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 31, 1994
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 otherjurisdiction ofincorporation or (I.R.S. Employer
organization Identification No.)
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 - $.50 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, 1995 closing price) of
voting stock held by non-affiliates of registrant: Approximately $8,136,000.
Number of common shares outstanding at March 21, 1995: 1,139,278.
Incorporation by reference: Portions of registrant's definitive proxy
statement for the 1995 Annual meeting of stockholders to be held on May 24, 1995
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 35 hereof.
1
NOTE: References to a "Note" are to the Notes to Consolidated Financial
Statements which are included on pages 15 through 23 of this Annual
Report on Form 10-K.
PART I
Item 1. BUSINESS
Continental Materials Corporation, Inc. and its subsidiaries (collectively
referred to as the "Company") operate primarily in two industry segments, the
Heating and Air Conditioning segment and the Construction Materials segment.
The Heating and Air Conditioning Segment is comprised of Phoenix Manufacturing,
Inc. ("Phoenix") of Phoenix, Arizona and Williams Furnace Co. ("Williams") of
Colton, California. The Construction Materials segment is comprised of Castle
Concrete Company ("Castle") and Transit Mix Concrete Co. ("Transit Mix") both of
Colorado Springs, Colorado.
The Heating and Air Conditioning segment manufactures wall furnaces, console
heaters, evaporative air coolers and fan coil/air handler product lines.
Numerous models with differing heating or cooling capacities as well as exterior
appearances are offered within each line.
The Construction Materials segment is involved in the production and sale of
ready mix concrete and other building materials as well as the exploration,
extraction and sales of limestone, sand and gravel.
In addition to the above operating segments, a General Corporate and Other
classification is utilized covering the general expenses of the corporate office
which provides treasury, insurance and tax services as well as strategic
business planning and general management services.
The Company has a 30% interest in Oracle Ridge Mining Partners ("ORMP"). ORMP
is a general partnership which operates a 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
presented in the other income and expense section of the Company's operating
statements.
Financial information relating to industry segments appears in Note 12 on page
23 of this Form 10-K. Summary financial information on ORMP appears in Note 4
on page 18 and audited financial statements for ORMP are included in Item 8 of
this Form 10-K. See index to item 8 on page 11.
2
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 direct to some major retail home-centers and other
retail outlets. Phoenix and Williams utilize independent manufacturers
representatives. The Company also employs a small staff of sales personnel.
Sales in this segment are predominantly in the United States and are
concentrated in the Western and Southwestern states. Sales of Williams'
furnaces usually increase in the months of September through January. Sales of
Phoenix' evaporative coolers usually increase in the months of February through
June. In order to sell wall furnaces and evaporative coolers during the "off
season", Williams and Phoenix offer extended payment terms to their customers.
The Construction Materials segment markets its products primarily through its
own direct sales representatives and confines its sales to the Colorado Springs
area. Sales are made to government entities, general and sub-contractors and
individuals. The businesses of Castle and Transit Mix are affected by the
general economic conditions in Colorado Springs (as it relates to construction)
and weather conditions. Revenues usually decline in the winter months as the
pace of construction slows.
During 1994, no customer accounted for 10% or more of the total sales of either
segment.
CUSTOMER SERVICE AND SUPPORT
While the companies in the Heating and Air Conditioning segment do not perform
installation services, they are committed to after-sales service and support of
the products. In addition, Williams holds training sessions at its plant for
distributors, contractors, utility company employees and other potential
customers. The companies in the Construction Materials segment routinely take a
leadership role in formulation of the products to meet the strength requirements
of their customers.
BACKLOG
At December 31, 1994, Williams' order backlog was approximately $900,000
($1,100,000 at January 1, 1994) the majority of which represented orders for
furnaces.
At December 31, 1994, Phoenix had a backlog of approximately $3,000,000
($1,100,000 at January 1, 1994) representing primarily preseason cooler orders.
The above backlogs are all related to the heating and air conditioning segment
and are expected to be filled during the first quarter of 1995.
At December 31, 1994 Transit Mix and Castle had a backlog of approximately
$3,100,000 ($2,600,000 at January 1, 1994) primarily relating to construction
contracts awarded and expected to be filled during the first half of 1995.
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
All companies rely upon, and intend to continue to rely upon, unpatented
proprietary technology and information. In addition, recent research and
development activities in the Heating and Air Conditioning segment has lead to
patent applications related to Phoenix' Power Cleaning System for the
evaporative coolers and the configuration of the heat exchanger for Williams'
furnaces which has increased efficiency above that previously offered by the
industry. 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 its businesses, Williams and Phoenix build inventory
during their "off seasons" in order to have adequate wall furnace and
evaporative cooler inventory to sell during the "season".
In general, raw materials required by the Company can be obtained from various
sources in the quantities desired. The Company has no long-term supply
contracts and does not consider itself dependent on any individual supplier.
Compliance with environmental protection laws and regulations has not had any
material effect upon the Company's capital expenditures, earnings, or
competitive position. Castle and Transit Mix have obtained reclamation bonds in
the aggregate amount of $860,000 and $1,038,000 respectively to cover the
estimated cost of future reclamation on properties currently being mined.
COMPETITIVE CONDITIONS
HEATING AND AIR CONDITIONING - Williams is one of four principal companies
producing wall furnaces and holds a significant share of the wall furnace market
(excluding units sold to the recreational vehicle industry). The wall furnace
market is only a small component of the heating industry. Williams' plant in
Colton, California is located close to the major wall furnace markets and it
covers the remaining market areas from three warehouse locations situated
throughout the country. The sales force consists of Williams' sales personnel
and 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.
Williams also manufactures a line of gas fired console heaters. Distribution is
similar to wall furnaces with the principal market areas in the South and
Southeast. There are five other manufacturers, none of whom is believed to have
a dominant share of the market.
Williams is a producer of fan coils. Fan coil sales are usually obtained
through a competitive bidding process. This market is dominated by
International Environmental Corp., a subsidiary of LSB Industries, Inc., a
manufacturer of a diversified line of commercial and industrial products. There
are also a number of other companies that produce fan coils. All of the
producers compete on the basis of price and timeliness of delivery.
4
Phoenix produces evaporative air coolers. This market is dominated by Adobe
Air. There is one other principal competitor plus a number of other small
companies that produce evaporative coolers. All producers of evaporative air
coolers compete aggressively on the basis of price.
CONSTRUCTION MATERIALS - Transit Mix is one of three companies producing ready
mix concrete in the Colorado Springs area. Although Transit Mix holds a
significant share of the market served, the other two competitors compete
aggressively on the basis of price.
There are a number of producers of aggregates, sand and gravel in the marketing
area served by Transit Mix and Castle who compete aggressively on the basis of
price and service.
Metal doors and door frames, rebar, reinforcement and other construction
materials sold in the Colorado Springs metropolitan area are subject to intense
competition. Transit Mix competes aggressively with two larger companies and a
number of small competitors. However, Transit Mix has a slight competitive
advantage in that many of its customers also purchase concrete, sand and
aggregates from Transit Mix and Castle whereas our competitors for these
particular product lines do not offer concrete, sand or aggregates.
EMPLOYEES
The Company employed 552 persons as of December 31, 1994. Employment varies
throughout the year due to the seasonal nature of sales and thus to a lesser
extent, production. A breakdown of the prior three years employment at year end
by segment was:
1994 1993 1992
------- ------- -------
Heating and Air Conditioning 335 371 516
Construction Materials 203 188 183
Corporate Office 14 14 14
------- ------- -------
Total 552 573 713
------- ------- -------
------- ------- -------
Factory employees at the Colton, California plant are represented by the
Amalgamated Industrial Workers Union under a contract that expires in June 1997.
