $ 849,487 $ 2,765,994
====================== =====================
See notes to condensed consolidated financial statements.
4
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
A. Organization and 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, 2004
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. For further information, refer to the consolidated
financial statements and footnotes of Continental Global Group, Inc. and
subsidiaries for the year ended December 31, 2003, included in the Company's
Form 10-K.
The Company's consolidated financial statements have been presented on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company has incurred recurring losses which totaled approximately $2,691,000
for the six months ended June 30, 2004, and approximately $12,633,000 and
$12,542,000 during the years ended December 31, 2003 and 2002, respectively. The
Company also had working capital deficiencies of approximately $123,244,000 and
$121,635,000 at June 30, 2004 and December 31, 2003, respectively. The recurring
losses are primarily the result of substantial debt service obligations because
the Company is highly leveraged and its current cash flows from operations have
been insufficient to service the interest expense on its existing debt
obligations.
The Company was not in compliance with certain covenants under its revolving
credit facilities as of December 31, 2003 or the subsequent ending quarters,
resulting in a cross default under the terms of the Company's Senior Notes. In
addition, the Company failed to make its $6,600,000 semi-annual interest payment
for the Senior Notes due on April 1, 2004. Following expiration of the 30-day
grace period provided for in the indenture, the Senior Notes were in default and
the Company has subsequently received a notice of default from the Trustee for
the Senior Notes. Accordingly, the Senior Notes have been recorded as current
liabilities in the condensed consolidated balance sheet. However, on April 26,
2004, the Company entered into a forbearance agreement with the holders of a
majority interest ("Majority Holders") of the Senior Notes which instructed the
Trustee for the Senior Notes to refrain from taking any action with respect to
the default prior to May 31, 2004. On May 27, 2004, June 14, 2004 and July 13,
2004, this agreement was amended to extend the forbearance agreement until July
23, 2004.
On July 22, 2004, the Company entered into a restructuring agreement with the
Majority Holders of the Senior Notes pursuant to which the Company agreed to
commence an offer to exchange new notes and a cash payment for all of the
outstanding Senior Notes. The restructuring agreement extends the forbearance
agreement with the Majority Holders until the restructuring is consummated or
the restructuring agreement is terminated.
5
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
A. Organization and Basis of Presentation (Continued)
On August 5, 2004, the Company commenced an offer to exchange (i) cash in the
aggregate amount of $17,500,000, (ii) 9% Series A Senior Secured Notes in the
aggregate principal amount of $65,000,000, and (iii) 13% Series B Senior Secured
Notes in the aggregate principal amount of $10,000,000, for all of its
outstanding 11% Senior Notes due 2007 in the aggregate principal amount of
$120,000,000 and all interest accrued thereon. The Company expects to fund the
cash payment from (a) $12,000,000 of new subordinated indebtedness from N.E.S.
Investment Co., (b) additional borrowings under an amended credit facility, and
(c) cash available from operations. The exchange offer was made exclusively to
holders of the 11% Senior Notes due 2007 and will expire on September 2, 2004,
unless extended.
On May 1, 2004, June 1, 2004, June 15, 2004, July 13, 2004 and July 29, 2004,
the Company and Bank One, N.A. entered into forbearance agreements under which
Bank One has agreed not to exercise its rights with respect to the defaults,
including the right to demand payment, under the revolving credit facility for a
stated period while the Company negotiates a possible restructuring of its
Senior Notes. On July 12, 2004, the Company received a commitment letter from
Bank One for a waiver of the covenant violations and an extension of the
revolving credit facility through July 31, 2006. The extension is contingent
upon the completion of a restructuring of the Company's Senior Notes. The
Company is currently in discussions with the lenders under its existing foreign
revolving credit facilities to extend such credit facilities that have matured
or are expiring in 2004.
At this time the ability of the Company to successfully extend its domestic and
foreign revolving credit facilities maturing in 2004 and to restructure the
terms of the Senior Notes is uncertain and subject to substantial risk. In the
event that the Company is not successful in the restructuring of its Senior
Notes, the Company may seek to implement the restructuring of its Senior Notes
through a plan of reorganization under Chapter 11 of the Bankruptcy Code.
The condensed consolidated financial statements do not include any adjustments
to reflect any possible future effects of a restructuring of the Senior Notes.
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.
6
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
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 64% and 57% of
inventories at June 30, 2004 and December 31, 2003, 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 $2,566,000 and $1,316,000 at June 30, 2004
and December 31, 2003, respectively.
