**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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 July 1, 2006                                                                                                                                                                                                                                          |
| ** ** |   |                                                                                                                                                                                                                                                                                 |
| ** ** |   | 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 registrant as specified in its charter)
| Delaware                                                        |   | 36-2274391                            |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

200 South WackerDrive, Suite 4000, Chicago, Illinois 60606(Address of principal executive offices)        (Zip Code)

 (312) 541-7200(Registrant’s telephone number, including area code)

 

(Former name, formeraddress 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       

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

Large acceleratedfiler ___                 Acceleratedfiler ___                           Non-acceleratedfiler  X 

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

Yes                         No   X
| Number of common shares outstanding at August 8,  2006 |   | 1,605,461 |
|--------------------------------------------------------|--------|-----------|

 

 

----

 

PART I — FINANCIAL INFORMATION

**Item 1.    Financial Statements**

CONTINENTAL MATERIALS CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETSJULY 1, 2006 and DECEMBER 31, 2005(Unaudited) (000’s omitted except share data)

 
| ** **                                                                                      | ** **   | **JULY 1,** | ** **   | **DECEMBER 31,** | ** **   |
|-------------------------------------------------------------------------------------------------|--------------|------------------|--------------|-----------------------|--------------|
| ***ASSETS***                                                                                    | ** **   | **2006**         | ** **   | **2005**              | ** **   |
| Current assets:                                                                                 |         |             |         |                  |         |
| Cash and cash  equivalents                                                                      |         | $                | 4,251        |                  | $            | 6,829 |   |
| Receivables, net                                                                                |         | 25,123           |         | 17,678                |         |
| Receivable for  insured losses                                                                  |         | 1,672            |         | 1,718                 |         |
| Inventories:                                                                                    |         |             |         |                  |         |
| Finished goods                                                                                  |         | 7,478            |         | 7,650                 |         |
| Work in process                                                                                 |         | 1,438            |         | 1,907                 |         |
| Raw materials  and supplies                                                                     |         | 9,821            |         | 7,898                 |         |
| Prepaid expenses                                                                                |         | 3,536            |         | 3,910                 |         |
| Total current  assets                                                                           |         | 53,319           |         | 47,590                |         |
|                                                                                            |         |             |         |                  |         |
| Property, plant and  equipment, net                                                             |         | 31,905           |         | 28,844                |         |
|                                                                                            |         |             |         |                  |         |
| Goodwill                                                                                        |         | 8,439            |         | 7,374                 |         |
| Non-compete agreements                                                                          |         | 1,104            |         | 728                   |         |
| Other assets                                                                                    |         | 2,267            |         | 2,524                 |         |
|                                                                                            |         |             |         |                  |         |
|                                                                                            |         | $                | 97,034       |                  | $            | 87,060 |   |
|                                                                                            |         |             |         |                  |         |
| ***LIABILITIES***                                                                               |         |             |         |                  |         |
| Current liabilities:                                                                            |         |             |         |                  |         |
| Bank loan  payable                                                                              |         | $                | 1,000        |                  | $            | — |   |
| Current portion  of long-term debt                                                              |         | 2,000            |         | 2,000                 |         |
| Accounts payable  and accrued expenses                                                          |         | 19,022           |         | 15,748                |         |
| Liability for  unpaid claims covered by insurance                                               |         | 1,672            |         | 1,718                 |         |
| Income taxes                                                                                    |         | 707              |         | 342                   |         |
| Total current  liabilities                                                                      |         | 24,401           |         | 19,808                |         |
|                                                                                            |         |             |         |                  |         |
| Long-term debt                                                                                  |         | 14,500           |         | 10,000                |         |
| Deferred income taxes                                                                           |         | 3,681            |         | 3,681                 |         |
| Other long-term  liabilities                                                                    |         | 2,014            |         | 2,264                 |         |
| *** ***                                                                                    | *** *** | *** ***     | *** *** | *** ***          | *** *** |
| ***SHAREHOLDERS’  EQUITY***                                                                |         |             |         |                  |         |
| Common shares, $0.25  par value; authorized  3,000,000 shares; issued 2,574,264 shares          |         | 643              |         | 643                   |         |
| Capital in excess of  par value                                                                 |         | 1,830            |         | 1,830                 |         |
| Retained earnings                                                                               |         | 66,460           |         | 65,331                |         |
| Accumulated other  comprehensive gains net of tax of $3 and $3 (interest rate swap adjustments) |         | 8                |         | 6                     |         |
| Treasury shares,  968,803, at cost                                                              |         | (16,503          | )            | (16,503               | )            |
|                                                                                            |         | 52,438           |         | 51,307                |         |
|                                                                                            |         |             |         |                  |         |
|                                                                                            |         | $                | 97,034       |                  | $            | 87,060 |   |

 

See accompanying notes

2

----

CONTINENTALMATERIALS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, RETAINED EARNINGSAND COMPREHENSIVE INCOME (LOSS)FOR THE THREE MONTHS ENDED JULY 1, 2006 AND JULY 2, 2005(Unaudited)(000’s omitted except per-share amounts)
| ** **                                                                    | ** ** | **JULY 1,** | ** ** | **JULY 2,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                    | ** ** | **2006**         | ** ** | **2005**         | ** ** |
|                                                                          |       |             |       |             |       |
| Sales                                                                         |       | $                | 43,704     |             | $          | 38,273 |   |
|                                                                          |       |             |       |             |       |
| Costs and  expenses:                                                          |       |             |       |             |       |
| Cost of sales (exclusive of depreciation, depletion  and amortization)        |       | 34,957           |       | 30,578           |       |
| Depreciation, depletion and amortization                                      |       | 1,249            |       | 1,215            |       |
| Selling and administrative                                                    |       | 5,194            |       | 5,226            |       |
|                                                                          |       |             |       |             |       |
| Gain on  disposition of property and equipment                                |       | 72               |       | 48               |       |
|                                                                          |       | 41,328           |       | 36,971           |       |
|                                                                          |       |             |       |             |       |
| Operating income                                                              |       | 2,376            |       | 1,302            |       |
|                                                                          |       |             |       |             |       |
| Interest                                                                      |       | (202             | )          | (159             | )          |
| Other (expense)  income, net                                                  |       | (9               | )          | 24               |       |
|                                                                          |       |             |       |             |       |
| Income before  income taxes                                                   |       | 2,165            |       | 1,167            |       |
|                                                                          |       |             |       |             |       |
| Provision for  income taxes                                                   |       | 735              |       | 222              |       |
|                                                                          |       |             |       |             |       |
| Net income                                                                    |       | 1,430            |       | 945              |       |
|                                                                          |       |             |       |             |       |
| Retained  earnings, beginning of period                                       |       | 65,030           |       | 62,285           |       |
|                                                                          |       |             |       |             |       |
| Retained  earnings, end of period                                             |       | $                | 66,460     |             | $          | 63,230 |   |
|                                                                          |       |             |       |             |       |
| Basic earnings  per share                                                     |       | $                | .89        |             | $          | .59 |   |
|                                                                          |       |             |       |             |       |
| Average shares outstanding                                                    |       | 1,605            |       | 1,592            |       |
|                                                                          |       |             |       |             |       |
| Diluted earnings  per share                                                   |       | $                | .89        |             | $          | .58 |   |
|                                                                          |       |             |       |             |       |
| Average shares outstanding                                                    |       | 1,605            |       | 1,633            |       |
|                                                                          |       |             |       |             |       |
| Comprehensive  income:                                                        |       |             |       |             |       |
| Net income                                                                    |       | $                | 1,430      |             | $          | 945 |   |
| Comprehensive  (loss) income from interest rate swap, net of tax of $0 and $2 |       | (1               | )          | 4                |       |
|                                                                          |       | $                | 1,429      |             | $          | 949 |   |

