SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending September 29, 2001
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	(I.R.S. Employer Identification No.)
incorporation or organization)

225 West Wacker Drive, Suite 1800, Chicago, Illinois 60606

(Address of principal executive office)

(Zip Code)

(312) 541-7200

(Registrant's telephone number, including area code)

(Former name, former address and former

year, if changed since last report)

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

Yes  ý     No  o

Number of common shares outstanding at October 30, 2001 1,805,913

PART I – FINANCIAL INFORMATION

Item 1.   Financial Statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 29, 2001 and DECEMBER 30, 2000

(Unaudited)

(000’s omitted except share data)

	SEPTEMBER 29,			DECEMBER 30,
ASSETS	2001			2000
Current assets:
Cash and cash equivalents	$	4,290		$	6,216
Receivables, net	17,795			16,723
Inventories:
Finished goods	7,058			6,595
Work in process	2,022			1,720
Raw materials and supplies	7,295			7,699
Prepaid expenses	2,976			2,572
Total current assets	41,436			41,525
Property, plant and equipment, net	32,334			24,727
Goodwill	6,129			—
Other assets	2,949			1,998
	$	82,848		$	68,250
LIABILITIES
Current liabilities:
Current portion of long-term debt	$	3,563		$	2,158
Accounts payable and accrued expenses	15,042			14,810
Income taxes	21			312
Total current liabilities	18,626			17,280
Long-term debt	15,209			5,147
Deferred income taxes	2,074			1,598
Other long-term liabilities	2,665			2,412
SHAREHOLDERS’ EQUITY
Common shares, $0.25 par value; authorized 3,000,000; issued 2,574,264	643			643
Capital in excess of par value	1,950			1,985
Retained earnings	51,160			48,138
Treasury shares, 768,167 and 741,040, at cost	(9,479		)	(8,953		)
	44,274			41,813
	$	82,848		$	68,250

See accompanying notes

CONTINENTAL MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000

(Unaudited)

(000’s omitted except per share amounts)

	SEPTEMBER 29, 2001			SEPTEMBER 30, 2000
Sales	$	32,964		$	29,186
Freight costs	1,614			1,733
Net sales	31,350			27,453
Costs and expenses:
Cost of sales (exclusive of depreciation, depletion and amortization)	22,739			20,077
Depreciation, depletion and amortization	1,589			1,605
Selling and administrative	4,166			4,138
	28,494			25,820
Operating income	2,856			1,633
Interest	(257		)	(179		)
Other income, net	426			36
Income before income taxes	3,025			1,490
Provision for income taxes	1,089			551
Net income	1,936			939
Retained earnings, beginning of period	49,224			44,226
Retained earnings, end of period	$	51,160		$	45,165
Basic earnings per share	$	1.07		$	.50
Average shares outstanding	1,807			1,866
Diluted earnings per share	$	1.05		$	.49
Average shares outstanding	1,842			1,904

See accompanying notes

CONTINENTAL MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE NINE MONTHS SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000

(Unaudited)

(000’s omitted except per share amounts)

	SEPTEMBER 29,			SEPTEMBER 30,
	2001			2000
Sales	$	95,810		$	84,768
Freight costs	4,424			4,180
Net sales	91,386			80,588
Costs and expenses:
Cost of sales (exclusive of depreciation, depletion and amortization)	68,662			60,088
Depreciation, depletion and amortization	4,871			4,328
Selling and administrative	12,927			12,334
	84,460			76,750
Operating income	4,926			3,838
Interest	(832		)	(517		)
Other income, net	628			428
Income before income taxes	4,722			3,749
Provision for income taxes	1,700			1,387
Net income	3,022			2,362
Retained earnings, beginning of period	48,138			42,803
Retained earnings, end of period	$	51,160		$	45,165
Basic earnings per share	$	1.67		$	1.26
Average shares outstanding	1,814			1,876
Diluted earnings per share	$	1.64		$	1.24
Average shares outstanding	1,847			1,913

