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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 2, 1999
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 - $.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 notbe
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 26, 1999 closing price) of
voting stock held by non-affiliates of registrant: Approximately $21,841,000.
Number of common shares outstanding at March 26, 1999: 1,057,251.
Incorporation by reference: Portions of registrant's definitive proxy
statement for the 1999 Annual meeting of stockholders to be held on May 26,
1999 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.
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 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 the investment in ORMP.
Financial information relating to industry segments appears in Note 13 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 direct 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 September through January.
Sales of evaporative coolers usually increase in the months of March through
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.
2
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 1998, 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 2, 1999 and January 3, 1998 for the Heating and
Air Conditioning segment were as follows:
January 2, 1999 January 3, 1998
---------------------- ------------------------
Furnaces $ 900,000 $ 1,226,000
Console heaters 230,000 74,000
Evaporative coolers 1,200,000 1,500,000
Fan coil 860,000 500,000
---------------------- ------------------------
Total $ 3,190,000 $ 3,300 000
---------------------- ------------------------
---------------------- ------------------------
The above backlogs are expected to be filled during the first quarter of 1999.
At January 2, 1999, the Construction Materials segment had a backlog of
approximately $1,900,000 ($2,200,000 at January 3, 1998) primarily relating
to construction contracts awarded and expected to be filled during the first
half of 1999.
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 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.
3
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 1997 and 1998 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.
COMPETITIVE CONDITIONS
HEATING AND AIR CONDITIONING - The Company 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. The market area is covered 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.
The Colton plant 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.
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 three companies producing
ready mix concrete in the Colorado Springs area and one of two 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 five producers of aggregates in the marketing area
served. All producers compete aggressively on the basis of price, quality of
material and service.
4
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 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 746 people as of January 2, 1999. 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:
1998 1997 1996
-------------- ------------- --------------
Heating and Air Conditioning 402 367 428
Construction Materials 332 307 309
Corporate Office 12 11 11
-------------- ------------- --------------
Total 746 685 748
-------------- ------------- --------------
-------------- ------------- --------------
The factory employees at the Colton, California plant voted to be represented
by the Carpenters Local 721 Union. The Amalgamated Industrial Workers Union
had previously represented the workers under a contract that expired in June
1997. Negotiations with the Carpenters Local 721 are ongoing. Certain
drivers, laborers and mechanics at the Pueblo facility are represented by the
Western Conference of Teamsters under a contract that expires in December
1999.
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.
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.
5
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 1998.
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
---- ---
1998 Fourth Quarter $36-1/2 $28-1/2
Third Quarter 37-1/4 29-1/4
Second Quarter 37-3/4 28-3/8
First Quarter 28-7/8 25-3/4
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
At March 16, 1999, the Company had approximately 2,800 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)
- ------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------ ------------- ------------- --------------
SUMMARY OF OPERATIONS
Net sales from continuing operations $ 108,744 $ 98,038 $ 91,414 $75,560 $75,294
------------- ------------ ------------- ------------- --------------
Earnings from continuing operations
Before interest, taxes, depreciation
And amortization (EBITDA) 11,570 9,224 6,703 3,396 5,899
------------- ------------ ------------- ------------- --------------
Net income from continuing
Operations 4,618 3,110 2,355 681 1,849
Net loss from discontinued operation -- -- -- -- (464)
------------- ------------ ------------- ------------- --------------
Net income $ 4,618 $ 3,110 $ 2,355 $ 681 $ 1,385
------------- ------------ ------------- ------------- --------------
