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 April 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
Number of common shares outstanding at April 11, 1999 1,043,963
THE EXHIBIT FILED WITH THIS REPORT IS ON PAGE 8
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONTINENTAL MATERIALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 3, 1999 and JANUARY 2, 1999
(Unaudited)
(000's omitted except share data)
<TABLE>
<CAPTION>
APRIL 3, JANUARY 2,
1999 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ -- $ 7,120
Receivables, net 16,361 16,821
Inventories:
Finished goods 8,761 6,761
Work in process 1,430 1,176
Raw materials and supplies 6,254 4,113
Prepaid expenses 2,945 2,695
Total current assets 35,751 38,686
Property, plant and equipment, net 22,694 22,105
Other assets:
Investment in mining partnership 100 100
Other 2,760 2,726
$ 61,305 $ 63,617
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 2,554 $ 2,526
Accounts payable and accrued expenses 14,904 16,695
Income taxes 878 1,271
Total current liabilities 18,336 20,492
Long-term debt 4,307 4,284
Deferred income taxes 1,670 1,670
Other long-term liabilities 982 933
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 36,635 35,901
Treasury shares, 278,125 and 254,217, at cost (4,772) (3,810)
36,010 36,238
$ 61,305 $ 63,617
</TABLE>
See accompanying notes
2
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND APRIL 4, 1998
(Unaudited)
(000's omitted except per share amounts)
<TABLE>
<CAPTION>
APRIL 3, APRIL 4,
1999 1998
<S> <C> <C>
Net sales $ 24,332 $ 22,806
Costs and expenses:
Cost of sales (exclusive of depreciation,
depletion and amortization) 18,375 17,278
Depreciation, depletion and amortization 1,087 1,020
Selling and administrative 3,778 3,510
23,240 21,808
Operating income 1,092 998
Interest (67) (172)
Equity loss from mining partnership -- (19)
Other income, net 105 84
Income before income taxes 1,130 891
Provision for income taxes 396 312
Net income 734 579
Retained earnings, beginning of period 35,901 31,283
Retained earnings, end of period $ 36,635 $ 31,862
Basic earnings per share $ .69 $ .54
Average shares outstanding 1,061 1,077
Diluted earnings per share $ .68 $ .53
Average shares outstanding 1,086 1,099
</TABLE>
See accompanying notes
3
CONSOLIDATED MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND APRIL 4, 1998
(Unaudited)
(000's omitted)
<TABLE>
<CAPTION>
APRIL 3, APRIL 4,
1999 1998
<S> <C> <C>
Net cash used by operating activities $(4,572) $(1,673)
Investing activities:
Capital expenditures (1,636) (637)
Proceeds from exercise of stock options 78 --
Proceeds from sale of property and equipment -- 32
Investment in mining partnership -- (19)
Net cash used in investing activities (1,558) (624)
Financing activities:
Borrowings under revolving credit facility -- 1,000
Capital lease obligation 101 --
Repayment of long term debt (50) --
Payment to acquire treasury stock (1,041) (142)
Net cash (used) provided by financing activities (990) 858
Net decrease in cash and cash equivalents (7,120) (1,439)
Cash and cash equivalents:
Beginning of period 7,120 1,524
End of period $ -- $ 85
Supplemental disclosures of cash flow items:
Cash paid during the three months for:
Interest $ 240 $ 175
Income taxes 774 93
</TABLE>
See accompanying notes
4
CONTINENTAL MATERIALS CORPORATION
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
NOTES TO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED APRIL 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 three 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 months ended April 3, 1999
and April 4, 1998.
<TABLE>
<CAPTION>
Per-share
Income earnings
(loss) Shares (loss)
<S> <C> <C> <C>
April 3, 1999
Basic EPS $ 734 1,061 $ .69
Effect of dilutive options -- 25
Diluted EPS $ 734 1,086 $ .68
April 4, 1998
Basic EPS $ 579 1,077 $ .54
Effect of dilutive options -- 22
Diluted EPS $ 579 1,099 $ .53
</TABLE>
5.The following table presents information about reported segments for
the three months ended April 3, 1999 and April 4, 1998 along with the items
necessary to reconcile the segment information to the totals reported in
the financial statements.
