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, 2006
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 by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Act. Large accelerated
filer [ ] Accelerated filer [ ] Non-accelerated filer [x]
Indicate by check mark whether the registrant is a shell company (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, 2006, 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, 2006 and December 31, 2005 2
Condensed Consolidated Statements of Income
Three Months and Six Months ended June 30, 2006 and 2005 3
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 2006 and 2005 4
Notes to Condensed Consolidated Financial Statements 5-12
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 13-19
Item 3 Quantitative and Qualitative Disclosures about Market Risk 20
Item 4 Controls and Procedures 20
Part II Other Information
Item 1 Legal Proceedings 21
Item 1A Risk Factors 21
Item 6 Exhibits 21
Signatures 22
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
1
Continental Global Group, Inc.
Condensed Consolidated Balance Sheets
June 30 December 31
2006 2005
-------------------- --------------------
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 985,507 $ 543,400
Accounts receivable, net 67,927,084 49,294,104
Inventories 51,031,253 42,170,889
Deferred income taxes 1,416,666 1,466,751
Other current assets 1,629,781 1,980,832
-------------------- --------------------
Total current assets 122,990,291 95,455,976
Property, plant and equipment 36,629,763 35,387,432
Less accumulated depreciation 22,362,981 21,821,194
-------------------- --------------------
14,266,782 13,566,238
Goodwill 13,789,054 13,789,054
Deferred financing costs 389,927 649,878
Other assets 697,516 745,199
-------------------- --------------------
$ 152,133,570 $ 124,206,345
==================== ====================
Liabilities and Stockholder's Equity (Deficit):
Current liabilities:
Notes payable $ 14,759,968 $ 12,485,090
Trade accounts payable 41,032,591 33,797,142
Accrued compensation and employee benefits 8,674,827 7,270,396
Accrued interest on senior notes 295,075 295,075
Other accrued liabilities 12,441,142 9,376,016
Management fees payable to Nesco, Inc. 4,299,046 2,996,054
Income taxes payable 2,227,001 2,942,570
Current maturities of long-term obligations 19,366,944 7,829,379
-------------------- --------------------
Total current liabilities 103,096,594 76,991,722
Pension obligations 1,602,471 1,483,305
Deferred income taxes 4,680,263 4,790,887
Senior notes 77,513,404 91,316,624
Note payable to N.E.S. Investment Co. 13,752,485 13,171,985
Other long-term obligations, less current maturities 4,686,589 4,697,353
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 (48,601,382) (63,536,195)
Accumulated other comprehensive loss (6,590,542) (6,703,024)
-------------------- --------------------
(53,198,236) (68,245,531)
-------------------- --------------------
$ 152,133,570 $ 124,206,345
==================== ====================
See notes to condensed consolidated financial statements.
2
Continental Global Group, Inc.
Condensed Consolidated Statements of Income
Three months ended June 30 Six months ended June 30
2006 2005 2006 2005
---------------------------------- -------------------------------------
(Unaudited) (Unaudited)
Net sales $ 94,216,160 $ 73,631,333 $ 181,228,705 $ 138,686,047
Cost of products sold 72,701,099 56,879,372 141,043,253 109,371,598
---------------------------------- -------------------------------------
Gross profit 21,515,061 16,751,961 40,185,452 29,314,449
Operating expenses:
Selling and engineering 4,477,566 3,961,146 8,490,844 7,649,024
General and administrative 3,570,751 3,134,759 6,687,809 6,309,786
Management fee 699,966 505,925 1,302,992 815,727
Amortization expense 6,590 6,590 13,180 13,180
Restructuring charges - 39,192 - 41,682
---------------------------------- -------------------------------------
Total operating expenses 8,754,873 7,647,612 16,494,825 14,829,399
---------------------------------- -------------------------------------
Operating income 12,760,188 9,104,349 23,690,627 14,485,050
Other expense:
Interest expense, net 1,256,366 1,341,059 2,487,679 2,433,848
Miscellaneous expense 168,546 457,581 92,541 524,577
---------------------------------- -------------------------------------
Total other expenses 1,424,912 1,798,640 2,580,220 2,958,425
---------------------------------- -------------------------------------
Income before income taxes 11,335,276 7,305,709 21,110,407 11,526,625
Income tax expense 3,322,750 2,180,203 6,175,594 3,108,805
---------------------------------- -------------------------------------
Net income $ 8,012,526 $ 5,125,506 $ 14,934,813 $ 8,417,820
================================== =====================================
See notes to condensed consolidated financial statements.
3
Continental Global Group, Inc.