Certain drivers, laborers and mechanics at the Colorado Springs facilities are
represented by the Western Conference of Teamsters. The contract expired on
February 28, 1995 and negotiations are ongoing.
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 facility (Phoenix, Arizona). 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.
5
The construction materials segment operates out of two owned facilities in
Colorado Springs, Colorado. Additionally, this segment owns four mining
properties in four counties in the vicinity of Colorado Springs, Colorado. In
the opinion of management, these four properties contain permitted and minable
reserves sufficient to service sand, rock and gravel requirements for the
foreseeable future.
The corporate office operates out of leased facilities in Chicago, Illinois.
Item 3. LEGAL PROCEEDINGS
See Note 6 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 1994.
PART II
Item 5. MARKETING 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 for the past two fiscal years are:
High Low
---- ---
1994 Fourth Quarter 13 3/4 10 7/8
Third Quarter 13 7/8 10 7/8
Second Quarter 11 3/8 9 1/8
First Quarter 10 3/8 7 7/8
1993 Fourth Quarter 8 1/2 7 7/8
Third Quarter 9 1/4 8
Second Quarter 8 3/4 7 7/8
First Quarter 9 3/4 6 3/4
Trading during the two months ended February 28, 1995 ranged from 11 1/8 to
12 3/8.
At December 31, 1994, the Company had approximately 3,400 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. In addition, the covenants of the Company's unsecured term
loan require prior approval of dividends by the lenders. See Note 5 on page 18.
6
Item 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA (Amounts in thousands, except per share amounts)
------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
SUMMARY OF OPERATIONS
Net sales from continuing operations $75,294 $62,495 $60,982 $58,043 $55,120
------- ------- ------- ------- -------
Net income (loss) from continuing
operations 1,849 1,187 1,201 1,132 (1,035)
Net (loss) income from discontinued
operation (464) 188 (1,064) (534) (116)
Extraordinary item, net -- (1,335) -- -- --
------- ------- ------- ------- -------
Net income (loss) $1,385 $ 40 $ 137 $ 598 $(1,151)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
PER SHARE DATA
Continuing operations $ 1.62 $ 1.02 $ 1.02 $ .96 $ (.88)
Discontinued operation (.41) .16 (.90) (.45) (.10)
Extraordinary item -- (1.15) -- -- --
------- ------- ------- ------- -------
Net income (loss) $ 1.21 $ .03 $ .12 $ .51 (.98)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Average shares outstanding during year 1,140 1,164 1,174 1,174 1,173
FINANCIAL CONDITION
Current ratio 2.0:1 2.2:1 2.5:1 2.5:1 2.6:1
Total assets $48,162 $45,424 $54,916 $55,425 $57,561
Long-term debt, including current
portion 4,923 6,819 16,114 17,950 21,061
Shareholders' equity 26,789 25,404 25,660 25,523 24,924
Ratio of net worth to long-term debt 5.44 3.73 1.59 1.42 1.18
Book value per share $ 23.50 $ 22.28 $ 21.86 $ 21.73 $ 21.23
CASH FLOWS
Net cash provided by (used in):
Operating activities $ 7,191 $ 2,727 $ 4,925 $ 5,132 $ 3,696
Investing activities (1,884) 6,628 (3,182) (1,134) (2,215)
Financing activities (3,596) (9,914) (1,836) (3,112) (1,916)
------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents $ 1,711 $ (559) $ (93) $ 886 $ (435)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
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 $2,778,000 at year end compared to
$1,067,000 the prior year.
Cash provided from operations in 1994 of $7,191,000 exceeded the $2,727,000
provided in 1993 and the $4,925,000 generated in 1992. The increase in net cash
generated by operating activities in 1994 was mainly due to improved sales
volume and increased levels of accounts payable and accrued expenses. Accounts
payable increased mainly due to the early purchase of raw materials in 1994 for
which 1995 price increases had been announced. The increase in accruals was
primarily due to the timing of payments with a decrease expected during the
first quarter of 1995. The reduction in 1993 from the 1992 level was largely
due to working capital changes.
Net cash used in investing activities was $1,884,000 in 1994 and $3,182,000 in
1992. Net cash of $6,628,000 was provided by investing activities in 1993
primarily as a result of the sale of Imeco, Inc. During 1994, the Company
invested $561,000 in Oracle Ridge Mining Partners, comparable to the amount
invested during 1992 but approximately half of the investment required in 1993.
In addition, during 1993, proceeds of $704,000 were received from the sale of an
equity investment.
Capital expenditures for 1994, 1993 and 1992 were $1,775,000, $3,677,000 and
$2,438,000 respectively. There were no significant commitments for capital
expenditures at the end of 1994. Budgeted capital expenditures for 1995,
exclusive of equipment that may be acquired under operating leases, are
approximately $2,756,000 (primarily routine replacements and upgrades), $450,000
more than planned depreciation. The 1995 expenditures will be funded from
internal sources and available borrowing capacity.
In connection with the sale of Imeco, the Company retained responsibility, if
any, on product liability claims involving Imeco equipment occurring prior to
the June 30, 1993 sale date. The 1994 results were reduced by $726,000,
$426,000 after related tax benefits. This provision is the result of new
developments related to these product liability matters. In March 1995, the
Company settled the suit brought by ConAgra and their insurance carrier. The
amount of the settlement was fully reserved as of December 31, 1994. The
remaining Imeco claims are not expected to have a material effect on future
earnings. See Note 6.
During 1994, cash of $3,596,000 was used in financing activities. The short-
term line of credit was paid off and scheduled long-term debt payments were met.
During 1993, cash of $9,914,000 was used in financing activities. The Company
used cash from the sale of Imeco, $1,700,000 of borrowings under the line of
credit and a portion of the $3,500,000 received from an amendment to the
Company's credit agreement with two banks, to repay $12,795,000 of fixed rate
long-term debt and the related prepayment penalty of $2,023,000. In addition,
the Company acquired 34,000 shares of treasury stock for $296,000 during 1993.
Cash of $1,836,000 was used in 1992 to repay scheduled long-term debt payments.
In February 1995, the Company amended its credit agreement with two banks to
provide $500,000 of additional term debt. The additional debt replaced cash
from available funds that was used to pay off an existing mortgage note in
November 1994. The $12,000,000 unsecured short-term line of credit remains
intact for use in funding seasonal sales programs at Williams Furnace Co. and
Phoenix Manufacturing, Inc. The line is also used for stand-by letters of
credit to insurance carriers in support of deductible amounts under the
Company's insurance program. The interest rates on both the term loan and the
short-term line will be reduced to prime during 1995 as certain 1994
profitability goals, set forth in the credit agreement, were met.
The Company anticipates the primary source of cash flow in 1995 to be from its
operating subsidiaries. This cash flow, supplemented by the line of credit, is
sufficient to cover normal and expected future cash needs, including servicing
debt and planned capital expenditures.
8
OPERATIONS
1994 VS. 1993
Consolidated net sales from continuing operations increased $12,799,000 (21%).
A majority of the increase ($7,698,000) occurred in the construction materials
segment. Strong economic conditions and mild weather patterns led to high sales
levels throughout the year, including the normally slow winter months. The
heating and air-conditioning segment also realized gains of $5,100,000 mainly
attributable to hot and dry weather patterns in the areas serviced by Phoenix
Manufacturing, Inc.
