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

**Washington, D.C.  20549**

** **

**FORM 10-Q**

** **
| **(Mark One)**                                                                                    |
|---------------------------------------------------------------------------------------------------|
|                                                                                              |
| **ý**                                                                                        | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                                                              |
| **For the quarterly period ending  September 27, 2003**                                      |
|                                                                                              |
| **OR**                                                                                            |
|                                                                                              |
| **o**                                                                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(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  its charter)                      |
|                                                                         |   |   |
| **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 office)  (Zip Code)                          |
|                                                                         |
| **(312) 541-7200**                                                           |
| (Registrant’s telephone number, including  area code)                   |
|                                                                         |   |   |
|                                                                         |   |   |
| (Former name, former address and former  year, if changed since last report) |

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes   ý   No   o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 

Yes   o   No   ý

 

Number of common shares outstanding at November 3,2003               **1,734,763**

 

 

----

 

PART I - FINANCIAL INFORMATION

 

**Item 1.   Financial Statements**

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 27, 2003 and DECEMBER 28,2002

(000’s omitted except share data)

 
|                                                                                                 |   | **SEPTEMBER 27,  2003** |         | **DECEMBER 28,  2002** |         |
|------------------------------------------------------------------------------------------------------|--------|------------------------------|--------------|-----------------------------|--------------|
|                                                                                                 |   | **(Unaudited)**              |         |                        |         |
| ***ASSETS***                                                                                         |   |                         |         |                        |         |
| Current assets:                                                                                      |   |                         |         |                        |         |
| Cash and cash equivalents                                                                            |   | $                            | 3,650        |                        | $            | 3,536 |   |
| Receivables, net                                                                                     |   | 17,115                       |         | 16,740                      |         |
| Inventories:                                                                                         |   |                         |         |                        |         |
| Finished goods                                                                                       |   | 7,654                        |         | 6,855                       |         |
| Work in process                                                                                      |   | 1,300                        |         | 1,523                       |         |
| Raw materials and supplies                                                                           |   | 6,059                        |         | 6,214                       |         |
| Prepaid expenses                                                                                     |   | 3,285                        |         | 3,530                       |         |
| Total current assets                                                                                 |   | 39,063                       |         | 38,398                      |         |
|                                                                                                 |   |                         |         |                        |         |
| Property, plant and equipment, net                                                                   |   | 31,383                       |         | 34,033                      |         |
|                                                                                                 |   |                         |         |                        |         |
| Goodwill                                                                                             |   | 7,374                        |         | 7,374                       |         |
| Non-compete agreements                                                                               |   | 1,235                        |         | 1,403                       |         |
| Other assets                                                                                         |   | 1,366                        |         | 1,426                       |         |
|                                                                                                 |   |                         |         |                        |         |
|                                                                                                 |   | **$**                        | **80,421**   | ** **                  | **$**        | **82,634** | ** ** |
|                                                                                                 |   |                         |         |                        |         |
| ***LIABILITIES***                                                                                    |   |                         |         |                        |         |
| Current  liabilities:                                                                                |   |                         |         |                        |         |
| Current portion of long-term debt                                                                    |   | $                            | 1,890        |                        | $            | 3,300 |   |
| Accounts payable and accrued expenses                                                                |   | 13,869                       |         | 13,358                      |         |
| Income taxes                                                                                         |   | —                       |         | 308                         |         |
| Total current liabilities                                                                            |   | 15,759                       |         | 16,966                      |         |
|                                                                                                 |   |                         |         |                        |         |
| Long-term debt                                                                                       |   | 9,875                        |         | 10,220                      |         |
| Deferred income taxes                                                                                |   | 3,037                        |         | 3,037                       |         |
| Other long-term liabilities                                                                          |   | 2,338                        |         | 2,422                       |         |
|                                                                                                 |   |                         | *** *** |                        | *** *** |
| ***SHAREHOLDERS’ EQUITY***                                                                      |   |                         |         |                        |         |
| Common shares, $0.25 par value; authorized  3,000,000; issued 2,574,264                              |   | 643                          |         | 643                         |         |
| Capital in excess of par value                                                                       |   | 1,982                        |         | 1,982                       |         |
| Retained earnings                                                                                    |   | 58,173                       |         | 57,851                      |         |
| Accumulated other comprehensive losses net  of tax of $174 and $216 (interest rate swap adjustments) |   | (324                         | )            | (404                        | )            |
| Treasury shares, 830,759 and 790,766 at  cost                                                        |   | (11,062                      | )            | (10,083                     | )            |
|                                                                                                 |   | 49,412                       |         | 49,989                      |         |
|                                                                                                 |   |                         |         |                        |         |
|                                                                                                 |   | **$**                        | **80,421**   | ** **                  | **$**        | **82,634** | ** ** |

