UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 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 October 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
September 30, 2006 and December 31, 2005 2
Condensed Consolidated Statements of Income
Three Months and Nine Months ended September 30, 2006 and 2005 3
Condensed Consolidated Statements of Cash Flows
Nine Months ended September 30, 2006 and 2005 4
Notes to Condensed Consolidated Financial Statements 5-14
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 15-21
Item 3 Quantitative and Qualitative Disclosures about Market Risk 22
Item 4 Controls and Procedures 22
Part II Other Information
Item 1 Legal Proceedings 23
Item 1A Risk Factors 23
Item 6 Exhibits 23
Signatures 24
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
1
Continental Global Group, Inc.
Condensed Consolidated Balance Sheets
September 30 December 31
2006 2005
-------------------- --------------------
(Unaudited) (Audited)
Assets:
Current assets:
Cash and cash equivalents $ 1,217,345 $ 543,400
Accounts receivable, net 64,324,678 49,294,104
Inventories 48,133,547 42,170,889
Deferred income taxes 1,981,627 1,466,751
Other current assets 1,428,949 1,980,832
-------------------- --------------------
Total current assets 117,086,146 95,455,976
Property, plant and equipment 37,986,738 35,387,432
Less accumulated depreciation 23,173,278 21,821,194
-------------------- --------------------
14,813,460 13,566,238
Goodwill 13,853,162 13,789,054
Deferred financing costs 259,951 649,878
Other assets 696,531 745,199
-------------------- --------------------
$ 146,709,250 $ 124,206,345
==================== ====================
Liabilities and Stockholder's Equity (Deficit):
Current liabilities:
Notes payable $ 4,902,797 $ 12,485,090
Trade accounts payable 35,679,192 33,797,142
Accrued compensation and employee benefits 9,657,562 7,270,396
Accrued interest on senior notes 590,150 295,075
Other accrued liabilities 16,034,335 9,376,016
Management fees payable to Nesco, Inc. 4,847,896 2,996,054
Income taxes payable 1,069,274 2,942,570
Current maturities of long-term obligations 19,285,811 7,829,379
-------------------- --------------------
Total current liabilities 92,067,017 76,991,722
Pension obligations 1,062,054 1,483,305
Deferred income taxes 4,652,858 4,790,887
Senior notes 77,513,405 91,316,624
Note payable to N.E.S. Investment Co. 14,042,735 13,171,985
Other long-term obligations, less current maturities 4,504,626 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 (42,877,150) (63,536,195)
Accumulated other comprehensive loss (6,249,983) (6,703,024)
-------------------- --------------------
(47,133,445) (68,245,531)
-------------------- --------------------
$ 146,709,250 $ 124,206,345
==================== ====================
See notes to condensed consolidated financial statements.
2
Continental Global Group, Inc.
Condensed Consolidated Statements of Income
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------- -------------------------------------
(Unaudited) (Unaudited)
Net sales $ 89,262,578 $ 82,731,072 $ 270,491,283 $ 221,417,119
Cost of products sold 71,152,140 64,241,679 212,195,393 173,613,277
---------------------------------- -------------------------------------
Gross profit 18,110,438 18,489,393 58,295,890 47,803,842
Operating expenses:
Selling and engineering 4,231,777 3,972,142 12,722,621 11,621,166
General and administrative 3,489,008 3,032,751 10,176,817 9,342,537
Management fee 548,850 599,427 1,851,842 1,415,154
Amortization expense 2,893 6,590 16,073 19,770
Restructuring charges - - - 41,682
--------------------------------------------------------------------------
Total operating expenses 8,272,528 7,610,910 24,767,353 22,440,309
--------------------------------------------------------------------------
Operating income 9,837,910 10,878,483 33,528,537 25,363,533
Other expense:
Interest expense, net 1,253,732 1,176,435 3,741,411 3,610,283
Miscellaneous expense 533,438 125,424 625,979 650,001
---------------------------------- -------------------------------------
Total other expenses 1,787,170 1,301,859 4,367,390 4,260,284
---------------------------------- -------------------------------------
Income before income taxes 8,050,740 9,576,624 29,161,147 21,103,249
Income tax expense 2,326,508 1,795,741 8,502,102 4,904,546
---------------------------------- -------------------------------------
Net income $ 5,724,232 $ 7,780,883 $ 20,659,045 $ 16,198,703
================================== =====================================
See notes to condensed consolidated financial statements.