 

See accompanying notes

 

3

----

CONTINENTALMATERIALS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGSAND COMPREHENSIVE INCOME (LOSS)FOR THE SIX MONTHS ENDED JULY 1, 2006 AND JULY 2, 2005(Unaudited)(000’s omitted except per-share amounts)
| ** **                                                              | ** ** | **JULY 1,** | ** ** | **JULY 2,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                              | ** ** | **2006**         | ** ** | **2005**         | ** ** |
|                                                                    |       |             |       |             |       |
| Sales                                                                   |       | $                | 77,388     |             | $          | 68,030 |   |
|                                                                    |       |             |       |             |       |
| Costs and expenses:                                                     |       |             |       |             |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization)  |       | 62,938           |       | 55,343           |       |
| Depreciation,  depletion and amortization                               |       | 2,439            |       | 2,431            |       |
| Selling and  administrative                                             |       | 10,201           |       | 9,407            |       |
|                                                                    |       |             |       |             |       |
| Gain on disposition of  property and equipment                          |       | 146              |       | 115              |       |
|                                                                    |       | 75,432           |       | 67,066           |       |
|                                                                    |       |             |       |             |       |
| Operating income                                                        |       | 1,956            |       | 964              |       |
|                                                                    |       |             |       |             |       |
| Interest                                                                |       | (298             | )          | (290             | )          |
| Other income, net                                                       |       | 52               |       | 70               |       |
|                                                                    |       |             |       |             |       |
| Income before income  taxes                                             |       | 1,710            |       | 744              |       |
|                                                                    |       |             |       |             |       |
| Provision for income  taxes                                             |       | 581              |       | 87               |       |
|                                                                    |       |             |       |             |       |
| Net income                                                              |       | 1,129            |       | 657              |       |
|                                                                    |       |             |       |             |       |
| Retained earnings,  beginning of period                                 |       | 65,331           |       | 62,573           |       |
|                                                                    |       |             |       |             |       |
| Retained earnings, end  of period                                       |       | $                | 66,460     |             | $          | 63,230 |   |
|                                                                    |       |             |       |             |       |
| Basic earnings per  share                                               |       | $                | .70        |             | $          | .41 |   |
|                                                                    |       |             |       |             |       |
| Average shares  outstanding                                             |       | 1,605            |       | 1,620            |       |
|                                                                    |       |             |       |             |       |
| Diluted earnings per  share                                             |       | $                | .70        |             | $          | .40 |   |
|                                                                    |       |             |       |             |       |
| Average shares  outstanding                                             |       | 1,605            |       | 1,660            |       |
|                                                                    |       |             |       |             |       |
| Comprehensive income:                                                   |       |             |       |             |       |
| Net income                                                              |       | $                | 1,129      |             | $          | 657 |   |
| Comprehensive income  from interest rate swap, net of tax of $1 and $28 |       | 2                |       | 47               |       |
|                                                                    |       | $                | 1,131      |             | $          | 704 |   |

 

See accompanying notes

4

----

CONTINENTALMATERIALS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE SIX MONTHS ENDED JULY 1, 2006 AND JULY 2, 2005(Unaudited)(000’s omitted)
| ** **

** **                                                  | ** ** | **JULY 1,  2006** | ** ** | **JULY 2,  2005** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                              | ** ** | ** **             | ** ** | ** **             | ** ** |
| Net cash used in  operating activities                                  |       | $                      | (2,183     | )                      | $          | (2,568 | ) |
|                                                                    |       |                   |       |                   |       |
| Investing  activities:                                                  |       |                   |       |                   |       |
| Cash paid for acquisitions of assets of certain  businesses             |       | (2,452                 | )          | —                 |       |
| Capital expenditures                                                    |       | (3,609                 | )          | (1,946                 | )          |
| Proceeds from sale of property and equipment                            |       | 166                    |       | 127                    |       |
| Net cash used in  investing activities                                  |       | (5,895                 | )          | (1,819                 | )          |
|                                                                    |       |                   |       |                   |       |
| Financing  activities:                                                  |       |                   |       |                   |       |
| Borrowings under revolving credit facility                              |       | 1,000                  |       | 1,300                  |       |
| Long-term borrowings                                                    |       | 5,000                  |       | 5,000                  |       |
| Repayment of long-term debt                                             |       | (500                   | )          | (1,000                 | )          |
| Payment to acquire treasury stock                                       |       | —                 |       | (3,707                 | )          |
| Net cash  provided by financing activities                              |       | 5,500                  |       | 1,593                  |       |
|                                                                    |       |                   |       |                   |       |
| Net decrease in  cash and cash equivalents                              |       | (2,578                 | )          | (2,794                 | )          |
| Cash and cash  equivalents:                                             |       |                   |       |                   |       |
| Beginning of period                                                     |       | 6,829                  |       | 2,828                  |       |
|                                                                    |       |                   |       |                   |       |
| End of period                                                           |       | $                      | 4,251      |                   | $          | 34 |   |
|                                                                    |       |                   |       |                   |       |
| Supplemental  disclosures of cash flow items:                           |       |                   |       |                   |       |
| Cash paid during  the six months for:                                   |       |                   |       |                   |       |
| Interest                                                                |       | $                      | 237        |                   | $          | 406 |   |
| Income taxes                                                            |       | 215                    |       | 575                    |       |
| Supplemental  disclosures of noncash investing and financing activities |       |                   |       |                   |       |
| Note issued as  partial consideration for asset purchase                |       | $                      | 1,000      |                   | —     |   |

 

See accompanying notes

 

5

----

 

CONTINENTAL MATERIALSCORPORATIONSECURITIES AND EXCHANGE COMMISSION FORM 10-QNOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTSQUARTER ENDED JULY 1, 2006(Unaudited)

1.               Theunaudited interim condensed consolidated financial statements included hereinare prepared pursuant to the rules and regulations for reporting on Form 10-Q.Accordingly, certain information and footnote disclosures normally accompanyingthe annual consolidated financial statements have been omitted. The interimcondensed consolidated financial statements and notes should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s latest annual report on Form 10-K. For reasons morefully discussed in Note 6, the segment information for the second quarter of2005 has been restated. In the opinion of management, the condensedconsolidated financial statements includes all adjustments (none of which wereother than normal recurring adjustments) necessary for a fair statement of theresults for the interim periods.

