<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1998
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
<TABLE>
<CAPTION>
<S> <C> <C>
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)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ( x ) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practical date.
As of July 31, 1998, there were 100 shares of the registrant's common stock
outstanding.
<PAGE> 2
INDEX
CONTINENTAL GLOBAL GROUP, INC.
<TABLE>
<CAPTION>
Part I Financial Information Page Number
<S> <C> <C>
Item 1 Financial Statements (Unaudited)................................................... 1
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997................................................ 2
Condensed Consolidated Statements of Income
Three Months and Six Months ended June 30, 1998 and 1997........................... 3
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 1998 and 1997............................................ 4
Notes to Condensed Consolidated Financial Statements.............................5-11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................12-15
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K.................................................. 16
Signature.................................................................................... 17
</TABLE>
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
1
<PAGE> 4
Continental Global Group, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 26,962,898 $ 30,882,733
Accounts receivable, net 41,154,459 30,458,953
Inventories 28,936,826 27,572,559
Other current assets 1,228,413 1,198,425
------------- -------------
Total current assets 98,282,596 90,112,670
Property, plant and equipment 20,293,557 19,530,408
Less accumulated depreciation 7,150,416 6,289,081
------------- -------------
13,143,141 13,241,327
Goodwill 20,050,131 20,713,078
Deferred financing costs 4,549,145 4,809,097
Other assets 922,626 848,611
------------- -------------
$ 136,947,639 $ 129,724,783
============= =============
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current liabilities:
Notes payable $ 5,731,863 $ 455,743
Trade accounts payable 23,571,563 18,874,057
Accrued compensation and employee benefits 5,759,911 6,030,950
Accrued interest on senior notes 3,300,000 3,300,000
Other accrued liabilities 5,889,659 7,166,645
Current maturities of long-term obligations 1,147,910 1,181,715
------------- -------------
Total current liabilities 45,400,906 37,009,110
Senior notes 120,000,000 120,000,000
Other long-term obligations, less current maturities 8,309,091 8,688,529
Stockholder's equity:
Common stock, no par value, authorized 1,500 shares,
issued and outstanding 100 shares at stated value of
$5 per share 500 500
Paid-in capital 1,993,188 1,993,188
Accumulated deficit (35,562,525) (35,456,724)
Accumulated other comprehensive income (3,193,521) (2,509,820)
------------- -------------
(36,762,358) (35,972,856)
------------- -------------
$ 136,947,639 $ 129,724,783
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
Continental Global Group, Inc.
Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
1998 1997 1998 1997
------------ ----------- -------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 60,560,222 $50,437,276 $ 117,651,497 $ 97,512,913
Cost of products sold 50,311,937 40,280,760 96,900,604 78,774,351
------------ ----------- ------------- ------------
Gross profit 10,248,285 10,156,516 20,750,893 18,738,562
Operating expenses:
Selling and engineering 4,263,081 3,144,642 8,307,238 6,397,859
General and administrative 2,246,292 1,850,083 4,220,601 3,147,809
Management fee 280,019 327,026 570,352 1,102,992
Amortization expense 169,017 162,645 340,392 252,026
Restructuring charge 295,436 -- 295,436 --
------------ ----------- ------------- ------------
Total operating expenses 7,253,845 5,484,396 13,734,019 10,900,686
------------ ----------- ------------- ------------
Operating income 2,994,440 4,672,120 7,016,874 7,837,876
Other expenses:
Interest expense, net 3,064,795 3,319,853 6,306,922 4,603,750
Miscellaneous, net 118,904 158,043 95,015 115,321
------------ ----------- ------------- ------------
Total other expenses 3,183,699 3,477,896 6,401,937 4,719,071
------------ ----------- ------------- ------------
Income (loss) before foreign
income taxes (189,259) 1,194,224 614,937 3,118,805
Foreign income taxes (benefit) (271,885) 88,404 (404,861) (161,596)
------------ ----------- ------------- ------------
Net income $ 82,626 $ 1,105,820 $ 1,019,798 $ 3,280,401
============ =========== ============= ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
Continental Global Group, Inc.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended June 30
1998 1997
------------- -------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income $ 1,019,798 $ 3,280,401
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Deferred foreign income tax credit -- (161,596)
Provision for depreciation and amortization 1,571,520 1,423,250
Changes in operating assets and liabilities (8,917,538) (4,043,496)
------------ -------------
Net cash provided by (used in) operating activities (6,326,220) 498,559
Investing activities:
Purchases of property, plant, and equipment (net) (1,496,774) (881,687)
Purchase of BCE, net of notes to seller -- (7,189,125)
Purchase of Hewitt-Robins -- (13,228,032)
------------ -------------
Net cash used in investing activities (1,496,774) (21,298,844)
Financing activities:
Proceeds from issuance of senior notes -- 120,000,000
Deferred financing costs -- (5,072,831)
Net increase (decrease) in borrowings on notes payable 5,562,017 (10,484,467)
Proceeds from long-term obligations 358,497 4,584,830
Principal payments on long-term obligations (584,467) (17,803,196)
Distributions for income taxes (1,125,599) (1,683,591)
Payment to former shareholders of BCE -- (2,927,300)
Dividends -- (40,000,000)
------------ -------------
Net cash provided by financing activities 4,210,448 46,613,445
Effect of exchange rate on cash (307,289) (117,838)
------------ -------------
Increase (decrease) in cash and cash equivalents (3,919,835) 25,695,322
Cash and cash equivalents at beginning of period 30,882,733 1,022,033
------------ -------------
Cash and cash equivalents at end of period $ 26,962,898 $ 26,717,355
============ =============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 7
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 1998
A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes of Continental Global Group,
Inc. and subsidiaries for the year ended December 31, 1997, included in the Form
10-K filed by the Company on March 27, 1998.
B. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
C. ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income",
which establishes new rules for the reporting and display of comprehensive
income and its components. Statement 130 requires the Company's foreign currency
translation adjustments to be included in other comprehensive income and the
disclosure of total comprehensive income. The Company adopted Statement 130 in
the first quarter of 1998 with no impact on net income or stockholder's equity.
The components of comprehensive income for the three month and six month periods
ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
1998 1997 1998 1997
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 82,626 $ 1,105,820 $ 1,019,798 $ 3,280,401
Other comprehensive income:
Foreign currency translation
adjustment (954,582) (398,446) (683,701) (414,045)
--------- ----------- ----------- -----------
Comprehensive income (loss) $(871,956) $ 707,374 $ 336,097 $ 2,866,356
========= =========== =========== ===========
</TABLE>
5
<PAGE> 8
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
C. ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted in years
beginning after June 15, 1999. Statement 133 requires all derivatives to be
recognized as either assets or liabilities in the balance sheet and be measured
at fair value. The Company is currently evaluating Statement 133 and because the
Company expects to have a minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a material effect on
earnings or the financial position of the Company.
D. INVENTORIES
Inventories, which consist of raw materials, manufactured and purchased parts,
and work in process are stated at the lower of cost or market. Since inventory
records are maintained on a job order basis, it is not practical to segregate
inventories into their major classes. The cost for approximately 70% and 66% of
inventories at June 30, 1998 and December 31, 1997, respectively, is determined
using the last-in, first-out (LIFO) method with the remainder determined using
the first-in, first-out (FIFO) method. Had the FIFO method of inventory (which
approximates replacement cost) been used to cost all inventories, inventories
would have increased by approximately $2,140,000 at June 30, 1998 and December
31, 1997.
E. RESTRUCTURING CHARGE
The Company incurred a restructuring charge of approximately $295,000 in the
second quarter of 1998 related to its Australian subsidiary. The Company has
executed a plan to close a manufacturing facility and merge its operations with
other existing facilities. The charge consists primarily of severance costs. As
of June 30, 1998, the Company has paid approximately $152,000 of these expenses.
In addition to the severance costs, the Company anticipates that relocation
costs related to this restructuring plan will total approximately $135,000
during the third quarter. These costs will be expensed as incurred.
F. INCOME TAXES
The Company and its domestic subsidiaries have elected Subchapter S Corporation
Status for United States income tax purposes. Accordingly, the Company's United
States operations are not subject to income taxes as separate entities. The
Company's United States income is included in the income tax returns of the
stockholder. Under the terms of the Tax Payment Agreement with the stockholder,
the Company makes distributions to the stockholder for payment of income taxes.
The Company has subsidiaries located in Australia, the United Kingdom, and South
Africa which are subject to income taxes in their respective countries. For the
six months ended June 30, 1998 and 1997, the Company recorded foreign income tax
benefits of approximately $405,000 and $162,000, respectively, related to its
Australian subsidiary. Pre-tax loss attributable to foreign operations was
approximately $(1,976,000) and $(659,000) for the six month periods ended June
30, 1998 and 1997, respectively.
6
<PAGE> 9
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
G. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Company's domestic subsidiaries, Continental Conveyor & Equipment Company
(CCE) and Goodman Conveyor Company (GCC), both of which are wholly owned, are
the only guarantors of the $120 million Series B Senior Notes. The guarantees
are full, unconditional, and joint and several. Separate financial statements of
these guarantor subsidiaries are not presented as management has determined that
they would not be material to investors.
