-----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, QlJ+ZpHhbgrUmmdcXewFJsr9Pxm+E3E+glTJcIDaOLA5qk7BO5CDGNCBMUNKErFX ejyya0MSkfdtJH+LbpWw6A== 0000024104-98-000002.txt : 19980401 0000024104-98-000002.hdr.sgml : 19980401 ACCESSION NUMBER: 0000024104-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980331 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: SEC FILE NUMBER: 001-03834 FILM NUMBER: 98583124 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 January 3, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-3834 Continental Materials Corporation (Exact name of registrant as specified in its charter) Delaware 36-2274391 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 225 West Wacker Drive, Suite 1800 60606 Chicago, Illinois (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code 312-541-7200 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock - $.50 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10- K or any amendment to this Form 10-K. [ ] The aggregate market value (based on March 20, 1998 closing price) of voting stock held by non-affiliates of registrant: Approximately $17,897,000. Number of common shares outstanding at March 20, 1998: 1,076,365. Incorporation by reference: Portions of registrant's definitive proxy statement for the 1998 Annual meeting of stockholders to be held on May 29, 1998 into Part III of this Form 10-K. (The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Form 10-K.) Index to Exhibits: on page 27 hereof. 1 NOTE: References to a "Note" are to the Notes to Consolidated Financial Statements which are included on pages 16 through 24 of this Annual Report on Form 10-K. PART I Item 1. BUSINESS There have been no significant changes in the business during the past five years other than the purchase of substantially all of the assets of Valco, Inc.'s (Valco) ready-mix concrete and aggregates operation in Pueblo, Colorado on October 21, 1996. The Company formed a new subsidiary, Transit Mix of Pueblo, Inc. to hold and operate these acquired assets. The Company operates primarily in two industry segments, the Heating and Air Conditioning segment and the Construction Materials segment. The Heating and Air Conditioning segment is comprised of Phoenix Manufacturing, Inc. of Phoenix, Arizona and Williams Furnace Co. of Colton, California. The Construction Materials segment is comprised of Castle Concrete Company and Transit Mix Concrete Co. both of Colorado Springs, Colorado, and Transit Mix of Pueblo, Inc. of Pueblo, Colorado. The Heating and Air Conditioning segment manufactures wall furnaces, console heaters, evaporative air coolers and fan coil/air handler product lines. Numerous models with differing heating or cooling capacities as well as exterior appearances are offered within each line. The Construction Materials segment is involved in the production and sale of ready mix concrete, construction aggregates and other building materials. In addition to the above operating segments, a General Corporate and Other classification is utilized covering the general expenses of the corporate office which provides treasury, insurance and tax services as well as strategic business planning and general management services. The Company has a 30% interest in Oracle Ridge Mining Partners (ORMP). ORMP is a general partnership which owns a copper mine near Tucson, Arizona. The Company is not the managing partner of ORMP and thus its operations are accounted for on the equity method with the Company's share of ORMP's operations presented in the other income and expense section of the Company's operating statements. See Note 4 on page 19 for further discussion of the Company's accounting for and valuation of ORMP. Financial information relating to industry segments appears in Note 13 on pages 23 and 24 of this Form 10-K. 2 MARKETING, SALES AND SUPPORT Marketing The Heating and Air Conditioning segment markets its products throughout the United States through plumbing, heating and air conditioning wholesale distributors as well as direct to some major retail home-centers and other retail outlets. Phoenix and Williams utilize independent manufacturers' representatives. Both companies also employ a small staff of sales and sales support personnel. Sales in this segment are predominantly in the United States and are concentrated in the Western and Southwestern states. Sales of Williams' furnaces usually increase in the months of September through January while sales of the fan coil product line are more evenly distributed throughout the year with some decline in the latter part of the year. Sales of Phoenix's evaporative coolers usually increase in the months of February through June. In order to sell wall furnaces and evaporative coolers during the off season, Williams and Phoenix offer extended payment terms (dating) to their customers. The Construction Materials segment markets its products primarily through its own direct sales representatives and confines its sales to the Front Range area in southern Colorado. Sales are made to general and sub- contractors, government entities and individuals. The businesses are affected by the general economic conditions in the areas serviced (as it relates to construction) and weather conditions. Revenues usually decline in the winter months as the pace of construction slows. During 1997, no customer accounted for 10% or more of the total sales of the Company. Customer Service and Support The companies in the Heating and Air Conditioning segment maintain parts departments and help lines to assist contractors, distributors and end users in servicing the companies' products. The Company does not perform installation services, nor are maintenance or service contracts offered. In addition, Williams holds training sessions at its plant for distributors, contractors, utility company employees and other customers. The companies in this segment do not derive any revenue from after-sales service and support other than from parts sales. The companies in the Construction Materials segment routinely take a leadership role in formulation of the products to meet the specifications of their customers. BACKLOG At January 3, 1998, Williams' order backlog was approximately $1,300,000 ($900,000 at December 28, 1996) the majority of which represented orders for fan coils and furnaces. At January 3, 1998, Phoenix had a backlog of approximately $1,500,000 ($2,000,000 at December 28, 1996) representing primarily preseason cooler orders. The above backlogs are all related to the heating and air conditioning segment and are expected to be filled during the first quarter of 1998. At January 3, 1998, Transit Mix and Castle had a backlog of approximately $2,200,000 ($2,000,000 at December 28, 1996) primarily relating to construction contracts awarded and expected to be filled during the first half of 1998. Management does not believe that any of the above backlogs represent a trend but rather are indicative only of the timing of orders received or contracts awarded. 