**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 28, 2002**                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                          |   |
| **OR** |
|   |                                                                                                                                                                                                                                                          |   |
|   | **o**                                                                                                                                                                                                                                                         | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|   |                                                                                                                                                                                                                                                          |   |   |
|   | **For the transition period  from                  to                  ** |

** **

**CommissionFile number 1-3834**

** **

**CONTINENTAL MATERIALS CORPORATION**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                     |                                                                           | **36-2274391**                        |
|------------------------------------------------------------------|--------------------------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |                                                                           | (I.R.S. Employer  Identification No.) |
|                                                             |                                                                           |                                  |
|                                                             | **225  West Wacker Drive, Suite 1800, Chicago, Illinois 60606**                |                                  |
|                                                             | (Address of principal  executive office)                                       |                                  |
|                                                             | (Zip Code)                                                                     |                                  |
|                                                             |                                                                           |                                  |
|                                                             | **(312)  541-7200**                                                            |                                  |
|                                                             | (Registrant’s telephone  number, including area code)                     |                                  |
|                                                             |                                                                           |                                  |
|                                                             |                                                                           |                                  |
|                                                             | (Former name, former  address and former   year, if changed since last report) |                                  |
|                                                                  |                                                                                |                                       |  |  |

 

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

 

Yes  ý   No  o

 

Number of common sharesoutstanding at November 4, 2002**                                                        **1,785,654

 

 

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PART I – FINANCIALINFORMATION

 

**Item 1.   FinancialStatements**

 

CONTINENTALMATERIALS CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETSSEPTEMBER 28, 2002 and DECEMBER 29, 2001(Unaudited)(000’s omitted except share data)

 
|                                                                               |   | **SEPTEMBER  28,  2002** |       | **DECEMBER  29,  2001** |   |
|------------------------------------------------------------------------------------|--------|--------------------------|------------|-------------------------|--------|
| ***ASSETS***                                                                       |   |                     |       |                    |   |
| Current assets:                                                                    |   |                     |       |                    |   |
| Cash and cash  equivalents                                                         |   | $                        | 277        |                    | $      | 7,579 |   |
| Receivables, net                                                                   |   | 18,826                   |       | 18,291                  |   |
| Inventories:                                                                       |   |                     |       |                    |   |
| Finished goods                                                                     |   | 8,423                    |       | 7,710                   |   |
| Work in process                                                                    |   | 1,774                    |       | 1,587                   |   |
| Raw materials  and supplies                                                        |   | 7,051                    |       | 6,351                   |   |
| Prepaid expenses                                                                   |   | 3,459                    |       | 3,067                   |   |
| Total current  assets                                                              |   | 39,810                   |       | 44,585                  |   |
|                                                                               |   |                     |       |                    |   |
| Property, plant and  equipment, net                                                |   | 34,598                   |       | 32,247                  |   |
|                                                                               |   |                     |       |                    |   |
| Goodwill                                                                           |   | 7,374                    |       | 6,474                   |   |
| Other assets                                                                       |   | 2,844                    |       | 2,757                   |   |
|                                                                               |   |                     |       |                    |   |
|                                                                               |   | **$**                    | **84,626** |                    | **$**  | **86,063** |   |
|                                                                               |   |                     |       |                    |   |
| ***LIABILITIES***                                                                  |   |                     |       |                    |   |
| Current liabilities:                                                               |   |                     |       |                    |   |
| Current portion  of long-term debt                                                 |   | $                        | 3,476      |                    | $      | 3,620 |   |
| Accounts payable  and accrued expenses                                             |   | 14,203                   |       | 16,111                  |   |
| Income taxes                                                                       |   | 1,154                    |       | 308                     |   |
| Total current  liabilities                                                         |   | 18,833                   |       | 20,039                  |   |
|                                                                               |   |                     |       |                    |   |
| Long-term debt                                                                     |   | 11,765                   |       | 13,520                  |   |
| Deferred income  taxes                                                             |   | 2,609                    |       | 2,511                   |   |
| Other long-term  liabilities                                                       |   | 2,499                    |       | 2,271                   |   |
|                                                                               |   |                     |       |                    |   |
| ***SHAREHOLDERS’  EQUITY***                                                   |   |                     |       |                    |   |
| Common shares,  $0.25 par value; authorized 3,000,000; issued 2,574,264            |   | 643                      |       | 643                     |   |
| Capital in  excess of par value                                                    |   | 1,982                    |       | 1,982                   |   |
| Retained  earnings                                                                 |   | 56,720                   |       | 54,576                  |   |
| Accumulated  other comprehensive losses (primarily interest rate swap adjustments) |   | (398                     | )          | —                  |   |
| Treasury shares,  788,610 and 768,167, at cost                                     |   | (10,027                  | )          | (9,479                  | )      |
|                                                                               |   | 48,920                   |       | 47,722                  |   |
|                                                                               |   |                     |       |                    |   |
|                                                                               |   | **$**                    | **84,626** |                    | **$**  | **86,063** |   |

