**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C.  20549

**FORM 10-Q**

(Mark One)

**x****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

For the quarterlyperiod ended **September 30, 2006**

OR

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

For the transitionperiod from                          to

Commission Filenumber **1-3834**

 

**CONTINENTAL MATERIALS CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                    | ** ** | **36-2274391**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**200 South Wacker Drive, Suite 4000, Chicago,Illinois  60606**(Address of principal executive offices) (Zip Code)

**(312)541-7200**(Registrant’s telephone number, including area code)

 

(Former name,former address and former fiscal year, if changed since last report)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section13 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 filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  x   No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror 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  o |   | Non-accelerated  filer  x |
|----------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 or theExchange Act).

Yes  o   No  x
| Number of common shares  outstanding at November 8, 2006 |   | 1,605,461 |   |
|----------------------------------------------------------|--------|-----------|--------|

 

 

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PART I — FINANCIAL INFORMATION

**Item 1.  Financial Statements**

CONTINENTAL MATERIALS CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETSSEPTEMBER 30, 2006 and DECEMBER 31, 2005(Unaudited) (000’s omitted except share data)
| ** **                                                                                      | ** ** | **SEPTEMBER 30,** | ** ** | **DECEMBER 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                      | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ***ASSETS***                                                                                    |       |                   |       |                  |       |
| Current assets:                                                                                 |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                      |       | $                      | 2,614      |                  | $          | 6,829 |   |
| Receivables, net                                                                                |       | 23,526                 |       | 17,678                |       |
| Receivable for  insured losses                                                                  |       | 1,708                  |       | 1,718                 |       |
| Inventories:                                                                                    |       |                   |       |                  |       |
| Finished goods                                                                                  |       | 8,420                  |       | 7,650                 |       |
| Work in process                                                                                 |       | 1,834                  |       | 1,907                 |       |
| Raw materials  and supplies                                                                     |       | 8,777                  |       | 7,898                 |       |
| Prepaid expenses                                                                                |       | 4,628                  |       | 3,910                 |       |
| Total current  assets                                                                           |       | 51,507                 |       | 47,590                |       |
|                                                                                            |       |                   |       |                  |       |
| Property, plant and  equipment, net                                                             |       | 32,202                 |       | 28,844                |       |
|                                                                                            |       |                   |       |                  |       |
| Goodwill                                                                                        |       | 8,439                  |       | 7,374                 |       |
| Non-compete agreements                                                                          |       | 1,023                  |       | 728                   |       |
| Other assets                                                                                    |       | 2,236                  |       | 2,524                 |       |
|                                                                                            | ** ** | ** **             | ** ** |                  |       |
|                                                                                            |       | $                      | 95,407     |                  | $          | 87,060 |   |
|                                                                                            |       |                   |       |                  |       |
| ***LIABILITIES***                                                                               |       |                   |       |                  |       |
| Current liabilities:                                                                            |       |                   |       |                  |       |
| Current portion  of long-term debt                                                              |       | $                      | 2,000      |                  | $          | 2,000 |   |
| Accounts payable  and accrued expenses                                                          |       | 19,109                 |       | 15,748                |       |
| Liability for  unpaid claims covered by insurance                                               |       | 1,708                  |       | 1,718                 |       |
| Income taxes                                                                                    |       | 539                    |       | 342                   |       |
| Total current  liabilities                                                                      |       | 23,356                 |       | 19,808                |       |
|                                                                                            |       |                   |       |                  |       |
| Long-term debt                                                                                  |       | 13,500                 |       | 10,000                |       |
| Deferred income taxes                                                                           |       | 3,681                  |       | 3,681                 |       |
| Other long-term  liabilities                                                                    |       | 1,908                  |       | 2,264                 |       |
| *** ***                                                                                    |       |                   |       |                  |       |
| ***SHAREHOLDERS’  EQUITY***                                                                |       |                   |       |                  |       |
| Common shares, $0.25  par value; authorized                                                     |       |                   |       |                  |       |
| 3,000,000 shares;  issued 2,574,264 shares                                                      |       | 643                    |       | 643                   |       |
| Capital in excess of  par value                                                                 |       | 1,830                  |       | 1,830                 |       |
| Retained earnings                                                                               |       | 66,989                 |       | 65,331                |       |
| Accumulated other  comprehensive gains net of tax of $1 and $3 (interest rate swap adjustments) |       | 3                      |       | 6                     |       |
| Treasury shares,  968,803, at cost                                                              |       | (16,503                | )          | (16,503               | )          |
|                                                                                            |       | 52,962                 |       | 51,307                |       |
|                                                                                            |       |                   |       |                  |       |
|                                                                                            |       | $                      | 95,407     |                  | $          | 87,060 |   |

 

See accompanying notes

2

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CONTINENTALMATERIALS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, RETAINED EARNINGSAND COMPREHENSIVE INCOME (LOSS)FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND OCTOBER 1, 2005(Unaudited)(000’s omitted except per-share amounts)
| ** **                                                                      | ** ** | **SEPTEMBER 30,** | ** ** | **OCTOBER 1,** | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                                                      | ** ** | **2006**               | ** ** | **2005**            | ** ** |
|                                                                            |       |                   |       |                |       |
| Sales                                                                           |       | $                      | 40,924     |                | $          | 36,415 |   |
|                                                                            |       |                   |       |                |       |
| Costs and  expenses:                                                            |       |                   |       |                |       |
| Cost of sales (exclusive of depreciation, depletion  and amortization)          |       | 33,731                 |       | 29,325              |       |
| Depreciation, depletion and amortization                                        |       | 1,212                  |       | 1,201               |       |
| Selling and administrative                                                      |       | 5,113                  |       | 4,337               |       |
|                                                                            |       |                   |       |                |       |
| Gain on  disposition of property and equipment                                  |       | 47                     |       | —              |       |
|                                                                            |       | 40,009                 |       | 34,863              |       |
|                                                                            |       |                   |       |                |       |
| Operating income                                                                |       | 915                    |       | 1,552               |       |
|                                                                            |       |                   |       |                |       |
| Interest expense                                                                |       | (250                   | )          | (225                | )          |
| Other income,  net                                                              |       | 137                    |       | 37                  |       |
|                                                                            |       |                   |       |                |       |
| Income before  income taxes                                                     |       | 802                    |       | 1,364               |       |
|                                                                            |       |                   |       |                |       |
| Provision for  income taxes                                                     |       | 273                    |       | 326                 |       |
|                                                                            |       |                   |       |                |       |
| Net income                                                                      |       | 529                    |       | 1,038               |       |
|                                                                            |       |                   |       |                |       |
| Retained  earnings, beginning of period                                         |       | 66,460                 |       | 63,230              |       |
|                                                                            | ** ** | ** **             |       | ** **          | ** ** |
| Retained  earnings, end of period                                               |       | $                      | 66,989     |                | $          | 64,268 |   |
|                                                                            |       |                   |       |                |       |
| Basic earnings  per share                                                       |       | $                      | .33        |                | $          | .66 |   |
|                                                                            |       |                   |       |                |       |
| Average shares outstanding                                                      |       | 1,605                  |       | 1,563               |       |
|                                                                            |       |                   |       |                |       |
| Diluted earnings  per share                                                     |       | $                      | .33        |                | $          | .65 |   |
|                                                                            |       |                   |       |                |       |
| Average shares outstanding                                                      |       | 1,605                  |       | 1,596               |       |
|                                                                            |       |                   |       |                |       |
|                                                                            |       |                   |       |                |       |
| Comprehensive  income:                                                          |       |                   |       |                |       |
| Net income                                                                      |       | $                      | 529        |                | $          | 1,038 |   |
| Comprehensive  (loss) income from interest rate swap, net of tax of $(3) and $2 |       | (5                     | )          | 18                  |       |
|                                                                            |       | $                      | 524        |                | $          | 1,056 |   |