See accompanying notes

CONSOLIDATED MATERIALS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000

(Unaudited)

(000’s omitted)

	SEPTEMBER 29, 2001			SEPTEMBER 30, 2000
Net cash provided by (used in) operating activities	$	7,284		$	3,729
Investing activities:
Purchase of Rocky Mountain Ready Mix Concrete, Inc. net of cash received	(11,262		)	—
Capital expenditures	(7,549		)	(2,441		)
Proceeds from sale of property and equipment	55			76
Net cash used in investing activities	(18,756		)	(2,365		)
Financing activities:
Repayment of revolving credit facility	—			(1,600		)
Long-term borrowings	12,000			4,000
Repayment of long term debt	(1,893		)	(107		)
Proceeds from exercise of stock options	75			203
Payment to acquire treasury stock	(636		)	(2,601		)
Net cash provided by (used in) financing activities	9,546			(105		)
Net decrease (increase) in cash and cash equivalents	(1,926		)	1,259
Cash and cash equivalents:
Beginning of period	6,216			347
End of period	$	4,290		$	1,606
Supplemental disclosures of cash flow items:
Cash paid during the nine months for:
Interest	$	791		$	534
Income taxes	1,893			1,912

See accompanying notes

CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 29, 2001

(Unaudited)

1.     The unaudited interim consolidated financial statements included herein are prepared pursuant to the rules and regulations for reporting on Form 10-Q.  Accordingly, certain information and footnote disclosures normally accompanying the annual financial statements have been omitted.  The interim financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K.  In the opinion of management, the consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods.

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

3.     Operating results for the first nine months of 2001 are not necessarily indicative of performance for the entire year.  Historically, sales of construction materials are higher in the second and third quarters.  Overall, sales of heating and air conditioning products have not shown strong seasonal fluctuations in recent years although product mix has historically yielded higher gross profit margins in the fourth quarter.  (See Note 11 of Notes to Consolidated Financial Statements in the Company’s 2000 Annual Report.)

4.     The following is a reconciliation of the calculation of basic and diluted earnings per share (EPS) for the three and nine months ended September 29, 2001 and September 30, 2000.  Amounts in thousands except per-share data.

	Three months ended					Nine months ended
	Income		Shares	Per- share earnings		Income		Shares	Per- share earnings
September 29, 2001
Basic EPS	$	1,936	1,807	$	1.07	$	3,022	1,814	$	1.67
Effect of dilutive options	—		35			—		33
Diluted EPS	$	1,936	1,842	$	1.05	$	3,022	1,847	$	1.64
September 30, 2000
Basic EPS	$	939	1,866	$	.50	$	2,362	1,876	$	1.26
Effect of dilutive options	—		38			—		37
Diluted EPS	$	939	1,904	$	.49	$	2,362	1,913	$	1.24

5.     The following table presents information about reported segments for the nine month and three month periods ended September 29, 2001 and September 30, 2000 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands).

	Heating and Air		Construction					Unallocated
	Conditioning		Materials		All Other			Corporate			Total
2001
Nine Months
Revenues from external customers	$	35,679	$	60,021	$	109		$	1		$	95,810
Operating income	1,745		5,577		(15		)	(2,381		)	4,926
Assets	27,549		49,079		74			6,146			82,848
Three Months
Revenues from external customers	10,551		22,376		37			0			32,964
Operating income	789		2,846		(5		)	(774		)	2,856
2000
Nine Months
Revenues from external customers	$	32,919	$	51,736	$	109		$	4		$	84,768
Operating income	1,380		4,731		(25		)	(2,248		)	3,838
Assets	29,387		33,132		43			4,472			67,034
Three Months
Revenues from external customers	10,698		18,451		37			—			29,186
Operating income	825		1,491		—			(683		)	1,633

There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the last annual report.

