**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 April 4,2009**

** **

**OR**

** **

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

** **

**For thetransition 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 checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant toRule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required to submitand post such files). Yes o  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 the number 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, shares outstanding at May 8, 2009                                                               |   | 1,598,278 |

 

 

 

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PART I - FINANCIAL INFORMATION

 

## **Item 1.   Financial Statements**

## ** **

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

APRIL 4, 2009 AND JANUARY 3, 2009

(Unaudited)

(000’s omitted except share data)

 
| ** **                                                                            | ** ** | **APRIL 4,** | ** **   | **JANUARY  3,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------|--------------|-----------------|------------|
| ** **                                                                            | ** ** | **2009**     | ** **   | **2009**        | ** ** |
| ***ASSETS***                                                                          | ** ** | ** **   | ** **   | ** **      | ** ** |
| Current assets:                                                                       |       |         |         |            |       |
| Cash and cash  equivalents                                                            |       | $            | 1,272        |            | $          | 1,097 |   |
| Receivables, net                                                                      |       | 25,639       |         | 22,062          |       |
| Receivable for  insured losses                                                        |       | 1,503        |         | 1,604           |       |
| Inventories:                                                                          |       |         |         |            |       |
| Finished goods                                                                        |       | 9,373        |         | 9,421           |       |
| Work in process                                                                       |       | 1,418        |         | 1,477           |       |
| Raw materials  and supplies                                                           |       | 12,096       |         | 12,528          |       |
| Prepaid expenses                                                                      |       | 4,814        |         | 4,254           |       |
| Total current  assets                                                                 |       | 56,115       |         | 52,443          |       |
|                                                                                  |       |         |         |            |       |
| Property, plant  and equipment, net                                                   |       | 30,525       |         | 30,956          |       |
|                                                                                  |       |         |         |            |       |
| Goodwill                                                                              |       | 7,829        |         | 7,829           |       |
| Amortizable  intangible assets, net                                                   |       | 799          |         | 872             |       |
| Other assets                                                                          |       | 1,590        |         | 1,566           |       |
|                                                                                  |       |         |         |            |       |
|                                                                                  |       | $            |  96,858 |            | $          | 93,666 |   |
| ***LIABILITIES***                                                                     |       |         |         |            |       |
| Current  liabilities:                                                                 |       |         |         |            |       |
| Current portion  of long-term debt                                                    |       | $            | 1,357        |            | $          | 1,164 |   |
| Accounts payable  and accrued expenses                                                |       | 18,864       |         | 17,132          |       |
| Liability for  unpaid claims covered by insurance                                     |       | 1,503        |         | 1,604           |       |
| Income taxes                                                                          |       | 490          |         | 148             |       |
| Total current  liabilities                                                            |       | 22,214       |         | 20,048          |       |
|                                                                                  |       |         |         |            |       |
| Revolving bank  loan payable                                                          |       | 8,700        |         | 6,400           |       |
| Long-term debt                                                                        |       | 9,000        |         | 9,607           |       |
| Deferred income  taxes                                                                |       | 3,340        |         | 3,414           |       |
| Other long-term  liabilities                                                          |       | 1,466        |         | 1,569           |       |
| ***SHAREHOLDERS’ EQUITY***                                                       |       |         |         |            |       |
| Common shares,  $0.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares |       | 643          |         | 643             |       |
| Capital in  excess of par value                                                       |       | 1,830        |         | 1,830           |       |
| Retained  earnings                                                                    |       | 66,280       |         | 66,770          |       |
| Treasury shares,  975,986, at cost                                                    |       | (16,615      | )            | (16,615         | )          |
|                                                                                  |       | 52,138       |         | 52,628          |       |
|                                                                                  |       |         |         |            |       |
|                                                                                  |       | $            |  96,858 |            | $          | 93,666 |   |

 

See accompanying notes

 

2

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CONTINENTAL MATERIALSCORPORATION

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHSENDED APRIL 4, 2009 AND MARCH 29, 2008

(Unaudited)

(000’s omitted exceptper-share amounts)

 
| ** **                                                             | ** ** | **APRIL 4,  2009** | ** ** | **MARCH 29,  2008** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
|                                                                   |       |                    |       |                     |       |
| Sales                                                                  |       | $                       | 32,731     |                     | $          | 34,512 |   |
|                                                                   |       |                    |       |                     |       |
| Costs and  expenses:                                                   |       |                    |       |                     |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization) |       | 26,853                  |       | 29,800                   |       |
| Depreciation,  depletion and amortization                              |       | 1,275                   |       | 1,335                    |       |
| Selling and  administrative                                            |       | 5,152                   |       | 5,200                    |       |
|                                                                   |       |                    |       |                     |       |
| Gain on  disposition of property and equipment                         |       | 57                      |       | 344                      |       |
|                                                                   |       | 33,223                  |       | 35,991                   |       |
|                                                                   |       |                    |       |                     |       |
| Operating loss                                                         |       | (492                    | )          | (1,479                   | )          |
|                                                                   |       |                    |       |                     |       |
| Interest  expense, net                                                 |       | (181                    | )          | (330                     | )          |
| Other income,  net                                                     |       | 18                      |       | 28                       |       |
|                                                                   |       |                    |       |                     |       |
| Loss before  income taxes                                              |       | (655                    | )          | (1,781                   | )          |
|                                                                   |       |                    |       |                     |       |
| Benefit from  income taxes                                             |       | (165                    | )          | (650                     | )          |
|                                                                   |       |                    |       |                     |       |
| Net loss                                                               |       | (490                    | )          | (1,131                   | )          |
|                                                                   |       |                    |       |                     |       |
| Retained  earnings, beginning of period                                |       | 66,770                  |       | 66,810                   |       |
| ** **                                                             | ** ** | ** **              | ** ** | ** **               | ** ** |
| Retained  earnings, end of period                                      |       | $                       | 66,280     |                     | $          | 65,679 |   |
|                                                                   |       |                    |       |                     |       |
| Basic and  diluted loss per share                                      |       | $                       | (.31       | )                        | $          | (.71 | ) |
|                                                                   |       |                    |       |                     |       |
| Average shares  outstanding                                            |       | 1,598                   |       | 1,599                    |       |

