** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

** **

**x****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thequarterly period ended September 29, 2007**

** **

**OR**

** **

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thetransition period from                           to                                     **

** **

**CommissionFile number 1-3834**

 

**CONTINENTAL MATERIALS CORPORATION**

(Exact name of registrantas specified in its charter)

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

  |

 

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

 

| **(312)  541-7200**                                                                 |
|-------------------------------------------------------------------------------------|
| (Registrant’s telephone  number, including area code)                          |
|                                                                                |
| (Former name,  former address and former fiscal year, if changed since last report) |
|                                                                                |

 

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

Yes   x           Noo

 

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

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

 

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

 

Yes o    No x

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: Common Stock, $0.25 par value, shares outstanding atNovember 8, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . .  . . . .1,602,706

 

 

 

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PART I — FINANCIALINFORMATION

 

**Item 1.   Financial Statements**

 

CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED BALANCE SHEETS

SEPTEMBER 29, 2007and DECEMBER 30, 2006

(Unaudited)

 (000’s omitted except share data)

 

 
| ** **                                                                            | ** **   | **SEPTEMBER 29,****2007** | ** **   | **DECEMBER 30,****2006** | ** **   |
|---------------------------------------------------------------------------------------|--------------|---------------------------|--------------|--------------------------|--------------|
| ***ASSETS***                                                                          | ** **   | ** **                | ** **   | ** **               | ** **   |
| Current assets:                                                                       |         |                      |         |                     |         |
| Cash and cash  equivalents                                                            |         | $                         | 3,184        |                     | $            | 2,770 |   |
| Receivables, net                                                                      |         | 24,603                    |         | 24,120                   |         |
| Receivable for  insured losses                                                        |         | 1,563                     |         | 1,584                    |         |
| Inventories:                                                                          |         |                      |         |                     |         |
| Finished goods                                                                        |         | 10,088                    |         | 7,104                    |         |
| Work in process                                                                       |         | 1,440                     |         | 1,502                    |         |
| Raw materials  and supplies                                                           |         | 10,270                    |         | 8,229                    |         |
| Prepaid expenses                                                                      |         | 4,338                     |         | 4,291                    |         |
| Total current  assets                                                                 |         | 55,486                    |         | 49,600                   |         |
|                                                                                  |         |                      |         |                     |         |
| Property, plant  and equipment, net                                                   |         | 35,648                    |         | 32,365                   |         |
|                                                                                  |         |                      |         |                     |         |
| Goodwill                                                                              |         | 7,829                     |         | 7,829                    |         |
| Amortizable  intangible assets, net                                                   |         | 1,274                     |         | 1,517                    |         |
| Other assets                                                                          |         | 2,272                     |         | 2,394                    |         |
|                                                                                  |         |                      |         |                     |         |
|                                                                                  |         | $                         | 102,509      |                     | $            | 93,705 |   |
|                                                                                  |         |                      |         |                     |         |
| ***LIABILITIES***                                                                     |         |                      |         |                     |         |
| Current liabilities:                                                                  |         |                      |         |                     |         |
| Bank loan  payable                                                                    |         | $                         | 8,700        |                     | $            | — |   |
| Current portion  of long-term debt                                                    |         | 2,567                     |         | 2,866                    |         |
| Accounts payable  and accrued expenses                                                |         | 18,628                    |         | 17,060                   |         |
| Liability for  unpaid claims covered by insurance                                     |         | 1,563                     |         | 1,584                    |         |
| Income taxes                                                                          |         | —                    |         | 579                      |         |
| Total current  liabilities                                                            |         | 31,458                    |         | 22,089                   |         |
|                                                                                  |         |                      |         |                     |         |
| Long-term debt                                                                        |         | 11,000                    |         | 12,800                   |         |
| Deferred income  taxes                                                                |         | 3,808                     |         | 3,883                    |         |
| Other long-term  liabilities                                                          |         | 2,102                     |         | 1,590                    |         |
| *** ***                                                                          | *** *** | *** ***              | *** *** | *** ***             | *** *** |
| ***SHAREHOLDERS’ EQUITY***                                                       |         |                      |         |                     |         |
|                                                                                  |         |                      |         |                     |         |
| Common shares,  $0.25 par value; authorized 3,000,000 shares; issued 2,574,264 shares |         | 643                       |         | 643                      |         |
| Capital in  excess of par value                                                       |         | 1,830                     |         | 1,830                    |         |
| Retained  earnings                                                                    |         | 68,241                    |         | 67,373                   |         |
| Treasury shares,  971,558 and 968,803, at cost                                        |         | (16,573                   | )            | (16,503                  | )            |
|                                                                                  |         | 54,141                    |         | 53,343                   |         |
|                                                                                  |         |                      |         |                     |         |
|                                                                                  |         | $                         | 102,509      |                     | $            | 93,705 |   |

 

 

See accompanyingnotes

 

 

2

----

 

 

CONTINENTAL MATERIALSCORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS, RETAINED EARNINGS

AND COMPREHENSIVEINCOME (LOSS)

FOR THE THREEMONTHS ENDED SEPTEMBER 29, 2007 AND SEPTEMBER 30, 2006

(Unaudited)

(000’s omittedexcept per-share amounts)

 

 
| ** **                                                                                                           | ** ** | **SEPTEMBER  29,  2007** | ** ** | **SEPTEMBER  30,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                                                                                                 |       |                     |       |                     |       |
| Sales                                                                                                                |       | $                        | 42,288     |                     | $          | 40,924 |   |
|                                                                                                                 |       |                     |       |                     |       |
| Costs and  expenses:                                                                                                 |       |                     |       |                     |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization)                                               |       | 36,701                   |       | 33,731                   |       |
| Depreciation,  depletion and amortization                                                                            |       | 1,309                    |       | 1,212                    |       |
| Selling and  administrative                                                                                          |       | 4,396                    |       | 5,113                    |       |
|                                                                                                                 |       |                     |       |                     |       |
| Gain on  disposition of property and equipment                                                                       |       | 53                       |       | 47                       |       |
|                                                                                                                 |       | 42,353                   |       | 40,009                   |       |
|                                                                                                                 |       |                     |       |                     |       |
| Operating (loss)  income                                                                                             |       | (65                      | )          | 915                      |       |
|                                                                                                                 |       |                     |       |                     |       |
| Interest expense                                                                                                     |       | (341                     | )          | (250                     | )          |
| Other income,  net                                                                                                   |       | 27                       |       | 137                      |       |
|                                                                                                                 |       |                     |       |                     |       |
| (Loss) income  before income taxes                                                                                   |       | (379                     | )          | 802                      |       |
|                                                                                                                 |       |                     |       |                     |       |
| (Benefit)  provision for income taxes                                                                                |       | (389                     | )          | 273                      |       |
|                                                                                                                 |       |                     |       |                     |       |
| Net income                                                                                                           |       | 10                       |       | 529                      |       |
|                                                                                                                 |       |                     |       |                     |       |
| Retained  earnings, beginning of period                                                                              |       | 68,231                   |       | 66,460                   |       |
|                                                                                                                 |       |                     |       |                     |       |
| Retained  earnings, end of period                                                                                    |       | $                        | 68,241     |                     | $          | 66,989 |   |
|                                                                                                                 |       |                     |       |                     |       |
| Basic and  diluted earnings per share                                                                                |       | $                        | .01        |                     | $          | .33 |   |
|                                                                                                                 |       |                     |       |                     |       |
| Average shares  outstanding                                                                                          |       | 1,603                    |       | 1,605                    |       |
|                                                                                                                 |       |                     |       |                     |       |
| Comprehensive  income:                                                                                               |       |                     |       |                     |       |
| Net income                                                                                                           |       | $                        | 10         |                     | $          | 529 |   |
| Comprehensive  loss from interest rate swap, net of tax benefit of $3 for the three months  ended September 30, 2006 |       | —                   |       | (5                       | )          |
|                                                                                                                 |       | $                        | 10         |                     | $          | 524 |   |
|                                                                                                                 |       |                     |       |                     |       |

