**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

|                                                                                                                                                                                                                                     | **(Mark One)** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|--------|
|                                                                                                                                                                                                                                     |
| **ý****QUARTERLY REPORT  PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                  |
|                                                                                                                                                                                                                                     |
| **For the quarterly period ended June 28,  2003**                                                                                                                                                                                        |
|                                                                                                                                                                                                                                     |
| **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 MATERIALS CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  ý   No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes o   No  ý

 
| Number of  common shares outstanding at July 28, 2003 | 1,744,715 |
|-------------------------------------------------------|-----------|

 

 

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PART I – FINANCIAL INFORMATION

 

**Item 1.   Financial Statements**

 

CONTINENTAL MATERIALS CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETSJUNE 28, 2003 and DECEMBER 28, 2002

(000’s omitted except share data)

 
|                                                                                                 |   | **JUNE 28,  2003** |       | **DECEMBER  28,  2002** |   |
|------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-------------------------|--------|
|                                                                                                 |   | **(Unaudited)**    |       |                    |   |
| ***ASSETS***                                                                                         |   |               |       |                    |   |
| Current assets:                                                                                      |   |               |       |                    |   |
| Cash and cash equivalents                                                                            |   | $                  | —     |                    | $      | 3,536 |   |
| Receivables, net                                                                                     |   | 23,595             |       | 16,740                  |   |
| Inventories:                                                                                         |   |               |       |                    |   |
| Finished goods                                                                                       |   | 6,582              |       | 6,855                   |   |
| Work in process                                                                                      |   | 1,614              |       | 1,523                   |   |
| Raw materials and supplies                                                                           |   | 6,109              |       | 6,214                   |   |
| Prepaid expenses                                                                                     |   | 3,184              |       | 3,530                   |   |
| Total current assets                                                                                 |   | 41,084             |       | 38,398                  |   |
|                                                                                                 |   |               |       |                    |   |
| Property, plant and equipment, net                                                                   |   | 32,622             |       | 34,033                  |   |
|                                                                                                 |   |               |       |                    |   |
| Goodwill                                                                                             |   | 7,374              |       | 7,374                   |   |
| Non-compete agreements                                                                               |   | 1,292              |       | 1,403                   |   |
| Other assets                                                                                         |   | 1,283              |       | 1,426                   |   |
|                                                                                                 |   |               |       |                    |   |
|                                                                                                 |   | **$**              | **83,655** |                    | **$**  | **82,634** |   |
|                                                                                                 |   |               |       |                    |   |
| ***LIABILITIES***                                                                                    |   |               |       |                    |   |
| Current  liabilities:                                                                                |   |               |       |                    |   |
| Bank loan payable                                                                                    |   | $                  | 2,900      |                    | $      | — |   |
| Current portion of long-term debt                                                                    |   | 3,310              |       | 3,300                   |   |
| Accounts payable and accrued expenses                                                                |   | 14,887             |       | 13,358                  |   |
| Income taxes                                                                                         |   | —             |       | 308                     |   |
| Total current liabilities                                                                            |   | 21,097             |       | 16,966                  |   |
|                                                                                                 |   |               |       |                    |   |
| Long-term debt                                                                                       |   | 8,500              |       | 10,220                  |   |
| Deferred income taxes                                                                                |   | 3,037              |       | 3,037                   |   |
| Other long-term liabilities                                                                          |   | 2,368              |       | 2,422                   |   |
|                                                                                                 |   |               |       |                    |   |
| ***SHAREHOLDERS’  EQUITY***                                                                     |   |               |       |                    |   |
| Common shares, $0.25 par value; authorized  3,000,000; issued 2,574,264 shares                       |   | 643                |       | 643                     |   |
| Capital in excess of par value                                                                       |   | 1,982              |       | 1,982                   |   |
| Retained earnings                                                                                    |   | 57,466             |       | 57,851                  |   |
| Accumulated other comprehensive losses net  of tax of $217 and $214 (interest rate swap adjustments) |   | (404               | )          | (404                    | )      |
| Treasury shares, 829,549 and 790,766, at  cost                                                       |   | (11,034            | )          | (10,083                 | )      |
|                                                                                                 |   | 48,653             |       | 49,989                  |   |
|                                                                                                 |   |               |       |                    |   |
|                                                                                                 |   | **$**              | **83,655** |                    | **$**  | **82,634** |   |

 

See accompanying notes

 

