**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  June 29, 2002** |

** **

**OR**

 

| **o**                                                                                                                                                                                                                                                                                                                                                         | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                          |                                                                                          |
| **For the transition period  from                          to                          ** |

 

**CommissionFile 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) 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 July 31, 2002 | 1,779,625 |
|------------------------------------------------------|-----------|

 

 

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PART I - FINANCIALINFORMATION

 

**Item 1.   FinancialStatements**

 

CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED BALANCE SHEETS

JUNE 29, 2002 andDECEMBER 29, 2001

(Unaudited)

(000’s omittedexcept share data)

 
|                                                                    |   | **JUNE 29,  2002** |       | **DECEMBER  29,  2001** |   |
|-------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|--------|
| ***ASSETS***                                                            |   |               |       |                    |   |
| Current assets:                                                         |   |               |       |                    |   |
| Cash and cash  equivalents                                              |   | $                  | 256        |                    | $      | 7,579 |   |
| Receivables, net                                                        |   | 23,623             |       | 18,291                  |   |
| Inventories:                                                            |   |               |       |                    |   |
| Finished goods                                                          |   | 8,675              |       | 7,710                   |   |
| Work in process                                                         |   | 1,686              |       | 1,587                   |   |
| Raw materials  and supplies                                             |   | 7,564              |       | 6,351                   |   |
| Prepaid expenses                                                        |   | 3,002              |       | 3,067                   |   |
| Total current  assets                                                   |   | 44,806             |       | 44,585                  |   |
|                                                                    |   |               |       |                    |   |
| Property, plant  and equipment, net                                     |   | 34,729             |       | 32,247                  |   |
|                                                                    |   |               |       |                    |   |
| Goodwill                                                                |   | 7,374              |       | 6,474                   |   |
| Other assets                                                            |   | 2,946              |       | 2,757                   |   |
|                                                                    |   |               |       |                    |   |
|                                                                    |   | **$**              | **89,855** | ** **              | **$**  | **86,063** | ** ** |
|                                                                    |   |               |       |                    |   |
| ***LIABILITIES***                                                       |   |               |       |                    |   |
| Current liabilities:                                                    |   |               |       |                    |   |
| Bank loan  payable                                                      |   | $                  | 5,000      |                    | $      | — |   |
| Current portion  of long-term debt                                      |   | 3,580              |       | 3,620                   |   |
| Accounts payable  and accrued expenses                                  |   | 15,649             |       | 16,111                  |   |
| Income taxes                                                            |   | 597                |       | 308                     |   |
| Total current  liabilities                                              |   | 24,826             |       | 20,039                  |   |
|                                                                    |   |               |       |                    |   |
| Long-term debt                                                          |   | 11,810             |       | 13,520                  |   |
| Deferred income  taxes                                                  |   | 2,609              |       | 2,511                   |   |
| Other long-term  liabilities                                            |   | 2,001              |       | 2,271                   |   |
|                                                                    |   |               |       |                    |   |
| ***SHAREHOLDERS’  EQUITY***                                        |   |               |       |                    |   |
| Common shares,  $0.25 par value; authorized 3,000,000; issued 2,574,264 |   | 643                |       | 643                     |   |
| Capital in  excess of par value                                         |   | 1,982              |       | 1,982                   |   |
| Retained  earnings                                                      |   | 55,684             |       | 54,576                  |   |
| Treasury shares,  776,479 and 768,167, at cost                          |   | (9,700             | )          | (9,479                  | )      |
|                                                                    |   | 48,609             |       | 47,722                  |   |
|                                                                    |   |               |       |                    |   |
|                                                                    |   | **$**              | **89,855** | ** **              | **$**  | **86,063** | ** ** |

 

See accompanyingnotes

 

2

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CONTINENTALMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREEMONTHS ENDED JUNE 29, 2002 AND JUNE 30, 2001

(Unaudited)

