10-Q 1 form10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2004 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, 2004 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 [ ] No [x] 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 July 31, 2004, there were 100 shares of the registrant's common stock outstanding. INDEX CONTINENTAL GLOBAL GROUP, INC.

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) June 30, 2004 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, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes of Continental Global Group, Inc. and subsidiaries for the year ended December 31, 2003, included in the Company's Form 10-K. The Company's consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring losses which totaled approximately $2,691,000 for the six months ended June 30, 2004, and approximately $12,633,000 and $12,542,000 during the years ended December 31, 2003 and 2002, respectively. The Company also had working capital deficiencies of approximately $123,244,000 and $121,635,000 at June 30, 2004 and December 31, 2003, respectively. The recurring losses are primarily the result of substantial debt service obligations because the Company is highly leveraged and its current cash flows from operations have been insufficient to service the interest expense on its existing debt obligations. The Company was not in compliance with certain covenants under its revolving credit facilities as of December 31, 2003 or the subsequent ending quarters, 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 has subsequently received a notice of default from the Trustee for the Senior Notes. Accordingly, the Senior Notes have been recorded as current liabilities in the condensed consolidated balance sheet. 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 prior to May 31, 2004. On May 27, 2004, June 14, 2004 and July 13, 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 extends the forbearance agreement with the Majority Holders until the restructuring is consummated or the restructuring agreement is terminated. 5 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2004 A. Organization and Basis of Presentation (Continued) 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 in the aggregate principal amount of $65,000,000, and (iii) 13% Series B Senior Secured Notes 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 Company expects to fund the cash payment from (a) $12,000,000 of new subordinated indebtedness from N.E.S. Investment Co., (b) additional borrowings under an amended credit facility, and (c) cash available from operations. The exchange offer was made exclusively to holders of the 11% Senior Notes due 2007 and will expire on September 2, 2004, unless extended. On May 1, 2004, June 1, 2004, June 15, 2004, July 13, 2004 and July 29, 2004, the Company and Bank One, N.A. entered into forbearance agreements under which Bank One has 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 negotiates a possible 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 through July 31, 2006. The extension is contingent upon the completion of a restructuring of the Company's Senior Notes. The Company is currently in discussions with the lenders under its existing foreign revolving credit facilities to extend such credit facilities that have matured or are expiring in 2004. At this time the ability of the Company to successfully extend its domestic and foreign revolving credit facilities maturing in 2004 and to restructure the terms of the Senior Notes is uncertain and subject to substantial risk. In the event that the Company is not successful in the restructuring of its Senior Notes, the Company may seek to implement the restructuring of its Senior Notes through a plan of reorganization under Chapter 11 of the Bankruptcy Code. The condensed consolidated financial statements do not include any adjustments to reflect any possible future effects of a restructuring of the Senior 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. 6 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2004 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 64% and 57% of inventories at June 30, 2004 and December 31, 2003, respectively, is determined using the last-in, first-out (LIFO) method with the remainder determined using the first-in, first-out (FIFO) method. Had the FIFO method of inventory (which approximates replacement cost) been used to cost all inventories, inventories would have increased by approximately $2,566,000 and $1,316,000 at June 30, 2004 and December 31, 2003, respectively. D. Warranty Costs The Company's products are generally covered by warranties against defects in material and workmanship for periods up to two years from the date of sale or installation of the product. The Company records a provision for estimated warranty cost based on historical experience and expectations of future conditions and continuously assesses the adequacy of its product warranty accrual and makes adjustments as needed. A summary of accrued warranty costs follows: Balance as of January 1, 2004 $ 1,275,401 Provision for warranties 418,484 Settlements made during the period (296,946) Effect of exchange rate changes (16,918) ----------------- Balance as of June 30, 2004 $ 1,380,021 ================= E. Restructuring Charges The Company incurred restructuring charges of approximately $174,000 and $58,000 for the six months ended June 30, 2004 and 2003, respectively, related to changes in staffing and production requirements in its domestic operations. 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. However, in the fourth quarter of 2003, the Company hired a third-party consultant to re-evaluate the restructuring plan and make further recommendations. These recommendations are currently under review by the Company's management and board of directors. The additional cost of this restructuring has not been determined. The charges incurred in 2004 consist primarily of consulting fees while the charges incurred in 2003 consist primarily of severance costs associated with a reduction in personnel which occurred in 2002 and 2003. Total restructuring charges incurred since this plan was developed are approximately $880,000. As of June 30, 2004, the Company has paid approximately $466,000 of the charges incurred to date, with the majority of the remainder expected to be paid by 2008. 7 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2004 F. Comprehensive Loss The components of comprehensive loss for the three months and six months ended June 30, 2004 and 2003 are as follows:

G. Employee Benefit Plans As of June 30, 2004, the Company has made contributions of approximately $2,477,000, including a required contribution of $266,000 and a voluntary contribution of approximately $2,211,000 due to the underfunded status of the plan. The Company does not expect to make any further contributions in 2004. The components of net periodic benefit cost for the three months and six months ended June 30 are as follows:

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's effective tax rate differs from the statutory rate in the United States due to losses incurred without a corresponding tax benefit. The Company has subsidiaries located in Australia, the United Kingdom, and South Africa, which are subject to income taxes in their respective countries. 8 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2004 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.

9 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2004 J. Guarantor and Non-Guarantor Subsidiaries The Company's domestic subsidiaries, Continental Conveyor & Equipment Company (CCE) and Goodman Conveyor Company (GCC), and certain of its Australian subsidiaries, all 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 United Kingdom and South African subsidiaries are not guarantors of the Senior Notes. Summarized consolidating balance sheets as of June 30, 2004 and December 31, 2003 for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

10 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2004 J. Guarantor and Non-Guarantor Subsidiaries (Continued)

11 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2004 J. Guarantor and Non-Guarantor Subsidiaries (Continued) Summarized consolidating statements of operations for the three months and six months ended June 30, 2004 and 2003, respectively, for the Company, the guarantor subsidiaries, and the non-guarantor subsidiaries are as follows (in thousands):

12 Continental Global Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2004 J. Guarantor and Non-Guarantor Subsidiaries (Continued)

Summarized consolidating cash flow statements for the six months ended June 30, 2004 and 2003, 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) June 30, 2004 J. Guarantor and Non-Guarantor Subsidiaries (Continued)

14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes included in the Company's Form 10-K for the year ended December 31, 2003. 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. 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, 2004 and 2003.