 

 

 

 

See accompanyingnotes

 

 

3

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

AND COMPREHENSIVEINCOME (LOSS)

FOR THE NINEMONTHS ENDED SEPTEMBER 29, 2007 AND SEPTEMBER 30, 2006

(Unaudited)

(000’s omittedexcept per-share amounts)

 

 
| ** **                                                                                                          | ** ** | **SEPTEMBER 29,****2007** | ** ** | **SEPTEMBER 30,****2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
|                                                                                                                |       |                      |       |                      |       |
| Sales                                                                                                               |       | $                         | 128,018    |                      | $          | 118,312 |   |
|                                                                                                                |       |                      |       |                      |       |
| Costs and  expenses:                                                                                                |       |                      |       |                      |       |
| Cost of sales  (exclusive of depreciation, depletion and amortization)                                              |       | 107,748                   |       | 96,669                    |       |
| Depreciation,  depletion and amortization                                                                           |       | 3,946                     |       | 3,651                     |       |
| Selling and  administrative                                                                                         |       | 14,965                    |       | 15,314                    |       |
|                                                                                                                |       |                      |       |                      |       |
| Gain on  disposition of property and equipment                                                                      |       | 86                        |       | 193                       |       |
|                                                                                                                |       | 126,573                   |       | 115,441                   |       |
|                                                                                                                |       |                      |       |                      |       |
| Operating income                                                                                                    |       | 1,445                     |       | 2,871                     |       |
|                                                                                                                |       |                      |       |                      |       |
| Interest expense                                                                                                    |       | (922                      | )          | (548                      | )          |
| Other income,  net                                                                                                  |       | 306                       |       | 189                       |       |
|                                                                                                                |       |                      |       |                      |       |
| Income before  income taxes                                                                                         |       | 829                       |       | 2,512                     |       |
|                                                                                                                |       |                      |       |                      |       |
| (Benefit)  provision for income taxes                                                                               |       | (39                       | )          | 854                       |       |
|                                                                                                                |       |                      |       |                      |       |
| Net income                                                                                                          |       | 868                       |       | 1,658                     |       |
|                                                                                                                |       |                      |       |                      |       |
| Retained  earnings, beginning of period                                                                             |       | 67,373                    |       | 65,331                    |       |
|                                                                                                                |       |                      |       |                      |       |
| Retained  earnings, end of period                                                                                   |       | $                         | 68,241     |                      | $          | 66,989 |   |
|                                                                                                                |       |                      |       |                      |       |
| Basic and diluted  earnings per share                                                                               |       | $                         | .54        |                      | $          | 1.03 |   |
|                                                                                                                |       |                      |       |                      |       |
| Average shares  outstanding                                                                                         |       | 1,603                     |       | 1,605                     |       |
|                                                                                                                |       |                      |       |                      |       |
| Comprehensive  income:                                                                                              |       |                      |       |                      |       |
| Net income                                                                                                          |       | $                         | 868        |                      | $          | 1,658 |   |
| Comprehensive  loss from interest rate swap, net of tax benefit of $2 for the nine months  ended September 30, 2006 |       | —                    |       | (3                        | )     |
|                                                                                                                |       | $                         | 868        |                      | $          | 1,655 |   |

 

 

 

 

 

See accompanyingnotes

 

4

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CONTINENTALMATERIALS CORPORATION

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINEMONTHS ENDED SEPTEMBER 29, 2007 AND SEPTEMBER 30, 2006

(Unaudited)

(000’s omitted)

 

 

 

 

 

 
| ** **                                                              | ** ** | **SEPTEMBER 29,  2007** | ** ** | **SEPTEMBER 30,  2006** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                                                    |       |                         |       |                         |       |
| Net cash  provided by (used in) operating activities                    |       | $                            | 418        |                         | $          | (274 | ) |
|                                                                    |       |                         |       |                         |       |
| Investing  activities:                                                  |       |                         |       |                         |       |
| Cash paid for  acquisitions of assets of certain businesses             |       | —                       |       | (2,452                       | )          |
| Capital  expenditures                                                   |       | (6,996                       | )          | (5,036                       | )          |
| Proceeds from  sale of assets                                           |       | 370                          |       | 214                          |       |
| Net cash used in  investing activities                                  |       | (6,626                       | )          | (7,274                       | )          |
|                                                                    |       |                         |       |                         |       |
| Financing  activities:                                                  |       |                         |       |                         |       |
| Borrowings under  revolving credit facility, net                        |       | 8,700                        |       | —                       |       |
| Long-term  borrowings                                                   |       | —                       |       | 5,000                        |       |
| Repayment of  long-term debt                                            |       | (2,099                       | )          | (1,667                       | )          |
| Payment to  acquire treasury stock                                      |       | (70                          | )          | —                       |       |
| Other                                                                   |       | 91                           |       | —                       |       |
| Net cash  provided by financing activities                              |       | 6,622                        |       | 3,333                        |       |
|                                                                    |       |                         |       |                         |       |
| Net increase  (decrease) in cash and cash equivalents                   |       | 414                          |       | (4,215                       | )          |
| Cash and cash  equivalents:                                             |       |                         |       |                         |       |
| Beginning of  period                                                    |       | 2,770                        |       | 6,829                        |       |
|                                                                    |       |                         |       |                         |       |
| End of period                                                           |       | $                            | 3,184      |                         | $          | 2,614 |   |
|                                                                    |       |                         |       |                         |       |
| Supplemental  disclosures of cash flow items:                           |       |                         |       |                         |       |
| Cash paid during  the six months for:                                   |       |                         |       |                         |       |
| Interest                                                                |       | $                            | 1,061      |                         | $          | 734 |   |
| Income taxes                                                            |       | 545                          |       | 656                          |       |
| Supplemental  disclosures of noncash investing and financing activities |       |                         |       |                         |       |
| Note issued as  partial consideration for asset purchase                |       | $                            | —     |                         | $          | 1,000 |   |
| Capital expenditures  purchased on account                              |       | 45                           |       | —                       |       |

 

 

 

 

 

 

See accompanyingnotes

 

 