 

See accompanying notes

3

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CONTINENTALMATERIALS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGSAND COMPREHENSIVE INCOME (LOSS)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND OCTOBER 1, 2005(Unaudited)(000’s omitted except per-share amounts)
| ** **                                                                       | ** ** | **SEPTEMBER 30,** | ** ** | **OCTOBER 1,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                                                                       | ** ** | **2006**               | ** ** | **2005**            | ** ** |
|                                                                             |       |                   |       |                |       |
| Sales                                                                            |       | $                      | 118,312    |                | $          | 104,445 |   |
|                                                                             |       |                   |       |                |       |
| Costs and  expenses:                                                             |       |                   |       |                |       |
| Cost of sales (exclusive of depreciation, depletion  and amortization)           |       | 96,669                 |       | 84,668              |       |
| Depreciation, depletion and amortization                                         |       | 3,651                  |       | 3,632               |       |
| Selling and administrative                                                       |       | 15,314                 |       | 13,744              |       |
|                                                                             |       |                   |       |                |       |
| Gain on  disposition of property and equipment                                   |       | 193                    |       | 115                 |       |
|                                                                             |       | 115,441                |       | 101,929             |       |
|                                                                             |       |                   |       |                |       |
| Operating income                                                                 |       | 2,871                  |       | 2,516               |       |
|                                                                             |       |                   |       |                |       |
| Interest expense                                                                 |       | (548                   | )          | (515                | )          |
| Other income,  net                                                               |       | 189                    |       | 107                 |       |
|                                                                             |       |                   |       |                |       |
| Income before  income taxes                                                      |       | 2,512                  |       | 2,108               |       |
|                                                                             |       |                   |       |                |       |
| Provision for  income taxes                                                      |       | 854                    |       | 413                 |       |
|                                                                             |       |                   |       |                |       |
| Net income                                                                       |       | 1,658                  |       | 1,695               |       |
|                                                                             |       |                   |       |                |       |
| Retained  earnings, beginning of period                                          |       | 65,331                 |       | 62,573              |       |
|                                                                             |       |                   |       |                |       |
| Retained  earnings, end of period                                                |       | $                      | 66,989     |                | $          | 64,268 |   |
|                                                                             |       |                   |       |                |       |
| Basic earnings  per share                                                        |       | $                      | 1.03       |                | $          | 1.06 |   |
|                                                                             |       |                   |       |                |       |
| Average shares outstanding                                                       |       | 1,605                  |       | 1,601               |       |
|                                                                             |       |                   |       |                |       |
| Diluted earnings  per share                                                      |       | $                      | 1.03       |                | $          | 1.03 |   |
|                                                                             |       |                   |       |                |       |
| Average shares outstanding                                                       |       | 1,605                  |       | 1,643               |       |
|                                                                             | ** ** | ** **             | ** ** | ** **          | ** ** |
|                                                                             | ** ** | ** **             | ** ** | ** **          | ** ** |
| Comprehensive  income:                                                           | ** ** | ** **             | ** ** | ** **          | ** ** |
| Net income                                                                       |       | $                      | 1,658      | ** **          | $          | 1,695 |   |
| Comprehensive  (loss) income from interest rate swap, net of tax of $(2) and $41 |       | (3                     | )          | 65                  |       |
|                                                                             |       | $                      | 1,655      | ** **          | $          | 1,760 |   |

 

See accompanying notes

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CONTINENTALMATERIALS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND OCTOBER 1, 2005(Unaudited)(000’s omitted)
| ** **                                                                | ** ** | **SEPTEMBER 30,   2006** | ** ** | **OCTOBER 1,   2005** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|
|                                                                      |       |                               |       |                            |       |
| Net cash (used  in) provided by operating activities                      |       | $                                  | (274       | )                               | $          | 2,869 |   |
|                                                                      |       |                               |       |                            |       |
| Investing  activities:                                                    |       |                               |       |                            |       |
| Cash paid for acquisitions of assets of certain  businesses               |       | (2,452                             | )          | —                          |       |
| Capital expenditures                                                      |       | (5,036                             | )          | (3,239                          | )          |
| Proceeds from sale of property and equipment                              |       | 214                                |       | 130                             |       |
| Net cash used in  investing activities                                    |       | (7,274                             | )          | (3,109                          | )          |
|                                                                      |       |                               |       |                            |       |
| Financing  activities:                                                    |       |                               |       |                            |       |
| Long-term borrowings                                                      |       | 5,000                              |       | 5,000                           |       |
| Repayment of long-term debt                                               |       | (1,500                             | )          | (1,500                          | )          |
| Payment on note issued for acquisition                                    |       | (167                               | )          | —                          |       |
| Proceeds from exercise of stock options                                   |       | —                             |       | 488                             |       |
| Payment to acquire treasury stock                                         |       | —                             |       | (4,079                          | )          |
| Net cash  provided by (used in) financing activities                      |       | 3,333                              |       | (91                             | )          |
|                                                                      |       |                               |       |                            |       |
| Net decrease in  cash and cash equivalents                                |       | (4,215                             | )          | (331                            | )          |
| Cash and cash  equivalents:                                               |       |                               |       |                            |       |
| Beginning of period                                                       |       | 6,829                              |       | 2,828                           |       |
|                                                                      |       |                               |       |                            |       |
| End of period                                                             |       | $                                  | 2,614      | ** **                      | $          | 2,497 |   |
|                                                                      |       |                               |       |                            |       |
|                                                                      |       |                               |       |                            |       |
|                                                                      |       |                               |       |                            |       |
| Supplemental  disclosures of cash flow items:                             |       |                               |       |                            |       |
| Cash paid during  the nine months for:                                    |       |                               |       |                            |       |
| Interest                                                                  |       | $                                  | 734        |                            | $          | 626 |   |
| Income taxes                                                              |       | 656                                |       | 573                             |       |
| Supplemental  disclosures of noncash investing and financing activities   |       |                               |       |                            |       |
| Note issued as partial consideration for ASCI  purchase                   |       | $                                  | 1,000      |                            | $          | — |   |
| Value of shares  tendered as payment related to exercise of stock options |       | —                             |       | 93                              |       |

 

See accompanying notes

5

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CONTINENTALMATERIALS CORPORATIONSECURITIES AND EXCHANGE COMMISSION FORM 10-QNOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTSQUARTER ENDED SEPTEMBER 30, 2006(Unaudited)

1.               Theunaudited interim condensed consolidated financial statements included hereinare prepared pursuant to the rules and regulations for reporting on Form 10-Q.Accordingly, certain information and footnote disclosures normally accompanyingthe annual consolidated financial statements have been omitted. The interim condensedconsolidated financial statements and notes should be read in conjunction withthe consolidated financial statements and notes thereto included in the Company’slatest annual report on Form 10-K. For reasons more fully discussed in Note 6,the segment information for the third quarter of 2005 has been restated. In theopinion of management, the condensed consolidated financial statements includesall adjustments (none of which were other than normal recurring adjustments)necessary for a fair statement of the results for the interim periods.

2.               Theprovision for income taxes for the quarter ended September 30, 2006 of 34% isthe same as the estimated effective rate of 34% for the year.

3.               Operatingresults for the first nine months of 2006 are not necessarily indicative ofperformance for the entire year. Historically, sales of the Evaporative Coolingsegment are higher in the first and second quarters, sales of the Concrete,Aggregates and Construction Supplies segment are higher in the second and thirdquarters and sales of the Heating and Cooling segment are higher in the thirdand fourth quarters. Sales of the Door segment have not shown strong seasonalfluctuations in recent years.