 

See accompanying notes

 

3

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CONTINENTAL MATERIALSCORPORATION

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

FOR THE THREE MONTHSENDED APRIL 4, 2009 AND MARCH 29, 2008

(Unaudited)

(000’s omitted)

 
| ** **                                                                                                       | ** ** | **APRIL 4,  2009** | ** ** | **MARCH 29,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------------|------------|
|                                                                                                             |       |               |       |                     |       |
| Net cash (used  in) operating activities                                                                         |       | $                  | (889       | )                        | $          | (1,874 | ) |
|                                                                                                             |       |               |       |                     |       |
| Investing  activities:                                                                                           |       |               |       |                     |       |
| Capital  expenditures                                                                                            |       | (879               | )          | (176                     | )          |
| Proceeds from  sale of property and equipment                                                                    |       | 57                 |       | 520                      |       |
| Net cash (used  in) provided by investing activities                                                             |       | (822               | )          | 344                      |       |
|                                                                                                             |       |               |       |                     |       |
| Financing  activities:                                                                                           |       |               |       |                     |       |
| Borrowings under  revolving credit facility                                                                      |       | 2,300              |       | 1,100                    |       |
| Repayment of  long term debt                                                                                     |       | (414               | )          | (600                     | )          |
| Net cash  provided by financing activities                                                                       |       | 1,886              |       | 500                      |       |
|                                                                                                             |       |               |       |                     |       |
| Net increase  (decrease) in cash and cash equivalents                                                            |       | 175                |       | (1,030                   | )          |
| Cash and cash  equivalents:                                                                                      |       |               |       |                     |       |
| Beginning of  period                                                                                             |       | 1,097              |       | 3,326                    |       |
|                                                                                                             |       |               |       |                     |       |
| End of period                                                                                                    |       | $                  | 1,272      |                     | $          | 2,296 |   |
|                                                                                                             |       |               |       |                     |       |
| Supplemental  disclosures of cash flow items:                                                                    |       |               |       |                     |       |
| Cash paid  (received) during the three months for:                                                               |       |               |       |                     |       |
| Interest, net                                                                                                    |       | $                  | 177        |                     | $          | 384 |   |
| Income taxes  refund                                                                                             |       | (414               | )          | —                   |       |
|                                                                                                             |       |               |       |                     |       |
| Supplemental  disclosures of noncash investing activities:                                                       |       |               |       |                     |       |
| Capital  expenditures purchased on account                                                                       |       | $                  | 60         |                     | $          | — |   |
| Cash receivable  as partial consideration on asset sale ($115) and buyer’s assumption of  liabilities ($88) |       | —             |       | 203                      |       |

 

See accompanying notes

 

4

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CONTINENTAL MATERIALSCORPORATION

SECURITIES AND EXCHANGECOMMISSION FORM 10-Q

NOTES TO THE QUARTERLYCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED APRIL 4,2009

(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.               Income taxes are reported consistent withFASB Statement No. 109, “Accounting for Income Taxes.” Income taxes areaccounted for under the asset and liability method that requires deferredincome taxes to reflect the future tax consequences attributable to differencesbetween the tax and financial reporting bases of assets and liabilities.Deferred tax assets and liabilities recognized are based on the tax rates ineffect in the year in which differences are expected to reverse. Deferred taxassets are reduced by a valuation allowance when, based on available positiveand negative evidence, it is “more likely than not” (greater than a 50%likelihood) that some or all of the net deferred tax assets will not berealized.

 

Ourincome tax returns are subject to audit by the Internal Revenue Service (IRS)and state tax authorities. The amounts recorded for income taxes reflect ourtax positions based on research and interpretations of complex laws andregulations. We accrue liabilities related to uncertain tax positions taken orexpected to be taken in a tax return in accordance with FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109” (FIN 48).

 

Our effective income taxrate is based on expected income, statutory tax rates and tax positions takenin the various jurisdictions in which we operate. For this interim financialperiod, the effective tax rate based upon the projected taxable income for thefull year does not yield a tax benefit that would be meaningful to the Company’sinterim financial statements based on the first quarter’s loss. As a result, inaccordance with FASB Interpretation No. 18: “Accounting for Income Taxesin Interim Periods,” this rate is 25.2%. As the year progresses, we refine theestimates of the year’s taxable income as new information becomes available,including year-to-date financial results. This continual estimation processoften results in a change to our expected effective income tax rate for theyear. When this occurs, we adjust the income tax provision during the quarterin which the change in estimate occurs so that the year-to-date provisionreflects the expected annual income tax rate. Significant judgment is requiredin determining our effective income tax rate and in evaluating our taxpositions.

 

We file income taxreturns in the United States Federal and various state jurisdictions. TheInternal Revenue Service has completed examinations for periods through 2004.Federal tax years 2005 through 2007 are either currently under examination orremain subject to examination. Various state income tax returns also remainsubject to examination. None of the unrecognized tax benefits at April 4,2009 are expected to be resolved within 12 months of this reporting date.

 

3.    Effective December 30, 2007, the Companyadopted FASB Statement No. 157, “Fair Value Measurements,” whichestablishes a framework for measuring fair value under accounting principlesgenerally accepted in the United States of America (GAAP). The adoption of No. 157had an immaterial impact on our consolidated financial statements. The Companyalso adopted the deferral provisions of FASB Staff Position No. 157-2, “EffectiveDate of FASB Statement No. 157,” which delayed the effective date of No. 157for all nonrecurring fair value measurements of non-financial assets andliabilities until the Company’s 2009 fiscal year. The Company’s adoption ofthis statement had no impact on its consolidated financial position, results ofoperations or cash flows.

