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 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 of (I.R.S. Employer incorporation or organization) Identification No.) 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 21, 1998......1,075,149 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 4, 1998 and JANUARY 3, 1998 (Unaudited) (000's omitted except share data) APRIL 4, JANUARY 3, 1998 1998 ASSETS Current assets: Cash and cash equivalents $ 85 $ 1,524 Receivables, net 16,992 13,882 Inventories: Finished goods 9,179 8,562 Work in process 1,527 1,471 Raw materials and supplies 4,573 4,260 Prepaid expenses 2,612 2,343 Total current assets 34,968 32,042 Property, plant and equipment, net 19,224 19,581 Other assets: Investment in mining partnership 600 600 Other 2,216 2,132 $ 57,008 $ 54,355 LIABILITIES Current liabilities: Bank loan payable $ 1,000 $ -- Current portion of long-term debt 1,900 1,900 Accounts payable and accrued expenses 12,393 11,327 Income taxes 441 222 Total current liabilities 15,734 13,449 Long-term debt 6,400 6,400 Deferred income taxes 1,722 1,722 Other long-term liabilities 857 926 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 31,862 31,283 Treasury shares, 251,439, at cost (3,714) (3,572) 32,295 31,858 $ 57,008 $ 54,355 See accompanying notes 2 CONTINENTAL MATERIALS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED APRIL 4, 1998 AND MARCH 29, 1997 (Unaudited) (000's omitted except per share amounts) APRIL 4, MARCH 29, 1998 1997 Net sales $ 22,806 $ 20,905 Costs and expenses: Cost of sales(exclusive of depreciation, depletion and amortization) 17,278 16,450 Depreciation, depletion and amortization 1,020 879 Selling and administrative 3,510 3,621 21,808 20,950 Operating income (loss) 998 (45) Interest (172) (180) Equity loss from mining partnership (19) (28) Other income, net 84 185 Income (loss) before income taxes 891 (68) Provision (credit) for income taxes 312 (26) Net income (loss) 579 (42) Retained earnings, beginning of period 31,283 28,173 Retained earnings, end of period $ 31,862 $ 28,131 Basic earnings (loss) per share $ .54 $ (.04) Average shares outstanding 1,077 1,103 Diluted earnings (loss) per share $ .53 $ (.04) Average shares outstanding 1,098 1,121 See accompanying notes 3 CONSOLIDATED MATERIALS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 4, 1998 AND MARCH 29, 1997 (Unaudited) (000's omitted) APRIL 4, MARCH 29, 1998 1997 Net cash used by operating activities $ (1,673) $ (5,814) Investing activities: Capital expenditures (637) (645) Proceeds from sale of property and equipment 32 8 Investment in mining partnership (19) (28) Net cash used in investing activities (624) (665) Financing activities: Borrowings under revolving credit facility 1,000 6,100 Payment to acquire treasury stock (142) -- Net cash provided by financing activities 858 6,100 Net decrease in cash and cash equivalents (1,439) (379) Cash and cash equivalents: Beginning of period 1,524 379 End of period $ 85 $ -- Supplemental disclosures of cash flow items: Cash paid during the three months for: Interest $ 175 $ 199 Income taxes 93 180 See accompanying notes 4 CONTINENTAL MATERIALS CORPORATION SECURITIES AND EXCHANGE COMMISSION FORM 10-Q NOTES TO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS QUARTER ENDED APRIL 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 three 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 months ended April 4, 1998 and March 29, 1997. Per-share Income (loss) Shares earnings (loss) April 4, 1998 Basic EPS $ 579 1,077 $ .54 Effect of dilutive options -- 21 Diluted EPS $ 579 1,098 $ .53 March 29, 1997 Basic EPS $ (42) 1,103 $ (.04) Effect of dilutive options -- 18 Diluted EPS $ (42) 1,121 $ (.04) 5.The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" as of January 4, 1998. Since the Company has no components of comprehensive income for the periods presented, there is no effect of the adoption reflected in the financial statements. 5 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 1998 used $1,673,000 in cash compared to $5,814,000 in 1997. The decrease in cash used is mainly attributed to changes in accrued expense and payables balances. The increase in these balances is largely due to the timing of paymemts. The Company estimates that its short-term line of credit (of which $1,000,000 was outstanding at April 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." 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 April 4, 1998 to Quarter Ended March 29, 1997 (See page 3) Consolidated net sales increased $1,901,000 (9.1%). The increase in the construction materials segment of $2,219,000 (21.7%) is attributed to mild weather and the continuing high level of construction activity along the Front Range in southern Colorado. A decrease in the heating and air-conditioning segment sales of $318,000 (3.0%) was due to depressed sales in the area serviced by Phoenix Manufacturing, Inc. which has experienced unfavorable weather patterns. Consolidated cost of sales (exclusive of depreciation and depletion) as a percentage of sales decreased from 78.7% to 75.8%. The decrease was due to improved margins in Williams Furnace Co.'s fan coil line combined with improved sales in the construction materials segment. Selling and administrative expenses decreased $111,000 (3.1%) and as a percentage of sales from 17.3% to 15.4%. The decrease in expenses was realized in numerous categories in the construction materials segment and at Williams Furnace Co. The percentage decline is due to the increase in net sales and the fixed nature of many of the expenses. Historically, the Company has experienced operating losses during the first quarter. 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, though not showing strong seasonality, experience product mix changes that yield higher gross profits in the fourth quarter. The break from this trend in the first quarters of 1998 and 1997 was mainly due to the strong performance of the construction materials segment which has benefited from the continuing strong economy and was aided by mild weather. Additionally, Williams' furnace sales were boosted by the damp, cool weather in the western states in 1998. 6 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 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: April 23, 1998 By: /S/ Joseph J. Sum Joseph J. Sum, Vice President and Chief Financial Officer 7