3 Research and Development/Patents In general, the companies rely upon, and intend to continue to rely upon, unpatented proprietary technology and information. However, research and development activities in the Heating and Air Conditioning segment have resulted in a patent related to Phoenix' Power Cleaning System for the evaporative coolers and patent applications on the configuration of the heat exchanger for Williams' furnaces which has increased efficiency above that previously offered by the industry. The amounts expended on research and development are not material and are expensed as incurred. The Company believes its interests in its patent applications, as well as its proprietary knowledge, are sufficient for its businesses as currently conducted. Manufacturing The Company conducts its manufacturing operations through a number of facilities as more completely described in Item 2, Properties, below. Due to the seasonality of its businesses, Williams and Phoenix build inventory during their off seasons in order to have adequate wall furnace and evaporative cooler inventory to sell during the season. In general, raw materials required by the Company can be obtained from various sources in the quantities desired. The Construction Materials companies have historically purchased most of their cement requirements from a single supplier. These companies experienced some difficulty in obtaining cement during the latter half of 1997 but were able to purchase sufficient quantities from non-traditional sources, which will remain available in the future. The Company has no long-term supply contracts and does not consider itself dependent on any individual supplier. In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas. In recent years, reclamation costs have had a more significant effect on the results of operations compared to prior years. We expect that the current level of reclamation expense will continue. Competitive Conditions Heating and Air Conditioning - Williams is one of five principal companies producing wall furnaces (excluding units sold to the recreational vehicle industry). The wall furnace market is only a small component of the heating industry. Williams' covers its market area from its plant in Colton, California and a warehouse in Ohio. The sales force consists of Williams' sales personnel and manufacturers' representatives. The entire heating industry is dominated by manufacturers (most of which are substantially larger than the Company) selling diversified lines of heating and air conditioning units directed primarily toward central heating and cooling systems. Williams also manufactures a line of gas fired console heaters. Distribution is similar to wall furnaces with the principal market areas in the South and Southeast. There are six other manufacturers, none of whom is believed to have a dominant share of the market. Williams is also a producer of fan coils. Fan coil sales are usually obtained through a competitive bidding process. International Environmental Corp., a subsidiary of LSB Industries, Inc., a manufacturer of a diversified line of commercial and industrial products dominates this market. There are also a number of other companies that produce fan coils. All of the producers compete on the basis of price and timeliness of delivery. 4 Phoenix produces evaporative air coolers. This market is dominated by Adobe Air. The other principal competitor is Champion/Essick. All producers of evaporative air coolers compete aggressively on the basis of price, service and product features. Construction Materials - Transit Mix is one of three companies producing ready mix concrete in the Colorado Springs area. Transit Mix of Pueblo is one of two companies producing ready mix concrete in the Pueblo area. Although Transit Mix and Transit Mix of Pueblo hold a significant share of the markets served, the other competitors compete aggressively on the basis of price, service and product features. Transit Mix is one of five producers of aggregates in the marketing area served by Transit Mix, Transit Mix of Pueblo and Castle who compete aggressively on the basis of price, quality of material and service. Metal doors and door frames, rebar reinforcement and other building materials sold in the Colorado Springs and Pueblo metropolitan areas are subject to intense competition. Transit Mix and Transit Mix of Pueblo compete aggressively with two larger companies from Denver and a number of small local competitors. However, both companies have a slight competitive advantage in that many of their customers also purchase concrete, sand and aggregates from Transit Mix, Transit Mix of Pueblo and Castle whereas our competitors for these particular product lines do not offer concrete, sand or aggregates. In addition, Transit Mix of Pueblo has a slight competitive advantage with respect to the two Denver companies based upon delivery costs. Employees The Company employed 685 people as of January 3, 1998. Employment varies throughout the year due to the seasonal nature of sales and thus to a lesser extent, production. A breakdown of the prior three years employment at year-end by segment was:
1997 1996 1995 Heating and Air Conditioning 367 428 421 Construction Materials 307 309 215 Corporate Office 11 11 13 Total 685 748 649
The factory employees at the Colton, California plant are represented by the Amalgamated Industrial Workers Union under a contract that expired in June 1997. Negotiations are ongoing. Certain drivers, laborers and mechanics at the Colorado Springs and the Pueblo facilities are represented by the Western Conference of Teamsters under contracts, which expired in December 1997 and February 1998, respectively. Negotiations on these contracts are also ongoing. The Company considers relations with its employees and with its unions to be good. Item 2. PROPERTIES The heating and air conditioning segment operates out of one owned (Colton, California) and one leased (Phoenix, Arizona) facility. Both manufacturing facilities utilized by this segment are, in the opinion of management, in good condition and sufficient for the Company's current needs. Productive capacity exists at the locations such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery. 5 The construction materials segment operates out of three owned facilities in Colorado Springs, Colorado and two-owned facilities in Pueblo, Colorado. Additionally, this segment owns six mining properties in five counties in the vicinity of Colorado Springs and Pueblo, Colorado. In the opinion of management, these six properties contain permitted and minable reserves sufficient to service sand, rock and gravel requirements for the foreseeable future. The corporate office operates out of leased facilities in Chicago, Illinois. Item 3. LEGAL PROCEEDINGS See Management Discussion and Analysis of Financial Condition and Results of Operations on pages 8 through 11 and Note 6 on page 20 of this Annual Report on Form 10-K. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1997. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Continental Materials Corporation shares are traded on the American Stock Exchange under the symbol CUO. Market prices for the past two fiscal years are:
High Low 1997 Fourth Quarter 28 25 11/16 Third Quarter 24 20 7/8 Second Quarter 22 1/4 19 3/4 First Quarter 23 5/8 19 1/8 1996 Fourth Quarter 21 3/8 16 3/4 Third Quarter 19 13 1/2 Second Quarter 16 14 First Quarter 14 5/8 12
At January 3, 1998, the Company had approximately 3,000 shareholders of record. The Company has never paid a dividend. The Company's policy is to reinvest earnings from operations, and the Company expects to follow this policy for the foreseeable future. 6 Selected Financial Data (Amounts in thousands, except per share amounts)