------------- ------------ ------------- ------------- --------------
PER SHARE DATA
Basic EPS:
Continuing operations $ 4.30 $ 2.83 $ 2.13 $ .60 $ 1.62
Discontinued operation -- -- -- -- (.41)
------------- ------------ ------------- ------------- --------------
Net income $ 4.30 $ 2.83 $ 2.13 $ .60 $ 1.21
------------- ------------ ------------- ------------- --------------
------------- ------------ ------------- ------------- --------------
Average shares outstanding during year 1,074 1,100 1,105 1,135 1,140
------------- ------------ ------------- ------------- --------------
------------- ------------ ------------- ------------- --------------
Diluted EPS:
Continuing operations $ 4.21 $ 2.78 $ 2.11 $ .60 $ 1.62
Discontinued operation -- -- -- -- (.41)
------------- ------------ ------------- ------------- --------------
Net income $ 4.21 $ 2.78 $ 2.11 $ .60 $ 1.21
------------- ------------ ------------- ------------- --------------
------------- ------------ ------------- ------------- --------------
Average shares outstanding during year 1,098 1,120 1,114 1,135 1,140
------------- ------------ ------------- ------------- --------------
------------- ------------ ------------- ------------- --------------
FINANCIAL CONDITION
Current ratio 1.9:1 2.4:1 2.1:1 2.0:1 2.0:1
Total assets $ 63,617 $ 54,355 $ 53,550 $ 47,223 $ 48,162
Long-term debt, including current
Portion 6,810 8,300 8,000 4,011 4,923
Shareholders' equity 36,238 31,858 29,350 27,281 26,789
Long-term debt to net worth .19 .26 .27 .15 .18
Book value per share $ 33.74 $ 28.96 $ 26.56 $ 24.04 $ 23.50
CASH FLOWS
Net cash provided by (used in):
Operating activities $ 14,223 $ 6,086 $ 6,676 $ 848 $ 7,191
Investing activities (6,899) (4,239) (9,174) (3,751) (1,884)
Financing activities (1,728) (702) 1,803 1,199 (3,596)
------------- ------------ ------------- ------------- --------------
Net increase (decrease) in cash and
Cash equivalents $ 5,596 $ 1,145 $ (695) $ (1,704) $ 1,711
------------- ------------ ------------- ------------- --------------
------------- ------------ ------------- ------------- --------------
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 $7,120,000 at year-end compared to
$1,524,000 in the prior year. Operations in 1998 provided $14,223,000 of cash
compared to $6,086,000 in 1997 and the $6,676,000 generated in 1996. The
increase in net cash generated by operating activities in 1998 was primarily
due to higher earnings and an increase in accounts payable and accrued
expenses. The decrease in 1997 from the 1996 level was mainly due to a
decrease in accounts payable.
The Company made payments to settle product liability claims totaling
$1,000,000 in 1996 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 $6,899,000 in 1998, $4,239,000 in
1997 and $9,174,000 in 1996. Capital expenditures for 1998, 1997 and 1996,
exclusive of the purchase of certain assets of Valco, Inc. (Valco), were
$6,464,000, $4,194,000 and $3,222,000, 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. In
addition, the 1998 capital additions include $1,339,000 made toward 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. 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 1998.
Budgeted capital expenditures for 1999 are approximately $6,000,000
($3,400,000 for the Construction Materials segment and $2,600,000 for the
Heating and Air Conditioning segment), which is $1,400,000 more than planned
depreciation. The Construction Materials budget contemplates building
projects totaling approximately $480,000, the purchase of approximately
$1,300,000 of additional equipment to support the increased business and
$250,000 related to the computer project. The Heating and Air Conditioning
budget includes approximately $1,370,000 for additional office and warehouse
space and $250,000 related to the computer project. The 1999 expenditures
will be funded from internal sources, available borrowing or leasing capacity.
Cash invested in Oracle Ridge Mining Partners (ORMP) during 1998, 1997 and
1996 was $52,000, $107,000, and $868,000, respectively. Future cash support
related to ORMP should approximate the levels experienced in the last two
years.
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. The scheduled
repayments of $30,000 were made against the lease
8
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. 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.
The Company maintains a credit agreement with two banks. The agreement, as
amended in October 1996 and June 1997, provides for a term loan of $9,250,000
($6,400,000 outstanding at January 2, 1999) 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 1999 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."
The accrual for workers' compensation, automobile liability and product
liability claims covers occurrences through January 2, 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for the year ended December 30, 2000. 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
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.
9
The Company experienced a high level of price competition in all of its
roduct lines, which the Company expects to continue into 1999. 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.
