<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 OCTOBER 2, 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
----- ---
Number of common shares outstanding at November 10, 1999 -- 1,969,817
THE EXHIBIT FILED WITH THIS REPORT IS ON PAGE 11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 2, 1999 and JANUARY 2, 1999
(Unaudited)
(000's omitted except share data)
<TABLE>
<CAPTION>
OCTOBER 2, JANUARY 2,
1999 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 141 $ 7,120
Receivables, net 18,893 16,821
Inventories:
Finished goods 7,144 6,761
Work in process 1,221 1,176
Raw materials and supplies 6,112 4,113
Prepaid expenses 3,130 2,695
-------- --------
Total current assets 36,641 38,686
-------- --------
Property, plant and equipment, net 26,326 22,105
-------- --------
Other assets:
Investment in mining partnership 100 100
Other 2,830 2,726
-------- --------
$ 65,897 $ 63,617
-------- --------
-------- --------
LIABILITIES
Current liabilities:
Bank loan payable $ 800 $ --
Current portion of long-term debt 2,576 2,526
Accounts payable and accrued expenses 17,748 16,695
Income taxes 783 1,271
-------- --------
Total current liabilities 21,907 20,492
-------- --------
Long-term debt 3,122 4,284
Deferred income taxes 1,457 1,670
Other long-term liabilities 2,161 933
SHAREHOLDERS' EQUITY
Common shares, $0.25 par value; authorized
3,000,000; issued 2,574,264 643 663
Capital in excess of par value 1,899 3,484
Retained earnings 40,272 35,901
Treasury shares, 594,163 and 508,434, at cost (5,564) (3,810)
-------- --------
37,250 36,238
-------- --------
$ 65,897 $ 63,617
-------- --------
-------- --------
</TABLE>
See accompanying notes
2
<PAGE>
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 3,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 33,426 $ 29,069
-------- --------
Costs and expenses:
Cost of sales (exclusive of depreciation,
depletion and amortization) 25,367 21,642
Depreciation, depletion and amortization 1,377 1,045
Selling and administrative 4,035 3,817
-------- --------
30,779 26,504
-------- --------
Operating income 2,647 2,565
Interest (136) (154)
Equity loss from mining partnership (21) (7)
Other income, net 46 189
-------- --------
Income before income taxes 2,536 2,593
Provision for income taxes 938 908
-------- --------
Net income 1,598 1,685
Retained earnings, beginning of period 38,674 33,094
-------- --------
Retained earnings, end of period $ 40,272 $ 34,779
-------- --------
-------- --------
Basic earnings per share $ .80 $ .79
-------- --------
-------- --------
Average shares outstanding 1,994 2,144
-------- --------
-------- --------
Diluted earnings per share $ .78 $ .77
-------- --------
-------- --------
Average shares outstanding 2,043 2,194
-------- --------
-------- --------
</TABLE>
See accompanying notes
3
<PAGE>
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 3,
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 89,011 $ 80,810
-------- --------
Costs and expenses:
Cost of sales (exclusive of depreciation,
depletion and amortization) 66,184 61,088
Depreciation, depletion and amortization 3,707 3,094
Selling and administrative 12,020 11,026
-------- --------
81,911 75,208
-------- --------
Operating income 7,100 5,602
Interest (352) (538)
Equity loss from mining partnership (42) (45)
Other income, net 232 360
-------- --------
Income before income taxes 6,938 5,379
Provision for income taxes 2,567 1,883
-------- --------
Net income 4,371 3,496
Retained earnings, beginning of period 35,901 31,283
-------- --------
Retained earnings, end of period $ 40,272 $ 34,779
-------- --------
-------- --------
Basic earnings per share $ 2.12 $ 1.63
-------- --------
-------- --------
Average shares outstanding 2,059 2,148
-------- --------
-------- --------
Diluted earnings per share $ 2.08 $ 1.59
-------- --------
-------- --------
Average shares outstanding 2,105 2,196
-------- --------
-------- --------
</TABLE>
See accompanying notes
4
<PAGE>
CONSOLIDATED MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 2, 1999 AND OCTOBER 3, 1998
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
OCTOBER 2, OCTOBER 3,
1999 1998
----------- -----------
<S> <C> <C>
Net cash provided by operating activities $ 4,511 $ 8,135
Investing activities:
Capital expenditures (7,793) (4,636)
Proceeds from sale of property and equipment 16 37
