** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

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

 

**For the quarterly period ended July 3, 2010**

 

**OR**

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

 

**For the transition period from             to             **

 

**Commission File number 1-3834**

 

**CONTINENTAL MATERIALS CORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                         | ** ** | **36-2274391**                       |
|----------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)       |       | (I.R.S. Employer Identification No.) |
|                                                                 |       |                                 |
| **200 South Wacker Drive, Suite 4000,  Chicago, Illinois** | ** ** | **60606**                            |
| (Address of principal executive offices)                             |       | (Zip Code)                           |

 

**(312) 541-7200**

(Registrant’s telephone number, includingarea code)

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classesof common stock, as of the latest practicable date: Common Stock, $0.25 parvalue, shares outstanding at July 27, 2010: 1,598,674.

 

 

 

----

 

PART I — FINANCIAL INFORMATION

 

**Item 1.   Financial Statements**

 

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

JULY 3, 2010 and JANUARY 2, 2010

(Unaudited)

(000’s omitted except share data)

 
| ** **                                                                            | ** ** | **JULY 3,** | ** ** | **JANUARY 2,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|
| ** **                                                                            | ** ** | **2010**         | ** ** | **2010**            | ** ** |
| ***ASSETS***                                                                          | ** ** | ** **       | ** ** | ** **          | ** ** |
| Current assets:                                                                       |       |             |       |                |       |
| Cash and cash equivalents                                                             |       | $                | 976        |                | $          | 681 |   |
| Receivables, net                                                                      |       | 19,248           |       | 17,001              |       |
| Receivable for insured losses                                                         |       | 637              |       | 684                 |       |
| Inventories:                                                                          |       |             |       |                |       |
| Finished goods                                                                        |       | 7,474            |       | 6,898               |       |
| Work in process                                                                       |       | 870              |       | 763                 |       |
| Raw materials and supplies                                                            |       | 7,950            |       | 8,634               |       |
| Refundable income taxes                                                               |       | 1,198            |       | 1,012               |       |
| Deferred income taxes                                                                 |       | 2,973            |       | 3,116               |       |
| Prepaid expenses                                                                      |       | 1,798            |       | 1,582               |       |
| Total current assets                                                                  |       | 43,124           |       | 40,371              |       |
|                                                                                  |       |             |       |                |       |
| Property, plant and equipment, net                                                    |       | 25,417           |       | 27,092              |       |
|                                                                                  |       |             |       |                |       |
| Goodwill                                                                              |       | 7,229            |       | 7,229               |       |
| Amortizable intangible assets, net                                                    |       | 411              |       | 479                 |       |
| Cash deposits with insurance carriers                                                 |       | 4,840            |       | 4,840               |       |
| Other assets                                                                          |       | 2,335            |       | 2,101               |       |
|                                                                                  |       |             |       |                |       |
|                                                                                  |       | $                | 83,356     |                | $          | 82,112 |   |
|                                                                                  |       |             |       |                |       |
| ***LIABILITIES***                                                                     |       |             |       |                |       |
| Currentliabilities:                                                                   |       |             |       |                |       |
| Current portion of long-term debt                                                     |       | $                | 1,625      |                | $          | 1,375 |   |
| Accounts payable and accrued expenses                                                 |       | 13,962           |       | 12,131              |       |
| Liability for unpaid claims covered by insurance                                      |       | 637              |       | 684                 |       |
| Total current liabilities                                                             |       | 16,224           |       | 14,190              |       |
|                                                                                  |       |             |       |                |       |
| Revolving bank loan payable                                                           |       | 7,000            |       | 5,850               |       |
| Long-term debt                                                                        |       | 4,900            |       | 5,775               |       |
| Deferred income taxes                                                                 |       | 3,098            |       | 3,243               |       |
| Other long-term liabilities                                                           |       | 1,913            |       | 1,868               |       |
|                                                                                  |       |             |       |                |       |
| ***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                                                                     |       | 64,363           |       | 65,328              |       |
| Treasury shares, 975,590, at cost                                                     |       | (16,615          | )          | (16,615             | )          |
|                                                                                  |       | 50,221           |       | 51,186              |       |
|                                                                                  |       |             |       |                |       |
|                                                                                  |       | $                | 83,356     |                | $          | 82,112 |   |

 

Seenotes to condensed consolidated financial statements.

 

2

----

 

CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FORTHE THREE MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009

(Unaudited)

(000’somitted except per-share amounts)

 
| ** **                                                                   | ** ** | **JULY 3,** | ** ** | **JULY 4,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **2010**         | ** ** | **2009**         | ** ** |
|                                                                         |       |             |       |             |       |
| Net sales                                                                    |       | $                | 31,750     |             | $          | 28,547 |   |
|                                                                         |       |             |       |             |       |
| Costs and expenses:                                                          |       |             |       |             |       |
| Cost of sales (exclusive of depreciation, depletion  and amortization)       |       | 24,114           |       | 22,152           |       |
| Depreciation, depletion and amortization                                     |       | 1,161            |       | 1,227            |       |
| Selling and administrative                                                   |       | 4,978            |       | 5,044            |       |
|                                                                         |       |             |       |             |       |
| Gain on disposition of property and equipment                                |       | —           |       | 2,066            |       |
|                                                                         |       | 30,253           |       | 26,357           |       |
|                                                                         |       |             |       |             |       |
| Operating income                                                             |       | 1,497            |       | 2,190            |       |
|                                                                         |       |             |       |             |       |
| Interest expense, net                                                        |       | (245             | )          | (382             | )          |
| Other income, net                                                            |       | 13               |       | 5                |       |
|                                                                         |       |             |       |             |       |
| Income from continuing operations before income  taxes                       |       | 1,265            |       | 1,813            |       |
|                                                                         |       |             |       |             |       |
| Provision for income taxes                                                   |       | 700              |       | 635              |       |
|                                                                         |       |             |       |             |       |
| Net income from continuing operations                                        |       | 565              |       | 1,178            |       |
|                                                                         |       |             |       |             |       |
| Loss from discontinued operation net of income tax  benefit of $7 and $1,117 |       | (72              | )          | (38              | )          |
|                                                                         |       |             |       |             |       |
| Net income                                                                   |       | 493              |       | 1,140            |       |
|                                                                         |       |             |       |             |       |
| Retained earnings, beginning of period                                       |       | 63,870           |       | 66,280           |       |
| ** **                                                                   | ** ** | ** **       | ** ** | ** **       | ** ** |
| Retained earnings, end of period                                             |       | $                | 64,363     |             | $          | 67,420 |   |
|                                                                         |       |             |       |             |       |
| Net income (loss) per basic and diluted share:                               |       |             |       |             |       |
| Continuing operations                                                        |       | $                | .35        |             | $          | .74 |   |
| Discontinued operation                                                       |       | (.04             | )          | (.03             | )          |
| Net income per basic and diluted share                                       |       | .31              |       | .71              |       |
|                                                                         |       |             |       |             |       |
| Average shares outstanding                                                   |       | 1,599            |       | 1,599            |       |

 

Seenotes to condensed consolidated financial statements

 

3

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FORTHE SIX MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009

(Unaudited)

(000’somitted except per-share amounts)

 
| ** **                                                                    | ** ** | **JULY 3,** | ** ** | **JULY 4,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                    | ** ** | **2010**         | ** ** | **2009**         | ** ** |
|                                                                          |       |             |       |             |       |
| Net sales                                                                     |       | $                | 55,391     |             | $          | 59,170 |   |
|                                                                          |       |             |       |             |       |
| Costs and expenses:                                                           |       |             |       |             |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization)        |       | 43,863           |       | 46,535           |       |
| Depreciation, depletion and amortization                                      |       | 2,265            |       | 2,346            |       |
| Selling and administrative                                                    |       | 9,876            |       | 10,193           |       |
|                                                                          |       |             |       |             |       |
| Gain on disposition of property and equipment                                 |       | 70               |       | 2,123            |       |
|                                                                          |       | 55,934           |       | 56,951           |       |
|                                                                          |       |             |       |             |       |
| Operating (loss) income                                                       |       | (543             | )          | 2,219            |       |
|                                                                          |       |             |       |             |       |
| Interest expense, net                                                         |       | (525             | )          | (535             | )          |
| Other income, net                                                             |       | 24               |       | 17               |       |
|                                                                          |       |             |       |             |       |
| (Loss) income from continuing operations before  income taxes                 |       | (1,044           | )          | 1,701            |       |
|                                                                          |       |             |       |             |       |
| (Benefit) provision for income taxes                                          |       | (167             | )          | 602              |       |
|                                                                          |       |             |       |             |       |
| Net (loss) income from continuing operations                                  |       | (877             | )          | 1,099            |       |
|                                                                          |       |             |       |             |       |
| Loss from discontinued operation net of income tax  benefit of $17 and $1,250 |       | (88              | )          | (449             | )          |
|                                                                          |       |             |       |             |       |
| Net (loss) income                                                             |       | (965             | )          | 650              |       |
|                                                                          |       |             |       |             |       |
| Retained earnings, beginning of period                                        |       | 65,328           |       | 66,770           |       |
|                                                                          |       |             |       |             |       |
| Retained earnings, end of period                                              |       | $                | 64,363     |             | $          | 67,420 |   |
|                                                                          |       |             |       |             |       |
| Net income (loss) per basic and diluted share:                                |       |             |       |             |       |
| Continuing operations                                                         |       | $                | (.55       | )                | $          | .69 |   |
| Discontinued operation                                                        |       | (.05             | )          | (.28             | )          |
| Net income (loss) per basic and diluted share                                 |       | (.60             | )          | .41              |       |
|                                                                          |       |             |       |             |       |
| Average shares outstanding                                                    |       | 1,599            |       | 1,599            |       |

 

Seenotes to condensed consolidated financial statements

 

4

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

FORTHE SIX MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009

(Unaudited)

(000’somitted)

 
| ** **                                                                 | ** ** | **JULY 3,  2010** | ** ** | **JULY 4,  2009** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
|                                                                       |       |                   |       |                   |       |
| Net cash provided by operating activities                                  |       | $                      | 222        |                   | $          | 887 |   |
|                                                                       |       |                   |       |                   |       |
| Investing activities:                                                      |       |                   |       |                   |       |
| Capital expenditures                                                       |       | (545                   | )          | (1,117                 | )          |
| Proceeds from sale of assets                                               |       | 93                     |       | 97                     |       |
| Net cash used in investing activities                                      |       | (452                   | )          | (1,020                 | )          |
|                                                                       |       |                   |       |                   |       |
| Financing activities:                                                      |       |                   |       |                   |       |
| Repayment of refinanced revolving credit facility                          |       | —                 |       | (6,400                 | )          |
| Payment of deferred financing fees related to new  credit facility         |       | —                 |       | (589                   | )          |
| Borrowings under revolving credit facility                                 |       | 1,150                  |       | 7,550                  |       |
| Repayment of refinanced long-term debt                                     |       | —                 |       | (10,771                | )          |
| Borrowings under new long-term debt                                        |       | —                 |       | 10,000                 |       |
| Repayment of new long-term debt                                            |       | (625                   | )          | (250                   | )          |
| Net cash provided by (used in) financing  activities                       |       | 525                    |       | (460                   | )          |
|                                                                       |       |                   |       |                   |       |
| Net increase (decrease) in cash and cash  equivalents                      |       | 295                    |       | (593                   | )          |
| Cash and cash equivalents:                                                 |       |                   |       |                   |       |
| Beginning of period                                                        |       | 681                    |       | 1,097                  |       |
|                                                                       |       |                   |       |                   |       |
| End of period                                                              |       | $                      | 976        |                   | $          | 504 |   |
|                                                                       |       |                   |       |                   |       |
| Supplemental disclosures of cash flow items:                               |       |                   |       |                   |       |
| Cash paid during the six months for:                                       |       |                   |       |                   |       |
| Interest                                                                   |       | $                      | 476        |                   | $          | 553 |   |
| Payment (refund) of income taxes                                           |       | 2                      |       | (342                   | )          |
| Supplemental disclosures of noncash investing and  financing activities    |       |                   |       |                   |       |
| Cash from sale of land in Colorado Springs  received in subsequent quarter |       | $                      | —     |                   | $          | 2,026 |   |
| Capital expenditures purchased on account                                  |       | —                 |       | 60                     |       |

 

Seenotes to condensed consolidated financial statements

 

5

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CONTINENTALMATERIALS CORPORATION

SECURITIESAND EXCHANGE COMMISSION FORM 10-Q

NOTESTO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTERENDED JULY 3, 2010

(Unaudited)

 

1.              The unauditedinterim condensed consolidated financial statements included herein areprepared pursuant to the Securities and Exchange Commission rules andregulations for reporting on Form 10-Q. Accordingly, certain informationand footnote disclosures normally accompanying the annual consolidatedfinancial statements have been omitted. The interim condensed consolidatedbalance sheet of the Company as of January 2, 2010 has been derived fromthe audited consolidated balance sheet of the Company as of that date. Theinterim condensed consolidated financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s latest annual report on Form 10-K. In theopinion of management, the condensed consolidated financial statements includeall adjustments (none of which were other than normal recurring adjustments)necessary for a fair statement of the results for the interim periods. On July 17,2009, the Company completed the sale of all of the outstanding capital stock ofRocky Mountain Ready Mix (RMRM), a Colorado corporation to Campbells C-MentContracting, Inc., a Colorado corporation. RMRM operated a ready mixconcrete business in the Denver metropolitan area and had been included in theConstruction, Aggregates and Construction Supplies (CACS) reporting segment.The operations of RMRM were classified as discontinued operations for the 2009periods presented. Certain prior year’s amounts have been reclassified toconform to the current presentation.

 

2.              Income taxesare accounted for under the asset and liability method that requires deferredincome taxes to reflect the future tax consequences attributable to differencesbetween the tax and financial reporting bases of assets and liabilities.Deferred tax assets and liabilities recognized are based on the tax rates ineffect in the year in which differences are expected to reverse. Deferred taxassets are reduced by a valuation allowance when, based on available positiveand negative evidence, it is “more likely than not” (greater than a 50% likelihood)that some or all of the net deferred tax assets will not be realized.

 

Ourincome tax returns are subject to audit by the Internal Revenue Service (IRS)and state tax authorities. The amounts recorded for income taxes reflect ourtax positions based on research and interpretations of complex laws andregulations. We accrue liabilities related to uncertain tax positions taken orexpected to be taken in a tax returns. The Company has established a valuationreserve related to the carry forward of all charitable contributions deductionsarising from prior years and the portion of contributions in 2010 that theCompany believes it will be unable to utilize prior to the expiration of theircarry forward periods. At January 2, 2010, the Company also established avaluation reserve of $1,721,000 related to the carry forward of the long-termcapital loss related to the sale of the stock of RMRM due to the uncertaintythat the Company will be able to generate offsetable long-term capital gainsprior to the expiration of the carry forward period. For Federal purposes, netoperating losses can be carried forward for a period of 20 years whilealternative minimum tax credits can be carried forward indefinitely. For Statepurposes, net operating losses can be carried forward for periods ranging from5 to 20 years for the states in which the Company is required to file.

 

TheInternal Revenue Service has completed examinations for periods through2007.  Various state income tax returnsalso remain subject to examination.

 

3.              Although theFinancial Accounting Standards Board has issued a number of new accountingstandards since the end of the first quarter of 2010, the Company does not haveany significant instances of the situations or accounting concerns addressed bythese new pronouncements.

 

4.              Operating results for thefirst six months of 2010 are not necessarily indicative of performance for theentire year due to the seasonality of most of our products. Historically, salesof the Evaporative Cooling segment are higher in the first and second quarters,sales of the CACS segment are higher in the second and third quarters and salesof the Heating and Cooling segment are higher in the third and fourth quarters.The sales of the Door segment are more evenly spread throughout the year. Theeconomic recession that began in the latter part of 2008 has had a significantdetrimental effect on the construction industry in general and on ourconstruction related businesses in particular in 2009 and 2010 and is expectedto continue to do so for the remainder of 2010.

 

5.              There is no difference inthe calculation of basic and diluted earnings per share (EPS) for thethree-month or six-month periods ended July 3, 2010 and July 4, 2009as the Company does not have any dilutive instruments.

 

6.              The Companyoperates primarily in two industry groups, Heating, Ventilation and AirConditioning (HVAC) and Construction Products. Within each of these twoindustry groups, the Company has identified two reportable segments: theHeating and 

 

6

----

 

Coolingsegment and the Evaporative Cooling segment in the HVAC industry group and theConcrete, Aggregates and Construction Supplies segment and the Door segment inthe Construction Products industry group.

 

TheHeating and Cooling segment produces and sells gas-fired wall furnaces, consoleheaters and fan coils from the Company’s wholly-owned subsidiary, WilliamsFurnace Co. of Colton, California (WFC). The Evaporative Cooling segmentproduces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona (PMI). Salesof these two segments are nationwide, but are concentrated in the southwesternUnited States. Concrete, Aggregates and Construction Supplies are offered fromnumerous locations along the Southern Front Range of Colorado operated by theCompany’s wholly-owned subsidiaries collectively referred to as Transit MixConcrete Co. (TMC). RMRM of Denver, formerly included in this segment, was soldon July 17, 2009 and is classified as discontinued operation (see Note 9).Doors are fabricated and sold along with the related hardware from ColoradoSprings and Pueblo through the Company’s wholly-owned subsidiary, McKinney Doorand Hardware, Inc. of Pueblo, Colorado (MDHI). Sales of these two segmentsare highly concentrated in the Southern Front Range area in Colorado althoughdoor sales are also made throughout the United States.

 

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

 

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

 

Thefollowing table presents information about reported segments for thethree-month and six-month periods ended July 3, 2010 and July 4, 2009along 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** | ** ** |
| 2010                                      |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Six  Months ended July 3, 2010       |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Net  sales to external customers          |       | $                                                            | 18,517     |               | $          | 6,740                                |       | $                         | 25,257     |                     | $          | 15,901 |   | $ | 14,054 |   | $ | 29,955 |   | $ | 7 |   | $ | 172 |   | $ | 55,391 |   |
| Depreciation,  depletion and amortization |       | 1,735                                                        |       | 72                 |       | 1,807                                |       | 196                       |       | 230                      |       | 426 |   | 32 |   | — |   | 2,265 |   |
| Operating  (loss) income                  |       | (985                                                         | )          | 524                |       | (461                                 | )          | (387                      | )          | 1,600                    |       | 1,213 |   | (1,349 | ) | 54 |   | (543 | ) |
| Segment  assets                           |       | 39,134                                                       |       | 6,006              |       | 45,140                               |       | 16,506                    |       | 13,175                   |       | 29,681 |   | 8,472 |   | 63 |   | 83,356 |   |
| Capital  expenditures (b)                 |       | 384                                                          |       | 9                  |       | 393                                  |       | 122                       |       | 30                       |       | 152 |   | — |   | — |   | 545 |   |
| Quarter  ended July 3, 2010          |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Net  sales to external customers          |       | $                                                            | 11,789     |               | $          | 3,112                                |       | $                         | 14,901     |                     | $          | 7,081 |   | $ | 9,678 |   | $ | 16,759 |   | $ | 4 |   | $ | 86 |   | $ | 31,750 |   |
| Depreciation,  depletion and amortization |       | 894                                                          |       | 38                 |       | 932                                  |       | 98                        |       | 115                      |       | 213 |   | 16 |   | — |   | 1,161 |   |
| Operating  (loss) income                  |       | 628                                                          |       | 180                |       | 808                                  |       | (84                       | )          | 1,450                    |       | 1,366 |   | (704 | ) | 27 |   | 1,497 |   |
| Segment  assets                           |       | 39,134                                                       |       | 6,006              |       | 45,140                               |       | 16,506                    |       | 13,175                   |       | 29,681 |   | 8,472 |   | 63 |   | 83,356 |   |
| Capital  expenditures (b)                 |       | 379                                                          |       | 9                  |       | 388                                  |       | 91                        |       | 25                       |       | 116 |   | — |   | — |   | 504 |   |

 
| ** **                                | ** ** | **Construction  Products**                                   | ** ** | **HVAC  Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**          | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2009                                      |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Six  Months ended July 4, 2009       |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Net  sales to external customers          |       | $                                                            | 18,030     |               | $          | 8,585                                |       | $                         | 26,615     |                     | $          | 15,015 |   | $ | 17,359 |   | $ | 32,374 |   | $ | 9 |   | $ | 172 |   | $ | 59,170 |   |
| Depreciation,  depletion and amortization |       | 1,777                                                        |       | 84                 |       | 1,861                                |       | 198                       |       | 250                      |       | 448 |   | 37 |   | — |   | 2,346 |   |
| Operating  (loss) income (a)              |       | (1,671                                                       | )          | 978                |       | (693                                 | )          | (133                      | )          | 2,535                    |       | 2,402 |   | 456 |   | 54 |   | 2,219 |   |
| Segment  assets (c)                       |       | 36,007                                                       |       | 6,509              |       | 42,516                               |       | 17,101                    |       | 13,141                   |       | 30,242 |   | 9,291 |   | 63 |   | 82,112 |   |
| Capital  expenditures (b)                 |       | 1,001                                                        |       | 3                  |       | 1,004                                |       | —                    |       | 84                       |       | 84 |   | 29 |   | — |   | 1,117 |   |
| Quarter  ended July 4, 2009          |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Net  sales to external customers          |       | $                                                            | 9,142      |               | $          | 3,862                                |       | $                         | 13,004     |                     | $          | 5,404 |   | $ | 10,050 |   | $ | 15,454 |   | $ | 3 |   | $ | 86 |   | $ | 28,547 |   |
| Depreciation,  depletion and amortization |       | 939                                                          |       | 42                 |       | 981                                  |       | 103                       |       | 125                      |       | 228 |   | 18 |   | — |   | 1,227 |   |
| Operating  (loss) income (a)              |       | (359                                                         | )          | 368                |       | 9                                    |       | (570                      | )          | 1,500                    |       | 930 |   | 1,224 |   | 27 |   | 2,190 |   |
| Segment  assets (c)                       |       | 36,007                                                       |       | 6,509              |       | 42,516                               |       | 17,101                    |       | 13,141                   |       | 30,242 |   | 9,291 |   | 63 |   | 82,112 |   |
| Capital  expenditures (b)                 |       | 313                                                          |       | 3                  |       | 316                                  |       | —                    |       | 27                       |       | 27 |   | — |   | — |   | 343 |   |

 

7

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(a)         Included in the 2009Unallocated Corporate operating amount is a gain of $2,026,000 on the sale ofland in Colorado Springs. The Company received the cash during the thirdquarter.

(b)         Capital expenditures arepresented on the accrual basis of accounting.

(c)          Segment assets are as ofJanuary 2, 2010.

 

There are no differences in the basis of segmentation or in the basisof measurement of segment profit or loss from the last Annual Report onForm 10-K.

 

7.              Identifiable intangibleassets as of July 3, 2010 include a non-compete agreement, a restrictiveland covenant and the customer relationships related to purchase of the assetsof ASCI in 2006. Collectively, these assets were carried at $411,000, net of$599,000 accumulated amortization. The pre-tax amortization expense forintangible assets during the quarter ended July 3, 2010 was $34,000compared to $42,000 for the quarter ended July 4, 2009 and $68,000 and$85,000 for the six months ended July 3, 2010 and July 4, 2009,respectively (including the final $25,000 of amortization of a non-competeagreement related to the Door segment). Based upon the intangible assetsrecorded on the balance sheet at July 3, 2010, amortization expense forthe next five years is estimated to be as follows: 2010 — $137,000; 2011 —$101,000; 2012 — $65,000; 2013 — $58,000 and 2014 — $52,000.

 

Asof July 3, 2010 the recorded goodwill of $7,229,000 consisted of$6,229,000 related to the CACS segment and $1,000,000 related to the Doorsegment. Goodwill is not amortized but rather assessed for impairment as of theend of each fiscal year. To the extent that events occur during the year,either involving the relevant Company subsidiaries or their industries, the Companyrevisits its assessment of the recorded goodwill to determine if impairment hasoccurred and should be immediately recognized.

 

8.              As of theperiod ended January 2, 2010 the Company was not in compliance with theminimum adjusted EBITDA and fixed charge coverage covenants of the CreditAgreement. As a result, effective January 1, 2010 the default rateprovision of the Credit Agreement increased the interest rate on alloutstanding revolving and long-term debt by 2%. Non-compliance with the financialcovenants in the Credit Agreement constitutes an event of default under theagreement. Upon the occurrence of an event of default, the lenders may, amongother things, terminate their lending commitments, in whole or in part, declareall or any part of the Company’s borrowings to be due and payable, and/orrequire the Company to collateralize with cash any or all letters of creditprovided by the lender. A waiver of the event of default relating to compliancewith the minimum adjusted EBITDA and fixed charge coverage covenants wasgranted and a second amendment to the Credit Agreement was entered into onApril 15, 2010. The second amendment provides for the following:

 

·                  The covenants regarding the fixed chargecoverage and the maximum leverage ratio was eliminated for the duration of theamended Credit Agreement.

·                  The Company must maintain a minimum tangiblenet worth of $32,000,000 provided that the required amount of tangible networth shall increase (but not decrease) each fiscal year, commencing with fiscalyear 2010, by an amount equal to fifty percent of the consolidated net incomefor the immediately preceding fiscal year.

·                  Capital expenditures for the trailing twelvemonths may not exceed $3,500,000.

·                  The maximum credit available under therevolving credit facility line will remain at $15,000,000 until October 1,2010 when it will be reduced to $13,500,000.

·                  The maturity date of the credit facility isAugust 1, 2011.

·                  The interest rate for the remaining term ofthe amended Credit Agreement will be 4.0% over LIBOR but with a LIBOR floor of2.0% (the Company’s effective LIBOR borrowing rate is currently 6.0%). Themargin on the “base” or prime rate option will be the base plus 1.75% with abase rate floor of 4% (the Company’s current effective borrowing rate is5.75%).

·                  The interest rate swap transaction willremain in effect.

 

TheCredit Agreement as amended on April 15, 2010 requires the Company tomaintain certain financial covenants as disclosed in the table below (amountsin thousands):

 
| **Financial Covenant**                                | ** ** | **Date Required**                                                        | ** ** | **Required  Amount** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------|------------|
| Minimum tangible  net worth                           |       | Beginning with the end of the second  quarter of 2010                    |       | $                    | 32,000     |   |
| Minimum adjusted  quarterly EBITDA                    |       | Quarter ended July 3, 2010                                          |       | 2,100                |       |
|                                                  |       | Quarter ended October 2, 2010                                       |       | 2,000                |       |
|                                                  |       | Quarter ended January 1, 2011                                       |       | 500                  |       |
|                                                  |       | Quarter ended April 2, 2011                                         |       | (600                 | )          |
|                                                  |       | Quarter ended July 2, 2011                                          |       | 2,100                |       |
| Maximum capital  expenditures (rolling twelve months) |       | Trailing 12 months beginning with the  end of the second quarter of 2010 |       | $                    | < 3,500 |   |

 

8

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Definitionsunder the Credit Agreement as amended are as follows:

 

·                  Tangible net worth is defined as net worthplus subordinated debt minus intangible assets (goodwill, intellectualproperty, prepaid expenses and deferred charges) minus all obligations owed tothe Company or any of its subsidiaries by any affiliate or any or itssubsidiaries and minus all loans owed by its officers, stockholders,subsidiaries or employees (Note: there are no loans owed by any of thereferenced parties at January 2, 2010 or as of the date of this filing).

·                  The adjusted EBITDA is defined as net incomeplus interest, income taxes, depreciation, depletion and amortization plusother non-cash charges approved by the lender.

 

TheCompany was in compliance with all covenants as of July 3, 2010 reportingtangible net worth of $36,514,000 and adjusted quarterly EBITDA, as defined, of$2,573,000. The Company expects to be in compliance with all debt covenants, asamended, during the next twelve months. The Company also believes that itsexisting cash balance, anticipated cash flow from operations and borrowingsavailable under the Credit Agreement, will be sufficient to cover expected cashneeds, including servicing debt and planned capital expenditures for the nexttwelve months.

 

The amount classified as current for the term loan under the CreditAgreement is $1,625,000 which includes the scheduled quarterly repayments dueduring the next four quarters.

 

9.              On July 17,2009, the Company completed the sale of all of the outstanding capital stock ofRMRM, a Colorado corporation to Campbell C-Ment Contracting, Inc., aColorado corporation. RMRM operated a ready mix concrete business in the Denvermetropolitan area and had been included in the CACS reporting segment.

 

Thenet sales, pretax loss and net loss from RMRM is reported as discontinuedoperations for the six and three month fiscal periods ended July 4, 2009,and is summarized as follows (amounts in thousands):

 
| ** **                                    | ** ** | **Six Months Ended**  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **July 4, 2009** | ** ** | **July 4, 2009**  | ** ** |
| Net sales                                     |       | $                     | 3,527      |                   | $          | 1,706 |   |
| Loss from operations                          |       | (1,052                | )          | (508                   | )          |
| Loss on disposal and impairment of net assets |       | (647                  | )          | (647                   | )          |
| Pre-tax loss                                  |       | (1,699                | )          | (1,155                 | )          |
| Income tax benefit                            |       | 1,250                 |       | 1,117                  |       |
| Loss from discontinued operation              |       | $                     | (449       | )                      | $          | (38 | ) |

 

Theloss from discontinued operations recorded during the six and three monthfiscal periods ended July 3, 2010 consists of adjustments to liabilitiesretained by the Company, primarily the reserve for workers compensation.

 

10.       The Company is involved in litigation mattersrelated to its continuing business, principally product liability mattersrelated to the gas-fired heating products in the Heating and Cooling segment.In the Company’s opinion, none of these proceedings, when concluded, will havea material adverse effect on the Company’s consolidated results of operationsof financial condition as the Company has established adequate accruals forknown occurrences which represent management’s best estimate of the futureliability related to these claims up to the associated deductible.

 

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

 

Company Overview

 

SeeNote 6 for an overview of the Company.

 

Liquidity and Capital Resources

 

9

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Asnoted above, various factors affect the sales of the Company’s products.Historically, the Company has experienced operating losses during the firstquarter except when construction activity is strong along the Front Range ofColorado and the weather is mild. Operating results typically improve in thesecond and third quarters reflecting more favorable weather conditions inColorado and the seasonal sales of the Evaporative Cooling segment however; theCompany expects construction activity along the Front Range will remain weakfor the balance of 2010.

 

Fourthquarter results can vary based on weather conditions in Colorado as well as inthe principal markets for the Company’s heating equipment. The Companytypically experiences operating cash flow deficits during the first half of theyear reflecting operating results, the use of sales dating programs (extendedpayment terms) related to the Evaporative Cooling segment and payments of theprior year’s accrued incentive bonuses and Company profit-sharingcontributions, if any. As a result, the Company’s borrowings against itsrevolving credit facility tend to peak during the second quarter and thendecline over the remainder of the year. This trend has continued thus far in2010.

 

Cashprovided by operations was $222,000 during the first six months of 2010compared to the $887,000 of cash provided during the first six months of 2009.The Company’s operating cash flow during the first six months of 2010 waspositive despite the operating loss primarily due to an increase in accountspayable and accrued expenses. Operating cash flow during the first six monthsof 2009 was primarily due to a decrease in receivables, largely due to weaksales in the Concrete, Aggregates and Construction Materials segment and theHeating and Cooling segment and a reduction of inventory partially offset by adecrease in accounts payable and accrued expenses, primarily related to thereduction in inventory in the Heating and Cooling segment. Also largelyoffsetting the strong cash flow generated by the changes in working capital wasthe Company’s need to fund $4,840,000 of deposits with our insurance carriersin lieu of previously issued letters of credit.

 

Duringthe six months ended July 3, 2010, investing activities used $452,000 ofcash compared to the $1,020,000 of cash used in the prior year’s period.Capital expenditures during the first six months of 2010 were curtailed due tothe lower sales volume while the CACS segment incurred almost $700,000 fordevelopment activities on the Pueblo East aggregates site during the 2009period.

 

Financingactivities during the first six months of 2010 provided $525,000 as the Companyborrowed against its revolving line of credit to fund the sales dating programsrelated to the Evaporative Cooling segment. Financing activities used $460,000of cash during the first six months of 2009 primarily due to the refinancing ofthe Company’s term and revolving credit facility during the 2009 second quarterincluding $589,000 in deferred financing fees, see Note 8. All scheduled debtrepayments were made during the first six months of both 2010 and 2009. Duringthe first six months of 2010, the highest amount of Company borrowingsoutstanding under the revolving credit agreement was $9,100,000 and the averageamount outstanding was $6,531,000.

 

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

 

Results of Operations - Comparison of Quarter Ended July 3, 2010to Quarter Ended July 4, 2009

 

(Inthe ensuing discussions of the results of operations the term gross profitmeans the amount determined by deducting cost of sales before depreciation,depletion and amortization from sales. The gross profit ratio is gross profitdivided by sales.)

 

Consolidatedsales in the second quarter of 2010 were $31,750,000 or $3,203,000 (11.2%) morethan sales from continuing operations in the second quarter of 2009. Salesresults at the Company’s business segments were mixed. Sales in the CACSsegment and the Heating and Cooling segments were higher in 2010 compared tothe prior year. Sales in the Door and Evaporative Cooling segment decreased in2010 compared to 2009. The consolidated gross profit ratio increased from 22.4%in the second quarter of 2009 to 24.1% in the current year quarter. Theimprovement in the gross profit ratio also represents varying results among theCompany’s four business segments. The CACS segment achieved a significantimprovement in its gross profit ratio principally due to higher volume andreduced costs in its aggregates operations. Gross profit ratios in the Door andHeating & Cooling Segment declined principally due to competitivepressures. The gross profit ratio in the Evaporative Cooling segmentessentially held steady.  Consolidatedselling and administrative expenses were $66,000 lower in the 2010 quartercompared to the prior year. However, consolidated selling and administrativeexpenses, as a percentage of consolidated sales, decreased from 17.7% to 15.7% reflectingcost reduction actions taken since the end of the second quarter of 2009.  The operating income for the second quarterof 2010 was $1,497,000 compared to a $2,190,000 operating profit fromcontinuing operations in the second quarter of 2009. However, the operatingprofit for the second quarter of 2009 included a $2,026,000 gain on the sale ofa portion of the Company’s sand property in Colorado Springs.

 

10

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Interestexpense in the second quarter of 2010 was slightly lower compared to the samequarter of 2009. Higher interest rates under the current credit agreement wereoffset by reduced outstanding borrowings. The average interest rate in thesecond quarter of 2010 was approximately 6.5% compared to approximately 4.7% inthe second quarter of 2009. Average total outstanding indebtedness wasapproximately $14,817,000 in 2010 compared to approximately $21,380,000 in2009. The reduction in outstanding indebtedness was due principally to reducedcapital spending, working capital and proceeds from the sale of Rocky MountainReady Mix in July 2009.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the Construction Products group for the quarters endedJuly 3, 2010 and July 4, 2009 (amounts in thousands):

 
| ** **                                    | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors**  | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|
| Quarter ended July 3, 2010               | ** ** | ** **                                            | ** ** | ** ** | ** ** |
| Net sales to external customers               |       | $                                                     | 11,789     |       | $          | 3,112 |   |
| Segment operating income                      |       | 628                                                   |       | 180        |       |
| Operating income as a percent of sales        |       | 5.3                                                   | %          | 5.8        | %          |
| Segment assets as of July 3, 2010        |       | $                                                     | 39,134     |       | $          | 6,006 |   |
| Return on assets                              |       | 1.6                                                   | %          | 3.0        | %          |
|                                          |       |                                                  |       |       |       |
| Quarter ended July 4, 2009               |       |                                                  |       |       |       |
| Net sales to external customers               |       | $                                                     | 9,142      |       | $          | 3,862 |   |
| Segment operating (loss) income               |       | (359                                                  | )          | 368        |       |
| Operating (loss) income as a percent of sales |       | (3.9                                                  | )%         | 9.5        | %          |
| Segment assets as of July 4, 2009        |       | $                                                     | 39,952     |       | $          | 6,053 |   |
| Return on assets                              |       | (0.9                                                  | )%         | 6.1        | %          |

 

Concrete, Aggregates and Construction Supplies Segment

 

Overallconstruction activity in the Company’s principal markets of Colorado Springsand Pueblo, Colorado was slow in both periods. Sales in the CACS segment increased by approximately 29.0% in the secondquarter of 2010 compared to the prior year quarter. In the second quarter of2010 the Company serviced a large ready-mix concrete job at Fort Carson justsouth of Colorado Springs, Colorado. The Company expects to complete this jobduring the third quarter of 2010. Concrete yardage increased by nearly 15% fromthe prior year quarter. The average price of ready-mixed concrete declined by6.9% as a result of a more intense level of competition, lower cement costs anda change in product mix. The gross profit per cubic yard of concrete wasapproximately $1.15 lower in 2010 as a result of the lower selling prices andhigher prices charged for diesel fuel. Sales of aggregates (sand, crushedlimestone and gravel) including those used internally were 24% higher in 2010compared to 2009. The higher volume reflects the increase in ready-mix concretesales and the increase in production capability at the Black Canyon Quarry. ThePikeview Quarry remains closed although the Company believes that it will beable to reopen the quarry pending approval of its mining and reclamation planby the Colorado Division of Reclamation, Mining and Safety. The Companyestimates that operations will resume in the latter part of 2010 or in 2011.The Company continues to reduce the ongoing expenses of the Pikeview Quarrysince the December 2008 landslide. The combined gross profit from allaggregate operations in the second quarter of 2010 was $1,031,000 compared to aprofit of $146,000 in 2009. There was not a significant change in eitherdepreciation or selling and administrative expenses for this segment.

 

Door Segment

 

Salesduring the second quarter of 2010 in the Door segment decreased $750,000 or19.4% from the comparable 2009 quarter as a result of the weaker constructionmarkets. The gross profit percentage in 2010 was 2 percent lower than in 2009due to an intensified level of price competition. Selling and administrativeexpenses were reduced in response to the lower sales volume.

 

**HVAC Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the quarters ended July 3,2010 and July 4, 2009 (amounts in thousands):

 

11

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| ** **                                    | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Quarter ended July 3, 2010               |       |                     |       |                     |       |
| Net sales to external customers               |       | $                        | 7,081      |                     | $          | 9,678 |   |
| Segment operating (loss) income               |       | (84                      | )          | 1,450                    |       |
| Operating (loss) income as a percent of sales |       | (1.2                     | )%         | 15.0                     | %          |
| Segment assets as of July 3, 2010        |       | $                        | 16,506     |                     | $          | 13,175 |   |
| Return on assets                              |       | (0.1                     | )%         | 11.0                     | %          |
|                                          |       |                     |       |                     |       |
| Quarter ended July 4, 2009               |       |                     |       |                     |       |
| Net sales to external customers               |       | $                        | 5,404      |                     | $          | 10,050 |   |
| Segment operating (loss) income               |       | (570                     | )          | 1,500                    |       |
| Operating (loss) income as a percent of sales |       | (10.5                    | )%         | 14.9                     | %          |
| Segment assets as of July 4, 2009        |       | $                        | 17,628     |                     | $          | 15,877 |   |
| Return on assets                              |       | (3.2                     | )%         | 9.4                      | %          |

 

Heating and Cooling Segment

 

Salesin the Heating and Cooling segment increased $1,677,000 (31.0%) in the secondquarter of 2010 from the comparable 2009 quarter. Sales of both furnaces andfan coils were higher in the current quarter. Cooler weather in April and May contributedto the increase in furnace sales. A couple of large hotel jobs spurred fan coilsales higher than the year ago level. The gross profit ratio for this segmentimproved from 22.8% to 26.6% due, in part, to an increased level of furnace salesand production.  Selling andadministrative expenses were higher as a result of the increase in sales,additional sales incentives to key furnace customers and a higher level oflegal expenses associated with product liability claims.

 

Evaporative Cooling Segment

 

Salesin the Evaporative Cooling segment decreased $372,000 or 3.7% in the secondquarter of 2010 compared to the 2009 quarter. Hot weather in the latter part ofthe second quarter of 2010 offset nearly all of the impact of the loss of anational retail account. There was only a slight drop in the gross margin ratiofrom 25.8% to 25.6%. A beneficial change in product sales mix offset most ofthe impact of a reduced production volume. Selling and administrative costswere reduced by $60,000 as a result of the lower sales and cost reductions. Asa percentage of sales, these expenses increased from 9.7% to 9.4%.

 

Operations - Comparison of Six Months Ended July 3, 2010 to SixMonths Ended July 4, 2009

 

(Inthe ensuing discussions of the results of operations the term gross profitmeans the amount determined by deducting cost of sales before depreciation,depletion and amortization from sales. The gross profit ratio is gross profitdivided by sales.)

 

Consolidatedsales in the first half of 2010 were $55,391,000, 6.4% less than sales fromcontinuing operations in the first six months of 2009. The sales recoveryexperienced in the second quarter of 2010 was not enough to overcome the lowersales in the first quarter. Sales results at three of the four Company’sbusiness segments were lower in the first half of 2010. Only the Heating andCooling segment realized increased sales. The consolidated gross profit ratiowas 20.8% in the first half of 2010 compared to 21.4% in the first six monthsof 2009.  The Concrete Aggregates andConstruction Supplies segment achieved a significant improvement in its grossprofit ratio principally due to higher volume and reduced costs in its aggregateoperations. Gross profit ratios in the other three business segments declineddue lower production volume (Evaporative Cooling segment) or to competitivepricing pressures.  Consolidated sellingand administrative expenses were $317,000 lower in the first half of 2010compared to the prior year. Consolidated selling and administrative expenses,as a percentage of consolidated sales, increased from 17.2% to 17.8% primarilydue to an increase in the Heating and Cooling segment discussed below.

 

Theoperating loss for the first half of 2010 was $543,000 compared to a $2,219,000operating profit from continuing operations in 2009. However, the operatingprofit for the first six months of 2009 included a $2,026,000 gain on the saleof a portion of the Company’s sand property in Colorado Springs.

 

Interestexpense in the first six months of 2010 was approximately $10,000 lowercompared to the same period of 2009. Higher interest rates under the currentcredit agreement were offset by reduced outstanding borrowings. The averageinterest rate in the first half of 2010 was approximately 7.00% compared toapproximately 4.25% in 2009. Average total outstanding indebtedness wasapproximately $13,775,000 in the first half of 2010 compared to approximately$19,592,000 in 2009. The reduction in outstanding indebtedness was dueprincipally to reduced capital spending, working capital and proceeds from thesale of Rocky Mountain Ready Mix in July 2009.

 

12

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Adiscussion of operations by segment follows.

 

**Construction Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the Construction Products group for the six months endedJuly 3, 2010 and July 4, 2009 (amounts in thousands):

 
| ** **                                    | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors**  | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|
| Six Months ended  July 3, 2010           | ** ** | ** **                                            | ** ** | ** ** | ** ** |
| Net sales to external customers               |       | $                                                     | 18,517     |       | $          | 6,740 |   |
| Segment operating (loss) income               |       | (985                                                  | )          | 524        |       |
| Operating (loss) income as a percent of sales |       | (5.3                                                  | )%         | 7.8        | %          |
| Segment assets as of July 3, 2010        |       | $                                                     | 39,134     |       | $          | 6,006 |   |
| Return on assets                              |       | (2.5                                                  | )%         | 8.7        | %          |
|                                          |       |                                                  |       |       |       |
| Six Months ended July 4, 2009            |       |                                                  |       |       |       |
| Net sales to external customers               |       | $                                                     | 18,030     |       | $          | 8,585 |   |
| Segment operating (loss) income               |       | (1,671                                                | )          | 978        |       |
| Operating (loss) income as a percent of sales |       | (9.3                                                  | )%         | 11.4       | %          |
| Segment assets as of July 4, 2009        |       | $                                                     | 39,952     |       | $          | 6,053 |   |
| Return on assets                              |       | (4.2                                                  | )%         | 16.1       | %          |

 

Concrete, Aggregates and Construction Supplies Segment

 

Salesin the Concrete, Aggregates and Construction Supplies segment decreased byapproximately 2.7% in the first six months of 2010 compared to the prior year.The higher level of business in the second quarter of 2010 was sufficient tooffset the low volume encountered in the first quarter. In the first quarter of2009, the Company serviced two large commercial ready-mix concrete jobs inPueblo. There were no similarly sized jobs in the first quarter of 2010.Concrete yardage decreased by 6.7% from the first six months of 2009. Theaverage price of ready-mixed concrete declined by 7.9% as a result of a moreintense level of competition, lower cement costs and a change in product mix.The gross profit per cubic yard of concrete was approximately $1.18 lower in2010 as a result of the lower volume, selling prices and higher prices chargedfor diesel fuel. Sales of aggregates (sand, crushed limestone and gravel)including those used internally were approximately 2% higher in 2010 comparedto 2009. The higher volume reflects higher sand sales and an increase inproduction capability at the Black Canyon Quarry. See discussion for the secondquarter regarding the status of the Pikeview Quarry. The combined gross profitfrom all aggregate operations in the first half of 2010 was $1,003,000 comparedto a loss of $160,000 in 2009. Sales of construction supplies were $500,000lower in the first half of 2010. The related gross profit was a loss of $36,000compared to a profit of $160,000 in the first half of 2009. There was not asignificant change in either depreciation or selling and administrativeexpenses for this segment.

 

Door Segment

 

Salesduring the first six months of 2010 in the Door segment decreased $1,845,000 or21.5% from the comparable 2009 period as a result of the weaker constructionmarkets. The gross profit ratio in 2010 was 24.7% compared to 25.2% in 2009 dueto an intensified level of price competition. Selling expenses were reduced inresponse to the lower sales volume.

 

**HVAC Products**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the six months ended July 3,2010 and July 4, 2009 (amounts in thousands):

 
| ** **                                    | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Six Months ended July 3, 2010            |       |                     |       |                     |       |
| Net sales to external customers               |       | $                        | 15,901     |                     | $          | 14,054 |   |
| Segment operating (loss) income               |       | (387                     | )          | 1,600                    |       |
| Operating (loss) income as a percent of sales |       | (2.4                     | )%         | 11.4                     | %          |
| Segment assets as of July 3, 2010        |       | $                        | 16,506     |                     | $          | 13,175 |   |
| Return on assets                              |       | (2.3                     | )%         | 12.1                     | %          |
|                                          |       |                     |       |                     |       |
| Six Months ended July 4, 2009            |       |                     |       |                     |       |
| Net sales to external customers               |       | $                        | 15,015     |                     | $          | 17,359 |   |
| Segment operating (loss) income               |       | (133                     | )          | 2,535                    |       |
| Operating (loss) income as a percent of sales |       | (0.9                     | )%         | 14.6                     | %          |
| Segment assets as of July 4, 2009        |       | $                        | 17,628     |                     | $          | 15,877 |   |
| Return on assets                              |       | (0.8                     | )%         | 16.0                     | %          |

 

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Heating and Cooling Segment

 

Salesin the Heating and Cooling segment increased $886,000 (5.9%) in the first halfof 2010 from the comparable period in 2009.  Cooler weather in April and May extended the heating season andcontributed to increased furnace sales. The gross profit ratio for this segment declined from 24.1% to 23.2%primarily due to lower margins on fan coils which was largely due to a morecompetitive pricing environment.  Sellingand administrative expenses were higher as a result of the increased furnacesales, additional sales incentives to key furnace customers and a higher levelof legal expenses associated with product liability claims.

 

Evaporative Cooling Segment

 

Salesin the Evaporative Cooling segment decreased $3,305,000 or 19.0% in the firstsix months of 2010 compared to the 2009 first half. The loss of a nationalretail account and a carryover of inventory at some customers from the previousseason accounted for the lower level of sales. The gross profit ratio declinedfrom 26.6% to 24.0% principally as the result of the lower sales and productionvolume. A beneficial change in product sales mix offset some of the impact ofthe reduced volume. Selling and administrative costs were reduced by $281,000as a result of the lower sales and cost reductions.  As a percentage of sales, these expensesincreased from 10.5% to 11.0%.

 

CRITICALACCOUNTING POLICIES AND ESTIMATES

 

Thecondensed consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States whichrequire the Company to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities as of July 3, 2010 and January 2, 2010 and affect thereported amounts of revenues and expenses for the periods reported. Actualresults could differ from those estimates.

 

Informationwith respect to the Company’s critical accounting policies which the Companybelieves could have the most significant effect on the Company’s reportedresults and require subjective or complex judgments by management is containedin Note 7 in this report on Form 10-Q and in Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations, ofthe Company’s Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2010.

 

OUTLOOK

 

Thelevel of construction activity in southern Colorado continues at a slow pace.Business conditions are not expected to substantially improve for the balanceof 2010. Housing starts in Colorado Springs have increased modestly compared tothe last two years but remain at relatively low levels. Housing construction inPueblo is very depressed. A significant portion of the ready mix concretevolume in the second quarter was at military facilities near Colorado Springs.The Company estimates that these jobs will be completed in August or September2010. The Company has submitted bids on other prospective commercialconstruction jobs but there is no assurance that the Company will be awardedthe contracts. Moreover, if the Company is awarded one or more of thecontracts, it is not certain when the work would commence. Under the currentconditions, pricing in the CACS segment is expected to remain sharplycompetitive. It is difficult to predict the timing and magnitude of any generalrecovery of construction in the markets served.

 

TheDoor segment’s sales are also, to a significant degree, reliant on new construction.The sales backlog of the Door segment has held steady for the last few monthsalthough pricing has become more competitive.

 

Julytypically marks the end of the selling season for evaporative coolers thoughsales in the first part of July 2010 were above expectations.

 

Thesales backlog for fan coil products in the Heating and Cooling segment hasincreased recently due to two hotel jobs although the overall commercialconstruction market and current bidding activity remains slow. Furnace sales sofar this year benefitted

 

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fromcool weather in the principal market areas in the first five months of theyear. In-season furnace sales later this year will be largely weatherdependent.

 

RECENTLYISSUED ACCOUNTING STANDARDS

 

SeeNote 3 for a discussion of recently issued accounting standards.

 

MATERIAL CHANGES TOCONTRACTUAL OBLIGATIONS

 

As discussed in Note 8, theCompany entered into an amendment of its Credit Agreement with its bank lender.Other than discussed in the preceding sentence, there were no material changesto contractual obligations that occurred during the quarter ended July 3, 2010.

 

FORWARD-LOOKING STATEMENTS

 

Theforegoing discussion contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended. Suchforward-looking statements are based on the beliefs of the Company’s managementas well as on assumptions made by and information available to the Company atthe time such statements were made.  Whenused in this Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,”“expects,” “plans,” “projects,” and similar expressions are intended toidentify forward-looking statements. Actual results could differ materiallyfrom those projected in the forward-looking statements as a result of factorsincluding but not limited to: weather, interest rates, availability of rawmaterials and their related costs, national and local economic conditions,competitive forces and changes in governmental regulations and policies. Someof these factors are discussed in more detail in the Company’s 2009 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 DisclosuresAbout Market Risk**

 

There were no material changes in the market risks nor legalproceedings that the Company is exposed to since those discussed in the Company’s2009 Annual Report on Form 10-K.

 

**Item 4T.    Controls andProcedures**

 

(a)                     Evaluation of DisclosureControls and Procedures.

 

The Company’s Chief Executive Officer and Chief Financial Officer, withthe participation of management, have evaluated the effectiveness of theCompany’s disclosure controls and procedures as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (Exchange Act) as of July 3, 2010. Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective and were reasonablydesigned to ensure that all material information relating to the Company(including its subsidiaries) required to be disclosed in this quarterly reportis recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and Exchange Commission. Thematerial weakness reported in the 2008 and 2009 Form 10-Ks relating toaccounting controls over inventory and related costs of sales reporting in theHeating and Cooling segment has been remediated. This conclusion was based inpart on the results of a physical inventory taken at the end of April 2010.

 

(b)                     Changes in Internal ControlOver Financial Reporting.

 

TheCompany continually reassesses our internal control over financial reportingand makes changes as deemed prudent. The Company had identified a materialweakness in internal control over financial reporting related to accounting forinventory and related cost of sales in its Heating and Cooling segment prior tothe close of the third quarter of Fiscal 2008. As part of its remediationprocess, the Company identified the causes that resulted in the inventoryaccounting errors and developed an action plan to address each of these causes.The Company believes that the changes made during 2009 and 2010 have improvedthe internal controls over financial reporting related to accounting forinventory and related cost of sales in its Heating and Cooling segment suchthat these controls can be relied upon as of July 3, 2010.

 

Duringthe quarter ended July 3, 2010, there were no other material weaknessesidentified in our review of internal control over financial reporting and nosignificant changes in the Company’s internal control over financial reportingoccurred during the quarter that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting except as noted in the previous paragraph.

 

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PART II - OTHER INFORMATION

 

**Item 2.       Unregistered Salesof Equity Securities and Use of Proceeds**

 

TheCompany has not purchased any of its common stock to become treasury stockduring the period April 4, 2010 through July 3, 2010.

 

OnJanuary 19, 1999, the Company initiated purchases under the currentopen-ended program to repurchase its common stock. Purchases are made on theopen market or in block trades at the discretion of management. The dollaramount authorized for the program has been periodically increased by the Boardof Directors and approved by the Company’s lender under the Company’s priorcredit facility. As of July 3, 2010, $1,307,404 of the authorized amountremains available for stock purchases. The Credit Agreement contains certainrestrictions on the Company’s ability to repurchase its stock. Amendments tothe Credit Agreement have retained these restrictions. See further discussionin Note 8 and the “Liquidity and Capital Resources” section of Item 2 above.

 

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

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3                    |       | Registrant’s  Restated Certificate of Incorporation dated May 28, 1975, as amended on May  24, 1978, May 27, 1987 and June 3, 1999 filed as Exhibit 3 to Form 10-K for  the year ended January 1, 2005, incorporated by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3a                   |       | Registrant’s  By-laws, as amended September 19, 1975 filed as Exhibit 6 to Form 8-K for the  month of September 1975, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.1                 |       | Credit  Agreement dated April 16, 2009 among Continental Materials Corporation, as  the Company, The Various Financial Institutions Party Hereto, as Lenders, and  The Private Bank and Trust Company , as Administrative Agent and Arranger,  filed as Exhibit 10f to Form 10-K for the year ended January 3, 2009,  incorporated herein by reference; First Amendment thereto dated as of  November 18, 2009, filed as Exhibit 10.1 to Form 10-K for the year ended  January 2, 2010, incorporated herein by reference; and Second Amendment thereto  dated April 15, 2010, filed as Exhibit 10.2 to Form 10-K for the year ended  January 2, 2010, incorporated herein by reference. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31.1                 |       | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) and  Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as  adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31.2                 |       | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) and  Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as  adopted pursuant to Section 302 of the Sarbanes - Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32                   |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes -  Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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SIGNATURE

 

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

 

 
|   |                | CONTINENTAL  MATERIALS CORPORATION |
|--------|---------------------|------------------------------------|
|   |                |                               |   |
|   |                |                               |   |
| Date:  | July 30,  2010 |                               | By: | /s/  Joseph J. Sum |
|   |                |                               | Joseph  J. Sum, Vice President |
|   |                |                               | and  Chief Financial Officer |
|        |                     |                                    |  |  |

 

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