** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

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

 

**For the fiscal year ended January 3, 2009**

 

**OR**

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

 

**For the transition periodfrom           to          **

 

**Commission file number 1-3834**

 

**Continental Materials Corporation**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|----------------------------------------|------------|-----------------------------------------------------------------------------|
| Common Stock - $.25 par value          |       | American Stock Exchange                                                     |

 

Securities registered pursuant to Section 12(g) of the Act: **NONE**

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined by Rule 405 of the Securities Act. Yes  o   No  x

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act. Yes  o   No  x

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of the Form 10-K orany amendment to this Form 10-K.  x

 

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

 

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

 

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

 

The aggregate market value (based on June 30,2008 closing price) of voting stock held by non-affiliates of registrant:Approximately $15,376,000.

 

Number of common shares outstanding at March 31, 2009: 1,598,278.

 
| Incorporation  by reference: Portions of registrant’s definitive proxy statement for the  2009 Annual Meeting of stockholders                                                                                                                               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| to be held May 27, 2009 into  Part III of this Form 10-K. The definitive proxy statement is  expected to be filed with the Securities and Exchange Commission within 120  days after the close of the fiscal year covered by this Form 10-K. |

 

 

 

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**PART I**

 

Item 1.                                             **BUSINESS**

 

ContinentalMaterials Corporation (the Company) is a Delaware corporation, incorporated in1954. The Company operates primarily within two industry groups, Heating,Ventilation and Air Conditioning (HVAC) and Construction Products. The Companyhas identified two reportable segments in each of the two industry groups: theHeating and Cooling segment and the Evaporative Cooling segment in the HVACindustry group and the Concrete, Aggregates and Construction Supplies segmentand the Door segment in the Construction Products industry group.

 

The Heating and Cooling segment produces and sells gas-fired wallfurnaces, console heaters and fan coils from the Company’s wholly-ownedsubsidiary, Williams Furnace Co. (WFC) of Colton, California. The EvaporativeCooling segment produces and sells evaporative coolers from the Company’swholly-owned subsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix,Arizona. 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.,of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo (the threecompanies collectively referred to as TMC) and Rocky Mountain Ready MixConcrete, Inc. (RMRM) of Denver. Doors are fabricated and sold along withthe related hardware, including electronic access hardware, from the Company’swholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI), whichoperates out of facilities in Pueblo and Colorado Springs, Colorado.

 

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

 

During the past five years the Company acquired:

 

·                  the assets of CSSL, a company in ColoradoSprings offering electronic access and locking capabilities on January 1,2006 for $352,000; and

·                  certain assets of ASCI, a concreteproducer in Colorado Springs on June 30, 2006 for $2,100,000 of cash and a$1,000,000 Note.

 

The Door segment of the Construction Products industry group consistsof the activities of MDHI. The CSSL assets were purchased by MDHI. The assetsof ASCI were acquired by TMC in the Concrete, Aggregates and ConstructionSupplies segment. Accordingly, the results of operations include theseactivities since their respective acquisition dates.

 

Financial information relating to industry segments appears in Note 13of this Form 10-K. References to a “Note” are to the “Notes toConsolidated Financial Statements.”

 

##### ***MARKETING***

##### *** ***

TheHVAC industry group markets its products throughout North America throughplumbing, heating and air conditioning wholesale distributors as well asdirectly to major retail home-centers and other retail outlets. Some of theproducts are also sold to HVAC installing contractors and equipmentmanufacturers for commercial applications. The Company contracts independentmanufacturers’ representatives for all of its products while also employing andutilizing a staff of sales and sales support personnel. Sales of furnaces andevaporative coolers are predominantly in the United States and are concentratedin the Western and Southwestern states. Sales of furnaces and console heatersusually increase in the months of August through January. Sales ofevaporative coolers have historically been higher in the months of March throughJuly. Sales of the fan coil product line are throughout the United States,Canada and the Caribbean and are more evenly distributed throughout the yearalthough the highest volume typically occurs during the late spring and summer.In order to enhance sales of wall furnaces and evaporative coolers during theoff season, extended payment terms are offered to some customers.

 

The Construction Products industry group markets its products primarilythrough its own direct sales personnel and, except for doors and relatedhardware, confines its sales to the Front Range area in Colorado. Sales areprimarily made to general and sub-contractors, government entities andindividuals. Sales are affected by the general economic conditions and weatherconditions in the areas serviced (as it relates to construction). Revenuesusually decline in the winter months as the pace of construction slows. Salesof doors and the related hardware are made throughout the United Statesalthough sales are primarily within Colorado and adjacent states.

 

During 2008, no customer accounted for 10% ormore of the total sales of the Company.

 

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#### ***CUSTOMER SERVICE AND SUPPORT***

#### *** ***

The HVAC industry group maintains parts departments and help lines toassist contractors, distributors and end users in servicing the products. TheCompany does not currently perform installation services, nor are maintenanceor service contracts offered. In addition, training and product informationsessions for the furnace, fan coil and evaporative cooler product lines areoffered at our plants and other sites for distributors, contractors, engineers,utility company employees and other customers. The HVAC industry group does notderive any revenue from after-sales service and support other than from partssales.

 

The personnel in the Concrete, Aggregates and Construction Suppliessegment routinely take a leadership role in formulation of the products to meetthe specifications of customers. The Company is not involved in setting formsor performing finishing work on any of its concrete products. The Door segmentoffers doors, frames and hardware, including electronic access systems. Doors,frames and hardware are installed by independent contractors engaged by thegeneral contractor or building owner. Electronic access systems are installedby the Company’s technicians.

 

***BACKLOG***

 

At January 3, 2009, the Heating and Cooling segment had a backlogof approximately $6,784,000 ($3,243,000 at December 29, 2007) primarilyrelating to orders that are expected to be filled during the first half of 2009although some fan coil projects may extend past this timeframe. The increase isprimarily due to the timing of awarding fan coil contracts on bids previouslysubmitted.

 

At January 3, 2009, the Evaporative Cooling segment had a backlogof approximately $284,000 ($778,000 at December 29, 2007) primarily due topreseason orders placed prior to year end. This backlog is expected to befilled during the first quarter of 2009 and is not necessarily indicative of adecrease in demand.

 

At January 3, 2009, the Concrete, Aggregates and ConstructionSupplies segment had a backlog of approximately $8,900,000 ($10,625,000 at December 29,2007) primarily relating to construction contracts awarded and expected to befilled during 2009. While an increase or decrease in backlog is normally moredue to the timing of orders rather than indicative of changes in demand, inthis case the decline is directly related to the country’s current economicconditions and the corresponding slowdown in construction along the entireFront Range of Colorado.

 

At January 3, 2009, the Door segment had a backlog ofapproximately $5,048,000 ($4,576,000 at December 29, 2007) primarilyrelating to orders that are expected to be filled during 2009. The higherbacklog is primarily due to the timing of the shipment of completed jobs andthe receipt of orders although this segment is also experiencing the effects ofthe overall slow economy and the decline in construction.

 

***RESEARCH AND DEVELOPMENT/PATENTS***

 

In general, the Company relies upon, and intends to continue to relyupon, unpatented proprietary technology and information. However, research anddevelopment activities in the HVAC industry group have resulted in a patentbeing issued to PMI related to the Power Cleaning System (expiring January 2014)used in evaporative coolers and a patent issued to WFC entitled “Wall FurnaceWith Side Vented Draft Hood” (expiring November 2011) for a process thatincreased the heat transference efficiency in our furnaces above thatpreviously offered by the Company and its competitors. The amounts expended onresearch and development are not material and are expensed as incurred. The Companybelieves its interests in its patents, as well as its proprietary knowledge,are sufficient for its businesses as currently conducted.

 

***MANUFACTURING***

 

TheCompany conducts its manufacturing operations through a number of facilities asmore completely described in Item 2. Properties below.

 

Due to the seasonality of the businesses and to balance productionthroughout the year, furnaces and evaporative coolers are built during theiroff seasons in order for the Company to have adequate supplies to sell duringthe season. Although sales are made throughout the year, sales volume isgenerally higher from August through January for furnaces while salesvolume of evaporative coolers is generally higher from March through July.

 

Ingeneral, the Company can obtain the raw materials required by our operations inall segments from various sources in the quantities desired. The Company’sConcrete, Aggregates and Construction Supplies segment has historicallypurchased most of its cement requirements from a single supplier in order toobtain favorable volume related pricing. Although there have been times duringheavy construction periods that there has been some scarcity of cement supply,the Company does not expect to encounter this situation in the foreseeable futuredue to the decline in construction activity and the completion of a new cementmill near Pueblo, Colorado during 2008. The Company has no long-term supplycontracts and does not consider 

 

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itselfto be dependent on any individual supplier. MDHI is an authorized distributorof a major manufacturer of hollow metal doors and hardware. MDHI hashistorically purchased the majority of its hardware primarily from thissupplier in order to obtain favorable volume related pricing; however, othersuppliers are available.

 

The Company mines aggregates (rock, gravel and sand) from various ownedand leased properties in Colorado. Colorado mining permits require permitholders to perform reclamation work in order to return the mined areas to abeneficial use. These requirements are similar in nature to those included inthe mining permits of our competitors. Reclamation costs have increased sincethe mid-1990’s as the Company has engaged in enhanced reclamation projects thatexceed the stated requirements. The enhanced reclamation efforts are beingperformed, in part, to establish community goodwill. The Company performs themajority of the reclamation work using existing production employees andequipment primarily at times when production is curtailed due to inclementweather or decreased demand for our products. Consequently, the reclamationwork has a minimal impact on our capital expenditures.

 

***COMPETITIVE CONDITIONS***

 

Heating and Cooling — The Company is one of threeprincipal companies producing wall furnaces (excluding units sold to therecreational vehicle industry) and gas-fired console heaters. The wall furnaceand console heater markets are only a small component of the heating industry.The Company serves its market from a plant in Colton, California.  The sales force consists of in-house salespersonnel and independent manufacturers’ representatives. The heating industryis dominated by a few manufacturers which are substantially larger than theCompany. These manufacturers sell diversified lines of heating and airconditioning units directed primarily toward central heating and coolingsystems. All of the producers, including the Company, compete primarily on abasis of price, product features and performance, service and timeliness ofdelivery.

 

Fancoils are also produced at the Colton plant. The Company generally obtainscontracts for larger jobs based upon a competitive bidding process. Thecontracts are typically awarded based upon the competitive factors noted below.International Environmental Corp., a subsidiary of LSB Industries, Inc. isthe largest manufacturer and competitor in this market. There are four otherlarge competitors as well as a number of smaller companies that produce fancoils. All of the producers compete primarily on the basis of price, ability tomeet customers’ specific design and performance requirements and timeliness ofdelivery.

 

EvaporativeCooling — The Companymanufactures evaporative air coolers at a plant in Phoenix, Arizona. The otherprincipal competitor is Essick Air Products, Inc. and its subsidiaryChampion Cooler Corp. All producers of evaporative air coolers typicallycompete aggressively on the basis of price, product features and productavailability during the cooling season. During 2008 a principal competitor wentout of business. The long-term effect of this situation is not known but couldpresent an opportunity to expand our sales during 2009.

 

Concrete, Aggregates and Construction Supplies — This segment operates in highlycompetitive markets. Depending on the market, the Company competes with anumber of large multinational producers as well as regional and small localproducers. The Company is one of four companies producing ready mix concrete inthe Colorado Springs area, one of three companies producing ready mix concretein the Pueblo area and one of eleven companies producing ready mix concrete inthe Denver area. In Denver, three of the producers are significantly largerthan RMRM. Because of the relatively high transportation costs associated withconcrete, the level of competition, especially in the Denver market, is heavilyinfluenced by the distance from production facilities to markets served. Price,plant location, transportation costs, service, product quality and reputationare major factors that affect competition among the ready mix concreteproducers. The Company is one of eight producers of aggregates in the ColoradoSprings and Pueblo marketing areas. All producers compete on the basis of price,quality of material and service.

