** **

###### **SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

###### **FORM 10-Q**

 

 
| **(Mark  One)**                                        |
|--------------------------------------------------------|
|                                                   |
| ý                                                 | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                   |
|                                                   |
| **For the quarterly period ending September 29, 2001** |
|                                                   |
| **OR**                                                 |
|                                                   |
| o                                                      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                   |
| **For  the transition period from ________ to ______** |

 

**Commission File number 1-3834**

 

**CONTINENTAL MATERIALSCORPORATION**

(Exactname of registrant as specified in its charter)

 

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

 

 

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

(Addressof principal executive office)

(ZipCode)

 

 

**(312) 541-7200**

(Registrant'stelephone number, including area code)

 

 

(Formername, former address and former

year,if changed since 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

 
| Number of common shares  outstanding at October 30, 2001 |   | 1,805,913 |
|----------------------------------------------------------|--------|-----------|

 

 

 

 

PARTI – FINANCIAL INFORMATION

 

**Item 1.   Financial Statements**

 

CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED BALANCE SHEETS

SEPTEMBER29, 2001 and DECEMBER 30, 2000

(Unaudited)

(000’somitted except share data)

 

 
|                                                                    |   | **SEPTEMBER  29,** |       | **DECEMBER  30,** |       |
|-------------------------------------------------------------------------|--------|--------------------|------------|-------------------|------------|
| ***ASSETS***                                                            |   | **2001**           |       | **2000**          |       |
| Current  assets:                                                        |   |               |       |              |       |
| Cash  and cash equivalents                                              |   | $                  | 4,290      |              | $          | 6,216 |   |
| Receivables,  net                                                       |   | 17,795             |       | 16,723            |       |
| Inventories:                                                            |   |               |       |              |       |
| Finished  goods                                                         |   | 7,058              |       | 6,595             |       |
| Work  in process                                                        |   | 2,022              |       | 1,720             |       |
| Raw  materials and supplies                                             |   | 7,295              |       | 7,699             |       |
| Prepaid  expenses                                                       |   | 2,976              |       | 2,572             |       |
| Total  current assets                                                   |   | 41,436             |       | 41,525            |       |
|                                                                    |   |               |       |              |       |
| Property,  plant and equipment, net                                     |   | 32,334             |       | 24,727            |       |
|                                                                    |   |               |       |              |       |
| Goodwill                                                                |   | 6,129              |       | —            |       |
| Other  assets                                                           |   | 2,949              |       | 1,998             |       |
|                                                                    |   |               | ** ** |              | ** ** |
|                                                                    |   | $                  | 82,848     |              | $          | 68,250 |   |
|                                                                    |   |               |       |              |       |
| ***LIABILITIES***                                                       |   |               |       |              |       |
| Current liabilities:                                                    |   |               |       |              |       |
| Current  portion of long-term debt                                      |   | $                  | 3,563      |              | $          | 2,158 |   |
| Accounts  payable and accrued expenses                                  |   | 15,042             |       | 14,810            |       |
| Income  taxes                                                           |   | 21                 |       | 312               |       |
| Total  current liabilities                                              |   | 18,626             |       | 17,280            |       |
|                                                                    |   |               |       |              |       |
| Long-term  debt                                                         |   | 15,209             |       | 5,147             |       |
| Deferred  income taxes                                                  |   | 2,074              |       | 1,598             |       |
| Other  long-term liabilities                                            |   | 2,665              |       | 2,412             |       |
|                                                                    |   |               |       |              |       |
| ***SHAREHOLDERS’ EQUITY***                                         |   |               |       |              |       |
| Common  shares, $0.25 par value; authorized 3,000,000; issued 2,574,264 |   | 643                |       | 643               |       |
| Capital  in excess of par value                                         |   | 1,950              |       | 1,985             |       |
| Retained  earnings                                                      |   | 51,160             |       | 48,138            |       |
| Treasury  shares, 768,167 and 741,040, at cost                          |   | (9,479             | )          | (8,953            | )          |
|                                                                    |   | 44,274             |       | 41,813            |       |
|                                                                    |   |               |       |              |       |
|                                                                    |   | $                  | 82,848     |              | $          | 68,250 |   |

 

 

 

Seeaccompanying notes

 

 

 

 

CONTINENTALMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FORTHE THREE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000

(Unaudited)

(000’somitted except per share amounts)

 

 

