SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

 

 

Title of each class		Name of each exchange on which registered
Common Stock - $.25 par value		American Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: NONE

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes  ý    No  o

 

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.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes  o        No  ý

 

The aggregate market value (based on June 28, 2003 closing price) of voting stock held by non-affiliates of registrant: Approximately $19,604,000.

 

Number of common shares outstanding at March 26, 2004: 1,709,927.

 

Incorporation by reference: Portions of registrant’s definitive proxy statement for the 2003 Annual meeting of stockholders to be held on May 26, 2004 into Part III of this Form 10-K.  (The definitive proxy statement is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year covered by this Form 10-K.)

 

 

PART I

 

Item 1.    BUSINESS

 

There have been no significant changes in the Company’s line of business during the past five years other than the acquisition of all of the stock of McKinney Door and Hardware, Inc. (MDHI), a refabricator and distributor of metal doors, wood doors and related hardware in Pueblo, Colorado on April 1, 2002, and all of the stock of Rocky Mountain Ready Mix Concrete, Inc. (RMRM), a ready-mix concrete producer in the metropolitan Denver, Colorado area, on December 31, 2000. Accordingly, results for 2002 include the activity of RMRM for the entire year and the activity of MDHI since April 1, 2002. Results for 2001 include the activity of RMRM for the entire year.

 

The Company operates primarily in two industry segments, the heating and air conditioning segment and the construction materials segment. The heating and air conditioning segment produces and sells gas-fired wall furnaces and console heaters, evaporative coolers and fan coils, which are manufactured by the Company’s wholly-owned subsidiaries, Phoenix Manufacturing, Inc. of Phoenix, Arizona and Williams Furnace Co. of Colton, California. The principal products of the construction materials segment are ready mix concrete, construction aggregates, building supplies and doors which are offered by the Company’s wholly-owned subsidiaries, Castle Concrete Company and Transit Mix Concrete Co., in Colorado Springs, Colorado and Transit Mix of Pueblo, Inc. and MDHI, in Pueblo, Colorado. Currently, the Company’s wholly-owned subsidiary, Rocky Mountain Ready Mix Concrete, Inc. of Denver, Colorado, only offers ready mix concrete.

 

In addition to the above operating segments, an “Other” classification is used to report a small real estate operation and the holding costs for certain mining interests that remain from the period the Company maintained significant interests in mining operations. The expenses of the corporate office, which provides treasury, insurance and tax services as well as strategic business planning and general management services, are not allocated to the segments. Expenses related to the Management Information Systems group are allocated to all locations, including the corporate office.

 

Financial information relating to industry segments appears in Note 11 on pages 27 and 28 of this Form 10-K. References to a “Note” are to the “Notes to Consolidated Financial Statements” included on pages 20 through 28 of this Annual Report on Form 10-K.

 

MARKETING, SALES AND SUPPORT

 

MARKETING

 

The heating and air conditioning segment markets its products throughout the United States through plumbing, heating and air conditioning wholesale distributors as well as directly to some major retail home-centers and other retail outlets. Fan coils are also sold to HVAC (Heating, Ventilation and Air Conditioning) installing contractors and equipment manufacturers for commercial applications. The Company contracts independent manufacturers’ representatives for all of its products while also employing and utilizing a staff of sales and sales support personnel. Sales in this segment are predominantly in the United States and are concentrated in the Western and Southwestern states. Sales of furnaces and console heaters usually increase in the months of August through January. Sales of evaporative coolers usually increase in the months of March through July. Sales of the fan coil product line are more evenly distributed throughout the year although the highest volume typically occurs during the late spring and summer.  In order to enhance sales of wall furnaces and evaporative coolers during the off season, extended payment terms typically are offered to customers.

 

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The construction materials segment markets its products primarily through its own direct sales personnel and, except for MDHI, confines its sales to the Front Range area in Colorado. Sales are primarily made to general and sub-contractors, government entities and individuals. Sales are affected by the general economic conditions and weather conditions in the areas serviced (as it relates to construction). Revenues usually decline in the winter months as the pace of construction slows. MDHI sells throughout the United States although sales are primarily within Colorado and adjacent states.

 

During 2003, no customer in either segment accounted for 10% or more of the total sales of the Company.

