**UNITEDSTATES****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 July 3, 2004** |
|            |   |   |
| **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**

 

**CONTINENTALMATERIALS 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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes  ý    No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).

 

Yes  o        No  ý

 

| Number of common shares  outstanding at August 6, 2004 |   | 1,666,427 |
|-------------------------------------------------------------|--------|-----------|

 

 

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PART I – FINANCIALINFORMATION

 

**Item 1.   FinancialStatements**

 

CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED BALANCE SHEETS

JULY 3, 2004and JANUARY 3, 2004

(000’s omittedexcept share data)

 
|                                                                                  |   | **JULY 3,  2004** |   | **JANUARY 3,  2004** |   |
|---------------------------------------------------------------------------------------|--------|------------------------|--------|---------------------------|--------|
|                                                                                  |   | **(Unaudited)**        |   |                      |   |
| ***ASSETS***                                                                          |   |                   |   |                      |   |
| Current  assets:                                                                      |   |                   |   |                      |   |
| Cash  and cash equivalents                                                            |   | $                      | — |                      | $      | 4,609 |   |
| Receivables,  net                                                                     |   | 22,108                 |   | 17,054                    |   |
| Inventories:                                                                          |   |                   |   |                      |   |
| Finished  goods                                                                       |   | 7,673                  |   | 7,163                     |   |
| Work  in process                                                                      |   | 1,522                  |   | 1,486                     |   |
| Raw  materials and supplies                                                           |   | 8,631                  |   | 7,532                     |   |
| Prepaid  expenses                                                                     |   | 3,387                  |   | 3,064                     |   |
| Total  current assets                                                                 |   | 43,321                 |   | 40,908                    |   |
|                                                                                  |   |                   |   |                      |   |
| Property,  plant and equipment, net                                                   |   | 30,607                 |   | 30,873                    |   |
|                                                                                  |   |                   |   |                      |   |
| Goodwill                                                                              |   | 7,374                  |   | 7,374                     |   |
| Non-compete  agreements                                                               |   | 1,067                  |   | 1,178                     |   |
| Other  assets                                                                         |   | 1,657                  |   | 1,493                     |   |
|                                                                                  |   |                   |   |                      |   |
|                                                                                  |   | $                      | 84,026 |                      | $      | 81,826 |   |
|                                                                                  |   |                   |   |                      |   |
| ***LIABILITIES***                                                                     |   |                   |   |                      |   |
| Current liabilities:                                                                  |   |                   |   |                      |   |
| Bank  loan payable                                                                    |   | $                      | 3,400  |                      | $      | — |   |
| Current  portion of long-term debt                                                    |   | 2,000                  |   | 1,970                     |   |
| Accounts  payable and accrued expenses                                                |   | 14,501                 |   | 13,504                    |   |
| Income  taxes                                                                         |   | 487                    |   | 700                       |   |
| Total  current liabilities                                                            |   | 20,388                 |   | 16,174                    |   |
|                                                                                  |   |                   |   |                      |   |
| Long-term  debt                                                                       |   | 8,000                  |   | 9,000                     |   |
| Deferred  income taxes                                                                |   | 3,219                  |   | 3,219                     |   |
| Other  long-term liabilities                                                          |   | 2,377                  |   | 2,576                     |   |
|                                                                                  |   |                   |   |                      |   |
| ***SHAREHOLDERS’  EQUITY***                                                      |   |                   |   |                      |   |
| Common  shares, $0.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares |   | 643                    |   | 643                       |   |
| Capital  in excess of par value                                                       |   | 1,982                  |   | 1,982                     |   |
| Retained  earnings                                                                    |   | 60,676                 |   | 60,200                    |   |
| Accumulated  other comprehensive losses (interest rate swap adjustments)              |   | (120                   | )      | (265                      | )      |
| Treasury  shares, 903,037 and 853,901, at cost                                        |   | (13,139                | )      | (11,703                   | )      |
|                                                                                  |   | 50,042                 |   | 50,857                    |   |
|                                                                                  |   |                   |   |                      |   |
|                                                                                  |   | $                      | 84,026 |                      | $      | 81,826 |   |

 

