-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UqP+IGWRxLDXqiqjxCUEP5B/2g+NK/mnZgBrN7aNQcnJhlNzVE7DOBUB2RI5xtcg gNP488nrqy4vMNcbZU/kVQ== 0000024104-97-000002.txt : 19970327 0000024104-97-000002.hdr.sgml : 19970327 ACCESSION NUMBER: 0000024104-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970326 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL MATERIALS CORP CENTRAL INDEX KEY: 0000024104 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 362274391 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03834 FILM NUMBER: 97563527 BUSINESS ADDRESS: STREET 1: 225 WEST WACKER STREET 2: SUITE 1800 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126617200 MAIL ADDRESS: STREET 1: 225 WEST WACKER STREET 2: SUITE 1800 CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: CONTINENTAL URANIUM INC DATE OF NAME CHANGE: 19660830 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 28, 1996 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 incorporation or organization) No.) 225 West Wacker Drive, Suite 1800 Chicago, Illinois 60606 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code 312-541-7200 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock - $.50 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value (based on March 19, 1997 closing price) of voting stock held by non-affiliates of registrant: Approximately $13,002,000. Number of common shares outstanding at March 19, 1997: 1,104,221. Incorporation by reference: Portions of registrant's definitive proxy statement for the 1997 Annual meeting of stockholders to be held on May 28, 1997 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 37 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 On October 21, 1996, Continental Materials Corporation, Inc. (along with its subsidiaries collectively referred to as the Company) acquired substantially all of the assets of Valco, Inc.'s ("Valco") ready-mix concrete and aggregates operation in Pueblo, Colorado for a cash purchase price of $5,148,000 net of $163,000 of accrued liabilities assumed. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of the Pueblo operations have been included in the consolidated results since the date of acquisition. The Company has formed a new subsidiary, Transit Mix of Pueblo, Inc. to operate this acquisition. 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, with a minimum annual royalty payment of $300,000. Both the production and minimum royalties are subject to annual inflation adjustments. The Company operates primarily in two industry segments, the Heating and Air Conditioning segment and the Construction Materials segment. The Heating and Air Conditioning segment is comprised of Phoenix Manufacturing, Inc. of Phoenix, Arizona and Williams Furnace Co. of Colton, California. The Construction Materials segment is comprised of Castle Concrete Company and Transit Mix Concrete Co. both of Colorado Springs, Colorado, and Transit Mix of Pueblo, Inc. of Pueblo, Colorado. The Heating and Air Conditioning segment manufactures wall furnaces, console heaters, evaporative air coolers and fan coil/air handler product lines. Numerous models with differing heating or cooling capacities as well as exterior appearances are offered within each line. The Construction Materials segment is involved in the production and sale of ready mix concrete and other building materials as well as the exploration, extraction and sale of limestone, sand and gravel. In addition to the above operating segments, a General Corporate and Other classification is utilized covering the general expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. The Company has a 30% interest in Oracle Ridge Mining Partners (ORMP). ORMP is a general partnership which owns a copper mine near Tucson, Arizona. The Company is not the managing partner of ORMP and thus its operations are accounted for on the equity method with the Company's share of ORMP's operations presented in the other income and expense section of the Company's operating statements. See Note 5 on page 19 for further discussion of the Company's accounting for and valuation of ORMP. Financial information relating to industry segments appears in Note 13 on pages 23 and 24 of this Form 10-K. 2 MARKETING, SALES AND SUPPORT Marketing The Heating and Air Conditioning segment markets its products throughout the United States through plumbing, heating and air conditioning wholesale distributors as well as direct to some major retail home-centers and other retail outlets. Phoenix and Williams utilize independent manufacturers' representatives. Both companies also employ a small staff of sales and sales support personnel. Sales in this segment are predominantly in the United States and are concentrated in the Western and Southwestern states. Sales of Williams' furnaces usually increase in the months of September through January. Sales of Phoenix's evaporative coolers usually increase in the months of February through June. In order to sell wall furnaces and evaporative coolers during the off season, Williams and Phoenix offer extended payment terms to their customers. The Construction Materials segment markets its products primarily through its own direct sales representatives and confines its sales to the Front Range area in south central Colorado. Sales are made to general and sub-contractors, government entities and individuals. The businesses are affected by the general economic conditions in the areas serviced (as it relates to construction) and weather conditions. Revenues usually decline in the winter months as the pace of construction slows. During 1996, no customer accounted for 10% or more of the total sales of the Company. Customer Service and Support The companies in the Heating and Air Conditioning segment maintain parts departments and help lines to assist contractors, distributors and end users in servicing the companies' products. The Company does not perform installation services, nor are maintenance or service contracts offered. In addition, Williams holds training sessions at its plant for distributors, contractors, utility company employees and other customers. The companies in this segment do not derive any revenue from after- sales service and support other than from parts sales. The companies in the Construction Materials segment routinely take a leadership role in formulation of the products to meet the specifications of their customers. BACKLOG At December 28, 1996, Williams' order backlog was approximately $900,000 ($600,000 at December 30, 1995) the majority of which represented orders for furnaces. At December 28, 1996, Phoenix had a backlog of approximately $2,000,000 ($3,100,000 at December 30, 1995) representing primarily preseason cooler orders. The above backlogs are all related to the heating and air conditioning segment and are expected to be filled during the first quarter of 1997. At December 28, 1996, Transit Mix and Castle had a backlog of approximately $2,000,000 ($4,300,000 at December 30, 1995) primarily relating to construction contracts awarded and expected to be filled during the first half of 1997. Management does not believe that any of the above backlogs represent a trend but rather are indicative only of the timing of orders received or contracts awarded. 