 

See accompanying notes

 

2

----

 

 

CONTINENTAL MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS ANDRETAINED EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 27,2003 AND SEPTEMBER 28, 2002

(Unaudited)

(000’s omitted except per share amounts)

 
|                                                                   |   | **SEPTEMBER 27,  2003** |       | **SEPTEMBER 28,  2002** |       |
|------------------------------------------------------------------------|--------|------------------------------|------------|------------------------------|------------|
|                                                                   |   |                         |       |                         |       |
| Sales                                                                  |   | $                            | 30,139     |                         | $          | 32,503 |   |
|                                                                   |   |                         |       |                         |       |
| Costs and expenses:                                                    |   |                         |       |                         |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization) |   | 23,382                       |       | 24,933                       |       |
| Depreciation, depletion and amortization                               |   | 1,517                        |       | 1,536                        |       |
| Selling and administrative                                             |   | 4,036                        |       | 4,303                        |       |
|                                                                   |   | 28,935                       |       | 30,772                       |       |
|                                                                   |   |                         |       |                         |       |
| Operating income                                                       |   | 1,204                        |       | 1,731                        |       |
|                                                                   |   |                         |       |                         |       |
| Interest                                                               |   | (206                         | )          | (223                         | )          |
| Other income, net                                                      |   | 91                           |       | 85                           |       |
|                                                                   |   |                         |       |                         |       |
| Income before income taxes                                             |   | 1,089                        |       | 1,593                        |       |
|                                                                   |   |                         |       |                         |       |
| Provision for income taxes                                             |   | 382                          |       | 557                          |       |
|                                                                   |   |                         |       |                         |       |
| Net income                                                             |   | 707                          |       | 1,036                        |       |
|                                                                   |   |                         |       |                         |       |
| Retained earnings, beginning of period                                 |   | 57,466                       |       | 55,684                       |       |
|                                                                   |   |                         | ** ** |                         | ** ** |
| Retained earnings, end of period                                       |   | $                            | 58,173     |                         | $          | 56,720 |   |
|                                                                   |   |                         |       |                         |       |
| Basic earnings per share                                               |   | $                            | .41        |                         | $          | .58 |   |
|                                                                   |   |                         |       |                         |       |
| Average shares outstanding                                             |   | 1,744                        |       | 1,787                        |       |
|                                                                   |   |                         |       |                         |       |
| Diluted earnings per share                                             |   | $                            | .40        |                         | $          | .57 |   |
|                                                                   |   |                         |       |                         |       |
| Average shares outstanding                                             |   | 1,779                        |       | 1,823                        |       |

 

See accompanying notes

 

3

----

 

CONTINENTAL MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS ANDRETAINED EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 27,2003 AND SEPTEMBER 28, 2002

(Unaudited)

(000’s omitted except per share amounts)