 

 
|                                                                   |   |                     |       |                     |       |
|------------------------------------------------------------------------|--------|--------------------------|------------|--------------------------|------------|
|                                                                   |   | **SEPTEMBER  29,  2001** | ** ** | **SEPTEMBER  30,  2000** | ** ** |
|                                                                   |   |                     |       |                     |       |
| Sales                                                                  |   | $                        | 32,964     |                     | $          | 29,186 |   |
| Freight  costs                                                         |   | 1,614                    |       | 1,733                    |       |
| Net  sales                                                             |   | 31,350                   |       | 27,453                   |       |
|                                                                   |   |                     |       |                     |       |
| Costs  and expenses:                                                   |   |                     |       |                     |       |
| Cost  of sales (exclusive of depreciation, depletion and amortization) |   | 22,739                   |       | 20,077                   |       |
| Depreciation,  depletion and amortization                              |   | 1,589                    |       | 1,605                    |       |
| Selling  and administrative                                            |   | 4,166                    |       | 4,138                    |       |
|                                                                   |   | 28,494                   |       | 25,820                   |       |
|                                                                   |   |                     |       |                     |       |
|                                                                   |   |                     |       |                     |       |
| Operating  income                                                      |   | 2,856                    |       | 1,633                    |       |
|                                                                   |   |                     |       |                     |       |
| Interest                                                               |   | (257                     | )          | (179                     | )          |
| Other  income, net                                                     |   | 426                      |       | 36                       |       |
|                                                                   |   |                     |       |                     |       |
| Income  before income taxes                                            |   | 3,025                    |       | 1,490                    |       |
|                                                                   |   |                     |       |                     |       |
| Provision  for income taxes                                            |   | 1,089                    |       | 551                      |       |
|                                                                   |   |                     |       |                     |       |
| Net  income                                                            |   | 1,936                    |       | 939                      |       |
|                                                                   |   |                     |       |                     |       |
| Retained  earnings, beginning of period                                |   | 49,224                   |       | 44,226                   |       |
|                                                                   |   |                     |       |                     |       |
| Retained  earnings, end of period                                      |   | $                        | 51,160     |                     | $          | 45,165 |   |
|                                                                   |   |                     |       |                     |       |
| Basic  earnings per share                                              |   | $                        | 1.07       |                     | $          | .50 |   |
|                                                                   |   |                     |       |                     |       |
| Average  shares outstanding                                            |   | 1,807                    |       | 1,866                    |       |
|                                                                   |   |                     |       |                     |       |
| Diluted  earnings per share                                            |   | $                        | 1.05       |                     | $          | .49 |   |
|                                                                   |   |                     |       |                     |       |
| Average  shares outstanding                                            |   | 1,842                    |       | 1,904                    |       |
|                                                                   |   |                     |       |                     |       |

 

 

 

Seeaccompanying notes

 

 

 

CONTINENTALMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FORTHE NINE MONTHS SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000

(Unaudited)

(000’somitted except per share amounts)

 

 

 
|                                                                   |   | **SEPTEMBER  29,** |   | **SEPTEMBER  30,** |   |
|------------------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|
|                                                                   |   | **2001**           |   | **2000**           |   |
|                                                                   |   |               |   |               |   |
| Sales                                                                  |   | $                  | 95,810 |               | $      | 84,768 |   |
| Freight  costs                                                         |   | 4,424              |   | 4,180              |   |
| Net  sales                                                             |   | 91,386             |   | 80,588             |   |
|                                                                   |   |               |   |               |   |
| Costs  and expenses:                                                   |   |               |   |               |   |
| Cost  of sales (exclusive of depreciation, depletion and amortization) |   | 68,662             |   | 60,088             |   |
| Depreciation,  depletion and amortization                              |   | 4,871              |   | 4,328              |   |
| Selling  and administrative                                            |   | 12,927             |   | 12,334             |   |
|                                                                   |   | 84,460             |   | 76,750             |   |
|                                                                   |   |               |   |               |   |
| Operating  income                                                      |   | 4,926              |   | 3,838              |   |
|                                                                   |   |               |   |               |   |
| Interest                                                               |   | (832               | )      | (517               | )      |
| Other  income, net                                                     |   | 628                |   | 428                |   |
|                                                                   |   |               |   |               |   |
| Income  before income taxes                                            |   | 4,722              |   | 3,749              |   |
|                                                                   |   |               |   |               |   |
| Provision  for income taxes                                            |   | 1,700              |   | 1,387              |   |
|                                                                   |   |               |   |               |   |
| Net  income                                                            |   | 3,022              |   | 2,362              |   |
|                                                                   |   |               |   |               |   |
| Retained  earnings, beginning of period                                |   | 48,138             |   | 42,803             |   |
|                                                                   |   |               |   |               |   |
| Retained  earnings, end of period                                      |   | $                  | 51,160 |               | $      | 45,165 |   |
|                                                                   |   |               |   |               |   |
| Basic  earnings per share                                              |   | $                  | 1.67   |               | $      | 1.26 |   |
|                                                                   |   |               |   |               |   |
| Average  shares outstanding                                            |   | 1,814              |   | 1,876              |   |
|                                                                   |   |               |   |               |   |
| Diluted  earnings per share                                            |   | $                  | 1.64   |               | $      | 1.24 |   |
|                                                                   |   |               |   |               |   |
| Average  shares outstanding                                            |   | 1,847              |   | 1,913              |   |