4.               The following is areconciliation of the calculation of basic and diluted earnings per share (EPS)for the three and nine months ended September 30, 2006 and October 1, 2005(amounts in thousands except per-share data).
| ** **                  | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **Income**                       | ** ** | **Shares**                      | ** ** | **Per-share  earnings** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per-share  earnings** | ** ** |
| September 30, 2006          |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Basic EPS                   |       | $                                | 529        |                            | 1,605      |   | $ | .33 |   | $ | 1,658 |   | 1,605 |   | $ | 1.03 |   |
| Effect of dilutive  options |       | —                           |       | —                          |       |   |   | — |   | — |   |   |   |
| Diluted EPS                 |       | $                                | 529        |                            | 1,605      |   | $ | .33 |   | $ | 1,658 |   | 1,605 |   | $ | 1.03 |   |
|                        |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| October 1, 2005             |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Basic EPS                   |       | $                                | 1,038      |                            | 1,563      |   | $ | .66 |   | $ | 1,695 |   | 1,601 |   | $ | 1.06 |   |
| Effect of dilutive  options |       | —                           |       | 33                              |       |   |   | — |   | 42 |   |   |   |
| Diluted EPS                 |       | $                                | 1,038      |                            | 1,596      |   | $ | .65 |   | $ | 1,695 |   | 1,643 |   | $ | 1.03 |   |

 

5.               On June 8, 2006,the Company entered into the Fourth Amendment to Revolving Credit and Term LoanAgreement amending the Company’s existing Credit Agreement. The FourthAmendment increased the principal amount of the term loan portion of the CreditAgreement by $5,000,000 and increased the revolving credit facility by$5,000,000. With the increase in the term loan and revolving credit amounts,the total loan commitment, at the time of the signing, was $31,500,000. At thefiling date of this Form 10-Q, the commitment had been reduced to $30,500,000due to term loan repayments of $1,000,000, as scheduled.

The additional$5,000,000 proceeds of the term loan facility were drawn at the close ofbusiness, June 30, 2006 in conjunction with the acquisition discussed in Note7. The amount available under the revolving credit facility of the Credit Agreementwas increased primarily due to increased stand-by letters of creditrequirements to insurance carriers in support of self-insured amounts under theCompany’s risk management program and to provide additional liquidity. Allother material terms of the Credit Agreement remain in force, except to theextent they have been modified by the Fourth Amendment as described in thisparagraph.

6.               The Companyoperates primarily in two industry groups, HVAC and Construction Products.Prior to the 2005 fiscal year, the Company reported its financial results intwo reportable segments, essentially along the lines of these two industrygroups. The reporting segments were titled the Heating and Air Conditioningsegment and

6

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the ConstructionMaterials segment. Prior to filing the annual report on Form 10-K for the 2005fiscal year, management determined that its segment disclosures did not complywith Statement of Financial Accounting Standards No. 131, “Disclosures aboutSegments of an Enterprise and Related Information.” As a result, the financialinformation presented for 2005 in the table below has been restated.

Prior to filing theannual report on Form 10-K for the 2005 fiscal year, management concluded thatthere are four reportable segments within its two principal industry groups;the Heating and Cooling segment and the Evaporative Cooling segment in the HVACindustry group and the Concrete, Aggregates and Construction Supplies segmentand the Door segment in the Construction Products industry group. The Heatingand Cooling segment produces and sells gas-fired wall furnaces, console heatersand fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co.of Colton, California. The Evaporative Cooling segment produces and sellsevaporative coolers from the Company’s wholly-owned subsidiary, PhoenixManufacturing, Inc. of Phoenix, Arizona. The operations of these two segmentswere previously combined and reported as the Heating and Air Conditioningsegment. Sales of these two segments are nationwide, but are concentrated inthe southwestern United States. Concrete, Aggregates and Construction Suppliesare offered from numerous locations along the Front Range of Colorado operatedby the Company’s wholly-owned subsidiaries Castle Concrete Company and TransitMix Concrete Co. (TMC), of Colorado Springs, Transit Mix of Pueblo, Inc. ofPueblo and Rocky Mountain Ready Mix Concrete, Inc. of Denver. Doors arefabricated and sold along with the related hardware from the Company’swholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI) of Pueblo,Colorado. The operations of these two segments were previously combined andreported as the Construction Materials segment. Sales of these two segments are highly concentrated in the Front Rangearea in Colorado although door sales are also made throughout the UnitedStates.

The Company evaluatesthe performance of its segments and allocates resources to them based on anumber of criteria including operating income, return on investment and otherstrategic objectives. Operating income is determined by deducting operatingexpenses from all revenues. In computing operating income, none of thefollowing has been added or deducted: unallocated corporate expenses, interest,other income or loss or income taxes.

In addition to the above reporting segments, an “Unallocated Corporate”classification is used to report the unallocated expenses of the corporateoffice which provides treasury, insurance and tax services as well as strategicbusiness planning and general management services and an “Other” classificationis used to report a small real estate operation. Expenses related to thecorporate information technology group are allocated to all locations,including the corporate office.

Thefollowing table presents information about reported segments for the nine monthand three month periods ended September 30, 2006 and October 1, 2005 along withthe items necessary to reconcile the segment information to the totals reportedin the financial statements (amounts in thousands except in footnotes):
| ** **                                | ** ** | **Construction Products**                           | ** ** | **HVAC Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,  Aggregates  &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2006                                      |       |                                                     |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Nine Months                               |       |                                                     |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                        | 74,442     |                   | $          | 6,816                                |       | $                         | 81,258     |                     | $          | 18,628 |   | $ | 18,163 |   | $ | 36,791 |   | $ | 5 |   | $ | 258 |   | $ | 118,312 |   |
| Depreciation,  depletion and amortization |       | 2,748                                                    |       | 101                    |       | 2,849                                |       | 296                       |       | 450                      |       | 746 |   | 56 |   | — |   | 3,651 |   |
| Operating income  (loss)                  |       | 5,179                                                    |       | 504                    |       | 5,683                                |       | (570                      | )          | 250                      |       | (320 | ) | (2,573 | ) | 81 |   | 2,871 |   |
| Segment assets                            |       | 57,547                                                   |       | 3,412                  |       | 60,959                               |       | 19,660                    |       | 10,048                   |       | 29,708 |   | 4,677 |   | 63 |   | 95,407 |   |
| Capital  expenditures (a)                 |       | 6,388                                                    |       | 70                     |       | 6,458                                |       | 158                       |       | 207                      |       | 365 |   | 2 |   | — |   | 6,825 |   |
| Three Months                              |       |                                                     |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                        | 27,236     |                   | $          | 2,399                                |       | $                         | 29,635     |                     | $          | 6,997 |   | $ | 4,204 |   | $ | 11,201 |   | $ | 2 |   | $ | 86 |   | $ | 40,924 |   |
| Depreciation,  depletion and amortization |       | 912                                                      |       | 34                     |       | 946                                  |       | 98                        |       | 150                      |       | 248 |   | 18 |   | — |   | 1,212 |   |
| Operating income  (loss)                  |       | 2,069                                                    |       | 209                    |       | 2,278                                |       | (421                      | )          | (81                      | )          | (502 | ) | (888 | ) | 27 |   | 915 |   |
| Segment assets                            |       | 57,547                                                   |       | 3,412                  |       | 60,959                               |       | 19,660                    |       | 10,048                   |       | 29,708 |   | 4,677 |   | 63 |   | 95,407 |   |
| Capital expenditures                      |       | 1,321                                                    |       | 5                      |       | 1,326                                |       | 56                        |       | 45                       |       | 101 |   | — |   | — |   | 1,427 |   |