3 Research and Development/Patents In general, companies rely upon, and intend to continue to rely upon, unpatented proprietary technology and information. However, recent research and development activities in the Heating and Air Conditioning segment has lead to a patent related to Phoenix' Power Cleaning System for the evaporative coolers and patent applications on the configuration of the heat exchanger for Williams' furnaces which has increased efficiency above that previously offered by the industry. The amounts expended on research and development are not material and are expensed as incurred. The Company believes its interests in its patent applications, as well as its proprietary knowledge, are sufficient for its businesses as currently conducted. Manufacturing The Company conducts its manufacturing operations through a number of facilities as more completely described in Item 2, Properties, below. Due to the seasonality of its businesses, Williams and Phoenix build inventory during their off seasons in order to have adequate wall furnace and evaporative cooler inventory to sell during the season. In general, raw materials required by the Company can be obtained from various sources in the quantities desired. The Company has no long-term supply contracts and does not consider itself dependent on any individual supplier. In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas. In recent years, reclamation costs have had a more significant effect on the results of operations compared to prior years. We expect that the current level of reclamation expense will continue. Competitive Conditions Heating and Air Conditioning - Williams is one of four principal companies producing wall furnaces (excluding units sold to the recreational vehicle industry). The wall furnace market is only a small component of the heating industry. Williams' covers its market area from its plant in Colton, California and a warehouse in Ohio. The sales force consists of Williams' sales personnel and manufacturers' representatives. The entire heating industry is dominated by manufacturers (most of which are substantially larger than the Company) selling diversified lines of heating and air conditioning units directed primarily toward central heating and cooling systems. Williams also manufactures a line of gas fired console heaters. Distribution is similar to wall furnaces with the principal market areas in the South and Southeast. There are five other manufacturers, none of whom is believed to have a dominant share of the market. Williams is also a producer of fan coils. Fan coil sales are usually obtained through a competitive bidding process. This market is dominated by International Environmental Corp., a subsidiary of LSB Industries, Inc., a manufacturer of a diversified line of commercial and industrial products. There are also a number of other companies that produce fan coils. All of the producers compete on the basis of price and timeliness of delivery. 4 Phoenix produces evaporative air coolers. This market is dominated by Adobe Air. The other principal competitor is Champion/Essick. All producers of evaporative air coolers compete aggressively on the basis of price and service. Construction Materials - Transit Mix is one of four companies producing ready mix concrete in the Colorado Springs area. Transit Mix of Pueblo is one of three companies producing ready mix concrete in the Pueblo area. Although Transit Mix and Transit Mix of Pueblo hold a significant share of the markets served, the other competitors compete aggressively on the basis of price and service. There are a number of producers of aggregates, sand and gravel in the marketing area served by Transit Mix, Transit Mix of Pueblo and Castle who compete aggressively on the basis of price, quality of material and service. Metal doors and door frames, rebar reinforcement and other building materials sold in the Colorado Springs and Pueblo metropolitan areas are subject to intense competition. Transit Mix and Transit Mix of Pueblo compete aggressively with two larger companies from Denver and a number of small local competitors. However, both companies have a slight competitive advantage in that many of their customers also purchase concrete, sand and aggregates from Transit Mix, Transit Mix of Pueblo and Castle whereas our competitors for these particular product lines do not offer concrete, sand or aggregates. In addition, Transit Mix of Pueblo has a slight competitive advantage with respect to the two Denver companies based upon delivery costs. Employees The Company employed persons as of December 28, 1996. Employment varies throughout the year due to the seasonal nature of sales and thus to a lesser extent, production. A breakdown of the prior three years employment at year end by segment was:
1996 1995 1994 Heating and Air Conditioning 428 421 335 Construction Materials 309 215 203 Corporate Office 11 13 14 Total 748 649 552
Factory employees at the Colton, California plant are represented by the Amalgamated Industrial Workers Union under a contract that expires in June 1997. Certain drivers, laborers and mechanics at the Colorado Springs facilities are represented by the Western Conference of Teamsters under a contract which expires in February 1998. The Company considers relations with its employees and with its unions to be good. Item 2. PROPERTIES The heating and air conditioning segment operates out of one owned (Colton, California) and one leased (Phoenix, Arizona) facility. Both manufacturing facilities utilized by this segment are, in the opinion of management, in good condition and sufficient for the Company's current needs. Productive capacity exists at the locations such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery. 5 The construction materials segment operates out of two 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 7 on page 20 of this Annual Report on Form 10-K. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1996. 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 1996 Fourth Quarter 21 3/8 16 3/4 Third Quarter 19 13 1/2 Second Quarter 16 14 First Quarter 14 5/8 12 1995 Fourth Quarter 13 11 3/4 Third Quarter 13 3/8 12 Second Quarter 12 7/8 12 First Quarter 12 1/2 10 7/8
Prior to the withdrawal on February 18, 1997, of the offer to take the Company private, trading ranged from 21 5/8 to 23 5/8. After withdrawal of the offer, trading ranged from 20 3/8 to 19 1/8 through February 28, 1997. At December 28, 1996, the Company had approximately 3,100 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)