 

 

 

Seeaccompanying notes

 

 

 

CONSOLIDATEDMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FORTHE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000

(Unaudited)

(000’somitted)

 

 

 

 

 

 
|                                                                      |   | **SEPTEMBER  29,  2001** |   | **SEPTEMBER  30,  2000** |   |
|---------------------------------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                                                      |   |                     |   |                     |   |
|                                                                      |   |                     |   |                     |   |
| Net  cash provided by (used in) operating activities                      |   | $                        | 7,284  |                     | $      | 3,729 |   |
|                                                                      |   |                     |   |                     |   |
| Investing  activities:                                                    |   |                     |   |                     |   |
| Purchase  of Rocky Mountain Ready Mix Concrete, Inc. net of cash received |   | (11,262                  | )      | —                   |   |
| Capital  expenditures                                                     |   | (7,549                   | )      | (2,441                   | )      |
| Proceeds  from sale of property and equipment                             |   | 55                       |   | 76                       |   |
| Net  cash used in investing activities                                    |   | (18,756                  | )      | (2,365                   | )      |
|                                                                      |   |                     |   |                     |   |
| Financing  activities:                                                    |   |                     |   |                     |   |
| Repayment  of revolving credit facility                                   |   | —                   |   | (1,600                   | )      |
| Long-term  borrowings                                                     |   | 12,000                   |   | 4,000                    |   |
| Repayment  of long term debt                                              |   | (1,893                   | )      | (107                     | )      |
| Proceeds  from exercise of stock options                                  |   | 75                       |   | 203                      |   |
| Payment  to acquire treasury stock                                        |   | (636                     | )      | (2,601                   | )      |
| Net  cash provided by (used in) financing activities                      |   | 9,546                    |   | (105                     | )      |
|                                                                      |   |                     |   |                     |   |
| Net  decrease (increase) in cash and cash equivalents                     |   | (1,926                   | )      | 1,259                    |   |
| Cash  and cash equivalents:                                               |   |                     |   |                     |   |
| Beginning  of period                                                      |   | 6,216                    |   | 347                      |   |
|                                                                      |   |                     |   |                     |   |
| End  of period                                                            |   | $                        | 4,290  |                     | $      | 1,606 |   |
|                                                                      |   |                     |   |                     |   |
|                                                                      |   |                     |   |                     |   |
|                                                                      |   |                     |   |                     |   |
| Supplemental  disclosures of cash flow items:                             |   |                     |   |                     |   |
| Cash  paid during the nine months for:                                    |   |                     |   |                     |   |
| Interest                                                                  |   | $                        | 791    |                     | $      | 534 |   |
| Income  taxes                                                             |   | 1,893                    |   | 1,912                    |   |

 

 

 

Seeaccompanying notes

 

 

 

CONTINENTALMATERIALS CORPORATION

SECURITIESAND EXCHANGE COMMISSION FORM 10-Q

NOTESTO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS

QUARTERENDED SEPTEMBER 29, 2001

(Unaudited)

 

 

 

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

 

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

 

3.     Operating results for the first nine monthsof 2001 are not necessarily indicative of performance for the entire year.  Historically, sales of constructionmaterials are higher in the second and third quarters.  Overall, sales of heating and airconditioning products have not shown strong seasonal fluctuations in recentyears although product mix has historically yielded higher gross profit marginsin the fourth quarter.  (See Note 11 ofNotes to Consolidated Financial Statements in the Company’s 2000 AnnualReport.)

 

4.     The following is a reconciliation of thecalculation of basic and diluted earnings per share (EPS) for the three andnine months ended September 29, 2001 and September 30, 2000.  Amounts in thousands except per-share data.

