**UNITEDSTATESSECURITIES 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 October 3, 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’s classesof common stock, as of the latest practicable date: Common Stock, $0.25 parvalue, shares outstanding at November 10, 2009: 1,598,278

 

 

 

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PART I — FINANCIAL INFORMATION

 

**Item 1.   Financial Statements**

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

OCTOBER 3, 2009 and JANUARY 3, 2009

(Unaudited)

(000’s omitted except share data)

 
| ** **                                                                            | ** ** | **OCTOBER 3,** | ** ** | **JANUARY 3,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                            | ** ** | **2009**            | ** ** | **2009**            | ** ** |
| ***ASSETS***                                                                          | ** ** | ** **          | ** ** | ** **          | ** ** |
| Current assets:                                                                       |       |                |       |                |       |
| Cash and cash equivalents                                                             |       | $                   | 630        |                | $          | 1,097 |   |
| Receivables, net                                                                      |       | 16,609              |       | 22,062              |       |
| Receivable for insured  losses                                                        |       | 1,834               |       | 1,604               |       |
| Inventories:                                                                          |       |                |       |                |       |
| Finished goods                                                                        |       | 9,650               |       | 9,421               |       |
| Work in process                                                                       |       | 867                 |       | 1,477               |       |
| Raw materials and supplies                                                            |       | 9,022               |       | 12,528              |       |
| Cash deposits with  insurance carriers                                                |       | 4,840               |       | —              |       |
| Prepaid expenses                                                                      |       | 4,971               |       | 4,254               |       |
| Total current assets                                                                  |       | 48,423              |       | 52,443              |       |
|                                                                                  |       |                |       |                |       |
| Property, plant and  equipment, net                                                   |       | 27,382              |       | 30,956              |       |
|                                                                                  |       |                |       |                |       |
| Goodwill                                                                              |       | 7,229               |       | 7,829               |       |
| Amortizable intangible  assets, net                                                   |       | 521                 |       | 872                 |       |
| Other assets                                                                          |       | 2,179               |       | 1,566               |       |
|                                                                                  |       |                |       |                |       |
|                                                                                  |       | $                   | 85,734     |                | $          | 93,666 |   |
|                                                                                  |       |                |       |                |       |
| ***LIABILITIES***                                                                     |       |                |       |                |       |
| Currentliabilities:                                                                   |       |                |       |                |       |
| Current portion of  long-term debt                                                    |       | $                   | 1,250      |                | $          | 1,164 |   |
| Accounts payable and  accrued expenses                                                |       | 14,417              |       | 17,280              |       |
| Liability for unpaid  claims covered by insurance                                     |       | 1,834               |       | 1,604               |       |
| Total current liabilities                                                             |       | 17,501              |       | 20,048              |       |
|                                                                                  |       |                |       |                |       |
| Revolving bank loan  payable                                                          |       | 5,100               |       | 6,400               |       |
| Long-term debt                                                                        |       | 6,150               |       | 9,607               |       |
| Deferred income taxes                                                                 |       | 2,939               |       | 3,414               |       |
| Other long-term  liabilities                                                          |       | 1,748               |       | 1,569               |       |
|                                                                                  |       |                |       |                |       |
| ***SHAREHOLDERS’ EQUITY***                                                       |       |                |       |                |       |
| Common shares, $0.25 par  value; authorized 3,000,000 shares; issued 2,574,264 shares |       | 643                 |       | 643                 |       |
| Capital in excess of par  value                                                       |       | 1,830               |       | 1,830               |       |
| Retained earnings                                                                     |       | 66,438              |       | 66,770              |       |
| Treasury shares, 975,986,  at cost                                                    |       | (16,615             | )          | (16,615             | )          |
|                                                                                  |       | 52,296              |       | 52,628              |       |
|                                                                                  |       |                |       |                |       |
|                                                                                  |       | $                   | 85,734     |                | $          | 93,666 |   |

 

Seenotes to condensed consolidated financial statements.

 

2

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FORTHE THREE MONTHS ENDED OCTOBER 3, 2009 AND SEPTEMBER 27, 2008

(Unaudited)

(000’somitted except per-share amounts)

 
| ** **                                                                     | ** ** | **OCTOBER  3,** | ** ** | **SEPTEMBER 27,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                                     | ** ** | **2009**        | ** ** | **2008**               | ** ** |
|                                                                           |       |            |       |                   |       |
| Net sales                                                                      |       | $               | 25,834     |                   | $          | 38,362 |   |
|                                                                           |       |            |       |                   |       |
| Costs and expenses:                                                            |       |            |       |                   |       |
| Cost of sales (exclusive  of depreciation, depletion and amortization)         |       | 21,090          |       | 31,363                 |       |
| Depreciation, depletion  and amortization                                      |       | 1,064           |       | 1,079                  |       |
| Selling and administrative                                                     |       | 4,544           |       | 4,580                  |       |
|                                                                           |       |            |       |                   |       |
| Gain on disposition of  property and equipment                                 |       | 78              |       | 8                      |       |
|                                                                           |       | 26,620          |       | 37,014                 |       |
|                                                                           |       |            |       |                   |       |
| Operating (loss) income                                                        |       | (786            | )          | 1,348                  |       |
|                                                                           |       |            |       |                   |       |
| Interest expense                                                               |       | (198            | )          | (309                   | )          |
| Other income, net                                                              |       | 40              |       | 24                     |       |
|                                                                           |       |            |       |                   |       |
| (Loss) income from  continuing operations before income taxes                  |       | (944            | )          | 1,063                  |       |
|                                                                           |       |            |       |                   |       |
| Benefit (provision) for  income taxes                                          |       | 244             |       | (390                   | )          |
|                                                                           |       |            |       |                   |       |
| Net (loss) income from  continuing operations                                  |       | (700            | )          | 673                    |       |
|                                                                           |       |            |       |                   |       |
| Loss from discontinued  operation net of income tax provision of $162 and $262 |       | (282            | )          | (323                   | )          |
|                                                                           |       |            |       |                   |       |
| Net (loss) income                                                              |       | (982            | )          | 350                    |       |
|                                                                           |       |            |       |                   |       |
| Retained earnings,  beginning of period                                        |       | 67,420          |       | 65,412                 |       |
| ** **                                                                     | ** ** | ** **      | ** ** | ** **             | ** ** |
| Retained earnings, end of  period                                              |       | $               | 66,438     |                   | $          | 65,762 |   |
|                                                                           |       |            |       |                   |       |
| Net (loss) income per basic and diluted share:                                 |       |            |       |                   |       |
| Continuing operations                                                          |       | $               | (.44       | )                      | $          | .42 |   |
| Discontinued operation                                                         |       | (.17            | )          | (.20                   | )          |
| Net (loss) income per  basic and diluted share                                 |       | (.61            | )          | .22                    |       |
|                                                                           |       |            |       |                   |       |
| Average shares outstanding                                                     |       | 1,598           |       | 1,599                  |       |

 

Seenotes to condensed consolidated financial statements.

