10-Q 1 form10-q.txt CONTINENTAL GLOBAL FORM 10-Q AS OF 3/31/05 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 March 31, 2005 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 & Continental Global Group, Inc. Equipment 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 if the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [x] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practical date. As of April 30, 2005, 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 March 31, 2005 and December 31, 2004 2 Condensed Consolidated Statements of Operations Three Months ended March 31, 2005 and 2004 3 Condensed Consolidated Statements of Cash Flows Three Months ended March 31, 2005 and 2004 4 Notes to Condensed Consolidated Financial Statements 5-15 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 16-22 Item 3 Quantitative and Qualitative Disclosures about Market Risk 23 Item 4 Controls and Procedures 23 Part II Other Information Item 1 Legal Proceedings 24 Item 6 Exhibits 24 Signatures 25

Part I. Financial Information Item 1. Financial Statements (Unaudited) 1 Continental Global Group, Inc. Condensed Consolidated Balance Sheets

See notes to condensed consolidated financial statements. 2 Continental Global Group, Inc. Condensed Consolidated Statements of Operations

See notes to condensed consolidated financial statements. 3 Continental Global Group, Inc. Condensed Consolidated Statements of Cash Flows

See notes to condensed consolidated financial statements. 4 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 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 three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes of Continental Global Group, Inc. and subsidiaries for the year ended December 31, 2004, included in the Company's Form 10-K. Certain amounts from the prior year financial statements have been reclassified to conform to current year presentation. The Company was not in compliance with certain covenants under its revolving credit facilities as of December 31, 2003 or the subsequent quarters through September 30, 2004, resulting in a cross default under the terms of the Company's Senior Notes. In addition, the Company failed to make its $6,600,000 semi-annual interest payment for the Senior Notes due on April 1, 2004. Following expiration of the 30-day grace period provided for in the indenture, the Senior Notes were in default and the Company received a notice of default from the Trustee for the Senior Notes. However, on April 26, 2004, the Company entered into a forbearance agreement with the holders of a majority interest ("Majority Holders") of the Senior Notes which instructed the Trustee for the Senior Notes to refrain from taking any action with respect to the default. Several times in 2004, this agreement was amended to extend the forbearance agreement until July 23, 2004. On July 22, 2004, the Company entered into a restructuring agreement with the Majority Holders of the Senior Notes pursuant to which the Company agreed to commence an offer to exchange new notes and a cash payment for all of the outstanding Senior Notes. The restructuring agreement extended the forbearance agreement with the Majority Holders until the restructuring was consummated or the restructuring agreement was terminated. On August 5, 2004, the Company commenced an offer to exchange (i) cash in the aggregate amount of $17,500,000, (ii) 9% Series A Senior Secured Notes due 2008 in the aggregate principal amount of $65,000,000, and (iii) 13% Series B Senior Secured Notes due 2008 in the aggregate principal amount of $10,000,000, for all of its outstanding 11% Senior Notes due 2007 in the aggregate principal amount of $120,000,000 and all interest accrued thereon. The exchange offer was made exclusively to holders of the 11% Senior Notes due 2007. 5 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 A. Organization and Basis of Presentation (Continued) Several times through August 31, 2004, the Company and Bank One, N.A. entered into forbearance agreements under which Bank One agreed not to exercise its rights with respect to the defaults, including the right to demand payment, under the revolving credit facility for a stated period while the Company negotiated a restructuring of its Senior Notes. On July 12, 2004, the Company received a commitment letter from Bank One for a waiver of the covenant violations and an extension of the revolving credit facility. On October 4, 2004, the Company's wholly-owned subsidiaries, CCE and GCC entered into a Second Amended and Restated Credit Facility and Security Agreement (the "Credit Agreement") with Bank One, N.A. The Credit Agreement extends the Company's revolving credit facility with Bank One until July 31, 2006. On October 4, 2004, the Company completed the exchange offer with respect to its outstanding 11% Senior Notes due 2007 (the "Old Notes") and entered into an Indenture by and among the Company, two of its wholly-owned subsidiaries, CCE and GCC (collectively, the "Subsidiary Guarantors") and Wells Fargo Bank, National Association, as trustee (the "Indenture"). Tenders with respect to Old Notes representing approximately $109,270,000 or 91.06% of the $120,000,000 of Old Notes outstanding principal amount were received by Wells Fargo Bank, N.A., which acted as depositary in