**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended September 27,2008**

** **

**OR**

 

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

 

**For the transition periodfrom                to**

 

**Commission File number 1-3834**

 

**CONTINENTALMATERIALS CORPORATION**

(Exact name 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,including area code)

 

 

(Former name, former addressand former fiscal 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 registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

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

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 or the Exchange Act).

 

Yes  o        No  x

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate: Common Stock, $0.25 par value, shares outstanding at November 5, 2008                                1,599,070

 

 

 

----

 

PART I –FINANCIAL INFORMATION

 

**Item 1.  Financial Statements**

 

CONTINENTAL MATERIALSCORPORATION

CONDENSED CONSOLIDATED BALANCESHEETS

SEPTEMBER 27, 2008 and DECEMBER29, 2007

(Unaudited)

(000’s omitted except sharedata)

 
| ** **                                                                            | ** ** | **SEPTEMBER 27,** | ** ** | **DECEMBER 29,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ***ASSETS***                                                                          | ** ** | ** **             | ** ** | ** **            | ** ** |
| Current assets:                                                                       |       |                   |       |                  |       |
| Cash and cash equivalents                                                             |       | $                      | 1,920      |                  | $          | 3,326 |   |
| Receivables, net                                                                      |       | 25,398                 |       | 22,652                |       |
| Receivable for insured losses                                                         |       | 2,479                  |       | 1,548                 |       |
| Inventories:                                                                          |       |                   |       |                  |       |
| Finished goods                                                                        |       | 10,803                 |       | 7,940                 |       |
| Work in process                                                                       |       | 1,369                  |       | 1,372                 |       |
| Raw materials and supplies                                                            |       | 12,965                 |       | 9,915                 |       |
| Prepaid expenses                                                                      |       | 5,393                  |       | 5,508                 |       |
| Total current assets                                                                  |       | 60,327                 |       | 52,261                |       |
|                                                                                  |       |                   |       |                  |       |
| Property, plant and equipment, net                                                    |       | 31,658                 |       | 34,917                |       |
|                                                                                  |       |                   |       |                  |       |
| Goodwill                                                                              |       | 7,829                  |       | 7,829                 |       |
| Amortizable intangible assets, net                                                    |       | 972                    |       | 1,198                 |       |
| Other assets                                                                          |       | 1,582                  |       | 2,305                 |       |
|                                                                                  |       |                   |       |                  |       |
|                                                                                  |       | $                      | 102,368    |                  | $          | 98,510 |   |
|                                                                                  |       |                   |       |                  |       |
| ***LIABILITIES***                                                                     |       |                   |       |                  |       |
| Current  liabilities:                                                                 |       |                   |       |                  |       |
| Revolving bank loan payable                                                           |       | $                      | 10,700     |                  | $          | 7,900 |   |
| Current portion of long-term debt                                                     |       | 1,657                  |       | 2,400                 |       |
| Accounts payable and accrued expenses                                                 |       | 20,840                 |       | 17,912                |       |
| Liability for unpaid claims covered by  insurance                                     |       | 2,479                  |       | 1,548                 |       |
| Income taxes                                                                          |       | —                 |       | 19                    |       |
| Total current liabilities                                                             |       | 35,676                 |       | 28,879                |       |
|                                                                                  |       |                   |       |                  |       |
| Long-term debt                                                                        |       | 9,529                  |       | 10,400                |       |
| Deferred income taxes                                                                 |       | 3,848                  |       | 3,848                 |       |
| Other long-term liabilities                                                           |       | 1,695                  |       | 1,796                 |       |
|                                                                                  |       |                   |       |                  |       |
| ***SHAREHOLDERS’ EQUITY***                                                       |       |                   |       |                  |       |
| Common shares, $0.25 par value; authorized  3,000,000 shares; issued 2,574,264 shares |       | 643                    |       | 643                   |       |
| Capital in excess of par value                                                        |       | 1,830                  |       | 1,830                 |       |
| Retained earnings                                                                     |       | 65,762                 |       | 66,810                |       |
| Treasury shares, 975,986 and 972,170, at  cost                                        |       | (16,615                | )          | (16,596               | )          |
|                                                                                  |       | 51,620                 |       | 52,687                |       |
|                                                                                  |       |                   |       |                  |       |
|                                                                                  |       | $                      | 102,368    |                  | $          | 98,510 |   |

 

See accompanying notes

 

2

----

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED SEPTEMBER 27, 2008 AND SEPTEMBER 29, 2007

(Unaudited)

(000’s omitted except per-share amounts)

 
| ** **                                                             | ** ** | **SEPTEMBER 27,** | ** ** | **SEPTEMBER 29,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                             | ** ** | **2008**               | ** ** | **2007**               | ** ** |
|                                                                   |       |                   |       |                   |       |
| Sales                                                                  |       | $                      | 41,454     |                   | $          | 42,288 |   |
|                                                                   |       |                   |       |                   |       |
| Costs and expenses:                                                    |       |                   |       |                   |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization) |       | 35,192                 |       | 36,701                 |       |
| Depreciation, depletion and amortization                               |       | 1,267                  |       | 1,309                  |       |
| Selling and administrative                                             |       | 4,187                  |       | 4,396                  |       |
|                                                                   |       |                   |       |                   |       |
| Gain on disposition of property and  equipment                         |       | 8                      |       | 53                     |       |
|                                                                   |       | 40,638                 |       | 42,353                 |       |
|                                                                   |       |                   |       |                   |       |
| Operating income (loss)                                                |       | 816                    |       | (65                    | )          |
|                                                                   |       |                   |       |                   |       |
| Interest expense                                                       |       | (353                   | )          | (341                   | )          |
| Other income, net                                                      |       | 15                     |       | 27                     |       |
|                                                                   |       |                   |       |                   |       |
| Income (loss) before income taxes                                      |       | 478                    |       | (379                   | )          |
|                                                                   |       |                   |       |                   |       |
| Provision (benefit) for income taxes                                   |       | 128                    |       | (389                   | )          |
|                                                                   |       |                   |       |                   |       |
| Net income                                                             |       | 350                    |       | 10                     |       |
|                                                                   |       |                   |       |                   |       |
| Retained earnings, beginning of period                                 |       | 65,412                 |       | 68,231                 |       |
| ** **                                                             | ** ** | ** **             | ** ** | ** **             | ** ** |
| Retained earnings, end of period                                       |       | $                      | 65,762     |                   | $          | 68,241 |   |
|                                                                   |       |                   |       |                   |       |
| Basic and diluted earnings per share                                   |       | $                      | .22        |                   | $          | .01 |   |
|                                                                   |       |                   |       |                   |       |
| Average shares outstanding                                             |       | 1,599                  |       | 1,603                  |       |

 

