**UNITEDSTATES**

**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 July 4, 2009**

** **

**OR**

 

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

 

**For the transition periodfrom                to                   **

** **

**Commission File number 1-3834**

 

**CONTINENTALMATERIALS CORPORATION**

(Exactname of registrant as 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, includingarea code)

 

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  No x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 or the Exchange Act).  Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date: Common Stock, $0.25par value, shares outstanding at August 18, 2009: 1,598,278

 

 

 

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PART I – FINANCIAL INFORMATION

 

**Item 1.   Financial Statements**

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

JULY 4, 2009 and JANUARY 3, 2009

(Unaudited)

(000’s omitted except share data)

 
| ** **                                                                            | ** ** | **JULY 4,** | ** ** | **JANUARY 3,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|
| ** **                                                                            | ** ** | **2009**         | ** ** | **2009**            | ** ** |
| ***ASSETS***                                                                          | ** ** | ** **       | ** ** | ** **          | ** ** |
| Current assets:                                                                       |       |             |       |                |       |
| Cash and cash equivalents                                                             |       | $                | 504        |                | $          | 1,097 |   |
| Receivables, net                                                                      |       | 19,680           |       | 22,062              |       |
| Receivable for insured losses                                                         |       | 1,960            |       | 1,604               |       |
| Inventories:                                                                          |       |             |       |                |       |
| Finished goods                                                                        |       | 9,025            |       | 9,421               |       |
| Work in process                                                                       |       | 1,361            |       | 1,477               |       |
| Raw materials and supplies                                                            |       | 10,221           |       | 12,528              |       |
| Cash deposits with insurance carriers                                                 |       | 4,840            |       | —              |       |
| Prepaid expenses                                                                      |       | 4,441            |       | 4,254               |       |
| Current assets held for sale                                                          |       | 1,878            |       | —              |       |
| Total current assets                                                                  |       | 53,910           |       | 52,443              |       |
|                                                                                  |       |             |       |                |       |
| Property, plant and equipment, net                                                    |       | 28,108           |       | 30,956              |       |
|                                                                                  |       |             |       |                |       |
| Goodwill                                                                              |       | 7,229            |       | 7,829               |       |
| Amortizable intangible assets, net                                                    |       | 563              |       | 872                 |       |
| Other assets                                                                          |       | 1,750            |       | 1,566               |       |
| Long-term assets held for sale                                                        |       | 1,905            |       | —              |       |
|                                                                                  |       |             |       |                |       |
|                                                                                  |       | $                | 93,465     |                | $          | 93,666 |   |
|                                                                                  |       |             |       |                |       |
| ***LIABILITIES***                                                                     |       |             |       |                |       |
| Currentliabilities:                                                                   |       |             |       |                |       |
| Current portion of long-term debt                                                     |       | $                | 3,225      |                | $          | 1,164 |   |
| Accounts payable and accrued expenses                                                 |       | 15,167           |       | 17,280              |       |
| Liability for unpaid claims covered by insurance                                      |       | 1,960            |       | 1,604               |       |
| Short term liabilities held for sale                                                  |       | 1,159            |       | —              |       |
| Total current liabilities                                                             |       | 21,511           |       | 20,048              |       |
|                                                                                  |       |             |       |                |       |
| Revolving bank loan payable                                                           |       | 7,550            |       | 6,400               |       |
| Long-term debt                                                                        |       | 6,525            |       | 9,607               |       |
| Deferred income taxes                                                                 |       | 3,057            |       | 3,414               |       |
| Other long-term liabilities                                                           |       | 1,544            |       | 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                                                                     |       | 67,420           |       | 66,770              |       |
| Treasury shares, 975,986, at cost                                                     |       | (16,615          | )          | (16,615             | )          |
|                                                                                  |       | 53,278           |       | 52,628              |       |
|                                                                                  |       |             |       |                |       |
|                                                                                  |       | $                | 93,465     |                | $          | 93,666 |   |

 

Seeaccompanying notes

 

2

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FORTHE THREE MONTHS ENDED JULY 4, 2009 AND JUNE 28, 2008

(Unaudited)

(000’somitted except per-share amounts)

 
| ** **                                                                                  | ** ** | **JULY 4,** | ** ** | **JUNE 28,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                                                  | ** ** | **2009**         | ** ** | **2008**          | ** ** |
|                                                                                        |       |             |       |              |       |
| Sales                                                                                       |       | $                | 28,682     |              | $          | 37,729 |   |
|                                                                                        |       |             |       |              |       |
| Costs and expenses:                                                                         |       |             |       |              |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization)                      |       | 22,627           |       | 31,293            |       |
| Depreciation, depletion and amortization                                                    |       | 1,227            |       | 1,125             |       |
| Selling and administrative                                                                  |       | 4,704            |       | 4,963             |       |
|                                                                                        |       |             |       |              |       |
| Gain on disposition of property and equipment                                               |       | 2,066            |       | 40                |       |
|                                                                                        |       | 26,492           |       | 37,341            |       |
|                                                                                        |       |             |       |              |       |
| Operating income                                                                            |       | 2,190            |       | 388               |       |
|                                                                                        |       |             |       |              |       |
| Interest expense                                                                            |       | (382             | )          | (245              | )          |
| Other income (expense), net                                                                 |       | 5                |       | (15               | )          |
|                                                                                        |       |             |       |              |       |
| Income from continuing operations before income  taxes                                      |       | 1,813            |       | 158               |       |
|                                                                                        |       |             |       |              |       |
| Provision for income taxes                                                                  |       | 635              |       | 59                |       |
|                                                                                        |       |             |       |              |       |
| Net income from continuing operations                                                       |       | 1,178            |       | 99                |       |
|                                                                                        |       |             |       |              |       |
| Loss from discontinued operation net of income tax  benefit (provision) of $1,117 and ($18) |       | (38              | )          | (366              | )          |
|                                                                                        |       |             |       |              |       |
| Net income (loss)                                                                           |       | 1,140            |       | (267              | )          |
|                                                                                        |       |             |       |              |       |
| Retained earnings, beginning of period                                                      |       | 66,280           |       | 65,679            |       |
| ** **                                                                                  | ** ** | ** **       | ** ** | ** **        | ** ** |
| Retained earnings, end of period                                                            |       | $                | 67,420     |              | $          | 65,412 |   |
|                                                                                        |       |             |       |              |       |
| Net income (loss) per basic and diluted share:                                              |       |             |       |              |       |
| Continuing operations                                                                       |       | $                | .74        |              | $          | .06 |   |
| Discontinued operation                                                                      |       | (.03             | )          | (.23              | )          |
| Net income (loss) per basic and diluted share                                               |       | .71              |       | (.17              | )          |
|                                                                                        |       |             |       |              |       |
| Average shares outstanding                                                                  |       | 1,598            |       | 1,599             |       |

 

Seeaccompanying notes

 

3

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FORTHE SIX MONTHS ENDED JULY 4, 2009 AND JUNE 28, 2008

(Unaudited)

(000’somitted except per-share amounts)

 
| ** **                                                                     | ** ** | **JULY 4,** | ** ** | **JUNE 28,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                                     | ** ** | **2009**         | ** ** | **2008**          | ** ** |
|                                                                           |       |             |       |              |       |
| Sales                                                                          |       | $                | 59,592     |              | $          | 69,667 |   |
|                                                                           |       |             |       |              |       |
| Costs and expenses:                                                            |       |             |       |              |       |
| Cost of sales (exclusive of depreciation, depletion  and amortization)         |       | 47,530           |       | 58,510            |       |
| Depreciation, depletion and amortization                                       |       | 2,346            |       | 2,267             |       |
| Selling and administrative                                                     |       | 9,620            |       | 9,823             |       |
|                                                                           |       |             |       |              |       |
| Gain on disposition of property and equipment                                  |       | 2,123            |       | 384               |       |
|                                                                           |       | 57,373           |       | 70,216            |       |
|                                                                           |       |             |       |              |       |
| Operating income (loss)                                                        |       | 2,219            |       | (549              | )          |
|                                                                           |       |             |       |              |       |
| Interest expense                                                               |       | (535             | )          | (534              | )          |
| Other income (loss), net                                                       |       | 17               |       | 35                |       |
|                                                                           |       |             |       |              |       |
| Income (loss) from continuing operations before  income taxes                  |       | 1,701            |       | (1,048            | )          |
|                                                                           |       |             |       |              |       |
| Provision (benefit) for income taxes                                           |       | 602              |       | (398              | )          |
|                                                                           |       |             |       |              |       |
| Net income (loss) from continuing operations                                   |       | 1,099            |       | (650              | )          |
|                                                                           |       |             |       |              |       |
| Loss from discontinued operation net of income tax  benefit of $1,250 and $175 |       | (449             | )          | (748              | )          |
|                                                                           |       |             |       |              |       |
| Net income (loss)                                                              |       | 650              |       | (1,398            | )          |
|                                                                           |       |             |       |              |       |
| Retained earnings, beginning of period                                         |       | 66,770           |       | 66,810            |       |
|                                                                           |       |             |       |              |       |
| Retained earnings, end of period                                               |       | $                | 67,420     |              | $          | 65,412 |   |
|                                                                           |       |             |       |              |       |
| Net income (loss) per basic and diluted share:                                 |       |             |       |              |       |
| Continuing operations                                                          |       | $                | .69        |              | $          | (.40 | ) |
| Discontinued operation                                                         |       | (.28             | )          | (.47              | )          |
| Net income (loss) per basic and diluted share                                  |       | .41              |       | (.87              | )          |
|                                                                           |       |             |       |              |       |
| Average shares outstanding                                                     |       | 1,598            |       | 1,600             |       |