 

3

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FORTHE NINE MONTHS ENDED OCTOBER 3, 2009 AND SEPTEMBER 27, 2008

(Unaudited)

(000’somitted except per-share amounts)

 
| ** **                                                                     | ** ** | **OCTOBER  3,** | ** ** | **SEPTEMBER 27,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                                     | ** ** | **2009**        | ** ** | **2008**               | ** ** |
|                                                                           |       |            |       |                   |       |
| Net sales                                                                      |       | $               | 88,418     |                   | $          | 108,029 |   |
|                                                                           |       |            |       |                   |       |
| Costs and expenses:                                                            |       |            |       |                   |       |
| Cost of sales (exclusive  of depreciation, depletion and amortization)         |       | 70,617          |       | 88,655                 |       |
| Depreciation, depletion  and amortization                                      |       | 3,410           |       | 3,346                  |       |
| Selling and administrative                                                     |       | 15,159          |       | 15,621                 |       |
|                                                                           |       |            |       |                   |       |
| Gain on disposition of  property and equipment                                 |       | 2,201           |       | 392                    |       |
|                                                                           |       | 86,985          |       | 107,230                |       |
|                                                                           |       |            |       |                   |       |
| Operating income                                                               |       | 1,433           |       | 799                    |       |
|                                                                           |       |            |       |                   |       |
| Interest expense                                                               |       | (733            | )          | (843                   | )          |
| Other income, net                                                              |       | 57              |       | 59                     |       |
|                                                                           |       |            |       |                   |       |
| Income from continuing  operations before income taxes                         |       | 757             |       | 15                     |       |
|                                                                           |       |            |       |                   |       |
| Provision (benefit) for  income taxes                                          |       | 358             |       | (8                     | )          |
|                                                                           |       |            |       |                   |       |
| Net income from continuing  operations                                         |       | 399             |       | 23                     |       |
|                                                                           |       |            |       |                   |       |
| Loss from discontinued  operation net of income tax benefit of $1,088 and $437 |       | (731            | )          | (1,071                 | )          |
|                                                                           |       |            |       |                   |       |
| Net loss                                                                       |       | (332            | )          | (1,048                 | )          |
|                                                                           |       |            |       |                   |       |
| Retained earnings,  beginning of period                                        |       | 66,770          |       | 66,810                 |       |
|                                                                           |       |            |       |                   |       |
| Retained earnings, end of  period                                              |       | $               | 66,438     |                   | $          | 65,762 |   |
|                                                                           |       |            |       |                   |       |
| Net income (loss) per basic and diluted share:                                 |       |            |       |                   |       |
| Continuing operations                                                          |       | $               | .25        |                   | $          | .01 |   |
| Discontinued operation                                                         |       | (.46            | )          | (.67                   | )          |
| Net loss per basic and  diluted share                                          |       | (.21            | )          | (.66                   | )          |
|                                                                           |       |            |       |                   |       |
| Average shares outstanding                                                     |       | 1,598           |       | 1,600                  |       |

 

See notes to condensedconsolidated financial statements.

 

4

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

FORTHE NINE MONTHS ENDED OCTOBER 3, 2009 AND SEPTEMBER 27, 2008

(Unaudited)

(000’somitted)

 
| ** **                                                              | ** ** | **OCTOBER 3,  2009** | ** ** | **SEPTEMBER 27,  2008** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
|                                                                    |       |                      |       |                         |       |
| Net cash provided by (used  in) operating activities                    |       | $                         | 1,775      |                         | $          | (2,444 | ) |
|                                                                    |       |                      |       |                         |       |
| Investing activities:                                                   |       |                      |       |                         |       |
| Capital expenditures                                                    |       | (1,411                    | )          | (815                         | )          |
| Proceeds from sale of  assets                                           |       | 4,429                     |       | 686                          |       |
| Net cash provided by (used  in) investing activities                    |       | 3,018                     |       | (129                         | )          |
|                                                                    |       |                      |       |                         |       |
| Financing activities:                                                   |       |                      |       |                         |       |
| (Repayment) borrowings on  refinanced revolving credit facility         |       | (6,400                    | )          | 2,800                        |       |
| Payment of deferred  financing fees related to new credit facility      |       | (589                      | )          | —                       |       |
| Borrowings under new  revolving credit facility                         |       | 5,100                     |       | —                       |       |
| Repayment of refinanced  long-term debt                                 |       | (10,771                   | )          | (1,614                       | )          |
| Borrowings under new  long-term debt                                    |       | 10,000                    |       | —                       |       |
| Repayment of new long-term  debt                                        |       | (2,600                    | )          | —                       |       |
| Payment to acquire  treasury stock                                      |       | —                    |       | (19                          | )          |
| Net cash (used in)  provided by financing activities                    |       | (5,260                    | )          | 1,167                        |       |
|                                                                    |       |                      |       |                         |       |
| Net decrease in cash and  cash equivalents                              |       | (467                      | )          | (1,406                       | )          |
| Cash and cash equivalents:                                              |       |                      |       |                         |       |
| Beginning of period                                                     |       | 1,097                     |       | 3,326                        |       |
|                                                                    |       |                      |       |                         |       |
| End of period                                                           |       | $                         | 630        |                         | $          | 1,920 |   |
|                                                                    |       |                      |       |                         |       |
| Supplemental disclosures of cash flow items:                            |       |                      |       |                         |       |
| Cash paid during the nine months for:                                   |       |                      |       |                         |       |
| Interest                                                                |       | $                         | 649        |                         | $          | 1,098 |   |
| Income taxes refunded  (paid)                                           |       | 526                       |       | (21                          | )          |
| Supplemental disclosures  of noncash investing and financing activities |       |                      |       |                         |       |
| Note received from sale of  discontinued operation                      |       | $                         | 525        |                         | $          | — |   |
| Buyer’s assumption of  liabilities                                 |       | —                    |       | 85                           |       |

 

Seenotes to condensed consolidated financial statements.

 

5

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CONTINENTALMATERIALS CORPORATION

SECURITIESAND EXCHANGE COMMISSION FORM 10-Q

NOTESTO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTERENDED OCTOBER 3, 2009

(Unaudited)

 

1.               Basis ofPresentation:

 

Theunaudited interim condensed consolidated financial statements included hereinare prepared 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 condensed consolidated balancesheet of the Company as of January 3, 2009 has been derived from theaudited consolidated balance sheet of the Company as of that date. The interimcondensed consolidated financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s latest annual report on Form 10-K. In theopinion of management, the condensed consolidated financial statements includeall adjustments (none of which were other than normal recurring adjustments)necessary for a fair statement of the results for the interim periods. Certainprior year’s amounts have been reclassified to conform to the currentpresentation.

 

The Company evaluatedsubsequent events through the filing date of our quarterly 10-Q with theSecurities and Exchange Commission on November 23, 2009.

 

2.               On July 1,2009, the Financial Accounting Standards Board (FASB) Accounting StandardsCodification (Codification) was issued and became effective for interim andannual reporting periods ending after September 15, 2009.  On that date, the Codification officiallybecame the single source of authoritative nongovernmental U.S. generallyaccepted accounting principles (GAAP); however, Securities and ExchangeCommission (SEC) registrants must also consider rules, regulations andinterpretive guidance issued by the SEC or its staff. Previous authoritativeGAAP was a proliferation of thousands of standards established by a variety ofstandard setters over the past 50-plus years. All existing standards that wereused to create the Codification became superseded. The Codification does notchange GAAP and therefore had no impact on the Company’s consolidated financialposition, results of operations or cash flows; however, references toauthoritative accounting literature will henceforth refer to the topics andguidance in the Codification.

 

3.               Income taxes are accounted for under theasset and liability method that requires that deferred income taxes reflect thefuture tax consequences attributable to differences between the tax andfinancial reporting bases of assets and liabilities. Deferred tax assets andliabilities recognized are based on the tax rates in effect in the year inwhich differences 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. Our accounting for income taxes includes utilizing the accountingprinciple that the realization of an uncertain income tax position must be “morelikely than not” (i.e., greater than 50% likelihood) that the position will be sustainedon audit by the taxing authority based solely on the technical merits of theassociated tax position.

 

Our effective income tax rate of 47.3% is based on our expected 2009income, statutory tax rates and tax positions taken in the various jurisdictionsin which 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 nine months ended October 3, 2009, we utilized theeffective rate based upon projected operating results for the full year andrecorded an income tax provision for the third quarter such that the nine 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.

 

4.               In April 2009,the FASB extended the new accounting standards requiring disclosures about fairvalue of financial instruments to interim as well as annual financial statements. The newinterim disclosure requirement became effective for the Company on April 1,2009, resulting inthe disclosure of the fair value attributable to the Company’s debt instrumentswithin this interim report. The Company has concluded that the carrying amountof the debt at October 3, 2009 approximates its fair value, thus the Company’sadoption of this statement had no impact on its consolidated financialposition, results of operations or cash flows.

 

6

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In May 2009, the FASB issued new accounting standards establishinggeneral accounting and disclosure requirements for events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. The new disclosure requirements became effective for the Companyfor the quarterly period ended July 4, 2009. See Note 1.

