10-Q 1 form10-q.txt FORM 10-Q FOR QUARTER ENDED 6/30/07 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, 2007 Commission File No. 333-27665 CONTINENTAL GLOBAL GROUP, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 31-1506889 -------- ---------- (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) CO-REGISTRANTS AND SUBSIDIARY GUARANTORS Continental Conveyor & Equipment Company Delaware 34-1603197 Goodman Conveyor Company Delaware 34-1603196 Continental Conveyor & Equipment Continental Global Group, Inc. Company Goodman Conveyor Company 438 Industrial Drive 438 Industrial Drive Route 178 South Winfield, Alabama 35594 Winfield, Alabama 35594 Belton, South Carolina 29627 (205) 487-6492 (205) 487-6492 (864) 338-7793

(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [x] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [x] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of July 31, 2007, there were 100 shares of the registrant's common stock outstanding. INDEX CONTINENTAL GLOBAL GROUP, INC. Page Part I Financial Information Number Item 1 Financial Statements (Unaudited) 1 Condensed Consolidated Balance Sheets June 30, 2007 and December 31, 2006 2 Condensed Consolidated Statements of Income Three Months and Six Months ended June 30, 2007 and 2006 3 Condensed Consolidated Statements of Cash Flows Six Months ended June 30, 2007 and 2006 4 Notes to Condensed Consolidated Financial Statements 5-13 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 14-19 Item 3 Quantitative and Qualitative Disclosures about Market Risk 20 Item 4 Controls and Procedures 20 Part II Other Information Item 1 Legal Proceedings 21 Item 1A Risk Factors 21 Item 6 Exhibits 21 Signatures 22

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

June 30 December 31 ~~2003~~2007 ~~2002~~2006 -------------------- -------------------- (Unaudited) (Audited) Assets: Current assets: Cash and cash equivalents $ 21,~~765~~559,~~994~~936 $ 54,~~635~~371,~~042~~978 Accounts receivable, ~~net 42~~56,~~050~~412,~~534~~372 2558,~~634~~299,~~100~~975 Inventories 2742,~~063~~037,~~430~~680 2745,~~752~~266,~~503~~133 Deferred income taxes 244,~~905~~171,520 253,~~893~~151,597 Other current assets 12,~~817~~543,~~461~~475 1991,~~959,369~~698 -------------------- -------------------- Total current assets 73106,~~722~~724,~~324~~983 61112,~~006~~081,~~907~~381 Property, plant and equipment 3042,~~116~~857,~~653~~067 2839,~~681~~904,~~527~~022 Less accumulated depreciation 1725,~~284~~781,~~638~~959 1524,~~800~~172,~~206~~196 -------------------- -------------------- 1217,~~832~~075,~~015~~108 1215,~~881~~731,~~321~~826 Goodwill 1314,~~547~~244,~~210~~719 1314,~~155~~016,~~269~~311 Deferred financing costs 1- 129,~~949~~975 Deferred income taxes 878,~~633~~752 2859,~~209,584~~106 Other assets ~~399~~1,~~583~~070,122 ~~414~~101,~~400~~256 -------------------- -------------------- $ ~~102~~139,~~450~~993,~~765~~684 $ 89142,~~667~~919,~~481~~855 ==================== ==================== Liabilities and Stockholder's Equity (Deficit): Current liabilities: Notes payable $ 195,~~673~~974,~~503~~209 $ 117,~~285~~258,~~602~~306 Trade accounts payable 2830,~~763~~560,~~664~~876 2030,~~039~~747,~~041~~620 Accrued compensation and employee benefits 58,~~066~~793,~~560~~941 49,~~974~~427,~~168~~026 Accrued interest on senior notes ~~3,300,000~~- 3295,~~300,000~~075 Other accrued liabilities 711,~~216~~502,~~364~~232 10,814,520 Management fees payable to Nesco, Inc. 6,~~696~~232,~~110~~465 5,327,224 Income taxes payable 963,742 787,549 Current maturities of long-term obligations 111,~~140~~811,~~209~~419 119,~~010~~355,~~032~~187 -------------------- -------------------- Total current liabilities 6575,~~160~~838,~~300~~884 4784,~~304~~012,~~953~~507 Pension obligations 21,~~855~~499,~~636~~563 21,~~645~~456,~~640~~969 Deferred income taxes ~~639~~3,~~225~~173,545 ~~561~~3,~~420~~382,644 Senior ~~notes~~Notes ~~120~~71,~~000~~366,~~000~~967 ~~120~~74,~~000~~440,~~000~~186 Note payable to N.E.S. Investment Company 14,989,671 14,356,926 Other long-term obligations, less current maturities 1,~~910~~098,~~044~~008 14,~~876~~402,~~928~~723 Stockholder's equity (deficit): Common stock, $0.01 par value, authorized 5,000,000 shares, issued and outstanding 100 shares 1 1 Paid-in capital 1,993,687 1,993,687 Accumulated deficit (8325,~~493~~806,~~475~~499) (7735,~~654~~809,~~146~~635) Accumulated other comprehensive loss (64,~~614~~160,~~653~~143) (75,~~061~~316,~~002~~153) -------------------- -------------------- (8827,~~114~~972,~~440~~954) (8239,~~721~~132,~~460~~100) -------------------- -------------------- $ ~~102~~139,~~450~~993,~~765~~684 $ 89142,~~667~~919,~~481~~855 ==================== ====================

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

Three months ended June 30 Six months ended June 30 ~~2003~~2007 ~~2002~~2006 ~~2003~~2007 ~~2002~~2006 ----------------------------------- ------------------------------------- (Unaudited) (Unaudited) Net sales $ 5789,~~010~~232,~~585~~471 $ 4694,~~102~~216,~~465~~160 $ 99168,~~583~~279,~~521~~727 $ 91181,~~646~~228,~~096~~705 Cost of products sold 4871,~~817~~685,~~808~~621 3772,~~678~~701,~~619~~099 85134,~~444~~560,~~448~~440 75141,~~278~~043,~~200~~253 ----------------------------------- ------------------------------------- Gross profit 817,~~192~~546,~~777~~850 821,~~423~~515,~~846~~061 1433,~~139~~719,~~073~~287 1640,~~367~~185,~~896~~452 Operating expenses: Selling and engineering 34,~~335~~573,~~664~~807 34,~~376~~477,~~215~~566 69,~~548~~178,~~618~~873 68,~~794~~490,~~291~~844 General and administrative 24,~~475~~035,~~205~~830 23,~~267~~570,~~449~~751 57,~~028~~651,~~021~~977 46,~~382~~687,~~067~~809 Management fee ~~144~~477,~~203~~754 ~~166~~699,~~657~~966 ~~180~~905,~~212~~241 ~~314~~1,~~422~~302,992 Amortization expense 24,854 6,590 3025,~~127~~898 13,~~181~~180 ~~59,941 Restructuring charges 43,919~~ - ~~57,924~~ - ------------------------------------------------------------------------- Total operating expenses 69,~~005~~112,~~581~~245 58,~~840~~754,~~448~~873 1117,~~827~~761,~~956~~989 1116,~~550~~494,~~721~~825 -------------------------------------------------------------------------- Operating income 28,~~187~~434,~~196~~605 212,~~583~~760,~~398~~188 215,~~311~~957,~~117~~298 423,~~817~~690,~~175~~627 Other ~~expenses~~expense (income): Interest expense 3,~~909,792~~ ~~3,869,386~~net 7855,~~640,549~~605 71,~~670~~256,~~890~~366 ~~Interest income (3~~1,~~636) (51~~900,~~257)~~210 ~~(12~~2,~~792) (104~~487,~~228)~~679 Miscellaneous, ~~net~~expense ~~332~~(1,~~623~~756) 9168,~~153~~546 ~~522~~538,~~689~~988 4192,~~435~~541 ----------------------------------- ------------------------------------- Total other expenses 4853,~~238,779~~849 31,~~827~~424,~~282~~912 82,~~150~~439,~~446~~198 72,~~608~~580,~~097~~220 ----------------------------------- ------------------------------------- ~~Loss~~Income before income taxes ~~and cumulative effect of change in accounting principle (2~~7,~~051~~580,~~583)~~756 (111,~~243~~335,~~884)~~276 (513,~~839~~518,~~329)~~100 (221,~~790~~110,~~922)~~407 Income tax ~~benefit~~expense ~~- - - (340,518) ----------------------------------- ----------------------------------- Loss before cumulative effect of change in accounting principle (2,051,583) (~~1,~~243~~964,~~884)~~219 (53,~~839~~322,~~329)~~750 (23,~~450~~514,~~404)~~964 ~~Cumulative effect of change in accounting principle - - - (3~~6,~~850~~175,~~000)~~594 ----------------------------------- ------------------------------------- Net ~~loss~~income $ (25,~~051~~616,~~583)~~537 $ (18,~~243~~012,~~884)~~526 $ (510,~~839~~003,~~329)~~136 $ (614,~~300~~934,~~404)~~813 =================================== =====================================