2

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CONTINENTAL MATERIALS CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGSFOR THE THREE MONTHS ENDED JUNE 28, 2003 AND JUNE 29, 2002

(Unaudited)(000’s omitted except per-share amounts)

 
|                                                                   |   | **JUNE 28,  2003** |       | **JUNE 29,  2002** |       |
|------------------------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                                   |   |               |       |               |       |
| Sales                                                                  |   | $                  | 34,620     |               | $          | 37,423 |   |
|                                                                   |   |               |       |               |       |
| Costs and expenses:                                                    |   |               |       |               |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization) |   | 26,694             |       | 28,578             |       |
| Depreciation, depletion and amortization                               |   | 1,595              |       | 1,545              |       |
| Selling and administrative                                             |   | 4,497              |       | 4,614              |       |
|                                                                   |   | 32,786             |       | 34,737             |       |
|                                                                   |   |               |       |               |       |
| Operating income                                                       |   | 1,834              |       | 2,686              |       |
|                                                                   |   |               |       |               |       |
| Interest                                                               |   | (198               | )          | (265               | )          |
| Other income, net                                                      |   | 22                 |       | 247                |       |
|                                                                   |   |               |       |               |       |
| Income before income taxes                                             |   | 1,658              |       | 2,668              |       |
|                                                                   |   |               |       |               |       |
| Provision for income taxes                                             |   | 647                |       | 953                |       |
|                                                                   |   |               |       |               |       |
| Net income                                                             |   | 1,011              |       | 1,715              |       |
|                                                                   |   |               |       |               |       |
| Retained earnings, beginning of period                                 |   | 56,455             |       | 53,969             |       |
|                                                                   |   |               | ** ** |               | ** ** |
| Retained earnings, end of period                                       |   | **$**              | **57,466** | ** **         | **$**      | **55,684** | ** ** |
|                                                                   |   |               |       |               |       |
| Basic earnings per share                                               |   | **$**              | **.57**    | ** **         | **$**      | **.95** | ** ** |
|                                                                   |   |               |       |               |       |
| Average shares outstanding                                             |   | **1,765**          | ** ** | **1,799**          | ** ** |
|                                                                   |   |               |       |               |       |
| Diluted earnings per share                                             |   | **$**              | **.56**    | ** **         | **$**      | **.94** | ** ** |
|                                                                   |   |               |       |               |       |
| Average shares outstanding                                             |   | **1,799**          | ** ** | **1,835**          | ** ** |

 

See accompanying notes

 

3

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CONTINENTAL MATERIALS CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGSFOR THE SIX MONTHS ENDED JUNE 28, 2003 AND JUNE 29, 2002

(Unaudited)(000’s omitted except per-share amounts)

 
|                                                                   |   | **JUNE 28,  2003** |       | **JUNE 29,  2002** |       |
|------------------------------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                                   |   |               |       |               |       |
| Sales                                                                  |   | $                  | 58,301     |               | $          | 64,026 |   |
|                                                                   |   |               |       |               |       |
| Costs and expenses:                                                    |   |               |       |               |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization) |   | 47,101             |       | 50,233             |       |
| Depreciation, depletion and amortization                               |   | 3,127              |       | 3,051              |       |
| Selling and administrative                                             |   | 8,375              |       | 8,892              |       |
|                                                                   |   | 58,603             |       | 62,176             |       |
|                                                                   |   |               |       |               |       |
| Operating (loss) income                                                |   | (302               | )          | 1,850              |       |
|                                                                   |   |               |       |               |       |
| Interest                                                               |   | (359               | )          | (492               | )          |
| Other income, net                                                      |   | 68                 |       | 347                |       |
|                                                                   |   |               |       |               |       |
| (Loss) income before income taxes                                      |   | (593               | )          | 1,705              |       |
|                                                                   |   |               |       |               |       |
| (Benefit) provision for income taxes                                   |   | (208               | )          | 597                |       |
|                                                                   |   |               |       |               |       |
| Net (loss) income                                                      |   | (385               | )          | 1,108              |       |
|                                                                   |   |               |       |               |       |
| Retained earnings, beginning of period                                 |   | 57,851             |       | 54,576             |       |
|                                                                   |   |               |       |               |       |
| Retained earnings, end of period                                       |   | **$**              | **57,466** | ** **         | **$**      | **55,684** | ** ** |
|                                                                   |   |               |       |               |       |
| Basic earnings per share                                               |   | **$**              | **(.22**   | **)**              | **$**      | **.62** | ** ** |
|                                                                   |   |               |       |               |       |
| Average shares outstanding                                             |   | **1,773**          | ** ** | **1,802**          | ** ** |
|                                                                   |   |               |       |               |       |
| Diluted earnings per share                                             |   | **$**              | **(.22**   | **)**              | **$**      | **.60** | ** ** |
|                                                                   |   |               |       |               |       |
| Average shares outstanding                                             |   | **1,773**          | ** ** | **1,837**          | ** ** |