D. Warranty Costs
The Company's products are generally covered by warranties against defects in
material and workmanship for periods up to two years from the date of sale or
installation of the product. The Company records a provision for estimated
warranty cost based on historical experience and expectations of future
conditions and continuously assesses the adequacy of its product warranty
accrual and makes adjustments as needed. A summary of accrued warranty costs
follows:
Balance as of January 1, 2004 $ 1,275,401
Provision for warranties 418,484
Settlements made during the period (296,946)
Effect of exchange rate changes (16,918)
-----------------
Balance as of June 30, 2004 $ 1,380,021
=================
E. Restructuring Charges
The Company incurred restructuring charges of approximately $174,000 and $58,000
for the six months ended June 30, 2004 and 2003, respectively, related to
changes in staffing and production requirements in its domestic operations. As
part of this restructuring, in 2002 the Company developed a plan to discontinue
the manufacturing operations in certain of its domestic facilities and merge
these operations with other existing facilities. The process of merging the
domestic operations began in 2003. However, in the fourth quarter of 2003, the
Company hired a third-party consultant to re-evaluate the restructuring plan and
make further recommendations. These recommendations are currently under review
by the Company's management and board of directors. The additional cost of this
restructuring has not been determined. The charges incurred in 2004 consist
primarily of consulting fees while the charges incurred in 2003 consist
primarily of severance costs associated with a reduction in personnel which
occurred in 2002 and 2003. Total restructuring charges incurred since this plan
was developed are approximately $880,000. As of June 30, 2004, the Company has
paid approximately $466,000 of the charges incurred to date, with the majority
of the remainder expected to be paid by 2008.
7
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
F. Comprehensive Loss
The components of comprehensive loss for the three months and six months ended
June 30, 2004 and 2003 are as follows:
Three months ended June 30 Six months ended June 30
2004 2003 2004 2003
---------------------------------- ---------------------------------
Net loss $ (469,037) $ (2,051,583) $ (2,690,766) $ (5,839,329)
Other comprehensive income (loss):
Foreign currency translation
adjustment (418,822) 217,732 (381,745) 368,919
Change in fair value of derivative
hedge, net of tax (231,552) 34,167 (258,375) 77,430
---------------------------------- ---------------------------------
Comprehensive loss $ (1,119,411) $ (1,799,684) $ (3,330,886) $ (5,392,980)
================================== =================================
G. Employee Benefit Plans
As of June 30, 2004, the Company has made contributions of approximately
$2,477,000, including a required contribution of $266,000 and a voluntary
contribution of approximately $2,211,000 due to the underfunded status of the
plan. The Company does not expect to make any further contributions in 2004.
The components of net periodic benefit cost for the three months and six months
ended June 30 are as follows:
Three months ended Six months ended
June 30 June 30
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Service cost $ 50,950 $ 46,717 $ 101,900 $ 93,434
Interest cost 115,570 110,401 231,140 220,802
Expected return on plan assets (127,960) (78,318) (255,920) (156,636)
Amortization of prior service cost 4,133 4,133 8,266 8,266
Recognized loss 14,933 17,626 29,866 35,252
--------------- --------------- --------------- ---------------
Net periodic benefit cost $ 57,626 $ 100,559 $ 115,252 $ 201,118
=============== =============== =============== ===============
H. Income Taxes
Income taxes are provided using the liability method in accordance with SFAS 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's effective tax rate differs from
the statutory rate in the United States due to losses incurred without a
corresponding tax benefit.
The Company has subsidiaries located in Australia, the United Kingdom, and South
Africa, which are subject to income taxes in their respective countries.
8
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
I. 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. 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.
Three months ended June 30 Six months ended June 30
2004 2003 2004 2003
-------------------------------------------------------------------
(in thousands) (in thousands)
Net sales:
Conveyor equipment $ 60,385 $ 50,071 $ 104,753 $ 86,766
Manufactured housing products 6,547 6,638 12,028 12,306
Other 178 302 333 512
-------------------------------------------------------------------
Total net sales $ 67,110 $ 57,011 $ 117,114 $ 99,584
===================================================================
Segment operating income:
Conveyor equipment $ 4,376 $ 2,199 $ 6,401 $ 2,532
Manufactured housing products 225 467 329 651
Other 54 87 110 164
-------------------------------------------------------------------
Total segment operating income 4,655 2,753 6,840 3,347
Management fee 237 144 346 180
Amortization expense 7 7 13 13
Restructuring charges 58 44 174 58
Corporate expense 419 371 865 785
-------------------------------------------------------------------
Total operating income 3,934 2,187 5,442 2,311
Interest expense, net 3,978 3,906 7,808 7,627
Miscellaneous, net 425 333 325 523
-------------------------------------------------------------------
Loss before income taxes $ (469) $ (2,052) $(2,691) $ (5,839)
===================================================================
9
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
J. 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, 2004 and December 31,
2003 for the Company, the guarantor subsidiaries, and the non-guarantor
subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
June 30, 2004: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 59 $ 743 $ 47 $ - $ 849
Accounts receivable, net - 31,612 11,581 (19) 43,174
Inventories - 20,278 6,746 - 27,024
Deferred income taxes 81 - 342 (65) 358
Other current assets 242 969 1,271 (996) 1,486
-------------------------------------------------------------------------------
Total current assets 382 53,602 19,987 (1,080) 72,891
Property, plant, and
equipment, net - 7,560 4,631 - 12,191
Goodwill - 12,870 766 - 13,636
Investment in subsidiaries 60,009 20,428 - (80,437) -
Deferred financing costs 1,430 - - - 1,430
Other assets 13,892 2,857 - (16,296) 453
-------------------------------------------------------------------------------
Total assets $ 75,713 $ 97,317 $ 25,384 $ (97,813) $ 100,601
===============================================================================
Current liabilities:
Notes payable $ - $ 12,054 $ 4,486 $ (1,107) $ 15,433
Trade accounts payable 168 24,240 9,744 (22) 34,130
Accrued compensation and
employee benefits 167 4,069 1,184 - 5,420
Accrued interest 9,900 - - - 9,900
Other accrued liabilities 1,773 5,675 3,768 (2,133) 9,083
Current maturities of
long-term obligations - 2,160 10 - 2,170
Senior notes in default 120,000 - - - 120,000
-------------------------------------------------------------------------------
Total current liabilities 132,008 48,198 19,192 (3,262) 196,136
Pension obligation - 641 - - 641
Deferred income taxes - 14,384 - (13,592) 792
Other long-term obligations - 250 1,361 (973) 638
Stockholder's equity
(deficit) (56,295) 33,844 4,831 (79,986) (97,606)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 75,713 $ 97,317 $ 25,384 $ (97,813) $ 100,601
===============================================================================
10
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
J. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
December 31, 2003: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 114 $ 734 $ 3 $ - $ 851
Accounts receivable, net - 17,951 14,338 (63) 32,226
Inventories - 19,925 4,609 - 24,534
Deferred income taxes 81 - 372 (188) 265
Other current assets 51 647 2,061 (1,817) 942
-------------------------------------------------------------------------------
Total current assets 246 39,257 21,383 (2,068) 58,818
Property, plant, and
equipment, net - 8,182 4,732 - 12,914
Goodwill - 13,031 832 - 13,863
Investment in subsidiaries 60,009 21,520 - (81,529) -
Deferred financing costs 1,690 - - - 1,690
Other assets 12,285 2,023 - (13,830) 478
-------------------------------------------------------------------------------
Total assets $ 74,230 $ 84,013 $ 26,947 $ (97,427) $ 87,763
===============================================================================
Current liabilities:
Notes payable $ - $ 11,298 $ 3,393 $ (731) $ 13,960
Trade accounts payable 34 12,922 11,810 (63) 24,703
Accrued compensation and
employee benefits 42 6,006 1,375 - 7,423
Accrued interest 3,300 - - - 3,300
Other accrued liabilities 878 5,737 4,441 (2,535) 8,521
Current maturities of
long-term obligations - 2,456 90 - 2,546
Senior Notes in default 120,000 - - - 120,000
-------------------------------------------------------------------------------
Total current liabilities 124,254 38,419 21,109 (3,329) 180,453
Pension obligation - 341 - - 341
Deferred income taxes - 12,860 - (11,985) 875
Other long-term obligations - 196 1,131 (958) 369
Stockholder's equity
(deficit) (50,024) 32,197 4,707 (81,155) (94,275)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 74,230 $ 84,013 $ 26,947 $ (97,427) $ 87,763
===============================================================================
11
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
J. Guarantor and Non-Guarantor Subsidiaries (Continued)
Summarized consolidating statements of operations for the three months and six
months ended June 30, 2004 and 2003, 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, 2004:
Net sales $ - $ 56,240 $ 10,870 $ - $ 67,110
Cost of products sold - 46,908 9,745 - 56,653
------------- ------------- --------------- ------------- -------------
Gross profit - 9,332 1,125 - 10,457
Total operating expenses 453 4,795 1,275 - 6,523
------------- ------------- --------------- ------------- -------------
Operating income (loss) (453) 4,537 (150) - 3,934
Interest expense, net 3,430 386 162 - 3,978
Miscellaneous, net 462 (30) (7) - 425
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (4,345) 4,181 (305) - (469)
Income tax expense (benefit) (912) 912 - - -
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (3,433) $ 3,269 $ (305) $ - $ (469)
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended June 30, 2003:
Net sales $ - $ 47,349 $ 9,847 $ (185) $ 57,011
Cost of products sold - 39,950 9,053 (185) 48,818
------------- ------------- --------------- ------------- -------------
Gross profit - 7,399 794 - 8,193
Total operating expenses 448 4,320 1,238 - 6,006
------------- ------------- --------------- ------------- -------------
Operating income (loss) (448) 3,079 (444) - 2,187
Interest expense, net 3,429 395 82 - 3,906
Miscellaneous, net 153 195 (15) - 333
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (4,030) 2,489 (511) - (2,052)
Income tax expense (benefit) (842) 842 - - -
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (3,188) $ 1,647 $ (511) $ - $ (2,052)
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Six months ended June 30, 2004:
Net sales $ - $ 93,564 $ 23,558 $ (8) $ 117,114
Cost of products sold - 77,738 21,198 (8) 98,928
------------- ------------- --------------- ------------- -------------
Gross profit - 15,826 2,360 - 18,186
Total operating expenses 806 9,365 2,573 - 12,744
------------- ------------- --------------- ------------- -------------
Operating income (loss) (806) 6,461 (213) - 5,442
Interest expense, net 6,860 658 290 - 7,808
Miscellaneous, net 462 (122) (15) - 325