(000’s omittedexcept per share amounts)

 
|                                                                   |   | **JUNE 29,  2002** |       | **JUNE 30,  2001** |       |
|------------------------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                                   |   |               |       |               |       |
| Sales                                                                  |   | $                  | 37,423     |               | $          | 34,487 |   |
| Freight costs                                                          |   | 1,434              |       | 1,553              |       |
| Net sales                                                              |   | 35,989             |       | 32,934             |       |
|                                                                   |   |               |       |               |       |
| Costs and  expenses:                                                   |   |               |       |               |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization) |   | 27,144             |       | 24,792             |       |
| Depreciation,  depletion and amortization                              |   | 1,545              |       | 1,631              |       |
| Selling and  administrative                                            |   | 4,614              |       | 4,438              |       |
|                                                                   |   | 33,303             |       | 30,861             |       |
|                                                                   |   |               |       |               |       |
| Operating income                                                       |   | 2,686              |       | 2,073              |       |
|                                                                   |   |               |       |               |       |
| Interest                                                               |   | (265               | )          | (291               | )          |
| Other income,  net                                                     |   | 247                |       | 41                 |       |
|                                                                   |   |               |       |               |       |
| Income before  income taxes                                            |   | 2,668              |       | 1,823              |       |
|                                                                   |   |               |       |               |       |
| Provision for  income taxes                                            |   | 953                |       | 656                |       |
|                                                                   |   |               |       |               |       |
| Net income                                                             |   | 1,715              |       | 1,167              |       |
|                                                                   |   |               |       |               |       |
| Retained  earnings, beginning of period                                |   | 53,969             |       | 48,057             |       |
|                                                                   |   |               | ** ** |               | ** ** |
| Retained  earnings, end of period                                      |   | **$**              | **55,684** | ** **         | **$**      | **49,224** | ** ** |
|                                                                   |   |               |       |               |       |
| Basic earnings  per share                                              |   | **$**              | **.95**    | ** **         | **$**      | **.64** | ** ** |
|                                                                   |   |               |       |               |       |
| Average shares  outstanding                                            |   | **1,799**          | ** ** | **1,810**          | ** ** |
|                                                                   |   |               |       |               |       |
| Diluted earnings  per share                                            |   | **$**              | **.94**    | ** **         | **$**      | **.63** | ** ** |
|                                                                   |   |               |       |               |       |
| Average shares  outstanding                                            |   | **1,835**          | ** ** | **1,844**          | ** ** |

 

See accompanyingnotes

 

3

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CONTINENTALMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE SIX MONTHSENDED JUNE 29, 2002 AND JUNE 30, 2001

(Unaudited)

(000’s omittedexcept per share amounts)

 
|                                                                   |   | **JUNE 29,  2002** |       | **JUNE 30,  2001** |       |
|------------------------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                                   |   |               |       |               |       |
| Sales                                                                  |   | $                  | 64,026     |               | $          | 62,846 |   |
| Freight costs                                                          |   | 2,451              |       | 2,810              |       |
| Net sales                                                              |   | 61,575             |       | 60,036             |       |
|                                                                   |   |               |       |               |       |
| Costs and  expenses:                                                   |   |               |       |               |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization) |   | 47,782             |       | 45,923             |       |
| Depreciation,  depletion and amortization                              |   | 3,051              |       | 3,282              |       |
| Selling and  administrative                                            |   | 8,892              |       | 8,761              |       |
|                                                                   |   | 59,725             |       | 57,966             |       |
|                                                                   |   |               |       |               |       |
| Operating income                                                       |   | 1,850              |       | 2,070              |       |
|                                                                   |   |               |       |               |       |
| Interest                                                               |   | (492               | )          | (575               | )          |
| Other income,  net                                                     |   | 347                |       | 202                |       |
|                                                                   |   |               |       |               |       |
| Income before  income taxes                                            |   | 1,705              |       | 1,697              |       |
|                                                                   |   |               |       |               |       |
| Provision for  income taxes                                            |   | 597                |       | 611                |       |
|                                                                   |   |               |       |               |       |
| Net income                                                             |   | 1,108              |       | 1,086              |       |
|                                                                   |   |               |       |               |       |
| Retained  earnings, beginning of period                                |   | 54,576             |       | 48,138             |       |
|                                                                   |   |               |       |               |       |
| Retained  earnings, end of period                                      |   | **$**              | **55,684** | ** **         | **$**      | **49,224** | ** ** |
|                                                                   |   |               |       |               |       |
| Basic earnings  per share                                              |   | **$**              | **.62**    | ** **         | **$**      | **.60** | ** ** |
|                                                                   |   |               |       |               |       |
| Average shares  outstanding                                            |   | **1,802**          | ** ** | **1,817**          | ** ** |
|                                                                   |   |               |       |               |       |
| Diluted earnings  per share                                            |   | **$**              | **.60**    | ** **         | **$**      | **.59** | ** ** |
|                                                                   |   |               |       |               |       |
| Average shares  outstanding                                            |   | **1,837**          | ** ** | **1,849**          | ** ** |