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

Six months ended June 30 ~~2003~~2007 ~~2002~~2006 ---------------------- --------------------- (Unaudited) Operating activities: Net ~~loss~~income $ (510,~~839~~003,~~329)~~136 $ (614,~~300~~934,~~404)~~813 Adjustments to reconcile net ~~loss~~income to net cash ~~used~~provided inby operating activities: Provision for depreciation and amortization 1,~~112~~242,~~901~~280 1,~~156~~066,~~837~~227 Amortization of deferred financing costs ~~259~~129,~~951~~975 259,~~952~~951 ~~Cumulative~~Deferred ~~effect~~income oftaxes ~~change~~(1,140,185) in(429,827) ~~accounting~~Non-cash ~~principle~~interest paid in-kind 3632,~~850~~745 580,~~000~~500 ~~Deferred~~Loss ~~income taxes -~~ (~~340,518~~gain) ~~Loss~~ on disposal of assets 36(16,~~957~~340) 168,~~494~~006 Changes in operating assets and liabilities (54,~~932~~944,~~611)~~709 (~~912~~14,~~468~~154,564) ---------------------- --------------------- Net cash ~~used~~provided inby operating activities ~~(10~~15,~~362~~796,~~131)~~320 (2,~~270~~265,~~107)~~106 ---------------------- --------------------- Investing activities: Purchases of property, plant, and equipment (~~240~~2,~~848~~335,082) (~~416~~1,~~602~~707,353) Proceeds from sale of property, plant, and equipment 55152,~~179~~621 288,~~937~~806 Acquisition of business (982,739) - ---------------------- --------------------- Net cash used in investing activities (~~185~~3,~~669~~165,200) (~~387~~1,~~665~~698,547) ---------------------- --------------------- Financing activities: Net increase (decrease) in borrowings on notes payable 7(1,~~938~~339,~~839~~782) ~~488~~2,~~419~~231,588 Proceeds from long-term obligations 377,457 1,324,367 Payments on Senior Notes (13,803,219) (3,073,220) Principal payments on long-term obligations (~~292~~697,~~369~~727) (~~517~~539,~~317~~118) ---------------------- --------------------- Net cash ~~provided by (~~used in) financing activities 7(15,~~646~~463,~~470~~271) (2856,~~898~~383) Effect of exchange rate changes on cash 3220,~~282~~109 (1468,~~276~~069) ---------------------- --------------------- ~~Decrease~~Increase (decrease) in cash and cash equivalents (2,~~869~~812,~~048~~042) (2442,~~700,946)~~107 Cash and cash equivalents at beginning of period 54,~~635~~371,~~042~~978 14543,~~671,806~~400 ---------------------- --------------------- Cash and cash equivalents at end of period $ 21,~~765~~559,~~994~~936 $ 11985,~~970,860~~507 ====================== =====================

See notes to condensed consolidated financial statements. 4 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2007 A. Organization and Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, refer to the consolidated financial statements and footnotes of Continental Global Group, Inc. and subsidiaries for the year ended December 31, 2006, included in the Company's Form 10-K. B. Acquisition On April 12, 2007, the Company purchased certain assets from Mid-Florida Wheel and Axle, Inc. for a purchase price of approximately $1,583,000. As of June 30, 2007, the Company has paid approximately $983,000 of the purchase price. The remaining balance will be paid in quarterly installments. The preliminary purchase price allocation includes $1,000,000 assigned to identifiable intangible assets. The transaction was accounted for as a purchase and accordingly, the results of operations since the date of acquisition have been included in the condensed consolidated financial statements. C. 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. 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 57% and 62% of inventories at June 30, 2007 and December 31, 2006, 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 from the LIFO value by approximately $6,489,000 and $5,889,000 at June 30, 2007 and December 31, 2006, respectively. 5 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2007 E. 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: 2007 2006 ----------------- ----------------- Balance as of January 1 $ 1,843,831 $ 1,731,456 Provision for warranties 554,375 702,967 Settlements made during the period (658,672) (372,526) Effect of exchange rate changes 46,131 10,603 ----------------- ----------------- Balance as of June 30 $ 1,785,665 $ 2,072,500 ================= ================= F. Comprehensive Income The components of comprehensive income for the three months and six months ended June 30 are as follows:

Three months ended June 30 Six months ended June 30 ~~2003~~2007 ~~2002~~2006 ~~2003~~2007 ~~2002~~2006 ---------------------------------- --------------------------------- Net ~~loss~~income $ (25,~~051~~616,~~583)~~537 $ (18,~~243~~012,~~884)~~526 $ (510,~~839~~003,~~329)~~136 $ (614,~~300~~934,~~404)~~813 Other comprehensive income ~~(loss)~~: Foreign currency translation adjustment ~~217~~777,~~732~~818 ~~542~~287,~~066~~427 ~~368~~1,~~919~~084,882 ~~765~~112,~~940~~482 ~~Change~~Amortization ~~in fair value~~ of ~~cash~~prior ~~flow~~service ~~hedges~~costs ~~(net~~and ofactuarial ~~tax)~~losses 3435,~~167~~564 ~~20,768~~- 7771,~~430~~128 ~~20,768~~- ---------------------------------- --------------------------------- Comprehensive ~~loss~~income $ (16,~~799~~429,~~684)~~919 $ ~~(681~~8,~~050)~~299,953 $ (511,~~392~~159,~~980)~~146 $ (515,~~513~~047,~~696)~~295 ================================== =================================

6 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2007 G. Employee Benefit Plans The components of net periodic benefit cost for the three months and six months ended June 30 are as follows:

