**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 ended April 2, 2005**                                                                                                   |
|                                                                                                                                               |       |                                                                                          |
| **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 ofregistrant as specified in its charter)

 

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

 

**200 SouthWacker Drive, Suite 4000, Chicago, Illinois 60606**

(Address ofprincipal executive offices)

(Zip Code)

 

**(312)541-7200**

(Registrant’s telephonenumber, including area code)

 

 

(Former name,former address and former fiscal

year, if changedsince last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes    ý    No  o

 

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

 

Yes  o      No  ý

 
| Number of common  shares outstanding at May 5, 2005 |   | 1,647,914 |   |
|-----------------------------------------------------|--------|-----------|--------|

 

 

----

 

PART I - FINANCIALINFORMATION

 

## **Item 1.  Financial Statements**

## ** **

CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED BALANCE SHEETS

APRIL 2, 2005 ANDJANUARY 1, 2005

 (000’s omitted except share data)

 
| ** **                                                                                          | ** ** | **APRIL 2,  2005** | ** ** | **JANUARY 1,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|
| ** **                                                                                          | ** ** | **(Unaudited)**    | ** ** | ** **           | ** ** |
| ***ASSETS***                                                                                        | ** ** | ** **         | ** ** | ** **           | ** ** |
| Current assets:                                                                                     |       |               |       |                 |       |
| Cash and cash  equivalents                                                                          |       | $                  | —     |                 | $          | 2,828 |   |
| Receivables, net                                                                                    |       | 19,154             |       | 18,418               |       |
| Receivable for  insured losses                                                                      |       | 4,520              |       | 4,466                |       |
| Inventories:                                                                                        |       |               |       |                 |       |
| Finished goods                                                                                      |       | 8,617              |       | 7,343                |       |
| Work in process                                                                                     |       | 1,547              |       | 1,684                |       |
| Raw materials  and supplies                                                                         |       | 8,764              |       | 7,582                |       |
| Prepaid expenses                                                                                    |       | 3,372              |       | 3,559                |       |
| Total current  assets                                                                               |       | 45,974             |       | 45,880               |       |
|                                                                                                |       |               |       |                 |       |
| Property, plant  and equipment, net                                                                 |       | 30,248             |       | 30,033               |       |
|                                                                                                |       |               |       |                 |       |
| Goodwill                                                                                            |       | 7,374              |       | 7,374                |       |
| Non-compete  agreements                                                                             |       | 897                |       | 953                  |       |
| Other assets                                                                                        |       | 1,407              |       | 1,643                |       |
|                                                                                                |       |               |       |                 |       |
| ** **                                                                                          | ** ** | **$**              | **85,900** | ** **           | **$**      | **85,883** |   |
| ** **                                                                                          | ** ** | ** **         | ** ** | ** **           |       |
| ***LIABILITIES***                                                                                   |       |               |       |                 |       |
| Current  liabilities:                                                                               |       |               |       |                 |       |
| Bank loan  payable                                                                                  |       | $                  | 800        |                 | $          | — |   |
| Current portion  of long-term debt                                                                  |       | 2,000              |       | 2,000                |       |
| Accounts payable  and accrued expenses                                                              |       | 14,193             |       | 14,239               |       |
| Liability for  unpaid claims covered by insurance                                                   |       | 4,520              |       | 4,466                |       |
| Income taxes                                                                                        |       | 344                |       | 767                  |       |
| Total current  liabilities                                                                          |       | 21,857             |       | 21,472               |       |
|                                                                                                |       |               |       |                 |       |
| Long-term debt                                                                                      |       | 6,500              |       | 7,000                |       |
| Deferred income  taxes                                                                              |       | 3,796              |       | 3,796                |       |
| Other long-term  liabilities                                                                        |       | 2,623              |       | 2,167                |       |
|                                                                                                |       |               |       |                 |       |
| ***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                                                                                  |       | 62,285             |       | 62,573               |       |
| Accumulated  other comprehensive losses net of tax of $12 and $41 (interest rate swap  adjustments) |       | (27                | )          | (67                  | )          |
| Treasury shares,  926,350 and 923,850, at cost                                                      |       | (13,759            | )          | (13,683              | )          |
|                                                                                                |       | 51,124             |       | 51,448               |       |
|                                                                                                |       |               |       |                 |       |
| ** **                                                                                          | ** ** | **$**              | **85,900** | ** **           | **$**      | **85,883** |   |