2.               Theprovision for income taxes for the quarter ended July 1, 2006 of 34% is thesame as that used for the quarter ended April 1, 2006 and the estimatedeffective rate of 34% for the year.

3.               Operatingresults for the first six months of 2006 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.

4.               The following is areconciliation of the calculation of basic and diluted earnings per share (EPS)for the three and six months ended July 1, 2006 and July 2, 2005 (amounts inthousands except per-share data).

|                             | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **Income**                       | ** ** | **Shares**                     | ** ** | **Per-share   earnings** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per-share   earnings** | ** ** |
| July 1, 2006                |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Basic EPS                   |       | $                                | 1,430      |                           | 1,605      |   | $ | .89 |   | $ | 1,129 |   | 1,605 |   | $ | .70 |   |
| Effect of dilutive  options |       | —                           |       | —                         |       |   |   | — |   | — |   |   |   |
| Diluted EPS                 |       | $                                | 1,430      |                           | 1,605      |   | $ | .89 |   | $ | 1,129 |   | 1,605 |   | $ | .70 |   |
|                        |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| July 2, 2005                |       |                             |       |                           |       |   |   |   |   |   |   |   |   |
| Basic EPS                   |       | $                                | 945        |                           | 1,592      |   | $ | .59 |   | $ | 657 |   | 1,620 |   | $ | .41 |   |
| Effect of dilutive  options |       | —                           |       | 41                             |       |   |   | — |   | 40 |   |   |   |
| Diluted EPS                 |       | $                                | 945        |                           | 1,633      |   | $ | .58 |   | $ | 657 |   | 1,660 |   | $ | .40 |   |

 

5.               On June 8, 2006,the Company entered into the Fourth Amendment to Revolving Credit and Term LoanAgreement amending the Company’s existing Credit Agreement. The FourthAmendment increases the principal amount of the term loan portion of the CreditAgreement by $5,000,000 and increases the revolving credit facility by$5,000,000. With the increase in the term loan and revolving credit amounts,the total loan commitment, at the time of the signing, was $31,500,000. At thefiling date of this Form 10-Q, the commitment had been reduced to $31,000,000 dueto a term loan repayment of $500,000, as scheduled.

The additional$5,000,000 proceeds of the term loan facility were drawn at the close ofbusiness, June 30, 2006 in conjunction with the acquisition discussed in Note7. The amount available under the revolving credit facility of the CreditAgreement was increased primarily due to increased stand-by letters of creditrequirements to insurance carriers in support of self-insured amounts under theCompany’s risk management program and to provide additional liquidity. Allother material terms of the Credit Agreement remain in force, except to theextent they have been modified by the Fourth Amendment as described in thisparagraph.

6.               The Companyoperates primarily in two industry groups, HVAC and Construction Products.Prior to the 2005 fiscal year, the Company reported its financial results intwo reportable segments, essentially along the lines of these two industrygroups. The reporting segments were titled the Heating and Air Conditioningsegment and the Construction Materials segment. Prior to filing the annualreport on Form 10-K for the 2005 fiscal year, management determined that itssegment disclosures did not comply with Statement of Financial Accounting

6

----

Standards No. 131, “Disclosuresabout Segments of an Enterprise and Related Information.” As a result, thefinancial information presented for 2005 in the table below has been restated.

Prior to filing theannual report on Form 10-K for the 2005 fiscal year, management concluded thatthere are four reportable segments within its two principal industry groups;the Heating and Cooling segment and the Evaporative Cooling segment in the HVACindustry group and the Concrete, Aggregates and Construction Supplies segmentand the Door segment in the Construction Products industry group. The Heatingand Cooling segment produces and sells gas-fired wall furnaces, console heatersand fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co.of Colton, California. The Evaporative Cooling segment produces and sellsevaporative coolers from the Company’s wholly-owned subsidiary, PhoenixManufacturing, Inc. of Phoenix, Arizona. The operations of these two segmentswere previously combined and reported as the Heating and Air Conditioningsegment. Sales of these two segments are nationwide, but are concentrated inthe southwestern United States. Concrete, Aggregates and Construction Suppliesare offered from numerous locations along the Front Range of Colorado operatedby the Company’s wholly-owned subsidiaries Castle Concrete Company and TransitMix Concrete Co. (TMC), of Colorado Springs, Transit Mix of Pueblo, Inc. ofPueblo and Rocky Mountain Ready Mix Concrete, Inc. of Denver. Doors arefabricated and sold along with the related hardware from the Company’swholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI) of Pueblo,Colorado. The operations of these two segments were previously combined andreported as the Construction Materials segment. Sales of these two segments are highly concentrated in the Front Rangearea in Colorado although door sales are also made throughout the UnitedStates.

The Company evaluatesthe performance of its segments and allocates resources to them based on anumber of criteria including operating income, return on investment and otherstrategic objectives. Operating income is determined by deducting operatingexpenses from all revenues. In computing operating income, none of thefollowing has been added or deducted: unallocated corporate expenses, interest,other income or loss or income taxes.