1997 1996 1995 1994 1993 SUMMARY OF OPERATIONS Net sales from continuing operations $98,038 $91,414 $75,560 $75,294 $62,495 Earnings from continuing operations before interest, taxes, depreciation and amortization (EBITDA) 9,224 6,703 3,396 5,899 4,218 Net income from continuing operations 3,110 2,355 681 1,849 1,187 Net (loss) income from discontinued operation -- -- -- (464) 188 Extraordinary item, net -- -- -- -- (1,335) Net income $ 3,110 $ 2,355 $ 681 $ 1,385 $ 40 PER SHARE DATA Basic EPS: Continuing operations $ 2.83 $ 2.13 $ .60 $ 1.62 $ 1.02 Discontinued operation -- -- -- (.41) .16 Extraordinary item -- -- -- -- (1.15) Net income $ 2.83 $ 2.13 $ .60 $ 1.21 $ .03 Average shares outstanding during year 1,100 1,105 1,135 1,140 1,164 Diluted EPS: Continuing operations $ 2.78 $ 2.11 $ .60 $ 1.62 $ 1.02 Discontinued operation -- -- -- (.41) .16 Extraordinary item -- -- -- -- (1.15) Net income $ 2.78 $ 2.11 $ .60 $ 1.21 $ .03 Average shares outstanding during year 1,120 1,114 1,135 1,140 1,164 FINANCIAL CONDITION Current ratio 2.4:1 2.1:1 2.0:1 2.0:1 2.2:1 Total assets $54,355 $53,550 $47,223 $48,162 $45,424 Long-term debt, including current portion 8,300 8,000 4,011 4,923 6,819 Shareholders' equity 31,858 29,350 27,281 26,789 25,404 Long-term debt to net worth .26 .27 .15 .18 .27 Book value per share $ 28.96 $ 26.56 $ 24.04 $ 23.50 $ 22.28 CASH FLOWS Net cash provided by (used in): Operating activities $ 6,086 $ 6,676 $ 848 $ 7,191 $ 2,727 Investing activities (4,239) (9,174) (3,751) (1,884) 6,628 Financing activities (702) 1,803 1,199 (3,596) (9,914) Net increase (decrease) in cash and cash equivalents $ 1,145 $ (695) $(1,704) $ 1,711 $ (559)
7 Management's Discussion and Analysis of Financial Condition and Results of Operations (References to a "Note" are to Notes to Consolidated Financial Statements) FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased to $1,524,000 at year-end compared to $379,000 in the prior year. Operations in 1997 provided $6,086,000 of cash compared to $6,676,000 in 1996 and the $848,000 generated in 1995. The decrease in net cash generated by operating activities in 1997 was primarily due to a decrease in accounts payable. The increase in 1996 from the 1995 level was mainly due to improved sales volume and the related increase in accounts payable and accrued expenses. The Company made payments to settle product liability claims totaling $1,000,000 and $250,000 in 1996 and 1995, respectively related to Imeco, Inc., a subsidiary sold in 1993. There are no known product liability claims remaining related to Imeco for which the company would be liable. Net cash used in investing activities was $4,239,000 in 1997, $9,174,000 in 1996, and $3,751,000 in 1995. Capital expenditures for 1997, 1996 and 1995, exclusive of the purchase of certain assets of Valco, were $4,194,000, $3,222,000, and $3,417,000, respectively. The capital expenditures were principally to support the continuing strong business demand that has been experienced by the companies in the construction materials segment. During 1996, the Company acquired substantially all of the assets of Valco's ready-mix concrete and aggregates operation in Pueblo, Colorado for a cash purchase price of $5,148,000 net of $163,000 of accrued liabilities assumed. Concurrent with this purchase, the Company entered into a long-term operating lease to mine aggregates from properties in Pueblo owned by Valco. The lease calls for the Company to pay a production royalty based upon the tons of aggregate mined up to an agreed upon total tonnage, with a minimum annual royalty payment of $300,000. Both the production and minimum royalty are subject to annual inflation adjustments. Transit Mix of Pueblo, Inc. holds and operates the acquired assets. There were no significant commitments for capital expenditures at the end of 1997. Budgeted capital expenditures for 1998 are approximately $4,268,000 (primarily routine replacements and upgrades), $449,000 more than planned depreciation. The 1998 expenditures will be funded from internal sources, available borrowing or leasing capacity. Cash invested in ORMP during 1997, 1996 and 1995 was $107,000, $868,000 and $883,000, respectively. During 1997, cash of $702,000 was used in financing activities. The Company converted $2,000,000 from the revolving credit facility to term debt to fund certain capital expenditures. Scheduled long-term debt repayments of $1,700,000 were made during the year and the $400,000 balance outstanding on the revolving line of credit at the end of 1996, was repaid. Cash of $602,000 was used to acquire 22,810 shares of treasury stock. During 1996, financing activities provided cash of $1,803,000. The Company made scheduled long-term debt repayments of $1,011,000 and reduced the revolving line of credit by $1,900,000. Cash of $286,000 was used to acquire 20,700 shares of treasury stock. Additional long-term debt borrowings of $5,000,000 were utilized to finance the acquisition of the Pueblo operation. During 1995, financing activities provided cash of $1,199,000. The net long-term debt repayment of $912,000 offset borrowings of $2,300,000 against the short-term line of credit. Cash of $189,000 was used to acquire 15,357 shares of treasury stock. 8 The Company maintains a credit agreement with two banks. The agreement as amended in October 1996 provides for a term loan of $8,300,000 and a revolving credit facility of $11,500,000 for funding of seasonal sales programs at Williams Furnace Co. and Phoenix Manufacturing, Inc. The line is also used for stand-by letters of credit to insurance carriers in support of self-insured amounts under the Company's insurance program. All borrowings under the new agreement are unsecured and bear interest at prime or an adjusted LIBOR rate. The Company anticipates the primary source of cash flow in 1998 to be from its operating subsidiaries. This anticipated cash flow, supplemented by the line of credit, will be sufficient to cover normal and expected future cash needs, including servicing debt and planned capital expenditures. The Company purchases insurance coverage for property loss, workers' compensation, general, product and automobile liability maintaining certain levels of retained risk (self-insured portion). Provisions for claims under the self-insured portion of the policies are recorded in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies." The accrual for workers' compensation, automobile liability and product liability claims covers occurrences through January 3, 1998. There were no unasserted claims as of January 3, 1998 that required a reserve or disclosure in accordance with SFAS NO. 5. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits." The Company has not determined the effect of the adoption of these pronouncements but does not expect that these pronouncements will have a material impact on future earnings. During 1997, the Company performed a review of the computer systems currently utilized by the Company and its subsidiaries. In order to address various operating problems that were being experienced at each location, the Company has concluded that a new system or systems are necessary. All systems being considered are year 2000 compliant. The Company expects that implementation of the new system will begin during the second quarter of 1998 and projects completion by mid 1999. It is anticipated the schedule allows sufficient time for testing. The Company has not yet determined whether third parties with whom the Company maintains relationships, such as vendors and suppliers, will have implemented corrective actions to their systems. If such modifications and conversions are not completed timely, the year 2000 problem may have a material impact on the operations of the Company. Management has not yet assessed the expense and related potential effect of this project on the Company's future earnings. 