 

TheCompany’s sales of rebar and other construction supplies in the ColoradoSprings and Pueblo metropolitan areas are subject to intense competition fromthree larger companies from Denver, two large companies in Colorado Springs anda number of small local competitors. However, the Company believes it cancompete effectively because many of our customers also purchase concrete andaggregates from us whereas our competitors for these particular product linesdo not offer concrete or aggregates. In addition, the Company believes itsPueblo location has a slight competitive advantage with respect to the twoDenver companies based upon delivery costs.

 

Door— The Company sells hollow metal doors, door frames and other hardwarethroughout the United States although sales are primarily in Colorado andadjacent states. There are numerous competitors which compete aggressivelybased on price and delivery times.

 

#### ***EMPLOYEES***

#### *** ***

TheCompany employed 798 people as of January 3, 2009. Employment variesthroughout the year due to the seasonal nature of the businesses. A breakdownof the prior three years employment at year-end by segment was:

 

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| ** **                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Heating and Cooling                             |       | 287      |       | 308      |       | 265      |       |
| Evaporative Cooling                             |       | 138      |       | 144      |       | 139      |       |
| Concrete, Aggregates and Construction  Supplies |       | 312      |       | 330      |       | 338      |       |
| Door                                            |       | 47       |       | 49       |       | 47       |       |
| Corporate Office                                |       | 14       |       | 15       |       | 13       |       |
| Total                                           |       | 798      |       | 846      |       | 802      |       |

 

Allsegments reported lower headcounts primarily due to the decline in sales exceptfor the Heating and Cooling segment which reduced headcount as a number ofinternal projects were completed and demand for the company’s furnace productsdeclined during 2008. The increase in the Heating and Cooling segment during2007 was due to filling a number of direct labor positions and office staff asproduction and sales had increased during 2007.

 

Thefactory employees at the Colton, California plant are represented by theCarpenters Local 721 Union under a contract that expires April 30, 2011.The Company considers relations with its employees and with their union to begood. There are no unions at any of the Company’s other operations.

 

***ENVIRONMENTAL MATTERS***

 

Our operations involve the use, release, discharge, disposal and cleanup of substances regulated under federal, state and/or local environmentalprotection laws and regulations, including those related to reclamation ofmined areas. We strive not only to maintain compliance with all applicableenvironmental laws and regulations, but to exceed the minimum requirements ofthose laws and regulations where practicable.

 

In 2008, our capital expenditures and remediation expenses forenvironmental matters, except those expenses related to our mining reclamationefforts, were not material to our financial condition. Because of thecomplexity and ever-changing nature of environmental laws and regulations, wecannot predict whether capital expenditures and remediation expenses for futureenvironmental matters will materially affect our financial condition, resultsof operations or liquidity.

 

#### ***AVAILABLE INFORMATION***

#### *** ***

The Company electronically files various reports and other informationwith the Securities and Exchange Commission (SEC) including this annual reporton Form 10-K, our quarterly reports on Form 10-Q and our currentreports on Form 8-K. The SEC maintains an internet site that containsreports, proxy and information statements and other information regarding theCompany. Access to this information is available free of charge at the SEC’swebsite at http://www.sec.gov. The Company does not maintain a corporatewebsite; however, we will provide electronic or paper copies of our filings,free of charge, upon electronic request to InvRel@contmtl.com or writtenrequest to Mark S. Nichter, Secretary and Corporate Controller, ContinentalMaterials Corporation, 200 South Wacker Drive, Suite 4000, Chicago,Illinois 60606.

 

Item 1A.                                   **RISK FACTORS**

 

An investment in our common stock involves risks and uncertainties. Thefactors set out below may have material adverse effects on our business,financial condition, results of operations and cash flows or on the value ofour stock. There may be other risks which are not known to us.

 

**Low trading volume in our common stock may adversely affect the abilityto purchase or sell in a timely manner and may adversely affect the tradingprice of our common stock.**

 

Our common stock is traded on the NYSE Alternext U.S., formerly knownas the American Stock Exchange (AMEX) under the symbol “CUO.” In addition tothe customary business factors affecting the price of a publicly traded company’scommon stock, such as financial condition, results of operations and cashflows, the concentration of ownership of the Company is a factor that should beconsidered before deciding to purchase, sell or hold our stock. Approximately85% of the Company’s common stock is owned by the Gidwitz family, otherofficers and directors of the Company, employees of the Company and by twoinstitutional fund groups. On days that the NYSE Alternext U.S. is open, thestock is often not traded at all and the average daily trading volume for 2008was approximately 300 shares. The low volume traded on any given day could havean adverse effect on a shareholder’s ability to purchase or sell shares of theCompany in a timely manner and/or adversely affect the trading price.

 

**We depend heavily on construction sectoractivity levels which tend to be cyclical and which differ throughout theregions in which we operate.**

 

Our results depend heavily on residential, commercial andinfrastructure construction activity and spending levels. The economy isexperiencing a severe and prolonged recession as a result of the deteriorationin the capital markets and related financial crisis which has adverselyimpacted our customer base. The overall levels of demand for our products are 

 

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influenced by fluctuations in the levels of end-user demand, whichdepends in large part on general macroeconomic conditions in the United Statesand the regional economic conditions in the markets we serve. Downturns inthese general economic conditions can significantly affect our customers, whichin turn affects the demand, volumes, pricing and operating margins for ourproducts. These conditions may also impact the ability of our customers tohonor their obligations to us. Failure to collect a significant portion ofamounts due on customer receivables could have a material adverse effect on ourresults of operations and financial condition.

 

Adverse economic and financial markets conditions may also cause oursuppliers to be unable to provide materials and components to us or may causesuppliers to make changes in the credit terms they extend to us, such asshortening the required payment period for our amounts owing them or reducingthe maximum amount of trade credit available to us. Such changes couldadversely affect our liquidity and could have a material adverse effect on ourresults of operation and financial condition. If we are unable to successfullyanticipate changing economic and financial market conditions, we could beadversely affected.

 

In addition, a substantial or prolonged material adverse impact on ourresults of operations and financial condition due to the economic recessioncould affect our ability to satisfy the financial covenants in our creditfacility, which could result in our having to seek amendments or waivers fromour lenders to avoid the termination of commitments and/or acceleration of thematurity of amounts that may be outstanding under our credit facility. The costof our obtaining an amendment or waiver could be significant, and couldsubstantially increase our cost of borrowing over the remaining term of ourcredit facility. Further, there can be no assurance that we would be able toobtain an amendment or waiver. If our lenders were unwilling to enter into anamendment or provide a waiver, all amounts outstanding under our creditfacility would become immediately due and payable which would have an adverseimpact on the Company’s financial condition and liquidity.

 

**Adverse weather lessens demand for ourproducts, which are seasonal.**

 

Construction activity, and thus demand for our concrete, aggregates andconstruction supplies, decreases substantially during periods of cold weather,when it snows or when heavy or sustained rains fall. Consequently, demand forthese products is significantly lower during the winter. Sales of concrete,aggregates and construction supplies are generally stronger during the secondand third quarters of the year because weather conditions are normally morefavorable for construction during these periods. Sales of furnaces and consoleheaters usually increase in the months of August through January inresponse to colder weather in areas served. Sales of the fan coil product lineare throughout the United States, Canada and the Caribbean and are more evenlydistributed throughout the year. The highest volume typically occurs during thelate spring and summer, particularly in Canada and in the Northern UnitedStates, where winter weather significantly reduces our first quarter sales.Evaporative coolers are marketed predominantly in geographic areas thatexperience hot and dry weather conditions. Sales are usually higher in themonths of March through July. Sales of all of our products are, therefore,affected by adverse weather conditions in their market locations. Such adverseweather conditions can materially and adversely affect our results ofoperations and profitability if they occur with unusual intensity, duringabnormal periods, or last longer than usual in our major markets.

 

**Competition in our industry could adverselyaffect our results of operations.**

 

Substantially all of the markets we operate in are highly competitive.In all of our business segments, we compete with several other domesticsuppliers some of which are substantially larger than us. Many factors affectthe competitive environments we face in our markets. Among others, they includethe number of competitors in the market, the pricing policies of thosecompetitors, the financial strength of those competitors, the total productioncapacity serving the market, the barriers that potential competitors face toenter the market and the proximity of natural resources to the market, as wellas economic conditions and product demand within the market. Such factors cometogether in each of our markets in varying ways, sometimes in ways thatadversely impact demand for our products and our results of operations.

 

**Increased energy and fuel costs may have amaterial adverse effect on our results.**

 

Our operations consume significant amounts of energy. The price andavailability of energy are subject to political, economic and market factorsthat are generally outside our control. In addition, delivery of required rawmaterials and distribution of our products are made by boat, truck or rail(primarily required raw materials). For these reasons, both the availability aswell as the cost of energy and fuel have significantly affected, and maycontinue to affect, our financial condition, results of operations andliquidity.

 

**Litigation could affect our profitability.**

 

The nature of all of our business segments exposes us to variouslitigation matters including product liability claims, employment, health andsafety matters, environmental matters, regulatory and administrativeproceedings, governmental investigations, tort claims and contract disputes. Wecontest these matters vigorously and make insurance claims where appropriate.However, litigation is inherently costly and unpredictable, making it difficultto accurately estimate the outcome of existing or future litigation or the costof our legal representation. Although we make accruals as we believe warranted,the 

 

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amounts that we accrue could vary significantly from any amounts weultimately pay due to the inherent uncertainties in the estimation process.

 

**Governmental policies and laws havesignificantly increased our costs and will likely continue to negatively impactearnings.**

 

As more fully described in Item 1. Business,our operations are decentralized and involve four distinct segments. Inaddition, the Company has generally attempted to operate the business, whilemaintaining adequate financial reporting controls, with a lean corporate staff.The Company is classified as a non-accelerated filer and has therefore beenexempt from the costly requirement to have our independent registered publicaccounting firm provide an attestation opinion as to the overall effectivenessof the Company’s internal control over financial reporting as required by Section 404of the Sarbanes-Oxley Act of 2002 (SOX). During the prior two years, however,the Company has hired a qualified employee to assist with the documenting andtesting of our financial reporting controls. During 2007, the first year of theCompany’s required compliance, we expended in excess of $500,000 for outsideconsulting services to assist us with the preparation of requireddocumentation. These figures do not include the value of time invested by ourother employees on the project nor the out-of-pocket costs incurred for traveland other related expenses. Many of these costs have continued through 2008 andthe Company projects that some of these costs will continue to recur for theforeseeable future. In addition, for 2009 the Company will be required toengage our independent registered public accounting firm to attest to theeffectiveness of our internal control over financial reporting. The cost ofthis requirement has not yet been determined.

 

**Governmental policies and laws, particularlythose relating to protection of the environment, could significantly impact ouroperations.**

 

Our operations, particularly our mining operations, require numerousgovernmental approvals and permits. Additionally, our HVAC products must meetvarious industry performance and safety tests which are strictly monitored.These approvals, permits and testing standards often require us to makesignificant capital and maintenance expenditures to comply with the appropriatelaws and regulations. Stricter laws and regulations including reclamationrequirements, or stricter interpretation of existing laws or regulations, mayimpose new liabilities on us, require additional investment by us, such as forpollution control equipment, or impede our opening new or expanding existingplants or facilities. The Company also has, on occasion, been the target ofpublic pressure to exceed the legal requirements for reclamation contained inits mining permits. Such pressure in the future may also cause the Company toexpend additional amounts for reclamation although no such expenditures arecurrently foreseen.

