Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 1, 2000
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 of (I.R.S. Employer Identification No.)
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 - $.25 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 24, 2000 closing price) of
voting stock held by non-affiliates of registrant: Approximately $23,642,000.
Number of common shares outstanding at March 24, 2000: 1,872,995.
Incorporation by reference: Portions of registrant's definitive proxy
statement for the 2000 Annual meeting of stockholders to be held on May 24, 2000
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 wall furnaces, console heaters, evaporative
coolers and fan coils which are manufactured by Phoenix Manufacturing, Inc. of
Phoenix, Arizona and Williams Furnace Co. of Colton, California. The
Construction Materials segment is comprised of ready mix concrete, construction
aggregates, building supplies and doors which are offered by Castle Concrete
Company and Transit Mix Concrete Co. both of Colorado Springs, Colorado, and
Transit Mix of Pueblo, Inc. of Pueblo, Colorado.
In addition to the above operating segments, an Other classification is utilized
to cover a small real estate operation and the holding costs for certain mining
interests that remain from the period the Company maintained significant
interests in mining operations. The expenses of the corporate office, which
provides treasury, insurance and tax services as well as strategic business
planning and general management services, are not allocated to the segments.
Expenses related to the Management Information Systems group, which is
headquartered at the corporate office, are allocated to all locations, including
the corporate office, based upon a formula that is intended to capture use of
the system and time spent by MIS staff.
The Company has a 30% interest in Oracle Ridge Mining Partners (ORMP). ORMP is a
general partnership that owns an inactive 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
included in other income and expense in the Company's statement of operations.
See Note 3 on page 18 for further discussion of the Company's accounting for and
valuation of the investment in ORMP.
Financial information relating to industry segments appears in Note 12 on pages
23 and 24 of this Form 10-K.
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 directly to some major retail home-centers and other
retail outlets. Fan coils are also sold to HVAC installing contractors and
equipment manufacturers for commercial applications. Independent manufacturers'
representatives are utilized for all products. The Company also employs and
utilizes 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 furnaces and console heaters usually
increase in the months of August through January. Sales of evaporative coolers
usually increase in the months of March through
2.
July. Sales of the fan coil product line are more evenly distributed throughout
the year although the highest volume typically occurs during the late spring and
summer. In order to sell wall furnaces and evaporative coolers during the off
season, extended payment terms (dating) are offered to 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. Sales 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 1999, no customer accounted for 10% or more of the total sales of the
Company.
CUSTOMER SERVICE AND SUPPORT
The Heating and Air Conditioning segment offers parts departments and help lines
to assist contractors, distributors and end users in servicing the products. The
Company does not perform installation services, nor are maintenance or service
contracts offered. In addition, training and product information sessions for
the furnace, cooler and fan coil product lines are offered at our plants and
other sites for distributors, contractors, utility company employees and other
customers. This segment does not derive any revenue from after-sales service and
support other than from parts sales. The personnel in the Construction Materials
segment routinely take a leadership role in formulation of the products to meet
the specifications of the customers.
BACKLOG
The order backlog at January 1, 2000 and January 2, 1999 for the Heating and Air
Conditioning segment were as follows:
January 1, 2000 January 2, 1999
--------------- ---------------
Furnaces $ 25,000 $ 900,000
Console heaters 5,000 230,000
Evaporative coolers 750,000 1,200,000
Fan coil 2,100,000 860,000
--------------- ---------------
Total $ 2,880,000 $ 3,190 000
=============== ===============
The above backlogs are expected to be filled during the first quarter of 2000.
At January 1, 2000, the Construction Materials segment had a backlog of
approximately $2,785,000 ($1,900,000 at January 2, 1999) primarily relating to
construction contracts awarded and expected to be filled during the first half
of 2000.
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.
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 the Power Cleaning System for the evaporative coolers and
patent applications on the configuration of the heat
3.
exchanger for furnaces which has increased efficiency above that previously
offered by the industry. A patent is pending related to the Company's new
combination cooling and heating product. 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 the businesses, furnaces and evaporative coolers build
inventory during their off seasons in order to have adequate supplies 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 1998 and 1999 but were able to purchase sufficient quantities
from non-traditional sources, which are expected to 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.
COMPETITIVE CONDITIONS
HEATING AND AIR CONDITIONING - The Company is one of four principal companies
producing wall furnaces (excluding units sold to the recreational vehicle
industry) and gas fired console heaters. The wall furnace and console heater
markets are only a small component of the heating industry. The Company serves
these market areas from a plant in Colton, California and a warehouse in Ohio.
The sales force consists of in-house sales personnel and external 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. All of the producers compete on a basis of price, service and
timeliness of delivery.
Fan coils are also produced at the Colton plant. 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, ability to meet customers' specific requirements
and timeliness of delivery.
The Company manufactures evaporative air coolers at a plant located in Phoenix,
Arizona. The cooler 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 and service.
CONSTRUCTION MATERIALS - The Company is one of four companies producing ready
mix concrete in the Colorado Springs area, with one more company expected to
enter the market during
4.
2000, and one of three companies producing ready mix concrete in the Pueblo
area. Although we hold a significant share of both of the markets served, the
other competitors compete aggressively on the basis of price, service and
product features.
The Company is one of six producers of aggregates in the marketing area served.
All producers compete aggressively on the basis of price, quality of material
and service.
