<PAGE>
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 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________________ to__________
Commission File number 1-3834
CONTINENTAL MATERIALS CORPORATION
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2274391
- ---------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
225 WEST WACKER DRIVE, SUITE 1800, 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
------- -------
<TABLE>
<S> <C>
Number of common shares outstanding at August 8, 1999.............. 1,995,217
</TABLE>
THE EXHIBIT FILED WITH THIS REPORT IS ON PAGE 10
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 3, 1999 and JANUARY 2, 1999
(Unaudited)
(000's omitted except share data)
<TABLE>
<CAPTION>
JULY 3, JANUARY 2,
1999 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 7,120
Receivables, net 21,438 16,821
Inventories:
Finished goods 7,444 6,761
Work in process 1,112 1,176
Raw materials and supplies 6,935 4,113
Prepaid expenses 3,109 2,695
---------- ----------
Total current assets 40,038 38,686
---------- ----------
Property, plant and equipment, net 24,992 22,105
---------- ----------
Other assets:
Investment in mining partnership 100 100
Other 2,595 2,726
---------- ----------
$ 67,725 $ 63,617
========== ==========
LIABILITIES
Current liabilities:
Bank loan payable $ 4,500 $ --
Current portion of long-term debt 2,576 2,526
Accounts payable and accrued expenses 17,253 16,695
Income taxes 501 1,271
---------- ----------
Total current liabilities 24,830 20,492
---------- ----------
Long-term debt 3,164 4,284
Deferred income taxes 1,457 1,670
Other long-term liabilities 2,206 933
SHAREHOLDERS' EQUITY
Common shares, $0.25 par value; authorized
3,000,000; issued 2,574,264 643 663
Capital in excess of par value 1,954 3,484
Retained earnings 38,674 35,901
Treasury shares, 579,047 and 508,434, at cost (5,203) (3,810)
---------- ----------
36,068 36,238
---------- ----------
$ 67,725 $ 63,617
========== ==========
</TABLE>
See accompanying notes
2
<PAGE>
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED JULY 3, 1999 AND JULY 4, 1998
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
JULY 3, JULY 4,
1999 1998
------------- ------------
<S> <C> <C>
Net sales $ 31,253 $ 28,935
------------- ------------
Costs and expenses:
Cost of sales (exclusive of depreciation,
depletion and amortization) 22,442 22,168
Depreciation, depletion and amortization 1,243 1,029
Selling and administrative 4,207 3,699
------------- ------------
27,892 26,896
------------- ------------
Operating income 3,361 2,039
Interest (149) (212)
Equity loss from mining partnership (21) (19)
Other income, net 81 87
------------- ------------
Income before income taxes 3,272 1,895
Provision for income taxes 1,233 663
------------- ------------
Net income 2,039 1,232
Retained earnings, beginning of period 36,635 31,862
------------- -------------
Retained earnings, end of period $ 38,674 $ 33,094
============= =============
Basic earnings per share $ .99 $ .58
============= =============
Average shares outstanding 2,060 2,146
============= =============
Diluted earnings per share $ .97 $ .56
============= =============
Average shares outstanding 2,108 2,198
============= =============
</TABLE>
See accompanying notes
3
<PAGE>
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 4, 1998
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
JULY 3, JULY 4,
1999 1998
------------------ ------------------
<S> <C> <C>
Net sales $ 55,585 $ 51,741
------------- -------------
Costs and expenses:
Cost of sales (exclusive of depreciation,
depletion and amortization) 40,817 39,446
Depreciation, depletion and amortization 2,330 2,049
Selling and administrative 7,985 7,209
------------- -------------
51,132 48,704
------------- -------------
Operating income 4,453 3,037
Interest (216) (384)
Equity loss from mining partnership (21) (38)
Other income, net 186 171
------------- -------------
Income before income taxes 4,402 2,786
Provision for income taxes 1,629 975
------------- -------------
Net income 2,773 1,811
Retained earnings, beginning of period 35,901 31,283
------------- -------------
Retained earnings, end of period $ 38,674 $ 33,094
============= =============
Basic earnings per share $ 1.33 $ .84
============= =============
Average shares outstanding 2,091 2,150
============= =============
Diluted earnings per share $ 1.30 $ .83
