** **

**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 January 3, 2004**                                                                                                                                                                                                                                                                                                                                                                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **OR**     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                             |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
|       |   | **  For the transition period  from                              to                              ** |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
|       |   | **Commission file number 1-3834**                                                                                                                                                                                                                                                                                                                                                                                         |

 

| **Continental Materials Corporation**                                     |
|---------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                    |
|                                                                      |   |   |
| **Delaware**                                                              |   | **36-2274391** |
| (State or other jurisdiction of incorporation or organization)            |   | (I.R.S. Employer Identification No.) |
|                                                                      |   |   |
| **225 West Wacker Drive, Suite 1800  Chicago, Illinois**                  |   | **60606** |
| (Address of principal executive offices)                                  |   | (Zip Code) |
|                                                                      |   |   |
| Registrant’s  telephone number, including area code **312-541-7200** |
|                                                                      |   |   |
| Securities  registered pursuant 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 registered pursuantto Section 12(g) of the Act: **NONE**

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.      Yes  ý    No  o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of the Form 10-K or any amendment to thisForm 10-K.  o

 

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

Yes  o        No  ý

 

The aggregate market value (based on June 28, 2003 closing price) ofvoting stock held by non-affiliates of registrant: Approximately $19,604,000.

 

Number ofcommon shares outstanding at March 26, 2004: 1,709,927.

 

Incorporation by reference: Portions of registrant’s definitive proxystatement for the 2003 Annual meeting of stockholders to be held on May 26,2004 into Part III of this Form 10-K. (The definitive proxy statement is expected to be filed with theSecurities and Exchange Commission within 120 days after the close of thefiscal year covered by this Form 10-K.)

 

 

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PART I

 

Item 1.    **BUSINESS**

 

There have been no significant changes in theCompany’s line of business during the past five years other than theacquisition of all of the stock of McKinney Door and Hardware, Inc. (MDHI), arefabricator and distributor of metal doors, wood doors and related hardware inPueblo, Colorado on April 1, 2002, and all of the stock of Rocky Mountain ReadyMix Concrete, Inc. (RMRM), a ready-mix concrete producer in the metropolitanDenver, Colorado area, on December 31, 2000. Accordingly, results for 2002include the activity of RMRM for the entire year and the activity of MDHI sinceApril 1, 2002. Results for 2001 include the activity of RMRM for the entireyear.

 

The Company operates primarilyin two industry segments, the heating and air conditioning segment and theconstruction materials segment. The heating and air conditioning segmentproduces and sells gas-fired wall furnaces and console heaters, evaporativecoolers and fan coils, which are manufactured by the Company’s wholly-ownedsubsidiaries, Phoenix Manufacturing, Inc. of Phoenix, Arizona and WilliamsFurnace 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., in ColoradoSprings, Colorado and Transit Mix of Pueblo, Inc. and MDHI, in Pueblo, Colorado. Currently, the Company’s wholly-ownedsubsidiary, Rocky Mountain Ready Mix Concrete, Inc. of Denver, Colorado, onlyoffers ready mix concrete.

 

In addition to the aboveoperating segments, an “Other” classification is used to report a small realestate operation and the holding costs for certain mining interests that remainfrom the period the Company maintained significant interests in miningoperations. The expenses of the corporate office, which provides treasury,insurance and tax services as well as strategic business planning and generalmanagement services, are not allocated to the segments. Expenses related to theManagement Information Systems group are allocated to all locations, includingthe corporate office.

 

Financial information relatingto industry segments appears in Note 11 on pages 27 and 28 of this Form 10-K.References to a “Note” are to the “Notes to Consolidated Financial Statements”included on pages 20 through 28 of this Annual Report on Form 10-K.

 

**MARKETING, SALES AND SUPPORT**

 

##### ***MARKETING***

##### *** ***

The heating and airconditioning segment markets its products throughout the United States throughplumbing, heating and air conditioning wholesale distributors as well asdirectly to some major retail home-centers and other retail outlets. Fan coilsare also sold to HVAC (Heating, Ventilation and Air Conditioning) installingcontractors and equipment manufacturers for commercial applications. TheCompany contracts independent manufacturers’ representatives for all of itsproducts while also employing and utilizing a staff of sales and sales supportpersonnel. Sales in this segment are predominantly in the United States and areconcentrated in the Western and Southwestern states. Sales of furnaces andconsole heaters usually increase in the months of August through January. Salesof evaporative coolers usually increase in the months of March through July.Sales of the fan coil product line are more evenly distributed throughout theyear although the highest volume typically occurs during the late spring andsummer.  In order to enhance sales ofwall furnaces and evaporative coolers during the off season, extended paymentterms typically are offered to customers.

 

2

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The construction materialssegment markets its products primarily through its own direct sales personneland, except for MDHI, confines its sales to the Front Range area in Colorado.Sales are primarily made to general and sub-contractors, government entitiesand individuals. Sales are affected by the general economic conditions andweather conditions in the areas serviced (as it relates to construction).Revenues usually decline in the winter months as the pace of constructionslows. MDHI sells throughout the United States although sales are primarilywithin Colorado and adjacent states.

 

During 2003, no customer in either segment accountedfor 10% or more of the total sales of the Company.

 

#### ***CUSTOMERSERVICE AND SUPPORT***

#### *** ***

The heating and airconditioning segment offers parts departments and help lines to assistcontractors, distributors and end users in servicing the products. The Companydoes not perform installation services, nor are maintenance or servicecontracts offered. In addition, training and product information sessions forthe furnace, cooler and fan coil product lines are offered at our plants andother sites for distributors, contractors, utility company employees and othercustomers. This segment does not derive any revenue from after-sales serviceand support other than from parts sales. The personnel in the constructionmaterials segment routinely take a leadership role in formulation of theproducts to meet the specifications of the customers.

 

***BACKLOG***

 

The order backlog at January 3,2004 and December 28, 2002 for the heating and air conditioning segment were asfollows:

 
|                |   | **January 3,  2004** |      | **December  28, 2002** |   |
|---------------------|--------|----------------------|-----------|------------------------|--------|
| Furnaces            |   | $                    | 180,000   |                   | $      | 75,000 |   |
| Evaporative coolers |   | 1,000,000            |      | 1,046,000              |   |
| Fan coil            |   | 88,000               |      | 376,000                |   |
| Total               |   | $                    | 1,268,000 |                   | $      | 1,497,000 |   |

 

The above backlogs are expectedto be substantially filled during the first quarter of 2004.

 

At January 3, 2004, theconstruction materials segment had a backlog of approximately $6,642,000($5,327,000 at December 28, 2002) primarily relating to construction contractsawarded and expected to be filled during the first half of 2004.

 

Management does notbelieve that any of the above backlogs represent a trend but rather areindicative only of the timing of orders received or contracts awarded. However,as noted below in the discussion of operations in Item 7, the constructionmaterials segment has experienced a decline in sales volume reflectingdecreased construction along the Front Range of Colorado and the fan coilproduct line has experienced a decline in sales volume reflecting thenationwide slump in commercial construction.

 

***RESEARCHAND DEVELOPMENT/PATENTS***

 

In general, the Company reliesupon, and intends to continue to rely upon, unpatented proprietary technologyand information. However, research and development activities in the heatingand air conditioning segment have resulted in a patent being issued to PhoenixManufacturing, Inc. related to the Power Cleaning System (expiring January2014) used in evaporative coolers and a patent issued to Williams Furnace Co.entitled “Wall Furnace With Side Vented Draft Hood” (expiring November 2011)which has increased the heat transference

 

3

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efficiency in our furnaces above that previously offered by the Companyand its competitors. The amounts expended on research and development are notmaterial and are expensed as incurred. The Company believes its interests inits patents, as well as its proprietary knowledge, are sufficient for itsbusinesses as currently conducted.

 

***MANUFACTURING***

 

The Company conducts its manufacturing operationsthrough a number of facilities as more completely described in Item 2,Properties, below.

 

Due to the seasonality of thebusinesses, furnaces and evaporative coolers build inventory during their offseasons in order to have adequate supplies to sell during the season. Althoughsales are made throughout the year, sales volume is generally higher fromAugust through January for furnaces while sales volume of evaporative coolersis generally higher from March through July.

 

In general, raw materials required by our companies’operations in both segments can be obtained from various sources in thequantities desired. The Company’s construction materials subsidiaries inColorado Springs and Pueblo have historically purchased most of their cementrequirements from a single supplier in order to obtain favorable 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 their needs.The Company has no long-term supply contracts and does not consider itselfdependent on any individual supplier.

 

In connection with permits tomine properties in Colorado, the Company is obligated to reclaim the minedareas. Although the conditions vary by permit, in general, the reclamationrequirements call for the stabilization of the mined area. In recent years,reclamation costs have had a more significant effect on the results ofoperations compared to prior years as the Company has engaged in enhancedreclamation projects that exceed the stated requirements. The augmentedreclamation efforts are being performed, in part, for goodwill purposes.

 

***COMPETITIVECONDITIONS***

 

Heating andAir Conditioning – The Company is one of threeprincipal companies producing wall furnaces (excluding units sold to therecreational vehicle industry) and gas fired console heaters. The wall furnaceand console heater markets are only a small component of the heating industry.The Company serves these market areas from a plant in Colton, California.  The sales force consists of in-house salespersonnel and independent manufacturers’ representatives. The entire heatingindustry is dominated by manufacturers (most of which are substantially largerthan the Company) selling diversified lines of heating and air conditioningunits directed primarily toward central heating and cooling systems. All of theproducers, including the Company, compete primarily on a basis of price,service and timeliness of delivery.

 

Fan coils are alsoproduced at the Colton plant. The Company generally obtains contracts forlarger jobs based upon a competitive bidding process. The contracts aretypically awarded based upon the competitive factors noted below. InternationalEnvironmental Corp., a subsidiary of LSB Industries, Inc., a manufacturer of adiversified line of commercial and industrial products, is the largestmanufacturer and competitor in this market. There are also a number of othercompanies that produce fan coils. All of the producers compete primarily on thebasis of price, ability to meet customers’ specific requirements and timelinessof delivery.

 

The Company manufacturesevaporative air coolers at a plant in Phoenix, Arizona. The cooler market isdominated by Adobe Air. The other principal competitor is Champion/Essick. Allproducers of evaporative air coolers typically compete aggressively on thebasis of price, product features and service.