9 OPERATIONS 1997 vs. 1996 Consolidated net sales increased $6,624,000 or 7% to $98,038,000. The net sales of the construction materials segment rose $8,030,000 while the net sales of the heating and air-conditioning segment declined $1,406,000 compared to the previous year. The increase in the construction materials segment was due to the October 1996 acquisition of the Pueblo, Colorado operation. Sales at Williams Furnace Co. rose due to increased fan coil sales. The sales decline at Phoenix Manufacturing, Inc. was in large part related to unfavorable weather conditions last summer. The Company experienced a high level of price competition at all of its subsidiaries, which the Company expects to continue into 1998. During 1997, inflation was not a significant factor at any of the operations. Cost of sales (exclusive of depreciation and depletion) remained relatively constant at 76%. Cost of sales were decreased by approximately $225,000 during 1997 and $140,000 during 1996 due to liquidation of LIFO inventory layers carried at costs that were lower than the costs of current purchases. Depreciation, depletion and amortization increased from $2,614,000 to $3,493,000 due to the Pueblo asset acquisition and increased capital expenditures in recent years. Selling and administrative expenses declined $32,000. As a percentage of sales, selling and administrative expense declined from 16% to 15%. The decrease is primarily due to the increase in sales occurring in the construction materials segment where these expenses are more fixed. The relatively constant operating income, despite the increase in sales, is due to the additional depreciation expense as a result of the Pueblo asset acquisition and a slight change in product mix. The increase in interest expense of $337,000 is the result of the additional debt incurred to purchase the Pueblo assets. The Company recorded an equity loss of $287,000 related to its investment in Oracle Ridge Mining Partners. Production at the mine was halted in February 1996. The partners continue their efforts to sell the project. The Company's 1997 effective income tax rate on income (35.3%) reflects federal and state statutory rates adjusted for non-deductible and other tax items. See Note 11. 10 OPERATIONS 1996 vs. 1995 Consolidated net sales increased $15,854,000 (21%). The net sales of the construction materials segment rose $10,813,000 while the net sales of the heating and air-conditioning segment improved by $5,041,000. A surge in the already strong construction market in the Colorado Springs, Colorado area accounted for most of the $10,813,000 (34%) increase in the construction materials segment while the addition of operations in Pueblo, Colorado since October 22, 1996, accounted for $1,399,000 of the increase. The $5,041,000 (11%) increase in the heating and air-conditioning segment was the result of new customers as well as dry hot weather in the areas serviced by Phoenix Manufacturing combined with improved furnace and fan coil sales at Williams Furnace. The Company experienced a high level of price competition at all of its subsidiaries. During 1996, inflation was not a significant factor at any of the operations. Cost of sales (exclusive of depreciation, depletion and amortization) declined from 77% to 75% as a result of increased sales and production combined with cost savings at all locations. Depreciation, depletion and amortization increased from $2,278,000 to $2,614,000 (15%) due to increased capital expenditures in the past two years and the Transit Mix of Pueblo asset acquisition during 1996. Selling and administrative expenses increased $1,704,000 (13%) while declining as a percentage of sales from 17% to 16%. The dollar increase is attributable mainly to higher sales volume while the percentage decline is due to the fixed nature of some of the expenses. The decrease in interest expense of $228,000 reflects lower average interest rates. The Company recorded a loss of $1,768,000 related to its investment in ORMP. This amount is comprised of a loss of $988,000 largely due to the curtailment of operations and a write down of $780,000 to management's best estimate of net realizable value, $600,000, as of December 28, 1996. On January 29, 1997, the ORMP partners, including the Company, signed a Letter of Intent to sell their interest in ORMP. A definitive agreement to sell is contingent upon, among other matters, the buyer's satisfactory completion of due diligence and financing arrangements. There were no charges against the discontinued operation during 1996 although the last of the known legal matters concerning the operation was settled during March 1996. See "Financial Condition, Liquidity and Capital Resources" for further discussion. Other income for 1995 includes a $300,000 gain on the sale of the Company's interest in Oracle Ridge surface rights to Union Copper, Inc., the majority partner of ORMP. The Company's 1996 effective income tax rate on income from continuing operations (32.8%) reflects federal and state statutory rates adjusted for non-deductible and other tax items. The current year's favorable impact from percentage depletion allowance was less than the prior year's due to the higher level of taxable income. See Note 11. Various statements made within this Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on Form 10-K constitute "forward looking statements" for purposes of the Securities and Exchange Commission's "safe harbor" provisions under the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under Securities and Exchange Act of 1934, as amended. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company's filings with the Securities and Exchange Commission. There can be no assurance that actual results will not differ from the Company's expectations. 11 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE Financial Statements and Schedule of Continental Materials Corporation and report thereon: Consolidated statements of operations and retained earnings for fiscal years 1997, 1996 and 1995 13 Consolidated statements of cash flows for fiscal years ended 1997, 1996 and 1995 14 Consolidated balance sheets at January 3, 1998 and December 28, 1996 15 Notes to consolidated financial statements 16-24 Report of Independent Accountants 25 12 Continental Materials Corporation Consolidated Statements of Operations and Retained Earnings For Fiscal Years 1997, 1996 and 1995 (Amounts in thousands, except per share data)
1997 1996 1995 NET SALES $ 98,038 $ 91,414 $ 75,560 COSTS AND EXPENSES Cost of sales (exclusive of depreciation, depletion and amortization) 74,524 68,740 58,497 Depreciation, depletion and amortization 3,493 2,614 2,278 Selling and administrative 14,451 14,483 12,779 Operating income 5,570 5,577 2,006 Interest expense (921) (584) (812) Equity loss from mining partnership (287) (1,768) (922) Other income, net 448 280 634 Income before income taxes 4,810 3,505 906 Income tax provision 1,700 1,150 225 Net income 3,110 2,355 681 Retained earnings, beginning of year 28,173 25,818 25,137 Retained earnings, end of year $ 31,28 $ 28,173 $ 25,818 Basic earnings per share $ 2.83 $ 2.13 $ .60 Average shares outstanding 1,100,000 1,105,000 1,135,000 Diluted earnings per share $ 2.78 $ 2.11 $ .60 Average shares outstanding 1,120,000 1,114,000 1,135,000
The accompanying notes are an integral part of the financial statements. 13 Continental Materials Corporation Consolidated Statements of Cash Flows For Fiscal Years 1997, 1996, and 1995 (Amounts in thousands)