Sales of metal doors and door frames, rebar reinforcement and other building
materials in the Colorado Springs and Pueblo metropolitan areas are subject to
intense competition from two larger companies from Denver, one large company in
Colorado Springs and a number of small local competitors. However, the Company
has a slight competitive advantage in that many of our customers also purchase
concrete, sand and aggregates from us whereas our competitors for these
particular product lines do not offer concrete, sand or aggregates. In addition,
our Pueblo location has a slight competitive advantage with respect to the two
Denver companies based upon delivery costs.
EMPLOYEES
The Company employed 801people as of January 1, 2000. Employment varies
throughout the year due to the seasonal nature of the businesses. A breakdown of
the prior three years employment at year-end by segment was:
1999 1998 1997
-------------- ------------- --------------
Heating and Air Conditioning 433 402 367
Construction Materials 354 332 307
Corporate Office 14 12 11
-------------- ------------- --------------
Total 801 746 685
============== ============= ==============
The factory employees at the Colton, California plant are represented by the
Carpenters Local 721 Union under a contract that expires in June 2002. Certain
drivers and mechanics at the Pueblo facility are represented by the Western
Conference of Teamsters under a contract that expires in December 2000.
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.
The construction materials segment operates out of five owned facilities in
Colorado Springs, Colorado and two owned facilities in Pueblo, Colorado. These
facilities are, in the opinion of management, in good condition and sufficient
for the Company's current needs. Additionally, this segment owns or leases seven
mining properties in three counties in the vicinity of Colorado Springs and
Pueblo, Colorado. In the opinion of management, these seven properties contain
permitted and minable reserves sufficient to service sand, rock and gravel
requirements for the foreseeable future.
5.
In the opinion of management, all of the facilities of the Company can be
subject to seasonal fluctuations but are believed to be generally well utilized.
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 5 on page 19 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 1999.
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 (restated for the stock split, see
Note 6 on pages 19 and 20) for the past two years are:
High Low
---- ---
1999 Fourth Quarter $23 1/8 $21
Third Quarter 23 19 1/4
Second Quarter 20 17 13/16
First Quarter 18 7/16 15 7/8
1998 Fourth Quarter $18 1/4 $14 1/4
Third Quarter 18 5/8 14 5/8
Second Quarter 18 7/8 14 3/16
First Quarter 14 7/16 12 7/8
At March 17, 2000, the Company had approximately 350 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.
Item 6. SELECTED FINANCIAL DATA
(Amounts in thousands, except per share amounts)
=============================================================================================================
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
SUMMARY OF OPERATIONS
Net sales $ 118,620 $ 108,744 $ 98,038 $ 91,414 $ 75,560
Earnings before interest, taxes,
depreciation and amortization (EBITDA) 16,209 11,570 9,224 6,703 3,396
Net income $ 6,902 $ 4,618 $ 3,110 $ 2,355 $ 681
PER SHARE DATA
Basic earnings per share $ 3.39 $ 2.15 $ 1.41 $ 1.06 $ .30
Weighted average shares outstanding 2,035 2,147 2,200 2,210 2,270
Diluted earnings per share $ 3.32 $ 2.10$ 1.39$1.05 $ .30
Weighted average shares outstanding 2,082 2,196 2,239 2,228 2,370
FINANCIAL CONDITION
Current ratio 1.7:1 2.0:1 2.4:1 2.1:1 2.0:1
Total assets $ 67,751 $ 63,617 $ 54,355 $ 53,550 $ 47,223
Long-term debt, including current
portion 4,457 6,810 8,300 8,000 4,011
Shareholders' equity 39,043 36,238 31,858 29,350 27,281
Long-term debt to net worth .11 .19 .26 .27 .15
Book value per diluted share $ 18.75 $ 16.50 $ 14.23 $ 13.17 $ 12.02
CASH FLOWS
Net cash provided by (used in):
Operating activities $ 6,228 $ 14,223 $ 6,086 $ 6,676 $ 848
Investing activities (9,038) (6,899) (4,239) (9,174) (3,751)
Financing activities (3,963) (1,728) (702) 1,803 1,199
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and
cash equivalents $ (6,773) $ 5,596 $ 1,145 $ (695) $ (1,704)
========= ========= ========= ========= =========
7.
Item 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 decreased to $347,000 at year-end compared to
$7,120,000 in the prior year. Operations in 1999 provided $6,228,000 of cash
compared to $14,223,000 in 1998 and the $6,086,000 generated in 1997. The
decrease in net cash generated by operating activities in 1999 was primarily due
to an increase in inventories. The increase in inventories was due to the low
level of finished goods furnace inventory on hand at year-end 1998. Raw
materials and work-in-process also increased due to the higher fan coil volume.
The increase in 1998 from the 1997 level was mainly due to higher earnings, a
decrease in inventories and an increase in accounts payable and accrued
expenses.
Net cash used in investing activities was $9,038,000 in 1999, $6,899,000 in 1998
and $4,239,000 in 1997. Capital expenditures for 1999, 1998 and 1997 were
$9,024,000, $6,464,000 and $4,194,000, 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 although
office and warehouse space was added in Phoenix. In addition, the 1999 and 1998
capital additions include approximately $1,100,000 and $1,300,000, respectively,
for the computer project discussed more fully under the heading "Year 2000
Compliance." Also during 1998, the Company invested $470,000 to acquire a new
product line for the heating and air conditioning segment.