 

Fairvalue is defined as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. No. 157 also expandsdisclosures about instruments measured at fair value and establishes a fairvalue hierarchy which requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fair value.The standard describes three levels of inputs that may be used to measure fairvalue:

 

Level1 – Quoted prices for identical assets and liabilities in active markets;

 

5

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Level2 – Quoted prices for similar assets and liabilities in active markets; quotedprices for identical or similar assets and liabilities in markets that are notactive; and model-derived valuations in which all significant inputs andsignificant value drivers are observable in active markets; and

 

Level3 – Valuations derived from valuation techniques in which one or moresignificant inputs or significant value drivers are unobservable.

 

TheCompany designates cash equivalents as Level 1, as they are money marketaccounts backed by U. S. Treasury Bills. As of April 4, 2009 and January 3,2009, the Company did not have any cash equivalents, therefore there were noassets measured at fair value.

 

4.               Operating results for the first three months of 2009are 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. Thesales of the Door segment are more evenly spread throughout the year.

 

5.               There is no difference in the calculation of basic anddiluted earnings per share (EPS) for the three months ended April 4, 2009 andMarch 29, 2008.

 

6.               The Company operates primarily in twoindustry groups, HVAC and Construction Products. Within these two industrygroups, the Company has identified two reportable segments in each of the twoindustry groups: the Heating and Cooling segment and the Evaporative Coolingsegment in the HVAC industry group and the Concrete, Aggregates andConstruction Supplies segment and the Door segment in the Construction Productsindustry group.

 

TheHeating and Cooling segment produces and sells gas-fired wall furnaces, consoleheaters and fan coils from the Company’s wholly-owned subsidiary, WilliamsFurnace Co. of Colton, California. The Evaporative Cooling segment produces andsells evaporative coolers from the Company’s wholly-owned subsidiary, PhoenixManufacturing, Inc. of Phoenix, Arizona. Sales of these two segments arenationwide, but are concentrated in the southwestern United States. Concrete,Aggregates and Construction Supplies are offered from numerous locations alongthe Front Range of Colorado operated by the Company’s wholly-owned subsidiariescollectively referred to as Transit Mix Concrete Co. and Rocky Mountain ReadyMix Concrete, Inc. of Denver. Doors are fabricated and sold along with therelated hardware from Colorado Springs and Pueblo through the Company’swholly-owned subsidiary, McKinney Door and Hardware, Inc. of Pueblo,Colorado. Sales of these two segments are highly concentrated in the FrontRange area in Colorado although door sales are also made throughout the UnitedStates.

 

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

 

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 corporateexpenses, interest, other income or loss or income taxes.

 

Thefollowing table presents information about reported segments for the threemonths ended April 4, 2009 and March 29, 2008 along with the itemsnecessary to reconcile the segment information to the totals reported in thefinancial statements (amounts in thousands):

 
| ** **                                | ** ** | **Construction  Products**                        | ** ** | **HVAC  Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|--------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,**                                     | ** ** | ** **         | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Quarter ended  April 4, 2009**     | ** ** | **Aggregates &  Construction  Supplies** | ** ** | **Doors**          | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
|                                      |       |                                              |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                 | 10,709     |               | $          | 4,723                                |       | $                         | 15,432     |                     | $          | 9,898 |   | $ | 7,309 |   | $ | 17,207 |   | $ | 6 |   | $ | 86 |   | $ | 32,731 |   |
| Depreciation,  depletion and amortization |       | 994                                               |       | 42                 |       | 1,036                                |       | 95                        |       | 125                      |       | 220 |   | 19 |   | — |   | 1,275 |   |
| Operating income  (loss)                  |       | (1,846                                            | )          | 610                |       | (1,236                               | )          | 437                       |       | 1,035                    |       | 1,472 |   | (755 | ) | 27 |   | (492 | ) |
| Segment assets                            |       | 45,802                                            |       | 6,904              |       | 52,706                               |       | 20,253                    |       | 21,691                   |       | 41,944 |   | 2,180 |   | 28 |   | 96,858 |   |
| Capital  expenditures (a)                 |       | 688                                               |       | 0                  |       | 688                                  |       | 0                         |       | 57                       |       | 57 |   | 29 |   | — |   | 774 |   |
|                                           |            |                                                   |            |                    |            |                                      |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

6

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| ** **                                | ** ** | **Construction  Products**                        | ** ** | **HVAC  Products** | ** ** | ** **                                | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|--------------------|------------|-------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,**                                     | ** ** | ** **         | ** ** | ** **                                | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Quarter ended  March 29, 2008**    | ** ** | **Aggregates &  Construction  Supplies** | ** ** | **Doors**          | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
|                                      |       |                                              |       |               |       |                                      |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                 | 13,789     |               | $          | 3,760                                     |       | $                         | 17,549     |                     | $          | 11,523 |   | $ | 5,349 |   | $ | 16,872 |   | $ | 5 |   | $ | 86 |   | $ | 34,512 |   |
| Depreciation,  depletion and amortization |       | 1,037                                             |       | 33                 |       | 1,070                                     |       | 108                       |       | 138                      |       | 246 |   | 19 |   | — |   | 1,335 |   |
| Operating income  (loss)                  |       | (1,884                                            | )          | 418                |       | (1,466                                    | )          | 357                       |       | 382                      |       | 739 |   | (779 | ) | 27 |   | (1,479 | ) |
| Segment assets  (b)                       |       | 46,410                                            |       | 6,276              |       | 52,686                                    |       | 23,521                    |       | 14,241                   |       | 37,762 |   | 3,195 |   | 23 |   | 93,666 |   |
| Capital  expenditures (a)                 |       | 4                                                 |       | 86                 |       | 90                                        |       | 30                        |       | 51                       |       | 81 |   | 5 |   | — |   | 176 |   |
|                                           |            |                                                   |            |                    |            |                                           |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)          Capitalexpenditures are presented on the accrual basis of accounting.