1997 1996 1995 Operating activities: Net income $3,110 $2,355 $ 681 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 3,493 2,614 2,278 Deferred income tax provision (benefit) 141 (332) (282) Provision for doubtful accounts 264 179 60 Gain on disposition of property and equipment (26) (59) (459) Equity loss from mining partnership 287 1,768 922 Changes in operating assets and liabilities, net of effect of purchase of assets of Valco, Inc.: Receivables 437 (1,688) (842) Inventories 891 (191) 1,840 Prepaid expenses (9) (476) 8 Income taxes (229) 420 21 Accounts payable and accrued expenses (1,818) 2,396 (3,417) Other (455) (310) 38 Net cash provided by operating activities 6,086 6,676 848 Investing activities: Purchase of assets of Valco, Inc. -- (5,148) -- Capital expenditures (4,194) (3,222) (3,417) Investment in mining partnership (107) (868) (883) Proceeds from sale of property and equipment 62 64 549 Net cash used in investing activities (4,239) (9,174) (3,751) Financing activities: (Repayment) borrowings under revolving credit facility (400) (1,900) 2,300 Long-term borrowings 2,000 5,000 500 Repayment of long-term debt (1,700) (1,011) (1,412) Payments to acquire treasury stock (602) (286) (189) Net cash (used in) provided by financing activities (702) 1,803 1,199 Net increase (decrease) in cash and cash equivalents 1,145 (695) (1,704) Cash and cash equivalents: Beginning of year 379 1,074 2,778 End of year $1,524 $ 379 $1,074 Supplemental disclosures of cash flow items: Cash paid during the year for: Interest $ 973 $ 520 $ 812 Income taxes 1,793 1,075 500
Supplemental Schedule of non-cash investing and financing activities: A portion of the 1995 proceeds from sale of property and equipment was in the form of a note receivable valued at $162. The accompanying notes are an integral part of the financial statements. 14 Continental Materials Corporation Consolidated Balance Sheets January 3, 1998 and December 28, 1996 (Amounts in thousands except share data)
January 3, December 28, 1998 1996 ASSETS Current assets: Cash and cash equivalents $ 1,524 $ 379 Receivables less allowance of $580 and $373 13,882 14,584 Inventories 14,293 15,184 Prepaid expenses 2,343 2,239 Total current assets 32,042 32,386 Property, plant and equipment: Land and improvements 2,159 2,104 Buildings and improvements 8,474 8,141 Machinery and equipment 50,444 46,935 Mining properties 2,170 2,170 Less accumulated depreciation and depletion (43,666) (40,532) 19,581 18,818 Other assets: Investment in mining partnership 600 600 Other 2,132 1,746 2,732 2,346 $54,355 $53,550 LIABILITIES Current liabilities: Bank loan payable $ -- $ 400 Current portion of long-term debt 1,900 1,500 Accounts payable 3,514 5,182 Income taxes 222 450 Accrued expenses: Compensation 1,765 1,969 Reserve for self-insured losses 2,030 2,212 Profit sharing 1,293 1,330 Reclamation 1,160 1,071 Other 1,565 1,202 Total current liabilities 13,449 15,316 Long-term debt 6,400 6,500 Deferred income taxes 1,722 1,487 Other long-term liabilities 926 897 Commitments and contingencies (Notes 6 and 9) SHAREHOLDERS' EQUITY Common shares, $.50 par value; authorized 3,000,000 shares; issued 1,326,588 shares 663 663 Capital in excess of par value 3,484 3,484 Retained earnings 31,283 28,173 Treasury shares, at cost (3,572) (2,970) 31,858 29,350 $54,355 $53,550
The accompanying notes are an integral part of the financial statements. 15 Notes to Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include Continental Materials Corporation and all of its subsidiaries (the Company). The equity method of accounting is used for the Company's 30% interest in Oracle Ridge Mining Partners (ORMP). Certain prior years' amounts have been reclassified to conform to the current presentation. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of January 3, 1998 and December 28, 1996 and the reported amounts of revenues and expenses during each of the three years in the period ended January 3, 1998. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Inventories Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for approximately 82% of total inventories at January 3, 1998 (83% at December 28, 1996). The cost of all other inventory is determined by the first-in, first-out (FIFO) method. Property, Plant and Equipment Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method as follows: Buildings 10 to 31 years Leasehold improvements Terms of leases Machinery and equipment 3 to 10 years Depletion of rock and sand deposits is computed by the unit-of-production method based upon estimated recoverable quantities of rock and sand. Amortization of certain other assets is computed on a straight-line basis over periods of 5 and 10 years. The cost of property sold or retired and the related accumulated depreciation, depletion and amortization are removed from the accounts and the resulting gain or loss is reflected in other income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized and depreciated over their useful lives. Retirement Plans The Company and certain subsidiaries have various contributory profit sharing retirement plans for specific employees. The plans allow qualified employees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k). The Company makes annual contributions, at its discretion, based primarily on profitability. Costs under the plans are charged to operations as incurred. 16 Reserve for Self-Insured Losses The Company's risk management program provides for certain levels of loss retention for workers' compensation, automobile liability and general and product liability claims. The components of the reserve have been recorded in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies" and represent management's best estimate of future liability for known claims based upon the Company's history of claims paid. There were no unasserted claims as of January 3, 1998 that require a reserve or disclosure in accordance with SFAS No. 5. Reclamation In connection with permits to mine properties in or near Colorado Springs and Pueblo, Colorado, the Company is obligated to reclaim the mined areas. Reclamation costs are calculated using a rate based on the total estimated reclamation costs, units of production and estimates of recoverable reserves. Reclamation costs are charged to operations as the properties are mined. Income Taxes Income taxes are reported consistent with SFAS No. 109, "Accounting for Income Taxes." Deferred taxes reflect the future tax consequences associated with the differences between financial accounting and tax bases of assets and liabilities. Concentration of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables and temporary cash investments. The Company invests its excess cash in commercial paper of companies with strong credit ratings. These securities typically mature within 30 days. The Company has not experienced any losses on these investments. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. See Note 13 for a description of the Company's customer base and geographical location by segment. Impairment of Long-lived Assets In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required. Fiscal Year End The Company's fiscal year end is the Saturday nearest December 31. Fiscal 1997 consists of 53 weeks while 1996 and 1995 each consist of 52 weeks. 2. ACQUISITION On October 21, 1996, the Company acquired substantially all of the assets of Valco, Inc.'s (Valco) ready-mix concrete and aggregates operation in Pueblo, Colorado for a cash purchase price of $5,148,000 net of $163,000 of accrued liabilities assumed. The acquisition has been accounted for under the purchase method and, accordingly, the operating results of the Pueblo operations have been included in the consolidated results since the date of acquisition. The Company has formed a new subsidiary, Transit Mix of Pueblo, Inc. to operate this acquisition. 