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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1998
OR
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
225 West Wacker Drive, Suite 1800 60606
Chicago, Illinois (Zip Code)
(Address of principal executive offices)
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 - $.50 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-
K or any amendment to this Form 10-K. [ ]
The aggregate market value (based on March 20, 1998 closing price) of
voting stock held by non-affiliates of registrant: Approximately $17,897,000.
Number of common shares outstanding at March 20, 1998: 1,076,365.
Incorporation by reference: Portions of registrant's definitive proxy
statement for the 1998 Annual meeting of stockholders to be held on May 29,
1998 into Part III of this Form 10-K. (The definitive proxy statement will
be filed with the Securities and Exchange Commission within 120 days after
the close of the fiscal year covered by this Form 10-K.)
Index to Exhibits: on page 27 hereof.
1
NOTE: References to a "Note" are to the Notes to Consolidated Financial
Statements which are included on pages 16 through 24 of this Annual Report
on Form 10-K.
PART I
Item 1. BUSINESS
There have been no significant changes in the business during the past five
years other than the purchase of substantially all of the assets of Valco,
Inc.'s (Valco) ready-mix concrete and aggregates operation in Pueblo,
Colorado on October 21, 1996. The Company formed a new subsidiary, Transit
Mix of Pueblo, Inc. to hold and operate these acquired assets.
The Company operates primarily in two industry segments, the Heating and
Air Conditioning segment and the Construction Materials segment. The
Heating and Air Conditioning segment is comprised of Phoenix Manufacturing,
Inc. of Phoenix, Arizona and Williams Furnace Co. of Colton, California.
The Construction Materials segment is comprised of Castle Concrete Company
and Transit Mix Concrete Co. both of Colorado Springs, Colorado, and
Transit Mix of Pueblo, Inc. of Pueblo, Colorado.
The Heating and Air Conditioning segment manufactures wall furnaces,
console heaters, evaporative air coolers and fan coil/air handler product
lines. Numerous models with differing heating or cooling capacities as
well as exterior appearances are offered within each line.
The Construction Materials segment is involved in the production and sale
of ready mix concrete, construction aggregates and other building
materials.
In addition to the above operating segments, a General Corporate and Other
classification is utilized covering the general expenses of the corporate
office which provides treasury, insurance and tax services as well as
strategic business planning and general management services.
The Company has a 30% interest in Oracle Ridge Mining Partners (ORMP).
ORMP is a general partnership which owns a copper mine near Tucson,
Arizona. The Company is not the managing partner of ORMP and thus its
operations are accounted for on the equity method with the Company's share
of ORMP's operations presented in the other income and expense section of
the Company's operating statements. See Note 4 on page 19 for further
discussion of the Company's accounting for and valuation of ORMP.
Financial information relating to industry segments appears in Note 13 on
pages 23 and 24 of this Form 10-K.
2
MARKETING, SALES AND SUPPORT
Marketing
The Heating and Air Conditioning segment markets its products throughout
the United States through plumbing, heating and air conditioning wholesale
distributors as well as direct to some major retail home-centers and other
retail outlets. Phoenix and Williams utilize independent manufacturers'
representatives. Both companies also employ a small staff of sales and
sales support personnel. Sales in this segment are predominantly in the
United States and are concentrated in the Western and Southwestern states.
Sales of Williams' furnaces usually increase in the months of September
through January while sales of the fan coil product line are more evenly
distributed throughout the year with some decline in the latter part of the
year. Sales of Phoenix's evaporative coolers usually increase in the
months of February through June. In order to sell wall furnaces and
evaporative coolers during the off season, Williams and Phoenix offer
extended payment terms (dating) to their customers.
The Construction Materials segment markets its products primarily through
its own direct sales representatives and confines its sales to the Front
Range area in southern Colorado. Sales are made to general and sub-
contractors, government entities and individuals. The businesses are
affected by the general economic conditions in the areas serviced (as it
relates to construction) and weather conditions. Revenues usually decline
in the winter months as the pace of construction slows.
During 1997, no customer accounted for 10% or more of the total sales of
the Company.
Customer Service and Support
The companies in the Heating and Air Conditioning segment maintain parts
departments and help lines to assist contractors, distributors and end
users in servicing the companies' products. The Company does not perform
installation services, nor are maintenance or service contracts offered.
In addition, Williams holds training sessions at its plant for
distributors, contractors, utility company employees and other customers.
The companies in this segment do not derive any revenue from after-sales
service and support other than from parts sales. The companies in the
Construction Materials segment routinely take a leadership role in
formulation of the products to meet the specifications of their customers.
BACKLOG
At January 3, 1998, Williams' order backlog was approximately $1,300,000
($900,000 at December 28, 1996) the majority of which represented orders
for fan coils and furnaces.
At January 3, 1998, Phoenix had a backlog of approximately $1,500,000
($2,000,000 at December 28, 1996) representing primarily preseason cooler
orders.
The above backlogs are all related to the heating and air conditioning
segment and are expected to be filled during the first quarter of 1998.
At January 3, 1998, Transit Mix and Castle had a backlog of approximately
$2,200,000 ($2,000,000 at December 28, 1996) primarily relating to
construction contracts awarded and expected to be filled during the first
half of 1998.
Management does not believe that any of the above backlogs represent a
trend but rather are indicative only of the timing of orders received or
contracts awarded.
3
Research and Development/Patents
In general, the companies rely upon, and intend to continue to rely upon,
unpatented proprietary technology and information. However, research and
development activities in the Heating and Air Conditioning segment have
resulted in a patent related to Phoenix' Power Cleaning System for the
evaporative coolers and patent applications on the configuration of the
heat exchanger for Williams' furnaces which has increased efficiency above
that previously offered by the industry. The amounts expended on research
and development are not material and are expensed as incurred. The Company
believes its interests in its patent applications, as well as its
proprietary knowledge, are sufficient for its businesses as currently
conducted.
Manufacturing
The Company conducts its manufacturing operations through a number of
facilities as more completely described in Item 2, Properties, below.
Due to the seasonality of its businesses, Williams and Phoenix build
inventory during their off seasons in order to have adequate wall furnace
and evaporative cooler inventory to sell during the season.
In general, raw materials required by the Company can be obtained from
various sources in the quantities desired. The Construction Materials
companies have historically purchased most of their cement requirements
from a single supplier. These companies experienced some difficulty in
obtaining cement during the latter half of 1997 but were able to purchase
sufficient quantities from non-traditional sources, which will remain
available in the future. The Company has no long-term supply contracts and
does not consider itself dependent on any individual supplier.
In connection with permits to mine properties in Colorado, the Company is
obligated to reclaim the mined areas. In recent years, reclamation costs
have had a more significant effect on the results of operations compared to
prior years. We expect that the current level of reclamation expense will
continue.