See accompanyingnotes

 

2

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CONTINENTALMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHSENDED JULY 3, 2004 AND JUNE 28, 2003

(Unaudited)

(000’s omittedexcept per-share amounts)

 
|                                                                     |   | **JULY 3,  2004** |   | **JUNE 28,  2003** |   |
|--------------------------------------------------------------------------|--------|------------------------|--------|-------------------------|--------|
|                                                                     |   |                   |   |                    |   |
| Sales                                                                    |   | $                      | 34,577 |                    | $      | 34,620 |   |
|                                                                     |   |                   |   |                    |   |
| Costs  and expenses:                                                     |   |                   |   |                    |   |
| Cost  of sales (exclusive of depreciation, depletion and amortization)   |   | 27,688                 |   | 26,694                  |   |
| Depreciation,  depletion and amortization                                |   | 1,251                  |   | 1,595                   |   |
| Selling  and administrative                                              |   | 4,389                  |   | 4,497                   |   |
|                                                                     |   | 33,328                 |   | 32,786                  |   |
|                                                                     |   |                   |   |                    |   |
| Operating  income                                                        |   | 1,249                  |   | 1,834                   |   |
|                                                                     |   |                   |   |                    |   |
| Interest                                                                 |   | (155                   | )      | (198                    | )      |
| Other  income, net                                                       |   | 217                    |   | 22                      |   |
|                                                                     |   |                   |   |                    |   |
| Income  before income taxes                                              |   | 1,311                  |   | 1,658                   |   |
|                                                                     |   |                   |   |                    |   |
| Provision  for income taxes                                              |   | 472                    |   | 647                     |   |
|                                                                     |   |                   |   |                    |   |
| Net  income                                                              |   | 839                    |   | 1,011                   |   |
|                                                                     |   |                   |   |                    |   |
| Retained  earnings, beginning of period                                  |   | 59,837                 |   | 56,455                  |   |
|                                                                     |   |                   |   |                    |   |
| Retained  earnings, end of period                                        |   | $                      | 60,676 |                    | $      | 57,466 |   |
|                                                                     |   |                   |   |                    |   |
| Basic  earnings per share                                                |   | $                      | .50    |                    | $      | .57 |   |
|                                                                     |   |                   |   |                    |   |
| Average  shares outstanding                                              |   | 1,695                  |   | 1,765                   |   |
|                                                                     |   |                   |   |                    |   |
| Diluted  earnings per share                                              |   | $                      | .48    |                    | $      | .56 |   |
|                                                                     |   |                   |   |                    |   |
| Average  shares outstanding                                              |   | 1,731                  |   | 1,799                   |   |
|                                                                     |   |                   |   |                    |   |
| Comprehensive  income:                                                   |   |                   |   |                    |   |
| Net  income (loss)                                                       |   | $                      | 839    |                    | $      | 1,011 |   |
| Comprehensive  income from interest rate swap, net of tax of $65 and $10 |   | 128                    |   | (14                     | )      |
|                                                                     |   | $                      | 967    |                    | $      | 997 |   |

 

See accompanyingnotes

 

3

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CONTINENTALMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE SIX MONTHSENDED JULY 3, 2004 AND JUNE 28, 2003

(Unaudited)

(000’s omittedexcept per-share amounts)

