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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) OF THE SECURITIES EXCHANGE ACT OF 1934****For the quarterly period ended March 31, 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.     Asof close of business on May 1, 2006, the Registrant hadoutstanding 20,478,765shares of Common Stock, par value $1 per share.  
 

 
**ElkCorp and Subsidiaries****For the Quarter Ended March 31, 2006****Table of Contents**       Page **Part I. FINANCIAL INFORMATION (unaudited)**         Item 1. Financial Statements         Consolidated Balance Sheets as of March 31, 2006 and June 30, 2005  1 Consolidated Statements of Operations for the Three Months and Nine Months Ended March 31, 2006 and 2005  2 Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2006 and 2005  3 Consolidated Statements of Shareholders’ Equity for the Nine Months Ended March 31, 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  14-21      Item 3. Quantitative and Qualitative Disclosures About Market Risk  22      Item 4. Controls and Procedures  22      **Part II. OTHER INFORMATION**         Item 1A. Risk Factors  23      Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  23      Item 6. Exhibits  23      **SIGNATURES**  24  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)           March 31,  June 30, Assets 2006  2005  Current Assets        Cash and cash equivalents $5,901  $9,261 Short-term investments  38,600   69,160 Trade receivables, less allowance of $598 and $695  170,045   148,928 Inventories  96,121   71,467 Prepaid expenses and other  10,725   8,223 Deferred income taxes  7,971   7,849 Discontinued operations  2,426   1,193        Total current assets  331,789   316,081                 Property, Plant and Equipment, at cost  474,082   440,989 Less — Accumulated depreciation  (179,694)  (156,901)       Property, plant and equipment, net  294,388   284,088                 Goodwill and Intangible Assets  23,369   2,186 Other Assets  5,040   7,496 Discontinued Operations — Noncurrent  2,188   3,718          $656,774  $613,569                 Liabilities and Shareholders’ Equity                 Current Liabilities        Accounts payable $59,469  $56,742 Accrued liabilities  33,930   31,171 Current maturities on long-term debt  977   381 Discontinued operations  865   937        Total current liabilities  95,241   89,231                 Long-Term Debt  201,218   200,146                 Deferred Income Taxes  53,004   53,382                 Commitments and Contingencies                 Shareholders’ Equity        Common stock ($1 par, 20,503,855 and 20,297,905 sharesissued)  20,504   20,298 Paid-in capital  82,060   70,412 Unearned compensation – stock-based compensation  (9,290)  (5,620)Retained earnings  215,011   186,388           308,285   271,478 Less — Treasury stock (27,564 and 22,761 shares, at cost)  (974)  (668)       Total shareholders’ equity  307,311   270,810          $656,774  $613,569        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  Nine Months Ended   March 31,  March 31,   2006  2005  2006  2005 Sales $243,194  $201,871  $688,000  $558,982                               Cost and Expenses                Cost of sales  200,917   157,939   563,858   444,258 Selling, general and administrative  23,476   19,004   65,103   50,065                               Operating Income from Continuing Operations  18,801   24,928   59,039   64,659                               Interest Expense and Other, Net  2,700   2,614   8,525   7,090                               Income From Continuing Operations BeforeIncome Taxes  16,101   22,314   50,514   57,569 Provision for income taxes  5,955   8,191   18,760   21,588              Income From Continuing Operations  10,146   14,123   31,754   35,981                  Income (Loss) From Discontinued Operations,Net of Income Taxes  —   1,174   (66)  451                               Net Income $10,146  $15,297  $31,688  $36,432                               Income (Loss) Per Share — Basic                Continuing operations $.50  $.71  $1.57  $1.83 Discontinued operations  —   .06   (.01)  .02              Net income $.50  $.77  $1.56  $1.85                               Income (Loss) Per Share — Diluted                Continuing operations $.49  $.69  $1.54  $1.78 Discontinued operations  —   .06   —   .02              Net income $.49  $.75  $1.54  $1.80                               Dividends Per Common Share $.05  $.05  $.15  $.15                               Average Common Shares Outstanding (000’s)                Basic  20,308   19,784   20,254   19,718              Diluted  20,697   20,482   20,627   20,184              See accompanying notes to consolidated financial statements
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**ELKCORP AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS**(Unaudited, $ in thousands)           Nine Months Ended   March 31,   2006  2005 Cash Flows From Operating Activities                 Net income $31,688  $36,432 Adjustments to reconcile net income to net cashprovided by operating activities:                 Depreciation and amortization  19,653   17,424 Deferred income taxes  (672)  7,934 Stock-based compensation  6,057   2,272 Changes in assets and liabilities, net of acquisition:        Trade receivables  (15,409)  (43,892)Inventories  (17,745)  (8,526)Prepaid expenses and other  (2,173)  (1,420)Accounts payable and accrued liabilities  (7,831)  18,577 Changes in assets and liabilitiesof discontinued operations  225   