 

InApril 2008, the FASB issued new accounting standards for determining theuseful life of intangible assets which amends the list of factors an entityshould consider in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset. The new standardsapply to intangible assets that are acquired individually or with a group ofassets and intangible assets acquired in both business combinations and assetacquisitions. Since adoption of these new standards on January 4, 2009,the first day of fiscal 2009, this statement has had no impact on the Company’sconsolidated financial position, results of operation and cash flows.

 

InMarch 2008, the FASB issued new accounting standards requiring expandeddisclosures about an entity’s derivative instruments and hedging activities.The new disclosure requirements became effective for the Company on January 4,2009.  At October 3, 2009, theCompany did not have any material derivative or hedging activities thatrequired disclosure under these new accounting standards.

 

5.               Operating results for thenine and three-month periods ended October 3, 2009 are not necessarilyindicative of performance for the entire year due to the seasonality of most ofour products. Historically, sales of the Evaporative Cooling segment are higherin the first and second quarters, sales of the Concrete, Aggregates andConstruction Supplies (CACS) segment are higher in the second and thirdquarters and sales of the Heating and Cooling segment are higher in the thirdand fourth quarters. The sales of the Door segment are more evenly spreadthroughout the year. However, the economic events of 2009 and their particulareffect on the construction industry have had a significant detrimental effecton our fiscal 2009 sales to date and are expected to continue to do so for theremainder of the year.

 

6.               There is no difference inthe calculation of basic and diluted earnings per share (EPS) for thethree-month or nine-month periods ended October 3, 2009 and September 27,2008 as the Company does not have any dilutive financial instruments.

 

7.               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). Rocky Mountain Ready Mix, Inc. (RMRM) of Denver, formerly includedin this segment, was sold on July 17, 2009 and has been reclassified asdiscontinued operation (see Notes 8 and 10). Doors are fabricated and soldalong with the related hardware from Colorado Springs and Pueblo through theCompany’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. ofPueblo, Colorado (MDHI). Sales of these two segments are highly concentrated inthe Front Range area in Colorado although door sales are also made throughoutthe 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.

 

7

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Thefollowing table presents information about reported segments for thethree-month and nine-month periods ended October 3, 2009 and September 27,2008 along with the items necessary to reconcile the segment information to thetotals reported in the financial statements (amounts in thousands):

 
| ** **                               | ** ** | **Construction  Products**                                   | ** ** | **HVAC  Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**          | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2009                                     |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Nine Months ended October 3, 2009   |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers         |       | $                                                            | 32,388     |               | $          | 11,756                               |       | $                         | 44,144     |                     | $          | 21,966 |   | $ | 22,038 |   | $ | 44,004 |   | $ | 12 |   | $ | 258 |   | $ | 88,418 |   |
| Depreciation, depletion and amortization |       | 2,575                                                        |       | 126                |       | 2,701                                |       | 278                       |       | 375                      |       | 653 |   | 56 |   | — |   | 3,410 |   |
| Operating (loss) income (a)              |       | (1,601                                                       | )          | 1,130              |       | (471                                 | )          | (869                      | )          | 2,833                    |       | 1,964 |   | (141 | ) | 81 |   | 1,433 |   |
| Segment assets                           |       | 40,199                                                       |       | 5,887              |       | 46,086                               |       | 17,959                    |       | 12,611                   |       | 30,570 |   | 8,569 |   | 509 |   | 85,734 |   |
| Capital expenditures (b)                 |       | 1,047                                                        |       | 171                |       | 1,218                                |       | 54                        |       | 107                      |       | 161 |   | 32 |   | — |   | 1,411 |   |
| Quarter ended October 3, 2009       |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers         |       | $                                                            | 11,366     |               | $          | 3,171                                |       | $                         | 14,537     |                     | $          | 6,529 |   | $ | 4,679 |   | $ | 11,208 |   | $ | 3 |   | $ | 86 |   | $ | 25,834 |   |
| Depreciation, depletion and amortization |       | 798                                                          |       | 42                 |       | 840                                  |       | 80                        |       | 125                      |       | 205 |   | 19 |   | — |   | 1,064 |   |
| Operating (loss) income                  |       | 70                                                           |       | 152                |       | 222                                  |       | (736                      | )          | 298                      |       | (438 | ) | (597 | ) | 27 |   | (786 | ) |
| Segment assets                           |       | 40,199                                                       |       | 5,887              |       | 46,086                               |       | 17,959                    |       | 12,611                   |       | 30,570 |   | 8,569 |   | 509 |   | 85,734 |   |
| Capital expenditures (b)                 |       | 46                                                           |       | 168                |       | 214                                  |       | 54                        |       | 23                       |       | 77 |   | 3 |   | — |   | 294 |   |

 
|                                      |       | **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                                      |       |                                                         |       |               |       |                                 |       |                       |       |                     |       |   |   |   |   |   |   |   |   |
| Nine Months ended September 27, 2008 |       |                                                         |       |               |       |                                 |       |                       |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers          |       | $                                                            | 48,328     |               | $          | 12,187                               |       | $                          | 60,515     |                     | $          | 29,134 |   | $ | 18,109 |   | $ | 47,243 |   | $ | 13 |   | $ | 258 |   | $ | 108,029 |   |
| Depreciation, depletion and amortization  |       | 2,438                                                        |       | 100                |       | 2,538                                |       | 338                        |       | 413                      |       | 751 |   | 57 |   | — |   | 3,346 |   |
| Operating income (loss)                   |       | 1,908                                                        |       | 1,434              |       | 3,342                                |       | (1,017                     | )          | 459                      |       | (558 | ) | (2,066 | ) | 81 |   | 799 |   |
| Segment assets (c)                        |       | 46,410                                                       |       | 6,277              |       | 52,687                               |       | 23,521                     |       | 14,241                   |       | 37,762 |   | 3,194 |   | 23 |   | 93,666 |   |
| Capital expenditures (b)                  |       | 401                                                          |       | 112                |       | 513                                  |       | 51                         |       | 97                       |       | 148 |   | 6 |   | — |   | 667 |   |
| Quarter ended September 27, 2008     |       |                                                         |       |               |       |                                 |       |                       |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers          |       | $                                                            | 20,270     |               | $          | 4,562                                |       | $                          | 24,832     |                     | $          | 9,530 |   | $ | 3,910 |   | $ | 13,440 |   | $ | 4 |   | $ | 86 |   | $ | 38,362 |   |
| Depreciation, depletion and amortization  |       | 774                                                          |       | 35                 |       | 809                                  |       | 113                        |       | 138                      |       | 251 |   | 19 |   | — |   | 1,079 |   |
| Operating income (loss)                   |       | 1,807                                                        |       | 648                |       | 2,455                                |       | (595                       | )          | (71                      | )          | (666 | ) | (420 | ) | 27 |   | 1,396 |   |
| Segment assets (c)                        |       | 46,410                                                       |       | 7,308              |       | 52,687                               |       | 23,521                     |       | 14,241                   |       | 37,762 |   | 3,194 |   | 23 |   | 93,666 |   |
| Capital expenditures (b)                  |       | 210                                                          |       | 12                 |       | 222                                  |       | —                     |       | 37                       |       | 37 |   | 1 |   | — |   | 260 |   |

 

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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 received anadditional cash payment of $2,026,000 all of which added to the operatingincome of the second quarter of 2009.

(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 thelast Annual Report on Form 10-K except for the reclassification of RMRMfrom the CACS segment to discontinued operations. Assets held for sale as of October 3,2009 are included in the Other column in the tables above.

 

8.               Identifiable intangibleassets as of October 3, 2009 include two non-compete agreements, arestrictive land covenant and customer relations. Collectively, these assetswere carried at $521,000, net of $589,000 accumulated amortization. The pre-taxamortization expense for intangible assets during the quarter ended October 3,2009 was $42,000 compared to $76,000 for the quarter ended September 27,2008 and $127,000 and $226,000 for the nine months ended October 3, 2009and September 27, 2008, respectively. Based upon the intangible assetsrecorded on the balance sheet at October 3, 2009, amortization expense forthe next five years is estimated to be as follows: 2009 – $169,000, 2010 –$137,000, 2011 – $101,000, 2012 – $65,000 and 2013 – $58,000.