 

Seeaccompanying notes

 

4

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CONSOLIDATED MATERIALS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE SIX MONTHS ENDED JUNE 28, 2003 AND JUNE 29, 2002

(Unaudited)(000’s omitted)

 
|                                                |   | **JUNE 28,  2003** |       | **JUNE 29,  2002** |       |
|-----------------------------------------------------|--------|--------------------|------------|--------------------|------------|
|                                                |   |               | ** ** |               | ** ** |
| Net cash used in operating activities               |   | $                  | (2,170     | )                  | $          | (3,017 | ) |
|                                                |   |               |       |               |       |
| Investing activities:                               |   |               |       |               |       |
| Acquisitions of subsidiaries, net of cash  acquired |   | —             |       | (2,125             | )          |
| Capital expenditures                                |   | (1,684             | )          | (5,374             | )          |
| Proceeds from sale of property and  equipment       |   | 79                 |       | 164                |       |
| Net cash used in investing activities               |   | (1,605             | )          | (7,335             | )          |
|                                                |   |               |       |               |       |
| Financing activities:                               |   |               |       |               |       |
| Borrowings under revolving credit facility          |   | 2,900              |       | 5,000              |       |
| Repayment of long term debt                         |   | (1,710             | )          | (1,750             | )          |
| Payment to acquire treasury stock                   |   | (951               | )          | (221               | )          |
| Net cash provided by financing activities           |   | 239                |       | 3,029              |       |
|                                                |   |               |       |               |       |
| Net decrease in cash and cash equivalents           |   | (3,536             | )          | (7,323             | )          |
| Cash and cash equivalents:                          |   |               |       |               |       |
| Beginning of period                                 |   | 3,536              |       | 7,579              |       |
|                                                |   |               |       |               |       |
| End of period                                       |   | **$**              | **—** | ** **         | **$**      | **256** | ** ** |
|                                                |   |               | ** ** |               | ** ** |
| Supplemental disclosures of cash flow  items:       |   |               |       |               |       |
| Cash paid (refunded) during the six months  for:    |   |               |       |               |       |
| Interest                                            |   | $                  | 455        |               | $          | 646 |   |
| Income taxes                                        |   | (156               | )          | (78                | )          |

 

See accompanying notes

 

5

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CONTINENTAL MATERIALS CORPORATIONSECURITIES AND EXCHANGE COMMISSION FORM 10-QNOTES TO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTSQUARTER ENDED JUNE 28, 2003

(Unaudited)

 

1.               Theunaudited interim consolidated financial statements included herein areprepared pursuant to 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 Report on Form10-K for the year ended December 28, 2002, including any amendments thereto(2002 Annual Report).  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.               Theprovision for income taxes is based upon the estimated effective tax rate of35% for the year.

 

3.               Operatingresults for the first six months of 2003 are not necessarily indicative ofperformance for the entire year. Historically, sales of construction materials are higher in the secondand third quarters.  Overall, sales ofheating and air conditioning products have not shown strong seasonalfluctuations in recent years although product mix has historically yieldedhigher gross profit margins in the fourth quarter.  (See Note 11 of Notes to Consolidated Financial Statements in theCompany’s 2002 Annual Report.)

 

4.               Duringthe quarter ended June 28, 2003, the Company exceeded the dollar amount allowedfor treasury share repurchases as stipulated in a covenant in its term loanagreement.  A waiver of the Company’scompliance with this covenant was obtained as of June 17, 2003.

