CUO Continental Materials Corp

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 11-K

ANNUAL REPORT

PURSUANT TO SECTION 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Annual report pursuant to Section 15(D) of the Securities Exchange Act of 1934 for the calendar year ended:  December 31, 2019

Transaction report pursuant to Section 15(d) of the Securities Exchange Act of 1934 for the transition period from                to                 

Commission File No. 1-258

A.                                    Full title of the plan and address of the plan if different from that of the issuer named below:

Continental Materials Corporation Employees Profit Sharing Retirement Plan

B.                                    Name of issuer of the securities held pursuant to the plan and the address of its principal executive office:

Continental Materials Corporation

440 S. LaSalle Street, Suite 3100

Chicago, Illinois 60605

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CONTINENTAL MATERIALS CORPORATION

EMPLOYEES PROFIT SHARING RETIREMENT PLAN

Chicago, Illinois

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Report on Supplemental Information

The supplemental information in the accompanying schedule of assets (held at end of year) as of December 31, 2019 has been subjected to audit procedures performed in conjunction with the audit of the Plan’s financial statements.  The supplemental schedule is the responsibility of the Plan’s management.  Our audit procedures included determining whether the supplemental schedule reconcile to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental schedule.  In forming our opinion on the supplemental schedule, we evaluated whether the supplemental schedule, including its form and content, is presented in conformity with the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974.  In our opinion, the schedule of assets (held at end of year) as of December 31, 2019 is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole.

/s/ BKD, LLP

We have served as the Plan’s auditor since 2015

Indianapolis, Indiana

May 21, 2020

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See accompanying notes to financial statements.

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See accompanying notes to financial statements.

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CONTINENTAL MATERIALS CORPORATION

EMPLOYEES PROFIT SHARING RETIREMENT PLAN

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$16,052 and $23,651, respectively.  In 2019, no forfeitures were used to pay administrative expenses and $2,694 of forfeited employer matching contributions was applied to offset employer contributions receivable at December 31, 2019.

Administrative Expenses:  Investment management, custodial, recordkeeping, and consulting expenses of the Plan are paid from the assets of the Plan. Legal and most audit expenses and the plan administrator’s salary are absorbed by the Employer.  Loan fees and managed account fees are paid out of the accounts of the individuals receiving loans or investing in managed accounts.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:  The accompanying financial statements have been prepared on the accrual basis of accounting.

Use of Estimates:  The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires Plan management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of Plan income and expenses during the reporting period.  Actual results could differ from those estimates.

Investment Valuation and Income Recognition:  The Plan values investments, except fully benefit-responsive investment contracts, at fair value (Note 4).  Investment transactions are reflected on a trade-date basis.  Net earnings on investments are allocated to participants on a daily basis.  Fully benefit-responsive investment contracts are valued at contract value.  Contract value represents contributions made under the contract, plus interest at the contract rate, less participant withdrawals and administrative expenses (Note 5).

Appreciation/Depreciation in Fair Value of Investments:  The Plan presents in the statement of changes in net assets available for benefits the net appreciation (depreciation) in the fair value of its investments, which consists of the realized gains or losses and the unrealized appreciation (depreciation) on those investments.  Realized gains or losses on sales of securities are based on average cost.

Payment of Benefits: Benefit payments to participants are recorded upon distribution.

Notes Receivable from Participants: Notes receivable from participants are reported at their unpaid principal balance, with no allowance for credit losses.  The notes are collateralized by the participants’ account balances.

NOTE 3 - INVESTMENT PROGRAM

Participants may choose to direct the investment of their contributions, the Employer contributions, and their account balance to various investment options, including mutual funds and a stable value fund.  Participants may change their investment elections at any time.

As of March 24, 2014, the CMC stock fund was frozen to new investments.  No additions can be made to the fund.

NOTE 4 - INVESTMENTS AND FAIR VALUE MEASUREMENT

Fair value is the price that would be received by the Plan for an asset or paid by the Plan to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date in the Plan’s principal or most advantageous market for the asset or liability.  Fair value measurements are determined by maximizing the use of observable inputs and minimizing the use of unobservable inputs.  The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurements), considers quoted prices for similar assets and gives the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs within the fair value hierarchy are defined as follows:

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Plan has the ability to access as of the measurement date.

Level 2:  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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Level 3:  Significant unobservable inputs that reflect the Plan’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

CMC has various processes and controls in place to ensure that fair value is properly reflected in the financial statements.

In some cases, a valuation technique used to measure fair value may include inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

The following descriptions of the valuation methods and assumptions used by the Plan to estimate the fair values of investments apply to investments held directly by the Plan.

Mutual funds and common stock are stated at the quoted market price on the last business day of the year as reflected on national securities exchanges (Level 1 inputs).

NOTE 5 - STABLE VALUE FUND

In December 2010, the Plan entered into a fully benefit-responsive investment contract with New York Life Insurance Company (NYLIC).  NYLIC maintains the contributions in its general account.  The Plan’s contract investment balance is credited with earnings based upon contractually determined interest rates, dividends (if any), and charged for plan withdrawals and administrative expenses.  NYLIC establishes an effective interest rate semiannually.  In no event will such effective annual interest rate minus the deductions for expenses, be less than the minimum interest rate as defined by the contract.

Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investments at contract value. There are no reserves against contract value for credit risk of the issuer or otherwise.

The Plan’s guaranteed interest contract specifies certain conditions under which distributions from the contract would be payable at amounts below contract value.  These conditions are defined in Section 1.5 (Payments to the contract holders) and Section 1.6 (Transfer to Other Funding Media) of the contract and includes events initiated by the Plan Sponsor including, but not limited to, total or partial plan termination, mergers, spinoffs, layoffs, early retirement incentive programs, sales or closing of all or part of the Plan Sponsor’s operations, or bankruptcy.

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The contract specifies the circumstances under which the issuer may terminate the contract with a written notice to the contract holder 30 days prior to the intended termination date.  Currently, management believes that the occurrence of an event that would cause the Plan to transact contract distributions at less than contract value is not probable.

The following represents contract value of the Plan’s fully benefit-responsive investment contracts:

The NYLIC Stable Value Fund is a guaranteed interest account and a fully benefit-responsive, general account group annuity contract.  It seeks to provide competitive yield and limited volatility with a guarantee of principal, accumulated interest and annuity purchase rates.  This account is backed by the general account of NYLIC.  Contributions made are invested in a broadly diversified fixed income portfolio within the general account.  The terms of the contract prohibit transfer or assignment of rights under the contract and provide for all distributions prior to contract termination at contract value, frequent resetting of contractual interest rates based upon market conditions, no liquidity restrictions and no defined maturities.

NOTE 6 - TERMINATION OF THE PLAN

While the Employer has not expressed any intent to terminate the Plan, it is free to do so at any time subject to the provisions of ERISA.  In the event such termination occurs, the participants would become fully vested in their accounts and the distribution of the Plan’s assets to participants or their beneficiaries would be made by the Trustee of the Plan.

On February 1, 2019 the Employer sold substantially all of the assets of one of its wholly-owned subsidiaries to another Company (“the buyer”). As part of the transaction, certain employees were terminated by the Employer and hired by the buyer. This resulted in a partial termination of the Plan since more than 20% of total plan participants were terminated. All affected employees became fully vested in their account balances as of February 1, 2019.

NOTE 7- FEDERAL INCOME TAXES

The Plan obtained its latest determination letter dated July 26, 2010, in which the Internal Revenue Service (“IRS”) stated that the Plan, as then designed, was in compliance with the applicable regulations of the Internal Revenue Code (“IRC”).  The Plan has been amended since receiving the determination letter; however, the Employer and the plan administrator believe that the Plan is currently designed and operated in compliance with the applicable requirements of the IRC and the Plan continues to be tax exempt.  Therefore, no provision for income taxes has been included in the Plan’s financial statements.

NOTE 8 - RISKS AND UNCERTAINTIES

The Plan provides for various investment options. These investments are exposed to various risks, such as market, liquidity, and credit risks.  Due to the level of risk associated with certain investments, it is at least reasonably possible that changes in the value of investments will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits.

NOTE 9 - PARTY-IN-INTEREST TRANSACTIONS

Parties-in-interest are defined under Department of Labor Regulations as any fiduciary of the Plan, any party rendering service to the Plan, the employer and certain others. CMC pays certain professional fees for the administration and audit of the Plan.

Effective September 1, 2015, John Hancock Trust Company LLC replaced New York Life Trust Company and assumed its duties and responsibilities.  NYLIC still manages the stable value fund, but they are no longer a party of interest.  Fees paid during 2019 were to investment advisors and other professional services of $30,508 and $73,209 to John Hancock Trust Company LLC, net of revenue sharing credits received of $73,104.

As of December 31, 2019 and 2018, the Plan held 43,447 and 47,071 shares of common stock of Continental Materials Corporation valued at $341,472 and $508,885 respectively.  Net depreciation on the common stock for the year ended December 31, 2019 was ($95,685).  As CMC is the Plan Sponsor, this investment constitutes a party-in-interest investment.  In addition, notes receivable from participants also reflect party-in-interest transactions.

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NOTE 10 - RECONCILIATION OF FINANCIAL STATEMENT TO FORM 5500

The net assets available for benefits per the financial statements are higher than the Form 5500 at December 31, 2019 and 2018 by $620,459 and $997,128 respectively.  The difference at December 31, 2019 and 2018 relates to contributions receivable and deemed distributions of participant loans.  The net decrease in net assets available per the financial statements is more than the net loss per the Form 5500 for the year ended December 31, 2019 by $376,669, which relates to the change in contributions receivable and deemed defaults from 2019 to 2018.

NOTE 11 — SUBSEQUENT EVENTS

There has been significant volatility in the investment markets both nationally and globally since December 31, 2019 resulting in an overall market decline which has resulted in a substantial decline in the value of Plan investment portfolio.

Effective January 1, 2020 the Plan was amended to provide for quarterly discretionary matching contributions beginning with the 2020 Plan Year, in an amount equal to a flat percentage of 2% of each eligible participant’s compensation for each calendar quarter, on behalf of participants who have made contributions to the Plan during the quarter, are employed by the Company or a participating employer in the Plan at the end of the quarter, retired during the quarter (at age 60 or older) or terminated due to death or disability.

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(See independent auditor’s report.)

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*              Indicates a permitted party-in-interest

#              Cost information is not required for participant-directed investments and, therefore, has not been included in this schedule.

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