 

4

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ConstructionMaterials – The Company is one of five companiesproducing ready mix concrete in the Colorado Springs area, one of threecompanies producing ready mix concrete in the Pueblo area and one of fourteencompanies producing ready mix concrete in the 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 of the producers are significantly largerthan RMRM. This market also experiences aggressive competition based on priceand service.

 

The Company is one of five producers of aggregates inthe Colorado Springs and Pueblo marketing areas. All producers competeaggressively on the basis of price, quality of material and service.

 

The Company’s sales of metal doors and door frames,rebar reinforcement and other building materials in the Colorado Springs andPueblo metropolitan areas are subject to intense competition from two largercompanies from Denver, two large companies in Colorado Springs and a number ofsmall local competitors. However, the Company believes it has a slightcompetitive advantage in that many of our customers also purchase concrete,sand and aggregates from us whereas our competitors for these particularproduct lines do not offer concrete, sand or aggregates. In addition, theCompany believes its Pueblo location has a slight competitive advantage withrespect to the two Denver companies based upon delivery costs.

 

#### ***EMPLOYEES***

#### *** ***

The Company employed 717 people as of January 3, 2004.Employment varies throughout the year due to the seasonal nature of thebusinesses. A breakdown of the prior three years employment at year-end bysegment was:

 
|                         |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Heating and Air Conditioning |   | 327      |   | 356      |   | 386      |   |
| Construction Materials       |   | 377      |   | 399      |   | 387      |   |
| Corporate Office             |   | 13       |   | 14       |   | 14       |   |
|                         |   |     |   |     |   |     |   |
| Total                        |   | 717      |   | 769      |   | 787      |   |

 

The factory employees atthe Colton, California plant are represented by the Carpenters Local 721 Unionunder a contract that expires in April 2005. The Company considers relationswith its employees 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 bythis segment are, in the opinion of management, in good condition andsufficient for the Company’s current needs. Productive capacity exists at thelocations such that the Company could exceed the highest volumes achieved inprior years or expected in the foreseeable future and maintain timely delivery.

 

The Company serves theColorado ready-mix concrete market from ten owned batch plants. In addition,the Company currently operates aggregate processing facilities on three ownedand 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 other aggregate deposits not currently inproduction. In the opinion of management, the owned and leased propertiescontain permitted and minable reserves sufficient to service customers’

 

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and our own sand, rockand gravel requirements for the foreseeable future.

 

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

 

The corporate office operatesout of leased office space in Chicago, Illinois.

 

Item 3.    **LEGAL PROCEEDINGS**

 

See Management’s Discussion andAnalysis of Financial Condition and Results of Operations on pages 9 through 14and Note 4 on page 25 of this Annual Report on Form 10-K.

 

Item 4.    **SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

There were no matterssubmitted to a vote of security holders during the fourth quarter of fiscal2003.

 

PART II

 

Item 5.    **MARKET FOR REGISTRANT’S COMMONEQUITY AND RELATED STOCKHOLDER MATTERS**

 

Continental MaterialsCorporation shares are traded on the American Stock Exchange under the symbolCUO. Market prices for the past two years are:

 

|   |   |            |   | **High** |   | **Low** |   |
|--------|--------|-----------------|--------|----------|--------|---------|--------|
| 2003   |   | Fourth  Quarter |   | $        | 29.10  |    | $      | 23.50 |   |
|   |   | Third  Quarter  |   | 23.40    |   | 23.00   |   |
|   |   | Second  Quarter |   | 26.45    |   | 20.15   |   |
|   |   | First  Quarter  |   | 27.30    |   | 26.45   |   |
|   |   |            |   |     |   |    |   |
| 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   |   |

 

At March 19, 2004,the Company had approximately 349 shareholders of record (includingnon-objecting beneficial owners).

 

The Company hasnever paid nor, does it currently intend to declare, any dividends. 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 isa summary of equity compensation plan information as of January 3, 2004:

 

**EQUITYCOMPENSATION PLAN INFORMATION**

 
|                                                   |   | **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))** |    |
|--------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                                   |   |                                                                                               |   |                                                                              |
|                                                   |   |                                                                                               |   |                                                                              |
| **Plan Category**                                      |   |                                                                                               |   |                                                                              |
|                                                   |   | **(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, exceptper share amounts)

 
|                                                  |   | **2003** |    | **2002** |   | **2001** |   | **2000** |    | **1999** |   |
|-------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
| SUMMARY OF OPERATIONS                                 |   |     |    |     |   |     |   |     |    |     |   |
| Sales                                                 |   | $        | 120,165 |     | $      | 128,301  |   | $        | 130,211 |     | $      | 116,002 |   | $ | 123,886 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Net income                                            |   | $        | 2,349   |     | $      | 3,275    |   | $        | 6,438   |     | $      | 5,335 |   | $ | 6,902 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| PER SHARE DATA                                        |   |     |    |     |   |     |   |     |    |     |   |
| Basic earnings per share                              |   | $        | 1.34    |     | $      | 1.83     |   | $        | 3.55    |     | $      | 2.86 |   | $ | 3.39 |   |
| Weighted average shares outstanding                   |   | 1,754    |    | 1,794    |   | 1,812    |   | 1,869    |    | 2,035    |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Diluted earnings per share                            |   | $        | 1.31    |     | $      | 1.79     |   | $        | 3.49    |     | $      | 2.81 |   | $ | 3.32 |   |
| Weighted average shares outstanding                   |   | 1,791    |    | 1,830    |   | 1,845    |   | 1,901    |    | 2,082    |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Cash dividends per declared per common  share         |   | $        | 0       |     | $      | 0        |   | $        | 0       |     | $      | 0 |   | $ | 0 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| FINANCIAL CONDITION                                   |   |     |    |     |   |     |   |     |    |     |   |
| Current ratio                                         |   | 2.5:1    |    | 2.3:1    |   | 2.2:1    |   | 2.4:1    |    | 1.7:1    |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Total assets                                          |   | $        | 81,826  |     | $      | 82,634   |   | $        | 86,063  |     | $      | 68,250 |   | $ | 67,751 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Long-term debt, including current portion             |   | 10,970   |    | 13,520   |   | 17,140   |   | 7,305    |    | 4,457    |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Shareholders’ equity                             |   | 50,857   |    | 49,989   |   | 47,722   |   | 41,813   |    | 39,043   |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Long-term debt to net worth                           |   | .22      |    | .27      |   | .36      |   | .18      |    | .11      |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Book value per diluted share                          |   | $        | 28.40   |     | $      | 27.32    |   | $        | 25.87   |     | $      | 22.00 |   | $ | 18.75 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Tangible book value per diluted share                 |   | $        | 23.62   |     | $      | 22.52    |   | $        | 21.62   |     | $      | 21.84 |   | $ | 18.59 |   |
|                                                  |   |     |    |     |   |     |   |     |    |     |   |
| CASH FLOWS                                            |   |     |    |     |   |     |   |     |    |     |   |
| Net cash provided by (used in):                       |   |     |    |     |   |     |   |     |    |     |   |
| Operating activities                                  |   | $        | 7,778   |     | $      | 9,753    |   | $        | 13,219  |     | $      | 10,021 |   | $ | 6,272 |   |
| Investing activities                                  |   | (2,535   | )       | (9,547   | )      | (19,215  | )      | (2,662   | )       | (8,982   | )      |
| Financing activities                                  |   | (4,170   | )       | (4,249   | )      | 7,359    |   | (1,490   | )       | (4,063   | )      |
| Net increase (decrease) in cash and cash  equivalents |   | $        | 1,073   |     | $      | (4,043   | )      | $        | 1,363   |     | $      | 5,869 |   | $ | (6,773 | ) |

 

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Item 7.    **Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

(References to a “Note” are tothe Notes to Consolidated Financial Statements contained elsewhere in thisreport)

 

**COMPANY OVERVIEW**

 

The Company operatesprimarily in two industry segments, the heating and air conditioning segmentand the construction materials segment. Theprimary products manufactured by the heating and air conditioning segment aregas fired wall furnaces, console heaters, evaporative coolers and fan coils.Gas-fired wall furnaces, console heaters and fan coil products are manufacturedat Williams Furnace Co., headquartered in Colton, California. Evaporativecoolers are manufactured at Phoenix Manufacturing, Inc., headquartered inPhoenix, Arizona. The primary products of the construction materials segmentare ready mix concrete, construction aggregates, building supplies and doorswhich are offered by Transit Mix Concrete Co. and Castle Concrete Company inColorado Springs, Colorado and Transit Mix of Pueblo, Inc. and McKinney Doorand Hardware, Inc. (MDHI) in Pueblo, Colorado. Currently, Rocky Mountain ReadyMix Concrete, Inc. (RMRM) of Denver, Colorado, only offers ready mix concrete.

 

Heatingand Air Conditioning Segment

Furnaceand console heater sales volume in 2003 was modestly lower than the prioryear’s level; however margins improved, rising slightly from the prior year.

 

Fancoil sales deteriorated to a level not experienced since 1994. The depressedcommercial construction market was the primary cause for the falloff. Hotelconstruction has been particularly hard hit, reflecting the overall depressedstate of the travel and leisure industry.

 

Evaporativecooler sales volume grew 10% largely due to expanded sales to a large retailcustomer during the year. Hot, dry weather that persisted later in the yearthan normal fueled the demand at the consumer level. Wholesale trade remainedstatic. Margins registered slight improvement reflecting the increased volume.

 

Selling,general and administrative costs were closely monitored and reduced wherepossible. These savings, however, were largely offset by unusually high legalcosts related to product liability claims and a suit filed to ensure thecontinued supply of a key purchased component for our evaporative coolerproduct line.

 

Cashflow from this segment approximated earnings. Depreciation exceeded capitalexpenditures; however, this was offset by an increase in furnace inventoriesfrom an all-time low level at the end of 2002.

 

ConstructionMaterials Segment

Despitetheir proximity, Denver, Colorado Springs and Pueblo have distinct competitiveand economic conditions. Concrete sales volumes declined in all three marketscompared to last year. The per-yard price of concrete reflected the diversityof the three markets. While Pueblo prices remained fairly constant, ColoradoSprings prices declined over 4% and Denver’s prices fell over 7%. The average pricingin Denver would have suffered more but for the effect of fixed priced contractsin the opening backlog of RMRM.