Condensed Consolidated Statements of Cash Flows
Six months ended June 30
2006 2005
---------------------- ---------------------
(Unaudited)
Operating activities:
Net income $ 14,934,813 $ 8,417,820
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Provision for depreciation and amortization 1,066,227 1,013,770
Amortization of deferred financing costs 259,951 259,951
Deferred income taxes (429,827) (144,183)
Non-cash interest paid in-kind 580,500 450,000
Loss (gain) on disposal of assets 8,006 (36,171)
Changes in operating assets and liabilities (14,154,564) (10,550,099)
---------------------- ---------------------
Net cash provided by (used in) operating activities 2,265,106 (588,912)
---------------------- ---------------------
Investing activities:
Purchases of property, plant, and equipment (1,707,353) (1,346,625)
Proceeds from sale of property, plant, and equipment 8,806 41,486
---------------------- ---------------------
Net cash used in investing activities (1,698,547) (1,305,139)
---------------------- ---------------------
Financing activities:
Net increase in borrowings on notes payable 2,231,588 5,025,592
Proceeds from long-term obligations 1,324,367 773,500
Payments on Senior Notes (3,073,220) (3,073,219)
Principal payments on long-term obligations (539,118) (809,914)
---------------------- ---------------------
Net cash provided by (used in) financing activities (56,383) 1,915,959
Effect of exchange rate changes on cash (68,069) 905
---------------------- ---------------------
Increase in cash and cash equivalents 442,107 22,813
Cash and cash equivalents at beginning of period 543,400 887,256
---------------------- ---------------------
Cash and cash equivalents at end of period $ 985,507 $ 910,069
====================== =====================
See notes to condensed consolidated financial statements.
4
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2006
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, 2006
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2006. For further information, refer to the consolidated
financial statements and footnotes of Continental Global Group, Inc. and
subsidiaries for the year ended December 31, 2005, included in the Company's
Form 10-K.
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. 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 67% of
inventories at June 30, 2006 and December 31, 2005 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 $4,677,000 and $4,302,000 at June 30, 2006
and December 31, 2005, 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:
2006 2005
----------------- -----------------
Balance as of January 1 $ 1,731,456 $ 1,634,049
Provision for warranties 702,967 774,230
Settlements made during the period (372,526) (478,893)
Effect of exchange rate changes 10,603 (32,220)
----------------- -----------------
Balance as of June 30 $ 2,072,500 $ 1,897,166
================= =================
5
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2006
E. Comprehensive Income
The components of comprehensive income for the three months and six months ended
June 30 are as follows:
Three months ended June 30 Six months ended June 30
2006 2005 2006 2005
---------------------------------- ---------------------------------
Net income $ 8,012,526 $ 5,125,506 $ 14,934,813 $ 8,417,820
Other comprehensive income (loss):
Foreign currency translation
adjustment 287,427 (170,827) 112,482 (320,615)
Change in fair value of derivative
hedge, net of tax - (556) - (5,889)
---------------------------------- ---------------------------------
Comprehensive income $ 8,299,953 $ 4,954,123 $ 15,047,295 $ 8,091,316
================================== =================================
F. Employee Benefit Plans
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
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
Service cost $ 51,203 $ 53,857 $ 102,406 $ 107,714
Interest cost 132,349 128,347 264,698 256,694
Expected return on plan assets (154,472) (146,479) (308,944) (292,958)
Amortization of prior service cost 19,342 11,161 38,684 22,322
Recognized loss 11,161 14,898 22,322 29,796
--------------- --------------- --------------- ---------------
Net periodic benefit cost $ 59,583 $ 61,784 $ 119,166 $ 123,568
=============== =============== =============== ===============
G. 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 has subsidiaries located in Australia, the United Kingdom, and South
Africa, which are subject to income taxes in their respective countries.
The Company's effective income tax rate is less than the statutory rate
primarily due to a favorable income tax benefit for interest payments on the New
Series A and Series B Notes due 2008 which are recorded as a reduction of the
outstanding indebtedness for financial reporting purposes. In addition, the
Company has not recognized income tax expense in certain of its foreign
subsidiaries due to the reversal of an income tax valuation allowance.
6
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2006
H. Segment Information
While the Company primarily manages its operations on a geographical basis, the
Company operates in two principal business segments: conveyor equipment and
manufactured housing products. The conveyor equipment business markets its
products in four main business areas. The mining equipment business area
includes the design, manufacture and testing 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
2006 2005 2006 2005
-------------------------------------------------------------------
(in thousands) (in thousands)
Net sales:
Conveyor equipment $ 85,908 $ 65,766 $ 163,260 $ 123,252
Manufactured housing products 8,021 7,701 17,493 15,140
Other 287 164 476 294
-------------------------------------------------------------------
Total net sales $ 94,216 $ 73,631 $ 181,229 $ 138,686
===================================================================
Segment operating income:
Conveyor equipment $ 13,470 $ 9,599 $ 24,628 $ 15,317
Manufactured housing products 576 403 1,287 753
Other 19 37 46 67
-------------------------------------------------------------------
Total segment operating income 14,065 10,039 25,961 16,137
Management fee 700 506 1,303 816
Amortization expense 7 7 13 13
Restructuring charges - 39 - 42
Corporate expense 598 383 954 781
-------------------------------------------------------------------
Total operating income 12,760 9,104 23,691 14,485
Interest expense, net 1,256 1,341 2,488 2,434
Miscellaneous expense 169 457 93 524
-------------------------------------------------------------------
Income before income taxes $ 11,335 $ 7,306 $ 21,110 $ 11,527
===================================================================
7
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2006
I. Guarantor and Non-Guarantor Subsidiaries
The Company's domestic subsidiaries, Continental Conveyor & Equipment Company
(CCE) and Goodman Conveyor Company (GCC), both of which are wholly owned, are
the 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 Australian, United Kingdom and South African
subsidiaries are not guarantors of the Senior Notes.