 

8

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Goodwill was $7,229,000 as of October 3, 2009 and$7,829,000 as of January 3, 2009. At January 3, 2009, $6,829,000 related to the CACS segment and$1,000,000 relates to the Door segment. Goodwill is not amortized but rather assessed for impairment as of theend of each fiscal year. To the extent that events occur during the year,either involving 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.

 

As discussed in Note 10, the Company completed thesales of all of the outstanding capital stock of RMRM. Accordingly, the Companyaccounted for RMRM as a discontinued operation for the quarter ended July 4,2009 and reclassified the assets and liabilities of RMRM as assets andliabilities held for sale. RMRM was part of the CACS reporting unit. As notedabove, as of January 3, 2009, $6,829,000 of goodwill related to the CACSreporting unit. Due to the sale of RMRM, the Company allocated $600,000 of the$6,829,000 of the goodwill associated with the CACS reporting unit to theassets of RMRM based upon the relative fair value of all of the assets of theCACS reporting unit. There were no other changes to goodwill during the firstnine months of 2009. See Note 10 for further discussion of the sale of RMRM andManagement’s Discussion and Analysis of Financial Condition and Results ofOperation for discussion of our analysis of the fair value of the remainingassets of the CACS reporting unit as of July 4, 2009, which indicated thatno impairment of the remaining goodwill or other assets in the CACS reportingunit was necessary.

 

9.              OnApril 16, 2009 the Company repaid indebtedness under its then existingcredit agreement and replaced it with a new secured credit agreement (NewCredit Agreement) whereby the new bank lender provided a total credit facilityof $30,000,000 consisting of a $20,000,000 revolving credit facility (reducedby letters of credit that may be issued by the lender on the Company’s behalf)and a $10,000,000 term loan facility. Both the term loan and the revolvingcredit facility provisions of the New Credit Agreement expire on April 16,2012. Borrowings under the New Credit Agreement are secured by the Company’saccounts receivable, inventories, machinery, equipment, vehicles and certainreal estate. Borrowings under the revolving credit facility are limited to 80%of eligible accounts receivable and 50% of eligible inventories. Inventoryborrowings are limited to a maximum of $10,000,000. The full $20,000,000 wasavailable under the revolving credit facility as of October 3, 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%. Based upon the Company’s performance, thecurrent effective interest rate was 5% under the LIBOR option and 4.75% underthe prime rate option. The Company also paid certain underwriting andarrangement fees at the time of closing.****The New CreditAgreement requires the Company to maintain certain financial covenants asdisclosed in the table below:

 
| **Financial Covenant**              | ** ** | **Required as of********October 3, 2009** | ** ** | **Actual as of********October 3, 2009** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
|                                |       |                                           |       |                                         |       |
| Minimum tangible net worth          |       | $32,000,000                                    |       | $40,960,000                                  |       |
|                                |       |                                           |       |                                         |       |
| Minimum adjusted EBITDA             |       | $8,150,000                                     |       | $7,668,000                                   |       |
|                                |       |                                           |       |                                         |       |
| Minimum fixed charge coverage ratio |       | > 1.30 to 1.00                              |       | 2.10 to 1.00                                 |       |
|                                |       |                                           |       |                                         |       |
| Maximum adjusted cash flow leverage |       | 2.25 to 1.00                                   |       | 1.00 to 1                                    |       |
|                                |       |                                           |       |                                         |       |
| Maximum capital expenditures        |       | $3,500,000                                     |       | $1,411,000                                   |       |
|                                |       | (for full fiscal year)                         |       | (9 months ended October 3, 2009)        |       |

 

Definitionsunder the New Credit Agreement are as follows:

 

·                  Tangible net worth is defined as net worthplus subordinated debt minus intangible assets (goodwill, intellectualproperty, prepaid expenses and deferred charges) minus all obligations owed tothe Company or any of its subsidiaries by any affiliate or any or itssubsidiaries and minus all loans owed by its officers, stockholders,subsidiaries or employees (Note: there are no loans owed by any of thereferenced parties).

·                  The adjusted EBITDA is defined as net incomeplus interest, income taxes, depreciation, depletion and amortization plusother non-cash charges approved by the lender (for the 2009 fiscal periods thisincluded the impairment charges recorded by Rocky Mountain Ready Mix in 2008and 2009).

·                  The fixed charge coverage ratio is defined as(a) the adjusted EBITDA minus income taxes paid and capital expendituresdivided by (b) the interest expense and scheduled principal payments bothfor the prior 12-month period.

·                  The adjusted cash flow leverage is defined astotal funded debt (less any cash provided in lieu of a letter of credit)divided by the adjusted EBITDA for the prior 12 months.

 

9

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Asnoted in the table above, the Company failed to meet the Adjusted EBITDAcovenant requirement at October 3, 2009. Non-compliance with the financialcovenants in the New Credit Agreement constitutes an event of default under theagreement. Upon the occurrence of an event of default, the lenders may, amongother things, terminate their lending commitments, in whole or in part, declareall or any part of the Company’s borrowings to be due and payable, and/orrequire the Company to collateralize with cash any or all letter of creditprovided by the lender. A waiver of the event of default relating to compliancewith the Adjusted EBITDA covenant was granted on November 18, 2009 and therequirements for the Adjusted EBITDA and the Fixed Charge Coverage Ratio weremodified for the next five quarters such that the Company will be in compliancewith the amended covenants if current projections for the next 15 months aremet. The amended covenants specifically exclude the results of discontinuedoperations from the covenant calculations. The New Credit Agreement was alsoamended to reduce the revolving line of credit from $20,000,000 to $15,000,000and the borrowing base relating to inventory was reduced from $10,000,000 to$7,500,000. The Company believes that the $15,000,000 revolving credit facilitywill be sufficient to provide for the Company’s credit needs through the end of2010.

 

Inaddition to requiring that the Company meet the above financial covenants,additional borrowings, acquisition of stock of other companies, purchase oftreasury shares and payment of cash dividends are either limited or requireprior approval by the lender. Payment of accrued interest is due monthly or atthe end of the applicable LIBOR period on revolving credit borrowings and theterm debt borrowings. Principal payments under the term loan are due quarterlywith a final payment of all remaining unpaid principal due April 16, 2012.Effective May 29, 2009, the Company entered into an interest rate swaptransaction as required by the New Credit Agreement. The notional amount of theswap was $5,000,000, which is reduced by $500,000 on September 11, 2011, December 31,2011 and March 31, 2012 before the swap terminates on April 16, 2012.Under the swap agreement the Company pays a fixed rate of 3.07% and receivesthe 30-day floating LIBOR rate but not less than 2.00%. At October 3,2009, the effective rate on $5,000,000 of the outstanding term debt wastherefore 6.07% (the 5% effective rate on the term debt under the LIBOR optionplus the swap differential of 1.07%). The fair value of the interest rate swap,included in interest expense, was not material to the Company’s financialstatements as of October 3, 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-insuredcasualty claims. Revolving credit borrowings were used to fund the cashcollateral account with the Company’s insurer.

 

10.         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. RMRMoperated a ready mix concrete business in the Denver metropolitan area and hadbeen included in the CACS reporting segment.

 

The Company received$1,905,000 in cash at closing and a Promissory Note for the closing date networking capital amount of RMRM, currently estimated at $525,000. The principalamount of the Promissory Note will be adjusted upon a final determination ofthe closing date net working capital. The Promissory Note bears interest at 5%per annum. The initial principal payment is due September 30, 2010, withfinal principal payment due June 30, 2012. Principal payments willcommence earlier if the Buyer achieves certain sales volume levels.

 

The Company and itswholly-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, accordingly novalue was recorded related to this agreement at the time of the sale.

 

As discussed in Note 8,the Company allocated a portion of the goodwill of the reporting unit to RMRMbased on the relative fair value of all of the assets of the CACS segment. As aresult of this analysis, $600,000 of goodwill was allocated to the net assetsof RMRM.