 

(b)         Segmentassets are as of January 3, 2009.

 

There are no differences in the basis ofsegmentation or in the basis of measurement of segment profit or loss from thelast annual report.

 

7.               Identifiable amortizable intangibleassets as of April,4, 2009 include five non-compete agreements, a restrictiveland covenant and customer relations. Collectively, these assets were carriedat $799,000, net of $1,561,000 accumulated amortization. The pre-taxamortization expense for intangible assets during the quarter ended April 4,2009 was $73,000 compared to $76,000 for the quarter ended March 29, 2008.

 

Identifiableintangible assets consist of the following (amounts in thousands):

 
| ** **                    | ** ** | **April 4, 2009** | ** **  | **January 3, 2009** | ** ** |
|-------------------------------|------------|------------------------|-------------|--------------------------|------------|
| ** **                    | ** ** | **Gross**              | ** **  | ** **               | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **carrying**           | ** **  | **Accumulated**          | ** ** | **carrying** | ** ** | **Accumulated** | ** ** |
| ** **                    | ** ** | **amount**             | ** **  | **amortization**         | ** ** | **amount** | ** ** | **amortization** | ** ** |
| Amortized  intangible assets: |       |                   |        |                     |       |   |   |   |   |
| Non-compete  agreements       |       | $                      | 1,640       |                     | $          | 1,298 |   | $ | 1,640 |   | $ | 1,247 |   |
| Restrictive land  covenant    |       | 350                    |        | 96                       |       | 350 |   | 87 |   |
| Customer  relationships       |       | 370                    |        | 167                      |       | 370 |   | 154 |   |
|                          |       | $                      |  2,360 |                     | $          | 1,561 |   | $ | 2,360 |   | $ | 1,488 |   |

 

Basedupon the intangible assets recorded on the balance sheet at April 4, 2009and January 3, 2009, amortization expense for the next five years isestimated to be as follows: 2009 – $266,000; 2010 – $233,000; 2011 – $101,000;2012 – $65,000 and 2013 – $65,000

 

8.               The outstanding revolving credit and term loan as of April 4,2009 was made available by two banks under the terms of a secured RevolvingCredit and Term Loan Agreement dated as of September 5, 2003, as amended(Amended Credit Agreement). Under the Amended Credit Agreement, the maximumrevolving credit facility during the first quarter of fiscal 2009 was$15,000,000. Borrowings under the Amended Credit Agreement were secured by theCompany’s accounts receivable, inventory, machinery, equipment and vehicles. AtApril 4, 2009 the Company was in compliance with the terms of the AmendedCredit Agreement.

 

TheAmended Credit Agreement provided that, at the Company’s option, the term loanand revolving credit facility would bear interest at prime or aperformance-based LIBOR rate. Based on the terms of the Amended CreditAgreement and the Company’s performance for the twelve months ended April 4,2009, the performance based rate would be LIBOR plus 3.00% for both the termloan and borrowings under the revolving credit facility.****TheAmended Credit Agreement also required the Company to maintain certain levelsof EBITDA (earnings before interest, income taxes, depreciation andamortization) or debt service coverage, consolidated tangible net worth and tomaintain certain ratios including consolidated debt to cash flow (as defined).Additional borrowings, acquisition of stock of other companies, purchase oftreasury shares and payment of cash dividends were either limited or requiredprior approval by the lenders. Payment of accrued interest was due and paidquarterly by the Company. Principal payments under the term loan were duequarterly with a final payment of all remaining unpaid principal due March 31,2011. The revolving credit line was used for seasonal or short-term cash needsand stand-by letters of credit. At April 4, 2009 the Company hadoutstanding stand-by letters of credit of $4,510,000 of which $4,490,000 wasissued to an insurance company to collateralize the self-insured amounts underthe Company’s risk management program. There was $8,700,000 of outstandingborrowings under the revolving credit line at April 4, 2009. The banks’commitment to provide revolving credit loans was scheduled to expire on July 31,2009. The Company was in compliance with the loan covenants as of the quarterended April 4, 2009 as defined by the Amended Credit Agreement.

 

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On April 16,2009 the Company replaced and repaid the Amended Credit Agreement with a newsecured new credit agreement (New Credit Agreement) whereby the new bank lenderprovided a total credit facility of $30,000,000 consisting of a $20,000,000revolving credit facility (reduced by letters of credit that may be issued by thelender on the Company’s behalf) and a $10,000,000 term loan facility.Borrowings under the New Credit Agreement are secured by the Company’s accountsreceivable, inventories, machinery, equipment, vehicles and certain realestate. Borrowings under the revolving credit facility are limited to 80% ofeligible accounts receivable and 50% of eligible inventories. Inventoryborrowings are limited to a maximum of $10,000,000. Borrowings under the NewCredit Agreement bear interest based on a performance based LIBOR or prime rateoption. The base LIBOR rate will not be less than 2% and the base prime ratewill not be less 4%. At inception of the New Credit Agreement the effectiveinterest rate under the LIBOR option was 5% and 4.75% under the prime rateoption. The Company also paid certain underwriting and arrangement fees at thetime of closing.****The New Credit Agreement requiresthe Company to maintain certain levels of tangible net worth, EBITDA (earningsbefore interest, income taxes, depreciation and amortization), debt servicecoverage and to maintain certain ratios of consolidated debt to cash flow (asdefined). The covenants are calculated on a quarterly basis beginning at July 4,2009, the end of the Company’s second fiscal quarter. Additional borrowings,acquisition of stock of other companies, purchase of treasury shares andpayment of cash dividends are either limited or require prior approval by thelender. Payment of accrued interest is due monthly or at the end of theapplicable LIBOR period on revolving credit borrowings and the term debtborrowings. Principal payments under the term loan are due quarterly with afinal payment of all remaining unpaid principal due April 16, 2012. TheCompany is required to, but has not yet entered into an interest rate swapagreement to hedge the interest rate on a minimum amount of $5,000,000 of termdebt.

