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 1, 2000 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 May 3, 2000.....................1,872,692 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 1, 2000 and JANUARY 1, 2000 (Unaudited) (000's omitted except share data) APRIL 1, JANUARY 1, ASSETS 2000 2000 ------ ------------------ --------------------- Current assets: Cash and cash equivalents $ -- $ 347 Receivables, net 17,869 20,161 Inventories: Finished goods 9,311 7,557 Work in process 1,764 1,642 Raw materials and supplies 7,266 6,767 Prepaid expenses 2,790 2,592 ------------------ --------------------- Total current assets 39,000 39,066 ------------------ --------------------- Property, plant and equipment, net 26,685 26,891 ------------------ --------------------- Other assets 1,687 1,794 ------------------ --------------------- $ 67,372 $ 67,751 ================== ===================== LIABILITIES Current liabilities: Bank loan payable $ 4,900 $ 1,600 Current portion of long-term debt 2,582 2,582 Accounts payable and accrued expenses 16,604 17,948 Income taxes 500 927 ------------------ --------------------- Total current liabilities 24,586 23,057 ------------------ --------------------- Long-term debt 1,840 1,875 Deferred income taxes 1,227 1,227 Other long-term liabilities 2,489 2,549 SHAREHOLDERS' EQUITY Common shares, $0.25 par value; authorized 3,000,000; issued 2,574,264 and 2,653,176 643 643 Capital in excess of par value 1,874 1,983 Retained earnings 43,186 42,803 Treasury shares, 700,406 and 556,250, at cost (8,473) (6,386) ------------------ --------------------- 37,230 39,043 ------------------ --------------------- $ 67,372 $ 67,751 ================== ===================== See accompanying notes 2 CONTINENTAL MATERIALS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999 (Unaudited) (000's omitted except per share amounts) APRIL 1, APRIL 3, 2000 1999 ------------------- ------------------ Net sales $ 24,375 $ 24,332 ------------------- ------------------ Costs and expenses: Cost of sales (exclusive of depreciation, depletion and amortization) 18,495 18,375 Depreciation, depletion and amortization 1,352 1,087 Selling and administrative 3,978 3,778 ------------------- ------------------ 23,825 23,240 ------------------- ------------------ Operating income 550 1,092 Interest (139) (67) Other income, net 197 105 ------------------- ------------------ Income before income taxes 608 1,130 Provision for income taxes 225 396 ------------------- ------------------ Net income 383 734 Retained earnings, beginning of period 42,803 35,901 ------------------- ------------------ Retained earnings, end of period $ 43,186 $ 36,635 =================== ================== Basic earnings per share $ .20 $ .35 =================== ================== Average shares outstanding 1,892 2,123 =================== ================== Diluted earnings per share $ .20 $ .34 =================== ================== Average shares outstanding 1,926 2,172 =================== ================== See accompanying notes 3 CONSOLIDATED MATERIALS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 1, 2000 AND APRIL 3, 1999 (Unaudited) (000's omitted) APRIL 1, APRIL 3, 2000 1999 -------------------- ------------------- Net cash used by operating activities $ (294) $ (4,572) Investing activities: Capital expenditures (1,122) (1,636) -------------------- ------------------- Net cash used in investing activities (1,122) (1,636) -------------------- ------------------- Financing activities: Borrowings under revolving credit facility 3,300 -- Capital lease obligation -- 101 Repayment of long term debt (35) (50) Proceeds from exercise of stock options 164 78 Payment to acquire treasury stock (2,360) (1,041) -------------------- ------------------- Net cash provided by (used in) financing activities 1,069 (912) Net decrease in cash and cash equivalents (347) (7,120) Cash and cash equivalents: Beginning of period 347 7,120 -------------------- ------------------- End of period $ -- $ -- ==================== =================== Supplemental disclosures of cash flow items: Cash paid during the three months for: Interest $ 155 $ 240 Income taxes 656 774 See accompanying notes 4 CONTINENTAL MATERIALS CORPORATION SECURITIES AND EXCHANGE COMMISSION FORM 10-Q NOTES TO THE QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS QUARTER ENDED APRIL 1, 2000 (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 2000 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 11 of Notes to Consolidated Financial Statements in the Company's 1999 