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (8,128) 5,925 (488) - (2,691)
Income tax expense (benefit) (1,607) 1,607 - - -
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (6,521) $ 4,318 $ (488) $ - $ (2,691)
============= ============= =============== ============= =============
12
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
J. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Six months ended June 30, 2003:
Net sales $ - $ 80,902 $ 18,893 $ (211) $ 99,584
Cost of products sold - 68,148 17,508 (211) 85,445
------------- ------------- --------------- ------------- -------------
Gross profit - 12,754 1,385 - 14,139
Total operating expenses 897 8,551 2,380 - 11,828
------------- ------------- --------------- ------------- -------------
Operating income (loss) (897) 4,203 (995) - 2,311
Interest expense, net 6,855 633 139 - 7,627
Miscellaneous, net 323 219 (19) - 523
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (8,075) 3,351 (1,115) - (5,839)
Income tax expense (benefit) (1,240) 1,240 - - -
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (6,835) $ 2,111 $ (1,115) $ - $ (5,839)
============= ============= =============== ============= =============
Summarized consolidating cash flow statements for the six months ended June 30,
2004 and 2003, 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, 2004:
Net cash provided by (used in)
operating activities $ (305) $ 938 $ (1,469) $ 15 $ (821)
Investing activities:
Purchases of property, plant, and
equipment - (189) (124) - (313)
Proceeds from sale of property,
plant, and equipment - 7 - - 7
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (182) (124) - (306)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase in borrowings on notes
payable - 807 634 - 1,441
Principal payments on long-term
obligations - (269) (49) - (318)
Distributions 250 (250) - - -
Intercompany loan activity - (1,044) 1,044 - -
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities 250 (756) 1,629 - 1,123
Exchange rate changes on cash - 9 8 (15) 2
------------- ------------- --------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents (55) 9 44 - (2)
Cash and cash equivalents at beginning
of period 114 734 3 - 851
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 59 $ 743 $ 47 $ - $ 849
============= ============= =============== ============= =============
13
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2004
J. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Six months ended June 30, 2003:
Net cash provided by (used in)
operating activities $ (7,892) $ 132 $ (2,633) $ 31 $ (10,362)
Investing activities:
Purchases of property, plant, and
equipment - (127) (114) - (241)
Proceeds from sale of property,
plant, and equipment - 52 3 - 55
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (75) (111) - (186)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase in borrowings on notes
payable - 4,995 2,944 - 7,939
Principal payments on long-term
obligations - (256) (36) - (292)
Distributions for interest on
senior notes 5,600 (5,600) - - -
Intercompany loan activity (175) 355 (180) - -
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities 5,425 (506) 2,728 - 7,647
Exchange rate changes on cash - 46 17 (31) 32
------------- ------------- --------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents (2,467) (403) 1 - (2,869)
Cash and cash equivalents at beginning
of period 4,524 1,109 2 - 5,635
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 2,057 $ 706 $ 3 $ - $ 2,766
============= ============= =============== ============= =============
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 for
the year ended December 31, 2003.
General
The Company, through its subsidiaries, is primarily engaged in the manufacture
and distribution of bulk material handling and replacement equipment, primarily
for use in the mining industry. The Company is a holding company organized under
the Delaware General Corporation law and conducts all of its business through
its direct and indirect operating subsidiaries. The Company's direct operating
subsidiaries are Continental Conveyor and Equipment Company and Goodman Conveyor
Company. The Company also owns indirectly all of the capital stock of
Continental Conveyor & Equipment Pty. Ltd., an Australian holding company that
owns all of the capital stock of four Australian operating companies. The
Company also owns indirectly all of the capital stock of Continental Conveyor
Ltd., a U.K. operating company, and Continental MECO (Pty.) Ltd., a South
African operating company.
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, 2004 and 2003.
Three months ended Six months ended
June 30 June 30
-------------------------- -------------------------
2004 2003 2004 2003
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 84.4 85.6 84.5 85.8
Gross profit 15.6 14.4 15.5 14.2
SG&A expenses 9.3 10.2 10.4 11.6
Management fee 0.3 0.3 0.3 0.2
Amortization expense - - - -
Restructuring charges 0.1 0.1 0.1 0.1
Operating income 5.9 3.8 4.7 2.3
Three months ended June 30, 2004, compared to three months ended June 30, 2003:
Net Sales
Net sales for the quarter increased $10.1 million, or 18%, from $57.0 million in
2003 to $67.1 million in 2004. Net sales in the domestic operations of the
Company's conveyor equipment segment increased $3.1 million due to improved
sales volume in the mining equipment and conveyor components business areas. Net
sales in the foreign operations of the Company's conveyor equipment segment
increased $7.2 million. Changes in foreign currency translation rates resulted
in $3.2 million of this increase. The remaining $4.0 million increase resulted
from increased net sales in the Company's Australian subsidiary due to
significant shipments on a major contract in May and June of 2004. Net sales in
the Company's manufactured housing products segment and other segment each
decreased by $0.1 million.