Budgeted capital expenditures for 2000 are approximately $6,400,000 ($4,500,000
for the construction materials segment and $1,900,000 for the heating and air
conditioning segment), which is $2,100,000 more than planned depreciation. The
construction materials budget contemplates expansion projects totaling
approximately $1,375,000 and purchases of approximately $1,900,000 of additional
equipment to support the increased business. The heating and air conditioning
budget includes approximately $1,125,000 for new office space. The 2000
expenditures will be funded from internal sources, available borrowing or
leasing capacity.
During 1999, cash of $3,963,000 was used in financing activities. Scheduled
long-term debt repayments of $2,556,000 were made during the year. Costs and
expenses associated with the June cancellation of 79,096 (post-split) shares
were $1,595,000, although only $708,000 was expended as $887,000 remains
unfunded at year-end and is included in accounts payable. An additional
$2,746,000 was used to acquire 139,574 shares of treasury stock. Borrowings
against the revolving credit facility of $1,600,000 and an increase in the
capital lease of $203,000 provided a portion of the above cash while proceeds
from the issuance of treasury shares related to the exercise of stock options
generated $244,000, including $100,000 of related tax savings. During 1998, cash
of $1,728,000 was used in financing activities. Scheduled long-term debt
repayments of $1,900,000 were made during the year and cash of $238,000 was used
to acquire 8,030 shares of treasury stock. A capital lease for $440,000 financed
software related to the computer project. Scheduled repayments aggregating
$30,000 were made against the lease during the year. 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.
8.
The Company maintains a credit agreement with two banks. The agreement, as
amended at various times, provides for a term loan of $9,250,000 ($4,000,000
outstanding at January 1, 2000) and a revolving credit facility of $11,500,000
for funding of seasonal sales programs related to the furnace and evaporative
cooler product lines. 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. Borrowings are unsecured and bear interest at prime or an
adjusted LIBOR rate.
The Company anticipates the primary source of cash flow in 2000 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 both claims and
unasserted claims that would be covered 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."
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of, and for the year ended December 29, 2001.
The Company has not yet adopted this pronouncement but does not expect that it
will have a material impact on the Company's financial position or results of
operations.
OPERATIONS
1999 VS. 1998
Consolidated sales increased $9,876,000, or 9%, to $118,620,000. The net sales
of the construction materials segment rose $5,126,000 (9%) while the net sales
of the heating and air conditioning segment rose $4,743,000 (9%) compared to the
previous year. The construction materials segment continued to report gains due
to a very strong construction market along the Front Range in southern Colorado.
The improvement in the heating and air conditioning segment was due to the
combined improvements in the fan coil and furnace lines offset by the decline in
evaporative cooler sales. The decline in the evaporative cooler line was the
result of an unseasonably cool 1999 spring and summer which also affected the
fourth quarter's pre-season sales.
The Company experienced a high level of price competition in all of its product
lines, which the Company expects to continue into 2000. During 1999, inflation
was not a significant factor at any of the operations.
Cost of sales (exclusive of depreciation, depletion and amortization), as a
percent of sales, improved from 75% to just under 73%. The improvement reflects
the increased volume in the fan coil and furnace lines as well as the
construction materials segment. Cost of sales in the heating and air
conditioning segment were reduced by approximately $361,000 during 1998 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 $3,992,000 to $4,998,000
due to the increased capital expenditure level the past two years.
Selling and administrative expenses increased $1,090,000. As a percentage of
sales, selling and administrative expenses remained relatively constant at just
under 14%.
9.
The increased operating income is principally attributed to the improved sales
volume.
The decline in interest expense of $116,000 is the result of the lower term loan
balance and the strong cash position at the beginning of the year which delayed
the use of the line of credit.
The Company wrote off the remaining $100,000 investment in Oracle Ridge Mining
Partners (ORMP) during 1999 and recorded a loss of $56,000 related to on going
carrying costs of the property. Carrying costs at this level are expected to be
on going.
The Company's 1999 effective income tax rate on income (35.7%) reflects federal
and state statutory rates adjusted for non-deductible and other tax items. See
Note 10.
OPERATIONS
1998 VS. 1997
Consolidated sales increased $10,706,000, or 11%, to $108,744,000. The net sales
of the construction materials segment rose $7,190,000 (14%) while the net sales
of the heating and air conditioning segment rose $3,516,000 (7%) compared to the
previous year. The construction materials segment continued to report gains due
to a very strong construction market in the Colorado Springs and Pueblo areas of
Colorado. The improvement in the heating and air conditioning segment was due to
the combined improvements in the fan coil and furnace lines offset by the
decline in evaporative cooler sales. The decline in the evaporative cooler line
was the result of the adverse effect of El Nino especially felt during the
second quarter of 1998.
The Company experienced a high level of price competition in all of its product
lines. During 1998, inflation was not a significant factor at any of the
operations.
Cost of sales (exclusive of depreciation, depletion and amortization), as a
percent of sales, improved slightly from 76% to just over 75%. The improvement
reflects the increased volume in the fan coil and furnace lines as well as the
construction materials segment. Cost of sales were reduced by approximately
$361,000 during 1998 and $225,000 during 1997 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 $3,493,000 to $3,992,000
due to the increased capital expenditure level the past two years.
Selling and administrative expenses increased $605,000. As a percentage of
sales, selling and administrative expense declined from 15% to 14%. The decrease
is primarily due to the continued increase in the construction materials segment
where these expenses do not increase (or decrease) proportionally with volume.
