**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                                                                                                  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                             | ** ** | ** **                                                                                               |
| **For the  quarterly period ended June 28, 2008**                                                                                 |
| ** **                                                                                                                             | ** ** | ** **                                                                                               |
| **OR**                                                                                                                                 |
| ** **                                                                                                                             | ** ** | ** **                                                                                               |
| **o**                                                                                                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                             | ** ** | ** **                                                                                               |
| **For the  transition period  from                to** |
| ** **                                                                                                                             | ** ** | ** **                                                                                               |
| **Commission  File number 1-3834**                                                                                                     |

 

**CONTINENTALMATERIALS 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 sincelast report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 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 forthe past 90 days.

 

Yes  x           No  o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large Accelerated Filer o                     |   | Accelerated Filer o          |
|-----------------------------------------------|--------|------------------------------|
|                                          |   |                         |
| Non-Accelerated Filer x                       |   | Smaller reporting  company o |
| (Do not check if a smaller reporting company) |   |                         |

 

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

 

Yes  o                   No  x

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date: Common Stock, $0.25 par value, sharesoutstanding at August 8, 2008                                1,598,674

 

 

 

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PART I – FINANCIAL INFORMATION

 

**Item1.   Financial Statements**

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

JUNE 28, 2008 and DECEMBER 29, 2007

(Unaudited)

 (000’s omitted except sharedata)

 
| ** **                                                                            | ** ** | **JUNE 28,** | ** ** | **DECEMBER 29,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ***ASSETS***                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                       |       |              |       |                  |       |
| Cash and cash  equivalents                                                            |       | $                 | 3,239      |                  | $          | 3,326 |   |
| Receivables, net                                                                      |       | 25,135            |       | 22,652                |       |
| Receivable for  insured losses                                                        |       | 1,454             |       | 1,548                 |       |
| Inventories:                                                                          |       |              |       |                  |       |
| Finished goods                                                                        |       | 9,183             |       | 7,940                 |       |
| Work in process                                                                       |       | 1,459             |       | 1,372                 |       |
| Raw materials  and supplies                                                           |       | 12,655            |       | 9,915                 |       |
| Prepaid expenses                                                                      |       | 5,488             |       | 5,508                 |       |
| Total current  assets                                                                 |       | 58,613            |       | 52,261                |       |
|                                                                                  |       |              |       |                  |       |
| Property, plant  and equipment, net                                                   |       | 32,450            |       | 34,917                |       |
|                                                                                  |       |              |       |                  |       |
| Goodwill                                                                              |       | 7,829             |       | 7,829                 |       |
| Amortizable  intangible assets, net                                                   |       | 1,049             |       | 1,198                 |       |
| Other assets                                                                          |       | 2,338             |       | 2,305                 |       |
|                                                                                  |       |              |       |                  |       |
|                                                                                  |       | $                 | 102,279    |                  | $          | 98,510 |   |
|                                                                                  |       |              |       |                  |       |
| ***LIABILITIES***                                                                     |       |              |       |                  |       |
| Current liabilities:                                                                  |       |              |       |                  |       |
| Current portion  of long-term debt                                                    |       | $                 | 1,657      |                  | $          | 2,400 |   |
| Accounts payable  and accrued expenses                                                |       | 21,498            |       | 17,912                |       |
| Liability for  unpaid claims covered by insurance                                     |       | 1,454             |       | 1,548                 |       |
| Income taxes                                                                          |       | —            |       | 19                    |       |
| Total current  liabilities                                                            |       | 24,609            |       | 21,879                |       |
|                                                                                  |       |              |       |                  |       |
| Revolving bank  loan payable                                                          |       | 11,000            |       | 7,900                 |       |
| Long-term debt                                                                        |       | 9,943             |       | 10,400                |       |
| Deferred income  taxes                                                                |       | 3,773             |       | 3,848                 |       |
| Other long-term  liabilities                                                          |       | 1,684             |       | 1,796                 |       |
|                                                                                  |       |              |       |                  |       |
| ***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                                                                    |       | 65,412            |       | 66,810                |       |
| Treasury shares,  975,590 and 972,170, at cost                                        |       | (16,615           | )          | (16,596               | )          |
|                                                                                  |       | 51,270            |       | 52,687                |       |
|                                                                                  |       |              |       |                  |       |
|                                                                                  |       | $                 | 102,279    |                  | $          | 98,510 |   |

 

See accompanying notes

 

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CONTINENTAL MATERIALSCORPORATION

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHSENDED JUNE 28, 2008 AND JUNE 30, 2007

(Unaudited)

(000’s omitted exceptper-share amounts)

 
| ** **                                                             | ** ** | **JUNE 28,** | ** ** | **JUNE 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                             | ** ** | **2008**          | ** ** | **2007**          | ** ** |
|                                                                   |       |              |       |              |       |
| Sales                                                                  |       | $                 | 41,761     |              | $          | 45,651 |   |
|                                                                   |       |              |       |              |       |
| Costs and  expenses:                                                   |       |              |       |              |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization) |       | 35,254            |       | 37,253            |       |
| Depreciation,  depletion and amortization                              |       | 1,318             |       | 1,322             |       |
| Selling and  administrative                                            |       | 5,102             |       | 5,276             |       |
|                                                                   |       |              |       |              |       |
| Gain on  disposition of property and equipment                         |       | 40                |       | 2                 |       |
|                                                                   |       | 41,634            |       | 43,849            |       |
|                                                                   |       |              |       |              |       |
| Operating income                                                       |       | 127               |       | 1,802             |       |
|                                                                   |       |              |       |              |       |
| Interest expense                                                       |       | (288              | )          | (368              | )          |
| Other (expense)  income, net                                           |       | (29               | )          | 263               |       |
|                                                                   |       |              |       |              |       |
| (Loss) income  before income taxes                                     |       | (190              | )          | 1,697             |       |
|                                                                   |       |              |       |              |       |
| Provision for  income taxes                                            |       | 77                |       | 511               |       |
|                                                                   |       |              |       |              |       |
| Net (loss)  income                                                     |       | (267              | )          | 1,186             |       |
|                                                                   |       |              |       |              |       |
| Retained  earnings, beginning of period                                |       | 65,679            |       | 67,045            |       |
| ** **                                                             | ** ** | ** **        | ** ** | ** **        | ** ** |
| Retained  earnings, end of period                                      |       | $                 | 65,412     |              | $          | 68,231 |   |
|                                                                   |       |              |       |              |       |
| Basic and  diluted (loss) earnings per share                           |       | $                 | (.17       | )                 | $          | .74 |   |
|                                                                   |       |              |       |              |       |
| Average shares  outstanding                                            |       | 1,599             |       | 1,603             |       |

 

See accompanying notes

 

3

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CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE SIX MONTHS ENDEDJUNE 28, 2008 AND JUNE 30, 2007

(Unaudited)

(000’s omitted exceptper-share amounts)

 
| ** **                                                             | ** ** | **JUNE 28,** | ** ** | **JUNE 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                             | ** ** | **2008**          | ** ** | **2007**          | ** ** |
|                                                                   |       |              |       |              |       |
| Sales                                                                  |       | $                 | 76,273     |              | $          | 85,730 |   |
|                                                                   |       |              |       |              |       |
| Costs and  expenses:                                                   |       |              |       |              |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization) |       | 65,054            |       | 71,047            |       |
| Depreciation,  depletion and amortization                              |       | 2,653             |       | 2,637             |       |
| Selling and  administrative                                            |       | 10,302            |       | 10,569            |       |
|                                                                   |       |              |       |              |       |
| Gain on  disposition of property and equipment                         |       | 384               |       | 33                |       |
|                                                                   |       | 77,625            |       | 84,220            |       |
|                                                                   |       |              |       |              |       |
| Operating (loss)  income                                               |       | (1,352            | )          | 1,510             |       |
|                                                                   |       |              |       |              |       |
| Interest expense                                                       |       | (618              | )          | (581              | )          |
| Other (loss)  income, net                                              |       | (1                | )          | 279               |       |
|                                                                   |       |              |       |              |       |
| (Loss) Income  before income taxes                                     |       | (1,971            | )          | 1,208             |       |
|                                                                   |       |              |       |              |       |
| (Benefit)  provision for income taxes                                  |       | (573              | )          | 350               |       |
|                                                                   |       |              |       |              |       |
| Net (loss)  income                                                     |       | (1,398            | )          | 858               |       |
|                                                                   |       |              |       |              |       |
| Retained  earnings, beginning of period                                |       | 66,810            |       | 67,373            |       |
|                                                                   |       |              |       |              |       |
| Retained  earnings, end of period                                      |       | $                 | 65,412     |              | $          | 68,231 |   |
|                                                                   |       |              |       |              |       |
| Basic and  diluted (loss) earnings per share                           |       | $                 | (.87       | )                 | $          | .53 |   |
|                                                                   |       |              |       |              |       |
| Average shares  outstanding                                            |       | 1,600             |       | 1,603             |       |

 

See accompanying notes

 

4

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CONTINENTAL MATERIALSCORPORATION

CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS

FOR THE SIX MONTHS ENDEDJUNE 28, 2008 AND JUNE 30, 2007

(Unaudited)

(000’s omitted)

 
| ** **                                                              | ** ** | **JUNE 28,  2008** | ** ** | **JUNE 30,  2007** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                                                                    |       |                    |       |                    |       |
| Net cash used in  operating activities                                  |       | $                       | (2,239     | )                       | $          | (1,105 | ) |
|                                                                    |       |                    |       |                    |       |
| Investing  activities:                                                  |       |                    |       |                    |       |
| Capital  expenditures                                                   |       | (407                    | )          | (4,631                  | )          |
| Proceeds from  sale of assets                                           |       | 678                     |       | 317                     |       |
| Net cash  provided by (used in) investing activities                    |       | 271                     |       | (4,314                  | )          |
|                                                                    |       |                    |       |                    |       |
| Financing  activities:                                                  |       |                    |       |                    |       |
| Borrowings under  revolving credit facility                             |       | 3,100                   |       | 6,800                   |       |
| Repayment of  long-term debt                                            |       | (1,200                  | )          | (1,333                  | )          |
| Insurance  proceeds for property and equipment damaged by flood         |       | —                  |       | 91                      |       |
| Payment to  acquire treasury stock                                      |       | (19                     | )          | (70                     | )          |
| Net cash  provided by financing activities                              |       | 1,881                   |       | 5,488                   |       |
|                                                                    |       |                    |       |                    |       |
| Net increase  (decrease) in cash and cash equivalents                   |       | (87                     | )          | 69                      |       |
| Cash and cash  equivalents:                                             |       |                    |       |                    |       |
| Beginning of  period                                                    |       | 3,326                   |       | 2,770                   |       |
|                                                                    |       |                    |       |                    |       |
| End of period                                                           |       | $                       | 3,239      |                    | $          | 2,839 |   |
|                                                                    |       |                    |       |                    |       |
| Supplemental  disclosures of cash flow items:                           |       |                    |       |                    |       |
| Cash paid during  the six months for:                                   |       |                    |       |                    |       |
| Interest                                                                |       | $                       | 730        |                    | $          | 675 |   |
| Income taxes                                                            |       | —                  |       | 545                     |       |
| Supplemental  disclosures of noncash investing and financing activities |       |                    |       |                    |       |
| Buyer’s  assumption of liabilities                                 |       | $                       | 85         |                    | $          | — |   |
| Capital  expenditures purchased on account                              |       | 8                       |       | 105                     |       |

 

See accompanying notes

 

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CONTINENTAL MATERIALSCORPORATION

SECURITIES AND EXCHANGECOMMISSION FORM 10-Q

NOTES TO THE QUARTERLYCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED JUNE 28,2008

(Unaudited)

 

1.               The unaudited interim condensed consolidated financialstatements included herein are prepared pursuant to the Securities and ExchangeCommission 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 interimcondensed consolidated financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s latest annual report on Form 10-K. In theopinion of management, the condensed consolidated financial statements includeall adjustments (none of which were other than normal recurring adjustments)necessary for a fair statement of the results for the interim periods.

 

2.               Our effective income tax rate is based onexpected income, statutory tax rates and tax positions taken in the variousjurisdictions in which we operate. For interim financial reporting, we estimatethe annual effective rate based on the projected taxable income for the fullyear and record a quarterly income tax provision in accordance with theanticipate annual rate. As the year progresses, we refine the estimates of theyear’s taxable income as new information becomes available, includingyear-to-date financial results. This continual estimation process often resultsin a change to our expected effective income tax rate for the year. When thisoccurs, we adjust the income tax provision during the quarter in which thechange in estimate occurs so that the year-to-date provision reflects the expectedannual income tax rate. For the six months ended June 28, 2008, weutilized the effective rate based upon projected operating results for the fullyear and recorded an income tax provision for the second quarter such that thesix month year-to-date rate reflected the estimated annual income tax rate.Significant judgment is required in determining our effective income tax rateand in evaluating our tax positions.

 

On December 31,2006, the first day of the 2007 fiscal year, we adopted the provisions ofFinancial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with Statementof Financial Accounting Standards (SFAS) No. 109, “Accounting for IncomeTaxes,” by prescribing a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. Under FIN 48, the financial statementeffects of a tax position should initially be recognized when it is more likelythan not, based on the technical merits, that the position will be sustainedupon examination. A tax position that meets the more-likely-than-notrecognition threshold should initially and subsequently be measured as thelargest amount of tax benefit that has a greater than 50% likelihood of beingrealized upon effective settlement with a taxing authority.

 

There was no cumulativeadjustment to retained earnings required as a result of the implementation ofFIN 48. The gross amount of unrecognized tax benefits at December 29, 2007was $328,000 of which $74,000 would affect the effective tax rate. The grossamount of unrecognized tax benefits at June 28, 2008 was $346,000 of which$56,000 would affect the effective tax rate.

 

We classify interest andpenalties recognized on the liability for unrecognized tax benefits as incometax expense. Accrued interest and penalties included in our total liability forunrecognized tax benefits were approximately $107,000 as of June 28, 2008and $69,000 as of December 29, 2007.

 

The United States Federaland various state statutes of limitations expire during the third quarter of2008 for our 2004 tax year. Included in the balance at June 28, 2008 isapproximately $9,000 related to tax positions expected to be resolved within12 months of this reporting date.

 

We file income taxreturns in the United States federal and various state jurisdictions.Generally, we are not subject to changes in income taxes by any taxingjurisdiction for the years prior to 2003.

 

3.               Effective December 30, 2007, theCompany adopted SFAS No. 157, “Fair Value Measurements,” which provides aframework for measuring fair value under accounting principles generallyaccepted in the United

 

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States of America. Theadoption of this statement had an immaterial impact on our consolidatedfinancial statements. The Company also adopted the deferral provisions of theFinancial Accounting Standards Board Staff Position FAS 157-2, whichdelays the effective date of SFAS No. 157 for all nonrecurring fair valuemeasurements of non-financial assets and liabilities until fiscal yearsbeginning after November 15, 2008.

 

Fair value is defined asthe exchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date. SFAS No. 157 also expands disclosures about instrumentsmeasured at fair value and establishes a fair value hierarchy which requires anentity to maximize the use of observable inputs and minimize the use ofunobservable inputs when measuring fair value. The standard describes threelevels of inputs that may be used to measure fair value:

 

Level 1 – Quoted pricesfor identical assets and liabilities in active markets;

 

Level 2 – Quoted pricesfor similar assets and liabilities in active markets; quoted prices foridentical or similar assets and liabilities in markets that are not active; andmodel-derived valuations in which all significant inputs and significant valuedrivers are observable  in activemarkets; and

 

Level 3 – Valuationsderived from valuation techniques in which one or more significant inputs orsignificant value drivers are unobservable.

 

The Company designatesthe cash equivalents as Level 1, as they are money market accounts backed byTreasury Bills. As of June 28, 2008, and December 29, 2007, theCompany did not have any cash equivalents, therefore there were no assetsmeasured at fair value.

 

4.               Operating results for the first six monthsof 2008 are not necessarily indicative of performance for the entire year.Historically, sales of the Evaporative Cooling segment are higher in the firstand second quarters, sales of the Concrete, Aggregates and ConstructionSupplies segment are higher in the second and third quarters and sales of theHeating and Cooling segment are higher in the third and fourth quarters. Salesof the Door segment have not shown strong seasonal fluctuations in recentyears.

 

5.               There is no difference in the calculationof basic and diluted earnings per share (EPS) for the three-month or six-monthperiods ended June 28, 2008 and June 30, 2007.

 

6.               The Company operates primarily in fourreportable segments within its two principal industry groups; the Heating andCooling segment and the Evaporative Cooling segment in the Heating, Ventilationand Air Conditioning (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-firedwall furnaces, console heaters and fan coils from the Company’s wholly-ownedsubsidiary, Williams Furnace Co. of Colton, California. The Evaporative Coolingsegment produces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona. Sales ofthese two segments are nationwide, but are concentrated in the southwesternUnited States. Concrete, Aggregates and Construction Supplies are offered fromnumerous locations along the Front Range of Colorado operated by the Company’swholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co.(TMC), of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo andRocky Mountain Ready Mix Concrete, Inc. of Denver. Doors are fabricatedand sold along with the related hardware from locations in Pueblo and ColoradoSprings by the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc.(MDHI) of Pueblo, Colorado. Sales of these two segments are highly concentratedin the Front Range area in Colorado although door sales are also madethroughout the United States.

 

TheCompany evaluates the performance of its segments and allocates resources tothem based on a number of criteria including operating income, return oninvestment and other strategic objectives. Operating income is determined bydeducting operating expenses from all revenues. In computing operating income,none of the following has been added or deducted: unallocated corporate expenses,interest, other income or loss or income taxes.

 

In addition to the abovereporting segments, an “Unallocated Corporate” classification is used to reportthe unallocated expenses of the corporate office which provides treasury,insurance and tax services as well as

 

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strategic businessplanning and general management services and an “Other” classification is usedto report a real estate operation. Expenses related to the corporateinformation technology group are allocated to all locations, including thecorporate office.

 

Thefollowing table presents information about reported segments for thethree-month and six-month periods ended June 28, 2008 and June 30,2007 along with the items necessary to reconcile the segment information to thetotals reported in the financial statements (amounts in thousands):

 
| ** **                               | ** ** | **Construction Products**                                    | ** ** | **HVAC Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**         | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2008                                     |       |                                                         |       |              |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Six Months ended June 28, 2008      |       |                                                         |       |              |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers         |       | $                                                            | 34,664     |              | $          | 7,625                                |       | $                         | 42,289     |                     | $          | 19,604 |   | $ | 14,199 |   | $ | 33,803 |   | $ | 9 |   | $ | 172 |   | $ | 76,273 |   |
| Depreciation, depletion and amortization |       | 2,050                                                        |       | 65                |       | 2,115                                |       | 225                       |       | 275                      |       | 500 |   | 38 |   | — |   | 2,653 |   |
| Operating (loss) income                  |       | (728                                                         | )          | 786               |       | 58                                   |       | (422                      | )          | 530                      |       | 108 |   | (1,572 | ) | 54 |   | (1,352 | ) |
| Segment assets                           |       | 52,997                                                       |       | 6,774             |       | 59,771                               |       | 23,861                    |       | 15,437                   |       | 39,298 |   | 3,206 |   | 4 |   | 102,279 |   |
| Capital expenditures (a)                 |       | 191                                                          |       | 100               |       | 291                                  |       | 51                        |       | 68                       |       | 119 |   | 5 |   | — |   | 415 |   |
| Quarter ended June 28, 2008         |       |                                                         |       |              |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers         |       | $                                                            | 20,875     |              | $          | 3,865                                |       | $                         | 24,740     |                     | $          | 8,081 |   | $ | 8,850 |   | $ | 16,931 |   | $ | 4 |   | $ | 86 |   | $ | 41,761 |   |
| Depreciation, depletion and amortization |       | 1,013                                                        |       | 32                |       | 1,045                                |       | 117                       |       | 137                      |       | 254 |   | 19 |   | — |   | 1,318 |   |
| Operating income (loss)                  |       | 1,156                                                        |       | 368               |       | 1,524                                |       | (779                      | )          | 148                      |       | (631 | ) | (793 | ) | 27 |   | 127 |   |
| Segment assets                           |       | 52,997                                                       |       | 6,774             |       | 59,771                               |       | 23,861                    |       | 15,437                   |       | 39,298 |   | 3,206 |   | 4 |   | 102,279 |   |
| Capital expenditures (a)                 |       | 187                                                          |       | 14                |       | 201                                  |       | 21                        |       | 17                       |       | 38 |   | — |   | — |   | 239 |   |

 
| ** **                               | ** ** | **Construction Products**                                    | ** ** | **HVAC Products** | ** ** | ** **                           | ** ** | ** **                 | ** ** | ** **               | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------|------------|--------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**         | ** ** | **Combined  Construction  Products** | ** ** | **Heating   and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2007                                     |       |                                                         |       |              |       |                                 |       |                       |       |                     |       |   |   |   |   |   |   |   |   |
| Six Months ended June 30, 2007      |       |                                                         |       |              |       |                                 |       |                       |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers         |       | $                                                            | 45,525     |              | $          | 9,449                                |       | $                          | 54,974     |                     | $          | 16,176 |   | $ | 14,399 |   | $ | 30,575 |   | $ | 9 |   | $ | 172 |   | $ | 85,730 |   |
| Depreciation, depletion and amortization |       | 2,029                                                        |       | 61                |       | 2,090                                |       | 211                        |       | 300                      |       | 511 |   | 36 |   | — |   | 2,637 |   |
| Operating income (loss)                  |       | 2,318                                                        |       | 1,167             |       | 3,485                                |       | (679                       | )          | 127                      |       | (552 | ) | (1,477 | ) | 54 |   | 1,510 |   |
| Segment assets (b)                       |       | 53,002                                                       |       | 7,398             |       | 60,400                               |       | 22,810                     |       | 13,101                   |       | 35,911 |   | 2,140 |   | 59 |   | 98,510 |   |
| Capital expenditures (c)                 |       | 3,806                                                        |       | 209               |       | 4,015                                |       | 232                        |       | 478                      |       | 710 |   | 31 |   | — |   | 4,756 |   |
| Quarter ended June 30, 2007         |       |                                                         |       |              |       |                                 |       |                       |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers         |       | $                                                            | 25,718     |              | $          | 4,531                                |       | $                          | 30,249     |                     | $          | 6,794 |   | $ | 8,518 |   | $ | 15,312 |   | $ | 4 |   | $ | 86 |   | $ | 45,651 |   |
| Depreciation, depletion and amortization |       | 1,021                                                        |       | 26                |       | 1,047                                |       | 106                        |       | 150                      |       | 256 |   | 19 |   | — |   | 1,322 |   |
| Operating income (loss)                  |       | 2,845                                                        |       | 571               |       | 3,416                                |       | (1,050                     | )          | 76                       |       | (974 | ) | (667 | ) | 27 |   | 1,802 |   |
| Segment assets (b)                       |       | 53,002                                                       |       | 7,398             |       | 60,400                               |       | 22,810                     |       | 13,101                   |       | 35,911 |   | 2,140 |   | 59 |   | 98,510 |   |
| Capital expenditures (c)                 |       | 715                                                          |       | 65                |       | 780                                  |       | 89                         |       | 149                      |       | 238 |   | 9 |   | — |   | 1,027 |   |

 

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(a)          Capitalexpenditures for the Evaporative Cooling segment include $8,000 of additionspurchased on account.

(b)         Segmentassets are as of December 29, 2007.

(c)          Capitalexpenditures for the Concrete, Aggregates and Construction Supplies segmentinclude $46,000 of additions purchased on account and capital expenditures forthe Evaporative Cooling segment include $59,000 of additions purchased onaccount.

 

There are no differences in the basis ofsegmentation or in the basis of measurement of segment profit or loss from thelast Annual Report on Form 10-K.

 

8

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7.               Identifiable intangible assets as of June 28,2008 include five non-compete agreements, a restrictive land covenant andcustomer relations. Collectively, these assets were carried at $1,049,000, netof $1,562,000 accumulated amortization. The pre-tax amortization expense forintangible assets during the quarter ended June 28, 2008 was $74,000compared to $76,000 for the quarter ended June 30, 2007 and $150,000 and$165,000 for the six months ended June 28, 2008 and June 30, 2007,respectively. Based upon the intangible assets recorded on the balance sheet atJune 28, 2008, amortization expense for the next five years is estimatedto be as follows: 2008 – $300,000, 2009 – $294,000, 2010 – $262,000, 2011 –$101,000 and 2012 – $65,000.

 

8.               At June 28, 2008, the Company wasnot in compliance with the Cash Flow (EBITDA) requirement or the Leverage Ratioas defined in the Company’s loan agreement dated September 5, 2003 withLaSalle Bank National Association and Fifth Third Bank. The Company has enteredinto a First Amendment to Amended and Restated Revolving Credit and Term LoanAgreement (First Amendment) dated August 12, 2008. The First Amendmentwaives the Events of Default previously noted. Repayment of the Term Loan($11,600,000 at the time of the signing) will be repayable in quarterlyinstallments of $414,286 with final payment of all outstanding Term Loanindebtedness on March 31, 2011. The First Amendment also extends theamount of availability under the revolving credit facility of $18,000,000 to December 31,2008 at which time the amount is decreased to $15,000,000 to the terminationdate of June 30, 2009. The revolving credit line is used for seasonal orshort-term cash needs and stand-by letter of credit. At June 28, 2008, theCompany had outstanding stand-by letters of credit to insurance carrierstotaling approximately $4,510,000 that collateralize the self-insured amountsunder the Company’s risk management program. There was $11,000,000 ofoutstanding borrowings under the revolving credit line at June 28, 2008.The amounts outstanding under the First Amendment are collateralized by theCompany’s accounts receivable, inventories, machinery and equipment (excludinglicensed vehicles) and other assets (excluding real estate). The FirstAmendment established certain financial covenants similar in nature to thoseexisting under the predecessor loan document. At the Company’s option, the termloan and revolving credit facility will bear interest at prime or aperformance- based LIBOR rate. Based on the terms of the First Amendment andthe Company’s performance for the twelve months ended June 28, 2008, theperformance based rate will be LIBOR plus 3% or Prime plus 1% for both the TermLoan and borrowings under the revolving credit facility. The Company expects tobe in compliance with the new covenants in future quarters.

 

**Item 2.        Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

** **

Company Overview

 

The Company operates infour reportable segments within its two principal industry groups; the Heatingand Cooling segment and the Evaporative Cooling segment in the HVAC industrygroup and the Concrete, Aggregates and Construction Supplies segment and theDoor segment in the Construction Products industry group.

 

The Heating and Coolingsegment produces and sells gas-fired wall furnaces, console heaters and fancoils from the Company’s wholly-owned subsidiary, Williams Furnace Co. ofColton, California. The Evaporative Cooling segment produces and sellsevaporative coolers from the Company’s wholly-owned subsidiary, PhoenixManufacturing, Inc. of Phoenix, Arizona. Concrete, Aggregates and ConstructionSupplies are offered from numerous locations along the Front Range of Coloradooperated by the Company’s wholly-owned subsidiaries Castle Concrete Company andTransit Mix Concrete Co., of Colorado Springs, Transit Mix of Pueblo, Inc.of Pueblo and Rocky Mountain Ready Mix Concrete, Inc. of Denver. Doors arefabricated and sold along with the related hardware from Colorado Springs andPueblo through the Company’s wholly-owned subsidiary, McKinney Door andHardware, Inc. of Pueblo, Colorado.

 

In addition to the abovereporting segments, an “Unallocated Corporate” classification is used to reportthe unallocated expenses of the corporate office which provides treasury,insurance and tax services as well as strategic business planning and generalmanagement services and an “Other” classification is used to report a realestate operation. Expenses related to the corporate information technologygroup are allocated to all locations, including the corporate office.

 

Liquidity andCapital Resources

 

Salesof the Company’s HVAC products, other than fan coils, are seasonal and weathersensitive. Revenues in the Company’s Concrete, Aggregates and ConstructionSupplies segment are influenced by the level of

 

9

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constructionactivity and weather conditions along the Front Range of Colorado. Sales forthe Door segment are not generally seasonal nor are they affected significantlyby weather conditions. Historically, the Company has experienced operatinglosses during the first quarter except when construction activity is strongalong the Front Range of Colorado and the weather is mild. Operating resultstypically improve in the second and third quarters reflecting more favorableweather conditions in Colorado and the seasonal sales of the EvaporativeCooling segment. Fourth quarter results can vary based on weather conditions inColorado as well as in the principal markets for the Company’s heatingequipment. The Company typically experiences operating cash flow deficitsduring the first half of the year reflecting operating results, the use ofsales dating programs (extended payment terms) related to the EvaporativeCooling segment and payments of the prior year’s accrued incentive bonuses andCompany profit-sharing contributions. As a result, the Company’s borrowingsagainst its revolving credit facility tend to peak during the second quarterand then decline over the remainder of the year. Although this trend was notfollowed throughout 2007, the results during the first half of 2008 have moreclosely resembled the historical trend.

 

Asexpected, the Company’s cash flow during the first six months of 2008 wasnegative due to the seasonality of sales, production schedules and the salesdating programs related to the evaporative cooler product line. Operations used$2,239,000 of cash compared to the $1,105,000 of cash used during the first sixmonths of 2007. The increased use of cash during the first six months of 2008was due to the decline in operating results partially offset by changes inworking capital accounts primarily a smaller net increase in accountsreceivable and inventories during the first six months of 2008 as compared tothe 2007 period. Receivables declined due to the lower sales. Partiallyoffsetting the decline in receivables was an increase in inventories due to thelower sales and the timing of receipt and higher prices of raw material prices.

 

Duringthe six months ended June 28, 2008, investing activities provided $271,000of cash compared to using $4,314,000 in the prior year’s period. Capitalexpenditures were held to a minimum during the first half of 2008 due to thedecline in sales and were primarily for routine replacements of equipment andthe completion of improvements to the building purchased for the Door segmentduring 2007. The Concrete, Aggregates and Construction Materials segment soldthe assets of a small aggregate operation (Table Mountain), during the firstquarter of 2008 for approximately $720,000 (including the buyer’s assumption ofjust over $85,000 of liabilities associated with the property) resulting in apre-tax gain of about $344,000. Table Mountain did not provide aggregates tothe Company’s ready-mix operations and management did not consider it to be astrategic part of its business. The proceeds from the sale of assets for 2007included $230,000 received from the June sale of stock received from thedemutualization of an insurance company that provides life insurance benefitsto our employees.

 

Financing activitiesprovided $1,881,000 during the first six months of 2008 compared to $5,488,000provided during the first six months of 2007. All scheduled debt repaymentswere made during the first six months of both 2008 and 2007. As expected, theCompany borrowed against its revolving credit facility during the first sixmonths of 2008. During the first six months of 2008, the highest amount ofCompany borrowings outstanding under the revolving credit agreement was$12,500,000 and the average amount outstanding was $9,355,000. See footnote 8for details regarding the First Amendment to the loan agreement signed August 11,2008.

 

TheCompany believes that anticipated cash flow from operations, supplemented byseasonal borrowings against the revolving line of credit, (of which $11,000,000was outstanding at June 28, 2008) will be sufficient to cover expectedcash needs, including servicing debt and planned capital expenditures for atleast the next twelve months.

 

Operations –Comparison of Quarter Ended June 28, 2008 to Quarter Ended June 30,2007

 

Historically, the Companyhas experienced improved operating results during the second quarter as salesin the Concrete, Aggregates and Construction Supplies segment increase due toweather more conducive to construction activity. The 2008 operating results,although still reporting a loss, were consistent with this trend. Consolidatedsales during the second quarter of 2008 were $41,761,000 compared to$45,651,000 in the second quarter of 2007.

 

The Heating and Coolingand the Evaporative Cooling segments both reported increased sales for thequarter while the Concrete, Aggregates and Construction Supplies segment andthe Door segment reported declines.

 

10

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Cost of sales as apercentage of sales increased from 81.6% to 84.4% primarily due to narrowermargins in the Concrete, Aggregates and Construction Supplies segment althoughthe Evaporative Cooling segment also reported a modest decline in margins.Selling and administrative costs decreased 3.3% but increased as a percentageof sales, from 11.6% to 12.2%, due to the lower sales volume. The reduction inselling and administrative costs was largely due to the lower sales volume.Costs related to implementation of the provisions of the Sarbanes-Oxley of 2002and consulting fees, particularly at the Corporate Office, partially offset thereduction. The resulting operating income of $127,000 lagged behind the$1,802,000 reported for the second quarter of 2007.

 

Interest expensedecreased from $368,000 for the second quarter of 2007 to $288,000 in the 2008quarter due lower interest rates.

 

The decrease in otherincome was due to a $230,000 gain during the second quarter of 2007 on the saleof stock received from the demutualization an insurance company that provideslife insurance to our employees.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

 

The table below presentsa summary of operating information for the two reportable segments within theConstruction Products group for the quarters ended June 28, 2008 and July 30,2007 (amounts in thousands):

 

| ** **                               | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors**  | ** ** |
|------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|
| Quarter ended  June 28, 2008             | ** ** | ** **                                            | ** ** | ** ** | ** ** |
| Revenues from  external customers        |       | $                                                     | 20,875     |       | $          | 3,865 |   |
| Segment  operating income                |       | 1,156                                                 |       | 368        |       |
| Operating income  as a percent of sales  |       | 5.5                                                   | %          | 9.5        | %          |
| Segment assets  as of June 28, 2008 |       | $                                                     | 52,997     |       | $          | 6,774 |   |
| Return on assets                         |       | 2.2                                                   | %          | 5.4        | %          |
|                                     |       |                                                  |       |       |       |
| Quarter ended  June 30, 2007        |       |                                                  |       |       |       |
| Revenues from  external customers        |       | $                                                     | 25,718     |       | $          | 4,531 |   |
| Segment  operating income                |       | 2,845                                                 |       | 571        |       |
| Operating income  as a percent of sales  |       | 11.1                                                  | %          | 12.6       | %          |
| Segment assets  as of June 30, 2007 |       | $                                                     | 61,545     |       | $          | 5,804 |   |
| Return on assets                         |       | 4.6                                                   | %          | 9.8        | %          |

 

Concrete,Aggregates and Construction Supplies Segment

 

Salesin the Concrete, Aggregates and Construction Supplies segment for the secondquarter of 2008 declined 18.8% from the prior year’s comparable quarter. Allthree product lines of this segment reported lower sales for the quarter ended June 28,2008 compared to the second quarter of 2007 due to the reduced constructionactivity along the Front Range of Colorado, especially housing construction.Profit margins for the segment declined as material and delivery costs,including fuel, continued to rise. Selling prices were unable to recapturethese increases due to competitive pressures created by the reducedconstruction activity. In addition, the 2007 second quarter results were aidedby the recovery of $725,000 from our insurance carrier as settlement of floodclaims that occurred during the third quarter of 2006. All expenses incurred torepair the damage and resume production had been recognized in cost of sales asincurred. Both quarries were back in operation by the end of 2006 although somemeasures to mitigate future vulnerability were performed in 2007. No recoverywas anticipated or recorded prior to receipt of the settlement during thesecond quarter of 2007.

 

Operatingincome for the second quarter of 2008 was $1,156,000 compared to$2,845,000 forthe comparable 2007 quarter primarily due to the reduced sales and the narrowermargins. Selling and administrative costs declined in line with the decrease insales, therefore remaining at approximately the same percentage of salesbetween the two quarters. As a result, both operating income as a percent ofsales and the return on assets declined in the second quarter of 2008 from thesecond quarter of 2007. Segment assets declined $8,548,000 from June 30,2007 to June 28, 2008 due to a lower receivables balance as a result ofthe reduced sales and lower net property, plant and equipment due todepreciation that outpaced capital expenditures.

 

11

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DoorSegment

 

Doorsegment sales declined $666,000, or 14.7%, during the second quarter of 2008from the comparable 2007 quarter. Sales during a specific quarter can beheavily influenced by customer requests to either accelerate or delay shipmentsof jobs to better coincide with their own construction schedules. Sales arealso influenced by the level of construction activity but the effect isgenerally slower to appear as the products supplied by this segment, when soldfor new construction, are some of the last items installed on a project. Thereduction in sales, therefore, reflects both the effect of the decline inconstruction activity over the past year and the timing of shipments as thebacklog has only declined approximately 3% from the level at the end of the2007 quarter. Margins declined principally due to the lower sales volume.

 

Operatingincome declined from $571,000 during the second quarter of 2007 to $368,000 forthe 2008 quarter primarily as a result of the lower sales volume. Selling andadministrative costs increased approximately 16% during the 2008 quarter due toexpenses related to the consolidation of the Colorado Springs operations intothe new facility and the addition of two employees. As a result, both operatingincome as a percent of sales and return on assets declined in the second quarterof 2008 from the prior year’s quarter.

 

**HVACProducts**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the quarters ended June 28,2008 and June 30, 2007 (amounts in thousands):

 

| ** **                                     | ** ** | **Heating and Cooling** | ** ** | **Evaporative Cooling** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Quarter ended  June 28, 2008              |       |                    |       |                    |       |
| Revenues from  external customers              |       | $                       | 8,081      |                    | $          | 8,850 |   |
| Segment  operating (loss) income               |       | (779                    | )          | 148                     |       |
| Operating (loss)  income as a percent of sales |       | (9.6                    | )%         | 1.7                     | %          |
| Segment assets  as of June 28, 2008       |       | $                       | 23,861     |                    | $          | 15,437 |   |
| Return on assets                               |       | (3.3                    | )%         | 1.0                     | %          |
|                                           |       |                    |       |                    |       |
| Quarter ended  June 30, 2007              |       |                    |       |                    |       |
| Revenues from  external customers              |       | $                       | 6,794      |                    | $          | 8,518 |   |
| Segment  operating (loss) income               |       | (1,050                  | )          | 76                      |       |
| Operating (loss)  income as a percent of sales |       | (15.5                   | )%         | .9                      | %          |
| Segment assets  as of June 30, 2007       |       | $                       | 19,886     |                    | $          | 14,426 |   |
| Return on assets                               |       | (5.3                    | )%         | .5                      | %          |

 

Heating andCooling Segment

 

Sales in the Heating andCooling segment were $8,081,000 for the second quarter of 2008, an increase of$1,287,000, or 18.9%, from the comparable 2007 quarter. Fan coil volumeaccounted for the increase with sales rising nearly 31% from the prior year’squarter. This increase was the result of the continuing beneficial effect ofthe restructured sales representative network which was completed in late 2005and favorable market conditions. Furnace volume remained relatively flat. Costof sales as a percentage of sales decreased during the second quarter of 2008to 88.2% from 90.6% for the comparable quarter of 2007 as pricing began tocatch up with the rise in commodity prices, notably copper and steel. Partiallyoffsetting this improvement was steel costs which soared during the quarter.Already announced sales price increases should recover some of these higher costsas the units are sold over the next two quarters.

 

The operating loss forthe 2008 quarter was reduced from $1,050,000 during the second quarter of 2007to $779,000. Selling and administrative expenses were slightly higher primarilydue to increased legal, audit and other professional services; however theywere lower as a percentage of sales. As a result of the reduced loss, bothoperating loss as a percent of sales and return on assets improved in the 2008quarter from the prior year’s quarter.

 

EvaporativeCooling Segment

 

Sales in the EvaporativeCooling segment improved slightly to $8,850,000, or 3.9%, during the secondquarter of 2008 from the comparable 2007 quarter. Slow sales during April andMay due to cool weather in the markets served was somewhat offset byhotter temperatures in June when sales exceeded June, 2007 sales.

 

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Operating income improvedto $148,000 compared to $76,000 for the second quarter of 2007. The improvementwas the result of a reduction of some manufacturing costs, including workerscompensation claims. The above savings were largely offset by increased steelprices which occurred after 2008 product prices were established. Competitivepressures restricted the company’s ability to fully increase selling prices inresponse to the cost increases. Both operating income as a percent of sales andreturn on assets improved in the 2008 quarter from the prior year’s quarter.

 

Operations -Comparison of Six Months Ended June 28, 2008 to Six Months Ended June 30,2007

 

Consolidated sales duringthe first half of 2008 were $76,273,000 compared to $85,730,000 during thefirst half of 2007. The decline was largely due to the decrease in theConcrete, Aggregates and Construction Supplies segment although the Door andEvaporative Cooling segments also experienced declining sales. The Heating andCooling segment reported increased sales for the six months ended June 28,2008 compared to the six months ended June 30, 2007. Cost of sales as a percentageof sales increased from 82.9% for the first half of 2007 to 85.3% during thefirst half of 2008. The increased cost of sales ratio was largely due to lowervolume in the Concrete, Aggregates and Construction Supplies segment and therecovery of $725,000 from an insurance claim during the 2007 period as noted inthe discussion of the second quarter results above. Selling and administrativecosts declined primarily related to the decrease in sales but increased as apercentage of sales due to increased costs related to the implementation of theprovisions of the Sarbanes-Oxley Act of 2002 and consulting fees, particularlyat the Corporate Office. The above factors resulted in an operating loss of$1,352,000 for the first six months of 2008 compared to operating income of$1,510,000 reported for the first six months of 2007. As noted above, otherincome for the first half of 2007 included a $230,000 gain on the sale of stockreceived from the demutualization of an insurance company that provides life insurancebenefits to our employees.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

 

The table below presentsa summary of operating information for the two reportable segments within theConstruction Products group for the six months ended June 28, 2008 and June 30,2007 (amounts in thousands):

 

| ** **                                     | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| Six Months ended  June 28, 2008           |       |                                                  |       |      |       |
| Revenues from  external customers              |       | $                                                     | 34,664     |      | $          | 7,625 |   |
| Segment  operating (loss) income               |       | (728                                                  | )          | 786       |       |
| Operating (loss)  income as a percent of sales |       | (2.1                                                  | )%         | 10.3      | %          |
| Segment assets  as of June 28, 2008       |       | $                                                     | 52,997     |      | $          | 6,774 |   |
| Return on assets                               |       | (1.4                                                  | )%         | 11.6      | %          |
|                                           |       |                                                  |       |      |       |
| Six Months ended  June 30, 2007           |       |                                                  |       |      |       |
| Revenues from  external customers              |       | $                                                     | 45,525     |      | $          | 9,449 |   |
| Segment  operating income                      |       | 2,318                                                 |       | 1,167     |       |
| Operating income  as a percent of sales        |       | 5.1                                                   | %          | 12.4      | %          |
| Segment assets  as of June 30, 2007       |       | $                                                     | 61,545     |      | $          | 5,804 |   |
| Return on assets                               |       | 3.8                                                   | %          | 20.1      | %          |

 

Concrete,Aggregates and Construction Supplies Segment

 

Salesin the Concrete, Aggregates and Construction Supplies segment for the first sixmonths of 2008 decreased 23.9% from the comparable 2007 period. As with thesecond quarter, all three product lines of this segment reported lower salesfor the first six months of 2008 compared to the comparable 2007 period for thereasons noted in the discussion of the second quarter’s results above. Similarto the results of the second quarter, margins declined due to the decreasedvolume and the fixed nature of many of the costs in this segment, most notablybatching and delivery costs. Margins during the first quarter of both 2007 and2008 were actually negative due to the above factors. As noted above, marginsfor the construction supply products improved despite the decline in sales.

 

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Operating resultsdeclined to a loss of $728,000 during the 2008 period from a profit of$2,318,000 during the comparable 2007 period. The decline was due to thereduced sales volume and margins for the concrete and aggregates lines. Inaddition, the recovery of the $725,000 insurance claim during the 2007 period,discussed above, was a factor in the decrease in 2008 operating results. Forthe first six months of 2008, selling and administrative expenses were reducedbut increased as a percent of sales. As a result, both operating results as apercent of sales and return on assets declined for the six months ended June 28,2008 compared to the six months ended June 30, 2007.

 

DoorSegment

 

Salesin the Door segment for the first six months of 2008 decreased $1,824,000 fromthe comparable 2007 period due to the lower construction activity and thetiming of shipments as described in the above discussion for the currentquarter.

 

Operatingincome also declined from $1,167,000 during the first half of 2007 to $786,000for the first half of 2008 due to lower sales volume and the expensesassociated with the consolidation of the Colorado Springs operations into thenew facility. As a result, both operating income as a percent of sales and thereturn on assets declined during the six months ended June 28, 2008compared to the six months ended June 30, 2007.

 

**HVACProducts**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the six months ended June 28,2008 and June 30, 2007 (amounts in thousands):

 

| ** **                                     | ** ** | **Heating and   Cooling** | ** ** | **Evaporative   Cooling** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Six Months ended  June 28, 2008           |       |                      |       |                      |       |
| Revenues from  external customers              |       | $                         | 19,604     |                      | $          | 14,199 |   |
| Segment  operating (loss) income               |       | (422                      | )          | 530                       |       |
| Operating (loss)  income as a percent of sales |       | (2.2                      | )%         | 3.7                       | %          |
| Segment assets  as of June 28, 2008       |       | $                         | 23,861     |                      | $          | 15,437 |   |
| Return on assets                               |       | (1.8                      | )%         | 3.4                       | %          |
|                                           |       |                      |       |                      |       |
| Six Months ended  June 30, 2007           |       |                      |       |                      |       |
| Revenues from  external customers              |       | $                         | 16,176     |                      | $          | 14,399 |   |
| Segment  operating (loss) income               |       | (679                      | )          | 127                       |       |
| Operating (loss)  income as a percent of sales |       | (4.2                      | )%         | .9                        | %          |
| Segment assets  as of June 30, 2007       |       | $                         | 19,886     |                      | $          | 14,426 |   |
| Return on assets                               |       | (3.4                      | )%         | .9                        | %          |

 

Heating andCooling Segment

 

Sales in the Heating andCooling segment increased $3,428,000, or 21.2%, during the first six months of2008 over the comparable 2007 period. As with the quarter’s results above, fancoil volume was responsible for the increase as furnace volume for the sixmonths trailed the 2007 period by approximately 6% due to milder weather duringthe first quarter of 2008.

 

The operating lossnarrowed from $679,000 during the first six months of 2007 to a loss of$422,000 for the 2008 period. Cost of sales as a percent of sales increasedfrom 83% to 84.9% due to the reasons noted in the quarter’s discussion above.Selling and administrative costs increased slightly due to higher marketingcosts associated with the fan coil line but declined over 3% as a percentage ofsales. As a result of the improved margins, both operating loss as a percent ofsales and the return on assets improved for the first six months of 2008compared to the prior year’s period.

 

EvaporativeCooling Segment

 

Sales in the EvaporativeCooling segment declined $200,000, or 1.4%, during the first six months of 2008over the comparable 2007 period. The decrease in sales was almost entirely dueto slow sales during March and April resulting from milder weatherduring 2008 compared to 2007. Hotter, less humid weather arrived in May andJune but it was too late to reach last year’s sales level.

 

14

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The segment reportedoperating income of $530,000 for the first six months of 2008 compared to$127,000 for the comparable 2007 period. The improved operating results werethe result of improved labor efficiencies in the plant and the reduction ofworkers’ compensation expense due fewer new claims and closing of some openclaims at lower amounts than anticipated. Increased steel prices partiallyoffset these gains. Selling and administrative expenses declined during thefirst six months of 2008 both in dollars and as a percentage of sales comparedto the comparable 2007 period largely due to lower advertising and compensationcosts. As a result, both operating results as a percent of sales and return onassets increased in the first six months of 2008 from the prior year’s period.

 

CRITICAL ACCOUNTINGPOLICIES 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 June 28, 2008 and December 29, 2007 and affect the reportedamounts of revenues and expenses for the periods reported. Actual results coulddiffer from those estimates.

 

Information with respectto the Company’s critical accounting policies which the Company believes couldhave the most significant effect on the Company’s reported results and requiresubjective or complex judgments by management is contained in Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations, of the Company’s Annual Report on Form 10-K for the fiscalyear ended December 29, 2007.

 

OUTLOOK

 

With regard to theConcrete, Aggregates and Construction Supplies segment, the softening ofconstruction activity nationwide, and notably along the Front Range of Coloradowhich our companies serve, continues with no clear indication as to when therecovery might begin. Concrete and aggregates volume and pricing throughout ourColorado markets will remain under pressure for the foreseeable future asaggressive competition vies for volume. The sales volume and pricing in theDoor division is also beginning to feel the effects of the constructionslow-down. Although the backlog remains strong, bidding on recent jobsindicates that pricing is becoming more competitive with narrower margins.

 

Sales of the EvaporativeCooling segment are not expected to grow significantly and will remain weathersensitive. The recent increase in steel prices has reduced margins.

 

The Heating and Coolingsegment expects to continue at roughly its current sales volume however,increased steel prices may also affect the margins of this product line. Salesof fan coil products are expected to continue to grow as a result of favorablemarket conditions (commercial and industrial construction throughout thecountry has not declined to the extent that housing construction has) and therestructured sales representative network and marketing efforts.

 

RECENTLY ISSUEDACCOUNTING STANDARDS

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. This statement defines fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements that are required or permitted under other accountingpronouncements. This statement was effective for financial statements issuedfor fiscal years beginning after November 15, 2007 and interim periodswithin those fiscal years. The Company’s adoption of this statement had animmaterial impact on its consolidated financial position, results of operationsand cash flows. The Company also adopted the deferral provisions of FASB StaffPosition (FSP) FAS 157-2, which delayed the effective date of SFAS No. 157for all nonrecurring fair value measurements of non-financial assets andliabilities until fiscal years beginning after November 15, 2008.

 

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. Thisstatement permits entities to choose to measure many financial instruments andcertain other items at fair value. This statement was effective as of thebeginning of the first fiscal year beginning after

 

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November 15, 2007. Upon the Company’s adoption ofSFAS No. 159 it did not elect the fair value option for any assets orliabilities. Therefore this statement had no impact on the Company’sconsolidated financial position, results of operations and cash flows.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendmentof SFAS No. 133,” which requires enhanced disclosures for derivative andhedging activities. SFAS No. 161 becomes effective in the first quarter of2009 and is not expected to have any impact on the Company’s consolidatedfinancial statements.

 

In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life ofIntangible Assets.” This FSP amendsthe factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwill andOther Intangible**Assets.”

 

The intent of this FSP is to improve the consistencybetween the useful life of a recognized intangible asset under SFAS No. 142and the period of expected cash flows used to measure the fair value of theasset under SFAS No. 141 (Revised 2007), “Business Combinations” and other U.S. generally acceptedaccounting principles (GAAP). This FSP is effective for financial statementsissued for fiscal years beginning after December 15, 2008, and interimperiods within those fiscal years. Early adoption is prohibited.  The Company is in the process of determiningthe impact of adopting this new accounting position on its consolidatedfinancial position.

 

The Company discusses other recently issued accountingstandards and tax law changes in the Critical Accounting Policies section underItem 7 and in Note 1 to Consolidated Financial Statements in Item 8 of theCompany’s Annual Report on Form 10-K for the fiscal year 2007. Other thanas discussed above and in those sections, the Company does not currently haveany transactions or circumstances that have been addressed by recently issuedaccounting pronouncements. Therefore, adoption of any of these statements orpronouncements would not have a material impact on the Company’s results ofoperations, financial position or liquidity.

 

MATERIAL CHANGES TO CONTRACTUAL OBLIGATIONS

 

There were no material changes to contractualobligations that occurred during the quarter ended June 28, 2008.Subsequent to the end of the quarter, the Company entered into a FirstAmendment to Amended and Restated Revolving Credit and Term Loan Agreementdated August 11, 2008 as more fully described in Note 8 above. The FirstAmendment is filed as Exhibit 10.1 to this report on Form 10-Q.

 

FORWARD-LOOKING STATEMENTS

 

The foregoing discussioncontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended. Such forward-looking statements arebased on the beliefs of the Company’s management as well as on assumptions madeby and information available to the Company at the time such statements weremade.  When used in this Report, wordssuch as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,”“projects,” and similar expressions are intended to identify forward-lookingstatements. Actual results could differ materially from those projected in theforward-looking statements as a result of factors including but not limited to:weather, interest rates, availability and cost of raw materials, national andlocal economic conditions and competitive forces. Some of these factors arediscussed in more detail in the Company’s 2007 Annual Report on Form 10-K.Changes in accounting pronouncements could also alter projected results.Forward-looking statements speak only as of the date they were made, and theCompany undertakes no obligation to publicly update them.

 

**Item 3.        Quantitative And Qualitative Disclosures About Market Risk**

 

There were no material changes in themarket risks nor legal proceedings that the Company is exposed to since thosediscussed in the Company’s 2007 Annual Report on Form 10-K.

 

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**Item 4.        Controls and Procedures**

 

(a)                  DisclosureControls and Procedures.

 

The Company’s ChiefExecutive Officer and Chief Financial Officer, with the participation ofmanagement, have evaluated the effectiveness of the Company’s “disclosurecontrols and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended) as of June 28, 2008.Based on that evaluation, they have concluded that the Company’s disclosurecontrols and procedures as of such date are effective and are reasonablydesigned to ensure that all material information relating to the Company(including its subsidiaries) is accumulated and communicated to management toallow timely decisions regarding required disclosure and to ensure that allmaterial information required to be disclosed in this quarterly report isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the Securities and Exchange Commission.

 

(b)                 Changesin Internal Control Over Financial Reporting.

 

The Company continuallyreassesses our internal control over financial reporting and makes changes asdeemed prudent. We did not identify any material weaknesses in our review ofinternal control, and no significant changes in the Company’s internal controlover financial reporting occurred during the quarter ended June 28, 2008that have materially affected, or are reasonably likely to materially affect,the Company’s internal control over financial reporting.

 

PART II -OTHER INFORMATION

 

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

 

The following tablepresents information with respect to purchases made by the Company of itscommon stock for the period March 30, 2008 through June 28, 2008. Theshares were purchased from the Continental Materials Corporation EmployeesProfit Sharing Retirement Plan. The shares became available due to changes inparticipants’ accounts. The Company purchased the shares as an alternative tothe Plan Administrator selling the shares on the open market.

 
| **Issuer Purchases of Equity Securities** | ** ** |
|-------------------------------------------|------------|
| **Period**                                | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid per   Share** | ** ** | **(c) Total Number of   Shares Purchased as Part  of Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Dollar   Value of Shares that May  Yet Be Purchased Under   the Plans or Programs** | ** ** |
| March 30 –  April 26, 2008 |       | — |   | $ | — |   | — |   | $ | 1,349,255 |   |
| April 27 –  May 24, 2008   |       | 810 |   | 23.10 |   | 810 |   | 1,330,544 |   |
| May 25 –  June 28, 2008    |       | — |   | — |   | — |   | 1,330,544 |   |
| Total                                     |       | 810 |   | $ | 23.10 |   | 810 |   | $ | 1,330,544 |   |

 

On January 19, 1999,the Company initiated purchases under the current open-ended program torepurchase its common stock. Purchases are made on the open market or in blocktrades at the discretion of management. The dollar amount authorized for theprogram has been periodically increased by the Board of Directors and approvedby the Company’s two banks as required by the Company’s Revolving Credit andTerm Loan Agreement. The Amended and Restated Revolving Credit and Term LoanAgreement dated as of March 28, 2008 provides that the Company may makepurchases of its own stock in an amount not to exceed $1,438,000. Since the2005 tender offer, management has not actively sought to repurchase shares.

 

**Item 4.        Submission of Matters to a Vote ofSecurity Holders**

 

(a)                      The 2008 Annual Meeting of theStockholders of the Company was held on May 28, 2008.

 

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(b)                     At that meeting, three individuals, all of whom are currentdirectors, were elected to serve until the 2011 Annual Meeting by the followingvotes:

 
| **Director**          | ** ** | **Shares For** | ** ** | **Shares Against** | ** ** | **Shares Withheld** | ** ** |
|-----------------------|------------|----------------|------------|--------------------|------------|---------------------|------------|
| Ralph W. Gidwitz      |       | 1,481,649      |       | —             |       | 80,984              |       |
| Peter E.  Thieriot    |       | 1,551,709      |       | —             |       | 10,924              |       |
| Theodore R.  Tetzlaff |       | 1,369,109      |       | —             |       | 193,524             |       |

 

Therewere no broker non-votes.

 

Thefollowing directors’ terms of office continued after the 2008 Meeting until theAnnual Meetings of the respective years as set forth opposite their namesbelow:

 

| **Directors**      | ** ** | **Expiration of Term** |
|--------------------|------------|------------------------|
| Thomas H. Carmody  |       | 2009                   |
| Ronald J. Gidwitz  |       | 2009                   |
| Darrell M. Trent   |       | 2009                   |
| William D. Andrews |       | 2010                   |
| Betsy R. Gidwitz   |       | 2010                   |
| James G. Gidwitz   |       | 2010                   |

 

(c)                      In addition to the above election, theappointment of the independent registered public accounting firm of Deloitte &Touche LLP was ratified by the following vote:

 

| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 1,561,334 |       | —      |       | 1,160       |       |

 

Therewere no broker non-votes.

 

(d)                     Not applicable.

 

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

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                            |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                       |
| 10.1                 |       | First Amendment to  Amended and Restated Revolving Credit and Term Loan Agreement dated as of  August 12, 2008, by and among the Company, LaSalle Bank National  Association and Fifth Third Bank.                                                    |
|                 |       |                                                                                                                                                                                                                                                       |
| 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:  | August 12, 2008               |   | By: | /s/ Joseph J. Sum |
|   |                               |   | Joseph J. Sum, Vice  President |
|   |                               |   | and Chief Financial  Officer |

 

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