Summarized consolidating balance sheets as of June 30, 2006 and December 31,
2005 for the Company, the guarantor subsidiaries, and the non-guarantor
subsidiaries are as follows (in thousands):
Combined Combined
Guarantor Non-Guarantor
June 30, 2006: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 149 $ 662 $ 174 $ - $ 985
Accounts receivable, net - 36,663 31,444 (180) 67,927
Inventories - 41,419 9,612 - 51,031
Deferred income taxes 81 1,079 257 - 1,417
Other current assets 21,856 2,307 1,418 (23,951) 1,630
-------------------------------------------------------------------------------
Total current assets 22,086 82,130 42,905 (24,131) 122,990
Property, plant, and
equipment, net - 8,389 5,878 - 14,267
Goodwill - 10,986 2,803 - 13,789
Investment in subsidiaries 60,309 35,788 - (96,097) -
Deferred financing costs 390 - - - 390
Other assets 1,138 5,027 83 (5,550) 698
-------------------------------------------------------------------------------
Total assets $ 83,923 $ 142,320 $ 51,669 $ (125,778) $ 152,134
===============================================================================
Current liabilities:
Notes payable $ - $ 7,689 $ 7,841 $ (770) $ 14,760
Trade accounts payable 215 21,754 21,121 (2,057) 41,033
Accrued compensation and
employee benefits 135 6,250 2,290 - 8,675
Accrued interest 295 - - - 295
Other accrued liabilities 2,198 5,468 6,802 (2,027) 12,441
Management fee payable 4,299 - - - 4,299
Income taxes payable - 24,064 - (21,837) 2,227
Current maturities of
long-term obligations 16,876 500 1,991 - 19,367
-------------------------------------------------------------------------------
Total current liabilities 24,018 65,725 40,045 (26,691) 103,097
Pension obligation - 1,602 - - 1,602
Deferred income taxes - 5,818 - (1,138) 4,680
Senior notes 77,513 - - - 77,513
N/P to N.E.S. Investment Co. 13,753 - - - 13,753
Other long-term obligations - 3,667 3,448 (2,428) 4,687
Stockholder's equity
(deficit) (31,361) 65,508 8,176 (95,521) (53,198)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 83,923 $ 142,320 $ 51,669 $ (125,778) $ 152,134
===============================================================================
8
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
December 31, 2005: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 40 $ 470 $ 33 $ - $ 543
Accounts receivable, net - 28,139 21,155 - 49,294
Inventories - 33,310 8,861 - 42,171
Deferred income taxes 81 759 627 - 1,467
Other current assets 18,729 2,242 1,804 (20,794) 1,981
-------------------------------------------------------------------------------
Total current assets 18,850 64,920 32,480 (20,794) 95,456
Property, plant, and
equipment, net - 7,685 5,881 - 13,566
Goodwill - 10,986 2,803 - 13,789
Investment in subsidiaries 60,309 35,788 - (96,097) -
Deferred financing costs 650 - - - 650
Other assets 1,138 4,916 118 (5,427) 745
-------------------------------------------------------------------------------
Total assets $ 80,947 $ 124,295 $ 41,282 $ (122,318) $ 124,206
===============================================================================
Current liabilities:
Notes payable $ - $ 7,172 $ 6,082 $ (769) $ 12,485
Trade accounts payable 239 17,221 18,214 (1,877) 33,797
Accrued compensation and
employee benefits - 5,139 2,132 - 7,271
Accrued interest 295 - - - 295
Other accrued liabilities 5,072 5,482 3,722 (1,904) 12,372
Income taxes payable - 21,623 - (18,680) 2,943
Current maturities of
long-term obligations 6,146 500 1,183 - 7,829
-------------------------------------------------------------------------------
Total current liabilities 11,752 57,137 31,333 (23,230) 76,992
Pension obligation - 1,483 - - 1,483
Deferred income taxes - 5,929 - (1,138) 4,791
Senior notes 91,317 - - - 91,317
N/P to N.E.S. Investment Co. 13,172 - - - 13,172
Other long-term obligations - 3,917 3,129 (2,349) 4,697
Stockholder's equity
(deficit) (35,294) 55,829 6,820 (95,601) (68,246)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 80,947 $ 124,295 $ 41,282 $ (122,318) $ 124,206
===============================================================================
9
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Summarized consolidating statements of operations for the three months and six
months ended June 30, 2006 and 2005, 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, 2006:
Net sales $ - $ 65,834 $ 28,567 $ (185) $ 94,216
Cost of products sold - 48,966 23,920 (185) 72,701
------------- ------------- --------------- ------------- -------------
Gross profit - 16,868 4,647 - 21,515
Total operating expenses 898 4,955 2,902 - 8,755
------------- ------------- --------------- ------------- -------------
Operating income (loss) (898) 11,913 1,745 - 12,760
Interest expense, net 716 319 221 - 1,256
Miscellaneous expense - 102 67 - 169
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (1,614) 11,492 1,457 - 11,335
Income tax expense (benefit) (1,595) 4,617 300 - 3,322
------------- ------------- --------------- ------------- -------------
Net income $ (19) $ 6,875 $ 1,157 $ - $ 8,013
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended June 30, 2005:
Net sales $ - $ 51,827 $ 21,804 $ - $ 73,631
Cost of products sold - 38,702 18,177 - 56,879
------------- ------------- --------------- ------------- -------------
Gross profit - 13,125 3,627 - 16,752
Total operating expenses 729 4,221 2,698 - 7,648
------------- ------------- --------------- ------------- -------------