 

Thesales volume of construction aggregates increased modestly from the 2002 level,however, gross profits declined. The learning curve on the two new aggregatesplants, one at the Colorado Springs sand operation and the other on the eastside of Pueblo, was longer than we expected. Progress was made during the year,though, and costs were reduced.

 

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TheDoor and Supply divisions, together with MDHI, experienced the same drop insales reflecting the construction slump. Sales for this group increasedslightly only because of the inclusion of MDHI for the full year compared tothe nine months included in 2002 after the April 1 purchase of MDHI. Profitmargins were steady for the door products but declined for building supplieslargely due to very competitive price bidding for reinforced steel bar (rebar)projects.

 

Theconstruction materials segment typically requires large capital investments,particularly when volume is strong. Reflecting the more modest demand, capitalspending in 2003 was held to approximately $2,520,000 as the new batch plant inBrighton, Colorado was brought online and a new maintenance facility in Pueblowas built to complement the move of mining and ready mix concrete batching tothe east side of Pueblo. Other expenditures were primarily routine replacementsand upgrades.

 

Cashflow surpassed earnings. Depreciation and amortization exceeded capitalexpenditures; however, an increase in receivables consumed cash.

 

**FINANCIAL CONDITION, LIQUIDITY AND CAPITALRESOURCES**

 

Cashand cash equivalents were $4,609,000 at the end of 2003 compared to $3,536,000at the prior year-end. Operations in 2003 provided $7,778,000 of cash comparedto $9,753,000 in 2002 and $13,219,000 generated in 2001. The decrease in netcash generated by operating activities in 2003 compared to 2002 was primarilydue to the decreased earnings. Net working capital increased by $687,000 in2003 compared to an increase of only $122,000 in 2002. The decrease in net cashgenerated by operating activities in 2002 compared to 2001 was chiefly due tothe decreased earnings. Increases in the Company’s working capital needs alsoconsumed approximately $122,000 during 2002 compared to providing approximately$1,073,000 of cash during 2001.

 

Net cash used in investing activities was $2,535,000in 2003, $9,547,000 in 2002 and $19,215,000 in 2001. Capital expenditures for 2003,2002 and 2001 were $2,880,000, $7,561,000 and $9,213,000, respectively. Thecapital expenditures in 2003 included the construction of a maintenancefacility in Pueblo and completion of the Brighton batch plant begun in 2002.The expenditures in 2002 included the completion of three large projects thatwere begun in 2001: a new state-of-the-art sand processing plant was completedin Colorado Springs during the third quarter, a new aggregate processing plantin Pueblo was completed in June and a new central mix batch plant was added inColorado Springs. In addition, a new batch plant was purchased to replace theexisting facility in Brighton, Colorado. As noted above, the new plant becameoperational in 2003. During 2001, work was performed on the aforementionedprojects and the Company also invested approximately $1,800,000 for a newoffice building in Colton. On April 1, 2002, $2,125,000 was expended topurchase McKinney Door and Hardware, Inc. (MDHI). During fiscal year 2001,$11,263,000 was used to purchase Rocky Mountain Ready Mix Concrete, Inc. (RMRM)on December 31, 2000.

 

Budgetedcapital expenditures for 2004 are approximately $3,840,000 (including$2,550,000 for the construction materials segment and $1,280,000 for theheating and air conditioning segment), which is approximately $1,875,000 lessthan planned depreciation. The expenditures are primarily for routinereplacement and upgrades. The Company expects that the 2004 expenditures willbe funded from existing cash balances and operating cash flow.

 

During2003, cash of $4,170,000 was used in financing activities. Scheduled long-termdebt payments of $2,550,000 were made during the year including $300,000against capital lease obligations. Cash of $1,620,000 was used to acquire63,135 shares of treasury stock. During 2002, cash of $4,249,000 was used infinancing activities. Scheduled long-term debt repayments of $3,620,000 weremade during the year including $620,000 against capital lease obligations. Cashof $604,000 was used to acquire 22,599 shares of treasury stock. During

 

9

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2001,cash of $7,359,000 was provided by financing activities. The Company increasedits term debt by $12,000,000 for the acquisition of RMRM. Scheduled long-termdebt repayments of $3,526,000were made during the year including $526,000 against capital lease obligations. Cash of $600,000 was used to acquire 33,127 shares of treasury stockpartially offset by proceeds of $39,000 from the exercise of stock options.

 

Capital Resources, Obligations and Commitments, andOff-Balance Sheet Arrangements

 

Revolving Credit and Term Loan Agreement

The Company signed a new Revolving Credit and TermLoan Agreement (the Credit Agreement”) with two banks in September 2003. TheAgreement provides for a revolving credit facility of $10,000,000 and a termloan facility in the original amount of $11,500,000. Both facilities areunsecured and bear interest at prime or a performance-based LIBOR rate. Theterm loan is payable in escalating quarterly installments with final payment ofall then unpaid principal on June 30, 2008. At January 3, 2004, $10,750,000 wasoutstanding on the term loan while there was no balance outstanding on therevolving credit facility. The revolving credit facility is available forseasonal needs including the funding of seasonal sales programs related to thefurnace 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. Currently suchperformance-based rate is LIBOR plus 1.50% for the term loan and LIBOR plus1.25% for borrowings under the revolving credit facility. Effective December17, 2001, the Company entered into an interest rate swap agreement (Swap) inorder to fix the floating interest rate characteristic of most of the Company’sterm loan borrowings. The Company’s current interest rate under the Swap is5.88%. 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.

 

Obligations and Commitments

The following tables represent our obligations andcommitments to make future payments under contracts, such as debt and leaseagreements, and under contingent commitments, such as debt guarantees, as ofJanuary 3, 2004.

 

Payments Due by Period as of January 3, 2004 (amountsin thousands)

 

 
| **Contractual  Obligations**            |   | **Less than  1 year** |   | **1 – 3  years** |   | **4 – 5  years** |   | **After 5  years** |   | **Total** |   |
|-----------------------------------------|--------|-----------------------|--------|-----------------------|--------|-----------------------|--------|--------------------|--------|-----------|--------|
|                                    |   |                  |   |                  |   |                  |   |               |   |      |   |
| Long-term debt (See Note 3)             |   | $                     | 1,750  |                  | $      | 7,500                 |   | $                  | 1,500  |      | $      | — |   | $ | 10,750 |   |
| Capital lease obligations (See  Note 3) |   | 220                   |   | —                |   | —                |   | —             |   | 220       |   |
| Operating leases (See Note 7)           |   | 1,567                 |   | 3,122                 |   | 1,690                 |   | 1,687              |   | 8,066     |   |
| Minimum royalty agreement (See  Note 7) |   | 399                   |   | 1,197                 |   | 798                   |   | 18,602             |   | 20,996    |   |
| Total contractual obligations           |   | $                     | 3,936  |                  | $      | 11,819                |   | $                  | 3,988  |      | $      | 20,289 |   | $ | 40,032 |   |

 

Amounts ofCommitment Expiration per Period as of January 3, 2004 (amounts in thousands)

 
| **Other  Commercial Commitments** |   | **Less than  1 year** |   | **1 – 3  years** |   | **4 – 5 years** |   | **After 5  years** |   | **Total** |   |
|-----------------------------------|--------|-----------------------|--------|-----------------------|--------|----------------------|--------|--------------------|--------|-----------|--------|
|                              |   |                  |   |                  |   |                 |   |               |   |      |   |
| Standby letters of credit         |   | $                     | 1,990  |                  | $      | —               |   | $                  | — |      | $      | — |   | $ | 1,990 |   |
|                                   |        |                       |        |                       |        |                      |        |                    |        |           |        |  |  |  |  |  |

 

We believe that existingcash balances and anticipated cash flow, supplemented by seasonal borrowingsagainst the revolving line of credit, will be sufficient to cover expected cashneeds, including servicing debt and planned capital expenditures for at leastthe next twelve months.

 

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheetarrangements that would be likely to have a material current or future effecton our financial condition, revenues, expenses, results of operations,liquidity, capital expenditures or capital resources.

 

10

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Operations   Fiscal2003 vs. 2002

 

Consolidated sales in 2003 declined $8,136,000, or6.3%, to $120,165,000. Sales declined $4,399,000 (5.8%) in the construction materialssegment. The reduced level of construction activity along the Front Range inColorado led to lower volumes and increased price competition resulting inlower ready-mix concrete prices, most notably in the Denver metropolitan area.The reduced volume combined with the lower prices account for the diminishedsales level. Sales in the heating and air conditioning segment decreased$3,919,000 (7.5%). A sharp decline in fan coil sales was only partially offsetby improved evaporative cooler sales. Fan coil sales continue to reflect thenationwide slump in commercial construction, particularly hotel construction.The improved evaporative cooler sales were primarily driven by hot, dry weatherthat persisted later in the year than normal.

 

The Company experienced a high level of pricecompetition in all of its product lines during 2003, especially in the Denverready mix concrete market. The Company does not expect any appreciable changein market conditions in Denver during 2004. During 2003, inflation was not asignificant factor at any of the operations except that employee health carecosts and general business insurance premiums again dramatically outpaced therate of inflation. In addition, producers of flat rolled steel products, keyraw materials in our heating and air conditioning products, recently announcedsignificant nationwide price increases. Phoenix Manufacturing has sufficientsteel inventory to cover cooler production for the remainder of the currentcooling season. Our steel suppliers will honor quoted prices on orders alreadyplaced. However, it can be expected that prices on future steel orders will besubstantially higher. Williams Furnace will incur a small surcharge for Apriland May deliveries of steel before paying the increased prices beginning inJune. While we would seek to increase the selling price of our products torecover the higher steel costs, there is no assurance that we would be able todo so due to the competitive conditions in our particular markets.

 

Cost of sales (exclusive of depreciation, depletionand amortization), as a percent of sales, decreased from 78.3% to 78.0%. Theimprovement realized in the heating and air conditioning segment was primarilydue to a $662,000 write-down in 2002 of inventories and other costs associatedwith a product manufactured at our Phoenix plant. A very slight improvement wasexperienced in the construction materials segment due to the inclusion of MDHIfor the full year in 2003. The further decline in construction activity alongthe Front Range in Colorado had the effect of increasing price competitionresulting in lower prices for ready mix concrete. The effect of lower concreteprices on 2003 profit margins was largely offset by lower costs and operatingimprovement at the various aggregates locations.