 
|                                                                    |   | **JULY 3,  2004** |   | **JUNE 28,  2003** |   |
|-------------------------------------------------------------------------|--------|------------------------|--------|-------------------------|--------|
|                                                                    |   |                   |   |                    |   |
| Sales                                                                   |   | $                      | 61,824 |                    | $      | 58,301 |   |
|                                                                    |   |                   |   |                    |   |
| Costs  and expenses:                                                    |   |                   |   |                    |   |
| Cost  of sales (exclusive of depreciation, depletion and amortization)  |   | 49,859                 |   | 47,101                  |   |
| Depreciation,  depletion and amortization                               |   | 2,619                  |   | 3,127                   |   |
| Selling  and administrative                                             |   | 8,513                  |   | 8,375                   |   |
|                                                                    |   | 60,991                 |   | 58,603                  |   |
|                                                                    |   |                   |   |                    |   |
| Operating  income (loss)                                                |   | 833                    |   | (302                    | )      |
|                                                                    |   |                   |   |                    |   |
| Interest                                                                |   | (311                   | )      | (359                    | )      |
| Other  income, net                                                      |   | 222                    |   | 68                      |   |
|                                                                    |   |                   |   |                    |   |
| Income  (loss) before income taxes                                      |   | 744                    |   | (593                    | )      |
|                                                                    |   |                   |   |                    |   |
| Provision  (benefit) for income taxes                                   |   | 268                    |   | (208                    | )      |
|                                                                    |   |                   |   |                    |   |
| Net  income (loss)                                                      |   | 476                    |   | (385                    | )      |
|                                                                    |   |                   |   |                    |   |
| Retained  earnings, beginning of period                                 |   | 60,200                 |   | 57,851                  |   |
|                                                                    |   |                   |   |                    |   |
| Retained  earnings, end of period                                       |   | $                      | 60,676 |                    | $      | 57,466 |   |
|                                                                    |   |                   |   |                    |   |
| Basic  earnings (loss) per share                                        |   | $                      | .28    |                    | $      | (.22 | ) |
|                                                                    |   |                   |   |                    |   |
| Average  shares outstanding                                             |   | 1,704                  |   | 1,773                   |   |
|                                                                    |   |                   |   |                    |   |
| Diluted  earnings (loss) per share                                      |   | $                      | .27    |                    | $      | (.22 | ) |
|                                                                    |   |                   |   |                    |   |
| Average  shares outstanding                                             |   | 1,740                  |   | 1,773                   |   |
|                                                                    |   |                   |   |                    |   |
| Comprehensive  income:                                                  |   |                   |   |                    |   |
| Net  income (loss)                                                      |   | $                      | 476    |                    | $      | (385 | ) |
| Comprehensive  income from interest rate swap, net of tax of $50 and $3 |   | 145                    |   | —                  |   |
|                                                                    |   | $                      | 621    |                    | $      | (385 | ) |

 

See accompanying notes

 

4

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CONSOLIDATEDMATERIALS CORPORATION

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE SIX MONTHSENDED JULY 3, 2004 AND JUNE 28, 2003

(Unaudited)

(000’s omitted)

 
|                                             |   | **JULY 3,  2004** |   | **JUNE 28,  2003** |   |
|--------------------------------------------------|--------|------------------------|--------|-------------------------|--------|
|                                             |   |                   |   |                    |   |
| Net  cash used in operating activities           |   | $                      | (3,576 | )                       | $      | (2,170 | ) |
|                                             |   |                   |   |                    |   |
| Investing  activities:                           |   |                   |   |                    |   |
| Capital  expenditures                            |   | (2,347                 | )      | (1,684                  | )      |
| Proceeds  from sale of property and equipment    |   | 320                    |   | 79                      |   |
| Net  cash used in investing activities           |   | (2,027                 | )      | (1,605                  | )      |
|                                             |   |                   |   |                    |   |
| Financing  activities:                           |   |                   |   |                    |   |
| Borrowings  under revolving credit facility      |   | 3,400                  |   | 2,900                   |   |
| Repayment  of long-term debt                     |   | (970                   | )      | (1,710                  | )      |
| Payment  to acquire treasury stock               |   | (1,436                 | )      | (951                    | )      |
| Net  cash provided by financing activities       |   | 994                    |   | 239                     |   |
|                                             |   |                   |   |                    |   |
| Net  decrease in cash and cash equivalents       |   | (4,609                 | )      | (3,536                  | )      |
| Cash  and cash equivalents:                      |   |                   |   |                    |   |
| Beginning  of period                             |   | 4,609                  |   | 3,536                   |   |
|                                             |   |                   |   |                    |   |
| End  of period                                   |   | $                      | — |                    | $      | — |   |
|                                             |   |                   |   |                    |   |
| Supplemental  disclosures of cash flow items:    |   |                   |   |                    |   |
| Cash  paid (refunded) during the six months for: |   |                   |   |                    |   |
| Interest                                         |   | $                      | 271    |                    | $      | 455 |   |
| Income  taxes                                    |   | 494                    |   | (156                    | )      |

 

See accompanyingnotes

 

5

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CONTINENTALMATERIALS CORPORATION

SECURITIES ANDEXCHANGE COMMISSION FORM 10-Q

NOTES TO THEQUARTERLY CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDEDJULY 3, 2004

(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 including any amendments thereto.  In the opinion of management, the consolidated financialstatements include all adjustments (none of which were other than normalrecurring adjustments) necessary for a fair statement of the results for theinterim periods.