 

Assets are required to berecorded at the lower of carrying value or fair value less costs to sell. Asnoted above, the carrying value assigned to RMRM included $600,000 of goodwill.Management concluded that as of July 4, 2009, the fair value of the assetsof RMRM, less costs to sell, was lower than the carrying value, resulting inthe recording of a pre-tax impairment charge for book purposes of $647,000during the quarter ended July 4, 2009. The $647,000 was recorded as a loss from discontinued operations.

 

The sale of RMRM resultedin a capital loss for tax purposes 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 isexpected to be utilized to offset the capital gain realized during 2009.

 

10

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Revenueand pretax loss from RMRM is reported as discontinued operations for the nineand three month fiscal periods ended October 3, 2009 and September 27,2008, respectively, and is summarized as follows (amounts in thousands):

 
| ** **  | ** ** | **Nine  Months** | ** ** | **Three  Months** | ** ** |
|-------------|------------|------------------|------------|-------------------|------------|
| ** **  | ** ** | **2009**         | ** ** | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue     |       | $                | 3,740      |              | $          | 9,698 |   | $ | 213 |   | $ | 3,092 |   |
| Pretax Loss |       | $                | (1,819     | )                 | $          | (1,508 | ) | $ | (120 | ) | $ | (323 | ) |

 

The loss fromdiscontinued operations for the nine and three month fiscal periods ended October 3,2009 and September 27, 2008, respectively, is summarized as follows(amounts in thousands):

 
| ** **                                          | ** ** | **Nine  Months** | ** **   | **Three  Months** | ** ** |
|-----------------------------------------------------|------------|------------------|--------------|-------------------|------------|
| ** **                                          | ** ** | **2009**         | ** **   | **2008**          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Loss from operations of RMRM                        |       | $                |  (1,172 | )                 | $          |  (1,508 | ) | $ |  (120 | ) | $ |  (585 | ) |
| Loss on disposal (impairment of net assets) of RMRM |       | (647             | )            | —            |       | — |   | — |   |
| Income tax benefit (provision)                      |       | 1,088            |         | 437               |       | (162 | ) | (262 | ) |
| Loss on discontinued operation                      |       | (731             | )            | (1,071            | )          | (282 | ) | (323 | ) |
|                                                     |            |                  |              |                   |            |  |  |  |  |  |  |  |  |

 

11.         The Company is involved in litigationmatters related to its continuing business, principally product liabilitymatters related to the gas-fired heating products in the Heating and Coolingsegment. In the Company’s opinion, none of these proceedings, when concluded,will have a material adverse effect on the Company’s consolidated results ofoperations or financial condition as the Company has established adequateaccruals for known occurrences which represent management’s best estimate ofthe future liability related to these claims up to the associated deductible.

 

**Item 2.**                       Management’s Discussion and Analysis of Financial Conditionand Results of Operations

** **

Company Overview

 

SeeNote 7 for an overview of the Company.

 

Liquidity and Capital Resources

 

Salesof the Company’s HVAC products are seasonal and weather sensitive except forfan coils. In addition, revenues in the Company’s CACS segment aresignificantly influenced by the level of construction activity and weatherconditions along the Front Range of Colorado. Sales for the Door segment arenot as seasonal nor are they much affected by weather conditions. Historically,the Company has experienced operating losses during the first quarter exceptwhen construction activity is strong along the Front Range of Colorado and theweather is mild. Operating results typically improve in the second and thirdquarters reflecting more favorable weather conditions in Colorado and theseasonal sales of the Evaporative Cooling segment. Fourth quarter results canvary based on weather conditions in Colorado as well as in the principalmarkets for the Company’s heating equipment. However the economic events of2009 and their effect on the construction activity have had a significantdetrimental effect on sales in 2009 and are expected to do so for the remainderof the year.

 

TheCompany typically experiences operating cash flow deficits during the firsthalf of the year reflecting operating results, the use of sales dating programs(extended payment terms) related to the Evaporative Cooling segment andpayments of the prior year’s accrued incentive bonuses and Companyprofit-sharing contributions. As a result, the Company’s borrowings against itsrevolving credit facility tend to peak during the second quarter and thendecline over the remainder of the year. The decline in borrowings toward theend of the second quarter was primarily due to reductions of inventory andreceivables levels. Cash flow generated during the third quarter was primarilydue to the additional cash received of $2,026,000 related to the sale of landin Colorado Springs and receipt of $1,905,000 from the sale of RMRM.

 

Cashprovided by operations was $1,775,000 during the first nine months of 2009compared to $2,444,000 of cash used during the first nine months of 2008.TheCompany’s operating cash flow during the first nine months of 2009 was positiveprimarily due to a decrease in receivables ($5,218,000) and inventory($3,740,000), partially offset by a decrease in accounts payable and accruedexpenses ($2,964,000), compared to an increase in all three categories($2,746,000, $5,910,000 and $3,013,000, respectively) during the first ninemonths of 2008. The decrease in receivables was primarily due to lower sales inthe CACS segment and the Heating and Cooling segment. The decline in inventoryand accounts payable and accrued expenses was largely due to the reduction ininventory in the Heating and Cooling segment. Production schedules were reducedduring 2009 to offset the weaker than expected sales during the fourth quarterof 2008. In addition, the timing of raw material receipts at the end of thefourth quarter of 2008 caused a temporary increase in raw material inventorieswhich were used during the first nine months of 

 

11

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2009.Partially offsetting this net positive cash flow was the need to fund$4,840,000 of deposits with our insurance carriers in lieu of previously issuedletters of credit.

 

Duringthe nine months ended October 3, 2009, investing activities generated$3,018,000 of cash compared to the use of $129,000 of cash in the prior year’speriod. Capital expenditures during the first nine months of 2009 wereprimarily incurred by the CACS segment including almost $541,000 fordevelopment activities on the Pueblo East aggregates site and $152,000 for amonitoring system to measure movement of the Pikeview Quarry walls related tothe 2008 landslide further discussed below. Should the Pikeview Quarry bepermitted to resume operations, we are not certain of the amount, if any, ofadditional capital expenditures that may be required. The proceeds from thesale of assets during the 2009 period included $2,026,000 related to the saleof land in Colorado Springs and receipt of $1,905,000 from the sale of RMRM.The proceeds from sale of assets during the 2008 period included the sale asmall aggregate operation (Table Mountain) by the CACS segment during the firstquarter of 2008. The proceeds were approximately $720,000 (including the buyer’sassumption of just over $85,000 of liabilities associated with the property)which resulted in a pre-tax gain of about $344,000. Table Mountain did notprovide aggregates to the Company’s ready-mix operations and management did notconsider it to be a strategic part of Company’s business.

 

Financingactivities used $5,260,000 of cash during the first nine months of 2009compared to providing $1,167,000 during the first nine months of 2008. Asdiscussed in Note 9, the Company replaced its former credit facility with a NewCredit Agreement during the 2009 second quarter. Financing activities used cashduring the first nine months of 2009 as cash generated by operating andinvesting activities during 2009 was used to pay down term debt and revolvingcredit. Financing activities provided cash during the first nine months of 2008as borrowings under the Company’s prior revolving credit facility were used tofinance operating activities. All scheduled debt repayments were made duringthe first nine months of both 2009 and 2008. During the first nine months of2009, the highest amount of Company borrowings outstanding under the revolvingcredit facility was $14,734,000 and the average amount outstanding was $7,757,000.

 

Asdisclosed in Note 9, the Company failed to meet its Adjusted EBITDA covenantrequirement at October 3, 2009. The weaker than anticipated constructionmarket, especially along the Front Range of Colorado, was the primary reasonfor the default. The event of default was waived as described in Note 9.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 as modified by theamendment.

 

Operations — Comparison of Quarter Ended October 3, 2009 to QuarterEnded September 27, 2008

 

Overall,consolidated sales declined over 32.7%, from $38,362,000 for the third quarterof 2008 to $25,834,000 for the third quarter of 2009, with significantdecreases reported by the all segments except the Evaporative Cooling segment.Despite efforts to mitigate the effect of the decline in sales, all segmentsother than the Evaporative Cooling segment also reported lower operating incomewith CACS results significantly lower than the 2008 third quarter’s results.

