**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

** **

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended October 2, 2004**

** **

**OR**

** **

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition period from          to          **

** **

**Commission File number 1-3834**

 

**CONTINENTAL MATERIALS CORPORATION**

(Exact name of registrant as specified in itscharter)

 
| **Delaware**                                                                         |   | **36-2274391**                       |
|--------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                      |   | (I.R.S. Employer Identification No.) |
|                                                                                 |   |                                 |
| **225 West Wacker Drive, Suite 1800, Chicago,  Illinois 60606**                      |
| (Address of principal executive offices)                                             |
| (Zip Code)                                                                           |
|                                                                                 |   |                                 |
| **(312) 541-7200**                                                                   |
| (Registrant’s telephone number, including  area code)                           |
|                                                                                 |   |                                 |
|                                                                                 |   |                                 |
| (Former name, former address and former  fiscal  year, if changed since last report) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes      ý      No      o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 

Yes      o      No      ý

 

Number of common shares outstanding at November 3,2004          1,656,427

 

 

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PART I – FINANCIAL INFORMATION

 

**Item 1.   Financial Statements**

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

OCTOBER 2, 2004 and JANUARY 3, 2004

(000’s omitted except share data)

 
| ** **                                                                            | ** ** | **OCTOBER 2,  2004** | ** ** | **JANUARY 3,  2004** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                            | ** ** | **(Unaudited)**      | ** ** | ** **           | ** ** |
| ***ASSETS***                                                                          | ** ** | ** **           | ** ** | ** **           | ** ** |
| Current assets:                                                                       |       |                 |       |                 |       |
| Cash and cash equivalents                                                             |       | $                    | —     |                 | $          | 4,609 |   |
| Receivables, net                                                                      |       | 18,191               |       | 17,054               |       |
| Inventories:                                                                          |       |                 |       |                 |       |
| Finished goods                                                                        |       | 8,702                |       | 7,163                |       |
| Work in process                                                                       |       | 1,555                |       | 1,486                |       |
| Raw materials and supplies                                                            |       | 8,024                |       | 7,532                |       |
| Prepaid expenses                                                                      |       | 3,529                |       | 3,064                |       |
| Total current assets                                                                  |       | 40,001               |       | 40,908               |       |
|                                                                                  |       |                 |       |                 |       |
| Property, plant and equipment, net                                                    |       | 30,058               |       | 30,873               |       |
|                                                                                  |       |                 |       |                 |       |
| Goodwill                                                                              |       | 7,374                |       | 7,374                |       |
| Non-compete agreements                                                                |       | 1,009                |       | 1,178                |       |
| Other assets                                                                          |       | 1,612                |       | 1,493                |       |
|                                                                                  |       |                 |       |                 |       |
|                                                                                  |       | $                    | 80,054     |                 | $          | 81,826 |   |
|                                                                                  |       |                 |       |                 |       |
| ***LIABILITIES***                                                                     |       |                 |       |                 |       |
| Current  liabilities:                                                                 |       |                 |       |                 |       |
| Bank loan payable                                                                     |       | $                    | 100        |                 | $          | — |   |
| Current portion of long-term debt                                                     |       | 2,000                |       | 1,970                |       |
| Accounts payable and accrued expenses                                                 |       | 14,093               |       | 13,504               |       |
| Income taxes                                                                          |       | 617                  |       | 700                  |       |
| Total current liabilities                                                             |       | 16,810               |       | 16,174               |       |
|                                                                                  |       |                 |       |                 |       |
| Long-term debt                                                                        |       | 7,500                |       | 9,000                |       |
| Deferred income taxes                                                                 |       | 3,219                |       | 3,219                |       |
| Other long-term liabilities                                                           |       | 2,273                |       | 2,576                |       |
|                                                                                  |       |                 |       |                 |       |
| ***SHAREHOLDERS’ EQUITY***                                                       |       |                 |       |                 |       |
| Common shares, $0.25 par value; authorized 3,000,000  shares; issued 2,574,264 shares |       | 643                  |       | 643                  |       |
| Capital in excess of par value                                                        |       | 1,982                |       | 1,982                |       |
| Retained earnings                                                                     |       | 61,262               |       | 60,200               |       |
| Accumulated other comprehensive losses  (interest rate swap adjustments)              |       | (112                 | )          | (265                 | )          |
| Treasury shares, 917,837 and 853,901, at  cost                                        |       | (13,523              | )          | (11,703              | )          |
|                                                                                  |       | 50,252               |       | 50,857               |       |
|                                                                                  |       |                 |       |                 |       |
|                                                                                  |       | $                    | 80,054     |                 | $          | 81,826 |   |