15
Gross Profit
Gross profit for the quarter increased $2.3 million, or 28%, from $8.2 million
in 2003 to $10.5 million in 2004. Gross profit in the domestic operations of the
Company's conveyor equipment segment increased $0.8 million as a result of
increased sales volume in the higher margin conveyor components business area.
Gross profit in the foreign operations of the Company's conveyor equipment
segment increased $1.7 million. Of this $1.7 million increase, $0.4 million was
caused by changes in foreign currency translation rates. Adjusted for foreign
currency effects, gross profit in the Company's Australian and United Kingdom
subsidiaries increased $1.1 million and $0.2 million, respectively. The increase
in Australia primarily resulted from improved profit margins on major contracts.
Gross profit in the Company's manufactured housing products segment decreased
$0.2 million.
SG&A Expenses
SG&A expenses for the quarter increased $0.4 million, or 7%, from $5.8 million
in 2003 to $6.2 million in 2004. SG&A expenses in the foreign operations of the
Company's conveyor equipment segment increased $0.2 million due to changes in
foreign currency translation rates. SG&A expenses in the domestic operations of
the Company's conveyor equipment segment and in the Company's manufactured
housing products segment each increased $0.1 million.
Operating Income
Operating income for the quarter increased $1.7 million, or 77%, from $2.2
million in 2003 to $3.9 million in 2004. This increase resulted from the $2.3
million increase in gross profit, partially offset by the $0.4 million increase
in SG&A expenses and a $0.2 million increase in other operating expenses,
primarily management fees.
Six months ended June 30, 2004, compared to six months ended June 30, 2003:
Net Sales
Net sales for the six-month period increased $17.5 million, or 18%, from $99.6
million in 2003 to $117.1 million in 2004. Net sales in the domestic operations
of the Company's conveyor equipment segment increased $4.6 million due to
improved sales volume in the mining equipment and conveyor components business
areas. Net sales in the foreign operations of the Company's conveyor equipment
segment increased $13.4 million. Changes in foreign currency translation rates
resulted in $7.2 million of this increase. The remaining increase primarily
resulted from increased net sales in the Company's Australian and United Kingdom
subsidiaries, adjusted for foreign currency translation rates, of $4.3 million
and $1.8 million, respectively. The increase in Australia was due to improved
market conditions in the coal industry and significant shipments on a major
contract in the second quarter of 2004. The increase in the United Kingdom
resulted from significant shipments on a major contract. Net sales in the
Company's manufactured housing products and other segments decreased $0.3
million and $0.2 million, respectively.
Gross Profit
Gross profit for the six-month period increased $4.1 million, or 29%, from $14.1
million in 2003 to $18.2 million in 2004. Gross profit in the domestic
operations of the Company's conveyor equipment segment increased $1.8 million
due to a more favorable product mixture in the mining equipment business area
and increased sales volume in the higher margin conveyor components business
area. Gross profit in the foreign operations of the Company's conveyor equipment
segment increased $2.5 million, of which $0.9 million resulted from changes in
foreign currency translation rates. The remaining increase can be attributed to
increases in Australia and the United Kingdom of $1.0 million and $0.6 million,
respectively. These increases were primarily attributable to improved profit
margins due to the increased sales volume which resulted in more efficient
16
utilization of overhead expenses. Gross profit in the Company's manufactured
housing products segment decreased $0.2 million.
SG&A Expenses
SG&A expenses for the six-month period increased $0.6 million, or 5%, from $11.6
million in 2003 to $12.2 million in 2004. SG&A expenses in the foreign
operations of the conveyor equipment segment increased $0.4 million. Changes in
foreign currency translation rates resulted in a $0.6 million increase. Adjusted
for foreign exchange rates, SG&A expenses in the foreign subsidiaries decreased
$0.2 million primarily due to reduced selling and engineering expenses at the
Australian and United Kingdom locations. In addition, SG&A expenses in the
Company's manufactured housing products segment increased $0.1 million and
corporate SG&A expenses increased $0.1 million.
Operating Income
Operating income for the six-month period increased $3.1 million, or over 100%,
from $2.3 million in 2003 to $5.4 million in 2004. This increase resulted from
the $4.1 million increase in gross profit, partially offset by the $0.6 million
increase in SG&A expenses and a $0.4 million increase in other operating
expenses, primarily management fees and restructuring charges.