See accompanying notes

 

3

----

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2008 AND SEPTEMBER 29, 2007

(Unaudited)

(000’s omitted except per-share amounts)

 
| ** **                                                             | ** ** | **SEPTEMBER 27,** | ** ** | **SEPTEMBER 29,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                             | ** ** | **2008**               | ** ** | **2007**               | ** ** |
|                                                                   |       |                   |       |                   |       |
| Sales                                                                  |       | $                      | 117,727    |                   | $          | 128,018 |   |
|                                                                   |       |                   |       |                   |       |
| Costs and expenses:                                                    |       |                   |       |                   |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization) |       | 100,246                |       | 107,748                |       |
| Depreciation, depletion and amortization                               |       | 3,920                  |       | 3,946                  |       |
| Selling and administrative                                             |       | 14,489                 |       | 14,965                 |       |
|                                                                   |       |                   |       |                   |       |
| Gain on disposition of property and  equipment                         |       | 392                    |       | 86                     |       |
|                                                                   |       | 118,263                |       | 126,573                |       |
|                                                                   |       |                   |       |                   |       |
| Operating (loss) income                                                |       | (536                   | )          | 1,445                  |       |
|                                                                   |       |                   |       |                   |       |
| Interest expense                                                       |       | (971                   | )          | (922                   | )          |
| Other income, net                                                      |       | 14                     |       | 306                    |       |
|                                                                   |       |                   |       |                   |       |
| (Loss) income before income taxes                                      |       | (1,493                 | )          | 829                    |       |
|                                                                   |       |                   |       |                   |       |
| Benefit for income taxes                                               |       | (445                   | )          | (39                    | )          |
|                                                                   |       |                   |       |                   |       |
| Net (loss) income                                                      |       | (1,048                 | )          | 868                    |       |
|                                                                   |       |                   |       |                   |       |
| Retained earnings, beginning of period                                 |       | 66,810                 |       | 67,373                 |       |
|                                                                   |       |                   |       |                   |       |
| Retained earnings, end of period                                       |       | $                      | 65,762     |                   | $          | 68,241 |   |
|                                                                   |       |                   |       |                   |       |
| Basic and diluted (loss) earnings per share                            |       | $                      | (.66       | )                      | $          | .54 |   |
|                                                                   |       |                   |       |                   |       |
| Average shares outstanding                                             |       | 1,600                  |       | 1,603                  |       |

 

Seeaccompanying notes

 

4

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CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2008 AND SEPTEMBER 29, 2007

(Unaudited)

(000’s omitted)

 
| ** **                                                              | ** ** | **SEPTEMBER 27,  2008** | ** ** | **SEPTEMBER 29,  2007** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                                                    |       |                         |       |                         |       |
| Net cash (used in) provided by operating  activities                    |       | $                            | (2,444     | )                            | $          | 418 |   |
|                                                                    |       |                         |       |                         |       |
| Investing activities:                                                   |       |                         |       |                         |       |
| Capital expenditures                                                    |       | (815                         | )          | (6,996                       | )          |
| Proceeds from sale of assets                                            |       | 686                          |       | 370                          |       |
| Net cash used in investing activities                                   |       | (129                         | )          | (6,626                       | )          |
|                                                                    |       |                         |       |                         |       |
| Financing activities:                                                   |       |                         |       |                         |       |
| Borrowings under revolving credit facility,  net                        |       | 2,800                        |       | 8,700                        |       |
| Repayment of long-term debt                                             |       | (1,614                       | )          | (2,099                       | )          |
| Payment to acquire treasury stock                                       |       | (19                          | )          | (70                          | )          |
| Other                                                                   |       | —                       |       | 91                           |       |
| Net cash provided by financing activities                               |       | 1,167                        |       | 6,622                        |       |
|                                                                    |       |                         |       |                         |       |
| Net (decrease) increase in cash and cash  equivalents                   |       | (1,406                       | )          | 414                          |       |
| Cash and cash equivalents:                                              |       |                         |       |                         |       |
| Beginning of period                                                     |       | 3,326                        |       | 2,770                        |       |
|                                                                    |       |                         |       |                         |       |
| End of period                                                           |       | $                            | 1,920      |                         | $          | 3,184 |   |
|                                                                    |       |                         |       |                         |       |
| Supplemental disclosures of cash flow  items:                           |       |                         |       |                         |       |
| Cash paid (refunded) during the nine months  for:                       |       |                         |       |                         |       |
| Interest                                                                |       | $                            | 1,098      |                         | $          | 1,061 |   |
| Income taxes                                                            |       | (21                          | )          | 545                          |       |
| Supplemental disclosures of noncash  investing and financing activities |       |                         |       |                         |       |
| Capital expenditures purchased on account                               |       | $                            | —     |                         | $          | 45 |   |
| Buyer’s assumption of liabilities                                  |       | 85                           |       | —                       |       |

 

See accompanying notes

 

5

----

 

CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED SEPTEMBER 27, 2008

(Unaudited)

 

1.               The unaudited interim condensedconsolidated financial statements included herein are prepared pursuant to theSecurities and Exchange Commission rules and regulations for reporting on Form 10-Q.Accordingly, certain information and footnote disclosures normally accompanyingthe annual consolidated financial statements have been omitted. The interimcondensed consolidated financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s latest annual report on Form 10-K. In theopinion of management, the condensed consolidated financial statements includeall adjustments (none of which were other than normal recurring adjustmentsnecessary for a fair statement of the results for the interim periods.

 

2.               Our effectiveincome tax rate is based on expected income, statutory tax rates and taxpositions taken in the various jurisdictions in which we operate. For interimfinancial reporting, we estimate the annual effective rate based on theprojected taxable income for the full year and record a quarterly income taxprovision in accordance with the anticipated annual rate. As the yearprogresses, we refine the estimates of the year’s taxable income as newinformation becomes available, including year-to-date financial results. Thiscontinual estimation process often results in a change to our expectedeffective income tax rate for the year. When this occurs, we adjust the incometax provision during the quarter in which the change in estimate occurs so thatthe year-to-date provision reflects the expected annual income tax rate. Forthe nine months ended September 27, 2008, we utilized the effective ratebased upon projected operating results for the full year and recorded an incometax provision for the third quarter such that the nine month year-to-date ratereflected the estimated annual income tax rate. Significant judgment isrequired in determining our effective income tax rate and in evaluating our taxpositions.

 

On December 31, 2006, the first day of the 2007 fiscal year, weadopted the provisions of Financial Accounting Standards Board Interpretation No. 48,“Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109” (FIN 48). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with Statement of Financial Accounting Standards (SFAS) No. 109,“Accounting for Income Taxes,” by prescribing a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. Under FIN 48,the financial statement effects of a tax position should initially berecognized when it is more likely than not, based on the technical merits, thatthe position will be sustained upon examination. A tax position that meets themore-likely-than-not recognition threshold should initially and subsequently bemeasured as the largest amount of tax benefit that has a greater than 50%likelihood of being realized upon effective settlement with a taxing authority.

