SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending July 4, 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
of Identification No.)
incorporation or organization)
225 West Wacker Drive, Chicago, Illinois 60606
(Address of principal executive office)
(Zip Code)
(312) 541-7200
(Registrant's telephone number, including area code)
(Former name, former address and former
year, if changed since last report)
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
Number of common shares outstanding at July 30, 1998 1,072,371
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 4, 1998 and JANUARY 3, 1998
(Unaudited)
(000's omitted except share data)
<CAPTION>
JULY 4, JANUARY 3,
1998 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 765 $ 1,524
Receivables, net 19,930 13,882
Inventories:
Finished goods 7,385 8,562
Work in process 1,516 1,471
Raw materials and supplies 5,322 4,260
Prepaid expenses 2,652 2,343
Total current assets 37,570 32,042
Property, plant and equipment, net 19,370 19,581
Other assets:
Investment in mining partnership 600 600
Other 2,253 2,132
$ 59,793 $ 4,355
LIABILITIES
Current liabilities:
Bank loan payable $ 2,500 $ --
Current portion of long-term debt 1,900 1,900
Accounts payable and accrued expenses 13,032 11,327
Income taxes 909 222
Total current liabilities 18,341 13,449
Long-term debt 5,450 6,400
Deferred income taxes 1,722 1,722
Other long-term liabilities 849 926
SHAREHOLDERS' EQUITY
Common shares, $0.50 par value; authorized
3,000,000; issued 1,326,588 663 663
Capital in excess of par value 3,484 3,484
Retained earnings 33,094 31,283
Treasury shares, 254,217, at cost (3,810) (3,572)
33,431 31,858
$ 59,793 $ 54,355
</TABLE>
See accompanying notes
2
<PAGE>
<TABLE>
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED JULY 4, 1998 AND JUNE 28, 1997
(Unaudited)
(000's omitted except per share amounts)
<CAPTION>
JULY 4, JUNE 28,
1998 1997
<S> <C> <C>
Net sales $ 28,935 $ 27,991
Costs and expenses:
Cost of sales (exclusive of depreciation,
depletion and amortization) 22,168 21,623
Depreciation, depletion and amortization 1,029 876
Selling and administrative 3,699 3,667
26,896 26,166
Operating income 2,039 1,825
Interest (212) (309)
Equity loss from mining partnership (19) (29)
Other income, net 87 85
Income before income taxes 1,895 1,572
Provision for income taxes 663 552
Net income 1,232 1,020
Retained earnings, beginning of period 31,862 28,131
Retained earnings, end of period $ 33,094 $ 29,151
Basic earnings per share $ 1.15 $ .92
Average shares outstanding 1,073 1,103
Diluted earnings per share $ 1.12 $ .90
Average shares outstanding 1,099 1,130
</TABLE>
See accompanying notes
3
<PAGE>
<TABLE>
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JULY 4, 1998 AND JUNE 28, 1997
(Unaudited)
(000's omitted except per share amounts)
<CAPTION>
JULY 4, JUNE 28,
1998 1997
<S> <C> <C>
Net sales $ 51,741 $ 48,896
Costs and expenses:
Cost of sales (exclusive of depreciation,
depletion and amortization) 39,446 38,073
Depreciation, depletion and amortization 2,049 1,755
Selling and administrative 7,209 7,288
48,704 47,116
Operating income 3,037 1,780
Interest (384) (504)
Equity loss from mining partnership (38) (57)
Other income, net 171 285
Income before income taxes 2,786 1,504
Provision for income taxes 975 526
Net income 1,811 978
Retained earnings, beginning of period 31,283 28,173
Retained earnings, end of period $ 33,094 $ 29,151
Basic earnings per share $ 1.68 $ .89
Average shares outstanding 1,075 1,103
Diluted earnings per share $ 1.65 $ .87
Average shares outstanding 1,099 1,130
</TABLE>
See accompanying notes
4
<PAGE>
<TABLE>
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 4, 1998 AND JUNE 28, 1997
(Unaudited)
(000's omitted)
<CAPTION>
JULY 4, JUNE 28,
1998 1997
<S> <C> <C>
Net cash used by operating activities $ (257) $ (5,648)
Investing activities:
Capital expenditures (1,812) (1,347)
Proceeds from sale of property and equipment 36 9
Investment in mining partnership (38) (57)
Net cash used in investing activities (1,814) (1,395)
Financing activities:
Borrowings under revolving credit facility 2,500 6,100
Long-term borrowings -- 2,000
Repayment of long-term debt (950) (750)
Payment to acquire treasury stock (238) --