 

See accompanyingnotes

 

2

----

 

CONTINENTALMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREEMONTHS ENDED APRIL 2, 2005 AND APRIL 3, 2004

(Unaudited)

(000’s omittedexcept per-share amounts)

 
| ** **                                                                 | ** ** | **APRIL 2,  2005** | ** ** | **APRIL 3,  2004** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
|                                                                       |       |               |       |               |       |
| Sales                                                                      |       | $                  | 29,757     |               | $          | 27,247 |   |
|                                                                       |       |               |       |               |       |
| Costs and  expenses:                                                       |       |               |       |               |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization)     |       | 24,765             |       | 22,171             |       |
| Depreciation,  depletion and amortization                                  |       | 1,216              |       | 1,368              |       |
| Selling and  administrative                                                |       | 4,181              |       | 4,124              |       |
|                                                                       |       |               |       |               |       |
| Gain (loss) on  disposition of property and equipment                      |       | 67                 |       | (1                 | )          |
|                                                                       |       | 30,095             |       | 27,664             |       |
|                                                                       |       |               |       |               |       |
| Operating loss                                                             |       | (338               | )          | (417               | )          |
|                                                                       |       |               |       |               |       |
| Interest                                                                   |       | (131               | )          | (156               | )          |
| Other income,  net                                                         |       | 46                 |       | 6                  |       |
|                                                                       |       |               |       |               |       |
| Loss before  income taxes                                                  |       | (423               | )          | (567               | )          |
|                                                                       |       |               |       |               |       |
| Benefit from  income taxes                                                 |       | (135               | )          | (204               | )          |
|                                                                       |       |               |       |               |       |
| Net loss                                                                   |       | (288               | )          | (363               | )          |
|                                                                       |       |               |       |               |       |
| Retained  earnings, beginning of period                                    |       | 62,573             |       | 60,200             |       |
| ** **                                                                 | ** ** | ** **         | ** ** | ** **         | ** ** |
| Retained  earnings, end of period                                          | ** ** | **$**              | **62,285** | ** **         | **$**      | **59,837** | ** ** |
|                                                                       |       |               |       |               |       |
| Basic loss per  share                                                      | ** ** | **$**              | **(.17**   | **)**              | **$**      | **(.21** | **)** |
|                                                                       |       |               |       |               |       |
| Average shares  outstanding                                                | ** ** | **1,648**          | ** ** | **1,714**          | ** ** |
|                                                                       |       |               |       |               |       |
| Diluted loss per  share                                                    | ** ** | **$**              | **(.17**   | **)**              | **$**      | **(.21** | **)** |
|                                                                       |       |               |       |               |       |
| Average shares  outstanding                                                | ** ** | **1,648**          | ** ** | **1,714**          | ** ** |
| ** **                                                                 | ** ** | ** **         | ** ** | ** **         | ** ** |
| Comprehensive  income:                                                     |       |               |       |               |       |
| Net loss                                                                   |       | $                  | (288       | )                  | $          | (363 | ) |
| Comprehensive  income from interest rate swap, net of tax of $29 and $(15) |       | 40                 |       | 17                 |       |
|                                                                       |       | $                  | (248       | )                  | $          | (346 | ) |

 

See accompanyingnotes

 

3

----

 

CONSOLIDATEDMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE THREEMONTHS ENDED APRIL 2, 2005 AND APRIL 3, 2004

(Unaudited)