17 In addition to the above, the Company concurrently entered into a long-term operating lease to mine aggregates from properties in Pueblo owned by Valco. The lease calls for the Company to pay a production royalty based upon the tons of aggregate mined, up to an agreed upon total tonnage, with a minimum annual royalty payment of $300,000. Both the production and minimum royalties are subject to annual inflation adjustments. Royalties paid in advance of actual tons mined will be recorded as a prepaid to be applied against production at the end of the lease. The funds used to acquire the Pueblo operation were provided by a renegotiated unsecured term loan entered into on October 21, 1996 with the Company's existing lending banks. The expenses related to the acquisition as well as the cost of a non-competition agreement are included in other assets and are being amortized over 5 and 10 years, respectively. The purchased operations are involved in the production and sale of ready- mix concrete and other building materials as well as the extraction and sale of sand and river rock from two locations in Pueblo, Colorado. Sales are made primarily in Pueblo County, Colorado. The table below summarizes the unaudited pro-forma results of operations for the year ended December 28, 1996, assuming the acquisition described had been consummated as of January 1, 1996, with adjustments primarily attributed to the royalty on tons of aggregates produced, interest expense relating to the refinancing of long-term debt and depreciation expense relating to the fair value of assets acquired. Amounts in thousands, except per share amounts: 1996 Unaudited Sales $101,532 Net income 2,342 Net income per share 2.12 These pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of the period presented, or of results which may occur in the future. 3. INVENTORIES Inventories consisted of the following (amounts in thousands): January 3, December 28, 1998 1996 Finished goods $ 8,562 $ 8,696 Work in process 1,470 1,800 Raw materials and supplies 4,260 4,688 $ 14,293 $ 15,184 If inventories valued on the LIFO basis were valued at current costs, inventories would be higher as follows: 1997--$2,340,000; 1996--$2,590,000; 1995--$2,626,000. Reduction in inventory quantities during 1997 and 1996 at one of the locations, resulted in liquidation of LIFO inventory layers carried at costs that were lower than the costs of current purchases. These effects were recorded in their respective fourth quarters. In 1997, the effect was to decrease cost of goods sold by approximately $225,000 and to increase net earnings by $140,000 or $.13 per diluted share. In 1996, the effect was to decrease cost of goods sold by approximately $125,000 and to increase net earnings by $78,000 or $.07 per diluted share. 18 4. INVESTMENT IN MINING PARTNERSHIP The Company has a 30% ownership interest in ORMP, a general partnership which operated a copper mine primarily situated in Pima County, Arizona. The equity method of accounting is used to include 30% of ORMP's income and losses in the Company's consolidated financial statements. Production at the mine was halted in February 1996. The Partners are currently attempting to sell the mine. During 1997, the Company recorded a loss totaling $287,000 from ORMP. In accordance with SFAS No. 121, the Investment in mining partnership was written down to management's best estimate of net realizable value, $600,000, as of December 28,1996. The related impairment loss, $780,000, is included in the $1,768,000 equity loss from mining partnership. During 1995, the Company recorded a loss totaling $922,000. This amount is comprised of an operating loss of $750,000 and a write down of $172,000 to management's best estimate of net realizable value, $1,500,000 as of December 30,1995. The year end values of $600,000 for 1997 and 1996 and $1,500,000 for 1995, were based on the estimated fair market value of the partnership's property and assets less liabilities at the respective dates. Future cash contributions to ORMP for carrying costs will be expensed when made. 5. LONG-TERM DEBT Long-term debt consisted of the following (amounts in thousands): January 3, December 28, 1998 1996 Unsecured term loan $8,300 $8,000 Less current portion 1,900 1,500 $6,400 $6,500 The unsecured term loan is payable to two banks in escalating semi-annual installments with final principal payment of all then unpaid principal due June 15, 2001. The loan, at the Company's option, bears interest at either prime or an adjusted LIBOR rate. The Company is required to maintain certain levels of consolidated tangible net worth, to attain certain levels of cash flow (as defined) on a rolling four-quarter basis, and to maintain certain ratios including consolidated debt to cash flow (as defined). Additional borrowing, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends are either limited or require prior approval by the lenders. Aggregate long-term debt matures as follows under the Agreement (amounts in thousands): 1998 $1,900 1999 2,400 2000 2,400 2001 1,600 $8,300 During 1997 and 1996, the Company had a $13,500,000 unsecured revolving line of credit (reduced to $11,500,000 at June 30, 1997). The line is with two banks and is used for short-term cash needs and standby letters of credit. Interest was charged at prime or adjusted LIBOR rates on cash borrowings during both years. The weighted average interest rate was 7.7% for fiscal 1997 and 7.8% for fiscal 1996. There were no outstanding balances against the line as of January 3, 1998. The outstanding balance at December 28, 1996 was $400,000. At January 3, 1998, the Company had letters of credit outstanding totaling approximately $3,528,000 that primarily collateralize the self-insured losses. 19 6. COMMITMENTS AND CONTINGENCIES In June 1993, the Company sold its Imeco, Inc. subsidiary. The Company retained the responsibility related to incidents involving Imeco products occurring prior to June 30, 1993. There were two suits that were settled in April 1995 and March 1996 respectively. Both settlements had been fully reserved as of December 31, 1994. Management is not currently aware of any asserted or unasserted claims involving Imeco products for which the Company has retained responsibility. During 1995, Williams Furnace Co. (Williams) was notified by Pacific Gas & Electric (PG&E) that a recent inspection had discovered a higher than normal incidence of cracks in the heat exchanger of two models of furnaces manufactured by Williams prior to 1992. Independent engineering reports indicate that there is no safety hazard arising from these cracks. The Consumer Products Safety Commission (CPSC) was notified and Williams cooperated with the CPSC in their investigation. To date, Williams is not aware of any claims related to these matters and accordingly, management has concluded that no amounts should be accrued in accordance with the requirements of SFAS No. 5. The Company is also involved in other litigation matters related to its continuing business principally product liability matters related to Williams gas-fired heating products. In the Company's opinion, none of these proceedings, when concluded, will have a material adverse effect on the Company's results of operations or financial position. 7. SHAREHOLDERS' EQUITY Four hundred thousand shares of preferred stock ($.50 par value) are authorized and unissued. Treasury share activity during 1995, 1996 and 1997 was as follows (dollars in thousands): Number of shares Cost Balance at December 31, 1994 186,310 $2,495 Purchase of treasury shares 16,367 189 Balance at December 30, 1995 202,677 $2,684 Purchase of treasury shares 20,700 286 Balance at December 28, 1996 223,377 $2,970 Purchase of treasury shares 22,810 602 Balance at January 3, 1998 246,187 $3,572 Under the Company's Stock Option Plan (the Plan) officers and key employees may be granted options to purchase the Company's common stock at option prices established by the Compensation Committee of the Board of Directors provided the option price is no less than the fair market value at the date of the grant. The Company has reserved 180,000 shares for distribution under the Plan. On September 26, 1995, a total of 78,000 options were granted to five individuals at an exercise price of $13.125. These shares became exercisable when the Company's stock price rose to 133% of the price at the time of issuance ($17.50) and remained at or above this level for a period of 30 consecutive trading days. This condition was met during 1996 and thus all of the 78,000 shares are exercisable. These 78,000 options represent the only grant under the Company's Plan during the three years ended January 3, 1998. As of January 3, 1998, none of the options had been exercised or lapsed during the period, however one individual who had been granted 12,000 shares left the Company without exercising his options. The remaining 66,000 of outstanding options expire on September 25, 2005. There were no options outstanding related to the predecessor plan during the periods. 