 

2.               The provision forincome taxes is based upon the estimated effective of tax rate of 36% for theyear.

 

3.               Operating resultsfor the first six months of 2004 are not necessarily indicative of performancefor the entire year.  Historically,sales of construction materials are higher in the second and third quarters.  Overall, sales of heating and airconditioning products have not shown strong seasonal fluctuations in recentyears although product mix has historically yielded higher gross profit marginsin the fourth quarter.  (See Note 10 ofNotes to Consolidated Financial Statements in the Company’s 2003 Annual Reporton Form 10-K.)

 

4.               The following is areconciliation of the calculation of basic and diluted earnings (loss) pershare (EPS) for the three and six months ended July 3, 2004 andJune 28, 2003 (amounts in thousands except per-share data).

 
|                        |   | **Three months  ended** |   | **Six months  ended** |   |
|-----------------------------|--------|-------------------------|--------|-----------------------|--------|
|                        |   | **Income**              |   | **Shares**            |   | **Per-  share  earnings** |   | **Income  (loss)** |   | **Shares** |   | **Per-share  earnings  (loss)** |   |
| July 3,  2004          |   |                    |   |                  |   |   |   |   |   |   |   |   |   |
| Basic  EPS                  |   | $                       | 839    |                  | 1,695  |   | $ | .50 |   | $ | 476 |   | 1,704 |   | $ | .28 |   |
| Effect  of dilutive options |   | —                  |   | 36                    |   |   |   | — |   | 36 |   |   |   |
| Diluted  EPS                |   | $                       | 839    |                  | 1,731  |   | $ | .48 |   | $ | 476 |   | 1,740 |   | $ | .27 |   |
|                        |   |                    |   |                  |   |   |   |   |   |   |   |   |   |
| 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 | ) |

 

5.               During the quarterended July 3, 2004, the Company amended its Revolving Credit and Term LoanAgreement with its existing two banks to extend the term through July 31,2006 and to increase the stated dollar limit of the Company’s ability topurchase treasury stock.

 

6.               The following tablepresents information about the Company’s reported segments for the six- andthree-month periods ended July 3, 2004 and June 28, 2003 along withthe items necessary to reconcile the segment information to the totals reportedin the financial statements (amounts in thousands).

 

6

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|                              |   | **Heating  and Air  Conditioning** |   | **Construction  Materials** |   | **All Other** |   | **Unallocated  Corporate** |   | **Total** |   |
|-----------------------------------|--------|------------------------------------|--------|-----------------------------|--------|---------------|--------|----------------------------|--------|-----------|--------|
| 2004                              |   |                               |   |                        |   |          |   |                       |   |      |   |
| Six  Months                       |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues  from external customers |   | $                                  | 24,112 |                        | $      | 37,538        |   | $                          | 172    |      | $      | 2 |   | $ | 61,824 |   |
| Segment  operating income (loss)  |   | 1,557                              |   | 1,078                       |   | 39            |   | (1,841                     | )      | 833       |   |
| Segment  assets                   |   | 30,144                             |   | 51,677                      |   | 264           |   | 1,941                      |   | 84,026    |   |
| Three  Months                     |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues  from external customers |   | 12,443                             |   | 22,048                      |   | 86            |   | —                     |   | 34,577    |   |
| Segment  operating income (loss)  |   | 449                                |   | 1,742                       |   | 27            |   | (969                       | )      | 1,249     |   |
|                              |   |                               |   |                        |   |          |   |                       |   |      |   |
| 2003                              |   |                               |   |                        |   |          |   |                       |   |      |   |
| Six  Months                       |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues  from external customers |   | $                                  | 24,603 |                        | $      | 33,541        |   | $                          | 156    |      | $      | 1 |   | $ | 58,301 |   |
| Segment  operating (loss) income  |   | 1,744                              |   | (628                        | )      | (8            | )      | (1,410                     | )      | (302      | )      |
| Segment  assets                   |   | 30,629                             |   | 50,370                      |   | 15            |   | 2,641                      |   | 83,655    |   |
| Three  Months                     |   |                               |   |                        |   |          |   |                       |   |      |   |
| Revenues  from external customers |   | 14,343                             |   | 20,191                      |   | 86            |   | —                     |   | 34,620    |   |
| Segment  operating income (loss)  |   | 931                                |   | 1,547                       |   | 5             |   | (649                       | )      | 1,834     |   |

