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  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**** ****FORM 10-Q**   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934****For the quarterly period ended September 30, 2006****OR**   o **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 1-5341****ELKCORP**(Exact name of Registrant as specified in its charter)   **DELAWARE** **75-1217920**   (State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)   **14911 QUORUM DRIVE, SUITE 600, DALLAS, TEXAS** **75254-1491**   (Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code **(972)851-0500**     Indicate by check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (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 þ.      No o.     Indicate by check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o      Accelerated filer þ      Non-accelerated filer o          Indicate by check mark whether the Registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o.      No þ.     As of close of business on November 1, 2006, the Registrant had outstanding 20,587,263shares of Common Stock, par value $1 per share.  
 

 
**ElkCorp and Subsidiaries****For the Quarter Ended September 30, 2006****Table of Contents**       Page**Part I. FINANCIAL INFORMATION (unaudited)**         Item 1. Financial Statements         Consolidated Balance Sheets as of September 30, 2006 and June 30, 2006  1 Consolidated Statements of Operations for the Three Months Ended September 30, 2006 and 2005  2 Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2006 and 2005  3 Consolidated Statements of Shareholders’ Equity for the Three Months Ended September 30, 2006 and 2005  4 Notes to Consolidated Financial Statements  5-13      Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations  14-17      Item 3. Quantitative and Qualitative Disclosures About Market Risk  18      Item 4. Controls and Procedures  18      **Part II. OTHER INFORMATION**         Item 1A. Risk Factors  19      Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  19      Item 6. Exhibits  19      **SIGNATURES**  20  Certification of CEO Pursuant to Section 302 Certification of CFO Pursuant to Section 302 Certification of CEO Pursuant to Section 906 Certification of CFO Pursuant to Section 906
 

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**PART I. FINANCIAL INFORMATION****Item 1. Financial Statements****ELKCORP AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS**(Unaudited, $ in thousands, except per share data)           September 30,  June 30,   2006  2006  Assets                 Current Assets        Cash and cash equivalents $9,343  $4,056 Short-term investments  19,930   32,960 Trade receivables, less allowance of $669 and $639  156,322   181,123 Inventories  145,228   107,929 Prepaid expenses and other  9,964   10,209 Deferred income taxes  9,421   9,317 Discontinued operations  2,844   2,675        Total current assets  353,052   348,269                 Property, Plant and Equipment, at cost  494,463   488,308 Less - Accumulated depreciation  (192,689)  (186,168)       Property, plant and equipment, net  301,774   302,140                 Goodwill  16,956   14,530 Intangible Assets  13,650   10,609 Other Assets  5,478   4,373 DiscontinuedOperations - Noncurrent  1,770   1,939          $692,680  $681,860                 Liabilities and Shareholders’ Equity                 Current Liabilities        Accounts payable $63,038  $71,585 Accrued liabilities  39,027   34,230 Current maturities on long-term debt  25,967   1,088 Discontinued operations  560   560        Total current liabilities  128,592   107,463                 Long-Term Debt, net of current maturities  176,664   199,689                 Deferred Income Taxes  51,647   52,282                 Commitments and Contingencies                 Shareholders’ Equity        Common stock ($1 par, 20,576,551 and 20,503,855 sharesissued)  20,577   20,504 Paid-in capital  79,768   75,724 Accumulated other comprehensive income  —   (64)Retained earnings  236,084   227,713           336,429   323,877 Less - Treasury stock (22,462 and 43,964 shares, at cost)  (652)  (1,451)       Total shareholders’ equity  335,777   322,426          $692,680  $681,860        See accompanying notes to consolidated financial statements