 

As of April 16,2009, the Company deposited $4,840,000 with the Company’s casualty insurancecompany in lieu of a letter of credit to secure the Company’s self-insuredcasualty claims. Revolving credit borrowings were used to fund the cashcollateral account with the Company’s insurer.

 

After givingeffect to the New Credit Agreement, the total term loan payments due during thenext twelve months are $1,357,000. This amount includes $357,000 paid on April 16,2009 to pay off the balance of the term loan portion of the Amended CreditAgreement not repaid by the $10,000,000 term loan provided by the New CreditAgreement.

 

**Item 2.        Management’s Discussion and Analysis ofFinancial 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.

 

FinancialCondition, Liquidity and Capital Resources

 

Salesof the Company’s HVAC products are seasonal and weather sensitive except forfan coils. Revenues in the Company’s Concrete, Aggregates and ConstructionSupplies segment are influenced by the level of construction activity andweather conditions along the Front Range of Colorado. Sales for the Doorsegment are not as seasonal nor are they much affected by weather conditions.Historically, the Company has experienced operating losses during the firstquarter except when construction activity is strong along the Front Range ofColorado and the weather is mild. Operating results typically improve in thesecond and third quarters reflecting more favorable weather conditions inColorado and the seasonal sales of the Evaporative Cooling segment however; theCompany expects construction activity along the Front Range will remain weakfor the balance of 2009. 

 

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Fourthquarter results can vary based on weather conditions in Colorado as well as inthe principal markets for the Company’s heating equipment. The Companytypically experiences operating cash flow deficits during the first half of theyear reflecting operating results, the use of sales dating programs (extendedpayment terms) related to the Evaporative Cooling segment and payments of theprior year’s accrued incentive bonuses and Company profit-sharingcontributions. As a result, the Company’s borrowings against its revolvingcredit facility tend to peak during the second quarter and then decline overthe remainder of the year. This trend has continued thus far in 2009.

 

Asexpected, the Company’s cash flow from operations during the first quarter wasnegative due to the seasonality of sales, production schedules and the salesdating programs related to the evaporative cooler product line. Operations forthe first three months of 2009 used $889,000 of cash compared to $1,874,000during the first three months of 2008. The reduced cash requirement wasprimarily the result of a decrease in inventory levels during the first quarterof 2009 compared to an increase in inventory levels during the first quarter of2008 which resulted in just over $3,000,000 less cash used. Inventory, largelyraw materials and finished goods had been increased during the latter part of2008 in the Evaporative Cooling segment in anticipation of added salesresulting from the departure of a large competitor from the United Statesmarket. Inventory in the Heating and Cooling segment was also higher at the endof the 2008 fiscal year due to reduced furnace sales related to a very mildwinter in many of the markets served. Offsetting approximately $2,275,000 ofthis improvement was an increase in receivables primarily related to theincrease in sales of the Evaporative Cooling segment, many of which were underour sales dating programs.

 

As more fully discussedin Note 8 above, on April 16, 2009, the Company entered into a secured NewCredit Agreement whereby the new bank lender will provide a total creditfacility of $30,000,000 consisting of a $20,000,000 revolving credit facilityfor a three year period and a $10,000,000 term loan facility. The increase inthe total credit facility is to provide additional liquidity during the Company’speak seasonal credit need. The Company was in compliance with the loancovenants as of the quarter ended April 4, 2009 under the Amended CreditAgreement which the New Credit Agreement replaced.

 

The New Credit Agreementextends the revolving credit facility until April 16, 2012 and accordingly,the outstanding revolving credit balances at April 4, 2009 and January 3,2009 were classified as long-term obligations.

 

Capitalexpenditures are expected to be held to a minimum during 2009; however,approximately $540,000 was expended on the completion of the slurry wall at thenew mining site at Pueblo East during first quarter of 2009. The decrease inproceeds from the sale of property and equipment was due to the inclusion of$520,000 of cash received on the sale of a small aggregates operation duringthe first quarter of 2008.

 

Scheduleddebt repayments were made during the first quarter of both 2009 and 2008. Asexpected, the Company borrowed against its revolving credit facility during thefirst quarter of 2009. The highest amount of Company borrowings outstandingunder the revolving credit agreement during the first quarter of 2009 was$9,450,000 and the average amount outstanding during the first quarter was$7,757,000.

 

TheCompany has prepared a projection of cash sources and uses for the next 12months. Under this projection, the Company believes that its existing cashbalance, anticipated cash flow from operations and borrowings available underthe New Credit Agreement will be sufficient to cover expected cash needs,including servicing debt and planned capital expenditures for the next twelvemonths. The Company expects to be in compliance with all debt covenants duringthis period.

 

Results ofOperations - Comparison of Quarter Ended April 4, 2009 to Quarter Ended March 29,2008

 

Consolidatedsales during the first quarter of 2009 were $32,731,000 resulting in a $492,000operating loss.  In the first quarter of2008 sales were $34,512,000 with an operating loss of $1,479,000. Historically,the Company has experienced operating losses during the first quarter exceptwhen the construction activity is strong and the weather is mild along theFront Range in Colorado.

 

TheConcrete, Aggregates and Construction Supplies segment and the Heating andCooling segment reported decreased sales partially offset by increases in theDoor and Evaporative Cooling segments. The declines in sales of the twosegments were due to reduced construction levels and a relatively mild winterin the furnace market areas. As reported in the Company’s 2008 Annual Report onForm 10-K, the Company continues to evaluate potential alternative operatingand strategic plans related to RMRM. The Door segment sales were strong despitethe slow construction largely due to this segments products being installednear the completion of a construction job. The Door segment’s backlog declinedthroughout the first quarter. Sales of evaporative coolers were strongprimarily due to new customers that were gained when a major competitor exitedthe United States market at the end of 2008. Overall cost of sales as apercentage of sales improved from 86.5 to 82.0% as materials costs declinedover the first quarter, primarily steel, copper and fuel, and product mixchanged to products with better margins. Selling and administrative costsdecreased $48,000 but increased as a percentage of sales. The first quarter of2008 also included the sale of a small aggregate operation (Table Mountain),during the 2008 quarter resulting in a pre-tax gain of 

 

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approximately$338,000 for the Concrete, Aggregates and Construction Materials segment. TableMountain did not provide aggregates to the Company’s ready-mix operations andmanagement did not consider it to be a strategic part of its business.