(000’s omitted)

 
| ** **                                         | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **APRIL 2,  2005**     | ** ** | **APRIL 3,  2004** | ** ** |
| ** **                                         | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net cash used in  operating activities             |       | $                      | (1,745     | ) | $ | (4,470 | ) |
|                                               |       |                   |       |   |   |
| Investing  activities:                             |       |                   |       |   |   |
| Capital  expenditures                              |       | (1,374                 | )          | (1,011 | ) |
| Proceeds from  sale of property and equipment      |       | 67                     |       | 1 |   |
| Net cash used in  investing activities             |       | (1,307                 | )          | (1,010 | ) |
|                                               |       |                   |       |   |   |
| Financing  activities:                             |       |                   |       |   |   |
| Borrowings under  revolving credit facility        |       | 800                    |       | 1,900 |   |
| Repayment of  long term debt                       |       | (500                   | )          | (549 | ) |
| Payment to  acquire treasury stock                 |       | (76                    | )          | (480 | ) |
| Net cash  provided by financing activities         |       | 224                    |       | 871 |   |
|                                               |       |                   |       |   |   |
| Net decrease in  cash and cash equivalents         |       | (2,828                 | )          | (4,609 | ) |
| Cash and cash  equivalents:                        |       |                   |       |   |   |
| Beginning of  period                               |       | 2,828                  |       | 4,609 |   |
|                                               |       |                   |       |   |   |
| End of period                                      | ** ** | **$**                  | **—** | ** ** | **$** | **—** | ** ** |
| ** **                                         | ** ** | ** **             | ** ** | ** ** | ** ** |
| Supplemental  disclosures of cash flow items:      |       |                   |       |   |   |
| Cash paid  (received) during the three months for: |       |                   |       |   |   |
| Interest                                           |       | $                      | 222        |   | $ | 166 |   |
| Income taxes                                       |       | 287                    |       | 501 |   |

 

See accompanyingnotes

 

4

----

 

CONTINENTALMATERIALS CORPORATION

SECURITIES ANDEXCHANGE COMMISSION FORM 10-Q

NOTES TO THEQUARTERLY CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED APRIL2, 2005

(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 and footnotedisclosures normally accompanying the annual financial statements have beenomitted.  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 including any amendments thereto.  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 2005 provisionfor income taxes is based upon the estimated effective of tax rate of 32% forthe year which includes the estimated impact of the American Jobs Creation Actof 2004.

 

3.               Operating resultsfor the first three months of 2005 are not necessarily indicative ofperformance for the entire year. Historically, sales of construction materials are higher in the secondand third quarters.  Overall, sales ofheating and air conditioning products have not shown strong seasonalfluctuations in recent years although product mix has historically yieldedhigher gross profit margins in the fourth quarter.  (See Note 10 of Notes to ConsolidatedFinancial Statements in the Company’s 2004 Annual Report on Form 10-K.)

 

4.               The following is areconciliation of the calculation of basic and diluted earnings per share (EPS)for the three months ended April 2, 2005 and April 3, 2004 (amounts inthousands, except per-share amounts):

 
| ** **                  | ** ** | **Income  (Loss)** | ** ** | **Shares** | ** ** | **Per-share  (loss) earnings** | ** ** |
|-----------------------------|------------|--------------------|------------|------------|------------|--------------------------------|------------|
| April 2, 2005               |       |               |       |       |       |                           |       |
| Basic EPS                   |       | $                  | (288       | )          | 1,648      |                           | $          | (.17 | ) |
| Effect of  dilutive options |       | —             |       | —     |       |                           |       |
| Diluted EPS                 |       | $                  | (288       | )          | 1,648      |                           | $          | (.17 | ) |
|                        |       |               |       |       |       |                           |       |
| April 3, 2004               |       |               |       |       |       |                           |       |
| Basic EPS                   |       | $                  | (363       | )          | 1,714      |                           | $          | (.21 | ) |
| Effect of  dilutive options |       | —             |       | —     |       |                           |       |
| Diluted EPS                 |       | $                  | (363       | )          | 1,714      |                           | $          | (.21 | ) |

 

5.               The following tablepresents information about reported segments for the three months ended April 2,2005 and April 3, 2004 along with the items necessary to reconcile the segmentinformation to the totals reported in the financial statements (amounts inthousands):