 

5.               Thefollowing is a reconciliation of the calculation of basic and diluted earnings(loss) per share (EPS) for the three and six months ended June 28, 2003 andJune 29, 2002 (amounts in thousands except per-share data).

 
|                       |   | **Three  months ended** |   | **Six months  ended** |   |
|----------------------------|--------|-------------------------|--------|-----------------------|--------|
|                       |   | **Income**              |   | **Shares**            |   | **Per-  share  earnings** |   | **(Loss)  income** |   | **Shares** |   | **Per-share  (loss)  earnings** |   |
| June 28, 2003              |   |                    |   |                  |   |   |   |   |   |   |   |   |   |
| Basic EPS                  |   | $                       | 1,011  |                  | 1,765  |   | $ | .57 |   | $ | (385 | ) | 1,773 |   | $ | (.22 | ) |
| Effect of dilutive options |   | —                  |   | 34                    |   |   |   | — |   | — |   |   |   |
| Diluted EPS                |   | $                       | 1,011  |                  | 1,799  |   | $ | .56 |   | $ | (385 | ) | 1,773 |   | $ | (.22 | ) |
|                       |   |                    |   |                  |   |   |   |   |   |   |   |   |   |
| June 29, 2002              |   |                    |   |                  |   |   |   |   |   |   |   |   |   |
| Basic EPS                  |   | $                       | 1,715  |                  | 1,799  |   | $ | .95 |   | $ | 1,108 |   | 1,802 |   | $ | .62 |   |
| Effect of dilutive options |   | —                  |   | 36                    |   |   |   | — |   | 35 |   |   |   |
| Diluted EPS                |   | $                       | 1,715  |                  | 1,835  |   | $ | .94 |   | $ | 1,108 |   | 1,837 |   | $ | .60 |   |

 

6.               Thefollowing table presents information about the Company’s reported segments forthe six-month and three-month periods ended June 28, 2003 and June 29, 2002along with the items necessary to reconcile the segment information to thetotals reported in the financial statements (amounts in thousands).

 

6

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|                             |   | **Heating  and Air  Conditioning** |   | **Construction  Materials** |   | **All Other** |   | **Unallocated  Corporate** |   | **Total** |   |
|----------------------------------|--------|------------------------------------|--------|-----------------------------|--------|---------------|--------|----------------------------|--------|-----------|--------|
| 2003                             |   |                               |   |                        |   |          |   |                       |   |      |   |
| Six Months                       |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from external customers |   | $                                  | 24,603 |                        | $      | 33,541        |   | $                          | 156    |      | $      | 1 |   | $ | 58,301 |   |
| Operating income                 |   | 1,744                              |   | (628                        | )      | (8            | )      | (1,410                     | )      | (302      | )      |
| Assets                           |   | 30,629                             |   | 50,370                      |   | 15            |   | 2,641                      |   | 83,655    |   |
| Three Months                     |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from external customers |   | 14,343                             |   | 20,191                      |   | 86            |   | —                     |   | 34,620    |   |
| Operating income                 |   | 931                                |   | 1,547                       |   | 5             |   | (649                       | )      | 1,834     |   |
|                             |   |                               |   |                        |   |          |   |                       |   |      |   |
| 2002                             |   |                               |   |                        |   |          |   |                       |   |      |   |
| Six Months                       |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from external customers |   | $                                  | 27,145 |                        | $      | 36,807        |   | $                          | 73     |      | $      | 1 |   | $ | 64,026 |   |
| Operating income                 |   | 2,195                              |   | 1,295                       |   | (89           | )      | (1,551                     | )      | 1,850     |   |
| Assets                           |   | 34,937                             |   | 53,016                      |   | 51            |   | 1,851                      |   | 89,855    |   |
| Three Months                     |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues from external customers |   | 14,558                             |   | 22,827                      |   | 37            |   | 1                          |   | 37,423    |   |
| Operating income                 |   | 1,077                              |   | 2,407                       |   | (48           | )      | (750                       | )      | 2,686     |   |

 

There are nodifferences in the basis of segmentation or in the basis of measurement ofsegment profit or loss from the 2002 Annual Report.

 

7.               On April 1, 2002,the Company acquired all of the stock of McKinney Door and Hardware, Inc.(MDHI), a refabricator and distributor of metal doors, wood doors and relatedhardware.  MDHI operates from onefacility in Pueblo, Colorado.  The$2,125,000 purchase price, net of cash received and $1,129,000 of liabilitiesand debt, was funded by available cash balances and credit sources.  The unallocated excess purchase price overfair value of net assets acquired of $900,000 has been classified as goodwill.  The acquisition has been accounted for underthe purchase method and accordingly, the operating results of MDHI have beenincluded in the consolidated results since the date of acquisition.