3
Continental Global Group, Inc.
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30
2006 2005
---------------------- ---------------------
(Unaudited)
Operating activities:
Net income $ 20,659,045 $ 16,198,703
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for depreciation and amortization 1,656,465 1,524,400
Amortization of deferred financing costs 389,927 389,927
Deferred income taxes (638,578) (1,379,797)
Non-cash interest paid in-kind 870,750 675,000
Loss (gain) on disposal of assets 8,004 (36,158)
Changes in operating assets and liabilities (9,092,597) (12,523,994)
---------------------- ---------------------
Net cash provided by operating activities 13,853,016 4,848,081
---------------------- ---------------------
Investing activities:
Purchases of property, plant, and equipment (2,730,953) (2,346,445)
Proceeds from sale of property, plant, and equipment 10,690 41,453
---------------------- ---------------------
Net cash used in investing activities (2,720,263) (2,304,992)
---------------------- ---------------------
Financing activities:
Net increase (decrease) in borrowings on notes payable (7,735,648) 1,734,074
Proceeds from long-term obligations 1,197,052 769,000
Payments on Senior Notes (3,073,219) (3,073,219)
Principal payments on long-term obligations (738,174) (1,329,926)
---------------------- ---------------------
Net cash used in financing activities (10,349,989) (1,900,071)
Effect of exchange rate changes on cash (108,819) (10,836)
---------------------- ---------------------
Increase in cash and cash equivalents 673,945 632,182
Cash and cash equivalents at beginning of period 543,400 887,256
---------------------- ---------------------
Cash and cash equivalents at end of period $ 1,217,345 $ 1,519,438
====================== =====================
See notes to condensed consolidated financial statements.
4
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 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 nine-month period ended September 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 65% and 67% of
inventories at September 30, 2006 and December 31, 2005, 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 $5,177,000 and
$4,302,000 at September 30, 2006 and December 31, 2005, respectively.
5
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2006
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 949,633 1,244,884
Settlements made during the period (573,019) (739,095)
Effect of exchange rate changes 24,307 (40,501)
----------------- -----------------
Balance as of September 30 $ 2,132,377 $ 2,099,337
================= =================
E. Comprehensive Income
The components of comprehensive income for the three months and nine months
ended September 30 are as follows:
Three months ended September 30 Nine months ended September 30
2006 2005 2006 2005
---------------------------------- ---------------------------------
Net income $ 5,724,232 $ 7,780,883 $ 20,659,045 $ 16,198,703
Other comprehensive income (loss):
Foreign currency translation
adjustment 340,559 (67,143) 453,041 (387,758)
Change in fair value of derivative
hedge, net of tax - - - (5,889)
---------------------------------- ---------------------------------
Comprehensive income $ 6,064,791 $ 7,713,740 $ 21,112,086 $ 15,805,056
================================== =================================
6
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2006
F. Employee Benefit Plans
During the third quarter of 2006, the Company made a contribution of $600,000 to
its defined benefit plan. The components of net periodic benefit cost for the
three months and nine months ended September 30 are as follows:
Three months ended Nine months ended
September 30 September 30
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
Service cost $ 51,203 $ 53,857 $ 153,609 $ 161,571
Interest cost 132,349 128,347 397,047 385,041
Expected return on plan assets (154,472) (146,479) (463,416) (439,437)
Amortization of prior service cost 19,342 11,161 58,026 33,483
Recognized loss 11,161 14,898 33,483 44,694
--------------- --------------- --------------- ---------------
Net periodic benefit cost $ 59,583 $ 61,784 $ 178,749 $ 185,352
=============== =============== =============== ===============
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.