 

See accompanying notes

 

4

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

FORTHE SIX MONTHS ENDED JULY 4, 2009 AND JUNE 28, 2008

(Unaudited)

(000’somitted)

 
| ** **                                                                 | ** ** | **JULY 4,  2009** | ** ** | **JUNE 28,  2008** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|
|                                                                       |       |                   |       |                    |       |
| Net cash provided by (used in) operating  activities                       |       | $                      | 887        |                    | $          | (2,239 | ) |
|                                                                       |       |                   |       |                    |       |
| Investing activities:                                                      |       |                   |       |                    |       |
| Capital expenditures                                                       |       | (1,117                 | )          | (407                    | )          |
| Proceeds from sale of assets                                               |       | 97                     |       | 678                     |       |
| Net cash (used in) provided by investing  activities                       |       | (1,020                 | )          | 271                     |       |
|                                                                       |       |                   |       |                    |       |
| Financing activities:                                                      |       |                   |       |                    |       |
| (Repayment) borrowings on refinanced revolving  credit facility            |       | (6,400                 | )          | 3,100                   |       |
| Payment of deferred financing fees related to new  credit facility         |       | (589                   | )          | —                  |       |
| Borrowings under new revolving credit facility                             |       | 7,550                  |       | —                  |       |
| Repayment of refinanced long-term debt                                     |       | (10,771                | )          | (1,200                  | )          |
| Borrowings under new long-term debt                                        |       | 10,000                 |       | —                  |       |
| Repayment of new long-term debt                                            |       | (250                   | )          | —                  |       |
| Payment to acquire treasury stock                                          |       | —                 |       | (19                     | )          |
| Net cash (used in) provided by financing  activities                       |       | (460                   | )          | 1,881                   |       |
|                                                                       |       |                   |       |                    |       |
| Net decrease in cash and cash equivalents                                  |       | (593                   | )          | (87                     | )          |
| Cash and cash equivalents:                                                 |       |                   |       |                    |       |
| Beginning of period                                                        |       | 1,097                  |       | 3,326                   |       |
|                                                                       |       |                   |       |                    |       |
| End of period                                                              |       | $                      | 504        |                    | $          | 3,239 |   |
|                                                                       |       |                   |       |                    |       |
| Supplemental disclosures of cash flow items:                               |       |                   |       |                    |       |
| Cash paid during the six months for:                                       |       |                   |       |                    |       |
| Interest                                                                   |       | $                      | 553        |                    | $          | 730 |   |
| Refund of prior income taxes                                               |       | 342                    |       | —                  |       |
| Supplemental disclosures of noncash investing and  financing activities    |       |                   |       |                    |       |
| Cash from sale of land in Colorado Springs  received in subsequent quarter |       | $                      | 2,026      |                    | $          | — |   |
| Buyer’s assumption of liabilities                                     |       | —                 |       | 85                      |       |
| Capital expenditures purchased on account                                  |       | —                 |       | 8                       |       |

 

Seeaccompanying notes

 

5

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CONTINENTALMATERIALS CORPORATION

SECURITIESAND EXCHANGE COMMISSION FORM 10-Q

NOTESTO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTERENDED JULY 4, 2009

(Unaudited)

 

1.               The unauditedinterim condensed consolidated financial statements included herein areprepared pursuant to the Securities and Exchange Commission rules andregulations for reporting on Form 10-Q. Accordingly, certain informationand footnote disclosures normally accompanying the annual consolidatedfinancial statements have been omitted. The interim condensed consolidatedfinancial statements and notes should be read in conjunction with theconsolidated financial statements and notes thereto included in the Company’slatest annual report on Form 10-K. In the opinion of management, thecondensed consolidated financial statements include all adjustments (none ofwhich were other than normal recurring adjustments) necessary for a fairstatement of the results for the interim periods.

 

2.               Income taxes are reported consistent withStatement of Financial Accounting Standards (SFAS) Statement No. 109, “Accountingfor Income Taxes.” Income taxes are accounted for under the asset and liabilitymethod that requires deferred income taxes to reflect the future taxconsequences attributable to differences between the tax and financialreporting bases of assets and liabilities. Deferred tax assets and liabilitiesrecognized are based on the tax rates in effect in the year in whichdifferences are expected to reverse. Deferred tax assets are reduced by avaluation allowance when, based on available positive and negative evidence, itis “more likely than not” (greater than a 50% likelihood) that some or all ofthe net deferred tax assets will not be realized.

 

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 tax rate of 34.6% is based on expected income,statutory tax rates and tax positions taken in the various jurisdictions inwhich we operate. For interim financial reporting, we estimate the annualeffective rate based on the projected taxable income for the full year andrecord a quarterly income tax provision in accordance with the anticipatedannual rate. As the year progresses, we refine the estimates of the year’staxable income as new information becomes available, including year-to-datefinancial results. This continual estimation process often results in a changeto our expected effective income tax rate for the year. When this occurs, weadjust the income tax provision during the quarter in which the change inestimate occurs so that the year-to-date provision reflects the expected annualincome tax rate. For the six months ended July 4, 2009, we utilized theeffective rate based upon projected operating results for the full year andrecorded an income tax provision for the second quarter such that the six monthyear-to-date rate reflected the estimated annual income tax rate. Significantjudgment is required in determining our effective income tax rate and inevaluating our tax positions.

 

Wefile income tax returns in the United States Federal and various statejurisdictions. The Internal Revenue Service has completed examinations forperiods through 2004. Federal tax years 2005 through 2007 are either currentlyunder examination or remain subject to examination. Various state income taxreturns also remain subject to examination. None of the unrecognized taxbenefits at July 4, 2009 are expected to be resolved within 12 monthsof this reporting date.

 

3.               Effective December 30,2007, the Company adopted SFAS No. 157, “Fair Value Measurements,” whichprovides a framework for measuring fair value under accounting principlesgenerally accepted in the United States of America. The adoption of thisstatement had an immaterial impact on our consolidated financial statements.The Company also adopted the deferral provisions of the Financial AccountingStandards Board Staff Position FAS 157-2, which delays the effective dateof SFAS No. 157 for all nonrecurring fair value measurements ofnon-financial assets and liabilities until the Company’s 2009 fiscal year. TheCompany’s adoption of this statement had no impact on its consolidatedfinancial position, results of operations 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. SFAS No. 157 alsoexpands disclosures about instruments measured at fair value and establishes afair value 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:

 

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

 

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 the cash equivalents as Level 1, as they are money marketaccounts backed by Treasury Bills. As of July 4, 2009, and January 3,2009, the Company did not have any cash equivalents, therefore there were no assetsmeasured at fair value.

 

In April 2009, theFASB issued FASB Staff Position (FSP) Financial Accounting Standard(FAS) 107-1 and Accounting Principles Board (APB) 28-1, InterimDisclosures about Fair Value of Financial Instruments. FSP FAS 107-1amended SFAS No. 107, Disclosures about Fair Value of FinancialInstruments, and APB Opinion No. 28, Interim Financial Reporting, torequire disclosures about the fair value of financial instruments in interim aswell as in annual financial statements. The Company adopted this standard inthe current quarter. The adoption of this standard resulted in the disclosureof fair value attributable to the Company’s debt instruments within thisinterim report. As the FSP addresses only disclosure requirements, theadoption of this FSP did not impact the Company’s consolidated financialposition, results of operations or cash flows. The carrying amount of the debtat July 4, 2009 approximates its fair value.

 

In May 2009, the FASB issued SFAS No. 165, “SubsequentEvents,” which establishes general standards of accounting for and disclosureof events that occur after the balance sheet date but before financialstatement are issued or are available to be issued. The Company’s disclosure ofthe sale of its wholly owned subsidiary, Rocky Mountain Ready Mix Concrete, Inc.(RMRM), on July 17, 2009, as discussed in Note 9, incorporates thesestandards.

 

In June 2009,the FASB issued SFAS No. 168, the FASB Accounting Standards Codification(TM) and the Hierarchy of Generally Accepted Accounting Principles (SFAS168).  SFAS 168 will become the single source of authoritativenongovernmental U.S. generally accepted accounting principles (GAAP),superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”),Emerging Issues Task Force (“EITF”), and related accountingliterature.  SFAS 168 reorganizes GAAP into approximately 90accounting topics and displays them using a consistentstructure.  Also included is relevant Securities and ExchangeCommission guidance organized using the same topical structure in separatesections.  SFAS 168 will be effective for financial statements issuedfor reporting periods that end after September 15, 2009.  Thisstatement will not impact the Company’s consolidated financial position,results of operations or cash flows; however it will impact all futurereferences to authoritative accounting literature.

 

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 assets and intangible assets acquired in both business combinationsand asset 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. Since adoption of FSP 142-3 on January 4,2009, the first day of fiscal 2009, this statement has had no impact on theCompany’s consolidated 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 July 4, 2009, the Company did not haveany material derivative or hedging activities that required disclosure underthis pronouncement.