the exchange offer. All Old Notes that were validly tendered were accepted for exchange. According to the terms of the exchange offer, on October 4, 2004, the Company issued $59,187,917 of 9% New Series A Notes due 2008 and $9,105,833 of 13% New Series B Notes due 2008. In addition, the Company made a cash payment as additional consideration to the Series A and Series B bondholders of approximately $14,114,000, or $15.50 for every $120 of Old Notes tendered. In October 2005, the Series A and Series B bondholders will receive cash of approximately $1,821,000, or $2.00 for every $120 of Old Notes tendered. According to the terms of the Indenture, the New Series A Notes will mature on October 1, 2008. Interest will accrue at the rate of 9% per annum and will be payable semiannually in arrears, in cash, on each April 1 and October 1 until maturity. Interest accrued on the New Series A Notes from April 1, 2004, as if the New Series A Notes had been issued on such date. The Company paid interest of $2,663,457 on October 4, 2004 related to the Series A Notes. The New Series B Notes will also mature on October 1, 2008. Interest will accrue at the rate of 13% per annum and will be payable semiannually in arrears, in kind, on each April 1 and October 1 until maturity. However, the Company has the right to make interest payment on the New Series B Notes in cash at the same rate and on the same terms as the New Series A Notes. The Company has assumed the interest will be paid in cash at a rate of 9% in all calculations involving the interest payments on the Series B Notes in these condensed consolidated financial statements. Interest accrued on the New Series B Notes from April 1, 2004, as if the New Series B Notes had been issued on such date. The Company paid interest of $409,763 on October 4, 2004 related to the Series B Notes. The New Series A and Series B Notes are jointly and severally guaranteed by the Subsidiary Guarantors and secured by substantially all of the assets of the Subsidiary Guarantors. 6 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 A. Organization and Basis of Presentation (Continued) The cash payment made on October 4, 2004 as additional consideration to the Series A and Series B bondholders was funded by new subordinated indebtedness to N.E.S. Investment Company in the amount of $10,000,000 and additional borrowings from the Company's revolving line of credit. The note payable to N.E.S. Investment Company accrues interest at a rate of 9%, payable in kind, compounded annually. The additional consideration to be paid by the Company in October 2005 to the Series A and Series B bondholders will be funded with an additional $2,000,000 of subordinated indebtedness to N.E.S. Investment Company. The debt exchange was accounted for according to Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". According to the requirements of SFAS No. 15, in the fourth quarter of 2004, the Company recorded a gain on the exchange of bonds of approximately $3,392,000, representing the difference between the future cash outlays of the Series A and Series B Notes and the carrying value of the Old Notes. All cash payments as additional consideration to Series A and Series B bondholders and interest payments on the New Series A and Series B Notes will be recorded as a reduction in the balance of outstanding indebtedness throughout the terms of the Series A and Series B Notes, and accordingly, the Company will not recognize any interest expense in the income statement related to the New Series A and Series B Notes. B. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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 64% of inventories at March 31, 2005 and December 31, 2004, 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 $5,484,000 and $5,184,000 at March 31, 2005 and December 31, 2004, respectively. 7 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 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: 2005 2004 ----------------- ----------------- Balance as of January 1 $ 1,634,049 $ 1,275,401 Provision for warranties 283,522 173,864 Settlements made during the period (77,296) (61,765) Effect of exchange rate changes (15,034) 7,885 ----------------- ----------------- Balance as of March 31 $ 1,825,241 $ 1,395,385 ================= ================= E. Restructuring Charges The Company incurred restructuring charges of approximately $2,000 and $115,000 in the first three months of 2005 and 2004, respectively, related to changes in staffing and production requirements in its domestic operations. These charges consist primarily of severance costs associated with a reduction in personnel which occurred in 2002 and 2003. As part of this restructuring, in 2002 the Company developed a plan to discontinue the manufacturing operations in certain of its domestic facilities and merge these operations with other existing facilities. The process of merging the domestic operations began in 2003 and continued throughout 2004. As of March 31, 2005, the Company has paid approximately $604,000 of the charges incurred to date, with the majority of the remainder expected to be paid by 2008. Due to increases in the Company's domestic backlog, the Company does not expect any further consolidation at this time. F. Comprehensive Income (Loss) The components of comprehensive income (loss) for the three months ended March 31 are as follows:

8 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 G. Employee Benefit Plans The components of net periodic benefit cost for the three months ended March 31 are as follows: 2005 2004 ----------------- ----------------- Service cost $ 53,857 $ 55,386 Interest cost 128,347 122,237 Expected return on plan assets (146,479) (127,960) Amortization of prior service cost 11,161 11,161 Recognized loss 14,898 14,933 ----------------- ----------------- Net periodic benefit cost $ 61,784 $ 75,757 ================= ================= H. Income Taxes Income taxes are provided using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes". For tax reporting purposes, the Company is included in the consolidated federal tax return of N.E.S. Investment Co. However, for financial reporting purposes, the Company's tax provision has been calculated on a stand-alone basis. The Company 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. 9 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 I. Segment Information While the Company primarily manages its operations on a geographical basis, the Company operates in two principal business segments: conveyor equipment and manufactured housing products. The conveyor equipment business markets its products in four main business areas. The mining equipment business area includes the design, manufacture and testing (and, outside the United States, installation and maintenance) of complete belt conveyor systems and components for mining application primarily in the coal industry. The conveyor components business area manufactures and sells components for conveyor systems primarily for resale through distributor networks. The engineered systems business area uses specialized project management and engineering skills to combine mining equipment products, purchased equipment, steel fabrication and other outside services for sale as complete conveyor equipment systems that meet specific customer requirements. The bulk conveyor equipment business area designs and manufactures a complete range of conveyor equipment sold to transport bulk materials, such as cement, lime, food products and industrial waste. The Company's manufactured housing products business manufactures and/or refurbishes axle components sold directly to the manufactured housing industry. As part of this segment the Company also sells mounted tire and rim assemblies to the manufactured housing industry. Included in the other category is primarily the manufacture and sale of air filtration equipment for use in enclosed environments, principally in the textile industry. Three months ended March 31 2005 2004 -------------------------------------- (in thousands) Net sales: Conveyor equipment $ 57,486 $ 44,368 Manufactured housing products 7,440 5,481 Other 129 155 -------------------------------------- Total net sales $ 65,055 $ 50,004 ====================================== Segment operating income: Conveyor equipment $ 5,717 $ 2,025 Manufactured housing products 350 103 Other 31 57 -------------------------------------- Total segment operating income 6,098 2,185 Management fee 310 109 Amortization expense 7 7 Restructuring charges 2 115 Corporate expense 398 446 -------------------------------------- Total operating income 5,381 1,508 Interest expense, net 1,093 3,830 Miscellaneous expense (income) 67 (100) -------------------------------------- Income (loss) before income taxes $ 4,221 $(2,222) ====================================== 10 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 J. 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 New Series A and Series B 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 New Series A and Series B Notes. Summarized consolidating balance sheets as of March 31, 2005 and December 31, 2004 for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

11 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 J. Guarantor and Non-Guarantor Subsidiaries (Continued)

12 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 J. Guarantor and Non-Guarantor Subsidiaries (Continued) Summarized consolidating statements of operations for the three months ended March 31, 2005 and 2004, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

13 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 J. Guarantor and Non-Guarantor Subsidiaries (Continued) Summarized consolidating cash flow statements for the three months ended March 31, 2005 and 2004, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

14 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 2005 J. Guarantor and Non-Guarantor Subsidiaries (Continued)