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 11.
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 of fan coil rose while sales of evaporative coolers declined
in large part related to unfavorable weather conditions last summer.
The Company experienced a high level of price competition in all of its
product lines. During 1997, inflation was not a significant factor at any of
the operations.
Cost of sales (exclusive of depreciation, depletion and amortization)
remained relatively constant at 76%. Cost of sales were reduced 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.
10
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.
YEAR 2000 COMPLIANCE
The year 2000 issue relates to the way computer hardware and software define
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. The Year 2000 issue can arise at any point in the Company's supply,
manufacturing, processing, distribution and financial chains. As a result,
the Company is at risk of disruptions to its business operations from
possible miscalculations or system failures occurring not only in its own
equipment and software, but those occurring in any business or governmental
entity that the Company relies on for goods or services.
The Company has completed a study, with the assistance of external
consultants, to evaluate the Company's current internal information and
financial systems. The Company concluded that the majority of the existing
systems were not Year 2000 compliant. We have therefore undertaken to
implement 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, has been
replaced. Work on the project began in the second quarter of 1998 and is
expected to be completed during the third quarter of 1999. The cost of the
entire project is currently estimated at $3,000,000 including hardware,
software, consulting fees and other out-of-pocket expenses. Approximately
$2,500,000 has been incurred to date. Funding will be furnished by a lease of
approximately $1,500,000 with the balance provided by operating cash flow.
The cost of the project is not expected to have a significant negative impact
on the Company's future financial results.
A review has been undertaken to assess and correct Year 2000 issues affecting
both our products and non-IT systems and equipment used in our businesses. At
the present time, the Company has not identified any products that would be
Year 2000 non-compliant.
We rely on third party suppliers for raw materials, water, utilities,
transportation and other key
11
services. Interruption to any of their operations due to Year 2000 issues
could affect the operations of our Company. We have initiated efforts to
ascertain the level of preparedness of this group. We have found some of
these entities less willing to provide information concerning their state of
readiness. Alternative sources of raw materials and certain other services
have been identified, where possible, to help mitigate any impact due to
disruptions at any of our key suppliers. While we believe that the steps we
have taken should reduce the adverse effect on our Company of any such
disruptions, the interdependent nature of the Company and its suppliers,
service providers, utilities and governmental agencies is such that a
disruption at one or more suppliers could have material adverse consequences.
We are also dependent upon our customers for sales and cash flow. Year 2000
interruptions in our customers' operations could result in reduced sales,
increased inventory or receivable levels and cash flow reductions. While
these events are possible, we believe our customer base is broad enough to
minimize the affects to our Company of system disruptions at some customers'
operations. We are, however, taking steps to contact and monitor the status
of our larger customers as a means of determining risks and alternatives.
At this time, we have not learned of any potential exposures from external,
non-compliant third party suppliers or customers.
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.
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
1998, 1997 and 1996 13
Consolidated statements of cash flows
for fiscal years ended 1998, 1997 and 1996 14
Consolidated balance sheets at January 2, 1999
and January 3, 1998 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 1998, 1997 AND 1996
(Amounts in thousands, except per share data)
- -----------------------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- ----------
NET SALES $108,744 $ 98,038 $ 91,414
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation,
depletion and amortization) 81,881 74,524 68,740
Depreciation, depletion and amortization 3,992 3,493 2,614
Selling and administrative 15,056 14,451 14,483
----------- ----------- ----------
OPERATING INCOME 7,815 5,570 5,577
Interest expense (585) (921) (584)
Equity loss from mining partnership (552) (287) (1,768)
Other income, net 315 448 280
----------- ----------- ----------
INCOME BEFORE INCOME TAXES 6,993 4,810 3,505
Income tax provision 2,375 1,700 1,150
----------- ----------- ----------
NET INCOME 4,618 3,110 2,355
Retained earnings, beginning of year 31,283 28,173 25,818
----------- ----------- ----------
----------- ----------- ----------
RETAINED EARNINGS, END OF YEAR $ 35,901 $ 31,283 $ 28,173
----------- ----------- ----------
----------- ----------- ----------
Basic earnings per share $ 4.30 $ 2.83 $ 2.13
----------- ----------- ----------
----------- ----------- ----------
Average shares outstanding 1,074 1,100 1,105
----------- ----------- ----------
----------- ----------- ----------
Diluted earnings per share $ 4.21 $ 2.78 $ 2.11
----------- ----------- ----------
----------- ----------- ----------
Average shares outstanding 1,098 1,120 1,114
----------- ----------- ----------
----------- ----------- ----------
The accompanying notes are an integral part of the financial statements.