 

5

----

 
| ** **                        | ** ** | **Heating and Air  Conditioning** | ** ** | **Construction  Materials** | ** ** | **All Other** | ** ** | **Unallocated  Corporate** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|---------------|------------|----------------------------|------------|-----------|------------|
| 2005                              |       |                              |       |                        |       |          |       |                       |       |      |       |
| Revenues from  external customers |       | $                                 | 10,693     |                        | $          | 18,978        |       | $                          | 86         |      | $          | — |   | $ | 29,757 |   |
| Segment  operating (loss) income  |       | 594                               |       | (136                        | )          | 16            |       | (812                       | )          | (338      | )          |
| Segment assets                    |       | 31,659                            |       | 52,361                      |       | 4             |       | 1,876                      |       | 85,900    |       |
|                              |       |                              |       |                        |       |          |       |                       |       |      |       |
| 2004                              |       |                              |       |                        |       |          |       |                       |       |      |       |
| Revenues from  external customers |       | $                                 | 11,669     |                        | $          | 15,490        |       | $                          | 86         |      | $          | 2 |   | $ | 27,247 |   |
| Segment  operating (loss) income  |       | 1,108                             |       | (665                        | )          | 12            |       | (872                       | )          | (417      | )          |
| Segment assets                    |       | 30,353                            |       | 48,921                      |       | 260           |       | 1,601                      |       | 81,135    |       |

 

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

 

6.               Identifiable intangibleassets as of April 2, 2005 consist of three amortizable non-compete agreements thatwere carried at $897,000, net of $1,103,000 accumulated amortization.  The pre-tax amortization expense forintangible assets during the quarter ended April 2, 2005 was $57,000.  Based upon the intangible assets recorded onthe balance sheet at April 2, 2005, amortization expense for the next fiveyears is estimated to be as follows: 2005 – $225,000, 2006 – $216,000, 2007 – $138,000,2008 – $125,000, and 2009 – $125,000.

 

7.               The interest rateswap agreement is reported consistent with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” and its related amendment, SFASNo. 138, “Accounting for Certain Derivative Instruments and Certain HedgingActivities,” which require recognition of derivatives as either assets orliabilities and measurement at fair value. The change in accumulated othercomprehensive losses, net of taxes, from January 2, 2005 to April 2, 2005 was asfollows (amounts in thousands):

 
| Balance at January  2, 2005                                                                                        |   | $  | (67    | ) |
|--------------------------------------------------------------------------------------------------------------------|--------|----|--------|---|
| Comprehensive  income from interest rate swap, net of tax effect of $29, for the three  months ended April 2, 2005 |   | 40 |   |
| Comprehensive  net loss                                                                                            |   | $  | (27    | ) |

 

8.               SUBSEQUENT EVENTS

 

OnApril 22, 2005, the Company commenced its previously announced modified Dutchauction **tender offer******for up to 400,000 shares of the Company’s common stock(approximately 24 percent of the Company’s outstanding shares) at a purchaseprice no greater than $30.50 nor less than $27.50.  Under the terms of the proposed offer, theCompany will select the lowest purchase price that will allow it to purchasethe lesser of (1) all of the shares validly tendered prior to the expirationdate, or (2) 400,000 shares.  All sharespurchased by the Company will be purchased at the same price, even ifstockholders have selected a lower price; however, the Company will notpurchase any shares above the determined purchase price.  The offer will expire at 5:00 p.m., NewYork City time, on Friday, May 20, 2005, unless the Company extends theoffer.  The Company’s stockholders andother interested parties are urged to read the Company’s tender offer statementwhich was mailed to them.  In addition, stockholdersand other interested parties are encouraged to read any amendments thereto, andrelated exhibits filed with the SEC. The information is also available free ofcharge at the commission’s website, www.sec.gov.

