**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

(MarkOne)
| **x**  | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                    |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                            |
|   | For the  quarterly period ended **June 30, 2007**                                                                                                                                               |
|   |                                                                                                                                                                                            |
|   | 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**

(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 SouthWacker Drive, Suite 4000, Chicago, Illinois 60606**

(Address of principalexecutive offices)        (Zip Code)

**(312)541-7200**

(Registrant’stelephone number, including area code)

 

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

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes   x      No   o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

| Large Accelerated Filer   o |   | Accelerated  Filer   o |   | Non-Accelerated  Filer   x |
|--------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 or theExchange Act).

Yes   o      No   x
| Indicate the number of shares outstanding of  each lf the issuer’s classes of common stock, as of the latest practicable date: |
|-------------------------------------------------------------------------------------------------------------------------------------|
| Common Stock, $0.25 par value, shares outstanding at  August 10, 2007                                                               | 1,602,706 |

 

 

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PART I — FINANCIAL INFORMATION

**Item 1.  Financial Statements**

CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED BALANCE SHEETS

JUNE 30, 2007 andDECEMBER 30, 2006

(Unaudited)

 (000’s omitted except sharedata)
| ** **                                                                            | ** **   | **JUNE 30,  2007** | ** **   | **DECEMBER 30,  2006** | ** **   |
|---------------------------------------------------------------------------------------|--------------|-------------------------|--------------|-----------------------------|--------------|
| ***ASSETS***                                                                          | ** **   | ** **              | ** **   | ** **                  | ** **   |
| Current assets:                                                                       |         |                    |         |                        |         |
| Cash and cash  equivalents                                                            |         | $                       | 2,839        |                        | $            | 2,770 |   |
| Receivables, net                                                                      |         | 29,596                  |         | 24,120                      |         |
| Receivable for  insured losses                                                        |         | 1,595                   |         | 1,584                       |         |
| Inventories:                                                                          |         |                    |         |                        |         |
| Finished goods                                                                        |         | 8,544                   |         | 7,104                       |         |
| Work in process                                                                       |         | 1,441                   |         | 1,502                       |         |
| Raw materials and  supplies                                                           |         | 9,718                   |         | 8,229                       |         |
| Prepaid expenses                                                                      |         | 4,245                   |         | 4,291                       |         |
| Total current  assets                                                                 |         | 57,978                  |         | 49,600                      |         |
|                                                                                  |         |                    |         |                        |         |
| Property, plant and  equipment, net                                                   |         | 34,575                  |         | 32,365                      |         |
|                                                                                  |         |                    |         |                        |         |
| Goodwill                                                                              |         | 7,829                   |         | 7,829                       |         |
| Amortizable intangible  assets, net                                                   |         | 1,352                   |         | 1,517                       |         |
| Other assets                                                                          |         | 2,420                   |         | 2,394                       |         |
|                                                                                  |         |                    |         |                        |         |
|                                                                                  |         | $                       | 104,154      |                        | $            | 93,705 |   |
|                                                                                  |         |                    |         |                        |         |
| ***LIABILITIES***                                                                     |         |                    |         |                        |         |
| Current liabilities:                                                                  |         |                    |         |                        |         |
| Bank loan  payable                                                                    |         | $                       | 6,800        |                        | $            | — |   |
| Current portion  of long-term debt                                                    |         | 2,733                   |         | 2,866                       |         |
| Accounts payable  and accrued expenses                                                |         | 20,996                  |         | 17,060                      |         |
| Liability for unpaid  claims covered by insurance                                     |         | 1,595                   |         | 1,584                       |         |
| Income taxes                                                                          |         | 384                     |         | 579                         |         |
| Total current  liabilities                                                            |         | 32,508                  |         | 22,089                      |         |
|                                                                                  |         |                    |         |                        |         |
| Long-term debt                                                                        |         | 11,600                  |         | 12,800                      |         |
| Deferred income taxes                                                                 |         | 3,883                   |         | 3,883                       |         |
| Other long-term  liabilities                                                          |         | 2,032                   |         | 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                                                                     |         | 68,231                  |         | 67,373                      |         |
| Treasury shares,  971,558 and 968,803, at cost                                        |         | (16,573                 | )            | (16,503                     | )            |
|                                                                                  |         | 54,131                  |         | 53,343                      |         |
|                                                                                  |         |                    |         |                        |         |
|                                                                                  |         | $                       | 104,154      |                        | $            | 93,705 |   |

 

See accompanying notes

2

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CONTINENTALMATERIALS CORPORATION

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS, RETAINED EARNINGS

AND COMPREHENSIVEINCOME (LOSS)

FOR THE THREEMONTHS ENDED JUNE 30, 2007 AND JULY 1, 2006

(Unaudited)

(000’s omitted exceptper-share amounts)
| ** **                                                                                             | ** ** | **JUNE 30,  2007** | ** ** | **JULY 1,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                                                                                   |       |                    |       |                   |       |
| Sales                                                                                                  |       | $                       | 45,651     |                   | $          | 43,704 |   |
|                                                                                                   |       |                    |       |                   |       |
| Costs and  expenses:                                                                                   |       |                    |       |                   |       |
| Cost of sales (exclusive of depreciation, depletion  and amortization)                                 |       | 37,253                  |       | 34,957                 |       |
| Depreciation, depletion and amortization                                                               |       | 1,322                   |       | 1,249                  |       |
| Selling and administrative                                                                             |       | 5,276                   |       | 5,194                  |       |
|                                                                                                   |       |                    |       |                   |       |
| Gain on  disposition of property and equipment                                                         |       | 2                       |       | 72                     |       |
|                                                                                                   |       | 43,849                  |       | 41,328                 |       |
|                                                                                                   |       |                    |       |                   |       |
| Operating income                                                                                       |       | 1,802                   |       | 2,376                  |       |
|                                                                                                   |       |                    |       |                   |       |
| Interest expense                                                                                       |       | (368                    | )          | (202                   | )          |
| Other (expense)  income, net                                                                           |       | 263                     |       | (9                     | )          |
|                                                                                                   |       |                    |       |                   |       |
| Income before  income taxes                                                                            |       | 1,697                   |       | 2,165                  |       |
|                                                                                                   |       |                    |       |                   |       |
| Provision for  income taxes                                                                            |       | 511                     |       | 735                    |       |
|                                                                                                   |       |                    |       |                   |       |
| Net income                                                                                             |       | 1,186                   |       | 1,430                  |       |
|                                                                                                   |       |                    |       |                   |       |
| Retained  earnings, beginning of period                                                                |       | 67,045                  |       | 65,030                 |       |
|                                                                                                   |       |                    |       |                   |       |
| Retained  earnings, end of period                                                                      |       | $                       | 68,231     |                   | $          | 66,460 |   |
|                                                                                                   |       |                    |       |                   |       |
| Basic and  diluted earnings per share                                                                  |       | $                       | .74        |                   | $          | .89 |   |
|                                                                                                   |       |                    |       |                   |       |
| Average shares outstanding                                                                             |       | 1,603                   |       | 1,605                  |       |
|                                                                                                   |       |                    |       |                   |       |
| Comprehensive  income:                                                                                 |       |                    |       |                   |       |
| Net income                                                                                             |       | $                       | 1,186      |                   | $          | 1,430 |   |
| Comprehensive  loss from interest rate swap, net of tax of $0 for the three months ended  July 1, 2006 |       | —                  |       | (1                     | )          |
|                                                                                                   |       | $                       | 1,186      |                   | $          | 1,429 |   |