13
CONTINENTAL MATERIALS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR FISCAL YEARS 1998, 1997, AND 1996
(Amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
------------- ----------- ------------
Operating activities:
Net income $ 4,618 $ 3,110 $ 2,355
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 3,992 3,493 2,614
Deferred income tax (benefit) provision (708) 141 (332)
Provision for doubtful accounts 304 264 179
Gain on disposition of property and equipment (42) (26) (59)
Equity loss from mining partnership 52 287 988
Write down of investment in mining partnership 500 -- 780
Changes in operating assets and liabilities, net of effect
of purchase of assets of Valco, Inc.:
Receivables (3,243) 437 (1,688)
Inventories 2,243 891 (191)
Prepaid expenses 306 (9) (476)
Income taxes 1,050 (229) 420
Accounts payable and accrued expenses 5,367 (1,818) 2,396
Other (216) (455) (310)
-------- -------- -------
Net cash provided by operating activities 14,223 6,086 6,676
-------- -------- -------
Investing activities:
Purchase of assets of Valco, Inc. -- -- (5,148)
Capital expenditures (6,464) (4,194) (3,222)
Investment in new product line (470) -- --
Investment in mining partnership (52) (107) (868)
Proceeds from sale of property and equipment 87 62 64
-------- -------- -------
Net cash used in investing activities (6,899) (4,239) (9,174)
-------- -------- -------
Financing activities:
Repayment of revolving credit facility -- (400) (1,900)
Long-term borrowings -- 2,000 5,000
Capital lease obligation 440 -- --
Repayment of long-term debt (1,930) (1,700) (1,011)
Payments to acquire treasury stock (238) (602) (286)
-------- -------- -------
Net cash (used in) provided by financing activities (1,728) (702) 1,803
-------- -------- -------
Net increase (decrease) in cash and cash equivalents 5,596 1,145 (695)
Cash and cash equivalents:
Beginning of year 1,524 379 1,074
-------- -------- -------
End of year $ 7,120 $ 1,524 $ 379
-------- -------- -------
-------- -------- -------
Supplemental disclosures of cash flow items:
Cash paid during the year for:
Interest $ 471 $ 973 $ 520
Income taxes 2,038 1,793 1,075
The accompanying notes are an integral part of the financial statements.
14
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED BALANCE SHEETS JANUARY 2, 1999 AND JANUARY 3, 1998
(Amounts in thousands except share data)
- ------------------------------------------------------------------------------
January 2, January 3,
1999 1998
---------------------- ----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,120 $ 1,524
Receivables less allowance of $775 and $580 16,821 13,882
Inventories 12,050 14,293
Prepaid expenses 2,695 2,343
---------------------- ----------------------
Total current assets 38,686 32,042
---------------------- ----------------------
Property, plant and equipment:
Land and improvements 2,200 2,159
Buildings and improvements 9,512 8,474
Machinery and equipment 55,103 50,444
Mining properties 2,170 2,170
Less accumulated depreciation and depletion (46,880) (43,666)
---------------------- ----------------------
22,105 19,581
---------------------- ----------------------
Other assets:
Investment in mining partnership 100 600
Other 2,726 2,132
---------------------- ----------------------
2,826 2,732
---------------------- ----------------------
---------------------- ----------------------
$ 63,617 $ 54,355
---------------------- ----------------------
---------------------- ----------------------
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 2,526 $ 1,900
Accounts payable 5,124 3,514
Income taxes 1,271 222
Accrued expenses:
Compensation 2,707 1,765
Reserve for self-insured losses 3,210 2,030
Profit sharing 2,108 1,293
Reclamation 1,495 1,160
Other 2,051 1,565
---------------------- ----------------------
Total current liabilities 20,492 13,449
---------------------- ----------------------
Long-term debt 4,284 6,400
Deferred income taxes 1,670 1,722
Other long-term liabilities 933 926
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 35,901 31,283
Treasury shares, at cost (3,810) (3,572)
---------------------- ----------------------
36,238 31,858
---------------------- ----------------------
---------------------- ----------------------
$ 63,617 $ 54,355
---------------------- ----------------------
---------------------- ----------------------
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 2, 1999 and January 3, 1998
and the reported amounts of revenues and expenses during each of the three
years in the period ended January 2, 1999. 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 83% of total
inventories at January 2, 1999 (82% at January 3, 1998). 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 both known and unasserted
claims based upon the Company's history of claims paid.
