** **

** **

**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** |
|------------|--------|----------------------------------------------------------------------------------------------|
|       |   |

 

 

**Forthe quarterly period ending March 30, 2002**

** **

**OR**

 

| **o**  |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|--------|--------|-----------------------------------------------------------------------------------------------|
|   |   |

 

                 **       **

**            **

 

**Forthe transition period from                                            to**

** **

**CommissionFile number 1-3834**

 

**CONTINENTAL MATERIALS CORPORATION**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                     |   | **36-2274391**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |   |                                  |

 

 

**225West Wacker Drive, Suite 1800, Chicago, Illinois  60606**

(Address ofprincipal executive office)

(Zip Code)

 

**(312)541-7200**

(Registrant’stelephone number, including area code)

 

(Former name,former address and former

year, if changedsince last report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports 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

 

| Number of common shares  outstanding at May 3, 2002 |   | 1,799,577 |
|-----------------------------------------------------|--------|-----------|

 

----

 

 

PART I - FINANCIALINFORMATION

 

## **Item 1.    Financial Statements**

 

CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED BALANCE SHEETS

MARCH 30, 2002 andDECEMBER 29, 2001

(Unaudited)

(000’s omittedexcept share data)

 

 
|                                                                                  |   | **MARCH 30,** |   | **DECEMBER  29,** |   |
|---------------------------------------------------------------------------------------|--------|---------------|--------|-------------------|--------|
|                                                                                  |   | **2002**      |   | **2001**          |   |
| ***ASSETS***                                                                          |   |          |   |              |   |
| Current assets:                                                                       |   |          |   |              |   |
| Cash and cash  equivalents                                                            |   | $             | 1,041  |              | $      | 7,579 |   |
| Receivables, net                                                                      |   | 17,588        |   | 18,291            |   |
| Inventories:                                                                          |   |          |   |              |   |
| Finished goods                                                                        |   | 8,924         |   | 7,710             |   |
| Work in process                                                                       |   | 1,662         |   | 1,587             |   |
| Raw materials  and supplies                                                           |   | 6,966         |   | 6,351             |   |
| Prepaid expenses                                                                      |   | 2,949         |   | 3,067             |   |
| Total current  assets                                                                 |   | 39,130        |   | 44,585            |   |
|                                                                                  |   |          |   |              |   |
| Property, plant  and equipment, net                                                   |   | 34,093        |   | 32,247            |   |
|                                                                                  |   |          |   |              |   |
| Goodwill                                                                              |   | 6,474         |   | 6,474             |   |
| Other assets                                                                          |   | 2,765         |   | 2,757             |   |
|                                                                                  |   |          |   |              |   |
|                                                                                  |   | **$**         | 82,462 |              | **$**  | 86,063 |   |
|                                                                                  |   |          |   |              |   |
| ***LIABILITIES***                                                                     |   |          |   |              |   |
| Current  liabilities:                                                                 |   |          |   |              |   |
| Current portion  of long-term debt                                                    |   | $             | 3,574  |              | $      | 3,620 |   |
| Accounts payable  and accrued expenses                                                |   | 13,965        |   | 16,111            |   |
| Income taxes                                                                          |   | —        |   | 308               |   |
| Total current  liabilities                                                            |   | 17,539        |   | 20,039            |   |
|                                                                                  |   |          |   |              |   |
| Long-term debt                                                                        |   | 13,432        |   | 13,520            |   |
| Deferred income  taxes                                                                |   | 2,511         |   | 2,511             |   |
| Other long-term  liabilities                                                          |   | 1,923         |   | 2,271             |   |
|                                                                                  |   |          |   |              |   |
| ***SHAREHOLDERS’  EQUITY***                                                      |   |          |   |              |   |
| Common shares,  $0.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares |   | 643           |   | 643               |   |
| Capital in  excess of par value                                                       |   | 1,982         |   | 1,982             |   |
| Retained  earnings                                                                    |   | 53,969        |   | 54,576            |   |
| Treasury shares,  774,503 and 768,167, at cost                                        |   | (9,537        | )      | (9,479            | )      |
|                                                                                  |   | 47,057        |   | 47,722            |   |
|                                                                                  |   |          |   |              |   |
|                                                                                  |   | **$**         | 82,462 |              | **$**  | 86,063 |   |
|                                                                                       |        |               |        |                   |        |  |  |  |