 

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 any non-

 

7

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controlling interest inthe acquiree at fair value as of the acquisition date; and (b) an acquirerin pre-acquisition periods to expense all acquisition-related costs. SFAS No. 141(R) alsorequires that any adjustments to an acquired entity’s deferred tax asset,valuation allowance, cash contingency, or deferred tax liability balance thatoccur after the measurement period be recorded as a component of income taxexpense. This accounting treatment is required for business combinationsconsummated before the effective date of SFAS No. 141(R) (non-prospective);otherwise SFAS No. 141(R) must be applied prospectively. Thepresentation and disclosure requirements must be applied retrospectively toprovide comparability in the financial statements. Early adoption isprohibited. SFAS No. 141(R) is effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008. The Company is required to comply with the provisions of this statementfor any business combinations subsequent to December 15, 2008. Theadoption of this statement had no impact on the Company’s second quarterfinancial statements since there were no current or recent acquisitions.

 

4.               Operating results for thefirst six months of 2009 are not necessarily indicative of performance for theentire year. Historically, sales of the Evaporative Cooling segment are higherin the first and second quarters, sales of the Concrete, Aggregates andConstruction Supplies segment are higher in the second and third quarters andsales of the Heating and Cooling segment are higher in the third and fourthquarters. The sales of the Door segment are more evenly spread throughout theyear.

 

5.               There is no difference inthe calculation of basic and diluted earnings per share (EPS) for thethree-month or six-month periods ended July 4, 2009 and June 28,2008.

 

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 (WFC). The Evaporative Cooling segmentproduces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona (PMI). Salesof these 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 collectively referred to as Transit Mix Concrete Co.(TMC). RMRM of Denver, formerly included in this segment, was sold on July 17,2009 and has been reclassified as discontinued operation (see Note 9). Doorsare fabricated and sold along with the related hardware from Colorado Springsand Pueblo through the Company’s wholly-owned subsidiary, McKinney Door andHardware, Inc. of Pueblo, Colorado (MDHI). Sales of these two segments arehighly concentrated in the Front Range area in Colorado although door sales arealso made throughout the United States.

 

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 thethree-month and six-month periods ended July 4, 2009 and June 28, 2008along 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** | ** ** |
| 2009                                      |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Six  Months ended July 4, 2009       |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues  from external customers         |       | $                                                            | 18,030     |               | $          | 8,585                                |       | $                         | 26,615     |                     | $          | 15,437 |   | $ | 17,359 |   | $ | 32,796 |   | $ | 9 |   | $ | 172 |   | $ | 59,592 |   |
| Depreciation,  depletion and amortization |       | 1,777                                                        |       | 84                 |       | 1,861                                |       | 198                       |       | 250                      |       | 448 |   | 37 |   | — |   | 2,346 |   |
| Operating  (loss) income (a)              |       | (1,671                                                       | )          | 978                |       | (693                                 | )          | (133                      | )          | 2,535                    |       | 2,402 |   | 456 |   | 54 |   | 2,219 |   |
| Segment  assets                           |       | 39,952                                                       |       | 6,053              |       | 46,005                               |       | 17,628                    |       | 15,877                   |       | 33,505 |   | 10,109 |   | 3,846 |   | 93,465 |   |
| Capital  expenditures (b)                 |       | 1,001                                                        |       | 3                  |       | 1,004                                |       | —                    |       | 84                       |       | 84 |   | 29 |   | — |   | 1,117 |   |
| Quarter  ended July 4, 2009          |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues  from external customers         |       | $                                                            | 9,142      |               | $          | 3,862                                |       | $                         | 13,004     |                     | $          | 5,539 |   | $ | 10,050 |   | $ | 15,589 |   | $ | 3 |   | $ | 86 |   | $ | 28,682 |   |
| Depreciation,  depletion and amortization |       | 939                                                          |       | 42                 |       | 981                                  |       | 103                       |       | 125                      |       | 228 |   | 18 |   | — |   | 1,227 |   |
| Operating  (loss) income (a)              |       | (359                                                         | )          | 368                |       | 9                                    |       | (570                      | )          | 1,500                    |       | 930 |   | 1,224 |   | 27 |   | 2,190 |   |
| Segment  assets                           |       | 39,952                                                       |       | 6,053              |       | 46,005                               |       | 17,628                    |       | 15,877                   |       | 33,505 |   | 10,109 |   | 3,846 |   | 93,465 |   |
| Capital  expenditures (b)                 |       | 313                                                          |       | 3                  |       | 316                                  |       | —                    |       | 27                       |       | 27 |   | — |   | — |   | 343 |   |

 

8

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| ** **                                | ** ** | **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         |       | $                                                            | 28,058     |               | $          | 7,625                                |       | $                          | 35,683     |                     | $          | 19,604 |   | $ | 14,199 |   | $ | 33,803 |   | $ | 9 |   | $ | 172 |   | $ | 69,667 |   |
| Depreciation,  depletion and amortization |       | 1,664                                                        |       | 65                 |       | 1,729                                |       | 225                        |       | 275                      |       | 500 |   | 38 |   | — |   | 2,267 |   |
| Operating  income (loss)                  |       | 101                                                          |       | 786                |       | 887                                  |       | (422                       | )          | 530                      |       | 108 |   | (1,598 | ) | 54 |   | (549 | ) |
| Segment  assets (c)                       |       | 46,410                                                       |       | 6,277              |       | 52,687                               |       | 23,521                     |       | 14,241                   |       | 37,762 |   | 3,194 |   | 23 |   | 93,666 |   |
| Capital  expenditures (b)                 |       | 183                                                          |       | 100                |       | 283                                  |       | 51                         |       | 68                       |       | 119 |   | 5 |   | — |   | 407 |   |
| Quarter  ended June 28, 2008         |       |                                                         |       |               |       |                                 |       |                       |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues  from external customers         |       | $                                                            | 16,843     |               | $          | 3,865                                |       | $                          | 20,708     |                     | $          | 8,081 |   | $ | 8,850 |   | $ | 16,931 |   | $ | 4 |   | $ | 86 |   | $ | 37,729 |   |
| Depreciation,  depletion and amortization |       | 820                                                          |       | 32                 |       | 852                                  |       | 117                        |       | 137                      |       | 254 |   | 19 |   | — |   | 1,125 |   |
| Operating  income (loss)                  |       | 1,430                                                        |       | 368                |       | 1,798                                |       | (779                       | )          | 148                      |       | (631 | ) | (806 | ) | 27 |   | 388 |   |
| Segment  assets (c)                       |       | 46,410                                                       |       | 6,277              |       | 52,687                               |       | 23,521                     |       | 14,241                   |       | 37,762 |   | 3,194 |   | 23 |   | 93,666 |   |
| Capital  expenditures (b)                 |       | 179                                                          |       | 14                 |       | 193                                  |       | 21                         |       | 17                       |       | 38 |   | — |   | — |   | 231 |   |

 

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(a)          Includedin the Unallocated Corporate operating amount is a gain of $2,026,000 on thesale of land in Colorado Springs. As disclosed in the 2008 Annual Report on Form 10-K,the Company received $2,114,000 during the fourth quarter of 2008 from the saleresulting in a pre-tax profit of $1,947,000. On July 2, 2009, the Companyand the buyer of the property reached an agreement on the final purchase pricefor that property. Under the terms of the agreement, the Company will receivean additional cash payment of $2,026,000 all of which added to the operatingincome of the second quarter of 2009. The Company received the cash subsequentto the end of the quarter.

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

(c)          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 the lastAnnual Report on Form 10-K except for the reclassification of RMRM fromthe Concrete, Aggregates and Construction Supplies segment to discontinuedoperations. Assets held for sale as of July 4, 2009 are included in theOther column in the tables above.

 

7.               Identifiable intangibleassets as of July 4, 2009 include two non-compete agreements, arestrictive land covenant and customer relations. Collectively, these assetswere carried at $563,000, net of $547,000 accumulated amortization. The pre-taxamortization expense for intangible assets during the quarter ended July 4,2009 was $42,000 compared to $74,000 for the quarter ended June 28, 2008and $85,000 and $150,000 for the six months ended July 4, 2009 and June 28,2008, respectively. Based upon the intangible assets recorded on the balancesheet at July 4, 2009, amortization expense for the next five years isestimated to be as follows: 2009 – $169,000, 2010 – $137,000, 2011 – $101,000,2012 – $65,000 and 2013 – $58,000.

 

Goodwill was $7,229,000 as of July 4, 2009 and$7,829,000 as of January 3, 2009. At January 3, 2009, $6,229,000 related to the Concrete, Aggregatesand Construction Supplies segment and $1,000,000 relates to the Doorsegment.  Goodwill is not amortized butrather assessed for impairment as of the end of each fiscal year in accordancewith SFAS No. 142. To the extent that events occur during the year, eitherinvolving the relevant Company subsidiaries or their industries, the Companyrevisits its assessment of the recorded goodwill to determine if impairment hasoccurred and should be immediately recognized.

 

During the quarter ended July 4, 2009, theCompany accounted for RMRM as a discontinued operation and accordinglyreclassified the assets and liabilities of RMRM as assets and liabilities heldfor sale. RMRM was part of the Concrete, Aggregates and Construction Suppliesreporting unit. In accordance with SFAS No. 142, the Company allocated aportion of the goodwill in the Concrete, Aggregates and Construction Suppliesreporting unit to the assets of RMRM on a relative fair value basis. The amountof goodwill allocated was $600,000. See Note 9. There were no other changes togoodwill during the quarter.