 

See accompanying notes

3

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

AND COMPREHENSIVE INCOME

FOR THE SIX MONTHSENDED JUNE 30, 2007 AND JULY 1, 2006

(Unaudited)

(000’s omitted exceptper-share amounts)
| ** **                                                                                             | ** ** | **JUNE 30,  2007** | ** ** | **JULY 1,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                                                                                   | ** ** | ** **              | ** ** | ** **             | ** ** |
|                                                                                                   |       |                    |       |                   |       |
| Sales                                                                                                  |       | $                       | 85,730     |                   | $          | 77,388 |   |
|                                                                                                   |       |                    |       |                   |       |
| Costs and expenses:                                                                                    |       |                    |       |                   |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization)                                 |       | 71,047                  |       | 62,938                 |       |
| Depreciation,  depletion and amortization                                                              |       | 2,637                   |       | 2,439                  |       |
| Selling and  administrative                                                                            |       | 10,569                  |       | 10,201                 |       |
|                                                                                                   |       |                    |       |                   |       |
| Gain on disposition of  property and equipment                                                         |       | 33                      |       | 146                    |       |
|                                                                                                   |       | 84,220                  |       | 75,432                 |       |
|                                                                                                   |       |                    |       |                   |       |
| Operating income                                                                                       |       | 1,510                   |       | 1,956                  |       |
|                                                                                                   |       |                    |       |                   |       |
| Interest expense                                                                                       |       | (581                    | )          | (298                   | )          |
| Other income, net                                                                                      |       | 279                     |       | 52                     |       |
|                                                                                                   |       |                    |       |                   |       |
| Income before income  taxes                                                                            |       | 1,208                   |       | 1,710                  |       |
|                                                                                                   |       |                    |       |                   |       |
| Provision for income  taxes                                                                            |       | 350                     |       | 581                    |       |
|                                                                                                   |       |                    |       |                   |       |
| Net income                                                                                             |       | 858                     |       | 1,129                  |       |
|                                                                                                   |       |                    |       |                   |       |
| Retained earnings,  beginning of period                                                                |       | 67,373                  |       | 65,331                 |       |
|                                                                                                   |       |                    |       |                   |       |
| Retained earnings, end  of period                                                                      |       | $                       | 68,231     |                   | $          | 66,460 |   |
|                                                                                                   |       |                    |       |                   |       |
| Basic and diluted  earnings per share                                                                  |       | $                       | .53        |                   | $          | .70 |   |
|                                                                                                   |       |                    |       |                   |       |
| Average shares  outstanding                                                                            |       | 1,603                   |       | 1,605                  |       |
|                                                                                                   |       |                    |       |                   |       |
| Comprehensive income:                                                                                  |       |                    |       |                   |       |
| Net income                                                                                             |       | $                       | 858        |                   | $          | 1,129 |   |
| Comprehensive income  from interest rate swap, net of tax of $1 for the six months ended July 1,  2006 |       | —                  |       | 2                      |       |
|                                                                                                   |       | $                       | 858        |                   | $          | 1,131 |   |

 

See accompanying notes

4

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHSENDED JUNE 30, 2007 AND JULY 1, 2006

(Unaudited)

(000’s omitted)
| ** **                                                              | ** ** | **JUNE 30,  2007** | ** ** | **JULY 1,  2006** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                                                    |       |                    |       |                   |       |
| Net cash used in  operating activities                                  |       | $                       | (1,105     | )                      | $          | (2,183 | ) |
|                                                                    |       |                    |       |                   |       |
| Investing  activities:                                                  |       |                    |       |                   |       |
| Cash paid for acquisitions of assets of certain  businesses             |       | —                  |       | (2,452                 | )          |
| Capital expenditures                                                    |       | (4,631                  | )          | (3,609                 | )          |
| Proceeds from sale of assets                                            |       | 317                     |       | 166                    |       |
| Net cash used in  investing activities                                  |       | (4,314                  | )          | (5,895                 | )          |
|                                                                    |       |                    |       |                   |       |
| Financing  activities:                                                  |       |                    |       |                   |       |
| Borrowings under revolving credit facility                              |       | 6,800                   |       | 1,000                  |       |
| Long-term borrowings                                                    |       | —                  |       | 5,000                  |       |
| Repayment of long-term debt                                             |       | (1,333                  | )          | (500                   | )          |
| Insurance proceeds for property and equipment damaged  by flood         |       | 91                      |       | —                 |       |
| Payment to acquire treasury stock                                       |       | (70                     | )          | —                 |       |
| Net cash  provided by financing activities                              |       | 5,488                   |       | 5,500                  |       |
|                                                                    |       |                    |       |                   |       |
| Net increase  (decrease) in cash and cash equivalents                   |       | 69                      |       | (2,578                 | )          |
| Cash and cash  equivalents:                                             |       |                    |       |                   |       |
| Beginning of period                                                     |       | 2,770                   |       | 6,829                  |       |
|                                                                    |       |                    |       |                   |       |
| End of period                                                           |       | $                       | 2,839      |                   | $          | 4,251 |   |
|                                                                    |       |                    |       |                   |       |
| Supplemental  disclosures of cash flow items:                           |       |                    |       |                   |       |
| Cash paid during  the six months for:                                   |       |                    |       |                   |       |
| Interest                                                                |       | $                       | 675        |                   | $          | 237 |   |
| Income taxes                                                            |       | 545                     |       | 215                    |       |
| Supplemental  disclosures of noncash investing and financing activities |       |                    |       |                   |       |
| Note issued as partial consideration for asset  purchase                |       | $                       | —     |                   | $          | 1,000 |   |
| Capital  expenditures purchased on account                              |       | 105                     |       | —                 |       |