Three months ended ~~June 30~~ Six months ended June 30 ~~2003~~June ~~2002~~30 ~~2003~~2007 ~~2002~~2006 ~~-------------------------------------------------------------------~~2007 ~~(in~~2006 ~~thousands) (in thousands) Net sales: Conveyor equipment $ 50,071 $ 37,428 $ 86,766 $ 75,432 Manufactured housing products 6,638 8,444 12,306 15,658 Other 302 230 512 556~~ --------------- --------------- --------------- ---------------~~-------~~ ~~Total~~Service ~~net~~cost ~~sales~~ $ 5749,~~011~~530 $ 4651,~~102~~203 $ 99,~~584~~060 $ 91102,~~646~~406 ~~===================================================================~~Interest ~~Segment~~cost ~~operating income: Conveyor equipment $ 2~~146,~~199~~615 ~~$ 2~~132,~~433~~349 ~~$ 2~~293,~~532~~230 ~~$ 4~~264,~~644~~698 ~~Manufactured~~Expected ~~housing~~return ~~products~~on ~~467~~plan ~~541~~assets ~~651 923 Other 87 21 164 55 ------------------------------------------------------------------- Total segment operating income 2~~(174,~~753~~847) 2(154,~~995~~472) 3(349,~~347~~696) 5(308,~~622~~944) ~~Management fee 144 167 180 314~~ Amortization ~~expense~~of 7prior 30service 13cost ~~60 Restructuring charges 44 - 58 - Corporate expense 371 215 785 431 ------------------------------------------------------------------- Total operating income 2~~11,~~187~~161 211,~~583~~161 222,~~311~~322 422,~~817~~322 ~~Interest~~Recognized ~~expense~~loss 324,~~910~~403 319,~~869~~342 748,~~640~~806 738,~~671~~684 ~~Interest income (4) (51) (13) (104) Miscellaneous, net 333 9 523 41~~ --------------- --------------- --------------- ---------------~~-------~~ ~~Loss~~Net ~~before~~periodic ~~income~~benefit ~~taxes~~cost $ (256,~~052)~~862 $ (159,~~244)~~583 $ (5113,~~839)~~722 $ (2119,~~791)~~166 =============== =============== =============== ===============~~=======~~

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, South Africa, and China, 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 Series A and Series B Notes due October 2008 which are recorded as a reduction of the outstanding indebtedness for financial reporting purposes. On January 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109." FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of this Interpretation had no impact on the Company's financial statements. 7 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2007 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 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.

~~Combined~~Three ~~Combined~~months ~~Guarantor~~ended ~~Non-Guarantor~~ June 30, ~~2003:~~Six ~~The~~months ~~Company~~ended ~~Subsidiaries~~June ~~Subsidiaries~~30 ~~Eliminations~~2007 ~~Total~~2006 2007 2006 -------------------------------------------------------------------~~------------~~ ~~Current assets: Cash and cash equivalents $ 2,057 $ 706 $ 3 $ - $ 2,766 Accounts receivable, net - 29,595 12,604~~ (~~148)~~in ~~42,051 Inventories - 22,400 4,663 - 27,063 Deferred income taxes 81 - 331 (387~~thousands) ~~25 Other current assets 168 479 1,175~~ (5)in ~~1,817 ------------------------------------------------------------------------------- Total current assets 2,306 53,180 18,776 (540~~thousands) ~~73,722~~Net ~~Property,~~sales: ~~plant,~~Conveyor ~~and~~ equipment, ~~net~~$ ~~- 8~~81,~~406~~376 ~~4,426~~$ ~~- 12~~85,~~832~~908 ~~Goodwill~~$ ~~- 12~~155,~~806~~542 ~~741~~$ ~~- 13~~163,~~547~~260 ~~Investment~~Manufactured inhousing ~~subsidiaries~~products 607,~~009~~770 208,~~001~~021 ~~- (80~~12,~~010)~~595 ~~- Deferred financing costs 1~~17,~~950~~493 ~~- - - 1,950~~ Other ~~assets~~86 ~~11,231~~287 ~~1,824~~143 -476 ~~(12,655) 400~~ -------------------------------------------------------------------~~------------~~ Total ~~assets~~net $sales ~~75,496~~ $ 9689,~~217~~232 $ 2394,~~943~~216 $ ~~(93~~168,~~205)~~280 $ ~~102~~181,~~451~~229 ===================================================================~~============~~ ~~Current~~Segment ~~liabilities~~operating income: ~~Notes~~Conveyor ~~payable~~equipment $ -9,222 $ 1413,~~792~~470 $ 517,~~530~~762 $ ~~(649)~~24,628 $Manufactured ~~19,673~~housing ~~Trade~~products ~~accounts~~444 ~~payable~~576 38434 201,~~978~~287 ~~7,879~~Other ~~(131)~~26 ~~28,764~~19 ~~Accrued~~44 ~~compensation~~46 ~~and~~------------------------------------------------------------------- ~~employee~~Total ~~benefits~~segment -operating ~~3,792~~income 19,~~275~~692 ~~- 5~~14,~~067~~065 ~~Accrued interest 3~~18,~~300~~240 ~~- - - 3~~25,~~300~~961 ~~Other~~Management ~~accrued~~fee ~~liabilities~~478 ~~638~~700 ~~4,138~~905 31,~~236~~303 ~~(796)~~Amortization expense 25 7~~,216~~ ~~Current~~26 ~~maturities~~13 ofCorporate ~~long-term~~expense ~~obligations~~754 -598 1,~~058~~352 82954 - ~~1,140~~ ------------------------------------------------------------------~~-------------~~ Total ~~current~~operating ~~liabilities~~income 38,~~976~~435 4412,~~758~~760 1815,~~002~~957 (123,~~576)~~691 ~~65,160~~Interest ~~Pension obligation - 2~~expense,~~856~~ -net ~~- 2,~~856 ~~Deferred income taxes - 11,570 - (10,931) 639 Senior Notes 120,000 - - - 120,000 Other long-term obligations -~~ 1,~~708~~256 1,~~091~~900 ~~(889) 1~~2,~~910~~488 ~~Stockholder's~~Miscellaneous ~~equity~~expense (~~deficit~~income) (~~48,480~~2) ~~35,325~~169 ~~4,850~~539 ~~(79,809)~~93 ~~(88,114)~~ -------------------------------------------------------------------~~------------~~ ~~Total~~Income ~~liabilities~~before ~~and~~income ~~stockholder's~~taxes ~~equity (deficit)~~ $ 757,~~496~~581 $ 9611,~~217~~335 $ 2313,~~943~~518 $ ~~(93~~21,~~205)~~110 ~~$ 102,451~~ ===================================================================~~============~~

8 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2007 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 Senior Notes. The guarantees are full, unconditional, and joint and several. Separate financial statements of these guarantor subsidiaries are not presented as management has determined that they would not be material to investors. The Company's Australian, United Kingdom and South African subsidiaries are not guarantors of the Senior Notes. Summarized consolidating balance sheets as of June 30, 2007 and December 31, 2006 for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