15 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, 2004. General The Company, through its subsidiaries, is primarily engaged in the manufacture and distribution of bulk material handling and replacement equipment, primarily for use in the mining industry. The Company is a holding company organized under the Delaware General Corporation Law and conducts all of its business through its direct and indirect operating subsidiaries. The Company's direct operating subsidiaries are Continental Conveyor and Equipment Company and Goodman Conveyor Company. The Company also owns indirectly all of the capital stock of Continental Conveyor & Equipment Pty. Ltd., an Australian holding company that owns all of the capital stock of four Australian operating companies. The Company also owns indirectly all of the capital stock of Continental Conveyor Ltd., a U.K. operating company, and Continental MECO (Pty.) Ltd., a South African operating company. 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 ended March 31, 2005 and 2004. Three months ended March 31 -------------------------- 2005 2004 Net sales 100.0% 100.0% Cost of products sold 80.7 84.5 Gross profit 19.3 15.5 SG&A expenses 10.5 12.0 Management fee 0.5 0.2 Restructuring charges - 0.3 Operating income 8.3 3.0 Three months ended March 31, 2005, compared to three months ended March 31, 2004: Net Sales Net sales increased $15.1 million, or 30%, from $50.0 million in 2004 to $65.1 million in 2005. Net sales in the domestic operations of the Company's conveyor equipment segment increased $13.4 million due to increased sales volumes and sales price increases in all business areas of the conveyor equipment segment. During 2004, the Company received significant steel price increases from its vendors requiring the Company to increase selling prices on its products beginning in March 2004 in order to recover these increased costs. The increase in sales volume was due primarily to the improved market conditions in the coal industry creating higher demand for coal which resulted in increased capital spending by the Company's major customers in the coal industry. Net sales in the foreign operations of the Company's conveyor equipment segment decreased $0.3 million from $21.2 million in 2004 to $20.9 million in 2005. This decrease in sales is net of a $0.7 million increase due to changes in foreign currency translation rates; adjusted for variations in foreign currency translation 16 rates, net sales in the foreign operations decreased $1.0 million. Net sales by the Australian subsidiary increased $2.0 million (after adjustments for foreign currency fluctuations) due to improved market conditions in the coal industry. Adjusted for variations in foreign currency translation rates, net sales by the United Kingdom subsidiary decreased $3.2 million due to decreased sales of engineered systems contracts, primarily to the tunneling industry, offset partially by an increase in the more profitable standard manufactured products business. Net sales by the South African subsidiary increased $0.2 million (after adjustments for foreign currency fluctuations) due to improved market conditions in the coal industry. Net sales in the Company's manufactured housing segment increased $2.0 million or 36% due to improved market conditions in the manufactured housing industry, combined with a change in the product mix with more sales of new manufactured products which have a higher selling price than refurbished products. Gross Profit Gross profit increased $4.9 million, or 64%, from $7.7 million in 2004 to $12.6 million in 2005. This increase in gross profit is the result of a $3.2 million increase due to increased sales volume combined with a $1.7 million increase due to improved margins. Gross profit in the domestic operations of the Company's conveyor equipment segment increased $3.8 million ($3.0 million due to increased volume and $0.8 million due to improved margins). The increased sales volumes contributed to a more efficient utilization of overhead expenses which improved the gross profit margins in the domestic conveyor equipment segment. Gross profit in the foreign operations of the Company's conveyor equipment segment increased $0.8 million, of which $0.1 million resulted from increases in foreign currency translation rates. The remaining increase in gross profit in the foreign operation was due to increases in Australia, United Kingdom and South Africa of $0.4 million, $0.2 million and $0.1 million respectively. Both operations in Australia and South Africa realized increased gross profit as a result of higher sales volume and more favorable utilization of overhead expenses. In the United Kingdom, gross profit increased due to a more favorable mixture of higher margin standard manufactured products business and more profitable engineered systems in the mining industry as opposed to less profitable engineered systems in the tunneling industry. Gross profit in the Company's manufactured housing segment increased $0.3 million due to increased sales volume and increased selling prices. Gross profit as a percentage of net sales increased from 15.5% in 2004 to 19.3% in 2005. This increase primarily resulted from improved margins due to increased sales volume in the Company's conveyor equipment segment. SG&A Expenses SG&A expenses increased $0.9 million, or 15%, from $6.0 million in 2004 to $6.9 million in 2005. SG&A expenses in the domestic operations of the Company's conveyor equipment segment increased $0.6 million primarily due to increased selling expenses which resulted from increased sales. SG&A expenses in the foreign operations of the Company's conveyor equipment segment increased $0.3 million, of which $0.1 million was due to increases in foreign currency translation rates. Operating Income Operating income increased $3.9 million, from $1.5 million in 2004 to $5.4 million in 2005. This increase resulted from the $4.9 million increase in gross