 

Identifiableintangible assets as of June 28, 2003 consist of three amortizablenon-compete agreements and were carried at $1,292,000 net of $708,000accumulated amortization.  The pre-taxamortization expense for intangible assets during the six-month and three-monthperiods ended June 28, 2003 was $111,000 and $55,000, respectively.  Based upon the intangible assets recorded onthe balance sheet at June 28, 2003, amortization expense for the next fiveyears is estimated to be as follows: 2003 – $225,000, 2004 – $225,000, 2005 –$225,000, 2006 – $216,000, and 2007 – $137,000.

 

8.               Theinterest rate swap agreement is reported consistent with SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” and its relatedamendment, SFAS No. 138, “Accounting for Certain Derivative Instruments andCertain Hedging Activities” which require recognition of derivatives as eitherassets or liabilities and measurement at fair value.  During the three-month and six-month periods ended June 28, 2003,pre-tax losses of $23,000 and $3,000, respectively, are reported undercomprehensive income (loss) as a result of the cash flow hedge as follows(amounts in thousands):

 

7

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|                                                                                                                                |   | **Three  Months Ended  June 28, 2003** |   | **Six Months  Ended  June 28, 2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
| Net income (loss), as reported                                                                                                      |   | $                                      | 1,011  |                                 | $      | (385 | ) |
| Swap agreement (loss) gain, net of tax effect  of $9 and $3, respectively, for the three months and six months ended June  28, 2003 |   | (14                                    | )      | —                               |   |
| Comprehensive net income (loss)                                                                                                     |   | $                                      | 997    |                                 | $      | (385 | ) |

 

**Item2.   Management’s Discussion andAnalysis of Financial Condition and Results of Operation**

 

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

 

Historically,the Company has experienced operating losses during the first quarter exceptwhen the weather is mild along the Front Range in Colorado.  Operating results typically improve in thesecond and third quarters reflecting more favorable weather conditions inColorado and the seasonal sales of evaporative coolers.  Fourth quarter results can vary based onweather conditions in Colorado as well as in the principal markets for theCompany’s heating equipment.  Sales offan coils are generally not subject to seasonal variation.  Reflecting the operating results and the useof sales dating programs related to the evaporative cooler product line, thecash balance is normally depleted during the first or second quarter of theyear.  The Company’s borrowings againstthe revolving credit facility peak during the second quarter and decline overthe remainder of the year. This trend has continued valid thus far in 2003.

 

Thecash balance decreased consistent with the normal trend due to the seasonalityof sales as well as the sales programs related to the evaporative coolerproduct line.  Operations used$2,170,000 of cash during the first six months of 2003 compared to using$3,017,000 of cash in the first six months of 2002.  Reduced working capital requirements in the first half of 2003more than offset the lower earnings.  Asignificant reduction in evaporative cooler inventories in the second quarterof 2003 (see discussion below) was a principal factor in the reduced workingcapital requirements.

 

Capitalexpenditures in the first six months of 2003 were $1,684,000 compared to$5,374,000 in the first half of 2002. The majority of the capital spending was in the construction materials segmentand related to the opening of the Brighton, Colorado batch plant during March2003 and several projects associated with the new aggregates and concretebatching operations on the east side of Pueblo. The unusually high level ofcapital spending during the first six months of 2002 related to four majorprojects as described in the Management’s Discussion and Analysis section ofthe Company’s 2002 Annual Report.  TheCompany anticipates that the level of capital spending in 2003 will reflect thedecline in sales volume and be significantly reduced compared to the spendingin recent years.

 

TheCompany expects that the operating cash flow from its subsidiaries,supplemented by the revolving line of credit (of which $2,900,000 wasoutstanding at June 28, 2003) will be sufficient to cover anticipated cashrequirements, including debt service and planned capital expenditures for thenext twelve months.

 

8

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Operations – Comparison of Quarter Ended June 28, 2003 to Quarter EndedJune 29, 2002 (See page 3)

 

Consolidatedsales during the quarter ended June 30, 2003 decreased $2,803,000 (7.5%) whencompared to the quarter ended June 29, 2002. Sales decreased $2,636,000 (11.5%) in the construction materialssegment.  The reduced level ofconstruction activity along the Front Range in Colorado lead to reduced volumesand increased price competition resulting in lower ready-mixed concrete prices,most notably in the Denver metropolitan area. The reduced volume combined with the lower prices account for thediminished sales level.  The heating andair conditioning segment reported a modest $215,000 (1.5%) decline insales.  A sharp decline in fan coilsales was partially offset by strong evaporative cooler sales during the 2003quarter.  The increase in evaporativecooler sales was primarily due to a change in shipping schedules of a few largewholesale accounts in 2003, which resulted in a shift of sales from the firstquarter to the second quarter.  Hot, dryweather in the markets served also aided cooler sales.  Fan coil sales continue to reflect thenationwide slump in commercial construction, notably hotel construction.