 

6

----

 

On April 14, 2005, theCompany entered into the Second Amendment (Amendment) to Revolving Credit andTerm Loan Agreement dated September 5, 2003 as amended as of May 29, 2004 (LoanAgreement).  The Amendment increases theprincipal amount of the term loan portion of the Loan Agreement by $12,500,000.  The proceeds will be used to fund thepurchase of the Company’s stock under the above tender offer and pay relatedfees and expenses.  The Amendment alsoreset the amount authorized for the repurchase of the Company’s own stock to$2,000,000, separate from purchases made in connection with the tenderoffer.  Principal and interest under theterm loan are payable on a quarterly basis ending on June 28, 2008.

 

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

 

Company Overview

 

The Company operatesprimarily in two industry segments, the heating and air conditioning segmentand the construction materials segment. The primary products manufactured by the heating and air conditioningsegment are gas-fired wall furnaces, console heaters, evaporative coolers andfan coils.  Gas-fired wall furnaces,console heaters and fan coil products are manufactured at Williams Furnace Co.,headquartered in Colton, California. Evaporative coolers are manufactured at Phoenix Manufacturing, Inc., basedin Phoenix, Arizona.  The primaryproducts of the construction materials segment are ready mix concrete,construction aggregates, building supplies and doors, which are offered byTransit Mix Concrete Co. and Castle Concrete Company in Colorado Springs,Colorado and Transit Mix of Pueblo, Inc. and McKinney Door and Hardware, Inc.in Pueblo, Colorado.  Currently, RockyMountain Ready Mix Concrete, Inc. of Denver, Colorado, only offers ready mixconcrete.

 

FinancialCondition 

 

Asignificant portion of the Company’s business tends to seasonallyfluctuate.  Historically, the Company hasexperienced operating losses during the first quarter except when the weatheris mild along the Front Range in Colorado. Operating results typically improve in the second and third quartersreflecting more favorable weather conditions in Colorado and the seasonal salesof evaporative coolers.  Fourth quarterresults can vary based on weather conditions in Colorado as well as in theprincipal markets for the Company’s heating equipment.  Sales of fan coils are generally not subjectto seasonal variation.  The cash balanceis normally depleted during the first or second quarter of the year reflectingoperating results and the use of sales dating programs related to theevaporative cooler product line.  As aresult, the Company’s borrowings against its revolving credit facility tend topeak during the second quarter and then decline over the remainder of the year.This trend has continued thus far in 2005.

 

Asexpected, the Company’s cash flow during the first quarter was negative due tothe seasonality of sales, production schedules and the sales dating programsrelated to the evaporative cooler product line. Operations for the first three months of 2005 used $1,745,000 of cashcompared to $4,470,000 during the first three months of 2004.  By segment, operating cash flow was asfollows:

 
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Construction  materials segment |       | $        | 1,466      |     | $          | (710 | ) |
| Heating and air  conditioning   |       | (2,564   | )          | (2,456   | )          |
| Corporate and  Other            |       | (647     | )          | (1,304   | )          |
| Total                           |       | $        | (1,745     | )        | $          | (4,470 | ) |

 

7

----

 

Theimproved cash flow in the construction and materials segment was primarily theresult of an increase in payables and accruals largely due to the timing ofpayments including the funding of the Company’s contribution to the profitsharing plan.  The payment of the 2004Company contribution, normally made by the end of the first quarter, wasdeferred until after the expiration date of the tender offer.  The improved cash flow for the Corporate andOther group was due to a lower estimated tax payment during the first quarterof 2005 and the aforementioned timing of the Company’s 2004 profit sharing plancontribution.

 

Theconstruction materials segment typically requires large capital investments,particularly when sales volume and demand are strong.  Reflecting the more modest demand in theconstruction materials segment during the past three years, capital spending wasmuch lower during the first quarter of both 2005 and 2004 as compared to expendituresfrom the mid-1990’s through 2001.  Theincrease in capital expenditures was primarily due to the capitalization ofsubsidized leasehold improvements in the new office space leased for theCorporate office.