 

Interestexpense declined to $181,000 in the first quarter of 2009 from $330,000 duringthe first quarter of 2008 due to lower interest rates and slightly loweraverage debt outstanding.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

 

The table below presentsa summary of operating information for the two reportable segments within theConstruction Products industry group for the quarters ended April 4, 2009and March 29, 2008 (dollar amounts in thousands):

 
| ** **                                     | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| Quarter ended  April 4, 2009              |       |                                                  |       |      |       |
| Revenues from  external customers              |       | $                                                     | 10,709     |      | $          | 4,760 |   |
| Segment  operating (loss) income               |       | (1,846                                                | )          | 610       |       |
| Operating (loss)  income as a percent of sales |       | (17.2                                                 | )%         | 12.8      | %          |
| Segment assets  as of April 4, 2009       |       | $                                                     | 45,802     |      | $          | 6,904 |   |
| Return on assets                               |       | (4.0                                                  | )%         | 8.8       | %          |
|                                           |       |                                                  |       |      |       |
| Quarter ended  March 29, 2008             |       |                                                  |       |      |       |
| Revenues from  external customers              |       | $                                                     | 13,789     |      | $          | 3,760 |   |
| Segment  operating (loss) income               |       | (1,884                                                | )          | 418       |       |
| Operating (loss)  income as a percent of sales |       | (13.7                                                 | )%         | 11.1      | %          |
| Segment assets  as of March 29, 2008      |       | $                                                     | 50,265     |      | $          | 6,847 |   |
| Return on assets                               |       | (3.7                                                  | )%         | 6.1       | %          |

 

Concrete,Aggregates and Construction Supplies Segment

Salesin the Concrete, Aggregates and Construction Supplies segment for the firstquarter of 2009 decreased 22.3% from the prior year’s comparable quarter as aresult of lower concrete and aggregate volumes, a direct result of thecontinuing decline in construction activity along the Front Range of Colorado,especially housing construction. Both concrete and aggregate margins werenegative largely due to the lower volume and the fixed nature of many of thecosts in this segment, most notably batching and delivery costs. The onlypositive results were achieved by the Pueblo operation which benefitted fromtwo large commercial concrete jobs, one of which will continue into the secondquarter. Also exacerbating the lower sales volume was the shutdown of thePikeview Quarry due to a landslide that occurred in December 2008. ThePikeview Quarry will remain shut down until the Company develops a new miningand reclamation plan. Such plan will be subject to the approval of the ColoradoDivision of Reclamation, Mining and Safety (DRMS). The Company and itsconsultants are working on a new mining and reclamation plan. The DRMS hasgiven the Company until May 13, 2010 to submit the new plan. In themeantime, the Company has ramped up production in the Black Canyon Quarry whichis expected to begin production early in the second quarter. The costs involvedin purchasing rock from third parties for our own concrete needs during thefirst quarter of 2009 as well as some start-up expenses at the Black CanyonQuarry further suppressed margins. Construction supplies volume also declinedin the 2009 first quarter compared to the 2008 quarter due to the reducedconstruction activity in Colorado Springs although margins were maintained. Afinal factor affecting the comparative results of the two quarters was theinclusion of a $338,000 profit from the sale of a small aggregate operation(Table Mountain), during the 2008 quarter.

 

Theoperating loss in the 2009 first quarter was approximately the same as the 2008first quarter loss in spite of much lower volumes, the loss of aggregateproduction from the Pikeview Quarry and the aforementioned gain on the sale ofa small aggregates operation during the first quarter of 2008. Selling andadministrative costs were reduced during the first quarter of 2009; howeverthey increased as a percentage of sales from 11.0% to 12.8% due to the lower salesvolume. As a result, both the operating loss as a percent of sales and thenegative return on assets increased in the 2009 first quarter compared to theprior year’s first quarter.

 

DoorSegment

Salesduring the first quarter of 2009 in the Door segment increased $1,000,000 or26.6% from the comparable 2008 quarter due primarily to a strong backlog andthe timing of shipments. Sales during a specific quarter can be heavilyinfluenced by customer requests to either accelerate or delay shipments of jobsto better coincide with their own construction schedules. The backlog shrankduring the first quarter of 2009 compared to the 2008 year-end by approximately$1,600,000 as a result of the decline in construction on a nationwide basis.

 

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Operatingincome increased from $418,000 for the 2008 quarter to $610,000 for the 2009quarter as a result of the increased sales. However, the Door segment isbeginning to experience a tightening of gross profit margins as morecompetitive pricing is being encountered in the slower economy. Selling andadministrative costs declined modestly; however, these costs decreased as apercentage of sales from 15.6% to 11.7% due to the increased sales volume. As aresult, operating income as a percent of sales increased in the 2009 firstquarter compared to the prior year’s quarter. The return on assets for the 2009first quarter increased at a higher rate due to the comparable asset base forboth quarters.