 

See accompanying notes

5

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CONTINENTALMATERIALS CORPORATION

SECURITIES ANDEXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLYCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED JUNE30, 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 reevaluated our reporting segmentsduring the first quarter in accordance with Financial Accounting StandardsBoard (FASB) Statement No. 131, “Disclosures about Segments of an Enterpriseand Related Information.” Although our four reporting segments, see Note 5,have remained the same, the Door Division of Transit Mix Concrete Co.,previously reported within the Concrete, Aggregates and Construction Suppliessegment is now reported within the Door segment. In the opinion of management,the condensed consolidated financial statements include all adjustments (noneof which were other than normal recurring adjustments) necessary for a fairstatement of the results 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 June 30, 2007 of 30% was down 4% from the 34% rate for the threemonths ended July 1, 2006. The decrease is primarily the result of ananticipated increase in the percentage depletion deduction, the scheduledincrease in the deduction for certain domestic production activities arisingunder the American Jobs Creation Act of 2004 and the release of taxcontingencies that were resolved in favor of the Company.

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. The gross amount of unrecognized tax benefits at June 30,2007 was $287,000 of which $86,000 would affect the effective tax rate.

We classify interest and penalties recognized on the liability forunrecognized tax benefits as income tax expense. Accrued interest and penaltiesincluded in our total liability for unrecognized tax benefits were $56,000 asof June 30, 2007 and $85,000 as of 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 June 30, 2007is approximately $21,000 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.

3.               Operatingresults for the first six 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. Sales of the Door segment have not shown strong seasonalfluctuations in recent years.

6

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4.               Thereis no difference in the calculation of basic and diluted earnings per share(EPS) for the six months ended June 30, 2007 and July 1, 2006.

5.               The Company operates primarily in four reportablesegments within its two principal industry groups; the Heating and Coolingsegment and the Evaporative Cooling segment in the Heating, Ventilation and AirConditioning (HVAC) industry group and the Concrete, Aggregates andConstruction Supplies segment and the Door segment in the Construction Productsindustry group. The Heating and Cooling segment produces and sells gas-firedwall furnaces, console heaters and fan coils from the Company’s wholly-ownedsubsidiary, Williams Furnace Co. of Colton, California. The Evaporative Coolingsegment produces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona. Sales of these twosegments are nationwide, but are concentrated in the southwestern United States.Concrete, Aggregates and Construction Supplies are offered from numerouslocations along the Front Range of Colorado operated by the Company’swholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co.(TMC), of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo and RockyMountain Ready Mix Concrete, Inc. of Denver. Doors are fabricated and soldalong with the related hardware from the Company’s wholly-owned subsidiary,McKinney Door and Hardware, Inc. (MDHI) of Pueblo, Colorado. Sales of these twosegments are highly concentrated in the Front Range area in Colorado althoughdoor sales are also made throughout the United States. Prior to the 2007 fiscalyear, the Company 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 segmentsand allocates resources to them based on a number of criteria includingoperating income, return on investment and other strategic objectives.Operating income is determined by deducting operating expenses from allrevenues. In computing operating income, none of the following has been addedor deducted: unallocated corporate expenses, interest, other income/expense orincome 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 aboutreported segments for the six month and three month periods ended June 30, 2007and July 1, 2006 along with the items necessary to reconcile the segmentinformation to the totals reported in the financial statements (amounts inthousands):

7

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| ** **                                | ** ** | **Construction Products**                                          | ** ** | **HVAC Products** | ** ** | ** **                                 | ** ** | ** **                            | ** ** | ** **                     | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|
| ****                                      | ** ** | **Concrete,  Aggregates &  Construction   Supplies** | ** ** | **Doors**         | ** ** | **Combined  Construction   Products** | ** ** | **Heating   and   Cooling** | ** ** | **Evaporative   Cooling** | ** ** | **Combined  HVAC   Products** | ** ** | **Unallocated   Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2007                                      |       |                                                               |       |              |       |                                       |       |                                  |       |                           |       |   |   |   |   |   |   |   |   |
| Six Months ended  June 30, 2007           |       |                                                               |       |              |       |                                       |       |                                  |       |                           |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                                  | 45,525     |              | $          | 9,449                                      |       | $                                     | 54,974     |                           | $          | 16,176 |   | $ | 14,399 |   | $ | 30,575 |   | $ | 9 |   | $ | 172 |   | $ | 85,730 |   |
| Depreciation,  depletion and amortization |       | 2,029                                                              |       | 61                |       | 2,090                                      |       | 211                                   |       | 300                            |       | 511 |   | 36 |   | — |   | 2,637 |   |
| Operating income  (loss)                  |       | 2,318                                                              |       | 1,167             |       | 3,485                                      |       | (679                                  | )          | 127                            |       | (552 | ) | (1,477 | ) | 54 |   | 1,510 |   |
| Segment assets                            |       | 61,545                                                             |       | 5,804             |       | 67,349                                     |       | 19,886                                |       | 14,426                         |       | 34,312 |   | 2,489 |   | 4 |   | 104,154 |   |
| Capital  expenditures (a)                 |       | 3,806                                                              |       | 209               |       | 4,015                                      |       | 232                                   |       | 478                            |       | 710 |   | 31 |   | — |   | 4,756 |   |
| Quarter ended  June 30, 2007              |       |                                                               |       |              |       |                                       |       |                                  |       |                           |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                                  | 25,718     |              | $          | 4,531                                      |       | $                                     | 30,249     |                           | $          | 6,794 |   | $ | 8,518 |   | $ | 15,312 |   | $ | 4 |   | $ | 86 |   | $ | 45,651 |   |
| Depreciation,  depletion and amortization |       | 1,021                                                              |       | 26                |       | 1,047                                      |       | 106                                   |       | 150                            |       | 256 |   | 19 |   | — |   | 1,322 |   |
| Operating income  (loss)                  |       | 2,845                                                              |       | 571               |       | 3,416                                      |       | (1,050                                | )          | 76                             |       | (974 | ) | (667 | ) | 27 |   | 1,802 |   |
| Segment assets                            |       | 61,545                                                             |       | 5,804             |       | 67,349                                     |       | 19,886                                |       | 14,426                         |       | 34,312 |   | 2,489 |   | 4 |   | 104,154 |   |
| Capital expenditures (a)                  |       | 715                                                                |       | 65                |       | 780                                        |       | 89                                    |       | 149                            |       | 238 |   | 9 |   | — |   | 1,027 |   |