337        Net cash provided by operating activities  13,793   29,138                 Cash Flows From Investing Activities                 Additions to property, plant and equipment  (14,997)  (32,141)Purchases of short-term investments  (268,480)  (127,435)Sales and redemptions of short-term investments  299,040   99,935 Proceeds from sale of assets of discontinued operations  —   3,093 Acquisitions, net of cash acquired  (24,285)  (471)Other, net  (2,380)  (1,496)                Net cash used for investing activities  (11,102)  (58,515)                Cash Flows From Financing Activities                 Proceeds from sale of Senior Notes  —   50,000 Repayments on Revolving Credit Facility, net  —   (10,300)Payments on other borrowings  (4,807)  — Dividends paid on common stock  (3,065)  (3,007)Purchases of common stock  (5,681)  (763)Exercises of stock options  6,782   4,831 Excess tax benefits of stock option exercises  720   —        Net cash provided by (used for) financing activities  (6,051)  40,761                 Net Increase (Decrease) in Cash and Cash Equivalents  (3,360)  11,384          Cash and Cash Equivalents at Beginning of Year  9,261   273                 Cash and Cash Equivalents at End of Period $5,901  $11,657        See accompanying notes to consolidated financial statements.
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**ELKCORP AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**(Unaudited, $ in thousands)                               Additional              Total   Common  Paid-in  Unearned  Retained  Treasury  Shareholders’   Stock  Capital  Compensation  Earnings  Stock  Equity Balance, June 30, 2004 $19,988  $57,852  $(628) $143,540  $(5,710) $215,042 Net income  —   —   —   36,432   —   36,432 Exercises of stock options  35   717   —   —   4,079   4,831 Restricted stock grants  —   1,260   (3,551)  —   2,291   — Restricted stock vesting  —   —   919   —   —   919 Performance stock grants  —   5,401   (5,401)  —   —   — Performance stockamortization  —   —   1,353   —   —   1,353 Purchases of treasury stock  —   —   —   —   (763)  (763)Dividends  —   —   —   (3,007)  —   (3,007)                   Balance, March 31, 2005 $20,023  $65,230  $(7,308) $176,965  $(103) $254,807                                                   Additional              Total   Common  Paid-in  Unearned  Retained  Treasury  Shareholders’   Stock  Capital  Compensation  Earnings  Stock  Equity Balance, June 30, 2005 $20,298  $70,412  $(5,620) $186,388  $(668) $270,810 Net income  —   —   —   31,688   —   31,688 Stock option grants  —   6,209   (6,209)  —   —   — Exercises of stock options  185   1,639   —   —   4,958   6,782 Excess tax benefit ofstock option exercises  —   720   —   —   —   720 Stock option vesting  —   —   3,321   —   —   3,321 Restricted stock grants  21   610   (1,027)  —   396   — Restricted stock vesting  —   —   1,111   —   —   1,111 Performance stock grants  —   2,331   (2,331)  —   —   — Performance stockamortization  —   —   1,625   —   —   1,625 Purchases of treasury stock  —   —   —   —   (5,681)  (5,681)Dividends  —   —   —   (3,065)  —   (3,065)Other  —   139   (160)  —   21   —                    Balance, March 31, 2006 $20,504  $82,060  $(9,290) $215,011  $(974) $307,311                    
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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, 2005. 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 and nine-month periods ended March31, 2006 and 2005. Because of seasonal, weather-related conditions in some of the company’s marketareas, sales can vary at times, and results of any one quarter or other interim reporting periodshould not necessarily be considered as indicative of results for a full fiscal year.     The company has revised its fiscal 2005 consolidated statement of cash flows to present theoperating and investing portion of cash flows attributable to discontinued operations on aseparately identifiable basis. The company had previously recorded these amounts on a combinedbasis.**Note 2 — Company Segments**     The Premium Roofing Products segment manufactures premium laminated fiberglass asphaltshingles and accessory products. The segment includes RGM Products, Inc. (RGM), which was acquiredin August 2005, and manufactures high-profile hip and ridge and other roofing related products.The Composite Building Products segment manufactures composite wood decking, railing, marine dock,and other OEM products. The Specialty Fabric Technologies segment is a marketing operationdeveloped to create brand awareness and promote increased sales of Elk’s nonwoven specialty fabricproducts, which includes external sales of coated and uncoated nonwoven fabrics used in firebarrier technologies, various applications for other industries and in asphalt shingles. Firebarrier technologies feature fire retardant coatings designed for use in bedding, home furnishings,and other consumer products. The Surface Finishes segment includes hard chrome and other finishesdesigned to extend the life of steel machinery components operating in abrasive environments.Prior to fiscal 2006, fire barrier technologies and the Surface Finishes segment were combined andshown as Other, Technologies. Prior to fiscal 2006, external sales of coated and uncoated nonwovenfabrics were included in the Premium Roofing Products segment. Corporate and Other representscorporate office expenses and other expense items not allocated to the operating segments. Infiscal 2005, both Cybershield, Inc. (Cybershield) and