Competitive Conditions
Heating and Air Conditioning - Williams is one of five principal companies
producing wall furnaces (excluding units sold to the recreational vehicle
industry). The wall furnace market is only a small component of the
heating industry. Williams' covers its market area from its plant in
Colton, California and a warehouse in Ohio. The sales force consists of
Williams' sales personnel and manufacturers' representatives. The entire
heating industry is dominated by manufacturers (most of which are
substantially larger than the Company) selling diversified lines of heating
and air conditioning units directed primarily toward central heating and
cooling systems.
Williams also manufactures a line of gas fired console heaters.
Distribution is similar to wall furnaces with the principal market areas in
the South and Southeast. There are six other manufacturers, none of whom
is believed to have a dominant share of the market.
Williams is also a producer of fan coils. Fan coil sales are usually
obtained through a competitive bidding process. International
Environmental Corp., a subsidiary of LSB Industries, Inc., a manufacturer
of a diversified line of commercial and industrial products dominates this
market. There are also a number of other companies that produce fan coils.
All of the producers compete on the basis of price and timeliness of
delivery.
4
Phoenix produces evaporative air coolers. This market is dominated by
Adobe Air. The other principal competitor is Champion/Essick. All
producers of evaporative air coolers compete aggressively on the basis of
price, service and product features.
Construction Materials - Transit Mix is one of three companies producing
ready mix concrete in the Colorado Springs area. Transit Mix of Pueblo is
one of two companies producing ready mix concrete in the Pueblo area.
Although Transit Mix and Transit Mix of Pueblo hold a significant share of
the markets served, the other competitors compete aggressively on the basis
of price, service and product features.
Transit Mix is one of five producers of aggregates in the marketing area
served by Transit Mix, Transit Mix of Pueblo and Castle who compete
aggressively on the basis of price, quality of material and service.
Metal doors and door frames, rebar reinforcement and other building
materials sold in the Colorado Springs and Pueblo metropolitan areas are
subject to intense competition. Transit Mix and Transit Mix of Pueblo
compete aggressively with two larger companies from Denver and a number of
small local competitors. However, both companies have a slight competitive
advantage in that many of their customers also purchase concrete, sand and
aggregates from Transit Mix, Transit Mix of Pueblo and Castle whereas our
competitors for these particular product lines do not offer concrete, sand
or aggregates. In addition, Transit Mix of Pueblo has a slight competitive
advantage with respect to the two Denver companies based upon delivery
costs.
Employees
The Company employed 685 people as of January 3, 1998. Employment varies
throughout the year due to the seasonal nature of sales and thus to a
lesser extent, production. A breakdown of the prior three years employment
at year-end by segment was:
1997 1996 1995
Heating and Air Conditioning 367 428 421
Construction Materials 307 309 215
Corporate Office 11 11 13
Total 685 748 649
The factory employees at the Colton, California plant are represented by
the Amalgamated Industrial Workers Union under a contract that expired in
June 1997. Negotiations are ongoing. Certain drivers, laborers and
mechanics at the Colorado Springs and the Pueblo facilities are represented
by the Western Conference of Teamsters under contracts, which expired in
December 1997 and February 1998, respectively. Negotiations on these
contracts are also ongoing.
The Company considers relations with its employees and with its unions to
be good.
Item 2. PROPERTIES
The heating and air conditioning segment operates out of one owned (Colton,
California) and one leased (Phoenix, Arizona) facility. Both manufacturing
facilities utilized by this segment are, in the opinion of management, in
good condition and sufficient for the Company's current needs. Productive
capacity exists at the locations such that the Company could exceed the
highest volumes achieved in prior years or expected in the foreseeable
future and maintain timely delivery.
5
The construction materials segment operates out of three owned facilities
in Colorado Springs, Colorado and two-owned facilities in Pueblo, Colorado.
Additionally, this segment owns six mining properties in five counties in
the vicinity of Colorado Springs and Pueblo, Colorado. In the opinion of
management, these six properties contain permitted and minable reserves
sufficient to service sand, rock and gravel requirements for the
foreseeable future.
The corporate office operates out of leased facilities in Chicago,
Illinois.
Item 3. LEGAL PROCEEDINGS
See Management Discussion and Analysis of Financial Condition and Results
of Operations on pages 8 through 11 and Note 6 on page 20 of this Annual
Report on Form 10-K.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Continental Materials Corporation shares are traded on the American Stock
Exchange under the symbol CUO. Market prices for the past two fiscal years
are:
High Low
1997 Fourth Quarter 28 25 11/16
Third Quarter 24 20 7/8
Second Quarter 22 1/4 19 3/4
First Quarter 23 5/8 19 1/8
1996 Fourth Quarter 21 3/8 16 3/4
Third Quarter 19 13 1/2
Second Quarter 16 14
First Quarter 14 5/8 12
At January 3, 1998, the Company had approximately 3,000 shareholders of
record.
The Company has never paid a dividend. The Company's policy is to reinvest
earnings from operations, and the Company expects to follow this policy for
the foreseeable future.
6
Selected Financial Data
(Amounts in thousands, except per share amounts)
1997 1996 1995 1994 1993
SUMMARY OF OPERATIONS
Net sales from continuing
operations $98,038 $91,414 $75,560 $75,294 $62,495
Earnings from continuing
operations before interest,
taxes, depreciation
and amortization (EBITDA) 9,224 6,703 3,396 5,899 4,218
Net income from continuing
operations 3,110 2,355 681 1,849 1,187
Net (loss) income from
discontinued operation -- -- -- (464) 188
Extraordinary item, net -- -- -- -- (1,335)
Net income $ 3,110 $ 2,355 $ 681 $ 1,385 $ 40
PER SHARE DATA
Basic EPS:
Continuing operations $ 2.83 $ 2.13 $ .60 $ 1.62 $ 1.02
Discontinued operation -- -- -- (.41) .16
Extraordinary item -- -- -- -- (1.15)
Net income $ 2.83 $ 2.13 $ .60 $ 1.21 $ .03
Average shares outstanding
during year 1,100 1,105 1,135 1,140 1,164
Diluted EPS:
Continuing operations $ 2.78 $ 2.11 $ .60 $ 1.62 $ 1.02
Discontinued operation -- -- -- (.41) .16
Extraordinary item -- -- -- -- (1.15)
Net income $ 2.78 $ 2.11 $ .60 $ 1.21 $ .03
Average shares outstanding
during year 1,120 1,114 1,135 1,140 1,164
FINANCIAL CONDITION
Current ratio 2.4:1 2.1:1 2.0:1 2.0:1 2.2:1
Total assets $54,355 $53,550 $47,223 $48,162 $45,424
Long-term debt, including
current portion 8,300 8,000 4,011 4,923 6,819
Shareholders' equity 31,858 29,350 27,281 26,789 25,404
Long-term debt to net worth .26 .27 .15 .18 .27
Book value per share $ 28.96 $ 26.56 $ 24.04 $ 23.50 $ 22.28
CASH FLOWS
Net cash provided by (used in):
Operating activities $ 6,086 $ 6,676 $ 848 $ 7,191 $ 2,727
Investing activities (4,239) (9,174) (3,751) (1,884) 6,628
Financing activities (702) 1,803 1,199 (3,596) (9,914)
Net increase (decrease) in
cash and cash equivalents $ 1,145 $ (695) $(1,704) $ 1,711 $ (559)
7
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(References to a "Note" are to Notes to Consolidated Financial Statements)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $1,524,000 at year-end compared to
$379,000 in the prior year. Operations in 1997 provided $6,086,000 of cash
compared to $6,676,000 in 1996 and the $848,000 generated in 1995. The
decrease in net cash generated by operating activities in 1997 was
primarily due to a decrease in accounts payable. The increase in 1996 from
the 1995 level was mainly due to improved sales volume and the related
increase in accounts payable and accrued expenses.