 

**Changes in the cost or availability of rawmaterials supplied by third parties may adversely affect our operating andfinancial performance.**

 

We obtain certain raw materials from third parties who produce suchmaterials as cement, aggregates (in the Denver market), fly ash and other additivesas well as steel, motors, electronic components, copper tubing and other items.Should our existing suppliers cease operations, reduce or eliminate productionof these products or experience work stoppages for whatever reason, ourcosts to procure these materials may increase significantly or we may beobliged to procure alternatives to replace these materials. Market demand, bothregional and international, also affects the pricing of these commodities.Although the Company has thus far been able to acquire sufficient raw materialsfor its operations, the Company has experienced significant increases in thecosts of cement, copper, motors, steel and fuel during the past couple of yearswhich have not been fully recovered by increased selling prices due tocompetitive pressures.

 

**Providing healthcare and workers’ compensation benefits to ouremployees is a significant cost of operation. Continuing increases in suchcosts could negatively affect our earnings.**

 

The costs of providing healthcare and workers’ compensation benefits toour employees have increased substantially over the past several years. We haveinstituted measures that attempt to control these costs; however, many factorsaffecting these costs are not in our control. Should these costs continue torise, this will likely have an adverse effect on our consolidated results ofoperations, cash flows or financial condition.

 

**Our insurance policies may not cover all losses, costs or liabilitiesthat we may experience.**

 

Wemaintain insurance coverage, but these policies do not cover all of ourpotential losses, costs or liabilities. We could suffer losses for uninsurableor uninsured risks or in amounts in excess of our existing insurance coverage.Our insurance policies have deductibles and self-retention limits that couldexpose us to significant financial expense. Our ability to obtain and maintainadequate insurance may be affected by conditions in the insurance market overwhich we have no control. The occurrence of an event that is not fully coveredby insurance, or the inability to obtain various types of insurance could havea material adverse effect on our business, financial condition and results ofoperations.

 

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**If we fail to maintain proper and effectiveinternal controls, our ability to produce accurate financial statements couldbe impaired.**

 

In designing and evaluating our internal controls, managementrecognizes that internal controls, no matter how well conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of theinternal controls are met. Our internal controls have been designed to meet,and management believes that they meet, reasonable assurance standards exceptas noted in Section 9A below. Additionally, in designing internalcontrols, our management necessarily is required to apply its judgment inevaluating the cost-benefit relationship of possible internal controls. Thedesign of any internal controls is based in part upon certain assumptions aboutthe likelihood of future events, and there can be no assurance that any controlwill succeed in achieving its stated goals under all potential futureconditions. We annually assess the effectiveness of our internal controls.During this process, we may identify material weaknesses or significantdeficiencies in our internal controls, or areas for further attention orimprovement. Any failure to maintain that adequacy or our ability to produceaccurate financial statements (including the proper application of our criticalaccounting policies) on a timely basis could increase our operating costs andmaterially impair our ability to operate our business. In addition, investors’perceptions that our internal controls are subject to material weaknesses orsignificant deficiencies, or are otherwise inadequate, or that we are unable toproduce accurate financial statements may adversely affect our stock price.

 

**We may be adversely affected by disruptionsin our information technology systems.**

 

Our operations are dependent upon our information technology systems,which encompass all of our major business functions. We rely upon suchinformation technology systems to manage and replenish inventory, fill and shipcustomer orders on a timely basis, bill customers and coordinate our salesactivities for our products and services. A substantial disruption in ourinformation technology systems for any prolonged time period could result indelays in receiving inventory and supplies or filling customer orders and adverselyaffect our customer service and relationships.

 

**A substantial amount of the Company’s common stock is controlled by asmall number of investors and could delay or prevent a change of control.**

 

Approximately 85% of the Company’s common stock is owned by the Gidwitzfamily, other officers and directors of the Company, employees of the Companyand two institutional fund groups. These stockholders will exercise substantialcontrol over our operation and future direction and such concentration ofcontrol may have the effect of discouraging, delaying or preventing a change incontrol and may also have an adverse effect on the market price of our commonstock.

 

**Item 1B. Unresolved Staff Comments.**

 

None.

 

Item 2.                                             **PROPERTIES**

 

The Heating and Cooling segment operates out of an owned facility inColton, California. This facility is, in the opinion of management, in goodcondition and sufficient for the Company’s current needs. Production capacityexists at the Colton plant such that the Company could exceed the highestvolumes achieved in prior years or expected in the foreseeable future andmaintain timely delivery.

 

The Evaporative Cooling segment operates out of a leased facility inPhoenix, Arizona. This facility is also, in the opinion of management, in goodcondition and sufficient for the Company’s current needs. Production capacityexists at the Phoenix plant such that the Company could exceed the highestvolumes achieved in prior years or expected in the foreseeable future andmaintain timely delivery.

 

TheConcrete, Aggregates and Construction Supplies segment serves the Coloradoready-mix concrete market from ten owned batch plants. In addition, the Companycurrently operates aggregate processing facilities on three owned and twoleased mining properties. All but one of the mining properties are located inor near Colorado Springs or Pueblo. These properties presently provide theaggregate requirements of our Colorado Springs and Pueblo ready mix concretebusiness as well as selling product to independent customers. The Denver areabatch plants currently purchase their aggregate needs from sources locatedcloser to that market. In general, the leased mining properties are onlong-term leases with payment based upon the number of tons mined. The lease ofan aggregates property in Pueblo, Colorado also requires minimum annual royaltypayments. See Note 9 for the schedule of future minimum payments. Constructionsupplies are sold from owned facilities adjacent to the main batch plants inColorado Springs and Pueblo. All of the Concrete, Aggregate and ConstructionSupplies segment’s facilities are located along the Front Range in Coloradoand, in the opinion of management, are in good condition and sufficient for theCompany’s current needs. The Company also leases or owns other aggregatedeposits along the Front Range that are not currently in production. In theopinion of management, the owned and leased properties contain permitted andmineable reserves sufficient to service customers’ and our own sand, rock andgravel requirements for the foreseeable future.

 

8

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In2007 the Company purchased an existing building near its previous doorfabrication facility. The newly acquired facility was first occupied at thebeginning of 2008. The Door segment operates out of this owned facility inColorado Springs and a leased facility in Pueblo, Colorado. The facilities are,in the opinion of management, in good condition and sufficient for the Company’scurrent needs.

 

Product volumes at all of the facilities of the Company are subject toseasonal fluctuations, but in the opinion of management, the facilities aregenerally well utilized.

 

The corporate office operates out of leased office space in Chicago,Illinois.

 

Item 3.                                             **LEGAL PROCEEDINGS**

 

TheCompany is involved in litigation matters related to its continuing business,principally product liability matters related to the gas-fired heating productsin the Heating and Cooling segment. In the Company’s opinion, none of these proceedings,when concluded, will have a material adverse effect on the Company’sconsolidated results of operations or financial condition as the Company hasestablished adequate accruals for known occurrences in accordance with therequirements of Statement of Financial Accounting Standards (SFAS) No. 5, “Accountingfor Contingencies” (SFAS No. 5) which represent management’s best estimateof the future liability related to these claims up to the associateddeductible. See Management’s Discussion and Analysis of Financial Condition andResults of Operations and Note 6.

 

Item 4.                                             **SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

There were no matterssubmitted to a vote of security holders during the fourth quarter of fiscal2008.

 

**PART II**

 

Item 5.                                          **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES**

 

Common stock of Continental Materials Corporation is traded on the NYSEAlternext U.S., formerly known as the American Stock Exchange (AMEX) under thesymbol CUO. Market sales prices for the fiscal quarters of the past two yearsare:

 
| ** ** | ** ** | ** **      | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|-----------------|------------|----------|------------|---------|------------|
| 2008       |       | Fourth  Quarter |       | $        | 20.59      |    | $          | 16.00 |   |
|       |       | Third Quarter   |       | 22.56    |       | 20.25   |       |
|       |       | Second Quarter  |       | 23.90    |       | 22.56   |       |
|       |       | First Quarter   |       | 26.62    |       | 23.38   |       |
|       |       |            |       |     |       |    |       |
| 2007       |       | Fourth  Quarter |       | $        | 29.07      |    | $          | 24.77 |   |
|       |       | Third Quarter   |       | 29.60    |       | 26.80   |       |
|       |       | Second Quarter  |       | 30.99    |       | 28.20   |       |
|       |       | First Quarter   |       | 29.95    |       | 26.51   |       |

 

At April 9, 2009, the Company had less than 200 shareholders ofrecord (including non-objecting beneficial owners).

 

The Company has never paid, nor does it currently intend to declare,any dividends. The Company’s policy of reinvesting earnings from operations isreviewed periodically by the Board of Directors.

 

The following table presents information with respect to purchases madeby the Company of its common stock to become treasury stock for the period September 28,2008 through January 3, 2009:

 
| ** **                                     | ** ** | **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** | ** ** |
| September 28 - October 25, 2008      |       | —                                                        |       | $ | — |   | — |   | $ | 1,307,404 |   |
| October 26 - November 29, 2008       |       | —                                                        |       | — |   | — |   | 1,307,404 |   |
| November 30, 2008 - January 3,  2009 |       | —                                                        |       | — |   | — |   | 1,307,404 |   |
| Total                                          |       | —                                                        |       | $ | — |   | — |   | $ | 1,307,404 |   |

 

9

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On January 19, 1999, the Company initiated purchases under thecurrent open-ended program to repurchase its common stock. Purchases are madeon the open market or in block trades at the discretion of management. Thedollar amount authorized for the program has been periodically increased by theBoard of Directors and approved by the Company’s lenders under the Company’sprior credit facility. Effective May 29, 2004, the Board increased thepermitted amount to a total not to exceed $2,750,000 for purchases on or after May 29,2004, separate from purchases made in connection with the June 2005 tenderoffer and shares acquired as part of a cashless exercise of stock options. Withthe exercise of all then remaining outstanding options during 2005, the Company’sStock Option Plan (the Plan) was terminated. Reinstatement of the Plan requiresthe consent of the Company’s stockholders. On April 16, 2009, the Companyentered into a new credit agreement with a bank which contains certainrestrictions on the Company’s ability to repurchase its stock. See furtherdiscussion in the Financial Condition, Liquidity and Capital Resources sectionbelow.

 

##### ***COMPARISON OF TOTAL STOCKHOLDER RETURN***

##### *** ***

The following graph compares the yearly percentage change in theCompany’s cumulative total stockholder return on its common stock for a five-yearperiod (December 31, 2003 to December 31, 2008), with the cumulativetotal return of the NYSE Alternext U.S., formerly known as the American StockExchange (AMEX) Market Value Index (“Index”), and a peer group of companiesselected by the Company. The “Peer Group” is more fully described below.Dividend reinvestment has been assumed with respect to the Index and the PeerGroup. The companies in the Peer Group are weighted by market capitalization asof the beginning of the measurement period. The Company has never paid adividend.

 

The Company manufactures and markets productsin two separate industries. These industries are (i) HVAC, primarilygas-fired wall furnaces, fan coils and evaporative coolers and (ii) ConstructionProducts, primarily concrete, aggregates, construction supplies and doors. TheCompany’s principal activities have occurred exclusively in these twoindustries for over 15 years. The Peer Group selected by the Company for theabove graph is a combination of companies from these two industries. Thecompanies included in the Peer Group are: Devcon International Corp.; EagleMaterials, Inc; Fedders Corporation (included through 2007 — company has beenliquidated); Florida Rock Industries, Inc. (included through 2006 —company acquired by Vulcan Materials); Hanson PLC (included through 2006 — ADRdelisted); Lafarge North America, Inc. (acquired by LaFarge SA — ADRduring May 2006); LSB Industries, Inc.; Martin Marietta Materials, Inc.;Masco Corp., Mesteck, Inc. and Simpson Manufacturing, Inc.