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

The following tablepresents information about reported segments for the six month and three monthperiods ended July 1, 2006 and July 2, 2005 along with the items necessary toreconcile the segment information to the totals reported in the financial statements(amounts in thousands except in footnotes):

 
| ** **                                | ** ** | **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                                |       |                                                         |       |              |       |                                       |       |                            |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external  customers         |       | $                                                            | 47,206     |              | $          | 4,417                                      |       | $                               | 51,623     |                     | $          | 11,631 |   | $ | 13,959 |   | $ | 25,590 |   | $ | 3 |   | $ | 172 |   | $ | 77,388 |   |
| Depreciation, depletion  and amortization |       | 1,836                                                        |       | 67                |       | 1,903                                      |       | 198                             |       | 300                      |       | 498 |   | 38 |   | — |   | 2,439 |   |
| Operating income (loss)                   |       | 3,110                                                        |       | 295               |       | 3,405                                      |       | (149                            | )          | 331                      |       | 182 |   | (1,685 | ) | 54 |   | 1,956 |   |
| Segment assets                            |       | 56,857                                                       |       | 3,507             |       | 60,364                                     |       | 17,418                          |       | 14,563                   |       | 31,981 |   | 4,685 |   | 4 |   | 97,034 |   |
| Capital expenditures (a)                  |       | 5,067                                                        |       | 65                |       | 5,132                                      |       | 102                             |       | 162                      |       | 264 |   | 2 |   | — |   | 5,398 |   |
| Three Months                              |       |                                                         |       |              |       |                                       |       |                            |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external  customers         |       | $                                                            | 27,121     |              | $          | 2,278                                      |       | $                               | 29,399     |                     | $          | 5,045 |   | $ | 9,171 |   | $ | 14,216 |   | $ | 3 |   | $ | 86 |   | $ | 43,704 |   |
| Depreciation, depletion  and amortization |       | 946                                                          |       | 33                |       | 979                                        |       | 100                             |       | 150                      |       | 250 |   | 20 |   | — |   | 1,249 |   |
| Operating income (loss)                   |       | 3,035                                                        |       | 157               |       | 3,192                                      |       | (354                            | )          | 358                      |       | 4 |   | (847 | ) | 27 |   | 2,376 |   |
| Segment assets                            |       | 56,857                                                       |       | 3,507             |       | 60,364                                     |       | 17,418                          |       | 14,563                   |       | 31,981 |   | 4,685 |   | 4 |   | 97,034 |   |
| Capital expenditures (a)                  |       | 3,799                                                        |       | —            |       | 3,799                                      |       | 97                              |       | 37                       |       | 134 |   | — |   | — |   | 3,933 |   |

 

(a)          Capitalexpenditures for the Concrete, Aggregates and Construction Supplies segmentinclude $1.735 million purchased on June 30, 2006 as part of the purchase ofcertain assets of a concrete producer in Colorado Springs. Capital expendituresfor the Door segment include $54 thousand purchased on January 1, 2006 as partof the purchase of the assets of Colorado State Safe & Lock Co. (CSSL).Also see Note 7.

7

----

 
| ** **                                | ** ** | **Construction Products**                                    | ** ** | **HVAC Products** | ** ** | ** **                                    | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------|------------|-----------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**         | ** ** | **Combined  Construction  Products (a)** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products (a)** | ** ** | **Unallocated  Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2005                                      |       |                                                         |       |              |       |                                          |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Six Months as restated                    |       |                                                         |       |              |       |                                          |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external  customers         |       | $                                                            | 39,681     |              | $          | 3,672                                         |       | $                         | 43,353     |                     | $          | 11,473 |   | $ | 13,032 |   | $ | 24,505 |   | $ | — |   | $ | 172 |   | $ | 68,030 |   |
| Depreciation, depletion  and amortization |       | 1,807                                                        |       | 44                |       | 1,851                                         |       | 249                       |       | 288                      |       | 537 |   | 43 |   | — |   | 2,431 |   |
| Operating income (loss)                   |       | 1,471                                                        |       | 260               |       | 1,731                                         |       | 722                       |       | 310                      |       | 1,032 |   | (1,842 | ) | 43 |   | 964 |   |
| Segment assets (b)                        |       | 47,180                                                       |       | 2,914             |       | 50,094                                        |       | 16,986                    |       | 12,544                   |       | 29,530 |   | 7,373 |   | 63 |   | 87,060 |   |
| Capital expenditures                      |       | 1,240                                                        |       | 29                |       | 1,269                                         |       | 87                        |       | 298                      |       | 385 |   | 292 |   | — |   | 1,946 |   |
| Three Months as restated                  |       |                                                         |       |              |       |                                          |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external  customers         |       | $                                                            | 22,671     |              | $          | 1,704                                         |       | $                         | 24,375     |                     | $          | 5,236 |   | $ | 8,576 |   | $ | 13,812 |   | $ | — |   | $ | 86 |   | $ | 38,273 |   |
| Depreciation, depletion  and amortization |       | 901                                                          |       | 22                |       | 923                                           |       | 124                       |       | 144                      |       | 268 |   | 24 |   | — |   | 1,215 |   |
| Operating income (loss)                   |       | 1,836                                                        |       | 31                |       | 1,867                                         |       | 120                       |       | 318                      |       | 438 |   | (1,030 | ) | 27 |   | 1,302 |   |
| Segment assets (b)                        |       | 47,180                                                       |       | 2,914             |       | 50,094                                        |       | 16,986                    |       | 12,544                   |       | 29,530 |   | 7,373 |   | 63 |   | 87,060 |   |
| Capital expenditures                      |       | 353                                                          |       | 4                 |       | 357                                           |       | 34                        |       | 173                      |       | 207 |   | 8 |   | — |   | 572 |   |

 

(a)          Columnsfor 2005 represent the segments as reported in the July 2, 2005 Form 10-Q.

(b)         Segmentassets are as of December 31, 2005.

There are no differencesin the basis of segmentation or in the basis of measurement of segment profitor loss from the last annual report.

7.               On January 1, 2006the Company purchased the assets of Colorado State Safe & Lock Co. (CSSL),a company in Colorado Springs offering electronic access and lockingcapabilities, for $352,000. The assets were acquired by MDHI in the Doorsegment. The preliminary purchase price allocation included $100,000 ofgoodwill and $100,000 for a non-compete agreement. The non-compete agreement isbeing amortized over its four year term.

On June 30, 2006 the Company purchased certain assets of a concreteproducer in Colorado Springs for $2,100,000 of cash and a $1,000,000 Note. Theassets were acquired by TMC in the Concrete, Aggregates and ConstructionSupplies segment. The preliminary purchase price allocation included $1,735,000of plant and equipment, $965,000 of goodwill, $300,000 for a non-competeagreement and $100,000 for a restriction of use agreement. The non-compete andthe restriction of use agreements are being amortized over their terms of fiveyears and ten year, respectively.

Both purchases were accounted for as acquisitions of a business underSFAS No. 141, “Standards of Accounting for Business Combinations.” The goodwillrelated to the above two purchases represents the only changes to the Company’srecorded goodwill during the first and second fiscal quarters of 2006.

The following unaudited pro forma summary financial informationsummarizes the estimated combined results of operations of the Company, ASCIand CSSL assuming that the acquisitions of ASCI and CSSL had taken place onJanuary 2, 2005. The unaudited pro forma combined results of operations wereprepared on the basis of information provided to the Company by the formermanagement of ASCI and CSSL and no representation is made by the Company withrespect to the accuracy of such information. The pro forma combined results ofoperations reflect adjustments for interest expense, additional depreciationbased on the fair market value of plant and equipment, amortization ofidentifiable intangibles and income tax expense.