5

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CONTINENTALMATERIALS CORPORATION

SECURITIES ANDEXCHANGE COMMISSION FORM 10-Q

NOTES TO THEQUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDEDSEPTEMBER 29, 2007

(Unaudited)

 

1.               The unaudited interim condensedconsolidated financial statements included herein are prepared pursuant to theSecurities and Exchange Commission rules and regulations for reporting on Form10-Q. Accordingly, certain information and footnote disclosures normallyaccompanying the annual consolidated financial statements have been omitted.The interim condensed consolidated financial statements and notes should beread in conjunction with the consolidated financial statements and notesthereto included in the Company’s latest annual report on Form 10-K. As aresult of certain organizational changes implemented at the beginning of the2007 fiscal year, we reevaluated our reporting segments during the firstquarter in accordance with Financial Accounting Standards Board (FASB)Statement No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation.” Although our four reporting segments, see Note 5, have remainedthe same, the Door Division of Transit Mix Concrete Co., previously reportedwithin the Concrete, Aggregates and Construction Supplies segment is nowreported within the Door segment. In the opinion of management, the condensedconsolidated financial statements include all adjustments (none of which wereother than normal recurring adjustments) necessary for a fair statement of theresults for the interim periods.

 

2.               Our effective income tax rate is based onexpected income, statutory tax rates and tax positions taken in the variousjurisdictions in which we operate. For interim financial reporting, we estimatethe annual income tax rate based on projected taxable income for the full yearand record a quarterly income tax provision in accordance with the anticipatedannual rate. As the year progresses, we refine the estimates of the year’staxable income as new information becomes available, including year-to-datefinancial results. This continual estimation process often results in a changeto our expected effective income tax rate for the year. When this occurs, weadjust the income tax provision during the quarter in which the change inestimate occurs so that the year-to-date provision reflects the expected annualincome tax rate. Significant judgment is required in determining our effectiveincome tax rate and in evaluating our tax positions. The effective income taxrate for the quarter ended September 29, 2007 of 103% is primarily due torecognition during the quarter of $362,000 of earned California Enterprise Zonecredits that will benefit future tax years.

 

On December 31, 2006, the first day of fiscal 2007, weadopted the provisions of Financial Accounting Standards Board InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation ofFASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes,”by prescribing a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. Under FIN 48, the financial statementeffects of a tax position should initially be recognized when it is more likelythan not, based on the technical merits, that the position will be sustainedupon examination. A tax position that meets the more-likely-than-notrecognition threshold should initially and subsequently be measured as thelargest amount of tax benefit that has a greater than 50% likelihood of beingrealized upon effective settlement with a taxing authority.

 

There was no cumulative adjustment to retainedearnings required as a result of the implementation of FIN 48. The gross amountof unrecognized tax benefits at December 31, 2006 was $290,000 of which $79,000would affect the effective tax rate. The gross amount of unrecognized taxbenefits at September 29, 2007 was $287,000 of which $86,000 would affect theeffective tax rate.

 

We classify interest and penalties recognized on theliability for unrecognized tax benefits as income tax expense. Accrued interestand penalties included in our total liability for unrecognized tax benefitswere $56,000 as of September 29, 2007 and $85,000 as of December 31, 2006.

 

The United States Federal statute of limitationsexpires during the third quarter of 2008 for our 2004 tax year. Included in thebalance at September 29, 2007 is approximately $15,000 related to tax positionsexpected to be resolved within 12 months of this reporting date.

 

We file income tax returns in the United Statesfederal and various state jurisdictions. Generally, we are not subject tochanges in income taxes by any taxing jurisdiction for the years prior to 2002.

 

 

 

6

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3.               Operating results for the first ninemonths of 2007 are not necessarily indicative of performance for the entireyear. Historically, sales of the Evaporative Cooling segment are higher in thefirst and second quarters, sales of the Concrete, Aggregates and ConstructionSupplies segment are higher in the second and third quarters and sales of theHeating and Cooling segment are higher in the third and fourth quarters. Salesof the Door segment have not shown strong seasonal fluctuations in recentyears.

 

4.               There is no difference in the calculationof basic and diluted earnings per share (EPS) for either the three months ornine months ended September 29, 2007 or September 30, 2006.

 

5.               The Company operates primarily in fourreportable segments within its two principal industry groups; the Heating andCooling segment and the Evaporative Cooling segment in the Heating, Ventilationand Air Conditioning (HVAC) industry group and the Concrete, Aggregates andConstruction Supplies segment and the Door segment in the Construction Productsindustry group. The Heating and Cooling segment produces and sells gas-firedwall furnaces, console heaters and fan coils from the Company’s wholly-ownedsubsidiary, Williams Furnace Co. of Colton, California. The Evaporative Coolingsegment produces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona. Sales of these twosegments are nationwide, but are concentrated in the southwestern UnitedStates. Concrete, Aggregates and Construction Supplies are offered fromnumerous locations along the Front Range of Colorado operated by the Company’swholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co.(TMC), of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo and RockyMountain Ready Mix Concrete, Inc. of Denver. Doors are fabricated and soldalong with the related hardware from the Company’s wholly-owned subsidiary,McKinney Door and Hardware, Inc. (MDHI) of Pueblo, Colorado. Sales of these twosegments are highly concentrated in the Front Range area in Colorado althoughdoor sales are also made throughout the United States. Prior to the 2007 fiscalyear, the Company reported the Door Division of TMC as part of the Concrete,Aggregates and Construction Materials segment. On December 31, 2006, the firstday of fiscal 2007, the Door Division was transferred to MDHI and is nowreported as part of the Door segment. As required by FASB Statement No. 131, wehave restated the 2006 financial information presented in the table below toconform to the current composition of our reportable segments.

 

The Company evaluates theperformance of its segments and allocates resources to them based on a numberof 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/expense or income taxes.

 

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

 

The following tablepresents information about reported segments for the nine month and three monthperiods ended September 29, 2007 and September 30, 2006 along with the itemsnecessary to reconcile the segment information to the totals reported in thefinancial statements (amounts in thousands):

 

 

 