Operating income (loss) (729) 8,904 929 - 9,104
Interest expense, net 650 465 226 - 1,341
Miscellaneous expense (income) 5 466 (14) - 457
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (1,384) 7,973 717 - 7,306
Income tax expense (benefit) (1,092) 3,272 - - 2,180
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (292) $ 4,701 $ 717 $ - $ 5,126
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Six months ended June 30, 2006:
Net sales $ - $ 129,922 $ 51,492 $ (185) $ 181,229
Cost of products sold - 97,263 43,965 (185) 141,043
------------- ------------- --------------- ------------- -------------
Gross profit - 32,659 7,527 - 40,186
Total operating expenses 1,457 9,548 5,490 - 16,495
------------- ------------- --------------- ------------- -------------
Operating income (loss) (1,457) 23,111 2,037 - 23,691
Interest expense, net 1,431 632 425 - 2,488
Miscellaneous expense (income) - 179 (86) - 93
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (2,888) 22,300 1,698 - 21,110
Income tax expense (benefit) (3,157) 8,958 374 - 6,175
------------- ------------- --------------- ------------- -------------
Net income $ 269 $ 13,342 $ 1,324 $ - $ 14,935
============= ============= =============== ============= =============
10
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Six months ended June 30, 2005:
Net sales $ - $ 96,006 $ 42,680 $ - $ 138,686
Cost of products sold - 73,431 35,941 - 109,372
------------- ------------- --------------- ------------- -------------
Gross profit - 22,575 6,739 - 29,314
Total operating expenses 797 8,727 5,305 - 14,829
------------- ------------- --------------- ------------- -------------
Operating income (loss) (797) 13,848 1,434 - 14,485
Interest expense, net 1,300 741 393 - 2,434
Miscellaneous expense (income) 11 577 (64) - 524
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (2,108) 12,530 1,105 - 11,527
Income tax expense (benefit) (1,987) 5,096 - - 3,109
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (121) $ 7,434 $ 1,105 $ - $ 8,418
============= ============= =============== ============= =============
Summarized consolidating cash flow statements for the six months ended June 30,
2006 and 2005, 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, 2006:
Net cash provided by (used in)
operating activities $ (481) $ 4,816 $ (2,073) $ 3 $ 2,265
Investing activities:
Purchases of property, plant, and
equipment - (1,228) (479) - (1,707)
Proceeds from sale of property,
plant, and equipment - - 8 - 8
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (1,228) (471) - (1,699)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase in borrowings on notes
payable - 517 1,715 - 2,232
Proceeds from long-term obligations - - 1,324 - 1,324
Payments on Senior Notes (3,073) - - - (3,073)
Principal payments on long-term
obligations - (250) (289) - (539)
Distributions 3,663 (3,663) - - -
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities 590 (3,396) 2,750 - (56)
Exchange rate changes on cash - - (65) (3) (68)
------------- ------------- --------------- ------------- -------------
Increase in cash and cash equivalents 109 192 141 - 442
Cash and cash equivalents at beginning
of period 40 470 33 - 543
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 149 $ 662 $ 174 $ - $ 985
============= ============= =============== ============= =============
11
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Six months ended June 30, 2005:
Net cash provided by (used in)
operating activities $ (420) $ 1,666 $ (1,828) $ (7) $ (589)
Investing activities:
Purchases of property, plant, and
equipment - (1,116) (230) - (1,346)
Proceeds from sale of property,
plant, and equipment - 36 5 - 41
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (1,080) (225) - (1,305)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase in borrowings on notes
payable - 3,553 1,473 - 5,026
Proceeds from long-term obligations - - 773 - 773
Payments on Senior Notes (3,073) - - - (3,073)
Principal payments on long-term
obligations - (346) (464) - (810)
Distributions 3,663 (3,663) - - -
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities 590 (456) 1,782 - 1,916
Exchange rate changes on cash - - (6) 7 1
------------- ------------- --------------- ------------- -------------
Increase (decrease) in cash and cash
equivalents 170 130 (277) - 23
Cash and cash equivalents at beginning
of period 12 509 366 - 887
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 182 $ 639 $ 89 $ - $ 910
============= ============= =============== ============= =============
J. New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109." FIN 48 clarifies the recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company will
adopt this interpretation as required. The Company is currently evaluating the
impact of this Interpretation on its financial statements.
12
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, 2005 and the unaudited financial statements and
notes contained herein.
General
The Company, through its subsidiaries, is a leading designer and manufacturer of
conveyor systems and components for mining applications, primarily in the coal
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. The assets
and liabilities of the Company's foreign subsidiaries are translated at current
exchange rates, while revenues and expenses are translated at average rates
prevailing during the year.
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, 2006 and 2005.