 

Selling and administrative expenses increased in 2003despite the decline in sales. The increase was due to higher legal costsrelated to product liability claims and a dispute with a supplier concerningthe continued availability of a key purchased component for our evaporativecooler product line.

 

The decline in operating income from $5,711,000 to$3,607,000 is primarily due to the decreased sales, the heightened competitionin Colorado and the aforementioned increased legal costs.

 

Otherincome increased $276,000 as a result of $176,000 of gain realized on thesettlement of property tax bills related to the Oracle Ridge Mining Partnersproperty. In addition $155,000 was realized during 2003 from the sale of a notexploitable aggregate property in Colorado.

 

TheCompany’s 2003 effective income tax rate (31.9%) reflects federal and statestatutory rates adjusted for non-deductible and other tax items. The effectiverate in 2003 was reduced by 5.3% due to earned California Enterprise Zone creditsthat will benefit future tax years. See Note 9.

 

11

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Operations   Fiscal 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.

 

The Company experienced ahigh level of price competition throughout both 2002 and 2001 in all of itsproduct lines. Inflation was not a significant factor at any of the operationsduring either 2002 or 2001, except that employee health care costs and generalbusiness insurance premiums dramatically outpaced the rate of inflation for the2002 period.

 

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 were 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%.

 

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.

 

RELATEDPARTY TRANSACTIONS

 

TheCompany purchases insurance coverage for workers’ compensation, general andproduct liability together with another company controlled by the Company’sprincipal shareholders to minimize insurance costs and to obtain other morefavorable terms. Allocation of the expense of the program is either provided bythe underwriter or based upon a formula that considers,

 

12

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amongother things, sales levels, loss exposure and claim experience. Claims underthe self-insured portion of the policies are charged directly to the incurringparty.

 

CRITICAL ACCOUNTING POLICIES

 

Financial Reporting Release No. 60, issued by theSecurities and Exchange Commission, requires all registrants, including theCompany, to include a discussion of “critical” accounting policies or methodsused in the preparation of financial statements. We believe the following areour critical accounting policies and methods.

 

Inventories

 

Inventories are priced at the lower of cost (76% atJanuary 3, 2004 at last-in, first-out, with the remainder at first-in,first-out) or market. Inventories are reviewed annually for excess or obsoletestock with a provision recorded, where appropriate.

 

Intangibles

 

Goodwill was amortized using a 40-year life throughthe 2001 year. In accordance with Statement of Financial Accounting Standards(SFAS) No. 142, “Goodwill and Other Intangible Assets,” goodwill is no longeramortized as a charge to earnings. As a result of this new standard,amortization expense was reduced by approximately $188,000 in 2003 and 2002. Weannually assess goodwill for potential impairment. This assessment requires usto make significant assumptions and estimates about the extent and timing offuture cash flows, discount rates, and growth rates. No impairment wasindicated in the current year. If the assessment had indicated that thecarrying value of goodwill was impaired, an impairment charge would have beenrecorded for the amount by which the carrying value of the goodwill exceededits fair value. Management believes that the assumptions and estimates used todetermine the estimated fair values are reasonable; however, changes indifferent assumptions and estimates could materially affect the estimated fairvalue.

 

Liabilities

 

The Company purchases insurance coverage for workers’compensation, general product and automobile liability, retaining certainlevels of risk (self-insured portion). Provision for workers’ compensation andautomobile claims is estimated based upon information provided by the Company’sindependent claims administrator and the Company’s own experience. With regardto product liability, provisions for both claims and unasserted claims thatwould be covered 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.

 

The Company records a reserve for future reclamationwork to be performed at its various aggregate operations based upon estimatesof the recoverable quantities of rock and sand available in each locationcombined with an estimate of the total expense that will be incurred to reclaima property. Provision is made based upon the units-of-production method. Actualreclamation costs are charged against the reserve. The adequacy of the recordedreserve is assessed annually. Estimates of both the quantities of recoverablematerial and the cost of reclamation are periodically updated by an independentprofessional. In a similar manner, depletion of rock and sand deposits andamortization of deferred development costs are computed by theunits-of-production method based upon estimated recoverable quantities of rockand sand.

 

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Sales

 

The Company recognizes revenue as products are shippedto 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 current program terms and historicalexperience.

 

Recently Issued Accounting Standards

 

The “Recently Issued Accounting Pronouncement” sectionof Note 1 discusses new accounting policies adopted by us during 2003 and theexpected impact of accounting pronouncements recently issued but not yetrequired to be adopted. To the extent the adoption of new accounting standardsmaterially affects financial condition, results of operations or liquidity, theimpacts are discussed in the applicable notes to the consolidated financialstatements.

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended.Such forward-looking statements are based on the beliefs of the Company’smanagement as well as on assumptions made by and information available to theCompany at the time such statements were made. When used in this Report, wordssuch as “anticipates,” “believes,” “contemplates,” “estimates,”  “expects,” “plans,” “projects” and similarexpressions are intended to identify forward-looking statements. Actual resultscould differ materially from those projected in the forward-looking statementsas a result of factors including but not limited to: weather, interest rates,availability of raw materials and their related costs, economic conditions andcompetitive forces. Changes in accounting pronouncements could also alterprojected results. Forward-looking statements speak only as of the date theywere made and we undertake no obligation to publicly update them.

 

Item 7A.  **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. At January 3, 2004, the notional amount subject to this agreementis $10,500,000. See above discussion under Financial Condition, Liquidity andCapital Resources. The cash payments or receipts associated with this agreementare reflected in interest expense.

 

Interest Rates

 

The Company utilizes revolving credit and term-loanfacilities that bear interest at either prime or an adjusted LIBOR rate. Theamount outstanding under these facilities aggregated $10,750,000 at January 3,2004. In addition, the Company is party to various capital lease agreementswith fixed interest rates and original maturity dates ranging up to 60 months.As the latest of the leases matures in early 2004, and the total long-termportion of all leases is $220,000, the book and fair value was considered to beapproximately the same. See Note 3.

 

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Commodities

 

The Company purchases commodities, such as steel,copper, aluminum, cement and cardboard for packaging, at market prices and doesnot currently use financial instruments to hedge commodity prices.

 

These statements and other information in this sectionconstitute forward-looking statements.

 

Item 8.    **FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 
| Financial Statements and Schedule of  Continental Materials Corporation and report thereon:          |   |
|------------------------------------------------------------------------------------------------------|--------|
|                                                                                                 |   |
| Consolidated statements of operations and  comprehensive income for fiscal years 2003, 2002 and 2001 |   |
|                                                                                                 |   |
| Consolidated statements of cash flows for  fiscal years ended 2003, 2002 and 2001                    |   |
|                                                                                                 |   |
| Consolidated balance sheets as of January  3, 2004 and December 28, 2002                             |   |
|                                                                                                 |   |
| Consolidated statements of shareholders’  equity for fiscal years ended 2003, 2002 and 2001     |   |
|                                                                                                 |   |
| Notes to consolidated financial statements                                                           |   |
|                                                                                                 |   |
| Report of Independent Auditors                                                                       |   |

 

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**Continental Materials Corporation**

**Consolidated Statements of Operations andComprehensive Income**

**For Fiscal Years 2003, 2002 and 2001**

(Amounts in thousands, exceptper share data)

 
|                                                                                                |   | **2003** |    | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                                                                |   |     |    |     |   |     |   |
| Sales                                                                                               |   | $        | 120,165 |     | $      | 128,301  |   | $ | 130,211 |   |
| Costs and expenses                                                                                  |   |     |    |     |   |     |   |
| Cost of sales (exclusive of depreciation,  depletion and amortization)                              |   | 93,713   |    | 100,477  |   | 98,712   |   |
| Depreciation, depletion and amortization                                                            |   | 6,062    |    | 6,080    |   | 6,387    |   |
| Selling and administrative                                                                          |   | 16,783   |    | 16,033   |   | 15,958   |   |
| Operating income                                                                                    |   | 3,607    |    | 5,711    |   | 9,154    |   |
| Interest expense                                                                                    |   | (670     | )       | (922     | )      | (937     | )      |
| Other income (expense), net                                                                         |   | 512      |    | 236      |   | 871      |   |
| Income before income taxes                                                                          |   | 3,449    |    | 5,025    |   | 9,088    |   |
| Income tax provision                                                                                |   | 1,100    |    | 1,750    |   | 2,650    |   |
| Net income                                                                                          |   | $        | 2,349   |     | $      | 3,275    |   | $ | 6,438 |   |
|                                                                                                |   |     |    |     |   |     |   |
| Basic earnings per share                                                                            |   | $        | 1.34    |     | $      | 1.83     |   | $ | 3.55 |   |
| Weighted average shares outstanding                                                                 |   | 1,754    |    | 1,794    |   | 1,812    |   |
| Diluted earnings per share                                                                          |   | $        | 1.31    |     | $      | 1.79     |   | $ | 3.49 |   |
| Weighted average shares outstanding                                                                 |   | 1,791    |    | 1,830    |   | 1,845    |   |
|                                                                                                |   |     |    |     |   |     |   |
| Comprehensive income:                                                                               |   |     |    |     |   |     |   |
| Net income                                                                                          |   | $        | 2,349   |     | $      | 3,275    |   | $ | 6,438 |   |
| Comprehensive income (loss) from interest  rate swap, net of tax of $90, $214, and $0, respectively |   | 139      |    | (404     | )      | 0        |   |
| Total comprehensive income                                                                          |   | $        | 2,488   |     | $      | 2,871    |   | $ | 6,438 |   |

 

The accompanying notes are an integral part of the financialstatements.