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(a)          Capitalexpenditures for the Concrete, Aggregates and Construction Supplies segmentinclude $46,000 of additions purchased on account and capital expenditures forthe Evaporative Cooling segment include $59,000 of additions purchased onaccount.
| ** **                                 | ** ** | **Construction Products**                                           | ** ** | **HVAC  Products** | ** ** | ** **                                 | ** ** | ** **                            | ** ** | ** **                     | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **Concrete,  Aggregates &   Construction   Supplies** | ** ** | **Doors**               | ** ** | **Combined  Construction   Products** | ** ** | **Heating   and   Cooling** | ** ** | **Evaporative   Cooling** | ** ** | **Combined  HVAC   Products** | ** ** | **Unallocated   Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2006                                       |       |                                                                     |       |                    |       |                                       |       |                                  |       |                           |       |   |   |   |   |   |   |   |   |
| Six Months ended  July 1, 2006 as restated |       |                                                                     |       |                    |       |                                       |       |                                  |       |                           |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers          |       | $                                                                        | 45,071     |                    | $          | 6,552                                      |       | $                                     | 51,623     |                           | $          | 11,631 |   | $ | 13,959 |   | $ | 25,590 |   | $ | 3 |   | $ | 172 |   | $ | 77,388 |   |
| Depreciation,  depletion and amortization  |       | 1,829                                                                    |       | 74                      |       | 1,903                                      |       | 198                                   |       | 300                            |       | 498 |   | 38 |   | — |   | 2,439 |   |
| Operating income  (loss)                   |       | 2,746                                                                    |       | 659                     |       | 3,405                                      |       | (149                                  | )          | 331                            |       | 182 |   | (1,685 | ) | 54 |   | 1,956 |   |
| Segment assets  (a)                        |       | 54,470                                                                   |       | 4,750                   |       | 59,220                                     |       | 18,303                                |       | 12,651                         |       | 30,954 |   | 3,468 |   | 63 |   | 93,705 |   |
| Capital  expenditures (b)                  |       | 5,067                                                                    |       | 65                      |       | 5,132                                      |       | 102                                   |       | 162                            |       | 264 |   | 2 |   | — |   | 5,398 |   |
| Quarter ended  July 1, 2006 as restated    |       |                                                                     |       |                    |       |                                       |       |                                  |       |                           |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers          |       | $                                                                        | 26,112     |                    | $          | 3,287                                      |       | $                                     | 29,399     |                           | $          | 5,045 |   | $ | 9,171 |   | $ | 14,216 |   | $ | 3 |   | $ | 86 |   | $ | 43,704 |   |
| Depreciation,  depletion and amortization  |       | 942                                                                      |       | 37                      |       | 979                                        |       | 100                                   |       | 150                            |       | 250 |   | 20 |   | — |   | 1,249 |   |
| Operating income  (loss)                   |       | 2,867                                                                    |       | 325                     |       | 3,192                                      |       | (354                                  | )          | 358                            |       | 4 |   | (847 | ) | 27 |   | 2,376 |   |
| Segment assets  (a)                        |       | 54,470                                                                   |       | 4,750                   |       | 59,220                                     |       | 18,303                                |       | 12,651                         |       | 30,954 |   | 3,468 |   | 63 |   | 93,705 |   |
| Capital expenditures (b)                   |       | 3,799                                                                    |       | —                  |       | 3,799                                      |       | 97                                    |       | 37                             |       | 134 |   | — |   | — |   | 3,933 |   |

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(a)          Segmentassets are as of December 30, 2006.

(b)         Capitalexpenditures for the Concrete, Aggregates and Construction Supplies segmentinclude $1,735,000 million purchased on June 30, 2006 as part of the purchaseof certain assets of a concrete producer in Colorado Springs. Capitalexpenditures for the Door segment include $54,000 purchased on January 1, 2006as part of the purchase of the assets of CSSL. Also see Note 6.

There are no differencesin the basis of segmentation or in the basis of measurement of segment profitor loss from the last annual report 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 use covenant,$370,000 for existing customer relations and $355,000 of goodwill, all of whichis amortizable over 15 years for tax purposes. For book purposes, thenon-compete is being amortized over its five-year term, the restriction of landuse 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.”

8

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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 financial information for the six months ended July1, 2006 includes the results of ASCI from January 1, 2006 through April 30,2006, and have been adjusted for interest expense, additional depreciationbased on the fair market value of plant and equipment, amortization ofidentifiable intangibles and income tax expense. Interim financial informationfor the six month periods ended July 1, 2006 was not made available to theCompany. Amounts are in thousands except per share amounts.
| ****                             | ** ** | **Six Months Ended  July 1, 2006** | ** ** |
|----------------------------------|------------|--------------------------------------------------------|------------|
| Net sales                        |       | $                                                      | 79,684     |   |
| Net loss                         |       | 1,156                                                  |       |
| Basic and diluted loss per share |       | .72                                                    |       |
|                                  |            |                                                        |            |  |

 

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 June 30, 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 $1,352,000,net of $1,258,000 accumulated amortization. The pre-tax amortization expensefor intangible assets during the quarter ended June 30, 2007 was $77,000. Basedupon the intangible assets recorded on the balance sheet at June 30, 2007,amortization expense for the next five years is estimated to be as follows:2007 — $320,000, 2008 — $300,000, 2009 — $293,000, 2010 — $262,000 and 2011 —$101,000.

8.               At June 30, 2007,the Company was not in compliance with the Cash Flow Ratio as defined in theCompany’s loan agreement dated September 5, 2003 with LaSalle Bank NationalAssociation and Fifth Third Bank. The Company has obtained waivers of the requirementfor the quarter and is in discussions with the banks to establish revisedrequirements such that the Company would expect to be in compliance with thecovenant in future quarters. A principal reason for not meeting the requiredratio was the high level of capital expenditures during the past twelve months.

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

The following Management’s Discussion and Analysisgives effect to the restatement 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.