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(a)                                  Capitalexpenditures for the Concrete, Aggregates and Construction Supplies segmentinclude $1.735 million purchased on June 30, 2006 as part of the purchase ofcertain assets of ASCI, a concrete producer

7

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in Colorado Springs.Capital expenditures for the Door segment include $54 thousand purchased onJanuary 1, 2006 as part of the purchase of the assets of Colorado State Safe& Lock Co. (CSSL). Also see Note 7.
| ** **                                | ** ** | **Construction Products**                           | ** ** | **HVAC Products** | ** ** | ** **                                    | ** ** | ** **                | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **Concrete,  Aggregates  &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products (a)** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products (a)** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2005                                      |       |                                                     |       |                   |       |                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |
| Nine Months as  restated                  |       |                                                     |       |                   |       |                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                        | 62,383     |                   | $          | 6,428                                         |       | $                         | 68,811     |   | $ | 18,428 |   | $ | 16,948 |   | $ | 35,376 |   | $ | — |   | $ | 258 |   | $ | 104,445 |   |
| Depreciation,  depletion and amortization |       | 2,709                                                    |       | 68                     |       | 2,777                                         |       | 357                       |       | 432 |   | 789 |   | 66 |   | — |   | 3,632 |   |
| Operating income  (loss)                  |       | 2,884                                                    |       | 620                    |       | 3,504                                         |       | 1,275                     |       | 261 |   | 1,536 |   | (2,594 | ) | 70 |   | 2,516 |   |
| Segment assets  (b)                       |       | 47,180                                                   |       | 2,914                  |       | 50,094                                        |       | 16,986                    |       | 12,544 |   | 29,530 |   | 7,373 |   | 63 |   | 87,060 |   |
| Capital  expenditures                     |       | 2,354                                                    |       | 29                     |       | 2,383                                         |       | 170                       |       | 365 |   | 535 |   | 321 |   | — |   | 3,239 |   |
| Three Months as  restated                 |       |                                                     |       |                   |       |                                          |       |                      |       |   |   |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                        | 22,702     |                   | $          | 2,756                                         |       | $                         | 25,458     |   | $ | 6,955 |   | $ | 3,916 |   | $ | 10,871 |   | $ | — |   | $ | 86 |   | $ | 36,415 |   |
| Depreciation,  depletion and amortization |       | 902                                                      |       | 24                     |       | 926                                           |       | 108                       |       | 144 |   | 252 |   | 23 |   | — |   | 1,201 |   |
| Operating income  (loss)                  |       | 1,413                                                    |       | 360                    |       | 1,773                                         |       | 553                       |       | (49 | ) | 504 |   | (752 | ) | 27 |   | 1,552 |   |
| Segment assets  (b)                       |       | 47,180                                                   |       | 2,914                  |       | 50,094                                        |       | 16,986                    |       | 12,544 |   | 29,530 |   | 7,373 |   | 63 |   | 87,060 |   |
| Capital expenditures                      |       | 1,114                                                    |       | —                 |       | 1,114                                         |       | 83                        |       | 67 |   | 150 |   | 29 |   | — |   | 1,293 |   |

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(a)          Columnsfor 2005 represent the segments as reported in the Form 10-Q for the periodended October 1, 2005.

(b)         Segmentassets are as of December 31, 2005.

There are no differencesin the basis of segmentation or in the basis of measurement of segment profitor loss from the last annual report.

7.               On January 1, 2006the Company purchased the assets of CSSL, a company in Colorado Springsoffering electronic access and locking capabilities, for $352,000. The assetswere acquired by MDHI in the Door segment. The preliminary purchase priceallocation included $100,000 of goodwill and $100,000 for a non-competeagreement. The non-compete agreement is being amortized over its four yearterm.

On June 30, 2006 the Company purchased certain assets of ASCI, aconcrete producer in Colorado Springs for $2,100,000 of cash and a $1,000,000Note. The assets were acquired by TMC in the Concrete, Aggregates andConstruction Supplies segment. The preliminary purchase price allocationincluded $1,735,000 of plant and equipment, $965,000 of goodwill, $300,000 fora non-compete agreement and $100,000 for a restriction of use agreement. Thenon-compete and the restriction of use agreements are being amortized overtheir terms of five years and ten years, respectively.

Both purchases were accounted for as acquisitions of a business underSFAS No. 141, “Standards of Accounting for Business Combinations.” The goodwillrelated to the above two purchases represents the only changes to the Company’srecorded goodwill during 2006.

The following unaudited pro forma summary financial informationsummarizes the estimated combined results of operations of the Company, ASCIand CSSL assuming that the acquisitions of ASCI and CSSL had taken place onJanuary 2, 2005. The unaudited pro forma combined results of operations wereprepared on the basis of information provided to the Company by the formermanagement of ASCI and CSSL and no representation is made by the Company withrespect to the accuracy of such information. The pro forma combined results ofoperations reflect adjustments for interest expense, additional depreciationbased on the fair market value of plant and equipment, amortization ofidentifiable intangibles and income tax expense.

The pro forma financial information presented below for the year endedDecember 31, 2005 includes the full year results for ASCI and CSSL, as adjustedfor the items noted above. The pro forma financial information for the nine monthsended September 30, 2006 includes the results of ASCI from January 1, 2006through April 30, 2006, as adjusted for the items noted above. ASCI’s interimfinancial information for May and June of 2006 were not made available to theCompany. Amounts are in thousands except per share amounts.

8

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| ** **                  | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Year Ended  December 31, 2005** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Net sales                   |       | $                                                             | 120,608    |                                             | $          | 149,022 |   |
| Net income                  |       | 1,685                                                         |       | 3,079                                            |       |
| Basic earnings  per share   |       | 1.05                                                          |       | 1.92                                             |       |
| Diluted earnings per  share |       | 1.05                                                          |       | 1.89                                             |       |
|                             |            |                                                               |            |                                                  |            |  |  |

 

The unaudited pro forma combined results of operations are notnecessarily indicative of, and do not purport to represent, what the Company’sresults of operations or financial condition actually would have been had theacquisitions been made as of January 2, 2005. Due to competitive conditions,the Company did not expect to, and has not, retained all of the concrete volumeor market share previously attained by ASCI.

8.               Identifiableintangible assets as of September 30, 2006 consisted of five amortizable non-competeagreements, including the non-compete agreements related to CSSL acquiredduring the first fiscal quarter of 2006 and the purchase of ASCI during thesecond fiscal quarter of 2006 (see Note 7). The non-compete agreements werecarried at $1,023,000, net of $1,477,000 accumulated amortization. The pre-taxamortization expense for intangible assets during the quarter ended September30, 2006 was $81,000. Based upon the intangible assets recorded on the balancesheet at September 30, 2006, amortization expense for the next five years isestimated to be as follows: 2006 — $277,000, 2007 — $233,000, 2008 — $220,000,2009 — $220,000, and 2010 — $195,000.

9.               The interest rateswap agreement is reported consistent with SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” and its related amendment, SFAS No. 138, “Accountingfor Certain Derivative Instruments and Certain Hedging Activities” whichrequire recognition of derivatives as either assets or liabilities andmeasurement at fair value. The change in accumulated other comprehensive incomenet of taxes from January 1, 2006 to September 30, 2006 was as follows (amountsin thousands):
| Balance at  January 1, 2006             |   | $  | 6      |   |
|-----------------------------------------|--------|----|--------|--------|
| Comprehensive  income, net of tax of $1 |   | 3  |   |
| Balance at April  1, 2006               |   | 9  |   |
| Comprehensive  loss, net of tax of $0   |   | (1 | )      |
| Balance at July  1, 2006                |   | 8  |   |
| Comprehensive  loss, net of tax of $(3) |   | (5 | )      |
| Balance at September  30, 2006          |   | $  | 3      |   |

 

**Item 2.        Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

The following Management’s Discussion and Analysisgives effect to the restatement discussed in Note 6.