Three months ended Six months ended
June 30 June 30
-------------------------- -------------------------
2006 2005 2006 2005
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 77.2 77.2 77.8 78.9
Gross profit 22.8 22.8 22.2 21.1
SG&A expenses 8.5 9.6 8.4 10.1
Management fee 0.7 0.7 0.7 0.6
Restructuring charges - 0.1 - -
Operating income 13.6 12.4 13.1 10.4
Three months ended June 30, 2006, compared to three months ended June 30, 2005:
Net Sales
Net sales for the quarter increased $20.6 million, or 28%, from $73.6 million in
2005 to $94.2 million in 2006. Net sales in the Company's conveyor equipment
segment have been favorably impacted as a result of the strong demand for coal.
Net sales in the domestic operations of the Company's conveyor equipment segment
increased $13.6 million primarily due to increased sales volumes. The increased
sales volumes resulted from improved market conditions in the coal industry
which resulted in increased capital spending by the Company's major customers in
this industry. The capital investment needs of these customers could change in
the future. The Company's domestic subsidiaries began the quarter with a backlog
of $104.6 million compared to $56.1 million in the corresponding period of 2005.
Net sales in the foreign operations of the Company's conveyor equipment segment
increased $6.6 million, net of a $0.6 million decrease due to changes in foreign
13
currency translation rates. When adjusted for foreign currency fluctuations, net
sales in the Company's Australian and the United Kingdom subsidiaries increased
by $5.1 million and $2.8 million respectively, and net sales in South Africa
decreased by $0.7 million. The increase in Australia resulted from increased
shipments due to improved market conditions. Australia began the quarter with a
backlog of $32.0 million compared to $13.2 million in the corresponding period
of 2005. The increase in the United Kingdom was due to improved market
conditions with higher sales to the OEM (original equipment manufacturer)
market. Net sales in the Company's manufactured housing products segment
increased $0.3 million primarily due to a change in the product mix with more
sales of new manufactured products which have a higher selling price than
refurbished products. Based on the Manufactured Housing Institute Economic
Report for June 2006, shipments of manufactured homes for the second quarter of
2006 decreased 5.2% from the same period of the prior year. Net sales in the
Company's other segment increased $0.1 million.
Gross Profit
Gross profit for the quarter increased $4.8 million, or 29%, from $16.7 million
in 2005 to $21.5 million in 2006 due to increased sales volume. Gross profit in
the domestic operations of the Company's conveyor equipment segment increased
$3.5 million and gross profit in the foreign operations of the conveyor
equipment segment increased $1.0 million. Gross profit in the Company's
manufactured housing products segment increased $0.3 million due to a change in
the product mix with more sales of new manufactured products which have a higher
selling price than refurbished products.
While gross profit as a percentage of net sales was unchanged from 2005 to 2006,
the Company did experience some increases in the costs of materials. These
increased costs were offset by a more efficient utilization of overhead expenses
due to the increased sales volumes.
SG&A Expenses
SG&A expenses for the quarter increased $0.9 million, or 13%, from $7.1 million
in 2005 to $8.0 million in 2006. This increase resulted from increased employee
expenses at the Company's domestic subsidiaries.
SG&A expenses as a percentage of net sales improved to 8.5% in the current
quarter compared to 9.6% in the second quarter of 2005. This improvement is due
to improved leverage as a result of the increased sales volume.
Operating Income
Operating income for the quarter increased $3.7 million, or 41%, from $9.1
million in 2005 to $12.8 million in 2006. This increase resulted from the $4.8
million increase in gross profit, offset by the $0.9 million increase in SG&A
expenses and a $0.2 million increase in management fees. Management fees are
based on the Company's Adjusted EBITDA earnings and this increase is a direct
result of the increased profits.
Income Tax Expense
Income taxes for the quarter increased $1.1 million, or 52%, from $2.2 million
in 2005 to $3.3 million in 2006. The increase resulted from the Company's
increased profits.
The Company's effective income tax rate of 29% is less than the statutory rate
primarily due to a favorable income tax benefit for interest payments on the New
Series A and Series B Notes due 2008 which are recorded as a reduction of the
outstanding indebtedness for financial reporting purposes. In addition, the
Company has not recognized income tax expense in certain of its foreign
subsidiaries due to the reversal of an income tax valuation allowance.
14
Net Income
Net income increased $2.9 million, or 57%, from $5.1 million in 2005 to $8.0
million in 2006. The increase resulted from the $3.7 million increase in
operating income combined with decreases in interest expense and miscellaneous
expenses of $0.1 million and $0.2 million, respectively, and partially offset by
the $1.1 million increase in income tax expense.
Six months ended June 30, 2006, compared to six months ended June 30, 2005:
Net Sales
Net sales for the six-month period increased $42.5 million, or 31%, from $138.7
million in 2005 to $181.2 million in 2006. Net sales in the domestic operations
of the Company's conveyor equipment segment increased $31.4 million due to
increased sales volumes. The increase in sales volume was due primarily to the
strong market conditions in the coal industry over the preceding twelve months.