7

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| ** **                                | ** ** | **Construction Products**                            | ** ** | **HVAC Products** | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **              | ** ** |
|-------------------------------------------|------------|------------------------------------------------------|------------|-------------------|------------|------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                | ** ** | **Concrete, Aggregates & Construction Supplies** | ** ** | **Doors**         | ** ** | **Combined Construction Products** | ** ** | **Heating and Cooling** | ** ** | **Evaporative Cooling** | ** ** | **Combined  HVAC Products** | ** ** | **Unallocated Corporate** | ** ** | **Other** | ** ** | **Total** | ** ** |
| 2007                                      |       |                                                 |       |              |       |                               |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Nine Months  ended September 29, 2007     |       |                                                 |       |              |       |                               |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                    | 71,110     |              | $          | 13,733                             |       | $                       | 84,843     |                    | $          | 24,297 |   | $ | 18,607 |   | $ | 42,904 |   | $ | 13 |   | $ | 258 |   | $ | 128,018 |   |
| Depreciation,  depletion and amortization |       | 3,047                                                |       | 79                |       | 3,126                              |       | 315                     |       | 450                     |       | 765 |   | 55 |   | — |   | 3,946 |   |
| Operating income  (loss)                  |       | 3,656                                                |       | 1,627             |       | 5,283                              |       | (1,503                  | )          | (366                    | )          | (1,869 | ) | (2,050 | ) | 81 |   | 1,445 |   |
| Segment assets                            |       | 58,280                                               |       | 7,128             |       | 65,408                             |       | 23,379                  |       | 11,222                  |       | 34,601 |   | 2,496 |   | 4 |   | 102,509 |   |
| Capital  expenditures (a)                 |       | 4,301                                                |       | 1,509             |       | 5,810                              |       | 627                     |       | 567                     |       | 1,194 |   | 37 |   | — |   | 7,041 |   |
| Quarter ended  September 29, 2007         |       |                                                 |       |              |       |                               |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                    | 25,585     |              | $          | 4,284                              |       | $                       | 29,869     |                    | $          | 8,121 |   | $ | 4,208 |   | $ | 12,329 |   | $ | 4 |   | $ | 86 |   | $ | 42,288 |   |
| Depreciation,  depletion and amortization |       | 1,018                                                |       | 18                |       | 1,036                              |       | 104                     |       | 150                     |       | 254 |   | 19 |   | — |   | 1,309 |   |
| Operating income  (loss)                  |       | 1,338                                                |       | 460               |       | 1,798                              |       | (824                    | )          | (493                    | )          | (1,317 | ) | (573 | ) | 27 |   | (65 | ) |
| Segment assets                            |       | 58,280                                               |       | 7,128             |       | 65,408                             |       | 23,379                  |       | 11,222                  |       | 34,601 |   | 2,496 |   | 4 |   | 102,509 |   |
| Capital  expenditures (a)                 |       | 495                                                  |       | 1,300             |       | 1,795                              |       | 395                     |       | 89                      |       | 484 |   | 6 |   | — |   | 2,285 |   |
|                                           |            |                                                      |            |                   |            |                                    |            |                         |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)         Capitalexpenditures for the Evaporative Cooling segment include $45,000 of additionspurchased on account.

 
| ** **                                        | ** ** | **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                                              |       |                                                 |       |              |       |                               |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Nine Months  ended September 30, 2006 as restated |       |                                                 |       |              |       |                               |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers                 |       | $                                                    | 71,093     |              | $          | 10,165                             |       | $                       | 81,258     |                    | $          | 18,628 |   | $ | 18,163 |   | $ | 36,791 |   | $ | 5 |   | $ | 258 |   | $ | 118,312 |   |
| Depreciation,  depletion and amortization         |       | 2,748                                                |       | 101               |       | 2,849                              |       | 296                     |       | 450                     |       | 746 |   | 56 |   | — |   | 3,651 |   |
| Operating income  (loss)                          |       | 4,583                                                |       | 1,100             |       | 5,683                              |       | (570                    | )          | 250                     |       | (320 | ) | (2,573 | ) | 81 |   | 2,871 |   |
| Segment assets  (a)                               |       | 54,470                                               |       | 4,750             |       | 59,220                             |       | 18,303                  |       | 12,651                  |       | 30,954 |   | 3,468 |   | 63 |   | 93,705 |   |
| Capital  expenditures (b)                         |       | 6,388                                                |       | 70                |       | 6,458                              |       | 158                     |       | 207                     |       | 365 |   | 2 |   | — |   | 6,825 |   |
| Quarter ended  September 30, 2006 as restated     |       |                                                 |       |              |       |                               |       |                    |       |                    |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers                 |       | $                                                    | 26,022     |              | $          | 3,613                              |       | $                       | 29,635     |                    | $          | 6,997 |   | $ | 4,204 |   | $ | 11,201 |   | $ | 2 |   | $ | 86 |   | $ | 40,924 |   |
| Depreciation,  depletion and amortization         |       | 912                                                  |       | 34                |       | 946                                |       | 98                      |       | 150                     |       | 248 |   | 18 |   | — |   | 1,212 |   |
| Operating income  (loss)                          |       | 1,837                                                |       | 441               |       | 2,278                              |       | (421                    | )          | (81                     | )          | (502 | ) | (888 | ) | 27 |   | 915 |   |
| Segment assets  (a)                               |       | 54,470                                               |       | 4,750             |       | 59,220                             |       | 18,303                  |       | 12,651                  |       | 30,954 |   | 3,468 |   | 63 |   | 93,705 |   |
| Capital  expenditures                             |       | 1,321                                                |       | 5                 |       | 1,326                              |       | 56                      |       | 45                      |       | 101 |   | — |   | — |   | 1,427 |   |
|                                                   |            |                                                      |            |                   |            |                                    |            |                         |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

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

 

Thereare no differences in the basis of segmentation or in the basis of measurementof segment profit or loss from the last annual report except as discussedabove.

 

6.               On June 30, 2006 the Company purchasedcertain assets of ASCI, a concrete producer in Colorado Springs, Colorado for$2,100,000 of cash and a $1,000,000 Note. The assets were acquired by TMC inthe Concrete, Aggregates and Construction Supplies segment. The final purchaseprice allocation included $1,735,000 of plant and equipment, $290,000 for anon-compete agreement, $350,000 for a restriction of use covenant, $370,000 forexisting customer relations and $355,000 of goodwill, all of which isamortizable over 15 years for tax purposes. For book purposes, the non-competeis being amortized over its five-year term, the restriction

 

8

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of land use covenant is being amortized over itsten-year term and the customer relations intangible is being amortized over itsestimated useful life of ten years. The purchase was accounted for as anacquisition of a business under FASB Statement No. 141, “Standards of Accounting for Business Combinations.”

 

The following unaudited pro forma summary financialinformation summarizes the estimated combined results of operations of theCompany and ASCI assuming that the acquisition of ASCI had taken place onJanuary 1, 2006. The unaudited pro forma combined results of operations wereprepared on the basis of information provided to the Company by the formermanagement of ASCI and no representation is made by the Company with respect tothe accuracy of such information. The pro forma financial information for thenine months ended September 30, 2006 includes the results of ASCI from January1, 2006 through April 30, 2006, and have been adjusted for interest expense,additional depreciation based on the fair market value of plant and equipment,amortization of identifiable intangibles and income tax expense. Interimfinancial information for the six month periods ended July 1, 2006 was not madeavailable to the Company. Amounts are in thousands except per share amounts.

 
| ** **                        | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| Net sales                         |       | $                                         | 120,608    |   |
| Net income                        |       | 1,685                                     |       |
| Basic and  diluted loss per share |       | 1.05                                      |       |
|                                   |            |                                           |            |  |

 

The unaudited pro forma combined results of operationsare not necessarily indicative of, and do not purport to represent, what theCompany’s results of operations or financial condition actually would have beenhad the acquisitions been made as of January 1, 2006. Due to competitiveconditions, the Company did not expect to, and has not, retained all of theconcrete volume or market share previously attained by ASCI.

