UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 30, 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 60606 Chicago, Illinois (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code 312-541-7200 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock - $.25 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE 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___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value (based on March 21, 2001 closing price) of voting stock held by non-affiliates of registrant: Approximately $17,090,000. Number of common shares outstanding at March 21, 2001: 1,815,097. Incorporation by reference: Portions of registrant's definitive proxy statement for the 2001 Annual meeting of stockholders to be held on May 23, 2001 into Part III of this Form 10-K. (The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Form 10-K.) Index to Exhibits: on page 27 hereof. 1. NOTE: References to a "Note" are to the Notes to Consolidated Financial Statements which are included on pages 16 through 24 of this Annual Report on Form 10-K. PART I Item 1. BUSINESS There have been no significant changes in the business during the past five years other than the purchase of substantially all of the assets of Valco, Inc.'s (Valco) ready-mix concrete and aggregates operation in Pueblo, Colorado on October 21, 1996. The Company formed a new subsidiary, Transit Mix of Pueblo, Inc. to hold and operate these acquired assets. Subsequent to the fiscal 2000 year-end, the Company acquired all of the stock of Rocky Mountain Ready Mix Concrete, Inc., a ready-mix concrete producer in the metropolitan Denver, Colorado area. Accordingly, results for 2000 do not include any activity for this new company. The Company operates primarily in two industry segments, the Heating and Air Conditioning segment and the Construction Materials segment. The Heating and Air Conditioning segment is comprised principally of wall furnaces, console heaters, evaporative coolers and fan coils which are manufactured by Phoenix Manufacturing, Inc. of Phoenix, Arizona and Williams Furnace Co. of Colton, California. The Construction Materials segment is comprised of ready mix concrete, construction aggregates, building supplies and doors which are offered by Castle Concrete Company and Transit Mix Concrete Co. both of Colorado Springs, Colorado, and Transit Mix of Pueblo, Inc. of Pueblo, Colorado. In addition to the above operating segments, an Other classification is utilized to cover a small real estate operation and the holding costs for certain mining interests that remain from the period the Company maintained significant interests in mining operations. The expenses of the corporate office, which provides treasury, insurance and tax services as well as strategic business planning and general management services, are not allocated to the segments. Expenses related to the Management Information Systems group are allocated to all locations, including the corporate office, based upon a formula that is intended to capture use of the system and time spent by MIS staff. The Company has a 30% interest in Oracle Ridge Mining Partners (ORMP). ORMP is a general partnership that owns an inactive copper mine near Tucson, Arizona. The Company is not the managing partner of ORMP and thus its operations are accounted for on the equity method with the Company's share of ORMP's operations included in other income and expense in the Company's statement of operations. See Note 3 on page 18 for further discussion of the Company's accounting for and valuation of the investment in ORMP. Financial information relating to industry segments appears in Note 12 on pages 23 and 24 of this Form 10-K. MARKETING, SALES AND SUPPORT MARKETING The Heating and Air Conditioning segment markets its products throughout the United States through plumbing, heating and air conditioning wholesale distributors as well as directly to some major retail home-centers and other retail outlets. Fan coils are also sold to HVAC installing contractors and equipment manufacturers for commercial applications. Independent 2. manufacturers' representatives are utilized for all products. The Company also employs and utilizes a small staff of sales and sales support personnel. Sales in this segment are predominantly in the United States and are concentrated in the Western and Southwestern states. Sales of furnaces and console heaters usually increase in the months of August through January. Sales of evaporative coolers usually increase in the months of March through July. Sales of the fan coil product line are more evenly distributed throughout the year although the highest volume typically occurs during the late spring and summer. In order to sell wall furnaces and evaporative coolers during the off season, extended payment terms are offered to customers. The Construction Materials segment markets its products primarily through its own direct sales representatives and confines its sales to the Front Range area in southern Colorado. Sales are made to general and sub-contractors, government entities and individuals. Sales are affected by the general economic conditions in the areas serviced (as it relates to construction) and weather conditions. Revenues usually decline in the winter months as the pace of construction slows. During 2000, no customer accounted for 10% or more of the total sales of the Company. CUSTOMER SERVICE AND SUPPORT The Heating and Air Conditioning segment offers parts departments and help lines to assist contractors, distributors and end users in servicing the products. The Company does not perform installation services, nor are maintenance or service contracts offered. In addition, training and product information sessions for the furnace, cooler and fan coil product lines are offered at our plants and other sites for distributors, contractors, utility company employees and other customers. This segment does not derive any revenue from after-sales service and support other than from parts sales. The personnel in the Construction Materials segment routinely take a leadership role in formulation of the products to meet the specifications of the customers. BACKLOG The order backlog at December 30, 2000 and January 1, 2000 for the Heating and Air Conditioning segment were as follows: December 30, 2000 January 1, 2000 ------------------- ------------------ Furnaces $ 366,000 $ 25,000 Console heaters 20,000 5,000 Evaporative coolers 1,100,000 750,000 Fan coil 1,469,000 2,100,000 ------------------- ------------------ Total $ 2,955,000 $ 2,880,000 =================== ================== The above backlogs are expected to be substantially filled during the first quarter of 2001. At December 30, 2000, the Construction Materials segment had a backlog of approximately $5,225,000 ($2,785,000 at January 1, 2000) primarily relating to construction contracts awarded and expected to be filled during the first half of 2001. Management does not believe that any of the above backlogs represent a trend but rather are indicative only of the timing of orders received or contracts awarded. 