Company Overview

The Company operates in four reportable segments within its twoprincipal industry groups; the Heating and Cooling segment and the EvaporativeCooling segment in the HVAC industry group and the Concrete, Aggregates andConstruction Supplies segment and the Door segment in the Construction Productsindustry group.

The Heating and Cooling segment produces and sells gas-fired wall furnaces,console heaters and fan coils from the Company’s wholly-owned subsidiary,Williams Furnace Co. of Colton, California. The Evaporative Cooling segmentproduces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona. Concrete,Aggregates and Construction Supplies are offered from numerous locations alongthe Front Range of Colorado operated by the Company’s wholly-owned subsidiariesCastle Concrete Company and Transit Mix Concrete Co. (TMC), of ColoradoSprings, Transit Mix of Pueblo, Inc. of Pueblo and Rocky Mountain Ready MixConcrete, Inc. of Denver.

Doors are fabricated and sold along with the related hardware from theCompany’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI) ofPueblo, Colorado.

9

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In addition to the above reporting segments, an “Unallocated Corporate”classification is used to report the unallocated expenses of the corporateoffice which provides treasury, insurance and tax services as well as strategicbusiness planning and general management services and an “Other” classificationis used to report a small real estate operation. Expenses related to thecorporate information technology group are allocated to all locations,including the corporate office.

Financial Condition 

Sales of the Company’sHVAC products are seasonal and weather sensitive except for fan coils. Revenuesin the Company’s Concrete, Aggregates and Construction Supplies segment areinfluenced by the level of construction activity and weather conditions alongthe Front Range of Colorado. Sales for the Door segment are not as stronglyseasonal nor are they much affected by weather conditions. Historically, theCompany has experienced operating losses during the first quarter except whenthe weather is mild along the Front Range. Operating results typically improvein the second and third quarters reflecting more favorable weather conditionsin Colorado and the seasonal sales of Evaporative Cooling segment. Fourthquarter results can vary based on weather conditions in Colorado as well as inthe principal markets for the Company’s heating equipment. The Companytypically experiences operating cash flow deficits during the first half of theyear reflecting operating results, the use of sales dating programs (extendedpayment terms) related to the Evaporative Cooling segment and payments of theprior year’s accrued incentive bonuses and Company profit-sharingcontributions. As a result, the Company’s borrowings against its revolvingcredit facility tend to peak during the second quarter and then decline overthe remainder of the year. This trend has continued thus far in 2006.

As expected, the Company’scash flow from operations during the quarter ended September 30, 2006 waspositive ($1,909,000) allowing the payoff of the revolving credit facilitybalance. The seasonality of sales, production schedules and the sales datingprograms related to the evaporative cooler product line have historicallyproduced strong cash flow in the third quarter of each year. For the nine monthsended September 30, 2006, operations used $274,000 of cash compared to the$2,869,000 of cash provided during the first nine months of 2005. The declinein cash flow was primarily due to a significant increase in receivables($3,974,000 relative to year-end) resulting from the increase in sales of$4,509,000 during the third quarter of 2006 as compared to the 2005 quarter.

On January 1, 2006 theCompany purchased the assets of CSSL, a company in Colorado Springs offeringelectronic access and locking capabilities, for $352,000 in cash. The assetswere acquired by MDHI in the Door segment. The purchase price allocationincluded $100,000 of goodwill and $100,000 for a non-compete agreement. On June30, 2006 the Company purchased certain assets of ASCI, a concrete producer inColorado Springs, for $2,100,000 of cash and a $1,000,000 Note (remainingbalance due on the Note at September 30, 2006 is $833,000). The assets wereacquired by TMC in the Concrete, Aggregates and Construction Supplies segment.The preliminary purchase price allocation included $965,000 of goodwill,$300,000 for a non-compete agreement and $100,000 for a restriction of useagreement. The $5,036,000 of capital expenditures, primarily for the Concrete,Aggregates and Construction Supplies segment, consisted primarily of routineequipment replacements.

As more fully discussedin Note 5, the principal amount of the term loan was increased by $5 million.Approximately $2.1 million of the proceeds were used to fund the purchase ofASCI discussed above. The balance of the additional term loan proceeds will beused for business expansion. Scheduled debt repayments of $1,500,000 were madeduring the first nine months of 2006.

As expected, the Companypaid off its revolving credit facility during the 2006 third quarter. Duringthe first nine months of 2006, the highest amount of Company borrowingsoutstanding under the revolving credit agreement was $4,500,000 and the averageamount outstanding was $900,000.

The Company believesthat anticipated cash flow from operations, supplemented by seasonal borrowingsagainst the revolving line of credit, (which was unused at September 30, 2006)will be sufficient to cover expected cash needs, including servicing debt andplanned capital expenditures for at least the next twelve months.

 

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Operations — Comparison of Quarter Ended September 30,2006 to Quarter Ended October 1, 2005

Historically, the Company has experienced strong operating resultsduring the third quarter as sales in the Concrete, Aggregates and ConstructionSupplies segment peak due to weather more conducive to construction activity.The 2006 operating results were consistent with this trend. Consolidated salesduring the third quarter of 2006 were $40,924,000 compared to $36,415,000 inthe third quarter of 2005.

All segments except Door reported increased sales for the quarter leadby a 20.0% increase from the Concrete, Aggregates and Construction Suppliessegment. Cost of sales as a percentage of sales increased from 80.5% to 82.4%due to narrower margins principally in the Heating and Cooling and EvaporativeCooling segments. Increased copper, aluminum and steel costs were thepredominant reasons for the decline in margins. Selling and administrativecosts increased in all segments both in amount and as a percentage of salesexcept for the Concrete, Aggregates and Construction Supplies segment where theexpenses as a percentage of sales declined. Sales and administrative costs weresignificantly higher in the Heating and Cooling segment. The reasons for thechanges in these costs are discussed by segment, below. The resulting operatingincome of $915,000 trailed the $1,552,000 reported for the third quarter of2005.

Interest expense increased from $225,000 for the third quarter of 2005to $250,000 in the 2006 quarter due to increased average debt and higherinterest rates.

A discussion ofoperations by segment follows.

**ConstructionProducts**

The table below presents a summary of operating information for the tworeportable segments within the Construction Products group for the quartersended September 30, 2006 and October 1, 2005 (amounts in thousands):

|                                          | ** ** | **Concrete,  Aggregates and  Construction   Supplies** | ** ** | **Doors** | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------|------------|-----------|------------|
| Quarter ended  September 30, 2006        |       |                                                             |       |      |       |
| Revenues from  external customers        |       | $                                                                | 27,236     |      | $          | 2,399 |   |
| Segment  operating income                |       | 2,069                                                            |       | 209       |       |
| Operating income  as a percent of sales  |       | 7.6                                                              | %          | 8.7       | %          |
| Segment assets  as of September 30, 2006 |       | $                                                                | 57,547     |      | $          | 3,412 |   |
| Return on assets                         |       | 3.6                                                              | %          | 6.1       | %          |
|                                     |       |                                                             |       |      |       |
| Quarter ended  October 1, 2005           |       |                                                             |       |      |       |
| Revenues from  external customers        |       | $                                                                | 22,702     |      | $          | 2,756 |   |
| Segment  operating income                |       | 1,413                                                            |       | 360       |       |
| Operating income  as a percent of sales  |       | 6.2                                                              | %          | 13.1      | %          |
| Segment assets  as of October 1, 2005    |       | $                                                                | 49,101     |      | $          | 4,018 |   |
| Return on assets                         |       | 2.9                                                              | %          | 9.0       | %          |

 

Concrete, Aggregates andConstruction Supplies Segment

Sales in the Concrete,Aggregates and Construction Supplies segment for the third quarter of 2006increased 20.0% over the prior year’s comparable quarter as a result ofincreased volume and improved pricing. Concrete and aggregates volumes improveddespite the beginning of a slowdown in construction activity along the FrontRange of Colorado. The increase in our concrete volume was due to continuingwork on three large jobs in the Pueblo area. Concrete pricing improved duringthe third quarter of 2006 although the increases were again largely institutedto offset increased cement and fuel costs. Cement supplies eased during thethird quarter of 2006 as overall construction activity declined along the FrontRange of Colorado. Construction supplies sales volume declined approximately5.8% in the third quarter of 2006 compared to the third quarter of 2005. Thedecline reflects the slowdown in construction activity while also beingaffected by the timing of shipments.