 

See accompanying notes

 

2

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CONTINENTAL MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS ANDRETAINED EARNINGS

FOR THE THREE MONTHS ENDED OCTOBER 2, 2004AND SEPTEMBER 27, 2003

(Unaudited)

(000’s omitted except per-share amounts)

 
| ** **                                                              | ** ** | **OCTOBER 2,  2004** | ** ** | **SEPTEMBER 27,  2003** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------|------------|-------------------------|------------|
|                                                                    |       |                 |       |                    |       |
| Sales                                                                   |       | $                    | 30,900     |                    | $          | 30,139 |   |
|                                                                    |       |                 |       |                    |       |
| Costs and expenses:                                                     |       |                 |       |                    |       |
| Cost of sales (exclusive of depreciation, depletion  and amortization)  |       | 24,736               |       | 23,382                  |       |
| Depreciation, depletion and amortization                                |       | 1,421                |       | 1,517                   |       |
| Selling and administrative                                              |       | 3,756                |       | 4,036                   |       |
|                                                                    |       |                 |       |                    |       |
| Gain on disposition of property and  equipment                          |       | 24                   |       | 51                      |       |
|                                                                    |       |                 |       |                    |       |
| Operating income                                                        |       | 1,011                |       | 1,255                   |       |
|                                                                    |       |                 |       |                    |       |
| Interest                                                                |       | (154                 | )          | (206                    | )          |
| Other income, net                                                       |       | 59                   |       | 40                      |       |
|                                                                    |       |                 |       |                    |       |
| Income before income taxes                                              |       | 916                  |       | 1,089                   |       |
|                                                                    |       |                 |       |                    |       |
| Provision for income taxes                                              |       | 330                  |       | 382                     |       |
|                                                                    |       |                 |       |                    |       |
| Net income                                                              |       | 586                  |       | 707                     |       |
|                                                                    |       |                 |       |                    |       |
| Retained earnings, beginning of period                                  |       | 60,676               |       | 57,466                  |       |
| ** **                                                              | ** ** | ** **           | ** ** | ** **              | ** ** |
| Retained earnings, end of period                                        |       | $                    | 61,262     |                    | $          | 58,173 |   |
|                                                                    |       |                 |       |                    |       |
| Basic earnings per share                                                |       | $                    | .35        |                    | $          | .41 |   |
|                                                                    |       |                 |       |                    |       |
| Average shares outstanding                                              |       | 1,663                |       | 1,744                   |       |
|                                                                    |       |                 |       |                    |       |
| Diluted earnings per share                                              |       | $                    | .34        |                    | $          | .40 |   |
|                                                                    |       |                 |       |                    |       |
| Average shares outstanding                                              |       | 1,699                |       | 1,779                   |       |
|                                                                    |       |                 |       |                    |       |
| Comprehensive income:                                                   |       |                 |       |                    |       |
| Net income (loss)                                                       |       | $                    | 586        |                    | $          | 707 |   |
| Comprehensive income from interest rate  swap, net of tax of $6 and $40 |       | 8                    |       | 80                      |       |
|                                                                    |       | $                    | 594        |                    | $          | 787 |   |

 

See accompanying notes

 

3

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CONTINENTAL MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS ANDRETAINED EARNINGS

FOR THE NINE MONTHS ENDED OCTOBER 2, 2004 ANDSEPTEMBER 27, 2003

(Unaudited)