 

Consolidatedcost of sales (exclusive of depreciation and depletion) as a percentage ofsales increased from 76.4% to 77.1%. The increase was experienced by both segments although the constructionmaterials segment was more severely affected. The higher cost ratio in the construction materials segment was theresult of the reduced volume, lower selling prices and higher operating costs,particularly maintenance and fuel.  Theheating and air conditioning segment also reported an increase in the cost ofsales percentage due to the reduced production levels of fan coils, whichincreased unit costs, and a change in product mix of sales in the evaporativecooler line to lower margin items.

 

Netinterest expense declined primarily due to the lower term loan balance as wellas lower borrowings against the revolving credit facility during the secondquarter of 2003.

 

Otherincome declined due to the inclusion of gains on the sale of property andequipment during the quarter ended June 29, 2002.

 

Operations - Comparison of Six Months Ended June 28, 2003 to Six MonthsEnded June 29, 2002 (See page 4)

 

Consolidatedsales for the six months ended June 28, 2003 decreased $5,725,000 (8.9%) whencompared to the six months ended June 29, 2002.  Sales in the construction materials segment declined $3,266,000(8.9%) despite the acquisition of McKinney Door and Hardware, Inc. on April 1,2002.  The decline was due to thereasons noted above.  In addition,inclement weather during the first quarter of 2003, including a near recordsnowfall on March 17th along Colorado’s Front Range, hamperedsales.  The heating and air conditioningsegment reported a $2,542,000 (9.4%) decrease in sales.  The decline was primarily due to thedepressed fan coil market.

 

Costof sales (exclusive of depreciation and depletion) as a percentage of salesincreased from 78.5% to 80.8%.  The costof sales percentage in the construction materials segment increased for thereasons noted above.  In addition, theaforementioned inclement weather during the first quarter of 2003 adverselyaffected production.  Cost of sales inthe heating and air conditioning segment increased for the reasons noted above.

 

Netinterest expense declined primarily due to the reasons noted above and receiptduring the first quarter of 2003 of approximately $62,000 of interest relatedto state tax refunds.

 

9

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Otherincome declined for the reason noted above.

 

OUTLOOK

 

Theweak construction market in Colorado and the depressed commercial constructionmarket nationwide, notably hotel construction, along with their above notedeffects on the Company, are expected to continue for at least the near futureand may not improve during the balance of 2003.

 

NEW ACCOUNTINGSTANDARDS

 

OnDecember 30, 2002, the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations.” Thisstandard requires recording the fair value of a liability for an assetretirement obligation in the period in which it is incurred. In connection withpermits to mine aggregate deposits in Colorado, the Company is obligated toreclaim the mined areas.  The Companyrecords a reserve for future reclamation work to be performed at its variousaggregate operations based upon estimates of the recoverable quantities of rockand sand available in each location combined with an estimate of the totalexpense that will be incurred to reclaim a property.  Provision is made based upon the units of production method.  Reclamation costs are charged to operationsas the properties are mined.  Actualreclamation costs are charged against the reserve.  The adequacy of the recorded reserve is assessed annually.  Estimates of both the quantities ofrecoverable material and the cost of reclamation are periodically updated withthe assistance of an independent professional. Reclamation on any mining property is performed soon after each sectionof the deposit is mined.  Reclamation issubstantially complete by the time the entire deposit is depleted.  The Company believes that this approach,which had been previously used to establish the annual expense and the reserverecorded for future reclamation obligations, continues to provide the bestestimate of the fair value of these obligations.   Therefore the adoption of SFAS No. 143 did not have an impact onthe Company’s consolidated balance sheet or consolidated statement ofoperations as of December 30, 2002.

 

Ifthe provisions of Statement 143 had been adopted effective December 30, 2001,there would have been no impact on earnings per share, net of income taxeffect. Since a change in earnings per share would not have occurred, proformaearnings per share disclosures are not presented.