9

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Financial Condition 

Sales of the Company’sHVAC products are seasonal and weather sensitive except for fan coils. Revenuesin the Company’s Concrete, Aggregates and Construction Supplies segment areinfluenced by the level of construction activity and weather conditions alongthe Front Range of Colorado. Sales for the Door segment are not as stronglyseasonal nor are they much affected by weather conditions. Historically, theCompany has experienced operating losses during the first quarter except whenthe weather is mild along the Front Range. Operating results typically improvein the second and third quarters reflecting more favorable weather conditionsin Colorado and the seasonal sales of Evaporative Cooling segment. Fourthquarter results can vary based on weather conditions in Colorado as well as inthe principal markets for the Company’s heating equipment. The Company typicallyexperiences operating cash flow deficits during the first half of the yearreflecting operating results, the use of sales dating programs (extendedpayment terms) related to the Evaporative Cooling segment and payments of theprior year’s accrued incentive bonuses and Company profit-sharingcontributions. As a result, the Company’s borrowings against its revolvingcredit facility tend to peak during the second quarter and then decline overthe remainder of the year. This trend has continued thus far in 2007.

As expected, the Company’scash flow during the first six months of 2007 was negative due to theseasonality of sales, production schedules and the sales dating programsrelated to the evaporative cooler product line. Operations used $1,105,000 ofcash compared to the $2,183,000 of cash used during the first six months of2006. The improved cash flow was due to changes in working capital accountsprimarily a larger increase in accounts payable and accrued expenses during thefirst six months of 2007 as compared to the 2006 period.

During the six monthsended June 30, 2007, investing activities used $4,314,000 of cash compared to$5,895,000 in the prior year’s period. Capital expenditures of $4,631,000during the first six months of 2007, primarily for the Concrete, Aggregates andConstruction Supplies segment, were significantly higher than the expendituresduring the comparable 2006 period. The replacement of two loaders and a scraperfor the quarry operations and the construction and installation of anindustrial sand plant all occurred during the first six months of 2007. Theproceeds from the sale of assets for 2007 include $230,000 received from theJune sale of stock received from the demutualization of a mutual insurancecompany. Investing activities during the first half of 2006 included $2,452,000for the acquisition of certain assets of two companies.

Financing activities provided $5,488,000 during the first six months of2007 compared to $5,500,000 provided during the first six months of 2006. Allscheduled debt repayments were made during the first six months of both 2007and 2006. As expected, the Company borrowed against its revolving creditfacility during the second quarter of 2007. During the first six months of2007, the highest amount of Company borrowings outstanding under the revolvingcredit agreement was $8,600,000 and the average amount outstanding was$3,687,000. At June 30, 2007, the Company was not in compliance with the CashFlow Ratio as defined in the loan agreement. The Company has obtained waiversof the requirement for the quarter and is in discussions with the banks toestablish revised requirements such that the Company would expect to be incompliance with the covenant in future quarters. A principal reason for notmeeting the required ratio was the high level of capital expenditures duringthe past twelve months.

The Company believesthat anticipated cash flow from operations, supplemented by seasonal borrowingsagainst the revolving line of credit, (of which $6,800,000 was outstanding atJune 30, 2007) will be sufficient to cover expected cash needs, includingservicing debt and planned capital expenditures for at least the next twelvemonths.

Operations — Comparison of Quarter Ended June 30, 2007to Quarter Ended July 1, 2006

Historically, the Company has experienced improved operating resultsduring the second quarter as sales in the Concrete, Aggregates and ConstructionSupplies segment increase due to weather more conducive to constructionactivity. The 2007 operating results were consistent with this trend.Consolidated sales during the second quarter of 2007 were $45,651,000 comparedto $43,704,000 in the second quarter of 2006.

The Heating and Cooling segment and the Door segment both reportedincreased sales for the quarter while the Concrete, Aggregates and ConstructionSupplies segment and the Evaporative Cooling segment reported declines. Cost ofsales as a percentage of sales increased slightly from 80.0% to 81.6% primarilydue to narrower margins in the Heating and Cooling segment. Selling andadministrative costs increased 1.6% but decreased as a percentage of sales. Anincrease in selling and administrative costs at the subsidiary level waspartially offset by a reduction at the Corporate office resulting fromadjustments to accrued incentive based compensation. Depreciation, depletionand amortization for the 2007 quarter increased $73,000 over the prior year’squarter due to increased capital expenditures during 2006 and 2007 andamortization of intangible assets associated with the ASCI acquisition. Theresulting operating income of $1,802,000 lagged behind the $2,376,000 reportedfor the second quarter of 2006.

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Interest expense increased from $202,000 for the second quarter of 2006to $368,000 in the 2007 quarter due to increased average debt and higherinterest rates.

Other income for the 2007 quarter includes a $230,000 gain on the saleof stock received from the demutualization of a mutual insurance company.

A discussion ofoperations by segment follows.

**ConstructionProducts**

The table below presents a summary of operating information for the tworeportable segments within the Construction Products group for the quartersended June 30, 2007 and July 1, 2006 (amounts in thousands):

 
| ** **                              | ** ** | **Concrete,   Aggregates and   Construction   Supplies** | ** ** | **Doors** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------|------------|
| Quarter ended  June 30, 2007            |       |                                                                         |       |      |       |
| Revenues from  external customers       |       | $                                                                            | 25,718     |      | $          | 4,531 |   |
| Segment  operating income               |       | 2,845                                                                        |       | 571       |       |
| Operating income  as a percent of sales |       | 11.1                                                                         | %          | 12.6      | %          |
| Segment assets  as of June 30, 2007     |       | $                                                                            | 61,545     |      | $          | 5,804 |   |
| Return on assets                        |       | 4.6                                                                          | %          | 9.8       | %          |
|                                    |       |                                                                         |       |      |       |
| Quarter ended  July 1, 2006             |       |                                                                         |       |      |       |
| Revenues from  external customers       |       | $                                                                            | 26,112     |      | $          | 3,287 |   |
| Segment  operating income               |       | 2,867                                                                        |       | 325       |       |
| Operating income  as a percent of sales |       | 11.0                                                                         | %          | 9.9       | %          |
| Segment assets  as of July 1, 2006      |       | $                                                                            | 55,777     |      | $          | 4,587 |   |
| Return on assets                        |       | 5.2                                                                          | %          | 7.1       | %          |

 

Concrete, Aggregates andConstruction Supplies Segment

Sales in the Concrete,Aggregates and Construction Supplies segment for the second quarter of 2007declined 1.5% from the prior year’s comparable quarter. Concrete volumeimproved; however margins deteriorated as pricing decisions made in order toprotect our market share were insufficient to fully recover higher material anddelivery costs, including fuel. Aggregate volumes declined 3% as constructionactivity along the Front Range of Colorado, especially housing construction,declined. Margins, however, improved as production efficiency improved. Inaddition, the recovery of $725,000 from our insurance carrier as settlement offlood claims at our two Arkansas River operations during the third quarter of2006, further enhanced aggregates margins. All expenses incurred to repair thedamage and resume production had been recognized in cost of sales as incurred.Both quarries were back in operation by the end of 2006 although some measuresto mitigate future vulnerability were performed in 2007. No recovery had beenrecorded prior to the settlement during the second quarter of 2007.