The pro forma financial information presented below for the year endedDecember 31, 2005 includes the full year results for ASCI and CSSL, as adjustedfor the items noted above. The pro forma financial information for the sixmonths ended July 1, 2006 includes the results of ASCI from January 1, 2006through April 30, 2006, as adjusted for the items noted above. Interimfinancial information for the six month periods ended July 1, 2006 and July 2,2005 was not made available to the Company. Amounts are in thousands except pershare amounts.

|                             | ** ** | **Six Months Ended  July 1, 2006** | ** ** | **Year Ended  December 31, 2005** | ** ** |
|-----------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| Net sales                   |       | $                                                      | 79,684     |                                             | $          | 149,022 |   |
| Net income                  |       | 1,156                                                  |       | 3,079                                            |       |
| Basic earnings  per share   |       | .72                                                    |       | 1.92                                             |       |
| Diluted earnings per  share |       | .72                                                    |       | 1.89                                             |       |
|                             |            |                                                        |            |                                                  |            |  |  |

 

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 2, 2005. Due to competitive conditions,the Company does not expect to retain all of the concrete volume or marketshare previously attained by ASCI.

8.               Identifiable intangibleassets as of July 1, 2006 consisted of five amortizable non-compete agreements,including the non-compete agreements related to CSSL acquired during the firstfiscal quarter of 2006 and the purchase of certain assets of a concreteproducer in Colorado Springs during the second fiscal quarter of 2006 (see Note7). The non-compete agreements were carried at $1,104,000, net of $1,396,000accumulated amortization. The pre-tax amortization expense for intangibleassets during the quarter ended July 1, 2006 was $63,000. Based upon theintangible assets recorded on the balance sheet at July 1, 2006, amortizationexpense for the next five years is estimated to be as follows: 2006 — $277,000,2007 — $233,000, 2008 — $220,000, 2009 — $220,000, and 2010 — $195,000.

9.               The interest rateswap agreement is reported consistent with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities,” and its related amendment, SFASNo. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”which require recognition of derivatives as either assets or liabilities andmeasurement at fair value. The change in accumulated other comprehensive incomenet of taxes from January 1, 2006 to July 1, 2006 was as follows (amounts inthousands):

 

| Balance at January 1, 2006              |   | $  | 6      |   |
|-----------------------------------------|--------|----|--------|--------|
| Comprehensive income,  net of tax of $1 |   | 3  |   |
| Balance at April 1,  2006               |   | 9  |   |
| Comprehensive loss, net  of tax of $0   |   | (1 | )      |
| Balance at July 1, 2006                 |   | $  | 8      |   |

 

 

8

----

 

**Item 2.        Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

The following Management’s Discussion and Analysisgives effect to the restatement discussed in Note 6.

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. (TMC), of ColoradoSprings, Transit Mix of Pueblo, Inc. of Pueblo and Rocky Mountain Ready MixConcrete, Inc. of Denver.

Doors are fabricated and sold along with the related hardware from theCompany’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI) 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 small real estate operation. Expenses related to thecorporate information technology group are allocated to all locations,including the corporate office.

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 Companytypically experiences operating cash flow deficits during the first half of theyear reflecting operating results, the use of sales dating programs (extendedpayment terms) related to the Evaporative Cooling segment and payments of theprior year’s accrued incentive bonuses and Company profit-sharingcontributions. 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 2006.

As expected, the Company’scash flow during the first six months of 2006 was negative due to theseasonality of sales, production schedules and the sales dating programsrelated to the evaporative cooler product line. Operations used $2,183,000 ofcash compared to the $2,568,000 of cash used during the first six months of2005. The improved cash flow was primarily due to the improved operating incomeas discussed below. Changes in working capital accounts largely offset eachother when comparing the first six months of 2006 to the comparable 2005period.

On January 1, 2006 theCompany purchased the assets of CSSL, a company in Colorado Springs offeringelectronic access and locking capabilities, for $352,000 in cash. The assetswere acquired by MDHI in the Door segment. The preliminary purchase priceallocation included $100,000 of goodwill and $100,000 for a non-competeagreement. On June 30, 2006 the Company purchased certain assets of a concreteproducer in Colorado Springs for $2,100,000 of cash and a $1,000,000 Note. Theassets were acquired by TMC in the Concrete, Aggregates and ConstructionSupplies segment. The preliminary purchase price allocation included $965,000of goodwill, $300,000 for a non-compete agreement and $100,000 for arestriction of use agreement. The $3,609,000 of capital expenditures, primarilyfor the Concrete, Aggregates and Construction Supplies segment, consistedprimarily of routine equipment replacements.

9

----

 

As more fully discussedin Note 5, the principal amount of the term loan was increased by $5 million.Approximately $2.1 million of the proceeds were used to fund the purchaseof certain assets of a concrete producer in Colorado Springs discussed above.The balance of the additional term loan proceeds will be used for businessexpansion. Scheduled debt repayments are automatically withdrawn from ouraccount by the bank. All scheduled debt repayments for the first six months of2006 and 2005 have been made as of the filing of this report on Form 10-Q,however, the second $500,000 payment for 2006 was not withdrawn from ouraccount until after the close of the Company’s second fiscal quarter.

As expected, the Companycontinued to borrow against its revolving credit facility during the 2006second quarter. During the first six months of 2006, the highest amount ofCompany borrowings outstanding under the revolving credit agreement was$4,500,000 and the average amount outstanding was $1,334,000.

The Company believesthat anticipated cash flow from operations, supplemented by seasonal borrowingsagainst the revolving line of credit, (of which $1,000,000 was outstanding atJuly 1, 2006) 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 July 1, 2006to Quarter Ended July 2, 2005

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 2006 operating results were consistent with this trend.Consolidated sales during the second quarter of 2006 were $43,704,000 comparedto $38,273,000 in the second quarter of 2005.

All segments except Heating and Cooling reported increased sales forthe quarter lead by a 19.6% increase from the Concrete, Aggregates andConstruction Supplies segment. Cost of sales as a percentage of sales increasedslightly form 79.9% to 80.0% due to narrower margins in the Heating and Coolingsegment. Selling and administrative costs decreased both in amount and as apercentage of sales. The reduction was primarily due to the continuingconsolidation of functions in the Concrete, Aggregates and ConstructionSupplies segment into the Colorado Springs office and the timing of somecontributions at the Corporate office. The resulting operating income of$2,376,000 exceeded the $1,302,000 reported for the second quarter of 2005.

