**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

**(MarkOne)**

 

| **ý**                         |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                             |
|------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                               |   | **For  the fiscal year ended December 28, 2002**                                                                                                                                                                                                                                                                                                                                                                                                      |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                               |   | **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **o**                              |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                         |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                               |   | **For  the transition period  from                                   to                                  ** |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| **Commission  file number 1-3834** |

 

**Continental Materials Corporation**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                    | **36-2274391**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) | (I.R.S. Employer  Identification No.) |
|                                                            |                                  |
| **225  West Wacker Drive, Suite 1800 Chicago, Illinois**        | **60606**                             |
| (Address of  principal executive offices)                       | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code **312-541-7200**

 

Securities registeredpursuant to Section 12(b) of the Act:

 

| **Title of each class**        |   | **Name of each exchange on which registered** |
|--------------------------------|--------|-----------------------------------------------|
|                           |   |                                          |
| Common Stock - $.25  par value |   | American Stock  Exchange                      |

 

Securities registeredpursuant to Section 12(g) of the Act: **NONE**

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.       Yes ý    No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of the Form 10-Kor any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).

 

| Yes o |   | No ý |
|------------|--------|-----------|

 

The aggregate market value (based on June28, 2002 closing price) of voting stock held by non-affiliates of registrant:Approximately $25,295,000.

 

Number of common shares outstanding at March 24, 2003:1,771,812.

 

Portions of registrant’s definitive proxystatement for the 2003 Annual Meeting of Stockholders to be held on May 28,2003 are incorporated by reference herein into Part III of this Form 10-K.  (The definitive proxy statement is expectedto be filed with the Securities and Exchange Commission within 120 days afterthe close of the fiscal year covered by this Form 10-K.)

 

 

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PART I

 
| Item 1. | **BUSINESS** |
|---------|--------------|

 

Therehave been no significant changes in the Company’s line of business during thepast five years other than the acquisition of all of the stock of McKinney Doorand Hardware, Inc. (MDHI), a refabricator and distributor of metal doors, wooddoors and related hardware in Pueblo, Colorado on April 1, 2002, and all of thestock of Rocky Mountain Ready Mix Concrete, Inc. (RMRM), a ready-mix concreteproducer in the metropolitan Denver, Colorado area, on December 31, 2000.Accordingly, results for 2002 include the activity of RMRM for the entire yearand the activity of MDHI since April 1, 2002. Results for 2001 include theactivity of RMRM for the entire year.

 

The Company operatesprimarily in two industry segments, the heating and air conditioning segmentand the construction materials segment. The heating and air conditioning segment produces and sells gas-firedwall furnaces and console heaters, evaporative coolers and fan coils, which aremanufactured by the Company’s wholly-owned subsidiaries, Phoenix Manufacturing,Inc. of Phoenix, Arizona and Williams Furnace Co. of Colton, California.  The principal products of the constructionmaterials segment are ready mix concrete, construction aggregates, buildingsupplies and doors which are offered by the Company’s wholly-ownedsubsidiaries, Castle Concrete Company and Transit Mix Concrete Co., both ofColorado Springs, Colorado and Transit Mix of Pueblo, Inc. and MDHI, both ofPueblo, Colorado. Currently, theCompany’s wholly-owned subsidiary, Rocky Mountain Ready Mix Concrete, Inc. ofDenver, Colorado, only offers ready mix concrete.

 

Inaddition to the above operating segments, an “Other” classification is used toreport a small real estate operation and the holding costs for certain mininginterests that remain from the period the Company maintained significantinterests in mining operations.  Theexpenses of the corporate office, which provides treasury, insurance and taxservices as well as strategic business planning and general managementservices, are not allocated to the segments. Expenses related to the Management Information Systems group areallocated to all locations, including the corporate office.

 

Financial informationrelating to industry segments appears in Note 11 on pages 26 and 27 of this Form10-K.  References to a “Note” are to the“Notes to Consolidated Financial Statements” included on pages 19 through 27 ofthis Annual Report on Form 10-K.

 
| **MARKETING, SALES AND SUPPORT** |
|----------------------------------|

 

***MARKETING***

 

The heating and air conditioning segment markets its productsthroughout the United States through plumbing, heating and air conditioningwholesale distributors as well as directly to some major retail home-centersand other retail outlets.  Fan coils arealso sold to HVAC (Heating, Ventilation and Air Conditioning) installingcontractors and equipment manufacturers for commercial applications.  The Company contracts independentmanufacturers’ representatives for all of its products while also employing andutilizing a staff of sales and sales support personnel.  Sales in this segment are predominantly inthe United States and are concentrated in the Western and Southwesternstates.  Sales of furnaces and consoleheaters usually increase in the months of August through January.  Sales of evaporative coolers usuallyincrease in the months of March through July. Sales of the fan coil product line are more evenly distributedthroughout the year although the highest volume typically occurs during thelate spring and summer.  In order toenhance sales of wall furnaces and evaporative coolers during the off season,extended payment terms typically are offered to customers.

 

2

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The constructionmaterials segment markets its products primarily through its own direct salespersonnel and, except for MDHI, confines its sales to the Front Range area inColorado.  Sales are primarily made togeneral and sub-contractors, government entities and individuals.  Sales are affected by the general economicconditions and weather conditions in the areas serviced (as it relates toconstruction).  Revenues usually declinein the winter months as the pace of construction slows.  MDHI sells throughout the United Statesalthough sales are primarily within Colorado and adjacent states.

 

During2002, no customer in either segment accounted for 10% or more of the totalsales of the Company.

 

***CUSTOMER SERVICEAND SUPPORT***

 

The heating and airconditioning segment offers parts departments and help lines to assistcontractors, distributors and end users in servicing the products.  The Company does not perform installationservices, nor are maintenance or service contracts offered.  In addition, training and product informationsessions for the furnace, cooler and fan coil product lines are offered at ourplants and other sites for distributors, contractors, utility company employeesand other customers.  This segment doesnot derive any revenue from after-sales service and support other than fromparts sales.  The personnel in theconstruction materials segment routinely take a leadership role in formulationof the products to meet the specifications of the customers.

 
| ***BACKLOG*** |
|---------------|

 

The order backlog atDecember 28, 2002 and December 29, 2001 for the heating and air conditioningsegment were as follows:

 
|                 |   | **December  28, 2002** |      | **December  29, 2001** |   |
|----------------------|--------|------------------------|-----------|------------------------|--------|
| Furnaces             |   | $                      | 75,000    |                   | $      | 220,000 |   |
| Evaporative  coolers |   | 1,046,000              |      | 1,000,000              |   |
| Fan  coil            |   | 376,000                |      | 1,661,000              |   |
| Total                |   | $                      | 1,497,000 |                   | $      | 2,881,000 |   |

 

The above backlogs areexpected to be substantially filled during the first quarter of 2003.

 

At December 28, 2002, theconstruction materials segment had a backlog of approximately $5,327,000($2,463,000 at December 29, 2001) primarily relating to construction contractsawarded and expected to be filled during the first half of 2003.

 

Managementdoes not believe that any of the above backlogs represent a trend but ratherare indicative only of the timing of orders received or contracts awarded.  However, as noted below in the discussion ofoperations in Item 7, the construction materials segment has experienced adecline in sales volume reflecting decreased construction along the Front Rangeof Colorado and the fan coil product line has experienced a decline in salesvolume reflecting the nationwide slump in commercial construction.

 

***Research and Development/Patents***

 

In general, the Companyrelies upon, and intends to continue to rely upon, unpatented proprietarytechnology and information.  However,research and development activities in the heating and air conditioning segmenthave resulted in a patent being issued to Phoenix Manufacturing, Inc. relatedto the Power Cleaning System (expiring January 2014) for the evaporativecoolers and a patent issued to Williams Furnace Co. entitled “Wall Furnace WithSide Vented Draft Hood” (expiring November 2011) which has increased the heattransference

 

3

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efficiency in ourfurnaces above that previously offered by the Company and its competitors.  The amounts expended on research anddevelopment are not material and are expensed as incurred.  The Company believes its interests in itspatents, as well as its proprietary knowledge, are sufficient for itsbusinesses as currently conducted.

 

***Manufacturing***

 

TheCompany conducts its manufacturing operations through a number of facilities asmore completely described in Item 2, Properties, below.

 

Due to the seasonality ofthe businesses, furnaces and evaporative coolers build inventory during theiroff seasons in order to have adequate supplies to sell during the season.  Although sales are made throughout the year,sales volume is generally higher from August through January for furnaces whilesales volume of evaporative coolers is generally higher from March throughJuly.

 

Ingeneral, raw materials required by the Company can be obtained from varioussources in the quantities desired.  TheCompany’s construction materials subsidiaries in Colorado Springs and Pueblohave historically purchased most of their cement requirements from a singlesupplier in order to obtain volume rates. These companies have, on past occasion, experienced some difficulty inobtaining the required volume of cement from this single supplier; however,they were able to acquire sufficient quantities from non-traditional sources,which are expected to remain available in the future, to satisfy theirneeds.  The Company has no long-termsupply contracts and does not consider itself dependent on any individualsupplier.

 

In connection withpermits to mine properties in Colorado, the Company is obligated to reclaim themined areas.  Although the conditionsvary by permit, in general, the reclamation requirements call for thestabilization of the mined area.  Inrecent years, reclamation costs have had a more significant effect on theresults of operations compared to prior years as the Company has engaged inenhanced reclamation projects that exceed the stated requirements.  The augmented reclamation efforts are beingperformed, in part, for goodwill purposes.

 

***Competitive Conditions***

 

Heating and AirConditioning – The Company is one of three principalcompanies producing wall furnaces (excluding units sold to the recreationalvehicle industry) and gas fired console heaters.  The wall furnace and console heater markets are only a smallcomponent of the heating industry.  TheCompany serves these market areas from a plant in Colton, California.  The sales force consists of in-house salespersonnel and independent manufacturers’ representatives.  The entire heating industry is dominated bymanufacturers (most of which are substantially larger than the Company) sellingdiversified lines of heating and air conditioning units directed primarilytoward central heating and cooling systems. All of the producers, including the Company, compete primarily on abasis of price, service and timeliness of delivery.

 

Fancoils are also produced at the Colton plant.  The Company generally obtains contracts for larger jobs based upon acompetitive bidding process.  Thecontracts are typically awarded based upon the competitive factors notedbelow.  International EnvironmentalCorp., a subsidiary of LSB Industries, Inc., a manufacturer of a diversifiedline of commercial and industrial products, is the largest manufacturer andcompetitor in this market.  There arealso a number of other companies that produce fan coils.  All of the producers compete primarily onthe basis of price, ability to meet customers’ specific requirements andtimeliness of delivery.

 

TheCompany manufactures evaporative air coolers at a plant located in Phoenix,Arizona.  The cooler market is dominatedby Adobe Air.  The other principalcompetitor is Champion/Essick.  Allproducers of evaporative air coolers typically compete aggressively on thebasis of price and service.

 

4

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Construction Materials– The Company is one of five companies producing ready mix concrete in theColorado Springs area, one of three companies producing ready mix concrete inthe Pueblo area and one of fourteen companies producing ready mix concrete inthe Denver area.  Although we are thelargest producer in the Colorado Springs and Pueblo markets served, the othercompetitors in these areas compete aggressively on the basis of price, serviceand product features.  In Denver, two ofthe producers are significantly larger than RMRM.  This market also experiences aggressive competition based onprice, service and product features.

 

TheCompany is one of five producers of aggregates in the marketing area served.  All producers compete aggressively on thebasis of price, quality of material and service.

 

TheCompany’s sales of metal doors and door frames, rebar reinforcement and otherbuilding materials in the Colorado Springs and Pueblo metropolitan areas aresubject to intense competition from two larger companies from Denver, two largecompanies in Colorado Springs and a number of small local competitors.  However, the Company believes it has aslight competitive advantage in that many of our customers also purchaseconcrete, sand and aggregates from us whereas our competitors for theseparticular product lines do not offer concrete, sand or aggregates.  In addition, the Company believes its Pueblolocation has a slight competitive advantage with respect to the two Denvercompanies based upon delivery costs.