The continued high level of price competition experienced at all of the
Company's subsidiaries is expected to continue into 1995. During 1994, the
Company experienced some increases in the cost of key raw materials. Selling
prices were increased but the Company was unable to recover all of such cost
increases.
Cost of sales (exclusive of depreciation and depletion) remained consistent at
76% between years. The 1.7% decline in the heating and air-conditioning
segment, due to price competition and the raw material cost increases, was
offset by 1.5% improvement in the construction materials segment due mainly to
increased volume as a relatively large portion of its operating costs and
expenses are fixed in nature.
Selling and administrative expenses rose $1,297,000 (12%) although they declined
as a percentage of net sales from 17% to 16%.
The increase in operating income is mainly due to the increase in net sales.
The Company recorded a loss of $545,000 related to its investment in Oracle
Ridge Mining Partners compared to $1,188,000 in the prior year. The reduction
in the loss is attributed to increased production and higher copper prices as
well as nonrecurring development costs incurred in the prior year. In 1993, the
project was shut down for a three-month period to install equipment and
facilities to increase production and improve copper recovery. Copper prices
increased throughout 1994, beginning around 74 cents per pound in January and
ending at $1.38. Since then, prices have decreased slightly to $1.30 as of the
end of February 1995. During 1994, the partnership entered into a one-year
agreement beginning September 1994 which fixes the price that the partnership
receives for the copper it produces at $1.07 per pound on approximately 50% of
ORMP's production. Copper prices have historically been, and are expected to
remain volatile.
Discussion of the discontinued operation and the prepayment penalty is presented
above under the heading Financial Condition, Liquidity and Capital Resources.
The Company's effective income tax rate on income from continuing operations
(34.2%) reflects federal and state statutory rates adjusted for the effect of
non-deductible expenses and other tax items. The current year was favorably
impacted by a substantially higher percentage depletion allowance. The 1993
rate was favorably influenced by the reversal of certain income tax
contingencies related to matters resolved in favor of the Company. (See Note 10
for the rate reconciliation).
9
OPERATIONS
1993 VS. 1992
Consolidated net sales from continuing operations increased $1,513,000 (2%).
The net sales of the heating and air-conditioning segment accounted for
virtually all of the gain while the net sales of the construction materials
segment remained strong but static compared to the previous year. Sales at
Williams Furnace Co. increased 12% due to a strengthening in the markets served
and acceptance in the market place of the company's higher efficiency furnaces.
Sales at Phoenix Manufacturing, Inc. declined reflecting cool, wet weather last
spring in the southwestern states.
The Company experienced a high level of price competition at all of its
subsidiaries which the Company expects to continue into 1994. During 1993,
inflation was not a significant factor at any of the operations.
Cost of sales (exclusive of depreciation and depletion) increased marginally due
to higher than normal workers' compensation costs in the construction materials
segment.
Selling and administrative expenses increased $764,000 (8%) due to the increase
in sales and additional costs associated with new product development and
marketing. As a percentage of sales, selling and administrative expense
increased from 16% to 17%.
The decrease in the operating income reflects the higher selling and
administrative cost as well as the marginal increase in cost of sales.
The decrease in interest expense of $98,000 reflects a lower interest rate on
term debt during 1993.
The Company recorded a loss of $1,188,000 related to its investment in Oracle
Ridge Mining Partners. This loss represents the Company's share (30%) of the
loss of the partnership for 1993. The Company began accounting for this
investment on the equity basis in 1993 (see Note 4). The loss is due to mine
development costs, lower than expected mill recoveries and weak copper prices
throughout 1993. The project was shut down from August 2 through the end of
October to install equipment and facilities to improve copper recovery. Copper
prices decreased throughout most of 1993 reaching a low of approximately 72
cents per pound in the fourth quarter. Since then, prices have improved to
approximately 90 cents per pound as of the beginning of March 1994. Copper
prices have historically been, and are expected to remain volatile.
The Company realized a gain of $794,000 from the sale of an equity investment
previously held by Transit Mix Concrete Co.
Discussion of the discontinued operation and the prepayment penalty is presented
above under the heading Financial Condition, Liquidity and Capital Resources.
The Company's 1993 effective income tax rate on income from continuing
operations was favorably influenced by the reversal of certain income tax
contingencies related to matters resolved in favor of the Company (see Note 10
for the rate reconciliation).
10
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
Financial Statements and Schedules of Continental
Materials Corporation and report thereon:
Consolidated statements of operations and
retained earnings for fiscal years
1994, 1993 and 1992 12
Consolidated statements of cash flows
for fiscal years ended 1994, 1993 and 1992 13
Consolidated balance sheets at December 31, 1994
and January 1, 1994 14
Notes to consolidated financial statements 15-23
Independent Auditors' Report 24
Financial Statements and Schedules of Oracle
Ridge Mining Partners and report thereon:
Independent Auditors' Report 25
Balance sheet at December 31, 1994 26
Statement of operations for the fourteen-month
period ended December 31, 1994 27
Statement of partners' deficit for the fourteen-
month period ended December 31, 1994 28
Statement of cash flows for the fourteen-month
period ended December 31, 1994 29
Notes to financial statements 30-33
11
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For Fiscal Years 1994, 1993 and 1992
(Amounts in thousands, except per share data)
--------------------------------------------------------------------------------
1994 1993 1992
---------- ---------- ----------
NET SALES $ 75,294 $ 62,495 $ 60,982
COSTS AND EXPENSES
Cost of sales (exclusive of depreciation
and depletion) 57,244 47,648 46,254
Depreciation and depletion 2,311 2,353 2,356
Selling and administrative 11,784 10,487 9,723
---------- ---------- ----------
Operating income 3,955 2,007 2,649
Interest expense (767) (770) (868)
Gain on sale of equity investment -- 794 --
Equity loss from mining partnership (545) (1,188) --
Write-off of terminated acquisition costs -- -- (117)
Other income, net 168 252 160
---------- ---------- ----------
Income from continuing operations
before income taxes 2,811 1,095 1,824
Income tax provision (benefit) 962 (92) 623
---------- ---------- ----------
Net income from continuing operations 1,849 1,187 1,201
Discontinued operation, net of tax:
(Loss) from discontinued operation -- (637) (1,064)
(Loss) gain on sale of
discontinued operation (464) 825 --
---------- ---------- ----------
(Loss) gain from discontinued operation (464) 188 (1,064)
---------- ---------- ----------
Income before extraordinary item 1,385 1,375 137
Extraordinary item, net of tax:
Prepayment penalty on early extinguish-
ment of debt -- (1,335) --
---------- ---------- ----------
Net income 1,385 40 137
Retained earnings, beginning of year 23,752 23,712 23,575
---------- ---------- ----------
Retained earnings, end of year $ 25,137 $ 23,752 $ 23,712
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per share:
Continuing operations $ 1.62 $ 1.02 $ 1.02
Discontinued operation (.41) .16 (.90)
Extraordinary (loss) -- (1.15) --
---------- ---------- ----------
Net income per share $ 1.21 $ .03 $ .12
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares 1,140 1,164 1,174
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of the financial statements.