 

There are no differences in the basis ofsegmentation or in the basis of measurement of segment profit or loss from the2003 Annual Report.

 

7.               The interest rateswap agreement is reported consistent with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” and its related amendment, SFASNo. 138, “Accounting for Certain Derivative Instruments and Certain HedgingActivities” which require recognition of derivatives as either assets orliabilities and measurement at fair value. The change in accumulated other comprehensive losses net of taxes fromJanuary 3, 2004 to July 3, 2004 was as follows (amounts inthousands):

 
| Balance  at January 3, 2004                                   |   | $    | (265   | ) |
|--------------------------------------------------------------------|--------|------|--------|---|
| Comprehensive  income from interest rate swap, net of tax of $(15) |   | 17   |   |
| Balance  at April 3, 2004                                     |   | (248 | )      |
| Comprehensive  income from interest rate swap, net of tax of $65   |   | 128  |   |
| Balance  at July 3, 2004                                      |   | $    | (120   | ) |

 

7

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

 

Company Overview

 

The Company operatesprimarily in two industry segments through wholly owned subsidiaries, theheating and air conditioning segment and the construction materialssegment.  The primary productsmanufactured by the heating and air conditioning segment are gas-fired wallfurnaces, console heaters, evaporative coolers and fan coils.  Gas-fired wall furnaces, console heaters andfan coil products are manufactured at Williams Furnace Co., headquartered inColton, California.  Evaporative coolersare manufactured at Phoenix Manufacturing, Inc., headquartered in Phoenix, Arizona.  The primary products of the constructionmaterials segment are ready mix concrete, construction aggregates, buildingsupplies and doors, which are offered by Transit Mix Concrete Co. and CastleConcrete Company in Colorado Springs, Colorado and Transit Mix of Pueblo, Inc.and McKinney Door and Hardware, Inc. in Pueblo, Colorado.  Currently, Rocky Mountain Ready MixConcrete, Inc. of Denver, Colorado, only offers ready mix concrete.

 

Financial Condition 

 

A significant portion of the Company’s businesstends to seasonally fluctuate.  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.  The cash balance is normally depleted duringthe first or second quarter of the year reflecting the Company’s operatingresults and the use of sales dating programs related to the evaporative coolerproduct line.  As a result, the Company’sborrowings against its revolving credit facility tend to peak during the secondquarter and then decline over the remainder of the year. This trend hascontinued thus far in 2004.

 

As expected, theCompany’s cash balance during the second quarter decreased due to theseasonality of sales, the corresponding production schedules and the salesdating programs related to the evaporative cooler product line.  Operations for the first six months of 2004used $3,576,000 of cash compared to $2,170,000 in 2003.  The increased use of cash during the firstsix months of 2004 was largely due to an increase in inventories as compared tothe modest decrease in inventories during the first six months of 2003.  The change in inventory levels was primarilyin the evaporative cooler line where strong sales volume in June 2003significantly depleted inventory levels compared to the lower sales volume inJune 2004 that left inventories above planned levels. Adjustments havebeen made to the evaporative cooler production schedule for the remainderof the year.

 

The constructionmaterials segment typically requires large capital investments, particularlywhen sales volume and demand are strong. Reflecting the more modest demand in the construction materials segmentduring the past two years, capital spending was much lower during the first sixmonths of both 2004 and 2003 as compared to expenditures from the mid-1990’sthrough 2001.  Capital expendituresduring the first six months of 2004 were primarily in the constructionmaterials segment and included earth moving equipment and the completion of thenew maintenance facility in Pueblo as well as a truck tracking system for theconcrete operations.