(000’s omitted except per-share amounts)

 
| ** **                                                               | ** ** | **OCTOBER 2,  2004** | ** ** | **SEPTEMBER 27,  2003** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------|------------|-------------------------|------------|
|                                                                     |       |                 |       |                    |       |
| Sales                                                                    |       | $                    | 92,724     |                    | $          | 88,440 |   |
|                                                                     |       |                 |       |                    |       |
| Costs and expenses:                                                      |       |                 |       |                    |       |
| Cost of sales (exclusive of depreciation, depletion  and amortization)   |       | 74,595               |       | 70,483                  |       |
| Depreciation, depletion and amortization                                 |       | 4,040                |       | 4,644                   |       |
| Selling and administrative                                               |       | 12,269               |       | 12,411                  |       |
|                                                                     |       |                 |       |                    |       |
| Gain on disposition of property and  equipment                           |       | 242                  |       | 51                      |       |
|                                                                     |       |                 |       |                    |       |
| Operating income                                                         |       | 2,062                |       | 953                     |       |
|                                                                     |       |                 |       |                    |       |
| Interest                                                                 |       | (465                 | )          | (565                    | )          |
| Other income, net                                                        |       | 63                   |       | 108                     |       |
|                                                                     |       |                 |       |                    |       |
| Income before income taxes                                               |       | 1,660                |       | 496                     |       |
|                                                                     |       |                 |       |                    |       |
| Provision for income taxes                                               |       | 598                  |       | 174                     |       |
|                                                                     |       |                 |       |                    |       |
| Net income                                                               |       | 1,062                |       | 322                     |       |
|                                                                     |       |                 |       |                    |       |
| Retained earnings, beginning of period                                   |       | 60,200               |       | 57,851                  |       |
|                                                                     |       |                 |       |                    |       |
| Retained earnings, end of period                                         |       | $                    | 61,262     |                    | $          | 58,173 |   |
|                                                                     |       |                 |       |                    |       |
| Basic earnings per share                                                 |       | $                    | .63        |                    | $          | .18 |   |
|                                                                     |       |                 |       |                    |       |
| Average shares outstanding                                               |       | 1,690                |       | 1,763                   |       |
|                                                                     |       |                 |       |                    |       |
| Diluted earnings per share                                               |       | $                    | .62        |                    | $          | .18 |   |
|                                                                     |       |                 |       |                    |       |
| Average shares outstanding                                               |       | 1,726                |       | 1,798                   |       |
|                                                                     |       |                 |       |                    |       |
| Comprehensive income:                                                    | ** ** | ** **           | ** ** | ** **              | ** ** |
| Net income (loss)                                                        |       | $                    | 1,062      |                    | $          | 322 |   |
| Comprehensive income from interest rate  swap, net of tax of $56 and $43 |       | 153                  |       | 80                      |       |
|                                                                     |       | $                    | 1,215      |                    | $          | 402 |   |

 

See accompanying notes

 

4

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CONSOLIDATED MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED OCTOBER 2, 2004 ANDSEPTEMBER 27, 2003

(Unaudited)

(000’s omitted)

 
| ** **                                        | ** ** | **OCTOBER 2,  2004** | ** ** | **SEPTEMBER 27,  2003** | ** ** |
|---------------------------------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **                                        | ** ** | ** **           | ** ** | ** **              | ** ** |
| Net cash provided by operating activities         |       | $                    | 1,413      |                    | $          | 4,623 |   |
|                                              |       |                 |       |                    |       |
| Investing activities:                             |       |                 |       |                    |       |
| Capital expenditures                              |       | (3,178               | )          | (1,988                  | )          |
| Proceeds from sale of property and  equipment     |       | 346                  |       | 213                     |       |
| Net cash used in investing activities             |       | (2,832               | )          | (1,775                  | )          |
|                                              |       |                 |       |                    |       |
| Financing activities:                             |       |                 |       |                    |       |
| Borrowings under the revolving credit  facility   |       | 100                  |       | —                  |       |
| Repayment of long-term debt                       |       | (1,470               | )          | (1,755                  | )          |
| Payment to acquire treasury stock                 |       | (1,820               | )          | (979                    | )          |
| Net cash used in financing activities             |       | (3,190               | )          | (2,734                  | )          |
|                                              |       |                 |       |                    |       |
| Net decrease in cash and cash equivalents         |       | (4,609               | )          | 114                     |       |
| Cash and cash equivalents:                        |       |                 |       |                    |       |
| Beginning of period                               |       | 4,609                |       | 3,536                   |       |
|                                              |       |                 |       |                    |       |
| End of period                                     |       | $                    | —     |                    | $          | 3,650 |   |
|                                              |       |                 |       |                    |       |
| Supplemental disclosures of cash flow  items:     |       |                 |       |                    |       |
| Cash paid (refunded) during the nine months  for: |       |                 |       |                    |       |
| Interest                                          |       | $                    | 516        |                    | $          | 689 |   |
| Income taxes                                      |       | 695                  |       | (140                    | )          |