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
1998 and 1996 each consist of 52 weeks while 1997 consists of 53 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 formed a new subsidiary, Transit Mix of Pueblo, Inc.
to operate this acquisition.
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
17
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 2, January 3,
1999 1998
----------------------- ----------------------
Finished goods $ 6,761 $ 8,562
Work in process $ 1,176 1,471
Raw materials and supplies 4,113 4,260
----------------- ------------
$ 12,050 $ 14,293
----------------- ------------
----------------- ------------
If inventories valued on the LIFO basis were valued at current costs,
inventories would be higher as follows: 1998--$1,610,000; 1997--$2,340,000;
1996--$2,590,000.
Reduction in inventory quantities during 1998 and 1997 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 1998, the effect was to
decrease cost of goods sold by approximately $361,000 and to increase net
earnings by $224,000 or $.20 per diluted share. 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.
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
attempting to sell the mine. Due to the current low price of copper, it is
unlikely that the property will be sold in the near future. In accordance
with SFAS No. 121, the investment in mining partnership was written down to
management's best estimate of net realizable value, $100,000, as of January
2, 1999. The related impairment loss of $500,000 is included in the $552,000
loss recorded for 1998. During 1997, the Company recorded a loss totaling
$287,000 from ORMP, while for 1996, the equity loss was $1,768,000 including
an impairment loss of $780,000 to reduce the carrying value to $600,000. The
year end values of $100,000 for 1998 and $600,000 for 1997 and 1996, 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 2, January 3,
1999 1998
---------- -----------
Unsecured term loan $6,400 $8,300
Capital lease 410 0
---------- -----------
6,810 8,300
Less current portion 2,526 1,900
---------- -----------
$4,284 $6,400
---------- -----------
---------- -----------
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 March 2002, with
interest at 6.7%.
Aggregate long-term debt matures as follows (amounts in thousands):
1999 $2,526
2000 2,526
2001 1,726
2002 32
--------
$6,810
--------
--------
During 1998 and 1997, 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. Interest was charged at prime or adjusted
LIBOR rates on cash borrowings during both years.
19
The weighted average interest rate was 7.6% for fiscal 1998 and 7.7% for
fiscal 1997. There were no outstanding balances against the line as of either
January 2, 1999 or January 3, 1998.
At January 2, 1999, the Company had letters of credit outstanding totaling
approximately $2,794,000 that primarily collateralize the self-insured losses.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation matters related to its continuing
business, principally product liability matters related to the gas-fired
heating products. In the Company's opinion, none of these proceedings, when
concluded, will have a material adverse effect on the Company's results of
operations or financial position.
7. SHAREHOLDERS' EQUITY
Four hundred thousand shares of preferred stock ($.50 par value) are
authorized and unissued.
Treasury share activity during 1996, 1997 and 1998 was as follows (dollars in
thousands):
Number
of shares Cost
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
Purchase of treasury shares 8,030 238
-------- -------
Balance at January 2, 1999 254,217 $3,810
-------- -------
-------- -------
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 became exercisable.
These 78,000 options represent the only grant under the Company's Plan during
the three years ended January 2, 1999. As of January 2, 1999, 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 during 1997
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.