The Company's domestic subsidiaries began the period with a backlog of $92.4
million compared to $21.5 million on January 1, 2005. The increased capital
spending by the Company's major customers in the coal industry contributed to
the strong backlog. The capital investment needs of these customers could change
in the future. Net sales in the foreign operations of the Company's conveyor
equipment segment increased $8.6 million, net of a $2.1 million decrease due to
changes in foreign currency translation rates. When adjusted for foreign
currency fluctuations, net sales in the Company's Australian and the United
Kingdom subsidiaries increased $6.4 million and $5.5 million respectively, and
net sales in the South African subsidiary decreased by $1.2 million. The
increase in Australia resulted from improved market conditions with a large
export system sale occurring during the period. The backlog in the Australian
subsidiary was $34.7 million at the beginning of 2006, an increase of $20.7
million from the beginning of 2005. The increase in the United Kingdom was due
to increased sales of both engineered systems projects and component sales to
the OEM (original equipment manufacturer) industry. In South Africa, market
conditions were very strong during the first half of 2005 but during the second
quarter of 2006, the subsidiary has experienced some delays from its customers
in placing orders. Net sales in the Company's manufactured housing products
segment increased $2.3 million as a result of increased shipments and a change
in the product mix with more sales of new manufactured products which have a
higher selling price than refurbished products. Based on the Manufactured
Housing Institute Economic Report for June 2006, shipments of manufactured homes
for the first six months of 2006 increased only 1.7% from the same period in
2005. While shipments to FEMA and other hurricane related demand contributed to
this increase, FEMA production was concluded in February 2006 and as discussed
above, shipments of manufactured homes for the second quarter of 2006 decreased
5.2% from the same period in 2005. Net sales in the Company's other segment
increased $0.2 million.
Gross Profit
Gross profit for the six-month period increased $10.9 million, or 37%, from
$29.3 million in 2005 to $40.2 million in 2006. This increase in gross profit
resulted from a $9.7 million increase due to increased sales volume combined
with a $1.2 million increase due to improved margins. Gross profit in the
domestic operations of the Company's conveyor equipment segment increased $9.4
million. This increase was primarily due to increased sales volume which
contributed to an increase in manufacturing direct labor hours providing a more
efficient utilization of overhead expenses and improved gross profit margins.
Gross profit in the foreign operations of the conveyor equipment segment
increased $0.8 million due to increased sales volume. Gross profit in the
manufactured housing segment increased $0.7 million due to increased sales
volume and increased selling prices.
Gross profit as a percentage of net sales increased from 21.1% in 2005 to 22.2%
in 2006. While the Company experienced some increases in the cost of materials,
these increased costs were more than offset by a more efficient utilization of
overhead expenses due to the increased sales volumes.
15
SG&A Expenses
SG&A expenses for the six-month period increased $1.2 million, or 9%, from $14.0
million in 2005 to $15.2 million in 2006. SG&A expenses in the Company's
domestic operations increased $1.0 million due to increased selling expenses as
a result of higher net sales and increased administrative expenses resulting
from higher employee expenses. SG&A expenses in the foreign operation increased
$0.2 million.
SG&A expenses as a percentage of net sales improved to 8.4% for the first half
of 2006 compared to 10.1% for the first half of 2005. This improvement is due to
improved leverage as a result of the increased sales volume.
Operating Income
Operating income for the six-month period increased $9.2 million, or 63%, from
$14.5 million in 2005 to $23.7 million in 2006. The increase resulted from the
$10.9 million increase in gross profit, offset by the $1.2 million increase in
SG&A expenses and a $0.5 million increase in management fees. Management fees
are based on the Company's Adjusted EBITDA earnings and this increase is a
direct result of the increased profits.
Income Tax Expense
Income tax expense for the six-month period increased $3.1 million, or 100%,
from $3.1 million in 2005 to $6.2 million in 2006. The increase resulted from
the Company's increased profits.
The Company's effective income tax rate increased from 27% in 2005 to 29% in
2006. This increase is primarily due to the expiration of net operating loss
carryforwards in its Australian subsidiary. The Company's effective income tax
rate is less than the statutory rate primarily due to a favorable income tax
benefit for interest payments on the New Series A and Series B Notes due 2008
which are recorded as a reduction of the outstanding indebtedness for financial
reporting purposes. In addition, the Company has not recognized income tax
expense in certain of its foreign subsidiaries due to the reversal of an income
tax valuation allowance.
Net Income
Net income for the six-month period increased $6.5 million, or 77%, from $8.4
million in 2005 to $14.9 million in 2006. The increase resulted from the $9.2
million increase in operating income combined with a $0.4 million decrease in
miscellaneous expenses and partially offset by the $3.1 million increase in
income tax expense.
Backlog
Backlog at June 30, 2006 was $142.6 million, an increase of $5.5 million, or 4%,
from $137.1 million at December 31, 2005 and a decrease of $1.5 million, or 1%,
from $144.1 million at March 31, 2006. At June 30, 2006, backlog in the domestic
operations of the Company's conveyor equipment segment was $94.5 million, a
decrease of $10.2 million from March 31, 2006, and backlog in the foreign
operations of the Company's conveyor equipment segment was $48.1 million, an
increase of $8.7 million from March 31, 2006. Management believes that in excess
of 80% of the backlog will be shipped in 2006.