The Company's foreign subsidiaries are not guarantors of the Series B Senior
Notes. Summarized consolidating balance sheets as of June 30, 1998 and December
31, 1997 for the Company, the guarantor subsidiaries, and the non-guarantor,
foreign subsidiaries are as follows (in thousands):
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
June 30, 1998:
Current assets:
Cash and cash equivalents $ 26,048 $ 826 $ 89 $ -- $ 26,963
Accounts receivable, net 2,493 22,983 19,326 (3,648) 41,154
Inventories -- 25,579 3,358 -- 28,937
Other current assets 102 1,932 358 (1,163) 1,229
--------- ------- ------- -------- ---------
Total current assets 28,643 51,320 23,131 (4,811) 98,283
Property, plant, and
equipment, net -- 6,001 7,142 -- 13,143
Goodwill -- 12,097 7,953 -- 20,050
Investment in subsidiaries 49,958 7,904 -- (57,862) --
Deferred financing costs 4,549 -- -- -- 4,549
Other assets 217 13,070 517 (12,881) 923
--------- ------- ------- -------- ---------
Total assets $ 83,367 $90,392 $38,743 $(75,554) $ 136,948
========= ======= ======= ======== =========
Current liabilities:
Notes payable $ -- $ 2,493 $ 5,732 $ (2,493) $ 5,732
Trade accounts payable 379 15,700 11,468 (3,975) 23,572
Accrued compensation and
employee benefits -- 4,376 1,384 -- 5,760
Accrued interest 3,300 -- -- -- 3,300
Other accrued liabilities 124 3,645 2,120 -- 5,889
Current maturities of
long-term obligations -- 186 962 -- 1,148
--------- ------- ------- -------- ---------
Total current liabilities 3,803 26,400 21,666 (6,468) 45,401
Series B Senior Notes 120,000 -- -- -- 120,000
Other long-term obligations -- 5,527 11,182 (8,400) 8,309
Stockholder's equity (deficit) (40,436) 58,465 5,895 (60,686) (36,762)
--------- ------- ------- -------- ---------
Total liabilities and
stockholder's equity $ 83,367 $90,392 $38,743 $(75,554) $ 136,948
========= ======= ======= ======== =========
</TABLE>
7
<PAGE> 10
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
G. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
Current assets:
Cash and cash equivalents $ 28,073 $ 2,322 $ 488 $ -- $ 30,883
Accounts receivable, net -- 19,299 11,731 (571) 30,459
Inventories -- 23,625 3,948 -- 27,573
Other current assets 47 633 1,671 (1,153) 1,198
--------- ------- ------- -------- ---------
Total current assets 28,120 45,879 17,838 (1,724) 90,113
Property, plant, and
equipment, net -- 6,028 7,213 -- 13,241
Goodwill -- 12,289 8,424 -- 20,713
Investment in subsidiaries 49,958 7,903 -- (57,861) --
Deferred financing costs 4,809 -- -- -- 4,809
Other assets 232 11,591 504 (11,478) 849
--------- ------- ------- -------- ---------
Total assets $ 83,119 $83,690 $33,979 $(71,063) $ 129,725
========= ======= ======= ======== =========
Current liabilities:
Notes payable $ -- $ -- $ 456 $ -- $ 456
Trade accounts payable -- 12,731 8,221 (2,078) 18,874
Accrued compensation and
employee benefits -- 4,756 1,275 -- 6,031
Accrued interest 3,300 -- -- -- 3,300
Other accrued liabilities 415 3,272 3,479 -- 7,166
Current maturities of
long-term obligations -- 185 997 -- 1,182
--------- ------- ------- -------- ---------
Total current liabilities 3,715 20,944 14,428 (2,078) 37,009
Series B Senior Notes 120,000 -- -- -- 120,000
Other long-term obligations -- 5,586 11,922 (8,819) 8,689
Stockholder's equity (deficit) (40,596) 57,160 7,629 (60,166) (35,973)
--------- ------- ------- -------- ---------
Total liabilities and
stockholder's equity $ 83,119 $83,690 $33,979 $(71,063) $ 129,725
========= ======= ======= ======== =========
</TABLE>
8
<PAGE> 11
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
G. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Summarized consolidating income statements for the three months and six months
ended June 30, 1998 and 1997, respectively, for the Company, the guarantor
subsidiaries, and the non-guarantor, foreign subsidiaries are as follows (in
thousands):
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Three months ended June 30, 1998:
Net sales $ -- $ 43,901 $ 16,788 $(129) $ 60,560
Cost of products sold -- 35,431 15,010 (129) 50,312
------- -------- -------- ----- --------
Gross profit -- 8,470 1,778 -- 10,248
Total operating expenses 258 4,256 2,740 -- 7,254
------- -------- -------- ----- --------
Operating income (loss) (258) 4,214 (962) -- 2,994
Interest expense, net 2,936 (265) 394 -- 3,065
Miscellaneous, net 141 78 (101) -- 118
------- -------- -------- ----- --------
Income (loss) before foreign
income taxes (3,335) 4,401 (1,255) -- (189)
Foreign income taxes (benefit) -- -- (272) -- (272)
------- -------- -------- ----- --------
Net income (loss) $(3,335) $ 4,401 $ (983) $ -- $ 83
======= ======== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Three months ended June 30, 1997:
Net sales $ -- $42,337 $ 8,580 $(480) $50,437
Cost of products sold -- 33,637 7,124 (480) 40,281
------- ------- ------- ----- -------
Gross profit -- 8,700 1,456 -- 10,156
Total operating expenses 95 4,150 1,239 -- 5,484
------- ------- ------- ----- -------
Operating income (loss) (95) 4,550 217 -- 4,672
Interest expense, net 3,114 142 64 -- 3,320
Miscellaneous, net -- 76 82 -- 158
------- ------- ------- ----- -------
Income (loss) before foreign
income taxes (3,209) 4,332 71 -- 1,194
Foreign income taxes -- -- 88 -- 88
------- ------- ------- ----- -------
Net income (loss) $(3,209) $ 4,332 $ (17) $ -- $ 1,106
======= ======= ======= ===== =======
</TABLE>
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1998:
Net sales $ -- $ 87,003 $ 31,150 $(502) $ 117,651
Cost of products sold -- 70,068 27,334 (502) 96,900
------- -------- -------- ----- ---------
Gross profit -- 16,935 3,816 -- 20,751
Total operating expenses 351 8,297 5,086 -- 13,734
------- -------- -------- ----- ---------
Operating income (loss) (351) 8,638 (1,270) -- 7,017
Interest expense, net 5,940 (404) 771 -- 6,307
Miscellaneous, net -- 160 (65) -- 95
------- -------- -------- ----- ---------
Income (loss) before foreign
income taxes (6,291) 8,882 (1,976) -- 615
Foreign income taxes (benefit) -- -- (405) -- (405)
------- -------- -------- ----- ---------
Net income (loss) $(6,291) $ 8,882 $ (1,571) $ -- $ 1,020
======= ======== ======== ===== =========
</TABLE>
9
<PAGE> 12
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
G. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1997:
Net sales $ -- $82,840 $ 15,414 $(741) $ 97,513
Cost of products sold -- 66,384 13,131 (741) 78,774
------- ------- -------- ----- --------
Gross profit -- 16,456 2,283 -- 18,739
Total operating expenses 95 8,167 2,639 -- 10,901
------- ------- -------- ----- --------
Operating income (loss) (95) 8,289 (356) -- 7,838
Interest expense, net 3,114 1,171 319 -- 4,604
Miscellaneous, net -- 132 (17) -- 115
------- ------- -------- ----- --------
Income (loss) before foreign
income taxes (3,209) 6,986 (658) -- 3,119
Foreign income taxes (benefit) -- -- (161) -- (161)
------- ------- -------- ----- --------
Net income (loss) $(3,209) $ 6,986 $ (497) $ -- $ 3,280
======= ======= ======== ===== ========
</TABLE>
Summarized consolidating cash flow statements for the six months ended June 30,
1998 and 1997, respectively, for the Company, the guarantor subsidiaries, and
the non-guarantor, foreign subsidiaries are as follows (in thousands):
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1998:
Net cash provided by (used in)
operating activities $ (8,476) $ 4,154 $(4,598) $ 2,594 $ (6,326)
Investing activities:
Purchases of property, plant,
and equipment (net) -- (508) (989) -- (1,497)
-------- ------- ------- ------- --------
Net cash used in investing -- (508) (989) -- (1,497)
activities
Financing activities:
Net increase in borrowings on
notes payable -- 2,493 5,562 (2,493) 5,562
Proceeds from long-term
obligations -- -- 358 -- 358
Principal payments on long-term
obligations -- (58) (526) -- (584)
Distributions for income taxes (124) (1,002) -- -- (1,126)
Distributions for interest on
senior notes 6,575 (6,575) -- -- --
-------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities 6,451 (5,142) 5,394 (2,493) 4,210
Effect of exchange rate on cash -- -- (206) (101) (307)
-------- ------- ------- ------- --------
Decrease in cash and cash (2,025) (1,496) (399) -- (3,920)
equivalents
Cash and cash equivalents at
beginning of period 28,073 2,322 488 -- 30,883
-------- ------- ------- ------- --------
Cash and cash equivalents at end
of period $ 26,048 $ 826 $ 89 $ -- $ 26,963
======== ======= ======= ======= ========
</TABLE>
10
<PAGE> 13
Continental Global Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) - Continued
G. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
Combined Combined
Guarantor Non-Guarantor
The Company Subsidiaries Subsidiaries Eliminations Total
----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 1997:
Net cash provided by (used in)
operating activities $ (1,853) $ 5,197 $(2,845) $ -- $ 499
Investing activities:
Purchases of property, plant,
and equipment (net) -- (738) (144) -- (882)
Purchase of BCE, net of notes
to seller -- (7,189) -- -- (7,189)
Purchase of Hewitt-Robins -- (13,228) -- -- (13,228)
Investment in subsidiaries (49,567) 44,456 5,111 -- --
--------- -------- ------- -------- ---------
Net cash provided by (used in)
investing activities (49,567) 23,301 4,967 -- (21,299)
Financing activities:
Proceeds from issuance of
senior notes 120,000 -- -- -- 120,000
Deferred financing costs (5,073) -- -- -- (5,073)
Net decrease (increase) in