6.     On December 31, 2000, the Company acquired all of the stock of Rocky Mountain Ready Mix Concrete, Inc. (“RMRM”), a ready-mix concrete producer in the metropolitan Denver, Colorado area for a cash purchase price of $11,262,000 net of $1,320,000 of cash received and $2,541,000 of liabilities and debt.  The acquisition has been accounted for under the purchase method and, accordingly, the operating results of RMRM have been included in the consolidated results since the date of acquisition.

The funds used to acquire RMRM were provided by a renegotiated unsecured term loan with the Company’s two existing banks.  Goodwill of $6,245,000 and the cost of a non-competition agreement of $1,250,000 (included in other assets) related to the acquisition are being amortized over 40 and 10 years, respectively.

The purchased company is involved in the production of ready-mix concrete from three locations in the metropolitan Denver, Colorado area.  Sales are made primarily within a 60-mile radius of Denver, Colorado.

The table below summarizes the unaudited pro-forma results of operation for the year ended December 30, 2000 assuming the acquisition described had been consummated as of January 1, 2000, with adjustments primarily attributed to interest expense relating to the renegotiated debt, depreciation expense relating to the write-up to fair value of the assets acquired and amortization of the related goodwill and non-competition agreement.

	2000 Unaudited
Sales	$	129,963
Net income	5,536
Diluted earnings per share	2.91

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

Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operation

Financial Condition (See pages 2, 4 and 5)

Operations provided $7,284,000 in cash flow in the first nine months of 2001 compared to $3,729,000 in the first nine months of 2000.  The improvement is generally due to the significant reduction of accounts payable and accruals during the first nine months of 2000.  Accounts payable and accruals did not experience a similar reduction in the current year.  The increased net earnings also contributed to the improvement.

Capital expenditures in the first nine months of 2001 were $7,549,000 compared to $2,441,000 in the first nine months of 2000.  Most of the increased capital spending was in the construction materials segment and included a new sand plant, a batch plant, the purchase of an aggregates property and an aggregate processing facility.  Approximately $2,000,000 of these expenditures is expected to be refinanced with a lease prior to year-end.  In the heating and air conditioning segment, a new office building is under construction in Colton, California.

Long term debt and goodwill increased as a result of the purchase of RMRM.

The Company estimates that its short-term line of credit (of which none was outstanding at September 29, 2001) combined with internally generated cash flow, will be adequate to meet its cash requirements for the remainder of the year.

Operations – Comparison of Quarter Ended September 29, 2001 to Quarter Ended September 30, 2000 (See page 3)

Consolidated sales increased $3,778,000 (13%).  Sales increased $3,925,000 (21%) in the construction materials segment.  The increased sales are due primarily to the acquisition of RMRM at the beginning of 2001.  Sales in the heating and air conditioning segment declined $147,000 (1%).

Consolidated cost of sales (exclusive of depreciation and depletion), as a percentage of sales, remained relatively constant at 69%.  The slight increase in the cost of sales percentage in the construction materials segment was offset by a decline in the heating and air conditioning segment. The construction materials segment experienced higher costs, as the overall gross margins of RMRM are moderately lower than at the Company’s other construction materials operations.  Lower production levels during the third quarter were largely responsible for the decline in the costs of the heating and air conditioning segment.

Depreciation and selling and administrative expenses were relatively constant for the quarter as savings at the Colorado Springs and Pueblo locations offset the addition of RMRM.

Net interest expense was higher as a result of the bank debt incurred to fund the acquisition.  The interest on the additional borrowings was offset to some extent by lower interest rates and earnings on cash investments.

Historically the first quarter is the Company’s weakest quarter as weather generally hinders production in the Company’s Colorado construction materials operations and the selling season for heating equipment ends.  Operating results typically improve in the second and third quarter along with weather conditions in Colorado.  Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment.  Sales of fan coils are generally not subject to seasonal variation.