The increased operating income is principally tied to the improved sales volume.
The decline in interest expense of $336,000 is the result of the lower term loan
balance and the strong cash flow, which allowed the earlier than normal payback
of the line of credit.
The Company wrote down the investment in ORMP from $600,000 to $100,000 during
1998 and recorded a loss of $52,000 related to on going carrying costs of the
property.
10.
The Company's 1998 effective income tax rate on income (34.0%) reflects federal
and state statutory rates adjusted for non-deductible and other tax items. See
Note 10.
YEAR 2000 COMPLIANCE
The Year 2000 issue related to the way computer hardware and software defined
calendar dates; many use only two digits to represent the year which could cause
failures or miscalculations. In addition, many systems and equipment that are
not typically thought of as "computer-related" (referred to as "non-IT") contain
imbedded hardware or software that may include a time element. While it is
impossible to predict whether there will be future ramifications from this
issue, to date, the Company has not experienced any significant disruptions in
its supply, manufacturing, processing, distribution or financial chains. Nor
have we been affected by Year 2000 interruptions in our customers' operations,
if any, resulting in reduced sales, increased inventory or receivable levels and
cash flow reductions. Additionally, the Company has not identified any of our
products or non-IT systems and equipment that are Year 2000 non-compliant.
During 1998 and 1999 the Company implemented a Year 2000 compliant enterprise
resource planning (ERP) system to replace all non-compliant systems as well as
to modernize and integrate all of the Company's systems. The majority of the
hardware utilized by the Company, including all that may be Year 2000
non-compliant, was also replaced. The cost of the entire project was
approximately $4,300,000 including hardware, software, consulting fees and other
out-of-pocket expenses. Funding was furnished by a lease of approximately
$1,500,000 with the balance provided by operating cash flow. Additional costs to
improve the system are expected and will be expensed as incurred. These
additional costs are not expected to have a material impact on the Company's
financial position or results of operations.
FORWARD-LOOKING STATEMENTS
This Annual Report 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 "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: weather, interest rates, availability of raw materials and
their related costs and competitive forces.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risks related to interest rates and commodity
prices. To manage these risks, the Company has, from time to time, entered into
various interest rate swaps to create synthetic-debt instruments as authorized
by the Company's policies and procedures. The Company does not use swaps or
hedging instruments for trading purposes, and is not a party to any transaction
involving leveraged derivatives. The Company is not currently involved in any
swaps or hedging contracts.
Interest Rates
The Company utilizes revolving credit and term-loan facilities that bear
interest at either prime or an adjusted LIBOR rate. The amount outstanding under
these facilities aggregated $4 million
11.
at January 1,2000. In addition, the Company has entered into a capital lease
with fixed interest rates and original maturity dates (based upon the date of
the draw) of 42 months. As the draws occurred during 1998 and 1999 and the total
remaining due is $457,000, its book and fair value was considered to be
approximately the same. See Note 4.
Commodities
The Company purchases commodities, such as steel, copper, cement and cardboard
for packaging, at market prices and does not currently use financial instruments
to hedge commodity prices.
The statements and other information in this section constitute forward-looking
statements.
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
1999, 1998 and 1997 13
Consolidated statements of cash flows
for fiscal years ended 1999, 1998 and 1997 14
Consolidated balance sheets at January 1, 2000
and January 2, 1999 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 1999, 1998 AND 1997
(Amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
1999 1998 1997
---------- ---------- ---------
NET SALES $ 118,620 $ 108,744 $ 98,038
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation,
depletion and amortization) 86,181 81,881 74,524
Depreciation, depletion and amortization 4,998 3,992 3,493
Selling and administrative 16,146 15,056 14,451
---------- ---------- ---------
OPERATING INCOME 11,295 7,815 5,570
Interest expense (469) (585) (921)
Other (expense) income, net (84) (237) 161
---------- ---------- ---------
INCOME BEFORE INCOME TAXES 10,742 6,993 4,810
Income tax provision 3,840 2,375 1,700
---------- ---------- ---------
NET INCOME 6,902 4,618 3,110
Retained earnings, beginning of year 35,901 1,283 28,173
---------- ---------- ---------
RETAINED EARNINGS, END OF YEAR $ 42,803 $ 35,901 $ 31,283
========== ========== =========
Basic earnings per share $ 3.39 $ 2.15 $ 1.41
Weighted average shares outstanding 2,035 2,147 2,200
Diluted earnings per share $ 3.32 $ 2.10 $ 1.39
Weighted average shares outstanding 2,082 2,196 2,239
The accompanying notes are an integral part of the
financial statements.
13.