 

 

10

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Item 6.               **SELECTED FINANCIAL DATA**

(Amounts in thousands, except per shareamounts)

 
| ** **                                                                                                                                                                                                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| SUMMARY OF OPERATIONS                                                                                                                                                                                                   |       |     |       |     |       |     |       |     |       |     |       |
| Sales                                                                                                                                                                                                                   |       | $        | 157,881    |     | $          | 168,429  |       | $        | 158,767    |     | $          | 138,999 |   | $ | 126,940 |   |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Net (loss) income                                                                                                                                                                                                       |       | $        | (40        | )        | $          | (563     | )          | $        | 2,042      |     | $          | 2,758 |   | $ | 2,373 |   |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| PER SHARE DATA                                                                                                                                                                                                          |       |     |       |     |       |     |       |     |       |     |       |
| Basic (loss) earnings per share                                                                                                                                                                                         |       | $        | (.03       | )        | $          | (.35     | )          | $        | 1.27       |     | $          | 1.72 |   | $ | 1.41 |   |
| Weighted average shares outstanding                                                                                                                                                                                     |       | 1,599    |       | 1,603    |       | 1,605    |       | 1,602    |       | 1,681    |       |
| Diluted (loss) earnings per share                                                                                                                                                                                       |       | $        | (.03       | )        | $          | (.35     | )          | $        | 1.27       |     | $          | 1.69 |   | $ | 1.38 |   |
| Weighted average of diluted shares  outstanding                                                                                                                                                                         |       | 1,599    |       | 1,603    |       | 1,605    |       | 1,632    |       | 1,725    |       |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Cash dividends declared per common share                                                                                                                                                                                |       | $        | 0          |     | $          | 0        |       | $        | 0          |     | $          | 0 |   | $ | 0 |   |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| FINANCIAL CONDITION                                                                                                                                                                                                     |       |     |       |     |       |     |       |     |       |     |       |
| Current ratio                                                                                                                                                                                                           |       | 2.6:1    |       | 2.4:1    |       | 2.2:1    |       | 2.4:1    |       | 2.1:1    |       |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Total assets                                                                                                                                                                                                            |       | $        | 93,666     |     | $          | 98,510   |       | $        | 93,705     |     | $          | 87,060 |   | $ | 85,883 |   |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Long-term debt, including current portion                                                                                                                                                                               |       | 10,771   |       | 12,800   |       | 15,666   |       | 12,000   |       | 9,000    |       |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Revolving credit — long-term portion                                                                                                                                                                               |       | 6,400    |       | 7,900    |       | —   |       | —   |       | —   |       |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Shareholders’ equity                                                                                                                                                                                               |       | 52,628   |       | 52,687   |       | 53,343   |       | 51,307   |       | 51,448   |       |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Long-term debt to shareholders’ equity  ratio                                                                                                                                                                      |       | .33:1    |       | .39:1    |       | .29:1    |       | .23:1    |       | .17:1    |       |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Book value per diluted share  (Book value is shareholders’ equity adjusted, for 2005 and 2004, for the  exercise of options using end of year stock price and shares  outstanding)                            |       | $        | 32.93      |     | $          | 32.89    |       | $        | 33.23      |     | $          | 31.96 |   | $ | 31.09 |   |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Tangible book value per diluted share  (Same as above calculation except Book value reduced by unamortized Goodwill  and Intangibles of $8,701, $9,027, $9,346, $8,102 and $8,327 for 2008, 2007,  2006, 2005 and 2004) |       | $        | 27.48      |     | $          | 27.25    |       | $        | 27.40      |     | $          | 26.91 |   | $ | 26.15 |   |
|                                                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| CASH FLOWS                                                                                                                                                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| Net cash provided by (used in):                                                                                                                                                                                         |       |     |       |     |       |     |       |     |       |     |       |
| Operating activities                                                                                                                                                                                                    |       | $        | 522        |     | $          | 3,104    |       | $        | 1,933      |     | $          | 7,741 |   | $ | 5,519 |   |
| Investing activities                                                                                                                                                                                                    |       | 797      |       | (7,489   | )          | (8,658   | )          | (3,159   | )          | (3,350   | )          |
| Financing activities                                                                                                                                                                                                    |       | (3,548   | )          | 4,941    |       | 2,666    |       | (581     | )          | (3,950   | )          |
| Net (decrease) increase in cash and cash  equivalents                                                                                                                                                                   |       | $        | (2,229     | )        | $          | 556      |       | $        | (4,059     | )        | $          | 4,001 |   | $ | (1,781 | ) |

 

Note: Above figures include the activity ofCSSL in the Door segment since January 1, 2006 and the activity of ASCI inthe Concrete, Aggregates and Construction Supplies segment since June 30,2006, the respective dates each was acquired. The 2008 results include apre-tax gain on the sale of land of $1,947 and a pre-tax impairment charge forlong-lived assets of $784.

 

11

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Item 7.                       **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

(References to a “Note” are to the Notes to Consolidated FinancialStatements contained elsewhere in this report)

 

**COMPANY OVERVIEW**

 

Asdiscussed in Item 1. Business, the Company operates primarily in two industrygroups, HVAC and Construction Products. Within these two industry groups, theCompany has identified two reportable segments in each of the two industrygroups: the Heating and Cooling segment and the Evaporative Cooling segment inthe HVAC industry group and the Concrete, Aggregates and Construction Supplies segmentand the Door segment in the Construction Products industry group.

 

TheHeating and Cooling segment produces and sells gas-fired wall furnaces, consoleheaters and fan coils from the Company’s wholly-owned subsidiary, WFC ofColton, California. The Evaporative Cooling segment produces and sellsevaporative coolers from the Company’s wholly-owned subsidiary, PMI of Phoenix,Arizona. Sales of these two segments are nationwide, but are concentrated inthe southwestern United States. Concrete, Aggregates and Construction Suppliesare offered from numerous locations along the Front Range of Colorado operatedby the Company’s wholly-owned subsidiaries collectively referred to as TMC andRMRM of Denver. Doors are fabricated and sold along with the related hardwarefrom Colorado Springs and Pueblo through the Company’s wholly-owned subsidiary,MDHI of Pueblo, Colorado. Sales of these two segments are highly concentratedin the Front Range area in Colorado although door sales are also madethroughout the United States.

 

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

 

**FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

Sales of the Company’sHVAC products are seasonal and weather sensitive except for fan coils. Revenuesin the Company’s Concrete, Aggregates and Construction Supplies segment areinfluenced by the level of construction activity and weather conditions alongthe Front Range of Colorado. Sales for the Door segment are not as seasonal norare they much affected by weather conditions. Historically, the Company hasexperienced operating losses during the first quarter except when the weatheris mild and demand strong along the Front Range. Operating results typicallyimprove in the second and third quarters reflecting more favorable weatherconditions in Colorado and the seasonal sales of the Evaporative Coolingsegment. Fourth quarter results can vary based on weather conditions inColorado as well as in the principal markets for the Company’s heatingequipment. 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. While this seasonal pattern ofsales and operating profits prevailed in 2008, cash flow lagged and the Company’soutstanding borrowings against its revolving credit facility peaked in September 2008and fluctuated over the remainder of the year before declining in lateDecember, primarily due to receipt of $2,114,000 from the sale of land inColorado Springs, to end the year at $6,400,000. The higher level of debtduring the year under the revolving credit facility was primarily due to ahigher level of inventories partially offset by an increase in trade payables.The increased inventory in the Heating and Cooling segment was primarily due toa lower than expected furnace sales during the peak selling season in thelatter part of the year combined with an increase in raw materials to supportthe increased volume of fan coil sales. The increase in the Evaporative Coolingsegment was due to a decline in cooler sales combined with the increasedpurchase of raw materials in anticipation of increased volume for 2009 as aprincipal competitor went out of business at the end of 2008. Increased steelprices and the increased purchase of some raw materials from overseas alsoadded to the increase in raw materials inventory at year-end. Overseaspurchases require longer lead times and are often ordered in larger quantitiesto minimize shipping costs and assure the materials are available when neededby production.

 

Cashand cash equivalents were $1,097,000 at the end of 2008 compared to $3,326,000at the prior year-end. Operations in 2008 provided $522,000 of cash compared to$3,104,000 in 2007 and $1,933,000 in 2006. The decrease in net cash generatedby operating activities during 2008 was primarily the result of an increase ininventories of $4,199,000 compared to the increase of $2,392,000 in inventoriesduring 2007 as discussed above. The increase in net cash generated by operatingactivities during 2007 was primarily the result of a decrease in receivables of$1,471,000 compared to the increase in receivables of $6,783,000 during 2006.This increase in cash generated was partially offset by the 2007 net loss andan increase in inventory levels compared to 2006.

 

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Netcash provided by investing activities was $797,000 compared to the use of$7,489,000 in 2007 and $8,658,000 in 2006. Capital expenditures for 2008, 2007and 2006 were $2,175,000 (including $165,000 that was included in accountspayable at January 3, 2009), $7,682,000 and $6,553,000, respectively,exclusive of the $2,452,000 expended during 2006 for those assets purchased aspart of the ASCI and CSSL acquisitions. Current year expenditures were sharplycurtailed during 2008 despite spending approximately $1,500,000 for a slurrywall and related expenditures associated with the next phase of mining at thePueblo aggregates operation.  Capitalexpenditures during 2007 were predominantly in the Concrete, Aggregates andConstruction Supplies segment. Expenditures included over $1,800,000 tocomplete the industrial sand plant. An additional $1,800,000 was expended topurchase an existing building in Colorado Springs for the Company’s Doorsegment to replace a smaller and older facility. Expenditures during 2006included $724,000 for the first outlay on an industrial sand plant while theremaining additions consisted primarily of routine equipment replacementslargely in the Concrete, Aggregates and Construction Supplies segment. Anadditional $2,452,000 was used in 2006 for the purchase of the ASCI and CSSLassets. On January 1, 2006 the Company purchased the assets of CSSL for$352,000 in cash including $100,000 of goodwill and $100,000 for a non-competeagreement. On June 30, 2006, the Company purchased certain assets of ASCIfor $2,100,000 of cash and a $1,000,000 note which was paid off during 2007. Inaddition to the $1,735,000 of trucks, equipment and concrete plant, the ASCIpurchase price included $290,000 for a non-compete agreement, $350,000 for arestrictive land covenant, $370,000 for existing customer relations and$355,000 of goodwill. Investing activities provided cash from the proceeds fromthe sale of property and equipment of $2,892,000, $193,000 and $347,000 during2008, 2007 and 2006, respectively. The 2008 sales included $2,114,000 receivedfrom the sale of land in Colorado Springs and the sale of the assets of a smallaggregate operation for approximately $720,000 (including the buyer’sassumption of just over $85,000 of liabilities associated with the property).This operation did not provide aggregates to the Company’s ready mix operationsand management did not consider it to be a strategic part of the business.Proceeds from the sale of assets for 2007 included $230,000 received from thesale of stock received from the demutualization of an insurance company thatprovides life insurance benefits to our employees. The 2006 sales were mainlyof equipment replaced during the year.