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
for 1996. 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.
20
8. EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share." 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 adopted SFAS 128
for the quarter and year-ended January 3, 1998 and restated EPS for all prior
periods reported.
The following is a reconciliation of the calculation of basic and diluted EPS
for the years ended 1998, 1997 and 1996.
Per-share
Income Shares earnings
--------- -------- -----------
1998
Basic EPS $4,618 1,074 $4.30
-----
-----
Effect of dilutive options -- 24
------ -----
Diluted EPS $4,618 1,098 $4.21
------ ----- -----
------ ----- -----
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
------ ----- -----
------ ----- -----
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 $2,435,000, $2,170,000 and $2,223,000 for 1998, 1997, and 1996,
respectively.
Future minimum rental commitments under non-cancelable operating leases for
1999 and thereafter are as follows: 1999--$2,034,000; 2000--$1,723,000;
2001--$1,253,000; 2002--$851,000; 2003--$638,000 and thereafter--$18,091,000.
Included in these amounts is $300,000 per year and approximately $16,041,000
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.
10. RETIREMENT PLANS
As discussed in Note 1, the Company maintains retirement benefit plans for
eligible employees. Total plan expenses charged to operations were
$2,025,000, $1,228,000 and $1,152,000 in 1998, 1997 and 1996, respectively.
11. INCOME TAXES
The provision (benefit) for income taxes is summarized as follows (amounts in
thousands):
21
1998 1997 1996
------- ------- -------
Federal: Current $ 2,742 $ 1,475 $ 1,378
Deferred (634) 126 (297)
State: Current 341 84 104
Deferred (74) 15 (35)
------- ------- -------
$ 2,375 $ 1,700 $ 1,150
------- ------- -------
------- ------- -------
The difference between the tax rate on income for financial statement
purposes and the federal statutory tax rate was as follows:
1998 1997 1996
------- ------ ------
Statutory tax rate 34.0% 34.0% 34.0%
Percentage depletion (3.2) (3.4) (4.5)
State income taxes, net of federal benefit 2.3 1.5 1.5
Non-deductible expenses .3 .4 .5
Other .6 2.8 1.3
------- ------ ------
34.0% 35.3% 32.8%
------- ------ ------
------- ------ ------
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):
1998 1997
------- ---------
Reserves for self-insured losses $ 1,130 $ 681
Deferred compensation 396 394
Asset valuation reserves 1,038 757
Other 40 112
-------- ----------
Total deferred tax assets 2,604 1,944
-------- ----------
Depreciation 1,873 1,710
Investment in mining partnership 52 271
Other 142 135
-------- ----------
Total deferred tax liabilities 2,067 2,116
-------- ----------
Net deferred tax asset (liability) $ 537 $ (172)
-------- ----------
-------- ----------
The net current deferred tax assets are $2,208 and $1,550 at year-end 1998
and 1997, respectively, and are included with "Prepaid expenses" on the
Consolidated Balance Sheets.
12. UNAUDITED QUARTERLY FINANCIAL DATA
The following table provides summarized unaudited quarterly financial data
for 1998 and 1997 (amounts in thousands, except per share amounts):
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 $ .54 $ 1.15 $ 1.57 $ 1.05
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted income per share $ .53 $ 1.12 $ 1.54 $ 1.02
--------- --------- --------- ---------
--------- --------- --------- ---------
22
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
---------- --------- ---------- ---------
---------- --------- ---------- ---------
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
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 table below presents information about reported segments for the fiscal
years 1998, 1997 and 1996 along with the items necessary to reconcile the
segment information to the totals reported in the financial statements
(amounts in thousands).