20 The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its Plan. Accordingly, no compensation expense has been recognized for its stock-based compensation Plan. Had compensation cost for the Company's Plan been determined based upon the fair value at the grant date for these awards consistent with the methodology proscribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share would have been reduced by approximately $201,000, or $0.18 per share and $50,000, or $0.04 per share for 1996 and 1995 respectively. The fair value of the options granted during 1995 is estimated as $5.00 on the date of the grant using the Black-Sholes option- pricing model with the following assumptions: dividend yield 0%, volatility of 30%, risk-free interest rate of 6.05%, and an expected life of five years. 8. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share," (SFAS 128). This pronouncement simplifies the standards for computing earning per share (EPS) and requires the presentation of two amounts, basic and diluted EPS. Basic EPS is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding, adjusted for dilutive common share equivalents attributed to outstanding options to purchase common stock. The Company has adopted SFAS 128 for the quarter and year-ended January 3, 1998 and has restated EPS for all prior periods reported. The following is a reconciliation of the calculation of basic and diluted EPS for the years ended 1997, 1996 and 1995. Per-share Income Shares earnings 1997 Basic EPS $3,110 1,100 $2.83 Effect of dilutive options -- 20 Diluted EPS $3,110 1,120 $2.78 1996 Basic EPS $2,355 1,105 $2.13 Effect of dilutive options -- 9 Diluted EPS $2,355 1,114 $2.11 1995 Basic EPS $ 681 1,135 $ .60 Effect of dilutive options -- -- Diluted EPS $ 681 1,135 $ .60 9. RENTAL EXPENSE, LEASES AND COMMITMENTS The Company leases certain of its facilities and equipment and is required to pay the related taxes, insurance and certain other expenses. Rental expense was $2,170,000, $2,223,000 and $2,006,000 for 1997, 1996, and 1995, respectively. Future minimum rental commitments under non-cancelable operating leases for 1998 and thereafter are as follows: 1998--$1,788,000; 1999--$1,556,000; 2000--$1,251,000; 2001--$784,000; 2002--$666,000 and thereafter-- $16,736,000. Included in these amounts is $300,000 per year and approximately $16,341,000 in the "thereafter" amount related to an aggregates lease in conjunction with the Pueblo operation. 21 The Company also receives annual rental income of $145,000 from a building it owns. The related lease expires in January 2003 and contains renewal options. 10. RETIREMENT PLANS As discussed in Note 1, the Company maintains retirement benefit plans for eligible employees. Total plan expenses charged to operations were $1,228,000, $1,152,000, and $979,000 in 1997, 1996 and 1995, respectively. 11. INCOME TAXES The provision (benefit) for income taxes is summarized as follows (amounts in thousands): 1997 1996 1995 Federal: Current $ 1,475 $ 1,378 $ 506 Deferred 126 (297) (253) State: Current 84 104 1 Deferred 15 (35) (29) $ 1,700 $ 1,150 $ 225 The difference between the tax rate on income from continuing operations for financial statement purposes and the federal statutory tax rate was as follows: 1997 1996 1995 Statutory tax rate 34.0% 34.0% 34.0% Percentage depletion (3.4) (4.5) (13.0) State income taxes, net of federal benefit 1.5 1.5 1.6 Non-deductible expenses .4 .5 1.4 Other 2.8 1.3 .8 35.3% 32.8% 24.8% For financial statement purposes, deferred tax assets and liabilities are recorded at a blend of the current statutory federal and states' tax rates - -- 38%. The principal temporary differences and their related deferred taxes are as follows (amounts in thousands): 1997 1996 Reserves for self-insured losses $ 681 $ 740 Deferred compensation 394 383 Asset valuation reserves 757 698 Other 112 18 Total deferred tax assets $1,944 $1,839 Depreciation $1,710 $1,465 Investment in mining partnership 271 339 Other 135 66 Total deferred tax liabilities $2,116 $1,870 Net deferred tax liabilities $ 172 $ 31 The net current deferred tax assets are $1,550 and $1,456 at year-end 1997 and 1996, respectively, and are included with "Prepaid expenses" on the Consolidated Balance Sheets. 22 12. UNAUDITED QUARTERLY FINANCIAL DATA The following table provides summarized unaudited quarterly financial data for 1997 and 1996 (amounts in thousands, except per share amounts):
First Second Third Fourth Quarter Quarter Quarter Quarter 1997 Net sales $20,905 $27,991 $25,612 $23,530 Gross profit $ 3,632 $ 5,548 $ 5,111 $ 5,955 Depreciation, depletion and amortization $ 879 $ 876 $ 881 $ 857 Net (loss) income $ (42) $ 1,020 $ 1,153 $ 979 Basic (loss) income per share $ (.04) $ .93 $ 1.05 $ .90 Diluted (loss) income per share $ (.04) $ .91 $ 1.03 $ .88 First Second Third Fourth Quarter Quarter Quarter Quarter 1996 Net sales $17,852 $27,124 $21,718 $24,720 Gross profit $ 3,323 $ 6,065 $ 5,030 $ 5,830 Depreciation, depletion and amortization $ 661 $ 668 $ 666 $ 619 Net (loss) income $ (577) $ 1,368 $ 1,050 $ 514 Basic (loss) income per share $ (.52) $ 1.24 $ .95 $ .47 Diluted (loss) income per share $ (.52) $ 1.23 $ .94 $ .46
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total for the year. 13. INDUSTRY SEGMENT INFORMATION The Heating and Air Conditioning segment produces heating and cooling equipment mainly for residential applications which is sold primarily to wholesale distributors and retail home centers. Sales are nationwide, but are concentrated in the Southwestern U.S. The Construction Materials segment is involved in the production and sale of concrete and other building materials and the exploration, extraction and sales of construction aggregates. Sales of this segment are confined to the Front Range area in southern Colorado. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest, income or loss from unconsolidated investees, other income, income taxes, gain or loss on discontinued operations and extraordinary items. General corporate assets are principally cash, accounts receivable and leasehold improvements. No customer accounts for 10% or more of consolidated sales. 23 The industry segment information for fiscal years 1997, 1996 and 1995 is as follows (amounts in thousands):
Depreci- ation, Deple- Identi- tion and Capital Net Operat- fiable Amortiza- Expend- Sales Income Assets tion itures 1997 Heating and air conditioning $47,601 $ 3,334 $23,927 $ 1,085 $ 1,190 Construction materials 50,292 4,960 27,821 2,364 2,991 General corporate and other 145 (2,724) 2,607 44 13 $98,038 $ 5,570 $54,355 $ 3,493 $ 4,194 1996 Heating and air conditioning $49,007 $ 4,058 $24,866 $ 1,055 $ 491 Construction materials 42,262 4,446 26,908 1,514 2,692 General corporate and other 145 (2,927) 1,776 45 39 $91,414 $ 5,577 $53,550 $ 2,614 $ 3,222 1995 Heating and air conditioning $43,966 $ 2,316 $25,393 $ 1,027 $ 1,066 Construction materials 31,449 2,912 19,132 1,210 2,337 General corporate and other 145 (3,222) 2,294 41 14 $75,560 $2,006 $46,819 $ 2,278 $ 3,417