 

Costof sales as a percentage of sales improved in the Heating and Cooling segmentas well as the Evaporative Cooling segment, primarily due to lower materialcosts, changes in product mix and some reduction in factory overhead costs. TheCACS segment reported a modest decrease in the cost of sales as a percentage ofsales, as sales prices increases combined with lower cement prices offsethigher costs of other materials. The increase in cost of sales as a percentageof sales in the Door segment was due to pricing pressure from competitors asbidding activity slowed with the construction activity decline. Lower salesalso contributed to the decline in margins except for the Evaporative Coolingsegment, which benefitted from higher sales.

 

Sellingand administrative costs decreased slightly but increased as a percentage ofsales, from 11.9% to 17.6%, due to the lower sales volume and the fixed natureof some of these expenses. The resulting operating loss of $786,000 for thethird quarter of 2009 fell well short of the operating profit of $1,348,000reported for the third quarter of 2008, due almost entirely to the dramaticdecline in sales during the 2009 quarter.

 

Theloss from discontinued operations for the third quarter of 2009 was $282,000,net of tax, compared to the loss of $323,000, net of tax, reported during the2008 third quarter.  The loss for the2009 quarter was higher than expected even though the Company only operatedRMRM for approximately two weeks in July before the sale, due to anadjustment to the expected tax rate for the year which increased the loss by$162,000.

 

Adiscussion of operations by segment follows.

 

12

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**Construction Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the Construction Products group for the quarters ended October 3,2009 and September 27, 2008 (amounts in thousands):

 
| ** **                                   | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors**  | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|
| Quarter ended October 3, 2009           | ** ** | ** **                                            | ** ** | ** ** | ** ** |
| Revenues from external customers             |       | $                                                     | 11,366     |       | $          | 3,171 |   |
| Segment operating income                     |       | 70                                                    |       | 152        |       |
| Operating income as a percent of sales       |       | 0.1                                                   | %          | 4.8        | %          |
| Segment assets as of October 3, 2009    |       | $                                                     | 40,199     |       | $          | 5,887 |   |
| Return on assets                             |       | 0.0                                                   | %          | 2.6        | %          |
|                                         |       |                                                  |       |       |       |
| Quarter ended September 27, 2008        |       |                                                  |       |       |       |
| Revenues from external customers             |       | $                                                     | 20,270     |       | $          | 4,562 |   |
| Segment operating income                     |       | 1,807                                                 |       | 648        |       |
| Operating income as a percent of sales       |       | 8.9                                                   | %          | 14.2       | %          |
| Segment assets as of September 27, 2008 |       | $                                                     | 40,209     |       | $          | 7,308 |   |
| Return on assets                             |       | 4.5                                                   | %          | 8.9        | %          |

 

Concrete,Aggregates and Construction Supplies Segment

 

Salesof concrete, aggregates and construction supplies (collectively referred toherein as construction materials) declined by $8,904,000 or 43.9%. The lowerlevel of sales is the result of a substantial slowing of construction activityin the Colorado Springs and Pueblo Colorado areas in both the residential andcommercial markets. The extent of the decrease in construction activity is notunlike that experienced throughout the country. Concrete volume was 40.7% lowerin the third quarter of 2009 compared to the third quarter of 2008. Aggregatevolume (tonnage) was down 50.4% compared to the prior year’s quarter.

 

Inaddition to the slow construction markets, the shutdown of the Company’sPikeview Quarry contributed to the lower aggregate volume and operatingresults. The Pikeview Quarry was shut down in December 2008 due to alandslide. The Colorado Division of Reclamation, Mining and Safety (DRMS)ordered that the Quarry be shut down until such time as the Company submits anew mining and reclamation plan. The DRMS has given the Company until May 13,2010 to submit a revised plan. The Company and its consultants are working on anew mining and reclamation plan for the Pikeview Quarry which must be approvedby the DRMS before the Company can resume production. The exact effect that theclosure of the Pikeview Quarry has had on the operations of the CACS segment isdifficult to substantiate as we were able to shift some of the lost productionto one or more of our other aggregate operations. However, a comparison of thePikeview Quarry operations for the third quarter of 2009 versus 2008 shows thattons sold dropped from 306,000 with a gross profit of $531,000 in 2008 to 525tons sold with a negative gross profit of $176,000. In spite of the lowerconcrete sales volume, gross profit margins did not decline significantly dueto lower cement and fuel costs in 2009. In response to the lower level ofbusiness, management reduced selling and administrative expenses byapproximately $211,000 through workforce reduction and other cost savingactions.

 

DoorSegment

 

Doorsegment sales of $3,171,000 for the third quarter of 2009 were down nearly30.5% from the comparable 2008 quarter. The decline is due to the significantreduction in construction activity. Sales during a specific quarter can beheavily influenced by customer requests to either accelerate or delay shipmentsof jobs to better coincide with their own construction schedules. Sales arealso influenced by the level of construction activity but the effect isgenerally slower to appear as the products supplied by this segment, when soldfor new construction, are some of the last items installed on a project. Thebacklog at October 3, 2009 was approximately 16% lower than the backlog atSeptember 27, 2008.

 

The2.1% decline in margins during the 2009 quarter was primarily due to morecompetitive pricing encountered as bidding opportunities decline. Operatingincome declined due to the reduced sales volume and narrower margins.

 

**HVACProducts**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the quarters ended October 3,2009 and September 27, 2008 (amounts in thousands):

 

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| ** **                                    | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Quarter ended October 3, 2009            |       |                     |       |                     |       |
| Revenues from external customers              |       | $                        | 6,529      |                     | $          | 4,679 |   |
| Segment operating (loss) income               |       | (736                     | )          | 298                      |       |
| Operating (loss) income as a percent of sales |       | (11.3                    | )%         | 6.4                      | %          |
| Segment assets as of October 3, 2009     |       | $                        | 17,959     |                     | $          | 12,611 |   |
| Return on assets                              |       | (4.1                     | )%         | 2.4                      | %          |
|                                          |       |                     |       |                     |       |
| Quarter ended September 27, 2008         |       |                     |       |                     |       |
| Revenues from external customers              |       | $                        | 9,530      |                     | $          | 3,910 |   |
| Segment operating loss                        |       | (595                     | )          | (71                      | )          |
| Operating loss as a percent of sales          |       | (6.2                     | )%         | (1.8                     | )%         |
| Segment assets as of September 27, 2008  |       | $                        | 26,630     |                     | $          | 12,162 |   |
| Return on assets                              |       | (2.2                     | )%         | (.6                      | )%         |

 

Heating and Cooling Segment

 

Salesin the Heating and Cooling segment were $6,529,000 for the third quarter of2009, a decrease of $3,001,000, or 31.5%, from the comparable 2008 quarter. Fancoil sales declined 72.0% from the prior year’s quarter. This decrease was theresult of the slowdown in commercial building, especially for new hotels.Furnace volume during the third quarter of 2009 increased 11.6% over thecomparable 2008 quarter in what is traditionally this product’s lowest salesquarter. Cost of sales as a percentage of sales decreased during the thirdquarter of 2009 to 83.9% from 88.2% for the comparable quarter of 2008. Lowercommodity prices and some reduction in factory overhead expenses were theprimary reasons for the improved margins. The Heating and Cooling segmentreported a material weakness in internal control over financial reporting at September 27,2008 related to inventory accounting which has not been fully remediated as ofthe quarter ended October 3, 2009. We recorded adjustments to inventoryand cost of goods sold during the third quarter of both years based upon theresults of physical inventory counts. We estimated the net effect on operatingincome in each of the first two quarters of both 2009 and 2008, concluding thatrestatements of prior quarters’ results were not warranted.

 

Sellingand administrative expenses were reduced by approximately $1,051,000 or 35.8%during the third quarter of 2009 compared to the third quarter of 2008 inresponse to the decline in sales. Despite numerous cost savings, the largereduction in revenue led to an operating loss for the 2009 quarter of $736,000compared to the operating loss of $595,000 incurred during the third quarter of2008.