CONTINENTAL MATERIALS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR FISCAL YEARS 1999, 1998, AND 1997
(Amounts in thousands)
- --------------------------------------------------------------------------------
1999 1998 1997
--------- --------- --------
OPERATING ACTIVITIES
Net income $ 6,902 $ 4,618 $ 3,110
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation, depletion and amortization 4,998 3,992 3,493
Deferred income tax provision (benefit) 109 (708) 141
Provision for doubtful accounts 486 304 264
Loss (gain) on disposition of property
and equipment 57 (42) (26)
Equity loss from mining partnership 56 52 287
Write-down of investment in mining partnership 100 500 --
Changes in operating assets and liabilities
Receivables (3,926) (3,243) 437
Inventories (3,916) 2,243 891
Prepaid expenses (450) 306 (9)
Income taxes (344) 1,050 (229)
Accounts payable and accrued expenses 1,778 5,367 (1,818)
Other 378 (216) (455)
--------- --------- --------
Net cash provided by operating activities 6,228 14,223 6,086
--------- --------- --------
INVESTING ACTIVITIES
Capital expenditures (9,024) (6,464) (4,194)
Investment in new product line -- (470) --
Investment in mining partnership (56) (52) (107)
Proceeds from sale of property and equipment 42 87 62
--------- --------- --------
Net cash used in investing activities (9,038) (6,899) (4,239)
--------- --------- --------
FINANCING ACTIVITIES
Borrowings (repayment) of revolving credit facility 1,600 -- (400)
Long-term borrowings 203 440 2,000
Repayment of long-term debt (2,556) (1,930) (1,700)
Payment to purchase and cancel stock (708) -- --
Proceeds from exercise of stock options 244 -- --
Payments to acquire treasury stock (2,746) (238) (602)
--------- --------- --------
Net cash used in financing activities (3,963) (1,728) (702)
--------- --------- --------
Net (decrease) increase in cash
and cash equivalents (6,773) 5,596 1,145
Cash and cash equivalents
Beginning of year 7,120 1,524 379
--------- --------- --------
End of year $ 347 $ 7,120 $ 1,524
========= ========= ========
Supplemental disclosures of cash flow items
Cash paid during the year
Interest $ 644 $ 471 $ 973
Income taxes 4,062 2,038 1,793
The accompanying notes are an integral part
of the financial statements.
14.
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED BALANCE SHEETS JANUARY 1, 2000 AND JANUARY 2, 1999
(Amounts in thousands except share data)
- --------------------------------------------------------------------------------
January 1, 2000 January 2, 1999
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 347 $ 7,120
Receivables less allowance of $800 and $775 20,161 16,821
Inventories 15,966 12,050
Prepaid expenses 2,592 2,695
----------- -----------
Total current assets 39,066 38,686
----------- -----------
Property, plant and equipment:
Land and improvements 3,970 2,881
Buildings and improvements 11,837 9,512
Machinery and equipment 57,792 55,103
Mining properties 2,170 2,170
Less accumulated depreciation and depletion (48,878) (46,880)
----------- -----------
26,891 22,786
----------- -----------
Other assets 1,794 2,145
----------- -----------
$ 67,751 $ 63,617
=========== ===========
LIABILITIES
Current liabilities
Bank loan payable $ 1,600 $ --
Current portion of long-term debt 2,582 2,526
Accounts payable 7,263 5,124
Income taxes 927 1,271
Accrued expenses
Compensation 3,214 2,707
Reserve for self-insured losses 2,579 3,210
Profit sharing 2,515 2,108
Other 2,377 2,401
----------- -----------
Total current liabilities 23,057 19,347
----------- -----------
Long-term debt 1,875 4,284
Deferred income taxes 1,227 1,670
Other long-term liabilities 2,549 2,078
Commitments and contingencies (Notes 5 and 8)
SHAREHOLDERS' EQUITY
Common shares, $.25 par value; authorized
3,000,000 shares; issued 2,574,264 and 2,653,176
shares, respectively 643 663
Capital in excess of par value 1,983 3,484
Retained earnings 42,803 35,901
Treasury shares, at cost (6,386) (3,810)
----------- -----------
39,043 36,238
----------- -----------
$ 67,751 $ 63,617
=========== ===========
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).
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 1, 2000 and January 2, 1999 and
the reported amounts of revenues and expenses during each of the three years in
the period ended January 1, 2000. 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 85% of total inventories
at January 1, 2000 (83% at January 2, 1999). 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 and amortization of deferred development
costs are computed by the units-of-production method based upon estimated
recoverable quantities of rock and sand.
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.
OTHER ASSETS
Amortization of certain other assets is computed on a straight-line basis over
periods of 5 and 10 years.
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.
RECLAMATION
In connection with permits to mine properties in 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.
REVENUE RECOGNITION
The Company's practice is to recognize revenues from product sales when title
transfers.
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 government securities. 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 12
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 1999
and 1998 each consist of 52 weeks while 1997 consists of 53 weeks.
2. INVENTORIES
Inventories consisted of the following (amounts in thousands):
January 1, 2000 January 2, 1999
--------------- ---------------
Finished $ 7,557 $ 6,761
Work in process 1,642 1,176
Raw materials and supplies 6,767 4,113
---------- ----------
$ 15,966 $ 12,050
========== ==========
If inventories valued on the LIFO basis were valued at current costs,
inventories would be higher as follows: 1999 -- $1,713,000, 1998 -- $1,610,000;
1997-- $2,340,000.
17.
Reduction in inventory quantities during 1998 at one of the locations, resulted
in liquidation of LIFO inventory layers carried at costs that were lower than
the costs of current purchases. The effect, recorded in the fourth quarter, was
to decrease cost of goods sold by approximately $361,000 and to increase net
earnings by $224,000 or $.10 per diluted share.