 

FORWARD-LOOKINGSTATEMENTS

 

Theforegoing discussion contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended.  Such forward-looking statements are based onthe beliefs of the Company’s management as well as on assumptions made by andinformation available to the Company at the time such statements were made.  When used in this Report, words such as“anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,”“projects,” and similar expressions are intended to identify forward-lookingstatements.  Actual results could differmaterially from those projected in the forward-looking statements as a resultof factors including but not limited to: weather, interest rates, availabilityof raw materials and their related costs, economic conditions and competitiveforces.  Changes in accounting pronouncementscould also alter projected results. Forward-looking statements speak only as of the date they were made, andwe undertake no obligation to publicly update them.

 

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**Item 3.   Quantitative And Qualitative Disclosures About Market Risk**

 

Therehave been no changes in the market risks that the Company is exposed to sincethose discussed in the Company’s 2002 Annual Report on Form 10-K.  At June 28, 2003, the amount subject to theinterest rate swap agreement was $12,000,000. Also see Note 8 above in the notes to financial statements.

 

**Item 4.   Disclosure Controls and Procedures**

 

Evaluationof disclosure controls and procedures.

 

TheCompany’s chief executive officer and chief financial officer, with theparticipation of management, have evaluated the effectiveness of our“disclosure controls and procedures” (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934).  Based on their evaluation, they have concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its subsidiaries)required to be disclosed in this quarterly report and no changes are requiredat this time.

 

Changesin internal controls.

 

Therewere no significant changes in the Company’s internal control over financialreporting identified in connection with the evaluation of such internal controlthat occurred during the last fiscal quarter that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

PART II – Other Information

 

Item 4.                       Submission of Matters to aVote of Security Holders

 

(a)                                  The2003 Annual Meeting of the Stockholders of the Company was held on May 28,2003.

 

(b)                                 Atthat meeting, three individuals, all of whom are current directors, werenominated and elected to serve until the 2006 Annual Meeting by the followingvotes:

 
| **Director**       |   | **Shares For** |   | **Shares Against** |   | **Shares Withheld** |   |
|--------------------|--------|----------------|--------|--------------------|--------|---------------------|--------|
| Thomas H.  Carmody |   | 1,610,488      |   | —             |   | 3,760               |   |
| Ronald J.  Gidwitz |   | 1,610,488      |   | —             |   | 3,760               |   |
| Darrell M.  Trent  |   | 1,610,488      |   | —             |   | 3,760               |   |

 

There were no broker non-votes.

 

The following directors’ terms of officecontinued after the 2003 Meeting until the Annual Meetings of the years asnoted:

 

| **Directors**         |   | **Expiration of Term** |   |
|-----------------------|--------|------------------------|--------|
| James G.  Gidwitz     |   | 2004                   |   |
| Betsy R.  Gidwitz     |   | 2004                   |   |
| Joseph J.  Sum        |   | 2004                   |   |
| Ralph  W. Gidwitz     |   | 2005                   |   |
| Theodore  R. Tetzlaff |   | 2005                   |   |
| Peter  E. Thieriot    |   | 2005                   |   |

 

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(c)                                  Inaddition to the above election, the appointment of the independent auditingfirm of PricewaterhouseCoopers LLP was ratified by the following vote:

 
| **For**   |   | **Against** |   | **Abstain** |   |
|-----------|--------|-------------|--------|-------------|--------|
| 1,609,748 |   | 2,520       |   | 1,980       |   |

 

There were no broker non-votes.

 

(d)                                 Noother matters were submitted for vote.

 

Item 6.                    Exhibits and Reports on Form 8-K

 

(a)  Exhibits

 
| **Exhibit  No.** |   | **Description**                                                                                      |
|------------------|--------|------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                 |
| 31.1             |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |
|             |   |                                                                                                 |
| 31.2             |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 |
|             |   |                                                                                                 |
| 32               |   | Certification  of Chief Executive 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 June 28, 2003.                     |

 

 

SIGNATURE

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   | CONTINENTAL  MATERIALS CORPORATION |
|--------|------------------------------------|
|   |                               |
|   |                               |
| Date:  | July 30,2003                       |   | By: | /S/ Joseph J. Sum |   |
|   |                               | Joseph J. Sum, Vice President and  Chief Financial Officer |
|        |                                    |  |  |  |  |

 

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Exhibit Index

 
| **Exhibit No.** |   | **Description**                                                                                                                  |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                             |
| 31.1            |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                             |
|            |   |                                                                                                                             |
| 31.2            |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                             |
|            |   |                                                                                                                             |
| 32              |   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 |

 

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