 

There was no cumulative adjustment to retained earnings required as aresult of the implementation of FIN 48. The gross amount of unrecognized taxbenefits at December 29, 2007 was $328,000 of which $74,000 would affectthe effective tax rate. The gross amount of unrecognized tax benefits at September 27,2008 was $326,000 of which $52,000 would affect the effective tax rate.

 

We classify interest and penalties recognized on the liability forunrecognized tax benefits as income tax expense. Accrued interest and penaltiesincluded in our total liability for unrecognized tax benefits wereapproximately $101,000 as of September 27, 2008 and $69,000 as of December 29,2007.

 

The United States Federal and various state statutes of limitationsexpire during the third and fourth quarters of 2008 for our 2004 tax year.There are no amounts included in the balance at September 27, 2008 thatare related to tax positions expected to be resolved within 12 months ofthis reporting date.

 

We file income tax returns in the United States federal and variousstate jurisdictions. Generally, we are not subject to changes in income taxesby any taxing jurisdiction for the years prior to 2003.

 

3.               Effective December 30,2007, the Company adopted SFAS No. 157, “Fair Value Measurements,” whichprovides a framework for measuring fair value under accounting principlesgenerally accepted in the United States of America. The adoption of thisstatement had an immaterial impact on our consolidated financial statements.The Company also adopted the deferral provisions of the Financial AccountingStandards Board Staff Position FAS 157-2, which delays the effective dateof SFAS No. 157 for all nonrecurring fair value measurements ofnon-financial assets and liabilities until fiscal years beginning after November 15,2008.

 

6

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

 

Level 1 – Quoted prices for identical assets and liabilities in activemarkets;

 

Level 2 – Quoted prices for similar assets and liabilities in activemarkets; quoted prices for identical or similar assets and liabilities inmarkets that are not active; and model-derived valuations in which allsignificant inputs and significant value drivers are observable in activemarkets; and

 

Level 3 – Valuations derived from valuation techniques in which one ormore significant inputs or significant value drivers are unobservable.

 

The Company designates the cash equivalents as Level 1, as they aremoney market accounts backed by U. S. Treasury Bills. As of September 27,2008, and December 29, 2007, the Company did not have any cashequivalents, therefore there were no assets measured at fair value.

 

4.               Operating resultsfor the first nine months of 2008 are not necessarily indicative of performancefor the entire year. Historically, sales of the Evaporative Cooling segment arehigher in the first and second quarters, sales of the Concrete, Aggregates andConstruction Supplies segment are higher in the second and third quarters andsales of the Heating and Cooling segment are higher in the third and fourthquarters. Sales of the Door segment have not shown strong seasonal fluctuationsin recent years.

 

5.               There is nodifference in the calculation of basic and diluted earnings per share (EPS) forthe three-month or nine-month periods ended September 27, 2008 and September 29,2007.

 

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

 

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

 

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

 

7

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The following table presents information about reported segments forthe three-month and nine-month periods ended September 27, 2008 and September 29,2007 along with the items necessary to reconcile the segment information to thetotals reported in the financial statements (amounts in thousands):

 
| ** **                                 | ** ** | **Construction Products**                               | ** ** | **HVAC Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                 | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2008                                       |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Nine Months ended  September 27, 2008 |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers          |       | $                                                            | 58,026     |                   | $          | 12,187                               |       | $                         | 70,213     |                     | $          | 29,134 |   | $ | 18,109 |   | $ | 47,243 |   | $ | 13 |   | $ | 258 |   | $ | 117,727 |   |
| Depreciation,  depletion and amortization  |       | 3,012                                                        |       | 100                    |       | 3,112                                |       | 338                       |       | 413                      |       | 751 |   | 57 |   | — |   | 3,920 |   |
| Operating income  (loss)                   |       | 462                                                          |       | 1,434                  |       | 1,896                                |       | (1,017                    | )          | 459                      |       | (558 | ) | (1,955 | ) | 81 |   | (536 | ) |
| Segment assets                             |       | 53,000                                                       |       | 7,308                  |       | 60,308                               |       | 26,630                    |       | 12,162                   |       | 38,792 |   | 3,205 |   | 63 |   | 102,368 |   |
| Capital  expenditures                      |       | 550                                                          |       | 112                    |       | 662                                  |       | 51                        |       | 97                       |       | 148 |   | 6 |   | — |   | 816 |   |
| Quarter ended  September 27, 2008     |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers          |       | $                                                            | 23,362     |                   | $          | 4,562                                |       | $                         | 27,924     |                     | $          | 9,530 |   | $ | 3,910 |   | $ | 13,440 |   | $ | 4 |   | $ | 86 |   | $ | 41,454 |   |
| Depreciation,  depletion and amortization  |       | 962                                                          |       | 35                     |       | 997                                  |       | 113                       |       | 138                      |       | 251 |   | 19 |   | — |   | 1,267 |   |
| Operating income  (loss)                   |       | 1,190                                                        |       | 648                    |       | 1,838                                |       | (595                      | )          | (71                      | )          | (666 | ) | (383 | ) | 27 |   | 816 |   |
| Segment assets                             |       | 53,000                                                       |       | 7,308                  |       | 60,308                               |       | 26,630                    |       | 12,162                   |       | 38,792 |   | 3,205 |   | 63 |   | 102,368 |   |
| Capital  expenditures                      |       | 359                                                          |       | 12                     |       | 371                                  |       | —                    |       | 29                       |       | 29 |   | 1 |   | — |   | 401 |   |