3. RESEARCH AND DEVELOPMENT/PATENTS In general, the companies rely upon, and intend to continue to rely upon, unpatented proprietary technology and information. However, research and development activities in the Heating and Air Conditioning segment have resulted in a patent related to the Power Cleaning System (expiring January 2014) for the evaporative coolers and a patent entitled "Wall Furnace With Side Vented Draft Hood" (expiring November 2011) which has increased efficiency above that previously offered by the industry. A patent is pending related to the Company's new combination cooling and heating product. The amounts expended on research and development are not material and are expensed as incurred. The Company believes its interests in its patent applications, as well as its proprietary knowledge, are sufficient for its businesses as currently conducted. MANUFACTURING The Company conducts its manufacturing operations through a number of facilities as more completely described in Item 2, Properties, below. Due to the seasonality of the businesses, furnaces and evaporative coolers build inventory during their off seasons in order to have adequate supplies to sell during the season. In general, raw materials required by the Company can be obtained from various sources in the quantities desired. The Construction Materials companies have historically purchased most of their cement requirements from a single supplier. These companies experienced some difficulty in obtaining cement during the latter half of 1998 and 1999 but were able to purchase sufficient quantities from non-traditional sources, which are expected to remain available in the future. The Company has no long-term supply contracts and does not consider itself dependent on any individual supplier. In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas. In recent years, reclamation costs have had a more significant effect on the results of operations compared to prior years. COMPETITIVE CONDITIONS HEATING AND AIR CONDITIONING - The Company is one of four principal companies producing wall furnaces (excluding units sold to the recreational vehicle industry) and gas fired console heaters. The wall furnace and console heater markets are only a small component of the heating industry. The Company serves these market areas from a plant in Colton, California. The sales force consists of in-house sales personnel and external manufacturers' representatives. The entire heating industry is dominated by manufacturers (most of which are substantially larger than the Company) selling diversified lines of heating and air conditioning units directed primarily toward central heating and cooling systems. All of the producers compete on a basis of price, service and timeliness of delivery. Fan coils are also produced at the Colton plant. Fan coil sales are usually obtained through a competitive bidding process. International Environmental Corp., a subsidiary of LSB Industries, Inc., a manufacturer of a diversified line of commercial and industrial products, dominates this market. There are also a number of other companies that produce fan coils. All of the producers compete on the basis of price, ability to meet customers' specific requirements and timeliness of delivery. The Company manufactures evaporative air coolers at a plant located in Phoenix, Arizona. The cooler market is dominated by Adobe Air. The other principal competitor is Champion/Essick. All producers of evaporative air coolers compete aggressively on the basis of price and service. 4. CONSTRUCTION MATERIALS - The Company is one of five companies producing ready mix concrete in the Colorado Springs area, and one of three companies producing ready mix concrete in the Pueblo area. Although we hold a significant share of both of the markets served, the other competitors compete aggressively on the basis of price, service and product features. The Company is one of six producers of aggregates in the marketing area served. All producers compete aggressively on the basis of price, quality of material and service. Sales of metal doors and door frames, rebar reinforcement and other building materials in the Colorado Springs and Pueblo metropolitan areas are subject to intense competition from two larger companies from Denver, one large company in Colorado Springs and a number of small local competitors. However, the Company has a slight competitive advantage in that many of our customers also purchase concrete, sand and aggregates from us whereas our competitors for these particular product lines do not offer concrete, sand or aggregates. In addition, our Pueblo location has a slight competitive advantage with respect to the two Denver companies based upon delivery costs. EMPLOYEES The Company employed 758 people as of December 30, 2000. Employment varies throughout the year due to the seasonal nature of the businesses. A breakdown of the prior three years employment at year-end by segment was: 2000 1999 1998 ----------- ---------- ---------- Heating and Air 397 433 402 Conditioning Construction Materials 347 354 332 Corporate Office 14 14 12 ----------- ---------- ---------- Total 758 801 746 =========== ========== ========== The factory employees at the Colton, California plant are represented by the Carpenters Local 721 Union under a contract that expires in June 2002. Certain drivers and mechanics at the Pueblo facility are represented by Teamsters Local 435 under a contract that expired in December 2000. No settlement on a new contract has been reached. The Company considers relations with its employees and with its unions to be good. Item 2. PROPERTIES The Heating and Air Conditioning segment operates out of one owned (Colton, California) and one leased (Phoenix, Arizona) facility. Both manufacturing facilities utilized by this segment are, in the opinion of management, in good condition and sufficient for the Company's current needs. Productive capacity exists at the locations such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery. The Company serves the southern Colorado ready-mix concrete market from seven owned batch plants. In addition, the Company currently operates aggregate processing facilities on three owned and three leased mining properties. These facilities are, in the opinion of management, in good condition and sufficient for the Company's current needs. The Company also owns or leases other aggregate deposits not currently in production. 5. In the opinion of management, the owned and leased properties contain permitted and minable reserves sufficient to service sand, rock and gravel requirements for the foreseeable future. In the opinion of management, all of the facilities of the Company can be subject to seasonal fluctuations but are believed to be generally well utilized. The corporate office operates out of leased facilities in Chicago, Illinois. Item 3. LEGAL PROCEEDINGS See Management Discussion and Analysis of Financial Condition and Results of Operations on pages 8 through 11 and Note 5 on page 19 of this Annual Report on Form 10-K. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 2000. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Continental Materials Corporation shares are traded on the American Stock Exchange under the symbol CUO. Market prices (restated for the stock split, see Note 6 on pages 19 through 21) for the past two years are: High Low 2000 Fourth Quarter $14 $10.75 Third Quarter 17.25 12.63 Second Quarter 23 16 First Quarter 23 3/4 21 5/8 1999 Fourth Quarter $23 1/8 $21 Third Quarter 23 19 1/4 Second Quarter 20 17 13/16 First Quarter 18 7/16 15 7/8 At March 16, 2001, the Company had approximately 325 shareholders of record. The Company has never paid a dividend. The Company's policy is to reinvest earnings from operations, and the Company expects to follow this policy for the foreseeable future. 6. Item 6. SELECTED FINANCIAL DATA (Amounts in thousands, except per share amounts) - ------------------------------------------------ 2000 1999 1998 1997 1996 SUMMARY OF OPERATIONS Sales $ 116,002 $ 123,886 $ 113,210 $ 101,852 $ 95,138 Earnings before interest, taxes, depreciation and amortization (EBITDA) 14,300 16,209 11,570 9,224 6,703 Net income $ 5,335 $ 6,902 $ 4,618 $ 3,110 $ 2,355 PER SHARE DATA Basic earnings per share $ 2.86 $ 3.39 $ 2.15 $ 1.41 $ 1.06 Weighted average shares outstanding 1,869 2,035 2,147 2,200 2,210 Diluted earnings per share $ 2.81 $ 3.32 $ 2.10 $ 1.39 $ 1.05 Weighted average shares outstanding 1,901 2,082 2,196 2,239 2,228 FINANCIAL CONDITION Current ratio 2.4:1 1.7:1 2.0:1 2.4:1 2.1:1 Total assets $ 68,250 $ 67,751 $ 63,617 $ 54,355 $ 53,550 Long-term debt, including current portion 7,305 4,457 6,810 8,300 8,000 Shareholders' equity 41,813 39,043 36,238 31,858 29,350 Long-term debt to net worth .18 .11 .19 .26 .27 Book value per diluted share $ 22.00 $ 18.75 $ 16.50 $ 14.23 $ 13.17 CASH FLOWS Net cash provided by (used in): Operating activities $ 10,108 $ 6,328 $ 14,223 $ 6,086 $ 6,676 Investing activities (2,749) (9,038) (6,899) (4,239) (9,174) Financing activities (1,490) (4,063) (1,728) (702) 1,803 --------- --------- ---------- ---------- -------- Net (decrease) increase in cash and cash equivalents $ 5,869 $ (6,773) $ 5,596 $ 1,145 $ (695) ========= ========= ========== ========== ======== 7. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (References to a "Note" are to Notes to Consolidated Financial Statements) FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased to $6,216,000 at year-end compared to $347,000 in the prior year. Operations in 2000 provided $10,108,000 of cash compared to $6,328,000 in 1999 and the $14,223,000 generated in 1998. The increase in net cash generated by operating activities in 2000 compared to 1999 was due primarily to the net change in receivables. The decrease in net cash generated by operations in 1999 was primarily due to an increase in inventories. This increase in inventories was due to the low level of finished goods furnace inventory on hand at year-end 1998. Raw materials and work-in-process also increased in 1999 due to the higher fan coil volume. Net cash used in investing activities was $2,749,000 in 2000, $9,038,000 in 1999, and $6,899,000 in 1998. Capital expenditures for 2000, 1999 and 1998 were $3,306,000, $9,024,000 and $6,464,000, respectively. The capital expenditures were principally to support the continuing strong business demand that has been experienced by the companies in the construction materials segment although some projects planned for 2000 were postponed. The 1999 and 1998 capital additions include approximately $1,100,000 and $1,300,000, respectively, related to the implementation of a Year 2000 compliant enterprise planning system as well as the modernization and integration of Company systems. Also during 1999, the Company invested approximately $1,237,000 in new office and warehouse space in Phoenix while during 1998, the Company invested $470,000 to acquire a new product line for the heating and air conditioning segment. Budgeted capital expenditures for 2001 are approximately $9,300,000 ($7,000,000 for the construction materials segment and $2,300,000 for the heating and air conditioning segment), which is approximately $3,300,000 more than planned depreciation. The construction materials budget includes approximately $2,100,000 for new batch plant sites and expansions of existing plants, $1,500,000 for a new aggregates crushing and screening plant for the east side of Pueblo and $1,250,000 for a new sand plant that is expected to increase yield, improve quality and reduce costs. The heating and air conditioning budget includes approximately $1,350,000 for new office space in Colton with the balance primarily for routine replacement and upgrades. The Company expects that the 2001 expenditures will be funded from existing cash balances, operating cash flow and leasing capacity. During 2000, cash of $1,490,000 was used in financing activities. The Company increased its term debt by $4,000,000. Scheduled long-term debt repayments of $1,152,000 were made during the year and the $1,600,000 balance outstanding on the revolving line of credit at the end of 1999 was repaid. Cash of $2,770,000 was used to acquire 146,032 shares of treasury stock partially offset by proceeds from the exercise of stock options which generated $32,000. During 1999, cash of $4,063,000 was used in financing activities. Scheduled long-term debt repayments of $2,556,000 were made during the year. Costs and expenses associated with the June cancellation of 79,096 (post-split) shares were $1,595,000. An additional $2,746,000 was used to acquire 139,574 shares of treasury stock. Borrowings against the revolving credit facility of $1,600,000 and an increase in the capital lease of $203,000 provided a portion of the above cash while proceeds from the exercise of stock options generated $144,000. During 1998, cash of $1,728,000 was used in financing activities. Scheduled long-term debt repayments of $1,900,000 were made during the year and cash of $238,000 was used to acquire 16,060 shares of treasury stock. 8. The Company maintains a term loan and revolving credit facility with two banks. At December 30, 2000 $7,000,000 was outstanding on the term loan. A revolving credit facility of up to $10,000,000 is available for seasonal needs including the funding of seasonal sales programs related to the furnace and evaporative cooler product lines. The line is also used for stand-by letters of credit to insurance carriers in support of self-insured amounts under the Company's insurance program. Borrowings are unsecured and bear interest at prime or an adjusted LIBOR rate. Effective January 3, 2001, the Company amended the credit agreement with its two banks to increase the unsecured term loan portion to $19,000,000. The additional $12,000,000 of funds was used to purchase the capital stock of Rocky Mountain Ready Mix Concrete, Inc., see Note 13. The amended agreement provides for semi-annual principal repayments of $1,500,000 beginning June 15, 2001 with final payment of $2,500,000 due on December 15, 2006. Terms and conditions of the amended agreement remain similar to those of the previous agreement. Other than the funds provided for the acquisition by the increased term loan noted above, the Company anticipates the primary source of cash flow in 2001 to be from its operating subsidiaries. The existing cash balances and anticipated cash flow in 2001, supplemented by the revolving line of credit, will be sufficient to cover expected cash needs, including servicing debt and planned capital expenditures. The Company purchases insurance coverage for workers' compensation, general, product and automobile liability, maintaining certain levels of retained risk (self-insured portion). Provisions for both claims and unasserted claims that would be covered under the self-insured portion of the policies are recorded in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies." OPERATIONS 2000 vs. 1999 Consolidated sales declined $7,884,000, or 6% to $116,002,000. The sales of the heating and air conditioning segment declined $7,685,000 (14%) while sales of the construction materials segment were off $195,000, less than 1%, compared to the previous year. The decline in the heating and air conditioning segment was experienced by all three of the product lines. The Company experienced a high level of price competition in all of its product lines, which the Company expects to continue into 2001. During 2000, inflation was not a significant factor at any of the operations. Cost of sales (exclusive of depreciation, depletion and amortization), as a percent of sales, remained relatively constant at approximately 70%. The slight increase is primarily due to the decline in sales in the heating and air conditioning segment although heightened competition in the Pueblo, Colorado ready-mix concrete market and increased costs at two construction aggregate operations affected profit margins in the construction materials segment. Depreciation, depletion and amortization increased from $4,998,000 to $5,419,000 due to the high level of capital expenditures during 1999. Selling and administrative expenses decreased $988,000. As a percentage of sales, selling and administrative expenses remained relatively constant at just over 13% The decline in operating income primarily reflects the decreased sales, the heightened competition in Pueblo, Colorado and the increased costs at the two construction aggregate operations. The increased depreciation also had a dampening effect on operating income. 