 

Budgetedcapital expenditures for 2009 are approximately $2,283,000, which isapproximately $2,739,000 less than planned depreciation, depletion andamortization. The budget includes approximately $750,000 to complete the Puebloslurry wall and all related expenditures. In addition approximately $567,000will be spent in late 2009 to buy-out two aggregates plants currently underlease. The remaining expenditures will primarily be made for the Heating andCooling segment and the Evaporative Cooling segment for various equipment,tooling and facility improvements. The Company expects that the 2009expenditures will be funded from existing cash balances, operating cash flowand funds available under the revolving credit facility.

 

During2008, cash of $3,548,000 was used in financing activities. The Company madescheduled term debt payments of $2,029,000 while also reducing the outstandingbalance of the revolving line of credit by $1,500,000. During 2007, cash of$4,941,000 was provided by financing activities. As more fully discussed inNote 5, $7,900,000 was borrowed during 2007 against the revolving line ofcredit to finance operating and working capital needs and capital expenditures.Scheduled debt repayments of $2,200,000 were made during 2007 as well as the pay-offof the remaining $666,000 owed on the note issued as part of the purchase priceof ASCI. An additional $93,000 was used to acquire treasury shares during 2007.During 2006, cash of $2,666,000 was provided by financing activities. Under theAmended Credit Agreement, discussed in the following section, the principalamount of the term loan was increased by $5,000,000 during 2006, primarily tofund the acquisition of the assets of ASCI and to pay for the industrial sandplant. See additional discussion of the term loan under Revolving Credit andTerm Loan Agreement, below. Scheduled debt repayments of $2,000,000 were madeduring 2006. In addition, scheduled payments of $334,000 were made against the$1,000,000 Note issued as part of the purchase price of ASCI.

 

**Revolving Credit and Term Loan Agreement**

 

As of January 3, 2009 the Company had a Revolving Credit and TermLoan Agreement (Credit Agreement) with two banks as amended on August 12,2008 (Amended Credit Agreement). At January 3, 2009, $10,771,000 wasoutstanding under the term loan facility. Under the Amended Credit Agreement,the maximum amount available on the revolving credit facility was $18,000,000which was reduced to $15,000,000 as of December 31, 2008. Borrowings underthe Amended Credit Agreement are secured by the Company’s accounts receivable,inventories, machinery, equipment and vehicles. At January 3, 2009 theCompany was in compliance with the terms of the Amended Credit Agreement whichincluded covenants requiring the Company to maintain certain levels of EBITDA(earnings before interest, income taxes, depreciation and amortization) or debtservice coverage, consolidated tangible net worth and to maintain certainratios including consolidated debt to cash flow (as defined). Additional borrowings,acquisition of stock of other companies, purchase of treasury shares andpayment of cash dividends were either limited or require prior approval by thelenders.

 

AtJanuary 3, 2009, there was $6,400,000 outstanding against the revolvingcredit facility leaving $4,090,000 available after reserving $4,510,000 for theoutstanding stand-by letters of credit. The revolving credit facility wasavailable at the discretion of management and it was primarily used for fundingthe seasonal sales programs related to the evaporative cooler and furnaceproduct lines. As noted, the line was also used to secure stand-by letters ofcredit primarily issued to insurance 

 

13

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carriersin support of self-insured amounts under the Company’s risk management program.During the 2008 fiscal year, the highest amount of Company borrowingsoutstanding under the revolving credit facility, not including the amountsecuring stand-by letters of credit, was $13,100,000 and the average amountoutstanding was $9,670,000.

 

The Amended Credit Agreement provided that, at the Company’s option,the term loan and revolving credit facility would bear interest at prime or aperformance-based LIBOR rate. Based on the terms of the Amended CreditAgreement and the Company’s performance for the twelve months ended January 3,2009, the performance based rate would be LIBOR plus 3.00% for both the termloan and for borrowings under the revolving credit facility, subject toadjustment depending upon the Company’s performance. Payment of accruedinterest was due and payable quarterly by the Company and principal under theterm loan was payable on a quarterly basis until March 31, 2011.

 

On April 16, 2009 the Company replaced the Amended CreditAgreement with a new secured credit agreement (New Credit Agreement) wherebythe new bank lender will provide a total credit facility of $30,000,000consisting of a $20,000,000 revolving credit facility for a three year period (reducedby letters of credit that may be issued by the lender on the Company’s behalf)and a $10,000,000 term loan facility. The Company’s outstanding stand-byletters of credit of $4,510,000 reduce the current borrowing capacity availableunder the revolving credit facility such that the maximum that can be borrowedis $15,490,000. Borrowings under the New Credit Agreement are secured by theCompany’s accounts receivable, inventories, machinery, equipment, vehicles andcertain real estate. Borrowings under the revolving credit facility are limitedto 80% of eligible accounts receivable and 50% of eligible inventories.Inventory borrowings are limited to a maximum of $10,000,000. Borrowings underthe New Credit Agreement will bear interest based on a performance based LIBORor prime rate option. The base LIBOR rate will not be less than 2% and the baseprime rate will not be less 4%. At inception of the New Credit Agreement, theinterest rate under the LIBOR option will be 5% and 4.75% under the prime rateoption. The Company also paid certain underwriting and arrangement fees at thetime of closing.****The New Credit Agreement requiresthe Company to maintain certain levels of tangible net worth and EBITDA(earnings before interest, income taxes, depreciation and amortization) or debtservice coverage and to maintain certain ratios including consolidated debt tocash flow (as defined), and adjusted EBITDA to interest expense and payments onfunded debt. Additional borrowings, acquisition of stock of other companies,purchase of treasury shares and payment of cash dividends are either limited orrequire prior approval by the lender. Payment of accrued interest is duemonthly or at the end of the applicable LIBOR period on both the revolvingcredit borrowings and the term debt borrowings. Principal payments under theterm loan are due quarterly with a final payment of all remaining unpaidprincipal due April 16, 2012. The Company is required to enter into aninterest rate swap agreement to hedge the interest rate on a minimum amount of$5,000,000 of term debt. The Company has sufficient qualifying assets such thatthe entire $20,000,000 or the revolving credit facility is immediatelyavailable and is expected to be available for the foreseeable future. At thetime of signing, the New Credit Agreement is expected to provide additionalborrowing capacity of approximately $4,000,000 (after payment of theunderwriting and arrangement fees) as compared to the amount available underthe Amended Credit Agreement. See Note 5.

 

Astandby letter of credit in the amount of $4,490,000 previously issued to aninsurance company to support self-insured amounts under the Company’s riskmanagement program, was drawn upon by the beneficiary in connection with theCompany’s New Credit Agreement. The proceeds of the letter of credit, which nowserve as cash collateral for the Company’s self-insurance obligations, aretreated as a revolving credit loan under the New Credit Agreement.

 

Dueto the terms of the New Credit Agreement, the 2008 year-end borrowings of$6,400,000 against the revolving credit line have been classified as long-termon the January 3, 2009 balance sheet.

 

The Company hasprepared a projection of cash sources and uses for the next 12 months. Underthis projection, the Company believes that its existing cash balance,anticipated cash flow from operations and borrowings available under the NewCredit Agreement, will be sufficient to cover expected cash needs, includingservicing debt and planned capital expenditures for the next twelve months. TheCompany also expects to be in compliance with all debt covenants during thisperiod.

 

**InsurancePolicies**

 

TheCompany maintained insurance policies since March 31, 2008 with thefollowing per incident deductibles and policy limits:

 
| ** **                 | ** ** | **Deductible** | ** ** | **Policy Limits** | ** ** |
|----------------------------|------------|----------------|------------|------------------------|------------|
| Product liability          |       | $              | 250,000    |                   | $          | 2,000,000 |   |
| General liability          |       | 250,000        |       | 5,000,000              |       |
| Workers’ compensation |       | 350,000        |       | Statutory              |       |
| Auto and truck liability   |       | 100,000        |       | 2,000,000              |       |
|                            |            |                |            |                        |            |  |  |

 

14

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Shouldthe aggregate out-of-pocket payments for the three policies exceed $5,580,000during a policy year, deductibles on future claims are waived and the policiespay all amounts up to the policy limits. Should any, or all policy limits beexceeded, an umbrella policy is maintained which covers the next $25,000,000 ofclaims.

 

**Obligationsand Commitments**

 

Thefollowing tables represent our obligations and commitments to make futurepayments under contracts, such as debt and lease agreements, and undercontingent commitments as of January 3, 2009.

 

PaymentsDue by Period as of January 3, 2009, giving effect to the New CreditAgreement as described in Note 5 are as follows (amounts in thousands):

 
| **Contractual Obligations**                         | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 — 3  years** | ** ** | **3 — 5  years** | ** ** | **More  than 5  years** | ** ** |
|----------------------------------------------------------|------------|-----------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| Long-term debt including interest (See Note  5) (a)      |       | $         | 12,086     |                            | $          | 1,996                           |       | $                               | 4,010      |                         | $          | 6,080 |   | $ | — |   |
| Revolving credit facility without interest  (See Note 5) |       | 6,400     |       | —                          |       | —                          |       | 6,400                           |       | —                       |       |
| Operating leases (See Note 9)                            |       | 6,771     |       | 1,646                           |       | 2,198                           |       | 1,719                           |       | 1,208                        |       |
| Minimum royalty agreement (See Note 9)                   |       | 20,920    |       | 418                             |       | 837                             |       | 837                             |       | 18,828                       |       |
| FIN 48 liability (See Note 11) (b)                       |       | 20        |       | 20                              |       | —                          |       | —                          |       | —                       |       |
| Total contractual obligations                            |       | $         | 46,197     |                            | $          | 4,080                           |       | $                               | 7,045      |                         | $          | 15,036 |   | $ | 20,036 |   |

 

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(a)          Interest on long-term debt is computed usingthe interest rate in effect at January 3, 2009. The amount shown in theone year column includes the March 2009 payment under the Amended CreditAgreement in effect at year-end plus the scheduled payments as scheduled forthe remaining quarters of 2009 under the New Credit Agreement. Although thereis an outstanding balance at year-end under our revolving credit facility, nointerest amounts have been included related to the revolving credit facilitybecause future paybacks and/or borrowings under this facility are unknown atthis time.

(b)         The Company has included $20,000 of uncertaintax liabilities under FASB Interpretation No. 48 “Accounting forUncertainty in Income Taxes,” that are classified as current liabilities on theconsolidated balance sheet. Excluded from the table is $149,000 of uncertaintax liabilities, as the Company is unable to reasonably estimate the ultimatetiming of settlement.

 

Amounts of Commitment Expiration per Periodas of January 3, 2009 (amounts in thousands):

 
| **Other Commercial Commitments** | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 — 3 years** | ** ** | **3 — 5 years** | ** ** | **More than  5 years** | ** ** |
|--------------------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|
| Standby letters of credit                  |       | $         | 4,510      |                            | $          | 4,510                          |       | $                                   | —     |                             | $          | — |   | $ | — |   |
|                                            |            |           |            |                                 |            |                                |            |                                     |            |                                  |            |  |  |  |  |  |

 

Astandby letter of credit in the amount of $4,490,000 issued to an insurance companyto support self-insured amounts under the Company’s risk management program,was drawn upon by the beneficiary in connection with the Company’s New CreditAgreement. The proceeds of the letter of credit, which now serve as cashcollateral for the Company’s self-insurance obligations, are treated as arevolving credit loan under the New Credit Agreement.

 

**Off-BalanceSheet Arrangements**

 

Wehave not entered into any off-balance sheet arrangements that would be likelyto have a material current or future effect on our financial condition,revenues, expenses, results of operations, liquidity, capital expenditures orcapital resources.