Other income increased during the current quarter reflecting $341,000 realized on sales of small parcels of land owned by Castle Concrete Company and miscellaneous equipment sales.

Operations - Comparison of Nine Months Ended September 29, 2001 to Quarter Ended September 30, 2000 (See page 4)

Consolidated sales increased $11,042,000 (13%).  Sales in the construction materials segment increased $8,285,000 (16%) for the reason noted above.  Sales in the heating and air conditioning segment increased $2,760,000 (8%).  Evaporative cooler sales improved compared to the depressed conditions encountered in the first three quarters of 2000.  Sales of wall furnaces were higher due to cold weather in the first quarter in the key market areas.  Offsetting these gains were fan coil sales which lagged behind the prior year levels as the result of a slow down in commercial construction.

Cost of sales (exclusive of depreciation and depletion) as a percentage of net sales increased from 70.9% to 71.7% for the reasons noted above.  In addition, the cost of sales in the heating and air conditioning segment increased as the result of higher labor, employee benefit, and energy costs.

Depreciation and selling and administrative expenses were higher in the 2001 period principally due to the aforementioned acquisition of RMRM.

Other income increased for the reasons noted above.

OUTLOOK

In September and October of 2001, sales have slowed at most of the Company’s operations compared to the prior year.  The weakening economy, certain weather conditions and to some extent the aftermath of the September 11 terrorist attacks have

contributed to the lower sales.  The Company expects that earnings in the fourth quarter of 2001 will not reach the level of earnings reported in the fourth quarter of 2000.

NEW ACCOUNTING STANDARDS

The Emerging Issues Task Force (“EITF”) issued EITF No. 00-14, “Accounting for Certain Sales Incentives” which addresses the recognition, measurement and statement of earnings classification for certain sales incentives and will be effective in the first quarter of 2002.  As a result, certain items previously included in cost of sales and in selling and administrative costs on the consolidated statement of operations will be recorded as a reduction of sales.  In April 2001, the EITF reached a consensus on Issue No. 00-25, “Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor’s Products or Services”.  EITF Issue No. 00-25 requires that certain expenses included in cost of sales and in selling and administrative costs be recorded as a reduction of sales and will be effective in the first quarter of 2002.  The Company is currently in the process of quantifying the changes mandated by EITF No. 00-14 and EITF No. 00-25. Upon adoption, prior period amounts will be reclassified to conform to the new requirements.  Neither EITF ruling will have an effect on “Operating income” or “Net income.”

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets”.  Effective January 1, 2002, the Company will no longer be required to amortize goodwill and certain intangible assets as a charge to earnings.  In addition, the Company will be required to review goodwill and other intangible assets for potential impairment.  The Company is currently in the process of quantifying the impact of the new standard.  However, the Company currently anticipates that substantially all amortization of goodwill will be eliminated.

FORWARD-LOOKING STATEMENTS

The foregoing discussion contains forward-looking statements within 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’s management as well as on assumptions made by and information available to the Company at the time such statements were made.  When used in this Report, words such as “estimates,” “anticipates,” “contemplates,” “expects” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of factors including but not limited to: general economic conditions, weather, interest rates, availability of raw materials and their related costs, competitive forces and uncertainties and other effects of the September 11, 2001 terrorist attacks and subsequent events.

PART II –	Other Information
Item 5.	Other Information
	During the quarter ended June 30, 2001, Mr. William G. Shoemaker retired from the Board of Directors creating a vacancy on the Board.  The vacancy is expected to be filled at the December Board of Directors’ meeting.

Item 6.	Exhibits and Reports on Form 8-K
	(b) Registrant filed no reports on Form 8-K during the quarter ended September 29, 2001.

SIGNATURE

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

                                                                                                          CONTINENTAL MATERIALS CORPORATION

Date:	November 6, 2001	By:	/S/ Joseph J. Sum
			Joseph J. Sum, Vice President
			and Chief Financial Officer