 

7.               Identifiable intangible assets as ofSeptember 29, 2007 include five amortizable non-compete agreements, includingthe non-compete agreement related to ASCI acquired during the second quarter of2006 (see Note 6). Identifiable intangible assets also include a restrictiveland covenant and customer relations value, both related to the ASCIacquisition. Collectively, these assets were carried at $1,274,000, net of$1,336,000 accumulated amortization. The pre-tax amortization expense forintangible assets during the three months and nine months ended September 29,2007 was $78,000 and $243,000, respectively. Based upon the intangible assetsrecorded on the balance sheet at September 29, 2007, amortization expense forthe next five years is estimated to be as follows: 2007 — $320,000, 2008 —$300,000, 2009 — $293,000, 2010 — $262,000 and 2011 — $101,000.

 

8.               At September 29, 2007, the Company was not incompliance with the Leverage Ratio covenant as defined in the Company’s loanagreement dated September 5, 2003, as amended, with LaSalle Bank NationalAssociation and Fifth Third Bank. In an amendment to the loan agreement datedOctober 23, 2007, the Company obtained waivers of the requirement for thequarter ended September 29, 2007 and for the quarter ended December 29, 2007.The Company expects to be in compliance with the covenant in future quarters.The principal reasons for not meeting the required ratio was the high level ofcapital expenditures as well as the decline in pre-tax earnings during the pasttwelve months. Also as part of the amendment, the revolving credit commitmentwas temporarily increased from $15,000,000 to $18,000,000 for the period fromOctober 23, 2007 through January 15, 2008.

 

** **

**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 5.

 

Company Overview

 

The Company operates in four reportable segmentswithin its two principal industry groups; the Heating and Cooling segment andthe Evaporative Cooling segment in the HVAC industry group and the Concrete,Aggregates and Construction Supplies segment and the Door segment in theConstruction Products industry group.

 

The Heating and Cooling segment produces and sellsgas-fired wall furnaces, console heaters and fan coils from the Company’swholly-owned subsidiary, Williams Furnace Co. of Colton, California. TheEvaporative Cooling segment produces and sells evaporative coolers from theCompany’s wholly-owned subsidiary,

 

 

9

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Phoenix Manufacturing, Inc. of Phoenix, Arizona.Concrete, Aggregates and Construction Supplies are offered from numerouslocations along the Front Range of Colorado operated by the Company’swholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co.,of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo and Rocky MountainReady Mix Concrete, Inc. of Denver. Doors are fabricated and sold along withthe related hardware from the Company’s wholly-owned subsidiary, McKinney Doorand Hardware, Inc. of Pueblo, Colorado.

 

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

 

Financial Condition andLiquidity 

 

Salesof the Company’s HVAC products are seasonal and weather sensitive except forfan coils. Revenues in the Company’s Concrete, Aggregates and ConstructionSupplies segment are influenced by the level of construction activity andweather conditions along the Front Range of Colorado. Sales for the Doorsegment are not as strongly seasonal nor are they much affected by weatherconditions. Historically, the Company has experienced operating losses duringthe first quarter except when the weather is mild along the Front Range.Operating results typically improve in the second and third quarters reflectingmore favorable weather conditions in Colorado and the seasonal sales ofEvaporative Cooling segment. Fourth quarter results can vary based on weatherconditions in Colorado as well as in the principal markets for the Company’sheating equipment. The Company typically experiences operating cash flow deficitsduring the first half of the year reflecting operating results, the use ofsales dating programs (extended payment terms) related to the EvaporativeCooling segment and payments of the prior year’s accrued incentive bonuses andCompany profit-sharing contributions. As a result, the Company’s borrowingsagainst its revolving credit facility tend to peak during the second quarterand then decline over the remainder of the year. This trend has continued thusfar in 2007.

 

Asexpected, the Company’s cash flow from operations during the quarter endedSeptember 29, 2007 was positive by $1,523,000 due to the seasonality of sales,production schedules and the sales dating programs related to the evaporativecooler product line. Borrowings against the revolving credit facility increasedhowever, as capital expenditures exceeded the cash generated by operations. Forthe nine months ended September 29, 2007, operations provided $418,000 of cashcompared to using $274,000 of cash during the first nine months of 2006. Theimproved cash flow was due to changes in working capital accounts, primarily asmaller increase in accounts receivable partially offset by a larger increasein inventories and a smaller increase in accounts payable and accrued expensesduring the first nine months of 2007 as compared to the 2006 period.

 

Duringthe nine months ended September 29, 2007, investing activities used $6,626,000of cash compared to $7,274,000 in the prior year’s period. Capital expendituresof $6,996,000 during the first nine months of 2007, primarily for the Concrete,Aggregates and Construction Supplies segment, were significantly higher thanthe expenditures during the comparable 2006 period. The replacement of twoloaders and a scraper for the quarry operations and the construction andinstallation of an industrial sand plant all occurred during the first ninemonths of 2007. In addition, the Door segment purchased a building in ColoradoSprings in order to consolidate activities and provide additional capacity forgrowth. The proceeds from the sale of assets for 2007 include $230,000 receivedfrom the June sale of stock received from the demutualization of a mutualinsurance company. Investing activities during the first nine months of 2006included $2,452,000 for the acquisition of certain assets of two companies.

 

Financing activities provided $6,622,000 during thefirst nine months of 2007 compared to $3,333,000 provided during the first ninemonths of 2006. The Company borrowed $8,700,000 against the revolving line ofcredit during the first nine months of 2007 compared to the $5,000,000 increasein the term loan during the 2006 period. All scheduled debt repayments weremade during the first nine months of both 2007 and 2006. During the first ninemonths of 2007, the highest amount of Company borrowings outstanding under therevolving credit agreement was $8,700,000 and the average amount outstandingwas $4,823,000. At September 29, 2007, the Company was not in compliance withthe Leverage Ratio covenant as defined in the loan agreement. In an amendmentto the loan agreement dated October 23, 2007, the Company obtained waivers ofthe requirement for the quarter ended September 29, 2007 and for the quarterended December 29, 2007. The Company expects to be in compliance with thecovenant in future quarters. The principal reasons

 

 

10

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for not meeting the required ratio was the high levelof capital expenditures as well as the decline in pre-tax earnings during thepast twelve months. Also as part of the amendment, the revolving creditcommitment was temporarily increased from $15,000,000 to $18,000,000 for theperiod from October 23, 2007 through January 15, 2008. The Company has notutilized any of the increase to the line as of the filing of this report onForm 10-Q.

 

TheCompany believes that anticipated cash flow from operations, supplemented byseasonal borrowings against the revolving line of credit, (of which $8,700,000was outstanding at September 29, 2007) will be sufficient to cover expectedcash needs, including servicing debt and planned capital expenditures for atleast the next twelve months.