Liquidity and Capital Resources
Net cash provided by (used in) operating activities was $2.3 million and $(0.6)
million for the six months ended June 30, 2006 and 2005, respectively. Net cash
provided by operating activities in 2006 resulted from net income of $14.9
million, combined with non-cash expenses of $1.5 million, and partially offset
by a net increase in operating assets and liabilities of $14.1 million. The net
16
increase in operating assets primarily resulted from increased accounts
receivable and inventory balances. The increase in accounts receivable resulted
from increased sales in the second quarter of 2006 compared to the fourth
quarter of 2005. The increase in inventory resulted from increased production to
support the increased backlog in the domestic operations. Net cash used in
operating activities in 2005 resulted from net income of $8.4 million, combined
with non-cash expenses of $1.5 million and offset by a net increase in operating
assets and liabilities of $10.5 million.
Net cash used in investing activities was $1.7 million and $1.3 million for the
six months ended June 30, 2006 and 2005, respectively, and represents net
purchases of property, plant, and equipment for both years.
Net cash provided by (used in) financing activities was $(0.1) million and $1.9
million for the six months ended June 30, 2006 and 2005, respectively. Net cash
used in financing activities in 2006 resulted from a $3.1 million semi-annual
interest payment on the Company's New Series A and Series B Senior Notes, which
was recorded as a reduction in the balance of outstanding indebtedness, combined
with principal payments on long-term obligations of $0.5 million, partially
offset by a net increase in borrowings on notes payable of $2.2 million and
proceeds from long-term obligations of $1.3 million. Net borrowings on notes
payable in the domestic subsidiaries increased $0.5 million and net borrowings
on notes payable in the foreign subsidiaries increased $1.7 million. Proceeds
from long-term obligations primarily represent additional proceeds on the
Australian subsidiary's term loan with National Australia Bank. Net cash
provided by financing activities in 2005 resulted from a net increase in
borrowings on notes payable of $5.0 million combined with proceeds from
long-term obligations of $0.8 million and offset by a $3.1 million semi-annual
interest payment on the Company's New Series A and Series B Senior Notes and
principal payments on long-term obligations of $0.8 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. Capital expenditures for the first six
months of 2006 were $1.7 million, which included expenditures to improve
productivity and for maintenance capital. In addition to the Company's debt
service requirements for interest expense, as of June 30, 2006, the Company had
outstanding principal balances on its domestic and foreign credit facilities of
approximately $7.7 million and $7.1 million, respectively.
The Company's Senior Notes outstanding indebtedness has been classified as short
and long-term liabilities as of June 30, 2006 based upon the payment terms of
the debt. The following table summarizes the reduction in the balance of the
Senior Notes based upon the payment requirements over the terms of the Series A
and Series B Notes:
Balance at June 30, 2006 of Senior Notes, including current
portion of $16,876,438 $ 94,389,842
Interest payments on Series A Notes, 2006-2008 (13,317,280)
Interest payments on Series B Notes, 2006-2008 (2,048,812)
Maturity of outstanding 11% Senior Notes due 2007 (10,730,000)
---------------
Maturity of Series A and Series B Notes due 2008 $ 68,293,750
===============
At June 30, 2006, the Company had cash and cash equivalents of approximately
$1.0 million and approximately $13.5 million available for use under its
domestic credit facility, representing approximately $14.5 million of liquidity.
This availability figure reflects a reserve of $5.0 million for the retirement
of the Company's outstanding 11% Senior Notes due 2007. Without this reserve,
the Company would have had approximately $18.5 million available for use under
its domestic credit facility. The Company will reserve an additional $2.5
million in each of the third and fourth quarters of 2006 for the retirement of
17
this debt. With the completion of the debt exchange in October 2004, the Company
reduced its annual debt service requirements related to interest payments on its
Senior debt by approximately $5.9 million. Annual debt service on the New Series
A and Series B Notes due 2008 combined with the outstanding Senior Notes due
2007 is approximately $7.3 million, down from $13.2 million prior to the debt
exchange. In order to partially fund the cash payments as additional
consideration to the Series A and Series B bondholders, the Company increased
the balance of a term loan with Bank One by approximately $3.8 million and
entered into subordinated promissory notes with N.E.S. Investment Co. in the
amount of $12 million. The debt service requirements for interest related to
these debt instruments in 2005 was approximately $0.3 million in cash and $1.0
million in kind. The Company expects current financial resources, existing lines
of credit, and funds from operations to be adequate to meet anticipated cash
requirements.
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. The principal foreign currencies in which the
Company transacts business are the Australian dollar, the British pound
sterling, and the South African rand. As the U.S. dollar strengthens and weakens
against these foreign currencies, the Company's financial results will be
affected. As discussed previously, the Company's net sales for the six months
ended June 30, 2006 decreased by approximately $2.1 million from the
corresponding period in the prior year due to changes in foreign currency
translation rates. The fluctuation of the U.S. dollar versus other currencies
also resulted in foreign currency translation gains (losses) included in the
accumulated other comprehensive income (loss) component of stockholder's equity
(deficit) of approximately $0.3 million and $(0.2) million for the six months
ended June 30, 2006 and 2005, respectively.
New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109." FIN 48 clarifies the recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company will
adopt this interpretation as required. The Company is currently evaluating the
impact of this Interpretation on its financial statements.