1996 1995 1994 1993 1992 SUMMARY OF OPERATIONS Net sales from continuing operations $92,768 $75,560 $75,294 $62,495 $60,982 Earnings from continuing operations before interest, taxes, depreciation and amortization (EBITDA) 6,703 3,396 5,899 4,218 5,048 Net income from continuing operations 2,355 681 1,849 1,187 1,201 Net (loss) income from discontinued operation -- -- (464) 188 (1,064) Extraordinary item, net -- -- -- (1,335) -- Net income $ 2,355 $ 681 $ 1,385 $ 40 $ 137 PER SHARE DATA Continuing operations $ 2.13 $ .60 $ 1.62 $ 1.02 $ 1.02 Discontinued operation -- -- (.41) .16 (.90) Extraordinary item -- -- -- (1.15) -- Net income $ 2.13 $ .60 $ 1.21 $ .03 $ .12 Average shares outstanding during year 1,106 1,135 1,140 1,164 1,174 FINANCIAL CONDITION Current ratio 2.0:1 2.0:1 2.0:1 2.2:1 2.5:1 Total assets $53,893 $47,223 $48,162 $45,424 $54,961 Long-term debt, including current portion 8,000 4,011 4,923 6,819 16,114 Shareholders' equity 29,350 27,281 26,789 25,404 25,660 Long-term debt to net worth .27 .15 .18 .27 .63 Book value per share $ 26.58 $ 24.25 $ 23.50 $ 22.28 $ 21.86 CASH FLOWS Net cash provided by (used in): Operating activities $ 6,676 $ 848 $ 7,191 $ 2,727 $ 4,925 Investing activities (9,174) (3,751) (1,884) 6,628 (3,182) Financing activities 1,803 1,199 (3,596) (9,914) (1,836) Net (decrease) increase in cash and cash equivalents $ (695) $(1,704) $ 1,711 $ (559) $ (93)
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 declined to $379,000 at year end compared to $1,074,000 in the prior year. Cash provided from operations in 1996 was $6,676,000 compared to $848,000 in 1995 and the $7,191,000 generated in 1994. The increase in net cash generated by operating activities in 1996 was mainly due to improved sales volume and the related increase in accounts payable and accrued expenses. The decrease in 1995 from the 1994 level (years that had similar sales volume) was mainly due to decreased levels of accounts payable and accrued expenses. The expected decrease in accounts payable in 1995 was the result of the early purchase of raw materials in 1994 for which 1995 price increases had been announced, and the timing of payments. The decrease in accruals was also expected and was due primarily to the timing of payments. The Company paid $250,000 and $1,000,000 in 1995 and 1996, respectively to settle product liability claims related to Imeco, Inc., a subsidiary sold in 1993. There are no known claims remaining related to Imeco for which the company would be liable. Net cash used in investing activities was $9,174,000 in 1996, $3,751,000 in 1995 and $1,884,000 in 1994. Capital expenditures for 1996, 1995 and 1994, exclusive of the purchase of certain assets of Valco, Inc. ("Valco"), were $3,222,000, $3,417,000, and $1,775,000, respectively. 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. The Company has formed a new subsidiary, Transit Mix of Pueblo, Inc. To operate this acquisition. There were no significant commitments for capital expenditures at the end of 1996. Budgeted capital expenditures for 1997 are approximately $3,125,000 (primarily routine replacements and upgrades), $175,000 less than planned depreciation. The 1997 expenditures will be funded from internal sources and available borrowing capacity. Cash invested in Oracle Ridge Mining Partners (ORMP) during 1996, 1995 and 1994 was $868,000, $883,000, and $561,000, respectively. During 1996, cash of $1,803,000 was provided by financing activities. The Company made scheduled long-term debt repayments of $1,011,000 and reduced the revolving line of credit by $1,900,000. Cash of $286,000 was used to acquire 20,700 shares of treasury stock. Additional long-term debt borrowings of $5,000,000 were utilized to finance the acquisition of the Pueblo operation. During 1995, cash of $1,199,000 was provided by financing activities. Borrowings of $2,300,000 against the short- term line of credit were offset by the net long-term debt repayment of $912,000. Cash of $189,000 was used to acquire 15,357 shares of treasury stock. During 1994, cash of $3,596,000 was used to pay off the revolving line of credit and the scheduled long-term debt payments. 8 The Company maintains a credit agreement with two banks. The agreement as amended in October, 1996 provides for a term loan of $8,000,000 and a revolving credit facility of $13,500,000 for funding of seasonal sales programs at Williams Furnace Co. And Phoenix Manufacturing, Inc. The line is also used for stand-by letters of credit to insurance carriers in support of deductible amounts under the Company's insurance program. All borrowings under the new agreement are unsecured and bear interest at prime or an adjusted LIBOR rate. Additionally, the credit agreement allows the Company to convert up to $2,000,000 of qualifying capital expenditures purchased with funds from the revolving credit facility to the term loan with a corresponding decrease in the revolving credit facility to $11,500,000 and a proportional increase in the term loan amortization schedule. The Company anticipates the primary source of cash flow in 1997 to be from its operating subsidiaries. This anticipated cash flow, supplemented by the line of credit, will be sufficient to cover normal and expected future cash needs, including servicing debt and planned capital expenditures. The Company purchases insurance coverage for property loss, workers' compensation, general, product and automobile liability maintaining certain levels of retained risk (self-insured portion). Provisions for claims under the self-insured portion of the policies are recorded in accordance with the requirements of SFAS No. 5. The accrual for workers' compensation, automobile liability and product liability claims covers occurrences through December 28, 1996. There were no unasserted claims as of December 28, 1996, that required a reserve or disclosure in accordance with SFAS No. 5. On November 13, 1996, an investor group led by James G. Gidwitz, the Company's chairman and chief executive officer made a proposal to the Board of Directors to take the Company private for a cash price of $21.00 per share. Immediately thereafter, three purported class action lawsuits were filed in the Delaware Court of Chancery seeking to enjoin consummation of the investor group's proposal and requesting other relief. On February 18, 1997, the group terminated their offer after concluding that, under the circumstances, they would not be able to reach agreement on an acquisition price with the Special Committee of the Board of Directors appointed to respond to the offer. 