 

Scheduleddebt repayments were made during the first quarter of both 2005 and 2004.  As expected, the Company, borrowed againstits revolving credit facility during the 2005 first quarter.  The highest amount of Company borrowingsoutstanding under the revolving credit agreement during the first quarter of2005 was the $800,000 outstanding at April 2, 2005 and the average amountoutstanding during the first quarter was $14,000.

 

Otherthan the anticipated funds to be provided to fund the tender offer discussed inNote 8, we believe that the anticipated cash flow from operations, supplementedby seasonal borrowings available from the revolving line of credit, will besufficient to cover expected cash needs, including servicing debt and plannedcapital expenditures for at least the next twelve months.

 

Results of Operations- Comparison of Quarter Ended April 2, 2005 to Quarter Ended April 3, 2004

 

Asummary of operating information by segment for the quarters ended April 2,2005 and April 3, 2004 is as follows:

 
| ** **                              | ** ** | **Quarter ended   April 2, 2005** | ** ** | **Quarter ended   April 3, 2004** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| Revenues from  external customers       |       |                              |       |                              |       |
| Heating and air  conditioning           |       | $                                 | 10,693     |                              | $          | 11,669 |   |
| Construction  materials                 |       | 18,978                            |       | 15,490                            |       |
|                                    |       |                              |       |                              |       |
| Operating income  (loss)                |       |                              |       |                              |       |
| Heating and air  conditioning           |       | 594                               |       | 1,108                             |       |
| Construction  materials                 |       | (136                              | )          | (664                              | )          |
|                                    |       |                              |       |                              |       |
| Assets                                  |       |                              |       |                              |       |
| Heating and air  conditioning           |       | 31,659                            |       | 30,353                            |       |
| Construction  materials                 |       | 52,361                            |       | 48,921                            |       |
|                                    |       |                              |       |                              |       |
| Operating income  as a percent of sales |       |                              |       |                              |       |
| Heating and air  conditioning           |       | 5.6                               | %          | 9.5                               | %          |
| Construction  materials                 |       | (.7                               | )          | (4.3                              | )          |
|                                    |       |                              |       |                              |       |
| Return on assets                        |       |                              |       |                              |       |
| Heating and air  conditioning           |       | 1.9                               | %          | 3.7                               | %          |
| Construction  materials                 |       | (.3                               | )          | (1.4                              | )          |
|                                         |            |                                   |            |                                   |            |  |  |

 

8

----

 

Consolidatedsales during the first quarter of 2005 were $29,757,000 yielding a $338,000operating loss.  In the first quarter of2004 sales were $27,247,000 with an operating loss of $417,000.  Historically, the Company has experiencedoperating losses during the first quarter except when the construction activityis strong and the weather is mild along the Front Range in Colorado.

 

Theheating and air conditioning segment reported a $976,000 decrease in sales, or8.4%.  The sales decline was mostly due todepressed evaporative cooler sales as a result of rather cool weather in themarkets served.  Cost of sales as apercentage of sales increased from 72.2% for the first quarter of 2004 to 76.6%for the 2005 quarter reflecting increased steel costs that the Company wasunable to fully recover through higher selling prices for both evaporativecoolers and furnaces.  Depreciationremained relatively constant between the first quarter of 2004 and firstquarter of 2005.  Selling andadministrative costs during the first quarter of 2005 declined as a result of areduction in office staff as well as lower commissions related to the decreasedevaporative cooler sales.  The decline inoperating income was the result of the increased steel costs on bothevaporative coolers and furnaces exacerbated by the decreased evaporativecooler sales volume.   Operating incomeas a percent of sales and the return on assets were both lower as a result ofthese factors.

 

Salesin the construction materials segment during the first quarter of 2005 increased$3,488,000, or 22.5%.  Sales improved dueto higher volumes of concrete sold and price increases in response to highercement and fuel costs.  Pricing in theDenver metropolitan market has improved, however, it remains depressed comparedto the pricing in effect as recently as 2001, reflecting the intenselycompetitive market.  Volumes improved largelyas a result of milder weather in Colorado during the 2005 quarter.  Cost of sales as a percentage of salesdecreased from 88.4% for the first quarter of 2004 to 87.1% for the 2005 first quarter.  A higher portion of this segments costs arerelatively fixed in nature and therefore cost of sales as a percentage of salesis highly sensitive to sales volume. Depreciation, depletion and amortization declined reflecting the effectof reduced capital spending in recent years. Selling and administrative costs increased in response to the improvedsales.  The reduced operating loss wasprimarily due to the improved volumes. Operating income as a percent of sales and the return on assets both improvedas a result of these factors.