Restructuring Charges
The Company incurred restructuring charges of approximately $0.2 million and
$0.1 million in 2004 and 2003, respectively, related to changes in staffing and
production requirements in its domestic operations. As part of this
restructuring, in 2002 the Company developed a plan to discontinue the
manufacturing operations in certain of its domestic facilities and merge these
operations with other existing facilities. The process of merging the domestic
operations began in 2003. However, in the fourth quarter of 2003, the Company
hired a third-party consultant to re-evaluate the restructuring plan and make
further recommendations. These recommendations are currently under review by the
Company's management and board of directors. The additional cost of this
restructuring has not been determined. The charges incurred in 2004 consist
primarily of consulting fees while the charges incurred in 2003 consist
primarily of severance costs associated with a reduction in personnel which
occurred in 2002 and 2003. Total restructuring charges incurred since this plan
was developed are approximately $0.9 million. As of June 30, 2004, the Company
has paid approximately $0.5 million of the charges incurred to date, with the
majority of the remainder expected to be paid by 2008.
Backlog
Backlog at June 30, 2004 was $44.3 million, an increase of $9.3 million, or 27%,
from $35.0 million at December 31, 2003 and a decrease of $16.8 million, or 27%,
from $61.1 million at March 31, 2004. At June 30, 2004, backlog in the domestic
operations of the Company's conveyor equipment segment was $23.3 million, an
increase of $2.8 million from March 31, 2004, and backlog in the foreign
operations of the Company's conveyor equipment segment was $21.0 million, a
decrease of $19.6 million from March 31, 2004. Management believes that
approximately 90% of the backlog will be shipped in 2004.
Liquidity and Capital Resources
Net cash used in operating activities was $0.8 million and $10.4 million for the
six months ended June 30, 2004 and 2003, respectively. Net cash used in
operating activities in 2004 resulted from a net loss of $2.7 million offset by
non-cash expenses of $1.4 million and a net decrease in operating assets and
liabilities of $0.5 million. Net cash used in operating activities in 2003
resulted from a net loss of $5.8 million combined with a net increase in
operating assets and liabilities of $5.9 million, partially offset by non-cash
expenses of $1.3 million. The reduction in net cash used in operating activities
17
from 2003 to 2004 was partially due to the reduction in the net loss which
resulted from higher net sales and improved gross profit margins. In addition,
the net increase in operating assets and liabilities in 2003 was primarily due
to the significant increase in trade accounts receivables which resulted from
higher sales in the second quarter of 2003 compared to the fourth quarter of
2002
Net cash used in investing activities was $0.3 million and $0.2 million for the
six months ended June 30, 2004 and 2003, respectively, and represents net
purchases of property, plant, and equipment for both years.
Net cash provided by financing activities was $1.1 million and $7.6 million for
the six months ended June 30, 2004 and 2003, respectively. Net cash provided by
financing activities in 2004 resulted from a net increase in borrowings on notes
payable of $1.4 million offset by principal payments on long-term obligations of
$0.3 million. Net borrowings on notes payable under the Company's domestic
credit facility increased $2.5 million and net borrowings on notes payable under
the Company's various credit facilities at the foreign subsidiaries decreased
$1.1 million. Net cash provided by financing activities in 2003 resulted from a
net increase in borrowings on notes payable of $7.9 million offset by principal
payments on long-term obligations of $0.3 million. Net borrowings on notes
payable under the Company's domestic credit facility increased $5.0 million
while net borrowings on notes payable under the Company's various credit
facilities at the foreign subsidiaries increased $2.9 million.
The Company's primary capital requirements consist of capital expenditures and
debt service. The Company utilizes cash on hand and its available credit
facilities to satisfy these requirements. The Company anticipates that capital
expenditures in 2004, which will be primarily for maintenance capital, will
approximate those made in 2003. In addition to the Company's debt service
requirements for interest expense, as of June 30, 2004, the Company's domestic
and foreign credit facilities had outstanding principal balances of
approximately $11.7 million and $3.7 million, respectively.
The Company has incurred recurring losses which totaled approximately $2.7
million for the six months ended June 30, 2004, and approximately $12.6 million
and $12.5 million during the years ended December 31, 2003 and 2002,
respectively. The Company also had working capital deficiencies of approximately
$123.2 million and $121.6 million at June 30, 2004 and December 31, 2003,
respectively. The recurring losses are primarily the result of substantial debt
service obligations because the Company is highly leveraged and its current cash
flows from operations have been insufficient to service the interest expense on
its existing debt obligations.
The Company was not in compliance with certain covenants under its revolving
credit facilities as of December 31, 2003 or the subsequent ending quarters,
resulting in a cross default under the terms of the Company's Senior Notes. In
addition, the Company failed to make its $6.6 million semi-annual interest
payment for the Senior Notes due on April 1, 2004. Following expiration of the
30-day grace period provided for in the indenture, the Senior Notes were in
default and the Company has subsequently received a notice of default from the
Trustee for the Senior Notes. Accordingly, the Senior Notes have been recorded
as current liabilities in the condensed consolidated balance sheet. However, on
April 26, 2004, the Company entered into a forbearance agreement with the
holders of a majority interest ("Majority Holders") of the Senior Notes which
instructed the Trustee for the Senior Notes to refrain from taking any action
with respect to the default prior to May 31, 2004. On May 27, 2004, June 14,
2004 and July 13, 2004, this agreement was amended to extend the forbearance
agreement until July 23, 2004.