Operating incomeremained relatively constant for the 2007 quarter compared to the 2006 quarter.The improved aggregates operations including the insurance recovery largelyoffset the deterioration of the concrete margins. Depreciation, depletion andamortization increased because of the higher capital spending during 2006 and2007 to date, including the addition of $1,010,000 of amortizable intangibles.Selling and administrative costs rose moderately during the second quarter of2007 compared to the 2006 quarter. As a result, operating income as a percentof sales improved modestly while the return on assets declined in the 2007quarter from the prior year’s quarter largely due to an increase in segmentassets. The increase in segment assets is attributable to the higher level ofcapital spending and receivables.

Door Segment

Door segment sales rose$1,244,000, or 38%, during the second quarter of 2007 over the comparable 2006quarter. Sales during a specific quarter can be heavily influenced by customerrequests to either accelerate or delay shipments of jobs to better coincidewith their own construction schedules. The backlog which had grown during thelatter part of 2006 has declined during the 2007 quarter as a number of jobswere shipped. The June 2007 backlog is at approximately the same level as it wasat the end of June 2006.  Sales pricesincreased in response to increased costs. Margin improved principally due tothe higher volume.

Operating incomeimproved from $325,000 during the second quarter of 2006 to $571,000 for the2007 quarter as a result of the higher sales volume, increased prices and animprovement in the electronics business (acquired at the beginning of 2006).Selling and administrative costs increased during the 2007 quarter primarilydue to

11

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the increased sales. Asa result, both operating income as a percent of sales and return on assetsimproved in the 2007 quarter from the prior year’s quarter.

**HVAC Products**

The table below presents a summary of operatinginformation for the two reportable segments within the HVAC products group forthe quarters ended June 30, 2007 and July 1, 2006 (amounts in thousands):
| ** **                                     | ** ** | **Heating and   Cooling** | ** ** | **Evaporative   Cooling** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|
| Quarter ended  June 30, 2007                   |       |                                |       |                           |       |
| Revenues from  external customers              |       | $                                   | 6,794      |                           | $          | 8,518 |   |
| Segment  operating (loss) income               |       | (1,050                              | )          | 76                             |       |
| Operating (loss)  income as a percent of sales |       | (15.5                               | )%         | .9                             | %          |
| Segment assets  as of June 30, 2007            |       | $                                   | 19,886     |                           | $          | 14,426 |   |
| Return on assets                               |       | (5.3                                | )%         | .5                             | %          |
|                                           |       |                                |       |                           |       |
| Quarter ended  July 1, 2006                    |       |                                |       |                           |       |
| Revenues from  external customers              |       | $                                   | 5,045      |                           | $          | 9,171 |   |
| Segment  operating (loss) income               |       | (354                                | )          | 358                            |       |
| Operating (loss)  income as a percent of sales |       | (7.0                                | )%         | 3.9                            | %          |
| Segment assets  as of July 1, 2006             |       | $                                   | 17,418     |                           | $          | 14,563 |   |
| Return on assets                               |       | (2.0                                | )%         | 2.5                            | %          |

 

Heating and Cooling Segment

Sales in the Heating and Cooling segment were $6,794,000 for the secondquarter of 2007, an increase of $1,749,000, or 34.7%, from the comparable 2006quarter. Fan coil volume accounted for the increase with sales surging nearly87% from the prior year’s quarter. This increase was the result of favorablemarket conditions and the restructured sales representative network which wascompleted in late 2005. Pricing remained relatively flat. Partially offsettingthis increase was an 11% decline in furnace volume after a particularly strongfirst quarter. Cost of sales as a percentage of sales increased during thesecond quarter of 2007 to 90.6% from 75.0% for the comparable quarter of 2006.Higher material and manufacturing costs contributed to this increase.

The operating loss for the 2007 quarter was $1,050,000 compared to theloss of $354,000 incurred during the second quarter of 2006. Selling andadministrative expenses were higher primarily due to the addition of personnelin the sales and engineering departments. Also contributing to the increase inselling costs were higher sales incentives and other related expenses incurredon sales to a national home center. A larger share of wall furnace sales duringthe second quarter of 2007 as compared to 2006, were made to this national homecenter account. As a result, both operating loss as a percent of sales andreturn on assets declined in the 2007 quarter from the prior year’s quarter.

Evaporative Cooling Segment

Sales in the Evaporative Cooling segment declined $653,000, or 7.7%,during the second quarter of 2007 from the comparable 2006 quarter. Coolweather in the markets served, especially during May, caused the decline.

Operating income also declined $282,000, or 79% from the same quarterin 2006. The decline resulted from of an increase in cost of sales as apercentage of sales which was due to the reduced sales volume, competitivepressures that restricted price increases in response to cost increases and anadditional accrual for workers compensation claims. Depreciation andamortization remained constant between the periods. The reduction of sellingand administrative expenses was related to the decline in sales as theseexpenses as a percentage of sales stayed relatively constant compared to thesecond quarter of 2006. As a result, both operating income as a percent ofsales and return on assets declined in the 2007 quarter from the prior year’squarter.

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Operations - Comparison of Six Months Ended June 30,2007 to Six Months Ended July 1, 2006

Consolidated sales during the first half of 2007 were $85,730,000compared to $77,388,000 during the first half of 2006. The improvement was ledby the Heating and Cooling segment, although all segments reported increasedsales for the six months ended June 30, 2007 compared to the six months endedJuly 1, 2006 except for the Concrete, Aggregates and Construction Suppliessegment. Cost of sales as a percentage of sales increased from 81.3% for the2006 period to 82.9% during the 2007 period. Depreciation, depletion andamortization increased $198,000 over the prior year’s period due to increasedcapital expenditures during 2006 and 2007 and amortization of intangible assetsassociated with the ASCI acquisition. Selling and administrative costs declinedas a percentage of sales. The resulting operating income of $1,510,000 was lessthan the $1,956,000 reported for the first six months of 2006. As noted above,other income for the first half of 2007 includes a $230,000 gain on the sale ofstock received from the demutualization of a mutual insurance company.

A discussion ofoperations by segment follows.