profit combined with a $0.1 million decrease in restructuring charges, partially offset by the $0.9 million increase in SG&A expenses and a $0.2 million increase in management fees. 17 Interest Expense, Net Interest expense decreased $2.7 million, from $3.8 million in 2004 to $1.1 million in 2005. This decrease resulted from the reduction of interest on the Company's Senior Notes. On October 4, 2004, the Company completed a restructuring of its 11% Senior Notes due 2007 which was accounted for according to Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". On April 1, 2005, the Company made a $3.1 million semi-annual interest payment on the newly issued Series A and Series B Notes due 2008. All interest payments on the Series A and Series B Notes will be recorded as a reduction of outstanding indebtedness rather than interest expense. Interest expense related to the 11% Senior Notes due 2007 decreased $3.0 million from $3.3 million in 2004 to $0.3 million in 2005. Income Tax Expense The Company recorded income tax expense of $0.9 million in 2005 due to the increase in income and the loss of all domestic tax attributes in the fourth quarter of 2004 due to the recognition of cancellation of indebtedness income which resulted from the restructuring of the Company's Senior Notes. The Company's effective income tax rate is less than the statutory rate primarily due to a favorable income tax benefit for interest payments on the New Series A and Series B Notes due 2008 which are recorded as a reduction of the outstanding indebtedness for financial reporting purposes. In addition, the Company has not recognized income tax expense in certain of its foreign subsidiaries due to the reversal of an income tax valuation allowance. Net Income (Loss) Net income (loss) increased $5.5 million, from a loss of $2.2 million in 2004 to income of $3.3 million in 2005. This increase resulted from the $3.9 million increase in operating income, combined with the $2.7 million decrease in interest expense, offset by a $0.2 million increase in miscellaneous expense (income) and a $0.9 million increase in income tax expense. Restructuring Charges The Company incurred restructuring charges of approximately $2,000 and $115,000 in the first three months of 2005 and 2004, respectively, related to changes in staffing and production requirements in its domestic operations. These charges consist primarily of severance costs associated with a reduction in personnel which occurred in 2002 and 2003. As part of this restructuring, in 2002 the Company developed a plan to discontinue the manufacturing operations in certain of its domestic facilities and merge these operations with other existing facilities. The process of merging the domestic operations began in 2003 and continued throughout 2004. As of March 31, 2005, the Company has paid approximately $604,000 of the charges incurred to date, with the majority of the remainder expected to be paid by 2008. Due to increases in the Company's domestic backlog, the Company does not expect any further consolidation at this time. Backlog Backlog at March 31, 2005 was $82.3 million, an increase of $36.7 million, or 80%, from $45.6 million at December 31, 2004. At March 31, 2005, backlog in the domestic operations of the Company's conveyor equipment segment was $56.1 million, an increase of $34.6 million from December 31, 2004, and backlog in the foreign operations of the Company's conveyor equipment segment was $26.2 million, an increase of $2.1 million from December 31, 2004. Management believes that approximately 95% of the backlog will be shipped in 2005. 18 Liquidity and Capital Resources Net cash used in operating activities was $3.6 million and $1.0 million for the three months ended March 31, 2005 and 2004, respectively. Net cash used in operating activities in 2005 resulted from net income of $3.3 million, combined with non-cash expenses of $0.7 million, and offset by a net increase in operating assets and liabilities of $7.6 million. The net increase in operating assets primarily resulted from increased accounts receivable and inventory balances at the Company's domestic subsidiaries. The increase in accounts receivable resulted from increased sales in the first quarter of 2005 compared to the fourth quarter of 2004. The increase in inventory resulted from increased production to support the increased backlog in the domestic operations. Net cash used in operating activities in 2004 resulted from a net loss of $2.2 million offset by non-cash expenses of $0.7 million and a net decrease in operating assets and liabilities of $0.5 million. Net cash used in investing activities was $0.4 million and $0.1 million for the three months ended March 31, 2005 and 2004, respectively, and represents net purchases of property, plant, and equipment for both years. Net cash provided by financing activities was $3.8 million and $1.2 million for the three months ended March 31, 2005 and 2004, respectively. Net cash provided by financing activities in 2005 resulted from a net increase in borrowings on notes payable of $3.4 million combined with proceeds from long-term obligations of $0.8 million, partially offset by principal payments on long-term obligations of $0.4 million. Net borrowings on notes payable in the domestic subsidiaries increased $1.6 