borrowings on notes payable -- (11,298) 813 -- (10,485)
Proceeds from long-term
obligations -- 4,470 115 -- 4,585
Principal payments on long-term
obligations -- (17,803) -- -- (17,803)
Distributions for income taxes 1,402 (3,084) (2) -- (1,684)
Payment to former shareholders
of BCE -- -- (2,927) -- (2,927)
Dividends paid (40,000) -- -- -- (40,000)
--------- -------- ------- -------- ---------
Net cash provided by (used in)
financing activities 76,329 (27,715) (2,001) -- 46,613
Effect of exchange rate on cash -- -- (118) -- (118)
--------- -------- ------- -------- ---------
Increase in cash and cash 24,909 783 3 -- 25,695
equivalents
Cash and cash equivalents at
beginning of period -- 1,020 2 -- 1,022
--------- -------- ------- -------- ---------
Cash and cash equivalents at end
of period $ 24,909 $ 1,803 $ 5 $ -- $ 26,717
========= ======== ======= ======== =========
</TABLE>
H. SUBSEQUENT EVENT
On August 6, 1998, the Company completed the acquisition of certain assets of
Huwood International (Huwood), a U.K. belt conveyor business, and a division of
FKI, Plc. Huwood generated revenues of approximately $13.8 million for the
fiscal year ended March 31, 1998. The aggregate purchase price for the net
assets was approximately $3.7 million (subject to any post closing adjustments)
plus the assumption of $3.1 million in liabilities. The operations of the
Company's existing U.K. facilities will be merged with the Huwood operations.
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes included in the Company's Form 10-K dated
March 27, 1998.
GENERAL
The Company believes it is a leading international manufacturer and supplier of
conveyor equipment for use in the coal mining industry. The Company estimates it
has the largest share of the United States market for idlers used in above
ground conveyor equipment and a significant share of the United States
underground coal mining conveyor equipment market. The Company increased its
market share in 1997 through several acquisitions. In January 1997, the Company
consummated the acquisition of BCE Holdings Pty. Ltd. (BCE), a group of conveyor
and related equipment and service companies in Australia. On April 1, 1997, the
Company acquired Hewitt-Robins, a United States manufacturer of conveyor
components. On October 17, 1997, the Company completed the acquisition of the
MECO Belts Group (MECO) from Joy Technologies Inc., a subsidiary of
Harnischfeger Industries. MECO is an international conveyor equipment company
with operations in the United States, United Kingdom, South Africa, and
Australia. On August 6, 1998, the Company acquired Huwood International in the
United Kingdom, which now establishes the Company as the leading manufacturer
and supplier of equipment for use in coal mining in the United Kingdom. The
Company anticipates that the consolidation of operations will allow it to
realize approximately $2.0 million, annually, in cost savings from the previous
combined companies' operating expenses. The majority of these savings will
result from staff reductions and reductions in facilities costs beginning in the
fourth quarter of 1998. To accomplish these cost savings, the Company estimates
there will be $.5 million in restructuring charges from severance and
consolidation of facilities commencing in the third quarter of 1998. Delays in
the integration of existing U.K. operations with Huwood may result in delayed or
reduced cost savings.
RESULTS OF OPERATIONS
The following table sets forth, on a comparative basis, selected income
statement data as a percentage of net sales for the three and six months period
ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
(000's) (000's)
-------------------------------------------------------------------------------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $60,560 100.0% $50,437 100.0% $117,651 100.0% $97,513 100.0%
Cost of products sold 50,312 83.1 40,281 79.9 96,900 82.4 78,774 80.8
Gross profit 10,248 16.9 10,156 20.1 20,751 17.6 18,739 19.2
SG&A expenses 6,510 10.7 4,994 9.9 12,528 10.6 9,546 9.8
Management fee 280 0.5 327 0.6 570 0.5 1,103 1.1
Amortization expense 169 0.3 163 0.3 341 0.3 252 0.3
Restructuring charge 295 0.5 -- -- 295 0.2 -- --
Operating income 2,994 4.9 4,672 9.3 7,017 6.0 7,838 8.0
</TABLE>
Three months ended June 30, 1998, compared to three months ended June 30, 1997:
Net Sales
Net sales increased $10.1 million, or 20%, from $50.4 million in 1997 to $60.5
million in 1998. Net sales in the Company's domestic operations increased $1.9
million primarily from the MECO acquisition and the Company's foreign
subsidiaries increased by $8.2 million, primarily from the Company's BCE
Australian subsidiary for $3.7 million and the MECO acquisition for $4.5
million.