 

See accompanying notes

 

5

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CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONSOLIDATED FINANCIALSTATEMENTS

QUARTER ENDED OCTOBER 2, 2004

(Unaudited)

 

1.               The unaudited interim consolidatedfinancial statements included herein are prepared pursuant to the rules andregulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normallyaccompanying the annual financial statements have been omitted.  The interim financial statements and notesshould be read in conjunction with the consolidated financial statements andnotes thereto included in the Company’s latest annual report on Form 10-Kincluding any amendments thereto.  In theopinion of management, the consolidated financial statements include alladjustments (none of which were other than normal recurring adjustments)necessary for a fair statement of the results for the interim periods.

 

2.               The provision for income taxes is basedupon the estimated effective of tax rate of 36% for the year.

 

3.               Operating results for the first ninemonths of 2004 are not necessarily indicative of performance for the entireyear.  Historically, sales of constructionmaterials are higher in the second and third quarters.  Overall, sales of heating and airconditioning products have not shown strong seasonal fluctuations in recentyears although product mix has historically yielded higher gross profit marginsin the fourth quarter.  (See Note 10 ofNotes to Consolidated Financial Statements in the Company’s 2003 Annual Report onForm 10-K.)

 

4.               The Consolidated Statements ofOperations and Retained Earnings for the Nine Month and Three Month PeriodsEnded September 27, 2003 have been revised to change the classification ofgains on disposition of property and equipment from other income to operatingincome.

 

5.               The following is a reconciliation of thecalculation of basic and diluted earnings (loss) per share (EPS) for the threeand nine months ended October 2, 2004 and September 27, 2003 (amounts inthousands except per-share data).

 
| ** **                 | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **Income**             | ** ** | **Shares**            | ** ** | **Per-  share  earnings** | ** ** | **Income  (loss)** | ** ** | **Shares** | ** ** | **Per-share  earnings  (loss)** | ** ** |
| October 2, 2004            |       |                   |       |                  |       |   |   |   |   |   |   |   |   |
| Basic EPS                  |       | $                      | 586        |                  | 1,663      |   | $ | .35 |   | $ | 1,062 |   | 1,690 |   | $ | .63 |   |
| Effect of dilutive options |       | —                 |       | 36                    |       |   |   | — |   | 36 |   |   |   |
| Diluted EPS                |       | $                      | 586        |                  | 1,699      |   | $ | .34 |   | $ | 1,062 |   | 1,726 |   | $ | .62 |   |
|                       |       |                   |       |                  |       |   |   |   |   |   |   |   |   |
| September 27, 2003         |       |                   |       |                  |       |   |   |   |   |   |   |   |   |
| Basic EPS                  |       | $                      | 707        |                  | 1,744      |   | $ | .41 |   | $ | 322 |   | 1,763 |   | $ | .18 |   |
| Effect of dilutive options |       | —                 |       | 35                    |       |   |   | — |   | 35 |   |   |   |
| Diluted EPS                |       | $                      | 707        |                  | 1,779      |   | $ | .40 |   | $ | 322 |   | 1,798 |   | $ | .18 |   |

 

6.               The following table presents informationabout the Company’s reported segments for the nine- and three-month periodsended October 2, 2004 and September 27, 2003 along with the items necessary toreconcile the segment information to the totals reported in the financialstatements (amounts in thousands).