Three months ended June 30, 2004, compared to three months ended June 30, 2003: Net Sales Net sales for the quarter increased $10.1 million, or 18%, from $57.0 million in 2003 to $67.1 million in 2004. Net sales in the domestic operations of the Company's conveyor equipment segment increased $3.1 million due to improved sales volume in the mining equipment and conveyor components business areas. Net sales in the foreign operations of the Company's conveyor equipment segment increased $7.2 million. Changes in foreign currency translation rates resulted in $3.2 million of this increase. The remaining $4.0 million increase resulted from increased net sales in the Company's Australian subsidiary due to significant shipments on a major contract in May and June of 2004. Net sales in the Company's manufactured housing products segment and other segment each decreased by $0.1 million. 15 Gross Profit Gross profit for the quarter increased $2.3 million, or 28%, from $8.2 million in 2003 to $10.5 million in 2004. Gross profit in the domestic operations of the Company's conveyor equipment segment increased $0.8 million as a result of increased sales volume in the higher margin conveyor components business area. Gross profit in the foreign operations of the Company's conveyor equipment segment increased $1.7 million. Of this $1.7 million increase, $0.4 million was caused by changes in foreign currency translation rates. Adjusted for foreign currency effects, gross profit in the Company's Australian and United Kingdom subsidiaries increased $1.1 million and $0.2 million, respectively. The increase in Australia primarily resulted from improved profit margins on major contracts. Gross profit in the Company's manufactured housing products segment decreased $0.2 million. SG&A Expenses SG&A expenses for the quarter increased $0.4 million, or 7%, from $5.8 million in 2003 to $6.2 million in 2004. SG&A expenses in the foreign operations of the Company's conveyor equipment segment increased $0.2 million due to changes in foreign currency translation rates. SG&A expenses in the domestic operations of the Company's conveyor equipment segment and in the Company's manufactured housing products segment each increased $0.1 million. Operating Income Operating income for the quarter increased $1.7 million, or 77%, from $2.2 million in 2003 to $3.9 million in 2004. This increase resulted from the $2.3 million increase in gross profit, partially offset by the $0.4 million increase in SG&A expenses and a $0.2 million increase in other operating expenses, primarily management fees. Six months ended June 30, 2004, compared to six months ended June 30, 2003: Net Sales Net sales for the six-month period increased $17.5 million, or 18%, from $99.6 million in 2003 to $117.1 million in 2004. Net sales in the domestic operations of the Company's conveyor equipment segment increased $4.6 million due to improved sales volume in the mining equipment and conveyor components business areas. Net sales in the foreign operations of the Company's conveyor equipment segment increased $13.4 million. Changes in foreign currency translation rates resulted in $7.2 million of this increase. The remaining increase primarily resulted from increased net sales in the Company's Australian and United Kingdom subsidiaries, adjusted for foreign currency translation rates, of $4.3 million and $1.8 million, respectively. The increase in Australia was due to improved market conditions in the coal industry and significant shipments on a major contract in the second quarter of 2004. The increase in the United Kingdom resulted from significant shipments on a major contract. Net sales in the Company's manufactured housing products and other segments decreased $0.3 million and $0.2 million, respectively. Gross Profit Gross profit for the six-month period increased $4.1 million, or 29%, from $14.1 million in 2003 to $18.2 million in 2004. Gross profit in the domestic operations of the Company's conveyor equipment segment increased $1.8 million due to a more favorable product mixture in the mining equipment business area and increased sales volume in the higher margin conveyor components business area. Gross profit in the foreign operations of the Company's conveyor equipment segment increased $2.5 million, of which $0.9 million resulted from changes in foreign currency translation rates. The remaining increase can be attributed to increases in Australia and the United Kingdom of $1.0 million and $0.6 million, respectively. These increases were primarily attributable to improved profit margins due to the increased sales volume which resulted in more efficient 16 utilization of overhead expenses. Gross profit in the Company's manufactured housing products segment decreased $0.2 million. SG&A Expenses SG&A expenses for the six-month period increased $0.6 million, or 5%, from $11.6 million in 2003 to $12.2 million in 2004. SG&A expenses in the foreign operations of the conveyor equipment segment increased $0.4 million. Changes in foreign currency translation rates resulted in a $0.6 million increase. Adjusted for foreign exchange rates, SG&A expenses in the foreign subsidiaries decreased $0.2 million primarily due to reduced selling and engineering expenses at the Australian and United Kingdom locations. In addition, SG&A expenses in the Company's manufactured housing products segment increased $0.1 million and corporate SG&A expenses increased $0.1 million. Operating Income Operating income for the six-month period increased $3.1 million, or over 100%, from $2.3 million in 2003 to $5.4 million in 2004. This increase resulted from the $4.1 million increase in gross profit, partially offset by the $0.6 million increase in SG&A expenses and a $0.4 million increase in other operating expenses, primarily management fees and restructuring charges. Restructuring Charges The Company incurred restructuring charges of approximately $0.2 million and $0.1 million in 2004 and 2003, respectively, related to changes in staffing and production requirements in its domestic operations. 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. However, in the fourth quarter of 2003, the Company hired a third-party consultant to re-evaluate the restructuring plan and make further recommendations. These recommendations are currently under review by the Company's management and board of directors. The additional cost of this restructuring has not been determined. The charges incurred in 2004 consist primarily of consulting fees while the charges incurred in 2003 consist primarily of severance costs associated with a reduction in personnel which occurred in 2002 and 2003. Total restructuring charges incurred since this plan was developed are approximately $0.9 million. As of June 30, 2004, the Company has paid approximately $0.5 million of the charges incurred to date, with the majority of the remainder expected to be paid by 2008. Backlog Backlog at June 30, 2004 was $44.3 million, an increase of $9.3 million, or 27%, from $35.0 million at December 31, 2003 and a decrease of $16.8 million, or 27%, from $61.1 million at March 31, 2004. At June 30, 2004, backlog in the domestic operations of the Company's conveyor equipment segment was $23.3 million, an increase of $2.8 million from March 31, 2004, and backlog in the foreign operations of the Company's conveyor equipment segment was $21.0 million, a decrease of $19.6 million from March 31, 2004. Management believes that approximately 90% of the backlog