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**ELKCORP AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF OPERATIONS**(Unaudited, $ in thousandsexcept per share data)           Three Months Ended   September 30,   2006  2005 Sales $218,108  $215,857 Cost of goods sold  177,209   176,129                 Gross profit  40,899   39,728 Selling, general and administrative  22,817   20,106                 Operating income  18,082   19,622                 Interest expense and other, net  3,312   2,857                 Income before income taxes  14,770   16,765          Provision for income taxes  5,370   6,238                 Net income $9,400  $10,527                 Net income per share – basic $.46  $.52                 Net income per share – diluted $.46  $.51                 Dividends per common share $.05  $.05                 Average common shares outstanding (000’s)        Basic  20,402   20,185        Diluted  20,495   20,576        See accompanying notes to consolidated financial statements
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**ELKCORP AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited, $ in thousands)           Three Months Ended   September 30,   2006  2005 Cash Flows From Operating Activities                 Net income $9,400  $10,527 Adjustments to reconcile net income to net cashprovided by operating activities:                 Depreciation and amortization  6,779   5,900 Deferred income taxes  (739)  (388)Stock-based compensation  3,302   1,936 Changes in assets and liabilities, net of acquisition:        Trade receivables  24,801   5,883 Inventories  (36,978)  2,861 Prepaid expenses and other  245   (286)Accounts payable and accrued liabilities  (3,022)  (7,390)Changes in assets and liabilitiesof discontinued operations  —   54        Net cash provided by operating activities  3,788   19,097                 Cash Flows From Investing Activities                 Additions to property, plant and equipment  (6,155)  (3,941)Purchases of short-term investments  (80,225)  (114,230)Sales and redemptions of short-term investments  93,255   128,503 Acquisitions, net of cash acquired  (6,000)  (24,285)Other, net  312   (895)       Net cash provided by (used for) investing activities  1,187   (14,848)                Cash Flows From Financing Activities                 Payments on long-term debt  (273)  (3,600)Dividends paid on common stock  (1,029)  (1,020)Purchases of common stock  (434)  (1,431)Exercises of stock options  1,858   2,475 Excess tax benefits of stock option exercises  190   —        Net cash provided by (used for) financing activities  312   (3,576)                Net Increase in Cash and Cash Equivalents  5,287   673          Cash and Cash Equivalents at Beginning of Year  4,056   9,261                 Cash and Cash Equivalents at End of Period $9,343  $9,934                 Supplemental Cash Flows                 Interest paid $1,097  $771 Income taxes paid $2,096  $57 See accompanying notes to consolidated financial statements.
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**ELKCORP AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**(Unaudited, $ in thousands)                                   Accumulated                      Other          Total   Common  Paid-in  Comprehensive  Retained  Treasury  Shareholders’   Stock  Capital  Income  Earnings  Stock  Equity Balance, June 30, 2005 $20,298  $64,792  $—  $186,388  $(668) $270,810 Net income  —   —   —   10,527   —   10,527 Exercises of stock options  97   992   —   —   1,386   2,475 Stock option vesting  —   1,076   —   —   —   1,076 Restricted stock vesting  —   334   —   —   —   334 Performance stockamortization  —   526   —   —   —   526 Purchases of treasury stock  —   —   —   —   (1,431)  (1,431)Dividends  —   —   —   (1,020)  —   (1,020)                   Balance, September 30, 2005 $20,395  $67,720  $—  $195,895  $(713) $283,297                                                       Accumulated                      Other          Total   Common  Paid-in  Comprehensive  Retained  Treasury  Shareholders’   Stock  Capital  Income  Earnings  Stock  Equity Balance, June 30, 2006 $20,504  $75,724  $(64) $227,713  $(1,451) $322,426 Net income  —   —   —   9,400   —   9,400 Derivative transactions,net of tax  —   —   64   —   —   64 Exercises of stock options  73   988   —   —   797   1,858 Stock option vesting  —   860   —   —   —   860 Excess tax benefit ofstock option exercises  —   190   —   —   —   190 Restricted stock grants  —   (436)  —   —   436   — Restricted stock vesting  —   507   —   —   —   507 Performance stockamortization  —   1,935   —   —   —   1,935 Purchases of treasury stock  —   —   —   —   (434)  (434)Dividends  —   —   —   (1,029)  —   (1,029)                   Balance, September 30, 2006 $20,577  $79,768  $—  $ 236,084  $(652) $335,777                    See accompanying notes to consolidated financial statements.