9. The increase in interest expense of $102,000 is the result of the higher term loan balance and higher interest rates. The increase in other income is primarily the result of a $383,000 gain on the sale of a depleted gravel property in Colorado Springs. The Company's 2000 effective income tax rate on income (35.8%) reflects federal and state statutory rates adjusted for non-deductible and other tax items. See Note 10. OPERATIONS 1999 vs. 1998 Consolidated sales increased $10,676,000, or 9%, to $123,886,000. The sales of the construction materials segment rose $6,152,000 (10%) while the sales of the heating and air conditioning segment rose $4,517,000 (9%) compared to the previous year. The construction materials segment continued to report gains due to a very strong construction market along the Front Range in southern Colorado. The improvement in the heating and air conditioning segment was due to the combined improvements in the fan coil and furnace lines offset by the decline in evaporative cooler sales. The decline in the evaporative cooler line was the result of an unseasonably cool 1999 spring and summer which also affected the fourth quarter's pre-season sales. The Company experienced a high level of price competition in all of its product lines. During 1999, inflation was not a significant factor at any of the operations. Cost of sales (exclusive of depreciation, depletion and amortization), as a percent of sales, improved from 72% to just under 70%. The improvement reflects the increased volume in the fan coil and furnace lines as well as the construction materials segment. Cost of sales in the heating and air conditioning segment were reduced by approximately $361,000 during 1998 due to liquidation of LIFO inventory layers carried at costs that were lower than the costs of current purchases. Depreciation, depletion and amortization increased from $3,992,000 to $4,998,000 due to the increased capital expenditure level the past two years. Selling and administrative expenses increased $1,090,000. As a percentage of sales, selling and administrative expenses remained relatively constant at just over 13% The increased operating income is principally attributed to the improved sales volume. The decline in interest expense of $116,000 is the result of the lower term loan balance and the strong cash position at the beginning of the year which delayed the use of the line of credit. The Company wrote off the remaining $100,000 investment in Oracle Ridge Mining Partners (ORMP) during 1999 and recorded a loss of $56,000 related to on going carrying costs of the property. Carrying costs at this level are expected to be on going. The Company's 1999 effective income tax rate on income (35.7%) reflects federal and state statutory rates adjusted for non-deductible and other tax items. See Note 10. 10. FORWARD-LOOKING STATEMENTS This Annual Report 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 "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. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risks related to interest rates and commodity prices. To manage these risks, the Company has, from time to time, entered into various interest rate swaps to create synthetic-debt instruments as authorized by the Company's policies and procedures. The Company does not use swaps or hedging instruments for trading purposes, and is not a party to any transaction involving leveraged derivatives. The Company is not currently involved in any swaps or hedging contracts. Interest Rates The Company utilizes revolving credit and term-loan facilities that bear interest at either prime or an adjusted LIBOR rate. The amount outstanding under these facilities aggregated $7 million at December 30, 2000. In addition, the Company has entered into a capital lease with fixed interest rates and original maturity dates (based upon the date of the draw) of 42 months. As the draws occurred during 1998 and 1999 and the total remaining due is $305,000, its book and fair value was considered to be approximately the same. See Note 4. Commodities The Company purchases commodities, such as steel, copper, cement and cardboard for packaging, at market prices and does not currently use financial instruments to hedge commodity prices. The statements and other information in this section constitute forward-looking statements. 11. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE Financial Statements and Schedule of Continental Materials Corporation and report thereon: Consolidated statements of operations and Retained earnings for fiscal years 2000, 1999 and 1998 13 Consolidated statements of cash flows for fiscal years ended 2000, 1999 and 1998 14 Consolidated balance sheets at December 30, 2000 and January 1, 2000 15 Notes to consolidated financial statements 16-24 Report of Independent Accountants 25 12. CONTINENTAL MATERIALS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR FISCAL YEARS 2000, 1999 AND 1998 (Amounts in thousands, except per share data) - --------------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- Sales $ 116,002 $ 123,886 $ 113,210 Freight costs 5,714 5,266 4,466 ---------- ----------- ----------- Net sales 110,288 118,620 108,744 Costs and expenses Cost of sales (exclusive of depreciation, depletion and amortization) 81,521 86,181 81,881 Depreciation, depletion and amortization 5,419 4,998 3,992 Selling and administrative 15,158 16,146 15,056 ---------- ----------- ----------- Operating income 8,190 11,295 7,815 Interest expense (571) (469) (585) Other income (expense), net 691 (84) (237) ---------- ----------- ----------- Income before income taxes 8,310 10,742 6,993 Income tax provision 2,975 3,840 2,375 ---------- ----------- ----------- Net income 5,335 6,902 4,618 Retained earnings, beginning of year 42,803 35,901 31,283 ---------- ----------- ----------- Retained earnings, end of year $ 48,138 $ 42,803 $ 35,901 ========== ========= ========== Basic earnings per share $ 2.86 $ 3.39 $ 2.15 Weighted average shares outstanding 1,869 2,035 2,147 Diluted earnings per share $ 2.81 $ 3.32 $ 2.10 Weighted average shares outstanding 1,901 2,082 2,196 The accompanying notes are an integral part of the financial statements. 13. CONTINENTAL MATERIALS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR FISCAL YEARS 2000, 1999, AND 1998 (Amounts in thousands) ----------------------------------------------------------------------- 2000 1999 1998 ---- ---- ---- OPERATING ACTIVITIES Operating activities Net income $ 5,335 $ 6,902 $ 4,618 Adjustments to reconcile net income to net cash provided by operating activities Depreciation, depletion and amortization 5,419 4,998 3,992 Deferred income tax provision (benefit) 532 109 (708) Provision for doubtful accounts (110) 486 304 Tax benefit from exercise of stock options 174 100 -- (Gain) loss on disposition of property and equipment (402) 57 (42) Equity loss from mining partnership 87 56 52 Write-down of investment in mining partnership -- 100 500 Changes in operating assets and liabilities Receivables 3,548 (3,926) (3,243) Inventories (48) (3,916) 2,243 Prepaid expenses (142) (450) 524 Income taxes (615) (344) 1,050 Accounts payable and accrued expenses (3,139) 1,778 5,367 Prepaid royalties (414) (11) (218) Other (117) 389 (216) -------- -------- -------- Net cash provided by operating activities 10,108 6,328 14,223 -------- -------- -------- Investing activities Capital expenditures (3,306) (9,024) (6,464) Investment in new product line -- -- (470) Investment in mining partnership (87) (56) (52) Proceeds from sale of property and equipment 644 42 87 -------- -------- -------- Net cash used in investing activities (2,749) (9,038) (6,899) -------- -------- -------- Financing activities (Repayment) borrowings of revolving credit facility (1,600) 1,600 -- Long-term borrowings 4,000 203 440 Repayment of long-term debt (1,152) (2,556) (1,930) Payment to purchase and cancel stock -- (708) -- Proceeds from exercise of stock options 32 144 -- Payments to acquire treasury stock (2,770) (2,746) (238) -------- -------- -------- Net cash used in financing activities (1,490) (4,063) (1,728) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 5,869 (6,773) 5,596 Cash and cash equivalents Beginning of year 347 7,120 1,524 -------- -------- -------- End of year $ 6,216 $ 347 $ 7,120 ======== ======== ======== Supplemental disclosures of cash flow items Cash paid during the year Interest $ 731 $ 644 $ 471 Income taxes 2,897 4,062 2,038 The accompanying notes are an integral part of the financial statements. 