 

See accompanyingnotes

 

4

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CONSOLIDATEDMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE SIX MONTHSENDED JUNE 29, 2002 AND JUNE 30, 2001

(Unaudited)

(000’s omitted)

 
|                                                 |   | **JUNE 29,  2002** |       | **JUNE 30,  2001** |       |
|------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                 |   |               |       |               |       |
| Net cash (used  in) provided by operating activities |   | $                  | (3,017     | )                  | $          | 1,621 |   |
|                                                 |   |               |       |               |       |
| Investing  activities:                               |   |               |       |               |       |
| Acquisitions of  subsidiaries, net of cash acquired  |   | (2,125             | )          | (11,262            | )          |
| Capital  expenditures                                |   | (5,374             | )          | (4,990             | )          |
| Proceeds from  sale of property and equipment        |   | 164                |       | 47                 |       |
| Net cash used in  investing activities               |   | (7,335             | )          | (16,205            | )          |
|                                                 |   |               |       |               |       |
| Financing  activities:                               |   |               |       |               |       |
| Borrowings under  revolving credit facility          |   | 5,000              |       | —             |       |
| Long-term  borrowings                                |   | —             |       | 12,000             |       |
| Repayment of  long term debt                         |   | (1,750             | )          | (1,760             | )          |
| Payment to  acquire treasury stock                   |   | (221               | )          | (422               | )          |
| Net cash  provided by financing activities           |   | 3,029              |       | 9,818              |       |
|                                                 |   |               |       |               |       |
| Net decrease in  cash and cash equivalents           |   | (7,323             | )          | (4,766             | )          |
| Cash and cash equivalents:                           |   |               |       |               |       |
| Beginning of  period                                 |   | 7,579              |       | 6,216              |       |
|                                                 |   |               |       |               |       |
| End of period                                        |   | **$**              | **256**    | ** **         | **$**      | **1,450** | ** ** |
|                                                 |   |               | ** ** |               | ** ** |
| Supplemental  disclosures of cash flow items:        |   |               |       |               |       |
| Cash paid  (refunded) during the six months for:     |   |               |       |               |       |
| Interest                                             |   | $                  | 646        |               | $          | 508 |   |
| Income taxes                                         |   | (78                | )          | 788                |       |

 

See accompanyingnotes

 

5

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CONTINENTALMATERIALS CORPORATION

SECURITIES ANDEXCHANGE COMMISSION FORM 10-Q

NOTES TO THEQUARTERLY CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED JUNE29, 2002

(Unaudited)

 

1.               The unauditedinterim consolidated financial statements included herein are prepared pursuantto the rules and regulations for reporting on Form 10-Q.  Accordingly, certain information andfootnote disclosures normally accompanying the annual financial statements havebeen omitted.  The interim financialstatements and notes should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s latest annualreport on Form 10-K.  In the opinion ofmanagement, the consolidated financial statements include all adjustments (noneof which were other than normal recurring adjustments) necessary for a fairstatement of the results for the interim periods.