Combined Combined Guarantor Non-Guarantor ~~December~~June 3130, ~~2002~~2007: The Company Subsidiaries Subsidiaries Eliminations Total ------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ ~~4,524~~27 $ ~~1,109~~871 $ 2662 $ - $ 51,~~635~~560 Accounts receivable, net - 1629,~~469~~952 926,~~165~~573 -(113) 2556,~~634~~412 Inventories - 2329,~~479~~519 412,~~274~~519 - 2742,~~753~~038 Deferred income taxes 812,098 - ~~280~~2,273 (~~335~~199) 264,172 Other current assets 3725,182 2,363 1,~~095~~404 ~~827~~(26,406) ~~- 1~~2,~~959~~543 ------------------------------------------------------------------------------- Total current assets 427,~~642~~307 4262,~~152~~705 1443,~~548~~431 (~~335~~26,718) 61106,~~007~~725 Property, plant, and equipment, ~~net~~92 ~~- 8~~9,~~713~~503 47,~~168~~480 - 1217,~~881~~075 net Goodwill - 1210,~~528~~986 ~~627~~3,259 - 1314,~~155~~245 Investment in subsidiaries 60,~~009~~309 1835,~~118~~788 - (7896,~~127~~097) - Deferred ~~financing~~income ~~costs~~taxes ~~2,210~~ - - 879 - ~~2,210~~879 Other assets 91,~~817~~528 16,~~833~~301 -58 (116,~~236~~817) ~~414~~1,070 ------------------------------------------------------------------------------- Total assets $ 7689,~~678~~236 $ 83125,~~344~~283 $ 1955,~~343~~107 $ (89129,~~698~~632) $ 89139,~~667~~994 =============================================================================== Current liabilities: Notes payable $ - $ 93,~~536~~255 $ 24,~~139~~083 $ (~~389~~1,364) $ 115,~~286~~974 Trade accounts payable 16464 1213,~~404~~208 719,~~619~~304 -(2,415) 2030,~~039~~561 Accrued compensation and employee benefits 4267 35,~~957~~896 ~~975~~2,831 - 48,~~974~~794 ~~Accrued~~Other ~~interest~~accrued liabilities 3,~~300~~105 4,870 6,660 (3,133) 11,502 Management fees payable 6,233 - - - 36,~~300~~233 ~~Other~~Income ~~accrued~~taxes ~~liabilities~~payable ~~564~~- 424,~~247~~118 ~~2,613~~964 (~~728~~24,118) ~~6,696~~964 Current maturities of long-term obligations -6,146 ~~963~~3,667 471,998 - 111,~~010~~811 ------------------------------------------------------------------------------- Total current liabilities 316,~~922~~015 3155,~~107~~014 1335,~~393~~840 (131,~~117~~030) 4775,~~305~~839 Pension obligation - 21,~~645~~500 - - 21,~~645~~500 Deferred income taxes - 104,~~253~~188 -97 (91,~~692~~112) ~~561~~3,173 Senior ~~Notes~~notes ~~120~~71,~~000~~367 - - - ~~120~~71,~~000~~367 N/P to N.E.S. Investment Co. 14,990 - - - 14,990 Other long-term obligations - 1- 3,~~766~~730 ~~985~~ (~~874~~2,632) 1,~~877~~098 Stockholder's equity (deficit) (4713,~~244~~136) 3764,~~573~~581 415,~~965~~440 (7894,~~015~~858) (8227,~~721~~973) ------------------------------------------------------------------------------- Total liabilities and stockholder's equity (deficit) $ 7689,~~678~~236 $ 83125,~~344~~283 $ 1955,~~343~~107 $ (89129,~~698~~632) $ 89139,~~667~~994 ===============================================================================

9 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2007 J. Guarantor and Non-Guarantor Subsidiaries (Continued)

Combined Combined Guarantor Non-Guarantor December 31, 2006: The Company Subsidiaries Subsidiaries Eliminations Total ------------- ------------- --------------- ------------- ------------------------- ~~Three~~Current ~~months~~assets: ~~ended~~Cash ~~June~~and ~~30,~~cash ~~2003:~~equivalents ~~Net~~$ ~~sales~~93 $ -494 $ 473,~~349~~785 $ ~~9,847~~- $ ~~(185)~~4,372 $Accounts 57receivable,~~011~~ ~~Cost~~net of- ~~products~~36,578 ~~sold~~21,479 243 58,300 Inventories - 3933,~~950~~317 911,~~053~~949 - 45,266 Deferred income taxes 1,736 - 2,090 (~~185~~674) 483,~~818~~152 Other current assets 23,244 2,750 929 (25,931) 992 ------------- ------------- --------------- ------------- ------------------------- ~~Gross~~Total ~~profit~~current -assets 725,~~399~~073 ~~794~~73,139 40,232 (26,362) 112,082 Property, plant, and equipment, - 8,~~193~~941 ~~Total~~6,791 ~~operating~~- ~~expenses~~15,732 ~~448~~net 4Goodwill - 10,~~320~~986 13,~~238~~030 - 614,~~006~~016 Investment in subsidiaries 60,309 35,788 - (96,097) - Deferred financing costs 130 - - - 130 Deferred income taxes - - 859 - 859 Other assets 807 4,795 90 (5,591) 101 ----- ------------- --------------- ------------- --------------------------------- ~~Operating~~Total ~~income~~assets $ 86,319 $ 133,649 $ 51,002 $ (~~loss~~128,050) $ 142,920 =============================================================================== Current liabilities: Notes payable $ - $ 5,360 $ 2,595 $ (~~448~~697) 3$ 7,~~079~~258 Trade accounts payable 539 12,380 20,202 (~~444~~2,373) 30,748 Accrued compensation and employee benefits - 6,788 2,~~187~~639 ~~Interest~~- ~~expense 3~~9,~~433~~427 ~~395~~Accrued 82interest 295 - 3- - 295 Other accrued liabilities 2,~~910~~671 ~~Interest~~5,381 ~~income~~5,966 (43,203) 10,815 Management fees payable 5,327 - - - ~~(4) Miscellaneous~~5,327 ~~net~~Income ~~153~~taxes ~~195~~payable - 22,898 1,113 (1523,224) 787 Current maturities of long-term ~~333~~obligations 16,876 500 1,979 - 19,355 ------------ ------------- --------------- ------------- -------------------------- ~~Income~~Total current liabilities 25,708 53,307 34,494 (~~loss~~29,497) ~~before~~84,012 Pension obligation - 1,457 - - 1,457 Deferred income taxes (- 4,~~030)~~190 ~~2,489~~- (~~511~~807) 3,383 Senior notes 74,440 - - - 74,440 N/P to N.E.S. Investment Co. 14,357 - - - 14,357 Other long-term obligations - 3,417 3,607 (2,~~052~~621) ~~Income~~4,403 ~~tax~~Stockholder's ~~expense~~equity (~~benefit~~deficit) (~~842~~28,186) ~~842~~71,278 -12,901 -(95,125) -(39,132) ------------- ------------- --------------- ------------- ------------------------- ~~Net~~Total ~~income~~liabilities ~~(loss)~~and $stockholder's equity (~~3,188~~deficit) $ 186,~~647~~319 $ ~~(511)~~133,649 $ -51,002 $ (2128,~~052~~050) $ 142,920 ============= ============= =============== ============= =========================

10 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2007 J. Guarantor and Non-Guarantor Subsidiaries (Continued) Summarized consolidating statements of income for the three months and six months ended June 30, 2007 and 2006, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

Combined Combined Guarantor Non-Guarantor The Company Subsidiaries Subsidiaries Eliminations Total ------------- ------------- --------------- ------------- ------------- Three months ended June 30, ~~2002~~2007: Net sales $ - $ 3654,~~426~~829 $ 934,~~676~~645 $ -(242) $ 4689,~~102~~232 Cost of products sold - 2943,~~503~~526 828,~~175~~401 -(242) 3771,~~678~~685 ------------- ------------- --------------- ------------- ------------- Gross profit - 611,~~923~~303 16,~~501~~244 - 817,~~424~~547 Total operating expenses ~~225~~287 4,~~595~~935 13,~~021~~890 - 59,~~841~~112 ------------- ------------- --------------- ------------- ------------- Operating income (loss) (~~225~~287) 6,368 2,~~328~~354 ~~480~~ - 28,~~583~~435 Interest expense 3,~~439~~ ~~421~~net 9316 367 173 - ~~3,869~~856 ~~Interest~~Miscellaneous ~~income~~expense (51income) - -48 - (5150) ~~Miscellaneous,~~- ~~net~~ (52) ~~19 (5)~~ - 9 ------------- ------------- --------------- ------------- ------------- Income (loss) before income taxes (~~3,608~~603) 15,~~888~~953 ~~476~~2,231 - (17,~~244)~~581 Income tax expense (benefit) (~~710~~1,009) ~~710~~2,394 -579 - -1,964 ------------- ------------- --------------- ------------- ------------- Net income ~~(loss)~~$ 406 $ (23,~~898)~~559 $ 1,~~178~~652 $ ~~476 $~~ - $ (15,~~244)~~617 ============= ============= =============== ============= =============