 

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## **ContinentalMaterials Corporation Consolidated Statements of Cash Flows**

**For Fiscal Years2003, 2002 and 2001**

(Amounts in thousands)

 
|                                                                              |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                              |   |     |   |     |   |     |   |
| Operating activities                                                              |   |     |   |     |   |     |   |
| Net income                                                                        |   | $        | 2,349  |     | $      | 3,275    |   | $ | 6,438 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities |   |     |   |     |   |     |   |
| Depreciation, depletion and amortization                                          |   | 6,062    |   | 6,080    |   | 6,387    |   |
| Deferred income tax provision                                                     |   | 83       |   | 422      |   | 6        |   |
| Provision for doubtful accounts                                                   |   | 112      |   | 75       |   | 134      |   |
| Tax benefit from exercise of stock options                                        |   | —   |   | —   |   | 32       |   |
| Gain on disposition of property and  equipment                                    |   | (141     | )      | (79      | )      | (851     | )      |
| Write-off of investment in Dual Air product  line                                 |   | —   |   | 102      |   | —   |   |
| Changes in operating assets and  liabilities                                      |   |     |   |     |   |     |   |
| Receivables                                                                       |   | (425     | )      | 2,247    |   | (512     | )      |
| Inventories                                                                       |   | (1,589   | )      | 2,158    |   | 754      |   |
| Prepaid expenses                                                                  |   | (176     | )      | 151      |   | 33       |   |
| Prepaid royalties                                                                 |   | 3        |   | (257     | )      | (6       | )      |
| Accounts payable and accrued expenses                                             |   | 146      |   | (3,856   | )      | 1,152    |   |
| Income taxes                                                                      |   | 1,132    |   | (339     | )      | (398     | )      |
| Other                                                                             |   | 222      |   | (226     | )      | 50       |   |
| Net cash provided by operating activities                                         |   | 7,778    |   | 9,753    |   | 13,219   |   |
|                                                                              |   |     |   |     |   |     |   |
| Investing activities                                                              |   |     |   |     |   |     |   |
| Acquisitions of subsidiaries, net of cash  received                               |   | —   |   | (2,125   | )      | (11,263  | )      |
| Capital expenditures                                                              |   | (2,880   | )      | (7,561   | )      | (9,213   | )      |
| Proceeds from sale of property and  equipment                                     |   | 345      |   | 139      |   | 1,261    |   |
| Net cash used in investing activities                                             |   | (2,535   | )      | (9,547   | )      | (19,215  | )      |
|                                                                              |   |     |   |     |   |     |   |
| Financing activities                                                              |   |     |   |     |   |     |   |
| Long-term borrowings                                                              |   | —   |   | —   |   | 12,000   |   |
| Repayment of long-term debt                                                       |   | (2,550   | )      | (3,620   | )      | (3,526   | )      |
| Payment of amounts due former shareholders                                        |   | —   |   | (25      | )      | (554     | )      |
| Proceeds from exercise of stock options                                           |   | —   |   | —   |   | 39       |   |
| Payments to acquire treasury stock                                                |   | (1,620   | )      | (604     | )      | (600     | )      |
| Net cash used in financing activities                                             |   | (4,170   | )      | (4,249   | )      | 7,359    |   |
| Net increase (decrease) in cash and cash  equivalents                             |   | 1,073    |   | (4,043   | )      | 1,363    |   |
|                                                                              |   |     |   |     |   |     |   |
| Cash and cash equivalents                                                         |   |     |   |     |   |     |   |
| Beginning of year                                                                 |   | 3,536    |   | 7,579    |   | 6,216    |   |
| End of year                                                                       |   | $        | 4,609  |     | $      | 3,536    |   | $ | 7,579 |   |
| Supplemental disclosures of cash flow  items                                      |   |     |   |     |   |     |   |
| Cash paid during the year                                                         |   |     |   |     |   |     |   |
| Interest                                                                          |   | $        | 799    |     | $      | 1,084    |   | $ | 990 |   |
| Income taxes                                                                      |   | (137     | )      | 1,682    |   | 3,011    |   |

 

The accompanying notes are an integral part of the financialstatements.

 

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**Continental Materials Corporation**

**Consolidated Balance Sheets as of****January 3,2004 and December 28, 2002**

(Amounts in thousands exceptshare data)

 
|                                                                                 |   | **January 3, 2004** |   | **December 28, 2002** |   |
|--------------------------------------------------------------------------------------|--------|---------------------|--------|-----------------------|--------|
|                                                                                 |   |                |   |                  |   |
| ASSETS                                                                               |   |                |   |                  |   |
| Current assets                                                                       |   |                |   |                  |   |
| Cash and cash equivalents                                                            |   | $                   | 4,609  |                  | $      | 3,536 |   |
| Receivables less allowance of $436 and  $432                                         |   | 17,054              |   | 16,740                |   |
| Inventories                                                                          |   | 16,181              |   | 14,592                |   |
| Prepaid expenses                                                                     |   | 3,043               |   | 2,769                 |   |
| Refundable income taxes                                                              |   | 21                  |   | 761                   |   |
| Total current assets                                                                 |   | 40,908              |   | 38,398                |   |
|                                                                                 |   |                |   |                  |   |
| Property, plant and equipment                                                        |   |                |   |                  |   |
| Land and improvements                                                                |   | 3,128               |   | 3,117                 |   |
| Buildings and improvements                                                           |   | 18,219              |   | 16,073                |   |
| Machinery and equipment                                                              |   | 69,660              |   | 71,392                |   |
| Mining properties                                                                    |   | 5,175               |   | 5,175                 |   |
| Less accumulated depreciation and  depletion                                         |   | (65,309             | )      | (61,724               | )      |
|                                                                                 |   | 30,873              |   | 34,033                |   |
| Other assets                                                                         |   |                |   |                  |   |
| Goodwill                                                                             |   | 7,374               |   | 7,374                 |   |
| Non-compete agreements                                                               |   | 1,178               |   | 1,403                 |   |
| Prepaid royalties                                                                    |   | 901                 |   | 904                   |   |
| Other                                                                                |   | 592                 |   | 522                   |   |
|                                                                                 |   | $                   | 81,826 |                  | $      | 82,634 |   |
| LIABILITIES                                                                          |   |                |   |                  |   |
| Current liabilities                                                                  |   |                |   |                  |   |
| Current portion of long-term debt                                                    |   | $                   | 1,970  |                  | $      | 3,300 |   |
| Accounts payable                                                                     |   | 4,688               |   | 4,434                 |   |
| Income taxes                                                                         |   | 700                 |   | 308                   |   |
| Accrued expenses                                                                     |   |                |   |                  |   |
| Compensation                                                                         |   | 2,101               |   | 2,153                 |   |
| Reserve for self-insured losses                                                      |   | 1,973               |   | 2,310                 |   |
| Profit sharing                                                                       |   | 1,456               |   | 1,782                 |   |
| Reclamation                                                                          |   | 409                 |   | 458                   |   |
| Other                                                                                |   | 2,877               |   | 2,221                 |   |
| Total current liabilities                                                            |   | 16,174              |   | 16,966                |   |
|                                                                                 |   |                |   |                  |   |
| Long-term debt                                                                       |   | 9,000               |   | 10,220                |   |
| Deferred income taxes                                                                |   | 3,219               |   | 3,037                 |   |
| Accrued reclamation                                                                  |   | 1,291               |   | 1,145                 |   |
| Other long-term liabilities                                                          |   | 1,285               |   | 1,277                 |   |
| 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                                                                    |   | 60,200              |   | 57,851                |   |
| Accumulated other comprehensive losses  (interest rate swap adjustments)             |   | (265                | )      | (404                  | )      |
| Treasury shares, at cost                                                             |   | (11,703             | )      | (10,083               | )      |
|                                                                                 |   | 50,857              |   | 49,989                |   |
|                                                                                 |   | $                   | 81,826 |                  | $      | 82,634 |   |

 

The accompanying notes are an integral part of thefinancial statements.

 

18

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**Continental Materials Corporation**

**Consolidated Statements ofShareholders’ Equity**

**For Fiscal Years 2003, 2002 and2001**

(Amounts in thousands exceptshare data)

 
|                                                              |   |               |   | **Common  shares  amount** |   | **Capital  in excess  of par** |   |   |                 | **Accum. other  comprehensive  losses** |   |    |   | **Treasury  shares  cost** |    |
|-------------------------------------------------------------------|--------|--------------------|--------|----------------------------|--------|--------------------------------|--------|--------|----------------------|-----------------------------------------|--------|---------|--------|----------------------------|---------|
|                                                              |   | **Common  shares** |   |                       |   | **Retained  earnings**         |   |   | **Treasury  shares** |                                    |   |
|                                                              |   |               |   |                       |   |                           |   |   |
| 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  |                 |                                    |   | —  |   | —                     |    |
| Comprehensive loss from interest rate swap,  net of tax of $214   |   | —             |   | —                     |   | —                         |   | — |                 | $                                       | (404   | )       | — |                       | —  |   |
| Balance at December 28, 2002                                      |   | 2,574,264          |   | 643                        |   | 1,982                          |   | 57,851 |                 | (404                                    | )      | 790,766 |   | 10,083                     |    |
| Purchase of treasury shares                                       |   | —             |   | —                     |   | —                         |   | — |                 |                                    |   | 63,135  |   | 1,620                      |    |
| Net income                                                        |   | —             |   | —                     |   | —                         |   | 2,349  |                 | —                                  |   | —  |   | —                     |    |
| Comprehensive income from interest rate  swap, net of tax of $90  |   | —             |   | —                     |   | —                         |   | — |                 | 139                                     |   | —  |   | —                     |    |
| Balance at January 3, 2004                                        |   | 2,574,264          |   | $                          | 643    |                           | $      | 1,982  |                 | $                                       | 60,200 |    | $      | (265                       | )       | 853,901 |   | $ | 11,703 |   |

 

The accompanying notes are an integral part of thefinancial statements.

 

19

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## **Notesto Consolidated Financial Statements**

## ** **

## **1. Summary of Significant Accounting Policies**

PRINCIPLES OFCONSOLIDATION

The consolidated financial statements includeContinental Materials Corporation and all of its subsidiaries (the Company)including McKinney Door and Hardware, Inc. (MDHI) from April 1, 2002. Theacquisition of MDHI was made to complement existing operations and extend themarket area served.

 

On April 1, 2002, the Company acquired MDHI for$2,125,000, net of cash received. The purchase of MDHI has been accounted foras a purchase. The total purchase price and the fair value of liabilitiesassumed have been allocated to the tangible and intangible assets of MDHI basedon respective fair values. The acquisition has resulted in an unallocatedexcess purchase price over fair value of net assets acquired of $900,000, whichhas been classified as goodwill.