 

In accordance with SFAS No. 142, the Companyperformed an assessment of the realizability of the remaining goodwill in theConcrete, Aggregates and Construction Supplies reporting unit as of July 4,2009. The results of the Company’s analysis indicated that no impairment of theremaining goodwill in the Concrete, Aggregates and Construction Suppliesreporting unit was necessary.

 

8.              OnApril 16, 2009 the Company repaid its existing credit agreement andreplaced it with a new secured credit agreement (New Credit Agreement) wherebythe new bank lender provided a total credit facility of $30,000,000 consistingof a $20,000,000 revolving credit facility (reduced by letters of credit thatmay be issued by the lender on the Company’s behalf) and a $10,000,000 

 

9

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term loan facility. Borrowings under the NewCredit Agreement are secured by the Company’s accounts receivable, inventories,machinery, equipment, vehicles and certain real estate. Borrowings under therevolving credit facility are limited to 80% of eligible accounts receivableand 50% of eligible inventories. Inventory borrowings are limited to a maximumof $10,000,000. The full $20,000,000 was available under the revolving creditfacility as of July 4, 2009.

 

Borrowingsunder the New Credit Agreement bear interest based on a performance based LIBORor prime rate option. The base LIBOR rate will not be less than 2% and the baseprime rate will not be less 4%. At inception of the New Credit Agreement theeffective interest rate under the LIBOR option was 5% and 4.75% under the primerate option. The Company also paid certain underwriting and arrangement fees atthe time of closing.****The New CreditAgreement requires the Company to maintain certain levels of tangible networth, EBITDA (earnings before interest, income taxes, depreciation and amortization),debt service coverage and to maintain certain ratios of consolidated debt tocash flow (as defined). Additional borrowings, acquisition of stock of othercompanies, purchase of treasury shares and payment of cash dividends are eitherlimited or require prior approval by the lender. Payment of accrued interest isdue monthly or at the end of the applicable LIBOR period on revolving creditborrowings and the term debt borrowings. Principal payments under the term loanare due quarterly with a final payment of all remaining unpaid principal due April 16,2012. Effective May 29, 2009, the Company entered into an interest rateswap transaction as required by the New Credit Agreement. The notional amountof the swap was $5,000,000 which is reduced by $500,000 on September 11,2011, December 31, 2011 and March 31, 2012 before the swap terminateson April 16, 2012. Under the swap agreement the Company pays a fixed rateof 3.07% and receives the 30 day floating LIBOR rate but not less than 2.00%.At July 4, 2009, the effective rate on $5,000,000 of the outstanding termdebt was therefore 6.07% (the 5% effective rate on the term debt under theLIBOR option plus the swap differential of 1.07%). The fair value of theinterest rate swap, included in interest expense, was not material to theCompany’s financial statements as of July 4, 2009.

 

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-insured casualtyclaims. Revolving credit borrowings were used to fund the cash collateralaccount with the Company’s insurer.

 

The amountclassified as current for the term loan under the New Credit Agreement is$3,225,000 which includes scheduled quarterly repayments totaling $1,125,000and payments required from the proceeds of the sale of property in ColoradoSprings ($535,000) and the net cash proceeds received from the sale of RMRM($1,565,000).

 

9.               During the quarter ended July 4, 2009, theCompany committed to a plan to sell RMRM. See Note 10 for additional details. As a result of this action, the Company accounted for RMRM as adiscontinued operation in accordance with SFAS No. 144— Accounting for theImpairment or Disposal of Long-Lived Assets (SFAS No. 144). The condensedconsolidated results of operations for all periods presented were reclassifiedto account for RMRM as a discontinued operation.  The assets and liabilities of RMRM areclassified as assets and liabilities held for sale in the accompanyingcondensed consolidated balance sheet as of July 4, 2009.

 

RMRM is included in theConcrete, Aggregates and Construction Supplies reporting segment.  In accordance with SFAS No. 142 –Goodwill and Other Intangible Assets, the Company allocated a portion of thegoodwill to RMRM on a relative fair value basis.  As a result of this allocation, $600,000 ofgoodwill was allocated to the net assets of RMRM as of July 4, 2009.

 

Revenueand pretax loss from RMRM is reported as discontinued operations for the six andthree month fiscal periods ended July 4, 2009 and June 28, 2008,respectively, and is summarized as follows (amounts in thousands):

 
| ** **  | ** ** | **Six Months** | ** ** | **Three Months** | ** ** |
|-------------|------------|----------------|------------|------------------|------------|
| ** **  | ** ** | **2009**       | ** ** | **2008**         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue     |       | $              | 3,527      |             | $          | 6,606 |   | $ | 1,706 |   | $ | 4,032 |   |
| Pretax Loss |       | $              | (1,699     | )                | $          | (923 | ) | $ | (1,155 | ) | $ | (348 | ) |

 

The loss fromdiscontinued operations for the six and three month fiscal periods ended July 4,2009 and June 28, 2008, respectively, is summarized as follows (amounts inthousands):

 
| ** **                                           | ** ** | **Six Months** | ** **   | **Three Months** | ** ** |
|------------------------------------------------------|------------|----------------|--------------|------------------|------------|
| ** **                                           | ** ** | **2009**       | ** **   | **2008**         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Loss from operations of  RMRM                        |       | $              |  (1,052 | )                | $          |  (923 | ) | $ |  (508 | ) | $ |  (348 | ) |
| Loss on disposal  (impairment of net assets) of RMRM |       | (647           | )            | —           |       | (647 | ) | — |   |
| Income tax benefit  (provision)                      |       | 1,250          |         | 175              |       | 1,117 |   | (18 | ) |
| Loss on discontinued  operation                      |       | (449           | )            | (748             | )          | (38 | ) | (366 | ) |
|                                                      |            |                |              |                  |            |  |  |  |  |  |  |  |  |

 

10

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In accordance with SFAS No. 144,the net assets of RMRM must be recorded at the lower of carrying value or fairvalue less costs to sell. As noted above, the carrying value as of July 4,2009 includes $600,000 of goodwill.  Thefair value of RMRM, less costs to sell, were lower than the carrying value asof July 4, 2009, which resulted in a pre-tax impairment charge of $647,000recorded in the quarter ended July 4, 2009.  This amount has been recorded as a loss ondiscontinued operations.

 

The components of thediscontinued operations, which are included on the Consolidated Balance Sheet,consist of the following at July 4, 2009 (amounts in thousands):

 
| ** **                             | ** ** | **July 4, 2009** | ** **  |
|----------------------------------------|------------|-----------------------|-------------|
| Cash                                   |       | $                     |  23    |   |
| Receivables                            |       | 1,185                 |        |
| Inventory                              |       | 518                   |        |
| Other  short-term assets               |       | 152                   |        |
| Property  and equipment                |       | 1,737                 |        |
| Other  long-term assets                |       | 168                   |        |
|                                   |       | $                     |  3,783 |   |
|                                   |       |                  |        |
| Current  liabilities                   |       | $                     |  1,159 |   |
|                                   |       |                  |        |
| Net  assets of discontinued operations |       | $                     |  2,624 |   |

 

The sale of RMRM isexpected to result in a capital loss of approximately $6,300,000 and a relateddeferred tax asset of approximately $2,400,000. This loss can be utilized tooffset current and future capital gains with a Federal carry forward periodlimited to five years. The Company has limited capital gains and as a result avaluation allowance of approximately $1,630,000 has been established againstthe deferred tax asset related to the capital loss in excess of that which is expectedto be utilized to offset the capital gain realized during 2009.

 

10.         **Subsequent Events:** On July 17, 2009, the Company completed the saleof all of the outstanding capital stock of RMRM, a Colorado corporation toCampbells C-Ment Contracting, Inc. (Buyer), a Colorado corporation. RMRM operateda ready mix concrete business in the Denver metropolitan area.

 

The Company received$1,905,000 in cash at closing and a Promissory Note in the original principalamount of $1,294,035, representing the estimated closing date net workingcapital amount of RMRM. The principal amount of the Promissory Note will beadjusted upon a final determination of the closing date net working capital.The Promissory Note bears interest at 5% per annum. The initial principalpayment is due September 30, 2010 with final principal payment due June 30,2012. Principal payments will commence earlier if the Buyer achieves certainsales volume levels.

 

The Company and its’wholly-owned subsidiary TMC also entered into a Non-Competition, Non-Disclosureand Non-Solicitation Agreement with the Buyer for a period of six years. Inconsideration of the covenants made by the Company and TMC, beginning in 2010the Company will receive compensation if certain sales volume or operatingprofit thresholds are reached by the Buyer. There is no assurance that thefuture operating results of the Buyer will be such that any futureconsideration will be due to the Company under this Agreement.

 

The Company evaluatedsubsequent events through the filing date of our quarterly 10-Q with the Securitiesand Exchange Commission on August 24, 2009.

 

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

** **

Company Overview

 

TheCompany operates in four reportable segments within its two principal industrygroups; the Heating and Cooling segment and the Evaporative Cooling segment inthe HVAC industry group and the Concrete, Aggregates and Construction Suppliessegment and the Door segment in the Construction Products industry group.