 

CUSTOMER SERVICE AND SUPPORT

 

The heating and air conditioning segment offers parts departments and help lines to assist contractors, distributors and end users in servicing the products. The Company does not perform installation services, nor are maintenance or service contracts offered. In addition, training and product information sessions for the furnace, cooler and fan coil product lines are offered at our plants and other sites for distributors, contractors, utility company employees and other customers. This segment does not derive any revenue from after-sales service and support other than from parts sales. The personnel in the construction materials segment routinely take a leadership role in formulation of the products to meet the specifications of the customers.

 

BACKLOG

 

The order backlog at January 3, 2004 and December 28, 2002 for the heating and air conditioning segment were as follows:

 

		January 3, 2004			December 28, 2002
Furnaces		$	180,000		$	75,000
Evaporative coolers		1,000,000			1,046,000
Fan coil		88,000			376,000
Total		$	1,268,000		$	1,497,000

 

The above backlogs are expected to be substantially filled during the first quarter of 2004.

 

At January 3, 2004, the construction materials segment had a backlog of approximately $6,642,000 ($5,327,000 at December 28, 2002) primarily relating to construction contracts awarded and expected to be filled during the first half of 2004.

 

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. However, as noted below in the discussion of operations in Item 7, the construction materials segment has experienced a decline in sales volume reflecting decreased construction along the Front Range of Colorado and the fan coil product line has experienced a decline in sales volume reflecting the nationwide slump in commercial construction.

 

RESEARCH AND DEVELOPMENT/PATENTS

 

In general, the Company relies upon, and intends to continue to rely upon, unpatented proprietary technology and information. However, research and development activities in the heating and air conditioning segment have resulted in a patent being issued to Phoenix Manufacturing, Inc. related to the Power Cleaning System (expiring January 2014) used in evaporative coolers and a patent issued to Williams Furnace Co. entitled “Wall Furnace With Side Vented Draft Hood” (expiring November 2011) which has increased the heat transference

 

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efficiency in our furnaces above that previously offered by the Company and its competitors. The amounts expended on research and development are not material and are expensed as incurred. The Company believes its interests in its patents, as well as its proprietary knowledge, are sufficient for its businesses as currently conducted.

 

MANUFACTURING

 

The Company conducts its manufacturing operations through a number of facilities as more completely described in Item 2, Properties, below.

 

Due to the seasonality of the businesses, furnaces and evaporative coolers build inventory during their off seasons in order to have adequate supplies to sell during the season. Although sales are made throughout the year, sales volume is generally higher from August through January for furnaces while sales volume of evaporative coolers is generally higher from March through July.

 

In general, raw materials required by our companies’ operations in both segments can be obtained from various sources in the quantities desired. The Company’s construction materials subsidiaries in Colorado Springs and Pueblo have historically purchased most of their cement requirements from a single supplier in order to obtain favorable volume rates. These companies have, on past occasion, experienced some difficulty in obtaining the required volume of cement from this single supplier; however, they were able to acquire sufficient quantities from non-traditional sources, which are expected to remain available in the future, to satisfy their needs. The Company has no long-term supply contracts and does not consider itself dependent on any individual supplier.

 

In connection with permits to mine properties in Colorado, the Company is obligated to reclaim the mined areas. Although the conditions vary by permit, in general, the reclamation requirements call for the stabilization of the mined area. In recent years, reclamation costs have had a more significant effect on the results of operations compared to prior years as the Company has engaged in enhanced reclamation projects that exceed the stated requirements. The augmented reclamation efforts are being performed, in part, for goodwill purposes.

 

COMPETITIVE CONDITIONS

 

Heating and Air Conditioning – The Company is one of three principal companies producing wall furnaces (excluding units sold to the recreational vehicle industry) and gas fired console heaters. The wall furnace and console heater markets are only a small component of the heating industry. The Company serves these market areas from a plant in Colton, California.  The sales force consists of in-house sales personnel and independent manufacturers’ representatives. The entire heating industry is dominated by manufacturers (most of which are substantially larger than the Company) selling diversified lines of heating and air conditioning units directed primarily toward central heating and cooling systems. All of the producers, including the Company, compete primarily on a basis of price, service and timeliness of delivery.

 

Fan coils are also produced at the Colton plant. The Company generally obtains contracts for larger jobs based upon a competitive bidding process. The contracts are typically awarded based upon the competitive factors noted below. International Environmental Corp., a subsidiary of LSB Industries, Inc., a manufacturer of a diversified line of commercial and industrial products, is the largest manufacturer and competitor in this market. There are also a number of other companies that produce fan coils. All of the producers compete primarily on the basis of price, ability to meet customers’ specific requirements and timeliness of delivery.