 

Had the acquisition of MDHI occurred as of December30, 2001, the unaudited pro forma results of the Company for 2002 would havebeen as follows (amounts in thousands except per share data):

 
| Sales                      |   | $ | 129,401 |   |
|----------------------------|--------|---|---------|--------|
| Net income                 |   | $ | 3,154   |   |
| Diluted earnings per share |   | $ | 1.72    |   |

 

These pro forma results havebeen prepared for comparative purposes only and do not purport to be indicativeof what would have occurred had the acquisition been made at the beginning ofthe period presented or the results which may occur in the future.

 

Certain prior years’ amountshave been reclassified to conform to the current presentation.

 

RECENTLY ISSUED ACCOUNTINGPRONOUNCEMENTS

The Financial AccountingStandards Board has recently issued the following statements andinterpretations:

 

SFAS No. 143, “Accountingfor Obligations Associated with the Retirement of Long-Lived Assets,” wasissued in June 2001 and was adopted by the Company on December 29, 2002. Thisstandard requires recording the fair value of a liability for an assetretirement obligation in the period in which it is incurred. In connection withpermits to mine aggregate deposits in Colorado, the Company is obligated to reclaimthe mined areas. The Company records a reserve for future reclamation work tobe performed at its various aggregate operations based upon estimates of therecoverable quantities of rock and sand available in each location combinedwith an estimate of the total expense that will be incurred to reclaim aproperty. Provision is made based upon the units of production method.Reclamation costs are charged to operations as the properties are mined. Actualreclamation costs are charged against the reserve. The adequacy of the recordedreserve is assessed annually. Estimates of both the quantities of recoverablematerial and the cost of reclamation are periodically updated with theassistance of an independent professional. Reclamation on any mining property isgenerally performed soon after each section of the deposit is mined.Reclamation is substantially complete by the time the entire deposit isdepleted. The Company believes that this approach, which had been previouslyused to establish the annual expense and the reserve recorded for futurereclamation obligations, continues to provide the best estimate of the fairvalue of these obligations.  Thereforethe adoption of SFAS No. 143 did not have an impact on the Company’sconsolidated balance sheet or consolidated statement of operations as ofDecember 30, 2002. If the provisions of Statement 143 had been adoptedeffective December 30, 2001, there would have been no impact on earnings pershare, net of income tax effect. Since a change in earnings per share would nothave occurred, pro forma earnings per share disclosures are not presented.

 

20

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SFAS No. 148, “Accountingfor Stock-Based Compensation, Transition and Disclosure,” was issued inDecember 2002. This standard provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. SFAS No. 148 also requires that disclosures of the proforma effect of using the fair value method of accounting for stock-basedemployee compensation be displayed more prominently and in a tabular format.Additionally, SFAS No. 148 requires disclosure of the pro forma effect ininterim financial statements. The transition and disclosure requirements ofSFAS No. 148 are effective for fiscal years ending after and interim periodsbeginning after December 15, 2002. As the Company did not have any transactionsor circumstances addressed by this pronouncement during the past three years,this statement did not have a material impact on the Company’s results ofoperations, financial position or liquidity.

 

SFAS No. 145, “Rescission ofFASB Statements No. 4, 44 and 84 and Amendment of FASB No. 13 and TechnicalCorrections as of April 2002;” SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities;” SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity;” Interpretation 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Guarantees of Indebtedness of Others;” andInterpretation No. 46, “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51,” were also recently issued. The Company does notcurrently have any transactions or circumstances that are addressed by thesepronouncements, therefore adoption of these statements and interpretations didnot have a material impact on the Company’s results of operations, financialposition or liquidity.

 

In March 2003, the SECissued Regulation G, “Conditions for Use of Non-GAAP Financial Measures.” Asdefined in Regulation G, a non-GAAP financial measure is a numerical measure ofa company’s historical or future performance, financial position or cash flowthat excludes or includes amounts or adjustments that are included or excludedin the most directly comparable measure calculated in accordance withaccounting principles generally accepted in the United States of America(GAAP). Companies that present non-GAAP financial measures must disclose anumerical reconciliation to the most directly comparable measurement usingGAAP. Management does not believe it has used any non-GAAP financial measure inthis report.

 

USE OF ESTIMATES IN THEPREPARATION OF FINANCIAL STATEMENTS

The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities as of January 3, 2004 andDecember 28, 2002 and the reported amounts of revenues and expenses during eachof the three years in the period ended January 3, 2004. Actual results coulddiffer from those estimates.

 

CASH AND CASH EQUIVALENTS

The Company considers allhighly liquid debt instruments purchased with a maturity of three months orless to be cash equivalents.

 

INVENTORIES

Inventories are valued atthe lower of cost or market. Cost is determined using the last-in, first-out(LIFO) method for approximately 76% of total inventories at January 3, 2004(77% at December 28, 2002). The cost of all other inventory is determined bythe first-in, first-out (FIFO) method.

 

PROPERTY, PLANT ANDEQUIPMENT

Property, plant andequipment are carried at cost. Depreciation is provided over the estimated usefullives of the related assets using the straight-line method as follows:

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

 

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Depletion of rock and sand deposits and amortizationof deferred development costs are computed by the units-of-production methodbased upon estimated recoverable quantities of rock and sand. The estimatedrecoverable quantities are periodically reassessed.

 

The cost of property sold or retired and the relatedaccumulated depreciation, depletion and amortization are removed from theaccounts 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 estimated useful lives.

 

OTHER ASSETS

Goodwill, all of which relates to the constructionmaterials segment, is not amortized but rather assessed annually forimpairment.

 

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

 
|                         |   | **January 3, 2004**         |                          | **December 28, 2002** |   |
|------------------------------|--------|-----------------------------|-------------------------------|-----------------------|--------|
|                         |   | **Gross  carrying  amount** |                          |                  |   | **Gross  carrying  amount** |   |   |   |
|                         |   |                        | **Accumulated  amortization** |                  |   | **Accumulated  amortization** |   |
|                         |   |                        |                          |                  |   |
| Amortized intangible assets: |   |                        |                          |                  |   |   |   |   |   |
| Pueblo non-compete           |   | $                           | 500                           |                  | $      | 359 |   | $ | 500 |   | $ | 309 |   |
| RMRM non-compete             |   | 1,250                       |                          | 375                   |   | 1,250 |   | 250 |   |
| MDHI non-compete             |   | 250                         |                          | 88                    |   | 250 |   | 38 |   |
|                         |   | $                           | 2,000                         |                  | $      | 822 |   | $ | 2,000 |   | $ | 597 |   |

 

Amortization of non-compete agreements is computed ona straight-line basis over their agreement periods of 5 and 10 years.Amortization expense for these intangible non-compete agreements was $225,000,$213,000 and $175,000 for 2003, 2002 and 2001, respectively. The estimatedamortization expense for the five subsequent fiscal years is as follows: 2004 —$225,000; 2005 — $225,000; 2006 — $216,000; 2007 — $137,000 and 2008 —$125,000.

 

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-INSURED LOSSES

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 SFAS No. 5,“Accounting for Contingencies,” and represent management’s best estimate offuture 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 are shippedto 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

 

22

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debt and warranty expense as well as an amountanticipated to be granted to customers under cooperative advertising programsbased upon program terms and historical experience. The changes in theaggregated product warranty liability for the year 2003, all of which isassociated with the heating and air conditioning segment, were as follows(amounts in thousands):

 
| Beginning balance             |   | $    | 260    |   |
|-------------------------------|--------|------|--------|--------|
| Warranty related expenditures |   | (381 | )      |
| Warranty expense accrued      |   | 276  |   |
| Ending balance                |   | $    | 155    |   |

 

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 Credit Risk

Financial instruments, which potentially subject theCompany to concentrations of credit risk, consist principally of tradereceivables and temporary cash investments. The Company invests its excess cashin commercial paper of companies with strong credit ratings and governmentsecurities. The Company has not experienced any losses on these investments.

 

The Company performs ongoing credit evaluations of itscustomers 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-lived Assets

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.

 

Fiscal Year End

The Company’s fiscal year end is the Saturday nearestDecember 31. Fiscal 2003 consists of 53 weeks. Fiscal 2002 and 2001 eachconsist of 52 weeks.

 

2. Inventories

 

Inventories consisted of the following (amounts inthousands):

 
|                       |   | **January 3, 2004** |   | **December 28, 2002** |   |
|----------------------------|--------|---------------------|--------|-----------------------|--------|
| Finished goods             |   | $                   | 7,163  |                  | $      | 6,855 |   |
| Work in process            |   | 1,486               |   | 1,523                 |   |
| Raw materials and supplies |   | 7,532               |   | 6,214                 |   |
|                       |   | $                   | 16,181 |                  | $      | 14,592 |   |

 

Ifinventories valued on the LIFO basis were valued at current costs, inventorieswould be higher as follows: 2003 — $2,126,000, 2002 — $2,052,000, and 2001 —$1,842,000.

 

Reductions in inventory quantities during 2002 at twolocations resulted in liquidation of LIFO inventory layers carried at coststhat were lower than the costs of current purchases. The effect was immaterialin both years.

 

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3. LONG-TERM DEBT

 

Long-term debt consisted of the following (amounts inthousands):

 
|                 |   | **January 3, 2004** |   | **December 28, 2002** |   |
|----------------------|--------|---------------------|--------|-----------------------|--------|
| Unsecured term loan  |   | $                   | 10,750 |                  | $      | 13,000 |   |
| Capital leases       |   | 220                 |   | 520                   |   |
|                 |   | 10,970              |   | 13,520                |   |
| Less current portion |   | 1,970               |   | 3,300                 |   |
|                 |   | $                   | 9,000  |                  | $      | 10,220 |   |

 

The Company signed a new Revolving Credit and TermLoan Agreement (the Credit Agreement”) with two banks in September 2003. Theunsecured term loan is payable to two banks in escalating quarterlyinstallments with final payment of all then unpaid principal on June 30, 2008.The loan, at the Company’s option, bears interest at either prime or anadjusted LIBOR rate. The Credit Agreement requires the Company to maintaincertain levels of consolidated tangible net worth, to attain certain levels ofcash flow (as defined) on a rolling four-quarter basis, and to maintain certainratios including consolidated debt to cash flow (as defined). Additionalborrowings, acquisition of stock of other companies, purchase of treasuryshares and payment of cash dividends are either limited or require priorapproval by the lenders.