 

8

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Scheduled debt repaymentswere made during the second quarter of both 2004 and 2003.  The decrease in the 2004 payments reflectsthe quarterly payback schedule under the Company’s new Revolving Creditand Term Loan Agreement signed during September 2004 as compared to thesemi-annual payment schedule under the previous agreement.

 

The Company believes thatanticipated cash flow from operations, supplemented by seasonal borrowingsagainst the revolving line of credit, (of which $3,400,000 was outstanding atJuly 3, 2004) will be sufficient to cover expected cash needs, includingservicing debt and planned capital expenditures for at least the next twelvemonths.

 

Operations – Comparisonof Quarter Ended July 3, 2004 to Quarter Ended June 28, 2003

 

Consolidated sales during the quarter endedJuly 3, 2004 were modestly lower than consolidated sales during the secondquarter of 2003.  Sales declined$1,900,000 (13.2%) in the heating and air conditioning segment. The decreasewas primarily due to lower evaporative cooler sales as a result of losing thewindow unit business at a large retail customer exacerbated by a higher thannormal dew point during the current quarter. Sales of window units arehistorically concentrated in the months of May and June. A small decline infurnace sales was more than offset by a healthy increase in fan coil sales ascompared to the depressed level of fan coil sales in the second quarter of2003. The construction materials segment reported an increase in sales of$1,857,000 (9.2%). Sales of doors and supplies increased sharply providing overhalf of the segment’s sales growth. Concrete volume also increased during the2004 quarter in the Denver and Pueblo markets; however, the Denver marketcontinues to experience intense price competition. Selling prices in ColoradoSprings and Pueblo were steady.

 

Consolidated cost of sales (exclusive ofdepreciation and depletion) as a percentage of sales increased from 77.1% to80.1%.  The increase was experienced byboth segments although the heating and air conditioning segment experienced amore significant increase in costs.  Thehigher cost ratio is being driven by raw material/commodity prices. Increasedsteel, copper and aluminum prices have negatively impacted margins in theheating and air conditioning segment while higher cement and gasoline priceshave negatively affected margins in the construction materials segment.

 

Net interest expense declined primarily due to thelower debt balance as well as lower average interest rates during the secondquarter of 2004.

 

The reduction indepreciation, depletion and amortization expense from $1,595,000 to $1,251,000is the direct result of the decreased capital spending levels since 2002.

 

Other income increased due to the sale of a westPueblo property during the quarter ended July 3, 2004.

 

Operations - Comparisonof Six Months Ended July 3, 2004 to Six Months Ended June 28, 2003

 

Consolidated sales for the six months endedJuly 3, 2004 increased $3,523,000 (6%) when compared to the six monthsended June 28, 2003.  Sales in theconstruction materials segment improved $3,997,000 (11.9%).  The increase was due to the reasons notedabove as well as milder weather in Colorado during March 2004 compared to2003. The heating and air conditioning segment reported a slight decrease of$491,000 (2%) primarily due to the decline in evaporative cooler sales duringthe second quarter of 2004 as noted above.

 

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Cost of sales (exclusive of depreciation anddepletion) as a percentage of sales decreased from 80.8% to 80.6%.  The decrease in the cost of sales percentagewas related to the improved performance in the construction materials segmentin the first quarter of 2004 offset by the higher raw material costsencountered in the second quarter.

 

Net interest expense declined due to the reasonsnoted above partially offset by receipt during the first quarter of 2003 ofapproximately $62,000 of interest related to state tax refunds.

 

Other income increased due to the reason notedabove.

 

Historically, the Companyhas experienced improved operating results during the second quarter as salesin the construction materials segment increase reflecting weather moreconducive to construction activity. The 2004 operating results were consistentwith this trend.