 

Evaporative Cooling Segment

 

Salesin the Evaporative Cooling segment improved to $4,679,000 or 19.7%, during thethird quarter of 2009 from the comparable 2008 quarter. Unit sales for thethird quarter of 2009 were 22.5% higher than the 2008 quarter principally dueto a major competitor exiting the U.S. market at the end of 2008.

 

Operatingincome for the third quarter of 2009 improved to $298,000 compared to a loss of$71,000 for the 2008 quarter. The improvement was the result of increasedsales, a more favorable product mix, lower material costs and reduced freightcosts. Selling and administrative costs increased in proportion to the increasein sales.

 

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Operations - Comparison of Nine Months Ended October 3, 2009 toNine Months Ended September 27, 2008

 

Consolidatedsales from continuing operations during the first nine months of 2009 were$88,418,000 compared to $108,029,000 during the first nine months of 2008. The18.2% decline was due to the significant revenue decreases in the CACS segmentand the Heating and Cooling segment. Sales in the Evaporative Cooling segmentincreased. The decrease in sales levels are due to the factors discussed in thesection on the third quarter’s results. For the nine months ended October 3,2009, the Evaporative Cooling segment reported an increase in sales for thereasons noted in the comparison of third quarter results above.

 

Ona consolidated basis cost of sales as a percentage of sales improved from 82.1%for the first nine months of 2008 to 78.7% during the first nine months of2009. The improvement was primarily due to the factors cited in the discussionof the quarter’s results. Selling and administrative costs decreased slightlyfor the nine months ended October 3, 2009 from the corresponding 2008period although they increased as a percentage of sales due to the relativelyfixed nature of some of these costs.

 

At the end of the secondquarter of 2009, the Company concluded negotiations with regard to the finalvalue of a parcel of land that was sold under a Possession and Use Agreement(the “Agreement”) at the end of 2008. Under the terms of the Agreement, thebuyer (the city of Colorado Springs) initially agreed to pay $2,114,000 and theAgreement called for a subsequent final determination of value. The Agreementwas signed and closed in December, 2008. The City paid $2,114,000 to theCompany and the Company recorded a gain in 2008 of $1,947,000 after deducting closingcosts and the cost basis of the property. During the first half of 2009, theCompany and the City negotiated the final purchase price and agreed on a valueof $4,140,000. The Real Estate Purchase Agreement was signed on July 2,2009 and the Company received the additional $2,026,000 in cash which wasrecorded as a gain in the second quarter of 2009.

 

Theloss from discontinued operations was $1,819,000 for the nine months ended October 3,2009; however the loss was only $731,000 on a net of tax basis because theCompany was able to utilize $769,000 of the capital loss generated by thistransaction to offset the capital gain realized from the above noted sale ofland in Colorado Springs.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the Construction Products group for the nine months ended October 3,2009 and September 27, 2008 (amounts in thousands):

 
| ** **                                    | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------|------------|-----------|------------|
| Nine Months ended October 3, 2009        |       |                                                  |       |      |       |
| Revenues from external customers              |       | $                                                     | 32,388     |      | $          | 11,756 |   |
| Segment operating (loss) income               |       | (1,601                                                | )          | 1,130     |       |
| Operating (loss) income as a percent of sales |       | (4.9                                                  | )%         | 9.6       | %          |
| Segment assets as of October 3, 2009     |       | $                                                     | 40,199     |      | $          | 5,887 |   |
| Return on assets                              |       | (4.0                                                  | )%         | 19.2      | %          |
|                                          |       |                                                  |       |      |       |
| Nine Months ended September 27, 2008     |       |                                                  |       |      |       |
| Revenues from external customers              |       | $                                                     | 48,328     |      | $          | 12,187 |   |
| Segment operating income                      |       | 1,908                                                 |       | 1,434     |       |
| Operating income as a percent of sales        |       | 3.9                                                   | %          | 11.8      | %          |
| Segment assets as of September 27, 2008  |       | $                                                     | 40,209     |      | $          | 7,308 |   |
| Return on assets                              |       | 3.6                                                   | %          | 19.6      | %          |

 

Concrete,Aggregates and Construction Supplies Segment

 

Thesame factors as discussed in the results of the third quarter (principally thedepressed construction markets and the shutdown of the Pikeview Quarry) had asimilar impact on the results for the first nine months of 2009 when comparedto the results of the first nine months of 2008. Sales of constructionmaterials were 33.0% lower in the first nine months of 2009 compared to theprior year’s period. Concrete volume was down by 31.1%. Concrete pricing thoughwas somewhat higher due to a modest price increase and the effect of certainjobs that called for higher specification concrete which entailed a higher costand price. Aggregate volume fell by 45.8%. The combined aggregate operationsgenerated a sizable loss during the first nine months of 2009 due to the lowvolume and the Pikeview shutdown compared to producing a gross profit during thefirst nine months of 

 

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2008.As noted in the discussion of the results of the quarter, it is difficult toquantify the actual effect the shutdown of the Pikeview Quarry had on theresults of 2009. However, again a comparison of the operations of the PikeviewQuarry for the nine months ended October 3, 2009 to the nine months ended September 27,2008 shows that tons sold declined from 636,000 with a gross profit of $902,000in 2008 to 60,000 sold with a negative gross profit of $769,000 for 2009.Selling and administrative expenses were reduced by approximately 5.8%. Thissegment’s operating loss in the first nine months of 2009 was $1,601,000compared to an operating profit of $1,908,000 in the first nine months of theprior year. The operating profit in 2008 included a gain of approximately$338,000 from the sale of a small specialty aggregate operation.

 

DoorSegment

 

Salesin the Door segment for the first nine months of 2009 decreased $431,000 from thecomparable 2008 period primarily due escalating impact the weak constructionmarket. The sales order backlog at October 3, 2009 has declinedapproximately 32.3% from the 2008 fiscal year-end.

 

Operatingincome for the first nine months of 2009 has followed the same trend of sales,declining 21.2% from the level achieved during the first nine months of 2008.However, this decline is largely due to the results of the third quarter. Twolarge jobs, completed during the first quarter of 2009 accounted for anincrease in sales and operating income during the first quarter of 2009compared to the first quarter of 2008. Since the first quarter of 2009, thissegment has reported declining sales in comparison to the comparable 2008periods.

 

**HVACProducts**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the nine months ended October 3,2009 and September 3, 2008 (amounts in thousands):

 
| ** **                                    | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Nine Months ended October 3, 2009        |       |                     |       |                     |       |
| Revenues from external customers              |       | $                        | 21,966     |                     | $          | 22,038 |   |
| Segment operating (loss) income               |       | (869                     | )          | 2,833                    |       |
| Operating (loss) income as a percent of sales |       | (4.0                     | )%         | 12.9                     | %          |
| Segment assets as of October 3, 2009     |       | $                        | 17,959     |                     | $          | 12,611 |   |
| Return on assets                              |       | (4.8                     | )%         | 22.5                     | %          |
|                                          |       |                     |       |                     |       |
| Nine Months ended September 27, 2008     |       |                     |       |                     |       |
| Revenues from external customers              |       | $                        | 29,134     |                     | $          | 18,109 |   |
| Segment operating (loss) income               |       | (1,017                   | )          | 459                      |       |
| Operating (loss) income as a percent of sales |       | (3.5                     | )%         | 2.5                      | %          |
| Segment assets as of September 27, 2008  |       | $                        | 26,630     |                     | $          | 12,162 |   |
| Return on assets                              |       | (3.8                     | )%         | 3.8                      | %          |

 

Heating and Cooling Segment

 

Salesin the Heating and Cooling segment decreased $7,168,000, or 24.6%, during thefirst nine months of 2009 from the comparable 2008 period. As with the quarter’sresults, fan coil volume was primarily responsible for the decline. The reasonsfor the lower level of sales are similar to those discussed for the quarteralthough milder weather during the first quarter of 2009 also contributed tothe modestly lower furnace sales.