Interest expense increased from $159,000 for the second quarter of 2005to $202,000 in the 2006 quarter due to increased average debt and higherinterest rates.

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 July 1, 2006 and July 2, 2005 (amounts in thousands):

|                                         | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|-----------|------------|
| Quarter ended  July 1, 2006             |       |                                                       |       |      |       |
| Revenues from  external customers       |       | $                                                          | 27,121     |      | $          | 2,278 |   |
| Segment  operating income               |       | 3,110                                                      |       | 157       |       |
| Operating income  as a percent of sales |       | 11.5                                                       | %          | 6.9       | %          |
| Segment assets  as of July 1, 2006      |       | $                                                          | 56,857     |      | $          | 3,507 |   |
| Return on assets                        |       | 5.5                                                        | %          | 4.5       | %          |
|                                    |       |                                                       |       |      |       |
| Quarter ended  July 2, 2005             |       |                                                       |       |      |       |
| Revenues from  external customers       |       | $                                                          | 22,671     |      | $          | 1,704 |   |
| Segment  operating income               |       | 1,836                                                      |       | 31        |       |
| Operating income  as a percent of sales |       | 8.1                                                        | %          | 1.8       | %          |
| Segment assets  as of July 2, 2005      |       | $                                                          | 49,001     |      | $          | 3,092 |   |
| Return on assets                        |       | 3.7                                                        | %          | 1.0       | %          |

 

10

----

Concrete, Aggregates andConstruction Supplies Segment

Sales in the Concrete,Aggregates and Construction Supplies segment for the second quarter of 2006increased 19.6% over the prior year’s comparable quarter as a result ofincreased volume and improved pricing. Concrete and aggregates volumes improvedas construction activity remained relatively strong along the Front Range ofColorado. The increase in concrete volume was primarily due to two large jobsin the southern section of our service area. Concrete pricing improved duringthe second quarter of 2006 although the increases were again largely institutedto offset increased cement and fuel costs. Cement supplies remained tightduring the second quarter of 2006; however, we were able to obtain sufficientquantities to service our customers. Construction supplies sales volumeimproved in the second quarter of 2006 compared to the second quarter of 2005.

Operating incomeimproved in the 2006 quarter over the 2005 quarter as a result of the increasein volumes, pricing increases that slightly outpaced increased costs, primarilyin the Denver area, and delivery efficiencies on the two large concrete jobsnoted above. A reduction in selling and administrative costs during the secondquarter of 2006 compared to the 2005 quarter also contributed to the improvedoperating income. These reductions were achieved through the continuingconsolidation of functions into the Colorado Springs office. As a result, bothoperating income as a percent of sales and return on assets improved in the2006 quarter over the prior year’s quarter.

DoorSegment

Salesduring the second quarter of 2006 in the Door segment increased $574,000 overthe comparable 2005 quarter. Sales from the recently acquired electronic accessproduct line and some sales price increases contributed to the added salesvolume. In addition, last year’s second quarter sales were weakened by customerrequests to delay shipment on some jobs until later in the year.

 

Operatingincome improved from $31,000 during the second quarter of 2005 to $157,000 for the2006 quarter as a result of the higher sales volume and increased prices.Selling and administrative costs increased during the 2006 quarter but declinedas a percentage of sales when compared to the 2005 quarter primarily due to theincreased sales in the 2006 quarter and the unusually low sales level of the2005 quarter as noted above. As a result, both operating income as a percent ofsales and return on assets improved in the 2006 quarter from the prior year’squarter.

** **

**HVAC Products**

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the quarters ended July 1, 2006 andJuly 2, 2005(amounts in thousands):

 

|                                                | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| 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                      | %          |
|                                           |       |                          |       |                     |       |
| Quarter ended  July 2, 2005                    |       |                          |       |                     |       |
| Revenues from  external customers              |       | $                             | 5,236      |                     | $          | 8,576 |   |
| Segment  operating income                      |       | 120                           |       | 318                      |       |
| Operating income  as a percent of sales        |       | 2.3                           | %          | 3.7                      | %          |
| Segment assets  as of July 2, 2005             |       | $                             | 15,609     |                     | $          | 16,066 |   |
| Return on assets                               |       | .8                            | %          | 2.0                      | %          |

 

Heating and CoolingSegment

Sales in the Heating andCooling segment were $5,045,000 for the second quarter of 2006, a decrease of$191,000, or 3.6%, from the comparable 2005 quarter. Lower furnace volume wasresponsible for the decrease as strong sales in March resulted in lower salesvolume in April and May. Cost of sales as a percentage of sales increasedduring the second quarter of 2006 as compared to the comparable quarter of 2005due to pricing decisions made to retain a national home center account. Fancoil volume improved as the restructured sales representative network began totake hold. Pricing improved slightly primarily in response to higher materialcosts.

 

11

----

 

Operating income declinedfrom $120,000 during the second quarter of 2005 to a loss of $354,000 for the2006 quarter as a result of the lower sales volume, narrower margins andincreased selling and administrative expenses. Selling and administrativeexpenses were higher due to the addition of personnel in the sales andengineering departments and the opening of a sales and service center inOklahoma City, Oklahoma. As a result, both operating income as a percent ofsales and return on assets declined in the 2006 quarter from the prior year’squarter.

 

Evaporative CoolingSegment

Sales in the EvaporativeCooling segment increased $595,000, or 6.9%, during the second quarter of 2006over the comparable 2005 quarter. Hot, dry weather in the markets servedprompted the improved sales.

 

Operating income improvedslightly during the 2006 quarter due to the increased sales volume as cost ofsales as a percentage of sales remained relatively constant compared to the2005 second quarter. Depreciation and amortization and selling andadministrative expenses increased modestly during the 2006 quarter but declinedas a percentage of sales compared to the first quarter of 2005. As a result,both operating income as a percent of sales and return on assets improved inthe 2006 quarter from the prior year’s quarter.