3. 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. Although the Partners are
attempting to sell the mine, continued low prices of copper makes it unlikely
that the property will be sold. In accordance with SFAS No. 121, the remaining
investment in the mining partnership was written off as of January 1, 2000. The
related impairment loss of $100,000 is included in the $156,000 loss recorded
for 1999. During 1998, the Company recorded an equity loss of $552,000 including
an impairment loss of $500,000. The equity losses are included in "Other
(expense) income, net" in the Consolidated Statements of Operations. The year
end values for each of the years 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.
4. LONG-TERM DEBT
Long-term debt consisted of the following (amounts in thousands):
January 1, 2000 January 2, 1999
--------------- ---------------
Unsecured term loan $ 4,000 $ 6,400
Capital lease 457 410
-------- --------
4,457 6,810
Less current portion 2,582 2,526
-------- --------
$ 1,875 $ 4,284
======== ========
The unsecured term loan is payable to two banks in semi-annual installments with
final principal payment 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.
The capital lease is payable in monthly installments through December 2002, with
interest at various rates based upon prevailing interest rates on the due dates
of the draws.
Aggregate long-term debt matures as follows (amounts in thousands):
1999 $ 2,582
2000 1,795
2001 80
---------
$ 4,457
=========
During 1999 and 1998, the Company had an $11,500,000 unsecured revolving line of
credit. The line is with two banks and is used for short-term cash needs and
standby letters of credit.
18.
Interest was charged at prime or adjusted LIBOR rates on cash borrowings during
both years. The weighted average interest rate was 7.4% for fiscal 1999 and 7.6%
for fiscal 1998. There was $1,600,000 outstanding as of January 1, 2000 while no
balance was outstanding against the line as of January 2, 1999.
At January 1, 2000, the Company had letters of credit outstanding totaling
approximately $3,494,000 that collateralize the self-insured losses.
5. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters related to its continuing
business, principally product liability matters related to the 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.
6. SHAREHOLDERS' EQUITY
The shareholders approved an amendment to the Restated Certificate of
Incorporation at the May 26,1999 annual meeting effecting a reverse 1-for-50
stock split followed immediately by a forward 100-for-1 stock split of the
Company's Common Stock. As permitted by Delaware law, registered stockholders
whose shares of stock were converted into less than one share in the reverse
1-for-50 split received the right to receive cash equal to the fair value of
those fractional interests. Registered stockholders whose shares of Common
Stock, $.50 par value, are converted into more than one share in the reverse
split will receive, in the forward 100-for-1 split, a number of shares of Common
Stock, $.25 par value, equal to 100 times the number of shares and fractional
shares held after the reverse split. In other words, all registered stockholders
originally holding 50 or more shares of Common Stock, $.50 par value,
immediately prior to the effective date of the transaction will hold twice the
number of shares of Common Stock, $.25 par value, immediately subsequent to the
transaction. The reverse and forward stock splits, together with the related
cash payments to stockholders with small holdings, is referred to below as the
"stock split." The effective date of the stock split was June 7, 1999.
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 360,000 shares for distribution under the Plan. On
September 26, 1995, a total of 156,000 options were granted to five individuals
at an exercise price of $6.5625. These shares became exercisable during 1996.
During 1997, one individual who had been granted 24,000 shares left the Company
without exercising his options. During 1999, options for 22,000 shares were
exercised. Per the agreement, 400 reload options were automatically granted when
one of the individuals paid a portion of the option price by delivery of shares
of the Company's common stock. The exercise price of these reload options is
$23.125, the market price of the stock on the date the reload option was
granted. The reload options are vested and retain all terms of the original
options, including the expiration date. The 110,400 outstanding options expire
on September 25, 2005.
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 was recognized for its stock-based
compensation Plan. Had compensation cost for the reload options been determined
based on the fair value at the grant date consistent with the methodology
proscribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the
effect on the Company's net income and earnings per share would not have been
significant.
19.
The following is the common shares and capital in excess of par value activity
during 1999. There was no activity in either of these accounts during 1997 or
1998.
Common Capital in
Common shares excess of
shares amount par value
------ ------ ---------
Balance at January 2, 1999 1,326,588 $ 663 $ 3,484
Effect of reverse split (39,456) (20) (1,575)
Effect of forward split 1,287,132 -- --
Common shares issued under the
Stock Option Plan (from treasury) -- -- (26)
Tax benefit from exercise of
options -- -- 100
--------- ------ ---------
Balance at January 1, 2000 2,574,264 $ 643 $ 1,983
========= ====== =========
The Board of Directors of the Company authorized various amounts to be utilized
in acquiring treasury shares during 1999. At their March 2, 2000 meeting, the
Board authorized an additional $2,000,000 to be used at the discretion of
management to repurchase shares. Treasury share activity during 1997, 1998 and
1999 was as follows (dollars in thousands and shares restated for the stock
split):
Number of shares Cost
---------------- -------
Balance at December 28, 1996 446,754 $ 2,970
Purchase of treasury shares 45,620 602
------- -------
Balance at January 3, 1998 492,374 $ 3,572
Purchase of treasury shares 16,060 238
------- -------
Balance at January 2, 1999 508,434 $ 3,810
Purchase of treasury shares 139,574 2,746
Issuance of treasury shares related
to the Stock Option Plan (22,000) (170)
------- -------
Balance at January 1, 2000 626,008 $ 6,386
======= =======
Four hundred thousand shares of preferred stock ($.50 par value) are authorized
and unissued.
7. EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." This
pronouncement simplifies the standards for computing earnings 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 following is a reconciliation of the calculation of basic and diluted EPS
for the years-ended 1999, 1998 and 1997 (dollars in thousands and shares
restated for the stock split).