 
| ** **                                 | ** ** | **Construction Products**                               | ** ** | **HVAC Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                 | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2007                                       |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Nine Months ended  September 29, 2007 |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers          |       | $                                                            | 71,110     |                   | $          | 13,733                               |       | $                         | 84,843     |                     | $          | 24,297 |   | $ | 18,607 |   | $ | 42,904 |   | $ | 13 |   | $ | 258 |   | $ | 128,018 |   |
| Depreciation,  depletion and amortization  |       | 3,047                                                        |       | 79                     |       | 3,126                                |       | 315                       |       | 450                      |       | 765 |   | 55 |   | — |   | 3,946 |   |
| Operating income  (loss)                   |       | 3,656                                                        |       | 1,627                  |       | 5,283                                |       | (1,503                    | )          | (366                     | )          | (1,869 | ) | (2,050 | ) | 81 |   | 1,445 |   |
| Segment assets  (a)                        |       | 53,002                                                       |       | 7,398                  |       | 60,400                               |       | 22,810                    |       | 13,101                   |       | 35,911 |   | 2,140 |   | 59 |   | 98,510 |   |
| Capital expenditures  (b)                  |       | 4,301                                                        |       | 1,509                  |       | 5,810                                |       | 627                       |       | 567                      |       | 1,194 |   | 37 |   | — |   | 7,041 |   |
| Quarter ended  September 29, 2007     |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers          |       | $                                                            | 25,585     |                   | $          | 4,284                                |       | $                         | 29,869     |                     | $          | 8,121 |   | $ | 4,208 |   | $ | 12,329 |   | $ | 4 |   | $ | 86 |   | $ | 42,288 |   |
| Depreciation,  depletion and amortization  |       | 1,018                                                        |       | 18                     |       | 1,036                                |       | 104                       |       | 150                      |       | 254 |   | 19 |   | — |   | 1,309 |   |
| Operating income  (loss)                   |       | 1,338                                                        |       | 460                    |       | 1,798                                |       | (824                      | )          | (493                     | )          | (1,317 | ) | (573 | ) | 27 |   | (65 | ) |
| Segment assets  (a)                        |       | 53,002                                                       |       | 7,398                  |       | 60,400                               |       | 22,810                    |       | 13,101                   |       | 35,911 |   | 2,140 |   | 59 |   | 98,510 |   |
| Capital  expenditures (b)                  |       | 495                                                          |       | 1,300                  |       | 1,795                                |       | 395                       |       | 89                       |       | 484 |   | 6 |   | — |   | 2,285 |   |

 

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

 

(b)         Capitalexpenditures for the Evaporative Cooling segment include $45 of additionspurchased on account.

 

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.

 

7.               Identifiableintangible assets as of September 27, 2008 include five non-compete agreements,a restrictive land covenant and customer relations. Collectively, these assetswere carried at $972,000, net of $1,638,000 accumulated amortization. Thepre-tax amortization expense for intangible assets during the quarter ended September 27,2008 was $76,000 compared to $78,000 for the quarter ended September 29,2007 and $226,000 and $243,000 for the nine months ended September 27,2008 and September 29, 2007, respectively. Based upon the intangibleassets recorded on the balance sheet at September 27, 2008, amortizationexpense for the next five years is estimated to be as follows: 2008 – $300,000,2009 – $294,000, 2010 – $262,000, 2011 – $101,000 and 2012 – $65,000.

 

8.               OnAugust 12, 2008, the Company entered into a First Amendment to Amended andRestated Revolving Credit and Term Loan Agreement (First Amendment). The FirstAmendment adjusted the quarterly repayment amounts of the Term Loan($11,600,000 at the time of the signing) to $414,286 with final payment of alloutstanding Term Loan indebtedness on March 31, 2011. The First Amendmentalso extended the $18,000,000 available under the revolving credit facility to December 31,2008 at which time the amount is decreased to $15,000,000 through thetermination date of June 30, 2009. The revolving credit line is used forseasonal or short-term cash needs and stand-by letter of credit. At September 27,2008, the Company had outstanding stand-by letters of credit to insurancecarriers totaling approximately $4,510,000 that collateralize the self-insuredamounts under the Company’s risk management program. There was $10,700,000 ofoutstanding borrowings under the revolving credit line at

 

8

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9.               September 27,2008. The amounts outstanding under the First Amendment are collateralized bythe Company’s accounts receivable, inventories, machinery and equipment(excluding licensed vehicles) and other assets (excluding real estate). TheFirst Amendment established certain financial covenants similar in nature to thoseexisting under the predecessor loan agreement. At the Company’s option, theterm loan and revolving credit facility will bear interest at prime or aperformance-based LIBOR rate. Based on the terms of the First Amendment and theCompany’s performance for the twelve months ended September 27, 2008, theperformance based rate will be LIBOR plus 3% or Prime plus 1% for both the TermLoan and borrowings under the revolving credit facility. The Company was incompliance with the new covenants as of September 27, 2008 and expects toremain in compliance with the new covenants in future quarters.

 

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

 

Company Overview

 

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

 

The Heating and Cooling segment produces and sells gas-fired wallfurnaces, console heaters and fan coils from the Company’s wholly-ownedsubsidiary, Williams Furnace Co. of Colton, California. The Evaporative Coolingsegment produces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona. Concrete,Aggregates and Construction Supplies are offered from numerous locations alongthe Front Range of Colorado operated by the Company’s wholly-owned subsidiariesCastle Concrete Company and Transit Mix Concrete Co., of Colorado Springs,Transit Mix of Pueblo, Inc. of Pueblo and Rocky Mountain Ready MixConcrete, Inc. of Denver. Doors are fabricated and sold along with therelated hardware from Colorado Springs and Pueblo through the Company’swholly-owned subsidiary, McKinney Door and Hardware, Inc. of Pueblo,Colorado.

 

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

 

Liquidity and Capital Resources

 

Salesof the Company’s HVAC products, other than fan coils, are seasonal and weathersensitive. Revenues in the Company’s Concrete, Aggregates and ConstructionSupplies segment are influenced by the level of construction activity andweather conditions along the Front Range of Colorado. Sales for the Doorsegment are not generally seasonal nor are they affected significantly byweather conditions. Historically, the Company has experienced operating lossesduring the first quarter except when construction activity is strong along theFront Range of Colorado and the weather is mild. Operating results typicallyimprove in the second and third quarters reflecting more favorable weatherconditions in Colorado and the seasonal sales of the Evaporative Coolingsegment. Fourth quarter results can vary based on weather conditions inColorado as well as in the principal markets for the Company’s heatingequipment. The Company typically experiences operating cash flow deficitsduring the first half of the year reflecting operating results, the use ofsales dating programs (extended payment terms) related to the EvaporativeCooling segment and payments of the prior year’s accrued incentive bonuses andCompany profit-sharing contributions. As a result, the Company’s borrowingsagainst its revolving credit facility tend to peak during the second quarterand then decline over the remainder of the year. Neither the results of the2007 year nor the first nine months of 2008 have followed the historical trend.

 

TheCompany’s operations used $2,444,000 of cash during the first nine months of2008 compared to providing $418,000 of cash during the first nine months offiscal 2007. The increased use of cash in 2008 was due to the decline inoperating income and higher working capital levels. Receivables increased dueto slower paying customers who are extending payments during this slowereconomic time. Inventories increased due to higher costs of raw materials thelonger lead time required for imported raw materials and some timing ofpurchases.