The Company made payments to settle product liability claims totaling
$1,000,000 and $250,000 in 1996 and 1995, respectively related to Imeco,
Inc., a subsidiary sold in 1993. There are no known product liability
claims remaining related to Imeco for which the company would be liable.
Net cash used in investing activities was $4,239,000 in 1997, $9,174,000 in
1996, and $3,751,000 in 1995. Capital expenditures for 1997, 1996 and
1995, exclusive of the purchase of certain assets of Valco, were
$4,194,000, $3,222,000, and $3,417,000, respectively. The capital
expenditures were principally to support the continuing strong business
demand that has been experienced by the companies in the construction
materials segment. During 1996, the Company acquired substantially all of
the assets of Valco's ready-mix concrete and aggregates operation in
Pueblo, Colorado for a cash purchase price of $5,148,000 net of $163,000 of
accrued liabilities assumed. Concurrent with this purchase, the Company
entered into a long-term operating lease to mine aggregates from properties
in Pueblo owned by Valco. The lease calls for the Company to pay a
production royalty based upon the tons of aggregate mined up to an agreed
upon total tonnage, with a minimum annual royalty payment of $300,000.
Both the production and minimum royalty are subject to annual inflation
adjustments. Transit Mix of Pueblo, Inc. holds and operates the acquired
assets. There were no significant commitments for capital expenditures at
the end of 1997.
Budgeted capital expenditures for 1998 are approximately $4,268,000
(primarily routine replacements and upgrades), $449,000 more than planned
depreciation. The 1998 expenditures will be funded from internal sources,
available borrowing or leasing capacity.
Cash invested in ORMP during 1997, 1996 and 1995 was $107,000, $868,000 and
$883,000, respectively.
During 1997, cash of $702,000 was used in financing activities. The
Company converted $2,000,000 from the revolving credit facility to term
debt to fund certain capital expenditures. Scheduled long-term debt
repayments of $1,700,000 were made during the year and the $400,000 balance
outstanding on the revolving line of credit at the end of 1996, was repaid.
Cash of $602,000 was used to acquire 22,810 shares of treasury stock.
During 1996, financing activities provided cash of $1,803,000. The Company
made scheduled long-term debt repayments of $1,011,000 and reduced the
revolving line of credit by $1,900,000. Cash of $286,000 was used to
acquire 20,700 shares of treasury stock. Additional long-term debt
borrowings of $5,000,000 were utilized to finance the acquisition of the
Pueblo operation. During 1995, financing activities provided cash of
$1,199,000. The net long-term debt repayment of $912,000 offset borrowings
of $2,300,000 against the short-term line of credit. Cash of $189,000 was
used to acquire 15,357 shares of treasury stock.
8
The Company maintains a credit agreement with two banks. The agreement as
amended in October 1996 provides for a term loan of $8,300,000 and a
revolving credit facility of $11,500,000 for funding of seasonal sales
programs at Williams Furnace Co. and Phoenix Manufacturing, Inc. The line
is also used for stand-by letters of credit to insurance carriers in
support of self-insured amounts under the Company's insurance program. All
borrowings under the new agreement are unsecured and bear interest at prime
or an adjusted LIBOR rate.
The Company anticipates the primary source of cash flow in 1998 to be from
its operating subsidiaries. This anticipated cash flow, supplemented by
the line of credit, will be sufficient to cover normal and expected future
cash needs, including servicing debt and planned capital expenditures.
The Company purchases insurance coverage for property loss, workers'
compensation, general, product and automobile liability maintaining certain
levels of retained risk (self-insured portion). Provisions for claims
under the self-insured portion of the policies are recorded in accordance
with the requirements of Statement of Financial Accounting Standards (SFAS)
No. 5, "Accounting for Contingencies." The accrual for workers'
compensation, automobile liability and product liability claims covers
occurrences through January 3, 1998. There were no unasserted claims as of
January 3, 1998 that required a reserve or disclosure in accordance with
SFAS NO. 5.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." In February 1998, the
FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits." The Company has not determined the effect of the
adoption of these pronouncements but does not expect that these
pronouncements will have a material impact on future earnings.
During 1997, the Company performed a review of the computer systems
currently utilized by the Company and its subsidiaries. In order to
address various operating problems that were being experienced at each
location, the Company has concluded that a new system or systems are
necessary. All systems being considered are year 2000 compliant. The
Company expects that implementation of the new system will begin during the
second quarter of 1998 and projects completion by mid 1999. It is
anticipated the schedule allows sufficient time for testing. The Company
has not yet determined whether third parties with whom the Company
maintains relationships, such as vendors and suppliers, will have
implemented corrective actions to their systems. If such modifications and
conversions are not completed timely, the year 2000 problem may have a
material impact on the operations of the Company. Management has not yet
assessed the expense and related potential effect of this project on the
Company's future earnings.
9
OPERATIONS
1997 vs. 1996
Consolidated net sales increased $6,624,000 or 7% to $98,038,000. The net
sales of the construction materials segment rose $8,030,000 while the net
sales of the heating and air-conditioning segment declined $1,406,000
compared to the previous year. The increase in the construction materials
segment was due to the October 1996 acquisition of the Pueblo, Colorado
operation. Sales at Williams Furnace Co. rose due to increased fan coil
sales. The sales decline at Phoenix Manufacturing, Inc. was in large part
related to unfavorable weather conditions last summer.
The Company experienced a high level of price competition at all of its
subsidiaries, which the Company expects to continue into 1998. During
1997, inflation was not a significant factor at any of the operations.