Ortloff Engineers, LTD (Ortloff) were sold.Both companies are reported as discontinued operations in all periods presented. Financialinformation by company segment is summarized as follows:                   (In thousands)  (In thousands)   Three Months Ended  Nine Months Ended   March 31,  March 31,   2006  2005  2006  2005 Sales from Continuing Operations                Premium Roofing Products $220,114  $185,549  $620,473  $512,965 Composite Building Products  7,545   4,726   21,303   10,968 Specialty Fabric Technologies  13,616   9,443   39,696   28,237 Surface Finishes  1,919   2,153   6,528   6,812                $243,194  $201,871  $688,000  $558,982                               Operating Profit (Loss) from Continuing Operations                Premium Roofing Products $24,990  $32,671  $78,709  $82,484 Composite Building Products  (2,059)  (2,441)  (7,577)  (6,341)Specialty Fabric Technologies  1,383   177   4,266   1,523 Surface Finishes  212   (371)  656   (228)Corporate and Other  (5,725)  (5,108)  (17,015)  (12,779)                18,801   24,928   59,039   64,659 Interest expense and other, net  (2,700)  (2,614)  (8,525)  (7,090)             Income from continuing operations before income taxes $16,101  $22,314  $50,514  $57,569              
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**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 secondary market to other investors.Although both ARS and VRDN securities are issued and rated as long-term securities, they arepriced and traded as short-term instruments. The company classifies these short-terminvestments as available for sale in accordance with SFAS No. 115, “Accounting for CertainInstruments 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 March 31, 2006 and June 30, 2005, disbursementstotaling approximately $18,000,000 and $23,000,000, respectively, had not been presented forpayment to the bank.**Note 4 — 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 shares. In accordance with SFAS No. 128, “Earnings per Share,” diluted earnings (orloss) per share from discontinued operations presented on the Consolidated Statements ofOperations were computed utilizing the same number of potential common shares used in computingthe diluted per share amount for income from continuing operations, regardless of whether thoseamounts were anti-dilutive to their respective basic per share amounts. Performance shareawards have been excluded from the calculation of diluted earnings per share, as the conditionsnecessary for their issuance have not been satisfied as of the end of the reporting period. Thefollowing table sets forth the computation of basic and diluted earnings per share fromcontinuing operations:                   (In thousands, except per share data)   Three Months Ended  Nine Months Ended   March 31,  March 31,   2006  2005  2006  2005 Income from continuing operations $10,146  $14,123  $31,754  $35,981                               Denominator for basic earnings per share — weightedaverage shares outstanding  20,308   19,784   20,254   19,718                  Effect of dilutive securities:                Unvested restricted shares and outstanding stockoptions  389   698   373   466                               Denominator for dilutive earnings per share —adjusted weighted average shares and assumedissuance of shares purchased under stock optionplans and vesting of restricted shares using thetreasury stock method  20,697   20,482   20,627   20,184              Basic earnings per share from continuing operations $.50  $.71  $1.57  $1.83              Diluted earnings per share from continuing operations $.49  $.69  $1.54  $1.78                               Stock options excluded from computation of dilutedearnings per share due to anti-dilutive effect  —   —   —   243              
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**Note 5 — Inventories**     Inventories consist of the following:           (In thousands)   March 31,  June 30,   2006  2005 Raw materials $20,950  $15,380 Work-in-process  209   219 Finished goods  74,962   55,868          $96,121  $71,467        **Note 6 — Long-Term Debt**     Long-term debt is summarized as follows:           (In thousands)   March 31,  June 30,   2006  2005 Senior Notes $195,000  $195,000 Revolving Credit Facility  —   — Fair value of interest rate swaps  174   4,463 Other debt  7,021   1,064           202,195   200,527 Less: Current maturities  (977)  (381)         $201,218  $200,146             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 March 31, 2006, the fair value of the derivative was $632,000 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 March 31, 2006, thefair value of the derivative was a liability of $458,000 and is recorded in accrued liabilities andas a decrease in the carrying value of long-term debt.     At March 31, 2006, the company had $125,000,000 of primary credit available under a RevolvingCredit Facility (Facility), including up to a maximum of $10,000,000 in letters of credit throughNovember 30, 2008. At March 31, 2006, there were no borrowings outstanding on the 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 March 31,2006, the company was in compliance with all of these financial covenants.     Other debt includes various mortgage debt and notes payable assumed in connection withacquisitions. The majority of these obligations, which included both fixed rate and variable rateinstruments, are secured by liens on the assets acquired, and are due at various dates through June2020.