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**ELKCORP AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**(Unaudited)**Note 1 — General**     The attached consolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information and footnotedisclosures normally included in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have been condensed or omitted. Thecompany believes that the disclosures included herein are adequate to make the informationpresented not misleading. These consolidated financial statements should be read in conjunctionwith the consolidated financial statements and related notes included in the company’s AnnualReport on Form 10-K for the fiscal year ended June 30, 2006. The unaudited financial informationcontained herein has been prepared in conformity with accounting principles generally accepted inthe United States of America on a consistent basis and does reflect all adjustments (consisting ofnormal recurring accruals) which are, in the opinion of management, necessary for a fairpresentation of the results of operations for the three-month periods ended September 30, 2006 and2005. Because of seasonal, weather-related conditions in some of the company’s market areas andcertain other factors, sales can vary at times, and results of any one quarter or other interimreporting period should not necessarily be considered as indicative of results for a full fiscalyear.**Note 2— Company Segments**     The Premium Roofing Products segment manufactures premium architectural roofing shingles andcertain accessory products. The Composite Building Products segment manufactures composite woodproducts for decking and railing. The Specialty Fabric Technologies segment is a marketingdivision established to create brand awareness and promote increased external sales of Elk’snonwoven specialty fabric products and fire barrier technologies. Fire barrier technologiesfeature fire retardant coatings designed for use in mattresses, bed clothes and upholsteredfurniture. The Surface Finishes segment includes hard chrome and other finishes designed to extendthe life of steel machinery components operating in abrasive environments. Corporate and Otherrepresents corporate office expenses and other expense items not allocated to the operatingsegments. Financial information by company segment is summarized as follows:           (In thousands)   Three Months Ended   September 30,   2006  2005 Sales to External Customers        Premium Roofing Products $198,240  $194,717 Composite Building Products  5,408   5,080 Specialty Fabric Technologies  12,185   13,744 Surface Finishes  2,275   2,316          $218,108  $215,857                 Operating Profit (Loss)        Premium Roofing Products $25,174  $27,559 Composite Building Products  (2,234)  (4,120)Specialty Fabric Technologies  1,688   1,510 Surface Finishes  505   273 Corporate and Other  (7,051)  (5,600)          18,082   19,622 Interest expense and other, net  (3,312)  (2,857)       Income before income taxes $14,770  $16,765        **Note 3— Cash, Cash Equivalents and Short-Term Investments**     Cash equivalents represent money market funds subject to daily redemption. Short-terminvestments consist of Auction Rate Securities (ARS) and Variable Rate Demand Notes (VRDN) andare carried at cost or par value, which approximates the fair market value. The company’s ARSand VRDN investments are tax-exempt instruments of high credit quality. The primary objectivesof both types of investments are safety, preservation of invested funds and liquidity sufficientto meet cash flow requirements. Both ARS and VRDN securities have variable rates tied toshort-term interest rates. Interest rates on ARS securities reset through a modified Dutchauction process at predetermined short-term intervals, either every 7, 28, or 35 days. Interestrates on VRDN securities reset weekly and can be tendered for sale upon notice (of generally nolonger than seven days) to the remarketing agent in the