 

***EMPLOYEES***

 

The Company employed 769 people as of December 28, 2002.  Employment varies throughout the year due tothe seasonal nature of the businesses. A breakdown of the prior three years employment at year-end by segmentwas:

 
|                          |   | **2002** |   | **2001** |   | **2000** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Heating  and Air Conditioning |   | 356      |   | 386      |   | 397      |   |
| Construction  Materials       |   | 399      |   | 387      |   | 347      |   |
| Corporate  Office             |   | 14       |   | 14       |   | 14       |   |
|                          |   |     |   |     |   |     |   |
| Total                         |   | 769      |   | 787      |   | 758      |   |

 

Thefactory employees at the Colton, California plant are represented by theCarpenters Local 721 Union under a contract that expires in April 2005.  The Company considers relations with itsemployees and with its union to be good.

 

 
| Item 2. | **PROPERTIES** |
|---------|----------------|

 

The heating and airconditioning segment operates out of one owned (Colton, California) and oneleased (Phoenix, Arizona) facility. Both manufacturing facilities utilized by this segment are, in theopinion of management, in good condition and sufficient for the Company’scurrent needs.  Productive capacityexists at the locations such that the Company could exceed the highest volumesachieved in prior years or expected in the foreseeable future and maintaintimely delivery.

 

TheCompany serves the Colorado ready-mix concrete market from ten owned batchplants. In addition, the Company currently operates aggregate processingfacilities on three owned and three leased mining properties.  These facilities are, in the opinion ofmanagement, in good condition and sufficient for the Company’s current needs.  The Company also owns or leases otheraggregate deposits not currently in production. In the opinion of management,the owned and leased properties contain permitted and minable reservessufficient to service sand, rock and gravel requirements for the foreseeablefuture.

 

5

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Product volumes at all ofthe facilities of the Company are subject to seasonal fluctuations, but in theopinion of management, the facilities are generally well utilized.

 

The corporate officeoperates out of a leased facility in Chicago, Illinois.

 

 
| Item 3. | **LEGAL PROCEEDINGS** |
|---------|-----------------------|

 

See Management Discussionand Analysis of Financial Condition and Results of Operations on pages 8through 14 and Note 4 on page 24 of this Annual Report on Form 10-K.

 

 
| Item 4. | **SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS** |
|---------|----------------------------------------------------------|

 

Therewere no matters submitted to a vote of security holders during the fourthquarter of fiscal 2002.

 

PART II

 
| Item 5. | **MARKET FOR REGISTRANT’S COMMON  EQUITY AND RELATED STOCKHOLDER MATTERS** |
|---------|---------------------------------------------------------------------------------|

 

Continental Materials Corporation shares are tradedon the American Stock Exchange under the symbol CUO. Market prices for the pasttwo years are:

 
|   |   |           |   | **High** |   | **Low** |   |
|--------|--------|----------------|--------|----------|--------|---------|--------|
| 2002   |   | Fourth Quarter |   | $        | 27.30  |    | $      | 25.50 |   |
|   |   | Third Quarter  |   | 28.25    |   | 25.70   |   |
|   |   | Second Quarter |   | 30.15    |   | 26.75   |   |
|   |   | First Quarter  |   | 26.40    |   | 19.80   |   |
|        |        |                |        |          |        |         |        |  |  |

 
| 2001   |   | Fourth Quarter |   | $     | 20.00  |   | $      | 18.70 |   |
|--------|--------|----------------|--------|-------|--------|--------|--------|-------|--------|
|   |   | Third Quarter  |   | 22.00 |   | 19.30  |   |
|   |   | Second Quarter |   | 21.35 |   | 18.80  |   |
|   |   | First Quarter  |   | 18.81 |   | 13.75  |   |

 

At March 20, 2003, the Company had approximately310 shareholders of record.

 

The Company has never paid a dividend. TheCompany’s policy of reinvesting earnings from operations is reviewedperiodically by the Board of Directors.

 

Under the Company’s StockOption Plan (the Plan), officers and key employees may be granted options topurchase the Company’s common stock at option prices established by theCompensation Committee of the Board of Directors provided the option price isnot less than the fair market value at the date of the grant.  The following is a summary of equitycompensation plan information as of December 28, 2002:

 

**EQUITY COMPENSATION PLAN INFORMATION**

 
| **Plan Category**                                       |   | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** |   | **Weighted-average exercise  price of outstanding options  warrants and rights** |   | **Number of  securities remaining  available for  future issuance under equity compensation  plans (excluding securities reflected in  column (a)** |    |
|---------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                                    |   | (a)                                                                                                |   | (b)                                                                              |   | (c)                                                                                                                                                 |    |
| Equity compensation plans approved by security  holders |   | 73,400                                                                                             |   | $                                                                                | 6.56   |                                                                                                                                                | 227,600 |   |
|                                                         |        |                                                                                                    |        |                                                                                  |        |                                                                                                                                                     |         |  |

 

6

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Item 6.    **Selected Financial Data**

(Amounts in thousands,except per share amounts)

 
|                                                  |   | **2002** |    | **2001** |   | **2000** |   | **1999** |    | **1998** |   |
|-------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
| Summary  of Operations                                |   |     |    |     |   |     |   |     |    |     |   |
| Sales                                                 |   | $        | 128,301 |     | $      | 130,211  |   | $        | 116,002 |     | $      | 123,886 |   | $ | 113,210 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Net income                                            |   | $        | 3,275   |     | $      | 6,438    |   | $        | 5,335   |     | $      | 6,902 |   | $ | 4,618 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Per  Share Data                                       |   |     |    |     |   |     |   |     |    |     |   |
| Basic earnings per share                              |   | $        | 1.83    |     | $      | 3.55     |   | $        | 2.86    |     | $      | 3.39 |   | $ | 2.15 |   |
| Weighted average shares  outstanding                  |   | 1,794    |    | 1,812    |   | 1,869    |   | 2,035    |    | 2,147    |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Diluted earnings per  share                           |   | $        | 1.79    |     | $      | 3.49     |   | $        | 2.81    |     | $      | 3.32 |   | $ | 2.10 |   |
| Weighted average shares  outstanding                  |   | 1,830    |    | 1,845    |   | 1,901    |   | 2,082    |    | 2,196    |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Financial  Condition                                  |   |     |    |     |   |     |   |     |    |     |   |
| Current ratio                                         |   | 2.3:1    |    | 2.2:1    |   | 2.4:1    |   | 1.7:1    |    | 2.0:1    |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Total assets                                          |   | $        | 82,634  |     | $      | 86,063   |   | $        | 68,250  |     | $      | 67,751 |   | $ | 63,617 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Long-term debt,  including current portion            |   | 13,520   |    | 17,140   |   | 7,305    |   | 4,457    |    | 6,810    |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Shareholders’ equity                             |   | 49,989   |    | 47,722   |   | 41,813   |   | 39,043   |    | 36,238   |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Long-term debt to net  worth                          |   | .27      |    | .36      |   | .18      |   | .11      |    | .19      |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Book value per diluted  share                         |   | $        | 27.32   |     | $      | 25.87    |   | $        | 22.00   |     | $      | 18.75 |   | $ | 16.50 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Tangible book value per  diluted share                |   | $        | 22.52   |     | $      | 21.62    |   | $        | 21.84   |     | $      | 18.59 |   | $ | 16.32 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Cash  Flows                                           |   |     |    |     |   |     |   |     |    |     |   |
| Net cash provided by  (used in):                      |   |     |    |     |   |     |   |     |    |     |   |
| Operating activities                                  |   | $        | 9,753   |     | $      | 13,219   |   | $        | 10,021  |     | $      | 6,272 |   | $ | 14,223 |   |
| Investing activities                                  |   | (9,547   | )       | (19,215  | )      | (2,662   | )      | (8,982   | )       | (6,899   | )      |
| Financing activities                                  |   | (4,249   | )       | 7,359    |   | (1,490   | )      | (4,063   | )       | (1,728   | )      |
| Net increase (decrease)  in cash and cash equivalents |   | $        | (4,043  | )        | $      | 1,363    |   | $        | 5,869   |     | $      | (6,773 | ) | $ | 5,596 |   |

 

7

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Item 7.    **Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

(References to a “Note”are to Notes to Consolidated Financial Statements)

 

**FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

Cashand cash equivalents decreased to $3,536,000 at the end of 2002 compared to$7,579,000 at the prior year-end. Operations in 2002 provided $9,753,000 ofcash compared to $13,219,000 in 2001 and $10,021,000 generated in 2000. Thedecrease in net cash generated by operating activities in 2002 compared to 2001was primarily due to the decreased earnings. The net change in working capitalalso used approximately $122,000 during 2002 compared to providingapproximately $1,073,000 of cash during 2001. The increase in net cashgenerated by operating activities in 2001 compared to 2000 was due primarily tothe increased earnings although the net change in working capital also contributedapproximately $1,073,000 of cash during 2001 compared to using approximately$927,000 during 2000.

 

Netcash used in investing activities was $9,547,000 in 2002, $19,215,000 in 2001and $2,662,000 in 2000. Capital expenditures for 2002, 2001 and 2000 were$7,561,000, $9,213,000 and $3,306,000, respectively. The capital expenditureswere principally for projects to support the business demand that has beenexperienced by the construction materials companies in Colorado. Theexpenditures in 2002 included the completion of three large projects that theCompany began in 2001; a new state-of-the-art sand processing plant wascompleted in Colorado Springs during the third quarter, a new aggregateprocessing plant in Pueblo was completed in June and a new central mix batchplant was added in Colorado Springs. In addition, a new batch plant waspurchased to replace the existing facility in Brighton, Colorado. The new plantwill be operational in the first half of 2003. During 2001, work was performedon the aforementioned projects and the Company also invested approximately$1,800,000 for a new office building in Colton. On April 1, 2002, $2,125,000was expended to purchase McKinney Door and Hardware, Inc. (MDHI). During fiscalyear 2001, $11,263,000 was used to purchase Rocky Mountain Ready Mix Concrete,Inc. (RMRM) on December 31, 2000.

 

Budgetedcapital expenditures for 2003 are approximately $4,850,000 (including$3,350,000 for the construction materials segment and $1,450,000 for theheating and air conditioning segment), which is approximately $750,000 lessthan planned depreciation. All other expenditures are primarily for routinereplacement and upgrades. The Company expects that the 2003 expenditures willbe funded from existing cash balances and operating cash flow.

 

During 2002, cash of$4,249,000 was used in financing activities. Scheduled long-term debtrepayments of $3,620,000 were made during the year including $620,000 againstcapital lease obligations. Cash of $604,000 was used to acquire 22,599 sharesof treasury stock. During 2001, cash of $7,359,000 was provided by financingactivities. The Company increased its term debt by $12,000,000 for theacquisition of RMRM. Scheduled long-term debt repayments of $3,526,000 weremade during the year including $526,000 against capital lease obligations. Cashof $600,000 was used to acquire 33,127 shares of treasury stock partiallyoffset by proceeds of $39,000 from the exercise of stock options. During 2000,cash of $1,490,000 was used in financing activities. The Company increased itsterm debt by $4,000,000. Scheduled long-term debt repayments of $1,152,000 weremade during the year and the $1,600,000 balance outstanding on the revolvingline of credit at the end of 1999 was repaid. Cash of $2,770,000 was used toacquire 146,032 shares of treasury stock partially offset by proceeds of$32,000 from the exercise of stock options.

 

TheCompany maintains a term loan and revolving credit facility with two banks. AtDecember 28, 2002, $13,000,000 was outstanding on the term loan. A revolvingcredit facility of up to $10,000,000 is available for seasonal needs includingthe funding of seasonal sales programs

 

8

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relatedto the furnace and evaporative cooler product lines. The line is also used forstand-by letters of credit to insurance carriers in support of self-insuredamounts under the Company’s risk management program. Borrowings are unsecuredand bear interest at prime or a performance based LIBOR rate. Currently suchperformance based rate is LIBOR plus 1.40% for the term loan and LIBOR plus1.15% for the revolving credit facility. Effective December 17, 2001, the Company enteredinto an interest rate swap agreement (Agreement) in order to fix the floating interestrate characteristic of most of the Company’s term loan borrowings. TheCompany’s current interest rate under the Agreement is 5.78%.Such rate is subject to adjustment depending upon the Company’s performance.The Company concluded that it was appropriate to take advantage of the interestrate environment and fix the interest rate at a relatively low level for afive-year period.

 

TheCompany believes that existing cash balances and anticipated cash flow,supplemented by seasonal borrowings against the revolving line of credit, willbe sufficient to cover expected cash needs, including servicing debt andplanned capital expenditures, for at least the next twelve months.