 

The Company is exposed to market risks related tocommodity prices and interest rates. To manage interest rate risk, the Companyhas, from time to time, entered into interest rate swaps as cash flow hedges.These swaps are authorized by the Company’s policies and procedures. TheCompany does not use swaps or hedging instruments for trading purposes, and isnot a party to any transaction involving leveraged derivatives. EffectiveDecember 17, 2001, the Company entered into an interest rate swap agreement(Agreement) in order to fix the floating interest rate characteristic of mostof the Company’s term loan borrowings. The Company’s current interest rate onthe term loan giving effect to the Agreement is 5.88%. Such rate is subject toadjustment depending upon the Company’s performance. Cash payments or receiptsassociated with this agreement are reflected in interest expense. During 2003 and2002, the fixed rate under the Agreement exceeded the floating rate on the termloan. The effect on operations was to reduce net income by $257,000 and$239,000 for 2003 and 2002, respectively. The fair value of the Agreement isrecorded on the balance sheet with subsequent changes recorded as a separatecomponent of shareholders’ equity. At January 3, 2004, the amount subject tothis Agreement is $10,500,000 which amount decreases by $1,500,000 eachSeptember and March, terminating on December 18, 2006.

 

The capital leases are payable in monthly installmentsover varying periods, the latest of which ends in April 2004. The leases bearinterest at various rates based upon the prevailing interest rates at theinception of the respective leases.

 

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

 
| 2004   |   | $     | 1,970  |   |
|--------|--------|-------|--------|--------|
| 2005   |   | 2,000 |   |
| 2006   |   | 2,500 |   |
| 2007   |   | 3,000 |   |
| 2008   |   | 1,500 |   |
|   |   | $     | 10,970 |   |

 

During 2003 and 2002, the Company had an unsecuredrevolving line of credit of $10,000,000. The line is used for short-term cashneeds and standby letters of credit. Interest was charged at

 

24

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prime or adjusted LIBOR rates on cash borrowingsduring both years. The weighted average interest rate for all debt was 5.6% forfiscal 2003 and 5.4% for fiscal 2002. There was no balance outstanding againstthe line as of either January 3, 2004 or December 28, 2002.

 

At January 3, 2004, the Company had letters of creditoutstanding totaling approximately $1,990,000 that collateralize theself-insured losses.

 

4. COMMITMENTS AND CONTINGENCIES

 

The Company is involved in litigation matters relatedto its continuing business, principally product liability matters related tothe gas-fired heating products. In the Company’s opinion, none of theseproceedings, when concluded, will have a material adverse effect on theCompany’s results of operations or financial position as the Company hasestablished adequate reserves for known occurrences.

 

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 January 3, 2004, there remained 227,600shares available for future issuance under the Plan (excluding the 73,400shares associated with options outstanding).

 

During 2001, options for 6,000 shares were exercised.No options were exercised during either 2003 or 2002. At January 3, 2004, thereremain 73,400 options (all fully vested with an exercise price of $6.56) whichwill expire on September 25, 2005.

 

The Company applies Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees,” and related interpretationsin accounting for its Plan. Accordingly, no compensation expense was recognizedfor its stock-based compensation Plan.

 

Four hundred thousand shares of preferred stock ($.50par 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-ended2003, 2002 and 2001 (dollars in thousands except per-share data).

 
|                       |   |            |   | **Weighted  average  shares** |                    |   |   |
|----------------------------|--------|-----------------|--------|-------------------------------|-------------------------|--------|--------|
|                       |   | **Net  Income** |   |                          | **Per-share  earnings** |   |
|                       |   |            |   |                          |
| 2003                       |   |            |   |                          |                    |   |   |
| Basic EPS                  |   | $               | 2,349  |                          | 1,754                   |   | $      | 1.34 |   |
| Effect of dilutive options |   | —          |   | 37                            |                    |   |   |
| Diluted EPS                |   | $               | 2,349  |                          | 1,791                   |   | $      | 1.31 |   |
|                       |   |            |   |                          |                    |   |   |
| 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 |   |

 

25

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7. Rental Expense, Leases and Commitments

 

The Company leases certain of its facilities andequipment and is required to pay the related taxes, insurance and certain otherexpenses. Rental expense was $2,922,000, $3,737,000 and $3,282,000 for 2003,2002 and 2001, respectively.

 

Future minimum rental commitments under non-cancelableoperating leases for 2004 and thereafter are as follows: 2004 — $1,966,000;2005 — $1,541,000; 2006 — $1,401,000; 2007 — $1,377,000; 2008 — $1,268,000 andthereafter — $21,509,000. Included in these amounts is $399,000 per year andapproximately $19,000,000 in the “thereafter” amount related to an aggregateslease in conjunction with the Pueblo, Colorado operation. Also included inthese amounts is $235,000 per year and approximately $647,000 in the“thereafter” amount related to a ground lease upon which the Company owns abuilding leased to a third party for approximately $344,000 per year. Theground lease runs through October 1, 2016 and contains a renewal clause. Thebuilding lease runs through January 31, 2013.

 

8. Retirement Plans

As discussed in Note 1, the Company maintainsretirement benefit plans for eligible employees. Total plan expenses charged tooperations were $1,644,000, $1,523,000 and $2,464,000 in 2003, 2002 and 2001,respectively.

 

9. Income Taxes

The provision (benefit) for income taxes is summarizedas follows (amounts in thousands):

 
|     |     | **2003** |   | **2002** |   | **2001** |   |
|----------|----------|----------|--------|----------|--------|----------|--------|
| Federal: | Current  |     | $      | 959      |   | $        | 1,201  |   | $ | 2,457 |   |
|     | Deferred |     | 56     |     | 541    |     | (144   | ) |
| State:   | Current  |     | 58     |     | 126    |     | 187    |   |
|     | Deferred |     | 27     |     | (118   | )        | 150    |   |
|     |     |     | $      | 1,100    |   | $        | 1,750  |   | $ | 2,650 |   |

 

 

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

 
|                                       |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Statutory tax rate                         |   | 34.0     | %      | 34.0     | %      | 34.0     | %      |
| Percentage depletion                       |   | (2.7     | )      | (1.9     | )      | (1.4     | )      |
| State income taxes, net of federal benefit |   | 1.9      |   | 2.2      |   | 1.4      |   |
| Non-deductible expenses                    |   | .7       |   | .4       |   | .7       |   |
| Benefit of state tax credits               |   | (5.3     | )      | (1.9     | )      | (5.0     | )      |
| Other                                      |   | .3       |   | 2.0      |   | (.5      | )      |
|                                       |   | 31.9     | %      | 34.8     | %      | 29.2     | %      |

 

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

 
|                             |   | **2003** |   | **2002** |   |
|----------------------------------|--------|----------|--------|----------|--------|
| Reserves for self-insured losses |   | $        | 763    |     | $      | 877 |   |
| Accrued reclamation              |   | 645      |   | 608      |   |
| Deferred compensation            |   | 447      |   | 389      |   |
| Asset valuation reserves         |   | 230      |   | 242      |   |
| Future state tax credits         |   | 502      |   | 210      |   |
| Other                            |   | 191      |   | 236      |   |
| Total deferred tax assets        |   | 2,778    |   | 2,562    |   |
|                                  |        |          |        |          |        |  |  |

 

26

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|                           |   | **2003** |   | **2002** |   |
|--------------------------------|--------|----------|--------|----------|--------|
| Depreciation                   |   | 3,072    |   | 2,944    |   |
| Deferred development           |   | 612      |   | 671      |   |
| Other                          |   | 510      |   | 279      |   |
| Total deferred tax liabilities |   | 4,194    |   | 3,894    |   |
|                           |   |     |   |     |   |
| Net deferred tax liability     |   | $        | (1,416 | )        | $      | (1,332 | ) |
|                                |        |          |        |          |        |  |  |

 

The net current deferredtax assets are $1,803,000 and $1,705,000 at year-end 2003 and 2002,respectively, and are included with “Prepaid expenses” on the ConsolidatedBalance Sheets.

 

10. UNAUDITEDQUARTERLY FINANCIAL DATA

The following table provides summarized unauditedfiscal quarterly financial data for 2003 and 2002 (amounts in thousands, exceptper share amounts):

 
|                                     |   | **First  quarter** |   | **Second  quarter** |   | **Third  quarter** |   | **Fourth  quarter** |   |
|------------------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
| 2003                                     |   |               |   |                |   |               |   |                |   |
| Sales                                    |   | $                  | 23,681 |                | $      | 34,620             |   | $                   | 30,139 |   | $ | 31,725 |   |
| Gross profit                             |   | 1,920              |   | 6,512               |   | 5,414              |   | 7,250               |   |
| Depreciation, depletion and amortization |   | 1,532              |   | 1,595               |   | 1,517              |   | 1,418               |   |
| Net (loss) income                        |   | (1,396             | )      | 1,011               |   | 707                |   | 2,027               |   |
| Basic (loss) income per share            |   | (.78               | )      | .57                 |   | .41                |   | 1.17                |   |
| Diluted (loss) income per share          |   | (.78               | )      | .56                 |   | .40                |   | 1.15                |   |
|                                          |        |                    |        |                     |        |                    |        |                     |        |  |  |  |  |

 
|                                     |   | **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                 |       |
|                                          |        |                    |        |                     |            |                    |            |                     |            |  |  |  |  |

 

Earnings per share are computed independently for eachof the quarters presented. Therefore, the sum of the quarterly earnings per sharemay not equal the total for the year.

 

11. INDUSTRY SEGMENT INFORMATION

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.

 

27

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The Company evaluates the performance of its segmentsand allocates resources to them based on operating income and return oninvestment. Other factors are also considered. Operating income is determinedby deducting operating expenses from all revenues. In computing operatingincome, none of the following has been added or deducted: unallocated corporateexpenses, interest, income or loss from unconsolidated investees, other incomeor loss or income taxes.