24 Report of Independent Accountants To the Shareholders and Board of Directors of Continental Materials Corporation We have audited the accompanying consolidated balance sheets of Continental Materials Corporation and Subsidiaries as of January 3, 1998 and December 28, 1996, and the related consolidated statements of operations and retained earnings and cash flows for each of the three years in the period ended January 3, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Continental Materials Corporation and Subsidiaries as of January 3, 1998 and December 28, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 3, 1998 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 25, 1998 25 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes of accountants and/or disagreements on any matter of accounting principle or financial statement disclosure during the past 24 months which would require a filing under Item 9. PART III Part III has been omitted from this 10-K Report since Registrant will file, not later than 120 days following the close of its fiscal year ended January 3, 1998, its definitive 1998 proxy statement. The information required by Part III will be included in that proxy statement and such information is hereby incorporated by reference, but excluding the information under the headings "Compensation Committee Report" and "Comparison of Total Shareholders' Return". PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 Financial statements required by Item 14 are included in Item 8 of Part II. (a) 2 The following is a list of financial statement schedules filed as part of this Report: Report of Independent Accountants Schedule II Valuation and Qualifying Accounts & Reserves For Years Ended January 3, 1998, December 28, 1996 and December 30, 1995 All other schedules are omitted because they are not applicable or the information is shown in the financial statements or notes thereto. 26 (a) 3 The following is a list of all exhibits filed as part of this Report: Exhibit 3 1975 Restated Certificate of Incorporation dated May 28, 1975 filed as Exhibit 5 to Form 8-K for the month of May 1975, incorporated herein by reference. Exhibit 3a Registrant's By-laws as amended September 19, 1975 filed as Exhibit 6 to Form 8-K for the month of September 1975, incorporated herein by reference. Exhibit 3b Registrant's Certificate of Amendment of Certificate of Incorporation dated May 24, 1978 filed as Exhibit 1 to Form 10- Q for quarter ended June 30, 1978, incorporated herein by reference. Exhibit 3c Registrant's Certificate of Amendment of Certificate of Incorporation dated May 27, 1987 filed as Exhibit 3c to Form 10-K for the year ended January 1, 1988, incorporated herein by reference. Exhibit 10 Continental Materials Corporation Amended and Restated 1994 Stock Option Plan dated May 25, 1994 filed as Appendix A to the 1994 Proxy Statement, incorporated herein by reference.* Exhibit 10a Revolving Credit and Term Loan Agreement between The Northern Trust Company, LaSalle National Bank and Continental Materials Corporation dated as of October 21, 1996 filed as Exhibit 2D to Form 8-K for the month of October 1996, incorporated herein by reference. Exhibit 10b Acquisition Agreement Between Valco Properties, Ltd. and Continental Materials Corporation filed as Exhibit 2A to Form 8-K for the month of October 1996, incorporated herein by reference. Exhibit 10c Non-Competition and Non-Disclosure Agreement by Valco, Inc. and Thomas E. Brubaker in favor of Continental Materials Corporation filed as Exhibit 2B to Form 8-K for the month of October 1996, incorporated herein by reference. Exhibit 10d Fee Sand and Gravel Lease Between Valco, Inc. and Continental Materials Corporation filed as Exhibit 2C to Form 8-K for the month of October 1996, incorporated herein by reference. Exhibit 10e Form of Supplemental Deferred Compensation Agreement filed as Exhibit 10 to Form 10-Q for the quarter ended July 1, 1983, incorporated herein by reference.* Exhibit 10f Continental Materials Corporation Employee Profit Sharing Retirement Plan Amended and Restated Generally Effective January 1, 1989 filed as Exhibit 10c to Form 10-K for the year ended December 31, 1994. Exhibit 21 Subsidiaries of Registrant (filed herewith). Exhibit 23 Consent of Independent Accountants (filed herewith). Exhibit 27 Financial Data Schedule (filed herewith). Exhibit 28 Continental Materials Corporation Employees Profit Sharing Retirement Plan on Form 11-K for the year ended December 31, 1997 (to be filed by amendment). * - Compensatory plan or arrangement (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended January 3, 1998. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONTINENTAL MATERIALS CORPORATION Registrant By: /S/Joseph J. Sum Joseph J. Sum, Vice President, Finance Date: March 26, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE CAPACITY(IES) DATE /S/ James G. Gidwitz James G. Gidwitz Chief Executive Officer and a Director March 26, 1998 /S/ Joseph J. Sum Joseph J. Sum Vice President and a Director March 26, 1998 /S/ Mark S. Nichter Mark S. Nichter Secretary and Controller March 26, 1998 /S/ Thomas H. Carmody Thomas H. Carmody Director March 26, 1998 /S/ Betsy R. Gidwitz Betsy R. Gidwitz Director March 26, 1998 /S/ Ralph W. Gidwitz Ralph W. Gidwitz Director March 26, 1998 /S/ Ronald J. Gidwitz Ronald J. Gidwitz Director March 26, 1998 /S/William G.Shoemaker William G. Shoemaker Director March 26, 1998 /S/Theodore R.Tetzlaff Theodore R. Tetzlaff Director March 26, 1998 /S/ Darrell M. Trent Darrell M. Trent Director March 26, 1998 28 REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of Continental Materials Corporation and Subsidiaries is included on page 25 of this Annual Report on Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 26 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 25, 1998
CONTINENTAL MATERIALS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (d) for the fiscal years 1997, 1996 and 1995 COLUMN A COLUMN B COLUMN C(1) COLUMN D COLUMN E Additions Balance at Charged to Balance Beginning Costs and Deductions at End of Description of Period Expenses - Describe Period Year 1997 Allowance for doubtful accounts $373,000 $264,000 $ 57,000 (a) $580,000 Inventory valuation reserve $404,000 $203,000 $374,000 (b) $233,000 Year 1996 Allowance for doubtful accounts $260,000 $199,000 $ 86,000 (a) $373,000 Inventory valuation reserve $236,000 $310,000 $142,000 (b) $404,000 Year 1995 Allowance for doubtful accounts $248,000 $ 60,000 $ 48,000 (a) $260,000 Inventory valuation reserve $223,000 $232,000 $219,000 (b) $236,000
Notes: (a) Accounts written off, net of (c) Reserve deducted in the balance recoveries. sheet from the asset to which it applies. (b) Amounts written off upon disposal (d) Column C(2) has been omitted as of assets. the answer would be "none". EX-21 2 SUBSIDIARIES OF REGISTRANT 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-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 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 25, 1998 on our audits of the consolidated financial statements and financial statement schedule of Continental Materials Corporation and Subsidiaries as of January 3, 1998 and December 28, 1996, and for the three years in the period ended January 3, 1998, which reports are included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Chicago, Illinois March 31, 1998 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JAN-03-1998 JAN-03-1998 1,524 0 13,882 580 14,293 32,042 19,581 43,666 54,355 13,449 0 0 0 663 31,195 54,355 98,038 98,038 74,524 92,468 (161) 0 921 4,810 1,700 3,110 0 0 0 3,110 2.83 2.78 Net of allowance for doubtful accounts Net of accumulated depreciation and depletion Exclusive of depreciation, depletion and amortization
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