Net cash provided by financing activities 1,312 7,350
Net (decrease) increase in cash
and cash equivalents (759) 307
Cash and cash equivalents:
Beginning of year 1,524 379
End of period $ 765 $ 686
Supplemental disclosures of cash flow items:
Cash paid during the six months for:
Interest $ 378 $ 555
Income taxes 293 380
</TABLE>
See accompanying notes
5
<PAGE>
CONTINENTAL MATERIALS CORPORATION
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
NOTES TO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED JULY 4, 1998
(Unaudited)
1.The unaudited interim consolidated financial statements
included herein are prepared pursuant to the rules and
regulations for reporting on Form 10-Q. Accordingly, certain
information and footnote disclosures normally accompanying the
annual financial statements have been omitted. The interim
financial statements and notes should be read in conjunction
with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-K.
In the opinion of management, the consolidated financial
statements include all adjustments (none of which were other
than normal recurring adjustments) necessary for a fair
statement of the results for the interim periods.
2.The provision for income taxes is based upon the estimated
effective tax rate for the year.
3.Operating results for the first six months of 1998 are not
necessarily indicative of performance for the entire year.
Historically, sales of construction materials are higher in
the second and third quarters. Overall, sales of heating and
air-conditioning products have not shown strong seasonal
fluctuations in recent years although product mix has
historically yielded higher gross profit margins in the fourth
quarter. (See Note 12 of Notes to Consolidated Financial
Statements in the Company's 1997 Annual Report.)
4.The following is a reconciliation of the calculation of
basic and diluted earnings per share (EPS) for the three and six
months ended July 4, 1998 and June 28, 1997.
<TABLE>
<CAPTION>
Three months ended Six months ended
Per- Per-
share share
Income Shares earnings Income Shares earnings
July 4, 1998
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,232 1,073 $ 1.15 $1,811 1,075 $ 1.68
Effect of
dilutive
options -- 26 -- 24
Diluted EPS $1,232 1,099 $ 1.12 $1,811 1,099 $ 1.65
<CAPTION>
June 28, 1997
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,020 1,103 $ .92 $ 978 1,103 $ .89
Effect of
dilutive
options -- 27 -- 27
Diluted EPS $1,020 1,130 $ .90 $ 978 1,130 $ .87
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Financial Condition (See pages 2 and 5)
Operations for the first six months of 1998 used $257,000 of
cash compared to $5,648,000 in 1997. The significant use of
cash in the first six months of 1997 was attributed to higher
inventory balances and reduced accrued expense and payables
balances. The return to more normal balances in these
categories during 1998 combined with the higher income to
account for the improved use of cash.
The Company estimates that its short-term line of credit (of
which $2,500,000 was outstanding at July 4, 1998) will be
adequate to meet its cash requirements for the foreseeable
future. Historically, the Company's borrowings against the
short-term line peak during the second quarter and decline
over the remainder of the year.
In June 1997, the Financial Accounting Standards Board (FASB)
issued 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." In June 1998,
the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company has not yet
adopted these pronouncements, but does not expect that they
will have a material impact on the Company's financial
position or results of operations.
Operations - Comparison of Quarter Ended July 4, 1998 to
Quarter Ended June 28, 1997
(See page 3)
Consolidated net sales increased $944,000 (3.4%). The
construction materials segment reported sales up $2,884,000
(21.2%), as construction activity along the Front Range in
southern Colorado remains strong. Unfavorable weather
conditions, caused by the El Nino` effect, during the height
of Phoenix Manufacturing's selling season were mainly
responsible for the decline of $1,940,000 (13.5%) in the
heating and air-conditioning segment. Williams Furnace
reported increased sales volume for its product lines.