14. CONTINENTAL MATERIALS CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 30, 2000 AND JANUARY 1, 2000 (Amounts in thousands except share data) - ----------------------------------------------------------------- December 30, 2000 January 1, 2000 ASSETS Current assets Cash and cash equivalents $ 6,216 $ 347 Receivables less allowance of $475 and $800 16,723 20,161 Inventories 16,014 15,966 Prepaid expenses 2,572 2,592 -------- -------- Total current assets 41,525 39,066 -------- -------- Property, plant and equipment: Land and improvements 2,723 3,970 Buildings and improvements 11,885 11,837 Machinery and equipment 59,310 57,792 Mining properties 4,009 2,170 Less accumulated depreciation and depletion (53,200) (48,878) -------- -------- 24,727 26,891 -------- -------- Other assets: Prepaid royalties 641 228 Other 1,357 1,566 -------- -------- $ 68,250 $ 67,751 ======== ======== LIABILITIES Current liabilities Bank loan payable $ -- $ 1,600 Current portion of long-term debt 2,158 2,582 Accounts payable 4,437 7,263 Income taxes 312 927 Accrued expenses Compensation 2,767 3,214 Reserve for self-insured losses 2,415 2,579 Profit sharing 2,440 2,515 Other 2,751 2,377 -------- -------- Total current liabilities 17,280 23,057 -------- -------- Long-term debt 5,147 1,875 Deferred income taxes 1,598 1,227 Accrued reclamation 1,004 1,311 Other long-term liabilities 1,408 1,238 Commitments and contingencies (Notes 5 and 8) SHAREHOLDERS' EQUITY Common shares, $.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares 643 643 Capital in excess of par value 1,985 1,983 Retained earnings 48,138 42,803 Treasury shares, at cost (8,953) (6,386) -------- -------- 41,813 39,043 -------- -------- $ 68,250 $ 67,751 ======== ======== The accompanying notes are an integral part of the financial statements. 15. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include Continental Materials Corporation and all of its subsidiaries (the Company). In accordance with the Emerging Issues Task Force Issue 00-10, "Sales" are reported prior to deduction of freight costs, traditionally netted by the Company against sales in arriving at "Net sales." In addition, certain prior years' amounts have been reclassified to conform to the current presentation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 30, 2000 and January 1, 2000 and the reported amounts of revenues and expenses during each of the three years in the period ended December 30, 2000. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for approximately 86% of total inventories at December 30, 2000 (85% at January 1, 2000). The cost of all other inventory is determined by the first-in, first-out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method as follows: Buildings 10 to 31 years Leasehold improvements Terms of leases Machinery and equipment 3 to 10 years Depletion of rock and sand deposits and amortization of deferred development costs are computed by the units-of-production method based upon estimated recoverable quantities of rock and sand. The cost of property sold or retired and the related accumulated depreciation, depletion and amortization are removed from the accounts and the resulting gain or loss is reflected in other income. Maintenance and repairs are charged to expense as incurred. Major renewals and betterments are capitalized and depreciated over their useful lives. OTHER ASSETS Amortization of certain other assets is computed on a straight-line basis over periods of 5 and 10 years. 16. RETIREMENT PLANS The Company and certain subsidiaries have various contributory profit sharing retirement plans for specific employees. The plans allow qualified employees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k). The Company makes annual contributions, at its discretion, based primarily on profitability. Costs under the plans are charged to operations as incurred. RESERVE FOR SELF-INSURED LOSSES The Company's risk management program provides for certain levels of loss retention for workers' compensation, automobile liability and general and product liability claims. The components of the reserve have been recorded in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 5, "Accounting for Contingencies," and represent management's best estimate of future liability. RECLAMATION In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas. Reclamation costs are calculated using a rate based on the total estimated reclamation costs, units of production and estimates of recoverable reserves. Reclamation costs are charged to operations as the properties are mined. REVENUE RECOGNITION The Company's practice is to recognize revenues from product sales when title transfers. INCOME TAXES Income taxes are reported consistent with SFAS No. 109, "Accounting for Income Taxes." Deferred taxes reflect the future tax consequences associated with the differences between financial accounting and tax bases of assets and liabilities. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables and temporary cash investments. The Company invests its excess cash in government securities. The Company has not experienced any losses on these investments. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations. See Note 12 for a description of the Company's customer base and geographical location by segment. IMPAIRMENT OF LONG-LIVED ASSETS In the event that facts and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation were required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow value is required. FISCAL YEAR END The Company's fiscal year end is the Saturday nearest December 31. Fiscal 2000, 1999 and 1998 each consist of 52 weeks. 17. 2. INVENTORIES Inventories consisted of the following (amounts in thousands): December 30, 2000 January 1, 2000 Finished goods $ 6,595 $ 7,557 Work in process 1,720 1,642 Raw materials and supplies 7,699 6,767 ----- ----- $ 16,014 $ 15,966 ======== ======== If inventories valued on the LIFO basis were valued at current costs, inventories would be higher as follows: 2000 -- $1,942,000, 1999 -- $1,713,000, 1998 -- $1,610,000. Reduction in inventory quantities during 1998 at one of the locations, resulted in liquidation of LIFO inventory layers carried at costs that were lower than the costs of current purchases. The effect, recorded in the fourth quarter, was to decrease cost of goods sold by approximately $361,000 and to increase net earnings by $224,000 or $.10 per diluted share. 