 

**RESULTS OFOPERATIONS**

 

This section discusses consolidated results of operations. Thefollowing sections discuss the operating results of the reporting segments andcontain more detail. Consolidated sales were $157,881,000 in 2008, $168,429,000in 2007 and $158,767,000 in 2006. The decrease in 2008 was due to the decreasedlevel of construction along the Front Range of Colorado and the United Statesin general. Sales in the Concrete, Aggregates and Construction Supplies segmentdeclined $13,443,000 or 14.9% while Door segment sales declined 19.2% althoughthis segment’s sales are also more affected by the timing of shipments based oncustomers’ requests than our other segments. Sales in the Heating and Coolingsegment increased $6,020,000 or 16.7% entirely due to an increase in fan coilsales, which was the result of higher volume and prices in response toincreased raw material costs. The Evaporative Cooling segment reported a modestincrease in sales despite a decline in volume. Price increases accounted forthe higher revenue as a portion of the steel costs were reflected in the unitprices. The increase in 2007 was primarily realized by the Heating and Coolingsegment ($6,216,000) and the Door segment ($4,924,000). Increased fan coilsales were the principal reason for the higher sales in the Heating and Coolingsegment while a continued strong demand and the timing of shipments accountedfor the Door segment sales increase.

 

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Cost of sales (exclusive of depreciation, depletion and amortization)remained relatively static as a percentage of sales at 84.8% for both 2008 and2007. Decreases in cost of sales were experienced by the Heating and Coolingsegment and the Evaporative Cooling segment. Price increases were institutedfor all products in these two segments in response to increased material costsincurred over the past year. Favorable workers’ compensation experience duringthe past year also reduced costs for both segments. Margins in the Concrete,Aggregates and Construction Supplies segment declined due to lower volumescombined with higher delivery and utility costs. Also contributing to the lowermargins in 2008 was the recovery of $725,000 in 2007 from an insurance claimfor flood damages in 2006. Pricing became more competitive as constructionactivity along the Front Range in Colorado declined preventing price increasesfrom fully recapturing the increased costs. Cost of sales (exclusive ofdepreciation, depletion and amortization) in the Door segment for 2008 waslargely unchanged. Cost of sales increased for 2007 compared to 2006 as apercentage of sales from 82.1% to 84.8%. The increase in cost of sales wasexperienced by all segments except the Door segment. Increased material,healthcare and factory overhead costs drove margins lower in the Heating andCooling segment and the Evaporative Cooling segment. Higher cement and deliverycosts lead to the decreased margins in the Concrete, Aggregates andConstruction Supplies segment despite the aforementioned recovery of $725,000in 2007 from the insurance claim for flood damages in 2006. Increasedcompetitive pricing resulting from reduced construction activity along theFront Range in Colorado prevented price increases from fully recapturing theincreased costs. The improvement in the Door segment was largely due to theincrease in sales.

 

Depreciation,depletion and amortization declined modestly in 2008 compared to 2007 due tothe curtailment of capital spending during 2008. Depreciation, depletion andamortization increased in 2007 compared to 2006 due to the high level ofcapital expenditures and a full year’s amortization of intangible assetsassociated with the ASCI and CSSL acquisitions of 2006.

 

Selling andadministrative costs declined but remained relatively constant as a percentageof sales at 12.3% for 2008 compared to 12.4% for 2007. Selling and administrativecosts increased as a percentage of sales in the Concrete, Aggregates andConstruction Supplies segment as well as the Door segment due to the decline insales and the relatively fixed nature of some of these expenses. The decreasedcosts as a percentage of sales were primarily due to the increase in sales ofthe Heating and Cooling segment and Evaporative Cooling segment. Selling andadministrative costs also declined due to the reduction of incentivecompensation accruals at all segments, most notably at the Corporate officewhich declined approximately $670,000 including a reduction in the supplementalprofit sharing balances. Selling and administrative costs increased during 2007as compared to 2006 but remained relatively constant as a percentage of salesat 12.4%. The increased costs were partially related to the increase in salesof the Heating and Cooling segment and the Door segment. However, increases inemployee healthcare, compliance costs associated with SOX, insurance and legalexpenses associated with product liability claims were the primary causes forthe increase in selling and administrative costs. Selling and administrativecosts at the corporate office were relatively constant between 2007 and 2006.

 

The gain onthe disposition of property and equipment increased during 2008 because of a$1,947,000 pre-tax profit on the sale of land in Colorado Springs. TheConcrete, Aggregates and Construction Supplies segment also realized a $344,000pre-tax gain related to the sale of the assets of a small aggregates operationduring the first quarter of 2008. The aggregates operation did not provideaggregates to the Company’s ready mix operations and management did notconsider it to be a strategic part of its business. The 2007 gain on thedisposition of property and equipment declined compared to 2006 as there werefew sales during the year. During 2006, gains were realized on numerousdispositions of equipment that were replaced during the year.

 

At January 3,2009, primarily due to the economic conditions in the Denver area, the Companydetermined that the carrying value of assets associated with RMRM within theCompany’s Concrete, Aggregates and Construction Supplies segment were belowcarrying value, resulting in an impairment charge. The fair value wasdetermined using the current fair value of similar assets in the marketplace.The impairment reduced the book carrying value of property, plant and equipmentby $758,000 and the covenant not to compete by $26,000. See the discussion inthe Property, Plant and Equipment section of Note 1 and Note 4.

 

Operatingincome improved to a profit of $938,000 for 2008 from a loss of $554,000 for2007. Operating results for 2006 declined from a profit of $3,849,000 during2006 to a loss of $554,000. The dramatic decline was the result of thedeterioration of margins in all but the Door segment combined with the lowervolume in the Concrete business.

 

Other incomewas lower in both 2008 and 2006 compared to 2007 due to $340,000 receivedduring 2007 which included $230,000 received from the sale of stock receivedfrom the demutualization of an insurance company that provides life insurancebenefits to our employees.

 

16

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Netinterest expense increased modestly in 2008 over 2007 as a 4.4% increase inaverage borrowings was partially offset by lower average interest rates during2008. Net interest expense for 2007 increased by $446,000 over the prior yeardue to increased borrowings as well as a higher average interest rate.

 

TheCompany’s effective income tax rates reflect federal and state statutory ratesadjusted for non-deductible and other tax items. The effective tax rate for2008 was a benefit of 86.0%. The primary increase to the benefit from thestatutory rate of 34% was the 66.9% benefit realized from the percentagedepletion deduction, which had a large percentage effect due to the lowerpre-tax operating results. Various other factors influenced the rate with thenotable item of a tax asset valuation allowance which reduced the benefit by20.1%. The effective tax rate for 2007 was a benefit of 61.6%. The primaryincreases to the benefit from the statutory rate of 34% was the 19.4% benefitrealized from percentage depletion and the 16.3% benefit for future state taxcredits resulting from operations within an Enterprise Zone in California. Theeffective rate for 2006 (35.3%) was increased by 6.1% for adjustments made tostate taxes and reduced by 5.4% for the benefit realized from the percentagedepletion deduction. The Company reviews its tax positions on a quarterly basisand accrues amounts for potential tax contingencies. Based on these reviews andthe closure of tax years subject to tax audit, reserves are adjusted asnecessary. Reserves for these tax matters are included in income taxes payableon the consolidated balance sheets. See Note 11.

 

As discussed above, the Company operates primarily in two industrygroups both of which are somewhat seasonal, weather sensitive and subject tocyclical factors. The following addresses various aspects of operatingperformance focusing on the reportable segments within each of the two industrygroups.

 

**ConstructionProducts Industry Group**

 

The table below presents a summary of operating information for the tworeportable segments within the Construction Products industry group for thefiscal years 2008, 2007 and 2006 (amounts in thousands).

 
| ** **                                     | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Door** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------|------------|----------|------------|
| 2008                                           |       |                                                       |       |     |       |
| Revenues from external customers               |       | $                                                          | 76,995     |     | $          | 15,373 |   |
| Segment operating (loss) income                |       | (674                                                       | )          | 1,455    |       |
| Operating (loss) income as a percent of  sales |       | (.9                                                        | )%         | 9.5      | %          |
| Segment assets                                 |       | $                                                          | 46,410     |     | $          | 6,276 |   |
| Return on assets                               |       | (1.5                                                       | )%         | 23.2     | %          |
|                                           |       |                                                       |       |     |       |
| 2007                                           |       |                                                       |       |     |       |
| Revenues from external customers               |       | $                                                          | 90,438     |     | $          | 19,024 |   |
| Segment operating income                       |       | 2,980                                                      |       | 2,245    |       |
| Operating income as a percent of sales         |       | 3.3                                                        | %          | 11.80    | %          |
| Segment assets                                 |       | $                                                          | 53,002     |     | $          | 7,398 |   |
| Return on assets                               |       | 5.6                                                        | %          | 30.3     | %          |
|                                           |       |                                                       |       |     |       |
| 2006                                           |       |                                                       |       |     |       |
| Revenues from external customers               |       | $                                                          | 92,214     |     | $          | 14,100 |   |
| Segment operating income                       |       | 4,888                                                      |       | 1,492    |       |
| Operating income as a percent of sales         |       | 5.3                                                        | %          | 10.6     | %          |
| Segment assets                                 |       | $                                                          | 54,470     |     | $          | 4,750 |   |
| Return on assets                               |       | 9.0                                                        | %          | 31.4     | %          |

 

Concrete,Aggregates and Construction Supplies Segment

 

Sales in theConcrete, Aggregates and Construction Supplies segment for 2008 declined fromthe sales level of 2007 by $13,443,000 or 14.9% to $76,995,000. Concrete volumedeclined 14.0% from the prior year’s level with only the Pueblo marketreporting a gain due to two large jobs that will be completed during the firsthalf of 2009. The sharp decline reflects the overall decline in constructiondue to the current economic recession and the deterioration in housingconstruction and the capital markets. The gross profit in this segment was alsonegatively impacted by competitive pricing on larger jobs and increased costsof delivery and some materials. The higher cost of diesel fuel was asignificant contributor to the increased costs. The cost of aggregates alsoincreased as the section of the Pueblo aggregates operation mined during 2008contained a higher sand to rock ratio than previously mined. We have opened anew area in 2009 which should yield a better mix of materials. Aggregatesvolume also declined nearly 25% directly related to our lower concrete volumeand other customers’ demand. This segment is very sensitive to volume as manycosts are relatively fixed in nature and the large decrease in sales volume wasthe primary cause of the reduced gross profit. Margins during 2008 were alsoreduced in comparison to 2007 due 

 

17

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to the$725,000 insurance recovery during 2007 related to the 2006 flood damage. Theconstruction materials division also experienced a decrease in sales ofapproximately 13%; however some well-timed purchases of steel rebar actuallyimproved the margins for this division.

 

Sales during2007 in the Concrete, Aggregates and Construction Supplies segment declined$1,776,000 from the 2006 level to $90,438,000 despite increased sales prices.The decline was attributable to a 6.9% decline in concrete volume asconstruction along the Front Range of Colorado slowed significantly during theyear. Delivery costs increased due to higher prices for diesel fuel and ahigher level of repairs and maintenance expenditures. As the communitiesserviced expand, traffic increases and more of our sales occur further from ourbatch plant sites. In the Pueblo market, a significant portion of the increaseddelivery costs can be attributable to the quick turnaround times we enjoyedservicing two very large jobs in 2006. Pricing became more competitive in allColorado markets as demand fell which prevented our price increases from fullyrecovering the increased costs. The Aggregates division reported improved salesduring 2007 although profits were aided by the $725,000 insurance recoveryrelated to the 2006 flood damage claims. The Construction Supplies divisionreported declines in sales directly related to the lower construction activityduring 2007.

 

As notedabove, operating income is highly sensitive to sales volume in the Concrete,Aggregates and Construction Supplies segment. This segment has alsohistorically required a sizable investment in capital assets resulting in asignificant portion of its costs being relatively fixed in nature. Operatingincome as a percent of sales, therefore, generally increases and decreases at ahigher rate but in tandem with sales changes.