 

11

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TheHeating and Cooling segment produces and sells gas-fired wall furnaces, consoleheaters and fan coils from the Company’s wholly-owned subsidiary, WFC ofColton, California. The Evaporative Cooling segment produces and sells evaporativecoolers from the Company’s wholly-owned subsidiary, PMI of Phoenix, Arizona.Concrete, Aggregates and Construction Supplies are offered from numerouslocations along the Front Range of Colorado operated by the Company’swholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co.,of Colorado Springs and Transit Mix of Pueblo, Inc. of Pueblo,collectively referred to as TMC. RMRM of Denver, previously part of thissegment, was sold on July 17, 2009 and has been reclassified as a discontinuedoperation. See Notes 9 and 10. Doors are fabricated and sold along with therelated hardware from Colorado Springs and Pueblo through the Company’swholly-owned subsidiary, MDHI of Pueblo, Colorado.

 

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 and assets of the discontinuedoperation. Expenses related to the corporate information technology group areallocated to all locations, including the corporate office.

 

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.

 

Fourthquarter results can vary based on weather conditions in Colorado as well as inthe principal markets for the Company’s heating equipment. The Company typicallyexperiences operating cash flow deficits during the first half of the yearreflecting 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. Although liquidity followed this trend for the firsthalf of 2009, the decline in borrowings toward the end of the second quarterwere primarily due to reductions of inventory and receivable levels rather thanimproved sales in the Concrete, Aggregates and Construction Supplies segment.

 

Cashprovided by operations was $887,000 during the first six months of 2009compared to the $2,239,000 of cash used during the first six months of 2008.TheCompany’s operating cash flow during the first six months of 2009 was positiveprimarily due to a decrease in receivables and inventory partially offset by adecrease in accounts payable and accrued expenses compared to an increase inall three categories during the first six months of 2008. The decrease inreceivables was primarily due to weak sales in the Concrete, Aggregates andConstruction Materials segment and the Heating and Cooling segment. The declinein inventory and accounts payable and accrued expenses was largely due to thereduction in inventory in the Heating and Cooling segment from an unusuallyhigh level at the end of 2008. Partially offsetting this net positive cash flowwas the need to fund $4,840,000 of deposits with our insurance carriers in lieuof previously issued letters of credit.

 

Duringthe six months ended July 4, 2009, investing activities used $1,020,000 ofcash compared to the $271,000 of cash provided in the prior year’s period.Capital expenditures during the first half of 2009 were primarily incurred bythe Concrete, Aggregates and Construction Materials segment including almost$700,000 for development activities on the Pueblo East aggregates site. Theproceeds from sale of assets during the 2008 period included the sale a smallaggregate operation (Table Mountain) by the Concrete, Aggregates andConstruction Materials segment during the first quarter of 2008. The proceedswere approximately $720,000 (including the buyer’s assumption of just over$85,000 of liabilities associated with the property) which resulted 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 Company’s business.

 

Financingactivities used $460,000 of cash during the first six months of 2009 comparedto providing $1,881,000 during the first six months of 2008. As discussed inNote 8, the Company refinanced its term and revolving credit facility duringthe 2009 second quarter. Financing activities provided less cash for the firstsix months of 2009 compared to the comparable 2008 period due to the $887,000of cash provided by operations during 2009 compared to the $2,239,000 of cashused in operations during 2008. All scheduled debt repayments were made duringthe first six months of both 2009 and 2008. During the first six months of2009, the highest amount of Company borrowings outstanding under the revolvingcredit agreement was $14,734,000 and the average amount outstanding was$9,670,000. See Note 8 for details regarding the New Credit Agreement signed April 16,2009.

 

12

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TheCompany believes that its existing cash balance, anticipated cash flow fromoperations and borrowings available under the New Credit Agreement will besufficient to cover expected cash needs, including servicing debt and plannedcapital expenditures for the next twelve months. The Company expects to be incompliance with all debt covenants during this period.

 

Operations — Comparison of Quarter Ended July 4,2009 to Quarter Ended June 28, 2008

 

Overall, consolidated sales declined over 24.0% from $37,729,000 forthe second quarter of 2008 to $28,682,000 for the second quarter of 2009 withsignificant decreases reported by the Concrete, Aggregates and ConstructionSupplies segment and the Heating and Cooling segment. The Evaporative Coolingsegment reported a significant increase in sales and operating income.

 

Cost of sales as a percentage of sales declined for all segments exceptDoor which reported a modest increase primarily due to increased sales pricecompetition directly related to the decline in construction activity. Theimproved margins in the Evaporative Cooling segment and the Heating and Coolingsegment were largely due to lower material costs, a change in product mix inthe Evaporative Cooling segment and some reduction in factory overhead costs inthe Heating and Cooling segment. The Evaporative Cooling segment alsobenefitted from significantly higher sales. The improved margins in theConcrete, Aggregates and Construction Supplies segment were primarily due toreduced cement costs and a large project in Pueblo.

 

Selling and administrative costs decreased 5.2% but increased as apercentage of sales, from 13.5% to 16.4%, due to the lower sales volume and thefixed nature of some of these expenses. The substantial increase in gain ondisposition of property and equipment during the first six months of 2009compared to the comparable 2008 period was due to sale of the land in ColoradoSprings. As disclosed in the 2008 Annual Report on Form 10-K, theCompany received $2,114,000 during the fourth quarter of 2008 from the saleresulting in a pre-tax profit of $1,947,000. On July 2, 2009, the Companyand the buyer of the property reached an agreement on the final purchase pricefor that property. Under the terms of the agreement, the Company will receivean additional cash payment of $2,026,000 all of which added to the operatingincome of the second quarter of 2009. The Company received the cash subsequentto the end of the quarter. The resulting operating income of $2,190,000for the 2009 quarter significantly improved over the $388,000 reported for thesecond quarter of 2008 primarily due to the gain on the sale of land inColorado Springs.

 

The loss from discontinued operations for the quarter, net of taxes was$38,000. The loss includes a pretax impairment charge against the net assets ofthe operation of $647,000. The small net loss was result of the sale generatinga large capital loss of which the Company was able to utilize $769,000 tooffset the capital gain realized from the sale of land in Colorado Springdiscussed above.

 

Adiscussion of operations by segment follows.

 

**ConstructionProducts**

 

The table below presents a summary of operating information for the tworeportable segments within the Construction Products group for the quartersended July 4, 2009 and June 28, 2008 (amounts in thousands):

 
| ** **                                     | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors**  | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|
| Quarter ended July 4, 2009                | ** ** | ** **                                            | ** ** | ** ** | ** ** |
| Revenues from external customers               |       | $                                                     | 9,142      |       | $          | 3,862 |   |
| Segment operating (loss) income                |       | (359                                                  | )          | 368        |       |
| Operating (loss) income as a percent of  sales |       | (3.9                                                  | )%         | 9.5        | %          |
| Segment assets as of July 4, 2009         |       | $                                                     | 39,952     |       | $          | 6,053 |   |
| Return on assets                               |       | (.9                                                   | )%         | 6.1        | %          |
|                                           |       |                                                  |       |       |       |
| Quarter ended June 28, 2008               |       |                                                  |       |       |       |
| Revenues from external customers               |       | $                                                     | 16,843     |       | $          | 3,865 |   |
| Segment operating income                       |       | 1,430                                                 |       | 368        |       |
| Operating income as a percent of sales         |       | 8.5                                                   | %          | 9.5        | %          |
| Segment assets as of June 28, 2008        |       | $                                                     | 39,496     |       | $          | 6,774 |   |
| Return on assets                               |       | 3.6                                                   | %          | 5.4        | %          |

 

13

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Concrete,Aggregates and Construction Supplies Segment

 

Sales of concrete, aggregates and construction supplies (collectivelyreferred to herein as construction materials) declined by $7,701,000 or 45.7%.The lower level of sales is the result of a substantial slowing of constructionactivity in the Colorado Springs and Pueblo Colorado area in both theresidential and commercial markets. The extent of the decrease in constructionactivity is not unlike that experienced throughout the country and is lesssevere than that experienced in some other regions. Concrete volume was 36.4%lower in the second quarter of 2009 compared to the second quarter of 2008.Aggregate volume (tonnage) was down 47% compared to the prior year quarter. Inaddition to the slow construction markets, the shutdown of the Company’sPikeview Quarry contributed to the lower aggregate volume. The Pikeview Quarrywas shut down in December 2008 due to a landslide. The Company and itsconsultants are working on a new mining and reclamation plan for the PikeviewQuarry. The mining and reclamation plan requires the approval of the ColoradoDivision of Reclamation, Mining and Safety (DRMS) before the Company can resumeproduction at the Pikeview Quarry. The DRMS has given the Company until May13,2010 to submit a new mining and reclamation plan. In spite of the lower salesvolume gross profit margins improved due to higher prices and some moderationin purchased materials costs, primarily cement resulting from increased cementproduction capacity in southern Colorado. In addition a couple of large jobs inthe first half of 2009 that required high specification concrete contributed toboth the higher price and the improved unit margins. Lower fuel prices andother cost containment measures also contributed to the improved margins.However, overall gross profit was down due to the diminished sales volume. Thelower sales volume, the shutdown of the Pikeview Quarry and some higher costsexperienced at our Arkansas River aggregate operations had a significantnegative effect on the operating results for the second quarter of 2009. Salesof construction supplies also decreased due to the construction slowdown. Thelower sales volume and more competitive pricing led to a significantly reducedprofit margin for this segment. Overall gross profits on all constructionmaterials were 17.3% compared to 20.1% in the second quarter of 2008. Inresponse to the lower level of business, management reduced selling andadministrative expenses through workforce reduction and other cost savingactions. In the second quarter of 2009 this segment had an operating loss of$359,000 compared to an operating profit of $1,430,000 in the second quarter of2008.