 

CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES

 

The condensed andconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States. Some of theseaccounting principles require management to make estimates, assumptions anddecisions that may significantly affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as ofJuly 3, 2004 and January 3, 2004 and affect the reported amounts of revenuesand expenses for the periods reported. Actual results could differ from thoseestimates. Information with respect to the Company’s critical accountingpolicies that management believes could have the most significant effect on theCompany’s reported results is contained on pages 13 and 14 in Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations, of the Company’s Annual Report on Form 10-K for the fiscal yearended January 3, 2004.

 

OUTLOOK

 

The depressed commercialconstruction market nationwide, notably hotel construction, is expected tocontinue for at least the near future. The construction market in Colorado isshowing some signs of stabilizing but still remains considerably weaker thanthe conditions that prevailed three to five years ago.

 

RECENTLY ISSUEDACCOUNTING STANDARDS

 

The Company does not currently have anytransactions or circumstances that have been addressed by recently issuedaccounting pronouncements. Therefore, adoption of any of these statements orpronouncements would not have a material impact on the Company’s results ofoperations, financial position or liquidity.

 

FORWARD-LOOKING STATEMENTS

 

The foregoing discussion contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended.  Such forward-lookingstatements are based on the beliefs of the Company’s management as well as onassumptions made by and information available to the Company at the time suchstatements were made.  When used in thisReport, words such as “anticipates,” “believes,” “contemplates,” “estimates,”“expects,” “plans,” “projects,” and similar expressions are intended toidentify forward-looking statements. Actual results could differ materially from those projected in theforward-looking statements as a result of factors including but not limited to:weather, interest rates, availability of raw materials and their related costs,national and local

 

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economic conditions and competitive forces.  Changes in accounting pronouncements couldalso alter projected results. Forward-looking statements speak only as of the date they were made, andthe Company undertakes no obligation to publicly update them.

 

**Item 3.****                  ****Quantitative And QualitativeDisclosures About Market Risk**

 

There have been no changes in the market risks thatthe Company is exposed to since those discussed in the Company’s 2003 AnnualReport on Form 10-K.  At July 3,2004, the amount subject to the interest rate swap agreement was$9,000,000.  Also see Note 7 to thequarterly financial statements above.

 

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

 

Evaluation of disclosure controls and procedures.

 

The Company’s chief executive officer and chieffinancial officer, with the participation of management, have evaluated theeffectiveness of our “disclosure controls and procedures” (as defined in Rules13a-15(e) under the Securities Exchange Act of 1934) as of the end of theperiod covering this report.  Based ontheir evaluation, they have concluded that the Company’s disclosure controlsand procedures are effective in timely alerting them to material informationrelating to the Company (including its subsidiaries) required to be disclosedin this quarterly report and no changes are required at this time.

 

Changes in internal controls.

 

There were no significant changes in the Company’sinternal control over financial reporting identified in connection with theevaluation of such internal control that occurred during the last fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

PART II – OtherInformation

 

Item 2.                                    Purchases ofEquity Securities by the Issuer and Affiliated Purchasers

 

Thefollowing table presents information with respect to purchases made by theCompany of its common stock to become treasury stock for the periodApril 4 through July 3, 2004.

 

Issuer Purchases of Equity Securities

 
| **Period**                       |   | **(a) Total  Number of  Shares  Purchased** |   | **(b)  Average  Price Paid per  Share** |   | **(c) Total  Number of  Shares Purchased as Part  of Publicly Announced  Plans or Programs** |    | **(d)  Maximum Dollar  Value that May Yet  Be Purchased Under  the Program, Note (1)** |   |
|----------------------------------|--------|---------------------------------------------|--------|-----------------------------------------|--------|----------------------------------------------------------------------------------------------|---------|----------------------------------------------------------------------------------------|--------|
| April 4  – May 1, 2004 |   | 1,550                                       |   | $                                       | 28.93  |                                                                                         | 443,149 |                                                                                   | $      | 1,148,972 |   |
| May  2 – May 29, 2004       |   | 6,050                                       |   | 28.65                                   |   | 449,199                                                                                      |    | 2,750,000                                                                              |   |
| May  30 – July 3, 2004 |   | 24,500                                      |   | 28.59                                   |   | 473,699                                                                                      |    | 2,049,647                                                                              |   |
| Total                            |   | 32,100                                      |   | $                                       | 28.61  |                                                                                         | 473,699 |                                                                                   | $      | 2,049,647 |   |

 

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Note(1) The amounts shown in column (d) reflect the dollar value remaining underthe limits, as established by the Board of Directors, in effect at the end ofeach period. The limit in effect through May 28, 2004 was $2,000,000. EffectiveMay 29, 2003, the Board increased the permitted amount to a total not to exceed$2,750,000 for purchases on or after May 29, 2004.