 

6

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| ** **                       | ** ** | **Heating and Air  Conditioning** | ** ** | **Construction  Materials** | ** ** | **All Other** | ** ** | **Unallocated  Corporate** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|---------------|------------|----------------------------|------------|-----------|------------|
| 2004                             |       |                              |       |                        |       |          |       |                       |       |      |       |
| Nine Months                      |       |                              |       |                        |       |          |       |                       |       |      |       |
| Revenues from external customers |       | $                                 | 33,182     |                        | $          | 59,282        |       | $                          | 258        |      | $          | 2 |   | $ | 92,724 |   |
| Segment operating income (loss)  |       | 1,767                             |       | 2,835                       |       | 66            |       | (2,606                     | )          | 2,062     |       |
| Segment assets                   |       | 27,508                            |       | 50,365                      |       | 264           |       | 1,917                      |       | 80,054    |       |
| Three Months                     |       |                              |       |                        |       |          |       |                       |       |      |       |
| Revenues from external customers |       | 9,070                             |       | 21,744                      |       | 86            |       | —                     |       | 30,900    |       |
| Segment operating income (loss)  |       | 210                               |       | 1,539                       |       | 27            |       | (765                       | )          | 1,011     |       |
|                             |       |                              |       |                        |       |          |       |                       |       |      |       |
| 2003                             |       |                              |       |                        |       |          |       |                       |       |      |       |
| Nine Months                      |       |                              |       |                        |       |          |       |                       |       |      |       |
| Revenues from external customers |       | $                                 | 34,627     |                        | $          | 53,569        |       | $                          | 242        |      | $          | 2 |   | $ | 88,440 |   |
| Segment operating (loss) income  |       | 2,405                             |       | 658                         |       | 2             |       | (2,112                     | )          | 953       |       |
| Segment assets                   |       | 25,007                            |       | 49,179                      |       | 132           |       | 6,103                      |       | 80,421    |       |
| Three Months                     |       |                              |       |                        |       |          |       |                       |       |      |       |
| Revenues from external customers |       | 10,024                            |       | 20,028                      |       | 86            |       | 1                          |       | 30,139    |       |
| Segment operating income (loss)  |       | 661                               |       | 1,286                       |       | 10            |       | (702                       | )          | 1,255     |       |

 

Thereare no differences in the basis of segmentation or in the basis of measurementof segment profit or loss from the 2003 Annual Report except for thereclassification of the gain on disposition of property and equipment tooperating income from other income for this report.

 

7.               The interest rate swap agreement isreported consistent with SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities,” and its related amendment, SFAS No. 138, “Accountingfor Certain Derivative Instruments and Certain Hedging Activities,” whichrequire recognition of derivatives as either assets or liabilities andmeasurement at fair value.  The change inaccumulated other comprehensive losses, net of taxes, from January 3, 2004 toOctober 2, 2004 was as follows (amounts in thousands):

 
| Balance at January 3, 2004                                       |   | $    | (265   | ) |
|------------------------------------------------------------------|--------|------|--------|---|
| Comprehensive income from interest rate  swap, net of tax of $50 |   | 145  |   |
| Balance at July 3, 2004                                          |   | (120 | )      |
| Comprehensive income from interest rate  swap, net of tax of $6  |   | 8    |   |
| Balance at October 2, 2004                                       |   | $    | (112   | ) |

 

7

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

** **

Company Overview

 

The Company operates primarily in two industry segments throughwholly-owned subsidiaries: the heating and air conditioning segment and theconstruction materials segment.  Theprimary products manufactured by the heating and air conditioning segment aregas-fired wall furnaces, console heaters, evaporative coolers and fan coils.  Gas-fired wall furnaces, console heaters andfan coil products are manufactured at Williams Furnace Co., headquartered inColton, California.  Evaporative coolersare manufactured at Phoenix Manufacturing, Inc., headquartered in Phoenix,Arizona.  The primary products of theconstruction materials segment are ready mix concrete, construction aggregates,building supplies and doors, which are offered by Transit Mix Concrete Co. andCastle Concrete Company in Colorado Springs, Colorado and Transit Mix of Pueblo,Inc. and McKinney Door and Hardware, Inc. in Pueblo, Colorado.  Currently, Rocky Mountain Ready Mix Concrete,Inc. of Denver, Colorado, only offers ready mix concrete.