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secondary market to other investors. Although both ARS and VRDN securities are issued and ratedas long-term securities, they are priced and traded as short-term instruments. The companyclassifies these short-term investments as available for sale in accordance with SFAS No. 115,“Accounting for Certain Instruments in Debt and Equity Securities.”     The company reflects disbursements as trade accounts payable until such time as paymentsare presented to the bank for payment. At September 30, 2006 and June 30, 2006, disbursementstotaling approximately $23,000,000 and $36,000,000, respectively, had not been presented forpayment to the bank.     **Note4 — Earnings Per Share**     Basic earnings per share is computed based on the average number of common sharesoutstanding. Diluted earnings per share includes outstanding stock options and unvestedrestricted stock. Performance stock awards have been excluded from the calculation of dilutedearnings per share, as the conditions necessary for their issuance have not been satisfied as ofthe end of the reporting period. The following table sets forth the computation of basic anddiluted earnings per share:           (In thousands, except per share data )   Three Months Ended   September 30,   2006  2005 Net income $9,400  $10,527                 Denominator for basic earnings per share – weightedaverage shares outstanding  20,402   20,185          Effect of dilutive securities:        Unvested restricted stock and outstanding stock options  93   391                 Denominator for diluted earnings per share – adjustedweighted average shares and assumed issuance of sharespurchased under stock option plans and vesting ofrestricted stock using the treasury stock method  20,495   20,576                 Basic earnings per share $.46  $.52                 Diluted earnings per share $.46  $.51                 Stock options excluded from computation of dilutedearnings per share due to anti-dilutive effect  597   —                 Performance stock excluded from computation of dilutedearnings per share due to conditions for issuance havingnot been satisfied  409   262        
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**Note 5— Inventories**     Inventories consist of the following:           (In thousands )   September 30,  June 30,   2006  2006 Raw materials $21,264  $19,426 Work-in-process  221   206 Finished goods  123,743   88,297          $145,228  $107,929        **Note 6— Long-Term Debt**     Long-term debt is summarized as follows:           (In thousands)   September 30,  June 30,   2006  2006 Senior Notes $195,000  $195,000 Revolving Credit Facility  —   — Other debt  6,520   6,793 Fair value of interest rate swaps  1,111   (1,016)          202,631   200,777 Less: Current maturities  (25,967)  (1,088)         $176,664  $199,689             The company has issued Senior Notes (Notes) summarized as follows (in thousands):     Principal    Amount Maturity Interest Rate$  25,000 July 2007 4.69%$  60,000 June 2009 6.99%$  60,000 June 2012 7.49%$  50,000 November 2014 6.28%     $ 195,000               In June 2002, the company entered into an interest rate swap to effectively convert theinterest rate from fixed to floating on $60,000,000 of Notes through June 2012. For this fairvalue hedge, both the fair value of the derivative and the underlying hedged item are reported inthe balance sheet. At September 30, 2006, the fair value of the derivative was $1,399,000 and thisamount was included in other assets and as an increase in the carrying value of long-term debt.Changes in the fair value of the derivative and the underlying hedged item offset and are recordedeach period in other income or expense, as applicable. In July 2004, the company entered into asecond interest rate swap to effectively convert the interest rate from fixed to floating on$25,000,000 of Notes through July 2007. This interest rate swap is also a fair value hedge withthe same accounting and reporting as the aforementioned interest rate swap. At September 30, 2006,the fair value of the derivative was a liability of $288,000 and is recorded in accrued liabilitiesand as a decrease in the carrying value of long-term debt.     At September 30, 2006, the company had $125,000,000 of primary credit available under aRevolving Credit Facility (Facility) expiring November 30, 2008, including up to a maximum of$10,000,000 in letters of credit. At September 30, 2006, there were no borrowings outstanding onthe Facility and $3,852,000 of letters of credit were outstanding.     Both the Notes and the Facility contain financial covenants which require that the companymaintain a specified minimum consolidated net worth, and a maximum debt to capitalization ratio,based on defined terms. The Facility also contains a minimum fixed charge coverage ratio and theNotes contain a minimum interest coverage ratio, also based on defined terms. Dividend paymentsand stock repurchases are also limited by the Facility to certain specified levels. At September30, 2006, the company was in compliance with all financial covenants.