 

2.               The provision forincome taxes is based upon the estimated effective tax rate for the year.

 

3.               As discussed inNote 5 of the Form 10-Q filed for the quarter ended March 30, 2002, the Companyamended its term loan agreement modifying the covenant requirements of theFixed Charge Coverage Ratio.  Theamendment was dated May 13, 2002.

 

4.               Operating resultsfor the first six months of 2002 are not necessarily indicative of performancefor the entire year.  Historically,sales of construction 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 2001 AnnualReport.)

 

5.               The following is areconciliation of the calculation of basic and diluted earnings per share (EPS)for the three and six months ended June 29, 2002 and June 30, 2001.  Amounts in thousands except per share data.

 
|                        |   | **Three  months ended** |   | **Six months  ended** |   |
|-----------------------------|--------|-------------------------|--------|-----------------------|--------|
|                        |   | **Income**              |   | **Shares**            |   | **Per-share  earnings** |   | **Income** |   | **Shares** |   | **Per-share  earnings** |   |
| June 29, 2002               |   |                    |   |                  |   |   |   |   |   |   |   |   |   |
| Basic EPS                   |   | $                       | 1,715  |                  | 1,799  |   | $ | .95 |   | $ | 1,108 |   | 1,802 |   | $ | .62 |   |
| Effect of  dilutive options |   | —                  |   | 36                    |   |   |   | — |   | 35 |   |   |   |
| Diluted EPS                 |   | $                       | 1,715  |                  | 1,835  |   | $ | .94 |   | $ | 1,108 |   | 1,837 |   | $ | .60 |   |
|                        |   |                    |   |                  |   |   |   |   |   |   |   |   |   |
| June 30, 2001               |   |                    |   |                  |   |   |   |   |   |   |   |   |   |
| Basic EPS                   |   | $                       | 1,167  |                  | 1,810  |   | $ | .64 |   | $ | 1,086 |   | 1,817 |   | $ | .60 |   |
| Effect of  dilutive options |   | —                  |   | 34                    |   |   |   | — |   | 32 |   |   |   |
| Diluted EPS                 |   | $                       | 1,167  |                  | 1,844  |   | $ | .63 |   | $ | 1,086 |   | 1,849 |   | $ | .59 |   |

 

6.               The following tablepresents information about the Company’s reported segments for the six monthand three month periods ended June 29, 2002 and June 30, 2001 along with theitems necessary to reconcile the segment information to the totals reported inthe financial statements (amounts in thousands).

 
|                              |   | **Heating  and Air  Conditioning** |   | **Construction  Materials** |   | **All Other** |   | **Unallocated  Corporate** |   | **Total** |   |
|-----------------------------------|--------|------------------------------------|--------|-----------------------------|--------|---------------|--------|----------------------------|--------|-----------|--------|
| 2002                              |   |                               |   |                        |   |          |   |                       |   |      |   |
| Six Months                        |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from  external customers |   | $                                  | 27,145 |                        | $      | 36,807        |   | $                          | 73     |      | $      | 1 |   | $ | 64,026 |   |
| Operating income                  |   | 2,195                              |   | 1,295                       |   | (89           | )      | (1,551                     | )      | 1,850     |   |
| Assets                            |   | 34,937                             |   | 53,016                      |   | 51            |   | 1,851                      |   | 89,855    |   |
| Three Months                      |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from  external customers |   | 14,558                             |   | 22,827                      |   | 37            |   | 1                          |   | 37,423    |   |
| Operating income                  |   | 1,077                              |   | 2,407                       |   | (48           | )      | (750                       | )      | 2,686     |   |
|                              |   |                               |   |                        |   |          |   |                       |   |      |   |
| 2001                              |   |                               |   |                        |   |          |   |                       |   |      |   |
| Six Months                        |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from  external customers |   | $                                  | 25,128 |                        | $      | 37,645        |   | $                          | 72     |      | $      | 1 |   | $ | 62,846 |   |
| Operating income                  |   | 956                                |   | 2,731                       |   | (10           | )      | (1,607                     | )      | 2,070     |   |
| Assets                            |   | 29,195                             |   | 49,136                      |   | 53            |   | 3,292                      |   | 81,676    |   |
| Three Months                      |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from  external customers |   | 12,908                             |   | 21,543                      |   | 36            |   | 0                          |   | 34,487    |   |
| Operating income                  |   | 98                                 |   | 2,801                       |   | (4            | )      | (822                       | )      | 2,073     |   |