 

Operations — Comparisonof Quarter Ended September 29, 2007 to Quarter Ended September 30, 2006

 

Historically, the Company has experienced strongoperating results during the third quarter as sales in the Concrete, Aggregatesand Construction Supplies segment peak due to weather more conducive toconstruction activity. Sales followed this pattern in 2007 however; operating resultswere well below the historical trend due to shortfalls in the two HVACreporting segments. Consolidated sales during the third quarter of 2007 were$42,288,000 compared to $40,924,000 in the third quarter of 2006. Operatingresults for the 2007 quarter were a loss of $65,000 compared to a profit of$915,000 during the comparable quarter of 2006.

 

The Heating and Cooling segment and the Door segmentreported increased sales while the Evaporative Cooling segment’s sales werestatic and the Concrete, Aggregates and Construction Supplies segment’s salesdeclined. Cost of sales as a percentage of sales increased from 82.4% to 86.8%primarily due to decreased margins in the Heating and Cooling segment and theEvaporative Cooling segment. Margins in the Concrete, Aggregates andConstruction Supplies segment also narrowed. Selling and administrative costsdecreased both in dollars and as a percentage of sales. A reduction wasrealized at three of the four reporting segments as well as at the Corporateoffice resulting primarily from adjustments to incentive based compensation.Depreciation, depletion and amortization for the 2007 quarter increased $97,000over the prior year’s quarter due to increased capital expenditures during 2006and 2007 and amortization of intangible assets associated with the ASCIacquisition. The resulting operating loss of $65,000 was well off of theoperating income of $915,000 reported for the third quarter of 2006.

 

Interest expense increased from $250,000 for the thirdquarter of 2006 to $341,000 in the 2007 quarter due to increased average debtand higher interest rates.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

The table below presents a summary of operatinginformation for the two reportable segments within the Construction Productsgroup for the quarters ended September 29, 2007 and September 30, 2006 (amountsin thousands):

 
| ** **                               | ** ** | **Concrete, Aggregates and Construction Supplies** | ** ** | **Doors** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|-----------|------------|
| Quarter ended  September 29, 2007        |       |                                               |       |      |       |
| Revenues from  external customers        |       | $                                                  | 25,585     |      | $          | 4,284 |   |
| Segment  operating income                |       | 1,338                                              |       | 460       |       |
| Operating income  as a percent of sales  |       | 5.2                                                | %          | 10.7      | %          |
| Segment assets  as of September 29, 2007 |       | $                                                  | 58,280     |      | $          | 7,128 |   |
| Return on assets                         |       | 2.3                                                | %          | 6.5       | %          |
|                                     |       |                                               |       |      |       |
| Quarter ended  September 30, 2006        |       |                                               |       |      |       |
| Revenues from  external customers        |       | $                                                  | 26,022     |      | $          | 3,613 |   |
| Segment  operating income                |       | 1,837                                              |       | 441       |       |
| Operating income  as a percent of sales  |       | 7.1                                                | %          | 12.2      | %          |
| Segment assets  as of September 30, 2006 |       | $                                                  | 56,323     |      | $          | 4,636 |   |
| Return on assets                         |       | 3.3                                                | %          | 9.5       | %          |

 

 

 

11

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Concrete,Aggregates and Construction Supplies Segment

Salesin the Concrete, Aggregates and Construction Supplies segment for the thirdquarter of 2007 declined 1.7% from the prior year’s comparable quarter.Concrete volume declined 12.5% while margins deteriorated as pricing decisionsmade in order to protect our market share were insufficient to fully recoverhigher material and delivery costs, including fuel. Aggregate volumes increased5.9% despite the decline in construction activity along the Front Range ofColorado, especially housing construction. Margins also increased as productionefficiency improved. Both increases are primarily due to the occurrence offloods at our two Arkansas River operations during the third quarter of 2006.All expenses incurred to repair the damage and resume production wererecognized in cost of sales as incurred. Both quarries were back in operationby the end of 2006 although some measures to mitigate future vulnerability wereperformed in 2007. Construction supplies sales and margins both declined duringthe third quarter of 2007 as compared to the 2006 quarter due to the slow-downin construction.

 

Operatingincome declined for the 2007 quarter compared to the 2006 quarter. The declinein concrete volume and margins more than offset the improved aggregatesoperations. Depreciation, depletion and amortization increased because of thehigher capital spending during 2006 and 2007 to date. Selling andadministrative costs were lower due to the adjustment of incentive basedcompensation. As a result, both operating income as a percent of sales and thereturn on assets declined in the 2007 quarter from the prior year’s quarter.

 

DoorSegment

Doorsegment sales rose $671,000, or 18.6%, during the third quarter of 2007 overthe comparable 2006 quarter. Sales during a specific quarter can be heavilyinfluenced by customer requests to either accelerate or delay shipments of jobsto better coincide with their own construction schedules. The backlog which hadgrown during the latter part of 2006 declined during the first six months of2007 as a number of jobs were shipped; however, it has grown again during thecurrent quarter to just below the September 2006 level. Sales prices increasedin response to increased costs while margins declined modestly as competitivepressures restrained price increases.

 

Operatingincome improved from $441,000 during the third quarter of 2006 to $460,000 forthe 2007 quarter as a result of the higher sales volume and an improvement inthe electronics business (acquired at the beginning of 2006). Selling andadministrative costs remained relatively constant during the 2007 quartercompared with the prior year quarter and decreased slightly as a percentage ofsales. The segment acquired a building in Colorado Springs during the 2007quarter and will consolidate their two Colorado Springs operations into thefacility by the end of the year. As a result of the cost increases, bothoperating income as a percent of sales and return on assets declined in the 2007quarter from the prior year’s quarter.

 

**HVACProducts**

The table below presentsa summary of operating information for the two reportable segments within theHVAC products group for the quarters ended September 29, 2007 and September 30,2006 (amounts in thousands):

 
| ** **                               | ** ** | **Heating and   Cooling** | ** ** | **Evaporative   Cooling** | ** ** |
|------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Quarter ended  September 29, 2007        |       |                      |       |                      |       |
| Revenues from  external customers        |       | $                         | 8,121      |                      | $          | 4,208 |   |
| Segment  operating loss                  |       | (824                      | )          | (493                      | )          |
| Operating loss  as a percent of sales    |       | (10.0                     | )%         | (11.7                     | )%         |
| Segment assets  as of September 29, 2007 |       | $                         | 23,379     |                      | $          | 11,222 |   |
| Return on assets                         |       | (3.5                      | )%         | (4.4                      | )%         |
|                                     |       |                      |       |                      |       |
| Quarter ended  September 30, 2006        |       |                      |       |                      |       |
| Revenues from  external customers        |       | $                         | 6,997      |                      | $          | 4,204 |   |
| Segment  operating loss                  |       | (421                      | )          | (81                       | )          |
| Operating loss  as a percent of sales    |       | (6.0                      | )%         | (1.9                      | )%         |
| Segment assets  as of September 30, 2006 |       | $                         | 19,660     |                      | $          | 10,048 |   |
| Return on assets                         |       | (2.1                      | )%         | (.8                       | )%         |

 

Heating and CoolingSegment

Sales in the Heating and Cooling segment were$8,121,000 for the third quarter of 2007, an increase of $1,124,000, or 16.1%,from the comparable 2006 quarter. Fan coil volume accounted for the increasewith sales surging nearly 54% from the prior year’s quarter. This increase wasthe result of favorable market

 

 

12

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conditions and the restructured sales representativenetwork which was completed in late 2005. Pricing remained relatively flat.Partially offsetting this increase was an 8% decline in furnace volume after aparticularly strong first quarter. Cost of sales as a percentage of salesincreased during the third quarter of 2007 to 93.6% from 79.7% for thecomparable quarter of 2006. A change in product mix in favor of Fan coils andhigher material and manufacturing costs contributed to this increase.