**ConstructionProducts**

The table below presents a summary of operating information for the tworeportable segments within the Construction Products group for the six monthsended June 30, 2007 and July 1, 2006 (amounts in thousands):
| ** **                                     | ** ** | **Concrete,   Aggregates and  Construction   Supplies** | ** ** | **Doors** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------|------------|
| Six Months ended June  30, 2007                |       |                                                                   |       |      |       |
| Revenues from external  customers              |       | $                                                                      | 45,525     |      | $          | 9,449 |   |
| Segment operating  income                      |       | 2,318                                                                  |       | 1,167     |       |
| Operating (loss) income  as a percent of sales |       | 5.1                                                                    | %          | 12.4      | %          |
| Segment assets as of  June 30, 2007            |       | $                                                                      | 61,545     |      | $          | 5,804 |   |
| Return on assets                               |       | 3.8                                                                    | %          | 20.1      | %          |
|                                           |       |                                                                   |       |      |       |
| Six Months ended July  1, 2006                 |       |                                                                   |       |      |       |
| Revenues from external  customers              |       | $                                                                      | 45,071     |      | $          | 6,552 |   |
| Segment operating (loss)  income               |       | 2,746                                                                  |       | 659       |       |
| Operating (loss) income  as a percent of sales |       | 6.1                                                                    | %          | 10.0      | %          |
| Segment assets as of  July 1, 2006             |       | $                                                                      | 55,777     |      | $          | 4,587 |   |
| Return on assets                               |       | 4.9                                                                    | %          | 14.3      | %          |

 

Concrete, Aggregates andConstruction Supplies Segment

Sales in the Concrete,Aggregates and Construction Supplies segment for the first six months of 2007increased slightly over the prior year’s comparable period. Concrete volumedeclined but sales dollars increased due to increased prices in response tohigher material and delivery costs, including fuel. Margins, however,deteriorated as pricing increases did not keep pace with higher cement, fueland other costs. Aggregate volumes increased primarily due to the sale of somebulk product, including fill sand, during the first quarter of 2007. Aggregatemargins improved as a result of the production efficiencies and insurancesettlement as described above for the current quarter. Construction suppliessales declined during the first six months of 2007 as compared to the 2006period due to the slow-down in construction.

Operating income declined to $2,318,000 during the 2007 period from$2,746,000 for the 2006 period. The decline was due to the reduced concretevolume and margins. Partially offsetting this decline was the improvedaggregate margins for the reasons noted above. Depreciation, depletion andamortization increased during the 2007 period for the reasons noted for the quarter.For the 2007 six month period, the lower selling and administrative expenseswere attributable to the consolidation of administrative functions into theColorado Springs office. As a result, both operating income as a percent ofsales and return on assets declined for the six months ended June 30, 2007compared to the six months ended July 1, 2006.

Door Segment

Sales in the Doorsegment for the first six months of 2007 increased $2,897,000 over thecomparable 2006 period due to the timing of shipments as described in thediscussion for the current quarter.

Operating incomeimproved from $659,000 during the first half of 2006 to $1,167,000 for the 2007period due to higher sales volume, increased prices and an improvement in theelectronics business. The backlog was also reduced during the first quarter of2007. As a result, both operating income as a percent of sales and the returnon assets improved in the six months ended June 30, 2007 compared to the sixmonths ended July 1, 2006.

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**HVAC Products**

The table below presents a summary of operatinginformation for the two reportable segments within the HVAC products group forthe six months ended June 30, 2007 and July 1, 2006 (amounts in thousands):
| ** **                                     | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| Six Months ended  June 30, 2007                |       |                          |       |                     |       |
| Revenues from  external customers              |       | $                             | 16,176     |                     | $          | 14,399 |   |
| Segment  operating (loss) income               |       | (679                          | )          | 127                      |       |
| Operating (loss)  income as a percent of sales |       | (4.2                          | )%         | .9                       | %          |
| Segment assets  as of June 30, 2007            |       | $                             | 19,886     |                     | $          | 14,426 |   |
| Return on assets                               |       | (3.4                          | )%         | .9                       | %          |
|                                           |       |                          |       |                     |       |
| Six Months ended  July 1, 2006                 |       |                          |       |                     |       |
| Revenues from  external customers              |       | $                             | 11,631     |                     | $          | 13,959 |   |
| Segment  operating (loss) income               |       | (149                          | )          | 331                      |       |
| Operating (loss)  income as a percent of sales |       | (1.3                          | )%         | 2.4                      | %          |
| Segment assets  as of July 1, 2006             |       | $                             | 17,418     |                     | $          | 14,563 |   |
| Return on assets                               |       | (.9                           | )%         | 2.3                      | %          |

 

Heating and Cooling Segment

Sales in the Heating and Cooling segment increased $4,545,000, or 39%,during the first six months of 2007 over the comparable 2006 period. Fan coilvolume was responsible for the majority of the increase although furnace volumewas higher on the strength of sales during the first quarter, largely inJanuary. For the first six months of 2007, fan coil sales increased 87% due tothe reasons cited for the quarter above.

The operating loss increased from $149,000 during the first six monthsof 2006 to a loss of $679,000 for the 2007 period despite the increase insales. Cost of sales as a percent of sales increased from 73.4% to 83% due tothe reasons noted above. In addition, pricing decisions made to retain anational home center account during the second quarter of 2006 also decreasedmargins. Selling and administrative costs were higher due to reasons notedabove. As a result, both operating income as a percent of sales and the returnon assets declined for the first six months of 2007 from the prior year’speriod.

Evaporative Cooling Segment

Sales in the Evaporative Cooling segment increased $440,000, or 3.2%,during the first six months of 2007 over the comparable 2006 period. Earlyshipments to a national home center account as a result of a warm March and twonew customers increased sales during the first quarter of 2007. The increasedfirst quarter sales turned out largely to be a timing difference betweenquarters as a milder April and May, noted above, caused the sales for thesecond quarter to lag behind the prior year.

The operating profit declined from $331,000 during the first six monthsof 2006 to $127,000 for the first six months of 2007. Cost of sales as a percentageof sales increased to 85.5% in 2007 from 83.7% for the comparable 2006 perioddue to the reasons cited above. Depreciation and amortization remained constantbetween the periods while selling and administrative expenses, althoughmodestly higher during the first six months of 2007 compared to the 2006period, declined as a percentage of sales. As a result, operating income as apercent of sales and the return on assets decreased during the first six monthsof 2007from the prior year’s period.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States which require theCompany to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities asof June 30, 2007 and December 30, 2006 and affect the reported amounts ofrevenues and expenses for the periods reported. Actual results could differ fromthose estimates.

