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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Heating and Air Conditioning 428 421 335
Construction Materials 309 215 203
Corporate Office 11 13 14
Total 748 649 552
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
Selected Financial Data (Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
7
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
Continental Materials Corporation
Consolidated Statements of Operations and Retained Earnings
For Fiscal Years 1996, 1995 and 1994
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
Continental Materials Corporation
Consolidated Statements of Cash Flows For Fiscal Years 1996, 1995, and 1994
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
Continental Materials Corporation
Consolidated Balance Sheets December 28, 1996 and December 30, 1995
(Amounts in thousands except share data)
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
<S> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of the financial statements.
15
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1996 1995
Unaudited Unaudited
<S> <C> <C>
Sales $101,532 $83,132
Net income 2,342 542
Net income per share 2.12 .48
</TABLE>
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):
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
December 28, December 30,
1996 1995
<S> <C> <C>
Unsecured term loan $ 8,000 $ 4,000
Other -- 11
8,000 4,011
Less current portion 1,500 1,011
$ 6,500 $ 3,000
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
Number
of
shares Cost
<S> <C> <C>
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
</TABLE>
20
<PAGE>
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
<PAGE>
11) INCOME TAXES
The provision (benefit) for income taxes is summarized as follows
(amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal: Current $ 1,378 $ 506 $ 785
Deferred (297) (253) (131)
State: Current 104 1 61
Deferred (35) (29) (15)
$ 1,150 $ 225 $ 700
</TABLE>
The provision (benefit) for income taxes has been allocated as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Continuing operations $ 1,150 $ 225 $ 962
Discontinued operations -- -- (262)
$1,150 225 $ 700
</TABLE>
The difference between the tax rate on income from continuing
operations for financial statement purposes and the federal
statutory tax rate was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
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%
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
The industry segment information for fiscal years 1996, 1995 and
1994 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
Depreci-
ation,
Deple-
tion
Identifi- and Capital
Net Operating able Amorti- Expendi-
Sales Income Assets zation tures
<S> <C> <C> <C> <C> <C>
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
</TABLE>
24
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
CONTINENTAL MATERIALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (d)
for the fiscal years 1996, 1995 and 1994
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
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
</TABLE>
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".
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
for the fiscal years ended 1996, 1995 and 1994
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
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
</TABLE>
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.
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.
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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 379
<SECURITIES> 0
<RECEIVABLES> 14,584<F1>
<ALLOWANCES> 0
<INVENTORY> 15,184
<CURRENT-ASSETS> 32,834
<PP&E> 18,818<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 53,893
<CURRENT-LIABILITIES> 16,213
<BONDS> 0
0
0
<COMMON> 663
<OTHER-SE> 28,687
<TOTAL-LIABILITY-AND-EQUITY> 53,893
<SALES> 92,768
<TOTAL-REVENUES> 92,768
<CGS> 70,095<F3>
<TOTAL-COSTS> 87,192
<OTHER-EXPENSES> 1,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 584
<INCOME-PRETAX> 3,505
<INCOME-TAX> 1,150
<INCOME-CONTINUING> 2,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,355
<EPS-PRIMARY> 2.13
<EPS-DILUTED> 2.13
<FN>
<F1>Net of allowance for doubtful accounts
<F2>Net of accumulated depreciation.
<F3>Exclusive of depreciation, depletion and amortization.
</FN>
</TABLE>