 

 

See accompanyingnotes

 

2

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CONTINENTALMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREEMONTHS ENDED MARCH 30, 2002 AND MARCH 31, 2001

(Unaudited)

(000’s omittedexcept per share amounts)

 
|                                                                   |   | **MARCH 30,  2002** |       | **MARCH 31,  2001** |       |
|------------------------------------------------------------------------|--------|---------------------|------------|---------------------|------------|
|                                                                   |   |                |       |                |       |
| Sales                                                                  |   | $                   | 26,602     |                | $          | 28,359 |   |
| Freight costs                                                          |   | 1,017               |       | 1,257               |       |
| Net sales                                                              |   | 25,585              |       | 27,102              |       |
|                                                                   |   |                |       |                |       |
| Costs and  expenses:                                                   |   |                |       |                |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization) |   | 20,637              |       | 21,131              |       |
| Depreciation,  depletion and amortization                              |   | 1,506               |       | 1,651               |       |
| Selling and  administrative                                            |   | 4,278               |       | 4,323               |       |
|                                                                   |   | 26,421              |       | 27,105              |       |
|                                                                   |   |                |       |                |       |
| Operating loss                                                         |   | (836                | )          | (3                  | )          |
|                                                                   |   |                |       |                |       |
| Interest                                                               |   | (227                | )          | (284                | )          |
| Other income,  net                                                     |   | 100                 |       | 161                 |       |
|                                                                   |   |                |       |                |       |
| Loss before  income taxes                                              |   | (963                | )          | (126                | )          |
|                                                                   |   |                |       |                |       |
| Benefit from  income taxes                                             |   | (356                | )          | (45                 | )          |
|                                                                   |   |                |       |                |       |
| Net loss                                                               |   | (607                | )          | (81                 | )          |
|                                                                   |   |                |       |                |       |
| Retained  earnings, beginning of period                                |   | 54,576              |       | 48,138              |       |
|                                                                   |   |                |       |                |       |
| Retained  earnings, end of period                                      |   | **$**               | **53,969** | ** **          | **$**      | **48,057** | ** ** |
|                                                                   |   |                |       |                |       |
| Basic loss per  share                                                  |   | **$**               | **(.34**   | **)**               | **$**      | **(.04** | **)** |
|                                                                   |   |                |       |                |       |
| Average shares  outstanding                                            |   | **1,805**           | ** ** | **1,824**           | ** ** |
|                                                                   |   |                |       |                |       |
| Diluted loss per  share                                                |   | **$**               | **(.34**   | **)**               | **$**      | **(.04** | **)** |
|                                                                   |   |                |       |                |       |
| Average shares  outstanding                                            |   | **1,805**           | ** ** | **1,824**           | ** ** |

** **

** **

See accompanying notes

 

3

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CONSOLIDATEDMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE THREEMONTHS ENDED MARCH 30, 2002 AND MARCH 31, 2001

(Unaudited)

(000’s omitted)

 

 
|                                                                      |   | **MARCH 30, 2002** |       | **MARCH 31, 2001** |       |
|---------------------------------------------------------------------------|--------|-------------------------|------------|-------------------------|------------|
|                                                                      |   |                    | ** ** |                    | ** ** |
| Net cash used in  operating activities                                    |   | $                       | (3,063     | )                       | $          | (1,225 | ) |
|                                                                      |   |                    |       |                    |       |
| Investing  activities:                                                    |   |                    |       |                    |       |
| Purchase of  Rocky Mountain Ready Mix Concrete, Inc. net of cash received |   | —                  |       | (11,262                 | )          |
| Capital  expenditures                                                     |   | (3,324                  | )          | (2,498                  | )          |
| Proceeds from  sale of property and equipment                             |   | 41                      |       | 16                      |       |
| Net cash used in  investing activities                                    |   | (3,283                  | )          | (13,744                 | )          |
|                                                                      |   |                    |       |                    |       |
| Financing  activities:                                                    |   |                    |       |                    |       |
| Long-term  borrowings                                                     |   | —                  |       | 12,000                  |       |
| Repayment of  long term debt                                              |   | (134                    | )          | (129                    | )          |
| Payment to  acquire treasury stock                                        |   | (58                     | )          | (294                    | )          |
| Net cash (used)  provided by financing activities                         |   | (192                    | )          | 11,577                  |       |
|                                                                      |   |                    |       |                    |       |
| Net decrease in  cash and cash equivalents                                |   | (6,538                  | )          | (3,392                  | )          |
| Cash and cash  equivalents:                                               |   |                    |       |                    |       |
| Beginning of  period                                                      |   | 7,579                   |       | 6,216                   |       |
|                                                                      |   |                    |       |                    |       |
| End of period                                                             |   | **$**                   | **1,041**  | ** **              | **$**      | **2,824** | ** ** |
|                                                                      |   |                    | ** ** |                    | ** ** |
| Supplemental  disclosures of cash flow items:                             |   |                    |       |                    |       |
| Cash paid during  the three months for:                                   |   |                    |       |                    |       |
| Interest                                                                  |   | $                       | 352        |                    | $          | 158 |   |
| Income taxes                                                              |   | (6                      | )          | 200                     |       |