Combined Combined Guarantor Non-Guarantor The Company Subsidiaries Subsidiaries Eliminations Total ------------- ------------- --------------- ------------- ------------- ~~Six~~Three months ended June 30, ~~2003~~2006: Net sales $ - $ 8065,~~902~~834 $ 1828,~~893~~567 $ (~~211~~185) $ 9994,~~584~~216 Cost of products sold - 6848,~~148~~966 1723,~~508~~920 (~~211~~185) 8572,~~445~~701 ------------- ------------- --------------- ------------- ------------- Gross profit - 1216,~~754~~868 14,~~385~~647 - 1421,~~139~~515 Total operating expenses ~~897~~898 84,~~551~~955 2,~~380~~902 - 118,~~828~~755 ------------- ------------- --------------- ------------- ------------- Operating income (loss) (~~897~~898) 411,~~203~~913 ~~(995)~~1,745 - 212,~~311~~760 Interest expense 6,~~868~~ ~~633~~net ~~139~~716 -319 ~~7,640~~221 ~~Interest income (13)~~ - -1,256 ~~- (13)~~ Miscellaneous, ~~net~~expense ~~323~~- ~~219~~102 ~~(19)~~67 - ~~523~~169 ------------- ------------- --------------- ------------- ------------- Income (loss) before income taxes (81,~~075~~614) 311,~~351~~492 (1,~~115)~~457 - (511,~~839)~~335 Income tax expense (benefit) (1,~~240~~595) 14,~~240~~617 -300 - -3,322 ------------- ------------- --------------- ------------- ------------- Net income ~~(loss)~~ $ (~~6,835~~19) $ 26,~~111~~875 $ (1,~~115)~~157 $ - $ (58,~~839)~~013 ============= ============= =============== ============= =============

Combined Combined Guarantor Non-Guarantor The Company Subsidiaries Subsidiaries Eliminations Total ------------- ------------- --------------- ------------- ------------- Six months ended June 30, ~~2002~~2007: Net sales $ - $ 73105,~~957~~879 $ 1762,~~689~~749 $ -(348) $ 91168,~~646~~280 Cost of products sold - 6082,~~106~~390 1552,~~172~~519 -(348) 75134,~~278~~561 ------------- ------------- --------------- ------------- ------------- Gross profit - 1323,~~851~~489 210,~~517~~230 - 1633,~~368~~719 Total operating expenses ~~451~~911 910,~~055~~037 26,~~045~~814 - 1117,~~551~~762 ------------- ------------- --------------- ------------- ------------- Operating income (loss) (~~451~~911) 413,~~796~~452 ~~472~~3,416 - 415,~~817~~957 Interest expense 6,~~880~~ ~~762~~net ~~29 - 7~~1,~~671~~058 ~~Interest~~544 ~~income~~298 ~~(104)~~ - -1,900 ~~- (104)~~ Miscellaneous, ~~net~~expense - 29117 12422 - 41539 ------------- ------------- --------------- ------------- ------------- Income (loss) before income taxes ~~and cumulative effect of change in accounting principle~~ (71,~~227~~969) 412,~~005~~791 ~~431~~2,696 - (213,~~791)~~518 Income tax expense (benefit) (12,~~837~~626) ~~1,496 - - (341) ------------- ------------- --------------- ------------- ------------- Income (loss) before cumulative effect of change in accounting principle (~~5,~~390)~~165 ~~2,509~~976 ~~431~~ - ~~(2,450) Cumulative effect of change in accounting principle - (~~3,~~850)~~515 - - ~~(3,850)~~ ------------- ------------- --------------- ------------- ------------- Net income ~~(loss)~~$ 657 $ (57,~~390)~~626 $ (1,~~341)~~720 $ ~~431 $~~ - $ (610,~~300)~~003 ============= ============= =============== ============= =============

11 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2007 J. Guarantor and Non-Guarantor Subsidiaries (Continued)

Combined Combined Guarantor Non-Guarantor The Company Subsidiaries Subsidiaries Eliminations Total ------------- ------------- --------------- ------------- ------------- Six months ended June 30, ~~2003~~2006: Net ~~cash~~sales ~~provided~~$ by- ~~(used in) operating activities~~ $ (7129,~~892)~~922 $ ~~132~~51,492 $ (~~2,633~~185) $ ~~31 $ (10~~181,~~362)~~229 ~~Investing~~Cost ~~activities: Purchases~~ of ~~property,~~products ~~plant,~~sold ~~and equipment~~ - ~~(127) (114) - (241) Proceeds from sale of property~~97,263 ~~plant~~43,965 ~~and equipment - 52 3 - 55 ------------- ------------- --------------- ------------- ------------- Net cash used in investing activities -~~ (75185) ~~(111)~~141,043 - ~~(186)~~ ------------- ------------- --------------- ------------- ------------- ~~Financing~~Gross ~~activities:~~profit ~~Net increase in borrowings on notes payable~~ - 432,~~995~~659 27,~~944~~527 - 740,~~939~~186 ~~Principal~~Total ~~payments~~operating onexpenses ~~long-term~~1,457 ~~obligations - (256) (36) - (292) Distributions for interest on senior notes 5~~9,~~600~~548 (5,~~600)~~490 - -16,495 - ~~Intercompany loan activity (175) 355 (180)~~ - - ----------~~---~~ ------------- --------------- ------------- ------------- ~~Net~~Operating ~~cash~~income ~~provided by~~ (~~used in~~loss) ~~financing activities 5,425~~ (~~506~~1,457) 23,111 2,~~728~~037 - 723,~~647~~691 ~~Exchange~~Interest ~~rate~~expense, ~~changes~~net on1,431 ~~cash~~632 425 - 462,488 17Miscellaneous expense (31income) 32- 179 (86) - 93 ------------- ------------- --------------- ------------- ------------- ~~Increase~~Income (~~decrease~~loss) inbefore ~~cash~~income ~~and~~taxes ~~cash equivalents~~ (2,~~467~~888) ~~(403)~~22,300 1,698 - (221,~~869)~~110 ~~Cash~~Income ~~and~~tax ~~cash~~expense ~~equivalents~~(benefit) ~~at beginning of period 4~~(3,~~524~~157) 18,~~109~~958 2374 - 56,~~635~~175 ------------- ------------- --------------- ------------- ------------- ~~Cash~~Net ~~and~~income ~~cash~~$ ~~equivalents~~269 ~~at end of period~~ $ 213,~~057~~342 $ ~~706~~1,324 $ ~~3 $~~ - $ 214,~~766~~935 ============= ============= =============== ============= =============

Summarized consolidating cash flow statements for the six months ended June 30, 2007 and 2006, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

Combined Combined Guarantor Non-Guarantor The Company Subsidiaries Subsidiaries Eliminations Total ------------- ------------- --------------- ------------- ------------- Six months ended June 30, ~~2002~~2007: Net cash provided by (used in) operating activities $ (~~7,381~~565) $ 419,~~574~~396 $ ~~529~~(3,047) $ 812 $ (215,~~270)~~796 Investing activities: Purchases of property, plant, and equipment -(91) (~~222~~1,189) (~~195~~1,055) - (~~417~~2,335) Proceeds from sale of property, plant, and equipment - 171 12152 - 29153 Acquisition of business - (983) - - (983) ------------- ------------- --------------- ------------- ------------- Net cash used in investing activities -(91) (~~205~~2,171) (~~183~~903) - (~~388~~3,165) ------------- ------------- --------------- ------------- ------------- Financing activities: Net increase (decrease) in borrowings on notes payable - ~~130~~(2,105) ~~358~~765 - ~~488~~(1,340) Proceeds from long-term obligations - - 377 - 377 Payments on Senior Notes (13,803) - - - (13,803) Principal payments on long-term obligations - (~~503~~250) (14447) - (~~517~~697) Distributions ~~for interest on senior notes 5~~14,~~900~~393 (514,~~900~~393) - - - Intercompany loan activity - ~~1,252~~ (~~1,252~~100) 100 - - ------------- ------------- --------------- ------------- ------------- Net cash provided by (used in) financing activities ~~5,900~~590 (516,~~021~~848) ~~(908)~~795 - (2915,463) Exchange rate changes on cash - 36- ~~(42)~~32 (812) ~~(14)~~20 ------------- ------------- --------------- ------------- ------------- ~~Decrease~~Increase (decrease) in cash and cash equivalents (~~1,481~~66) ~~(616)~~377 (~~604~~3,123) - (2,~~701~~812) Cash and cash equivalents at beginning of period ~~12,548~~93 1494 3,~~518~~785 ~~606~~ - 144,~~672~~372 ------------- ------------- --------------- ------------- ------------- Cash and cash equivalents at end of period $ ~~11,067~~27 $ ~~902~~871 $ 2662 $ - $ 111,~~971~~560 ============= ============= =============== ============= =============