 

Operations   2002 vs. 2001

 

Consolidatedsales in 2002 declined $1,910,000, or 1.5%, to $128,301,000. Excluding thesales of MDHI, acquired on April 1, 2002, the sales decline would have beenapproximately 6%. The sales of the construction materials segment declined$2,917,000 (4%) while sales of the heating and air conditioning segmentincreased $1,007,000 (2%), compared to the previous year. The reduction in theconstruction materials segment was across the three main markets in Colorado asconstruction continued to decline along the Front Range of Colorado. The modestincrease in the heating and air conditioning segment was the result of strongevaporative cooler sales and slightly improved furnace sales offset by reducedsales of fan coils. The increase in evaporative cooler sales was primarily dueto the addition of a large new retail customer. Fan coil sales declinedreflecting the nationwide slump in commercial construction, notably hotelconstruction.

 

TheCompany experienced a high level of price competition in all of its productlines during 2002, which the Company expects to continue into 2003. During2002, inflation was not a significant factor at any of the operations exceptthat employee health care costs and general business insurance premiumsdramatically outpaced the rate of inflation.

 

Costof sales (exclusive of depreciation, depletion and amortization), as a percentof sales, increased from 75.8% to 78.3%. The increase was primarily experiencedin the construction materials segment. The declining construction activityalong the Front Range in Colorado had the effect of increasing pricecompetition resulting in lower prices per yard. Some of the aggregatesoperations experienced increased costs as well. Higher costs were incurred inthe Pueblo gravel operation as a now depleted gravel site was closed andstart-up costs at the new site exceeded expectations. In addition, initialyields of primary products at the new Pueblo gravel site are less than thatexperienced at the Company’s other gravel operations. Additional costs werealso incurred in dismantling the old aggregates plant. Finally, a plantbreakdown at one of the aggregates operations during the first quarter of 2002and a brief shut-down prior to bringing the new sand plant on-line in ColoradoSprings added to the increased costs. The increase in the heating and airconditioning segment is due to a change in product mix and the $662,000write-down of inventories and other costs associated with a productmanufactured at our Phoenix plant.

 

Sellingand administrative expenses remained relatively constant at $16,033,000. As apercentage of sales, selling and administrative expenses increased slightly to12.5%.

 

9

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Thedecline in operating income from $9,154,000 to $5,711,000 is primarily due tothe decreased sales, the heightened competition in Colorado, the aforementionedincreased costs at three of the construction aggregate operations and theinventory write-down.

 

The$635,000 decrease in other income is primarily the result of $851,000 of gainsrealized on sales of depleted or not exploitable aggregate properties inColorado during 2001 compared to $79,000 of gains on sales during 2002.

 

TheCompany’s 2002 effective income tax rate (34.8%) reflects federal and statestatutory rates adjusted for non-deductible and other tax items. The lowereffective rate in 2001 was due to the benefit of California Enterprise Zonecredits as discussed below. Also see Note 9.

 

 

Operations   2001 vs. 2000

 

Consolidatedsales in 2001 increased $14,209,000, or 12.2%, to $130,211,000. The sales ofthe construction materials segment increased $12,038,000 due primarily to theacquisition of RMRM. Sales at the Company’s other construction materials sitesdeclined due to cold weather during the first quarter of 2001 and a decline incommercial construction in the Colorado Springs market. The heating and airconditioning segment sales improved $2,171,000, or 4.4%, compared to theprevious year. The increase in the heating and air conditioning segment was dueto evaporative cooler sales that improved from the depressed conditionsencountered in 2000, while a small improvement in the furnace line due to coldweather during the first quarter of 2001 was more than offset by a decline infan coil sales as a result of a slow down in commercial construction.

 

TheCompany experienced a high level of price competition in all of its productlines during 2001. During 2001, inflation was not a significant factor at anyof the operations.

 

Costof sales (exclusive of depreciation, depletion and amortization), as a percentof sales, increased from 75.2% to 75.8%. This slight increase was experiencedin both segments. The reduced fan coil sales and heightened competition in thefurnace product line resulted in increases in costs as a percentage of salesthat more than offset the improvement in the evaporative cooler line in theheating and air conditioning segment. The addition of RMRM was the main factorin the construction materials segment increase as their cost of sales ratio hashistorically exceeded that experienced by the Company’s other constructionmaterials operations in Southern Colorado.

 

Depreciation,depletion and amortization increased from $5,419,000 to $6,387,000 due to thepurchase of RMRM.

 

Sellingand administrative expenses increased $800,000 primarily due to the acquisitionof RMRM. As a percentage of sales, selling and administrative expenses declinedfrom 13.1% to 12.3%. RMRM was also the major factor in the percentageimprovement as its relationship of selling and administrative expense to salesis relatively low, similar to the Company’s other construction materials sites.Contributing to the improvement was a reduction of the selling andadministrative expense level at Williams Furnace Co., which was largely due topersonnel reductions.

 

Theimproved operating income primarily reflects the contribution of RMRM. Anadditional increase from the evaporative cooler product line more that offsetthe decline experienced in the furnace and fan coil product lines.

 

Interestexpense increased $366,000 to $937,000 reflecting the increased debt resultingfrom the acquisition of RMRM.

 

10

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Otherincome is primarily the result of gains from sales of aggregate properties inColorado that were either depleted or not exploitable and miscellaneousequipment sales. These gains totaled $851,000 and $461,000 for 2001 and 2000,respectively.  The sale of one largedepleted aggregate property was the primary cause of the increase in otherincome in 2001.

 

TheCompany’s 2001 effective income tax rate (29.2%) reflects federal and statestatutory rates adjusted for state tax credits, non-deductible and other taxitems. See Note 9. The reduction from the prior year’s rate of 35.8% is due toCalifornia Enterprise Zone credits earned during the years 1995 through 2001.The benefit of these credits for prior and future years reduced the effectiverate by 5%. Application of the credits against the tax due on the currentyear’s earnings reduced the rate by 1.5% and is included in the 1.4% noted as“State income taxes, net of federal benefit” line in Note 9.

 

 

RELATEDPARTY TRANSACTIONS

 

TheCompany purchases insurance coverage for workers’ compensation, general andproduct liability together with another company controlled by or related to theCompany’s principal shareholders to minimize insurance costs and to obtainother more favorable terms. Allocation of the expense of the program is eitherprovided by the underwriter or based upon a formula that considers, among otherthings, sales levels and claim experience. Claims under the self-insuredportion of the policies are charged directly to the incurring party.

 

 

CRITICALACCOUNTING POLICIES

 

FinancialReporting Release No. 60, issued by the Securities and Exchange Commission,requires all registrants, including the Company, to include a discussion of“critical” accounting policies or methods used in the preparation of financialstatements. We believe the following are our critical accounting policies andmethods.

 

Inventories

 

Inventoriesare priced at the lower of cost (77% at December 28, 2002 at last-in,first-out, with the remainder at first-in, first-out) or market. Inventoriesare reviewed annually for excess or obsolete stock with a provision recorded,where appropriate.

 

Intangibles

 

Goodwillwas amortized using a 40-year life through the 2001 year. In accordance withStatement of Financial Accounting Standards (SFAS) No. 141 and No. 142,goodwill is no longer amortized as a charge to earnings. We annually assessgoodwill for potential impairment.

 

Liabilities

 

TheCompany purchases insurance coverage for workers’ compensation, general productand automobile liability, retaining certain levels of risk (self-insuredportion). Provision for workers’ compensation and automobile claims isestimated based upon information provided by the Company’s independent claimsadministrator and the Company’s own experience. With regard to productliability, provisions for both claims and unasserted claims that would becovered under the self-insured portion of the policies are recorded inaccordance with the requirements of SFAS No. 5, “Accounting for Contingencies,”and are reviewed at least annually for revisions in estimates.

 

11

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TheCompany records a reserve for future reclamation work to be performed at itsvarious aggregate operations based upon estimates of the recoverable quantitiesof rock and sand available in each location combined with an estimate of thetotal expense that will be incurred to reclaim a property. Provision is madebased upon the units of production method. Actual reclamation costs are chargedagainst the reserve. The adequacy of the recorded reserve is assessed annually.Estimates of both the quantities of recoverable material and the cost ofreclamation are periodically updated by an independent professional. In asimilar manner, depletion of rock and sand deposits and amortization ofdeferred development costs are computed by the units-of-production method basedupon estimated recoverable quantities of rock and sand.

 

Sales

 

TheCompany recognizes revenue as products are shipped to customers. The amount isrecorded net of applicable provisions for discounts, volume incentives, returnsand allowances. At the time of revenue recognition, the Company also providesan estimate of potential bad debt and warranty expense as well as an amountanticipated to be granted to customers under cooperative advertising programsbased upon historical experience.

 

RecentlyIssued Accounting Standards

 

EmergingIssues Task Force (EITF) No. 01-09, “Accounting for Consideration Given by aVendor to a Customer (Including a Reseller of the Vendor’s Products),”addresses the recognition, measurement and statement of earnings classificationfor certain sales incentives and other expenses. The Company has two types ofcustomer programs that are considered within the scope of this statement:volume rebate incentives and cooperative advertising. The Company early adoptedEITF 01-09 as both programs have historically been recorded as required by thenew pronouncement. Volume rebate incentives are classified as a reduction ofsales while cooperative advertising is classified as a marketing expenditureincluded within “selling and administrative” expenses as the advertisingarrangements meet the requirement of receipt of a separable and measurablebenefit.

 

TheFinancial Accounting Standards Board issued SFAS No. 141, “BusinessCombinations,” No. 142, “Goodwill and Other Intangible Assets” and No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” Effective January 1,2002, the Company no longer amortizes goodwill as a charge to earnings. As aresult of adopting this new standard, amortization expense was reduced byapproximately $177,000 (pre-tax) in the current year. Goodwill is assessedannually for impairment under the SFAS No. 142. The Company does, however, havecertain finite-lived identifiable intangible assets that will continue to beamortized over their estimated useful economic lives. Assessment of impairmentof these assets is governed by SFAS No. 144. No impairment adjustment wasnecessary for any of the intangible assets at the date of adoption or as aresult of the 2002 year-end review.

 

SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities,” andits related amendment SFAS No. 138, “Accounting for Certain DerivativeInstruments and Certain Hedging Activities,” were adopted by the Companyeffective December 31, 2000. These statements establish accounting andreporting standards for derivative instruments, including the interest rateswap agreement that the Company entered into on December 17, 2001. Thesestatements require recognition of all derivatives as either assets orliabilities on the balance sheet and the measurement of those instruments atfair value.

 

SFASNo. 143, “Accounting for Obligations Associated with the Retirement ofLong-Lived Assets,” SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and84 and Amendment of FASB No. 13 and Technical Corrections as of April 2002” andSFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities” are all effective for 2003. The Company does not currently have anytransactions or circumstances that are addressed by these pronouncements,however, should they arise, the Company will apply the provisions of thesestatements.

 

12

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FORWARD-LOOKINGSTATEMENTS

 

ThisAnnual Report contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended. Such forward-looking statementsare based on the beliefs of the Company’s management as well as on assumptionsmade by and information available to the Company at the time such statementswere made.  When used in this Report,words such as “anticipates,” “believes,” “contemplates,” “estimates,”“expects,” “plans,” “projects” and similar expressions are intended to identifyforward-looking statements. Actual results could differ materially from thoseprojected in the forward-looking statements as a result of factors includingbut not limited to: weather, interest rates, availability of raw materials andtheir related costs, economic conditions and competitive forces. Changes inaccounting pronouncements could also alter projected results. Forward-lookingstatements speak only as of the date they were made and we undertake noobligation to publicly update them.

 

 

Item7A.    **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

TheCompany is exposed to market risks related to commodity prices and interestrates. To manage interest rate risk, the Company has, from time to time,entered into interest rate swaps as cash flow hedges. These swaps areauthorized by the Company’s policies and procedures. The Company does not useswaps or hedging instruments for trading purposes, and is not a party to anytransaction involving leveraged derivatives. Effective December 17, 2001, theCompany entered into an interest swap agreement to offset the majority of thefloating interest rate characteristic of the Company’s term loan borrowings.See paragraph below. While the notional amount of the swap is generally belowthe outstanding balance of the term loan, the scheduled decreases in thenotional amount do not coincide with the scheduled payments on the term loan.This disparity caused the notional amount to exceed the outstanding term loanbalance by $500,000 at December 28, 2002. The effect of this timing disparityis not material to the 2002 results of operations. At December 28, 2002, thenotional amount subject to this agreement is $13,500,000. See above discussionunder Financial Condition, Liquidity and Capital Resources. The cash paymentsor receipts associated with this agreement are reflected in interest expense.