 

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OnJanuary 19, 1999 the Company established the current open-ended program torepurchase its common stock. Purchases are made on the open market or in blocktrades at the discretion of management. The dollar amount authorized for theprogram has been periodically increased by the Board of Directors and approvedby the Company’s two banks as required by the Company’s Revolving Credit and TermLoan Agreement. Effective May 29, 2003, the Board increased the permittedamount to a total not to exceed $2,750,000 for purchases on or after May 29,2004

 

Item 4.                                     Submission ofMatters to a Vote of Security Holders

 

(a)          The 2004 Annual Meetingof the Stockholders of the Company was held on May 26, 2004.

 

(b)         At that meeting, threeindividuals, two of whom are current directors, were nominated and elected toserve until the 2007 Annual Meeting. In addition to the two current directors,William D. Andrews was nominated to replace Joseph J. Sum, the Company’s VicePresident and Treasurer, in order to comply with regulations mandating that theBoard be composed of independent directors. The results of the voting are asfollows:

 
| **Director**        |   | **Shares For** |   | **Shares Against** |   | **Shares  Withheld** |   |
|---------------------|--------|----------------|--------|--------------------|--------|----------------------|--------|
| William  D. Andrews |   | 1,459,561      |   | —             |   | 4,980                |   |
| Betsy  R. Gidwitz   |   | 1,440,153      |   | —             |   | 24,388               |   |
| James  G. Gidwitz   |   | 1,440,153      |   | —             |   | 24,388               |   |

 

There were no brokernon-votes.

 

The following directors’terms of office continued after the 2004 Meeting until the Annual Meetings ofthe years as noted:

 
| **Directors**        |   | **Expiration  of Term** |
|----------------------|--------|-------------------------|
| Ralph W. Gidwitz     |   | 2005                    |
| Theodore R. Tetzlaff |   | 2005                    |
| Peter E. Thieriot    |   | 2005                    |
| Thomas  H. Carmody   |   | 2006                    |
| Ronald J. Gidwitz    |   | 2006                    |
| Darrell  M. Trent    |   | 2006                    |

 

(c)          In addition to the aboveelection, the appointment of the independent auditing firm ofPricewaterhouseCoopers LLP was ratified by the following vote:

 
| **For**   |   | **Against** |   | **Abstain** |
|-----------|--------|-------------|--------|-------------|
| 1,462,661 |   | 1,320       |   | 560         |

 

There were no brokernon-votes.

 

(d)         Not applicable.

 

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Item 6.                                    Exhibits andReports on Form 8-K

 

(a)  Exhibits

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                     |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                |
| 10              |   | First Amendment To  Revolving Credit And Term Loan Agreement dated as of May 29, 2004, by and  among Continental Materials Corporation and LaSalle Bank National Association  and Fifth Third Bank. |
|            |   |                                                                                                                                                                                                |
| 31.1            |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                           |
|            |   |                                                                                                                                                                                                |
| 31.2            |   | Certification of Chief  Financial Officer pursuant to Section 906 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                                                               |

 

(b)  The Company filed one report on Form 8-Kduring the quarter ended July 3, 2004. The report, dated May 13, 2004,related to the press release disclosing the results of the Company’s operationsfor the 2004 first quarter issued May 11, 2004.

 

SIGNATURE

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |                  | CONTINENTAL MATERIALS  CORPORATION |
|--------|-----------------------|------------------------------------|
|   |                  |                               |
|   |                  |                               |
| Date:  | August 12,  2004 |                               | By: | /S/ Joseph J. Sum |   |
|   |                  |                               | Joseph J. Sum, Vice  President |
|   |                  |                               | and Chief Financial  Officer |
|        |                       |                                    |  |  |  |

 

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