7
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 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 September 30 Nine months ended September 30
2006 2005 2006 2005
-------------------------------------------------------------------
(in thousands) (in thousands)
Net sales:
Conveyor equipment $ 83,591 $ 74,618 $ 246,851 $ 197,870
Manufactured housing products 5,599 7,843 23,092 22,983
Other 72 270 548 564
-------------------------------------------------------------------
Total net sales $ 89,262 $ 82,731 $ 270,491 $ 221,417
===================================================================
Segment operating income:
Conveyor equipment $ 10,907 $ 11,229 $ 35,535 $ 26,545
Manufactured housing products 83 495 1,369 1,248
Other 20 18 67 85
-------------------------------------------------------------------
Total segment operating income 11,010 11,742 36,971 27,878
Management fee 549 599 1,852 1,415
Amortization expense 3 7 16 20
Restructuring charges - - - 42
Corporate expense 620 258 1,574 1,038
-------------------------------------------------------------------
Total operating income 9,838 10,878 33,529 25,363
Interest expense, net 1,254 1,176 3,742 3,610
Miscellaneous expense 533 125 626 650
-------------------------------------------------------------------
Income before income taxes $ 8,051 $ 9,577 $ 29,161 $ 21,103
===================================================================
8
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 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 September 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
September 30, 2006: The Company Subsidiaries Subsidiaries Eliminations Total
-------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 82 $ 943 $ 192 $ - $ 1,217
Accounts receivable, net - 36,489 27,836 - 64,325
Inventories - 37,281 10,852 - 48,133
Deferred income taxes 81 1,260 641 - 1,982
Other current assets 23,215 2,188 1,361 (25,335) 1,429
-------------------------------------------------------------------------------
Total current assets 23,378 78,161 40,882 (25,335) 117,086
Property, plant, and
equipment, net - 8,972 5,841 - 14,813
Goodwill - 10,986 2,867 - 13,853
Investment in subsidiaries 60,309 35,788 - (96,097) -
Deferred financing costs 260 - - - 260
Other assets 1,138 4,860 85 (5,386) 697
-------------------------------------------------------------------------------
Total assets $ 85,085 $ 138,767 $ 49,675 $ (126,818) $ 146,709
===============================================================================
Current liabilities:
Notes payable $ - $ 2,956 $ 2,601 $ (654) $ 4,903
Trade accounts payable 460 17,003 20,148 (1,932) 35,679
Accrued compensation and
employee benefits 277 7,054 2,327 - 9,658
Accrued interest 590 - - - 590
Other accrued liabilities 2,165 5,932 9,931 (1,994) 16,034
Management fee payable 4,848 - - - 4,848
Income taxes payable - 24,265 - (23,196) 1,069
Current maturities of
long-term obligations 16,876 500 1,910 - 19,286
-------------------------------------------------------------------------------
Total current liabilities 25,216 57,710 36,917 (27,776) 92,067
Pension obligation - 1,062 - - 1,062
Deferred income taxes - 5,791 - (1,138) 4,653
Senior notes 77,513 - - - 77,513
N/P to N.E.S. Investment Co. 14,043 - - - 14,043
Other long-term obligations - 3,541 3,459 (2,496) 4,504
Stockholder's equity
(deficit) (31,687) 70,663 9,299 (95,408) (47,133)
-------------------------------------------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $ 85,085 $ 138,767 $ 49,675 $ (126,818) $ 146,709
===============================================================================
9
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 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
===============================================================================
10
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Summarized consolidating statements of operations for the three months and nine
months ended September 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 September 30, 2006:
Net sales $ - $ 61,057 $ 28,205 $ - $ 89,262
Cost of products sold - 47,264 23,888 - 71,152
------------- ------------- --------------- ------------- -------------
Gross profit - 13,793 4,317 - 18,110
Total operating expenses 770 4,805 2,697 - 8,272
------------- ------------- --------------- ------------- -------------
Operating income (loss) (770) 8,988 1,620 - 9,838
Interest expense, net 715 344 195 - 1,254
Miscellaneous expense 200 35 298 - 533
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (1,685) 8,609 1,127 - 8,051
Income tax expense (benefit) (1,359) 3,454 232 - 2,327