 

9

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Duringthe nine months ended September 27, 2008, investing activities used$129,000 of cash compared to using $6,626,000 in the first nine months offiscal 2007. Capital expenditures were held to a minimum during the first ninemonths of 2008 due to the decline in sales and were primarily for routinereplacements of equipment and the completion of improvements to the buildingpurchased for the Door segment during 2007. The Concrete, Aggregates andConstruction Materials segment sold the assets of a small aggregate operation(Table Mountain), during the first quarter of 2008 for approximately $720,000(including the buyer’s assumption of just over $85,000 of liabilitiesassociated with the property) resulting in a pre-tax gain of about $344,000.Table Mountain did not provide aggregates to the Company’s ready-mix operationsand management did not consider it to be a strategic part of its business. Theproceeds from the sale of assets for 2007 included $230,000 received from the June saleof stock received from the demutualization of an insurance company thatprovides life insurance benefits to our employees.

 

Financing activities provided $1,167,000 during the first nine monthsof 2008 compared to $6,622,000 provided during the first nine months of 2007.Although the Company repaid $300,000 of the borrowings under the revolvingcredit facility during the third quarter of 2008, for the nine months ended September 27,2008 the Company borrowed $2,800,000 compared to the $8,700,000 borrowedagainst the revolving credit facility during the first nine months of 2007. Allscheduled debt repayments were made during the first nine months of both 2008and 2007. During the first nine months of 2008, the highest amount of Companyborrowings outstanding under the revolving credit agreement was $13,100,000 andthe average amount outstanding was $9,873,000.

 

TheCompany believes that anticipated cash flow from operations during the fourthquarter will be sufficient to accommodate the reduction in the revolving creditfacility at December 31, 2008. In addition, the Company believes thatanticipated cash flow from operations, supplemented by seasonal borrowingsagainst the revolving line of credit, (of which $10,700,000 was outstanding at September 27,2008) will be sufficient to cover expected cash needs, including servicing debtand planned capital expenditures for at least the next twelve months. Ourexisting revolving line of credit expires June 30, 2009, however we expectto be able to renew or extend the line either with our current lenders or withother financing sources beyond June 30, 2009.

 

Operations – Comparison of Quarter Ended September 27,2008 to Quarter Ended September 29, 2007

 

Historically, the Company has experienced improved operating resultsduring the third quarter as sales in the Concrete, Aggregates and ConstructionSupplies segment increase due to weather more conducive to constructionactivity. The 2008 operating results were consistent with this trend.

 

Consolidated sales during the third quarter of 2008 were $41,454,000compared to $42,288,000 in the third quarter of 2007. The Heating and Coolingand the Door segments both reported increased sales for the quarter while theConcrete, Aggregates and Construction Supplies segment and the EvaporativeCooling segment reported declines.

 

Cost of sales as a percentage of sales decreased from 86.8% to 84.9%largely due higher margins in the Heating and Cooling segment and theEvaporative Cooling segment although the margins of all of the segmentsimproved. Selling and administrative costs decreased $209,000 while also decliningas a percentage of sales from 10.4% to 10.1%. The decrease for the 2008 quarteras compared to the third quarter of 2007 was due to reductions made tocompensation accruals. Incentive compensation accruals were reduced asoperating results deteriorated in conjunction with the slowing economy. Thereduction in the cost of sales as a percentage of sales was the result of alower level of workers’ compensation claims and other cost reductions.Operating results thus improved from a loss of $65,000 in 2007 to income of$816,000 reported for the third quarter of 2008.

 

Interest expense increased only slightly from $341,000 for the thirdquarter of 2007 to $353,000 in the 2008 quarter despite higher averageborrowings, due to lower interest rates.

 

Adiscussion of operations by segment follows.

 

10

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**ConstructionProducts**

 

The table below presents a summary of operating information for the tworeportable segments within the Construction Products group for the quartersended September 27, 2008 and September 29, 2007 (dollar amounts inthousands):

 
| ** **                                    | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors**  | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------|------------|------------|------------|
| Quarter ended September 27, 2008         | ** ** | ** **                                                 | ** ** | ** ** | ** ** |
| Revenues from external customers              |       | $                                                          | 23,362     |       | $          | 4,562 |   |
| Segment operating income                      |       | 1,190                                                      |       | 648        |       |
| Operating income as a percent of sales        |       | 5.1                                                        | %          | 14.2       | %          |
| Segment assets as of September 27,  2008 |       | $                                                          | 53,000     |       | $          | 7,308 |   |
| Return on assets                              |       | 2.2                                                        | %          | 8.9        | %          |
|                                          |       |                                                       |       |       |       |
| Quarter ended September 29, 2007         |       |                                                       |       |       |       |
| Revenues from external customers              |       | $                                                          | 25,585     |       | $          | 4,284 |   |
| Segment operating income                      |       | 1,338                                                      |       | 460        |       |
| Operating income as a percent of sales        |       | 5.2                                                        | %          | 10.7       | %          |
| Segment assets as of September 29,  2007 |       | $                                                          | 58,280     |       | $          | 7,128 |   |
| Return on assets                              |       | 2.3                                                        | %          | 6.5        | %          |

 

Concrete,Aggregates and Construction Supplies Segment

 

Salesin the Concrete, Aggregates and Construction Supplies segment for the thirdquarter of 2008 declined 8.7% from the prior year’s comparable quarter. Allthree product lines of this segment reported lower sales volumes for thequarter ended September 27, 2008 compared to the third quarter of 2007 dueto the reduced construction activity along the Front Range of Colorado,especially housing construction. Profit margins for the segment improvedslightly primarily due to a reduction in workers’ compensation claims. Sellingprices declined slightly due to competitive pressures created by the reducedconstruction activity.

 

Sellingand administrative costs declined in line with the decrease in sales; howeverthey increased slightly as a percentage of sales between the two quarters dueto the fixed nature of some of the costs. Operating income for the thirdquarter of 2008 was $1,190,000 compared to $1,338,000 for the comparable 2007quarter primarily due to the reduced sales. Despite the reduction in sales,both operating income as a percent of sales and the return on assets declinedonly slightly due to the improved margins in the third quarter of 2008 comparedto the third quarter of 2007. Segment assets declined $5,280,000 from September 29,2007 to September 27, 2008 as depreciation outpaced capital expenditures.

 

DoorSegment

 

Doorsegment sales increased $278,000, or 6.5%, during the third quarter of 2008from the comparable 2007 quarter. Sales during a specific quarter can beheavily influenced by customer requests to either accelerate or delay shipmentsof jobs to better coincide with their own construction schedules. Sales arealso influenced by the level of construction activity but the effect isgenerally slower to appear as the products supplied by this segment, when soldfor new construction, are some of the last items installed on a project. Theincrease in sales during the third quarter of 2008, therefore, is morereflective of the timing of shipments as 2008 year-to-date sales are below thelevel achieved during the first nine months of 2007. In addition, biddingactivity has slowed and the backlog has declined approximately 27% from thelevel at the end of the third quarter of 2007 as result of the decline in newconstruction over the past two years. Margins improved principally due to theincreased sales volume and slightly lower material costs.