5
<TABLE>
<CAPTION>
Heating
and Air Construction All Unallocated
Conditioning Materials Other Corporate Total
<S> <C> <C> <C> <C> <C>
1999
Revenues from
external customers $10,132 $14,162 $ 36 $ 2 $24,332
Segment operating
income 354 1,444 11 (717) 1,092
Segment assets 28,416 31,035 173 1,681 61,305
1998
Revenues from
external customers $10,332 $12,438 $ 36 $ - $22,806
Segment operating
income 488 1,151 10 (651) 998
Segment assets 27,094 27,616 731 1,567 57,008
</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.
6.On April 14,1999, the Company's Board of Directors approved a 1-for-50
reverse stock split to be immediately followed by a 100-for-1 forward stock
split. The splits are subject to shareholder approval. If approved, the
stock splits would occur following the market close on June 7, 1999, or as
soon thereafter as practicable.
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 three months of 1999 used $4,572,000 in cash
compared to $1,673,000 in 1998. The increase in cash used is mainly
attributed to changes in accounts receivable, inventories and accrued
expense and payables balances. The decrease in the accounts receivable
and increase in liability balances is largely due to the timing of
receipts and payments, while the increase in inventories reflects the
build up of inventory levels 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 none
was outstanding at April 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.
Operations - Comparison of Quarter Ended April 3, 1999 to Quarter Ended
April 4, 1998 (See page 3)
Consolidated net sales increased $1,526,000 (6.7%). The construction
materials segment accounted for the entire increase, $1,724,000
(13.9%), which can be attributed to mild weather and the continuing
high level of construction activity along the Front Range in southern
Colorado. A small decrease in the sales of the heating and air
conditioning segment, $200,000 (2.0%), dampened the overall growth.
6
Consolidated cost of sales (exclusive of depreciation and depletion) as
a percentage of sales decreased slightly from 75.8% to 75.5%. The
decrease was due to the improved sales in the construction materials
segment.
Selling and administrative expenses increased $268,000 (7.6%) and as a
percentage of sales from 15.4% to 15.5%. The slight increase in
percentage is related to the introduction of a new combination cooling
and heating product.
Although, historically, the Company has experienced operating losses
during the first quarter, this pattern has changed in recent years
mainly due to the strong performance of the construction materials
segment which has benefited from the continuing strong economy and mild
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.
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.
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
third quarter of 1999. The cost of the entire project is currently
estimated at $3,300,000 including hardware, software, consulting fees
and other out-of-pocket expenses. Approximately $2,800,000 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
7
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.
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 April 3, 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: May 13, 1999 By: /S/ Joseph J. Sum
Joseph J. Sum, Vice President
and Chief Financial Officer
8
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 16,361<F1>
<ALLOWANCES> 0
<INVENTORY> 16,445
<CURRENT-ASSETS> 35,751
<PP&E> 22,694<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 61,305
<CURRENT-LIABILITIES> 18,336
<BONDS> 0
0
0
<COMMON> 663
<OTHER-SE> 35,347
<TOTAL-LIABILITY-AND-EQUITY> 61,305
<SALES> 24,332
<TOTAL-REVENUES> 24,332
<CGS> 18,375<F3>
<TOTAL-COSTS> 23,240
<OTHER-EXPENSES> (105)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 1,130
<INCOME-TAX> 396
<INCOME-CONTINUING> 734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 734
<EPS-PRIMARY> $ .69
<EPS-DILUTED> $ .68
<FN>
<F1>Net of allowance for doubtful accounts.
<F2>Net of accumulated depreciation and depletion.
<F3>Exclusive of depreciation, depletion and amortization.
</FN>
</TABLE>