------------- ------------- --------------- ------------- -------------
Net income $ (326) $ 5,155 $ 895 $ - $ 5,724
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Three months ended September 30, 2005:
Net sales $ - $ 62,302 $ 20,429 $ - $ 82,731
Cost of products sold - 47,539 16,703 - 64,242
------------- ------------- --------------- ------------- -------------
Gross profit - 14,763 3,726 - 18,489
Total operating expenses 457 4,367 2,787 - 7,611
------------- ------------- --------------- ------------- -------------
Operating income (loss) (457) 10,396 939 - 10,878
Interest expense, net 650 375 151 - 1,176
Miscellaneous expense, net - 132 (7) - 125
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (1,107) 9,889 795 - 9,577
Income tax expense (benefit) (2,428) 4,224 - - 1,796
------------- ------------- --------------- ------------- -------------
Net income $ 1,321 $ 5,665 $ 795 $ - $ 7,781
============= ============= =============== ============= =============
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Nine months ended September 30, 2006:
Net sales $ - $ 190,979 $ 79,697 $ (185) $ 270,491
Cost of products sold - 144,527 67,853 (185) 212,195
------------- ------------- --------------- ------------- -------------
Gross profit - 46,452 11,844 - 58,296
Total operating expenses 2,227 14,353 8,187 - 24,767
------------- ------------- --------------- ------------- -------------
Operating income (loss) (2,227) 32,099 3,657 - 33,529
Interest expense, net 2,146 976 620 - 3,742
Miscellaneous expense 200 214 212 - 626
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (4,573) 30,909 2,825 - 29,161
Income tax expense (benefit) (4,516) 12,412 606 - 8,502
------------- ------------- --------------- ------------- -------------
Net income $ (57) $ 18,497 $ 2,219 $ - $ 20,659
============= ============= =============== ============= =============
11
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Nine months ended September 30, 2005:
Net sales $ - $ 158,308 $ 63,109 $ - $ 221,417
Cost of products sold - 120,969 52,644 - 173,613
------------- ------------- --------------- ------------- -------------
Gross profit - 37,339 10,465 - 47,804
Total operating expenses 1,254 13,094 8,092 - 22,440
------------- ------------- --------------- ------------- -------------
Operating income (loss) (1,254) 24,245 2,373 - 25,364
Interest expense, net 1,950 1,116 544 - 3,610
Miscellaneous expense, net 11 710 (71) - 650
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (3,215) 22,419 1,900 - 21,104
Income tax expense (benefit) (4,415) 9,320 - - 4,905
------------- ------------- --------------- ------------- -------------
Net income $ 1,200 $ 13,099 $ 1,900 $ - $ 16,199
============= ============= ============== ============= =============
Summarized consolidating cash flow statements for the nine months ended
September 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
------------- ------------- --------------- ------------- -------------
Nine months ended September 30, 2006:
Net cash provided by (used in)
operating activities $ (548) $ 10,721 $ 3,679 $ 1 $ 13,853
Investing activities:
Purchases of property, plant, and
equipment - (2,125) (606) - (2,731)
Proceeds from sale of property,
plant, and equipment - 1 10 - 11
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (2,124) (596) - (2,720)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net decrease in borrowings on notes
payable - (4,216) (3,520) - (7,736)
Proceeds from long-term obligations - - 1,197 - 1,197
Payments on Senior Notes (3,073) - - - (3,073)
Principal payments on long-term
obligations - (375) (363) - (738)
Distributions 3,663 (3,663) - - -
Intercompany loan activity - 130 (130) - -
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities 590 (8,124) (2,816) - (10,350)
Exchange rate changes on cash - - (108) (1) (109)
------------- ------------- --------------- ------------- -------------
Increase in cash and cash equivalents 42 473 159 - 674
Cash and cash equivalents at beginning
of period 40 470 33 - 543
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 82 $ 943 $ 192 $ - $ 1,217
============= ============= =============== ============= =============
12
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2006
I. Guarantor and Non-Guarantor Subsidiaries (Continued)
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
------------- ------------- --------------- ------------- -------------
Nine months ended September 30, 2005:
Net cash provided by (used in)
operating activities $ (192) $ 3,327 $ 1,707 $ 6 $ 4,848
Investing activities:
Purchases of property, plant, and
equipment - (1,986) (360) - (2,346)
Proceeds from sale of property,