 

Theoperating loss narrowed from $1,017,000 during the first nine months of 2008 toa loss of $869,000 for the 2009 period. Cost of sales as a percent of salesimproved from 81.4% to 80.5% for the reasons noted in the discussion of thequarter above. Selling and administrative costs declined $358,000 for the firstnine months of 2009 compared to the first nine months of 2008 but increased asa percent of sales due to the fixed nature of some of these costs.

 

Evaporative Cooling Segment

 

Salesin the Evaporative Cooling segment increased $3,929,000, or 21.7%, during thefirst nine months of 2009 over the comparable 2008 period. The increase insales was primarily due to a major competitor exiting the U.S. market near theend of 2008.

 

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Thesegment reported operating income of $2,833,000 for the first nine months of2009 compared to $459,000 for the comparable 2008 period.

 

CRITICALACCOUNTING POLICIES AND ESTIMATES

 

Thecondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States whichrequire the Company to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities as of October 3, 2009 and January 3, 2009 and affect thereported amounts of revenues and expenses for the periods reported. Actualresults could differ from those estimates.

 

Informationwith respect to the Company’s critical accounting policies which the Companybelieves could have the most significant effect on the Company’s reportedresults and require subjective or complex judgments by management is containedin Note 8 in this report on Form 10-Q and in Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, ofthe Company’s Annual Report on Form 10-K for the fiscal year ended January 3,2009.

 

As noted in the Note 8, the Company performed anassessment of the realizability of the goodwill in the CACS reporting unit asof July 4, 2009.  Due to thisassessment, we have updated our critical accounting policy disclosure relatedto goodwill below.

 

Goodwill and Other Intangible Assets

 

Goodwill is not amortized as a charge to earnings;rather the Company annually assesses goodwill for potential impairment as ofthe last day of its fiscal year. In addition, to the extent that events occur,either involving the relevant Company subsidiaries or their industries, theCompany revisits its assessment of the recorded goodwill to determine ifimpairment has occurred and should be immediately recognized. This assessmentrequires us to make significant assumptions and estimates about the extent andtiming of future cash flows, discount rates, growth rates and costs. Inaddition, the terms 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 a combinationof discounted cash flow models and a market valuation approach. Forecasts offuture cash flows are based on our best estimate of future sales and operatingcosts and general market conditions. The cash flow forecasts are adjusted by anappropriate discount rate. Therefore, changes in any of these assumptions couldimpact the estimated fair value. Themarket valuation approach compares the Company’sfinancial results to those entities of similar size and industry and alsoconsiders the impact of recent transactions in the industry.

 

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 CACS reporting unit, accordingly, the Companyallocated a portion of the goodwill in the CACS reporting unit to the assets ofRMRM on a relative fair value basis. The amount of goodwill allocated was$600,000. See Note 10.

 

The Company also performed an assessment of therealizability of the remaining goodwill in the CACS 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 CACS reporting unit was necessary.  The Company’s undiscounted cash flow analysisconsidered the impact of the current adverse operating conditions affecting theCACS reporting unit and the current business outlook. The result of ouranalysis was that while the fair value of the remaining reporting unit declinedfrom year end, the fair value of the reporting unit was still in excess of thecarrying value of the reporting unit and as a result, no adjustment forimpairment was necessary. However, a decline of approximately 10% of the fair valueof the reporting unit may result in an impairment of our goodwill. If theconditions impacting the CACS reporting unit deteriorate more than we currentlybelieve could, we could have an impairment of our goodwill in the future.

 

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

 

Currently,the two principal markets served by the CACS 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 

 

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andReinvestment Act of 2009 (“ARRA”) had little or no impact on our sales in thefirst three quarters 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 was begun in the latter part of September, 2009.New home construction in our two markets in the first three quarters was nearrecord lows. Recently though there has been a modest increase in new homeconstruction, primarily in lower priced homes, and the inventory of unsoldhomes has diminished. As previously reported, the Company is working with itsconsultants to develop a new mining and reclamation plan for the PikeviewQuarry. The Pikeview Quarry has been a principal source of aggregate used bothin the production of our ready mix concrete and for sale to third parties forother construction applications.

 

Salesof doors in the first nine months of 2009 have declined those in the first ninemonths of 2008. The sales backlog for doors has also declined compared to ayear ago although there has been a slight increase in bidding opportunitiesrecently. We expect pricing levels to remain competitive in the near future.

 

Salesof evaporative coolers are expected to remain at or near current levelsdepending on weather conditions during the cooling season. Profit margins willvary depending on competitive conditions and material cost changes.

 

Aslow commercial construction market particularly with regard to hotelconstruction will likely result in a continued lower level of fan coils salescompared to levels obtained in the past two or three years. We expect sales ofheating products to remain relatively constant subject to weather conditionsduring the heating season. We do not expect a significant change in profitmargins except to the extent the lower fan coil volume may have an influence onthe profit margin.

 

RECENTLYISSUED ACCOUNTING STANDARDS

 

SeeNote 4 for a discussion of recently issued accounting standards.

 

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**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 October 3, 2009. The Chief Executive Officer and ChiefFinancial Officer, based on that evaluation, concluded that our disclosurecontrols and procedures are still not effective in that the Company has not yetcompleted the remediation process needed to establish adequate controls overinventory accounting in its Heating and Cooling Segment. The material weaknessrelates to the appropriate accounting for inventory and related cost of salesof this segment. This weakness was first discovered in October 2008 and isdiscussed in more detail in Item 9A of the Company’s 2008 Annual Report on Form 10-K.The lack of adequate controls over inventory accounting is considered amaterial weakness in internal controls over financial reporting as definedunder standards established by the Public Company Accounting Oversight Board(United States).

 

**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 prior to the close of the third quarter of Fiscal 2008. Duringthe fourth quarter of Fiscal 2008, the Company began a process to remediatethis material weakness in internal controls. As part of this process, theCompany identified the causes which resulted in the inventory accounting errorsand developed an action plan to address each of these causes. As of October 3,2009, although we have implemented certain of these actions, the weakness stillexists. We will implement the outstanding items during the remainder of Fiscal2009 and into Fiscal 2010. We believe our action plan, once fully implemented,will improve 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 fiscal2010 and we believe that such measures will appropriately address the materialweakness related to the accounting for inventory accounting in the Heating andCooling segment.

 

During the quarter endedOctober 3, 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**

 

Thefollowing table presents information with respect to purchases made by theCompany of its common stock for the period July 5, 2009 through October 3,2009. No shares were purchased during the current quarter.

 

**IssuerPurchases 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** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| July 5 – August 1,  2009     |       | —                                           |       | $                                            | —     |                                                                                               | —     |                                                                                                    | $          | 1,307,404 |   |
| August 2 – August 29,  2009  |       | —                                           |       | —                                       |       | —                                                                                             |       | 1,307,404                                                                                               |       |
| August 30 – October 3,  2009 |       | —                                           |       | —                                       |       | —                                                                                             |       | 1,307,404                                                                                               |       |
| Total                                       |       | —                                           |       | $                                            | —     |                                                                                               | —     |                                                                                                    | $          | 1,307,404 |   |

 

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OnJanuary 19, 1999, the Company initiated purchases under the currentopen-ended program to repurchase its common stock. Purchases are made on theopen market or in block trades at the discretion of management. The dollaramount authorized for the program has been periodically increased by the Boardof Directors and approved by the Company’s lenders under the Company’s priorcredit facility. The $1,307,404 in the above table represents the remainingamount authorized by the Board. On April 16, 2009, the Company enteredinto a new credit agreement with a bank which contains certain restrictions onthe Company’s ability to repurchase its stock.

 

**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                                                           |

 

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SIGNATURE

 

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

 
|   | CONTINENTAL  MATERIALS CORPORATION |
|--------|------------------------------------|
|   |                               |
|   |                               |
| Date:  | November 23,  2009            |   | By: | /s/  Joseph J. Sum |
|   |                               | Joseph  J. Sum, Vice President |
|   |                               | and  Chief Financial Officer |
|        |                                    |  |  |  |

 

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