Operating incomeimproved in the 2006 quarter over the 2005 quarter as a result of the increasein volumes, pricing increases that slightly outpaced increased costs anddelivery efficiencies on the three large concrete jobs noted above. Operatingresults for the aggregates operations during the 2006 quarter were depresseddue

 

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to flooding of our twoArkansas River operations in July and a second flood at our Pueblo East pit inlate August. Both were the result of heavy rains in the area. All expensesincurred to date to repair the damage and resume production have been expensedin operating expenses. Full recovery from the flood damage had not beencompleted as of the end of the quarter. Management is in the process ofdocumenting the property and business losses to determine whether either of theclaims will exceed our insurance policy deductibles. Selling and administrativecosts increased during the third quarter of 2006 compared to the 2005 quarterdue to sales increases; however these costs declined as a percentage of salesfrom 6.9% for the 2005 quarter to 6.2% for the 2006 quarter. The percentagedecline was achieved through the continuing consolidation of administrativefunctions into the Colorado Springs office as well as the fixed nature of someexpenses which did not increase proportionately to sales. As a result, bothoperating income as a percent of sales and return on assets improved in the2006 quarter over the prior year’s quarter.

Door Segment

Sales during the thirdquarter of 2006 in the Door segment declined $357,000 from the comparable 2005quarter primarily due to the timing of shipments as order backlog remainsstrong. Sales during a specific quarter can be heavily influenced by customerrequests to either accelerate or delay shipments of jobs to better coincidewith their own construction schedule.

Operating incomedeclined from $360,000 during the third quarter of 2005 to $209,000 for the2006 quarter as a result of the lower sales and increased costs of sales. Steelprices as well as pricing decisions in response to competitive conditionscontributed to the decline in margin. Selling and administrative costs duringthe third quarter of 2006 remained relatively constant in terms of dollars ascompared to the 2005 quarter; however they increased as a percentage of saleswhen compared to the 2005 quarter due to the decline in sales in the 2006quarter. As a result, both operating income as a percent of sales and return onassets declined in the 2006 quarter from the prior year’s quarter.

**HVAC Products**

The table below presentsa summary of operating information for the two reportable segments within theHVAC products group for the quarters ended September 30, 2006 and October 1,2005 (amounts in thousands):

|                                          | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| Quarter ended  September 30, 2006        |       |                          |       |                     |       |
| Revenues from  external customers        |       | $                             | 6,997      |                     | $          | 4,204 |   |
| Segment  operating income                |       | (421                          | )          | (81                      | )          |
| Operating income  as a percent of sales  |       | (6.0                          | )%         | (1.9                     | )%         |
| Segment assets  as of September 30, 2006 |       | $                             | 19,660     |                     | $          | 10,048 |   |
| Return on assets                         |       | (2.1                          | )%         | (.8                      | )%         |
|                                     |       |                          |       |                     |       |
| Quarter ended  October 1, 2005           |       |                          |       |                     |       |
| Revenues from  external customers        |       | $                             | 6,955      |                     | $          | 3,916 |   |
| Segment  operating income (loss)         |       | 553                           |       | (49                      | )          |
| Operating income  as a percent of sales  |       | 8.0                           | %          | (1.3                     | )%         |
| Segment assets  as of October 1, 2005    |       | $                             | 17,808     |                     | $          | 10,717 |   |
| Return on assets                         |       | 3.1                           | %          | (.5                      | )%         |

 

Heating and Cooling Segment

Sales in the Heating and Cooling segment remained relatively constantduring the third quarter of 2006 at $6,997,000 as compared to the 2005 quarter.An increase in fan coil sales was largely offset by lower furnace volume.Management believes the lower furnace volume is probably due to the timing ofsales while the increase in fan coil volume is attributable to the Company’srestructuring of its sales representative network and the addition of internalsales and support staff. Cost of sales as a percentage of sales increasedduring the third quarter of 2006 as compared to the comparable quarter of 2005due to pricing decisions made to retain a national home center account andincreases in copper, aluminum and steel costs.

Operating income declined from $553,000 during the third quarter of2005 to a loss of $421,000 for the 2006 quarter as a result of the narrowermargins discussed above and increased selling and administrative expenses.Selling and administrative expenses were higher due to the addition ofpersonnel in the sales and engineering

 

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departments and the opening of a sales and service center in OklahomaCity, Oklahoma. As a result, both operating income as a percent of sales andreturn on assets declined in the 2006 quarter compared to the prior year’squarter.

Evaporative Cooling Segment

Sales in the Evaporative Cooling segment increased $288,000, or 7.4%,during the third quarter of 2006 over the comparable 2005 quarter. A shift ofproduct mix to larger industrial units prompted the improved sales despite theoverall decline in cooler unit volume.

The operating loss increased slightly during the 2006 quarter due to anincrease in cost of sales as a percentage of sales attributable to highermaterial and utility costs. Selling and administrative expenses, primarilycompensation costs, were reduced partially offsetting the effect of the risingmaterial and utility costs on operating results. As a result, both operatingincome as a percent of sales and return on assets declined in the 2006 quartercompared to the prior year’s quarter.

Operations - Comparison of Nine Months Ended September30, 2006 to Nine Months Ended October 1, 2005

Consolidated sales during the first nine months of 2006 were$118,312,000 compared to $104,445,000 during the first nine months of 2005. Allsegments reported increased sales for the nine months ended September 30, 2006compared to the nine months ended October 1, 2005 lead by a 19.3% increase fromthe Concrete, Aggregates and Construction Supplies segment. Cost of sales as apercentage of sales increased during the nine months ended September 30, 2006compared to the prior year’s period. Similar to the quarter’s results, theincrease was due to higher copper, aluminum and steel costs in the Heating andCooling, Evaporative Cooling and Door segments. Selling and administrativecosts increased in dollars; however they declined as a percentage of sales.Operating results by segment are discussed below. Unallocated Corporate andOther operating results for 2006 remained unchanged from the prior year. Theresulting operating income of $2,871,000 exceeded the $2,516,000 reported forthe first nine months of 2005.

A discussion ofoperations by segment follows.

**ConstructionProducts**

The table below presents a summary of operatinginformation for the two reportable segments within the Construction Productsgroup for the nine months ended September 30, 2006 and October 1, 2005 (amountsin thousands):

|                                          | ** ** | **Concrete,  Aggregates and  Construction Supplies** | ** ** | **Doors** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------|------------|-----------|------------|
| Nine Months  ended September 30, 2006    |       |                                                           |       |      |       |
| Revenues from  external customers        |       | $                                                              | 74,442     |      | $          | 6,816 |   |
| Segment  operating income                |       | 5,179                                                          |       | 504       |       |
| Operating income  as a percent of sales  |       | 7.0                                                            | %          | 7.4       | %          |
| Segment assets  as of September 30, 2006 |       | $                                                              | 57,547     |      | $          | 3,412 |   |
| Return on assets                         |       | 9.0                                                            | %          | 14.8      | %          |
|                                     |       |                                                           |       |      |       |
| Nine Months  ended October 1, 2005       |       |                                                           |       |      |       |
| Revenues from  external customers        |       | $                                                              | 62,383     |      | $          | 6,428 |   |
| Segment  operating income                |       | 2,884                                                          |       | 620       |       |
| Operating income  as a percent of sales  |       | 4.6                                                            | %          | 9.6       | %          |
| Segment assets  as of October 1, 2005    |       | $                                                              | 49,101     |      | $          | 4,018 |   |
| Return on assets                         |       | 5.9                                                            | %          | 15.4      | %          |

 

Concrete, Aggregates andConstruction Supplies Segment

Sales in the Concrete,Aggregates and Construction Supplies segment for the first nine months of 2006increased 19.3% over the prior year’s comparable period due to the reasonsnoted above and favorable weather during the first quarter of 2006.

 

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Operating income improved to $5,179,000 during the 2006 period from$2,884,000 for the 2005 period due to the improved margins and reduction ofselling and administrative costs as a percentage of sales as discussed above.The flooding, also discussed above, negatively impacted the overall results. Asa result, both operating income as a percent of sales and return on assetsimproved for the nine months ended September 30, 2006 compared to the ninemonths ended October 1, 2005.

Door Segment

Sales in the Doorsegment for the first nine months of 2006 increased $388,000 over thecomparable 2005 period primarily due to the electronic access product lineacquired at the beginning of the 2006 year.

Operating incomedeclined from $620,000 during the first nine months of 2005 to $504,000 for the2006 period chiefly due to tighter margins resulting from higher steel pricesand pricing decisions made in response to more competitive bidding on availablejobs. Increases in both depreciation and selling and administrative costs alsodepressed operating income. As a result, operating income as a percent of salesdeclined in 2006 compared to the 2005 period. The return on assets was lessaffected by the decline in operating income as segment assets at September 30,2006 were lower than the prior year’s balance as a result of a reducedreceivables balance attributed to the timing of collections.

**HVAC Products**

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the nine months ended September 30,2006 and October 1, 2005 (amounts in thousands):

|                                          | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| Nine Months  ended September 30, 2006    |       |                          |       |                     |       |
| Revenues from  external customers        |       | $                             | 18,628     |                     | $          | 18,163 |   |
| Segment  operating (loss) income         |       | (570                          | )          | 250                      |       |
| Operating income  as a percent of sales  |       | (3.1                          | )%         | 1.4                      | %          |
| Segment assets  as of September 30, 2006 |       | $                             | 19,660     |                     | $          | 10,048 |   |
| Return on assets                         |       | (2.9                          | )%         | 2.5                      | %          |
|                                     |       |                          |       |                     |       |
| Nine Months  ended October 1, 2005       |       |                          |       |                     |       |
| Revenues from  external customers        |       | $                             | 18,428     |                     | $          | 16,948 |   |
| Segment  operating income                |       | 1,275                         |       | 261                      |       |
| Operating income  as a percent of sales  |       | 6.9                           | %          | 1.5                      | %          |
| Segment assets  as of October 1, 2005    |       | $                             | 17,808     |                     | $          | 10,717 |   |
| Return on assets                         |       | 7.2                           | %          | 2.4                      | %          |

 

Heating and Cooling Segment

Sales in the Heating and Cooling segment increased $200,000, or 1.1%,during the first nine months of 2006 over the comparable 2005 period. Whilefurnace volume was slightly lower during the first nine months of 2006, fancoil sales more than made up the difference. The reasons for the changes are thesame as described in the discussion of the third quarter’s results, above.

Operating income declined from $1,275,000 during the first nine monthsof 2005 to a loss of $570,000 for the 2006 period. The decrease was the resultof lower margins due to the pricing decisions made to retain a national homecenter account, higher copper, aluminum and steel material costs not fullyrecaptured by higher selling prices, and increased selling and administrativeexpenses.  Selling and administrativecosts were higher due to the above noted addition of personnel and opening of asales and service center in Oklahoma City, Oklahoma. As a result, bothoperating income as a percent of sales and the return on assets declined forthe first nine months of 2006 from the prior year’s period.

Evaporative Cooling Segment

Sales in the Evaporative Cooling segment increased $1,215,000, or 7.2%,during the first nine months of 2006 over the comparable 2005 period. Hot, dryweather in the markets served prompted the improved sales. The change inproduct mix to larger industrial units during the third quarter alsocontributed to the improved sales.

The operating profit declined modestly from $261,000 during the firstnine months of 2005 to $250,000 for the first nine months of 2006. Cost ofsales as a percentage of sales increased in 2006 due to the higher

 

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Materials costs and continued competitive pressures on selling pricesdiscussed above. Selling and administrative expenses during 2006 were held tothe prior year’s level. As a result, operating income as a percent of salesdeclined slightly. The return on assets improved for the 2006 period largelydue to a decrease in segment assets resulting from lower inventory levels andnet property, plant and equipment at September 30, 2006.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States which require theCompany to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities asof September 30, 2006 and December 31, 2005 and affect the reported amounts ofrevenues and expenses for the periods reported. Actual results could differfrom those estimates.

Information withrespect to the Company’s critical accounting policies which the Companybelieves could have the most significant effect on the Company’s reportedresults and require subjective or complex judgments by management is containedin Item 7, Management’s Discussion and Analysis of Financial Condition andResults of Operations, of the Company’s Annual Report on Form 10-K for thefiscal year ended December 31, 2005.

OUTLOOK

Concrete prices throughout our Colorado markets have improved comparedto 2005 although a substantial portion of the price increase was in response tohigher prices paid for cement and fuel. The slow-down in new home constructionalong the Front Range in Colorado will likely affect future volume and mayresult in more competitive pricing and lower profit margins. Commercial andindustrial construction seems to be steady. The sales volume and backlog forthe door segment remains strong.

Sales of the Heating and Cooling segment and the Evaporative Coolingsegment are not expected to grow significantly and will remain weathersensitive. However, the demand for fan coil products in the heating and coolingsegment is expected to continue to improve as a result of the restructuredsales representative network and the addition of sales and support staff.Improved margins are dependent on a number of factors including competitiveconditions and commodity costs.

RECENTLY ISSUED ACCOUNTING STANDARDS

The Companydiscusses recently issued accounting standards and tax law changes in theCritical Accounting Policies section under Item 7 and in Note 1 to ConsolidatedFinancial Statements in Item 8 of the Company’s Annual Report on Form 10-K forthe fiscal year 2005. Other than as discussed in those sections, or as notedbelow, the Company does not currently have any transactions or circumstancesthat have been addressed by recently issued accounting pronouncements. Adoptionof any of these statements or pronouncements are not expected to have amaterial impact on the Company’s results of operations, financial position orliquidity.

In November 2004, SFASNo. 151, “Inventory Costs - An Amendment of ARB No. 43, Chapter 4,” was issuedwhich amends the guidance in Accounting Research Bulletin (“ARB”) No. 43,Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material. Among other provisions, the new rule requires that items such as idlefacility expense, excessive spoilage, double freight and rehandling costs berecognized as current -period charges regardless of whether they meet thecriteria of “so abnormal” as stated in ARB No. 43.  Additionally, SFAS 151requires the allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 1, 2005. The Company adopted this standard in the first quarter of fiscal 2006 andsuch adoption did not have a material impact on its consolidated results ofoperations, cash flows or financial condition.