 

Operations — Comparisonof Six Months Ended July 1, 2006 to Six Months Ended July 2, 2005

 

Consolidated sales duringthe first half of 2006 were $77,388,000 compared to $68,030,000 during thefirst half of 2005. All segments reported increased sales for the six monthsended July 1, 2006 compared to the six months ended July 2, 2005 lead by a19.0% increase from the Concrete, Aggregates and Construction Supplies segment.Cost of sales as a percentage of sales was largely unchanged between the twosix month periods. Selling and administrative costs increased, however theydeclined as a percentage of sales. The resulting operating income of $1,956,000exceeded the $964,000 reported for the first six months of 2005.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

The table below presentsa summary of operating information for the two reportable segments within theConstruction Products group for the six months ended July 1, 2006 and July 2,2005 (amounts in thousands):

 

|                                         | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|-----------|------------|
| Six Months ended  July 1, 2006          |       |                                                       |       |      |       |
| Revenues from  external customers       |       | $                                                          | 47,206     |      | $          | 4,417 |   |
| Segment  operating income               |       | 3,110                                                      |       | 295       |       |
| Operating income  as a percent of sales |       | 6.6                                                        | %          | 6.7       | %          |
| Segment assets  as of July 1, 2006      |       | $                                                          | 56,857     |      | $          | 3,507 |   |
| Return on assets                        |       | 5.5                                                        | %          | 8.4       | %          |
|                                    |       |                                                       |       |      |       |
| Six Months ended  July 2, 2005          |       |                                                       |       |      |       |
| Revenues from  external customers       |       | $                                                          | 39,681     |      | $          | 3,672 |   |
| Segment  operating income               |       | 1,471                                                      |       | 260       |       |
| Operating income  as a percent of sales |       | 3.7                                                        | %          | 7.1       | %          |
| Segment assets  as of July 2, 2005      |       | $                                                          | 49,001     |      | $          | 3,092 |   |
| Return on assets                        |       | 3.0                                                        | %          | 8.4       | %          |

 

Concrete,Aggregates and Construction Supplies Segment

Salesin the Concrete, Aggregates and Construction Supplies segment for the first sixmonths of 2006 increased 19.0% over the prior year’s comparable period due tothe reasons noted above and favorable weather during the first quarter of 2006.

 

Operating income improvedto $3,110,000 during the 2006 period from $1,471,000 for the 2005 period due tothe improved margins and reduction of selling and administrative costs as apercentage of sales discussed above. As a result, both operating income as apercent of sales and return on assets improved for the six months ended July 1,2006 compared to the six months ended July 2, 2005.

 

 

 

 

12

----

DoorSegment

Sales in the Door segment for the first six months of2006 increased $745,000 over the comparable 2005 period due to reasons notedabove. Sales from the recently acquired electronic access product linecontributed to the added sales volume for the entire six month period in 2006.

Operating income improved from $260,000 during thefirst half of 2005 to $295,000 for the 2006 period chiefly due to the improvedresults of the second quarter of 2006 over the comparable 2005 quarter asdiscussed above. The operating income for the first quarter of 2006 lagged the2005 first quarter results due to tighter margins resulting from pricingdecisions made in response to more competitive bidding on available jobs andslight increases in both depreciation and selling and administrative costs. Asa result, operating income as a percent of sales declined while the return onassets was unchanged in the six months ended July 1, 2006 compared to the sixmonths ended July 2, 2005.

**HVAC Products**

The table below presents a summary of operatinginformation for the two reportable segments within the HVAC products group forthe six months ended July 1, 2006 and July 2, 2005 (amounts in thousands):

|                                                | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| 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                      | %          |
|                                           |       |                          |       |                     |       |
| Six Months ended July  2, 2005                 |       |                          |       |                     |       |
| Revenues from external  customers              |       | $                             | 11,473     |                     | $          | 13,032 |   |
| Segment operating  income                      |       | 722                           |       | 310                      |       |
| Operating income as a  percent of sales        |       | 6.3                           | %          | 2.4                      | %          |
| Segment assets as of  July 2, 2005             |       | $                             | 15,609     |                     | $          | 16,066 |   |
| Return on assets                               |       | 4.6                           | %          | 1.9                      | %          |

 

Heatingand Cooling Segment

Sales in the Heating and Cooling segment increased$158,000, or 1.4%, during the first six months of 2006 over the comparable 2005period. Furnace volume was slightly higher as first quarter sales remainedstrong through March then declined resulting in little change for the first sixmonths of 2006 compared to the first six months of 2005. Similarly, lower fancoil volume during the first quarter of 2006 blunted the increased sales of thesecond quarter resulting in a slight increase in sales for the first six monthsof 2006 compared to the first six months of 2005. The lower fan coil volume ofthe first quarter of 2006 was attributed to the restructuring of the salesrepresentative network over the prior six months which caused some short-termdisruption in bidding on jobs.

Operating income declined from $722,000 during thefirst six months of 2005 to a loss of $149,000 for the 2006 period. Thedecrease was the result of lower margins due to the pricing decisions discussedabove and higher material costs not fully recaptured by higher selling prices,and increased selling and administrative expenses.  Selling and administrative costs were higherdue to the above noted addition of personnel and opening of a sales and servicecenter in Oklahoma City, Oklahoma. As a result, both operating income as apercent of sales and the return on assets declined for the first six months of2006 from the prior year’s period.

EvaporativeCooling Segment

Sales in the Evaporative Cooling segment increased$927,000, or 7.1%, during the first six months of 2006 over the comparable 2005period. Hot, dry weather in the markets served prompted the improved sales.

The operating profit grew modestly from $310,000during the first six months of 2005 to $331,000 for the first six months of2006. Cost of sales as a percentage of sales increased slightly in 2006 due toa decrease in labor efficiency, principally the result of the using moretemporary workers, and increased supervision and maintenance costs.Depreciation and amortization and selling and administrative expenses, althoughmodestly higher during the first six months of 2006 compared to the 2005period, declined as a percentage of sales. As a result, operating income as apercent of sales was unchanged. The return on assets improved for the 2006period largely due to a decrease in segment assets resulting from lowerinventory levels at July 1, 2006.

13

----

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

The condensed consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States which require the Company to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities as of July 1, 2006 and December 31, 2005 andaffect the reported amounts of revenues and expenses for the periods reported.Actual results could differ from those estimates.

Information with respect to the Company’s criticalaccounting policies which the Company believes could have the most significanteffect on the Company’s reported results and require subjective or complexjudgments by management is contained in Item 7, Management’s Discussion andAnalysis of Financial Condition and Results of Operations, of the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2005.

**OUTLOOK**

Concrete prices throughout our Colorado markets haveimproved compared to 2005 although a substantial portion of the price increasewas in response to higher prices paid for cement and fuel. We expect the Denverconcrete market to remain very competitive and a small new concrete producer inColorado Springs is pursuing large home-builders with an aggressive pricingstrategy. Commercial and industrial construction seems to be improving. Thereis some concern that new home construction may slow throughout Colorado, inpart due to higher mortgage interest rates. The sales volume and backlog forthe door segment remains strong.

Sales of the heating and cooling segment and theevaporative cooling segment are not expected to grow significantly and willremain weather sensitive. However, the demand for fan coil products in theheating and cooling segment is expected to show some improvement from therather depressed levels of recent years.