 
|                                                                   |   | **SEPTEMBER 27,  2003** |   | **SEPTEMBER 28,  2002** |   |
|------------------------------------------------------------------------|--------|------------------------------|--------|------------------------------|--------|
|                                                                   |   |                         |   |                         |   |
| Sales                                                                  |   | $                            | 88,440 |                         | $      | 96,529 |   |
|                                                                   |   |                         |   |                         |   |
| Costs and expenses:                                                    |   |                         |   |                         |   |
| Cost of sales (exclusive of depreciation,  depletion and amortization) |   | 70,483                       |   | 75,166                       |   |
| Depreciation, depletion and amortization                               |   | 4,644                        |   | 4,587                        |   |
| Selling and administrative                                             |   | 12,411                       |   | 13,195                       |   |
|                                                                   |   | 87,538                       |   | 92,948                       |   |
|                                                                   |   |                         |   |                         |   |
| Operating income                                                       |   | 902                          |   | 3,581                        |   |
|                                                                   |   |                         |   |                         |   |
| Interest                                                               |   | (565                         | )      | (715                         | )      |
| Other income, net                                                      |   | 159                          |   | 432                          |   |
|                                                                   |   |                         |   |                         |   |
| Income before income taxes                                             |   | 496                          |   | 3,298                        |   |
|                                                                   |   |                         |   |                         |   |
| Provision for income taxes                                             |   | 174                          |   | 1,154                        |   |
|                                                                   |   |                         |   |                         |   |
| Net income                                                             |   | 322                          |   | 2,144                        |   |
|                                                                   |   |                         |   |                         |   |
| Retained earnings, beginning of period                                 |   | 57,851                       |   | 54,576                       |   |
|                                                                   |   |                         |   |                         |   |
| Retained earnings, end of period                                       |   | $                            | 58,173 |                         | $      | 56,720 |   |
|                                                                   |   |                         |   |                         |   |
| Basic earnings per share                                               |   | $                            | .18    |                         | $      | 1.19 |   |
|                                                                   |   |                         |   |                         |   |
| Average shares outstanding                                             |   | 1,763                        |   | 1,797                        |   |
|                                                                   |   |                         |   |                         |   |
| Diluted earnings per share                                             |   | $                            | .18    |                         | $      | 1.17 |   |
|                                                                   |   |                         |   |                         |   |
| Average shares outstanding                                             |   | 1,798                        |   | 1,832                        |   |

 

See accompanying notes

 

4

----

 

CONSOLIDATED MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 27,2003 AND SEPTEMBER 28, 2002

(Unaudited)

(000’s omitted)
|                                                  |   | **SEPTEMBER 27,  2003** |       | **SEPTEMBER 28,  2002** |       |
|-------------------------------------------------------|--------|------------------------------|------------|------------------------------|------------|
|                                                  |   |                         | ** ** |                         | ** ** |
| Net cash provided by operating activities             |   | $                            | 4,653      |                         | $          | 3,846 |   |
|                                                  |   |                         |       |                         |       |
| Investing activities:                                 |   |                         |       |                         |       |
| Acquisitions of subsidiaries, net of cash  received   |   | —                       |       | (2,125                       | )          |
| Capital expenditures                                  |   | (1,988                       | )          | (6,740                       | )          |
| Investment in mining partnership                      |   | (30                          | )          | —                       |       |
| Proceeds from sale of property and  equipment         |   | 213                          |       | 164                          |       |
| Net cash used in investing activities                 |   | (1,805                       | )          | (8,701                       | )          |
|                                                  |   |                         |       |                         |       |
| Financing activities:                                 |   |                         |       |                         |       |
| Repayments of long term debt                          |   | (1,755                       | )          | (1,899                       | )          |
| Payments to acquire treasury stock                    |   | (979                         | )          | (548                         | )          |
| Net cash used in financing activities                 |   | (2,734                       | )          | (2,447                       | )          |
|                                                  |   |                         |       |                         |       |
| Net increase (decrease) in cash and cash  equivalents |   | 114                          |       | (7,302                       | )          |
| Cash and cash equivalents:                            |   |                         |       |                         |       |
| Beginning of period                                   |   | 3,536                        |       | 7,579                        |       |
|                                                  |   |                         |       |                         |       |
| End of period                                         |   | $                            | 3,650      |                         | $          | 277 |   |
|                                                  |   |                         |       |                         |       |
| Supplemental disclosures of cash flow  items:         |   |                         |       |                         |       |
| Cash paid during the nine months for:                 |   |                         |       |                         |       |
| Interest                                              |   | $                            | 689        |                         | $          | 906 |   |
| Income taxes                                          |   | (140                         | )          | 812                          |       |

 

Seeaccompanying notes

 

5

----

 

 

CONTINENTALMATERIALS CORPORATION

SECURITIES ANDEXCHANGE COMMISSION FORM 10-Q

NOTES TO THEQUARTERLY CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDEDSEPTEMBER 27, 2003

(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 Report on Form 10-K for the year endedDecember 28, 2002, including any amendments thereto (2002 AnnualReport).  In the opinion of management,the consolidated financial statements include all adjustments (none of whichwere other than normal recurring adjustments) necessary for a fair statement ofthe results for the interim periods.

 

2.               The provision for income taxes is basedupon the estimated effective tax rate of 35% for the year.

 

3.               The Company signed a new RevolvingCredit and Term Loan Agreement (the “Credit Agreement”) in September 2003providing for a revolving credit facility in the amount of $10,000,000 and aterm loan facility in the original principal amount of $11,500,000.  Both facilities are unsecured.  The term loan is payable in escalatingquarterly installments with final payment of all then unpaid principal, on June 30,2008.  The loan bears interest at primeor an adjusted LIBOR rate.  