 

See accompanying notes

 

4

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CONTINENTALMATERIALS CORPORATION

SECURITIES ANDEXCHANGE COMMISSION FORM 10-Q

NOTES TO THEQUARTERLY CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDEDMARCH 30, 2002

(Unaudited)

Amounts inthousands, except per share amounts.

 

1.               The unaudited interim consolidated financialstatements included herein are prepared pursuant to the rules and regulationsfor 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-K.  In the opinion of management, the consolidatedfinancial statements include all adjustments (none of which were other thannormal recurring adjustments) necessary for a fair statement of the results forthe interim periods.

 

2.               The provision for income taxes is based upon theestimated effective tax rate for the year.

 

3.               Operating results for the first three months of 2002are not necessarily indicative of performance for the entire year.  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 11 ofNotes to Consolidated Financial Statements in the Company’s 2001 AnnualReport.)

 

4.               The following is a reconciliation of the calculationof basic and diluted earnings per share (EPS) for the three months ended March30, 2002 and March 31, 2001.

 

|                        |   | **Income   (Loss)** |   | **Shares** |   | **Per-share   (loss) earnings** |   |
|-----------------------------|--------|---------------------|--------|------------|--------|---------------------------------|--------|
| March 30, 2002              |   |                |   |       |   |                            |   |
| Basic EPS                   |   | $                   | (607   | )          | 1,805  |                            | $      | (.34 | ) |
| Effect of  dilutive options |   | —              |   | —     |   |                            |   |
| Diluted EPS                 |   | $                   | (607   | )          | 1,805  |                            | $      | (.34 | ) |
|                        |   |                |   |       |   |                            |   |
| March 31, 2001              |   |                |   |       |   |                            |   |
| Basic EPS                   |   | $                   | (81    | )          | 1,824  |                            | $      | (.04 | ) |
| Effect of  dilutive options |   | —              |   | —     |   |                            |   |
| Diluted EPS                 |   | $                   | (81    | )          | 1,824  |                            | $      | (.04 | ) |

 

5.               At March 30, 2002, the Company was not in compliancewith the Fixed Charge Coverage Ratio calculated quarterly as defined in itsterm loan agreement.  The term loanagreement has been amended to cure the default.

 

6.               The following table presents information aboutreported segments for the three months ended March 30, 2002 and March 31, 2001along with the items necessary to reconcile the segment information to thetotals reported in the financial statements.

 

 

5

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|                              |   | **Heating  and Air** |   | **Construction** |   |          |   | **Unallocated** |   |      |   |
|-----------------------------------|--------|----------------------|--------|------------------|--------|---------------|--------|-----------------|--------|-----------|--------|
|                              |   | **Conditioning**     |   | **Materials**    |   | **All Other** |   | **Corporate**   |   | **Total** |   |
| 2002                              |   |                 |   |             |   |          |   |            |   |      |   |
| Revenues from  external customers |   | $                    | 12,587 |             | $      | 13,979        |   | $               | 36     |      | $      | — |   | $ | 26,602 |   |
| Segment  operating (loss) income  |   | 1,118                |   | (1,112           | )      | (41           | )      | (801            | )      | (836      | )      |
| Segment assets                    |   | 33,111               |   | 46,505           |   | 64            |   | 2,782           |   | 82,462    |   |
|                              |   |                 |   |             |   |          |   |            |   |      |   |
| 2001                              |   |                 |   |             |   |          |   |            |   |      |   |
| Revenues from  external customers |   | $                    | 12,220 |             | $      | 16,102        |   | $               | 36     |      | $      | 1 |   | $ | 28,359 |   |
| Segment  operating (loss) income  |   | 858                  |   | (70              | )      | (6            | )      | (785            | )      | (3        | )      |
| Segment assets                    |   | 29,387               |   | 46,045           |   | 35            |   | 4,931           |   | 80,398    |   |

 

Thereare no differences in the basis of segmentation or in the basis of measurementof segment profit or loss from the last annual report.