18
On July 22, 2004, the Company entered into a restructuring agreement with the
Majority Holders of the Senior Notes pursuant to which the Company agreed to
commence an offer to exchange new notes and a cash payment for all of the
outstanding Senior Notes. The restructuring agreement extends the forbearance
agreement with the Majority Holders until the restructuring is consummated or
the restructuring agreement is terminated.
On August 5, 2004, the Company commenced an offer to exchange (i) cash in the
aggregate amount of $17.5 million, (ii) 9% Series A Senior Secured Notes in the
aggregate principal amount of $65 million, and (iii) 13% Series B Senior Secured
Notes in the aggregate principal amount of $10 million, for all of its
outstanding 11% Senior Notes due 2007 in the aggregate principal amount of $120
million and all interest accrued thereon. The Company expects to fund the cash
payment from (a) $12 million of new subordinated indebtedness from N.E.S.
Investment Co., (b) additional borrowings under an amended credit facility, and
(c) cash available from operations. The exchange offer was made exclusively to
holders of the 11% Senior Notes due 2007 and will expire on September 2, 2004,
unless extended.
On May 1, 2004, June 1, 2004, June 15, 2004, July 13, 2004 and July 29, 2004,
the Company and Bank One, N.A. entered into forbearance agreements under which
Bank One has agreed not to exercise its rights with respect to the defaults,
including the right to demand payment, under the revolving credit facility for a
stated period while the Company negotiates a possible restructuring of its
Senior Notes. On July 12, 2004, the Company received a commitment letter from
Bank One for a waiver of the covenant violations and an extension of the
revolving credit facility through July 31, 2006. The extension is contingent
upon the completion of a restructuring of the Company's Senior Notes. The
Company is currently in discussions with the lenders under its existing foreign
revolving credit facilities to extend such credit facilities that have matured
or are expiring in 2004.
The credit facility of the Company's United Kingdom subsidiary matured on March
31, 2004. The subsidiary was not in compliance with its debt covenants at March
31, 2004. However, the subsidiary's principal lender has continued to allow the
subsidiary to borrow under the facility to date at a reduced line of 2.25
million British pounds sterling. The subsidiary is currently in negotiations for
a new agreement. The credit facility of the Company's Australian subsidiary also
matured on March 31, 2004. The subsidiary's principal lender has continued to
allow the subsidiary to borrow under the facility to date and the subsidiary is
currently in negotiations for a new agreement.
At June 30, 2004, the Company had cash and cash equivalents of approximately
$0.8 million and approximately $9.7 million available for use under its domestic
credit facility, representing approximately $10.5 million of liquidity. At this
time the ability of the Company to successfully extend its domestic and foreign
revolving credit facilities maturing in 2004 and to restructure the terms of the
Senior Notes is uncertain and subject to substantial risk. In the event that the
Company is not successful in the restructuring of its Senior Notes, the Company
may seek to implement the restructuring of its Senior Notes through a plan of
reorganization under Chapter 11 of the Bankruptcy Code.
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
19
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 $(0.4) million and $0.4 million for the six months
ended June 30, 2004 and 2003, respectively.
Cautionary Statement for Safe Harbor Purposes
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
federal securities laws. As a general matter, forward-looking statements are
those focused upon future plans, objectives or performance as opposed to
historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters that are not historical in nature.
Such forward looking statements are subject to uncertainties and factors
relating to the Company's operations and business environment, all of which are
difficult to predict and many of which are beyond the control of the Company,
that could cause actual results of the Company to differ materially from those
matters expressed in or implied by such forward-looking statements.
In addition, the Company's future results of operations, financial condition,
liquidity and capital resources could be materially adversely affected by, among
other things, economic and political uncertainties or prolonged economic
recession.
20
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) 2004 2005 2006 2007 2008 Total 6/30/04
- ------------------------------------------------------------------------------------------------------
Long-Term Obligations,
including current portion
Fixed Rate $ 120,000 $ - $ - $ - $ - $ 120,000 $ 24,000
Average interest rate 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.
Item 4. Controls and Procedures
As of June 30, 2004, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There were no significant changes in the Company's internal controls
over financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
21
Part II. Other Information
Item 1. Legal Proceedings
In August and September 2003, Continental Conveyor & Equipment Company was
served as one of fifty-eight known and unknown defendants in nineteen separate
actions pending in various state courts in the State of Alabama alleging various
contract, tort and warranty claims. All claims in such actions arose out of
alleged injuries and deaths occurring at the Jim Walters Resources No. 5 Mine
which occurred on September 23, 2001. The plaintiffs in such actions do not
allege a particular set of actions or omissions by Continental Conveyor &
Equipment Company that give rise to the claims, nor is there a specific amount
of damages sought. The Company believes that these claims are without merit and
intends to vigorously defend all claims. The Company considers such claims to be
the type of claims that arise in the normal course of its business. While it is
not feasible to predict the outcome of these matters with certainty, management
is of the opinion that their ultimate disposition should not have a material
adverse effect on the Company's financial condition.