20.
Weighted
average Per-share
Income shares earnings
------ ------ --------
1999
Basic EPS $6,902 2,035 $3.39
=====
Effect of dilutive options -- 47
------ -----
Diluted EPS $6,902 2,082 $3.32
====== ===== =====
1998
Basic EPS $4,618 2,147 $2.15
=====
Effect of dilutive options -- 49
------ -----
Diluted EPS $4,618 2,196 $2.10
====== ===== =====
1997
Basic EPS $3,110 2,200 $1.41
=====
Effect of dilutive options -- 39
------ -----
Diluted EPS $3,110 2,239 $1.39
====== ===== =====
8. 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
$2,460,000, $2,435,000 and $2,170,000 for 1999, 1998 and 1997, respectively.
Future minimum rental commitments under non-cancelable operating leases for 1999
and thereafter are as follows: 2000 -- $1,969,000; 2001 -- $1,748,000; 2002 --
$1,655,000; 2003 -- $984,000; 2004 -- $751,000 and thereafter -- $19,197,000.
Included in these amounts is $300,000 per year and approximately $16,100,000 in
the "thereafter" amount related to an aggregates lease in conjunction with the
Pueblo operation.
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.
9. RETIREMENT PLANS
As discussed in Note 1, the Company maintains retirement benefit plans for
eligible employees. Total plan expenses charged to operations were $2,783,000,
$2,025,000 and $1,228,000 in 1999, 1998 and 1997, respectively.
10. INCOME TAXES
The provision (benefit) for income taxes is summarized as follows (amounts in
thousands):
1999 1998 1997
---- ---- ----
Federal: Current $ 3,221 $ 2,742 $ 1,475
Deferred 98 (634) 126
State: Current 510 341 84
Deferred 11 (74) 15
------- ------- -------
$ 3,840 $ 2,375 $ 1,700
======= ======= =======
The difference between the tax rate on income for financial statement purposes
and the federal statutory tax rate was as follows:
21.
1999 1998 1997
---- ---- ----
Statutory tax rate 34.0% 34.0% 34.0%
Percentage depletion (1.8) (3.2) (3.4)
State income taxes, net of federal benefit 3.0 2.3 1.5
Non-deductible expenses .1 .3 .4
Other .4 .6 2.8
---- ---- ----
35.7% 34.0% 35.3%
==== ==== ====
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):
1999 1998
---- ----
Reserves for self-insured losses $ 1,087 $ 1,130
Deferred compensation 498 396
Asset valuation reserves 1,154 1,038
Other 44 40
-------- --------
Total deferred tax assets 2,783 2,604
-------- --------
Depreciation 1,939 1,873
Investment in mining partnership 14 52
Other 402 142
-------- --------
Total deferred tax liabilities 2,355 2,067
-------- --------
Net deferred tax asset $ 428 $ 537
======== ========
The net current deferred tax assets are $1,654 and $2,208 at year-end 1999 and
1998, respectively, and are included with "Prepaid expenses" on the Consolidated
Balance Sheets.
11. UNAUDITED QUARTERLY FINANCIAL DATA
The following table provides summarized unaudited fiscal quarterly financial
data for 1999 and 1998 (amounts in thousands, except per share amounts; per
share data restated for the stock split):
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
1999
Net sales $24,332 $31,253 $33,426 $29,609
Gross profit 4,950 7,655 6,768 8,624
Depreciation, depletion and
amortization 1,087 1,243 1,377 1,291
Net income 734 2,039 1,598 2,531
Basic income per share .34 .99 .80 1.29
Diluted income per share .33 .97 .78 1.26
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- -------
1998
Net sales $22,806 $28,935 $29,069 $27,935
Gross profit 4,592 5,822 6,467 6,330
Depreciation, depletion and
amortization 1,020 1,029 1,045 898
Net income 579 1,232 1,685 1,123
Basic income per share .27 .58 .79 .53
Diluted income per share .26 .56 .77 .51
22.
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.
12. INDUSTRY SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 replaces the "industry segment"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
SFAS 131 also requires disclosures about products and services, geographic areas
and major customers. The adoption of SFAS 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information.
The Company is organized along its two principal product lines. Wall furnaces,
console heaters, evaporative coolers and fan coils have been aggregated into the
heating and air conditioning segment. Ready mix concrete, construction
aggregates, building supplies and doors are combined to form the construction
materials segment. The heating and air conditioning segment produces heating and
cooling equipment for residential applications which is sold primarily to
wholesale distributors and retail home centers. Fan coils are also sold to HVAC
installing contractors and equipment manufacturers for commercial applications.
A significant portion of fan coil revenues is dependent upon new hotel
construction. 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.
The Company evaluates the performance of its segments and allocates resources to
them based on operating income and return on investment. Other factors are also
considered. 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 or loss or income taxes.
The following table presents information about reported segments for the fiscal
years 1999, 1998 and 1997 along with the items necessary to reconcile the
segment information to the totals reported in the financial statements (amounts
in thousands).
Heating and Construction All Unallocated
Air Conditioning Materials Other (a) Corporate Total
---------------- --------- --------- --------- -----
1999
Revenues from external
customers $ 55,860 $ 62,608 $ 145 $ 7 $ 118,620
Depreciation, depletion
and amortization 1,181 3,758 22 37 4,998
Segment operating income 7,793 7,001 43 (3,542) 11,295
Segment assets 31,568 34,157 65 1,961 67,751
Expenditures for segment
assets 2,640 6,262 -- 122 9,024
23.