12
<PAGE> 15
Gross Profit
Gross profit increased $0.1 million, or 1%, from $10.1 million in 1997 to $10.2
million in 1998. Gross profit in the Company's domestic operations decreased by
$0.2 million as a result of slightly lower profit margins due to a change in
product mix between the two periods. The profit margins on a product by product
basis remained approximately the same. Gross profit in the Company's foreign
operations increased by $0.3 million; however, gross profit margins decreased
from 17.0% in 1997 to 10.7% in 1998 due to unanticipated cost overruns in the
Company's Australian operations on contracts which have been substantially
completed.
SG&A Expenses
Selling, engineering, general and administrative expenses, which do not include
management fees (SG&A expenses), increased $1.5 million, or 30%, from $5.0
million in 1997 to $6.5 million in 1998. Increased engineering, administrative,
sales, and marketing costs resulting from the acquisition of MECO accounted for
$1.2 million of this increase. The remaining increase occurred in the Company's
other businesses.
Operating Income
Operating income decreased $1.7 million, or 36%, from $4.7 million in 1997 to
$3.0 million in 1998. The decrease is the result of the $0.1 million increase in
gross profit, offset by the $1.5 million increase in SG&A expenses and the 1998
restructuring charge of $0.3 million. The restructuring charge relates to the
Company's decision to close a manufacturing facility at its Australian
subsidiary and merge its operations with other existing facilities. The charge
is comprised primarily of severance expenses. The Company anticipates that the
restructuring will result in a cost savings in excess of $1.5 million annually
beginning in the third quarter of 1998. Delays in the consolidation of the
Australian facilities may result in delayed or reduced cost savings.
Six months ended June 30, 1998, compared to six months ended June 30, 1997:
Net Sales
Net sales increased $20.1 million, or 21%, from $97.5 million in 1997 to $117.6
million in 1998. This sales increase was due to additional contracts received by
the Company's BCE Australian operation for $5.3 million and sales from the
Hewitt-Robins and MECO acquisitions of $3.7 million and $15.5 million
respectively. This sales increase was partially offset by a decrease in sales of
$4.4 million primarily in the Company's other conveyor equipment business due to
a spending decrease from a key customer between the two periods.
Gross Profit
Gross profit increased $2.0 million, or 11%, from $18.7 million in 1997 to $20.7
million in 1998. The acquisitions of Hewitt-Robins and MECO increased gross
profit $3.7 million. Gross profit in the Company's other conveyor equipment
business decreased by $1.7 million due to a decrease in sales volume and a
change in product mix. Consolidated gross profit margins decreased from 19.2%
in 1997 to 17.6% in 1998 primarily due to the decreased sales volume, change in
product mix, and the impact of the contract cost overruns in the second quarter.
SG&A Expenses
SG&A expense increased $3.0 million, or 31%, from $9.5 million in 1997 to $12.5
million in 1998. The acquisitions of Hewitt-Robins and MECO accounted for $0.4
million and $2.3 million respectively of this increase and the balance of $0.3
million from the Company's other operations.
Operating Income
Operating income decreased $0.8 million, or 10%, from $7.8 million in 1997 to
$7.0 million in 1998. The decrease is the result of the $2.0 million increase in
gross profit and the $3.0 million increase in SG&A expenses, along with a
decrease in management fees of $0.5 million and the 1998 restructuring charge of
$0.3 million. The decrease in management fees resulted from a limitation on
payment of such fees under a new management agreement that became effective
April 1, 1997.
13
<PAGE> 16
Backlog
Backlog at June 30, 1998 was $73.8 million, an increase of $17.1 million, or
30%, from $56.7 million at December 31, 1997. The increase is attributable to
increased orders in the mining equipment business area. Management believes
that the majority of the backlog will be shipped in 1998.
Although there can be no guarantee of future forecasts and prospects, based on
the strength of the Company's 1998 shippable backlog, cost savings from
restructuring its Australian operations and United Kingdom operations through
the acquisition of Huwood International, the Company believes, based on current
forecasts, that net sales and operating income for the second half of 1998 will
be increased over the first half of 1998. The Company further believes that the
third quarter 1998 operating income will be slightly better than the second
quarter 1998 and the fourth quarter will be significantly better in net sales
and operating income than the previous quarters of 1998. The Company
anticipates that net sales in 1998 will be higher than 1997, and operating
income (excluding restructuring charges) in 1998 will be similar to 1997.