plant, and equipment - 36 5 - 41
------------- ------------- --------------- ------------- -------------
Net cash used in investing activities - (1,950) (355) - (2,305)
------------- ------------- --------------- ------------- -------------
Financing activities:
Net increase (decrease) in
borrowings on notes payable - 2,867 (1,133) - 1,734
Proceeds from long-term obligations - - 769 - 769
Payments on senior notes (3,073) - - - (3,073)
Principal payments on long-term
obligations - (471) (859) - (1,330)
Distributions 3,663 (3,663) - - -
------------- ------------- --------------- ------------- -------------
Net cash provided by (used in)
financing activities 590 (1,267) (1,223) - (1,900)
Exchange rate changes on cash - - (5) (6) (11)
------------- ------------- --------------- ------------- -------------
Increase in cash and cash equivalents 398 110 124 - 632
Cash and cash equivalents at beginning
of period 12 509 366 - 887
------------- ------------- --------------- ------------- -------------
Cash and cash equivalents at end of
period $ 410 $ 619 $ 490 $ - $ 1,519
============= ============= =============== ============= =============
13
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2006
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.
In September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R)." SFAS No. 158 requires companies to recognize the funded status of a
benefit plan as the difference between plan assets at fair value and the
projected benefit obligation. Unrecognized gains or losses and prior service
costs, as well as the transition asset or obligation remaining from the initial
application of SFAS Nos. 87 and 106 will be recognized in the balance sheet, net
of tax, as a component of other comprehensive income and will subsequently be
recognized as components of net periodic benefit cost pursuant to the
recognition and amortization provisions of those Statements. In addition, SFAS
No. 158 requires additional disclosures about the future effects on net periodic
benefit cost that arise from the delayed recognition of gains or losses, prior
service costs or credits, and transition asset or obligation. SFAS No. 158 also
requires that defined benefit plan assets and obligations be measured as of the
date of the employer's fiscal year-end balance sheet. The recognition and
disclosure provisions of SFAS No. 158 are effective for fiscal years ending
after December 15, 2006. The requirement to measure plan assets and benefit
obligations as of the date of the employer's fiscal year-end balance sheet is
effective for fiscal years ending after December 15, 2008. The Company is
currently evaluating the impact of SFAS No. 158 on its financial statements.
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, 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 nine months
ended September 30, 2006 and 2005.
Three months ended Nine months ended
September 30 September 30
-------------------------- -------------------------
2006 2005 2006 2005
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 79.7 77.7 78.4 78.4
Gross profit 20.3 22.3 21.6 21.6
SG&A expenses 8.7 8.5 8.5 9.5
Management fee 0.6 0.7 0.7 0.6
Restructuring charges - - - -
Operating income 11.0 13.1 12.4 11.5
Three months ended September 30, 2006, compared to three months ended September
30, 2005:
Net Sales
Net sales for the quarter increased $6.6 million, or 8%, from $82.7 million in
2005 to $89.3 million in 2006. Net sales in the domestic operations of the
Company's conveyor equipment segment increased $1.2 million due to increased
sales volumes resulting from the continued strong market conditions in the coal
industry and increased capital spending by the Company's major customers in this
industry. Net sales in the foreign operations of the conveyor equipment segment
increased $7.8 million, including an increase of $0.3 million due to changes in
foreign currency translation rates. When adjusted for foreign currency
fluctuations, net sales in the Company's Australian and United Kingdom
subsidiaries increased by $3.2 million and $5.2 million, respectively, and net
sales in the Company's South African subsidiary decreased $0.9 million. The
increases in Australia and the United Kingdom resulted from increased shipments
15
due to improved market conditions. Australia began the quarter with a backlog of
$34.6 million compared to $16.5 million in the corresponding period of 2005. The
United Kindgom began the quarter with a backlog of $13.3 million compared to
$8.7 million in the corresponding period of 2005. Net sales in the Company's
manufactured housing segment decreased $2.2 million due to decreased shipments.