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
------------------ -------------- ------------- -------------- -----------
------------------ -------------- ------------- -------------- -----------
1996
Revenues from external
customers $ 49,007 $ 42,262 $ 145 $ - $ 91,414
------------------ -------------- ------------- -------------- -----------
------------------ -------------- ------------- -------------- -----------
Depreciation, depletion
and amortization 1,055 1,514 26 19 2,614
------------------ -------------- ------------- -------------- -----------
------------------ -------------- ------------- -------------- -----------
Segment operating income 4,058 4,455 (56) (2,880) 5,577
------------------ -------------- ------------- -------------- -----------
------------------ -------------- ------------- -------------- -----------
Segment assets 26,908 24,266 738 1,638 53,550
------------------ -------------- ------------- -------------- -----------
------------------ -------------- ------------- -------------- -----------
Expenditures for segment assets 491 2,692 26 13 3,222
------------------ -------------- ------------- -------------- -----------
------------------ -------------- ------------- -------------- -----------
(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 Shareholders and Board of Directors
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 Subsidiaries at January 2, 1999 and January 3, 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended January 2, 1999, in conformity with generally accepted
accounting principles. 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 generally accepted auditing standards 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 3, 1999
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 1999 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 1998, 1997 and 1996
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 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, ental Materials Corporation filed as Exhibit 2C 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, herein incorporated 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 27.1 Financial Data Schedule (filed herewith).
Exhibit 27.2 Financial Data Schedule Restated (filed herewith).
Exhibit 28 Continental Materials Corporation Employees Profit
Sharing Retirement Plan on Form 11-K for the year ended
December 31, 1998 (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 2, 1999.
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 30, 1999
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 30, 1999
/S/ Joseph J. Sum
- -------------------------------------
Joseph J. Sum Vice President
and a Director March 30, 1999
/S/ Mark S. Nichter
- -------------------------------------
Mark S. Nichter Secretary and Controller March 30, 1999
/S/ Thomas H. Carmody
- -------------------------------------
Thomas H. Carmody Director March 30, 1999
/S/ Betsy R. Gidwitz
- -------------------------------------
Betsy R. Gidwitz Director March 30, 1999
/S/ Ralph W. Gidwitz
- -------------------------------------
Ralph W. Gidwitz Director March 30, 1999
/S/ Ronald J. Gidwitz
- -------------------------------------
Ronald J. Gidwitz Director March 30, 1999
/S/ William G. Shoemaker
- -------------------------------------
William G. Shoemaker Director March 30, 1999
/S/ Theodore R. Tetzlaff
- -------------------------------------
Theodore R. Tetzlaff Director March 30, 1999
/S/ Darrell M. Trent
- -------------------------------------
Darrell M. Trent Director March 30, 1999
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.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 3, 1999
29
CONTINENTAL MATERIALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (d)
for the fiscal years 1998, 1997 and 1996
COLUMN A COLUMN B COLUMN C(1) COLUMN D COLUMN E
Balance at Additions
Beginning of Charged to Deductions - Balance at End
Description Period Costs and Describe of Period
Expenses
- ---------------------- ------------ ---------- ------------ ---------------
YEAR 1998
Allowance for doubtful $580,000 $304,000 $109,000(a) $775,000
accounts
------------ ---------- ------------ ---------------
------------ ---------- ------------ ---------------
Inventory valuation reserve $233,000 $667,000 $396,000 $504,000
------------ ---------- ------------ ---------------
------------ ---------- ------------ ---------------
YEAR 1998
Allowance for doubtful $373,000 $264,000 $ 57,000(a) $580,000
accounts
------------ ---------- ------------ ---------------
------------ ---------- ------------ ---------------
Inventory valuation reserve $404,000 $203,000 $374,000(b) $233,000
------------ ---------- ------------ ---------------
------------ ---------- ------------ ---------------
YEAR 1996
Allowance for doubtful $260,000 $199,000 $ 86,000(a) $373,000
accounts
------------ ---------- ------------ ---------------
------------ ---------- ------------ ---------------
Inventory valuation reserve $236,000 $310,000 $142,000(b) $404,000
------------ ---------- ------------ ---------------
------------ ---------- ------------ ---------------
Notes:
(a) Accounts written off, net of recoveries.
(b) Amounts written off upon disposal of assets.
(c) Reserve deducted in the balance sheet from the asset to which it
applies.
(d) Column C(2) has been omitted as the answer would be "none."
30