12
CONTINENTAL MATERIALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS For Fiscal Years 1994, 1993, and 1992
(Amounts in thousands)
--------------------------------------------------------------------------------
1994 1993 1992
---------- ---------- ----------
Operating activities:
Net income $ 1,385 $ 40 $ 137
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and depletion 2,311 2,854 3,358
Deferred income tax benefit (66) (971) (131)
Provision for doubtful accounts 148 79 177
Gain on sale of property and equipment (133) (18) (63)
Gain on sale of equity investment -- (794) --
Gain on sale of discontinued operation -- (1,050) --
Loss on early retirement of debt -- 2,023 --
Equity loss from mining partnership 545 1,188 --
Changes in operating assets and liabilities, net of
effects from sale of subsidiary:
Receivables (1,395) (841) (685)
Inventories (61) 404 872
Prepaid expenses (92) 38 137
Income taxes (145) (374) 671
Accounts payable and accrued expenses 5,037 49 572
Other (343) 100 (120)
---------- ---------- ----------
Net cash provided by operating activities 7,191 2,727` 4,925
---------- ---------- ----------
Investing activities:
Capital expenditures (1,775) (3,677) (2,438)
Investment in mining partnership (561) (1,194) (567)
Return of investment (equity investment) in
environmental managment venture 250 -- (250)
Proceeds from sale of property and equipment 202 45 73
Proceeds from sale of equity investment -- 704 --
Proceeds from sale of discontinued operation -- 10,750 --
---------- ---------- ----------
Net cash (used in) provided by investing activities (1,884) 6,628 (3,182)
---------- ---------- ----------
Financing activities:
(Repayment) borrowings under revolving credit facility (1,700) 1,700 --
Long-term borrowings -- 3,500 --
Repayment of long-term debt (1,896) (12,795) (1,836)
Prepayment penalty -- (2,023) --
Payments to acquire treasury stock -- (296) --
---------- ---------- ----------
Net cash used in financing activities (3,596) (9,914) (1,836)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1,711 (559) (93)
Cash and cash equivalents:
Beginning of year 1,067 1,626 1,719
---------- ---------- ----------
End of year $ 2,778 $ 1,067 $ 1,626
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow items:
Cash paid during the year for:
Interest $ 773 $ 1,335 $ 1,877
Income taxes 916 546 287
Supplemental Schedule of non-cash investing and financing activities:
A portion of the proceeds from the sale of equity investment was in the form of
preferred stock valued at $90.
The accompanying notes are an integral part of the financial statements.
13
Continental Materials Corporation
Consolidated Balance Sheets December 31 and January 1, 1994
(Amounts in thousands except share data)
-------------------------------------------------------------------------------
DECEMBER 31, JANUARY 1,
1994 1994
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,778 $ 1,067
Receivables less allowance of $248 and $139 11,376 10,129
Inventories 16,497 16,435
Prepaid expenses 1,505 1,291
------------ ------------
Total current assets 32,156 28,922
------------ ------------
Property, plant and equipment:
Land and improvements 1,713 1,713
Buildings and improvements 7,731 7,685
Machinery and equipment 38,617 37,609
Mining properties 2,329 2,329
Less accumulated depreciation and depletion (36,664) (35,007)
------------ ------------
13,726 14,329
------------ ------------
Other assets:
Investment in mining partnership 1,539 1,523
Other 741 650
------------ ------------
2,280 2,173
------------ ------------
$ 48,162 $ 45,424
------------ ------------
------------ ------------
LIABILITIES
Current liabilities:
Bank loan payable $ -- $ 1,700
Current portion of long-term debt 1,411 1,896
Accounts payable 7,017 4,747
Income taxes 10 155
Accrued expenses:
Compensation 1,836 1,219
Reserve for self-insured losses 3,278 2,077
Profit sharing 1,146 673
Other 1,433 957
------------ ------------
Total current liabilities 16,131 13,424
------------ ------------
Long-term debt 3,512 4,923
------------ ------------
Commitments and contingencies (Notes 6 and 8)
------------ ------------
Deferred income taxes 1,730 1,673
------------ ------------
SHAREHOLDERS' EQUITY
Common shares, $.50 par value; authorized
3,000,000 shares; issued 1,326,588 shares 663 663
Capital in excess of par value 3,484 3,484
Retained earnings 25,137 23,752
Treasury shares (2,495) (2,495)
------------ ------------
26,789 25,404
------------ ------------
$ 48,162 $ 45,424
------------ ------------
------------ ------------
The accompanying notes are an integral part of the financial statements.
14
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"). Beginning in 1993, the equity
method of accounting is used for the Company's 30% interest in Oracle Ridge
Mining Partners. Prior to 1993, this investment was accounted for on the cost
basis.
Certain prior years' amounts have been reclassified to conform with the current
presentation.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined using
the last-in, first-out (LIFO) method for approximately 88% of total inventories
at December 31, 1994 (87% at January 1, 1994). The cost of all other inventory
is determined by the first-in, first-out (FIFO) method.
PROPERTY AND DEPRECIATION
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
The cost of property sold or retired and the related accumulated depreciation
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.
RETIREMENT PLANS
The Company and certain subsidiaries have various contributory and
noncontributory defined contribution profit sharing retirement plans for
specific employees. Costs under the plans are charged to operations as
incurred. The plans are funded currently with the exception of the executive
deferred compensation plan and the supplemental profit sharing plan.
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 provision for self-insured losses is recorded
based on the Company's estimate of the liability for claims incurred in
accordance with the requirements of Statement of Financial Accounting Standards
No. 5, "Accounting for Contingencies."
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.
15
INCOME TAXES
Income taxes are reported consistent with Statement of Financial Accounting
Standards 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 commercial paper of
companies with strong credit ratings. These securities typically mature within
30 days. 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.
FISCAL YEAR END
In 1993, the Company changed its fiscal year end from the Friday to the Saturday
nearest December 31. The effect of the change on the 1993 financial statements
was immaterial. Fiscal 1994, 1993 and 1992 each consist of 52 weeks.
2. DISCONTINUED OPERATION
In June 1993, the Company sold its Imeco, Inc. ("Imeco") subsidiary for a cash
payment of $10,750,000. Net assets at the sale date consisted primarily of
receivables of $1,909,000, inventories of $1,397,000 and payables of $1,380,000
as well as non-current assets of net property, plant and equipment of $3,204,000
and net intangibles of $3,771,000.
The sale resulted in a pre-tax gain of $1,050,000 ($825,000 after-tax or $0.71
per share). This gain is net of an accrual, recorded in the fourth quarter of
1993, for management's best estimate of possible costs to be incurred related to
product liability suits retained by the Company. During the fourth quarter of
1994, the Company re-evaluated the accrual and, based on updated information,
recorded an additional $726,000 ($464,000 after-tax or $0.41 per share). See
Note 6.
The results of Imeco have been reported separately as a component of
discontinued operations in the Consolidated Statements of Operations and
Retained Earnings. Net sales of Imeco were $7,513,000 and $18,187,000 for the
six months ended June 30, 1993 and fiscal year 1992, respectively.
16
3. INVENTORIES
Inventories consisted of the following (amounts in thousands):
DECEMBER 31, January 1,
1994 1994
------------- -------------
Finished goods $ 8,882 $ 9,521
Work in process 1,208 2,802
Raw materials
and supplies 5,407 5,112
------------- -------------
$16,497 $16,435
------------- -------------
------------- -------------
If inventories valued on the LIFO basis were valued at current costs,
inventories would be higher as follows: 1994--$2,716,000 1993--$2,456,000; and
1992--$2,643,000.