 

Sellingand administrative costs decreased approximately 3% during the 2008 quarter dueto reduced compensation accruals. Operating income increased from $460,000during the third quarter of 2007 to $648,000 for the 2008 quarter due to thehigher sales volume and lower material costs. As a result, both operatingincome as a percent of sales and return on assets increased in the thirdquarter of 2008 from the prior year’s quarter.

 

11

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**HVAC Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the quarters ended September 27,2008 and September 29, 2007 (dollar amounts in thousands):

 
| ** **                                    | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| 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                      | )%         |
|                                          |       |                          |       |                     |       |
| Quarter ended September 29, 2007         |       |                          |       |                     |       |
| Revenues from external customers              |       | $                             | 8,121      |                     | $          | 4,208 |   |
| Segment operating loss                        |       | (824                          | )          | (493                     | )          |
| Operating loss as a percent of sales          |       | (10.0                         | )%         | (11.7                    | )%         |
| Segment assets as of September 29,  2007 |       | $                             | 23,379     |                     | $          | 11,222 |   |
| Return on assets                              |       | (3.5                          | )%         | (4.4                     | )%         |

 

Heating and Cooling Segment

 

Sales in the Heating and Cooling segment were $9,530,000 for the thirdquarter of 2008, an increase of $1,409,000, or 17.4%, from the comparable 2007quarter. Fan coil volume accounted for almost all of the increase with salesrising nearly 37.7% from the prior year’s quarter. This increase was the resultof the continuing beneficial effect of the restructured sales representativenetwork which was completed in late 2005 and the introduction of configurationsoftware which aids customers in the design and selection of fan coils. Furnacevolume declined slightly although sales dollars were higher due to increasedprices in response to the rise in commodity prices, notably steel. Cost ofsales as a percentage of sales decreased during the third quarter of 2008 to90.8% from 93.6% for the comparable quarter of 2007 as pricing increases beganto catch up with the rise in commodity prices experienced over the course ofthis year.

 

Selling and administrative expenses were higher primarily due toincreased legal costs and commission expenses related to the fan coil linepartially offset by a reduction in incentive compensation accruals during thequarter. Despite the increase in selling and administrative expenses, theoperating loss for the 2008 quarter was reduced from $824,000 during the thirdquarter of 2007 to $595,000. As a result of the reduced loss, both operatingloss as a percent of sales and return on assets improved in the 2008 quarterfrom the prior year’s quarter.

 

Evaporative Cooling Segment

 

Sales in the Evaporative Cooling segment declined to $3,910,000, or7.1%, during the third quarter of 2008 from the comparable 2007 quarter. Unitsales for the 2008 quarter were lower by approximately 3.9% compared to the2007 quarter in what is usually a slow quarter. Cost of sales as a percentageof sales decreased during the third quarter of 2008 to 86.8% from 96.9% as anincrease in average selling prices combined with a reduction of some factoryoverhead costs, including workers compensation claims.

 

Selling and administrative costs declined in the third quarter of 2008as compared to the 2007 third quarter due to the lower sales and reductions toincentive compensation accruals during the 2008 quarter. The operating loss wasreduced to $71,000 compared to the $493,000 loss for the third quarter of 2007largely due to the improvement in cost of sales. As a result, both operatingincome as a percent of sales and return on assets improved in the 2008 quarterfrom the prior year’s quarter.

 

Operations - Comparison of Nine Months Ended September 27,2008 to Nine Months Ended September 29, 2007

 

Consolidated sales during the first nine months of 2008 were$117,727,000 compared to $128,018,000 during the first nine months of 2007. Thedecline was largely due to the decrease in the Concrete, Aggregates andConstruction Supplies segment although the Door and Evaporative Coolingsegments also experienced lower sales. The Heating and Cooling segment reportedincreased sales for the nine months ended September 27, 2008 compared tothe nine months ended September 29, 2007. Cost of sales as a percentage ofsales increased slightly from 84.2% for the first nine months of 2007 to 85.2%during the first nine months of 2008. The increased cost of sales ratio waslargely due to lower volume in the Concrete, Aggregates and Construction

 

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Supplies segment and the recovery of $725,000 from an insurance claimduring the second quarter of 2007 from our insurance carrier as settlement offlood claims that occurred during the third quarter of 2006. All expensesincurred to repair the damage and resume production had been recognized in costof sales as incurred. No recovery was anticipated or recorded prior to receiptof the settlement during the second quarter of 2007. Selling and administrativecosts decreased $476,000 during the nine months ended September 27, 2008primarily related to reductions to compensation accruals at all segments. Theabove factors resulted in an operating loss of $536,000 for the first ninemonths of 2008 compared to operating income of $1,445,000 reported for thefirst nine months of 2007. Other income for the first nine months of 2008includes a pre-tax gain of $344,000 related to the sale of the assets of asmall aggregate operation (Table Mountain), during the first quarter of 2008.Table Mountain did not provide aggregates to the Company’s ready-mix operationsand management did not consider it to be a strategic part of its business.Other income during 2007 included $230,000 received from the June sale ofstock received from the demutualization of an insurance company that provides lifeinsurance benefits to our employees.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

 

The table below presents a summary of operating information for the tworeportable segments within the Construction Products group for the nine monthsended September 27, 2008 and September 29, 2007 (dollar amounts inthousands):

 
| ** **                                    | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------|------------|-----------|------------|
| Nine Months ended September 27, 2008     |       |                                                       |       |      |       |
| Revenues from external customers              |       | $                                                          | 58,026     |      | $          | 12,187 |   |
| Segment operating income                      |       | 462                                                        |       | 1,434     |       |
| Operating income as a percent of sales        |       | .8                                                         | %          | 11.8      | %          |
| Segment assets as of September 27,  2008 |       | $                                                          | 53,000     |      | $          | 7,308 |   |
| Return on assets                              |       | .9                                                         | %          | 19.6      | %          |
|                                          |       |                                                       |       |      |       |
| Nine Months ended September 29, 2007     |       |                                                       |       |      |       |
| Revenues from external customers              |       | $                                                          | 71,110     |      | $          | 13,733 |   |
| Segment operating income                      |       | 3,656                                                      |       | 1,627     |       |
| Operating income as a percent of sales        |       | 5.1                                                        | %          | 11.8      | %          |
| Segment assets as of September 29,  2007 |       | $                                                          | 58,280     |      | $          | 7,128 |   |
| Return on assets                              |       | 6.3                                                        | %          | 22.8      | %          |

 

Concrete,Aggregates and Construction Supplies Segment

 

Salesin the Concrete, Aggregates and Construction Supplies segment for the firstnine months of 2008 decreased 18.4% from the comparable 2007 period. As withthe third quarter, all three product lines of this segment reported lower salesfor the first nine months of 2008 compared to the comparable 2007 period forthe reasons noted in the discussion of the third quarter’s results above.Similar to the results of the third quarter, margins declined due to thedecreased volume and the fixed nature of some of the costs in this segment.