 

InterestRates

 

TheCompany utilizes revolving credit and term-loan facilities that bear interestat either prime or an adjusted LIBOR rate. The amount outstanding under thesefacilities aggregated $13,000,000 at December 28, 2002. In addition, the Companyis party to various capital lease agreements with fixed interest rates andoriginal maturity dates ranging up to 60 months. As the latest of the leasesmatures in early 2004, and the total long-term portion of all leases is$220,000, the book and fair value was considered to be approximately the same.See Note 3.

 

Commodities

 

TheCompany purchases commodities, such as steel, copper, aluminum, cement andcardboard for packaging, at market prices and does not currently use financialinstruments to hedge commodity prices.

 

Thestatements and other information in this section constitute forward-lookingstatements.

 

 

OBLIGATIONSAND COMMITMENTS

 

Thefollowing tables represent our obligations and commitments to make futurepayments under contracts, such as debt and lease agreements, and undercontingent commitments, such as debt guarantees, as of December 28, 2002.

 

13

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PaymentsDue by Period as of December 28, 2002 (amounts in thousands)

 
| **Contractual Obligations**             |   | **Less than 1 year** |   | **1 – 3 years** |   | **4 – 5 years** |   | **After 5 years** |   | **Total** |   |
|-----------------------------------------|--------|----------------------|--------|----------------------|--------|----------------------|--------|-------------------|--------|-----------|--------|
| Long-term debt (See Note  3)            |   | $                    | 3,000  |                 | $      | 10,000               |   | $                 | — |      | $      | — |   | $ | 13,000 |   |
| Capital lease  obligations (See Note 3) |   | 300                  |   | 220                  |   | —               |   | —            |   | 520       |   |
| Operating leases (See  Note 7)          |   | 1,776                |   | 3,551                |   | 1,839                |   | 2,775             |   | 9,941     |   |
| Minimum royalty  agreement (See Note 7) |   | 386                  |   | 1,158                |   | 772                  |   | 19,081            |   | 21,397    |   |
| Total Contractual  Obligations          |   | $                    | 5,462  |                 | $      | 14,929               |   | $                 | 2,611  |      | $      | 21,856 |   | $ | 44,858 |   |
|                                         |        |                      |        |                      |        |                      |        |                   |        |           |        |  |  |  |  |  |  |

 

 

Amounts of Commitment Expiration per Period as ofDecember 28, 2002 (amounts in thousands)

 
| **Other Commercial Commitments** |   | **Less than 1 year** |   | **1 – 3 years** |   | **4 – 5 years** |   | **After 5 years** |   | **Total** |   |
|----------------------------------|--------|----------------------|--------|----------------------|--------|----------------------|--------|-------------------|--------|-----------|--------|
| Standby letters of  credit       |   | $                    | 1,700  |                 | $      | —               |   | $                 | — |      | $      | — |   | $ | 1,700 |   |
| Reclamation bonds                |   | 4,457                |   | —               |   | —               |   | —            |   | 4,457     |   |
| Total Commercial Commitments     |   | $                    | 6,157  |                 | $      | —               |   | $                 | — |      | $      | — |   | $ | 6,157 |   |

 

 
| Item 8. | **FINANCIAL STATEMENTS AND  SUPPLEMENTARY DATA** |
|---------|--------------------------------------------------|

 
|   | Financial  Statements and Schedule of Continental  Materials Corporation and report thereon:      | Page   |
|--------|---------------------------------------------------------------------------------------------------|--------|
|   |                                                                                              |   |
|   | Consolidated  statements of operations  fiscal years 2002, 2001 and 2000                          | 15     |
|   |                                                                                              |   |
|   | Consolidated  statements of cash flows  for fiscal years ended 2002, 2001 and 2000                | 16     |
|   |                                                                                              |   |
|   | Consolidated  balance sheets at December 28, 2002  and December 29, 2001                          | 17     |
|   |                                                                                              |   |
|   | Consolidated  statements of shareholders’ equity  for fiscal years ended 2002, 2001 and 2000 | 18     |
|   |                                                                                              |   |
|   | Notes to consolidated  financial statements                                                       | 19-27  |
|   |                                                                                              |   |
|   | Report of Independent  Accountants                                                                | 28     |

 

14

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**Continental Materials Corporation Consolidated Statements of Operations**

**For Fiscal Years 2002, 2001 and 2000**

(Amounts in thousands,except per share data)

 
|                                                                   |   | **2002** |    | **2001** |   | **2000** |   |
|------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                                   |   |     |    |     |   |     |   |
| Sales                                                                  |   | $        | 128,301 |     | $      | 130,211  |   | $ | 116,002 |   |
| Costsand expenses                                                      |   |     |    |     |   |     |   |
| Cost of sales  (exclusive of depreciation, depletion and amortization) |   | 100,477  |    | 98,712   |   | 87,235   |   |
| Depreciation, depletion  and amortization                              |   | 6,080    |    | 6,387    |   | 5,419    |   |
| Selling and  administrative                                            |   | 16,033   |    | 15,958   |   | 15,158   |   |
| Operating income                                                       |   | 5,711    |    | 9,154    |   | 8,190    |   |
| Interest expense                                                       |   | (922     | )       | (937     | )      | (571     | )      |
| Other income (expense),  net                                           |   | 236      |    | 871      |   | 691      |   |
| Income before income  taxes                                            |   | 5,025    |    | 9,088    |   | 8,310    |   |
| Income tax provision                                                   |   | 1,750    |    | 2,650    |   | 2,975    |   |
| Net income                                                             |   | $        | 3,275   |     | $      | 6,438    |   | $ | 5,335 |   |
|                                                                   |   |     |    |     |   |     |   |
| Basic earnings per  share                                              |   | $        | 1.83    |     | $      | 3.55     |   | $ | 2.86 |   |
| Weighted average shares  outstanding                                   |   | 1,794    |    | 1,812    |   | 1,869    |   |
| Diluted earnings per  share                                            |   | $        | 1.79    |     | $      | 3.49     |   | $ | 2.81 |   |
| Weighted average shares  outstanding                                   |   | 1,830    |    | 1,845    |   | 1,901    |   |

 

The accompanyingnotes are an integral part of the financial statements.

 

15

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## **Continental MaterialsCorporation Consolidated Statementsof Cash Flows**

**For Fiscal Years 2002, 2001 and 2000**

(Amounts in thousands)

 

 
|                                                                              |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **Operating activities**                                                          |   |     |   |     |   |     |   |
| Net income                                                                        |   | $        | 3,275  |     | $      | 6,438    |   | $ | 5,335 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |   |     |   |     |   |     |   |
| Depreciation, depletion  and amortization                                         |   | 6,080    |   | 6,387    |   | 5,419    |   |
| Deferred income tax  provision                                                    |   | 422      |   | 6        |   | 532      |   |
| Provision for doubtful  accounts                                                  |   | 75       |   | 134      |   | (110     | )      |
| Tax benefit from  exercise of stock options                                       |   | —   |   | 32       |   | 174      |   |
| (Gain) loss on  disposition of property and equipment                             |   | (79      | )      | (851     | )      | (402     | )      |
| Write-off of investment  in Dual Air product line                                 |   | 102      |   | —   |   | —   |   |
| Changes in operating  assets and liabilities                                      |   |     |   |     |   |     |   |
| Receivables                                                                       |   | 2,247    |   | (512     | )      | 3,548    |   |
| Inventories                                                                       |   | 2,158    |   | 754      |   | (48      | )      |
| Prepaid expenses                                                                  |   | 151      |   | 33       |   | (142     | )      |
| Prepaid royalties                                                                 |   | (257     | )      | (6       | )      | (414     | )      |
| Accounts payable and  accrued expenses                                            |   | (3,856   | )      | 1,152    |   | (3,139   | )      |
| Income taxes                                                                      |   | (339     | )      | (398     | )      | (615     | )      |
| Other                                                                             |   | (226     | )      | 50       |   | (117     | )      |
| Net cash provided by  operating activities                                        |   | 9,753    |   | 13,219   |   | 10,021   |   |
|                                                                              |   |     |   |     |   |     |   |
| **Investing activities**                                                          |   |     |   |     |   |     |   |
| Acquisitions of  subsidiaries, net of cash received                               |   | (2,125   | )      | (11,263  | )      | —   |   |
| Capital expenditures                                                              |   | (7,561   | )      | (9,213   | )      | (3,306   | )      |
| Proceeds from sale of  property and equipment                                     |   | 139      |   | 1,261    |   | 644      |   |
| Net cash used in  investing activities                                            |   | (9,547   | )      | (19,215  | )      | (2,662   | )      |
|                                                                              |   |     |   |     |   |     |   |
| **Financing activities**                                                          |   |     |   |     |   |     |   |
| (Repayment) borrowings  of revolving credit facility                              |   | —   |   | —   |   | (1,600   | )      |
| Long-term borrowings                                                              |   | —   |   | 12,000   |   | 4,000    |   |
| Repayment of long-term  debt                                                      |   | (3,620   | )      | (3,526   | )      | (1,152   | )      |
| Payment of amounts due  former shareholders                                       |   | (25      | )      | (554     | )      | —   |   |
| Proceeds from exercise  of stock options                                          |   | —   |   | 39       |   | 32       |   |
| Payments to acquire  treasury stock                                               |   | (604     | )      | (600     | )      | (2,770   | )      |
| Net cash used in financing  activities                                            |   | (4,249   | )      | 7,359    |   | (1,490   | )      |
| Net increase (decrease)  in cash and cash equivalents                             |   | (4,043   | )      | 1,363    |   | 5,869    |   |
|                                                                              |   |     |   |     |   |     |   |
| Cash and cash  equivalents                                                        |   |     |   |     |   |     |   |
| Beginning of year                                                                 |   | 7,579    |   | 6,216    |   | 347      |   |
| End of year                                                                       |   | $        | 3,536  |     | $      | 7,579    |   | $ | 6,216 |   |
| Supplemental  disclosures of cash flow items                                      |   |     |   |     |   |     |   |
| Cash paid during the  year                                                        |   |     |   |     |   |     |   |
| Interest                                                                          |   | $        | 1,084  |     | $      | 990      |   | $ | 731 |   |
| Income taxes                                                                      |   | 1,682    |   | 3,011    |   | 2,897    |   |

 

The accompanyingnotes are an integral part of the financial statements.

 

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| **Continental Materials Corporation**

**Consolidated  Balance****Sheets   December 28, 2002 and December 29, 2001**

(Amounts in thousands  except share data) |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|                                                                                 |   | **December 28, 2002** |   | **December 29, 2001** |   |
|--------------------------------------------------------------------------------------|--------|-----------------------|--------|-----------------------|--------|
| Assets                                                                               |   |                  |   |                  |   |
| Current assets                                                                       |   |                  |   |                  |   |
| Cash and cash  equivalents                                                           |   | $                     | 3,536  |                  | $      | 7,579 |   |
| Receivables less  allowance of $432 and $435                                         |   | 16,740                |   | 18,291                |   |
| Inventories                                                                          |   | 14,592                |   | 15,648                |   |
| Prepaid expenses                                                                     |   | 2,769                 |   | 2,673                 |   |
| Refundable income taxes                                                              |   | 761                   |   | 394                   |   |
| Total current assets                                                                 |   | 38,398                |   | 44,585                |   |
|                                                                                 |   |                  |   |                  |   |
| Property, plant and  equipment                                                       |   |                  |   |                  |   |
| Land and improvements                                                                |   | 3,117                 |   | 3,110                 |   |
| Buildings and  improvements                                                          |   | 16,073                |   | 14,699                |   |
| Machinery and equipment                                                              |   | 71,392                |   | 67,336                |   |
| Mining properties                                                                    |   | 5,175                 |   | 4,909                 |   |
| Less accumulated  depreciation and depletion                                         |   | (61,724               | )      | (57,807               | )      |
|                                                                                 |   | 34,033                |   | 32,247                |   |
| Other assets                                                                         |   |                  |   |                  |   |
| Goodwill                                                                             |   | 7,374                 |   | 6,474                 |   |
| Non-compete agreements                                                               |   | 1,403                 |   | 1,366                 |   |
| Prepaid royalties                                                                    |   | 904                   |   | 647                   |   |
| Other                                                                                |   | 522                   |   | 744                   |   |
|                                                                                 |   | $                     | 82,634 |                  | $      | 86,063 |   |
| Liabilities                                                                          |   |                  |   |                  |   |
| Current liabilities                                                                  |   |                  |   |                  |   |
| Current portion of  long-term debt                                                   |   | $                     | 3,300  |                  | $      | 3,620 |   |
| Accounts payable                                                                     |   | 4,434                 |   | 5,174                 |   |
| Income taxes                                                                         |   | 308                   |   | 308                   |   |
| Accrued expenses                                                                     |   |                  |   |                  |   |
| Compensation                                                                         |   | 2,153                 |   | 3,274                 |   |
| Reserve for  self-insured losses                                                     |   | 2,310                 |   | 2,156                 |   |
| Profit sharing                                                                       |   | 1,782                 |   | 2,611                 |   |
| Other                                                                                |   | 2,679                 |   | 2,896                 |   |
| Total current  liabilities                                                           |   | 16,966                |   | 20,039                |   |
|                                                                                 |   |                  |   |                  |   |
| Long-term debt                                                                       |   | 10,220                |   | 13,520                |   |
| Deferred income taxes                                                                |   | 3,037                 |   | 2,511                 |   |
| Accrued reclamation                                                                  |   | 1,145                 |   | 936                   |   |
| Other long-term  liabilities                                                         |   | 1,277                 |   | 1,335                 |   |
| Commitments and  contingencies (Notes 4 and 7)                                       |   |                  |   |                  |   |
|                                                                                 |   |                  |   |                  |   |
| Shareholders’  Equity                                                           |   |                  |   |                  |   |
| Common shares, $.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                                                                    |   | 57,851                |   | 54,576                |   |
| Accumulated other  comprehensive losses (interest rate swap adjustments)             |   | (404                  | )      | —                |   |
| Treasury shares, at  cost                                                            |   | (10,083               | )      | (9,479                | )      |
|                                                                                 |   | 49,989                |   | 47,722                |   |
|                                                                                 |   | $                     | 82,634 |                  | $      | 86,063 |   |