 

The operating loss for the 2007 quarter was $824,000compared to the loss of $421,000 incurred during the third quarter of 2006.Selling and administrative expenses were $503,000 lower primarily due to lowerincentive based compensation. As a result of the significant increase inmanufacturing costs, both operating loss as a percent of sales and return onassets increased in the 2007 quarter from the prior year’s quarter.

 

Evaporative CoolingSegment

Sales in the Evaporative Cooling segment were static;increasing only $4,000 during the third quarter of 2007 compared to the thirdquarter of 2006. There were no significant events during the quarter thataffected sales.

 

Operating results declined for the third quarter of2007 to a loss of $493,000 from an $81,000 loss for the same quarter in 2006.The decline resulted from of an increase in cost of sales as a percentage ofsales from 87.6% to 96.9%. Competitive pressures restricted price increases inresponse to cost increases and an additional workers compensation claims.Depreciation and amortization remained constant between the periods. The smallincrease in selling and administrative expenses was largely due to increasedselling expenses, notably commissions and volume incentive. As a result, boththe operating loss as a percent of sales and return on assets increased in the2007 quarter from the prior year’s quarter.

 

Operations - Comparisonof Nine Months Ended September 29, 2007 to Nine Months Ended September 30, 2006

 

Consolidated sales during the first nine months of2007 were $128,018,000 compared to $118,312,000 during the first nine months of2006. The improvement was primarily generated by the Heating and Coolingsegment and the Door segment. Cost of sales as a percentage of sales increasedfrom 81.7% for the 2006 period to 84.2% during the 2007 period. Depreciation,depletion and amortization increased $295,000 over the prior year’s period dueto increased capital expenditures during 2006 and 2007 and amortization ofintangible assets associated with the ASCI acquisition. Selling andadministrative costs declined as a percentage of sales as well as in total, theresult of adjustments to accrued incentive based compensation. The increasedcost of sales led to a reduction of operating income from $2,871,000 for thenine months ended September 30, 2006 to $1,445,000 for the first nine months of2006. Interest expense increased from $548,000 for the nine months endedSeptember 30, 2006 to $922,000 for the nine months ended September 29, 2007 dueto increased average borrowings and higher rates. Other income for the firstnine months of 2007 includes a $230,000 gain on the sale of stock received fromthe demutualization of a mutual insurance company.

 

Adiscussion of operations by segment follows.

 

**Construction Products**

The table below presents a summary of operatinginformation for the two reportable segments within the Construction Productsgroup for the nine months ended September 29, 2007 and September 30, 2006(amounts in thousands):
| ** **                               | ** ** | **Concrete, Aggregates and Construction Supplies** | ** ** | **Doors** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|-----------|------------|
| Nine Months  ended September 29, 2007    |       |                                               |       |      |       |
| Revenues from  external customers        |       | $                                                  | 71,110     |      | $          | 13,733 |   |
| Segment  operating income                |       | 3,656                                              |       | 1,627     |       |
| Operating income  as a percent of sales  |       | 5.1                                                | %          | 11.8      | %          |
| Segment assets  as of September 29, 2007 |       | $                                                  | 58,280     |      | $          | 7,128 |   |
| Return on assets                         |       | 6.3                                                | %          | 22.8      | %          |
|                                     |       |                                               |       |      |       |
| Nine Months  ended September 30, 2006    |       |                                               |       |      |       |
| Revenues from  external customers        |       | $                                                  | 71,093     |      | $          | 10,165 |   |
| Segment  operating income                |       | 4,583                                              |       | 1,100     |       |
| Operating income  as a percent of sales  |       | 6.4                                                | %          | 10.8      | %          |
| Segment assets  as of September 30, 2006 |       | $                                                  | 54,470     |      | $          | 4,750 |   |
| Return on assets                         |       | 8.4                                                | %          | 23.2      | %          |

 

 

 

13

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Concrete,Aggregates and Construction Supplies Segment

Salesin the Concrete, Aggregates and Construction Supplies segment for the firstnine months of 2007 were flat compared to the prior year’s comparable period.Concrete volume declined approximately 4% but sales dollars increased due toincreased prices in response to higher material and delivery costs, includingfuel. Margins, however, deteriorated as pricing increases did not keep pacewith higher cement, delivery and other costs. Repair and maintenance costs werealso higher than the prior year period. Aggregate volumes increasedapproximately 5% despite the decline in construction activity, primarily due tothe sale of some bulk product, including fill sand, during the first quarter of2007 and the interruption of business at our two Arkansas River operations fromfloods during the third quarter of 2006. Aggregate margins improved as a resultof the production efficiencies during 2007 and the flood damage costs incurredduring the third quarter of 2006 as described above for the current quarter. Inaddition, margins were aided by the recovery of $725,000 during the secondquarter of 2007 from our insurance carrier as settlement of flood claims.Construction supplies sales and margins declined during the first nine monthsof 2007 for the reasons noted above for the quarter.

 

Operating income declined to $3,656,000 during the2007 period from $4,583,000 for the 2006 period. The decline was due to thereduced concrete volume and margins. Partially offsetting this decline was theimproved aggregate margins for the reasons noted above. Depreciation, depletionand amortization increased during the 2007 period for the reasons noted for thequarter. For the 2007 nine month period, the lower selling and administrativeexpenses were attributable to incentive based compensation noted in thediscussion of the quarter and the consolidation of administrative functionsinto the Colorado Springs office. As a result of the decline of concrete volumeand margins, both operating income as a percent of sales and return on assetsdeclined for the nine months ended September 29, 2007 compared to the ninemonths ended September 30, 2006.

 

DoorSegment

Salesin the Door segment for the first nine months of 2007 increased $3,568,000 overthe comparable 2006 period due to the timing of shipments as described in thediscussion for the current quarter, pricing increases in response to highercosts and a steady market demand. Due to the nature of this segment’s products,its sales correspond to the latter part of the construction cycle; thereforethe current nationwide decline in construction activity has not yet beenexperienced by this segment.

 

Operatingincome improved from $1,100,000 during the first nine of 2006 to $1,627,000 forthe 2007 period primarily due to higher sales volume and an improvement in theelectronics business. As noted in the discussion of the current quarter, thebacklog was also reduced during the first half of 2007. As a result, operatingincome as a percent of sales improved while the return on assets declinedslightly due to the building addition during the nine months ended September29, 2007 compared to the nine months ended September 30, 2006.