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     Other debt includes various mortgage debt and notes payable assumed in connection withacquisitions. The majority of these obligations, which include both fixed rate and variable rateinstruments, are secured by liens on the assets acquired, and are due at various dates through June2020.**Note7 — Comprehensive Income**     Total comprehensive income for the three-month periods ended September 30, 2006 andSeptember 30, 2005 were as follows:           (In thousands)   Three Months Ended   September 30,   2006  2005 Net income $9,400  $10,527 Derivative transactions, net of tax  64   —        Total comprehensive income $9,464  $10,527             At September 30, 2006, there were no derivative transactions in effect that will cause netincome to vary from total comprehensive income in future periods.**Note 8— Stock-Based Compensation**     The Compensation Committee of the Board of Directors has a current practice of awardingElkCorp officers 75% of a long-term incentive compensation award in the form of performance stockawards and 25% in the form of stock options. Other key employees receive their long-term incentivecompensation in the form of awards of performance stock and stock loan grants. Stock-basedcompensation is granted to officers, directors and certain key employees in accordance with theprovisions of the shareholder approved 2004 Amended and Restated ElkCorp Equity IncentiveCompensation Plan (Equity Incentive Compensation Plan). This plan provides for grants of stockoptions, performance stock awards and restricted stock.StockOptions —     The company’s Equity Incentive Compensation Plan provides for the granting of incentive andnonqualified stock options to directors, officers and key employees of the company for purchase ofthe company’s common stock. Stock options are generally granted for a ten-year term. Optionsgranted to officers and key employees generally vest ratably over a three-year period but vestearlier upon death, disability, retirement or a change in control of the company. Options grantedto nonemployee directors fully vest at grant date. Options granted prior to July 1, 2005 toemployees who have reached retirement age are amortized over the applicable vesting period untilsuch time that they announce their intention to retire. At that time, remaining unrecognizedcompensation is recorded as compensation expense during the remainder of their employment.Beginning in fiscal 2006, awards to employees who have reached retirement age are recorded ascompensation expense when the awards are granted.     The company is currently using the Black-Scholes option pricing model to determine the fairvalue of all option grants. The only option grants issued in the three-month periods endedSeptember 30, 2006 and 2005 were made on July 1 of each fiscal year, and the followingweighted-average assumptions were used:           Three Months Ended  September 30,  2006 2005Dividend yield:  0.60%  0.85%Risk-free interest rate:  5.07%  4.07%Expected market price volatility:  .42   .41 Expected life of options: 8 years 8 yearsFair value of grants: $14.39  $13.49      For the three-month periods ended September 30, 2006 and 2005, the company recorded $860,000and $1,076,000, respectively, for stock-based compensation expense related to stock option grants.These amounts are recorded in selling, general and administrative expense. The company issuestreasury shares, if available, to satisfy stock option exercises. If treasury shares areunavailable, new shares are issued. At September 30, 2006, there is $1,926,000 of totalunrecognized compensation cost related to unvested stock options remaining to be recognized. Ofthis total, $1,229,000 is expected to be recognized in the remainder of fiscal 2007 and $697,000 isexpected to be