12 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2007 J. Guarantor and Non-Guarantor Subsidiaries (Continued)

~~Interest~~Combined ~~Rate~~Combined ~~Sensitivity~~Guarantor ~~Principal~~Non-Guarantor ~~Amount~~The byCompany ~~Expected~~Subsidiaries ~~Maturity~~Subsidiaries ~~Average~~Eliminations ~~Interest~~Total ~~Rate~~------------- ~~Fair~~------------- ~~Value~~--------------- ------------- ------------- Six months ended June 30, 2006: Net cash provided by (~~dollars~~used in) ~~thousands~~operating activities $ (481) ~~2003~~$ ~~2004~~4,816 ~~2005~~$ ~~2006~~(2,073) ~~2007~~$ ~~Total~~3 ~~6/30/03~~$ 2,265 Investing activities: Purchases of property, plant, and equipment - (1,228) (479) - (1,707) Proceeds from sale of property, plant, and equipment - - 8 - 8 ------------- ------------- --------------- ------------- ------------- Net cash used in investing activities - (1,228) (471) - (1,699) ------------- ------------- ~~Long~~-~~Term~~-------------- ~~Obligations,~~------------- ~~including~~------------- ~~current~~Financing ~~portion~~activities: ~~Fixed~~Net ~~Rate~~increase $in borrowings on notes payable - $517 1,715 - $2,232 Proceeds from long-term $obligations - $- ~~120~~1,~~000~~324 $- ~~120~~1,~~000~~324 $Payments 54on Senior Notes (3,~~000~~073) ~~Average~~- ~~interest~~- - (3,073) Principal payments on long-term obligations - (250) (289) - (539) Distributions 3,663 (3,663) - - - ------------- ------------- --------------- ------------- ------------- Net cash provided by (used in) financing activities 590 (3,396) 2,750 - (56) Exchange rate ~~11%~~changes ~~11%~~on ~~11%~~cash ~~11%~~- ~~11%~~- (65) (3) (68) ------------- ------------- --------------- ------------- ------------- Increase in cash and cash equivalents 109 192 141 - 442 Cash and cash equivalents at beginning of period 40 470 33 - 543 ------------- ------------- --------------- ------------- ------------- Cash and cash equivalents at end of period $ 149 $ 662 $ 174 $ - $ 985 ============= ============= =============== ============= =============

13 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, 2006 and the unaudited financial statements and notes contained herein. General The Company, through its subsidiaries, is a leading designer and manufacturer of conveyor systems and components for mining applications, primarily in the coal industry. The Company is a holding company organized under the Delaware General Corporation Law and conducts all of its business through its direct and indirect operating subsidiaries. The Company's direct operating subsidiaries are Continental Conveyor and Equipment Company and Goodman Conveyor Company. The Company also owns indirectly all of the capital stock of Continental Conveyor & Equipment Pty. Ltd., an Australian holding company that owns all of the capital stock of four Australian operating companies and a Wholly Foreign Owned Enterprise (WFOE) in Beijing, China. 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. Through the United Kingdom subsidiary, a branch sales office has been established in Kemerovo, Russia. The assets and liabilities of the Company's foreign subsidiaries are translated at current exchange rates, while revenues and expenses are translated at average monthly prevailing rates. In April 2007, the Company acquired the assets of Mid-Florida Wheel and Axle, Inc., a business in Florida that refurbishes axle components and tires, in order to expand the Company's manufactured housing segment. Results of Operations The following table sets forth, on a comparative basis, selected income statement data as a percentage of net sales for the three months and six months ended June 30, 2007 and 2006.