 

The Company manufactures evaporative air coolers at a plant in Phoenix, Arizona. The cooler market is dominated by Adobe Air. The other principal competitor is Champion/Essick. All producers of evaporative air coolers typically compete aggressively on the basis of price, product features and service.

 

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Construction Materials – The Company is one of five companies producing ready mix concrete in the Colorado Springs area, one of three companies producing ready mix concrete in the Pueblo area and one of fourteen companies producing ready mix concrete in the Denver area. Although we are the largest producer in the Colorado Springs and Pueblo markets served, the other competitors in these areas compete aggressively on the basis of price, service and product features. In Denver, two of the producers are significantly larger than RMRM. This market also experiences aggressive competition based on price and service.

 

The Company is one of five producers of aggregates in the Colorado Springs and Pueblo marketing areas. All producers compete aggressively on the basis of price, quality of material and service.

 

The Company’s sales of metal doors and door frames, rebar reinforcement and other building materials in the Colorado Springs and Pueblo metropolitan areas are subject to intense competition from two larger companies from Denver, two large companies in Colorado Springs and a number of small local competitors. However, the Company believes it has a slight competitive advantage in that many of our customers also purchase concrete, sand and aggregates from us whereas our competitors for these particular product lines do not offer concrete, sand or aggregates. In addition, the Company believes its Pueblo location has a slight competitive advantage with respect to the two Denver companies based upon delivery costs.

 

EMPLOYEES

 

The Company employed 717 people as of January 3, 2004. Employment varies throughout the year due to the seasonal nature of the businesses. A breakdown of the prior three years employment at year-end by segment was:

 

		2003		2002		2001
Heating and Air Conditioning		327		356		386
Construction Materials		377		399		387
Corporate Office		13		14		14
Total		717		769		787

 

The factory employees at the Colton, California plant are represented by the Carpenters Local 721 Union under a contract that expires in April 2005. The Company considers relations with its employees and with its union to be good.

 

Item 2.    PROPERTIES

 

The heating and air conditioning segment operates out of one owned (Colton, California) and one leased (Phoenix, Arizona) facility. Both manufacturing facilities utilized by this segment are, in the opinion of management, in good condition and sufficient for the Company’s current needs. Productive capacity exists at the locations such that the Company could exceed the highest volumes achieved in prior years or expected in the foreseeable future and maintain timely delivery.

 

The Company serves the Colorado ready-mix concrete market from ten owned batch plants. In addition, the Company currently operates aggregate processing facilities on three owned and three leased mining properties. These facilities are, in the opinion of management, in good condition and sufficient for the Company’s current needs. The Company also owns or leases other aggregate deposits not currently in production. In the opinion of management, the owned and leased properties contain permitted and minable reserves sufficient to service customers’

 

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and our own sand, rock and gravel requirements for the foreseeable future.

 

Product volumes at all of the facilities of the Company are subject to seasonal fluctuations, but in the opinion of management, the facilities are generally well utilized.

 

The corporate office operates out of leased office space in Chicago, Illinois.

 

Item 3.    LEGAL PROCEEDINGS

 

See Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 9 through 14 and Note 4 on page 25 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 2003.

 

PART II

 

Item 5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Continental Materials Corporation shares are traded on the American Stock Exchange under the symbol CUO. Market prices for the past two years are:

 

 

At March 19, 2004, the Company had approximately 349 shareholders of record (including non-objecting beneficial owners).

 

The Company has never paid nor, does it currently intend to declare, any dividends. The Company’s policy of reinvesting earnings from operations is reviewed periodically by the Board of Directors.

 

Under the Company’s Stock Option Plan (the Plan), officers and key employees may be granted options to purchase the Company’s common stock at option prices established by the Compensation Committee of the Board of Directors provided the option price is not less than the fair market value at the date of the grant. The following is a summary of equity compensation plan information as of January 3, 2004:

 

EQUITY COMPENSATION PLAN INFORMATION

 

		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights			Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan Category
		(a)		(b)			(c)
Equity compensation plans approved by security holders		73,400		$	6.56		227,600

 

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Item 6.         Selected Financial Data

(Amounts in thousands, except per share amounts)

 

		2003			2002			2001			2000			1999
SUMMARY OF OPERATIONS
Sales		$	120,165		$	128,301		$	130,211		$	116,002		$	123,886
Net income		$	2,349		$	3,275		$	6,438		$	5,335		$	6,902
PER SHARE DATA
Basic earnings per share		$	1.34		$	1.83		$	3.55