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 1, 2000 and April 3, 1999. Per-share Income Shares earnings ---------------- ----------- --------------- April 1, 2000 Basic EPS $383 1,892 $ .20 =============== Effect of dilutive options -- 34 ================ =========== Diluted EPS $383 1,926 $ .20 ================ =========== =============== April 3, 1999 Basic EPS $734 2,123 $ .35 =============== Effect of dilutive options -- 49 ================ =========== Diluted EPS $734 2,172 $ .34 ================ =========== =============== 5. The following table presents information about reported segments for the three months ended April 1, 2000 and April 3, 1999 along with the items necessary to reconcile the segment information to the totals reported in the financial statements. 5 Heating and Air Construction Unallocated Conditioning Materials All Other Corporate Total ------------ --------- --------- --------- ----- 2000 Revenues from external customers $ 9,399 $14,939 $ 36 $ 1 $24,375 Segment operating income 185 1,164 (13) (786) 550 Segment assets 31,398 34,041 38 1,895 67,372 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 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 June 7,1999, the Company effected a 1-for-50 reverse stock split immediately followed by a 100-for-1 forward stock split. Share and per share amounts for 1999 have been restated to reflect this transaction. 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 2000 used $294,000 in cash compared to $4,572,000 in 1999. The decrease in cash used is mainly attributed to changes in accounts receivable and inventories. The decrease in the accounts receivable balances is largely due to the timing of receipts. Cash used for the increase in inventories during the first quarter of 2000 was significantly less than during the 1999 period which reflected 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 $4,900,000 was outstanding at April 1, 2000) 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 1, 2000 TO QUARTER ENDED APRIL 3, 1999 (SEE PAGE 3) Consolidated net sales were relatively constant at $24,375,000. Sales of the construction materials segment increased $778,000 (5.2%) which is attributed to mild weather and the continuing high level of construction activity along the Front Range in southern Colorado. Partially offsetting this increase was a decrease in the sales of the heating and air conditioning segment of $733,000 (7.2%). This decrease was caused by the carryover into the 2000 season of evaporative cooler inventory at customers' locations as a result of the unseasonably cool 1999 spring and summer. To a lesser extent, the decrease also reflects the loss of a large retail evaporative cooler customer 6 Consolidated cost of sales (exclusive of depreciation and depletion) as a percentage of sales increased from 75.5% to 75.9%. The increase reflects heightened competition in the construction materials segment due to a new competitor. Selling and administrative expenses increased $200,000 (5.3%) and as a percentage of sales from 15.5% to 16.3%. The increase in percentage is related to small increases in various expense categories and the addition of personnel. Depreciation, depletion and amortization increased from $1,087,000 to $1,352,000 as a result of the increased capital expenditures in the past two years. Interest expense increased due to higher levels of debt and interest rates. Historically, the Company has experienced operating losses during the first quarter. This pattern has changed in recent years 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 There have not been any disruptions to the Company resulting from the year 2000 issue during the current quarter nor is there any meaningful update regarding this issue from the discussion in the Company's latest annual report on Form 10-K. 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. FORWARD-LOOKING STATEMENTS This From 10 - Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by and information available to the Company at the time such statements were made. When used in this Report, words such as "estimates," "anticipates," "contemplates," "expects" and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of factors including but not limited to: weather, interest rates, availability of raw materials and their related costs and competitive forces. 7 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 1, 2000. 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 12, 2000 By: /S/ Joseph J. Sum -------------------------- ------------------------------ Joseph J. Sum, Vice President and Chief Financial Officer 8