4. INVESTMENT IN MINING PARTNERSHIP
The Company has a 30% ownership interest in Oracle Ridge Mining Partners. ORMP
is a general partnership which operates a copper mine primarily situated in Pima
County, Arizona. The Company accounted for its investment in ORMP on the cost
basis through the end of 1992. In late 1992, the partners of ORMP purchased the
obligations owed by the partnership to a bank that had provided a majority of
the funding for the redevelopment and initial operating stages of the project.
Since the end of 1992, the partners have directly provided all of the financing
needs of ORMP. Consequently, beginning in 1993, the Company changed its
accounting for the investment in ORMP to the equity method.
The Company's share of the losses from ORMP in 1994 and 1993 was $545,000 and
$1,188,000, respectively. The Company made cash advances of $561,000 and
$1,194,000 to ORMP during 1994 and 1993, respectively.
The realization of this investment is contingent upon the successful operation
of the Oracle Ridge mine.
17
The Company's interest in the assets, liabilities, and results of operations of
Oracle Ridge Mining Partners as of and for the years ended December 31, 1994 and
1993 is summarized as follows (amounts in thousands):
1994 1993
---------- ----------
Current assets $ 1,300 $ 797
Non-current assets 8,259 8,422
Current liabilities (2,065) (1,842)
Equity and advances of other joint venturer (5,350) (5,196)
---------- ----------
Interest in net assets 2,144 2,181
Excess of interest in net assets over
carrying value of investment (605) (658)
---------- ----------
Investment at December 31 $ 1,539 $ 1,523
---------- ----------
---------- ----------
Net sales $ 5,953 $ 3,065
---------- ----------
---------- ----------
Gross profit $ (846) $(3,267)
---------- ----------
---------- ----------
Net loss $(1,973) $(4,009)
---------- ----------
---------- ----------
Share of loss reflected in Company's
Statement of Operations $ (545) $(1,188)
---------- ----------
---------- ----------
5. LONG-TERM DEBT
Long-term debt consisted of the following (amounts in thousands):
December 31, January 1,
1994 1994
------------- -------------
Unsecured term loan $ 4,900 $ 6,300
Mortgage note -- 486
Other 23 33
------------- -------------
4,923 6,819
Less current portion 1,411 1,896
------------- -------------
$ 3,512 $ 4,923
------------- -------------
------------- -------------
The unsecured term loan is payable to two banks in semi-annual installments of
$700,000 with final principal payment of all then unpaid principal due on April
20, 1996. The loan bears interest at prime plus 3/4% (prime was 8.5% at December
31, 1994).
The Company is required by the unsecured term loan to maintain certain levels of
consolidated tangible net worth, to attain certain levels of cash flow (as
defined) on an annual basis, and to maintain certain ratios including
consolidated debt to consolidated tangible net worth. 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
Aggregate long-term debt matures as follows (amounts in thousands):
1995 $1,411
1996 3,512
--------
$4,923
--------
During 1994, the Company had a $12,000,000 unsecured line of credit ($9,000,000
in 1993) with two banks to be used for short-term cash needs and standby letters
of credit. Interest was charged at the rate of prime plus 1/4% on cash
borrowings. The weighted average interest rate was 7.2% for fiscal 1994 and
6.3% for fiscal 1993. There was no outstanding balance at December 31, 1994.
The outstanding balance at January 1, 1994 was $1,700,000.
At December 31, 1994, the Company had letters of credit outstanding totalling
approximately $4,429,000 which primarily guarantee various insurance activities.
In February 1995, the Company amended its credit agreement with two banks to
provide an additional $500,000 of term debt. Interest rates on both the term
debt and the short-term line will be reduced to prime during 1995 as certain
1994 profitability goals, as set forth in the credit agreement, were met.
6. COMMITMENTS AND CONTINGENCIES
As discussed in Note 2, the Company retained the responsibility, if any, related
to incidents involving Imeco products occurring prior to June 30, 1993. During
1992 ConAgra, Inc. d/b/a Armour Food Company and its insurance carrier,
Arkwright Mutual Insurance Company, each filed suit against Imeco and Central
Ice Machine Company in the District Court of Douglas County, Nebraska. In March
1995, the Company settled the suit. The amount of the settlement was fully
reserved as of December 31, 1994. Imeco was also named as one of the defendants
in a product liability matter in which an individual was seriously injured while
servicing an evaporative condensor unit manufactured by Imeco. No amount of
damages has yet been stated. For the period involved, the Company maintained an
aggregate deductible amount of $1,000,000 pertaining to product liability claims
and a $10,000,000 umbrella policy for losses in excess of $1,000,000. The
Company is vigorously defending the claim. Although this proceeding is not
expected to have a material effect on financial condition, a negative resolution
of this matter could have a material effect on quarterly or annual operating
results.
The Company is also involved in other litigation matters related to its
business. In the Company's opinion, none of these proceedings, when concluded,
will have a material adverse effect on the Company's results of operations or
financial position.
7. SHAREHOLDERS' EQUITY
Four hundred thousand shares of preferred stock ($.50 par value) are authorized
and unissued.
There was no treasury shares activity during either 1994 or 1992. Activity for
1993 was as follows (dollars in thousands):
Number
of
shares Cost
------------ ------------
Balance at January 1, 1993 152,310 $2,199
Purchase of treasury shares 34,000 296
------------ ------------
Balance at January 1
and December 31, 1994 186,310 $2,495
------------ ------------
------------ ------------
A Stock Option Plan (the "Plan") provides for grants of options and option
prices established by the Compensation Committee of the Board of Directors.
Options are exercisable for a period of five years from the date of grant. The
Company has reserved 180,000 shares for distribution under the Plan. No options
are outstanding as of December 31, 1994.
19
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
$1,694,000, $1,964,000 and $1,781,000 for 1994, 1993 and 1992, respectively.
Future minimum rental commitments under non-cancelable operating leases for 1995
and thereafter are as follows: 1995--$1,459,000; 1996--$1,284,000; 1997--
$788,000; 1998--$737,000; 1999--$617,000; and thereafter--$1,091,000.
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.
9. RETIREMENT PLANS
Retirement plan expenses charged to operations were $1,165,000, $745,000 and
$947,000 in 1994, 1993 and 1992, respectively.