 

See accompanyingnotes

 

2

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CONTINENTALMATERIALS CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGSFOR THE THREE MONTHS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001(Unaudited)(000’s omitted except per share amounts)

 
|                                                                   |   | **SEPTEMBER  28,  2002** |       | **SEPTEMBER  29,  2001** |       |
|------------------------------------------------------------------------|--------|--------------------------|------------|--------------------------|------------|
|                                                                   |   |                     |       |                     |       |
| Sales                                                                  |   | $                        | 32,503     |                     | $          | 32,964 |   |
|                                                                   |   |                     |       |                     |       |
| Costs and  expenses:                                                   |   |                     |       |                     |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization) |   | 24,933                   |       | 24,353                   |       |
| Depreciation,  depletion and amortization                              |   | 1,536                    |       | 1,589                    |       |
| Selling and  administrative                                            |   | 4,303                    |       | 4,166                    |       |
|                                                                   |   | 30,772                   |       | 30,108                   |       |
|                                                                   |   |                     |       |                     |       |
| Operating income                                                       |   | 1,731                    |       | 2,856                    |       |
|                                                                   |   |                     |       |                     |       |
| Interest                                                               |   | (223                     | )          | (257                     | )          |
| Other income,  net                                                     |   | 85                       |       | 426                      |       |
|                                                                   |   |                     |       |                     |       |
| Income before  income taxes                                            |   | 1,593                    |       | 3,025                    |       |
|                                                                   |   |                     |       |                     |       |
| Provision for  income taxes                                            |   | 557                      |       | 1,089                    |       |
|                                                                   |   |                     |       |                     |       |
| Net income                                                             |   | 1,036                    |       | 1,936                    |       |
|                                                                   |   |                     |       |                     |       |
| Retained  earnings, beginning of period                                |   | 55,684                   |       | 49,224                   |       |
|                                                                   |   |                     | ** ** |                     | ** ** |
| Retained  earnings, end of period                                      |   | $                        | 56,720     |                     | $          | 51,160 |   |
|                                                                   |   |                     |       |                     |       |
| Basic earnings  per share                                              |   | $                        | .58        |                     | $          | 1.07 |   |
|                                                                   |   |                     |       |                     |       |
| Average shares  outstanding                                            |   | 1,787                    |       | 1,807                    |       |
|                                                                   |   |                     |       |                     |       |
| Diluted earnings  per share                                            |   | $                        | .57        |                     | $          | 1.05 |   |
|                                                                   |   |                     |       |                     |       |
| Average shares  outstanding                                            |   | 1,823                    |       | 1,842                    |       |

 

See accompanyingnotes

 