 

**HVACProducts**

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products industry group for the quarters ended April 4,2009 and March 29, 2008 (dollar amounts in thousands):

 
| ** **                                | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Quarter ended  April 4, 2009         |       |                     |       |                     |       |
| Revenues from  external customers         |       | $                        | 9,898      |                     | $          | 7,309 |   |
| Segment  operating income                 |       | 437                      |       | 1,035                    |       |
| Operating income  as a percent of sales   |       | 4.4                      | %          | 14.2                     | %          |
| Segment assets  as of April 4, 2009  |       | $                        | 20,253     |                     | $          | 21,691 |   |
| Return on assets                          |       | 2.2                      | %          | 4.8                      | %          |
|                                      |       |                     |       |                     |       |
| Quarter ended  March 29, 2008        |       |                     |       |                     |       |
| Revenues from  external customers         |       | $                        | 11,523     |                     | $          | 5,349 |   |
| Segment  operating income                 |       | 357                      |       | 382                      |       |
| Operating income  as a percent of sales   |       | 3.1                      | %          | 7.1                      | %          |
| Segment assets  as of March 29, 2008 |       | $                        | 23,222     |                     | $          | 16,966 |   |
| Return on assets                          |       | 1.5                      | %          | 2.3                      | %          |

 

Heating andCooling Segment

Sales in the Heating andCooling segment declined $1,625,000, or 14.1%, during the first quarter of 2009from the comparable 2008 quarter. Furnace sales dollars and volume during thefirst quarter of 2009 declined from the 2008 results due to milder weatherwhile fan coil sales declined due to a decline in commercial construction. Alsoduring 2008, WFC provided fan coils for a large new hotel in Las Vegas.Overall, pricing for this segment showed mixed results due to competitivepressures partially offset by lower materials prices, primarily steel andcopper.

 

Operating income improvedfrom $357,000 during the first quarter of 2008 to $437,000 for the 2009 quarterdespite the decline in sales as a result of lower material costs and a shift inbusiness to smaller, higher margin jobs. As noted above, a significant portionof the fan coil volume during 2008 was due to the job in Las Vegas whichcarried lower margins. Largely the result of lower material prices, cost ofsales as a percent of sales declined from 85.5% for the first quarter of 2008to 78.2% for the comparable 2009 quarter. Selling and administrative expenseswere reduced by $43,000 but increased as a percentage of sales by 1.9% largelydue to the lower sales. Both operating income as a percent of sales and returnon assets improved due to the increased margins that resulted from reducedmaterials costs during the first quarter of 2009 from the level of the prioryear’s quarter.

 

Evaporative CoolingSegment

Sales in the EvaporativeCooling segment increased $1,960,000, or 36.6%, during the first quarter of2009 from the comparable 2008 quarter. The increase in sales was almostentirely due to the initial stocking orders from new customers, including amajor national retailer, as the result of a major competitor exiting the UnitedStates market. Continuation of the increased demand is now largely dependentupon the existence of hot, dry weather in the Southwest during the second andthird quarters.

 

The segmentreported operating income of $1,035,000 for the 2009 first quarter compared to$382,000 for the 2008 first quarter. The improved operating results were thedue to the increased sales and improved margins based in part on lower materialprices, notably steel. Margins also benefitted from increased production levelsand efficiencies. Selling and administrative expenses increased $191,000 duringthe 2009 first quarter largely due to volume incentives, commissions, co-opadvertising and other expenses directly related to the increase in sales.However, these costs declined as a percentage of sales from 12.5% for the 2008first quarter to 11.8% for the 2009 quarter. As a result, both operatingresults as a percent of sales and return on assets increased in the 2009 firstquarter from the prior year’s quarter.

 

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CRITICALACCOUNTING POLICIES AND ESTIMATES

 

The condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States which require theCompany to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities asof April 4, 2009 and January 3, 2009 and affect the reported amountsof revenues and expenses for the periods reported. Actual results could differfrom 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 January 3, 2009.

 

OUTLOOK

 

Concrete andaggregate volumes are expected to remain at comparatively low levels for thenear term until construction activity along the Front Range of Coloradoimproves. While the sales volume of the Door segment was quite strong duringthe first quarter of 2009, the backlog has diminished and we may see someerosion in margins in order to maintain sales volume in a declining market ifthe construction slow-down continues.

 

Sales of the EvaporativeCooling segment are expected to grow significantly with the departure of amajor competitor from the United States market, but as always, volume willremain weather sensitive. Sales of fan coil products in the Heating and Coolingsegment are expected to remain somewhat depressed due to the decline incommercial construction activity nationwide; however, furnace sales couldimprove if the weather returns to a more normal pattern during the next heatingseason.

 

RECENTLY ISSUEDACCOUNTING STANDARDS

 

InApril 2008, the Financial Accounting Standards Board (FASB) issued FASBStaff Position 142-3, “Determination of the Useful Life of Intangible Assets”(FSP 142-3) which amends the list of factors an entity should consider indeveloping renewal or extension assumptions used to determine the useful lifeof a recognized intangible asset under Statement of Financial AccountingStandard (SFAS) No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142).FSP 142-3 applies to intangible assets that are acquired individually or with agroup of asset and intangible assets acquired in both business combinations andasset acquisitions. FSP 142-3 removes the provision under SFAS No. 142that requires an entity to consider whether the renewal or extension can beaccomplished without substantial cost or material modification of the existingterms and conditions associated with the asset. Instead, FSP 142-3 requiresthat an entity consider its own experience in renewing similar arrangements. Anentity would consider market participant assumptions regarding renewal if nosuch relevant experience exits. Upon adoption of FSP 142-3 on January 4,2009, the first day of fiscal 2009, this statement had no impact on the Company’sconsolidated financial position, results of operation and cash flows.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures AboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”.The new statement requires expanded disclosure about an entity’s derivativeinstruments and hedging activities. It is effective for fiscal years beginningafter November 15, 2008, including interim periods within those fiscalyears, with early application encouraged. The disclosures are required only forthose derivative instruments and related hedged items accounted for under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities” and its relatedinterpretations (including nonderivative instruments that are designated andqualify as hedging instruments). At April 4, 2009, the Company did nothave any derivative or hedging activities that were addressed by thispronouncement.