In March 2005, theEmerging Issues Task Force reached a consensus on Issue 04-6, “Accounting forStripping Costs in the Mining Industry” (EITF 04-6) which became effective onJanuary 1, 2006. EITF 04-6 states that stripping costs incurred after the firstsaleable minerals are extracted from the mine (i.e. post-production strippingcosts) should be considered costs of the extracted minerals and recognized as acomponent of inventory to be recognized in costs of sales in the same period asthe revenue from the sale of the inventory. As disclosed in the Company’s 2005Annual Report on Form 10-K, the Company has historically treated post-

 

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production strippingcosts in the manner prescribed by EITF 04-6 and, therefore, adoption of EITF04-6 in the first quarter of fiscal 2006 did not have a material impact on theCompany’s consolidated results of operations, cash flows or financialcondition.

In June 2006 FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes” was issuedwhich clarifies the application of SFAS No. 109, “Accounting for Income Taxes”by establishing a threshold condition that a tax position must meet for anypart of the benefit of that position to be recognized in financial statements.In addition to recognition, Interpretation No. 48 provides guidance onmeasurement, derecognition, classification and disclosure of tax positions.Interpretation No. 48 is effective for fiscal years beginning after December 15,2006, with earlier adoption permitted as of the beginning of a fiscal year forwhich annual or interim financial statements have not yet been issued. TheCompany has not had sufficient time to evaluate what impact Interpretation No.48 might have on the Company’s consolidated results of operations or financialcondition.

The Company hasdetermined that it qualifies for certain deductions that the American JobsCreation Act of 2004 provides for income from qualified domestic productionactivities. Although the effect of the deduction is not expected to have amaterial effect on the tax provision for 2006, a preliminary estimate of thededuction was included in the determination of the tax provision.

FORWARD-LOOKINGSTATEMENTS

The foregoing discussion contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended. Suchforward-looking statements are based on the beliefs of the Company’s managementas well as on assumptions made by and information available to the Company atthe time such statements were made.  Whenused in this Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,”“expects,” “plans,” “projects,” and similar expressions are intended toidentify forward-looking statements. Actual results could differ materiallyfrom those projected in the forward-looking statements as a result of factorsincluding but not limited to: weather, interest rates, availability of rawmaterials and their related costs, the Company’s ability to timely resumeoperations after the flooding at its two Arkansas River aggregates sites,national and local economic conditions and competitive forces. Some of thesefactors are discussed in more detail in the Company’s 2005 Annual Report onForm 10-K. Changes in accounting pronouncements could also alter projectedresults. Forward-looking statements speak only as of the date they were made,and the Company undertakes no obligation to publicly update them.

**Item 3.        QuantitativeAnd Qualitative Disclosures About Market Risk**

Therehave been no material changes in the market risks that the Company is exposedto since those discussed in the Company’s 2005 Annual Report on Form 10-K. AtSeptember 30, 2006, the amount subject to the interest rate swap agreement was$1,500,000. Also see Note 9 to the quarterly financial statements above.

**Item 4.        Controlsand Procedures**

(a)       Disclosure Controls and Procedures.

TheCompany’s Chief Executive Officer and Chief Financial Officer, with theparticipation of management, have evaluated the effectiveness of the Company’s “disclosurecontrols and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) as of September 30, 2006. Based onthat evaluation, they have concluded that the Company’s disclosure controls andprocedures as of such date are effective and are reasonably designed to ensurethat all material information relating to the Company (including itssubsidiaries) required to be disclosed in this quarterly report is recorded,processed, summarized and reported within the time periods specified in therules and forms of the Securities and Exchange Commission.

(b)       Changes in Internal Control OverFinancial Reporting.

Therehave been no significant changes in the Company’s internal control overfinancial reporting identified in connection with the evaluation of suchinternal control that occurred during the last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

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**PART II -OTHER INFORMATION**

**Item 2.        Unregistered Sales of Equity Securitiesand Use of Proceeds**

There were no purchases made by the Company of its common stock tobecome treasury stock for the period July 1 through September 30, 2006.

On January 19, 1999, the Company initiated purchases under the currentopen-ended program to repurchase its common stock. Purchases are made on theopen market or in block trades at the discretion of management. The dollaramount authorized for the program has been periodically increased by the Boardof Directors and approved by the Company’s two banks as required by the Company’sRevolving Credit and Term Loan Agreement. The June 28, 2005 amendment to theLoan Agreement provides that the Company may make purchases of its own stock inan amount not to exceed $1,438,000, separate from purchases made in connectionwith the 2005 tender offer and the exercise of cash-less stock options. AtSeptember 30, 2006, the maximum dollar value of shares that may yet bepurchased under the program was $1,418,942. Since the 2005 tender offer,management has not actively sought to repurchase shares.

**Item 4.        Submissionof Matters to a Vote of Security Holders**

(a)                                  The2006 Annual Meeting of the Stockholders of the Company was held on September13, 2006.

(b)                                 Atthat meeting, three individuals, all of whom are current directors, wereelected to serve until the 2009 Annual Meeting by the following votes:

| Director          | ** ** | **Shares For** | ** ** | **Shares Against** | ** ** | **Shares Withheld** | ** ** |
|-------------------|------------|---------------------|------------|-------------------------|------------|--------------------------|------------|
| Thomas H. Carmody |       | 1,457,907           |       | —                  |       | 103,844                  |       |
| Ronald J. Gidwitz |       | 1,446,076           |       | —                  |       | 115,675                  |       |
| Darrell M. Trent  |       | 1,457,947           |       | —                  |       | 103,804                  |       |

 

There were no broker non-votes.

The followingdirectors’ terms of office continued after the 2006 Meeting until the AnnualMeetings of the respective years as set forth opposite their names below:

| Directors            | ** ** | **Expiration of Term** | ** ** |
|----------------------|------------|----------------------------------|------------|
| William D.  Andrews  |       | 2007                             |       |
| Betsy R. Gidwitz     |       | 2007                             |       |
| James G. Gidwitz     |       | 2007                             |       |
| Ralph W. Gidwitz     |       | 2008                             |       |
| Peter E.  Thieriot   |       | 2008                             |       |
| Theodore R. Tetzlaff |       | 2008                             |       |

 

(c)                                  Inaddition to the above election, the appointment of the independent registeredpublic accounting firm of Deloitte & Touche LLP was ratified by thefollowing vote:

|  For |   | Against |   | Abstain |
|-----------|--------|---------|--------|---------|
| 1,559,487 |   | 2,264   |   | —  |

 

There were nobroker non-votes.

(d)                                 Notapplicable.

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**Item 6.****                       Exhibits**

 

Exhibits
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                   |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                              |
| 31.1        |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) and Rule  13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes — Oxley Act of 2002 |
|        |       |                                                                                                                                                                                                                              |
| 31.2        |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) and Rule 13a-14(d)/15d-14(d)  of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes — Oxley Act of 2002 |
|        |       |                                                                                                                                                                                                                              |
| 32          |       | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes — Oxley Act of 2002                                            |

 

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SIGNATURE

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                              |   |   | CONTINENTAL MATERIALS CORPORATION |
|------------------------------|--------|--------|-----------------------------------|
|                         |   |   |                              |
|                         |   |   |                              |
| Date: November 13, 2006 |   |   | By:                               |  /S/ Joseph J.  Sum |   |
|                         |   |   |                              | Joseph J. Sum, Vice President |
|                         |   |   |                              | and Chief Financial Officer |

 

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