9 OPERATIONS 1996 vs. 1995 Consolidated net sales increased $17,208,000 (23%). The net sales of the construction materials segment rose $10,813,000 while the net sales of the heating and air-conditioning segment improved by $6,395,000. A surge in the already strong construction market in the Colorado Springs, Colorado area accounted for most of the $10,813,000 (34%) increase in the construction materials segment while the addition of operations in Pueblo, Colorado since October 22, 1996, accounted for $1,399,000 of the increase. The $6,395,000 (15%) increase in the heating and air-conditioning segment was the result of new customers as well as dry hot weather in the areas serviced by Phoenix Manufacturing combined with improved furnace and fan coil sales at Williams Furnace. The Company experienced a high level of price competition at all of its subsidiaries which is expected to continue into 1997. During 1996, inflation was not a significant factor at any of the operations. Cost of sales (exclusive of depreciation, depletion and amortization) declined from 77% to 76% as a result of increased sales and production combined with cost savings at all locations. Depreciation, depletion and amortization increased from $2,278,000 to $2,614,000 (15%) due to increased capital expenditures in the past two years and the Transit Mix of Pueblo asset acquisition during 1996. Selling and administrative expenses increased $1,704,000 (13%) while declining as a percentage of sales from 17% to 16%. The dollar increase is attributable mainly to higher sales volume while the percentage decline is due to the fixed nature of some of the expenses. The decrease in interest expense of $228,000 reflects lower average interest rates. The Company recorded a loss of $1,768,000 related to its investment in ORMP. This amount is comprised of a loss of $988,000 largely due to the curtailment of operations and a write down of $780,000 to management's best estimate of net realizable value, $600,000, as of December 28, 1996. On January 29,1997, the ORMP partners, including the Company, signed a Letter of Intent to sell their interest in ORMP. A definitive agreement to sell is contingent upon, among other matters, the buyer's satisfactory completion of due diligence and financing arrangements. There were no charges against the discontinued operation during 1996 although the last of the known legal matters concerning the operation was settled during March 1996. See "Financial Condition, Liquidity and Capital Resources" for further discussion. Other income for 1995 includes a $300,000 gain on the sale of the Company's interest in Oracle Ridge surface rights to Union Copper, Inc., the majority partner of ORMP. The Company's 1996 effective income tax rate on income from continuing operations (32.8%) reflects federal and state statutory rates adjusted for non-deductible and other tax items. The current year's favorable impact from percentage depletion allowance was less than the prior year's due to the higher level of taxable income. See Note 11. During 1996, the Financial Accounting Standards Board issued a new pronouncement, SFAS No. 128 "Earnings per Share" which is relevant to the Company's operations. The statement is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier, application is not permitted. The Company intends to adopt SFAS No. 128 at year end 1997. Its affect is not expected to be material to earnings per share. 10 OPERATIONS 1995 vs. 1994 Consolidated net sales from continuing operations increased $266,000. The net sales of the heating and air-conditioning segment rose slightly while the net sales of the construction materials segment declined slightly compared to the previous year. Sales at Phoenix Manufacturing, Inc. Rose due to new customers and a strong pre-season sales program during the fourth quarter. Sales at Williams Furnace Co. Declined slightly due to new competitive products. A decline in sales in the Northern California region was possibly due to publicity of the heat exchanger matter concerning units manufactured by Williams prior to 1992 (See Note 7). The Company experienced a high level of price competition at all of its subsidiaries which the Company expects to continue into 1996. During 1995, inflation was not a significant factor at any of the operations. Cost of sales (exclusive of depreciation and depletion) increased from 76% to 77% due to product mix in the heating and air- conditioning segment. Selling and administrative expenses increased $995,000 (8%) due to legal and other expenses incurred in regards to the Williams Furnace heat exchanger matter, additional costs associated with new products marketing and the accrual of future compensation to be paid to the Company's former president. As a percentage of sales, selling and administrative expense increased from 16% to 17%. The decrease in the operating income reflects the increase in cost of sales as well as the higher selling and administrative expenses. The increase in interest expense of $45,000 reflects a higher interest rate partially offset by lower average borrowings. The Company recorded a loss of $922,000 related to its investment in Oracle Ridge Mining Partners. This loss represents the Company's share (30%) of the loss of the partnership for 1995 as well as a $172,000 write down of the carrying value of the investment to management's best estimate of net realizable value, $1,500,000, as of December 30, 1995. Production at the mine was halted in February 1996 as the partners are reassessing their plans, including a possible sale of the mine. There were no charges against the discontinued operation during 1995. See "Financial Condition, Liquidity and Capital Resources" for further discussion. The Company's 1995 effective income tax rate on income from continuing operations (24.8%) reflects federal and state statutory rates adjusted for non-deductible and other tax items. The current year was favorably impacted by a substantial percentage depletion allowance. See Note 11. 11 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE Financial Statements and Schedule of Continental Materials Corporation and report thereon: Consolidated statements of operations and retained earnings for fiscal years 1996, 1995 and 1994 13 Consolidated statements of cash flows for fiscal years ended 1996, 1995 and 14 1994 Consolidated balance sheets at December 28, 1996 and December 30, 1995 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 1996, 1995 and 1994 (Amounts in thousands, except per share data)
1996 1995 1994 NET SALES $92,768 $75,560 $75,294 COSTS AND EXPENSES Cost of sales (exclusive of depreciation, depletion and amortization) 70,095 58,497 57,244 Depreciation, depletion and amortization 2,614 2,278 2,311 Selling and administrative 14,483 12,779 11,784 Operating income 5,577 2,006 3,955 Interest expense (584) (812) (767) Equity loss from mining partnership (1,768) (922) (545) Other income, net 280 634 168 Income from continuing operations before income taxes 3,505 906 2,811 Income tax provision 1,150 225 962 Income from continuing operations 2,355 681 1,849 Loss on sale of discontinued operation, net of tax -- -- (464) Net income 2,355 681 1,385 Retained earnings, beginning of year 25,818 25,137 23,752 Retained earnings, end of year $28,173 $25,818 $25,137 Net income (loss) per share: Continuing operations $ 2.13 $ .60 $ 1.62 Discontinued operation -- -- (.41) Net income per share $ 2.13 $ .60 $ 1.21 Weighted average shares outstanding 1,106 1,135 1,140