============= =============
Average shares outstanding 2,138 2,198
============= =============
</TABLE>
See accompanying notes
4
<PAGE>
CONSOLIDATED MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JULY 3, 1999 AND JULY 4, 1998
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
JULY 3, JULY 4,
1999 1998
-------------- -------------
<S> <C> <C>
Net cash used by operating activities $ (2,477) $ (257)
Investing activities:
Capital expenditures (5,125) (1,812)
Proceeds from sale of property and equipment 16 36
Investment in mining partnership (21) (38)
------------- -----------
Net cash used in investing activities (5,130) (1,814)
------------- -----------
Financing activities:
Borrowings under revolving credit facility 4,500 2,500
Capital lease obligation 203 --
Repayment of long term debt (1,273) (950)
Proceeds from exercise of stock options 78 --
Payment to acquire treasury stock (1,471) (238)
Payment to purchase and cancel stock (1,550) --
------------- -----------
Net cash (used) provided by financing activities 487 1,312
------------- -----------
Net decrease in cash and cash equivalents (7,120) (759)
Cash and cash equivalents:
Beginning of period 7,120 1,524
------------- -----------
End of period $ -- $ 765
============= ===========
Supplemental disclosures of cash flow items:
Cash paid during the three months for:
Interest $ 329 $ 378
Income taxes 1,606 293
</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 3, 1999
(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 1999 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
1998 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 3, 1999
and July 4, 1998. Amounts in thousands except per share data.
<TABLE>
<CAPTION>
Three months ended Six months ended
----------------------------------------- -----------------------------------------
Per-share Per-share
Income Shares earnings Income Shares earnings
------------ ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
July 3, 1999
Basic EPS $2,039 2,060 $ .99 $2,773 2,091 $ 1.33
=========== ===========
Effect of dilutive options -- 48 -- 47
------------ ---------- ------------ ----------
Diluted EPS $2,039 2,108 $ .97 $2,773 2,138 $ 1.30
============ ========== =========== ============ ========== ===========
July 4, 1998
Basic EPS $1,232 2,146 $ .58 $1,811 2,150 $ .84
=========== ===========
Effect of dilutive options -- 52 -- 48
------------ ---------- ------------ ----------
Diluted EPS $1,232 2,198 $ .56 $1,811 2,198 $ .83
============ ========== =========== ============ ========== ===========
</TABLE>
Following the market close on June 7,1999, the Company effected a 1-for-50
reverse stock split immediately followed by a 100-for-1 forward stock
split. Shares and Earnings per share figures for all periods shown in the
table, reflect this split.
5. The following table presents information about reported segments for the
six month and three month periods ended July 3,1999 and July 4, 1998 along
with the items necessary to reconcile the segment information to the totals
reported in the financial statements (amounts in thousands).
6
<PAGE>
<TABLE>
<CAPTION>
Heating and Air Construction Unallocated
Conditioning Materials All Other Corporate Total
-------------- ----------- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
1999
SIX MONTHS
Revenues from external
customers $ 25,969 $29,541 $ 72 $ 3 $55,585
Operating income 2,025 3,872 22 (1,466) 4,453
Assets 31,351 34,216 148 2,010 67,725
THREE MONTHS
Revenues from external
customers 15,837 15,379 36 1 31,253
Operating income 1,671 2,428 11 (749) 3,361
1998
SIX MONTHS
Revenues from external
customers $ 22,740 $28,929 $ 72 $ -- $51,741
Operating income 753 3,509 21 (1,246) 3,037
Assets 26,384 30,090 714 2,605 59,793
THREE MONTHS
Revenues from external
customers 12,408 16,491 36 -- 28,935
Operating income 292 2,328 11 (592) 2,039
</TABLE>
There are no differences in the basis of segmentation or in the basis of
measurement of segment profit or loss from the last annual report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FINANCIAL CONDITION (SEE PAGES 2 AND 4)
Operations for the first six months of 1999 used $2,477,000 in cash
compared to $257,000 in 1998. The increase in cash used is mainly
attributed to an increase in inventories reflecting the build up in the
heating and air conditioning segment related to abnormally low levels of
furnaces at 1998 year end.