Three months ended June 30, 2007, compared to three months ended June 30, 2006: Net Sales Net sales for the quarter decreased $5.0 million, or 5%, from $94.2 million in 2006 to $89.2 million in 2007. Net sales in the domestic operations of the Company's conveyor equipment segment decreased $10.6 million due to a decline in sales volume which resulted from decreased capital spending by the Company's customers in the coal industry. Net sales in the foreign operations of the Company's conveyor equipment segment increased $6.0 million. Changes in foreign currency translation rates caused $2.7 million of this increase. Adjusted for foreign currency fluctuations, net sales in Australia increased $3.8 million, net sales in the United Kingdom decreased $1.1 million, and net sales in South 14 Africa increased $0.6 million. The increase in Australia resulted from improved market penetration in the Western Australia aggregate market. The decrease in the United Kingdom was primarily due to the rescheduling of Engineered Systems projects. Net sales in the Company's manufactured housing segment decreased $0.2 million. The acquisition of Mid-Florida Wheel and Axle, Inc. in April 2007 contributed sales for the quarter of $1.3 million. According to the Manufactured Housing Institute's economic report for June 2007, shipments of manufactured homes for the three months ended June 30, 2007 decreased 18% from the same period in 2006. Net sales in the Company's other segment decreased $0.2 million. Gross Profit Gross profit for the quarter decreased $4.0 million, or 19%, from $21.5 million in 2006 to $17.5 million in 2007. Gross profit in the domestic operations of the conveyor equipment segment decreased $5.3 million due to lower sales volumes and the resulting loss in overhead absorption and efficiency. Gross profit in the foreign operations of the conveyor equipment segment increased $1.5 million, including an increase of $0.5 million due to changes in foreign currency translation rates. The remaining increase is primarily due to a $0.9 million increase in Australia resulting from the increase in net sales. Gross profit in the manufactured housing segment decreased $0.2 million. Gross profit as a percentage of net sales decreased from 22.8% in 2006 to 19.7% in 2007. This decrease was primarily attributable to a decline in profit margins in the domestic operations of the conveyor equipment segment. SG&A Expenses SG&A expenses for the quarter increased $0.6 million, or 8%, from $8.0 million in 2006 to $8.6 million in 2007. Changes in foreign currency translation rates accounted for $0.2 million of this increase. The remaining increase is primarily attributable to administrative expenses incurred in developing market locations of China and Russia. Operating Income Operating income for the quarter decreased $4.4 million, or 34%, from $12.8 million in 2006 to $8.4 million in 2007. The decrease in operating income resulted from the $4.0 million decrease in gross profit, combined with the $0.6 million increase in SG&A expenses, partially offset by a $0.2 million decrease in management fee expense. Interest Expense Interest expense for the quarter decreased $0.4 million, or 31%, from $1.3 million in 2006 to $0.9 million in 2007. This decrease primarily resulted from the April 2, 2007 Senior Notes bond redemption. Income Tax Expense Income tax expense for the quarter decreased $1.4 million, or 42%, from $3.3 million in 2006 to $1.9 million in 2007. This decrease resulted from lower pre-tax income. 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. Net Income Net income for the quarter decreased $2.4 million, or 30%, from $8.0 million in 2006 to $5.6 million in 2007. The decrease resulted from the $4.4 million decrease in operating income, offset by the $0.4 million decrease in interest expense, the $1.4 million decrease in income tax expense, and a $0.2 million decrease in miscellaneous expenses. 15 Six months ended June 30, 2007, compared to six months ended June 30, 2006: Net Sales Net sales for the six months decreased $12.9 million, or 7%, from $181.2 million in 2006 to $168.3 million in 2007. Net sales in the domestic operations of the Company's conveyor equipment segment decreased $18.8 million due to a decline in sales volume which resulted from decreased capital spending by the Company's customers in the coal industry. In reaction to the softening in domestic coal prices in the last half of 2006, a number of coal companies have shut down high-cost operations, reduced production, and deferred capital spending. Net sales in the foreign operations of the conveyor equipment segment increased $11.1 million, including an increase for changes in foreign currency translation rates of $4.1 million. Adjusted for these changes in foreign exchange rates, net sales in Australia and South Africa increased $9.5 million and $1.6 million, respectively, while net sales in the United Kingdom decreased $4.1 million. The increase in Australia resulted from improved market penetration in the Western Australia aggregate market. The decrease in the United Kingdom was due to the rescheduling of Engineered Systems projects. Net sales in the Company's manufactured housing segment decreased $4.9 million, or 28%, due to decreased shipments. Based on the Manufactured Housing Institute's economic report for June 2007, shipments of manufactured homes for the six months ended June 30, 2007 decreased 28% from the same period in 2006. In addition, the first two months of 2006 included some hurricane related shipments which did not recur in 2007. Net sales in the Company's other segment decreased $0.3 million. Gross Profit Gross profit for the six months decreased $6.5 million, or 16%, from $40.2 million in 2006 to $33.7 million in 2007. Gross profit in the domestic operations of the conveyor equipment segment decreased $8.2 million. Lower sales volume resulted in $5.0 million of this decrease. The remaining $3.2 million decrease was attributable to lower margins resulting from a loss in overhead absorption and efficiency due to the lower sales. Gross profit in the foreign operations of the conveyor equipment segment increased $2.7 million. Increases in foreign currency translation rates resulted in $0.7 million of this increase. The remaining $2.0 million increase was primarily attributable to an increase in the Australian subsidiary which resulted from higher sales. Gross profit in the manufactured housing segment decreased $0.9 million due to lower sales volume. Gross profit in the other segment decreased $0.1 million. Gross profit as a percentage of net sales decreased from 22.2% in 2006 to 20.0% in 2007. This decline resulted from lower profit margins in the Company's domestic conveyor operations and manufactured housing segment. SG&A Expenses SG&A expenses for the six months increased $1.6 million, or 11%, from $15.2 million in 2006 to $16.8 million in 2007. SG&A expenses in the domestic operations of the conveyor equipment segment increased $0.4 million due to higher commissions and employee expenses. SG&A expenses in the foreign operations of the conveyor equipment segment increased $0.9 million due to increases in foreign currency translation rates and expenses incurred in developing market locations of China and Russia. Corporate SG&A expenses increased $0.4 million due primarily to increased employee costs that were previously paid by a foreign subsidiary. SG&A expenses in the Company's manufactured housing segment decreased $0.1 million. Operating Income Operating income for the six months decreased $7.7 million, or 32%, from $23.7 million in 2006 to $16.0 million in 2007. This decrease resulted from the $6.5 million decrease in gross profit, combined with the $1.6 million increase in SG&A expenses, offset by a $0.4 million decrease in management fee expense. 16 Interest Expense Interest expense for the six months decreased $0.6 million, or 24%, from $2.5 million in 2006 to $1.9 million in 2007. This decrease primarily resulted from the April 2, 2007 Senior Notes bond redemption and lower outstanding balances on the subsidiaries' lines of credit. Income Tax Expense Income tax expense for the six months decreased $2.7 million, or 44%, from $6.2 million in 2006 to $3.5 million in 2007. This decrease resulted from lower pre-tax income. 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. Net Income Net income for the six months decreased $4.9 million, or 33%, from $14.9 million in 2006 to $10.0 million in 2007. This decrease resulted from the $7.7 million decrease in operating income, combined with a $0.5 million decrease in miscellaneous expenses, and partially offset by the $0.6 million decrease in interest expense and the $2.7 million decrease in income tax expense. Backlog Backlog at June 30, 2007 was $129.6 million, an increase of $26.5 million, or 26%, from $103.1 million at December 31, 2006 and an increase of $5.3 million, or 4%, from $124.3 million at March 31, 2007. At June 30, 2007, backlog in the domestic operations of the Company's conveyor equipment segment was $45.3 million, a decrease of $15.7 million from March 31, 2007, and backlog in the foreign operations of the Company's conveyor equipment segment was $84.3 million, an increase of $21.0 million from March 31, 2007. Management believes that approximately 85% of the backlog will be shipped in 2007. Liquidity and Capital Resources Net cash provided by operating activities was $15.8 million and $2.3 million for the six months ended June 30, 2007 and 2006, respectively. Net cash provided by operating activities in 2007 resulted from net income of $10.0 million, combined with non-cash expenses of $0.9 million and a net decrease in operating assets and liabilities of $4.9 million. The net decrease in operating assets primarily resulted from a decrease in accounts receivable and inventories. Net cash provided by operating activities in 2006 resulted from net income of $14.9 million, combined with non-cash expenses of $1.5 million and partially offset by a net increase in operating assets and liabilities of $14.1 million. Net cash used in investing activities was $3.2 million and $1.7 million for the six months ended June 30, 2007 and 2006, respectively. Net cash used in investing activities in 2007 represents net purchases of property, plant, and equipment of $2.2 million and the acquisition of the assets of Mid-Florida Wheel and Axle, Inc. for $1.0 million. Net cash used in investing activities in 2006 represents net purchases of property, plant, and equipment. Net cash used in financing activities was $15.5 million and $0.1 million for the six months ended June 30, 2007 and 2006, respectively. Net cash used in financing activities in 2007 resulted from a net decrease in borrowings on notes payable of $1.3 million, combined with payments on Senior Notes of $13.8 million and principal payments on long-term obligations of $0.7 million, partially 17 offset by proceeds from long-term obligations of $0.3 million. The payments on Senior Notes included $10.7 million for the payment of the Senior Notes due April 2007 and interest payments of $3.1 million on the Series A and