The accompanying notes are an integral part of the financial statements. 13 Continental Materials Corporation Consolidated Statements of Cash Flows For Fiscal Years 1996, 1995, and 1994 (Amounts in thousands)
1996 1995 1994 Operating activities: Net income $ 2,355 $ 681 $ 1,385 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 2,614 2,278 2,311 Deferred income tax benefit (332) (282) (66) Provision for doubtful accounts 179 60 148 Gain on disposition of property and equipment (59) (459) (133) Equity loss from mining partnership 1,768 922 545 Changes in operating assets and liabilities, net of effect of purchase of assets of Valco, Inc.: Receivables (1,688) (842) (1,395) Inventories (191) 1,840 (61) Prepaid expenses (476) 8 (92) Income taxes 420 21 (145) Accounts payable and accrued expenses 2,226 (3,267) 5,037 Other (140) (112) (343) Net cash provided by operating activities 6,676 848 7,191 Investing activities: Purchase of assets of Valco, Inc. (5,148) -- -- Capital expenditures (3,222) (3,417) (1,775) Investment in mining partnership (868) (883) (561) Return of investment in environmental management venture -- -- 250 Proceeds from sale of property and equipment 64 549 202 Net cash used in investing activities (9,174) (3,751) (1,884) Financing activities: (Repayment) borrowings under revolving credit facility (1,900) 2,300 (1,700) Long-term borrowings 5,000 500 -- Repayment of long-term debt (1,011) (1,412) (1,896) Payments to acquire treasury stock (286) (189) -- Net cash provided by (used in) financing activities 1,803 1,199 (3,596) Net (decrease) increase in cash and cash equivalents (695) (1,704) 1,711 Cash and cash equivalents: Beginning of year 1,074 2,778 1,067 End of year $ 379 $ 1,074 $ 2,778 Supplemental disclosures of cash flow items: Cash paid during the year for: Interest $ 520 $ 812 $ 773 Income taxes 1,075 500 916
Supplemental Schedule of non-cash investing and financing activities: A portion of the 1995 proceeds from sale of property and equipment was in the form of a note receivable valued at $162. The accompanying notes are an integral part of the financial statements. 14 Continental Materials Corporation Consolidated Balance Sheets December 28, 1996 and December 30, 1995 (Amounts in thousands except share data)
December 28, December 30, 1996 1995 ASSETS Current assets: Cash and cash equivalents $ 379 $ 1,074 Receivables less allowance of $373 and $259 14,584 12,158 Inventories 15,184 14,657 Prepaid expenses 2,687 2,206 Total current assets 32,834 30,095 Property, plant and equipment: Land and improvements 2,104 1,713 Buildings and improvements 8,141 7,731 Machinery and equipment 46,935 41,078 Mining properties 2,170 2,170 Less accumulated depreciation and depletion (40,532) (38,079) 18,818 14,613 Other assets: Investment in mining partnership 600 1,500 Other 1,641 1,015 2,241 2,515 $ 53,893 $ 47,223 LIABILITIES Current liabilities: Bank loan payable $ 400 $ 2,300 Current portion of long-term debt 1,500 1,011 Accounts payable 5,182 4,037 Income taxes 450 31 Accrued expenses: Compensation 2,631 1,853 Reserve for self-insured losses 2,212 2,984 Profit sharing 1,565 1,031 Reclamation 1,071 645 Other 1,202 893 Total current liabilities 16,213 14,785 Long-term debt 6,500 3,000 Deferred income tax es 1,830 2,157 Commitments and contingencies (Notes 7 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 28,173 25,818 Treasury shares (2,970) (2,684) 29,350 27,281 $ 53,893 $ 47,223
The accompanying notes are an integral part of the financial statements. 15 Notes to Consolidated Financial Statements 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include Continental Materials Corporation and all of its subsidiaries (the "Company"). The equity method of accounting is used for the Company's 30% interest in Oracle Ridge Mining Partners ("ORMP"). Certain prior years' amounts have been reclassified to conform with 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 December 28, 1996 and December 30, 1995 and the reported amounts of revenues and expenses during each of the three years in the period ended December 28, 1996. 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 December 28, 1996 (88% at December 30, 1995). The cost of all other inventory is determined by the first-in, first-out (FIFO) method. Property, Plant and Equipment Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method as follows: Buildings 10 to 31 years Leasehold improvements Terms of leases Machinery and equipment 3 to 10 years Depletion of rock and sand deposits is computed by the unit-of- production method based upon estimated recoverable quantities of rock and sand. Amortization of certain other assets is computed on a straight line basis over periods of 5 and 10 years. The cost of property sold or retired and the related accumulated depreciation, depletion and amortization are removed from the accounts and the resulting gain or loss is reflected in other income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized and depreciated over their useful lives. Retirement Plans The Company and certain subsidiaries have various contributory profit sharing retirement plans for specific employees. The plans allow qualified employees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k). The Company makes annual contributions, at its discretion, based primarily on profitability. Costs under the plans are charged to operations as incurred. 16 Reserve for Self-Insured Losses The Company's risk management program provides for certain levels of loss retention for workers' compensation, automobile liability and general and product liability claims. The components of the reserve have been recorded in accordance with the requirements of Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies" and represent management's best estimate of future liability for known claims based upon the Company's history of claims paid. There were no unasserted claims as of December 28, 1996 that require a reserve or disclosure in accordance with SFAS No. 5. Reclamation In connection with permits to mine properties in 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 is 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 1996, 1995 and 1994 each consist of 52 weeks. 2. ACQUISITION On October 21, 1996, the Company acquired substantially all of the assets of Valco, Inc.'s ("Valco") ready-mix concrete and aggregates operation in Pueblo, Colorado for a cash purchase price of $5,148,000 net of $163,000 of accrued liabilities assumed. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of the Pueblo operations have been included in the consolidated results since the date of acquisition. The Company has formed a new subsidiary, Transit Mix of Pueblo, Inc. To operate this acquisition. In addition to the above, the Company concurrently entered into a long-term operating lease to mine aggregates from properties in Pueblo owned by Valco. The lease calls for the Company to pay a production royalty based upon the tons of aggregate mined, up to an agreed upon total tonnage, with a minimum annual royalty payment of $300,000. Both the production and minimum royalties are subject to annual inflation adjustments. Royalties paid in advance of actual tons mined will be recorded as a prepaid to be applied against production at the end of the lease. 17 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 years ended December 28, 1996 and December 30, 1995, assuming the acquisition described had been consummated as of January 1, 1995, 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 1995 Unaudited Unaudited Sales $101,532 $83,132 Net income 2,342 542 Net income per share 2.12 .48