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,
18
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.
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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, 2006, 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.
20
Part II. Other Information
Item 1. Legal Proceedings
There are pending or threatened against the Company or its subsidiaries various
claims and lawsuits, all arising from the ordinary course of business with
respect to commercial and products liability matters, which seek remedies or
damages. The Company believes that any liability that may finally be determined
with respect to commercial and product liability claims should not have a
material adverse effect on its financial condition. Legal costs are generally
expensed when incurred.
At June 30, 2006 and December 31, 2005, the Company's Consolidated Balance Sheet
includes an accrued liability for any pending or threatened claim with respect
to any commercial and products liability matter of $0.3 million, and was
included in current liabilities as Other Accrued Liabilities.
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. A settlement of these actions has been
agreed to by the parties involved, pending approval by the courts. The proposed
settlement does not materially impact the Company's financial condition.
Item 1A. Risk Factors
There have been no material changes to the Company's risk factors as described
in the Company's Report on Form 10-K for the year ended December 31, 2005.
Item 6. Exhibits
Exhibits: Refer to the index of exhibits.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ Jimmy L. Dickinson
-----------------------
Jimmy L. Dickinson
Vice President and Chief Financial Officer
(As duly authorized representative and as
Principal Financial and Accounting Officer)
CONTINENTAL CONVEYOR & EQUIPMENT COMPANY
By: /s/ Jimmy L. Dickinson
-----------------------
Jimmy L. Dickinson
Vice President - Finance (As duly authorized
representative and as Principal Financial and
Accounting Officer)
GOODMAN CONVEYOR COMPANY
By: /s/ J. Mark Etchberger
-----------------------
J. Mark Etchberger
Controller (As duly authorized representative
and as Principal Financial and Accounting
Officer)
Date: August 14, 2006
22
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-K for the year ended December 31, 2005, 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). *
4.2 Supplemental Indenture, dated as of October 4, 2004, between
Continental Global Group, Inc., Continental Conveyor & Equipment
Pty., Ltd., Continental ACE Pty., Goodman Conveyor Company,
Continental Conveyor & Equipment Company, and Wells Fargo Bank,
National Association, as trustee. (Filed as Exhibit 4.2 to the
Company's Form 10-Q for the quarter ended September 30, 2004, and
is incorporated herein by reference.)
4.3 Indenture, dated October 4, 2004, among Continental Global Group,
Inc., Continental Conveyor & Equipment Company, Goodman Conveyor
Company, and Wells Fargo Bank, National Association. (Filed as
Exhibit 4.1 to Form 8-K filed by the Company on October 7, 2004,
and is incorporated herein by reference.)
4.4 9% Convertible Subordinated Promissory Note, dated October 4,
2004, from Continental Global Group, Inc. to N.E.S. Investment
Co. in the amount of $10,000,000. (Filed as Exhibit 4.3 to Form
8-K filed by the Company on October 7, 2004, and is incorporated
herein by reference.)
10.1 Second Amended and Restated Credit Facility and Security
Agreement, dated October 4, 2004, by and among Continental
Conveyor & Equipment Company, Goodman Conveyor Company, and Bank
One, N.A. (Filed as Exhibit 4.2 to Form 8-K filed by the Company
on October 7, 2004, 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 February 13, 2006, between
Continental Global Group, Inc. and Ronald Kaplan. (Filed as
Exhibit 10.3 to Form 8-K filed by the Company on March 17, 2006,
and is incorporated herein by reference.)
10.4 Reserved
Continental Global Group, Inc.
Form 10-Q
Index of Exhibits
Exhibit
Number Description of Exhibit
10.5 First Amendment to Second Amended and Restated Credit Facility and
Security Agreement, dated March 9, 2006, by Continental Conveyor &
Equipment Company, Goodman Conveyor Company, and JP Morgan Chase
Bank, N.A., successor by merger to Bank One, N.A. (Filed as
Exhibit 10.5 to the Company's Form 10-K for the year ended
December 31, 2005, 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.)
Continental Global Group, Inc.
Form 10-Q
Index of Exhibits
Exhibit
Number Description of Exhibit
10.15 Forbearance Agreement, effective as of July 29, 2004, by and among
Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.15 to the Company's
Form 10-Q for the quarter ended June 30, 2004, and is incorporated
herein by reference.)
10.16 Forbearance Agreement, effective as of August 31, 2004, by and
among Bank One, NA, Continental Conveyor & Equipment Company, and
Goodman Conveyor Company. (Filed as Exhibit 10.16 to the Company's
Form 10-Q for the quarter ended September 30, 2004, and is
incorporated herein by reference.)
10.17 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. (Filed as Exhibit 99.1 to Form 8-K filed
by the Company on July 23, 2004, and is incorporated herein by
reference.)
10.18 First Amendment, dated as of July 30, 2004, to 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. (Filed as Exhibit 99.1 to Form 8-K filed by the
Company on August 3, 2004, and is incorporated herein by
reference.)
10.19 Second Amendment, dated as of October 1, 2004, to 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. (Filed as Exhibit 10.19 to the Company's Form 10-Q
for the quarter ended September 30, 2004, and is incorporated
herein by reference.)
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.