 

Financial Condition 

 

A significant portion of the Company’s businesstends to seasonally fluctuate. Historically, the Company has experienced operating losses during thefirst quarter except when the weather is mild along the Front Range inColorado.  Operating results typicallyimprove in the second and third quarters reflecting more favorable weatherconditions in Colorado and the seasonal sales of evaporative coolers.  Fourth quarter results can vary based onweather conditions in Colorado as well as in the principal markets for theCompany’s heating equipment.  Sales offan coils are generally not subject to seasonal variation.  The cash

balance is normally depleted during the first orsecond quarter of the year reflecting the Company’s operating results and theuse of sales dating programs related to the evaporative cooler product line.  As a result, the Company’s borrowings againstits revolving credit facility tend to peak during the second quarter and thendecline over the remainder of the year. This trend has continued thus far in2004.

 

Asexpected, the Company’s cash flow during the third quarter was positive due tothe seasonality of sales, the corresponding production schedules and the salesdating programs related to the evaporative cooler product line.  This positive cash flow allowed the Companyto reduce the short-term debt by $3,300,000 and to make the scheduled $500,000payment on the long-term debt during the third quarter.  Operations for the first nine months of 2004provided $1,413,000 of cash compared to $4,623,000 in 2003.  The decrease in cash provided during the firstnine months of 2004 was primarily due to increases in inventories andreceivables.  The Company experienced asignificantly larger increase in inventories during the first nine months of2004 as compared to the increase in inventories during the 2003 period.  The higher inventory level was primarily inthe evaporative cooler line where strong sales volume in June and July of 2003significantly depleted inventory levels compared to the lower sales volume inJune and July of 2004, leaving inventories well above the plan.  In addition, a large retail customer returnedinventory unsold at the end of the 2004 cooling season.  Adjustments have been made to the evaporativecooler production schedule for the remainder of the year.  Receivables increased more during the 2004nine month period reflecting the increase in sales.

 

Theconstruction materials segment typically requires large capital investments,particularly when sales volume and demand are strong.  Reflecting the more modest demand in theconstruction materials segment during the past two years, capital spending

 

8

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wasmuch lower during the first nine months of both 2004 and 2003 as compared toexpenditures from the mid-1990’s through 2001. Capital expenditures during the first nine months of 2004 were primarilyin this segment and included earth moving equipment, construction of a batchplant and the completion of the new maintenance facility in Pueblo, developmentof an aggregates site and a truck-tracking system for the concrete operations.

 

Scheduleddebt repayments were made during the first nine months of both 2004 and2003.  The decrease in the 2004 paymentsreflects the quarterly payback schedule under the Company’s new RevolvingCredit and Term Loan Agreement signed during September 2003 as compared to thesemi-annual payment schedule under the previous agreement.

 

TheCompany believes that anticipated cash flow from operations, supplemented byseasonal borrowings against the revolving line of credit (of which $100,000 wasoutstanding at October 2, 2004), will be sufficient to cover expected cashneeds, including servicing debt and planned capital expenditures for at leastthe next twelve months.

 

Operations – Comparison of Quarter EndedOctober 2, 2004 to Quarter Ended September 27, 2003

 

Consolidatedsales during the quarter ended October 2, 2004 were $761,000 (2.5%) higher thanconsolidated sales during the third quarter of 2003. The construction materialssegment reported an increase in sales of $1,716,000 (8.6%) during the 2004quarter largely due to increased concrete volume in the Denver and Pueblomarkets. Concrete selling prices in Colorado Springs and Pueblo were steady;however, the Denver market continues to experience intense price competition.Sales declined $954,000 (9.5%) in the heating and air conditioning segment. Thedecrease was primarily due to lower evaporative cooler sales as a result oflosing the window unit business at a large retail customer exacerbated by thereturn of inventory unsold at the end of the cooling season by that samecustomer. Sales of window units are historically concentrated in the months ofMay, June and July. A small decline in fan coil sales was more than offset byan increase in furnace sales which is believed to be timing related as theheating season begins.