**RECENTLY ISSUED ACCOUNTINGSTANDARDS**

The Company discusses recently issued accountingstandards and tax law changes in the Critical Accounting Policies section underItem 7 and in Note 1 to Consolidated Financial Statements in Item 8 of theCompany’s Annual Report on Form 10-K for the fiscal year 2005. Other than asdiscussed in those sections, or as noted below, the Company does not currentlyhave any transactions or circumstances that have been addressed by recentlyissued accounting pronouncements. Therefore, adoption of any of thesestatements or pronouncements would not have a material impact on the Company’sresults of operations, financial position or liquidity.

In November 2004, SFAS No. 151, “Inventory Costs—AnAmendment of ARB No. 43, Chapter 4,” was issued which amends the guidance inAccounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs, and wasted material.  Among other provisions, the new rulerequires that items such as idle facility expense, excessive spoilage, doublefreight and rehandling costs be recognized as current -period chargesregardless of whether they meet the criteria of “so abnormal” as stated in ARBNo. 43.  Additionally, SFAS 151 requires the allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities.  SFAS 151 is effective for fiscal yearsbeginning after June 1, 2005.  The Company adopted this standard in thefirst quarter of fiscal 2006 and such adoption did not have a material impacton its consolidated results of operations, cash flows or financial condition.

In March 2005, the Emerging Issues Task Force reacheda consensus on Issue 04-6, “Accounting for Stripping Costs in the MiningIndustry” (EITF 04-6) which became effective on January 1, 2006. EITF 04-6states that stripping costs incurred after the first saleable minerals areextracted from the mine (i.e. post-production stripping costs) should beconsidered costs of the extracted minerals and recognized as a component ofinventory to be recognized in costs of sales in the same period as the revenuefrom the sale of the inventory. As disclosed in the Company’s 2005 AnnualReport on Form 10-K, the Company has historically treated post-productionstripping costs in the manner prescribed by EITF 04-6 and, therefore, adoptionof EITF 04-6 in the first quarter of fiscal 2006 did not have a material impacton the Company’s consolidated results of operations, cash flows or financialcondition.

In June 2006 FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” was issued which clarifies the application ofSFAS No. 109, “Accounting for Income Taxes” by establishing a thresholdcondition that a tax position must meet for any part of the benefit of thatposition to be recognized in financial statements. In addition to recognition,Interpretation No. 48 provides guidance on measurement, derecognition,classification and disclosure of tax positions. Interpretation No. 48 iseffective for fiscal years beginning after

14

----

December 15, 2006, with earlier adoption permitted asof the beginning of a fiscal year for which annual or interim financialstatements have not yet been issued. The Company has not had sufficient time toevaluate what impact Interpretation No. 48 might have on the Company’sconsolidated results of operations or financial condition.

The Company has determined that it qualifies forcertain deductions that the American Jobs Creation Act of 2004 provides forincome from qualified domestic production activities. Although the effect ofthe deduction is not expected to have a material effect on the tax provisionfor 2006, a preliminary estimate of the deduction was included in thedetermination of the tax provision.

**FORWARD-LOOKING STATEMENTS**

The foregoing discussion contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended. Such forward-looking statements are based on the beliefs of theCompany’s management as well as on assumptions made by and informationavailable to the Company at the time such statements were made.  When used in this Report, words such as “anticipates,”“believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects,” andsimilar expressions are intended to identify forward-looking statements. Actualresults could differ materially from those projected in the forward-lookingstatements as a result of factors including but not limited to: weather,interest rates, availability of raw materials and their related costs, nationaland local economic conditions and competitive forces. Some of these factors arediscussed in more detail in the Company’s 2005 Annual Report on Form 10-K.Changes in accounting pronouncements could also alter projected results.Forward-looking statements speak only as of the date they were made, and theCompany undertakes no obligation to publicly update them.

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

There have been no material changes in the marketrisks that the Company is exposed to since those discussed in the Company’s2005 Annual Report on Form 10-K. At July 1, 2006, the amount subject to theinterest rate swap agreement was $3,000,000. Also see Note 9 to the quarterlyfinancial statements above.

**Item 4.**                          Controlsand Procedures

(a)  DisclosureControls and Procedures.

The Company’s Chief Executive Officer and ChiefFinancial Officer, with the participation of management, have evaluated theeffectiveness of the Company’s “disclosure controls and procedures” (as definedin Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended) as of July 1, 2006. Based on that evaluation, they have concluded thatthe Company’s disclosure controls and procedures as of such date are effectiveand are reasonably designed to ensure that all material information relating tothe Company (including its subsidiaries) required to be disclosed in thisquarterly report is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the Securities and ExchangeCommission.

(b)  Changes inInternal Control Over Financial Reporting.

As of July 1, 2006, the Company has corrected thematerial weakness disclosed in its Form 10-K for the fiscal year ended December31, 2005, regarding the Company’s design of internal control over financialreporting with respect to its lack of a process to evaluate all relevantinformation specified in Statement of Financial Accounting Standards No. 131, “Disclosuresabout Segments of an Enterprise and Related Information” (SFAS 131) to ensurethat its segment reporting included in the Notes to the Consolidated Financial Statementsis presented in accordance with SFAS 131. To address this material weakness,the Company designed and implemented a process during the second quarter inwhich the Company’s Chief Financial Officer and Chief Accounting Officerdiscuss, evaluate and analyze changes in internal management reporting,economic characteristics and other factors specified in SFAS 131 as they occurto determine whether any of the changes affect segment reporting on a quarterlybasis in accordance with SFAS 131. There have been no other significant changesin the Company’s internal control over financial reporting identified inconnection with the evaluation of such internal control that occurred duringthe last fiscal quarter that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting,except as described above.

15

----

**PARTII—OTHER INFORMATION**

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

There were no purchases made by the Company of itscommon stock to become treasury stock for the period April 2 through July 1,2006.

On January 19, 1999, the Company initiated purchasesunder the current open-ended program to repurchase its common stock. Purchasesare made on the open market or in block trades at the discretion of management.The dollar amount authorized for the program has been periodically increased bythe Board of Directors and approved by the Company’s two banks as required bythe Company’s Revolving Credit and Term Loan Agreement. The June 28, 2005amendment to the Loan Agreement provides that the Company may make purchases ofits own stock in an amount not to exceed $1,438,000, separate from purchasesmade in connection with the 2005 tender offer and the exercise of cash-less stockoptions. At July 1, 2006, the maximum dollar value of shares that may yet bepurchased under the program was $1,418,942.

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

** **

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

 

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 15, 2005 |   | By:                               |   | /s/ Joseph J. Sum |
|   |   |            |   |                              |   | Joseph J. Sum, Vice President   and Chief Financial Officer |

 

16

----