 

The accompanying notes are an integral part of thefinancial statements.

 

17

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**Continental Materials Corporation**

**Consolidated Statements ofShareholders’****Equity**

**ForFiscal Years 2002, 2001 and 2000**

(Amounts in thousandsexcept share data)

 
|                                                              |   | **Common  shares** |   | **Common  shares  amount** |   | **Capital  in excess  of par** |   | **Retained  earnings** |   | **Accumulated  comprehensive  losses** |   | **Treasury  shares** |   | **Treasury  shares  cost** |    |
|-------------------------------------------------------------------|--------|--------------------|--------|----------------------------|--------|--------------------------------|--------|------------------------|--------|----------------------------------------|--------|----------------------|--------|----------------------------|---------|
| Balance at January 1,  2000                                       |   | 2,574,264          |   | $                          | 643    |                           | $      | 1,983                  |   | $                                      | 42,803 |                 |   |                       | 626,008 |   | $ | 6,386 |   |
| Common shares issued under the Stock Option Plan  (from treasury) |   | —             |   | —                     |   | (172                           | )      | —                 |   |                                   |   | —               |   | —                     |    |
| Tax benefit from exercise of options                              |   | —             |   | —                     |   | 174                            |   | —                 |   |                                   |   | —               |   | —                     |    |
| Purchase of treasury shares                                       |   | —             |   | —                     |   | —                         |   | —                 |   |                                   |   | 146,032              |   | 2,770                      |    |
| Issuance of treasury shares related to the Stock  Option Plan     |   | —             |   | —                     |   | —                         |   | —                 |   |                                   |   | (31,000              | )      | (203                       | )       |
| Net income                                                        |   | —             |   | —                     |   | —                         |   | 5,335                  |   |                                   |   | —               |   | —                     |    |
| Balance at December 30, 2000                                      |   | 2,574,264          |   | 643                        |   | 1,985                          |   | 48,138                 |   |                                   |   | 741,040              |   | 8,953                      |    |
| Common shares issued under the Stock Option Plan  (from treasury) |   | —             |   | —                     |   | (36                            | )      | —                 |   |                                   |   | —               |   | —                     |    |
| Tax benefit from exercise of options                              |   | —             |   | —                     |   | 33                             |   | —                 |   |                                   |   | —               |   | —                     |    |
| Purchase of treasury shares                                       |   | —             |   | —                     |   | —                         |   | —                 |   |                                   |   | 33,127               |   | 600                        |    |
| Issuance of treasury shares related to the Stock  Option Plan     |   | —             |   | —                     |   | —                         |   | —                 |   |                                   |   | (6,000               | )      | (74                        | )       |
| Net income                                                        |   | —             |   | —                     |   | —                         |   | 6,438                  |   |                                   |   | —               |   | —                     |    |
| Balance at December 29, 2001                                      |   | 2,574,264          |   | 643                        |   | 1,982                          |   | 54,576                 |   |                                   |   | 768,167              |   | 9,479                      |    |
| Purchase of treasury shares                                       |   | —             |   | —                     |   | —                         |   | —                 |   |                                   |   | 22,599               |   | 604                        |    |
| Net income                                                        |   | —             |   | —                     |   | —                         |   | 3,275                  |   | $                                      | 3,275  |                 | — |                       | —  |   |
| Comprehensive loss from interest rate swap, net  of tax of $214   |   |               |   |                       |   |                           |   |                   |   | (404                                   | )      |                 |   |                       |    |
| Comprehensive income                                              |   |               |   |                       |   |                           |   |                   |   | $                                      | 2,871  |                 |   |                       |    |   |
| Balance at December 28, 2002                                      |   | 2,574,264          |   | $                          | 643    |                           | $      | 1,982                  |   | $                                      | 57,851 |                 |   |                       | 790,766 |   | $ | 10,083 |   |

 

The accompanying notes are an integral part of thefinancial statements.

 

 

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## **Notesto** Consolidated FinancialStatements

 

1. Summary of SignificantAccounting Policies

Principles ofConsolidation

Theconsolidated financial statements include Continental Materials Corporation andall of its subsidiaries (the Company) including McKinney Door and Hardware,Inc. (MDHI) from April 1, 2002 and Rocky Mountain Ready Mix Concrete, Inc.(RMRM) from December 31, 2000. The acquisitions of RMRM and MDHI were made to complementexisting operations and extend the market area served.

 

On April 1,2002, the Company acquired MDHI for $2,125,000 net of cash received. Thepurchase of MDHI has been accounted for as a purchase. The total purchase priceand the fair value of liabilities assumed have been allocated to the tangibleand intangible assets of MDHI based on respective fair values. The acquisitionhas resulted in an unallocated excess purchase price over fair value of netassets acquired of $900,000 which has been classified as goodwill.

 

Had theacquisition of MDHI occurred as of December 31, 2000, the unaudited pro-formaresults of the Company would have been as follows (amounts in thousands exceptper share data):

 
|                        |   | **2002** |    | **2001** |   |
|-----------------------------|--------|----------|---------|----------|--------|
| Sales                       |   | $        | 129,401 |     | $      | 136,193 |   |
| Net income                  |   | $        | 3,154   |     | $      | 6,783 |   |
| Diluted earnings per  share |   | $        | 1.72    |     | $      | 3.68 |   |

 

Thesepro-forma results have been prepared for comparative purposes only and do notpurport to be indicative of what would have occurred had the acquisition beenmade at the beginning of the period presented, or the results which may occurin the future.

 

On December31, 2000, the Company acquired RMRM for $11,263,000 net of cash received. Thepurchase of RMRM was accounted for as a purchase. The total purchase price andthe fair value of liabilities assumed were allocated to the tangible andintangible assets of RMRM based on respective fair values. The acquisitionresulted in an unallocated excess purchase price over fair value of net assetsacquired of $6,630,000, which was classified as goodwill. The assigned usefullife was 40 years, however, with the adoption of Statements of FinancialAccounting Standards (SFAS) No. 142, the amortization of goodwill ceased as ofDecember 30, 2001.

 

Certain prioryears’ amounts have been reclassified to conform to the current presentation.

 

Recently Issued Accounting Pronouncements

EITF No.01-09, “Accounting for Consideration Given by a Vendor to a Customer (Includinga Reseller of the Vendor’s Products),” addresses the recognition, measurementand statement of earnings classification for certain sales incentives and otherexpenses. The Company has two types of customer programs that are consideredwithin the scope of this statement: volume rebate incentives and cooperativeadvertising. Both programs have historically been recorded as required by thenew pronouncement. Volume rebate incentives are classified as a reduction ofsales while cooperative advertising is classified as a marketing expenditureincluded within “selling and administrative” expenses as the advertisingarrangements meet the requirement of receipt of a separable and measurablebenefit.

 

TheFinancial Accounting Standards Board issued SFAS No. 141, “BusinessCombinations,” No. 142, “Goodwill and Other Intangible Assets” and No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” EffectiveJanuary 1, 2002, the Company no longer amortizes goodwill as a charge toearnings. As a result of adopting this new standard, amortization expense wasreduced by approximately $177,000 (pre-tax) in the current year. Goodwill isassessed annually for impairment under SFAS No. 142. The Company does, however,have

 

19

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certainfinite-lived identifiable intangible assets that will continue to be amortizedover their estimated useful economic lives. Assessment of impairment of theseassets is governed by SFAS No. 144. No impairment adjustment was necessary forany of the intangible assets at the date of adoption or as a result of the 2002year-end review.

 

SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” and its relatedamendment SFAS No. 138, “Accounting for Certain Derivative Instruments andCertain Hedging Activities,” were adopted by the Company effective December 31,2000. These statements establish accounting and reporting standards forderivative instruments, including the interest rate swap agreement that theCompany entered into on December 17, 2001. These statements require recognitionof derivatives as either assets or liabilities and measurement at fair value.

 

SFAS No. 143,“Accounting for Obligations Associated with the Retirement of Long-LivedAssets,” SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 84 andAmendment of FASB No. 13 and Technical Corrections as of April 2002” and SFASNo. 146, “Accounting for Costs Associated with Exit or Disposal Activities” areall effective for 2003. The Company does not currently have any transactions orcircumstances that are addressed by these pronouncements, however, should theyarise, the Company will apply the provisions of these statements.

 

Use of Estimates in thePreparation of Financial Statements

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of December28, 2002 and December 29, 2001 and the reported amounts of revenues and expensesduring each of the three years in the period ended December 28, 2002. Actualresults could differ from those estimates.

 

Cash and Cash Equivalents

The Company considers all highly liquid debtinstruments purchased with a maturity of three months or less to be cashequivalents.

 

Inventories

Inventories are valued at the lower of cost ormarket. Cost is determined using the last-in, first-out (LIFO) method forapproximately 77% of total inventories at December 28, 2002 (84% at December29, 2001). The cost of all other inventory is determined by the first-in,first-out (FIFO) method.

 

Property, Plant andEquipment

Property,plant and equipment are carried at cost. Depreciation is provided over theestimated useful lives of the related assets using the straight-line method asfollows:

 

| Buildings               |   | 10 to 31 years  |
|-------------------------|--------|-----------------|
| Leasehold improvements  |   | Terms of leases |
| Machinery and equipment |   | 3 to 10 years   |

 

Depletion of rock and sand deposits andamortization of deferred development costs are computed by the units-of-productionmethod based upon estimated recoverable quantities of rock and sand. Theestimated recoverable quantities are periodically reassessed.

 

The cost of property sold or retired and therelated accumulated depreciation, depletion and amortization are removed fromthe accounts and the resulting gain or loss is reflected in other income.Maintenance and repairs are charged to expense as incurred. Major renewals andbetterments are capitalized and depreciated over their useful lives.

 

 

20

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Other Assets

Goodwill, all of which relates to the constructionmaterials segment, is not amortized.

 

Identifiable intangible assets consist of thefollowing (amounts in thousands):

 
|                          |   | **December 28, 2002**       |   | **December 29, 2001**         |   |
|-------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
|                          |   | **Gross  carrying  amount** |   | **Accumulated  amortization** |   | **Gross  carrying  amount** |   | **Accumulated  amortization** |   |
| Amortized intangible  assets: |   |                        |   |                          |   |   |   |   |   |
| Valco non-compete             |   | $                           | 500    |                          | $      | 309 |   | $ | 500 |   | $ | 259 |   |
| RMRM non-compete              |   | 1,250                       |   | 250                           |   | 1,250 |   | 125 |   |
| MDHI non-compete              |   | 250                         |   | 38                            |   | — |   | — |   |
|                          |   | $                           | 2,000  |                          | $      | 597 |   | $ | 1,750 |   | $ | 384 |   |

 

Amortization of non-compete agreements is computedon a straight-line basis over their agreement periods of 5 and 10 years.Amortization expense for these intangible non-compete agreements was $213,000,$175,000 and $50,000 for 2002, 2001 and 2000, respectively. The estimatedamortization expense for the five subsequent fiscal years is as follows: 2003 —$225,000; 2004 — $225,000; 2005 — $225,000; 2006 — $216,000 and 2007 —$137,000.