The Company's ability to achieve 1998 balance of year sales and operating
income forecasts can be effected by delays in shipments of vendor items,
customer directed changes, and other engineering and production interruptions.
Impact of Year 2000
As the Year 2000 approaches, the Company is aware of the issues associated with
the programming code in older computer systems. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. A company-wide taskforce is reviewing all systems to ensure that they
do not malfunction as a result of the Year 2000 and the Company is utilizing
both internal and external resources to identify, correct or reprogram, and test
the systems for the Year 2000 compliance. The Company is in the process of
replacing some systems and upgrading others. While the current cost of this
effort is still being evaluated, the Company does not expect the cost to be
material.
The Company expects to complete its Year 2000 activities within a timeframe that
will enable its information systems to function without significant disruption
in Year 2000. In addition, the Company is in the process of obtaining assurances
from third parties that are critical to its business, such as customers and
vendors, regarding their Year 2000 compliance. If assurances are not received
from critical vendors regarding their Year 2000 compliance, alternative sources
will be selected. Failure of the Company or such third parties to achieve Year
2000 compliance can result in disruption of the Company's operations that could
have a material adverse effect on the Company's financial condition or results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $(6.3) million and $0.5
million for the six months ending June 30, 1998 and 1997, respectively. Net cash
used in operating activities in 1998 resulted from lower net income and an $8.9
million increase in operating assets. The decline in net income of $2.2 million
was primarily the result of increased interest expense related the Senior Notes
issued on April 1, 1997. The increase in operating assets was due to an increase
in accounts receivable of $10.7 million caused by increased sales and decreased
receivable turns. Net cash provided by operating activities in 1997 resulted
primarily from net income of $3.3 million offset by an increase in operating
assets of $4.0 million.
Net cash used in investing activities was $1.5 million and $21.3 million for the
six months ending June 30, 1998 and 1997, respectively. The significant
difference between 1998 and 1997 is due to the 1997 acquisitions of BCE for $7.2
million and Hewitt-Robins for $13.2 million. The balance of expenditures for
investing activities, $1.5 million in 1998 and $0.9 million in 1997, represents
net purchases of property, plant, and equipment.
Net cash provided by financing activities was $4.2 million and $46.6 million for
the six months ending June 30, 1998 and 1997, respectively. Net cash provided by
financing activities in 1998
14
<PAGE> 17
represents increases in borrowings on notes payable of $5.6 million and proceeds
from long-term obligations of $0.3 million, offset by payments on long-term
obligations of $0.6 million. The Company made distributions to NES Group, Inc.
of $1.1 million in 1998 for the payment of income taxes.
Net cash provided by financing activities in 1997 is the result of the issuance
of $120.0 million of senior notes. At the time of the debt offering, the Company
paid dividends to its sole stockholder in the amount of $40.0 million and paid
financing fees in the amount of $5.1 million. In connection with the BCE
acquisition, $2.9 million was paid to former shareholders of BCE. The Company
reduced its borrowings on notes payable and long-term obligations by $10.5
million and $13.2 million, respectively. The Company made distributions to NES
Group, Inc. of $1.7 million in 1997 for the payment of income taxes.
The Company's primary capital requirements consist of capital expenditures and
debt service. The Company expects current financial resources and funds from
continuing operations to be adequate to meet current cash requirements. At June
30, 1998, the Company had cash and cash equivalents of $27.0 million and an
unused credit facility line of $30.0 million.
CAUTIONARY STATEMENT FOR SAFE HARBOR PURPOSES
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) contains forward-looking statements within the meaning of the
federal securities laws. As a general matter, forward-looking statements are
those focused upon future plans, objectives, or performance as opposed to
historical items and include statements of anticipated events or trends and
expectations and beliefs relating to matters that are not historical in nature.
Such forward-looking statements include, without limitation, statements
regarding the Company's Year 2000 compliance program and future prospects of the
business. 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.
15
<PAGE> 18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See index of exhibits
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1998
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONTINENTAL GLOBAL GROUP, INC.
By: /s/ JIMMY L. DICKINSON
----------------------------------------
JIMMY L. DICKINSON
Vice President and Chief Financial Officer (As duly
authorized representative and as Principal Financial
and Accounting Officer)
CONTINENTAL CONVEYOR & EQUIPMENT COMPANY
By: /s/ JIMMY L. DICKINSON
----------------------------------------
JIMMY L. DICKINSON
Vice President - Finance (As duly authorized representative
and as Principal Financial and Accounting Officer)
GOODMAN CONVEYOR COMPANY
By: /s/ LAWRENCE KUKULSKI
----------------------------------------
LAWRENCE KUKULSKI
Vice President - Finance and Administration (As duly
authorized representative and as Principal Financial
and Accounting Officer)
Date: August 14, 1998
17
<PAGE> 20
CONTINENTAL GLOBAL GROUP, INC.