million and net borrowings on notes payable in the foreign subsidiaries increased $1.8 million. Proceeds from long-term obligations represent additional proceeds on the Australian subsidiary's term loan with National Australia Bank of 1,000,000 Australian dollars. Net cash provided by financing activities in 2004 resulted from a net increase in borrowings on notes payable of $1.3 million offset by principal payments on long-term obligations of $0.1 million. The Company's primary capital requirements consist of capital expenditures and debt service. The Company utilizes cash on hand and its available credit facilities to satisfy these requirements. The Company anticipates that capital expenditures in 2005 will be approximately $3.0 million, which will include expenditures to improve productivity and for maintenance capital. In addition to the Company's debt service requirements for interest expense, as of March 31, 2005, the Company's domestic and foreign credit facilities had outstanding principal balances of approximately $14.9 million and $5.6 million, respectively. The Company was not in compliance with certain covenants under its revolving credit facilities as of December 31, 2003 or the subsequent quarters through September 30, 2004, resulting in a cross default under the terms of the Company's Senior Notes. In addition, the Company failed to make its $6.6 million semi-annual interest payment for the Senior Notes due on April 1, 2004. Following expiration of the 30-day grace period provided for in the indenture, the Senior Notes were in default and the Company received a notice of default from the Trustee for the Senior Notes. However, on April 26, 2004, the Company entered into a forbearance agreement with the holders of a majority interest ("Majority Holders") of the Senior Notes which instructed the Trustee for the Senior Notes to refrain from taking any action with respect to the default. Several times in 2004, this agreement was amended to extend the forbearance agreement until July 23, 2004. On July 22, 2004, the Company entered into a restructuring agreement with the Majority Holders of the Senior Notes pursuant to which the Company agreed to commence an offer to exchange new notes and a cash payment for all of the outstanding Senior Notes. The restructuring agreement extended the forbearance 19 agreement with the Majority Holders until the restructuring was consummated or the restructuring agreement was terminated. On August 5, 2004, the Company commenced an offer to exchange (i) cash in the aggregate amount of $17.5 million, (ii) 9% Series A Senior Secured Notes due 2008 in the aggregate principal amount of $65 million, and (iii) 13% Series B Senior Secured Notes due 2008 in the aggregate principal amount of $10 million, for all of its outstanding 11% Senior Notes due 2007 in the aggregate principal amount of $120 million and all interest accrued thereon. The exchange offer was made exclusively to holders of the 11% Senior Notes due 2007. Several times through August 31, 2004, the Company and Bank One, N.A. entered into forbearance agreements under which Bank One agreed not to exercise its rights with respect to the defaults, including the right to demand payment, under the revolving credit facility for a stated period while the Company negotiated a restructuring of its Senior Notes. On July 12, 2004, the Company received a commitment letter from Bank One for a waiver of the covenant violations and an extension of the revolving credit facility. On October 4, 2004, the Company's wholly-owned subsidiaries, CCE and GCC entered into a Second Amended and Restated Credit Facility and Security Agreement (the "Credit Agreement") with Bank One, N.A. The Credit Agreement extends the Company's revolving credit facility with Bank One until July 31, 2006. On October 4, 2004, the Company completed the exchange offer with respect to its outstanding 11% Senior Notes due 2007 (the "Old Notes") and entered into an Indenture by and among the Company, two of its wholly-owned subsidiaries, CCE and GCC (collectively, the "Subsidiary Guarantors") and Wells Fargo Bank, National Association, as trustee (the "Indenture"). Tenders with respect to Old Notes representing approximately $109.3 million or 91% of the $120 million of Old Notes outstanding principal amount were received by Wells Fargo Bank, N.A., which acted as depositary in the exchange offer. All Old Notes that were validly tendered were accepted for exchange. According to the terms of the exchange offer, on October 4, 2004, the Company issued approximately $59.2 million of 9% New Series A Notes due 2008 and approximately $9.1 million of 13% New Series B Notes due 2008. In addition, the Company made a cash payment as additional consideration to the Series A and Series B bondholders of approximately $14.1 million, or $15.50 for every $120 of Old Notes tendered. In October 2005, the Series A and Series B bondholders will receive cash of approximately $1.8 million, or $2.00 for every $120 of Old Notes tendered. According to the terms of the Indenture, the New Series A Notes will mature on October 1, 2008. Interest will accrue at the rate of 9% per annum and will be payable semiannually in arrears, in cash, on each April 1 and October 1 until maturity. Interest accrued on the New Series A Notes from