Item 3. Defaults upon Senior Securities
On April 1, 2004, the Company failed to make its $6.6 million semi-annual
interest payment due for the 11% Senior Notes due 2007. Following expiration of
the 30-day grace period provided for in the indenture, the Senior Notes were in
default and the Company has subsequently received a notice of default from the
Trustee for the Senior Notes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Refer to the index of exhibits.
(b) Reports on Form 8-K:
On April 1, 2004, the Company filed a Form 8-K regarding
Regulation FD Disclosure, which contained as an Exhibit a letter
of notification to Wells Fargo Bank, the Trustee of the
Company's 11% Senior Notes due 2007, that the Company had
determined to avail itself of the 30-day grace period for the
payment of interest due on April 1, 2004.
On July 23, 2004, the Company filed a Form 8-K which contained
as an Exhibit a Restructuring Agreement, dated as of July 22,
2004, by and among Continental Global Group, Inc., N.E.S.
Investment Co. and Wayzata Investment Partners LLC, pursuant to
which the Company agreed to commence an offer to exchange (i)
cash in the aggregate amount of $17,500,000, (ii) 9% Series A
Senior Secured Notes in the aggregate principal amount of
$65,000,000, and (iii) 13% Series B Senior Secured Notes in the
aggregate principal amount of $10,000,000, for all of its
outstanding 11% Senior Notes due 2007 in the aggregate principal
amount of $120,000,000.
On August 3, 2004, the Company filed a Form 8-K which amended
the Restructuring Agreement to extend the non-commencement
termination date from July 30, 2004 to August 6, 2004.
22
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 16, 2004
23
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 Amended and Restated Credit Facility and Security Agreement, dated
as of July 25, 2002, among Bank One, NA, Continental Conveyor &
Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit
10.1 to the Company's Form 10-Q for the quarter ended September
30, 2002, and is incorporated herein by reference.)
10.2 Management Agreement, dated as of April 1, 1997, between
Continental Global Group, Inc. and Nesco, Inc. *
10.3 Employment Agreement, effective November 4, 2002, between
Continental Global Group, Inc. and Robert Hale. (Filed as Exhibit
10.3 to the Company's Form 10-K for the year ended December 31,
2002, and is incorporated herein by reference.)
10.4 Continental Global Group, Inc. Phantom Stock Plan dated as of
November 4, 2002. (Filed as Exhibit 10.4 to the Company's Form
10-K for the year ended December 31, 2002, and is incorporated
herein by reference.)
10.5 Second Amendment to Amended and Restated Credit Facility and
Security Agreement, effective as of August 12, 2003, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.5 to the Company's
Form 10-Q for the quarter ended June 30, 2003, and is incorporated
herein by reference.)
10.6 Forbearance Agreement, effective as of April 26, 2004, by and
among Continental Global Group, Inc., N.E.S. Investment Co., and
CFSC Wayland Advisers, Inc. (Filed as Exhibit 10.6 to the
Company's Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.7 Forbearance Agreement, effective as of May 1, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.7 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.8 Amendment 1, dated as of May 27, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers,
Inc. (Filed as Exhibit 10.8 to the Company's Form 10-K for the
year ended December 31, 2003, and is incorporated herein by
reference.)
10.9 Forbearance Agreement, effective as of June 1, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.9 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.10 Amendment 2, dated as of June 14, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers,
Inc. (Filed as Exhibit 10.10 to the Company's Form 10-K for the
year ended December 31, 2003, and is incorporated herein by
reference.)
10.11 Forbearance Agreement, effective as of June 15, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.11 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.12 Commitment Letter, dated as of July 12, 2004, from Bank One, NA to
Continental Conveyor & Equipment Company, Goodman Conveyor
Company, and Continental Global Group, Inc. (Filed as Exhibit
10.12 to the Company's Form 10-K for the year ended December 31,
2003, and is incorporated herein by reference.)
10.13 Amendment 3, dated as of July 13, 2004, to Forbearance Agreement
effective as of April 26, 2004, by and among Continental Global
Group, Inc., N.E.S. Investment Co., and Wayzata Advisers LLC.
(Filed as Exhibit 10.13 to the Company's Form 10-K for the year
ended December 31, 2003, and is incorporated herein by reference.)
10.14 Forbearance Agreement, effective as of July 13, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.14 to the Company's
Form 10-K for the year ended December 31, 2003, and is
incorporated herein by reference.)
10.15 Forbearance Agreement, effective as of July 29, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company.
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certifications of the Chief Executive Officer and Chief Financial
Officer pursuant to 18, U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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.