will be shipped in 2004. Liquidity and Capital Resources Net cash used in operating activities was $0.8 million and $10.4 million for the six months ended June 30, 2004 and 2003, respectively. Net cash used in operating activities in 2004 resulted from a net loss of $2.7 million offset by non-cash expenses of $1.4 million and a net decrease in operating assets and liabilities of $0.5 million. Net cash used in operating activities in 2003 resulted from a net loss of $5.8 million combined with a net increase in operating assets and liabilities of $5.9 million, partially offset by non-cash expenses of $1.3 million. The reduction in net cash used in operating activities 17 from 2003 to 2004 was partially due to the reduction in the net loss which resulted from higher net sales and improved gross profit margins. In addition, the net increase in operating assets and liabilities in 2003 was primarily due to the significant increase in trade accounts receivables which resulted from higher sales in the second quarter of 2003 compared to the fourth quarter of 2002 Net cash used in investing activities was $0.3 million and $0.2 million for the six months ended June 30, 2004 and 2003, respectively, and represents net purchases of property, plant, and equipment for both years. Net cash provided by financing activities was $1.1 million and $7.6 million for the six months ended June 30, 2004 and 2003, respectively. Net cash provided by financing activities in 2004 resulted from a net increase in borrowings on notes payable of $1.4 million offset by principal payments on long-term obligations of $0.3 million. Net borrowings on notes payable under the Company's domestic credit facility increased $2.5 million and net borrowings on notes payable under the Company's various credit facilities at the foreign subsidiaries decreased $1.1 million. Net cash provided by financing activities in 2003 resulted from a net increase in borrowings on notes payable of $7.9 million offset by principal payments on long-term obligations of $0.3 million. Net borrowings on notes payable under the Company's domestic credit facility increased $5.0 million while net borrowings on notes payable under the Company's various credit facilities at the foreign subsidiaries increased $2.9 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 2004, which will be primarily for maintenance capital, will approximate those made in 2003. In addition to the Company's debt service requirements for interest expense, as of June 30, 2004, the Company's domestic and foreign credit facilities had outstanding principal balances of approximately $11.7 million and $3.7 million, respectively. The Company has incurred recurring losses which totaled approximately $2.7 million for the six months ended June 30, 2004, and approximately $12.6 million and $12.5 million during the years ended December 31, 2003 and 2002, respectively. The Company also had working capital deficiencies of approximately $123.2 million and $121.6 million at June 30, 2004 and December 31, 2003, respectively. The recurring losses are primarily the result of substantial debt service obligations because the Company is highly leveraged and its current cash flows from operations have been insufficient to service the interest expense on its existing debt obligations. The Company was not in compliance with certain covenants under its revolving credit facilities as of December 31, 2003 or the subsequent ending quarters, 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 has subsequently received a notice of default from the Trustee for the Senior Notes. Accordingly, the Senior Notes have been recorded as current liabilities in the condensed consolidated balance sheet. 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 prior to May 31, 2004. On May 27, 2004, June 14, 2004 and July 13, 2004, this agreement was amended to extend the forbearance agreement until July 23, 2004. 18 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 extends the forbearance agreement with the Majority Holders until the restructuring is consummated or the restructuring agreement is 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 in the aggregate principal amount of $65 million, and (iii) 13% Series B Senior Secured Notes 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 Company expects to fund the cash payment from (a) $12 million of new subordinated indebtedness from N.E.S. Investment Co., (b) additional borrowings under an amended credit facility, and (c) cash available from operations. The exchange offer was made exclusively to holders of the 11% Senior Notes due 2007 and will expire on September 2, 2004, unless extended. On May 1, 2004, June 1, 2004, June 15, 2004, July 13, 2004 and July 29, 2004, the Company and Bank One, N.A. entered into forbearance agreements under which Bank One has 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 negotiates a possible 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 through July 31, 2006. The extension is contingent upon the completion of a restructuring of the Company's Senior Notes. The Company is currently in discussions with the lenders under its existing foreign revolving credit facilities to extend such credit facilities that have matured or are expiring in 2004. The credit facility of the Company's United Kingdom subsidiary matured on March 31, 2004. The subsidiary was not in compliance with its debt covenants at March 31, 2004. However, the subsidiary's principal lender has continued to allow the subsidiary to borrow under the facility to date at a reduced line of 2.25 million British pounds sterling. The subsidiary is currently in negotiations for a new agreement. The credit facility of the Company's Australian subsidiary also matured on March 31, 2004. The subsidiary's principal lender has continued to allow the subsidiary to borrow under the facility to date and the subsidiary is currently in negotiations for a new agreement. At June 30, 2004, the Company had cash and cash equivalents of approximately $0.8 million and approximately $9.7 million available for use under its domestic credit facility, representing approximately $10.5 million of liquidity. At this time the ability of the Company to successfully extend its domestic and foreign revolving credit facilities maturing in 2004 and to restructure the terms of the Senior Notes is uncertain and subject to substantial risk. In the event that the Company is not successful in the restructuring of its Senior Notes, the Company may seek to implement the restructuring of its Senior Notes through a plan of reorganization under Chapter 11 of the Bankruptcy Code. 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. As the U.S. dollar strengthens and weakens against foreign currencies in which the Company transacts business, its financial results will be affected. The principal foreign currencies in which the Company transacts business are the Australian dollar, the British pound 19 sterling, and the South African rand. The fluctuation of the U.S. dollar versus other currencies resulted in increases (decreases) to stockholder's equity (deficit) of approximately $(0.4) million and $0.4 million for the six months ended June 30, 2004 and 2003, 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. 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk The following table provides information about the Company's Senior Notes. The table presents principal cash flows and interest rate by expected maturity date.