Based on the Manufactured Housing Institute Economic Report for September 2006,
shipments of manufactured homes for the third quarter of 2006 decreased 18% from
the same period of the prior year. Shipments of manufactured homes were higher
in the third quarter of 2005 due to the demand for mobile homes from the Federal
Emergency Management Agency for housing for hurricane victims. Net sales in the
Company's other segment decreased $0.2 million.
Gross Profit
Gross profit for the quarter decreased $0.4 million, or 2%, from $18.5 million
in 2005 to $18.1 million in 2006. This decrease was the result of a $1.7 million
increase due to increased sales volume, combined with a $2.1 million decrease
due to lower margins. Gross profit in the domestic operations of the Company's
conveyor equipment segment decreased $0.6 million due to lower margins resulting
primarily from increased steel prices occurring in the third quarter. During the
fourth quarter, the Company has begun to see a moderation of these steel price
increases. Gross profit in the Company's foreign operations of the conveyor
equipment segment increased $0.6 million primarily due to increased sales volume
in the Australian and United Kingdom subsidiaries. Gross profit in the Company's
manufactured housing segment decreased $0.4 million as a result of lower sales
volume.
Gross profit as a percentage of net sales decreased from 22.3% in 2005 to 20.3%
in 2006. This decrease resulted from lower margins in the domestic conveyor
operations and the South African subsidiary.
SG&A Expenses
SG&A expenses for the quarter increased $0.7 million, or 10%, from $7.0 million
in 2005 to $7.7 million in 2006. This increase resulted primarily from higher
employee expenses at the Company's domestic subsidiaries.
Operating Income
Operating income for the quarter decreased $1.1 million, or 10%, from $10.9
million in 2005 to $9.8 million in 2006. This decrease resulted from the $0.4
million decrease in gross profit, combined with the $0.7 million increase in
SG&A expenses.
Income Tax Expense
Income taxes for the quarter increased $0.5 million, or 28%, from $1.8 million
in 2005 to $2.3 million in 2006. The increase primarily resulted from an
increase in the Company's effective income tax rate from 19% in 2005 to 29% in
2006. This increase is primarily due to certain tax return adjustments recorded
in the third quarter of 2005.
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.
16
Net Income
Net income for the quarter decreased $2.1 million, or 27%, from $7.8 million in
2005 to $5.7 million in 2006. This decrease resulted from the $1.1 million
decrease in operating income, combined with a $0.4 million increase in
miscellaneous expenses, a $0.1 million increase in interest expense, and a $0.5
million increase in income tax expense.
Nine months ended September 30, 2006, compared to nine months ended September
30, 2005:
Net Sales
Net sales for the nine-month period increased $49.1 million, or 22%, from $221.4
million in 2005 to $270.5 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 conveyor equipment segment
increased $32.6 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 period with a backlog
of $92.4 million compared to $21.5 million on January 1, 2005. Backlog at
September 30, 2006 was $78.8 million. Net sales in the foreign operations of the
Company's conveyor equipment segment increased $16.4 million, net of a $1.8
million decrease due to changes in foreign currency translation rates. When
adjusted for foreign currency fluctuations, net sales in the Company's
Australian and United Kingdom subsidiaries increased $9.6 million and $10.7
million, respectively, while net sales in the Company's South African subsidiary
decreased $2.1 million. The increases in Australia and the United Kingdom
resulted from increased shipments due to improved market conditions. Australia
began the period with a backlog of $34.7 million compared to $14.0 million at
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. The decrease in South Africa was the
result of decreased sales volumes and reduced selling prices due to increased
competition in the South African market. Net sales in the Company's manufactured
housing segment increased $0.1 million and net sales in the Company's other
segment were unchanged.