3. INVESTMENT IN MINING PARTNERSHIP The Company has a 30% ownership interest in ORMP, a general partnership, which operated a copper mine primarily situated in Pima County, Arizona. The equity method of accounting is used to include 30% of ORMP's income and losses in the Company's consolidated financial statements. Production at the mine was halted in February 1996. Although the Partners are attempting to sell the mine, continued low prices of copper makes it unlikely that the property will be sold. In accordance with SFAS No. 121, the remaining investment in the mining partnership was written off as of January 1, 2000. The related impairment loss of $100,000 is included in the $156,000 loss recorded for 1999. During 1998, the Company recorded an equity loss of $552,000 including an impairment loss of $500,000. The equity losses are included in "Other (expense) income, net" in the Consolidated Statements of Operations. Future cash contributions to ORMP for carrying costs will be expensed when made. 4. LONG-TERM DEBT Long-term debt consisted of the following (amounts in thousands): December 30, 2000 January 1, 2000 Unsecured term loan $ 7,000 $ 4,000 Capital lease 305 457 -------- -------- 7,305 4,457 Less current portion 2,158 2,582 -------- -------- Long-term amount $ 5,147 $ 1,875 ======== ======== The unsecured term loan is payable to two banks in semi-annual installments with final principal payment due June 15, 2001. The loan, at the Company's option, bears interest at either prime or an adjusted LIBOR rate. The Company is required to maintain certain levels of consolidated tangible net worth, to attain certain levels of cash flow (as defined) on a rolling four-quarter basis, and to maintain certain ratios including consolidated debt to cash flow (as defined). Additional borrowing, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends are either limited or require prior approval by the lenders. 18. The capital lease is payable in monthly installments through December 2002, with interest at various rates based upon prevailing interest rates on the due dates of the draws. Aggregate long-term debt matures as follows (amounts in thousands): 2001 $ 2,158 2002 2,147 2003 2,000 2004 1,000 --------- $ 7,305 ========= During 2000 and 1999, the Company had an unsecured revolving line of credit of $10,000,000 and $11,500,000, respectively. The line is with two banks and is used for short-term cash needs and standby letters of credit. Interest was charged at prime or adjusted LIBOR rates on cash borrowings during both years. The weighted average interest rate was 7.8% for fiscal 2000 and 7.4% for fiscal 1999. There was no balance outstanding against the line as of December 30, 2000 while $1,600,000 was outstanding as of January 1, 2000. At December 30, 2000, the Company had letters of credit outstanding totaling approximately $3,144,000 that collateralize the self-insured losses. Effective January 3, 2001, the Company amended the revolving credit and term loan agreement with its two banks to increase the unsecured term loan portion to $19,000,000. The additional funds were used to purchase the capital stock of Rocky Mountain Ready Mix Concrete, Inc., see Note 13. The amended agreement provides for semi-annual principal repayments of $1,500,000 beginning June 15, 2001 with final payment of $2,500,000 due on December 15, 2006. Terms and conditions of the amended agreement remain similar to those of the previous agreement. 5. COMMITMENTS AND CONTINGENCIES The Company is involved in litigation matters related to its continuing business, principally product liability matters related to the gas-fired heating products. In the Company's opinion, none of these proceedings, when concluded, will have a material adverse effect on the Company's results of operations or financial position. 6. SHAREHOLDERS' EQUITY The shareholders approved an amendment to the Restated Certificate of Incorporation at the May 26,1999 annual meeting effecting a reverse 1-for-50 stock split followed immediately by a forward 100-for-1 stock split of the Company's Common Stock. As permitted by Delaware law, registered stockholders whose shares of stock were converted into less than one share in the reverse 1-for-50 split received the right to receive cash equal to the fair value of those fractional interests. Registered stockholders whose shares of Common Stock, $.50 par value, converted into more than one share in the reverse split received, in the forward 100-for-1 split, a number of shares of Common Stock, $.25 par value, equal to 100 times the number of shares and fractional shares held after the reverse split. In other words, all registered stockholders originally holding 50 or more shares of Common Stock, $.50 par value, immediately prior to the effective date of the transaction hold twice the number of shares of Common Stock, $.25 par value, immediately subsequent to the transaction. The reverse and forward stock splits, together with the related cash payments to stockholders with small holdings, is referred to below as the "stock split." The effective date of the stock split was June 7, 1999. Under the Company's Stock Option Plan (the Plan), officers and key employees may be granted options to purchase the Company's common stock at option prices established by the 19. Compensation Committee of the Board of Directors provided the option price is no less than the fair market value at the date of the grant. The Company has reserved 360,000 shares for distribution under the Plan. On September 26, 1995, a total of 156,000 options were granted to five individuals at an exercise price of $6.5625. These shares became exercisable during 1996. During 1999, options for 22,000 shares were exercised. Per the agreement, 400 reload options were automatically granted during 1999 when one of the individuals paid a portion of the option price by delivery of shares of the Company's common stock. The exercise price of these reload options is $23.125, the market price of the stock on the date the reload option was granted. The reload options are vested and retain all terms of the original options, including the expiration date. During 2000, options for 31,000 shares were exercised. At December 30, 2000, there remain 79,400 options which will expire on September 25, 2005. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its Plan. Accordingly, no compensation expense was recognized for its stock-based compensation Plan. Had compensation cost for the reload options been determined based on the fair value at the grant date consistent with the methodology proscribed under SFAS No. 123, "Accounting for Stock-Based Compensation," the effect on the Company's net income and earnings per share would not have been significant. The following is the common shares and capital in excess of par value activity during 1999 and 2000. There was no activity in either of these accounts during 1998. Common Capital in Common shares excess of shares amount par value Balance at January 2, 1999 1,326,588 $ 663 $ 3,484 Effect of reverse split (39,456) (20) (1,575) Effect of forward split 1,287,132 - - Common shares issued under the Stock Option Plan (from treasury) - - (26) Tax benefit from exercise of options - - 100 --------- ------- -------- Balance at January 1, 2000 2,574,264 643 1,983 Common shares issued under the Stock Option Plan (from treasury) - - (172) Tax benefit from exercise of options 174 --------- ------- -------- Balance at December 30, 2000 2,574,264 $ 643 $ 1,985 ========= ======= ======== The Board of Directors of the Company has, from time to time, authorized various amounts to be utilized in acquiring treasury shares. Treasury share activity during 1998, 1999 and 2000 was as follows (dollars in thousands and shares restated for the stock split): 20. Number of shares Cost Balance at January 3, 1998 492,374 $3,572 Purchase of treasury shares 16,060 238 -------- ------ Balance at January 2, 1999 508,434 3,810 Purchase of treasury shares 139,574 2,746 Issuance of treasury shares related to the Stock Option Plan (22,000) (170) -------- ------ Balance at January 1, 2000 626,008 6,386 Purchase of treasury shares 146,032 2,770 Issuance of treasury shares related to the Stock Option Plan (31,000) (203) -------- ------ Balance at December 30, 2000 741,040 $8,953 ======= ====== Four hundred thousand shares of preferred stock ($.50 par value) are authorized and unissued. 