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 periods presented, or of results which may occur in the future. 3) DISCONTINUED OPERATION In June 1993, the Company sold its Imeco, Inc. Subsidiary. The Company retained responsibility on product liability claims involving Imeco equipment occurring prior to the June 30, 1993 sale date. As of January 1, 1993, in accordance with the requirements of SFAS No. 5, the Company maintained an accrual of $616,000 toward the settlement of the claims. During the fourth quarter of 1994, the Company, based on updated information, recorded an additional $726,000 ($464,000 after-tax or $0.41 per share) toward the settlement of the last of the known claims. This last claim was settled in early March 1996. See Note 7. 4) INVENTORIES Inventories consisted of the following (amounts in thousands):
December 28, December 30, 1996 1995 Finished goods $ 8,696 $ 8,038 Work in process 1,800 2,282 Raw materials and supplies 4,688 4,337 $ 15,184 $ 14,657
If inventories valued on the LIFO basis were valued at current costs, inventories would be higher as follows: 1996--$2,590,000; 1995--$2,626,000; 1994--$2,716,000. Reduction in inventory quantities during 1996 at one of the locations resulted in liquidation of LIFO inventory layers carried at costs which were lower than the costs of current purchases. The effect of the reduction in 1996, recorded in the fourth quarter, was to decrease cost of goods sold by approximately $125,000 and to increase net earnings by $78,000 or $.07 per share. 5) 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. 18 Production at the mine was halted in February 1996 and remained idle throughout 1996, as the Partners reassessed their plans. On January 29, 1997, the Partners, including the Company, signed a Letter of Intent to sell their interest in ORMP. A definitive agreement to sell is contingent upon, among other matters, the buyer's satisfactory completion of due diligence and financing arrangements. In accordance with SFAS No. 121, the Investment in mining partnership was written down to management's best estimate of net realizable value, $1,500,000, as of December 30, 1995. The related impairment loss, $172,000, is included in the $922,000 equity loss from mining partnership. During 1996, the Company recorded a loss totaling $1,768,000. This amount is comprised of an operating loss of $988,000 largely due to the curtailment of operations and a write down of $780,000 to management's best estimate of net realizable value, $600,000, as of December 28, 1996. The year end values of $600,000 and $1,500,000 for 1996 and 1995, respectively, 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. 6) LONG-TERM DEBT Long-term debt consisted of the following (amounts in thousands):
December 28, December 30, 1996 1995 Unsecured term loan $ 8,000 $ 4,000 Other -- 11 8,000 4,011 Less current portion 1,500 1,011 $ 6,500 $ 3,000
The unsecured term loan is payable to two banks in escalating semi-annual installments with final principal payment of all then unpaid principal due June 15, 2001, including extension periods. The loan, at the Company's option, bears interest at either prime or an adjusted LIBOR rate. The Company is required to maintain certain levels of consolidated tangible net worth, to attain certain levels of cash flow (as defined) on a rolling four-quarter basis, and to maintain certain ratios including consolidated debt to cash flow (as defined). Additional borrowing, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends are either limited or require prior approval by the lenders. Aggregate long-term debt matures as follows under the Agreement (amounts in thousands): 1997 $1,500 1998 1,500 1999 2,000 2000 2,000 2001 1,000 $8,000 19 During 1996, the Company had a $13,500,000 unsecured line of credit ($12,000,000 in 1995) with two banks to be used for short- term cash needs and standby letters of credit. During 1996, interest was charged at prime or adjusted LIBOR rates on cash borrowings (prime in 1995). The weighted average interest rate was 7.8% for fiscal 1996 and 8.9% for fiscal 1995. The outstanding balance at December 28, 1996 was $400,000. The outstanding balance at December 30, 1995 was $2,300,000. Additionally, the current credit agreement allows the Company to convert up to $2,000,000 of qualifying capital expenditures purchased with funds from the revolving credit facility to the term loan with a corresponding decrease in the revolving credit facility to $11,500,000 at June 30, 1997 and a proportional increase in the term-loan amortization schedule. At December 28, 1996, the Company had letters of credit outstanding totaling approximately $3,529,000 which primarily collateralize the self-insured losses. 7) COMMITMENTS AND CONTINGENCIES As discussed in Note 3, the Company retained the responsibility related to incidents involving Imeco products occurring prior to June 30, 1993. There were two suits which were settled in April 1995 and March 1996 respectively. Both settlements had been fully reserved as of December 31, 1994. Management is not currently aware of any asserted or unasserted claims involving Imeco products for which the Company has retained responsibility. During 1995, Williams Furnace Co. ("Williams") was notified by Pacific Gas & Electric ("PG&E") that a recent inspection had discovered a higher than normal incidence of cracks in the heat exchanger of two models of furnaces manufactured by Williams prior to 1992. Independent engineering reports indicate that there is no safety hazard arising from these cracks. However, PG&E replaced approximately 5,900 units purchased during the period. The Consumer Products Safety Commission ("CPSC") has been notified and Williams is cooperating with the CPSC in their investigation. To date, Williams is not aware of any claims related to these matters and accordingly, management has concluded that no amounts should be accrued in accordance with the requirements of SFAS No. 5. The Company is also involved in other litigation matters related to its continuing business and to the purported class action opposing the now withdrawn offer of the Gidwitz group to take the Company private. In the Company's opinion, none of these proceedings, when concluded, will have a material adverse effect on the Company's results of operations or financial position. 8) SHAREHOLDERS' EQUITY Four hundred thousand shares of preferred stock ($.50 par value) are authorized and unissued. There was no treasury shares activity during 1994. Activity for 1995 and 1996 was as follows (dollars in thousands):