 

Net interest expense declinedas a result of decreased levels of debt and a slightly reduced average interestrate for the 2005 first quarter compared to the first quarter of 2004.

 

CRITICAL ACCOUNTING POLICIESAND ESTIMATES

 

The condensed and consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States which require the Company to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities as of April 2, 2005 and January1, 2005 and affect the reported amounts of revenues and expenses for theperiods reported. Actual results could differ from those estimates.

 

Information with respect to the Company’s criticalaccounting policies which the Company believes could have the most significanteffect on the Company’s reported results and require subjective or complexjudgments by management is contained on pages 13 and 14 in Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, ofthe Company’s Annual Report on Form 10-K for the fiscal year ended January 1,2005.  In addition, the followinginformation is provided:

 

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The Company maintained insurance policies since March31, 2003 with the following per incident deductibles and policy limits:

 
| ** **                     | ** ** | **Deductible** | ** ** | **Policy Limits** | ** ** |
|--------------------------------|------------|----------------|------------|-------------------|------------|
| Product and  general liability |       | $              | 250,000    |              | $          | 5,000,000 |   |
| Workers’  compensation    |       | 350,000        |       | 1,000,000         |       |
| Auto and truck  liability      |       | 100,000        |       | 2,000,000         |       |
|                                |            |                |            |                   |            |  |  |

 

Should the aggregatedout-of-pocket payments for the three policies exceed $3,400,000 during a policyyear, deductibles on future claims are waived and the policies pay all amountsup to the policy limits.  Should any, orall policy limits be exceeded, an umbrella policy is maintained which coversthe next $25,000,000 of claims.

 

Revenues received forshipping and handling are classified as sales. Costs associated with shippingand handling are classified as costs of sales.

 

The Company annuallyassesses goodwill for potential impairment as of the last day of its fiscalyear.

 

OUTLOOK

 

The construction marketin Colorado continues to show some signs of stabilizing but still remainsconsiderably weaker than the conditions that prevailed three to five yearsago.  Concrete prices in the Denvermarket, though improved in the first quarter of 2005 compared to the firstquarter of 2004, are expected to remain very competitive.

 

RECENTLY ISSUED ACCOUNTINGSTANDARDS

 

The Company does not currently have any transactionsor circumstances that have been addressed by recently issued accountingpronouncements.  Therefore, adoption ofany of these statements or pronouncements would not have a material impact onthe Company’s results of operations, financial position or liquidity.

 

FORWARD-LOOKINGSTATEMENTS

 

The foregoing discussioncontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended.  Suchforward-looking statements are based on the beliefs of the Company’s managementas well as on assumptions made by and information available to the Company atthe time such statements were made.  Whenused in this Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,”“expects,” “plans,” “projects,” and similar expressions are intended toidentify forward-looking statements. Actual results could differ materially from those projected in theforward-looking statements as a result of factors including but not limited to:weather, interest rates, availability of raw materials and their related costs,national and local economic conditions and competitive forces.  Changes in accounting pronouncements couldalso alter projected results. Forward-looking statements speak only as of the date they were made, andthe Company undertakes no obligation to publicly update them.

 

**Item 3.****            ****Quantitative And Qualitative Disclosures AboutMarket Risk**

 

There have been no materialchanges in the market risks that the Company is exposed to since thosediscussed in the Company’s 2004 Annual Report on Form 10-K.  At April 2, 2005, the amount subject to theinterest rate swap agreement was $6,000,000. Also see Note 7 to the quarterly financial statements above.

 

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**Item 4.****            ****Controls and Procedures**

 

(a)            DisclosureControls and Procedures.