Gross Profit
Gross profit for the nine-month period increased $10.5 million, or 22%, from
$47.8 million in 2005 to $58.3 million in 2006. Gross profit in the domestic
operations of the Company's conveyor equipment segment increased $8.8 million
primarily due to increased sales volume. Gross profit in the foreign operations
of the Company's conveyor equipment segment increased $1.0 million in Australia
and $1.5 million in the United Kingdom due to higher sales volume, offset by a
$1.1 million decrease in South Africa as a result of reduced volume and selling
prices. Gross profit in the Company's manufactured housing segment increased
$0.3 million primarily due to higher selling prices.
SG&A Expenses
SG&A expenses for the nine-month period increased $1.9 million, or 9%, from
$21.0 million in 2005 to $22.9 million in 2006. The increase is primarily due to
increases in the domestic operations of the Company's conveyor equipment segment
of $1.1 million and an increase in corporate SG&A expenses of $0.5 million. The
increase in the domestic conveyor operations resulted from higher selling
expenses due to higher net sales and increased administrative expenses as a
result of higher employee expenses. The increase in corporate SG&A expenses
resulted from higher employee and professional expenses. SG&A expenses in the
foreign operations of the conveyor equipment segment increased $0.1 million and
SG&A expenses in the Company's manufactured housing segment increased $0.2
million.
17
Operating Income
Operating income for the nine-month period increased $8.1 million, or 32%, from
$25.4 million in 2005 to $33.5 million in 2006. The increase resulted from the
$10.5 million increase in gross profit, partially offset by the $1.9 million
increase in SG&A expenses and a $0.5 million increase in other operating
expenses, primarily accrued management fee expense.
Income Tax Expense
Income tax expense for the nine-month period increased $3.6 million, or 73%,
from $4.9 million in 2005 to $8.5 million in 2006. The increase resulted from
the Company's increased profits and an increase in the Company's effective
income tax rate from 23% in 2005 to 29% in 2006. This increase is primarily due
to certain tax return adjustments recorded in the third quarter of 2005.
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.
Net Income
Net income for the nine-month period increased $4.5 million, or 28%, from $16.2
million in 2005 to $20.7 million in 2006. This increase resulted from the $8.1
million increase in operating income, partially offset by a $3.6 million
increase in income tax expense.
Backlog
Backlog at September 30, 2006 was $118.5 million, a decrease of $18.6 million,
or 14%, from $137.1 million at December 31, 2005 and a decrease of $24.1
million, or 18%, from $142.6 million at June 30, 2006. At September 30, 2006,
backlog in the domestic operations of the Company's conveyor equipment segment
was $78.8 million, a decrease of $15.7 million from June 30, 2006, and backlog
in the foreign operations of the Company's conveyor equipment segment was $39.7
million, a decrease of $8.4 million from June 30, 2006. Management believes that
approximately 65% of the backlog will be shipped in 2006.
Liquidity and Capital Resources
Net cash provided by operating activities was $13.9 million and $4.8 million for
the nine months ended September 30, 2006 and 2005, respectively. Net cash
provided by operating activities in 2006 resulted from net income of $20.7
million, combined with non-cash expenses of $2.3 million, and partially offset
by a net increase in operating assets and liabilities of $9.1 million. The net
increase in operating assets primarily resulted from increased accounts
receivable due to higher sales in the third quarter of 2006 compared to the
fourth quarter of 2005. Net cash provided by operating activities in 2005
resulted from net income of $16.2 million, combined with non-cash expenses of
$1.1 million and offset by a net increase in operating assets and liabilities of
$12.5 million.
Net cash used in investing activities was $2.7 million and $2.3 million for the
nine months ended September 30, 2006 and 2005, respectively, and represents net
purchases of property, plant, and equipment for both years.