10. INCOME TAXES
The provision (benefit) for income taxes is summarized as follows (amounts in
thousands):
1994 1993 1992
---------- ---------- ----------
Federal:Current $ 785 $ 121 $ 392
Deferred (131) (842) (248)
State: Current 61 25 10
Deferred (15) (154) (29)
---------- ---------- ----------
$ 700 $ (850) $ 125
---------- ---------- ----------
---------- ---------- ----------
The provision (benefit) for income taxes has been allocated as follows:
1994 1993 1992
---------- ---------- ----------
Continuing operations $ 962 $ (92) $ 623
Discontinued operations (262) (70) (498)
Extraordinary item -- (688) --
---------- ---------- ----------
$ 700 $ (850) $ 125
---------- ---------- ----------
---------- ---------- ----------
The difference between the tax rate on income from continuing operations for
financial statement purposes and the federal statutory tax rate was as follows:
1994 1993 1992
---------- ---------- ----------
Statutory tax rate 34.0% 34.0% 34.0%
Percentage depletion (5.1) (.7) (1.3)
State income taxes, net of federal benefit 1.0 (12.7) (.7)
Non-deductible expenses .5 .6 .3
Reduction of tax contingency recorded
in the fourth quarter -- (27.9) --
Other 3.8 (1.7) 1.9
---------- ---------- ----------
34.2% (8.4)% 34.2%
---------- ---------- ----------
---------- ---------- ----------
20
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 gross temporary differences that give rise to deferred taxes
are as follows (amounts in thousands):
1994 1993
-------- --------
Reserves for self-insured losses $2,217 $1,645
Deferred compensation 916 763
Asset valuation reserves 494 641
Other 54 148
-------- --------
Total deferred tax assets $3,681 $3,197
-------- --------
-------- --------
Depreciation $3,420 $3,336
Investment in mining partnership 1,961 1,791
Other -- 3
-------- --------
Total deferred tax liabilities $5,381 $5,130
-------- --------
-------- --------
21
11. UNAUDITED QUARTERLY FINANCIAL DATA
The following table provides summarized unaudited quarterly financial data for
1994 and 1993 (amounts in thousands, except per share amounts):
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
1994
Net sales $15,260 $19,265 $19,630 $21,139
-------- -------- -------- --------
-------- -------- -------- --------
Gross profit $ 2,354 $ 3,639 $ 4,572 $ 5,333
-------- -------- -------- --------
-------- -------- -------- --------
Depreciation and depletion $ 567 $ 568 $ 570 $ 606
-------- -------- -------- --------
-------- -------- -------- --------
Net (loss) income:
Continuing operations $ (558) $ 392 $ 763 $ 1,252
Discontinued operations -- -- -- (464)
-------- -------- -------- --------
$ (558) $ 392 $ 763 $ 788
-------- -------- -------- --------
-------- -------- -------- --------
Net (loss) income per share:
Continuing operations $ (.49) $ .34 $ .67 $ 1.10
Discontinued operations -- -- -- (.41)
-------- -------- -------- --------
$ (.49) $ .34 $ .67 $ .69
-------- -------- -------- --------
-------- -------- -------- --------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
1993
Net sales $12,852 $17,413 $15,951 $16,289
-------- -------- -------- --------
-------- -------- -------- --------
Gross profit $ 1,551 $ 2,860 $ 3,962 $ 4,656
-------- -------- -------- --------
-------- -------- -------- --------
Depreciation and depletion $ 543 $ 584 $ 562 $ 664
-------- -------- -------- --------
-------- -------- -------- --------
Net (loss) income:
Continuing operations $ (451) $ (328) $ 503 $ 1,463
Discontinued operations (238) 845 (34) (385)
Extraordinary item -- (1,335) -- --
-------- -------- -------- --------
$ (689) $ (818) $ 469 $ 1,078
-------- -------- -------- --------
-------- -------- -------- --------
Net (loss) income per share:
Continuing operations $ (.39) $ (.28) $ .43 $ 1.28
Discontinued operations (.20) .72 (.03) (.34)
Extraordinary item -- (1.14) -- --
-------- -------- -------- --------
$ (.59) $ (.70) $ .40 $ .94
-------- -------- -------- --------
-------- -------- -------- --------
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.
22
12. INDUSTRY SEGMENT INFORMATION
The Heating and Air Conditioning segment produces and sells heating and cooling
equipment which is sold primarily to distributors and retail outlets. 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 sale of limestone, sand
and gravel. Sales of this segment are confined to the Colorado Springs area.
Operating profit is determined by deducting operating expenses from all
revenues. In computing operating profit, none of the following has been added
or deducted: unallocated corporate expenses, interest, other income, income
taxes and unusual items.
General corporate assets are principally cash, accounts receivable and leasehold
improvements.
No customer accounts for 10% or more of consolidated sales.
The industry segment information for fiscal years 1994, 1993 and 1992 is as
follows (amounts in thousands):
1994
----
Depreci-
Identifi- ation and Capital
Net Operating able Deple- Expendi-
Sales Income Assets tion tures
---------- ---------- ---------- ---------- ----------
Heating and air condi-
tioning $ 43,271 $ 3,718 $ 27,551 $ 1,087 $ 533
Construction materials 31,878 2,645 18,635 1,183 1,211
General corporate
and other 145 (2,408) 1,976 41 31
---------- ---------- ---------- ---------- ----------
$ 75,294 $ 3,955 $ 48,162 $ 2,311 $ 1,775
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
1993
----
Heating and air condi-
tioning $ 38,171 $ 3,025 $ 26,197 $ 1,120 $ 1,027
Construction materials 24,180 1,415 18,300 1,173 2,650
General corporate
and other 144 (2,433) 927 60 --
---------- ---------- ---------- ---------- ----------
$ 62,495 $ 2,007 $ 45,424 $ 2,353 $ 3,677
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
1992
----
Heating and air condi-
tioning $ 36,658 $ 2,893 $ 37,272 $ 1,182 $ 757
Construction materials 24,194 2,096 14,975 1,121 1,630
General corporate
and other 130 (2,340) 2,669 53 51
---------- ---------- ---------- ---------- ----------
$ 60,982 $ 2,649` $ 54,916 $ 2,356 $ 2,438
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
23
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Continental Materials Corporation
We have audited the accompanying consolidated balance sheets of Continental
Materials Corporation and Subsidiaries as of December 31 and January 1, 1994,
and the related consolidated statements of operations and retained earnings and
cash flows for each of the three years in the period ended December 31, 1994.
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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Continental
Materials Corporation and Subsidiaries as of December 31 and January 1, 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 10, 1995
24
INDEPENDENT AUDITORS' REPORT
Oracle Ridge Mining Partners:
We have audited the accompanying balance sheet of Oracle Ridge Mining Partners
(the Partnership) as of December 31, 1994, and the related statements of
operations, partners' deficit, and cash flows for the fourteen month period then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of December 31, 1994 and
the results of its operations and its cash flows for the fourteen month period
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 1 to the
financial statements, the Partnership's losses from operations and partners'
capital deficit raise substantial doubt about the Partnership's ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Tucson, Arizona
March 3, 1995
25
ORACLE RIDGE MINING PARTNERS
BALANCE SHEET
DECEMBER 31, 1994
-------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 96,754
Accounts receivable 793,301
Inventories (Note 3) 410,102
------------
Total current assets 1,300,157
------------
PROPERTY AND MINERAL INTERESTS (Notes 4 and 10):
Plant, equipment and buildings 8,414,321
Mineral property and claims 954,185
Deferred development costs 3,459,470
------------
12,827,976
Less accumulated depreciation, depletion and amortization 4,630,290
------------
Property and mineral interests - net 8,197,686
------------
OTHER ASSETS (Note 9) 47,875
------------
TOTAL $ 9,545,718
------------
------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,075,500
Accrued payroll taxes 315,645
Accrued property taxes 294,826
Accrued use tax 133,649
Installment purchase liability (Note 10) 148,746
Due to Santa Catalina Mining Corp. (Note 11) 96,755
------------
Total current liabilities 2,065,121
------------
DEBT DUE TO PARTNERS:
Subordinated debt due to partners (Note 7) 7,491,745
Senior debt - Union (Note 5) 4,760,978
Senior debt - Continental (Note 5) 2,040,418
Union debt (Note 6) 348,492
------------
Total debt due to partners 14,641,633
------------
COMMITMENT AND CONTINGENCIES (Notes 5 and 9)
PARTNERS' DEFICIT (7,161,036)
------------
TOTAL $ 9,545,718
------------
------------
See notes to financial statements.