 

Retirement Plans

The Company and certain subsidiaries have variouscontributory profit sharing retirement plans for specific employees. The plansallow qualified employees to make tax deferred contributions pursuant toInternal Revenue Code Section 401(k). The Company makes annual contributions,at its discretion, based primarily on profitability. Costs under the plans arecharged to operations as incurred.

 

Reserve for Self-InsuredLosses

The Company’s risk management program provides forcertain levels of loss retention for workers’ compensation, automobileliability and general and product liability claims. The components of thereserve have been recorded in accordance with the requirements of Statement ofFinancial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies,”and represent management’s best estimate of future liability.

 

Reclamation

In connection with permits to mine properties inColorado, the Company is obligated to reclaim the mined areas. Reclamationcosts are calculated using a rate based on the total estimated reclamationcosts, units of production and estimates of recoverable reserves. Reclamationcosts are charged to operations as the properties are mined.

 

Revenue Recognition

The Company recognizes revenue as products areshipped to customers. The amount is recorded net of applicable provisions fordiscounts, volume incentives, returns and allowances. At the time of revenuerecognition, the Company also provides an estimate of potential bad debt andwarranty expense as well as an amount anticipated to be granted to customersunder cooperative advertising programs based upon historical experience. Thechanges in the aggregated product warranty liability for the year 2002, all ofwhich is associated with the heating and air conditioning segment, were asfollows (amounts in thousands):

 
| Beginning balance              |   | $    | 160    |   |
|--------------------------------|--------|------|--------|--------|
| Warranty related  expenditures |   | 261  |   |
| Warranty expense  accrued      |   | (261 | )      |
| Ending balance                 |   | $    | 160    |   |

 

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Income Taxes

Income taxes are reported consistent with SFAS No.109, “Accounting for Income Taxes.” Deferred taxes reflect the future taxconsequences associated with the differences between financial accounting andtax bases of assets and liabilities.

 

Concentration of CreditRisk

Financial instruments, which potentially subjectthe Company to concentrations of credit risk, consist principally of tradereceivables and temporary cash investments. The Company invests its excess cashin government securities. The Company has not experienced any losses on theseinvestments.

 

The Company performs ongoing credit evaluations ofits customers and generally does not require collateral. The Company maintainsreserves for potential credit losses and such losses have been withinmanagement’s expectations. See Note 11 for a description of the Company’scustomer base and geographical location by segment.

 

Impairment of Long-livedAssets

In the event that facts and circumstances indicatethat the cost of any long-lived assets may be impaired, an evaluation ofrecoverability would be performed. If an evaluation were required, theestimated future undiscounted cash flows associated with the asset would becompared to the asset’s carrying amount to determine if a write-down to marketvalue or discounted cash flow value is required. SFAS No. 144, discussed above,clarifies and revises existing guidance for accounting for the impairment oflong-lived assets.

 

Fiscal Year End

The Company’s fiscalyear end is the Saturday nearest December 31. Fiscal 2002, 2001 and 2000 eachconsist of 52 weeks.

 

2. Inventories

Inventories consisted of the following (amounts inthousands):

 
|                        |   | **December 28, 2002** |   | **December 29, 2001** |   |
|-----------------------------|--------|-----------------------|--------|-----------------------|--------|
| Finished goods              |   | $                     | 6,855  |                  | $      | 7,710 |   |
| Work in process             |   | 1,523                 |   | 1,587                 |   |
| Raw materials and  supplies |   | 6,214                 |   | 6,351                 |   |
|                        |   | $                     | 14,592 |                  | $      | 15,648 |   |

 

If inventoriesvalued on the LIFO basis were valued at current costs, inventories would behigher as follows: 2002 — $2,052,000, 2001 — $1,842,000, and 2000 — $1,942,000.

 

Reductions in inventory quantities during 2002 attwo locations and during 2001 at one of the locations resulted in liquidationof LIFO inventory layers carried at costs that were lower than the costs ofcurrent purchases. The effect was immaterial in both years.

 

3. Long-Term Debt

Long-term debt consisted of the following (amountsin thousands):

 
|                 |   | **December 28, 2002** |   | **December 29, 2001** |   |
|----------------------|--------|-----------------------|--------|-----------------------|--------|
| Unsecured term loan  |   | $                     | 13,000 |                  | $      | 16,000 |   |
| Capital leases       |   | 520                   |   | 1,140                 |   |
|                 |   | 13,520                |   | 17,140                |   |
| Less current portion |   | 3,300                 |   | 3,620                 |   |
|                 |   | $                     | 10,220 |                  | $      | 13,520 |   |

 

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The unsecuredterm loan is payable to two banks in semi-annual installments with finalprincipal payment due December 15, 2006. The loan, at the Company’s option,bears interest at either prime or an adjusted LIBOR rate. The term loanagreement requires the Company to maintain certain levels of consolidatedtangible net worth, to attain certain levels of cash flow (as defined) on arolling four-quarter basis, and to maintain certain ratios including consolidateddebt to cash flow (as defined). Additional borrowing, acquisition of stock ofother companies, purchase of treasury shares and payment of cash dividends areeither limited or require prior approval by the lenders. At December 28, 2002,the Company was not in compliance with the Cash Flow Ratio as defined in theloan agreement. The Company has obtained waivers of the requirement for theyear-end and the quarterly requirement has been restated for the first threequarters of 2003. A principal reason for not meeting the required ratio was thelevel of capital expenditures during 2002. Capital expenditures are budgeted todecline during 2003 and the Company expects to be in compliance during 2003.

 

The Company isexposed to market risks related to commodity prices and interest rates. Tomanage interest rate risk, the Company has, from time to time, entered intointerest rate swaps as cash flow hedges. These swaps are authorized by theCompany’s policies and procedures. The Company does not use swaps or hedginginstruments for trading purposes, and is not a party to any transactioninvolving leveraged derivatives. Effective December 17, 2001, the Companyentered into an interest rate swap agreement (Agreement) in order to fix thefloating interest rate characteristic of most of the Company’s term loanborrowings. While the notional amount of the swap is generally below theoutstanding balance of the term loan, the scheduled decreases in the notionalamount do not coincide with the scheduled payments on the term loan. Thisdisparity causes the notional amount to exceed the outstanding term loanbalance by $500,000 at December 28, 2002. The effect of this timing disparityis not material to the 2002 results of operations. The Company’s currentinterest rate on the term loan giving effect to the Agreement is 5.78%. Suchrate is subject to adjustment depending upon the Company’s performance. Cashpayments or receipts associated with this agreement are reflected in interestexpense. During 2002, the fixed rate under the Agreement exceeded the floatingrate on the term loan. The effect on the 2002 operations was to reduce netincome by $239,000 while the effect on 2001 operations was immaterial. The fairvalue of the Agreement is recorded on the balance sheet with subsequent changesrecorded as a separate component of shareholders’ equity. At December 28, 2002,the amount subject to this Agreement is $13,500,000 which amount decreases by$1,500,000 each September and March, terminating on December 18, 2006.

 

The capital leases are payable in monthlyinstallments over varying period, the latest of which ends in April 2004. Theleases bear interest at various rates based upon the prevailing interest ratesat the inception of the respective leases.

 

Aggregate long-term debt matures as follows(amounts in thousands):

 
| 2003   |   | $     | 3,300  |   |
|--------|--------|-------|--------|--------|
| 2004   |   | 3,220 |   |
| 2005   |   | 3,000 |   |
| 2006   |   | 4,000 |   |
|   |   | $     | 13,520 |   |

 

During 2002 and 2001, the Company had an unsecuredrevolving line of credit of $10,000,000. The line is with two banks and is usedfor short-term cash needs and standby letters of credit. Interest was chargedat prime or adjusted LIBOR rates on cash borrowings during both years. Theweighted average interest rate was 5.4 % for fiscal 2002 and 6.0% for fiscal2001. There was no balance outstanding against the line as of either December28, 2002 or December 29, 2001.

 

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At December 28, 2002, the Company had letters ofcredit outstanding totaling approximately $1,700,000 that collateralize the self-insuredlosses.

 

4. Commitments andcontingencies

The Company isinvolved in litigation matters related to its continuing business, principallyproduct liability matters related to the gas-fired heating products. In theCompany’s opinion, none of these proceedings, when concluded, will have amaterial adverse effect on the Company’s results of operations or financialposition as the Company has established adequate reserves for knownoccurrences.

 

5. Shareholders’ Equity

Under the Company’s Stock Option Plan (the Plan),officers and key employees may be granted options to purchase the Company’scommon stock at option prices established by the Compensation Committee of theBoard of Directors provided the option price is no less than the fair marketvalue at the date of the grant. At December 28, 2002, there remain 227,600shares available for future issuance under the Plan (excluding the 73,400shares associated with options outstanding).

 

During 2001 and 2000, options for 6,000 and 31,000shares, respectively, were exercised. No options were exercised during 2002. AtDecember 28, 2002, there remain 73,400 options (all fully vested with anexercise price of $6.56) all of which will expire on September 25, 2005.

 

The Company applies Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations in accounting for its Plan. Accordingly, no compensationexpense was recognized for its stock-based compensation Plan.

 

Four hundred thousand shares of preferred stock($.50 par value) are authorized and unissued.

 

6. Earnings Per Share

The Company computes earnings per share (EPS) inaccordance with SFAS No. 128, “Earnings Per Share.” The following is areconciliation of the calculation of basic and diluted EPS for the years-ended2002, 2001 and 2000 (dollars in thousands except per-share data).

 
|                        |   | **Net  Income** |   | **Weighted  average  shares** |   | **Per-share  earnings** |   |
|-----------------------------|--------|-----------------|--------|-------------------------------|--------|-------------------------|--------|
| 2002                        |   |            |   |                          |   |                    |   |
| Basic EPS                   |   | $               | 3,275  |                          | 1,794  |                    | $      | 1.83 |   |
| Effect of dilutive  options |   | —          |   | 36                            |   |                    |   |
| Diluted EPS                 |   | $               | 3,275  |                          | 1,830  |                    | $      | 1.79 |   |
|                        |   |            |   |                          |   |                    |   |
| 2001                        |   |            |   |                          |   |                    |   |
| Basic EPS                   |   | $               | 6,438  |                          | 1,812  |                    | $      | 3.55 |   |
| Effect of dilutive  options |   | —          |   | 33                            |   |                    |   |
| Diluted EPS                 |   | $               | 6,438  |                          | 1,845  |                    | $      | 3.49 |   |
|                        |   |            |   |                          |   |                    |   |
| 2000                        |   |            |   |                          |   |                    |   |
| Basic EPS                   |   | $               | 5,335  |                          | 1,869  |                    | $      | 2.86 |   |
| Effect of dilutive  options |   | —          |   | 32                            |   |                    |   |
| Diluted EPS                 |   | $               | 5,335  |                          | 1,901  |                    | $      | 2.81 |   |

 

7. Rental Expense, Leasesand Commitments

The Company leases certain of its facilities andequipment and is required to pay the related taxes, insurance and certain otherexpenses. Rental expense was $3,737,000, $3,282,000 and $2,727,000 for 2002,2001 and 2000, respectively.

 

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Future minimum rentalcommitments under non-cancelable operating leases for 2003 and thereafter areas follows: 2003 — $2,162,000; 2004 — $1,878,000; 2005 — $1,481,000; 2006 —$1,351,000; 2007 — $1,341,000 and thereafter — $23,126,000. Included in theseamounts is $386,000 per year and approximately $19,466,000 in the “thereafter”amount related to an aggregates lease in conjunction with the Pueblo, Coloradooperation. Also included in these amounts is $235,000 per year andapproximately $882,000 in the “thereafter” amount related to a ground leaseupon which the Company owns a building leased to a third party for approximately$344,000 per year. The ground lease runs through October 1, 2016 and contains arenewal clause. The building lease runs through January 31, 2013.