April 1, 2004, as if the New Series A Notes had been issued on such date. The Company paid interest of approximately $2.7 million on October 4, 2004 related to the Series A Notes. The New Series B Notes will also mature on October 1, 2008. Interest will accrue at the rate of 13% per annum and will be payable semiannually in arrears, in kind, on each April 1 and October 1 until maturity. However, the Company has the right to make interest payment on the New Series B Notes in cash at the same rate and on the same terms as the New Series A Notes. The Company has assumed the interest will be paid in cash at a rate of 9% in all calculations involving the interest payments on the Series B Notes in these condensed consolidated financial statements. Interest accrued on the New Series B Notes from April 1, 2004, as if the New Series B Notes had been issued on such date. The Company paid interest of approximately $0.4 million on October 4, 2004 related to the Series B Notes. The New Series A and Series B Notes are jointly and severally guaranteed by the Subsidiary Guarantors and secured by substantially all of the assets of the Subsidiary Guarantors. 20 The cash payment made on October 4, 2004 as additional consideration to the Series A and Series B bondholders was funded by new subordinated indebtedness to N.E.S. Investment Company in the amount of $10 million and additional borrowings from the Company's revolving line of credit. The note payable to N.E.S. Investment Company accrues interest at a rate of 9%, payable in kind, compounded annually. The additional consideration to be paid by the Company in October 2005 to the Series A and Series B bondholders will be funded with an additional $2 million of subordinated indebtedness to N.E.S. Investment Company. The debt exchange was accounted for according to Statement of Financial Accounting Standards ("SFAS") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings". According to the requirements of SFAS No. 15, in the fourth quarter of 2004, the Company recorded a gain on the exchange of bonds of approximately $3.4 million, representing the difference between the future cash outlays of the Series A and Series B Notes and the carrying value of the Old Notes. All cash payments as additional consideration to Series A and Series B bondholders and interest payments on the New Series A and Series B Notes will be recorded as a reduction in the balance of outstanding indebtedness throughout the terms of the Series A and Series B Notes, and accordingly, the Company will not recognize any interest expense in the income statement related to the New Series A and Series B Notes. The outstanding indebtedness has been classified as short and long-term liabilities as of March 31, 2005 based upon the payment terms of the new 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 March 31, 2005 of Senior Notes, including current portion of $7,967,604 $ 105,430,665 October 2005 payment as additional consideration (1,821,166) Interest payments on Series A Notes, 2005-2008 (21,307,650) Interest payments on Series B Notes, 2005-2008 (3,278,099) 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 March 31, 2005, the Company had cash and cash equivalents of approximately $0.7 million and approximately $12.4 million available for use under its domestic credit facility, representing approximately $13.1 million of liquidity. With the completion of the debt exchange in October 2004, the Company has reduced its annual debt service requirements related to interest payments by approximately $4.8 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, a decrease of $5.9 million 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 a subordinated promissory note with N.E.S. Investment Company in the amount of $10 million. The annual debt service requirements for interest related to these debt instruments are approximately $0.2 million in cash and $0.9 million in kind. In October 2005, the Company will make a cash payment as additional consideration to the Series A and Series B bondholders for approximately $2 million, funded by an increase in the subordinated promissory note with N.E.S. Investment Company and increasing the annual debt service requirements by approximately $0.2 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. 21 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 three months ended March 31, 2005 increased by approximately $0.7 million over the corresponding period in the prior year due to changes in foreign currency translation rates, primarily the strengthening of the Australian dollar and the British pound sterling against the U.S. dollar. 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 $(0.15) million and $0.04 million for the three months ended March 31, 2005 and 2004, respectively. Cautionary Statement for Safe Harbor Purposes This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements within the meaning of the federal securities laws. As a general matter, forward-looking statements are those focused upon future plans, objectives or performance as opposed to historical items and include statements of anticipated events or trends and expectations and beliefs relating to matters that are not historical in nature. Such forward looking statements are subject to uncertainties and factors relating to the Company's operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those matters expressed in or implied by such forward-looking statements. In addition, the Company's future results of operations, financial condition, liquidity and capital resources could be materially adversely affected by, among other things, economic and political uncertainties or prolonged economic recession. 