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recognized in subsequent years through fiscal 2009. For the three-month period ended September 30,2006, $190,000 of excess tax benefits relating to stock option exercises were recorded. There wereno excess tax benefits from the exercise of options recognized in the three-month period endedSeptember 30, 2005.PerformanceStock Awards —     In December 2004, July 2005 and July 2006, the company entered into Performance Stock Awardagreements (PSA Agreements) granting performance stock awards (PSAs) to certain of the company’sofficers and other key employees under the Equity Incentive Compensation Plan. The PSAs consist ofa contingent right to receive whole shares of the company’s common stock if the company meetsspecified performance criteria over a three-year performance period. The performance criteria for70% of the total PSA is based on the company’s return on equity (ROE) measured against all New YorkStock Exchange (NYSE) listed companies, and 30% of the total PSA is based on the company’s totalshareholder return (TSR), or stock appreciation plus dividends, measured against all NYSE listedcompanies.     Following are the company’s current estimates as to the probable number of shares to be issuedat the end of the indicated performance period, together with the maximum potential number ofshares for each performance period.     Performance Period Probable Shares Maximum SharesThree-Year Period Ending To Be Issued To Be IssuedJune 30, 2007 157,152 205,305June 30, 2008 128,266 183,255June 30, 2009 124,053 193,140     All PSAs are accounted for at fair value in accordance with the provisions of SFAS No. 123(R).During the three-month periods ended September 30, 2006 and 2005, $1,935,000 and $526,000 wascharged to compensation expense, respectively, for PSAs, based on the probable number of sharesthat will be issued at the end of the applicable performance periods. At September 30, 2006, thereis $3,588,000 of total unrecognized compensation cost related to performance stock awards remainingto be recognized based on the currently estimated probable number of shares to be issued. Of thistotal, $2,146,000 is expected to be recognized in the remainder of fiscal 2007 and $1,442,000 isexpected to be recognized in subsequent years through fiscal 2009. Compensation expenseattributable to performance stock awards is classified as selling, general and administrativeexpense.RestrictedStock —     The Equity Incentive Compensation Plan also provides for grants of restricted stock todirectors and employees of the company. Grantees generally have all rights of a shareholder exceptthat unvested shares are held in escrow. Restricted shares either vest 33 1/3% per year over athree-year restriction period or 20% per year over a five-year restriction period. In thethree-month period ended September 30, 2006, 13,680 restricted shares were granted at the marketprice of $26.90 per share. Restricted stock issued to directors vests in full three years aftergrant date. In the three-month periods ended September 30, 2006 and 2005, compensation expense of$507,000 and $334,000, respectively, was recognized relating to restricted stock awards. AtSeptember 30, 2006, there is $2,171,000 of total unrecognized compensation cost related to unvestedrestricted stock remaining to be recognized. Of this total $1,077,000 is expected to be recognizedin the remainder of fiscal 2007 and $1,094,000 is expected to be recognized in subsequent yearsthrough fiscal 2011. Compensation expense attributable to restricted shares is classified asselling, general and administrative expense.Stock/LoanPlan —     Under the company’s Stock/Loan Plan, certain employees are granted loans based on a percentageof their salaries, the performance of their operating units, and also as long-term incentivecompensation awards, for the purpose of purchasing the company’s common stock. Under theStock/Loan Plan, a ratable portion of the loans, which are unsecured, and any accrued interest areforgiven and recognized as compensation expense over five years of continuing service with thecompany. If employment is terminated for any reason except death, disability or retirement, thebalance of the loan becomes due and payable. Loans outstanding at September 30, 2006, and June 30,2006, totaling $3,999,000 and $4,302,000, respectively, are included in other assets. Incompliance with certain provisions of the Sarbanes-Oxley Act of 2002, no loans have been granted toexecutive officers of ElkCorp since the passage of this law.