 

8. Retirement Plans

As discussedin Note 1, the Company maintains retirement benefit plans for eligibleemployees. Total plan expenses charged to operations were $1,523,000,$2,464,000 and $2,375,000 in 2002, 2001 and 2000, respectively.

 

9. Income Taxes

The provision (benefit) for income taxes issummarized as follows (amounts in thousands):

 
|     |     | **2002** |   | **2001** |   | **2000** |   |
|----------|----------|----------|--------|----------|--------|----------|--------|
| Federal: | Current  |     |   | $        | 1,201  |     | $      | 2,457 |   | $ | 2,156 |   |
|     | Deferred |     |   | 541      |   | (144     | )      | 477 |   |
| State:   | Current  |     |   | 126      |   | 187      |   | 287 |   |
|     | Deferred |     |   | (118     | )      | 150      |   | 55 |   |
|     |     |     |   | $        | 1,750  |     | $      | 2,650 |   | $ | 2,975 |   |

 

The difference between the tax rate on income forfinancial statement purposes and the federal statutory tax rate was as follows:

 
|                                        |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Statutory tax rate                          |   | 34.0     | %      | 34.0     | %      | 34.0     | %      |
| Percentage depletion                        |   | (1.9     | )      | (1.4     | )      | (1.4     | )      |
| State income taxes, net  of federal benefit |   | 2.2      |   | 1.4      |   | 3.0      |   |
| Non-deductible expenses                     |   | .4       |   | .7       |   | .2       |   |
| Benefit of state tax  credits               |   | (1.9     | )      | (5.0     | )      | —   |   |
| Other                                       |   | 2.0      |   | (.5      | )      | —   |   |
|                                        |   | 34.8%    |   | 29.2     | %      | 35.8     | %      |

 

For financial statement purposes, deferred taxassets and liabilities are recorded at a blend of the current statutory federaland states’ tax rates – 38%. The principal temporary differences and theirrelated deferred taxes are as follows (amounts in thousands):

 
|                              |   | **2002** |   | **2001** |   |
|-----------------------------------|--------|----------|--------|----------|--------|
| Reserves for  self-insured losses |   | $        | 877    |     | $      | 911 |   |
| Accrued reclamation               |   | 608      |   | 556      |   |
| Deferred compensation             |   | 389      |   | 445      |   |
| Asset valuation  reserves         |   | 242      |   | 347      |   |
| Other                             |   | 446      |   | 416      |   |
| Total deferred tax  assets        |   | 2,562    |   | 2,675    |   |
|                              |   |     |   |     |   |
| Depreciation                      |   | 2,944    |   | 2,854    |   |
| Other                             |   | 950      |   | 767      |   |
| Total deferred tax  liabilities   |   | 3,894    |   | 3,621    |   |
|                              |   |     |   |     |   |
| Net deferred tax liability        |   | $        | (1,332 | )        | $      | (946 | ) |

 

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The net currentdeferred tax assets are $1,705,000 and $1,565,000 at year-end 2002 and 2001,respectively, and are included with “Prepaid expenses” on the ConsolidatedBalance Sheets.

 

10. Unaudited QuarterlyFinancial Data

The following tableprovides summarized unaudited fiscal quarterly financial data for 2002 and 2001(amounts in thousands, except per share amounts):

 
|                                      |   | **First  quarter** |   | **Second  quarter** |   | **Third  quarter** |   | **Fourth  quarter** |   |
|-------------------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
| 2002                                      |   |               |   |                |   |               |   |                |   |
| Sales                                     |   | $                  | 26,602 |                | $      | 37,423             |   | $                   | 32,503 |   | $ | 31,773 |   |
| Gross profit                              |   | 3,574              |   | 7,480               |   | 6,179              |   | 5,240               |   |
| Depreciation, depletion  and amortization |   | 1,506              |   | 1,545               |   | 1,567              |   | 1,462               |   |
| Net (loss) income                         |   | (607               | )      | 1,715               |   | 1,036              |   | 1,131               |   |
| Basic (loss) income per  share            |   | (.34               | )      | .95                 |   | .58                |   | .63                 |   |
| Diluted (loss) income  per share          |   | (.34               | )      | .94                 |   | .57                |   | .62                 |   |
|                                           |        |                    |        |                     |        |                    |        |                     |        |  |  |  |  |

 
|                                      |   | **First  quarter** |   | **Second  quarter** |   | **Third  quarter** |   | **Fourth  quarter** |   |
|-------------------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
| 2001                                      |   |               |   |                |   |               |   |                |   |
| Sales                                     |   | $                  | 28,359 |                | $      | 34,487             |   | $                   | 32,964 |   | $ | 34,401 |   |
| Gross profit                              |   | 4,501              |   | 6,687               |   | 7,192              |   | 7,433               |   |
| Depreciation, depletion  and amortization |   | 1,651              |   | 1,631               |   | 1,589              |   | 1,516               |   |
| Net (loss) income                         |   | (81                | )      | 1,167               |   | 1,936              |   | 3,416               |   |
| Basic (loss) income per  share            |   | (.04               | )      | .64                 |   | 1.07               |   | 1.89                |   |
| Diluted (loss) income  per share          |   | (.04               | )      | .63                 |   | 1.05               |   | 1.86                |   |
|                                           |        |                    |        |                     |        |                    |        |                     |        |  |  |  |  |

 

Earnings per share are computed independently foreach of the quarters presented. Therefore, the sum of the quarterly earningsper share may not equal the total for the year.

 

11. Industry SegmentInformation

The Company reports its segments in accordance withSFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation.” The Company is organized along its two principal product lines.Wall furnaces, console heaters, evaporative coolers and fan coils have beenaggregated into the heating and air conditioning segment. Ready mix concrete,construction aggregates, building supplies and doors are combined to form theconstruction materials segment. The heating and air conditioning segmentproduces heating and cooling equipment for residential applications which issold primarily to wholesale distributors and retail home centers. Fan coils arealso sold to HVAC installing contractors and equipment manufacturers forcommercial applications. A significant portion of fan coil revenues isdependent upon new hotel construction. Sales are nationwide, but areconcentrated in the southwestern U.S. The construction materials segment isinvolved in the production and sale of concrete and other building materialsand the exploration, extraction and sales of construction aggregates. Sales ofthis segment are highly concentrated in the Front Range area in Colorado.

 

The Company evaluates the performance of itssegments and allocates resources to them based on operating income and returnon investment. Other factors are also considered. Operating income isdetermined by deducting operating expenses from all revenues. In computingoperating income, none of the following has been added or deducted: unallocatedcorporate expenses, interest, income or loss from unconsolidated investees,other income or loss or income taxes.

 

26

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The following table presents information aboutreported segments for the fiscal years 2002, 2001 and 2000 along with the itemsnecessary to reconcile the segment information to the totals reported in thefinancial statements (amounts in thousands).

 
|                                      |   | **Heating and  air conditioning** |   | **Construction  materials (a)** |   | **All  other (b)** |   | **Unallocated  corporate (c)** |   | **Total** |   |
|-------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|--------------------|--------|--------------------------------|--------|-----------|--------|
| 2002                                      |   |                              |   |                            |   |               |   |                           |   |      |   |
| Revenues from external  customers         |   | $                                 | 52,261 |                            | $      | 75,892             |   | $                              | 145    |      | $      | 3 |   | $ | 128,301 |   |
| Depreciation, depletion  and amortization |   | 1,256                             |   | 4,756                           |   | —             |   | 68                             |   | 6,080     |   |
| Segment operating  income (loss)          |   | 4,888                             |   | 3,757                           |   | (150               | )      | (2,784                         | )      | 5,711     |   |
| Segment assets                            |   | 28,731                            |   | 48,450                          |   | 40                 |   | 5,413                          |   | 82,634    |   |
| Expenditures for  segment assets          |   | 1,624                             |   | 5,908                           |   | —             |   | 29                             |   | 7,561     |   |
|                                      |   |                              |   |                            |   |               |   |                           |   |      |   |
| 2001                                      |   |                              |   |                            |   |               |   |                           |   |      |   |
| Revenues from external  customers         |   | $                                 | 51,254 |                            | $      | 78,809             |   | $                              | 145    |      | $      | 3 |   | $ | 130,211 |   |
| Depreciation, depletion  and amortization |   | 1,155                             |   | 5,156                           |   | —             |   | 76                             |   | 6,387     |   |
| Segment operating  income (loss)          |   | 5,257                             |   | 6,881                           |   | 28                 |   | (3,012                         | )      | 9,154     |   |
| Segment assets                            |   | 30,446                            |   | 46,549                          |   | 38                 |   | 9,030                          |   | 86,063    |   |
| Expenditures for  segment assets          |   | 2,572                             |   | 6,592                           |   | —             |   | 49                             |   | 9,213     |   |
|                                      |   |                              |   |                            |   |               |   |                           |   |      |   |
| 2000                                      |   |                              |   |                            |   |               |   |                           |   |      |   |
| Revenues from external  customers         |   | $                                 | 49,083 |                            | $      | 66,771             |   | $                              | 145    |      | $      | 3 |   | $ | 116,002 |   |
| Depreciation, depletion  and amortization |   | 1,220                             |   | 4,117                           |   | 22                 |   | 60                             |   | 5,419     |   |
| Segment operating  income (loss)          |   | 5,002                             |   | 6,144                           |   | 45                 |   | (3,001                         | )      | 8,190     |   |
| Segment assets                            |   | 28,868                            |   | 31,536                          |   | 36                 |   | 7,810                          |   | 68,250    |   |
| Expenditures for  segment assets          |   | 651                               |   | 2,586                           |   | —             |   | 69                             |   | 3,306     |   |

 

----

(a)          The ConstructionMaterials segment information for 2002 includes MDHI reflecting the purchasewhich was effective April 1, 2002 and 2001 includes RMRM reflecting thepurchase which was effective December 31, 2000.

(b)         All otherrepresents segments below the quantitative thresholds. The segments include asmall real estate operation and the holding costs for certain mining intereststhat remain from the period the Company maintained significant interests inmining operations.

(c)          Corporate assetsconsist primarily of cash and cash equivalents.

 

All long-lived assets are in the UnitedStates.  During 2002, no customer ineither segment accounted for 10% or more of total sales.

 

27

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Report of Independent Accountants

To the Board of Directors and Shareholders ofContinental Materials Corporation

 

In our opinion, the accompanying consolidatedbalance sheets and the related consolidated statements of operations, cashflows and shareholders’ equity present fairly, in all material respects, thefinancial position of Continental Materials Corporation and its subsidiaries atDecember 28, 2002 and December 29, 2001, and the results of their operationsand their cash flows for each of the three years in the period ended December28, 2002, in conformity with accounting principles generally accepted in theUnited States of America. These financial statements are the responsibility ofthe Company’s management; our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of thesefinancial statements in accordance with auditing standards generally acceptedin the United States of America, which require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

 
| PricewaterhouseCoopers LLP |
|----------------------------|
|                       |
| Chicago, Illinois          |
| March 19, 2003             |

 

28

----

 
| Item 9. | **CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON** |
|---------|-------------------------------------------------------|
|    | **ACCOUNTING AND FINANCIAL DISCLOSURE**               |

 

There have been nochanges of accountants and/or disagreements on any matter of accountingprinciple or financial statement disclosure during fiscal year 2001 or 2002,nor during the subsequent interim period that required a filing under Item 9.

 

PART III

 

Items 10, 11, 12 and 13of Part III have been omitted from this 10-K Report since Registrant expects tofile, not later than 120 days following the close of its fiscal year endedDecember 28, 2002, its definitive 2003 proxy statement.  The information required by Items 10, 11, 12and 13 of Part III will be included in that proxy statement and suchinformation is hereby incorporated by reference.

 

Item 14.     **CONTROLS AND PROCEDURES**

 

(a)          The Company’s ChiefExecutive Officer and Chief Financial Officer have reviewed and evaluated theeffectiveness of the Company’s disclosure controls and procedures (as definedin Exchange Act Rules 13a-14 (c) and 15d-14 (c)) as of the date within 90 daysbefore the filing date of this Annual Report (the “Evaluation Date”).  Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer have concluded that the Company’scurrent disclosure controls and procedures are effective, providing them withmaterial information relating to the Company as required to be disclosed in thereports the Company files or submits under the Exchange Act on a timely basis.

 

(b)         There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect those controls subsequent to the Evaluation Date.