Consolidated cost of sales (exclusive of depreciation,
depletion and amortization) as a percentage of sales decreased
slightly from 77.2% to 76.6%. The decrease was due to
improved margins in Williams Furnace's fan coil line combined
with increased sales in the construction materials segment.
Depreciation, depletion and amortization increased 17.5%
($153,000) due to increased capital expenditures.
Interest expense declined 31.4% ($97,000) due to lower levels
of outstanding debt.
Operations - Comparison of Six Months Ended July 4, 1998 to
Six Months June 28, 1997(See page 4)
Net sales rose $2,845,000 (5.8%). The increase in the
construction materials segment, $5,103,000 (21.4%) and the
decrease in the heating and air-conditioning segment
$2,258,000 (9.0%), were due to the reasons noted above.
7
<PAGE>
Consolidated cost of sales (exclusive of depreciation,
depletion and amortization) as a percentage of sales decreased
from 77.9% to 76.2% due to improved margins in Williams
Furnace Co.'s fan coil line combined with increased sales in
the construction materials segment.
Depreciation, depletion and amortization increased 16.8%
($294,000) due to increased capital expenditures.
Interest expense declined 23.8% ($120,000) due to the reason
noted above.
Historically, the Company has experienced operating losses
during the first quarter. The second quarter has historically
improved over the first quarter's operating results. This
trend is expected to continue as sales of construction
materials are generally higher in the second and third
quarters while sales of heating and air-conditioning products,
although not showing strong seasonality, experience product
mix changes that yield higher gross profits in the fourth
quarter.
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the stockholders of the
Company was held on May 27, 1998.
(b) At that meeting, three individuals, all of whom
are current directors, were nominated and elected
to serve until the 2001 Annual Meeting by the
following votes:
Director Shares Shares Shares
For Against Withheld
Betsy R. Gidwitz 873,190 -- 41,030
James G. Gidwitz 873,170 -- 41,050
Joseph J. Sum 873,319 -- 40,901
There were no broker non-votes.
The following directors' terms of office continued
after the meeting until the Annual Meetings of the
years as noted:
Directors Expiration of
Term
Ralph W. Gidwitz 1999
William G. Shoemaker 1999
Theodore R. Tetzlaff 1999
Thomas H. Carmody 2000
Ronald J. Gidwitz 2000
Darrell M. Trent 2000
8
<PAGE>
(c) In addition to the above election, the independent
auditing firm of Coopers & Lybrand L.L.P. was
appointed by the following vote:
For Against Abstain
909,411 1,641 3,168
There were no broker non-votes.
(d) A shareholder proposal had been included in the
proxy, however, it was not submitted for vote at
the meeting. For informational purposes, the
matter would have been defeated by the following
vote:
For Against Abstain Non-Vote
200,793 586,255 4,810 122,362
(e) No other matters were submitted for vote.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27: Financial data schedule
(b) Registrant filed no reports on Form 8-K during the
quarter ended July 4, 1998.
SIGNATURE
Pursuant to the requirement 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
Date: August 3, 1998 By: /S/ Joseph J. Sum
Joseph J. Sum, Vice President
and Chief Financial Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-1999
<PERIOD-END> JUL-04-1998
<CASH> 765
<SECURITIES> 0
<RECEIVABLES> 19,930<F1>
<ALLOWANCES> 0
<INVENTORY> 14,223
<CURRENT-ASSETS> 37,570
<PP&E> 19,370<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 59,793
<CURRENT-LIABILITIES> 18,341
<BONDS> 0
0
0
<COMMON> 663
<OTHER-SE> 32,768
<TOTAL-LIABILITY-AND-EQUITY> 59,793
<SALES> 51,741
<TOTAL-REVENUES> 51,741
<CGS> 39,446<F3>
<TOTAL-COSTS> 48,704
<OTHER-EXPENSES> (133)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 384
<INCOME-PRETAX> 2,786
<INCOME-TAX> 975
<INCOME-CONTINUING> 1,811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,811
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.65
<FN>
<F1>Net of allowance for doubtful accounts
<F2>Net of accumulated depreciation and depletion
<F3>Exclusive of depreciation, depletion and amortization
</FN>
</TABLE>