 

**HVACProducts**

The table below presentsa summary of operating information for the two reportable segments within theHVAC products group for the nine months ended September 29, 2007 and September30, 2006 (amounts in thousands):

 
| ** **                                     | ** ** | **Heating   and Cooling** | ** ** | **Evaporative   Cooling** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| Nine Months  ended September 29, 2007          |       |                      |       |                      |       |
| Revenues from  external customers              |       | $                         | 24,297     |                      | $          | 18,607 |   |
| Segment  operating loss                        |       | (1,503                    | )          | (366                      | )          |
| Operating loss  as a percent of sales          |       | (6.2                      | )%         | (2.0                      | )%         |
| Segment assets  as of September 29, 2007       |       | $                         | 23,379     |                      | $          | 11,222 |   |
| Return on assets                               |       | (6.4                      | )%         | (3.3                      | )%         |
|                                           |       |                      |       |                      |       |
| Nine Months  ended September 30, 2006          |       |                      |       |                      |       |
| Revenues from  external customers              |       | $                         | 18,628     |                      | $          | 18,163 |   |
| Segment  operating (loss) income               |       | (570                      | )          | 250                       |       |
| Operating (loss)  income as a percent of sales |       | (3.1                      | )%         | 1.4                       | %          |
| Segment assets  as of September 30, 2006       |       | $                         | 19,660     |                      | $          | 10,048 |   |
| Return on assets                               |       | (2.9                      | )%         | 2.5                       | %          |

 

Heating and CoolingSegment

Sales in the Heating and Cooling segment increased$5,669,000, or 30%, during the first nine months of 2007 over the comparable2006 period. Fan coil volume was responsible for the majority of the increasealthough

 

 

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furnace volume was higher on the strength of salesduring the first quarter, largely in January. For the first nine months of2007, fan coil sales increased 73% due to the reasons cited for the quarterabove.

 

The operating loss increased from $570,000 during thefirst nine months of 2006 to a loss of $1,503,000 for the 2007 period despitethe increase in sales. Cost of sales as a percent of sales increased from 75.8%to 86.5% due to the reasons noted above. In addition, pricing decisions made toretain a national home center account during the second quarter of 2006 alsodecreased margins. Selling and administrative costs were $328,000 lower due toreasons noted above partially offset by the addition of personnel in the salesand engineering departments. As a result of the significant increase inmanufacturing costs, the operating loss as a percent of sales increased whilethe return on assets declined for the first nine months of 2007 from the prioryear’s period.

 

Evaporative CoolingSegment

Sales in the Evaporative Cooling segment increased$444,000, or 2.4%, during the first nine months of 2007 over the comparable2006 period. The improvement occurred during the first quarter largely as aresult of two new customers.

 

The operating profit of $250,000 during the first ninemonths of 2006 declined to a loss of $366,000 for the first nine months of2007. Cost of sales as a percentage of sales increased to 88% in 2007 from84.6% for the comparable 2006 period due to the reasons cited above.Depreciation and amortization remained constant between the periods whileselling and administrative expenses increased modestly during the first ninemonths of 2007 compared to the 2006 period for the reasons cited in the quarter’sdiscussion above. As a result, the operating results as a percent of sales andthe return on assets were lower during the first nine months of 2007from theprior year’s period.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

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 September 29, 2007 and December 30,2006 and affect the reported amounts of revenues and expenses for the periodsreported. 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 30, 2006.

 

OUTLOOK

 

Concrete prices throughout our Colorado markets haveimproved compared to 2006, however not enough to recover the higher prices paidfor cement and increased delivery costs. The pressure on pricing has come fromaggressive competition, especially from a small new concrete producer inColorado Springs, in response to a softening in construction activity along theFront Range of Colorado. Current predictions do not anticipate construction torecover until at least 2008. The sales volume and backlog for the Door segmentremain strong and it is unknown whether the current downturn in constructionwill affect this segment’s sales in the near future.

 

Sales of the Evaporative Cooling segment are notexpected to grow significantly and will remain weather sensitive. However,sales of fan coil products in the Heating and Cooling segment are expected togrow as a result of favorable market conditions and the restructured salesrepresentative network and marketing efforts. Pricing in these two segmentsremains a concern.

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

See Note 2 for discussion of the accounting standardsadopted in 2007.

 

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

 

 

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Annual Report on Form 10-K for the fiscal year 2006.Other than as discussed in those sections, the Company does not currently haveany transactions or circumstances that have been addressed by recently issuedaccounting pronouncements. Therefore, adoption of any of these statements orpronouncements would not have a material impact on the Company’s results ofoperations, financial position or liquidity.

 

FORWARD-LOOKINGSTATEMENTS

 

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 2006 Annual Report on Form 10-K.Changes in accounting rules and pronouncements could also alter projectedresults. Forward-looking statements speak only as of the date they were made,and the Company undertakes no obligation to publicly update them, except asrequired by law.

 

 

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

 

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

 

 

**Item 4.        Controls and Procedures**

 

(a)                  DisclosureControls and Procedures.

 

The Company’s Chief Executive Officer andChief Financial Officer, with the participation of management, have evaluatedthe effectiveness of the Company’s “disclosure controls and procedures” (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934, as amended) as of September 29, 2007. Based on that evaluation, they haveconcluded that the Company’s disclosure controls and procedures as of such dateare effective and are reasonably designed to ensure that all materialinformation relating to the Company (including its subsidiaries) is accumulatedand communicated to management to allow timely decisions regarding requireddisclosure and to ensure that all material information required to be disclosedin this quarterly report is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the Securities andExchange Commission.

 

(b)                 Changesin Internal Control Over Financial Reporting.

 

There have been no significant changes inthe 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.

 

 

 

 

 

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PART II - OTHER INFORMATION

 

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

 

The following table presents information with respectto purchases made by the Company of its common stock to become treasury stockfor the period July 1, 2007 through September 29, 2007. No shares werepurchased during the current quarter.

 
| **Issuer  Purchases of Equity Securities** | ** ** |
|--------------------------------------------|------------|
| **Period**                                 | ** ** | **(a) Total Number of Shares Purchased** | ** ** | **(b) Average Price Paid per Share** | ** ** | **(c) Total Number of Shares Purchased as Part of Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under  the Plans or Programs** | ** ** |
| July 1— July 28,  2007                |       | — |   | $ | — |   | — |   | $ | 1,349,255 |   |
| July 29 — August  25, 2007            |       | — |   | — |   | — |   | 1,349,255 |   |
| August 26 —  September 29, 2007       |       | — |   | — |   | — |   | 1,349,255 |   |
| Total                                      |       | — |   | $ | — |   | — |   | $ | 1,349,255 |   |

 

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 cashlessstock options. Since the 2005 tender offer, management has not actively soughtto repurchase shares.

 

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

 

 

 

SIGNATURE

 

 

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

 

 

                                                                                                          CONTINENTALMATERIALS CORPORATION

 

 
| Date:  | November 13, 2007 | By:    | /S/ Joseph J. Sum             |
|--------|-------------------|--------|-------------------------------|
|   |              |   | Joseph J. Sum, Vice President |
|   |              |   | and Chief Financial Officer   |

 

 

 

 

 

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