 

7.               OnDecember 31, 2000, the Company acquired RMRM for $11,263,000 net of cashreceived. The purchase of RMRM has been accounted for as a purchase.  The total purchase price and the fair valueof liabilities assumed have been allocated to the tangible and intangibleassets of RMRM based on respective fair values.  The acquisition has resulted in an unallocated excess purchaseprice over fair value of net assets acquired of $6,630,000 which has been classifiedas goodwill.  The assigned useful lifewas 40 years, however with the adoption of Statements of Financial AccountingStandards (SFAS) No. 142, see discussion in Note 8, the amortization of thegoodwill stopped as of December 30, 2001.

 

8.               On January 1, 2002, the Company adopted SFAS No. 142“Goodwill and Other Intangible Assets.” As a result, the Company ceased recording the amortization of goodwillas a charge to earnings during the first quarter of 2002.  The Company estimates that the net loss anddiluted loss per share would have been approximately $56,000 and 3 cents,respectively, for the three months ended March 31, 2001 had the provisions ofthe new standard been applied as of January 1, 2001.  In addition, the Company is required to conduct an annual reviewof goodwill and intangible assets for potential impairment.  The Company did not have to record a chargeto earnings for an impairment of goodwill or other intangible assets as aresult of adopting the new standard.  Asof March 30, 2002, all goodwill related to the construction materials segmentand there was no material change in the carrying amount of goodwill during thethree months ended March 30, 2002.

 

Intangible assets as of March 30, 2002 are allamortizable and consist primarily of non-compete agreements and were carried at$1,494,000 net of $726,000 accumulated amortization.  The pre-tax amortization expense for intangible assets during thequarter ended March 30, 2002 was $68,000. Based upon the intangible assets recorded on the balance sheet at March30, 2002, amortization expense for the next five years is estimated to be asfollows: 2002 — $269,000, 2003 — $269,000, 2004 — $183,000, 2005 — $175,000,and 2006 — $166,000.

 

Effective January 1, 2002, the Company also adoptedSFAS No. 144 “Accounting for the Impairment or Disposal of Long-LivedAssets.”  The Statement clarifies andrevises existing guidance on accounting for the impairment or disposal oflong-lived assets such as property, plant and equipment, amortized intangiblesand other long-lived assets not specifically addressed in other accountingliterature.  The adoption of this newstandard had no impact on the Company’s financial position, results ofoperations or cash flows for the three months ended March 30, 2002.

 

6

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9.               OnApril 1, 2002, the Company acquired all of the stock of McKinney Door andHardware, Inc. (MDHI), a refabricator and distributor of metal doors, wooddoors and related hardware.  MDHIoperates from one facility in Pueblo, Colorado and will continue to do businessunder its current name.  The $2,150,000purchase price was funded by available cash balances and credit sources.  The acquisition did not meet the presumptionof significance as defined by the Securities and Exchange Commission and thusno Form 8-K was filed.

 

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

 

**           **Financial Condition

 

Operations for the firstthree months of 2002 used $3,063,000 of cash compared to $1,225,000 in2001.  An increase in inventoriescombined with a decrease in payables and accruals to account for the increaseduse of cash in of 2002.

 

The Company experiencedan unusually high level of capital spending during the quarter as four majorprojects were either completed or neared completion.  In the heating and air conditioning segment, a new officebuilding was completed in Colton, California during the quarter.  The other three projects benefit theconstruction materials segment.  Theseare a new central mix batch plant in Colorado Springs and a new gravel plant inPueblo, both expected to be completed during the second quarter of 2002  and a new, state-of-the-art sand processingplant in Colorado Springs which is expected to be completed during the thirdquarter of 2002.  The Companyanticipates that the level of capital spending will decline each quarter forthe remainder of 2002.