 

6

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

 

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 and will continue to do business under its currentname.  The $2,125,000 purchase price,net of cash received and $1,129,000 of liabilities and debt, was funded byavailable cash balances and credit sources. The unallocated excess purchase price over fair value of net assetsacquired of $900,000 has been classified as goodwill.  The acquisition has been accounted for under the purchase methodand accordingly, the operating results of MDHI have been included in theconsolidated results since the date of acquisition.

 

8.               On January 1, 2002,the Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets.”  As a result, the Company ceased recordingthe amortization of goodwill as a charge to earnings during the first quarterof 2002.  The Company estimates that thenet income and diluted income per share would have been approximately $1,136,000and 61 cents and $1,192,000 and 65 cents, respectively, for the six month andthree month periods ended June 30, 2001 had the provisions of the new standardbeen applied as of January 1, 2001.  Inaddition, the Company is required to conduct an annual review of goodwill andintangible assets for potential impairment. The Company did not have to record a charge to earnings for animpairment of goodwill or other intangible assets as a result of adopting thenew standard.  As of June 29, 2002, allgoodwill related to the construction materials segment and there was nomaterial change in the carrying amount of goodwill during the six month orthree month periods ended June 29, 2002.

 

Intangible assets as ofJune 29, 2002 are all amortizable and consist primarily of non-competeagreements and were carried at $1,666,000 net of $804,000 accumulatedamortization.  The pre-tax amortizationexpense for intangible assets during the six month and three month periodsended June 29, 2002 was $146,000 and $68,000, respectively.  Based upon the intangible assets recorded onthe balance sheet at June 29, 2002, amortization expense for the next fiveyears is estimated to be as follows: 2002 - $307,000, 2003 - $319,000, 2004 -$233,000, 2005 - $225,000, and 2006 - $216,000.

 

Effective January 1,2002, the Company also adopted SFAS No. 144 “Accounting for the Impairment orDisposal of Long-Lived Assets.”  ThisStatement clarifies and revises existing guidance on accounting for the impairmentor disposal of long-lived assets such as property, plant and equipment,amortized intangibles and other long-lived assets not specifically addressed inother accounting literature.  Theadoption of this new standard had no impact on the Company’s financialposition, results of operations or cash flows for the six month or three monthperiods ended June 29, 2002.

 

**Item 2.        Management’s Discussion and Analysis ofFinancial Condition and Results of Operation**

 

FinancialCondition, Liquidity and Capital Resources (See pages 2, 4 and 5)

 

Operations used$3,017,000 of cash flow during the first six months of 2002 compared toproviding $1,621,000 of cash flow in the first half of 2001.  The increased use of cash was largely due toan increase in accounts receivable.  Asubstantial rise in sales of evaporative coolers, combined with the extendedpayment terms offered on sales of this product line, was the primary cause ofthe increased receivables during the second quarter of 2002 compared to theprior year’s quarter.

 

Capital expenditures inthe first six months of 2002 were $5,374,000 compared to $4,990,000 in thefirst half of 2001.  The majority of thecapital spending was in the construction materials segment and included a newgravel plant in Pueblo that was

 

7

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completed in June,continued work on a new, state-of-the-art sand processing plant in ColoradoSprings which is expected to be completed during the third quarter of 2002, anew central mix batch plant in Colorado Springs and various equipmentadditions.  Expenditures in the heatingand air conditioning segment included the completion of the new office buildingin Colton, California during the first quarter of the year.

 

The Company expects thatthe existing cash balances and estimated operating cash flow from itssubsidiaries, supplemented by the revolving line of credit (of which $5,000,000was outstanding at June 29, 2002) will be sufficient to cover anticipated cashrequirements, including debt service and planned capital expenditures.  Historically, the Company’s borrowingsagainst the revolving credit facility peak during the second quarter anddecline over the remainder of the year.