Information withrespect 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 Item 7, Management’s Discussion and Analysis of Financial Condition andResults of Operations, of the Company’s Annual Report on Form 10-K for thefiscal year ended December 30, 2006.

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.

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RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 2 fordiscussion of the accounting standards adopted in 2007.

The Companydiscusses recently issued accounting standards and tax law changes in theCritical Accounting Policies section under Item 7 and in Note 1 to ConsolidatedFinancial Statements in Item 8 of the Company’s Annual Report on Form 10-K forthe fiscal year 2006. Other than as discussed in those sections, the Companydoes not currently have any transactions or circumstances that have beenaddressed by recently issued accounting pronouncements. Therefore, adoption ofany of these statements or pronouncements would not have a material impact onthe Company’s results of operations, financial position or liquidity.

FORWARD-LOOKINGSTATEMENTS

The foregoing discussion contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended. Suchforward-looking statements are based on the beliefs of the Company’s managementas well as on assumptions made by and information available to the Company atthe time such statements were made.  Whenused in this Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,”“expects,” “plans,” “projects,” and similar expressions are intended toidentify forward-looking statements. Actual results could differ materiallyfrom those projected in the forward-looking statements as a result of factorsincluding but not limited to: weather, interest rates, availability of rawmaterials and their related costs, national and local economic conditions andcompetitive forces. Some of these factors are discussed in more detail in theCompany’s 2006 Annual Report on Form 10-K. Changes in accounting rules andpronouncements could also alter projected results. Forward-looking statementsspeak only as of the date they were made, and the Company undertakes noobligation to publicly update them, except as required by law.

**Item 3.**                          QuantitativeAnd Qualitative Disclosures About Market Risk

Therehave been no material changes in the market risks that the Company is exposedto since those discussed in the Company’s 2006 Annual Report on Form 10-K.

**Item 4.**                          Controlsand Procedures

(a)                  DisclosureControls and Procedures.

TheCompany’s Chief Executive Officer and Chief Financial Officer, with theparticipation of management, have evaluated the effectiveness of the Company’s “disclosurecontrols and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) as of June 30, 2007. Based on thatevaluation, they have concluded that the Company’s disclosure controls andprocedures as of such date are effective and are reasonably designed to ensurethat all material information relating to the Company (including itssubsidiaries) is accumulated and communicated to management to allow timely decisionsregarding required disclosure and to ensure that all material informationrequired to be disclosed in this quarterly report is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission.

(b)                 Changesin Internal Control Over Financial Reporting.

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 periodApril 1, 2007 through June 30, 2007. The shares were purchased from theContinental Materials Corporation Employees Profit Sharing Retirement Plan. Theshares became available 

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due to changes in participants’ accounts. The Company purchased theshares rather than having the Plan Administrator sell the shares on the openmarket.

Issuer Purchases ofEquity Securities
| **Period**                    | ** ** | **(a) Total   Number of   Shares   Purchased** | ** ** | **(b) Average   Price Paid per   Share** | ** ** | **(c) Total Number of   Shares Purchased as Part  of Publicly Announced   Plans or Programs** | ** ** | **(d) Maximum Dollar   Value of shares that May   Yet Be Purchased Under  the Plans or Programs** | ** ** |
|-------------------------------|------------|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1 - April  28,2007 |       | 857                                                                     |       | $                                                                 | 28.61      |                                                                                                                                                      | 857        |                                                                                                                                                                    | $          | 1,349,255 |   |
| April 29 - May  26, 2007 |       | —                                                                  |       | —                                                            |       | —                                                                                                                                                    |       | 1,349,255                                                                                                                                                               |       |
| May 27 - June  30, 2007  |       | —                                                                  |       | —                                                            |       | —                                                                                                                                                    |       | 1,349,255                                                                                                                                                               |       |
| Total                         |       | 857                                                                     |       | $                                                                 | 28.61      |                                                                                                                                                      | 857        |                                                                                                                                                                    | $          | 1,349,255 |   |

 

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 cashless stock options. Sincethe 2005 tender offer, management has not actively sought to repurchase shares.

**Item 4.**                       Submissionof Matters to a Vote of Security Holders
|        | (a)    |   | The 2007 Annual Meeting of the Stockholders of the  Company was held on May 23, 2007.                                                                |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                 |   |
|   | (b)    |   | At that meeting, three individuals, all of whom are  current directors, were elected to serve until the 2010 Annual Meeting by the  following votes: |

 
| Director            | ** ** | **Shares For** | ** ** | **Shares Against** | ** ** | **Shares Withheld** |
|---------------------|------------|----------------|------------|--------------------|------------|---------------------|
| William D.  Andrews |       | 1,440,151      |       | —             |       | 2,140               |
| Betsy R. Gidwitz    |       | 1,429,811      |       | —             |       | 12,480              |
| James G. Gidwitz    |       | 1,429,931      |       | —             |       | 12,360              |

 

There were no brokernon-votes.

 

The following directors’terms of office continued after the 2007 Meeting until the Annual Meetings ofthe respective years as set forth opposite their names below:

 
|        | Directors             | ** ** | **Expiration of Term** | ** ** |
|--------|-----------------------|------------|------------------------|------------|
|   | Ralph W. Gidwitz      |       | 2008                   |       |
|   | Peter E.  Thieriot    |       | 2008                   |       |
|   | Theodore R.  Tetzlaff |       | 2008                   |       |
|   | Thomas H.  Carmody    |       | 2009                   |       |
|   | Ronald J.  Gidwitz    |       | 2009                   |       |
|   | Darrell M. Trent      |       | 2009                   |       |

 
|  | (c) |   | In addition to the above election, the appointment  of the independent registered public accounting firm of Deloitte & Touche  LLP was ratified by the following vote: |
|--|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
|        | **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|--------|-----------|------------|-------------|------------|-------------|------------|
|   | 1,441,091 |       | 800         |       | 400         |       |

 

There were no brokernon-votes.

 
|  | (d) |   | Not applicable. |
|--|-----|--------|-----------------|

 

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** **

**Item 6.**                          Exhibits

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

 

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SIGNATURE

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                                              |   | CONTINENTAL MATERIALS CORPORATION |
|----------------------------------------------|--------|-----------------------------------|
|                                         |   |                              |   |   |   |   |
|                                         |   |                              |   |   |   |   |
| Date:    August 13, 2007 |   | By:                               |   | /S/ Joseph J. Sum |
|                                         |   |                              |   | Joseph J. Sum, Vice President |
|                                         |   |                              |   | and Chief Financial Officer |
|                                              |        |                                   |  |  |  |  |  |  |

 

 

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