26
ORACLE RIDGE MINING PARTNERS
STATEMENT OF OPERATIONS
FOR THE FOURTEEN MONTH PERIOD ENDED DECEMBER 31, 1994
-------------------------------------------------------------------------------
REVENUES - Net value of concentrate (Note 8) $ 6,586,717
------------
OPERATING COSTS AND EXPENSES:
Production costs 6,285,941
General and administrative 999,070
Property and other taxes 264,651
Depreciation, depletion and amortization 1,211,608
Loss on equipment disposals 19,227
Interest expense 221,878
------------
Total operating costs and expenses 9,002,375
------------
NET LOSS $ 2,415,658
------------
------------
See notes to financial statements.
27
ORACLE RIDGE MINING PARTNERS
STATEMENT OF PARTNERS' DEFICIT
FOR THE FOURTEEN MONTH PERIOD ENDED DECEMBER 31, 1994
-------------------------------------------------------------------------------
UNION CONTINENTAL
COPPER, CATALINA,
INC. INC. TOTAL
PARTNERS' DEFICIT, NOVEMBER 1, 1993 $(3,321,765) $(1,423,613) $(4,745,378)
Net loss (1,690,961) (724,697) (2,415,658)
------------ ------------ ------------
PARTNERS' DEFICIT, DECEMBER 31, 1994 $(5,012,726) $(2,148,310) $(7,161,036)
------------ ------------ ------------
------------ ------------ ------------
See notes to financial statements.
28
ORACLE RIDGE MINING PARTNERS
STATEMENT OF CASH FLOWS
FOR THE FOURTEEN MONTH PERIOD ENDED DECEMBER 31, 1994
-------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net Loss $(2,415,658)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion, and amortization 1,211,608
Loss on equipment disposals 19,227
Changes in assets and liabilities:
Accounts receivable (792,301)
Inventories (222,522)
Other assets 67,233
Accounts payable and other accrued liabilities 438,939
Due to Santa Catalina Mining Corp. 91,818
------------
Net cash used in operating activities (1,601,656)
------------
INVESTING ACTIVITIES:
Purchases of plant, equipment and buildings (578,992)
Additions to deferred development costs (498,166)
------------
Net cash used in investing activities (1,077,158)
------------
FINANCING ACTIVITIES:
Subordinated debt due to partners 2,717,245
------------
Net cash provided by financing activities 2,717,245
------------
NET INCREASE IN CASH 38,431
CASH, NOVEMBER 1, 1993 58,323
------------
CASH, DECEMBER 31, 1994 $ 96,754
------------
------------
SUPPLEMENTAL CASH FLOW INFORMATION - Interest paid $ 179,160
------------
------------
NON CASH INVESTING AND FINANCING ACTIVITIES:
The Partnership acquired $149,000 of equipment by an installment purchase.
See notes to financial statements.
29
ORACLE RIDGE MINING PARTNERS
NOTES TO FINANCIAL STATEMENTS
FOR FOURTEEN MONTH PERIOD ENDED DECEMBER 31, 1994
-------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - Oracle Ridge Mining Partners (the Partnership) is a general
partnership formed under the Arizona Uniform Partnership Act on May 24,
1977 pursuant to a partnership agreement between Union Copper, Inc. (a
Maryland corporation) (Union) and Continental Catalina, Inc. (an Arizona
corporation) (Continental).
Union is a wholly-owned subsidiary of Santa Catalina Mining Corp. (formerly
known as South Atlantic Ventures Ltd.) (a Canadian corporation).
Continental is a wholly-owned subsidiary of Continental Copper, Inc. (an
Arizona corporation) which in turn is a wholly-owned subsidiary of
Continental Materials Corporation (a Delaware corporation).
The Partnership has a copper mining property with an underground mine and
adjacent crushing and grinding equipment situated in Pima County, Arizona
which commenced commercial production in 1991. Smelting is performed by an
unrelated third party at another location.
The Fifth Amended and Restated Partnership Agreement dated October 1, 1994
provides, among other things, the following:
a. Union shall be the managing partner of the project.
b. Profits and losses shall generally be allocated 70% to Union and 30%
to Continental. Certain types of gains or losses may be subject to an
alternative allocation.
BASIS OF PRESENTATION - The accompanying financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Partnership
has incurred a loss from operations of $2,415,658 for the fourteen month period
ended December 31, 1994, and, as of December 31, 1994, has a partners' capital
deficit of $7,161,036 and a net working capital deficiency of $764,964 which may
indicate that the Partnership will be unable to continue as a going concern for
a reasonable period of time. If the Partnership is not able to generate
sufficient levels of cash flow from operations, additional financial support
will be required from the partners or from other sources to pay its obligations
as they come due. Management believes that it can continue to improve the
efficiency and the output of the mining property to the extent necessary to
attain profitable operations. The ability of the Partnership to ultimately
attain profitable operations is also dependent upon the market price for copper.
The financial statements do not include any adjustments relating to the
recoverability of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Partnership be unable to continue
as a going concern.
30
2. SIGNIFICANT ACCOUNTING POLICIES
PLANT, EQUIPMENT AND BUILDINGS are carried at cost less accumulated
depreciation. Depreciation is provided on the straight-line basis over
estimated useful lives which range from four to fifteen years.
INVENTORIES - Inventories of concentrate and supplies are stated at the
lower of average cost or estimated market value.
MINERAL PROPERTY AND CLAIMS are carried at cost, reflecting costs incurred
in connection with the acquisition of the properties, less depletion and
write-downs for recognized impairments in value. The carrying value of the
mineral property and claims will be charged to operations of the
Partnership over future years by means of depletion charges computed on the
basis of actual ore production and estimated recoverable ore reserves.
DEFERRED DEVELOPMENT COSTS are carried at cost reflecting all mine
development costs incurred since the recommencement of development in 1989,
including an allocable portion of depreciation, interest and general and
administrative expenses. Since the commencement of production in March,
1991, only direct mine development expenditures have been deferred. Such
costs will be charged to operations in the same manner as mineral property
and claims.
REVENUE RECOGNITION - Revenue is recognized when product is delivered in
satisfaction of sales agreements and title passes to the buyer. Final
revenue amounts are adjusted based on the results of the final assays of
the copper concentrate approximately 60 to 90 days after shipment.
INCOME TAXES - Each partner reflects its share of taxable income or loss in
its tax return and no income taxes are recorded in the financial statements
of the Partnership.
3. INVENTORIES
Inventories consisted of the following at December 31, 1994:
Copper concentrate $ 135,000
Warehouse supplies and stores 206,079
Other - reagents, explosives 69,023
------------
$ 410,102
------------
------------
31
4. PROPERTY AND MINERAL INTERESTS
Plant, equipment and buildings consisted of the following at December 31,
1994:
Crushing and processing plant $ 3,935,880
Underground equipment 2,068,442
Mining and service equipment 1,057,125
Tailing pond 665,377
Vehicles 117,651
Buildings 386,546
Office equipment 153,147
Road improvements 30,153
------------
8,414,321
Less accumulated depreciation (3,730,253)
------------
Net plant, equipment and buildings $4,684,068
------------
------------
Depreciation expense for the fourteen month period ended December 31, 1994
totaled $874,513.
Mineral property and claims and deferred developments costs consisted of the
following at December 31, 1994:
Mineral property and claims $ 954,185
Deferred development costs 3,459,470
------------
4,413,655
Less accumulated depletion and amortization (900,037)
------------
Net mineral property and claims and deferred development costs $3,513,618
----------
----------
Depletion and amortization expense for the fourteen month period ended
December 31, 1994 totaled $337,095.