22 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 March 31, 2005, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. There were no significant changes in the Company's internal controls over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 23 Part II. Other Information Item 1. Legal Proceedings In August and September 2003, Continental Conveyor & Equipment Company was served as one of fifty-eight known and unknown defendants in nineteen separate actions pending in various state courts in the State of Alabama alleging various contract, tort and warranty claims. All claims in such actions arose out of alleged injuries and deaths occurring at the Jim Walters Resources No. 5 Mine which occurred on September 23, 2001. The plaintiffs in such actions do not allege a particular set of actions or omissions by Continental Conveyor & Equipment Company that give rise to the claims, nor is there a specific amount of damages sought. The Company believes that these claims are without merit and intends to vigorously defend all claims. The Company considers such claims to be the type of claims that arise in the normal course of its business. While it is not feasible to predict the outcome of these matters with certainty, management is of the opinion that their ultimate disposition should not have a material adverse effect on the Company's financial condition. Item 6. Exhibits Exhibits: Refer to the index of exhibits. 24 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: May 16, 2005 25 Continental Global Group, Inc. Form 10-Q Index of Exhibits Exhibit Number Description of Exhibit 3.1 (a) Certificate of Incorporation of Continental Global Group, Inc., as currently in effect. * (b) Certificate of Amendment of Certificate of Incorporation of Continental Global Group, Inc. (Filed as Exhibit 3.1(b) to the Company's Form 10-Q for the quarter ended September 30, 2000, and is incorporated herein by reference.) 3.2 By-Laws of Continental Global Group, Inc., as currently in effect. * 3.3 Certificate of Incorporation of Continental Conveyor & Equipment Company, as currently in effect. * 3.4 By-Laws of Continental Conveyor & Equipment Company, as currently in effect. * 3.5 Certificate of Incorporation of Goodman Conveyor Company, as currently in effect. * 3.6 By-Laws of Goodman Conveyor Company, as currently in effect. * 4.1 Indenture, dated as of April 1, 1997, among Continental Global Group, Inc., Continental Conveyor & Equipment Company, Goodman Conveyor Company, and the Trustee (containing, as exhibits, specimens of the Series A Notes and the Series B Notes). * 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 Reserved 10.4 Reserved 10.5 Reserved Exhibit Number Description of Exhibit 10.6 Forbearance Agreement, effective as of April 26, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers, Inc. (Filed as Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.) 10.7 Forbearance Agreement, effective as of May 1, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.) 10.8 Amendment 1, dated as of May 27, 2004, to Forbearance Agreement effective as of April 26, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers, Inc. (Filed as Exhibit 10.8 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.) 10.9 Forbearance Agreement, effective as of June 1, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit 10.9 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.) 10.10 Amendment 2, dated as of June 14, 2004, to Forbearance Agreement effective as of April 26, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co., and CFSC Wayland Advisers, Inc. (Filed as Exhibit 10.10 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.) 10.11 Forbearance Agreement, effective as of June 15, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit 10.11 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.) 10.12 Commitment Letter, dated as of July 12, 2004, from Bank One, NA to Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Continental Global Group, Inc. (Filed as Exhibit 10.12 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.) 10.13 Amendment 3, dated as of July 13, 2004, to Forbearance Agreement effective as of April 26, 2004, by and among Continental Global Group, Inc., N.E.S. Investment Co., and Wayzata Advisers LLC. (Filed as Exhibit 10.13 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.) 10.14 Forbearance Agreement, effective as of July 13, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (Filed as Exhibit 10.14 to the Company's Form 10-K for the year ended December 31, 2003, and is incorporated herein by reference.) 10.15 Forbearance Agreement, effective as of July 29, 2004, by and among Bank One, NA, Continental Conveyor & Equipment Company, and Goodman Conveyor Company. (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.) Exhibit Number Description of Exhibit 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.

CONTINENTAL CONVEYOR & EQUIPMENT CO 10-Q