Cost of sales (exclusive of depreciation and depletion) remained relatively
constant at 76%. Cost of sales were decreased by approximately $225,000
during 1997 and $140,000 during 1996 due to liquidation of LIFO inventory
layers carried at costs that were lower than the costs of current
purchases.
Depreciation, depletion and amortization increased from $2,614,000 to
$3,493,000 due to the Pueblo asset acquisition and increased capital
expenditures in recent years.
Selling and administrative expenses declined $32,000. As a percentage of
sales, selling and administrative expense declined from 16% to 15%. The
decrease is primarily due to the increase in sales occurring in the
construction materials segment where these expenses are more fixed.
The relatively constant operating income, despite the increase in sales, is
due to the additional depreciation expense as a result of the Pueblo asset
acquisition and a slight change in product mix.
The increase in interest expense of $337,000 is the result of the
additional debt incurred to purchase the Pueblo assets.
The Company recorded an equity loss of $287,000 related to its investment
in Oracle Ridge Mining Partners. Production at the mine was halted in
February 1996. The partners continue their efforts to sell the project.
The Company's 1997 effective income tax rate on income (35.3%) reflects
federal and state statutory rates adjusted for non-deductible and other tax
items. See Note 11.
10
OPERATIONS
1996 vs. 1995
Consolidated net sales increased $15,854,000 (21%). The net sales of the
construction materials segment rose $10,813,000 while the net sales of the
heating and air-conditioning segment improved by $5,041,000. A surge in
the already strong construction market in the Colorado Springs, Colorado
area accounted for most of the $10,813,000 (34%) increase in the
construction materials segment while the addition of operations in Pueblo,
Colorado since October 22, 1996, accounted for $1,399,000 of the increase.
The $5,041,000 (11%) increase in the heating and air-conditioning segment
was the result of new customers as well as dry hot weather in the areas
serviced by Phoenix Manufacturing combined with improved furnace and fan
coil sales at Williams Furnace.
The Company experienced a high level of price competition at all of its
subsidiaries. During 1996, inflation was not a significant factor at any
of the operations.
Cost of sales (exclusive of depreciation, depletion and amortization)
declined from 77% to 75% as a result of increased sales and production
combined with cost savings at all locations.
Depreciation, depletion and amortization increased from $2,278,000 to
$2,614,000 (15%) due to increased capital expenditures in the past two
years and the Transit Mix of Pueblo asset acquisition during 1996.
Selling and administrative expenses increased $1,704,000 (13%) while
declining as a percentage of sales from 17% to 16%. The dollar increase is
attributable mainly to higher sales volume while the percentage decline is
due to the fixed nature of some of the expenses.
The decrease in interest expense of $228,000 reflects lower average
interest rates.
The Company recorded a loss of $1,768,000 related to its investment in
ORMP. This amount is comprised of a loss of $988,000 largely due to the
curtailment of operations and a write down of $780,000 to management's best
estimate of net realizable value, $600,000, as of December 28, 1996. On
January 29, 1997, the ORMP partners, including the Company, signed a Letter
of Intent to sell their interest in ORMP. A definitive agreement to sell
is contingent upon, among other matters, the buyer's satisfactory
completion of due diligence and financing arrangements.
There were no charges against the discontinued operation during 1996
although the last of the known legal matters concerning the operation was
settled during March 1996. See "Financial Condition, Liquidity and Capital
Resources" for further discussion.
Other income for 1995 includes a $300,000 gain on the sale of the Company's
interest in Oracle Ridge surface rights to Union Copper, Inc., the majority
partner of ORMP.
The Company's 1996 effective income tax rate on income from continuing
operations (32.8%) reflects federal and state statutory rates adjusted for
non-deductible and other tax items. The current year's favorable impact
from percentage depletion allowance was less than the prior year's due to
the higher level of taxable income. See Note 11.
Various statements made within this Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Annual
Report on Form 10-K constitute "forward looking statements" for purposes of
the Securities and Exchange Commission's "safe harbor" provisions under the
Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under
Securities and Exchange Act of 1934, as amended. Investors are cautioned
that all forward-looking statements involve risks and uncertainties,
including those detailed in the Company's filings with the Securities and
Exchange Commission. There can be no assurance that actual results will
not differ from the Company's expectations.
11
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
Financial Statements and Schedule of Continental
Materials Corporation and report thereon:
Consolidated statements of operations and
retained earnings for fiscal years
1997, 1996 and 1995 13
Consolidated statements of cash flows
for fiscal years ended 1997, 1996 and 1995 14
Consolidated balance sheets at January 3, 1998
and December 28, 1996 15
Notes to consolidated financial statements 16-24
Report of Independent Accountants 25
12
Continental Materials Corporation Consolidated Statements of Operations and
Retained Earnings
For Fiscal Years 1997, 1996 and 1995
(Amounts in thousands, except per share data)
1997 1996 1995
NET SALES $ 98,038 $ 91,414 $ 75,560
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation,
depletion and amortization) 74,524 68,740 58,497
Depreciation, depletion and amortization 3,493 2,614 2,278
Selling and administrative 14,451 14,483 12,779
Operating income 5,570 5,577 2,006
Interest expense (921) (584) (812)
Equity loss from mining partnership (287) (1,768) (922)
Other income, net 448 280 634
Income before income taxes 4,810 3,505 906
Income tax provision 1,700 1,150 225
Net income 3,110 2,355 681
Retained earnings, beginning of year 28,173 25,818 25,137
Retained earnings, end of year $ 31,28 $ 28,173 $ 25,818
Basic earnings per share $ 2.83 $ 2.13 $ .60
Average shares outstanding 1,100,000 1,105,000 1,135,000
Diluted earnings per share $ 2.78 $ 2.11 $ .60
Average shares outstanding 1,120,000 1,114,000 1,135,000
The accompanying notes are an integral part of the financial statements.