 

Operations for 2008 resultedin a loss of $674,000 as compared to the operating income of $2,980,000generated during 2007. As noted above volume was largely the causealthough the recording of a $784,000 long-lived asset impairment charge alsonegatively impacted the operating results of this segment. Competitive pricingcombined with increased costs to also dampened margins. The preceding negativeevents more than offset the segment’s realization of a $344,000 pre-tax gainrelated to the sale of a small aggregates operation during 2008.

 

Operatingincome for 2007 was $2,980,000 as compared to the 2006 operating profit of$4,888,000. Cost of sales as a percentage of sales increased from 83.9% in 2006to 85.7% in 2007 despite the insurance recovery of $725,000 from the 2006 flooddamage claims. As noted above, due to the increased competitive pricing causedby the decline in construction activity, higher costs were not able to be fullypassed on to customers through higher prices. In addition, depreciation expenserose approximately $200,000 in 2007 compared to 2006 due to the high capitalspending in recent years and the amortization of intangibles related to theASCI acquisition. The segment also sold numerous assets during 2006 whichresulted in gains of $195,000 compared to the small loss of $9,000 incurredduring 2007.

 

The 2008 operatingloss resulted in negative results for both operations as a percent of sales andreturn on assets. The reduced profit level of 2007 compared to 2006 resulted inlower operating income as a percent of sales and lower return on assets fromthe 2006 level.

 

Door Segment

 

Sales in theDoor segment declined $3,651,000 or 19.2% during 2008 from the 2007 level ascommercial and industrial construction declined nationwide due in part to thetight credit markets. The sales backlog at the end of 2008 was over $5,000,000which is higher than the amount at the end of 2007; however, the rate of ordercapture has recently declined indicating an increasingly competitive biddingatmosphere. Sales in the Door segment during 2007 increased $5,352,000 or 38%over the 2006 level as demand remained strong and sales of electronic accesssystems increased. Sales are also affected by the timing of shipments ascontractors may accelerate or delay shipments depending on the progress oftheir projects. Backlog was reduced over the course of 2007 but remained at astrong level.

 

Due to thelower sales volume and a higher provision for workers’ compensation claims, theDoor segment reported $1,455,000 of operating income compared to $2,245,000 in2007. Operating income was $2,245,000 during 2007 compared to $1,492,000 during2006 due principally to the increase in sales volume.

 

Operatingincome as a percentage of sales for 2008 declined primarily due to the reducedvolume. Selling and administrative costs were reduced by over $219,000 butincreased as a percentage of sales. Depreciation increased due to the purchaseof a new office and plant at the end of 2007 which was placed into service atthe beginning of 2008. Operating income as a percentage of sales for 2007improved over the 2006 level as the electronic access products were assimilatedinto more projects and the Company was able to leverage their electronicscapability to increase sales and pricing.

 

Due todecreased operating income during 2008, both the operating income as a percentof sales and the return on assets during 2008 declined from the 2007 level. Thedecrease in segment assets was due to lower receivables directly related to thelower level of sales. Although the operating income as a percent of salesincreased during 2007 as compared to 2006, due to 

 

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the increasein sales, the return on assets during 2007 declined slightly from the 2006level primarily due to the acquisition of the Colorado Springs facility during2007 which increased the asset base of the segment.

 

**HVACIndustry Group**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC industry group for the fiscal years 2008, 2007 and2006 (amounts in thousands).

 
| ** **                             | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| 2008                                   |       |                          |       |                     |       |
| Revenues from external customers       |       | $                             | 42,166     |                     | $          | 22,985 |   |
| Segment operating income               |       | 85                            |       | 458                      |       |
| Operating income as a percent of sales |       | .2                            | %          | 2.0                      | %          |
| Segment assets                         |       | $                             | 23,521     |                     | $          | 14,241 |   |
| Return on assets                       |       | .4                            | %          | 3.2                      | %          |
|                                   |       |                          |       |                     |       |
| 2007                                   |       |                          |       |                     |       |
| Revenues from external customers       |       | $                             | 36,146     |                     | $          | 22,460 |   |
| Segment operating loss                 |       | (1,858                        | )          | (906                     | )          |
| Operating loss as a percent of sales   |       | (5.1                          | )%         | (4.0                     | )%         |
| Segment assets                         |       | $                             | 22,810     |                     | $          | 13,101 |   |
| Return on assets                       |       | (8.1                          | )%         | (6.9                     | )%         |
|                                   |       |                          |       |                     |       |
| 2006                                   |       |                          |       |                     |       |
| Revenues from external customers       |       | $                             | 29,930     |                     | $          | 22,167 |   |
| Segment operating income               |       | 161                           |       | 267                      |       |
| Operating income as a percent of sales |       | .5                            | %          | 1.2                      | %          |
| Segment assets                         |       | $                             | 18,303     |                     | $          | 12,651 |   |
| Return on assets                       |       | .9                            | %          | 2.1                      | %          |

 

Heatingand Cooling Segment

 

Salesin the Heating and Cooling segment in 2008 increased to $42,166,000, anincrease of $6,020,000 or 16.7% from the $36,146,000 in 2007. The increaseoccurred in the fan coil line which was aided by a large hotel project in LasVegas. Furnace unit volume declined approximately 11.2% due to a mild winter inthe Southwest and the full force of the economic recession and deterioration ofthe capital markets occurring during the peak selling period for this productline. Margins improved modestly in 2008 in part due to selling price increasesthat offset higher commodity prices that we experienced in both 2008 and 2007,particularly in steel and copper. A reduction of factory overhead costsincluding favorable workers’ compensation experience also added to the improvedmargins. Despite the large increase in sales, selling and administrativeexpenses rose less than 1% and decreased as a percentage of sales by over 2.4%primarily due to reduced incentive compensation expenses.

 

Salesin the Heating and Cooling segment improved to $36,146,000, an increase of$6,216,000 or 20.8% from the $29,930,000 in 2006. Furnace volume increased amodest 1.2% while the fan coil line added over $6,000,000 in sales during 2007.Profit margins, however, were lower compared to 2006. The reduced margins weredue to significantly higher plant overhead costs, higher than expected materialcosts and more generous sales incentive plans offered to key furnace customers.Factory overhead expenses were significantly higher in part due to an increasein employee healthcare costs and workers’ compensation claims. Factory indirectpayroll costs were higher due to additional personnel hired to accommodate theincreased fan coil volume. Expenses associated with a business systemsconversion and the implementation of a product configurator program for the fancoil line reduced the 2007 operating results. Selling expenses increased byalmost 3% of sales due to volume incentives and other marketing expensesrelated to programs offered to major furnace customers.

 

Operatingresults for 2008 returned to a profit of $85,000 after the $1,858,000 lossincurred during 2007. The improvement was due to the solid growth in fan coilvolume as well as the increased sales prices and cost savings noted above. The2007 operating results fell to a loss of $1,858,000 from the $161,000 profitreported for 2006. As noted above, the addition of personnel in anticipation ofcontinued growth in fan coil sales, increased factory costs and pricingpressures primarily in the form of enhanced sales incentive programs allcombined to diminish profit margins. Higher insurance premiums and legal costsassociated with product liability claims contributed to the loss in 2007. TheCompany also continued to be affected by raw material price increases. Pricingfor certain products is generally determined and fixed at the time the contractis awarded. The period of time from the awarding of a contract to theproduction and delivery of the product can vary. Commodity price increasesduring the intervening period will significantly impact the margins realized.

 

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Operating results as apercentage of sales and the return on assets both improved but only to nearbreak-even levels. Operating results as a percent of sales and the return onassets were both negative for 2007 due to the loss incurred while bothpercentages were positive in 2006 due to the operating profit reported.

 

EvaporativeCooling Segment

 

Salesin the Evaporative Cooling segment in 2008 increased to $22,985,000, up$525,000 or 2.3% over the 2007 level despite a 4.7% decline in unit volume. Amodest increase in selling prices and a change in product mix resulted in theincrease in sales revenue. Margins improved by 4.7% as factory overhead costswere lowered largely due to a significant decrease in charges for workerscompensation costs. The decline in workers’ compensation costs was the resultof both fewer claims during the year and a lower cost of settling older claimsthan had been predicted at year-end 2007. Sales for 2007 increased slightly to$22,460,000, up $293,000 or 1.3% over the 2006 amount of $22,167,000. Theincrease was due to modest sales price gains as unit sales were essentially equalto the 2006 level. Margins declined substantially due to higher material costsas well as higher employee benefit expenses. Workers’ compensation claims,self-insured healthcare claims and maintenance costs were all higher in 2007.

 

Operatingresults for 2008 returned to a profit of $458,000 after the segment experiencedan operating loss of $906,000. As noted above, the improvement is due to theincreased prices and reduced overhead expenses. Selling and administrativecosts were also reduced primarily due to lower incentive based compensation andemployee benefits. The 2007 operating results slipped from a profit of $267,000in 2006 to a loss of $906,000 in 2007. As noted above, the increased costscombined with aggressive competition that limited sales price increases, werethe causes for the decline.

 

Operating results as a percent of sales and thereturn on assets were both improved in 2008 compared to 2007 as a result of theoperating income generated during 2008 compared to the loss incurred during2007. Similarly, operating results as a percent of sales and the return onassets were both negative for 2007, and well below the 2006 level, due to theloss noted above.

 

**OUTLOOK**

 

TheConcrete, Aggregates and Construction Supplies segment continues to beadversely affected by the nation-wide recession and the substantial decline inconstruction activity along the Front Range of Colorado. New residentialconstruction remains depressed and is likely to remain weak throughout 2009.Historically, pricing competition has escalated in times of diminished demandwhich would further adversely affect this segment. Although fuel costs havedeclined, the cost of diesel fuel has not declined in the same proportion andfuture prices remain unpredictable. The Door segment is also beginning toexperience some slow-down in bidding activity and more pricing competition.

 

Withthe exit of the leading manufacturer of evaporative coolers from the U.S.market, some opportunities for increased sales in the Evaporative Cooling segmentmay be realized but the full impact of that company’s departure is stillunknown. The Heating and Cooling segment will also likely be negativelyaffected by the overall weak economy and decline in commercial construction andweather will continue to be a significant factor. Increased steel prices havenegatively impacted margins; however, recently there have been modest decreasesin steel prices.

 

**CRITICALACCOUNTING POLICIES**

 

FinancialReporting Release No. 60, issued by the Securities and ExchangeCommission, requires all registrants, including the Company, to include adiscussion of “critical” accounting policies or methods used in the preparationof financial statements. We believe the following are our critical accountingpolicies and methods.

 

Goodwill and Other Intangible Assets

 

Inaccordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”goodwill is not amortized as a charge to earnings. The Company annuallyassesses goodwill for potential impairment as of the last day of its fiscalyear. In addition, to the extent that events occur, either involving therelevant Company subsidiaries or in their industries, the Company revisits itsassessment of the recorded goodwill to determine if impairment has occurred andshould be immediately recognized. This assessment requires us to makesignificant assumptions and estimates about the extent and timing of futurecash flows, discount rates, growth rates and costs. In addition, the terms ofrecent industry transactions/mergers are considered.

 

TheCompany has goodwill associated with two of its reporting units. We estimatethe fair value of our reporting segments using a combination of discounted cashflow models and a market valuation approach. Forecasts of future cash flows arebased on our best estimate of future sales and operating costs and generalmarket conditions. The cash flow forecasts are adjusted by an appropriatediscount rate derived from our market capitalization plus an appropriatecontrol premium at the date of evaluation. Therefore, changes in any of theseassumptions could impact the estimated fair value. The

 

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marketvaluation approach compares the Company’s financial results to entities ofsimilar size and industry and also considers the impact of recent transactionsin the industry. Additionally, the Company considered the relation of the fairvalue of the Company’s reporting units to the market capitalization of theCompany.