The Company estimates that its short-term line of credit (of which
$4,500,000 was outstanding at July 3, 1999) 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.
7
<PAGE>
OPERATIONS - COMPARISON OF QUARTER ENDED JULY 3, 1999 TO QUARTER ENDED
JULY 4, 1998 (SEE PAGE 3)
Consolidated net sales increased $2,318,000 (8%). The heating and air
conditioning segment accounted for the entire increase, $3,429,000
(27.6%), which can be attributed to favorable weather for the heating
products, strong sales of the fan coil product line and an improvement in
the evaporative cooler market from the prior year level. A $1,112,000
decline in the construction materials segment is attributable to
inclement weather during April. Construction activity along the Front
Range in southern Colorado, however, remains strong.
Consolidated cost of sales (exclusive of depreciation and depletion) as a
percentage of sales decreased from 76.8% to 71.8%. The decrease was
realized by both segments and is due to the improved sales as well as
cost containment measures.
Selling and administrative expenses increased $508,000 (13.7%) and as a
percentage of sales from 12.8% to 13.5%. The increase in percentage is
related compensation matters and higher consulting fees.
Interest expense declined reflecting the lower levels of outstanding
debt.
The historical pattern of operating losses during the first quarter
followed by stronger second and third quarters with a slight decline
during the fourth quarter has changed in recent years. The main causes
are the strong performance of the construction materials segment which
has benefited from the continuing strong economy and mild winter weather
along the Front Range of southern Colorado. Additionally, the fan coil
product line of the heating and air conditioning segment continues to
grow and shows little seasonality.
OPERATIONS - COMPARISON OF SIX MONTHS ENDED JULY 3, 1999 TO SIX MONTHS
JULY 3, 1998 (SEE PAGE 4)
Net sales rose $3,844,000 (7.4%). The increase in the heating and air
conditioning segment, $3,229,000 was due to the reasons noted above. The
$612,000 increase in the construction materials segment can be attributed
to mild weather and the continuing high level of construction activity
along the Front Range in southern Colorado slightly offset by the results
for April as noted above.
Consolidated cost of sales (exclusive of depreciation and depletion) as a
percentage of sales decreased from 76.2% to 73.4%. The decrease was
realized by both segments and is due to the reasons noted above.
Selling and administrative expenses increased $776,000 (10.8%) and as a
percentage of sales from 13.9% to 14.4%. The increase in percentage is
related to the introduction of a new combination cooling and heating
product as well as the reasons noted above.
Interest expense declined due to the reason noted above.
YEAR 2000 COMPLIANCE
The year 2000 issue relates to the way computer hardware and software
define calendar dates; many use only two digits to represent the year
which could cause failures or miscalculations. In addition, many systems
and equipment that are not typically thought of as "computer-related"
(referred to as "non-IT") contain imbedded hardware or software that may
include a time element. The Year 2000 issue can arise at any point in the
8
<PAGE>
Company's supply, manufacturing, processing, distribution and financial
chains. As a result, the Company is at risk of disruptions to its
business operations from possible miscalculations or system failures
occurring not only in its own equipment and software, but those occurring
in any business or governmental entity that the Company relies on for
goods or services.
The Company has completed a study, with the assistance of external
consultants, to evaluate the Company's current internal information and
financial systems. The Company concluded that the majority of the
existing systems were not Year 2000 compliant. We have therefore
undertaken to implement a Year 2000 compliant enterprise resource
planning (ERP) system to replace all non-compliant systems as well as to
modernize and integrate all of the Company's systems. The majority of the
hardware utilized by the Company, including all that may be Year 2000
non-compliant, has been replaced. Work on the project began in the second
quarter of 1998 and is expected to be completed during the fourth quarter
of 1999. The cost of the entire project is currently estimated at
$3,500,000 including hardware, software, consulting fees and other
out-of-pocket expenses. Approximately $3,000,000 has been incurred to
date. Funding will be furnished by a lease of approximately $1,500,000
with the balance provided by operating cash flow. The cost of the project
is not expected to have a significant negative impact on the Company's
future financial results.