Investment in mining partnership (42) (45)
------- -------
Net cash used in investing activities (7,819) (4,644)
------- -------
Financing activities:
Borrowings under revolving credit facility 800 --
Capital lease obligation 203 --
Repayment of long term debt (1,315) (1,900)
Proceeds from exercise of stock options 118 --
Payment to acquire treasury stock (1,887) (238)
Payment to purchase and cancel stock (1,590) --
------- -------
Net cash used in financing activities (3,671) (2,138)
------- -------
Net (decrease) increase in cash and cash equivalents (6,979) 1,353
Cash and cash equivalents:
Beginning of period 7,120 1,524
------- -------
End of period $ 141 $ 2,877
------- -------
------- -------
Supplemental disclosures of cash flow items:
Cash paid during the nine months for:
Interest $ 490 $ 543
Income taxes 3,505 1,218
</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 OCTOBER 2, 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 nine 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 nine months ended October 2,
1999 and October 3, 1998. Amounts in thousands except per share data.
<TABLE>
<CAPTION>
Three months ended Nine months ended
----------------------------------------- -----------------------------------------
Per-share Per-share
Income Shares earnings Income Shares earnings
------------ ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
October 2, 1999
Basic EPS $1,598 1,994 $ .80 $4,371 2,059 $ 2.12
----------- -----------
----------- -----------
Effect of dilutive options -- 49 -- 46
------------ ---------- ------------ ----------
Diluted EPS $1,598 2,043 $ .78 $4,371 2,105 $ 2.08
------------ ---------- ----------- ------------ ---------- -----------
------------ ---------- ----------- ------------ ---------- -----------
October 3, 1998
Basic EPS $1,685 2,144 $ .79 $3,496 2,148 $ 1.63
=========== ===========
Effect of dilutive options -- 50 -- 48
------------ ---------- ------------ ----------
Diluted EPS $1,685 2,194 $ .77 $3,496 2,196 $ 1.59
------------ ---------- ----------- ------------ ---------- -----------
------------ ---------- ----------- ------------ ---------- -----------
</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
nine month and three month periods ended October 2, 1999 and October 3,
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
- ------
Nine Months
- -----------
Revenues from external
customers $ 39,393 $49,482 $ 109 $ 27 $89,011
Operating income 3,661 5,588 32 (2,181) 7,100
Assets 28,785 34,775 160 2,177 65,897
Three Months
- ------------
Revenues from external
customers 13,424 19,941 37 24 33,426
Operating income 1,636 1,716 10 (715) 2,647
1998
- ----
Nine Months
- -----------
Revenues from external
customers $ 36,054 $44,647 $ 109 $ -- $80,810
Operating income 2,121 5,429 31 (1,979) 5,602
Assets 23,366 31,357 707 3,930 59,360
Three Months
- ------------
Revenues from external
customers 13,314 15,718 37 -- 29,069
Operating income 1,368 1,920 10 (733) 2,565
</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 nine months of 1999 generated $4,511,000 in cash
compared to $8,135,000 in 1998. The diminished cash flow is mainly
attributed to an increase in inventories reflecting the build up in the
heating and air conditioning segment as a result of abnormally low levels
of furnaces at 1998 year-end.
The Company estimates that its short-term line of credit (of which
$800,000 was outstanding at October 2, 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.
OPERATIONS - COMPARISON OF QUARTER ENDED OCTOBER 2, 1999 TO QUARTER ENDED
OCTOBER 3, 1998 (SEE PAGE 3)
Consolidated net sales increased $4,357,000 (15%). The construction
materials segment accounted for virtually all of the increase, $4,223,000
(26.9%) as the construction activity along the Front Range in southern
Colorado remained very strong and projects delayed by April's inclement
weather were brought current. The heating and air conditioning
7
<PAGE>
segment accounted for the remainder of the increase with mixed results in
its product lines. The fan coil and furnace lines both registered strong
sales increases. A record sales volume in July 1998 due to extremely hot
weather coupled with an unseasonably cool 1999 summer lead to a
significant decline in evaporative cooler sales in the third quarter of
1999.