 

Forthe first nine months of 2008, selling and administrative expenses were reducedby approximately 7.3% but increased as a percent of sales. Operating incomedeclined to $462,000 during the 2008 period from $3,656,000 during thecomparable 2007 period. The decline was due to the reduced sales volume andmargins for the concrete and aggregates lines. In addition, the 2007 ninemonths’ results were aided by the recovery of $725,000 from our insurance carrieras settlement of flood claims that occurred during the third quarter of 2006 asdiscussed above. As a result, both operating results as a percent of sales andreturn on assets declined for the nine months ended September 27, 2008compared to the nine months ended September 28, 2007.

 

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DoorSegment

 

Salesin the Door segment for the first nine months of 2008 decreased $1,546,000 fromthe comparable 2007 period due to the lower construction activity and thetiming of shipments as described in the above discussion for the currentquarter.

 

Operatingincome also declined from $1,627,000 during the first nine months of 2007 to$1,434,000 for the first nine months of 2008 due to lower sales volume. Lowermaterial costs were offset by expenses associated with the consolidation of theColorado Springs operations into the new facility and increased compensationcosts. As a result, operating income as a percent of sales remained virtuallyidentical for the nine months ended September 27, 2008 compared to thenine months ended September 29, 2007 while the return on assets declined.

 

**HVACProducts**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the nine months ended September 27,2008 and September 29, 2007 (dollar amounts in thousands):

 
| ** **                                     | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| 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                      | %          |
|                                           |       |                          |       |                     |       |
| Nine Months ended September 29, 2007      |       |                          |       |                     |       |
| Revenues from external customers               |       | $                             | 24,297     |                     | $          | 18,607 |   |
| Segment operating loss                         |       | (1,503                        | )          | (366                     | )          |
| Operating loss as a percent of sales           |       | (6.2                          | )%         | (2.0                     | )%         |
| Segment assets as of September 29,  2007  |       | $                             | 23,379     |                     | $          | 11,222 |   |
| Return on assets                               |       | (6.4                          | )%         | (3.3                     | )%         |

 

Heating and Cooling Segment

 

Sales in the Heating and Cooling segment increased $4,837,000, or19.9%, during the first nine months of 2008 over the comparable 2007 period. Aswith the quarter’s results above, fan coil volume was responsible for theincrease as furnace volume for the nine months trailed the 2007 period byapproximately 3.9% due to milder weather during the first quarter of 2008. Costof sales as a percentage of sales decreased slightly during the nine months of2008 to 86.8% from 86.5% for the comparable period of 2007 due to the reasonsnoted in the quarter’s discussion above.

 

Selling and administrative costs increased due to the reasons noted inthe quarter’s discussion above. The operating loss narrowed from $1,503,000during the first nine months of 2007 to a loss of $1,017,000 for the 2008period. As a result of the improved sales volume and related margins, bothoperating loss as a percent of sales and the return on assets improved for thefirst nine months of 2008 compared to the prior year’s period.

 

Evaporative Cooling Segment

 

Sales in the Evaporative Cooling segment declined $498,000, or 2.7%,during the first nine months of 2008 from the comparable 2007 period. Thedecrease in sales was due to lower third quarter sales and slow sales during March andApril resulting from milder weather during 2008 compared to 2007. Hotter,less humid weather arrived in May and June but it was too late toreach last year’s sales level. Cost of sales as a percentage of sales decreasedduring the nine months ended September 27, 2008 to 84.1% from 88.1% forthe 2007 period due to the reasons noted in the quarter’s discussion above aswell as improved labor efficiencies. Increased steel prices partially offsetthese gains.

 

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Selling and administrative expenses declined during the first ninemonths of 2008 both in dollars and as a percentage of sales compared to thecomparable 2007 period largely due to lower advertising and compensation costs.The segment reported operating income of $459,000 for the first nine months of2008 compared to a loss of $366,000 for the comparable 2007 period. Theimproved operating results were the result of improved cost of sales and thelower selling and administrative costs. As a result, both operating results asa percent of sales and return on assets increased in the first nine months of2008 from the prior year’s period.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The condensed consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States which require the Company to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of September 27,2008 and December 29, 2007 and affect the reported amounts of revenues andexpenses for the periods reported. Actual results could differ from thoseestimates.

 

Information with respect to the Company’scritical accounting policies which the Company believes could have the mostsignificant effect on the Company’s reported results and require subjective orcomplex judgments by management is contained in Item 7, Management’s Discussionand Analysis of Financial Condition and Results of Operations, of the Company’sAnnual Report on Form 10-K for the fiscal year ended December 29,2007.

 

OUTLOOK

 

The Concrete, Aggregates and Construction Supplies segment continues tobe adversely affected by the on-going decline in construction activity alongthe Front Range of Colorado. New residential construction which has droppedsharply is likely to remain weak throughout 2009. Historically, pricingcompetition has escalated in times of diminished demand which would furtheradversely affect this segment. Although fuel costs have recently declined,future prices remain unpredictable. The sales volume and pricing in the Doorsegment is also beginning to feel the effects of the construction slow-downwith both the backlog and bidding activity declining in recent months.

 

Financial challenges faced by a leading manufacturer of evaporativecoolers may present some opportunities for increased sales in the EvaporativeCooling segment during the forthcoming year. Weather will continue to be asignificant factor. Increased steel prices have negatively impacted margins;however, recently there have been modest decreases in steel prices.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

In September 2006, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 157, Fair ValueMeasurements. This statement defines fair value in generally acceptedaccounting principles and expands disclosures about fair value measurementsthat are required or permitted under other accounting pronouncements. Thisstatement was effective for financial statements issued for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears. The Company’s adoption of this statement had an immaterial impact on itsconsolidated financial position, results of operations and cash flows. TheCompany also adopted the deferral provisions of FASB Staff Position (FSP) FAS157-2, which delayed the effective date of SFAS No. 157 for allnonrecurring fair value measurements of non-financial assets and liabilitiesuntil fiscal years beginning after November 15, 2008.

 

In February 2007, the FASB issued SFAS No. 159, The FairValue Option for Financial Assets and Financial Liabilities. This statementpermits entities to choose to measure many financial instruments and certainother items at fair value. This statement was effective as of the beginning ofthe first fiscal year beginning after November 15, 2007. Upon the Company’sadoption of SFAS No. 159 it did not elect the fair value option for anyassets or liabilities. Therefore this statement had no impact on the Company’sconsolidated financial position, results of operations and cash flows.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133,”which requires enhanced disclosures for derivative and hedging activities. SFASNo. 161 becomes effective in the first quarter of 2009 and is not expectedto have any impact on the Company’s consolidated financial statements.