Series B Senior Notes due October 2008. Net cash used in financing activities in 2006 resulted from payments on Senior Notes of $3.1 million and principal payments on long-term obligations of $0.5 million, partially offset by a net increase in borrowings on notes payable of $2.2 million and proceeds from long-term obligations of $1.3 million. The Company's primary capital requirements consist of capital expenditures and debt service. The Company utilizes cash on hand and its available credit facilities to satisfy these requirements. Capital expenditures for the first six months of 2007 were $2.3 million, which included expenditures to improve productivity and for maintenance capital. In addition to the Company's debt service requirements for interest expense, as of June 30, 2007, the Company had outstanding principal balances on its domestic and foreign credit facilities of approximately $3.3 million and $2.7 million, respectively. The Company's Senior Notes outstanding indebtedness has been classified as short and long-term liabilities as of June 30, 2007 based upon the payment terms of the debt. The following table summarizes the reduction in the balance of the Senior Notes based upon the payment requirements over the terms of the Series A and Series B Notes: Balance at June 30, 2007 of Senior Notes, including current portion of $6,146,438 $ 77,513,405 Interest payments on Series A Notes, 2007-2008 (7,990,368) Interest payments on Series B Notes, 2007-2008 (1,229,287) ------------------ Maturity of Series A and Series B Notes due October 2008 $ 68,293,750 ================== At June 30, 2007, the Company had cash and cash equivalents of approximately $1.6 million and approximately $24.0 million available for use under its domestic credit facility, representing approximately $25.6 million of liquidity. On April 2, 2007, the Company made a payment of $11.3 million for the retirement of all outstanding 11% Senior Notes due April 2007 and all accrued interest thereon. Annual debt service related to interest payments on the Series A and Series B Notes due October 1, 2008 is approximately $6.1 million. In addition, in 2004 and 2005, in order to partially fund the cash payments as additional consideration to the Series A and Series B bondholders, the Company increased the balance of a term loan with Bank One by approximately $3.8 million and entered into subordinated promissory notes with N.E.S. Investment Co. in the amount of $12 million. The debt service for interest related to these debt instruments in the first six months of 2007 was approximately $0.2 million in cash and $0.6 million in kind. The Company expects current financial resources, existing lines of credit, and funds from operations to be adequate to meet its anticipated short-term cash requirements. International Operations The Company transacts business in a number of countries throughout the world and has facilities in the United States, Australia, the United Kingdom, and South Africa. As a result, the Company is subject to business risks inherent in non-U.S. operations, including political and economic uncertainty, import and export limitations, exchange controls and currency fluctuations. The Company believes that the risks related to its foreign operations are mitigated by the relative political and economic stability of the countries in which its largest foreign operations are located. The principal foreign currencies in which the Company transacts business are the Australian dollar, the British pound sterling, and the South African rand. As the U.S. dollar strengthens and weakens against these foreign currencies, the Company's financial results will be affected. As discussed previously, the Company's net sales for the six months ended June 30, 2007 increased by approximately $4.1 million from the 18 corresponding period in the prior year due to changes in foreign currency translation rates. The fluctuation of the U.S. dollar versus other currencies also resulted in foreign currency translation gains included in the accumulated other comprehensive income (loss) component of stockholder's equity (deficit) of approximately $1.1 million and $0.1 million for the six months ended June 30, 2007 and 2006, 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. 19 Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company's interest income and expense are most sensitive to changes in the general level of U.S. interest rates. In this regard, changes in U.S. interest rates affect the interest earned on the Company's cash equivalents as well as interest paid on its debt. To mitigate the impact of fluctuations in U.S. interest rates, the Company generally borrows on a long-term basis to maintain a debt structure that is fixed rate in nature. A portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions. The Company manufactures and sells its products in the United States, Australia, the United Kingdom, and South Africa. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are exposed to changes in exchange rates between the U.S. dollar and the Australian dollar, the British pound sterling, and the South African rand. Item 4. Controls and Procedures As of June 30, 2007, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be included in the Company's periodic filings with the Securities and Exchange Commission. There were no significant changes in the Company's internal controls over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 20 Part II. Other Information Item 1. Legal Proceedings There are pending or threatened against the Company or its subsidiaries various claims and lawsuits, all arising from the ordinary course of business with respect to commercial and products liability matters, which seek remedies or damages. The Company believes that any liability that may finally be determined with respect to commercial and product liability claims should not have a material adverse effect on its financial condition. Legal costs are generally expensed when incurred. At June 30, 2007 and December 31, 2006, the Company's Consolidated Balance Sheet includes an accrued liability for any pending or threatened claim with respect to any commercial and products liability matter of $0.3 million, and was included in current liabilities as Other Accrued Liabilities. In August and September 2003, Continental Conveyor & Equipment Company was served as one of fifty-eight known and unknown defendants in nineteen separate actions pending in various state courts in the State of Alabama alleging various contract, tort and warranty claims. All claims in such actions arose out of alleged injuries and deaths occurring at the Jim Walters Resources No. 5 Mine which occurred on September 23, 2001. A settlement of these actions has been agreed to by the parties involved, pending approval by the courts. The proposed settlement does not materially impact the Company's financial condition. Item 1A. Risk Factors There have been no material changes to the Company's risk factors as described in the Company's Report on Form 10-K for the year ended December 31, 2006. Item 6. Exhibits Exhibits: Refer to the index of exhibits. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONTINENTAL GLOBAL GROUP, INC. By: /s/ Jeffrey A. Behrendt ------------------------ Jeffrey A. Behrendt Vice President and Chief Financial Officer (As duly authorized representative and as Principal Financial and Accounting Officer) CONTINENTAL CONVEYOR & EQUIPMENT COMPANY By: /s/ Jeffrey A. Behrendt ------------------------ Jeffrey A. Behrendt Vice President - Finance (As duly authorized representative and as Principal Financial and Accounting Officer) GOODMAN CONVEYOR COMPANY By: /s/ J. Mark Etchberger ----------------------- J. Mark Etchberger Controller (As duly authorized representative and as Principal Financial and Accounting Officer) Date: August 14, 2007 22 Continental Global Group, Inc. Form 10-Q Index of Exhibits Exhibit Number Description of Exhibit 3.1 (a) Certificate of Incorporation of Continental Global Group, Inc., as currently in effect. * (b) Certificate of Amendment of Certificate of Incorporation of Continental Global Group, Inc. (Filed as Exhibit 3.1(b) to the Company's Form 10-K for the year ended December 31, 2005, and is incorporated herein by reference.) 3.2 By-Laws of Continental Global Group, Inc., as currently in effect. * 3.3 Certificate of Incorporation of Continental Conveyor & Equipment Company, as currently in effect. * 3.4 By-Laws of Continental Conveyor & Equipment Company, as currently in effect. * 3.5 Certificate of Incorporation of Goodman Conveyor Company, as currently in effect. * 3.6 By-Laws of Goodman Conveyor Company, as currently in effect. * 4.1 Indenture, dated 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.) 4.2 9% Convertible Subordinated Promissory Note, dated October 4, 2004, from Continental Global Group, Inc. to N.E.S. Investment Co. in the amount of $10,000,000. (Filed as Exhibit 4.3 to Form 8-K filed by the Company on October 7, 2004, and is incorporated herein by reference.) 10.1 Second Amended and Restated Credit Facility and Security Agreement, dated October 4, 2004, by and among Continental Conveyor & Equipment Company, Goodman Conveyor Company, and Bank One, N.A. (Filed as Exhibit 4.2 to Form 8-K filed by the Company on October 7, 2004, and is incorporated herein by reference.) 10.2 Management Agreement, dated as of April 1, 1997, between Continental Global Group, Inc. and Nesco, Inc. * 10.3 Employment Agreement, effective February 13, 2006, between Continental Global Group, Inc. and Ronald Kaplan. (Filed as Exhibit 10.3 to Form 8-K filed by the Company on March 17, 2006, and is incorporated herein by reference.) 10.4 Amendment, dated October 26, 2006, to Employment Agreement, effective February 13, 2006, between Continental Global Group, Inc. and Ronald Kaplan. (Filed as Exhibit 10.4 to the Company's Form 10-K for the year ended December 31, 2006, and is incorporated herein by reference.) 10.5 First Amendment to Second Amended and Restated Credit Facility and Security Agreement, dated March 9, 2006, by Continental Conveyor & Equipment Company, Goodman Conveyor Company, and JP Morgan Chase Bank, N.A., successor by merger to Bank One, N.A. (Filed as Exhibit 10.5 to the Company's Form 10-K for the year ended December 31, 2005, and is incorporated herein by reference.) 10.6 Continental Global Group, Inc. incentive award letter dated October 26, 2006. (Filed as Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 2006, and is incorporated herein by reference.) Continental Global Group, Inc. Form 10-Q Index of Exhibits Exhibit Number Description of Exhibit 10.7 Continental Global Group, Inc. retention letter dated October 26, 2006. (Filed as Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 2006, and is incorporated herein by reference.) 10.8 Employment Agreement by and between Continental Global Group, Inc. and Jeffrey A. Behrendt dated March 26, 2007. (Filed as Exhibit 10.8 to Form 8-K filed by the Company on June 7, 2007, 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.

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