 

The following table presents information aboutreported segments for the fiscal years 2003, 2002 and 2001 along with the itemsnecessary to reconcile the segment information to the totals reported in thefinancial statements (amounts in thousands).

 
|                                     |   | **Heating and  air conditioning** |   | **Construction  materials (a)** |   | **All  other (b)** |   | **Unallocated  corporate (c)** |   | **Total** |   |
|------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|--------------------|--------|--------------------------------|--------|-----------|--------|
| 2003                                     |   |                              |   |                            |   |               |   |                           |   |      |   |
| Revenues from external customers         |   | $                                 | 48,342 |                            | $      | 71,493             |   | $                              | 327    |      | $      | 3 |   | $ | 120,165 |   |
| Depreciation, depletion and amortization |   | 1,147                             |   | 4,846                           |   | —             |   | 69                             |   | 6,062     |   |
| Segment operating income (loss)          |   | 4,988                             |   | 1,493                           |   | 17                 |   | (2,891                         | )      | 3,607     |   |
| Segment assets                           |   | 27,829                            |   | 48,354                          |   | 157                |   | 5,486                          |   | 81,826    |   |
| Expenditures for segment assets          |   | 352                               |   | 2,520                           |   | —             |   | 8                              |   | 2,880     |   |
|                                     |   |                              |   |                            |   |               |   |                           |   |      |   |
| 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     |   |
|                                          |        |                                   |        |                                 |        |                    |        |                                |        |           |        |  |  |  |  |  |  |

 

----

(a)          The Construction Materials segmentinformation for 2002 includes MDHI reflecting the purchase which was effectiveApril 1, 2002 and 2001 includes RMRM reflecting the purchase which waseffective December 31, 2000.

(b)         All other represents segments below thequantitative thresholds. The segments include a small real estate operation andthe holding costs for certain mining interests that remain from the period theCompany maintained significant interests in mining operations.

(c)          Corporate assets consist primarily of cashand cash equivalents.

 

All long-lived assets are in the United States. During2003, no customer in either segment accounted for 10% or more of total sales ofthe Company.

 

28

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REPORTOF INDEPENDENT AUDITORS

To the Board ofDirectors and Shareholders of Continental Materials Corporation

 

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of operations and comprehensiveincome, of shareholders’ equity and of cash flows present fairly, in allmaterial respects, the financial position of Continental Materials Corporationand its subsidiaries at January 3, 2004 and December 28, 2002, and the resultsof their operations and their cash flows for each of the three years in theperiod ended January 3, 2004, in conformity with accounting principlesgenerally accepted in the United States of America. These financial statementsare the responsibility of the Company’s management; our responsibility is toexpress an opinion on these financial statements based on our audits. Weconducted our audits of these financial statements in accordance with auditingstandards generally accepted in the United States of America, which requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

 
| PricewaterhouseCoopers  LLP |
|-----------------------------|
|                        |
| Chicago,  Illinois          |
| March  12, 2004             |

 

29

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Item 9.             **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

 

There have been no changes ofaccountants and/or disagreements on any matter of accounting principle orfinancial statement disclosure during fiscal year 2002 or 2003, nor during thesubsequent interim period that required a filing under Item 9.

 

Item 9A. **CONTROLS AND PROCEDURES**

 

Evaluuation of DisclosureControls and Procedures

 

James G. Gidwitz, our Chief Executive Officer, andJoseph J. Sum, our Chief Financial Officer, have performed an evaluation of theCompany’s disclosure controls and procedures as that term is defined in Rule13a-14 (c) of the Securities Exchange Act of 1934, as amended (“Exchange Act”),as of January 3, 2004 and each has concluded that such disclosure controls andprocedures are effective to ensure that information required to be disclosed inour periodic reports under the Exchange Act is recorded, processed, summarizedand reported, within the time periods specified by the Securities and ExchangeCommission’s rules and regulations.

 

Changes in Internal Controls

 

No changes in the Company’s internal controls overfinancial reporting occurred during the quarter ended January 3, 2004 that havematerially affected, or are reasonably likely to materially affect, theCompany’s internal controls over financial reporting.

 

PART III

 

Items 10, 11, 12, 13 and 14 ofPart 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 endedJanuary 3, 2004, its definitive 2004 proxy statement.  The information required by Items 10, 11, 12, 13 and 14 of PartIII will be included in that proxy statement and such information is herebyincorporated by reference.

 

PART IV

 

Item 15.  **EXHIBITS, FINANCIAL STATEMENTSCHEDULES 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 Auditors                               |
|--------|---------------------------------------------------------------|
|   |                                                          |
|   | Schedule II  Valuation and Qualifying Accounts & Reserves |
|   | For the  Fiscal Years 2003, 2002 and 2001                     |

 

All other schedules are omittedbecause they are not applicable or the information is shown in the financialstatements or notes thereto.

 

30

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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 dated as of September 5, 2003, by and  among the Company and LaSalle Bank National Association and Fifth Third Bank  filed as 10 to Form 10-Q for the quarterly period ending September 27, 2003,  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 10g  |   | 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 21   |   | Subsidiaries  of Registrant (filed herewith).                                                                                                                                                                                                                                          |
|         |   |                                                                                                                                                                                                                                                                                   |
| Exhibit 23   |   | Consent of  Independent Accountants (filed herewith).                                                                                                                                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                   |
| Exhibit 31.1 |   | Rule  15d-14(a) Certification of Chief Executive Officer (filed herewith).                                                                                                                                                                                                             |
|         |   |                                                                                                                                                                                                                                                                                   |
| Exhibit 31.2 |   | Rule  15d-14(a) Certification of Chief Financial Officer (filed herewith).                                                                                                                                                                                                             |
|         |   |                                                                                                                                                                                                                                                                                   |
| Exhibit 32.1 |   | Section 1350  Certification of Chief Executive Officer (filed herewith).                                                                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                   |
| Exhibit 32.2 |   | Section 1350  Certification of Chief Financial Officer (filed herewith).                                                                                                                                                                                                               |

 

----

* - Compensatory plan orarrangement

 

31

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(b)                                 Reports on Form 8-K:

 

Registrant filed one report on Form 8-Kduring the quarter ended January 3, 2004. The report, dated November 6, 2003,related to the press release disclosing the results of the registrant’soperations for the third quarter of 2003 issued November 5, 2003. In addition,one report on Form 8-K was filed after January 3, 2004 but prior to the date ofthis Form 10-K filing. The report, dated March 17, 2004, related to the pressrelease disclosing the results of the registrant’s operations for the 2003fourth quarter and full year issued March 15, 2004.

 

SIGNATURES

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                      |  CONTINENTAL  MATERIALS CORPORATION |                     |
|---------------------------|------------------------------------------|--------------------------|
|                      |                                     | Registrant               |
|                      |                                     |
|                      | By:                                      |  /S/  Joseph J. Sum |   |
|                      | Joseph J.  Sum, Vice President, Finance  |
| Date:  April 1, 2004 |                                     |
|                           |                                          |                          |  |  |  |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

 
| **SIGNATURE**                         |   | **CAPACITY(IES)**        |   | **DATE**      |
|---------------------------------------|--------|--------------------------|--------|---------------|
|                                  |   |                     |   |          |
|   /S/  James G. Gidwitz     |   | Chief Executive Officer  |   |          |
| James G. Gidwitz                      |   | And a Director           |   | April 1, 2004 |
|                                  |   |                     |   |          |
|   /S/  Joseph J. Sum        |   | Vice President           |   |          |
| Joseph J. Sum                         |   | And a Director           |   | April 1, 2004 |
|                                  |   |                     |   |          |
|   /S/  Mark S. Nichter      |   |                     |   |          |
| Mark S. Nichter                       |   | Secretary and Controller |   | April 1, 2004 |
|                                  |   |                     |   |          |
|   /S/  Thomas H. Carmody    |   |                     |   |          |
| Thomas H. Carmody                     |   | Director                 |   | April 1, 2004 |
|                                  |   |                     |   |          |
|   /S/  Betsy R. Gidwitz     |   |                     |   |          |
| Betsy R. Gidwitz                      |   | Director                 |   | April 1, 2004 |
|                                  |   |                     |   |          |
|   /S/  Ralph W. Gidwitz     |   |                     |   |          |
| Ralph W. Gidwitz                      |   | Director                 |   | April 1, 2004 |
|                                  |   |                     |   |          |
|   /S/  Ronald J. Gidwitz    |   |                     |   |          |
| Ronald J. Gidwitz                     |   | Director                 |   | April 1, 2004 |
|                                  |   |                     |   |          |
|   /S/  Theodore R. Tetzlaff |   |                     |   |          |
| Theodore R. Tetzlaff                  |   | Director                 |   | April 1, 2004 |
|                                  |   |                     |   |          |
|   /S/  Peter E. Thieriot    |   |                     |   |          |
| Peter E. Thieriot                     |   | Director                 |   | April 1, 2004 |
|                                  |   |                     |   |          |
|   /S/  Darrell M. Trent     |   |                     |   |          |
| Darrell M. Trent                      |   | Director                 |   | April 1, 2004 |

 

32

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**REPORT OF INDEPENDENTAUDITORS ON**

**FINANCIAL STATEMENTSCHEDULE**

 

To the Board of Directors andShareholders of Continental Materials Corporation

 

Our audits of the consolidated financial statementsreferred to in our report dated March 12, 2004 appearing in the 2003 AnnualReport to Shareholders of Continental Materials Corporation also included anaudit of the financial statement schedule listed in Item 15(a)(2) of this Form10-K. In our opinion, this financial statement schedule presents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements.

 

 
| PricewaterhouseCoopers  LLP |
|-----------------------------|
|                        |
| Chicago,  Illinois          |
| March 12,  2004             |

 

----

 

CONTINENTAL MATERIALS CORPORATION

 

**SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (d)**

 

for the fiscal years 2003, 2002 and 2001

 

 
| **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 2003**                       |   |                                 |    |                                          |   |                         |   |                           |    |
| Allowance for doubtful accounts     |   | $                                    | 432,000 |                                          | $      | 112,000                      |   | $                              | 108,000 | (a) | $ | 436,000 |   |
| Inventory valuation reserve         |   | $                                    | 205,000 |                                          | $      | 11,000                       |   | $                              | 45,000  | (b) | $ | 171,000 |   |
|                                |   |                                 |    |                                          |   |                         |   |                           |    |
| **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 |   |

 

----

Notes:

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

 

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