 

As a result, both operating income as apercent of sales and the return on assets declined in the second quarter of2009 from the second quarter of 2008.

 

DoorSegment

 

Doorsegment sales of $3,862,000 for the second quarter of 2009 were virtuallyidentical to the comparable 2008 quarter despite the decline in constructionactivity over the past year. 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. Sales are alsoinfluenced by the level of construction activity but the effect is generallyslower to appear as the products supplied by this segment, when sold for newconstruction, are some of the last items installed on a project. Thus, althoughsales remained constant, the backlog at July 4, 2009 was approximately 45%lower than the backlog at June 28, 2008.

 

Theslight decline in margins, approximately three tenths of a percent, wasprimarily due to more competitive pricing encountered on the more recent salesas bidding opportunities decline. Operating income remained constant as lowerselling and administrative costs offset an increase in depreciation expense andthe small decline in margins. As a result, operating income as a percent ofsales remained the same while the return on assets improved from 5.4% for the2008 quarter to 6.1% for the 2009 quarter. The improved return was largely dueto lower inventory levels at July 4, 2009 reflecting the decreasedbacklog.

 

**HVACProducts**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the quarters ended July 4,2009 and June 28, 2008 (amounts in thousands):

 
| ** **                                     | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Quarter ended July 4, 2009                |       |                     |       |                     |       |
| Revenues from external customers               |       | $                        | 5,539      |                     | $          | 10,050 |   |
| Segment operating (loss) income                |       | (570                     | )          | 1,500                    |       |
| Operating (loss) income as a percent of  sales |       | (10.3                    | )%         | 14.9                     | %          |
| Segment assets as of July 4, 2009         |       | $                        | 17,628     |                     | $          | 15,877 |   |
| Return on assets                               |       | (3.2                     | )%         | 9.4                      | %          |
|                                           |       |                     |       |                     |       |
| 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                      | %          |

 

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Heating and Cooling Segment

 

Sales in the Heating and Cooling segment were $5,539,000 for the secondquarter of 2009, a decrease of $2,542,000, or 31.5%, from the comparable 2008quarter. Fan coil volume accounted for most of the decrease in sales declining44.2% from the prior year’s quarter. This decrease was the result of theslowdown in commercial building, especially for new hotels. Furnace volumeduring the second quarter of 2009 also lagged behind the comparable 2008quarter in what is traditionally this product’s lowest sales quarter. Cost ofsales as a percentage of sales decreased during the second quarter of 2009 to83.9% from 88.2% for the comparable quarter of 2008. Lower commodity prices,some reduction in factory overhead expenses and the absence of a large lowmargin fan coil job in Las Vegas during the 2008 quarter were the primaryreasons for the improved margins.

 

Despite a reduction in selling and administrative expenses byapproximately $259,000 or 16.0% during the second quarter of 2009 compared tothe second quarter of 2008, selling and administrative expenses increased as apercentage of sales from 20.0% to 24.5% as many of these costs are relativelyfixed in nature. The operating loss for the 2009 quarter was reduced from $779,000during the second quarter of 2008 to $570,000 primarily due to the improvedmargins. The return on assets improved slightly due to the large decrease inassets from June 28, 2008 to July 4, 2009. The decrease in inventorywas a planned reduction from an unusually high level carried at the end of 2008while the decrease in receivables is directly related to the decline in sales.

 

Evaporative Cooling Segment

 

Sales in the Evaporative Cooling segment improved to $10,050,000 or13.6%, during the second quarter of 2009 from the comparable 2008 quarter.Although 2009 unit sales for the second quarter of 2009 were lower thanexpected and less than the 2008 quarter, an increase in commercial and industrialcoolers and parts sales drove sales higher. The lower residential unit salesand increased parts sales may be the result of the depressed economicconditions leading more consumers to attempt to repair rather than replaceolder units. A slightly cooler weather pattern during the first part of thesecond quarter of 2009 was also a factor in the lower than expected sales.

 

Operating income for the second quarter of 2009 improved to $1,500,000compared to $148,000 for the 2008 quarter. The improvement was the result of amore favorable product mix, lower material costs, primarily steel, increasedproduction levels and reduced freight costs. Selling and administrative costsincreased both in dollars and as a percentage of sales due to the increasedcommissions, co-op advertising, media advertising and customer discounts allrelated to the increase in sales and higher audit fees related to the firstyear the Company will be required to obtain an opinion on its internal controlsover financial reporting. Both operating income as a percent of sales andreturn on assets improved in the 2009 quarter from the prior year’s comparablequarter.

 

Operations - Comparison of Six Months Ended July 4,2009 to Six Months Ended June 28, 2008

 

Consolidated sales from continuing operations during the first half of2009 were $59,592,000 compared to $69,667,000 during the first half of 2008.The 14.5% decline was due to the decreases in the Concrete, Aggregates andConstruction Supplies segment and the Heating and Cooling segment which morethan offset increases in the Evaporative Cooling and the Door segments. Thechanges in sales levels are due to the factors noted in the discussion of thesecond quarter’s results. The improved sales level in the Door segment wasprimarily due to the timing of shipments. For the six months ended July 4,2009, the Evaporative Cooling segment and the Heating and Cooling segment bothreported a decrease in the cost of sales as a percentage of sales. TheConcrete, Aggregates and Construction Supplies segment and the Door segmentboth reported small increases in their cost of sales as a percentage of sales.On a consolidated basis cost of sales as a percentage of sales improved from85.3% for the first half of 2008 to 80.6 during the first half of 2009. Theimprovement was primarily due to the factors cited in the discussion of thequarter’s results. Selling and administrative costs decreased slightly for thesix months ended July 4, 2009 from the corresponding 2008 period althoughthey increased as a percentage of sales due to the relatively fixed nature ofsome of these costs. Also as noted in the quarter’s discussion, the Companyrecorded an additional gain from the 2008 sale of land of $2,026,000 during thesecond quarter of 2009. The above factors including the gain on sale of land resultedin an operating income of $2,219,000 for the first six months of 2009 comparedto an operating loss of $493,000 reported for the first six months of 2008.

 

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The loss from discontinued operations was $295,000 for the six monthsended July 4, 2009. The small net loss was the primarily due to theability of the Company to utilize a portion of the capital loss that wasgenerated by the sale as noted in the above discussion of the quarter’soperations.

 

Adiscussion of operations by segment follows.

 

**ConstructionProducts**

 

The table below presents a summary of operating information for the tworeportable segments within the Construction Products group for the six monthsended July 4, 2009 and June 28, 2008 (amounts in thousands):

 
| ** **                                     | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| Six Months ended July 4, 2009             |       |                                                  |       |      |       |
| Revenues from external customers               |       | $                                                     | 18,030     |      | $          | 8,585 |   |
| Segment operating (loss) income                |       | (1,671                                                | )          | 978       |       |
| Operating (loss) income as a percent of  sales |       | (9.3                                                  | )%         | 11.4      | %          |
| Segment assets as of July 4, 2009         |       | $                                                     | 39,952     |      | $          | 6,053 |   |
| Return on assets                               |       | (4.2                                                  | )%         | 16.1      | %          |
|                                           |       |                                                  |       |      |       |
| Six Months ended June 28, 2008            |       |                                                  |       |      |       |
| Revenues from external customers               |       | $                                                     | 28,058     |      | $          | 7,625 |   |
| Segment operating income                       |       | 131                                                   |       | 786       |       |
| Operating income as a percent of sales         |       | .5                                                    | %          | 10.3      | %          |
| Segment assets as of June 28, 2008        |       | $                                                     | 39,496     |      | $          | 6,774 |   |
| Return on assets                               |       | .3                                                    | %          | 11.6      | %          |

 

Concrete,Aggregates and Construction Supplies Segment

 

The same factors as discussed in the results of the second quarter(principally the depressed construction markets and the shutdown of thePikeview Quarry) had a similar impact on the results for the first six monthsof 2009 when compared to the results for the first half of 2008. Sales ofconstruction materials were 35.7% lower in the first half of 2009 compared to ayear ago. Concrete volume was down by 24%. Concrete pricing though was somewhathigher due to a modest price increase and the effect of certain jobs thatcalled for higher specification concrete which entailed a higher cost andprice. Aggregate volume fell by 42%. The combined aggregate operationsgenerated a sizable loss in the second quarter of 2009 due to the low volumeand the Pikeview shutdown. Sales of construction supplies were down 44%compared to the prior year. Selling and administrative expenses were reduced byapproximately 10%. This segment’s operating loss in the first six months of2009 was $1,671,000 compared to an operating profit of $131,000 in the prioryear. The operating profit in 2008 included a gain of approximately $338,000from the sale of a small specialty aggregate operation.

 

As a result, both operating results as a percent of sales and return onassets declined for the six months ended July 4, 2009 compared to the sixmonths ended June 28, 2008.

 

DoorSegment

 

Salesin the Door segment for the first six months of 2009 increased $960,000 fromthe comparable 2008 period primarily due to the timing of shipments asdescribed in the above discussion for the current quarter as backlog shrank byapproximately $2,250,000. The decrease in the backlog corresponds to thedecline in construction on a nationwide basis.