 

The Company is required by the Credit Agreement to maintain certainlevels of consolidated tangible net worth, to attain certain levels of cashflow (as defined) on a rolling four-quarter basis, and to maintain certainratios including consolidated debt to earnings before interest, taxes,depreciation and amortization and excluding extraordinary items.  Additional borrowing, acquisition of stockof other companies, purchase of treasury shares and payment of cash dividendsare either limited or require prior approval by the lenders.  

 

The term loan debt matures as follows under the Credit Agreement(amounts in thousands):  

 

| 2003   |   | $     | 750    |   |
|--------|--------|-------|--------|--------|
| 2004   |   | 1,750 |   |
| 2005   |   | 2,000 |   |
| 2006   |   | 2,500 |   |
| 2007   |   | 3,000 |   |
| 2008   |   | 1,500 |   |
|   |   | $     | 11,500 |   |

 

The revolving credit facility is used for short-term cash needs andstandby letters of credit.  Interest ischarged at prime or adjusted LIBOR rates on cash borrowings.  There was no balance outstanding against therevolving credit facility as of September 27, 2003.

 

4.               Operating results for the first ninemonths of 2003 are not necessarily indicative of performance for the entireyear.  Historically, sales ofconstruction materials 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 11 ofNotes to Consolidated Financial Statements in the Company’s 2002 AnnualReport.)

 

6

----

 

5.               The following is a reconciliation of thecalculation of basic and diluted earnings per share (EPS) for the three andnine months ended September 27, 2003 and September 28, 2002 (amountsin thousands except per share data).  

 
|                       |   | **Three  months ended** |   | **Nine  months ended** |   |
|----------------------------|--------|-------------------------|--------|------------------------|--------|
|                       |   | **Income**              |   | **Shares**             |   | **Per-share  earnings** |   | **Income** |   | **Shares** |   | **Per-share  earnings** |   |
| 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 |   |
|                       |   |                    |   |                   |   |   |   |   |   |   |   |   |   |
| September 28, 2002    |   |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Basic EPS                  |   | $                       | 1,036  |                   | 1,787  |   | $ | .58 |   | $ | 2,144 |   | 1,797 |   | $ | 1.19 |   |
| Effect of dilutive options |   | —                  |   | 36                     |   |   |   | — |   | 35 |   |   |   |
| Diluted EPS                |   | $                       | 1,036  |                   | 1,823  |   | $ | .57 |   | $ | 2,144 |   | 1,832 |   | $ | 1.17 |   |

 

6.               The following table presents informationabout the Company’s reported segments for the nine-month and three-monthperiods ended September 27, 2003 and September 28, 2002 along withthe items necessary to reconcile the segment information to the totals reportedin the financial statements (amounts in thousands).

 
|                             |   | **Heating  and Air  Conditioning** |   | **Construction  Materials** |   | **All Other** |   | **Unallocated  Corporate** |   | **Total** |   |
|----------------------------------|--------|------------------------------------|--------|-----------------------------|--------|---------------|--------|----------------------------|--------|-----------|--------|
| 2003  Nine Months                |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from external customers |   | $                                  | 34,627 |                        | $      | 53,569        |   | $                          | 242    |      | $      | 2 |   | $ | 88,440 |   |
| Operating income                 |   | 2,405                              |   | 607                         |   | 2             |   | (2,112                     | )      | 902       |   |
| Assets                           |   | 25,007                             |   | 49,179                      |   | 132           |   | 6,103                      |   | 80,421    |   |
| Three Months                     |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from external customers |   | 10,024                             |   | 20,028                      |   | 86            |   | 1                          |   | 30,139    |   |
| Operating income                 |   | 661                                |   | 1,235                       |   | 10            |   | (702                       | )      | 1,204     |   |
|                             |   |                               |   |                        |   |          |   |                       |   |      |   |
| 2002  Nine Months                |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from external customers |   | $                                  | 38,266 |                        | $      | 58,152        |   | $                          | 109    |      | $      | 2 |   | $ | 96,529 |   |
| Operating income                 |   | 2,919                              |   | 3,138                       |   | (98           | )      | (2,378                     | )      | 3,581     |   |
| Assets                           |   | 30,289                             |   | 52,989                      |   | 74            |   | 1,274                      |   | 84,626    |   |
| Three Months                     |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from external customers |   | 11,121                             |   | 21,345                      |   | 36            |   | 1                          |   | 32,503    |   |
| Operating income                 |   | 724                                |   | 1,843                       |   | (9            | )      | (827                       | )      | 1,731     |   |

 

There are no differences in the basis ofsegmentation or in the basis of measurement of segment profit or loss from the2002 Annual Report.

 

7

----

 

7.               On April 1,2002, the Company acquired all of the stock of McKinney Door and Hardware, Inc.(MDHI), a refabricator and distributor of metal doors, wood doors and relatedhardware.  MDHI operates from onefacility in Pueblo, Colorado.  The$2,125,000 purchase price, net of cash received and $1,129,000 of liabilitiesand debt, was funded by available cash balances and credit sources.  The unallocated excess purchase price overfair value of net assets acquired of $900,000 has been classified asgoodwill.  The acquisition has beenaccounted for under the purchase method and accordingly, the operating resultsof MDHI have been included in the consolidated results since the date ofacquisition.

 

Identifiable intangible assets as ofSeptember 27, 2003 consist of three amortizable non-compete agreements andwere carried at $1,235,000 net of $765,000 accumulated amortization.  The pre-tax amortization expense forintangible assets during the nine-month and three-month periods endedSeptember 27, 2003 was $168,000 and $57,000, respectively.  Based upon the intangible assets recorded onthe balance sheet at September 27, 2003, amortization expense for the nextfive years is estimated to be as follows: 2003 - $225,000, 2004 -$225,000, 2005 - $225,000, 2006 - $216,000, and 2007 -$137,000.

 

8.               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.  During thethree-month and nine-month periods ended September 27, 2003, pre-tax gainsof $120,000 and $123,000, respectively, are reported under comprehensive incomeas a result of the cash flow hedge as follows (amounts in thousands):  

 
|                                                                                                                                      |   | **Three  Months Ended  September 27, 2003** |   | **Nine  Months Ended  September 27, 2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|-------------------------------------------------|--------|
| Net Income, as reported                                                                                                                   |   | $                                                | 707    |                                            | $      | 322 |   |
| Swap agreement gain, net of tax effect of  $40 and $43, respectively, for the three months and nine months ended  September 27, 2003 |   | 80                                               |   | 80                                              |   |
| Comprehensive net income                                                                                                                  |   | $                                                | 787    |                                            | $      | 402 |   |

 

**Item 2.   Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

Financial Condition (See pages 2, 4 and 5)

 

Historically,the Company has experienced operating losses during the first quarter exceptwhen the weather is mild along the Front Range in Colorado.  Operating results typically improve in thesecond and third quarters reflecting more favorable weather conditions inColorado 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.  Reflecting the operating results and the useof sales dating programs related to the evaporative cooler product line, thecash balance is normally depleted during the first or second quarter of theyear.  The Company’s borrowings againstthe revolving credit facility tend to peak during the second quarter anddecline over the remainder of the year. This trend has continued thus far in2003.

 

8

----

 

The cash balance increased consistent with the normaltrend due to the seasonality of sales as well as the collection of evaporativecooler receivables related to the sales dating programs.  Operations provided $4,653,000 in cash flowin the first nine months of 2003 compared to $3,846,000 in the first nine monthsof 2002.  Relative changes in accountspayable and accruals (including income taxes) between the periods wereresponsible for approximately $1,300,000 of the increase.  The increase in inventories during the firstnine months of 2003 used approximately $1,200,000 less cash than had been usedduring the first nine months of 2002. The decline in 2003 net earnings compared to 2002 ($1,822,000) partiallyoffset the positive cash flow effects of inventories, accounts payable andaccruals.

 

The Company acquired MDHI for $2,125,000 at thebeginning of the second quarter of 2002. Short term borrowings used for a portion of the purchase were repaidduring the third quarter of 2002 from operating cash flow.

 

Capital expenditures in the first nine months of 2003were $1,988,000 compared to $6,740,000 in the first nine months of 2002.  The majority of the capital spending in 2003was in the construction materials segment and related to the opening of theBrighton, Colorado batch plant during March 2003 and several projectsassociated with the new aggregates and concrete batching operations on the eastside of Pueblo. The unusually high level of capital spending during the firstnine months of 2002 related to four major projects as described in theManagement’s Discussion and Analysis section of the Company’s 2002 AnnualReport.  The Company has reduced thelevel of capital spending in 2003 in response to the decline in sales andproduction volume especially in the construction materials segment.