 

 
|                        |   | **Three  months ended** |   | **Nine  months ended** |   |
|-----------------------------|--------|-------------------------|--------|------------------------|--------|
|                        |   | **Income**              |   | **Shares**             |   | **Per-  share  earnings** |   | **Income** |   | **Shares** |   | **Per-  share  earnings** |   |
| September  29, 2001         |   |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Basic  EPS                  |   | $                       | 1,936  |                   | 1,807  |   | $ | 1.07 |   | $ | 3,022 |   | 1,814 |   | $ | 1.67 |   |
| Effect  of dilutive options |   | —                  |   | 35                     |   |   |   | — |   | 33 |   |   |   |
| Diluted  EPS                |   | $                       | 1,936  |                   | 1,842  |   | $ | 1.05 |   | $ | 3,022 |   | 1,847 |   | $ | 1.64 |   |
|                        |   |                    |   |                   |   |   |   |   |   |   |   |   |   |
| September  30, 2000         |   |                    |   |                   |   |   |   |   |   |   |   |   |   |
| Basic  EPS                  |   | $                       | 939    |                   | 1,866  |   | $ | .50 |   | $ | 2,362 |   | 1,876 |   | $ | 1.26 |   |
| Effect  of dilutive options |   | —                  |   | 38                     |   |   |   | — |   | 37 |   |   |   |
| Diluted  EPS                |   | $                       | 939    |                   | 1,904  |   | $ | .49 |   | $ | 2,362 |   | 1,913 |   | $ | 1.24 |   |

 

 

 

5.     The following table presents informationabout reported segments for the nine month and three month periods endedSeptember 29, 2001 and September 30, 2000 along with the items necessary toreconcile the segment information to the totals reported in the financialstatements (amounts in thousands).

 

 
|                              |   | **Heating  and Air** |   | **Construction** |   |           |   | **Unallocated** |   |      |   |
|-----------------------------------|--------|----------------------|--------|------------------|--------|----------------|--------|-----------------|--------|-----------|--------|
|                              |   | **Conditioning**     |   | **Materials**    |   | **All  Other** |   | **Corporate**   |   | **Total** |   |
| 2001                              |   |                 |   |             |   |           |   |            |   |      |   |
| Nine  Months                      |   |                 |   |             |   |           |   |            |   |      |   |
| Revenues  from external customers |   | $                    | 35,679 |             | $      | 60,021         |   | $               | 109    |      | $      | 1 |   | $ | 95,810 |   |
| Operating  income                 |   | 1,745                |   | 5,577            |   | (15            | )      | (2,381          | )      | 4,926     |   |
| Assets                            |   | 27,549               |   | 49,079           |   | 74             |   | 6,146           |   | 82,848    |   |
| Three  Months                     |   |                 |   |             |   |           |   |            |   |      |   |
| Revenues  from external customers |   | 10,551               |   | 22,376           |   | 37             |   | 0               |   | 32,964    |   |
| Operating  income                 |   | 789                  |   | 2,846            |   | (5             | )      | (774            | )      | 2,856     |   |
|                              |   |                 |   |             |   |           |   |            |   |      |   |
| 2000                              |   |                 |   |             |   |           |   |            |   |      |   |
| Nine  Months                      |   |                 |   |             |   |           |   |            |   |      |   |
| Revenues  from external customers |   | $                    | 32,919 |             | $      | 51,736         |   | $               | 109    |      | $      | 4 |   | $ | 84,768 |   |
| Operating  income                 |   | 1,380                |   | 4,731            |   | (25            | )      | (2,248          | )      | 3,838     |   |
| Assets                            |   | 29,387               |   | 33,132           |   | 43             |   | 4,472           |   | 67,034    |   |
| Three  Months                     |   |                 |   |             |   |           |   |            |   |      |   |
| Revenues  from external customers |   | 10,698               |   | 18,451           |   | 37             |   | —          |   | 29,186    |   |
| Operating  income                 |   | 825                  |   | 1,491            |   | —         |   | (683            | )      | 1,633     |   |

 

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

 

6.     On December 31, 2000, the Company acquiredall of the stock of Rocky Mountain Ready Mix Concrete, Inc. (“RMRM”), aready-mix concrete producer in the metropolitan Denver, Colorado area for acash purchase price of $11,262,000 net of $1,320,000 of cash received and$2,541,000 of liabilities and debt.  Theacquisition has been accounted for under the purchase method and, accordingly,the operating results of RMRM have been included in the consolidated resultssince the date of acquisition.