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**Note 7 — Stock-Based Compensation**     The Compensation Committee of the Board of Directors has established a current practice ofawarding ElkCorp officers 75% of a long-term incentive compensation award in the form ofperformance shares (as described below) and 25% in the form of stock options. Other key employeesreceive their long-term incentive compensation in the form of awards of performance shares andstock loan grants. Stock-based compensation is granted to officers, directors and certain keyemployees in accordance with the provisions of the shareholder approved 2004 Amended and RestatedElkCorp Equity Incentive Compensation Plan (Equity Incentive Compensation Plan). This planprovides for grants of stock options, performance shares 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 three-year or five-year periods.Options granted to nonemployee directors fully vest at grant date. Options granted prior to July1, 2005 to employees who have reached retirement age are amortized over the applicable vestingperiod until such time that they announce their intention to retire. At that time, remainingunrecognized compensation is recorded as compensation expense duringthe remainder of their employment.     Prior to fiscal 2006, the company accounted for its stock options under the recognition andmeasurement provisions of APB Opinion No. 25 and related interpretations. Effective July 1, 2005,the company adopted the provisions of SFAS No. 123 (Revised 2004), “Share-Based Payments” (SFAS 123(R)), and selected the modified prospective method to initially report stock-based compensationamounts in the consolidated financial statements. The company is currently using the Black-Scholesoption pricing model to determine the fair value of all option grants. For option grants issued inthe nine-month period ended March 31, 2006, the following weighted-average assumptions were used:     Dividend yield:  0.85%Risk-free interest rate:  4.15%Expected market price volatility:  .39 Expected life of options: 8 yearsFair value of grants: $13.37      For the three-month and nine-month periods ended March 31, 2006, the company recorded$1,033,000 and $3,321,000, respectively, for stock-based compensation expense related to stockoption grants. This amount is recorded in selling, general and administrative expense. The companyissues treasury shares, if available, to satisfy stock option exercises. If treasury shares areunavailable, new shares are issued. At March 31, 2006, there is $2,887,000 of total unrecognizedcompensation cost related to unvested stock options remaining to be recognized. Of this total,$1,013,000 will be recognized in the last three-months of fiscal 2006 and $1,874,000 will berecognized in subsequent years through fiscal 2008. Beginning July 1, 2005, any tax deductions inexcess of recognized compensation costs are reported as financing cash flows rather than operatingcash flows as was prescribed prior to the adoption of SFAS 123(R). For the nine-month period endedMarch 31, 2006, $720,000 of excess tax benefits relating to stock option exercises were recorded.There were no excess tax benefits from the exercise of options in the nine-month period ended March31, 2005.