 

Consolidatedcost of sales (exclusive of depreciation and depletion) as a percentage ofsales increased from 77.6% to 80.1%.  Theincrease was experienced by the heating and air conditioning segment wheredramatically higher material/commodity prices, notably steel, copper andaluminum, have negatively impacted margins. Although the construction materialssegment has endured higher cement and gasoline prices, a small improvement inmargins was realized as the market accepted some price increases and highervolume aided margins as certain costs of sales are relatively fixed in nature.

 

The reduction in depreciation, depletion and amortization expense from$1,517,000 to $1,421,000 is the direct result of the decreased capital spendinglevels since 2002.

 

Sellingand administrative expenses declined both in real dollars and as a percentageof sales as various compensation accruals were adjusted down during the quarterto reflect current expectations.

 

Netinterest expense declined primarily due to the lower debt balance as well aslower average interest rates during the third quarter of 2004.

 

9

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Operations - Comparison of Nine Months EndedOctober 2, 2004 to Nine Months Ended September 27, 2003

 

Consolidatedsales for the nine months ended October 2, 2004 increased $4,284,000 (4.8%)when compared to the nine months ended September 27, 2003.  Sales in the construction materials segmentimproved $5,713,000 (10.1%).  Theincrease was due to the reasons noted above as well as a sharp increase in thesales of doors and supplies, especially during the second quarter of 2004 ascompared to the same period of 2003. The heating and air conditioning segmentreported a decrease of $1,445,000 (4.2%) primarily due to the decline inevaporative cooler sales during the second and third quarters of 2004 as notedabove.

 

The gain on the disposition of property andequipment increased due to the sale of a historic barn during the secondquarter of 2004.  The barn was situatedon a parcel of land adjacent to our batch plant location in west Pueblo whichwas acquired in 1996 along with other operating assets of a Pueblo ready mixconcrete and aggregates producer.

 

Costof sales (exclusive of depreciation and depletion) as a percentage of salesincreased from 79.7% to 81.4%.  Theincrease in the cost of sales percentage was incurred in the heating and airconditioning segment due to the higher material/commodity prices noted above.Partially offsetting this increase was the small improvement in the margins ofthe construction materials segment for the reasons noted above as well asimproved operations during the first quarter of 2004.

 

Thechanges in depreciation, depletion and amortization and selling andadministrative expenses are due to the reasons noted.

 

Thedecline in interest expense is due to the reasons noted above partially offsetby receipt during the first quarter of 2003 of approximately $62,000 ofinterest related to state tax refunds.

 

Asdescribed in the Financial Condition section above, a significant portion ofthe Company’s business tends to seasonally fluctuate. The 2004 operating results have, thusfar, been consistent with this trend.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The condensed and consolidated financial statements have been preparedin accordance with accounting principles generally accepted in the UnitedStates. Some of these accounting principles require management to makeestimates, assumptions and decisions that may significantly affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of October2, 2004 and January 3, 2004 and affect the reported amounts of revenues andexpenses for the periods reported. Actual results could differ from thoseestimates. Information with respect to the Company’s critical accountingpolicies that management believes could have the most significant effect on theCompany’s reported results is contained on pages 13 and 14 in Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations, of the Company’s Annual Report on Form 10-K for the fiscal yearended January 3, 2004.

 

OUTLOOK

 

The depressed commercial construction market nationwide, notably hotelconstruction, is expected to continue into the near future. The constructionmarket in Colorado continues to show some signs of stabilizing but stillremains considerably weaker than the conditions that prevailed three to fiveyears ago.  Concrete prices in the Denvermarket are expected to remain very competitive.

 

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RECENTLY ISSUED ACCOUNTING STANDARDS

 

The Company does notcurrently have any transactions or circumstances that have been addressed byrecently issued accounting pronouncements. Therefore, adoption of any of thesestatements or pronouncements would not have a material impact on the Company’sresults of operations, financial position or liquidity.