 

Operations – Comparisonof Quarter Ended June 29, 2002 to Quarter Ended June 30, 2001 (See page 3)

 

Consolidated salesincreased $2,936,000 (8.5%).  Salesincreased $1,284,000 (6%) in the construction materials segment as the resultof the acquisition of MDHI on April 1, 2002. Concrete sales rebounded from the weather restrained first quarter,however, the continued decline in non-residential construction in the Denverand Colorado Springs markets held sales below the prior year’s level.  Sales in the heating and air conditioningsegment increased $1,650,000 (12.8%) as evaporative cooler sales improved due tohot dry weather in the markets served and the addition of a large new retailcustomer.  Furnace sales improved inwhat is traditionally its weakest quarter, however, fan coil sales declinedreflecting the nationwide slump in commercial construction, notably hotelconstruction.

 

Consolidated cost ofsales (exclusive of depreciation and depletion) as a percentage of salesincreased from 71.9% to 72.5%.  The costof sales percentage in the construction materials segment increased reflectingthe overall reduced volume as well as higher costs in the Pueblo graveloperations as the now depleted west side gravel operation was closed and somestart-up costs at the new operation on the east side were incurred.  The cost percentage in the heating and airconditioning segment declined reflecting improvements in each of the productlines.

 

Depreciation, depletionand amortization declined from $1,631,000 to $1,545,000 reflecting, in part,the discontinuance of amortization of goodwill as discussed in Note 8.

 

Net interest expensedeclined due to lower interest rates.

 

Other income includesgains on the sale of property and equipment of $118,000 for the quarter endedJune 29, 2002 as compared to no gains in the prior year’s quarter.

 

Historically, the Companyhas experienced operating losses during the first quarter except when theweather is mild along the Front Range in Colorado.  Operating results typically improve in the second and thirdquarters reflecting more favorable weather conditions in Colorado and theseasonal sales of evaporative coolers. Fourth quarter results can vary based on weather conditions in Coloradoas well as in the principal markets for the Company’s heating equipment.  Sales of fan coils are generally not subjectto seasonal variation.

 

Operations - Comparisonof Six Months Ended June 29, 2002 to Six Months Ended June 30, 2001 (See page4)

 

Consolidated salesincreased $1,180,000 (1.9%).  Sales inthe construction materials segment declined $838,000 (2.2%) despite theacquisition of MDHI, discussed above. Inclement weather along the Front Range in Colorado prevented progresson most construction projects during the first three months of 2002.  Also, as noted above, Colorado isexperiencing a slowdown in non-residential construction.

 

8

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Sales in the heating andair conditioning segment increased $2,017,000 (8%).  Evaporative cooler sales increased for same reasons notedabove.  Sales of wall furnaces were higherdue to cold weather in the first quarter in the key market areas.  Fan coil sales declined as the result of aslow down in commercial construction.

 

Costof sales (exclusive of depreciation and depletion) as a percentage of salesincreased from 73.1% to 74.6%.  The costof sales percentage in the construction materials segment increased for thereasons noted above.  In addition,during the first quarter of 2002, inclement weather and equipment failuresadded to the costs in this segment. Cost of sales in the heating and air conditioning segment declined asnoted above.

 

Depreciation, depletionand amortization declined for the reason noted above.

 

Net interest expensedeclined due to lower interest rates and a decreased level of debt during thefirst three months of the year.  Capitalexpenditures and the acquisition of MDHI in April drove the average debt to alevel slightly higher than the prior year in April through June.

 

Other income includesgains on the sale of property and equipment of $118,000 for the six monthsended June 29, 2002 as compared to no gains in the prior year’s first half.

 

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 of Long-LivedAssets.”  As a result of adopting thisnew standard, we currently anticipate that amortization expense will be reducedby approximately $156,000 (pre-tax) on an annual basis compared to 2001.