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**Note 9— Product Warranties**     The company provides its customers with limited warranties on certain products. Limitedwarranties relating to products sold by the Premium Roofing Products segment generally range from30 to 50 years and the warranties relating to Composite Building Products are generally for 20years. Warranties relating to Specialty Fabric Technologies and Surface Finishes are notsignificant to their operations. Warranty reserves are established based on known or probableclaims, together with historical experience factors. The company periodically assesses theadequacy of its recorded warranty liability and adjusts the amount as necessary. Changes in thecompany’s warranty liability during the first three months of fiscal 2007 were as follows:       (In thousands)   Three Months Ended   September 30,   2006 Balance, at beginning of year $6,129 Warranties of acquired business  — Accrued for new warranties  656 Changes in estimates for pre-existing warranties  679 Warranty settlements during the period  (1,246)    Balance, at end of period $6,218     **Note10 — Environmental Risk**     ElkCorp and its subsidiaries are subject to federal, state and local requirements regulatingthe discharge of materials into the environment, the handling and disposal of solid and hazardouswastes, and protection of the public health and the environment generally (collectively,Environmental Laws). Certain facilities of the company’s subsidiaries ship waste products tovarious waste management facilities for treatment or disposal. Governmental authorities have thepower to require compliance with these Environmental Laws, and violators may be subject to civil orcriminal penalties, injunctions or both. Third parties may also have the right to sue for damagesand/or to enforce compliance and to require remediation of contamination. If there are releases orif these facilities do not operate in accordance with Environmental Laws, or their owners oroperators become financially unstable or insolvent, the company or its subsidiaries are subject topotential liability.     The company and its subsidiaries are also subject to Environmental Laws that impose liabilityfor the costs of cleaning up contamination resulting from past spills, disposal, and other releasesof hazardous substances. In particular, an entity may be subject to liability under the FederalComprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) andsimilar state laws that impose liability — without a showing of fault, negligence, or regulatoryviolations — for the generation, transportation or disposal of hazardous substances that havecaused, or may cause, environmental contamination. In addition, an entity could be liable forcleanup of property it owns or operates even if it did not contribute to the contamination of suchproperty. From time to time, the company or its subsidiaries may incur such remediation andrelated costs at the company-owned plants and certain offsite locations maintained by otherparties.     Chromium Corporation (Chromium) has engaged in limited remediation activities at the site ofits former plating operation in Lufkin, Texas. Soil sampling results from a pre-closingenvironmental evaluation of the site indicated the necessity of localized cleanup. Chromium hasentered the property into the Texas Voluntary Cleanup Program (VCP). Under this program, the TexasCommission on Environmental Quality (TCEQ) reviews the voluntary clean-up plan the applicantsubmits, and, when the work is complete, issues a certificate of completion, evidencing cleanup tolevels protective of human health and the environment and releasing prospective purchasers andlenders from liability to the state. Properties entered into the VCP are protected from TCEQenforcement actions.     In fiscal 2004, Chromium completed a supplemental groundwater and soil assessment at theLufkin facility. The assessment further defined the horizontal and vertical extent of metals insoils, assessed the horizontal extent of metals in groundwater, and estimated the direction ofgroundwater movement. Chromium submitted its Affected Property Assessment Report (APAR) to theTCEQ. In June 2004, the TCEQ issued a letter accepting Chromium’s APAR in substantially allrespects, indicating that no further assessment of the extent of contamination is necessary. InMay 2005, Chromium proposed a Remedial Action Plan (RAP) to the TCEQ in which it proposedactivities and engineering controls, including capping of affected soils and a pump-and-treatsystem for affected groundwater, to cleanup the site under the VCP to a site specific risk-basedcleanup standard. The TCEQ approved the RAP, with some revisions, in
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October 2005. Chromium completed the soil capping portion of the RAP and submitted a ResponseAction Completion Report for the soil remediation to the TCEQ in August 2006 and is awaiting theagency’s approval.     Chromium applied to the City of Lufkin for a permit to discharge its post-treatment effluentfrom the groundwater pump-and-treat system into the City’s sewer system. The availability of thisdisposal method would decrease the on-going costs of treating the groundwater as proposed under theRAP. In June 2006 the City wrote Chromium a letter explaining that the City has applied to theTCEQ for a modification of its discharge permit which would allow the City to reallocate industrialwaste loads. The City stated that if the TCEQ approves this permit modification it will be able toissue Chromium a discharge permit. The City believes that it will receive the desired permitmodifications and, therefore, Chromium is optimistic that it will receive the desired dischargepermit but can give no assurances that it will.     