 

TheCompany expects that the operating cash flow from its subsidiaries,supplemented by the revolving line of credit (of which none was outstanding atSeptember 27, 2003) will be sufficient to cover anticipated cashrequirements, including debt service and planned capital expenditures for thenext twelve months.

 

Operations - Comparison of Quarter EndedSeptember 27, 2003 to Quarter Ended September 28, 2002 (See page 3)

 

Consolidated sales during the quarter endedSeptember 27, 2003 declined $2,364,000 (7.3%) when compared to the quarterended September 28, 2002.  Salesdecreased $1,317,000 (6.2%) in the construction materials segment. The reduced levelof construction activity along the Front Range in Colorado lead to lowervolumes and increased price competition resulting in lower ready-mixed concreteprices, most notably in the Denver metropolitan area.  The reduced volume combined with the lower prices account for thediminished sales level.  Sales inthe heating and air conditioning segment declined $1,097,000 (9.9%).  A sharp decline in fan coil sales combined withmodestly lower furnace sales was responsible for the lower sales.  Fan coil sales continue to reflect thenationwide slump in commercial construction, notably hotel construction.  Partially offsetting the decline in fan coiland furnace sales was an increase in evaporative cooler sales driven primarilyby hot, dry weather that persisted later in the year than normal.  

 

Consolidated cost of sales (exclusive of depreciationand depletion), as a percentage of sales, increased 0.9% to 77.6% for the quarterended September 27, 2003 as compared to the 2002 quarter.  The increase was incurred exclusively by theconstruction materials segment.  The higher costratio in the construction materials segment was the result of the reducedvolume, lower selling prices and higher operating costs, particularlymaintenance.  The cost of salespercentage for the heating and air conditioning segment was virtuallyunchanged.

 

9

----

 

Selling and administrative expenses declined slightlyin tandem with the diminished sales.  

 

Operations - Comparison of Nine Months EndedSeptember 27, 2003 to Nine Months Ended September 28, 2002 (See page4)

 

Consolidatedsales for the nine months ended September 27, 2003 decreased $8,089,000(8.4%) when compared to the nine months ended September 28, 2002.  Sales in the construction materials segmentdeclined $4,583,000 (7.9%) despite the acquisition of McKinney Door andHardware, Inc. on April 1, 2002. The decline was due to the reasons noted above.  In addition, inclement weather during thefirst quarter of 2003, including a near record snowfall on March 17thalong Colorado’s Front Range, hampered sales.  The heating and air conditioning segment reported a $3,639,000(9.5%) decrease in sales.  The declinewas primarily due to the depressed fan coil market.

 

Costof sales (exclusive of depreciation and depletion) as a percentage of salesincreased from 77.9% for the nine months ended September 28, 2002 to 79.7%for the nine months ended September 27, 2003.  The cost of sales percentage in the construction materialssegment increased for the reasons noted above. In addition, the aforementioned inclement weather during the firstquarter of 2003 adversely affected production. The heating and air conditioning segment reported an increase in thecost of sales percentage due to the reduced production levels of fan coils,which increased unit costs, and a change in product mix of sales in theevaporative cooler line to lower margin items.

 

Selling and administrative expenses declined slightlyin tandem with the diminished sales.

 

Netinterest expense declined primarily due to the lower term loan balance in 2003,lower borrowings against the revolving credit facility during the secondquarter of 2003 and receipt during the first quarter of 2003 of approximately$62,000 of interest related to state tax refunds.

 

OUTLOOK

 

Theweak construction market in Colorado and the depressed commercial constructionmarket nationwide, notably hotel construction, along with their above notedeffects on the Company, are expected to continue for the balance of 2003.