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PerformanceStock Awards —     In December 2004 and July 2005, the company entered into Performance Stock Award agreements(PSA Agreements) granting performance stock awards (PSAs) to certain of the company’s officers andother key employees under the Equity Incentive Compensation Plan. The PSAs consist of a contingentright to receive whole shares of the company’s common stock if the company meets specifiedperformance criteria over a three-year performance period. The performance criteria for 70% of thetotal PSA is based on the company’s return on equity (ROE) measured against all New York StockExchange (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.     The company currently estimates that the probable number of shares to be issued at the end ofthe three-year performance period ending June 30, 2007, will be 136,870 shares. The maximumpotential number of shares that can be issued for this performance period is 205,305 shares. Forthe three-year performance period ending June 30, 2008, the company estimates that the probablenumber of shares to be issued will be 122,170 shares. The maximum potential number of shares thatcan be issued for this second performance period is 183,255 shares. Prior to July 1, 2005, theinitial award was accounted for using variable accounting as prescribed by APB No. 25, “Accountingfor Stock Issued to Employees”, and related interpretations, and the disclosure-only provisions ofSFAS No. 123, “Accounting for Stock-Based Compensation”. Under APB 25, performance shares wereaccounted for by charging a ratable portion of compensation expense during each accounting periodbased on the probable number of shares to be issued times the price of ElkCorp common stock at theend of each period. Beginning July 1, 2005, all performance shares are accounted for at fair valuein accordance with the provisions of SFAS No. 123(R) multiplied by the probable number of shares tobe issued. During the three-month and nine-month periods ended March 31, 2006, $573,000 and$1,625,000, respectively, was charged to compensation expense for performance shares, based on theprobable number of shares that will be issued at the end of the applicable performance periods.During the three-month and nine-month periods ended March 31, 2005, $545,000 and $1,353,000respectively, was charged to compensation expense for performance shares. At March 31, 2006, thereis $3,592,000 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, $573,000 will be recognized in the last three months of fiscal 2006 and $3,019,000 will berecognized in subsequent years through fiscal 2008. Compensation expense attributable toperformance stock awards is classified as selling, general and administrative expense.Restricted Stock —     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 thenine-month period ended March 31, 2006, 32,590 restricted shares were granted at market pricesranging from $30.18 to $35.55 per share. At grant date, the value of restricted stock is reflectedas unearned compensation in shareholders’ equity and is amortized over the applicable restrictionperiod. Restricted stock issued to directors vest in full three years after grant date. In thethree-month and nine-month periods ended March 31, 2006, compensation expense of $411,000 and$1,111,000, respectively, was recognized relating to restricted stock awards. In the three-monthand nine-month periods ended March 31, 2005, compensation expense of $328,000 and $919,000,respectively, was recognized relating to restricted stock awards. At March 31, 2006, there is$3,384,000 of total unrecognized compensation cost related to unvested restricted stock remainingto be recognized. Of this total $450,000 will be recognized in the last three-months of fiscal2006 and $2,934,000 will be recognized in subsequent years through fiscal 2011. Compensationexpense attributable to restricted shares is classified as selling, general and administrativeexpense.Stock/Loan Plan —     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 March 31, 2006, and June 30,2005, totaling $4,338,000 and $2,963,000, 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 the Sarbanes-Oxley Act of 2002.
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PriorYear Pro Forma Disclosure —     If compensation cost for stock-based compensation plans had been determined for thethree-month and nine-month periods ended March 31, 2005 using the fair value method, pro forma netincome, stock option compensation expense and basic and diluted earnings per common share wouldhave been as follows:           (In thousands, except per share data)   Three Months  Nine Months   Ended  Ended   March 31,  March 31,   2005  2005 Net income as reported $15,297  $36,432 Add: Stock-based employee compensation expense included inreported net income under APB No. 25, net of related taxeffects  355   880 Deduct: Total stock-based compensation expense determined under fairvalue based method, net of related tax effects  (1,005)  (2,688)       Pro forma earnings $14,647  $34,624                 Earnings per common share:        Basic — as reported $.77  $1.85        Basic — pro forma $.74  $1.76        Diluted — as reported $.75  $1.80        Diluted — pro forma $.72  $1.72        **Note 8 — 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 current year period were as follows:     (In thousands) Warranty Liability Balance, June 30, 2005 $4,902 Warranties of acquired business  167 Accrued for new warranties  2,176 Changes in estimates for pre-existing warranties  1,770 Warranty settlements during the period  (3,119)    Balance, March 31, 2006 $5,896     **Note 9 — 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 our subsidiaries ship waste products to various wastemanagement facilities for treatment or disposal. Governmental authorities have the power torequire compliance with these Environmental Laws, and violators may be subject to civil or criminalpenalties, injunctions or both. Third parties may also have the right to sue for damages and/or toenforce compliance and to require remediation of contamination. If there are releases or if thesefacilities do not operate in accordance with Environmental Laws, or their owners or operatorsbecome financially unstable or insolvent, our subsidiaries are subject to potential liability.