3

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CONTINENTALMATERIALS CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGSFOR THE NINE MONTHS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001(Unaudited)(000’s omitted except per share amounts)

 
|                                                                   |   | **SEPTEMBER  28,  2002** |   | **SEPTEMBER  29,  2001** |   |
|------------------------------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                                                   |   |                     |   |                     |   |
| Sales                                                                  |   | $                        | 96,529 |                     | $      | 95,810 |   |
|                                                                   |   |                     |   |                     |   |
| Costs and  expenses:                                                   |   |                     |   |                     |   |
| Cost of sales  (exclusive of depreciation, depletion and amortization) |   | 75,166                   |   | 73,086                   |   |
| Depreciation,  depletion and amortization                              |   | 4,587                    |   | 4,871                    |   |
| Selling and  administrative                                            |   | 13,195                   |   | 12,927                   |   |
|                                                                   |   | 92,948                   |   | 90,884                   |   |
|                                                                   |   |                     |   |                     |   |
| Operating income                                                       |   | 3,581                    |   | 4,926                    |   |
|                                                                   |   |                     |   |                     |   |
| Interest                                                               |   | (715                     | )      | (832                     | )      |
| Other income,  net                                                     |   | 432                      |   | 628                      |   |
|                                                                   |   |                     |   |                     |   |
| Income before  income taxes                                            |   | 3,298                    |   | 4,722                    |   |
|                                                                   |   |                     |   |                     |   |
| Provision for  income taxes                                            |   | 1,154                    |   | 1,700                    |   |
|                                                                   |   |                     |   |                     |   |
| Net income                                                             |   | 2,144                    |   | 3,022                    |   |
|                                                                   |   |                     |   |                     |   |
| Retained  earnings, beginning of period                                |   | 54,576                   |   | 48,138                   |   |
|                                                                   |   |                     |   |                     |   |
| Retained  earnings, end of period                                      |   | $                        | 56,720 |                     | $      | 51,160 |   |
|                                                                   |   |                     |   |                     |   |
| Basic earnings  per share                                              |   | $                        | 1.19   |                     | $      | 1.67 |   |
|                                                                   |   |                     |   |                     |   |
| Average shares  outstanding                                            |   | 1,797                    |   | 1,814                    |   |
|                                                                   |   |                     |   |                     |   |
| Diluted earnings  per share                                            |   | $                        | 1.17   |                     | $      | 1.64 |   |
|                                                                   |   |                     |   |                     |   |
| Average shares  outstanding                                            |   | 1,832                    |   | 1,847                    |   |

 

See accompanying notes

 

4

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CONSOLIDATEDMATERIALS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE NINE MONTHS ENDED SEPTEMBER 28, 2002 AND SEPTEMBER 29, 2001(Unaudited)(000’s omitted)

 
|                                                 |   | **SEPTEMBER  28,  2002** |   | **SEPTEMBER  29,  2001** |   |
|------------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                                 |   |                     |   |                     |   |
| Net cash  provided by operating activities           |   | $                        | 3,846  |                     | $      | 7,284 |   |
|                                                 |   |                     |   |                     |   |
| Investing  activities:                               |   |                     |   |                     |   |
| Acquisitions of  subsidiaries, net of cash received  |   | (2,125                   | )      | (11,262                  | )      |
| Capital  expenditures                                |   | (6,740                   | )      | (7,549                   | )      |
| Proceeds from  sale of property and equipment        |   | 164                      |   | 55                       |   |
| Net cash used in  investing activities               |   | (8,701                   | )      | (18,756                  | )      |
|                                                 |   |                     |   |                     |   |
| Financing  activities:                               |   |                     |   |                     |   |
| Long-term  borrowings                                |   | —                   |   | 12,000                   |   |
| Repayment of  long term debt                         |   | (1,899                   | )      | (1,893                   | )      |
| Proceeds from  exercise of stock options             |   | —                   |   | 75                       |   |
| Payment to  acquire treasury stock                   |   | (548                     | )      | (636                     | )      |
| Net cash (used  in) provided by financing activities |   | (2,447                   | )      | 9,546                    |   |
|                                                 |   |                     |   |                     |   |
| Net decrease in  cash and cash equivalents           |   | (7,302                   | )      | (1,926                   | )      |
| Cash and cash  equivalents:                          |   |                     |   |                     |   |
| Beginning of  period                                 |   | 7,579                    |   | 6,216                    |   |
|                                                 |   |                     |   |                     |   |
| End of period                                        |   | $                        | 277    |                     | $      | 4,290 |   |
|                                                 |   |                     |   |                     |   |
| Supplemental  disclosures of cash flow items:        |   |                     |   |                     |   |
| Cash paid during  the nine months for:               |   |                     |   |                     |   |
| Interest                                             |   | $                        | 906    |                     | $      | 791 |   |
| Income taxes                                         |   | 812                      |   | 1,893                    |   |

 

See accompanyingnotes

 

5

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CONTINENTALMATERIALS CORPORATIONSECURITIES AND EXCHANGE COMMISSION FORM 10-QNOTES TO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTSQUARTER ENDED SEPTEMBER 28, 2002(Unaudited)

 

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

 

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

 

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

 

4.               Operating resultsfor the first nine months of 2002 are not necessarily indicative of performancefor the entire year.  Historically,sales of construction materials are higher in the second and thirdquarters.  Overall, sales of heating andair conditioning products have not shown strong seasonal fluctuations in recentyears although product mix has historically yielded higher gross profit marginsin the fourth quarter.  (See Note 11 ofNotes to Consolidated Financial Statements in the Company’s 2001 Annual Reporton Form 10-K.)

 

5.               The following is areconciliation of the calculation of basic and diluted earnings per share (EPS)for the three and nine months ended September 28, 2002 and September 29,2001.  Amounts in thousands except pershare data.

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

 

6

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5.               The following tablepresents information about reported segments for the nine-month and three-monthperiods ended September 28, 2002 and September 29, 2001 along with the itemsnecessary to reconcile the segment information to the totals reported in thefinancial statements (amounts in thousands).

 
|                              |   | **Heating  and Air  Conditioning** |   | **Construction  Materials** |   | **All Other** |   | **Unallocated  Corporate** |   | **Total** |   |
|-----------------------------------|--------|------------------------------------|--------|-----------------------------|--------|---------------|--------|----------------------------|--------|-----------|--------|
| 2002                              |   |                               |   |                        |   |          |   |                       |   |      |   |
| Nine Months                       |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from  external customers |   | $                                  | 38,266 |                        | $      | 58,152        |   | $                          | 109    |      | $      | 2 |   | $ | 96,529 |   |
| Operating income                  |   | 2,919                              |   | 3,138                       |   | (98           | )      | (2,378                     | )      | 3,581     |   |
| Assets                            |   | 30,289                             |   | 52,989                      |   | 74            |   | 1,274                      |   | 84,626    |   |
| Three Months                      |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from  external customers |   | 11,121                             |   | 21,345                      |   | 36            |   | 1                          |   | 32,503    |   |
| Operating income                  |   | 724                                |   | 1,843                       |   | (9            | )      | (827                       | )      | 1,731     |   |
|                              |   |                               |   |                        |   |          |   |                       |   |      |   |
| 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     |   |

 

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 April 1, 2002,the Company acquired all of the stock of McKinney Door and Hardware, Inc.(MDHI), a refabricator and distributor of metal doors, wood doors and relatedhardware.  MDHI operates from one facilityin Pueblo, Colorado and continues to do business under its current name.  The $2,125,000 purchase price, net of cashreceived and $1,129,000 of liabilities and debt, was funded by available cashbalances and credit sources.  Theunallocated excess purchase price over fair value of net assets acquired of$900,000 has been classified as goodwill. The acquisition has been accounted for under the purchase method andaccordingly, the operating results of MDHI have been included in theconsolidated results since the date of acquisition.

 

7.               On January 1, 2002,the Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets.”  As a result, the Company ceased recordingthe amortization of goodwill as a charge to earnings during the first quarter of2002.  The Company estimates that thenet income and diluted income per share would have been approximately$3,097,000 and $1.68 and $1,961,000 and $1.06, respectively, for the nine monthand three month periods ended September 29, 2001 had the provisions of the newstandard been applied as of January 1, 2001. In addition, the Company is required to conduct an annual review ofgoodwill and intangible assets for potential impairment.  The Company did not have to record a chargeto earnings for an impairment of goodwill or other intangible assets as aresult of adopting the new standard.  Asof September 28, 2002, all goodwill related to the construction materialssegment and there was no material change in the carrying amount of goodwillduring the nine-month or three-month periods ended September 28, 2002.

 

7

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Intangible assets, otherthan goodwill, as of September 28, 2002 are all amortizable and consistprimarily of non-compete agreements and were carried at $1,585,000 net of$885,000 accumulated amortization.  Thepre-tax amortization expense for intangible assets during the nine-month andthree-month periods ended September 28, 2002 was $227,000 and $81,000,respectively.   Based upon theintangible assets recorded on the balance sheet at September 28, 2002,amortization expense for the remainder of 2002 and the next five years isestimated to be as follows: remainder of 2002 – $80,000, 2003 – $319,000, 2004– $233,000, 2005 – $225,000, 2006 – $216,000 and 2007 – $137,000.

 

Effective January 1,2002, the Company also adopted SFAS No. 144 “Accounting for the Impairment orDisposal of Long-Lived Assets.”  ThisStatement clarifies and revises existing guidance on accounting for the impairmentor disposal of long-lived assets such as property, plant and equipment,amortized intangibles and other long-lived assets not specifically addressed inother accounting literature.  Theadoption of this new standard had no impact on the Company’s financialposition, results of operations or cash flows for the nine-month or three-monthperiods ended September 28, 2002.

 

8.               Effective December31, 2000, the Company adopted SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” and its related amendment, SFAS No. 138,“Accounting for Certain Derivative Instruments and Certain HedgingActivities.”  As of December 30, 2001,the adoption of these new standards did not have a material effect on netearnings or accumulated other comprehensive losses.

 

During the three monthsand nine months ended September 28, 2002, a pre-tax loss of $383,000 and$613,000, respectively,  would bereported under comprehensive income as a result of the cash flow hedge asfollows (amounts in thousands):

 
|                                                                                                                                   |   | **Three  Months Ended  September 28, 2002** |   | **Nine  Months Ended  September 28, 2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
| Net Income, as  reported                                                                                                               |   | $                                           | 1,036  |                                       | $      | 2,144 |   |
| Swap agreement  loss, net of tax effect of $134 and $215, respectively, for the three months  and nine months ended September 28, 2002 |   | 249                                         |   | 398                                        |   |
| Comprehensive  net income                                                                                                              |   | $                                           | 787    |                                       | $      | 1,746 |   |

 

 

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

 

 

Financial Condition (Seepages 2, 4 and 5)

 

Operations provided$3,846,000 in cash flow in the first nine months of 2002 compared to $7,284,000in the first nine months of 2001.  Thedecrease is generally due to the significant reduction of accounts payable andaccruals, primarily related to compensation and taxes, during the first nine monthsof 2002 as compared to the prior year period when accounts payable and accrualsincreased slightly.  An increase ininventory and the decline in net earnings also contributed to the decrease incash flow from operations.

 

The Company acquired MDHIfor $2,125,000 at the beginning of the second quarter of 2002.  Short term borrowings used for a portion ofthe purchase were repaid during the third quarter from operating cash flow.

 

8

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Capital expenditures inthe first nine months of 2002 were $6,740,000 compared to $7,549,000 in thefirst nine months of 2001.  Most of thecapital spending was in the construction materials segment and included a new,state-of-the-art sand processing plant in Colorado Springs completed during thethird quarter, a new aggregates processing plant in Pueblo that was completedin June, a new central mix batch plant in Colorado Springs and variousequipment additions.  Expenditures inthe heating and air conditioning segment included the completion of the newoffice building in Colton, California during the first quarter of the year.

 

The Company estimatesthat its short-term line of credit (of which none was outstanding at September28, 2002) combined with internally generated cash flow, will be adequate tomeet its cash requirements for the next twelve months.

 

Operations – Comparisonof Quarter Ended September 28, 2002 to Quarter Ended September 29, 2001 (Seepage 3)

 

Consolidated salesdeclined $461,000 (1%) despite the inclusion of MDHI sales in the current yearquarter.  Sales fell $1,031,000 (5%) inthe construction materials segment reflecting the weakening construction marketin Colorado.  Sales in the heating andair

conditioning segmentimproved by $570,000 (5%) primarily due to strong sales of furnaces although evaporativecooler sales also assisted with season ending sales stronger than the prioryear’s period.  Fan coil salesdeteriorated as the nationwide slump in commercial construction, notably hotelconstruction, continued.

 

Consolidated cost ofsales (exclusive of depreciation and depletion), as a percentage of sales,increased 2.8% to 76.7%.  The increasewas incurred by the construction materials segment and was the result of theoverall reduced volume of sales as well as higher costs in the Pueblo gravel operationsas a now depleted gravel operation was closed and start-up costs at the newoperation exceeded expectations.  Inaddition, initial yields of primary products at the new Pueblo gravel operationare less than that experienced at the Company’s other gravel operations.  The cost of sales percentage for the heatingand air conditioning segment declined slightly in the furnace line reflectingthe increased volume while slight increases were experienced in both the fancoil and evaporative cooler lines.

 

Selling andadministrative expenses increased slightly due to the inclusion of MDHI.

 

Net interest expensedecreased as reduced average borrowings offset the slight increase in interestrates resulting from the Company’s interest rate swap (see Note 11 of Notes toConsolidated Financial Statements in the Company’s 2001 Annual Report on Form10-K).

 

Other income alsodecreased as the third quarter of 2001 included $232,000 realized on sales ofsmall parcels of land owned by Castle Concrete Company.

 

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

 

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Operations - Comparisonof Nine Months Ended September 28, 2002 to Nine Months Ended September 29, 2001(See page 4)

 

Consolidated salesincreased $719,000 (1%).  Sales in theheating and air conditioning segment increased $2,587,000 (7%).  Evaporative cooler sales improved due tohot, dry weather in the markets served and the addition of a large new retailcustomer.  Sales of wall furnaces alsoregistered increases in each quarter of 2002. Offsetting these gains were fan coil sales which lagged behind the prioryear levels as noted above.  Sales inthe construction materials segment declined $1,869,000 (3%) for the reasonnoted above.  In addition, inclementweather along the Front Range in Colorado prevented progress on mostconstruction projects during the first three months of 2002.  Excluding sales of MDHI, acquired on April1, 2002, sales of all of the other construction materials businesses declinedby over $5,000,000 or approximately 9% compared to 2001.

 

Cost of sales (exclusiveof depreciation and depletion) as a percentage of sales increased from 76.3% to77.9%.  The increase in the constructionmaterials segment was the result of the reasons noted above in the quarterlycomparison as well as added costs associated with equipment failures and theinclement weather experienced during the first quarter of 2002.  The cost of sales percentage in the heatingand air conditioning segment declined slightly as noted above.

 

Selling andadministrative expenses increased primarily for the reason noted above.

 

OUTLOOK

 

The weakeningconstruction market in Colorado is expected to continue for at least the nearfuture.

 

NEW ACCOUNTING STANDARDS

 

The Financial Accounting Standards Board issuedSFAS No. 141, “Business Combinations,” and No. 142, “Goodwill and OtherIntangible Assets.”  Effective January1, 2002, the Company was no longer required to amortize goodwill as a charge toearnings.  In addition, we are requiredto annually review goodwill for potential impairment.  The Company does have certain finite-lived identifiableintangible assets that will continue to be amortized over their estimateduseful economic lives.  Thesefinite-lived identifiable intangible assets will be assessed for impairmentunder the new SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”  As a result ofadopting SFAS No. 142, we currently anticipate that amortization expense willbe reduced by approximately $156,000 (pre-tax) on an annual basis compared to2001.

 

SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” was issued in August 2001and is effective for fiscal years beginning after December 15, 2001.  The Statement clarifies and revises existingguidance on accounting for the impairment or disposal of long-lived assets suchas property, plant and equipment, amortized intangibles and other long-livedassets not specifically addressed in other accounting literature.  We adopted the standard at the beginning of2002.  We do not expect the adoption ofthis standard will have a significant impact on our 2002 financial results.

 

**Item 3.        QuantitativeAnd Qualitative Disclosures About Market Risk**

 

There have been nochanges in the market risks that the Company is exposed to since thosediscussed in the Company’s 2001 Annual Report on Form 10-K.  At September 28, 2002, the amount subject tothe interest rate swap agreement was $13,500,000.  Also see Note 8 above.

 

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**Item 4.        DisclosureControls and Procedures**

 

(a)   Evaluation of disclosure controls andprocedures.

 

TheCompany’s chief executive officer and chief financial officer, with theparticipation of management, have evaluated the effectiveness of our “disclosurecontrols and procedures” (as defined in Rules 13a-14(c) and 15d-14(c) under theSecurities Exchange Act of 1934) as of a date within 90 days prior to thefiling of this quarterly report on Form 10-Q. Based on their evaluation, theyhave concluded that the Company’s disclosure controls and procedures areeffective in timely alerting them to material information relating to theCompany (including its subsidiaries) required to be disclosed in the Company’speriodic Securities and Exchange Commission filings.

 

(b)   Changes in internal controls.

 

Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation.

 

FORWARD-LOOKINGSTATEMENTS

 

The foregoing discussioncontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of theCompany’s management as well as on assumptions made by and informationavailable to the Company at the time such statements were made.  When used in this Report, words such as“estimates,” “anticipates,” “contemplates,” “expects” and similar expressionsare intended to identify forward-looking statements. Forward-looking statementsare subject to risks and uncertainties that could cause actual results todiffer materially from those projected in the forward-looking statements.  These risks and uncertainties include, but arenot limited to: the economy,  weather,interest rates, availability of raw materials and their related costs andcompetitive forces.  Forward-lookingstatements speak only as of the date they were made and the Company undertakesno obligation to publicly update them.

 

PART II – OtherInformation

 

Item 6.      Exhibits and Reports on Form 8-K

 
|   | (a)  Exhibits |
|--------|--------------------|

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

 
|   | (b)   Registrant filed no reports on Form 8-K during the quarter ended  September 28, 2002. |
|--------|--------------------------------------------------------------------------------------------------|

 

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SIGNATURE

 

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

 

 
|   |              |   | CONTINENTAL MATERIALS CORPORATION |
|--------|-------------------|--------|-----------------------------------|
|   |              |   |                              |   |
|   |              |   |                              |   |
|   |              |   |                              |   |
| Date:  | November 12, 2002 |   | By:                               | /s/ Joseph J. Sum |   |
|   |              |   |                              | Joseph J. Sum, Vice President  and Chief Financial Officer |

 

12

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CERTIFICATION

 

I, James G.Gidwitz, certify that:

 

1.              I havereviewed this quarterly report on Form 10-Q of Continental MaterialsCorporation;

 

2.              Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.              Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.              Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)          designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)         evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)          presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.              Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)          allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)         any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.              Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date: November12, 2002

 
|   | By:    | /s/ James G. Gidwitz                               |   |
|--------|--------|----------------------------------------------------|--------|
|   |   | James G. Gidwitz                                   |
|   |   | Chairman of the Board and  Chief Executive Officer |

 

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CERTIFICATION

 

I, Joseph J. Sum, certify that:

 

1.              I havereviewed this quarterly report on Form 10-Q of Continental MaterialsCorporation;

 

2.              Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.              Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.              Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)          designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)         evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)          presented inthis quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.              Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)          allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)         any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.              Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date: November12, 2002

 
|   | By:    | /s/ Joseph J. Sum                          |   |
|--------|--------|--------------------------------------------|--------|
|   |   | Joseph J. Sum                              |
|   |   | Vice President and Chief Financial Officer |

 

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