 

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In April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful Life ofIntangible Assets.” This FSP amendsthe factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder SFAS No. 142, “Goodwill andOther Intangible**Assets.” Theintent of this FSP is to improve the consistency between the useful life of arecognized intangible asset under SFAS No. 142 and the period of expectedcash flows used to measure the fair value of the asset under SFAS No. 141(Revised 2007), “Business Combinations”and other U.S. generally accepted accounting principles (GAAP). This FSPis effective for financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years. Early adoption isprohibited.  The Company is in theprocess of determining the impact of adopting this new accounting position onits consolidated financial position.

 

The Company discusses other recently issued accounting standards andtax law changes in the Critical Accounting Policies section under Item 7 and inNote 1 to Consolidated Financial Statements in Item 8 of the Company’s AnnualReport on Form 10-K for the fiscal year 2007. Other than as discussedabove and in those sections, the Company does not currently have anytransactions or circumstances that have been addressed by recently issuedaccounting pronouncements. Therefore, adoption of any of these statements orpronouncements would not have a material impact on the Company’s results ofoperations, financial position or liquidity.

 

MATERIAL CHANGES TO CONTRACTUAL OBLIGATIONS

 

On August 12, 2008, the Company entered into a First Amendment toAmended and Restated Revolving Credit and Term Loan Agreement as more fullydescribed in Note 8 above. The First Amendment was filed as Exhibit 10.1to the report dated August 12, 2008 filed on Form 10-Q for thequarter ended June 28, 2008.

 

FORWARD-LOOKING STATEMENTS

 

The foregoing discussion contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended. Suchforward-looking statements are based on the beliefs of the Company’s managementas well as on assumptions made by and information available to the Company atthe time such statements were made.  Whenused in this Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,”“expects,” “plans,” “projects,” and similar expressions are intended toidentify forward-looking statements. Actual results could differ materiallyfrom those projected in the forward-looking statements as a result of factorsincluding but not limited to: weather, interest rates, availability and cost ofraw materials, national and local economic conditions and competitive forces.Some of these factors are discussed in more detail in the Company’s 2007 AnnualReport on Form 10-K. Changes in accounting pronouncements could also alterprojected results. Forward-looking statements speak only as of the date theywere made, and the Company undertakes no obligation to publicly update them.

 

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

 

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

 

**Item 4.        Controls and Procedures**

 

(a)       Disclosure Controls and Procedures.

 

The Company’s ChiefExecutive Officer and Chief Financial Officer, with the participation ofmanagement, have evaluated the effectiveness of the Company’s “disclosurecontrols and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended) as of September 27, 2008.Based on that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were noteffective in that the Company does not have adequate controls over inventoryaccounting in its Heating and Cooling Segment to ensure that the inventory andrelated cost of sales of this segment are appropriately recorded. See below foradditional details regarding this matter which was deemed to be a weakness ininternal control over financial reporting.

 

(b)       Changes in Internal Control OverFinancial Reporting.

 

The Company implementedan Enterprise Resource Planning (ERP) system for the Heating and CoolingSegment at the end of the third quarter of 2007. The Company performed aphysical inventory for this segment at the end of October 2008 whichresulted in

 

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an adjustment todecrease the inventory balance and a corresponding charge to cost of sales asof the end of the third quarter of 2008. These adjustments to the Company’sfinancial statements have been reflected in the Company’s third quarter interimfinancial statements included in this report on Form 10-Q. Thedeficiencies in internal controls that lead to the material weakness primarilyrelate to inaccurate bills of materials associated with the production of theHeating and Cooling Segment’s products and insufficient cycle counting duringthe interim periods. These deficiencies are considered to be a materialweakness in internal control over financial reporting that existed as of theend of the third quarter of 2008. The Company performed additional analysis toassure that the Heating and Cooling Segment’s inventory was properly stated asof the end of the third quarter. The Company will also begin a process toimprove the internal control over financial reporting related to inventoryaccounting during the fourth quarter of 2008 to address this material weakness.If the process is not completed by year-end, management will perform additionalanalysis and other post-closing procedures to ensure that the Heating andCooling Segment’s inventory is accounted for properly in the Company’sconsolidated year-end financial statements. During the quarter ended September 27,2008, there were no other material weaknesses identified in our review ofinternal control and no significant changes in the Company’s internal controlover financial reporting occurred during the quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

PART II - OTHER INFORMATION

 

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

 

The following table presents information with respect to purchases madeby the Company of its common stock for the period June 29, 2008 through September 27,2008. No shares were purchased during the current quarter.

 
| **Issuer Purchases of Equity Securities** | ** ** |
|---------------------------------------------------------------|------------|
| **Period**                                                    | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid per  Share** | ** ** | **(c) Total Number of  Shares Purchased as Part  of Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Dollar  Value of Shares that May  Yet Be Purchased Under  the Plans or Programs** | ** ** |
| June 29 – July 26, 2008                        |       | — |   | $ | — |   | — |   | $ | 1,330,544 |   |
| July 27 – August 23, 2008                      |       | — |   | — |   | — |   | 1,330,544 |   |
| August 24 – September 27, 2008                 |       | — |   | — |   | — |   | 1,330,544 |   |
| Total                                                         |       | — |   | $ | — |   | — |   | $ | 1,330,544 |   |

 

On January 19, 1999, the Company initiated purchases under thecurrent open-ended program to repurchase its common stock. Purchases are madeon the open market or in block trades at the discretion of management. Thedollar amount authorized for the program has been periodically increased by theBoard of Directors and approved by the Company’s two banks as required by theCompany’s Revolving Credit and Term Loan Agreement. The First Amendment datedas of August 12, 2008 (see Note 8 above) continued the provision of theAmended and Restated Revolving Credit And Term Loan Agreement dated as of March 28,2008 that the Company may make purchases of its own stock in an amount not toexceed $1,438,000 if certain financial conditions are met. Since the 2005tender offer, management has not actively sought to repurchase shares.

 

**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

 

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

 

 
|   |                   |   |   | CONTINENTAL MATERIALS CORPORATION |
|--------|------------------------|--------|--------|-----------------------------------|
|   |                   |   |   |                              |
|   |                   |   |   |                              |
| Date:  | November 17, 2008 |   |   | By:                               | /s/ Joseph J. Sum |
|   |                   |   |   |                              | Joseph J. Sum, Vice President |
|   |                   |   |   |                              | and Chief Financial Officer |

 

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