13
Continental Materials Corporation Consolidated Statements of Cash Flows
For Fiscal Years 1997, 1996, and 1995
(Amounts in thousands)
1997 1996 1995
Operating activities:
Net income $3,110 $2,355 $ 681
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 3,493 2,614 2,278
Deferred income tax provision (benefit) 141 (332) (282)
Provision for doubtful accounts 264 179 60
Gain on disposition of property and equipment (26) (59) (459)
Equity loss from mining partnership 287 1,768 922
Changes in operating assets and liabilities, net
of effect of purchase of assets of Valco, Inc.:
Receivables 437 (1,688) (842)
Inventories 891 (191) 1,840
Prepaid expenses (9) (476) 8
Income taxes (229) 420 21
Accounts payable and accrued expenses (1,818) 2,396 (3,417)
Other (455) (310) 38
Net cash provided by operating activities 6,086 6,676 848
Investing activities:
Purchase of assets of Valco, Inc. -- (5,148) --
Capital expenditures (4,194) (3,222) (3,417)
Investment in mining partnership (107) (868) (883)
Proceeds from sale of property and equipment 62 64 549
Net cash used in investing activities (4,239) (9,174) (3,751)
Financing activities:
(Repayment) borrowings under revolving credit
facility (400) (1,900) 2,300
Long-term borrowings 2,000 5,000 500
Repayment of long-term debt (1,700) (1,011) (1,412)
Payments to acquire treasury stock (602) (286) (189)
Net cash (used in) provided by financing activities (702) 1,803 1,199
Net increase (decrease) in cash and cash
equivalents 1,145 (695) (1,704)
Cash and cash equivalents:
Beginning of year 379 1,074 2,778
End of year $1,524 $ 379 $1,074
Supplemental disclosures of cash flow items:
Cash paid during the year for:
Interest $ 973 $ 520 $ 812
Income taxes 1,793 1,075 500
Supplemental Schedule of non-cash investing and financing activities:
A portion of the 1995 proceeds from sale of property and equipment was in the
form of a note receivable valued at $162.
The accompanying notes are an integral part of the financial statements.
14
Continental Materials Corporation
Consolidated Balance Sheets January 3, 1998 and December 28, 1996
(Amounts in thousands except share data)
January 3, December 28,
1998 1996
ASSETS
Current assets:
Cash and cash equivalents $ 1,524 $ 379
Receivables less allowance of $580 and $373 13,882 14,584
Inventories 14,293 15,184
Prepaid expenses 2,343 2,239
Total current assets 32,042 32,386
Property, plant and equipment:
Land and improvements 2,159 2,104
Buildings and improvements 8,474 8,141
Machinery and equipment 50,444 46,935
Mining properties 2,170 2,170
Less accumulated depreciation and depletion (43,666) (40,532)
19,581 18,818
Other assets:
Investment in mining partnership 600 600
Other 2,132 1,746
2,732 2,346
$54,355 $53,550
LIABILITIES
Current liabilities:
Bank loan payable $ -- $ 400
Current portion of long-term debt 1,900 1,500
Accounts payable 3,514 5,182
Income taxes 222 450
Accrued expenses:
Compensation 1,765 1,969
Reserve for self-insured losses 2,030 2,212
Profit sharing 1,293 1,330
Reclamation 1,160 1,071
Other 1,565 1,202
Total current liabilities 13,449 15,316
Long-term debt 6,400 6,500
Deferred income taxes 1,722 1,487
Other long-term liabilities 926 897
Commitments and contingencies (Notes 6 and 9)
SHAREHOLDERS' EQUITY
Common shares, $.50 par value; authorized
3,000,000 shares; issued 1,326,588 shares 663 663
Capital in excess of par value 3,484 3,484
Retained earnings 31,283 28,173
Treasury shares, at cost (3,572) (2,970)
31,858 29,350
$54,355 $53,550
The accompanying notes are an integral part of the financial statements.
15
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include Continental Materials
Corporation and all of its subsidiaries (the Company). The equity method
of accounting is used for the Company's 30% interest in Oracle Ridge Mining
Partners (ORMP).
Certain prior years' amounts have been reclassified to conform to the
current presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of January 3, 1998 and
December 28, 1996 and the reported amounts of revenues and expenses during
each of the three years in the period ended January 3, 1998. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for approximately 82% of total
inventories at January 3, 1998 (83% at December 28, 1996). The cost of all
other inventory is determined by the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is
provided over the estimated useful lives 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
Depletion of rock and sand deposits is computed by the unit-of-production
method based upon estimated recoverable quantities of rock and sand.
Amortization of certain other assets is computed on a straight-line basis
over periods of 5 and 10 years.
The cost of property sold or retired and the related accumulated
depreciation, depletion and amortization are removed from the accounts and
the resulting gain or loss is reflected in other income. Maintenance and
repairs are charged to expense as incurred. Major renewals and betterments
are capitalized and depreciated over their useful lives.
Retirement Plans
The Company and certain subsidiaries have various contributory profit
sharing retirement plans for specific employees. The plans allow qualified
employees to make tax deferred contributions pursuant to Internal Revenue
Code Section 401(k). The Company makes annual contributions, at its
discretion, based primarily on profitability. Costs under the plans are
charged to operations as incurred.
16
Reserve for Self-Insured Losses
The Company's risk management program provides for certain levels of loss
retention for workers' compensation, automobile liability and general and
product liability claims. The components of the reserve have been recorded
in accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 5, "Accounting for Contingencies" and represent
management's best estimate of future liability for known claims based upon
the Company's history of claims paid. There were no unasserted claims as
of January 3, 1998 that require a reserve or disclosure in accordance with
SFAS No. 5.
Reclamation
In connection with permits to mine properties in or near Colorado Springs
and Pueblo, Colorado, the Company is obligated to reclaim the mined areas.
Reclamation costs are calculated using a rate based on the total estimated
reclamation costs, units of production and estimates of recoverable
reserves. Reclamation costs are charged to operations as the properties
are mined.
Income Taxes
Income taxes are reported consistent with SFAS No. 109, "Accounting for
Income Taxes." Deferred taxes reflect the future tax consequences
associated with the differences between financial accounting and tax bases
of assets and liabilities.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of trade receivables and
temporary cash investments. The Company invests its excess cash in
commercial paper of companies with strong credit ratings. These securities
typically mature within 30 days. The Company has not experienced any
losses on these investments.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations. See Note 13 for a description of the Company's customer base
and geographical location by segment.
Impairment of Long-lived Assets
In the event that facts and circumstances indicate that the cost of any
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation were required, the estimated future
undiscounted cash flows associated with the asset would be compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value is required.
Fiscal Year End
The Company's fiscal year end is the Saturday nearest December 31. Fiscal
1997 consists of 53 weeks while 1996 and 1995 each consist of 52 weeks.
2. ACQUISITION
On October 21, 1996, the Company acquired substantially all of the assets
of Valco, Inc.'s (Valco) ready-mix concrete and aggregates operation in
Pueblo, Colorado for a cash purchase price of $5,148,000 net of $163,000 of
accrued liabilities assumed. The acquisition has been accounted for under
the purchase method and, accordingly, the operating results of the Pueblo
operations have been included in the consolidated results since the date of
acquisition. The Company has formed a new subsidiary, Transit Mix of
Pueblo, Inc. to operate this acquisition.
17
In addition to the above, the Company concurrently entered into a long-term
operating lease to mine aggregates from properties in Pueblo owned by
Valco. The lease calls for the Company to pay a production royalty based
upon the tons of aggregate mined, up to an agreed upon total tonnage, with
a minimum annual royalty payment of $300,000. Both the production and
minimum royalties are subject to annual inflation adjustments. Royalties
paid in advance of actual tons mined will be recorded as a prepaid to be
applied against production at the end of the lease.