 

Operatingincome also improved from $786,000 during the first half of 2008 to $978,000for the first half of 2009 largely due to the increased sales volume during thefirst quarter of 2009. A 4.6% decrease in selling and administrative expensesalso added to the improved operating results. As a result, both operatingincome as a percent of sales and the return on assets increased during the sixmonths ended July 4, 2009 compared to the six months ended June 28,2008. The return on assets increased at a greater rate than the operatingincome as a percent of sales for the reasons noted in the above discussion ofthe quarter.

 

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**HVACProducts**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the six months ended July 4,2009 and June 28, 2008 (amounts in thousands):

 
| ** **                                     | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Six Months ended July 4, 2009             |       |                     |       |                     |       |
| Revenues from external customers               |       | $                        | 15,437     |                     | $          | 17,359 |   |
| Segment operating (loss) income                |       | (133                     | )          | 2,535                    |       |
| Operating (loss) income as a percent of  sales |       | (.9                      | )%         | 14.6                     | %          |
| Segment assets as of July 4, 2009         |       | $                        | 17,628     |                     | $          | 15,877 |   |
| Return on assets                               |       | (.8                      | )%         | 16.0                     | %          |
|                                           |       |                     |       |                     |       |
| 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                      | %          |

 

Heating and Cooling Segment

 

Sales in the Heating and Cooling segment decreased $4,167,000, or21.3%, during the first six months of 2009 from the comparable 2008 period. Aswith the quarter’s results above, fan coil volume was primarily responsible forthe decline although furnace volume also lagged behind the level achieved forthe first six months of 2008. The reasons for the lower level of sales aresimilar to those discussed for the quarter although milder weather during thefirst quarter of 2009 also contributed to the lower furnace sales.

 

The operating loss narrowed from $422,000 during the first six monthsof 2008 to a loss of $133,000 for the 2009 period. Cost of sales as a percentof sales improved from 84.9% to 80.2% for the reasons noted in the discussionof the quarter above. Selling and administrative costs declined $302,000 forthe first six months of 2009 compared to the first six months of 2008 butincreased as a percent of sales due to the fixed nature of some of these costs.As a result of the improved margins, both the operating loss as a percent ofsales and the return on assets improved for the first six months of 2009compared to the prior year’s period.

 

Evaporative Cooling Segment

 

Sales in the Evaporative Cooling segment increased $3,160,000, or22.3%, during the first six months of 2009 over the comparable 2008 period. Theincrease in sales was due to a major competitor exiting the U.S. market and thefactors noted in the discussion of the second quarter’s results above.

 

The segment reported operating income of $2,535,000 for the first sixmonths of 2009 compared to $530,000 for the comparable 2008 period. Theimproved operating results were also due to the factors noted above andresulted in a significant increase in both operating results as a percent ofsales and return on assets for the first six months of 2009 compared to theprior year’s period.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Stateswhich require the Company to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities as of July 4, 2009 and January 3, 2009 and affect thereported amounts of revenues and expenses for the periods reported. Actualresults could differ from those estimates.

 

Information with respect to the Company’s critical accounting policieswhich the Company believes could have the most significant effect on theCompany’s reported results and require subjective or complex judgments bymanagement is contained in Note 7 in this report on Form 10-Q and in Item7, 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 4, 2009.

 

As noted in the Note 7, the Company performed anassessment of the realizability of the goodwill in the Concrete, Aggregates andConstruction Supplies reporting unit as of July 4, 2009.  Due to this assessment, we have updated ourcritical accounting policy disclosure related to goodwill below.

 

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Goodwill and Other Intangible Assets

 

In accordance with SFAS No. 142, “Goodwill andOther Intangible Assets,” goodwill is not amortized as a charge to earnings.The Company annually assesses goodwill for potential impairment as of the lastday of its fiscal year. In addition, to the extent that events occur, eitherinvolving the relevant Company subsidiaries or their industries, the Companyrevisits its assessment of the recorded goodwill to determine if impairment hasoccurred and should be immediately recognized. This assessment requires us tomake significant assumptions and estimates about the extent and timing offuture cash flows, discount rates, growth rates and costs. In addition, theterms of recent industry transactions/mergers are considered.

 

The Company has goodwill associated with two of itsreporting units. We estimate the fair value of our reporting segments using acombination of discounted cash flow models and a market valuation approach.Forecasts of future cash flows are based on our best estimate of future salesand operating costs and general market conditions. The cash flow forecasts areadjusted by an appropriate discount rate derived from our market capitalizationplus an appropriate control premium at the date of evaluation. Therefore,changes in any of these assumptions could impact the estimated fair value. Themarket valuation approach compares theCompany’s financial results to those entities of similar size and industry andalso considers the impact of recent transactions in the industry. Additionally,the Company considers the relation of the fair value of the Company’s reportingunits to the market capitalization of the Company.

 

During the quarter ended July 4, 2009, theCompany accounted for RMRM as a discontinued operation and accordinglyreclassified the assets and liabilities of RMRM as assets and liabilities heldfor sale. RMRM was part of the Concrete, Aggregates and Construction Suppliesreporting unit. In accordance with SFAS No. 142, the Company allocated aportion of the goodwill in the Concrete, Aggregates and Construction Suppliesreporting unit to the assets of RMRM on a relative fair value basis. The amountof goodwill allocated was $600,000. See Note 9.

 

In accordance with SFAS No. 142, the Companyperformed an assessment of the realizability of the remaining goodwill in theConcrete, Aggregates and Construction Supplies reporting unit as of July 4,2009. The results of the Company’s analysis indicated that no adjustment forimpairment of the remaining goodwill in the Concrete, Aggregates andConstruction Supplies reporting unit was necessary.  The Company’s discounted cash flow analysisconsidered the impact of the current adverse operating conditions impacting theConcrete, Aggregates and Construction Supplies reporting unit and the currentbusiness outlook. The result of our analysis was that while the fair value ofthe remaining reporting unit declined from year end, the fair value of thereporting unit was still in excess of the carrying value of the reporting unitand as a result, no adjustment for impairment was necessary. However, a declineof approximately 10% of the fair value of the reporting unit may result in animpairment of our goodwill. If the conditions impacting the Concrete,Aggregates and Construction Supplies reporting unit continue to deteriorateduring the remaining six months of 2009, we may have an impairment of ourgoodwill during the current fiscal year.

 

If the assessment had indicated that the carryingvalue of goodwill was impaired, an impairment charge would have been recordedfor the amount by which the carrying value of the goodwill exceeded its fairvalue. Management believes that the assumptions and estimates used to determinethe estimated fair values are reasonable; however, as noted above, changes inthe aforementioned assumptions and estimates, as well as the effects of unknownfuture events or circumstances could materially affect the estimated fairvalue.

 

OUTLOOK

 

The Company has sold its concrete ready mix business that served theDenver, Colorado market. Currently, the two principal markets served by theConcrete, Aggregates and Construction Supplies segment are Colorado Springs andPueblo, Colorado. It is difficult to predict the timing and magnitude of therecovery in the construction markets in these two areas. While the AmericanRecovery and Reinvestment Act of 2009 (“ARRA”) had little or no impact on oursales in the first half of 2009 we do expect that spending on this program willbenefit our two local markets and should add to our sales volume in the nexttwelve months or longer. Both local governments (Colorado Springs and Pueblo)have submitted a substantial list of construction projects to the federalgovernment seeking ARRA funding. Recently, the Company was awarded a contractto provide concrete to the Fort Carson army base located just to the south ofColorado Springs. This work is scheduled to begin in September, 2009. New homeconstruction in our two markets in the first half was near record lows.Recently though there has been a modest increase in new home construction andthe inventory of unsold homes has diminished. As previously reported, theCompany is working with its consultants to develop a new mining and reclamationplan for the Pikeview Quarry. The Pikeview Quarry has been a principal sourceof aggregate used both in the production of our ready mix concrete and for saleto third parties for other construction applications. If the Company is unableto resume production at the Pikeview Quarry additional capital expenditures maybe required to increase production at one or more of our other aggregatelocations.

 

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Sales of doors in the first half of 2009 exceeded those in the firsthalf of 2008. However, the sales backlog for doors at the end of June, 2009 was45% lower compared to a year ago. As a result it may be reasonable to expectthat sales of doors in the second half of 2009 will be less than the previousyear. We expect pricing levels to be more competitive in the near future aswell.

 

Sales of evaporative coolers are expected to remain at or near currentlevels depending on weather conditions during the cooling season. Profitmargins will vary depending on material cost changes. Steel prices are asignificant cost factor. In management’s opinion, steel prices are not likelyto increase significantly until the general economic recovery spurs a higherlevel of demand for steel.

 

A slow commercial construction market particularly with regard to hotelconstruction will likely result in a lower level of fan coils sales compared tolevels obtained in the past two or three years. We expect sales of heatingproducts to remain relatively constant subject to weather conditions during theheating season. We do not expect a significant change in profit margins exceptto the extent the lower fan coil volume may have an influence on the profitmargin.

 

RECENTLY ISSUED ACCOUNTING 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 assets and intangible assets acquired in both business combinationsand asset 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. Since adoption of FSP 142-3 on January 4,2009, the first day of fiscal 2009, this statement has had no impact on theCompany’s consolidated 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 July 4, 2009, the Company did not haveany material derivative or hedging activities that required disclosure underthis pronouncement.