A review has been undertaken to assess and correct Year 2000 issues
affecting both our products and non-IT systems and equipment used in our
businesses. At the present time, the Company has not identified any
products that would not be Year 2000 compliant.
We rely on third party suppliers for raw materials, water, utilities,
transportation and other key services. Interruption to any of their
operations due to Year 2000 issues could affect the operations of our
Company. We have initiated efforts to ascertain the level of preparedness
of this group. We have found some of these entities less willing to
provide information concerning their state of readiness. Alternative
sources of raw materials and certain other services have been identified,
where possible, to help mitigate any impact due to disruptions at any of
our key suppliers. While we believe that the steps we have taken should
reduce the adverse effect on our Company of any such disruptions, the
interdependent nature of the Company and its suppliers, service
providers, utilities and governmental agencies is such that a disruption
at one or more suppliers could have material adverse consequences.
We are also dependent upon our customers for sales and cash flow. Year
2000 interruptions in our customers' operations could result in reduced
sales, increased inventory or receivable levels and cash flow reductions.
While these events are possible, we believe our customer base is broad
enough to minimize the affects to our Company of system disruptions at
some customers' operations. We are, however, taking steps to contact and
monitor the status of our larger customers as a means of determining
risks and alternatives.
At this time, we have not learned of any potential exposures from
external, non-compliant third party suppliers or customers.
9
<PAGE>
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 26, 1999.
(b) At that meeting, three individuals, all of whom are
current directors, were nominated and elected to serve
until the 2002 Annual Meeting by the following votes:
<TABLE>
<CAPTION>
Director Shares For Shares Against Shares Withheld
- ----------------------------- ------------------- -------------------- ----------------------
<S> <C> <C> <C>
Ralph W. Gidwitz 931,864 -- 53,815
William G. Shoemaker 934,747 -- 50,932
Theodore R. Tetzlaff 934,827 -- 50,852
</TABLE>
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:
<TABLE>
<CAPTION>
Directors Expiration of Term
-------------------------------- ------------------------
<S> <C>
Thomas H. Carmody 2000
Ronald J. Gidwitz 2000
Darrell M. Trent 2000
James G. Gidwitz 2001
Betsy R. Gidwitz 2001
Joseph J. Sum 2001
</TABLE>
(c) In addition to the above election, the independent
auditing firm of PricewaterhouseCoopers LLP was
appointed by the following vote:
<TABLE>
<CAPTION>
For Against Abstain
------------------- ------------------- -------------------
<S> <C> <C>
981,960 2,938 778
</TABLE>
There were no broker non-votes.
(d) A proposal to amend the Company's Certificate of
Incorporation to effect a reverse stock split
followed by a forward stock split of the Company's
common stock was ratified by the following vote:
<TABLE>
<CAPTION>
For Against Abstain
------------------ --------------- ----------------
<S> <C> <C>
932,620 59,791 2,268
</TABLE>
(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 a current report on Form 8-K (Items 5
and 7) dated June 7, 1999.
10
<PAGE>
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 10, 1999 By: /s/ Joseph J. Sum
----------------------- -----------------------------------
Joseph J. Sum, Vice President
and Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 21,438<F1>
<ALLOWANCES> 0
<INVENTORY> 15,491
<CURRENT-ASSETS> 40,038
<PP&E> 24,992<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 67,725
<CURRENT-LIABILITIES> 24,830
<BONDS> 0
643
0
<COMMON> 0
<OTHER-SE> 35,425
<TOTAL-LIABILITY-AND-EQUITY> 67,725
<SALES> 55,585
<TOTAL-REVENUES> 55,585
<CGS> 40,817<F3>
<TOTAL-COSTS> 51,132
<OTHER-EXPENSES> (165)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 216
<INCOME-PRETAX> 4402
<INCOME-TAX> 1629
<INCOME-CONTINUING> 2773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,773
<EPS-BASIC> 1.33
<EPS-DILUTED> 1.30
<FN>
<F1> Net of allowance for doubtful accounts
<F2> Net of accumulated depreciation and depletion
<F3> Exclusive of depreciation, depletion and amortization
</FN>
</TABLE>