The funds used to acquire the Pueblo operation were provided by a
renegotiated unsecured term loan entered into on October 21, 1996 with the
Company's existing lending banks. The expenses related to the acquisition
as well as the cost of a non-competition agreement are included in other
assets and are being amortized over 5 and 10 years, respectively.
The purchased operations are involved in the production and sale of ready-
mix concrete and other building materials as well as the extraction and
sale of sand and river rock from two locations in Pueblo, Colorado. Sales
are made primarily in Pueblo County, Colorado.
The table below summarizes the unaudited pro-forma results of operations
for the year ended December 28, 1996, assuming the acquisition described
had been consummated as of January 1, 1996, with adjustments primarily
attributed to the royalty on tons of aggregates produced, interest expense
relating to the refinancing of long-term debt and depreciation expense
relating to the fair value of assets acquired.
Amounts in thousands, except per share amounts:
1996
Unaudited
Sales $101,532
Net income 2,342
Net income per share 2.12
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 of
results which may occur in the future.
3. INVENTORIES
Inventories consisted of the following (amounts in thousands):
January 3, December 28,
1998 1996
Finished goods $ 8,562 $ 8,696
Work in process 1,470 1,800
Raw materials
and supplies 4,260 4,688
$ 14,293 $ 15,184
If inventories valued on the LIFO basis were valued at current costs,
inventories would be higher as follows: 1997--$2,340,000; 1996--$2,590,000;
1995--$2,626,000.
Reduction in inventory quantities during 1997 and 1996 at one of the
locations, resulted in liquidation of LIFO inventory layers carried at
costs that were lower than the costs of current purchases. These effects
were recorded in their respective fourth quarters. In 1997, the effect was
to decrease cost of goods sold by approximately $225,000 and to increase
net earnings by $140,000 or $.13 per diluted share. In 1996, the effect
was to decrease cost of goods sold by approximately $125,000 and to
increase net earnings by $78,000 or $.07 per diluted share.
18
4. INVESTMENT IN MINING PARTNERSHIP
The Company has a 30% ownership interest in ORMP, a general partnership
which operated a copper mine primarily situated in Pima County, Arizona.
The equity method of accounting is used to include 30% of ORMP's income and
losses in the Company's consolidated financial statements.
Production at the mine was halted in February 1996. The Partners are
currently attempting to sell the mine. During 1997, the Company recorded a
loss totaling $287,000 from ORMP. In accordance with SFAS No. 121, the
Investment in mining partnership was written down to management's best
estimate of net realizable value, $600,000, as of December 28,1996. The
related impairment loss, $780,000, is included in the $1,768,000 equity
loss from mining partnership. During 1995, the Company recorded a loss
totaling $922,000. This amount is comprised of an operating loss of
$750,000 and a write down of $172,000 to management's best estimate of net
realizable value, $1,500,000 as of December 30,1995. The year end values
of $600,000 for 1997 and 1996 and $1,500,000 for 1995, were based on the
estimated fair market value of the partnership's property and assets less
liabilities at the respective dates. Future cash contributions to ORMP for
carrying costs will be expensed when made.
5. LONG-TERM DEBT
Long-term debt consisted of the following (amounts in thousands):
January 3, December 28,
1998 1996
Unsecured term loan $8,300 $8,000
Less current portion 1,900 1,500
$6,400 $6,500
The unsecured term loan is payable to two banks in escalating semi-annual
installments with final principal payment of all then unpaid principal due
June 15, 2001. The loan, at the Company's option, bears interest at either
prime or an adjusted LIBOR rate.
The Company is required to maintain certain levels of consolidated tangible
net worth, to attain certain levels of cash flow (as defined) on a rolling
four-quarter basis, and to maintain certain ratios including consolidated
debt to cash flow (as defined). Additional borrowing, acquisition of stock
of other companies, purchase of treasury shares and payment of cash
dividends are either limited or require prior approval by the lenders.
Aggregate long-term debt matures as follows under the Agreement (amounts in
thousands):
1998 $1,900
1999 2,400
2000 2,400
2001 1,600
$8,300
During 1997 and 1996, the Company had a $13,500,000 unsecured revolving
line of credit (reduced to $11,500,000 at June 30, 1997). The line is with
two banks and is used for short-term cash needs and standby letters of
credit. Interest was charged at prime or adjusted LIBOR rates on cash
borrowings during both years. The weighted average interest rate was 7.7%
for fiscal 1997 and 7.8% for fiscal 1996. There were no outstanding
balances against the line as of January 3, 1998. The outstanding balance
at December 28, 1996 was $400,000.
At January 3, 1998, the Company had letters of credit outstanding totaling
approximately $3,528,000 that primarily collateralize the self-insured
losses.
19
6. COMMITMENTS AND CONTINGENCIES
In June 1993, the Company sold its Imeco, Inc. subsidiary. The Company
retained the responsibility related to incidents involving Imeco products
occurring prior to June 30, 1993. There were two suits that were settled
in April 1995 and March 1996 respectively. Both settlements had been fully
reserved as of December 31, 1994. Management is not currently aware of any
asserted or unasserted claims involving Imeco products for which the
Company has retained responsibility.
During 1995, Williams Furnace Co. (Williams) was notified by Pacific Gas &
Electric (PG&E) that a recent inspection had discovered a higher than
normal incidence of cracks in the heat exchanger of two models of furnaces
manufactured by Williams prior to 1992. Independent engineering reports
indicate that there is no safety hazard arising from these cracks. The
Consumer Products Safety Commission (CPSC) was notified and Williams
cooperated with the CPSC in their investigation. To date, Williams is not
aware of any claims related to these matters and accordingly, management
has concluded that no amounts should be accrued in accordance with the
requirements of SFAS No. 5.
The Company is also involved in other litigation matters related to its
continuing business principally product liability matters related to
Williams gas-fired heating products. In the Company's opinion, none of
these proceedings, when concluded, will have a material adverse effect on
the Company's results of operations or financial position.
7. SHAREHOLDERS' EQUITY
Four hundred thousand shares of preferred stock ($.50 par value) are
authorized and unissued.