FORM 10-Q
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C> <C>
3.1 Certificate of Incorporation of Continental Global Group, Inc., as currently in effect *
3.2 By-Laws of Continental Global Group, Inc., as currently in effect *
3.3 Certificate of Incorporation of Continental Conveyor & Equipment Company, as currently *
in effect
3.4 By-Laws of Continental Conveyor & Equipment Company, as currently in effect *
3.5 Certificate of Incorporation of Goodman Conveyor Company, as currently in effect *
3.6 By-Laws of Goodman Conveyor Company, as currently in effect *
4.1 Indenture, dated as of April 1, 1997, among Continental Global *
Group, Inc., Continental Conveyor & Equipment Company, Goodman
Conveyor Company, and the Trustee (containing, as exhibits,
specimens of the Series A Notes and the Series B Notes)
10.1 Revolving Credit Facility, dated as of September 14, 1992, as *
amended by Amendment I, II, and III, among Continental Conveyor &
Equipment Company, Goodman Conveyor Company, and Bank One,
Cleveland, NA
10.2 Share Sale Agreement dated as of November 8, 1996, as amended by First and Second *
Supplementary Deeds, among Continental Pty. Ltd. and various Australian sellers,
relating to the BCE acquisition
10.3 Asset Purchase Agreement, dated as of March 3, 1997, among Continental Conveyor & *
Equipment Company, Process Technology Holdings, Inc., and W.S. Tyler Incorporated,
relating to the Hewitt-Robins acquisition
10.4 Management Agreement, dated as of April 1, 1997, between Continental Global Group, Inc. *
and Nesco, Inc.
10.5 Tax Payment Agreement, dated as of April 1, 1997, among Continental *
Global Group, Inc., Continental Conveyor & Equipment Company,
Goodman Conveyor Company, and NES Group, Inc.
10.6 World Wide Purchase and Sale Agreement dated as of October 17, **
1997, by and among Continental Conveyor International Inc., Joy
Technologies, Inc., and certain affiliates of Joy Technologies Inc.
(The "Purchase Agreement"). (All exhibits to the Purchase Agreement
have been omitted, and Registrant will furnish supplementally to
the Commission, upon request, a copy of any omitted exhibit.)
12 Statement regarding computation of ratio of earnings to fixed charges
27 Financial Data Schedule (filed electronically only)
* Incorporated by reference from Form S-4 Registration Number 333-27665 filed
under the Securities Act of 1933, as amended
** Incorporated by reference from Form 8-K filed November 3, 1997, under the
Securities Exchange Act of 1934, as amended.
</TABLE>
<PAGE> 1
Exhibit 12
Continental Global Group, Inc.
Computation of Ratio of Earnings to Fixed Charges
(In thousands, except for ratios)
<TABLE>
<CAPTION>
Six months ended
Three months ended June 30 June 30
-------------------------- ---------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Computation of Earnings:
Income (loss) before foreign income taxes $ (189) $1,194 $ 615 $3,119
Add:
Interest expense 3,065 3,320 6,307 4,604
Portion of rent expense representative of an
interest factor 173 114 356 226
-------------------------- ---------------------
Earnings $3,049 $4,628 $7,278 $7,949
========================== =====================
Computation of Fixed Charges:
Interest expense $3,065 $3,320 $6,307 $4,604
Portion of rent expense representative of an
interest factor 173 114 356 226
-------------------------- ---------------------
Fixed Charges $3,238 $3,434 $6,663 $4,830
========================== =====================
Ratio of Earnings to Fixed Charges 0.94 1.35 1.09 1.65
========================== =====================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001039785
<NAME> CONTINENTAL GLOBAL GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 26,963
<SECURITIES> 0
<RECEIVABLES> 41,154
<ALLOWANCES> 0
<INVENTORY> 28,937
<CURRENT-ASSETS> 98,283
<PP&E> 20,294
<DEPRECIATION> 7,150
<TOTAL-ASSETS> 136,948
<CURRENT-LIABILITIES> 45,401
<BONDS> 120,000
0
0
<COMMON> 1
<OTHER-SE> (36,763)
<TOTAL-LIABILITY-AND-EQUITY> 136,948
<SALES> 117,651
<TOTAL-REVENUES> 117,651
<CGS> 96,901
<TOTAL-COSTS> 96,901
<OTHER-EXPENSES> 570
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,307
<INCOME-PRETAX> 615
<INCOME-TAX> (405)
<INCOME-CONTINUING> 1,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,020
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