 

FORWARD-LOOKINGSTATEMENTS

 

Theforegoing discussion contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended.  Such forward-looking statements are based onthe beliefs of the Company’s management as well as on assumptions made by andinformation available to the Company at the time such statements weremade.  When used in this Report, wordssuch as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,”“projects,” and similar expressions are intended to identify forward-lookingstatements.  Actual results could differmaterially from those projected in the forward-looking statements as a resultof factors including but not limited to: weather, interest rates, availabilityof raw materials and their related costs, national and local economicconditions and competitive forces. Changes in accounting pronouncements could also alter projectedresults.  Forward-looking statementsspeak only as of the date they were made, and the Company undertakes noobligation to publicly update them.

 

**Item 3.****          ****Quantitative And QualitativeDisclosures About Market Risk**

 

Therehave been no changes in the market risks that the Company is exposed to sincethose discussed in the Company’s 2003 Annual Report on Form 10-K.  At October 2, 2004, the amount subject to theinterest rate swap agreement was $7,500,000. Also see Note 7 to the quarterly financial statements above.

 

**Item 4.    Controls and Procedures**

 

Disclosurecontrols and procedures.

 

TheCompany’s chief executive officer and chief financial officer, with theparticipation of management, have evaluated the effectiveness of the Company’s “disclosurecontrols and procedures” (as defined in Rules 13a-15(e) under the SecuritiesExchange Act of 1934) as of the end of the period covering this report.  Based on their evaluation, they haveconcluded that the Company’s disclosure controls and procedures are effectivein timely alerting them to material information relating to the Company(including its subsidiaries) required to be disclosed in this quarterly reportand no changes are required at this time.

 

Changesin internal control over financial reporting.

 

Therewere no significant changes in the Company’s internal control over financialreporting identified by the Company’s chief executive officer and chieffinancial officer, with the participation of management, in connection with theevaluation of such internal control over financial reporting that occurredduring the last fiscal quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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PART II – OtherInformation

 
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
|---------|-------------------------------------------------------------|

 

The following table presents information with respect to purchases madeby the Company of its common stock to become treasury stock for the period July4 through October 2, 2004.

 

Issuer Purchases of Equity Securities

 
| **Period**                       | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid per  Share** | ** ** | **(c) Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs** | ** ** | **(d) Maximum Dollar  Value of shares that  May Yet Be Purchased  Under the Plans or  Programs** | ** ** |
|----------------------------------|------------|---------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| July 4 – July 31, 2004      |       | 2,100                                       |       | $                                      | 28.26      |                                                                                         | 477,099    |                                                                                             | $          | 1,990,292 |   |
| August 1 – August 28, 2004  |       | 6,500                                       |       | 28.05                                  |       | 483,599                                                                                      |       | 1,807,938                                                                                        |       |
| August 29 – October 2, 2004 |       | 4,900                                       |       | 29.04                                  |       | 488,499                                                                                      |       | 1,665,658                                                                                        |       |
| Total                            |       | 13,500                                      |       | $                                      | 28.44      |                                                                                         | 488,499    |                                                                                             | $          | 1,665,658 |   |

 

On January 19, 1999, the Company established the current open-endedprogram to repurchase its common stock. Purchases are made on the open marketor in block trades at the discretion of management. The dollar amountauthorized for the program has been periodically increased by the Board ofDirectors and approved by the Company’s two banks as required by the Company’sRevolving Credit and Term Loan Agreement. Effective May 29, 2003, the Boardincreased the permitted amount to a total not to exceed $2,750,000 forpurchases on or after May 29, 2004.

 
| Item 6. | Exhibits |   |
|---------|----------|--------|

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                 |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                            |
| 31.1             |       | Certification of Chief Executive Officer pursuant to Rule 13a-14(a),  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                      |
|             |       |                                                                                                                                                                            |
| 31.2             |       | Certification of Chief Financial Officer pursuant to Rule 13a-14(a),  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                      |
|             |       |                                                                                                                                                                            |
| 32               |       | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

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SIGNATURE

 

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 theundersigned thereunto duly authorized.

 

 
|   | CONTINENTAL MATERIALS CORPORATION |
|--------|-----------------------------------|
|   |                              |   |
|   |                              |   |
| Date:  | November 16, 2004                 |   | By: | /S/ Joseph J. Sum |   |
|   |                              | Joseph J. Sum, Vice President  and Chief Financial Officer |
|        |                                   |  |  |  |  |

 

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