 

PART IV

 
| Item 15. | **EXHIBITS, FINANCIAL STATEMENT  SCHEDULES AND REPORTS**                                |
|----------|-----------------------------------------------------------------------------------------|
|     | **ON FORM 8-K**                                                                         |
|     |                                                                                    |
| (a) 1    | Financial  statements required by Item 15 are included in Item 8 of Part II.            |
|     |                                                                                    |
| (a) 2    | The following is  a list of financial statement schedules filed as part of this Report: |

 

 
|   | Report of Independent  Accountants                            |
|--------|---------------------------------------------------------------|
|   |                                                          |
|   | Schedule II Valuation  and Qualifying Accounts & Reserves |
|   | For the Fiscal Years  2002, 2001 and 2000                     |

 

All other schedules areomitted because they are not applicable or the information is shown in thefinancial statements or notes thereto.

 

29

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| (a) 3       | The following is  a list of all exhibits filed as part of this Report:                                                                                                                                                                                                                                                                                               |   |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 3   | 1975 Restated  Certificate of Incorporation dated May 28, 1975 filed as Exhibit 5 to Form  8-K for the month of May 1975, incorporated herein by reference.                                                                                                                                                                                                          |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 3a  | Registrant’s  By-laws as amended September 19, 1975 filed as Exhibit 6 to Form 8-K for the  month of September 1975, incorporated herein by reference.                                                                                                                                                                                                          |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 3b  | Registrant’s  Certificate of Amendment of Certificate of Incorporation dated May 24, 1978  filed as Exhibit 1 to Form 10-Q for quarter ended June 30, 1978, incorporated  herein by reference.                                                                                                                                                                  |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 3c  | Registrant’s  Certificate of Amendment of Certificate of Incorporation dated May 27, 1987  filed as Exhibit 3c to Form 10-K for the year ended January 1, 1988,  incorporated herein by reference.                                                                                                                                                              |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 3d  | Registrant’s  Certificate of Amendment of Restated Certificate of Incorporation dated June  4, 1999 filed as Exhibit 1 to Form 8-K for the month of June 1999,  incorporated herein by reference.                                                                                                                                                               |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 10  | Continental  Materials Corporation Amended and Restated 1994 Stock Option Plan dated May  25, 1994 filed as Appendix A to the 1994 Proxy Statement, incorporated herein  by reference.*                                                                                                                                                                              |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 10a | Revolving Credit  and Term Loan Agreement between The Northern Trust Company, LaSalle National  Bank and Continental Materials Corporation dated as of October 21, 1996 filed  as Exhibit 2D to Form 8-K for the month of October 1996 and the Amendment  thereto filed as Exhibit 2B to Form 8-K for the month of December 2000,  incorporated herein by reference. |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 10b | Acquisition  Agreement Between Valco Properties, Ltd. And Continental Materials  Corporation filed as Exhibit 2A to Form 8-K for the month October 1996,  incorporated herein by reference.                                                                                                                                                                          |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 10c | Non-Competition  and Non-Disclosure Agreement by Valco, Inc. And Thomas E. Brubaker in favor  of Continental Materials Corporation filed as Exhibit 2B to Form 8-K for the  month of October 1996, incorporated herein by reference.                                                                                                                                 |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 10d | Fee Sand and  Gravel Lease Between Valco, Inc. And Continental Materials Corporation filed  as Exhibit 2C to Form 8-K for the month of October 1996, incorporated herein  by reference.                                                                                                                                                                              |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 10e | Form of  Supplemental Deferred Compensation Agreement filed as Exhibit 10 to Form 10-Q  for the quarter ended July 1, 1983, incorporated herein by reference.*                                                                                                                                                                                                       |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 10f | Stock Purchase  Agreement By and Among Continental Materials Corporation, Rocky Mountain  Ready Mix Concrete, Inc. and The Shareholders of Rocky Mountain Ready Mix  Concrete, Inc. Filed as Exhibit 2A to Form 8-K for the month of December  2000, incorporated herein by reference.                                                                               |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 21  | Subsidiaries of  Registrant (filed herewith).                                                                                                                                                                                                                                                                                                                        |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 23  | Consent of  Independent Accountants (filed herewith).                                                                                                                                                                                                                                                                                                                |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 99a | Continental  Materials Corporation Employee Profit Sharing Retirement Plan Amended and  Restated Generally Effective October 1, 1997 filed as Exhibit 99a to Form  10-K for the year ended January 1, 2000, incorporated herein by reference.*                                                                                                                       |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 99b | Certification of  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (filed herewith).                                                                                                                                                                                                                                               |
|        |                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 99c | Certification of  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (filed herewith).                                                                                                                                                                                                                                               |
|             |                                                                                                                                                                                                                                                                                                                                                                      |        |  |

 

----

* - Compensatory plan orarrangement

 

30

----

 

 
|   |                                                                           |
|--------|--------------------------------------------------------------------------------|
| (b)    | Reports on Form  8-K:                                                          |
|   |                                                                           |
|   | No reports on  Form 8-K were filed during the quarter ended December 28, 2002. |

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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     |   |
|--------|--------|----------------------------------------|--------|
|   |   | Registrant                             |   |
|   |   |                                   |   |
|   | By:    | /S/ Joseph J. Sum                      |
|   |   | Joseph J. Sum, Vice President, Finance |

 

Date:       March 28, 2003

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **SIGNATURE**             |   | **CAPACITY(IES)**         |   | **DATE**       |
|---------------------------|--------|---------------------------|--------|----------------|
|                      |   |                      |   |           |
| /S/ James G. Gidwitz      |   |                      |   |           |
| James  G. Gidwitz         |   | Chief Executive  Officer  |   |           |
|                      |   | And a Director            |   | March 28, 2003 |
|                      |   |                      |   |           |
| /S/ Joseph J. Sum         |   |                      |   |           |
| Joseph  J. Sum            |   | Vice President            |   |           |
|                      |   | And a Director            |   | March 28, 2003 |
|                      |   |                      |   |           |
| /S/ Mark S. Nichter       |   |                      |   |           |
| Mark  S. Nichter          |   | Secretary and  Controller |   | March 28, 2003 |
|                      |   |                      |   |           |
| /S/ Thomas H. Carmody     |   |                      |   |           |
| Thomas  H. Carmody        |   | Director                  |   | March 28, 2003 |
|                      |   |                      |   |           |
| /S/ Betsy R. Gidwitz      |   |                      |   |           |
| Betsy  R. Gidwitz         |   | Director                  |   | March 28, 2003 |
|                      |   |                      |   |           |
| /S/ Ralph W. Gidwitz      |   |                      |   |           |
| Ralph  W. Gidwitz         |   | Director                  |   | March 28, 2003 |
|                      |   |                      |   |           |
| /S/ Ronald J. Gidwitz     |   |                      |   |           |
| Ronald  J. Gidwitz        |   | Director                  |   | March 28, 2003 |
|                      |   |                      |   |           |
| /S/ Theodore R.  Tetzlaff |   |                      |   |           |
| Theodore  R. Tetzlaff     |   | Director                  |   | March 28, 2003 |
|                      |   |                      |   |           |
| /S/ Peter E. Thieriot     |   |                      |   |           |
| Peter  E. Thieriot        |   | Director                  |   | March 28, 2003 |
|                      |   |                      |   |           |
| /S/ Darrell M. Trent      |   |                      |   |           |
| Darrell  M. Trent         |   | Director                  |   | March 28, 2003 |

 

31

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CERTIFICATION

 

I, James G.Gidwitz, certify that:

 

1.               I havereviewed this annual report on Form 10-K of Continental Materials Corporation;

 

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

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations, cash flows and changes in equity of theregistrant as of, and for, the periods presented in this annual report;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6.               Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date: March 28, 2003 |   |   |   |   |                      |   |   |   |
|----------------------|--------|--------|--------|--------|---------------------------|--------|--------|--------|
|                 |   |   |   | By:    | /s/ James G. Gidwitz      |   |
|                 |   |   |   |   | James G. Gidwitz          |   |
|                 |   |   |   |   | Chairman of the Board and |
|                 |   |   |   |   | Chief Executive Officer   |

 

32

----

 

CERTIFICATION

 

I, Joseph J.Sum, certify that:

 

1.               I havereviewed this annual report on Form 10-K of Continental Materials Corporation;

 

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

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financial condition,results of operations, cash flows and changes in equity of the registrant asof, and for, the periods presented in this annual report;

 

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

 

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

 

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

 

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

 

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

 

(a)            all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

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

 

6.               Theregistrant’s other certifying officers and I have indicated in this annual reportwhether there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: March 28, 2003 |   |   |   |   |   |   |                                       |   |
|----------------------|--------|--------|--------|--------|--------|--------|--------------------------------------------|--------|
|                 |   |   |   |   |   |   |                                       |   |
|                 |   |   |   |   |   | By:    | /s/ Joseph J. Sum                          |   |
|                 |   |   |   |   |   |   | Joseph J. Sum                              |
|                 |   |   |   |   |   |   | Vice President and Chief Financial Officer |
|                      |        |        |        |        |        |        |                                            |        |  |

 

33

----

 

 

**REPORT OF INDEPENDENT ACCOUNTANTS ON**

**FINANCIAL STATEMENT SCHEDULE**

 

 

To the Board of Directorsand Shareholders

  of Continental Materials Corporation

 

Ouraudits of the consolidated financial statements referred to in our report datedMarch 19, 2003 appearing in the 2002 Annual Report to Shareholders ofContinental Materials Corporation also included an audit of the financialstatement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,this financial statement schedule presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements.

 

 
| PricewaterhouseCoopers  LLP |
|-----------------------------|
|                        |
| Chicago, Illinois           |
| March 28, 2003              |

 

34

----

 

CONTINENTALMATERIALS CORPORATION

 

**SCHEDULE II - VALUATION AND QUALIFYINGACCOUNTS AND RESERVES (c) (d)**

 

for the fiscalyears 2002, 2001 and 2000

 
| **COLUMN A**                        |   | **COLUMN B**                         |    | **COLUMN  C(1)**                              |   | **COLUMN D**                 |   | **COLUMN E**                   |    |
|-------------------------------------|--------|--------------------------------------|---------|-----------------------------------------------|--------|------------------------------|--------|--------------------------------|---------|
| **Description**                     |   | **Balance at  Beginning  of Period** |    | **Additions  Charged to Costs  and Expenses** |   | **Deductions  -   Describe** |   | **Balance at  End  of Period** |    |
|                                |   |                                 |    |                                          |   |                         |   |                           |    |
| **Year  2002**                      |   |                                 |    |                                          |   |                         |   |                           |    |
| Allowance  for doubtful accounts    |   | $                                    | 435,000 |                                          | $      | 147,000                      |   | $                              | 150,000 | (a) | $ | 432,000 |   |
| Inventory  valuation reserve(f)     |   | $                                    | 420,000 |                                          | $      | —                       |   | $                              | 215,000 | (b) | $ | 205,000 |   |
|                                |   |                                 |    |                                          |   |                         |   |                           |    |
| **Year  2001**                      |   |                                 |    |                                          |   |                         |   |                           |    |
| Allowance  for doubtful accounts(e) |   | $                                    | 486,000 |                                          | $      | 134,000                      |   | $                              | 185,000 | (a) | $ | 435,000 |   |
| Inventory  valuation reserve        |   | $                                    | 443,000 |                                          | $      | 33,000                       |   | $                              | 81,000  | (b) | $ | 395,000 |   |
|                                |   |                                 |    |                                          |   |                         |   |                           |    |   |   |   |   |
| **Year  2000**                      |   |                                 |    |                                          |   |                         |   |                           |    |
| Allowance  for doubtful accounts    |   | $                                    | 800,000 |                                          | $      | (110,000                     | )      | $                              | 215,000 | (a) | $ | 475,000 |   |
| Inventory  valuation reserve        |   | $                                    | 568,000 |                                          | $      | 14,000                       |   | $                              | 139,000 | (b) | $ | 443,000 |   |

 

----

Notes:

 

| (a)  Accounts written off, net of recoveries.                                       |
|------------------------------------------------------------------------------------------|
|                                                                                     |
| (b)  Amounts written off upon disposal of  assets.                                  |
|                                                                                     |
| (c)  Reserve deducted in the balance sheet from  the asset to which it applies.     |
|                                                                                     |
| (d)  Column C(2) has been omitted as the answer  would be “none”.         |
|                                                                                     |
| (e)  Beginning balance has been adjusted to reflect RMRM reserve on  purchase date. |
|                                                                                     |
| (f)  Beginning balance has been adjusted to  reflect MDHI reserve on purchase date. |

 

35

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