Treasury share activity during 1995, 1996 and 1997 was as follows (dollars
in thousands):
Number
of shares Cost
Balance at December 31, 1994 186,310 $2,495
Purchase of treasury shares 16,367 189
Balance at December 30, 1995 202,677 $2,684
Purchase of treasury shares 20,700 286
Balance at December 28, 1996 223,377 $2,970
Purchase of treasury shares 22,810 602
Balance at January 3, 1998 246,187 $3,572
Under the Company's Stock Option Plan (the Plan) officers and key employees
may be granted options to purchase the Company's common stock at option
prices established by the Compensation Committee of the Board of Directors
provided the option price is no less than the fair market value at the date
of the grant. The Company has reserved 180,000 shares for distribution
under the Plan. On September 26, 1995, a total of 78,000 options were
granted to five individuals at an exercise price of $13.125. These shares
became exercisable when the Company's stock price rose to 133% of the price
at the time of issuance ($17.50) and remained at or above this level for a
period of 30 consecutive trading days. This condition was met during 1996
and thus all of the 78,000 shares are exercisable.
These 78,000 options represent the only grant under the Company's Plan
during the three years ended January 3, 1998. As of January 3, 1998, none
of the options had been exercised or lapsed during the period, however one
individual who had been granted 12,000 shares left the Company without
exercising his options. The remaining 66,000 of outstanding options expire
on September 25, 2005. There were no options outstanding related to the
predecessor plan during the periods.
20
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting
for its Plan. Accordingly, no compensation expense has been recognized for
its stock-based compensation Plan. Had compensation cost for the Company's
Plan been determined based upon the fair value at the grant date for these
awards consistent with the methodology proscribed under SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced by approximately $201,000, or
$0.18 per share and $50,000, or $0.04 per share for 1996 and 1995
respectively. The fair value of the options granted during 1995 is
estimated as $5.00 on the date of the grant using the Black-Sholes option-
pricing model with the following assumptions: dividend yield 0%, volatility
of 30%, risk-free interest rate of 6.05%, and an expected life of five
years.
8. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share," (SFAS 128).
This pronouncement simplifies the standards for computing earning per share
(EPS) and requires the presentation of two amounts, basic and diluted EPS.
Basic EPS is computed by dividing net income by the weighted-average number
of common shares outstanding during the period. Diluted EPS is computed by
dividing net income by the weighted-average number of common shares
outstanding, adjusted for dilutive common share equivalents attributed to
outstanding options to purchase common stock. The Company has adopted SFAS
128 for the quarter and year-ended January 3, 1998 and has restated EPS for
all prior periods reported.
The following is a reconciliation of the calculation of basic and diluted
EPS for the years ended 1997, 1996 and 1995.
Per-share
Income Shares earnings
1997
Basic EPS $3,110 1,100 $2.83
Effect of dilutive options -- 20
Diluted EPS $3,110 1,120 $2.78
1996
Basic EPS $2,355 1,105 $2.13
Effect of dilutive options -- 9
Diluted EPS $2,355 1,114 $2.11
1995
Basic EPS $ 681 1,135 $ .60
Effect of dilutive options -- --
Diluted EPS $ 681 1,135 $ .60
9. RENTAL EXPENSE, LEASES AND COMMITMENTS
The Company leases certain of its facilities and equipment and is required
to pay the related taxes, insurance and certain other expenses. Rental
expense was $2,170,000, $2,223,000 and $2,006,000 for 1997, 1996, and 1995,
respectively.
Future minimum rental commitments under non-cancelable operating leases for
1998 and thereafter are as follows: 1998--$1,788,000; 1999--$1,556,000;
2000--$1,251,000; 2001--$784,000; 2002--$666,000 and thereafter--
$16,736,000. Included in these amounts is $300,000 per year and
approximately $16,341,000 in the "thereafter" amount related to an
aggregates lease in conjunction with the Pueblo operation.
21
The Company also receives annual rental income of $145,000 from a building
it owns. The related lease expires in January 2003 and contains renewal
options.
10. RETIREMENT PLANS
As discussed in Note 1, the Company maintains retirement benefit plans for
eligible employees. Total plan expenses charged to operations were
$1,228,000, $1,152,000, and $979,000 in 1997, 1996 and 1995, respectively.
11. INCOME TAXES
The provision (benefit) for income taxes is summarized as follows (amounts
in thousands):
1997 1996 1995
Federal: Current $ 1,475 $ 1,378 $ 506
Deferred 126 (297) (253)
State: Current 84 104 1
Deferred 15 (35) (29)
$ 1,700 $ 1,150 $ 225
The difference between the tax rate on income from continuing operations
for financial statement purposes and the federal statutory tax rate was as
follows:
1997 1996 1995
Statutory tax rate 34.0% 34.0% 34.0%
Percentage depletion (3.4) (4.5) (13.0)
State income taxes, net of federal benefit 1.5 1.5 1.6
Non-deductible expenses .4 .5 1.4
Other 2.8 1.3 .8
35.3% 32.8% 24.8%
For financial statement purposes, deferred tax assets and liabilities are
recorded at a blend of the current statutory federal and states' tax rates
- -- 38%. The principal temporary differences and their related deferred
taxes are as follows (amounts in thousands):
1997 1996
Reserves for self-insured losses $ 681 $ 740
Deferred compensation 394 383
Asset valuation reserves 757 698
Other 112 18
Total deferred tax assets $1,944 $1,839
Depreciation $1,710 $1,465
Investment in mining partnership 271 339
Other 135 66
Total deferred tax liabilities $2,116 $1,870
Net deferred tax liabilities $ 172 $ 31
The net current deferred tax assets are $1,550 and $1,456 at year-end 1997
and 1996, respectively, and are included with "Prepaid expenses" on the
Consolidated Balance Sheets.
22
12. UNAUDITED QUARTERLY FINANCIAL DATA
The following table provides summarized unaudited quarterly financial data
for 1997 and 1996 (amounts in thousands, except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
1997
Net sales $20,905 $27,991 $25,612 $23,530
Gross profit $ 3,632 $ 5,548 $ 5,111 $ 5,955
Depreciation, depletion and
amortization $ 879 $ 876 $ 881 $ 857
Net (loss) income $ (42) $ 1,020 $ 1,153 $ 979
Basic (loss) income per share $ (.04) $ .93 $ 1.05 $ .90
Diluted (loss) income per share $ (.04) $ .91 $ 1.03 $ .88
First Second Third Fourth
Quarter Quarter Quarter Quarter
1996
Net sales $17,852 $27,124 $21,718 $24,720
Gross profit $ 3,323 $ 6,065 $ 5,030 $ 5,830
Depreciation, depletion and
amortization $ 661 $ 668 $ 666 $ 619
Net (loss) income $ (577) $ 1,368 $ 1,050 $ 514
Basic (loss) income per share $ (.52) $ 1.24 $ .95 $ .47
Diluted (loss) income per share $ (.52) $ 1.23 $ .94 $ .46
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
equal the total for the year.
13. INDUSTRY SEGMENT INFORMATION
The Heating and Air Conditioning segment produces heating and cooling
equipment mainly for residential applications which is sold primarily to
wholesale distributors and retail home centers. Sales are nationwide, but
are concentrated in the Southwestern U.S. The Construction Materials
segment is involved in the production and sale of concrete and other
building materials and the exploration, extraction and sales of
construction aggregates. Sales of this segment are confined to the Front
Range area in southern Colorado.
Operating income is determined by deducting operating expenses from all
revenues. In computing operating income, none of the following has been
added or deducted: unallocated corporate expenses, interest, income or loss
from unconsolidated investees, other income, income taxes, gain or loss on
discontinued operations and extraordinary items.
General corporate assets are principally cash, accounts receivable and
leasehold improvements.
No customer accounts for 10% or more of consolidated sales.
23
The industry segment information for fiscal years 1997, 1996 and 1995 is as
follows (amounts in thousands):
Depreci-
ation,
Deple-
Identi- tion and Capital
Net Operat- fiable Amortiza- Expend-
Sales Income Assets tion itures
1997
Heating and air
conditioning $47,601 $ 3,334 $23,927 $ 1,085 $ 1,190
Construction materials 50,292 4,960 27,821 2,364 2,991
General corporate
and other 145 (2,724) 2,607 44 13
$98,038 $ 5,570 $54,355 $ 3,493 $ 4,194
1996
Heating and air
conditioning $49,007 $ 4,058 $24,866 $ 1,055 $ 491
Construction materials 42,262 4,446 26,908 1,514 2,692
General corporate
and other 145 (2,927) 1,776 45 39
$91,414 $ 5,577 $53,550 $ 2,614 $ 3,222
1995
Heating and air
conditioning $43,966 $ 2,316 $25,393 $ 1,027 $ 1,066
Construction materials 31,449 2,912 19,132 1,210 2,337
General corporate
and other 145 (3,222) 2,294 41 14
$75,560 $2,006 $46,819 $ 2,278 $ 3,417
24
Report of Independent Accountants
To the Shareholders and Board of Directors of Continental Materials
Corporation
We have audited the accompanying consolidated balance sheets of Continental
Materials Corporation and Subsidiaries as of January 3, 1998 and December
28, 1996, and the related consolidated statements of operations and
retained earnings and cash flows for each of the three years in the period
ended January 3, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Continental Materials Corporation and Subsidiaries as of January 3, 1998
and December 28, 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended January 3,
1998 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 25, 1998
25
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes of accountants and/or disagreements on any
matter of accounting principle or financial statement disclosure during the
past 24 months which would require a filing under Item 9.
PART III
Part III has been omitted from this 10-K Report since Registrant will file,
not later than 120 days following the close of its fiscal year ended
January 3, 1998, its definitive 1998 proxy statement. The information
required by Part III will be included in that proxy statement and such
information is hereby incorporated by reference, but excluding the
information under the headings "Compensation Committee Report" and
"Comparison of Total Shareholders' Return".
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) 1 Financial statements required by Item 14 are included in
Item 8 of Part II.
(a) 2 The following is a list of financial statement schedules
filed as part of this Report:
Report of Independent Accountants
Schedule II Valuation and Qualifying Accounts & Reserves
For Years Ended January 3, 1998, December 28, 1996 and
December 30, 1995
All other schedules are omitted because they are not applicable or the
information is shown in the financial statements or notes thereto.
26
(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 10 Continental Materials Corporation Amended and Restated 1994
Stock Option Plan dated May 25, 1994 filed as Appendix A to
the 1994 Proxy Statement, incorporated herein by reference.*
Exhibit 10a Revolving Credit and Term Loan Agreement between The Northern
Trust Company, LaSalle National Bank and Continental Materials
Corporation dated as of October 21, 1996 filed as Exhibit 2D
to Form 8-K for the month of October 1996, 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 of 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 Continental Materials Corporation Employee Profit Sharing
Retirement Plan Amended and Restated Generally Effective
January 1, 1989 filed as Exhibit 10c to Form 10-K for the year
ended December 31, 1994.
Exhibit 21 Subsidiaries of Registrant (filed herewith).
Exhibit 23 Consent of Independent Accountants (filed herewith).
Exhibit 27 Financial Data Schedule (filed herewith).
Exhibit 28 Continental Materials Corporation Employees Profit Sharing
Retirement Plan on Form 11-K for the year ended December 31,
1997 (to be filed by amendment).
* - Compensatory plan or arrangement
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended January 3,
1998.
27
SIGNATURES
Pursuant to the 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 the undersigned, thereunto duly authorized.
CONTINENTAL MATERIALS CORPORATION
Registrant
By: /S/Joseph J. Sum
Joseph J. Sum, Vice President, Finance
Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY(IES) DATE
/S/ James G. Gidwitz
James G. Gidwitz Chief Executive Officer
and a Director March 26, 1998
/S/ Joseph J. Sum
Joseph J. Sum Vice President and a
Director March 26, 1998
/S/ Mark S. Nichter
Mark S. Nichter Secretary and Controller March 26, 1998
/S/ Thomas H. Carmody
Thomas H. Carmody Director March 26, 1998
/S/ Betsy R. Gidwitz
Betsy R. Gidwitz Director March 26, 1998
/S/ Ralph W. Gidwitz
Ralph W. Gidwitz Director March 26, 1998
/S/ Ronald J. Gidwitz
Ronald J. Gidwitz Director March 26, 1998
/S/William G.Shoemaker
William G. Shoemaker Director March 26, 1998
/S/Theodore R.Tetzlaff
Theodore R. Tetzlaff Director March 26, 1998
/S/ Darrell M. Trent
Darrell M. Trent Director March 26, 1998
28
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Continental
Materials Corporation and Subsidiaries is included on page 25 of this
Annual Report on Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 26 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 25, 1998
CONTINENTAL MATERIALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (d)
for the fiscal years 1997, 1996 and 1995
COLUMN A COLUMN B COLUMN C(1) COLUMN D COLUMN E
Additions
Balance at Charged to Balance
Beginning Costs and Deductions at End of
Description of Period Expenses - Describe Period
Year 1997
Allowance for
doubtful accounts $373,000 $264,000 $ 57,000 (a) $580,000
Inventory valuation
reserve $404,000 $203,000 $374,000 (b) $233,000
Year 1996
Allowance for
doubtful accounts $260,000 $199,000 $ 86,000 (a) $373,000
Inventory valuation
reserve $236,000 $310,000 $142,000 (b) $404,000
Year 1995
Allowance for
doubtful accounts $248,000 $ 60,000 $ 48,000 (a) $260,000
Inventory valuation
reserve $223,000 $232,000 $219,000 (b) $236,000
Notes:
(a) Accounts written off, net of (c) Reserve deducted in the balance
recoveries. sheet from the asset to which it
applies.
(b) Amounts written off upon disposal (d) Column C(2) has been omitted as
of assets. the answer would be "none".