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, 2004, 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. 21 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 3. Defaults upon Senior Securities On April 1, 2004, the Company failed to make its $6.6 million semi-annual interest payment due for the 11% Senior Notes due 2007. Following expiration of the 30-day grace period provided for in the indenture, the Senior Notes were in default and the Company has subsequently received a notice of default from the Trustee for the Senior Notes. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Refer to the index of exhibits. (b) Reports on Form 8-K: On April 1, 2004, the Company filed a Form 8-K regarding Regulation FD Disclosure, which contained as an Exhibit a letter of notification to Wells Fargo Bank, the Trustee of the Company's 11% Senior Notes due 2007, that the Company had determined to avail itself of the 30-day grace period for the payment of interest due on April 1, 2004. On July 23, 2004, the Company filed a Form 8-K which contained as an Exhibit a 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, pursuant to which the Company agreed to commence an offer to exchange (i) cash in the aggregate amount of $17,500,000, (ii) 9% Series A Senior Secured Notes in the aggregate principal amount of $65,000,000, and (iii) 13% Series B Senior Secured Notes 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. On August 3, 2004, the Company filed a Form 8-K which amended the Restructuring Agreement to extend the non-commencement termination date from July 30, 2004 to August 6, 2004. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONTINENTAL GLOBAL GROUP, INC. By: /s/ Jimmy L. Dickinson ------------------------------- Jimmy L. Dickinson Vice President and Chief Financial Officer (As duly authorized representative and as Principal Financial and Accounting Officer) CONTINENTAL CONVEYOR & EQUIPMENT COMPANY By: /s/ Jimmy L. Dickinson ------------------------------- Jimmy L. Dickinson Vice President - Finance (As duly authorized representative and as Principal Financial and Accounting Officer) GOODMAN CONVEYOR COMPANY By: /s/ J. Mark Etchberger ------------------------------- J. Mark Etchberger Controller (As duly authorized representative and as Principal Financial and Accounting Officer) Date: August 16, 2004 23 Continental Global Group, Inc. Form 10-Q Index of Exhibits

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