 

NEW ACCOUNTING STANDARDS

 

OnDecember 30, 2002, the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” Thisstandard requires recording the fair value of a liability for an assetretirement obligation in the period in which it is incurred. In connection withpermits to mine aggregate deposits in Colorado, the Company is obligated toreclaim the mined areas.  The Companyrecords a reserve for future reclamation work to be performed at its variousaggregate operations based upon estimates of the recoverable quantities of rockand sand available in each location combined with an estimate of the totalexpense that will be incurred to reclaim a property.  Provision is made based upon the units of production method.  Reclamation costs are charged to operationsas the properties are mined.  Actualreclamation costs are charged against the reserve.  The adequacy of the recorded reserve is assessed annually.  Estimates of both the quantities ofrecoverable material and the cost of reclamation are periodically updated withthe assistance of an independent professional.  Reclamation on any mining property is performed soon after eachsection of the deposit is mined. Reclamation is substantially complete by the time the entire deposit is depleted.  The Company believes that this approach,which had been previously used to establish the annual expense and the reserverecorded for future reclamation obligations, continues

 

10

----

 

to provide the best estimate of the fair value ofthese obligations.   Therefore theadoption of SFAS No. 143 did not have an impact on the Company’s consolidatedbalance sheet or consolidated statement of operations as of December 30,2002.

 

Ifthe provisions of Statement 143 had been adopted effective December 30,2001, there would have been no impact on earnings per share, net of income taxeffect. Since a change in earnings per share would not have occurred, proformaearnings per share disclosures are not presented.

 

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 identifyforward-looking statements.  Actualresults could differ materially from those projected in the forward-lookingstatements as a result of factors including but not limited to: weather,interest rates, availability of raw materials and their related costs, economicconditions and competitive forces. Changes in accounting pronouncements could also alter projectedresults.  Forward-looking statementsspeak only as of the date they were made, and we undertake no obligation topublicly update them.

 

**Item3.   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 2002 Annual Report on Form 10-K.  At September 27, 2003, the amountsubject to the interest rate swap agreement was $10,500,000.  Also see Note 8 above in the notes tofinancial statements.

 

**Item4.   Disclosure Controls and Procedures**

** **

(a)   Evaluation of disclosure controls and procedures.

 

TheCompany’s chief executive officer and chief financial officer, with theparticipation of management, have evaluated the effectiveness of the Company’s“disclosure controls and procedures” (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934).  Based on their evaluation, they have concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its subsidiaries)required to be disclosed in this quarterly report and no changes are requiredat this time.

 

(b)   Changes in internal controls over financial reporting.

 

Therewere no significant changes in the Company’s internal control over financialreporting identified in connection with the evaluation of such internal controlthat occurred during the last fiscal quarter that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

11

----

 

PART II - Other Information

 
| Item 6. |   | Exhibits and Reports on Form 8-K |
|---------|--------|----------------------------------|
|    |   |                             |
|    |   | (a)                              | Exhibits |

 
|   |   | **Exhibit No.**                                                                                                                                                                                                                                                                                       |   | **Description** |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|
|   |   |                                                                                                                                                                                                                                                                                                  |
|   |   | 10    Revolving Credit and Term Loan Agreement,  dated as of September 5, 2003, by and among the Company and LaSalle Bank  National Association and Fifth Third Bank.                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                  |   |
|   |   | 31.1  Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                  |   |
|   |   | 31.2  Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                  |   |
|   |   | 32    Certification of Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                  |   |
|   |   | (b) Registrant filed one report on Form 8-K during the quarter  ended September 27, 2003.  The  report, dated August 8, 2003, related to the press release disclosing  the results of the registrant’s operations for the second quarter of 2003  issued July 29, 2003. |
|        |        |                                                                                                                                                                                                                                                                                                       |        |                 |  |

 

 

SIGNATURE

 

 

Pursuant to the requirement of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|   |                  | CONTINENTAL MATERIALS CORPORATION |
|--------|-----------------------|-----------------------------------|
|   |                  |                              |
|   |                  |                              |
| Date:  | November 5, 2003 |                              | By: | /S/ Joseph J. Sum |   |
|   |                  |                              | Joseph J. Sum, Vice President  and Chief Financial Officer |
|        |                       |                                   |  |  |  |

 

12

----

 

ExhibitIndex

** **
| **Exhibit No.** |   | **Description**                                                                                                                                                      |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                 |
| 10              |   | Revolving Credit and Term Loan Agreement, dated as  of September 5, 2003, by and among the Company and LaSalle Bank National  Association and Fifth Third Bank. |
|            |   |                                                                                                                                                                 |
| 31.1            |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                            |
|            |   |                                                                                                                                                                 |
| 31.2            |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                            |
|            |   |                                                                                                                                                                 |
| 32              |   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                |

 

13

----