5. SENIOR DEBT
The Partnership owes Union and Continental $4,760,978 and $2,040,418,
respectively, as non-interest bearing senior debt with no defined maturity
date. Such debt is collateralized by substantially all of the assets of the
Partnership.
6. UNION DEBT
As of December 31, 1994, the Partnership was indebted to Union in the amount
of $348,492. The loan bears interest at the prime rate plus 2% and does not
carry a defined maturity date. Interest is waived for periods in which the
Partnership incurs a net loss before interest expense for this debt.
Interest has been waived by Union for the fourteen months ended December 31,
1994. This debt is subordinated to the Senior Debt.
32
7. SUBORDINATED DEBT DUE TO PARTNERS
As of December 31, 1994, the Partnership had subordinated debt due to the
partners of $5,244,011 to Union and $2,247,734 to Continental. The
subordinated debt bears interest at the prime rate plus 2%. Interest is
waived for periods in which the Partnership incurs a net loss before interest
expense for this debt. Interest has been waived by Union and Continental for
the fourteen months ended December 31, 1994. The debt is subordinated to the
Senior Debt (Note 5) and the Union Debt (Note 6) and does not carry a
defined maturity date.
8. MAJOR CUSTOMER AND FIXED PRICE AGREEMENT
The Partnership sells all of its concentrate under a sales agreement to a
single unrelated customer. Under the terms of an amendment to the sales
agreement, the first 160 metric tons of copper per month are sold at a fixed
price of $1.07 per pound. If the Partnership does not deliver 160 metric
tons, in a given month, the shortfall is added to the next months base
requirement of 160 metric tons on a cumulative basis. Monthly sales in
excess of 160 metric tons are sold at a computed average market price. The
Partnership sold 3,878 metric tons under this agreement for the fourteen
months ended December 31, 1994. The market price per pound of copper was
$1.43 at December 31, 1994. The fixed price agreement expires August 30,
1995 and the sales agreement expires December 31, 1995.
9. COMMITMENT
Under an arrangement with the State of Arizona, the Partnership has provided
a $45,000 bond to be used for reclamation purposes. In addition, the
agreement requires that for each ton of ore mined an additional $0.05 will be
provided (up to a total of $99,000) for reclamation. Management believes
that the amounts provided under this agreement will be sufficient to pay for
all reclamation costs.
10.INSTALLMENT PURCHASE
In 1994, the Partnership entered into agreements to purchase two pieces of
equipment on an installment basis. At December 31, 1994, the remaining
liability related to the purchases was $148,746, all due in 1995. The
installment agreements are collateralized by the related items of equipment.
11.RELATED PARTY TRANSACTIONS
Related party transactions are disclosed throughout the financial statements.
Additional related party transactions are as follows for the fourteen month
period ended December 31, 1994:
Management fees to Santa Catalina Mining Corp.
for January, February, May, November and December 1994 $ 60,000
Reimbursement of expenses incurred by Santa Catalina Mining Corp.
on behalf of the Partnership $ 36,755
Santa Catalina Mining Corp. is entitled to a management fee equal to
$12,000 per month in connection with the performance of its duties as
managing partner of the partnership. However, the managing partner shall
not be entitled to such fee in the event net operating income for any given
month, calculated on an accrual basis, is less than $15,000.
33
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no Form 8-K filed within the 24 months prior to the date of the
most recent financial statements reporting a change of accountants and/or
reporting a disagreement on any matter of accounting principle or financial
statement disclosure.
PART III
Part III 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 31,
1994, its definitive 1995 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 Auditors on Schedules.....................
Schedule II Valuation and Qualifying Accounts & Reserves........
For Years Ended December 31, 1994, January 1, 1994
and January 1, 1993.........................................
All other schedules are omitted because they are not applicable or the
information is shown in the financial statements or notes thereto.
34
(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 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 Fifth Amendment to Revolving Credit and Term Loan Agreement
between The Northern Trust, LaSalle National Bank and Continental
Materials Corporation dated as of January 31, 1995 (filed
herewith).
Exhibit 10b 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 10c Continental Materials Corporation Employee Profit Sharing
Retirement Plan Amended and Restated Generally Effective January
1, 1989 (filed herewith).
Exhibit 11 Statement Regarding Computation of Per Share Earnings (filed
herewith).
Exhibit 21 Subsidiaries of Registrant (filed herewith).
Exhibit 23 Consent of Independent Accountants (file herewith).
Exhibit 27 Financial Data Schedule (filed herewith).
Exhibit 28 Continental Materials Corporation Employees Profit Sharing
Retirement Plan on Form 11-K for the year ended December 31, 1994
(to be filed by amendment).
* - Compensatory plan or arrangement
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended December
31, 1994.
35
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 28, 1995
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 28, 1995
/S/ William A. Ryan
------------------------
William A. Ryan President and a Director March 28, 1995
/S/ Joseph J. Sum
------------------------
Joseph J. Sum Vice President and a
Director March 28, 1995
/S/ Mark S. Nichter
------------------------
Mark S. Nichter Secretary and Controller March 28, 1995
/S/ Thomas H. Carmody
------------------------
Thomas H. Carmody Director March 28, 1995
/S/ Joseph L. Gidwitz
------------------------
Joseph L. Gidwitz Director March 28, 1995
/S/ Ralph W. Gidwitz
------------------------
Ralph W. Gidwitz Director March 28, 1995
/S/ Ronald J. Gidwitz
------------------------
Ronald J. Gidwitz Director March 28, 1995
/S/ William G. Shoemaker
------------------------
William G. Shoemaker Director March 28, 1995
/S/ Theodore R. Tetzlaff
------------------------
Theodore R. Tetzlaff Director March 28, 1995
36
REPORT OF INDEPENDENT AUDITORS ON SCHEDULES
Our report on the consolidated financial statements of Continental
Materials Corporation and Subsidiaries is included on page 24 of this Annual
Report on Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
in the index on page 34 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 10, 1995
CONTINENTAL MATERIALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (C) (D)
for the fiscal years 1994, 1993 and 1992
COLUMN A COLUMN B COLUMN C(1) COLUMN D COLUMN E
Balance at Additions
Beginning of Charged to Costs Deductions - Balance at End of
Description Period and Expenses Describe Period
-------------------------------- ------------- ---------------- -------------- -----------------
YEAR 1994
Allowance for doubtful accounts $ 139,000 $148,000 $ 39,000 (a) $248,000
------------ ------------ -------------- ------------
Inventory valuation reserve $ 420,000 $289,000 $486,000 (b) $223,000
------------ ------------ -------------- ------------
YEAR 1993
Allowance for doubtful accounts $ 258,000 $101,000 $220,000 (e) $139,000
------------ ------------ -------------- ------------
Inventory valuation reserve $ 40,000 $398,000 $ 18,000 (b) $420,000
------------ ------------ -------------- ------------
YEAR 1992
Allowance for doubtful accounts $ 320,000 $177,000 $239,000 (a) $258,000
------------ ------------ -------------- ------------
Inventory valuation reserve $ 223,000 $238,000 $421,000 (b) $ 40,000
------------ ------------ -------------- ------------
<FN>
Notes:
(a) Accounts written off, net of recoveries. (c) Reserve deducted in the balance sheet from the asset to which it
applies.
(b) Amounts written off upon disposal of assets. (d) Column C(2) has been omitted as the answer would be "none".
(e) Accounts written off, net of recoveries plus $102,000 reserve balance transferred with sale of subsidiary.