 

The Company expects thatthe existing cash balances and estimated operating cash flow from itssubsidiaries, supplemented by the revolving line of credit (which was unused atMarch 30, 2002) will be sufficient to cover anticipated cash requirements,including the acquisition discussed in Note 8, above, servicing debt andplanned capital expenditures.  Historically,the Company’s borrowings against the revolving credit facility peak during thesecond quarter and decline over the remainder of the year.

 

Operations - Comparisonof Quarter Ended March 30, 2002 to Quarter Ended March 31, 2001

 

Consolidated salesdecreased $1,757,000 to $26,602,000 entirely due to the construction materialssegment.  Inclement weather along theFront Range in Colorado prevented progress on most construction projectscausing lower than anticipated concrete sales. In addition, Colorado is experiencing a slowdown in construction in boththe residential and commercial sectors. Sales of the heating and air conditioning segment increased a modestamount.  Strong furnace sales related tothe cold winter experienced particularly in the western states combined withincreased evaporative cooler sales to offset a decline in fan coil sales.  Evaporative cooler sales showed broad-basedstrength as well as early season shipments to a large new retail customer.  Fan coil sales reflect the nationwide slumpin commercial construction, notably hotel construction.

 

Consolidated cost ofsales (exclusive of depreciation and depletion) as a percentage of salesincreased from 74.5% to 77.6% due to the construction materials segment.  This segment experienced increased costs atthree of its aggregates operations.  Theincreased costs were attributable to a combination of factors including theweather, equipment failures and start-up expenses associated with new aggregateprocessing facilities.

 

 

7

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Depreciation, depletionand amortization declined from $1,651,000 to $1,506,000 reflecting, in part,the discontinuance of amortization of goodwill as discussed in Note 7.

 

Interest expense declineddue to decreased levels of debt and lower interest rates.

 

Historically, theCompany has experienced operating losses during the first quarter except whenthe weather is mild along the Front Range in Colorado.

 

NEW ACCOUNTING STANDARDS

 

The Financial Accounting Standards Board issuedSFAS No. 141, “Business Combinations,” and No. 142, “Goodwill and OtherIntangible Assets.”  Effective January1, 2002, the Company was no longer required to amortize goodwill as a charge toearnings.  In addition, we are requiredto annually review goodwill for potential impairment.  The Company does have certain finite-lived identifiableintangible assets that will continue to be amortized over their estimateduseful economic lives.  Thesefinite-lived identifiable intangible assets will be assessed for impairmentunder the new SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”  As a result ofadopting this new standard, we currently anticipate that amortization expensewill be reduced by approximately $156,000 (pre-tax) on an annual basis comparedto 2001.

 

SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” was issued inAugust 2001 and is effective for fiscal years beginning after December 15,2001.  The Statement clarifies andrevises existing guidance on accounting for the impairment or disposal oflong-lived assets such as property, plant and equipment, amortized intangiblesand other long-lived assets not specifically addressed in other accountingliterature.  We adopted the standard atthe beginning of 2002.  We do not expectthe adoption of this standard will have a significant impact on our 2002financial results.

 

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 were made.  When used in this Report, words such as “estimates,”“anticipates,” “contemplates,” “expects” and similar expressions are intendedto identify forward-looking statements. Actual results could differ materiallyfrom those projected in the forward-looking statements as a result of factorsincluding but not limited to: weather, interest rates, availability of rawmaterials and their related costs and competitive forces.

 

 

8

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| PART II - Other  Information |                              |
|------------------------------|-----------------------------------|
|                         |                              |
| Item 6.                      | Exhibits and Reports on  Form 8-K |
|                              |                                   |  |

 
|   | (b) Registrant filed no  reports on Form 8-K during the quarter ended March 30, 2002. |
|--------|---------------------------------------------------------------------------------------|

 

 

SIGNATURE

 

Pursuant to therequirement of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   |         |   | CONTINENTAL MATERIALS CORPORATION |
|--------|--------------|--------|-----------------------------------|
|   |         |   |                              |
|   |         |   |                              |
|   |         |   |                              |
|   |         |   |                              |
|   |         |   |                              |   |   |
| Date:  | May 13, 2001 |   | By:                               | /S/ Joseph J. Sum |   |
|   |         |   | Joseph J. Sum, Vice President     |
|   |         |   | and Chief Financial Officer       |

 

 

9

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