 

The Company’s chiefexecutive officer and chief financial officer, with the participation ofmanagement, have evaluated the effectiveness of the Company’s “disclosurecontrols and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) as of the end of the periodcovering this report. Based on their evaluation, they have concluded that theCompany’s disclosure controls and procedures were effective and were reasonablydesigned to ensure that all material information relating to the Company(including its subsidiaries) required to be disclosed in this quarterly report isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the Securities and Exchange Commission.

 

(b)           Changesin Internal Control Over Financial Reporting.

 

As of April 2, 2005, theCompany has corrected the material weaknesses disclosed in its Form 10-K forthe year ended January 1, 2005, regarding the Company’s design of internalcontrol over financial reporting with respect to its calculation of accruedliabilities for estimated workers’ compensation claims and related expense andthe accounting for income taxes.  TheAudit Committee and management have engaged an actuary to perform periodicevaluations of the Company’s claims activity for the purpose of establishingthe reserve for workers’ compensation claims. The Audit Committee and management have also instituted reviewprocedures with regard to the accounting for income taxes.  There have been no other significant changesin the Company’s internal control over financial reporting identified inconnection with the evaluation of such internal control that occurred duringthe last fiscal quarter that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting,except as described above.

 

 

PART II - OTHERINFORMATION

 

**Item 2.****             UnregisteredSales of Equity Securities and Use of Proceeds**

 

The following tablepresents information with respect to purchases made by the Company of itscommon stock to become treasury stock for the period January 2 through April 2,2005.

 
| ** **                           | ** ** | **Issuer Purchases of Equity Securities**   | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| **Period**                           | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid  per Share** | ** ** | **(c) Total Number of   Shares Purchased as   Part of Publicly   Announced Plans or   Programs** | ** ** | **(d) Maximum Dollar   Value of shares that   May Yet Be Purchased   Under the Plans or   Programs** | ** ** |
| January 2 –  January 29, 2005   |       | 2,500                                       |       | $ | 27.43 |   | 2,500 |   | $ | 1,437,360 |   |
| January 30 –  February 26, 2005 |       | —                                      |       | — |   | — |   | 1,437,360 |   |
| February 27 –  April 2, 2005    |       | —                                      |       | — |   | — |   | 1,437,360 |   |
| Total                                |       | 2,500                                       |       | $ | 27.43 |   | 2,500 |   | $ | 1,437,360 |   |

 

On January 19, 1999, theCompany initiated purchases under the current open-ended program to repurchaseits common stock. Purchases are made on the open market or in

 

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block trades at thediscretion of management. The dollar amount authorized for the program has beenperiodically increased by the Board of Directors and approved by the Company’stwo banks as required by the Company’s Revolving Credit and Term LoanAgreement. The April 14, 2005 amendment to the Loan Agreement provides that theCompany may make purchases of its own stock in an amount not to exceed$2,000,000, separate from purchases made in connection with the tender offer.

 

**Item 6.****             Exhibits**

 
|       | Exhibits         |       |                                                                                                                                                                                       |
|------------|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |             |       |                                                                                                                                                                                       |
| ** ** | **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                            |
|       |             |       |                                                                                                                                                                                       |
|       | 31.1             |       | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes –  Oxley Act of 2002 |
|       |             |       |                                                                                                                                                                                       |
|       | 31.2             |       | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes –  Oxley Act of 2002 |
|       |             |       |                                                                                                                                                                                       |
|       | 32               |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act  of 2002    |
|       |             |       |                                                                                                                                                                                       |

 

SIGNATURE

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   |         | CONTINENTAL MATERIALS  CORPORATION |
|--------|--------------|------------------------------------|
|   |         |                               |   |
|   |         |                               |   |
| Date:  | May 17, 2005 |                               | By: |   /S/ Joseph  J. Sum |   |
|   |         |                               |   Joseph J.  Sum, Vice President |
|   |         |                               |   and Chief  Financial Officer |
|        |              |                                    |  |  |  |

 

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