Number of shares Cost Balance at January 1 and December 31, 1994 186,310 $2,495 Purchase of treasury shares 15,357 189 Balance at December 30, 1995 201,667 $2,684 Purchase of treasury shares 20,700 286 Balance at December 28, 1996 222,367 $2,970
20 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 become exercisable when the Company's stock price rises to 133% of the price at the time of issuance ($17.50) and remains 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 December 28, 1996. The full 78,000 options remain outstanding as of December 28, 1996 as none were exercised or lapsed during the period. The outstanding options expire on September 25, 2005 and 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 and $50,000, or $0.04 per share for 1996 and 1995 respectively. The fair value of the options granted during 1995 is estimated as $5.00 on the date of the grant using the Black-Sholes option- pricing model with the following assumptions: dividend yield 0%, volatility of 30%, risk-free interest rate of 6.05%, and an expected life of five years. 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 $2,223,000, $2,006,000 and $1,694,000 for 1996, 1995 and 1994, respectively. Future minimum rental commitments under non-cancelable operating leases for 1997 and thereafter are as follows: 1997--$1,832,000; 1998--$1,776,000; 1999--$1,543,000; 2000--$1,043,000; 2001-- $720,000 and thereafter--$17,772,000. Included in these amounts are $300,000 per year and approximately $16,941,000 in the "thereafter" amount related to the new aggregates lease. See Note 2. The Company also receives annual rental income of $145,000 from a building it owns. The related lease expires in January 2003 and contains renewal options. 10) RETIREMENT PLANS As discussed in Note 1, the Company maintains retirement benefit plans for eligible employees. Total plan expenses charged to operations were $1,152,000, $979,000 and $1,165,000 in 1996, 1995 and 1994, respectively. 21 11) INCOME TAXES The provision (benefit) for income taxes is summarized as follows (amounts in thousands):
1996 1995 1994 Federal: Current $ 1,378 $ 506 $ 785 Deferred (297) (253) (131) State: Current 104 1 61 Deferred (35) (29) (15) $ 1,150 $ 225 $ 700
The provision (benefit) for income taxes has been allocated as follows:
1996 1995 1994 Continuing operations $ 1,150 $ 225 $ 962 Discontinued operations -- -- (262) $1,150 225 $ 700
The difference between the tax rate on income from continuing operations for financial statement purposes and the federal statutory tax rate was as follows:
1996 1995 1994 Statutory tax rate 34.0% 34.0% 34.0% Percentage depletion (4.5) (13.0) (5.1) State income taxes, net of federal benefit 1.5 1.6 1.0 Non-deductible expenses .5 1.4 .5 Other 1.3 .8 3.8 32.8% 24.8% 34.2%
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):
1996 1995 Reserves for self-insured losses $ 740 $ 904 Deferred compensation 383 405 Asset valuation reserves 698 435 Other 18 50 Total deferred tax assets $ 1,839 $ 1,794 Depreciation $ 1,465 $ 1,324 Investment in mining partnership 339 807 Other 66 26 Total deferred tax liabilities $ 1,870 $ 2,157 Net deferred tax liabilities $ 31 $ 363
The net current deferred tax assets are $1,799 and $1,794 for the years end 1996 and 1995, respectively, and are included with "Prepaid expenses" on the Consolidated Balance Sheets. 22 12) UNAUDITED QUARTERLY FINANCIAL DATA The following table provides summarized unaudited quarterly financial data for 1996 and 1995 (amounts in thousands, except per share amounts):
First Second Third Fourth Quarter Quarter Quarter Quarter 1996 Net sales $17,852 $27,124 $21,718 $26,074 Gross profit $ 3,323 $ 6,065 $ 5,030 $ 5,830 Depreciation, depletion and amortization $ 661 $ 668 $ 666 $ 619 Net (loss) income $ (577) $ 1,368 $ 1,050 $ 514 Net (loss) income per share $ (.52) $ 1.24 $ .95 $ .47 First Second Third Fourth Quarter Quarter Quarter Quarter 1995 Net sales $16,191 $19,355 $18,183 $21,831 Gross profit $ 2,417 $ 3,318 $ 4,366 $ 4,735 Depreciation and depletion $ 591 $ 590 $ 569 $ 528 Net (loss) income $ (495) $ 52 $ 495 $ 629 Net (loss) income per share $ (.43) $ .05 $ .44 $ .56
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total for the year. 13) INDUSTRY SEGMENT INFORMATION The Heating and Air Conditioning segment produces and sells heating and cooling equipment mainly for residential applications which is sold primarily to wholesale distributors and retail home centers. Sales are nationwide, but are concentrated in the Southwestern U.S. The Construction Materials segment is involved in the production and sale of concrete and other building materials and the exploration, extraction and sales of limestone, sand and gravel. Sales of this segment are confined to the Front Range area in south central Colorado. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest, income or loss from unconsolidated investees, other income, income taxes, gain or loss on discontinued operations and extraordinary items. General corporate assets are principally cash, accounts receivable and leasehold improvements. No customer accounts for 10% or more of consolidated sales. 23 The industry segment information for fiscal years 1996, 1995 and 1994 is as follows (amounts in thousands):
Depreci- ation, Deple- tion Identifi- and Capital Net Operating able Amorti- Expendi- Sales Income Assets zation tures 1996 Heating and air conditioning $50,361 $ 4,058 $24,870 $ 1,055 $ 491 Construction materials 42,262 4,446 26,899 1,514 2,692 General corporate and other 145 (2,927) 2,124 45 39 $92,768 $ 5,577 $53,893 $ 2,614 $ 3,222 1995 Heating and air conditioning $43,966 $ 2,316 $25,393 $ 1,027 $ 1,066 Construction materials 31,449 2,912 19,164 1,210 2,337 General corporate and other 145 (3,222) 2,666 41 14 $75,560 $ 2,006 $47,223 $ 2,278 $ 3,417 1994 Heating and air conditioning $43,271 $ 3,718 $27,551 $ 1,087 $ 533 Construction materials 31,878 2,645 18,635 1,183 1,211 General corporate and other 145 (2,408) 1,976 41 31 $75,294 $ 3,955 $48,162 $ 2,311 $ 1,775