 

The funds used toacquire RMRM were provided by a renegotiated unsecured term loan with theCompany’s two existing banks.  Goodwillof $6,245,000 and the cost of a non-competition agreement of $1,250,000(included in other assets) related to the acquisition are being amortized over40 and 10 years, respectively.

 

The purchased company isinvolved in the production of ready-mix concrete from three locations in themetropolitan Denver, Colorado area. Sales are made primarily within a 60-mile radius of Denver, Colorado.

 

 

 

The table belowsummarizes the unaudited pro-forma results of operation for the year endedDecember 30, 2000 assuming the acquisition described had been consummated as ofJanuary 1, 2000, with adjustments primarily attributed to interest expenserelating to the renegotiated debt, depreciation expense relating to thewrite-up to fair value of the assets acquired and amortization of the relatedgoodwill and non-competition agreement.

 

 
|                        |   | **2000  Unaudited** |    |
|-----------------------------|--------|---------------------|---------|
| Sales                       |   | $                   | 129,963 |   |
| Net  income                 |   | 5,536               |    |
| Diluted  earnings per share |   | 2.91                |    |
|                             |        |                     |         |  |

 

These pro-forma resultshave been prepared for comparative purposes only and do not purport to beindicative of what would have occurred had the acquisition been made at thebeginning of the period presented, or the results which may occur in thefuture.

 

 

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

 

 

**          **FinancialCondition (See pages 2, 4 and 5)

 

Operations provided$7,284,000 in cash flow in the first nine months of 2001 compared to $3,729,000in the first nine months of 2000.  Theimprovement is generally due to the significant reduction of accounts payableand accruals during the first nine months of 2000.  Accounts payable and accruals did not experience a similarreduction in the current year.  The increasednet earnings also contributed to the improvement.

 

Capital expenditures inthe first nine months of 2001 were $7,549,000 compared to $2,441,000 in thefirst nine months of 2000.  Most of theincreased capital spending was in the construction materials segment andincluded a new sand plant, a batch plant, the purchase of an aggregatesproperty and an aggregate processing facility. Approximately $2,000,000 of these expenditures is expected to berefinanced with a lease prior to year-end. In the heating and air conditioning segment, a new office building isunder construction in Colton, California.

 

Longterm debt and goodwill increased as a result of the purchase of RMRM.

 

The Company estimatesthat its short-term line of credit (of which none was outstanding at September29, 2001) combined with internally generated cash flow, will be adequate tomeet its cash requirements for the remainder of the year.

 

 

Operations– Comparison of Quarter Ended September 29, 2001 to Quarter Ended September 30,2000 (See page 3)

 

Consolidated salesincreased $3,778,000 (13%).  Salesincreased $3,925,000 (21%) in the construction materials segment.  The increased sales are due primarily to theacquisition of RMRM at the beginning of 2001. Sales in the heating and air conditioning segment declined $147,000(1%).

 

 

 

Consolidated cost ofsales (exclusive of depreciation and depletion), as a percentage of sales,remained relatively constant at 69%. The slight increase in the cost of sales percentage in the constructionmaterials segment was offset by a decline in the heating and air conditioningsegment. The construction materials segment experienced higher costs, as theoverall gross margins of RMRM are moderately lower than at the Company’s otherconstruction materials operations. Lower production levels during the third quarter were largely responsiblefor the decline in the costs of the heating and air conditioning segment.

 

Depreciationand selling and administrative expenses were relatively constant for thequarter as savings at the Colorado Springs and Pueblo locations offset theaddition of RMRM.

 

Netinterest expense was higher as a result of the bank debt incurred to fund theacquisition.  The interest on theadditional borrowings was offset to some extent by lower interest rates andearnings on cash investments.

 

Historically the firstquarter is the Company’s weakest quarter as weather generally hindersproduction in the Company’s Colorado construction materials operations and theselling season for heating equipment ends. Operating results typically improve in the second and third quarter alongwith weather conditions in Colorado. 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.

 

Other income increasedduring the current quarter reflecting $341,000 realized on sales of smallparcels of land owned by Castle Concrete Company and miscellaneous equipmentsales.