7. EARNINGS PER SHARE The Company computes earnings per share (EPS) in accordance with SFAS No. 128, "Earnings Per Share." The following is a reconciliation of the calculation of basic and diluted EPS for the years-ended 2000, 1999 and 1998 (dollars in thousands and shares restated for the stock split). Weighted Net average Per-share Income shares earnings 2000 Basic EPS $5,335 1,869 $2.86 Effect of dilutive options - 32 ------ ----- ----- Diluted EPS $5,335 1,901 $2.81 ====== ===== ===== 1999 Basic EPS $6,902 2,035 $3.39 Effect of dilutive options - 47 ------ ----- ------ Diluted EPS $6,902 2,082 $3.32 ====== ===== ===== 1998 Basic EPS $4,618 2,147 $2.15 Effect of dilutive options - 49 ------ ----- ------ Diluted EPS $4,618 2,196 $2.10 ====== ===== ===== 8. RENTAL EXPENSE, LEASES AND COMMITMENTS The Company leases certain of its facilities and equipment and is required to pay the related taxes, insurance and certain other expenses. Rental expense was $2,727,000, $2,460,000 and $2,435,000 for 2000, 1999 and 1998, respectively. Future minimum rental commitments under non-cancelable operating leases for 2000 and thereafter are as follows: 2001 -- $2,008,000; 2002 -- $1,974,000; 2003 -- $1,450,000; 2004 -- $1,094,000; 2005 -- $835,000 and thereafter -- $21,307,000. Included in these amounts is $370,000 per year and approximately $18,582,000 in the "thereafter" amount related to an aggregates lease in conjunction with the Pueblo, Colorado operation. The Company also receives annual rental income of $145,000 from a building it owns. The related lease expires in January 2003 and contains renewal options. 21. 9. RETIREMENT PLANS As discussed in Note 1, the Company maintains retirement benefit plans for eligible employees. Total plan expenses charged to operations were $2,375,000, $2,783,000 and $2,025,000 in 2000, 1999 and 1998, respectively. 10. INCOME TAXES The provision (benefit) for income taxes is summarized as follows (amounts in thousands): 2000 1999 1998 ---- ---- ---- Federal: Current $ 2,156 $ 3,221 $ 2,742 Deferred 477 98 (634) State: Current 287 510 341 Deferred 55 11 (74) ------- ------- ------- $ 2,975 $ 3,840 $ 2,375 ======= ======= ======= The difference between the tax rate on income for financial statement purposes and the federal statutory tax rate was as follows: 2000 1999 1998 ---- ---- ---- Statutory tax rate 34.0% 34.0% 34.0% Percentage depletion (1.4) (1.8) (3.2) State income taxes, net of federal benefit 3.0 3.0 2.3 Non-deductible expenses .2 .1 .3 Other - .4 .6 ----- ----- ----- 35.8% 35.7% 34.0% ===== ===== ===== For financial statement purposes, deferred tax assets and liabilities are recorded at a blend of the current statutory federal and states' tax rates - 38%. The principal temporary differences and their related deferred taxes are as follows (amounts in thousands): 2000 1999 Reserves for self-insured losses $ 1,012 $ 1,087 Deferred compensation 469 498 Asset valuation reserves 1,041 1,154 Other 35 44 -------- -------- Total deferred tax assets 2,557 2,783 Depreciation 1,953 1,939 Investment in mining partnership 14 14 Other 694 402 -------- -------- Total deferred tax liabilities 2,661 2,355 -------- -------- Net deferred tax (liability) asset $ (104) $ 428 ======== ======== The net current deferred tax assets are $1,494 and $1,654 at year-end 2000 and 1999, respectively, and are included with "Prepaid expenses" on the Consolidated Balance Sheets. 22. 11. UNAUDITED QUARTERLY FINANCIAL DATA The following table provides summarized unaudited fiscal quarterly financial data for 2000 and 1999 (amounts in thousands, except per share amounts; per share data restated for the stock split): First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2000 Sales $25,350 $30,232 $29,186 $31,234 Gross profit 4,715 6,057 5,955 7,331 Depreciation, depletion and amortization 1,352 1,371 1,605 1,091 Net income 383 1,040 939 2,973 Basic income per share .20 .56 .50 1.61 Diluted income per share .20 .55 .49 1.59 First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1999 Sales $25,499 $32,493 $34,831 $31,063 Gross profit 4,950 7,655 6,768 8,624 Depreciation, depletion and amortization 1,087 1,243 1,377 1,291 Net income 734 2,039 1,598 2,531 Basic income per share .34 .99 .80 1.29 Diluted income per share .33 .97 .78 1.26 Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the total for the year. The fourth quarter results for 2000, as compared to 1999, were positively affected by adjustments to maintenance costs in the construction materials segment. 12. INDUSTRY SEGMENT INFORMATION The Company reports its segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company is organized along its two principal product lines. Wall furnaces, console heaters, evaporative coolers and fan coils have been aggregated into the heating and air conditioning segment. Ready mix concrete, construction aggregates, building supplies and doors are combined to form the construction materials segment. The heating and air conditioning segment produces heating and cooling equipment for residential applications which is sold primarily to wholesale distributors and retail home centers. Fan coils are also sold to HVAC installing contractors and equipment manufacturers for commercial applications. A significant portion of fan coil revenues is dependent upon new hotel construction. Sales are nationwide, but are concentrated in the southwestern U.S. The construction materials segment is involved in the production and sale of concrete and other building materials and the exploration, extraction and sales of construction aggregates. Sales of this segment are confined to the Front Range area in Colorado. The Company evaluates the performance of its segments and allocates resources to them based on operating income and return on investment. Other factors are also considered. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated 23. corporate expenses, interest, income or loss from unconsolidated investees, other income or loss or income taxes. The following table presents information about reported segments for the fiscal years 2000, 1999 and 1998 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands). Heating and Construction All Unallocated air conditioning materials other (a) corporate (b) Total ---------------- --------- ----------------------- ----- 2000 Revenues from external customers $ 49,083 $ 66,771 $ 145 $ 3 $ 116,002 Depreciation, depletion and amortization 1,220 4,117 22 60 5,419 Segment operating income 5,002 6,144 45 (3,001) 8,190 Segment assets 28,868 31,536 36 7,810 68,250 Expenditures for segment assets 651 2,586 - 69 3,306 1999 Revenues from external customers $ 56,768 $ 66,966 $ 145 $ 7 $ 123,886 Depreciation, depletion and amortization 1,181 3,758 22 37 4,998 Segment operating income 7,793 7,001 43 (3,542) 11,295 Segment assets 31,568 34,157 65 1,961 67,751 Expenditures for segment assets 2,640 6,262 - 122 9,024 1998 Revenues from external customers $ 52,251 $ 60,814 $ 145 $ - $ 113,210 Depreciation, depletion and amortization 1,091 2,862 22 17 3,992 Segment operating income 4,183 6,414 41 (2,823) 7,815 Segment assets 25,628 29,888 183 7,918 63,617 Expenditures for segment assets 1,352 4,994 - 118 6,464 (a) All other represents segments below the quantitative thresholds. The segments include a small real estate operation and the holding costs for certain mining interests that remain from the period the Company maintained significant interests in mining operations. (b) Corporate assets consist primarily of cash and cash equivalents. All long-lived assets are in the United States and no customer accounts for 10% or more of consolidated revenue. 13. SUBSEQUENT EVENT On December 31, 2000, the Company acquired all of the stock of Rocky Mountain Ready Mix Concrete, Inc., a ready-mix concrete producer in the metropolitan Denver, Colorado area for approximately $12,450,000. The new company operates three ready-mix batch plants in the Denver area and will continue to do business under its current name. 24. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Continental Materials Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and retained earnings and cash flows present fairly, in all material respects, the financial position of Continental Materials Corporation and its subsidiaries at December 30, 2000 and January 1, 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Chicago, Illinois March 7, 2001 25. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes of accountants and/or disagreements on any matter of accounting principle or financial statement disclosure during the past 24 months which would require a filing under Item 9. PART III Part III (Items 10, 11, 12,and 13) has been omitted from this 10-K Report since Registrant will file, not later than 120 days following the close of its fiscal year ended December 30, 2000, its definitive 2001 proxy statement. The information required by Part III will be included in that proxy statement and such information is hereby incorporated by reference, but excluding the information under the headings "Compensation Committee Report" and "Comparison of Total Shareholders' Return". PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 Financial statements required by Item 14 are included in Item 8 of Part II. (a) 2 The following is a list of financial statement schedules filed as part of this Report: Report of Independent Accountants Schedule II Valuation and Qualifying Accounts & Reserves For the Fiscal Years 2000, 1999 and 1998 All other schedules are omitted because they are not applicable or the information is shown in the financial statements or notes thereto. 26. (a) 3 The following is a list of all exhibits filed as part of this Report: Exhibit 3 1975 Restated Certificate of Incorporation dated May 28, 1975 filed as Exhibit 5 to Form 8-K for the month of May 1975, incorporated herein by reference. Exhibit 3a Registrant's By-laws as amended September 19, 1975 filed as Exhibit 6 to Form 8-K for the month of September 1975, incorporated herein by reference. Exhibit 3b Registrant's Certificate of Amendment of Certificate of Incorporation dated May 24, 1978 filed as Exhibit 1 to Form 10-Q for quarter ended June 30, 1978, incorporated herein by reference. Exhibit 3c Registrant's Certificate of Amendment of Certificate of Incorporation dated May 27, 1987 filed as Exhibit 3c to Form 10-K for the year ended January 1, 1988, incorporated herein by reference. Exhibit 3d Registrant's Certificate of Amendment of Restated Certificate of Incorporation dated June 4, 1999 filed as Exhibit 1 to Form 8-K for the month of June 1999, incorporated herein by reference. Exhibit 10 Continental Materials Corporation Amended and Restated 1994 Stock Option Plan dated May 25, 1994 filed as Appendix A to the 1994 Proxy Statement, incorporated herein by reference.* Exhibit 10a Revolving Credit and Term Loan Agreement between The Northern Trust Company, LaSalle National Bank and Continental Materials Corporation dated as of October 21, 1996 filed as Exhibit 2D to Form 8-K for the month of October 1996 and the Amendment thereto filed as Exhibit 2B to Form 8-K for the month of December 2000, incorporated herein by reference. Exhibit 10b Acquisition Agreement Between Valco Properties, Ltd. And Continental Materials Corporation filed as Exhibit 2A to Form 8-K for the month October 1996, incorporated herein by reference. Exhibit 10c Non-Competition and Non-Disclosure Agreement by Valco, Inc. And Thomas E. Brubaker in favor of Continental Materials Corporation filed as Exhibit 2B to Form 8-K for the month of October 1996, incorporated herein by reference. Exhibit 10d Fee Sand and Gravel Lease Between Valco, Inc. And Continental Materials Corporation filed as Exhibit 2C to Form 8-K for the month of October 1996, incorporated herein by reference. Exhibit 10e Form of Supplemental Deferred Compensation Agreement filed as Exhibit 10 to Form 10-Q for the quarter ended July 1, 1983, incorporated herein by reference.* Exhibit 10f Stock Purchase Agreement By and Among Continental Materials Corporation, Rocky Mountain Ready Mix Concrete, Inc. and The Shareholders of Rocky Mountain Ready Mix Concrete, Inc. Filed as Exhibit 2A to Form 8-K for the month of December 2000, incorporated herein by reference. Exhibit 21 Subsidiaries of Registrant (filed herewith). Exhibit 23 Consent of Independent Accountants (filed herewith). Exhibit 99a Continental Materials Corporation Employee Profit Sharing Retirement Plan Amended and Restated Generally Effective October 1, 1997 filed as Exhibit 99a to Form 10-K for the year ended January 1, 2000, incorporated herein by reference.* Exhibit 99b Continental Materials Corporation Employees Profit Sharing Retirement Plan on Form 11-K for the year ended December 30, 2000 (to be filed by amendment). * - Compensatory plan or arrangement 27. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended December 30, 2000. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Registrant By: /s/Joseph J. Sum ------------------------------------ Joseph J. Sum, Vice President, Finance Date: March 27, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE CAPACITY(IES) DATE - ------------------------- ------------------------- -------------- /s/ James G. Gidwitz - ------------------------- James G. Gidwitz Chief Executive Officer And a Director March 27, 2001 /s/ Joseph J. Sum - ------------------------- Joseph J. Sum Vice President And a Director March 27, 2001 /s/ Mark S. Nichter - ------------------------- Mark S. Nichter Secretary and Controller March 27, 2001 /s/ Thomas H. Carmody - ------------------------- Thomas H. Carmody Director March 27, 2001 /s/ Betsy R. Gidwitz - ------------------------- Betsy R. Gidwitz Director March 27, 2001 /s/ Ralph W. Gidwitz - ------------------------- Ralph W. Gidwitz Director March 27, 2001 /s/ Ronald J. Gidwitz - ------------------------- Ronald J. Gidwitz Director March 27, 2001 /s/ William G. Shoemaker - ------------------------- William G. Shoemaker Director March 27, 2001 /s/ Theodore R. Tetzlaff - ------------------------- Theodore R. Tetzlaff Director March 27, 2001 /s/ Darrell M. Trent - ------------------------- Darrell M. Trent Director March 27, 2001 28. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of Continental Materials Corporation Our audits of the consolidated financial statements referred to in our report dated March 7, 2001 appearing in the 2000 Annual Report to Shareholders of Continental Materials Corporation also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Chicago, Illinois March 7, 2001 29. CONTINENTAL MATERIALS CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (d) for the fiscal years 2000, 1999 and 1998 COLUMN A COLUMN B COLUMN C(1) COLUMN D COLUMN E Additions Balance at Charged to Beginning of Costs and Deductions - Balance at Description Period Expenses Describe End of Period ---------------------------- -------------- --------------- --------------- -------------- YEAR 2000 Allowance for doubtful accounts $800,000 $(110,000) $215,000 (a) $475,000 ============== =============== =============== ============== Inventory valuation reserve $568,000 $ 14,000 $139,000 (b) $443,000 ============== =============== =============== ============== YEAR 1999 Allowance for doubtful accounts $775,000 $486,000 $461,000 (a) $800,000 ============== =============== =============== ============== Inventory valuation reserve $504,000 $127,000 $ 63,000 (b) $568,000 ============== =============== =============== ============== YEAR 1998 Allowance for doubtful accounts $ 580,000 $304,000 $109,000 (a) $775,000 ============== =============== =============== ============== Inventory valuation reserve $ 233,000 $667,000 $396,000 (b) $504,000 ============== =============== =============== ============== Notes: (a) Accounts written off, (c) Reserve deducted net of recoveries. in the balance sheet from the asset to which it applies. (b) Amounts written off (d) Column C(2) has upon disposal of assets. been omitted as the answer would be "none". 30