At September 30, 2006, the company has an accrued liability in the amount of approximately$650,000, which the company currently believes is adequate for costs relating to the matter.However, the cost of remediation could vary significantly depending on Chromium’s success inobtaining the requested City permit, and the success of the designed pump-and-treat system inattaining the groundwater response objective for Chromium established in the final RAP.     Other than the possible costs associated with the previously described Chromium matter, thecompany does not believe its subsidiaries will be required to expend amounts which will have amaterial adverse effect on the companies consolidated results of operations, financial position orliquidity. The company establishes and maintains reserves for such known or probable remediationactivities in accordance with SFAS No. 5 and AICPA Statement of Position 96-1. Such environmentallaws are frequently changed and could result in significantly increased cost of compliance. Thecompany anticipates that its subsidiaries will incur costs to comply with Environmental Laws,including remediating any existing non-compliance with such laws and achieving compliance withanticipated future standards for air emissions and reduction of waste streams. Such subsidiariesexpend funds to minimize the discharge of materials into the environment and to comply withgovernmental regulations relating to the protection of the environment. Further, certain of thecompany’s manufacturing operations utilize hazardous materials in their production processes. As aresult, the company incurs costs for recycling or disposal of such materials and may incur costsfor remediation activities at its facilities and off-site from time to time.**Note 11 — Acquisitions**     On September 14, 2006, a new subsidiary of the company acquired substantially all of theassets of a privately held Texas limited partnership doing business as SlateDirectSM.The subsidiary of ElkCorp will sell a slate and interlayment roofing system under the trade nameTruSlate® (TruSlate). The acquisition broadens ElkCorp’s current roofing product line. Thepurchase price of the acquisition was $6,000,000, plus contingent future supplemental paymentsbased on sales of the TruSlate roofing system for a period of six years, with supplemental paymentsnot to exceed $6,000,000. On a preliminary basis, the purchase price was allocated to $321,000 fortangible assets, $3,300,000 for identifiable intangible assets and $2,379,000 for goodwill. Theallocation of the purchase price to assets acquired is preliminary and is subject to furtheranalysis. Any modification of purchase price will result in an increase or decrease in theallocation to goodwill. Any supplemental payments made will also increase the amount of goodwill.The results of TruSlate’s operations were included in the results of operations prospectively fromthe date of acquisition. Pro forma financial information was not presented, as the effects werenot material to ElkCorp’s historical financial statements.     On August 25, 2005, Elk Premium Building Products, Inc., acquired the outstanding shares ofRGM Products, Inc. (RGM), a privately-held manufacturer of high-profile hip and ridge and otherroofing related products and certain other assets related to RGM’s business. The acquisitionenhanced the company’s current roofing accessory business and the company believes it now offersthe broadest ridge product line in its industry. The purchase price of the acquisition was$24,285,000, together with the assumption of certain related indebtedness and costs of acquisition.In connection with the acquisition, the company incurred an additional $1,940,000 of expendituresrelating to, among other things, audit and severance costs and legal expenses. The purchase pricewas allocated to $26,286,000 for net tangible assets, $10,700,000 for identifiable intangibleassets and $12,879,000 for goodwill, taking into account indebtedness and current liabilitiesassumed. The results of RGM’s operations were included in the results of operations prospectivelyfrom the date of acquisition. Pro forma financial information was not presented, as the effectswere not material to ElkCorp’s historical financial statements.
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**Note12 — Goodwill and Intangible Assets**     The change in the carrying amount of goodwill for the three-month period ended September 30,2006 was (in thousands):     Balance, June 30, 2006 $14,530 Goodwill acquired  2,426     Balance, September 30, 2006 $16,956          The changes in intangible assets for the three months ended September 30, 2006 were (inthousands):                                   Intangible Assets, Gross  Accumulated Amortization  Net Book Value   June 30, 2006  Additions  Sept. 30, 2006  June 30, 2006  Expense  Sept. 30, 2006  June 30, 2006  Sept. 30, 2006          Patents $6,215  $3,300  $9,515  $395  $106  $501  $5,820  $9,014          Customerrelationships  3,700   —   3,700   308   93   401   3,392   3,299          Trademarks  600   —   600   36   10   46   564   554          Noncompete agreement  1,000   —   1,000   167   50   217   833   783                            $11,515  $3,300  $14,815  $906  $259  $1,165  $10,609  $13,650                          Weighed average useful lives are as follows:Patents— 16 years