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations—a replacement ofFASB No. 141” (SFAS No. 141(R)). SFAS No. 141(R) requires (a) acompany to recognize the assets acquired, the liabilities assumed, and anynon-controlling interest in the acquiree at fair value as of the acquisitiondate; and (b) an acquirer in pre-acquisition periods to expense allacquisition-related costs. SFAS No. 141(R) also requires that anyadjustments to an acquired entity’s deferred tax asset, valuation allowance,cash contingency, or deferred tax liability balance that occur after themeasurement period be recorded as a component of income tax expense. Thisaccounting treatment is required for business combinations consummated beforethe effective date of SFAS No. 141(R) (non-prospective); otherwiseSFAS No. 141(R) must be applied prospectively. The presentation anddisclosure requirements must be applied retrospectively to providecomparability in the financial statements. Early adoption is prohibited. SFAS No. 141(R) iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. The Company will be required tocomply with the provisions of this statement for any business combinationssubsequent to December 15, 2008. The adoption of this statement had noimpact on the Company’s first quarter financial statements since there were nocurrent or recent acquisitions.

 

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 the 

 

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Company’s Annual Report on Form 10-K for thefiscal year 2008. Other than as discussed above, in Note 3 to this Report on Form 10-Qand in those sections of the 2008 Report on Form 10-K, the Company doesnot currently have any transactions or circumstances that have been addressedby recently issued accounting pronouncements. Therefore, adoption of any ofthese statements or pronouncements would not have a material impact on theCompany’s results of operations, financial position or liquidity.

 

MATERIAL CHANGES TO CONTRACTUAL OBLITATIONS

 

There were no material changes to contractualobligations that occurred during the quarter ended April 4, 2009.

 

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 of raw materials and their related costs,national and local economic conditions, competitive forces and changes ingovernmental regulations and policies. Some of these factors are discussed inmore detail in the Company’s 2008 Annual Report on Form 10-K. Changes inaccounting pronouncements could also alter projected results. Forward-lookingstatements speak only as of the date they were made, and the Company undertakesno 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 2008 Annual Report on Form 10-K.

 

**Item 4.        Controls and Procedures**

 

(a)                      Evaluationof Disclosure Controls and Procedures.

 

TheCompany’s Chief Executive Officer and Chief Financial Officer, with theparticipation of management, have evaluated the effectiveness of the Company’sdisclosure controls and procedures as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended( ExchangeAct) as of April 4, 2009. As noted in Item 9A. in the Company’s 2008Annual Report on Form 10-K, based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were not effective in that the Company does not have adequatecontrols over inventory accounting in its Heating and Cooling Segment to ensurethat the inventory and related cost of sales of this segment are appropriatelyaccounted for. The lack of adequate controls over inventory accounting is considereda material weakness in internal controls over financial reporting as definedunder standards established by the Public Company Accounting Oversight Board(United States). See Item 9A. in the 2008 Form 10-K for additional detailsregarding this matter which was deemed to be a weakness in internal controlover financial reporting.

 

**Item 4T.     Controls and Procedures**

 

(b)                     Changesin Internal Control Over Financial Reporting.

 

The Company continually reassesses ourinternal control over financial reporting and makes changes as deemed prudent. Asnoted above, the Company identified a material weakness in internal controlover financial reporting related to accounting for inventory during the thirdquarter of Fiscal 2008. During the fourth quarter of Fiscal 2008, the Companybegan a process to remediate this material weakness in internal controls. Aspart of this process, the Company identified the causes which resulted in theinventory accounting errors and developed an action plan to address each ofthese causes. As of April 4, 2009, we have implemented certain of these actionsand will implement the remaining items during Fiscal 2009. We believe ouraction plan, once fully implemented, will improve the internal control overfinancial reporting related to inventory accounting at our Heating and CoolingSegment. The Company intends to complete its assessment of the controls relatedto inventory accounting during fiscal 2009 and we believe that such measureswill appropriately address the material weakness related to the accounting forinventory accounting in the Heating and Cooling segment.

 

Duringthe quarter ended April 4, 2009, there were no other material weaknessesidentified in our review of internal control over financial reporting and nosignificant changes in the Company’s internal control over financial reportingoccurred during the quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

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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 to become treasury stock for the period January 4, 2009through April 4, 2009. No shares were purchased during the currentquarter.

 

Issuer Purchasesof 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** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| January 4 –  January 31, 2009   |       | —                                           |       | $                                           | —     |                                                                                             | —     |                                                                                                 | $          | 1,307,404 |   |
| February 1 –  February 28, 2009 |       | —                                           |       | —                                      |       | —                                                                                           |       | 1,307,404                                                                                            |       |
| March 1 –  April 4, 2009        |       | —                                           |       | —                                      |       | —                                                                                           |       | 1,307,404                                                                                            |       |
| Total                                          |       | —                                           |       | $                                           | —     |                                                                                             | —     |                                                                                                 | $          | 1,307,404 |   |

 

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 lenders under the Company’s prior credit facility. The$1,307,404 in the above table represents the remaining amount authorized by theBoard. On April 16, 2009, the Company entered into a new credit agreementwith a bank which contains certain restrictions on the Company’s ability torepurchase its stock. See further discussion in the Financial Condition,Liquidity and Capital Resources section of Item 2. above.

 

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**Item 6.        Exhibits**

 
| Exhibits             |       |                                                                                                                                                                                                                                                                                                                                                                     |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                     |
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1                 |       | Credit Agreement dated  April 16, 2009 among Continental Materials Corporation, as the Company,  The Various Financial Institutions Party Hereto, as Lenders, and The  PrivateBank and Trust Company, as Administrative Agent and Arranger filed as  Exhibit 10f to Form 10-K for the year ended January 3, 2009,  incorporated herein by reference) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                     |
| 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

 

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   | CONTINENTAL MATERIALS  CORPORATION |
|--------|------------------------------------|
|   |                               |   |
|   |                               |   |
| Date:  | May 15, 2009                  |   | By: | /s/ Joseph J. Sum |
|   |                               | Joseph J. Sum, Vice  President |
|   |                               | and Chief Financial  Officer |
|        |                                    |  |  |  |

 

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