Heating and Construction All Unallocated
Air Conditioning Materials Other (a) Corporate Total
---------------- --------- --------- --------- -----
1998
Revenues from external
customers $ 51,117 $ 57,482 $ 145 $ -- $ 108,744
Depreciation, depletion
and amortization 1,091 2,862 22 17 3,992
Segment operating income 4,183 6,414 41 (2,823) 7,815
Segment assets 25,628 29,888 183 7,918 63,617
Expenditures for segment
assets 1,352 4,994 -- 118 6,464
1997
Revenues from external
customers $ 47,601 $ 50,292 $ 145 $ -- $ 98,038
Depreciation, depletion
and amortization 1,085 2,364 25 19 3,493
Segment operating income 3,334 4,975 (97) (2,642) 5,570
Segment assets 23,927 27,221 720 2,487 54,355
Expenditures for segment
assets 1,191 2,991 3 9 4,194
(a) All Other represents segments below the quantitative thresholds.
The segments include a small real estate operation and the holding
costs for certain mining interests that remain from the period the
Company maintained significant interests in mining operations.
All long-lived assets are in the United States and no customer accounts for 10%
or more of consolidated revenue.
24.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Continental Materials Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and retained earnings and cash flows
present fairly, in all material respects, the financial position of Continental
Materials Corporation and its subsidiaries at January 1, 2000 and January 2,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended January 1, 2000, in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 2, 2000
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 (Items 10, 11, 12,and 13) 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 1, 2000, its definitive 2000 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 the Fiscal Years 1999, 1998 and 1997
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 3d Registrant's Certificate of Amendment of Restated
Certificate of Incorporation dated June 4, 1999 filed as
Exhibit 1 to Form 8-K for the month of June 1999,
incorporated herein by reference.
Exhibit 10 Continental Materials Corporation Amended and Restated 1994
Stock Option Plan dated May 25, 1994 filed as Appendix A to
the 1994 Proxy Statement, incorporated herein by reference.*
Exhibit 10a Revolving Credit and Term Loan Agreement between The
Northern Trust Company, LaSalle National Bank and
Continental Materials Corporation dated as of October 21,
1996 filed as Exhibit 2D to Form 8-K for the month of
October 1996, 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 21 Subsidiaries of Registrant (filed herewith).
Exhibit 23 Consent of Independent Accountants (filed herewith).
Exhibit 27 Financial Data Schedule (filed herewith).
Exhibit 99a Continental Materials Corporation Employee Profit Sharing
Retirement Plan Amended and Restated Generally Effective
October 1, 1997.
Exhibit 99b Continental Materials Corporation Employees Profit Sharing
Retirement Plan on Form 11-K for the year ended January 1,
2000 (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 1, 2000.
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 28, 2000
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 28, 2000
/S/ Joseph J. Sum
- -------------------------------------
Joseph J. Sum Vice President
and a Director March 28, 2000
/S/ Mark S. Nichter
- -------------------------------------
Mark S. Nichter Secretary and Controller March 28, 2000
/S/ Thomas H. Carmody
- -------------------------------------
Thomas H. Carmody Director March 28, 2000
/S/ Betsy R. Gidwitz
- -------------------------------------
Betsy R. Gidwitz Director March 28, 2000
/S/ Ralph W. Gidwitz
- -------------------------------------
Ralph W. Gidwitz Director March 28, 2000
/S/ Ronald J. Gidwitz
- -------------------------------------
Ronald J. Gidwitz Director March 28, 2000
/S/ William G. Shoemaker
- -------------------------------------
William G. Shoemaker Director March 28, 2000
/S/ Theodore R. Tetzlaff
- -------------------------------------
Theodore R. Tetzlaff Director March 28, 2000
/S/ Darrell M. Trent
- -------------------------------------
Darrell M. Trent Director March 28, 2000
28.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Continental Materials Corporation
Our audits of the consolidated financial statements referred to in our report
dated March 2, 2000 appearing in the 1999 Annual Report to Shareholders of
Continental Materials Corporation also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 2, 2000
CONTINENTAL MATERIALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (d)
for the fiscal years 1999, 1998 and 1997
COLUMN A COLUMN B COLUMN C(1) COLUMN D COLUMN E
Balance at Additions
Beginning of Charged to Costs Deductions - Balance at End of
Description Period and Expenses Describe Period
-------------------------------- ----------------- ----------------- ---------------- ------------------
YEAR 1999
Allowance for doubtful accounts $775,000 $486,000 $461,000 (a) $800,000
================= ================= ================ ==================
Inventory valuation reserve $504,000 $127,000 $ 63,000 (b) $568,000
================= ================= ================ ==================
YEAR 1998
Allowance for doubtful accounts $580,000 $304,000 $109,000 (a) $775,000
================= ================= ================ ==================
Inventory valuation reserve $233,000 $667,000 $396,000 (b) $504,000
================= ================= ================ ==================
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
================= ================= ================ ==================
Notes:
(a) Accounts written off, net of recoveries. (c) Reserve deducted in the balance sheet from
the asset to which it applies.
(b) Amounts written off upon disposal of assets. (d) Column C(2) has been omitted as the answer
would be "none".