 

Operations- Comparison of Nine Months Ended September 29, 2001 to Quarter Ended September30, 2000 (See page 4)

 

Consolidated salesincreased $11,042,000 (13%).  Sales inthe construction materials segment increased $8,285,000 (16%) for the reasonnoted above.  Sales in the heating andair conditioning segment increased $2,760,000 (8%).  Evaporative cooler sales improved compared to the depressedconditions encountered in the first three quarters of 2000.  Sales of wall furnaces were higher due tocold weather in the first quarter in the key market areas.  Offsetting these gains were fan coil saleswhich lagged behind the prior year levels as the result of a slow down incommercial construction.

 

Costof sales (exclusive of depreciation and depletion) as a percentage of net salesincreased from 70.9% to 71.7% for the reasons noted above.  In addition, the cost of sales in theheating and air conditioning segment increased as the result of higher labor,employee benefit, and energy costs.

 

Depreciation and sellingand administrative expenses were higher in the 2001 period principally due tothe aforementioned acquisition of RMRM.

 

Other income increasedfor the reasons noted above.

 

OUTLOOK

 

InSeptember and October of 2001, sales have slowed at most of the Company’soperations compared to the prior year. The weakening economy, certain weather conditions and to some extent theaftermath of the September 11 terrorist attacks have

contributedto the lower sales.  The Company expectsthat earnings in the fourth quarter of 2001 will not reach the level ofearnings reported in the fourth quarter of 2000.

 

NEWACCOUNTING STANDARDS

 

TheEmerging Issues Task Force (“EITF”) issued EITF No. 00-14, “Accounting forCertain Sales Incentives” which addresses the recognition, measurement andstatement of earnings classification for certain sales incentives and will beeffective in the first quarter of 2002. As a result, certain items previously included in cost of sales and inselling and administrative costs on the consolidated statement of operations willbe recorded as a reduction of sales.  InApril 2001, the EITF reached a consensus on Issue No. 00-25, “Vendor IncomeStatement Characterization of Consideration to a Purchaser of the Vendor’sProducts or Services”.  EITF Issue No.00-25 requires that certain expenses included in cost of sales and in sellingand administrative costs be recorded as a reduction of sales and will beeffective in the first quarter of 2002. The Company is currently in the process of quantifying the changesmandated by EITF No. 00-14 and EITF No. 00-25. Upon adoption, prior periodamounts will be reclassified to conform to the new requirements.  Neither EITF ruling will have an effect on“Operating income” or “Net income.”

 

InJuly 2001, the Financial Accounting Standards Board issued Statements ofFinancial Accounting Standards No. 141, “Business Combinations” and No. 142,“Goodwill and Other Intangible Assets”. Effective January 1, 2002, the Company will no longer be required toamortize goodwill and certain intangible assets as a charge to earnings.  In addition, the Company will be required toreview goodwill and other intangible assets for potential impairment.  The Company is currently in the process ofquantifying the impact of the new standard. However, the Company currently anticipates that substantially allamortization of goodwill will be eliminated.

 

FORWARD-LOOKINGSTATEMENTS

 

The foregoing discussion containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct 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. When used in this Report, words such as “estimates,” “anticipates,”“contemplates,” “expects” and similar expressions are intended to identifyforward-looking statements. Actual results could differ materially from thoseprojected in the forward-looking statements as a result of factors includingbut not limited to: general economic conditions, weather, interest rates,availability of raw materials and their related costs, competitive forces anduncertainties and other effects of the September 11, 2001 terrorist attacks andsubsequent events.

 

 
| PART II – | Other Information                                                                                                                                                                                                                      |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                   |
| Item 5.        | Other Information                                                                                                                                                                                                                      |
|           |                                                                                                                                                                                                                                   |
|           | During the quarter  ended June 30, 2001, Mr. William G. Shoemaker retired from the Board of  Directors creating a vacancy on the Board.   The vacancy is expected to be filled at the December Board of  Directors’ meeting. |

 

 

 
| Item 6. | Exhibits and Reports on  Form 8-K                                                         |
|---------|-------------------------------------------------------------------------------------------|
|    |                                                                                      |
|    | (b) Registrant filed  no reports on Form 8-K during the quarter ended September 29, 2001. |
|    |                                                                                      |

 

 

SIGNATURE

 

 

Pursuant to the requirement of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 

                                                                                                          CONTINENTALMATERIALS CORPORATION

 

 

 

 
| Date:  | November  6, 2001 |   | By:    | /S/ Joseph J. Sum              |
|--------|-------------------|--------|--------|--------------------------------|
|   |              |   |   | Joseph J. Sum, Vice  President |
|   |              |   |   | and Chief Financial  Officer   |