 

SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” wasissued in August 2001 and is effective for fiscal years beginning afterDecember 15, 2001.  The Statementclarifies and revises existing guidance on accounting for the impairment ordisposal of long-lived assets such as property, plant and equipment, amortizedintangibles and other long-lived assets not specifically addressed in otheraccounting literature.  We adopted thestandard at the beginning of 2002.  Wedo not expect the adoption of this standard will have a significant impact onour 2002 financial results.

 

FORWARD-LOOKINGSTATEMENTS

 

The foregoing discussioncontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of theCompany’s management as well as on assumptions made by and informationavailable to the Company at the time such statements were made.  When used in this Report, words such as“estimates,” “anticipates,” “contemplates,” “expects” and similar expressionsare intended to identify forward-looking statements. Forward-looking statementsare subject to risks and uncertainties that could cause actual results todiffer materially from those projected in the forward-looking statements.  These risks and uncertainties include, butare not limited to: the economy, weather, interest rates, availability of raw materials and their relatedcosts and competitive forces. Forward-looking statements speak only as of the date they were made andthe Company undertakes no obligation to publicly update them.

 

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QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been nochanges in the market risks that the Company is exposed to since thosediscussed in the Company’s latest annual report on Form 10-K.  At June 29, 2002, the amount subject to theinterest rate swap agreement was $15,000,000.

 

PART II - OtherInformation

 

Item 4.             Submission of Matters to a Voteof Security Holders

 

(a)           The annual meeting of thestockholders of the Company was held on May 22, 2002.

 

(b)           At that meeting, three individuals,all of whom are current directors, were nominated and elected to serve untilthe 2005 Annual Meeting by the following votes:

 
| **Director**          |   | **Shares For** |   | **Shares  Against** |   | **Shares  Withheld** |   |
|-----------------------|--------|----------------|--------|---------------------|--------|----------------------|--------|
| Ralph W. Gidwitz      |   | 1,621,529      |   | —              |   | 8,600                |   |
| Theodore R.  Tetzlaff |   | 1,621,489      |   | —              |   | 8,640                |   |
| Peter E.  Thieriot    |   | 1,621,489      |   | —              |   | 8,640                |   |

 

There were no broker non-votes.

 

The following directors’ terms of office continuedafter the meeting until the Annual Meetings of the years as noted:

 

| **Directors**      |   | **Expiration  of Term** |   |
|--------------------|--------|-------------------------|--------|
| Thomas H.  Carmody |   | 2003                    |   |
| Ronald J.  Gidwitz |   | 2003                    |   |
| Darrell M. Trent   |   | 2003                    |   |
| James G. Gidwitz   |   | 2004                    |   |
| Betsy R. Gidwitz   |   | 2004                    |   |
| Joseph J. Sum      |   | 2004                    |   |

 

(c)           In addition to the above election,the appointment of the independent auditing firm of PricewaterhouseCoopers LLPwas ratified by the following vote:

 
| **For**   |   | **Against** |   | **Abstain** |   |
|-----------|--------|-------------|--------|-------------|--------|
| 1,624,709 |   | 4,420       |   | 1,000       |   |

 

There were no broker non-votes.

 

(d)           No other matters were submitted forvote.

 

Item 5.            Other Information

 

Peter E. Thieriotfiled one late report with the Securities and Exchange Commission in 2002 underSection 16(a) relating to shares of the Company he owned at the time he becamea Director of the Company.

 

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Item 6.            Exhibits and Reports on Form 8-K

 

(a)  Exhibits

 
|   | **Exhibit  No.** |   | **Description**                                                                                     |   |
|--------|------------------|--------|-----------------------------------------------------------------------------------------------------|--------|
|   |             |   |                                                                                                |   |
|   | 99.1             |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |   |
|   |             |   |                                                                                                |   |
|   | 99.2             |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |   |

 

 

(b)  Registrantfiled no reports on Form 8-K during the quarter ended June 29, 2002.

 

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:  | August 6, 2002 | By:                               | /S/ Joseph J. Sum |   |
|   |           |                              | Joseph J. Sum, Vice President and  Chief Financial Officer |

 

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