Consolidated cost of sales (exclusive of depreciation, depletion and
amortization) as a percentage of sales increased from 74.5% to 75.9%. The
increase was entirely due to the construction materials segment where
accounting adjustments to fringe benefits and raw material costs were
made in the third quarter.
Selling and administrative expenses increased $218,000 (5.7%) but
declined as a percentage of sales from 13.1% to 12.1%. The decline in
percentage is related to the increase in sales.
Depreciation, depletion and amortization expense increased due to the
high level of capital expenditures in the last twelve months.
Interest expense declined reflecting the lower levels of outstanding debt
and a lower average interest rate.
OPERATIONS - COMPARISON OF NINE MONTHS ENDED OCTOBER 2, 1999 TO NINE
MONTHS ENDED OCTOBER 3, 1998 (SEE PAGE 4)
Net sales rose $8,201,000 (10.1%). The increase in the heating and air
conditioning segment, $3,339,000 was due to the reasons noted above. The
$4,835,000 increase in the construction materials segment can be
attributed to mild winter weather and the continuing high level of
construction activity along the Front Range in southern Colorado.
Consolidated cost of sales (exclusive of depreciation, depletion and
amortization) as a percentage of sales decreased from 75.5% to 74.4%. The
decrease was realized by the heating and air conditioning segment and is
due to the increased sales and cost containment measures.
Selling and administrative expenses increased $994,000 (9.0%) but
remained relatively constant as a percentage of sales at 13.5% during
1999 and 13.6% during 1998. The effect of increased sales was partially
offset by costs associated the introduction of a new combination cooling
and heating product earlier in the year.
Depreciation, depletion and amortization expense increased due to the
above reason.
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
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.
8
<PAGE>
The Company completed a study in early 1998 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. To date the concrete dispatch, general ledger,
accounts payable, accounts receivable and payroll packages have been
implemented. Sales order processing has been implemented at one location
and is running parallel at the other two locations with "go-live"
scheduled prior to year-end. The manufacturing and procurement modules
are in the final stages of testing and are scheduled to be implemented
prior to year-end. Contingency plans have been investigated and are
believed to be adequate should the scheduled implementation be delayed.
The cost of the entire project is currently estimated at $4,000,000
including hardware, software, consulting fees and other out-of-pocket
expenses. Approximately $3,600,000 has been incurred to date. Funding was
furnished by a lease of approximately $1,650,000 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 was also 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 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 October 2, 1999.
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: November 12, 1999 By: /s/ Joseph J. Sum
--------------------------- ---------------------------------
Joseph J. Sum, Vice President
and Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-02-1999
<CASH> 141
<SECURITIES> 0
<RECEIVABLES> 18,893<F1>
<ALLOWANCES> 0
<INVENTORY> 14,477
<CURRENT-ASSETS> 36,641
<PP&E> 26,326<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 65,897
<CURRENT-LIABILITIES> 21,907
<BONDS> 0
643
0
<COMMON> 0
<OTHER-SE> 36,607
<TOTAL-LIABILITY-AND-EQUITY> 65,897
<SALES> 89,011
<TOTAL-REVENUES> 89,011
<CGS> 66,184<F3>
<TOTAL-COSTS> 81,911
<OTHER-EXPENSES> (190)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 352
<INCOME-PRETAX> 6,938
<INCOME-TAX> 2,567
<INCOME-CONTINUING> 4,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,371
<EPS-BASIC> 2.12
<EPS-DILUTED> 2.08
<FN>
<F1>NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS
<F2>NET OF ACCUMULATED DEPRECIATION AND DEPLETION
<F3>EXCLUSIVE OF DEPRECIATION, DEPLETION AND AMORTIZATION
</FN>
</TABLE>