Net cash used in financing activities was $10.3 million and $1.9 million for the
nine months ended September 30, 2006 and 2005, respectively. Net cash used in
financing activities in 2006 resulted from a net decrease in borrowings on notes
payable of $7.7 million, combined with 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, and
principal payments on long-term obligations of $0.7 million, partially offset by
18
proceeds from long-term obligations of $1.2 million. Net borrowings on notes
payable in the domestic subsidiaries decreased $4.2 million and net borrowings
on notes payable in the foreign subsidiaries decreased $3.5 million. Proceeds
from long-term obligations primarily represent additional proceeds on the
Australian subsidiary's term loan with National Australia Bank. Net cash used in
financing activities in 2005 resulted from 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 $1.3 million, partially offset by a net
increase in borrowings on notes payable of $1.7 million and proceeds from
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
nine months of 2006 were $2.7 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 September 30, 2006, the Company
had outstanding principal balances on its domestic and foreign credit facilities
of approximately $3.0 million and $1.9 million, respectively.
The Company's Senior Notes outstanding indebtedness has been classified as short
and long-term liabilities as of September 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 September 30, 2006 of Senior Notes, including current
portion of $16,876,438 $ 94,389,843
Interest payments on Series A Notes, 2006-2008 (13,317,280)
Interest payments on Series B Notes, 2006-2008 (2,048,813)
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 September 30, 2006, the Company had cash and cash equivalents of
approximately $1.2 million and approximately $15.7 million available for use
under its domestic credit facility, representing approximately $16.9 million of
liquidity. This availability figure reflects a reduction of $7.5 million for the
retirement of the Company's outstanding 11% Senior Notes due 2007. Without this
reduction, the Company would have had approximately $23.2 million available for
use under its domestic credit facility. The Company will reduce availability an
additional $2.5 million in the fourth quarter of 2006 for the retirement of 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.
19
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 nine months
ended September 30, 2006 decreased by approximately $1.8 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 $0.5 million and $(0.4) million for the nine months
ended September 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.
In September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 158 "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and
132(R)." SFAS No. 158 requires companies to recognize the funded status of a
benefit plan as the difference between plan assets at fair value and the
projected benefit obligation. Unrecognized gains or losses and prior service
costs, as well as the transition asset or obligation remaining from the initial
application of SFAS Nos. 87 and 106 will be recognized in the balance sheet, net
of tax, as a component of other comprehensive income and will subsequently be
recognized as components of net periodic benefit cost pursuant to the
recognition and amortization provisions of those Statements. In addition, SFAS
No. 158 requires additional disclosures about the future effects on net periodic
benefit cost that arise from the delayed recognition of gains or losses, prior
service costs or credits, and transition asset or obligation. SFAS No. 158 also
requires that defined benefit plan assets and obligations be measured as of the
date of the employer's fiscal year-end balance sheet. The recognition and
disclosure provisions of SFAS No. 158 are effective for fiscal years ending
after December 15, 2006. The requirement to measure plan assets and benefit
obligations as of the date of the employer's fiscal year-end balance sheet is
effective for fiscal years ending after December 15, 2008. The Company is
currently evaluating the impact of SFAS No. 158 on its financial statements.
20
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.
21
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 September 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) that is
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.
22
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 September 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.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ Jimmy L. Dickinson
--------------------------
Jimmy L. Dickinson
Vice President and Chief Financial Officer
(As duly authorized representative and as
Principal Financial and Accounting Officer)
CONTINENTAL CONVEYOR & EQUIPMENT COMPANY
By: /s/ Jimmy L. Dickinson
---------------------------
Jimmy L. Dickinson
Vice President - Finance (As duly authorized
representative and as Principal Financial and
Accounting Officer)
GOODMAN CONVEYOR COMPANY
By: /s/ J. Mark Etchberger
----------------------------
J. Mark Etchberger
Controller (As duly authorized representative
and as Principal Financial and Accounting
Officer)
Date: November 14, 2006
24
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.