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     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 and its subsidiaries may incur such remediation andrelated costs at company-owned plants and certain offsite locations maintained by other parties.     Chromium Corporation (Chromium), one of the company’s subsidiaries, has engaged in limitedremediation activities at the site of its former plating operation in Lufkin, Texas. Soil samplingresults from a pre-closing environmental evaluation of the site indicated the necessity oflocalized cleanup. Chromium has entered the property into the Texas Voluntary Cleanup Program(VCP). Under this program, the Texas Commission on Environmental Quality (TCEQ) reviews thevoluntary clean-up plan the applicant submits, and, when the work is complete, issues a certificateof completion, evidencing cleanup to levels protective of human health and the environment andreleasing prospective purchasers and lenders from liability to the state. Properties entered intothe VCP are protected from TCEQ enforcement 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 was necessary.Chromium has received approval from the TCEQ for a Remediation ActionPlan (RAP) that describesremediation activities and engineering controls to clean up the site under the VCP to a sitespecific risk-based clean-up standard as prescribed by the Texas Risk Reduction Program. Thecompany believes that current findings indicate that remediation activities will be similar to aplan utilized at another Chromium plant. This assessment, in conjunction with projectionsdeveloped in finalizing the RAP that are site specific, resulted in the company recording anaccrued liability of $700,000 in fiscal 2005. Certain other scenarios, none of which are reasonablyexpected at this time, could potentially result in material costs to the company.     The company’s operations are subject to extensive Environmental Laws. Other than the possiblecosts associated with the previously described Chromium matter, management does not believe thecompany will be required to expend amounts which will have a material adverse effect on thecompany’s consolidated results of operations, financial position or liquidity. The companyestablishes and maintains reserves for such known or probable remediation activities in accordancewith SFAS No. 5 and AICPA Statement of Position 96-1. Such environmental laws are frequentlychanged and could result in significantly increased cost of compliance. The company anticipatesthat its subsidiaries will incur costs to comply with Environmental Laws, including remediating anyexisting non-compliance with such laws and achieving compliance with anticipated future standardsfor air emissions and reduction of waste streams. Such subsidiaries expend funds to minimize thedischarge of materials into the environment and to comply with governmental regulations relating tothe protection of the environment. Further, certain of our manufacturing operations utilizehazardous materials in their production processes. As a result, the company and its subsidiariesincur costs for recycling or disposal of such materials and may incur costs for remediationactivities at company facilities and off-site from time to time.**Note 10 — Acquisitions**     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 acquisitionenhances ElkCorp’s current roofing accessory business and allows the company to offer the broadestridge 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.     The allocation of the purchase price to assets acquired and liabilities assumed is preliminaryand is subject to further analysis. Any modification of purchase price will result in an increaseor decrease in the allocation to goodwill. On a preliminary basis, the purchase price wasallocated to $27,759,000 for net tangible assets, $10,700,000 of identifiable intangible assets and$11,040,000 of goodwill, taking into account indebtedness and current liabilities assumed. Theresults of RGM’s operations are included in the results of operations prospectively from the dateof
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acquisition. Pro forma financial information has not been presented, as the effects were notmaterial to ElkCorp’s historical financial statements.**Note 11 — Goodwill and Intangible Assets**     The change in the carrying amount of goodwill for the nine-month period ended March 31, 2006was (in thousands):     Balance, June 30, 2005 $1,497 Goodwill acquired  11,098     Balance, March 31, 2006 $12,595     The changes in intangible assets for the nine months ended March 31, 2006 were (in thousands):                                   Intangible Assets, Gross  Accumulated Amortization  Net Book Value   June 30,      Mar. 31,  June 30,      Mar. 31,  June 30,  Mar. 31, (in thousands) 2005  Additions  2006  2005  Expense  2006  2005  2006 Patents $724  $5,400  $6,124  $35  $257  $292  $689  $5,832                                  Customerrelationships  —   3,700   3,700   —   216   216   —   3,484                                  Trademarks  —   600   600   —   25   25   —   575 Noncompete agreement  —   1,000   1,000   —   117   117   —   883                            $724  $10,700  $11,424  $35  $615  $650  $689  $10,774                          Weighed average useful lives are as follows: