**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**

** **

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**For the quarterly periodended March 31, 2007**

** **

**OR**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

** **

**For the transition periodfrom                to               **

** **

**Commission File number 1-3834**

** **

**CONTINENTAL MATERIALS CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                    | ** ** | **36-2274391**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

| **200 South Wacker Drive, Suite 4000, Chicago, Illinois** |   | **60606**  |
|-----------------------------------------------------------|--------|------------|
| (Address of  principal executive offices)                 |   | (Zip Code) |

** **

**(312) 541-7200**

(Registrant’s telephone number, including area code)

** **

 

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

** **

Indicate by check mark whether the registrant (1) hasfiled all reports 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 is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

** **

Yes  o    No  x

** **

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 or the Exchange Act).

** **

Yes  o    No  x

** **
| Number of common shares outstanding at July 1,  2006 |   | 1,605,461 |
|------------------------------------------------------|--------|-----------|

 

 

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PART I - FINANCIAL INFORMATION

## **Item1.   Financial Statements**

CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED BALANCE SHEETS

MARCH 31, 2007 ANDDECEMBER 30, 2006

(Unaudited)

 (000’s omitted except sharedata)

 
| ** **                                                                             | ** ** | **MARCH 31,  2007** | ** ** | **DECEMBER 30,  2006** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ***ASSETS***                                                                           | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                        |       |                     |       |                        |       |
| Cash and cash  equivalents                                                             |       | $                        | 2,200      |                        | $          | 2,770 |   |
| Receivables, net                                                                       |       | 29,066                   |       | 24,120                      |       |
| Receivable for  insured losses                                                         |       | 1,619                    |       | 1,584                       |       |
| Inventories:                                                                           |       |                     |       |                        |       |
| Finished goods                                                                         |       | 7,401                    |       | 7,104                       |       |
| Work in process                                                                        |       | 1,480                    |       | 1,502                       |       |
| Raw materials  and supplies                                                            |       | 9,339                    |       | 8,229                       |       |
| Prepaid expenses                                                                       |       | 4,263                    |       | 4,291                       |       |
| Total current  assets                                                                  |       | 55,368                   |       | 49,600                      |       |
|                                                                                   |       |                     |       |                        |       |
| Property, plant and  equipment, net                                                    |       | 34,857                   |       | 32,365                      |       |
|                                                                                   |       |                     |       |                        |       |
| Goodwill                                                                               |       | 7,829                    |       | 7,829                       |       |
| Amortizable intangible  assets, net                                                    |       | 1,429                    |       | 1,517                       |       |
| Other assets                                                                           |       | 2,339                    |       | 2,394                       |       |
|                                                                                   |       |                     |       |                        |       |
|                                                                                   |       | $                        | 101,822    |                        | $          | 93,705 |   |
| ***LIABILITIES***                                                                      |       |                     |       |                        |       |
| Current liabilities:                                                                   |       |                     |       |                        |       |
| Bank loan  payable                                                                     |       | $                        | 6,000      |                        | $          | — |   |
| Current portion  of long-term debt                                                     |       | 2,700                    |       | 2,866                       |       |
| Accounts payable  and accrued expenses                                                 |       | 20,480                   |       | 17,060                      |       |
| Liability for  unpaid claims covered by insurance                                      |       | 1,619                    |       | 1,584                       |       |
| Income taxes                                                                           |       | —                   |       | 579                         |       |
| Total current  liabilities                                                             |       | 30,799                   |       | 22,089                      |       |
|                                                                                   |       |                     |       |                        |       |
| Long-term debt                                                                         |       | 12,300                   |       | 12,800                      |       |
| Deferred income taxes                                                                  |       | 3,882                    |       | 3,883                       |       |
| Other long-term  liabilities                                                           |       | 1,872                    |       | 1,590                       |       |
| *** ***                                                                           |       |                     |       |                        |       |
| ***SHAREHOLDERS’  EQUITY***                                                       |       |                     |       |                        |       |
| Common shares, $0.25  par value; authorized  3,000,000 shares; issued 2,574,264 shares |       | 643                      |       | 643                         |       |
| Capital in excess of  par value                                                        |       | 1,830                    |       | 1,830                       |       |
| Retained earnings                                                                      |       | 67,045                   |       | 67,373                      |       |
| Treasury shares,  971,374 and 968,803, at cost                                         |       | (16,549                  | )          | (16,503                     | )          |
|                                                                                   |       | 52,969                   |       | 53,343                      |       |
|                                                                                   |       |                     |       |                        |       |
|                                                                                   |       | $                        | 101,822    |                        | $          | 93,705 |   |

 

See accompanying notes

2

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS, RETAINED EARNINGS

AND COMPREHENSIVEINCOME (LOSS)

FOR THE THREEMONTHS ENDED MARCH 31, 2007 AND APRIL 1, 2006

(Unaudited)

(000’s omitted exceptper-share amounts)

 
| ** **                                                                                            | ** ** | **MARCH 31, 2007** | ** ** | **APRIL 1, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                                                                  |       |                         |       |                        |       |
| Sales                                                                                                 |       | $                            | 40,079     |                        | $          | 33,684 |   |
|                                                                                                  |       |                         |       |                        |       |
| Costs and expenses:                                                                                   |       |                         |       |                        |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization)                                |       | 33,794                       |       | 27,981                      |       |
| Depreciation,  depletion and amortization                                                             |       | 1,315                        |       | 1,190                       |       |
| Selling and  administrative                                                                           |       | 5,293                        |       | 5,007                       |       |
|                                                                                                  |       |                         |       |                        |       |
| Gain on disposition of  property and equipment                                                        |       | 31                           |       | 74                          |       |
|                                                                                                  |       | 40,371                       |       | 34,104                      |       |
|                                                                                                  |       |                         |       |                        |       |
|                                                                                                  |       |                         |       |                        |       |
| Operating loss                                                                                        |       | (292                         | )          | (420                        | )          |
|                                                                                                  |       |                         |       |                        |       |
| Interest, net                                                                                         |       | (213                         | )          | (96                         | )          |
| Other income, net                                                                                     |       | 16                           |       | 61                          |       |
|                                                                                                  |       |                         |       |                        |       |
| Loss before income  taxes                                                                             |       | (489                         | )          | (455                        | )          |
|                                                                                                  |       |                         |       |                        |       |
| Benefit from income  taxes                                                                            |       | (161                         | )          | (154                        | )          |
|                                                                                                  |       |                         |       |                        |       |
| Net loss                                                                                              |       | (328                         | )          | (301                        | )          |
|                                                                                                  |       |                         |       |                        |       |
| Retained earnings,  beginning of period                                                               |       | 67,373                       |       | 65,331                      |       |
|                                                                                                  |       |                         | ** ** | ** **                  | ** ** |
| Retained earnings, end  of period                                                                     |       | $                            | 67,045     |                        | $          | 65,030 |   |
|                                                                                                  |       |                         |       |                        |       |
| Basic and diluted loss  per share                                                                     |       | $                            | (.20       | )                           | $          | (.19 | ) |
|                                                                                                  |       |                         |       |                        |       |
| Average shares  outstanding                                                                           |       | 1,604                        |       | 1,605                       |       |
|                                                                                                  |       |                         |       |                        |       |
|                                                                                                  |       |                         |       |                        |       |
| Comprehensive (loss)  income:                                                                         |       |                         |       |                        |       |
| Net loss                                                                                              |       | $                            | (328       | )                           | $          | (301 | ) |
| Comprehensive income  from interest rate swap, net of tax of $1 for three months ended April 1,  2006 |       | —                       |       | 3                           |       |
|                                                                                                  |       | $                            | (328       | )                           | $          | (298 | ) |

 

See accompanying notes

3

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREEMONTHS ENDED MARCH 31, 2007 AND APRIL 1, 2006

(Unaudited)

(000’s omitted)
| ** **                                                | ** ** | **MARCH 31, 2007** | ** ** | **APRIL 1, 2006** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                      |       |                         |       |                        |       |
| Net cash used in  operating activities                    |       | $                            | (2,358     | )                           | $          | (5,684 | ) |
|                                                      |       |                         |       |                        |       |
| Investing activities:                                     |       |                         |       |                        |       |
| Purchase of CSSL                                          |       | —                       |       | (352                        | )          |
| Capital  expenditures                                     |       | (3,542                       | )          | (1,411                      | )          |
| Proceeds from  sale of property and equipment             |       | 42                           |       | 118                         |       |
| Net cash used in  investing activities                    |       | (3,500                       | )          | (1,645                      | )          |
|                                                      |       |                         |       |                        |       |
| Financing activities:                                     |       |                         |       |                        |       |
| Borrowings under  revolving credit facility               |       | 6,000                        |       | 1,000                       |       |
| Repayment of  long term debt                              |       | (666                         | )          | (500                        | )          |
| Payment to  acquire treasury stock                        |       | (46                          | )          | —                      |       |
| Net cash provided by  financing activities                |       | 5,288                        |       | 500                         |       |
|                                                      |       |                         |       |                        |       |
| Net decrease in cash  and cash equivalents                |       | (570                         | )          | (6,829                      | )          |
| Cash and cash  equivalents:                               |       |                         |       |                        |       |
| Beginning of  period                                      |       | 2,770                        |       | 6,829                       |       |
|                                                      |       |                         |       |                        |       |
| End of period                                             |       | $                            | 2,200      |                        | $          | — |   |
|                                                      |       |                         |       |                        |       |
|                                                      |       |                         |       |                        |       |
|                                                      |       |                         |       |                        |       |
| Supplemental  disclosures of cash flow items:             |       |                         |       |                        |       |
| Cash paid during the  three months for:                   |       |                         |       |                        |       |
| Interest                                                  |       | $                            | 293        |                        | $          | 18 |   |
| Income taxes                                              |       | 560                          |       | 215                         |       |
|                                                      |       |                         |       |                        |       |
| Supplemental  disclosures of noncash investing activities |       |                         |       |                        |       |
| Capital expenditures  purchased on account                |       | $                            | 187        |                        | $          | — |   |

 

See accompanying notes

4

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CONTINENTALMATERIALS CORPORATION

SECURITIES ANDEXCHANGE COMMISSION FORM 10-Q

NOTES TO THEQUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDEDMARCH 31, 2007

(Unaudited)

1.               Theunaudited interim condensed consolidated financial statements included hereinare prepared pursuant to the Securities and Exchange Commission rules andregulations for reporting on Form 10-Q. Accordingly, certain information andfootnote disclosures normally accompanying the annual consolidated financialstatements have been omitted. The interim condensed consolidated financialstatements and notes should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s latest annualreport on Form 10-K. As a result of certain organizational changes implementedat the beginning of the 2007 fiscal year, we have reevaluated our reportingsegments in accordance with Financial Accounting Standards Board (FASB)Statement No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation.” Although our four reporting segments, see Note 5, have remainedthe same, the Door Division of Transit Mix Concrete Co., previously reportedwithin the Concrete, Aggregates and Construction Supplies segment is nowreported within the Door segment. In the opinion of management, the condensedconsolidated financial statements include all adjustments (none of which wereother than normal recurring adjustments) necessary for a fair statement of theresults for the interim periods.

2.               Oureffective income tax rate is based on expected income, statutory tax rates andtax positions taken in the various jurisdictions in which we operate. Forinterim financial reporting, we estimate the annual income tax rate based onprojected taxable income for the full year and record a quarterly income taxprovision in accordance with the anticipated annual rate. As the yearprogresses, we refine the estimates of the year’s taxable income as newinformation becomes available, including year-to-date financial results. Thiscontinual estimation process often results in a change to our expectedeffective income tax rate for the year. When this occurs, we adjust the incometax provision during the quarter in which the change in estimate occurs so thatthe year-to-date provision reflects the expected annual income tax rate.Significant judgment is required in determining our effective income tax rateand in evaluating our tax positions. The effective income tax rate for thequarter ended March 31, 2007 of 33% was down 1% from the 34% rate for the threemonth ended April 1, 2006. The decrease is primarily the result of ananticipated increase in the percentage depletion deduction and the scheduledincrease in the deduction for certain domestic production activities arisingunder the American Jobs Creation Act of 2004.

On December 31, 2006, the first day of fiscal 2007, we adopted theprovisions of Financial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an Interpretation of FASB StatementNo. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith FASB Statement No. 109, “Accounting for Income Taxes,” by prescribinga recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. Under FIN 48, the financial statement effects of a tax positionshould initially be recognized when it is more likely than not, based on thetechnical merits, that the position will be sustained upon examination. A taxposition that meets the more-likely-than-not recognition threshold shouldinitially and subsequently be measured as the largest amount of tax benefitthat has a greater than 50% likelihood of being realized upon effectivesettlement with a taxing authority.

There was no cumulative adjustment to retained earnings required as aresult of the implementation of FIN 48. The gross amount of unrecognized taxbenefits at December 31, 2006 was $290,000 of which $79,000 would affect theeffective tax rate.

We classify interest and penalties recognized on the liability forunrecognized tax benefits as income tax expense. Accrued interest and penaltiesincluded in our total liability for unrecognized tax benefits were $85,000 asof March 31, 2007 and December 31, 2006.

The U.S. Federal statute of limitations expires during the thirdquarter of 2007 for our 2003 tax year. Included in the balance at March 31,2007 is approximately $24,000 related to tax positions expected to be resolvedwithin 12 months of this reporting date.

We file income tax returns in the United States federal and variousstate jurisdictions. Generally, we are not subject to changes in income taxesby any taxing jurisdiction for the years prior to 2002.

 

5

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3.               Operatingresults for the first three months of 2007 are not necessarily indicative ofperformance for the entire year. Historically, sales of the Evaporative Coolingsegment are higher in the first and second quarters, sales of the Concrete,Aggregates and Construction Supplies segment are higher in the second and thirdquarters and sales of the Heating and Cooling segment are higher in the thirdand fourth quarters. The sales of the Door segment have not shown strongseasonal fluctuations in recent years.

4.               Thereis no difference in the calculation of basic and diluted earnings per share(EPS) for the three months ended March 31, 2007 and April 1, 2006.

5.               The Companyoperates primarily in four reportable segments within its two principalindustry groups; the Heating and Cooling segment and the Evaporative Coolingsegment in the Heating, Ventilation and Air Conditioning (HVAC) industry groupand the Concrete, Aggregates and Construction Supplies segment and the Doorsegment in the Construction Products industry group. The Heating and Coolingsegment produces and sells gas-fired wall furnaces, console heaters and fancoils from the Company’s wholly-owned subsidiary, Williams Furnace Co. ofColton, California. The Evaporative Cooling segment produces and sellsevaporative coolers from the Company’s wholly-owned subsidiary, PhoenixManufacturing, Inc. of Phoenix, Arizona. Sales of these two segments arenationwide, but are concentrated in the southwestern United States. Concrete,Aggregates and Construction Supplies are offered from numerous locations alongthe Front Range of Colorado operated by the Company’s wholly-owned subsidiariesCastle Concrete Company and Transit Mix Concrete Co. (TMC), of ColoradoSprings, Transit Mix of Pueblo, Inc. of Pueblo and Rocky Mountain Ready MixConcrete, Inc. of Denver. Doors are fabricated and sold along with the relatedhardware from the Company’s wholly-owned subsidiary, McKinney Door andHardware, Inc. (MDHI) of Pueblo, Colorado. Sales of these two segments arehighly concentrated in the Front Range area in Colorado although door sales arealso made throughout the United States. Prior to the 2007 fiscal year, theCompany reported the Door Division of TMC as part of the Concrete, Aggregatesand Construction Materials segment. On December 31, 2006, the first day offiscal 2007, the Door Division was transferred to MDHI and is now reported aspart of the Door segment. As required by FASB Statement No. 131, we haverestated the 2006 financial information presented in the table below to conformto the current composition of our reportable segments.

The Company evaluates the performance of its segments and allocatesresources to them based on a number of criteria including operating income,return on investment and other strategic objectives. Operating income isdetermined by deducting operating expenses from all revenues. In computingoperating income, none of the following has been added or deducted: unallocatedcorporate expenses, interest, other income or loss or income taxes.

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

The following table presents information about reported segments forthe three months ended March 31, 2007 and April 1, 2006 along with the itemsnecessary to reconcile the segment information to the totals reported in thefinancial statements (amounts in thousands):

6

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| ** **                                       | ** ** | **Construction Products**                           | ** ** | **HVAC Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| **Quarter ended  March 31, 2007** | ** ** | **Concrete,  Aggregates  &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
|                                             |       |                                                     |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external  customers                |       | $                                                        | 19,807     |                   | $          | 4,918                                |       | $                         | 24,725     |                     | $          | 9,382 |   | $ | 5,881 |   | $ | 15,263 |   | $ | 5 |   | $ | 86 |   | $ | 40,079 |   |
| Depreciation, depletion  and amortization        |       | 1,008                                                    |       | 35                     |       | 1,043                                |       | 105                       |       | 150                      |       | 255 |   | 17 |   | — |   | 1,315 |   |
| Operating income (loss)                          |       | (527                                                     | )          | 596                    |       | 69                                   |       | 371                       |       | 51                       |       | 422 |   | (810 | ) | 27 |   | (292 | ) |
| Segment assets                                   |       | 59,998                                                   |       | 5,847                  |       | 65,845                               |       | 16,886                    |       | 17,111                   |       | 33,997 |   | 1,976 |   | 4 |   | 101,822 |   |
| Capital expenditures (a)                         |       | 3,091                                                    |       | 144                    |       | 3,235                                |       | 143                       |       | 329                      |       | 472 |   | 22 |   | — |   | 3,729 |   |
|                                                  |            |                                                          |            |                        |            |                                      |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)          Capital expenditures forthe Concrete, Aggregates and Construction Supplies segment include $184,000 ofadditions purchased on account and capital expenditures for the EvaporativeCooling segment include $3,000 of additions purchased on account.
| ** **                                                            | ** ** | **Construction Products**                           | ** ** | **HVAC Products** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| **Quarter ended  April 1, 2006 as restated** | ** ** | **Concrete,  Aggregates  &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
|                                                                  |       |                                                     |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external  customers                                     |       | $                                                        | 18,959     |                   | $          | 3,265                                |       | $                         | 22,224     |                     | $          | 6,586 |   | $ | 4,788 |   | $ | 11,374 |   | $ | — |   | $ | 86 |   | $ | 33,684 |   |
| Depreciation, depletion  and amortization                             |       | 887                                                      |       | 37                     |       | 924                                  |       | 98                        |       | 150                      |       | 248 |   | 18 |   | — |   | 1,190 |   |
| Operating income (loss)                                               |       | (121                                                     | )          | 334                    |       | 213                                  |       | 205                       |       | (27                      | )          | 178 |   | (838 | ) | 27 |   | (420 | ) |
| Segment assets (b)                                                    |       | 54,470                                                   |       | 4,750                  |       | 59,220                               |       | 18,303                    |       | 12,651                   |       | 30,954 |   | 3,468 |   | 63 |   | 93,705 |   |
| Capital expenditures                                                  |       | 1,214                                                    |       | 65                     |       | 1,279                                |       | 5                         |       | 125                      |       | 130 |   | 2 |   | — |   | 1,411 |   |
|                                                                       |            |                                                          |            |                        |            |                                      |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(b)         Segment assets are as ofDecember 30, 2006.

There are no differences in the basis of segmentationor in the basis of measurement of segment profit or loss from the last annualreport except as discussed above.

6.               On June 30, 2006the Company purchased certain assets of ASCI, a concrete producer in ColoradoSprings, Colorado for $2,100,000 of cash and a $1,000,000 Note. The assets wereacquired by TMC in the Concrete, Aggregates and Construction Supplies segment.The final purchase price allocation included $1,735,000 of plant and equipment,$290,000 for a non-compete agreement, $350,000 for a restriction of usecovenant, $370,000 for existing customer relations and $355,000 of goodwill,all of which is amortizable over 15 years for tax purposes. For book purposes,the non-compete is being amortized over its five-year term, the restriction ofland use covenant is being amortized over its ten-year term and the customerrelations intangible is being amortized over its estimated useful life of tenyears.

The purchase was accounted for as an acquisition of a business underSFAS No. 141, “Standards of Accounting for Business Combinations.” The goodwillrelated to the above purchase represents the only change to the Company’srecorded goodwill during the period from the April 1, 2006 through March 31,2007.

The following unaudited pro forma summary financial informationsummarizes the estimated combined results of operations of the Company and ASCIassuming that the acquisition of ASCI had taken place on January 1, 2006. Theunaudited pro forma combined results of operations were prepared on the basisof information provided to the Company by the former management of ASCI and norepresentation is made by the Company with respect to the accuracy of suchinformation. The pro forma combined results of operations reflect adjustmentsfor interest expense, additional depreciation based on the fair market value ofplant and equipment, amortization of identifiable intangibles and income taxexpense. Amounts are in thousands except per share amounts.

7

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|                                   | ** ** | **Three Months Ended  April 1, 2006** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------|------------|
| Net sales                         |       | $                                                         | 35,337     |   |
| Net loss                          |       | (307                                                      | )          |
| Basic and diluted loss  per share |       | (.19                                                      | )          |
|                                   |            |                                                           |            |  |

 

The unaudited pro forma combined results of operations are notnecessarily indicative of, and do not purport to represent, what the Company’sresults of operations or financial condition actually would have been had theacquisitions been made as of January 1, 2006. Due to competitive conditions,the Company did not expect to, and has not, retained all of the concrete volumeor market share previously attained by ASCI.

7.               Identifiableintangible assets as of March 31, 2007 include five amortizable non-competeagreements, including the non-compete agreement related to ASCI acquired duringthe second quarter of 2006 (see Note 6). Identifiable intangible assets alsoinclude a restrictive land covenant and customer relations value, both relatedto the ASCI acquisition. Collectively, these assets were carried at $1,429,000,net of $1,181,000 accumulated amortization. The pre-tax amortization expensefor intangible assets during the quarter ended March 31, 2007 was $88,000.Based upon the intangible assets recorded on the balance sheet at March 31,2007, amortization expense for the next five years is estimated to be asfollows: 2007 — $320,000, 2008 — $300,000, 2009 — $293,000, 2010 — $262,000 and2011 — $101,000.

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

The following Management’s Discussion and Analysis gives effect to therestatement discussed in Note 5.

Company Overview

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

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

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

Financial Condition 

Sales of the Company’s HVAC products are seasonal and weather sensitiveexcept for fan coils. Revenues in the Company’s Concrete, Aggregates andConstruction Supplies segment are influenced by the level of constructionactivity and weather conditions along the Front Range of Colorado. Sales forthe Door segment are not as strongly seasonal nor are they much affected byweather conditions. Historically, the Company has experienced operating lossesduring the first quarter except when the weather is mild along the Front Range.Operating results typically improve in the second and third quarters reflectingmore favorable weather conditions in Colorado and the seasonal sales of theEvaporative Cooling segment. Fourth quarter results can vary based on weatherconditions in Colorado as well as in the principal markets for the Company’sheating equipment. The Company typically experiences operating cash flowdeficits during the first half of the year reflecting operating results, theuse of sales dating programs (extended payment terms)

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related to the Evaporative Cooling segment and payments of the prioryear’s accrued incentive bonuses and Company profit-sharing contributions. As aresult, the Company’s borrowings against its revolving credit facility tend topeak during the second quarter and then decline over the remainder of the year.This trend has continued thus far in 2007.

As expected, the Company’s cash flow during the first quarter wasnegative due to the seasonality of sales, production schedules, the salesdating programs related to the evaporative cooler product line and the paymentof 2006 bonus awards. Operations for the first three months of 2007 used$2,358,000 of cash compared to $5,684,000 during the first three months of2006. The reduced cash flow required during the first quarter of 2007 wasprimarily the result of an increase in accounts payable and accrued expenses,as well as long term liabilities, as compared to the first quarter of 2006.This change was largely due to the timing of payments.

Capital expenditures, primarily for the Concrete, Aggregates andConstruction Supplies segment, were significantly higher during the 2007quarter compared the prior year’s quarter due to the timing of the purchases.The replacement of two loaders and a scraper for the quarry operations and theconstruction and installation of an industrial sand plant all occurred duringthe first quarter. Completion of the industrial sand plant is planned for thesecond quarter.

Scheduled debt repayments were made during the first quarter of both2007 and 2006. As expected, the Company borrowed against its revolving creditfacility during the 2007 quarter. The highest amount of Company borrowingsoutstanding under the revolving credit agreement during the first quarter of2007 was the $6,000,000 outstanding at March 31, 2007 and the average amountoutstanding during the first quarter was $1,255,000.

We believe that the anticipated cash flow from operations, supplementedby seasonal borrowings against the revolving line of credit, (which balance was$6,000,000 at March 31, 2007) will be sufficient to cover expected cash needs,including business expansion, servicing debt and planned capital expendituresfor at least the next twelve months.

Results of Operations - Comparison of Quarter Ended March 31, 2007 toQuarter Ended April 1, 2006

Consolidated sales during the first quarter of 2007 were $40,079,000 resultingin a $292,000 operating loss.  In thefirst quarter of 2006 sales were $33,684,000 with an operating loss of$420,000. Historically, the Company has experienced operating losses during thefirst quarter except when the construction activity is strong and the weatheris mild along the Front Range in Colorado.

All segments reported increased sales, however much of the increase wasdue to price increases implemented in response to increased costs. Cost ofsales as a percentage of sales increased from 83.1% to 84.3%. The increase incost of sales was primarily due to cement and aggregate price increases thatslightly outpaced our ability to increase concrete prices and the lingeringeffects from 2006 of increased copper, aluminum and steel costs and pricingdecisions made to retain a national home center account. Selling andadministrative costs increased $286,000 largely due to the increase in sales.The resulting operating loss of $292,000 improved from the prior year’soperating loss of $420,000.

A discussion of operations by segment follows.

**Construction Products**

As discussed in Note 5, as a result of certain organizational changes,we have reevaluated our segment reporting under FASB Statement No. 131. TheDoor Division of TMC, previously reported within the Concrete, Aggregates andConstruction Supplies segment is now reported within the Door segment.Accordingly, the 2006 information presented in the table below has beenrestated to conform to the current year’s segment composition.

The table below presents a summary of operating information for the tworeportable segments within the Construction Products industry group for thequarters ended March 31, 2007 and April 1, 2006 (dollar amounts in thousands):

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|                                                | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------|------------|-----------|------------|
| Quarter ended March 31,  2007                  |       |                                                       |       |      |       |
| Revenues from external  customers              |       | $                                                          | 19,807     |      | $          | 4,918 |   |
| Segment operating  (loss) income               |       | (527                                                       | )          | 596       |       |
| Operating (loss) income  as a percent of sales |       | (2.7                                                       | )%         | 12.1      | %          |
| Segment assets as of  March 31, 2007           |       | $                                                          | 59,998     |      | $          | 5,847 |   |
| Return on assets                               |       | (.9                                                        | )%         | 10.2      | %          |
|                                           |       |                                                       |       |      |       |
| Quarter ended April 1,  2006                   |       |                                                       |       |      |       |
| Revenues from external  customers              |       | $                                                          | 18,959     |      | $          | 3,265 |   |
| Segment operating  (loss) income               |       | (121                                                       | )          | 334       |       |
| Operating (loss) income  as a percent of sales |       | (.6                                                        | )%         | 10.2      | %          |
| Segment assets as of  April 1, 2006            |       | $                                                          | 47,389     |      | $          | 4,511 |   |
| Return on assets                               |       | (.3                                                        | )%         | 7.4       | %          |

 

Concrete, Aggregates andConstruction Supplies Segment

Sales in the Concrete,Aggregates and Construction Supplies segment for the first quarter of 2007increased 4.5% over the prior year’s comparable quarter as a result ofincreased pricing in response to increased material costs. Concrete volumedeclined slightly as construction activity along the Front Range of Colorado,especially housing construction, declined. Concrete margins narrowed as pricingdecisions made in order to protect our market share were unable to fullyrecover higher material and delivery costs, including fuel. Aggregates volumesimproved in the 2007 quarter despite the decline in concrete volume as the saleof some bulk product, including fill sand, added to sales. Constructionsupplies volume declined in the 2007 quarter compared to the 2006 quarterprimarily due to the reduced construction activity in Colorado Springs.

The operating lossdeclined in the 2007 quarter from the 2006 quarter as a result of the reducedconcrete margins and volume. Depreciation, depletion and amortization increasedbecause of the higher capital spending during 2006 and 2007 to date, includingthe addition of $1,010,000 of amortizable intangibles. Offsetting this increasewas a reduction in selling and administrative costs attributable to theconsolidation of administrative functions into the Colorado Springs office. Asa result, both operating loss as a percent of sales and return on assetsdeclined in the 2007 quarter compared to the prior year’s quarter.

Door Segment

Sales during the firstquarter of 2007 in the Door segment rose 50.6% over the comparable 2006 quarterdue to the timing of shipments and some growth. Sales during a specific quartercan be heavily influenced by customer requests to either accelerate or delayshipments of jobs to better coincide with their own construction schedules. Thebacklog had grown over the past year and, although it remains quite strong, itdeclined during the 2007 quarter as a number of jobs were shipped.  Sales prices increased in response toincreased costs while also recovering some of the margin lost in the 2006quarter which was the result of pricing decisions made in response to morecompetitive bidding on available jobs.

Operating income improvedfrom $334,000 during the first quarter of 2006 to $596,000 for the 2007 quarteras a result of the increased sales and improved pricing. Slightly offsettingthe improvement were increased selling and administrative costs due to theaddition of TMC’s door division in 2007. As a result, both operating income asa percent of sales and return on assets improved in the 2007 quarter from theprior year’s quarter.

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**HVAC Products**

The table below presentsa summary of operating information for the two reportable segments within theHVAC products industry group for the quarters ended March 31, 2007 and April 1,2006 (dollar amounts in thousands):

|                                                | ** ** | **Heating andCooling** | ** ** | **Evaporative**

**Cooling** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Quarter ended March 31,  2007                  |       |                        |       |                         |       |
| Revenues from external  customers              |       | $                           | 9,382      |                         | $          | 5,881 |   |
| Segment operating  income                      |       | 371                         |       | 51                           |       |
| Operating income as a  percent of sales        |       | 4.0                         | %          | .9                           | %          |
| Segment assets as of  March 31, 2007           |       | $                           | 16,886     |                         | $          | 17,111 |   |
| Return on assets                               |       | 2.2                         | %          | .3                           | %          |
|                                           |       |                        |       |                         |       |
| Quarter ended April 1,  2006                   |       |                        |       |                         |       |
| Revenues from external  customers              |       | $                           | 6,586      |                         | $          | 4,788 |   |
| Segment operating  income (loss)               |       | 205                         |       | (27                          | )          |
| Operating income (loss)  as a percent of sales |       | 3.1                         | %          | (.6                          | )%         |
| Segment assets as of  April 1, 2006            |       | $                           | 16,134     |                         | $          | 15,832 |   |
| Return on assets                               |       | 1.3                         | %          | (.2                          | )%         |

 

Heating and Cooling Segment

Sales in the Heating and Cooling segment increased $2,796,000, or42.5%, during the first quarter of 2007 over the comparable 2006 quarter.Furnace volume (both unit volume and sales dollars) improved roughly 28% on thestrength of January sales which were aided by cold weather in the areas served.Fan coil volume surged nearly 87% from the low volume in the prior year’squarter as a result of favorable market conditions and the restructured salesrepresentative network which was completed in late 2005. Pricing improvedduring the 2007 quarter.

Operating income improved from $205,000 during the first quarter of2006 to $371,000 for the 2007 quarter as a result of the increased sales.Partially offsetting the improvement was the rise in cost of sales as a percentof sales which increased from 72.2% to 77.5% as a result of the lingeringeffect of the higher copper, aluminum and steel materials costs experienced inthe second and third quarters of 2006. A pricing decision made to retain anational home center account during the second quarter of 2006 also decreasedthe margins. As a result, both operating income as a percent of sales andreturn on assets improved in the 2007 quarter over the prior year’s quarter.

Evaporative Cooling Segment

Sales in the Evaporative Cooling segment increased $1,093,000, or22.8%, during the first quarter of 2007 over the comparable 2006 quarter. Theincrease in sales is attributable to early shipments to a national home centeraccount as a result of a warm March and two new customers.

The segment reported operating income of $51,000 compared to the 2006quarter’s loss of $27,000 primarily due to the increase in sales. The improvedoperating results were partially offset by higher raw material costs. Sellingand administrative expenses increased modestly during the 2007 quarter butdeclined as a percentage of sales compared to the first quarter of 2006. As aresult, both operating results as a percent of sales and return on assetsincreased in the 2007 quarter from the prior year’s quarter.

CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES

The condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Stateswhich require the Company to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities as of March 31, 2007 and December 30, 2006 and affect thereported amounts of revenues and expenses for the periods reported. Actualresults could differ from those estimates.

Information with respect to the Company’s critical accounting policieswhich the Company believes could have the most significant effect on theCompany’s reported results and require subjective or complex judgments bymanagement is contained in Item 7, Management’s Discussion and Analysis ofFinancial

Condition and Results of Operations, of the Company’s Annual Report onForm 10-K for the fiscal year ended December 30, 2006.

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OUTLOOK

Concrete prices throughout our Colorado markets have improved comparedto 2006, however not enough to recover the higher prices paid for cement andincreased delivery costs. The pressure on pricing has come from aggressivecompetition, especially from a small new concrete producer in Colorado Springs,in response to a softening in construction activity along the Front Range ofColorado. The sales volume and backlog for the door segment remain strong.

Sales of the evaporative cooling segment are not expected to growsignificantly and will remain weather sensitive. However, sales of fan coilproducts in the heating and cooling segment are expected to grow as a result offavorable market conditions and the restructured sales representative networkand marketing efforts.

RECENTLY ISSUEDACCOUNTING STANDARDS

See Note 2 for discussion of the accounting standards adopted in 2007.

The Company discusses recently issued accounting standards and tax lawchanges in the Critical Accounting Policies section under Item 7 and in Note 1to Consolidated Financial Statements in Item 8 of the Company’s Annual Reporton Form 10-K for the fiscal year 2006. Other than as discussed in thosesections, the Company does not currently have any transactions or circumstancesthat have been addressed by recently issued accounting pronouncements.Therefore, adoption of any of these statements or pronouncements would not havea material impact on the Company’s results of operations, financial position orliquidity.

FORWARD-LOOKINGSTATEMENTS

The foregoing discussion contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended. Such forward-lookingstatements are based on the beliefs of the Company’s management as well as onassumptions made by and information available to the Company at the time suchstatements were made.  When used in thisReport, words such as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,”“plans,” “projects,” and similar expressions are intended to identifyforward-looking statements. Actual results could differ materially from thoseprojected in the forward-looking statements as a result of factors includingbut not limited to: weather, interest rates, availability of raw materials andtheir related costs, national and local economic conditions and competitiveforces. Some of these factors are discussed in more detail in the Company’s2006 Annual Report on Form 10-K. Changes in accounting pronouncements couldalso alter projected results. Forward-looking statements speak only as of thedate they were made, and the Company undertakes no obligation to publiclyupdate them.

**Item 3.        Quantitative And Qualitative DisclosuresAbout Market Risk**

There have been no material changes in the market risks that theCompany is exposed to since those discussed in the Company’s 2006 Annual Reporton Form 10-K.

**Item 4.        Controls and Procedures**

(a)            Disclosure Controlsand 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 in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as ofMarch 31, 2007. Based on that evaluation, they have concluded that the Company’sdisclosure controls and procedures as of such date are effective and arereasonably designed to ensure that all material information relating to theCompany (including its subsidiaries) is accumulated and communicated tomanagement to allow timely decisions regarding required disclosure and toensure that all material information required to be disclosed in this quarterlyreport is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and Exchange Commission.

(b)           Changes in InternalControl Over Financial Reporting.

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There have been nosignificant changes in the Company’s internal control over financial reportingidentified in connection with the evaluation of such internal control thatoccurred during the last fiscal quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

PART II - OTHERINFORMATION

 

**Item 2.        Unregistered Sales of Equity Securitiesand Use of Proceeds**

The following table presents information with respect to purchases madeby the Company of its common stock to become treasury stock for the periodDecember 31, 2006 through March 31, 2007. The shares were purchased from theContinental Materials Corporation Employees Profit Sharing Retirement Plan. Theshares became available due to changes in participants’ accounts. The Companypurchased the shares rather than having the Plan Administrator sell the shareson the open market.

Issuer Purchasesof Equity Securities
| **Period**                                 | ** ** | **(a) Total   Number of   Shares   Purchased** | ** ** | **(b) Average  Price Paid per   Share** | ** ** | **(c) Total Number of   Shares Purchased as Part  of Publicly Announced   Plans or Programs** | ** ** | **(d) Maximum Dollar   Value of shares that May  Yet Be Purchased Under   the Plans or Programs** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| December 31, 2006 —  January 27, 2007 |       | 1,714                                                                   |       | $                                                           | 26.35      |                                                                                                                                                      | 1,714      |                                                                                                                                                                    | $          | 1,373,774 |   |
| January 28 —   February 24, 2007      |       | —                                                                  |       | —                                                      |       | —                                                                                                                                                    |       | 1,373,774                                                                                                                                                               |       |
| February 25 —  March 31, 2007         |       | —                                                                  |       | —                                                      |       | —                                                                                                                                                    |       | 1,373,774                                                                                                                                                               |       |
| Total                                      |       | 1,714                                                                   |       | $                                                           | 26.35      |                                                                                                                                                      | 1,714      |                                                                                                                                                                    | $          | 1,373,774 |   |

 

On January 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 two banks as required by the Company’sRevolving Credit and Term Loan Agreement. The June 28, 2005 amendment to theLoan Agreement provides that the Company may make purchases of its own stock inan amount not to exceed $1,438,000, separate from purchases made in connectionwith the 2005 tender offer and the exercise of cash-less stock options. Sincethe 2005 tender offer, management has not actively sought to repurchase shares.

**Item 6.        Exhibits**
| ** ** | Exhibits        | ** ** | ** **                                                                                                                                                                                                                          |
|------------|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |            |       |                                                                                                                                                                                                                                |
| ** ** | **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                     |
|       |            |       |                                                                                                                                                                                                                                |
|       | 31.1            |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a) and  Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted   pursuant to Section 302 of the Sarbanes — Oxley Act of 2002  |
|       |            |       |                                                                                                                                                                                                                                |
|       | 31.2            |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/15d-14(a) and   Rule 13a-14(d)/15d-14(d) of the Securities Exchange Act of 1934, as adopted   pursuant to Section 302 of the Sarbanes — Oxley Act of 2002 |
|       |            |       |                                                                                                                                                                                                                                |
|       | 32              |       | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes —  Oxley   Act of 2002                                           |

 

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SIGNATURE

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

 
|        |         |   |   |   | CONTINENTAL MATERIALS CORPORATION         |
|--------|--------------|--------|--------|--------|-------------------------------------------|
|   |         |   |   |   |                                      |   |
|   |         |   |   |   |                                      |   |
| Date:  | May 15, 2007 |   |   | By:    |   /s/ Joseph J. Sum             |   |
|   |         |   |   |   |   Joseph J. Sum, Vice President |   |
|   |         |   |   |   |   and Chief Financial Officer   |   |

 

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