 

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. This accountingtreatment is required for business combinations consummated before theeffective date of SFAS No. 141(R) (non-prospective); otherwise SFAS No. 141(R) mustbe applied prospectively. The presentation and disclosure requirements must beapplied retrospectively to provide comparability in the financial statements.Early adoption is prohibited. SFAS No. 141(R) is effective for fiscalyears, and interim periods within those fiscal years, beginning on or after December 15,2008. The Company is required to comply with the provisions of this statementfor any business combinations subsequent to December 15, 2008. Theadoption of this statement had no impact on the Company’s second quarterfinancial statements since there were no current or recent acquisitions.

 

InApril 2009, the Financial Accounting Standards Board (“FASB”) issued FASBStaff Position (“FSP”) Financial Accounting Standard (“FAS”) 107-1 andAccounting Principles Board (“APB”) 28-1, Interim Disclosures about Fair Valueof Financial Instruments.   FSP FAS 107-1 amended Statementof Financial Accounting Standards (“SFAS”) No. 107, Disclosures about FairValue of Financial Instruments, and APB Opinion No. 28, Interim FinancialReporting, to require disclosures about the fair value of financial instrumentsin interim as well as in annual financial statements. The adoption of thisstandard resulted in the disclosure of fair value attributable to the Company’sdebt instruments within this interim report.  As the FSP addressesonly disclosure requirements, the adoption of this FSP did not impact theCompany’s consolidated financial position, results of operations or cashflows.

 

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In May 2009, the FASB issued SFAS No. 165, “SubsequentEvents,” which establishes general standards of accounting for and disclosureof events that occur after the balance sheet date but before financialstatements are issued or are available to be issued. The Company’s disclosureof the sale of its wholly owned subsidiary, RMRM, on July 17, 2009, asdiscussed in Note 10, incorporates these standards.

 

InJune 2009, the FASB issued SFAS No. 168, the FASB AccountingStandards Codification (TM) and the Hierarchy of Generally Accepted AccountingPrinciples (“SFAS 168”).  SFAS 168 will become the single source ofauthoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”),superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”),Emerging Issues Task Force (“EITF”), and related accountingliterature.  SFAS 168 reorganizes GAAP into approximately 90accounting topics and displays them using a consistentstructure.  Also included is relevant Securities and ExchangeCommission guidance organized using the same topical structure in separatesections.  SFAS 168 will be effective for financial statements issuedfor reporting periods that end after September 15, 2009.  Thisstatement will not impact the Company’s consolidated financial position,results of operations or cash flows; however it will impact all futurereferences to authoritative accounting literature.

 

The Companydiscusses other recently issued accounting standards and tax law changes in theCritical Accounting Policies section under Item 7 and in Note 1 to ConsolidatedFinancial Statements in Item 8 of the Company’s Annual Report on Form 10-Kfor the fiscal year 2008. Other than as discussed above and in those sections,the Company does not currently have any transactions or circumstances that havebeen addressed by recently issued accounting pronouncements. Therefore,adoption of any of these statements or pronouncements would not have a materialimpact on the Company’s results of operations, financial position or liquidity.

 

MATERIALCHANGES TO CONTRACTUAL OBLIGATIONS

 

There were nomaterial changes to contractual obligations that occurred during the quarterended July 4, 2009 except for the New Credit Agreement entered into on April 16,2009 discussed in Note 8. The New Credit Agreement was filed as Exhibit 10.1to Form 10-Q filed for the quarterly period ended April 4, 2009.

 

FORWARD-LOOKING STATEMENTS

 

The foregoing discussion contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended. Suchforward-looking statements are based on the beliefs of the Company’s managementas well as on assumptions made by and information available to the Company atthe time such statements were made.  Whenused in this Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,”“expects,” “plans,” “projects,” and similar expressions are intended toidentify forward-looking statements. Actual results could differ materiallyfrom those projected in the forward-looking statements as a result of factorsincluding but not limited to: weather, interest rates, availability of rawmaterials and their related costs, national and local economic conditions,competitive forces and changes in governmental regulations and policies. Someof these factors are discussed in more detail in the Company’s 2008 AnnualReport on Form 10-K. Changes in accounting pronouncements could also alterprojected results. Forward-looking statements speak only as of the date theywere made, and the Company undertakes no obligation to publicly update them.

 

**Item 3.****       ****Quantitative and Qualitative Disclosures AboutMarket 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 July 4, 2009. As noted in Item 9A. in the Company’s 2008 AnnualReport on Form 10-K, based on that evaluation, the Chief Executive Officerand 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 isconsidered a material weakness in internal controls over financial reporting asdefined under standards established by the Public Company Accounting OversightBoard (United States). See Item 9A. in the 2008 Form 10-K for additionaldetails regarding this matter which was deemed to be a weakness in internalcontrol over financial reporting.

 

**Item 4T.     Controls and Procedures**

 

(b)                     Changesin Internal Control Over Financial Reporting.

 

The Company continuallyreassesses our internal control over financial reporting and makes changes itdeems prudent. The Company identified a material weakness in internal controlover financial reporting related to accounting for inventory of our Heating andCooling segment during the third quarter of Fiscal 2008. During the fourthquarter of Fiscal 2008, the Company began a process to remediate this materialweakness in internal controls. As part of this process, the Company identifiedthe causes which resulted in the inventory accounting errors and developed anaction plan to address each of these causes. As of July 4, 2009, we haveimplemented certain of these actions and will implement the remaining itemsduring Fiscal 2009. We believe our action plan, once fully implemented, willimprove the internal control over financial reporting related to inventoryaccounting at our Heating and Cooling segment. The Company intends to completeits assessment of the controls related to inventory accounting during fiscal2009 and we believe that such measures will appropriately address the materialweakness related to the accounting for inventory accounting in the Heating andCooling segment.

 

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During the quarter endedJuly 4, 2009, there were no other material weaknesses identified in ourreview of internal control over financial reporting and no significant changesin the Company’s internal control over financial reporting occurred during thequarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

**Item 2.****        UnregisteredSales of Equity Securities and Use of Proceeds**

 

The following table presents information with respect to purchases madeby the Company of its common stock for the period April 5, 2009 through July 4,2009. No shares were purchased during the current quarter.

 

**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** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| April 5 – May 1, 2009 |       | —                                           |       | $                                            | —     |                                                                                              | —     |                                                                                                   | $          | 1,307,404 |   |
| May 2 – May 30, 2009  |       | —                                           |       | —                                       |       | —                                                                                            |       | 1,307,404                                                                                              |       |
| May 31 – July 4, 2009 |       | —                                           |       | —                                       |       | —                                                                                            |       | 1,307,404                                                                                              |       |
| Total                                |       | —                                           |       | $                                            | —     |                                                                                              | —     |                                                                                                   | $          | 1,307,404 |   |

 

On January 19, 1999, the Company initiated purchases under thecurrent open-ended program to repurchase its common stock. Purchases are madeon the open market or in block trades at the discretion of management. Thedollar amount authorized for the program has been periodically increased by theBoard of Directors and approved by the Company’s lenders under the Company’sprior credit facility. The $1,307,404 in the above table represents theremaining amount authorized by the Board. On April 16, 2009, the Companyentered into a new credit agreement with a bank which contains certainrestrictions on the Company’s ability to repurchase its stock. See furtherdiscussion in the Financial Condition, Liquidity and Capital Resources sectionof Item 2. above.

 

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

 

(a)                      The 2009 Annual Meeting of theStockholders of the Company was held on May 27, 2009.

 

(b)                     At that meeting, threeindividuals, all of whom are current directors, were elected to serve until the2012 Annual Meeting by the following votes:

 
| **Director**      | ** ** | **Shares For** | ** ** | **Shares Against** | ** ** | **Shares Withheld** | ** ** |
|-------------------|------------|----------------|------------|--------------------|------------|---------------------|------------|
| Thomas H. Carmody |       | 1,407,111      |       | —             |       | 141,549             |       |
| Ronald J. Gidwitz |       | 1,456,694      |       | —             |       | 91,966              |       |
| Darrell M. Trent  |       | 1,410,611      |       | —             |       | 138,049             |       |

 

There were no broker non-votes.

 

The following directors’ terms of office continued after the 2009Meeting until the Annual Meetings of the respective years as set forth oppositetheir names below:

 
| **Directors**        | ** ** | **Expiration of Term** | ** ** |
|----------------------|------------|------------------------|------------|
| William D. Andrews   |       | 2010                   |       |
| Betsy R. Gidwitz     |       | 2010                   |       |
| James G. Gidwitz     |       | 2010                   |       |
| Ralph W. Gidwitz     |       | 2011                   |       |
| Peter E. Thieriot    |       | 2011                   |       |
| Theodore R. Tetzlaff |       | 2011                   |       |

 

(c)                      In addition to the aboveelection, the appointment of the independent registered public accounting firmof Deloitte & Touche LLP was ratified by the following vote:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|
| 1,546,705 |       | 800         |       | 1,155       |       |

 

There were no broker non-votes.

 

(d)                     Not applicable.

 

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

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

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   | CONTINENTAL MATERIALS CORPORATION |
|--------|-----------------------------------|
|   |                              |
|   |                              |
| Date:  | August 24, 2009              |   | By: | /s/ Joseph J. Sum |
|   |                              | Joseph J. Sum, Vice President |
|   |                              | and Chief Financial Officer |
|        |                                   |  |  |  |

 

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