24 Report of Independent Accountants To the Shareholders and Board of Directors of Continental Materials Corporation We have audited the accompanying consolidated balance sheets of Continental Materials Corporation and Subsidiaries as of December 28, 1996 and December 30, 1995, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended December 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Continental Materials Corporation and Subsidiaries as of December 28, 1996 and December 30, 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 28, 1996 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 28, 1997 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 December 28, 1996, its definitive 1997 proxy statement. The information required by Part III will be included in that proxy statement and such information is hereby incorporated by reference, but excluding the information under the headings "Compensation Committee Report" and "Comparison of Total Shareholders' Return". PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 Financial statements required by Item 14 are included in Item 8 of Part II. (a) 2 The following is a list of financial statement schedules filed as part of this Report: Report of Independent Accountants Schedule II Valuation and Qualifying Accounts & Reserves For Years Ended December 28, 1996, December 30, 1995 and December 31, 1994 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 10d Acquisition Agreement Between Valco Properties, Ltd. And Continental Materials Corporation filed as Exhibit 2A to Form 8-K for the month of October 1996, incorporated herein by reference. Exhibit 10e 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 10f 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 10b 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 10c 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 11 Computation of Per Share Earnings (filed herewith). Exhibit 21 Subsidiaries of Registrant (filed herewith). Exhibit 24 Consent of Independent Accountants (filed herewith). Exhibit 27 Financial Data Schedule (filed herewith). Exhibit 28 Continental Materials Corporation Employees Profit Sharing Retirement Plan on Form 11-K for the year ended December 31, 1996 (to be filed by amendment). * - Compensatory plan or arrangement (b) Reports on Form 8-K: A Form 8-K was filed on November 1, 1996 related to the Company's purchase of the Pueblo operation discussed in Item 1, Part 1. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONTINENTAL MATERIALS CORPORATION Registrant By: /S/Joseph J. Sum Joseph J. Sum, Vice President, Finance Date: March 26, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE CAPACITY(IES) DATE /S/ James G. Gidwitz James G. Gidwitz Chief Executive Officer and a Director March 26, 1997 /S/ Joseph J. Sum Joseph J. Sum Vice President and a Director March 26, 1997 /S/ Mark S. Nichter Mark S. Nichter Secretary and March 26, 1997 Controller /S/ Thomas H. Carmody Thomas H. Carmody Director March 26, 1997 /S/ Betsy R. Gidwitz Betsy R. Gidwitz Director March 26, 1997 /S/ Ralph W. Gidwitz Ralph W. Gidwitz Director March 26, 1997 /S/ Ronald J. Gidwitz Ronald J. Gidwitz Director March 26, 1997 /S/ William A. Ryan William A. Ryan Director March 26, 1997 /S/ William G. Shoemaker William G. Shoemaker Director March 26, 1997 /S/ Theodore R. Tetzlaff Theodore R. Tetzlaff Director March 26, 1997 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 35 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 28, 1997 CONTINENTAL MATERIALS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (d) for the fiscal years 1996, 1995 and 1994
COLUMN A COLUMN B COLUMN C(1) COLUMN D COLUMN E Additions Balance at Charge to Balance at Beginning Costs and Deductions End of Description of Period Expenses Describe Period Year 1996 Allowance for doubtful accounts $ 260,000 $199,000 $ 86,000 (a) $373,000 Inventory valuation reserve $ 236,000 $310,000 $142,000 (b) $404,000 Year 1995 Allowance for doubtful accounts $ 248,000 $ 60,000 $ 48,000 (a) $260,000 Inventory valuation reserve $ 223,000 $232,000 $219,000 (b) $236,000 Year 1994 Allowance for doubtful accounts $ 139,000 $148,000 $ 39,000 (a) $248,000 Inventory valuation reserve $ 420,000 $289,000 $486,000 (b) $223,000
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". EX-11 2 EXHIBIT 11 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE for the fiscal years ended 1996, 1995 and 1994 (Dollar amounts in thousands, except per share data)
1996 1995 1994 Primary Earnings Per Share: Net Earnings $ 2,355 $ 681 $ 1,385 Weighted Average Shares Outstanding: Common Shares 1,125 1,129 1,140 Primary Earnings Per Share $ 2.09 $ .60 $ 1.21 Fully Diluted Earnings Per Share: Net Earnings $ 2,355 $ 681 $ 1,385 Weighted Average Shares Outstanding: Common Shares 1,136 1,129 1,140 Fully Diluted Earnings Per Share $ 2.07 $ .60 $ 1.21
Notes: Common stock equivalents are excluded from the primary earnings per share weighted average shares outstanding on the face of the Consolidated Statements of Operations and Retained Earnings as their effect is immaterial. Fully diluted earnings per share for 1996 are not disclosed on the face of the Consolidated Statements of Operations and Retained Earnings as their effect is immaterial. The above weighted average shares outstanding can also be used to compute the primary and fully diluted earnings per share for continuing and discontinued operations. EX-21 3 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Registrant has no parent; see proxy statement for Registrant's principal shareholders. The following are Registrant's subsidiaries which are included in the consolidated financial statements: Name of Subsidiary State or Other (Each Owned 100% by Registrant Jurisdiction Except as Otherwise Stated) of Incorporation Castle Concrete Company Colorado Continental Catalina, Inc.* Arizona Continental Copper, Inc. Arizona Continental Quicksilver, Inc. Idaho Continental Uranium, Inc. Colorado Edens Industrial Park, Inc. Illinois Phoenix Manufacturing, Inc. Arizona ProSoft International, Inc.** Colorado Transit Mix Concrete Co. Colorado Transit Mix of Pueblo, Inc. Colorado Williams Furnace Co. Delaware * owned by Continental Copper, Inc. **owned by Transit Mix Concrete Co. EX-24 4 EXHIBIT 24 EXHIBIT 24 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Continental Materials Corporation and Subsidiaries on Form S-8 (File No. 33-23671) of our report dated February 28, 1997 on our audits of the consolidated financial statements and financial statement schedule of Continental Materials Corporation and Subsidiaries as of December 28, 1996 and December 30, 1995, and for the three years in the period ended December 28, 1996, which reports are included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Chicago, Illinois March 26, 1997 EX-27 5 EXHIBIT 27
5 1000 YEAR DEC-28-1996 DEC-28-1996 379 0 14,584 0 15,184 32,834 18,818 0 53,893 16,213 0 0 0 663 28,687 53,893 92,768 92,768 70,095 87,192 1,488 0 584 3,505 1,150 2,355 0 0 0 2,355 2.13 2.13 Net of allowance for doubtful accounts Net of accumulated depreciation. Exclusive of depreciation, depletion and amortization.
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