 

Noimpairment was indicated as a result of the Company’s assessment in the currentyear. A 10 percent decrease in the fair value of estimates used for bothreporting units would not have changed this determination. If the assessmenthad indicated that the carrying value of goodwill was impaired, an impairmentcharge would have been recorded for the amount by which the carrying value ofthe goodwill exceeded its fair value. Management believes that the assumptionsand estimates used to determine the estimated fair values are reasonable;however, changes in the aforementioned assumptions and estimates, as well asthe effects of unknown future events or circumstances could materially affectthe estimated fair value.

 

Long-livedAssets (other than Goodwill and Intangible Assets)

 

TheCompany reviews long-lived assets by asset group for impairment whenever eventsor changes in circumstances indicate that the related carrying amounts may notbe recoverable. Determining whether impairment has occurred typically requiresvarious estimates and assumptions, including determining which cash flows aredirectly related to the potentially impaired asset, the amount and useful lifeover which cash flows will occur and the asset’s residual value, if any. Inturn, measurement of an impairment loss requires a determination of fair value,which is based on the best information available given the Company’s historicalexperience and internal business plans.

 

Liabilities

 

TheCompany purchases insurance coverage for workers’ compensation, general productand automobile liability, retaining certain levels of risk (self-insuredportion). Provision for workers’ compensation claims is estimated with theassistance of an independent expert who applies actuarial methodology toinformation provided by the Company’s independent claims administrator.Provision for automobile claims is estimated based upon information provided bythe Company’s independent claims administrator and the Company’s ownexperience. With regard to product liability, provisions for both claims andunasserted claims that would be covered under the self-insured portion of thepolicies are recorded in accordance with the requirements of SFAS No. 5and are reviewed at least annually for revisions in estimates.

 

TheCompany records a reserve for future reclamation work to be performed at itsvarious aggregate operations based upon an estimate of the total expense thatwill be incurred to reclaim the disturbed areas. Actual reclamation costs arecharged against the reserve. The adequacy of the recorded reserve is assessed annually.The assessment may be done more frequently if events or circumstances arisethat may indicate a change in estimated costs, recoverable material or theperiod of mining activity. The Company periodically engages an independentprofessional to assist in reevaluating the estimates of both the quantities ofrecoverable material and the cost of reclamation. Our assessment of theadequacy of the reclamation reserves is based on management’s assumptions withthe assistance of an independent professional. The analysis requires the use ofsignificant assumptions and estimates about the mining plans, homogeneity ofthe deposits, third party costs to perform work, method of reclamation to beused, etc. Management believes that the assumptions and estimates used todetermine the reserve are reasonable; however, changes in the aforementionedassumptions and estimates, as well as the effects of unknown future events orcircumstances, including legislative requirements, could materially affectestimated costs, the quantities of recoverable material or the period ofmining. Depletion of rock and sand deposits and amortization of deferreddevelopment costs are computed by the units-of-production method based uponestimated recoverable quantities of rock and sand.

 

Sales

 

TheCompany recognizes revenue as products are shipped to customers. Sales arerecorded net of estimates of applicable provisions for discounts, volumeincentives, returns and allowances based upon current program terms andhistorical experience. At the time of revenue recognition, the Company alsoprovides an estimate of potential bad debt and warranty expense as well as anamount anticipated to be granted to customers under cooperative advertisingprograms based upon current program terms and historical experience.

 

Recently Issued Accounting Standards

 

In“Recently Issued Accounting Pronouncement” section of Note 1 to theConsolidated Financial Statements discusses new accounting policies adopted bythe Company since 2007 and the expected impact of accounting pronouncementsrecently issued but not yet required to be adopted. To the extent the adoptionof new accounting standards has an affect on financial condition, results ofoperations or liquidity, the impacts are discussed in the applicable notes tothe consolidated financial statements.

 

**FORWARD-LOOKING STATEMENTS**

 

ThisAnnual Report contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended. Such forward-looking statements arebased on the beliefs of the Company’s management as well as on assumptions madeby and information available to the Company at the time such statements weremade. When used in this Report, words

 

21

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suchas “anticipates,” “believes,” “contemplates,” “estimates,”  “expects,” “plans,” “projects” and similarexpressions are intended to identify forward-looking statements. Actual resultscould differ materially from those projected in the forward-looking statementsas a result of factors including but not limited to: weather, interest rates,availability of raw materials and their related costs, economic conditions andcompetitive forces in the regions where the Company does business, and theability of the Company to obtain credit on commercially reasonable terms.Changes in accounting pronouncements could also alter projected results.Forward-looking statements speak only as of the date they were made and weundertake no obligation to publicly update them.

 

Item7A.  **QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

TheCompany is exposed to market risks related to commodity prices and interestrates. To manage interest rate risk, the Company has, from time to time,entered into interest rate swaps as cash flow hedges. These swaps areauthorized by the Company’s policies and procedures. The Company does not useswaps or hedging instruments for trading purposes, and is not a party to anytransaction involving leveraged derivatives. The Company entered into aninterest rate swap agreement (Swap Agreement) covering the period December 17,2001 through December 18, 2006 in order to minimize the adverse impact ofthe floating interest rate characteristic of some of the Company’s term loanborrowings. The Company’s effective interest rate on the portion of the termloan covered by the Swap Agreement was 5.88% during 2006. Cash payments orreceipts associated with this agreement are reflected in interest expense. Thefixed rate under the Swap Agreement was less than the floating rate on the termloan during 2006 which increased net income by $21,000. During the swap period,the fair value of the Swap Agreement was recorded on the balance sheet withsubsequent changes recorded as a separate component of accumulated othercomprehensive income in shareholders’ equity. See paragraph below and abovediscussion under Financial Condition, Liquidity and Capital Resources. 

 

Interest Rates

 

TheCompany utilizes revolving credit and term-loan facilities that bear interestat either an adjusted prime or adjusted LIBOR rate. The amount outstandingunder these facilities aggregated $17,171,000 at January 3, 2009. TheCompany is not currently a party to any financial debt instruments that containfixed interest charges. However the New Credit Agreement, as discussed in Note5, will require the Company to enter into an interest rate swap during 2009.The Company is not a party to any capital lease agreements as of January 3,2009. 

 

22

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| Item 8.    | **FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA**                                                                                                                        | ** ** | ** ** |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** ** | ** **                                                                                                                                                              | ** ** |
| ** ** | ** **                                                                                                                                                              | **PAGE**   |
|       |                                                                                                                                                                    |       |
|       | Financial Statements and Financial Statement Schedule of  Continental  Materials Corporation and  Report of Independent Registered Public Accounting Firm thereon: |       |       |
|       |                                                                                                                                                                    |       |       |
|       | Consolidated statements of operations and  comprehensive (loss)  income for fiscal  years 2008, 2007 and 2006                                                      |       | 24         |
|       |                                                                                                                                                                    |       |       |
|       | Consolidated statements of cash flows   for fiscal years 2008, 2007 and 2006                                                                                       |       | 25         |
|       |                                                                                                                                                                    |       |       |
|       | Consolidated  balance sheets as of January 3, 2009   and December 29, 2007                                                                               |       | 26         |
|       |                                                                                                                                                                    |       |       |
|       | Consolidated  statements of shareholders’ equity  for  fiscal years 2008, 2007 and 2006                                                                       |       | 27         |
|       |                                                                                                                                                                    |       |       |
|       | Notes to  consolidated financial statements                                                                                                                             |       | 28-38      |
|       |                                                                                                                                                                    |       |       |
|       | Report of Independent Registered Public  Accounting Firm                                                                                                                |       | 39         |
|            |                                                                                                                                                                         |            |            |  |

 

23

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**Continental Materials Corporation**

**Consolidated Statements of Operations and Comprehensive (Loss) Income**

**For Fiscal Years 2008, 2007 and 2006**

(Amounts in thousands, except per share data)

 
| ** **                                                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                          |       |     |       |     |       |     |       |
| Sales                                                                         |       | $        | 157,881    |     | $          | 168,429  |       | $ | 158,767 |   |
| Costs and expenses                                                            |       |     |       |     |       |     |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization)        |       | 133,932  |       | 142,838  |       | 130,410  |       |
| Depreciation, depletion and amortization                                      |       | 5,135    |       | 5,284    |       | 5,009    |       |
| Selling and administrative                                                    |       | 19,441   |       | 20,888   |       | 19,711   |       |
| Gain on disposition of property and  equipment                                |       | 2,349    |       | 27       |       | 212      |       |
| Long-lived asset impairment charge                                            |       | 784      |       | —   |       | —   |       |
| Operating income (loss)                                                       |       | 938      |       | (554     | )          | 3,849    |       |
| Interest expense                                                              |       | (1,292   | )          | (1,254   | )          | (808     | )          |
| Other income, net                                                             |       | 63       |       | 340      |       | 116      |       |
| (Loss) income before income taxes                                             |       | (291     | )          | (1,468   | )          | 3,157    |       |
| Income (benefit) tax provision                                                |       | (251     | )          | (905     | )          | 1,115    |       |
| Net (loss) income                                                             |       | $        | (40        | )        | $          | (563     | )          | $ | 2,042 |   |
|                                                                          |       |     |       |     |       |     |       |
| Basic (loss) earnings per share                                               |       | $        | (.03       | )        | $          | (.35     | )          | $ | 1.27 |   |
| Weighted average shares outstanding                                           |       | 1,599    |       | 1,603    |       | 1,605    |       |
| Diluted (loss) earnings per share                                             |       | $        | (.03       | )        | $          | (.35     | )          | $ | 1.27 |   |
| Weighted average shares outstanding                                           |       | 1,599    |       | 1,603    |       | 1,605    |       |
|                                                                          |       |     |       |     |       |     |       |
| Comprehensive (loss) income:                                                  |       |     |       |     |       |     |       |
| Net (loss) income                                                             |       | $        | (40        | )        | $          | (563     | )          | $ | 2,042 |   |
| Comprehensive loss from interest rate swap,  net of tax of $(3) for 2006 |       | —   |       | —   |       | (6       | )          |
| Total comprehensive (loss) income                                             |       | $        | (40        | )        | $          | (563     | )          | $ | 2,036 |   |

 

The accompanying notes are an integral partof the financial statements.

 

24

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**Continental Materials Corporation**

**Consolidated Statements of Cash Flows****For Fiscal Years 2008,2007 and 2006**

(Amounts in thousands)

 
| ** **                                                                                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities                                                                      |       |     |       |     |       |     |       |
| Net (loss) income                                                                         |       | $        | (40        | )        | $          | (563     | )          | $ | 2,042 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Depreciation, depletion and amortization                                                  |       | 5,135    |       | 5,284    |       | 5,009    |       |
| Long-lived asset impairment charge                                                        |       | 784      |       | —   |       | —   |       |
| Deferred income tax provision                                                             |       | (205     | )          | (261     | )          | 213      |       |
| Provision for doubtful accounts                                                           |       | 142      |       | (3       | )          | 341      |       |
| Gain on disposition of property and  equipment                                            |       | (2,349   | )          | (27      | )          | (212     | )          |
| Receivables                                                                               |       | 448      |       | 1,471    |       | (6,783   | )          |
| Inventories                                                                               |       | (4,199   | )          | (2,392   | )          | 718      |       |
| Prepaid expenses                                                                          |       | 1,050    |       | (362     | )          | (392     | )          |
| Prepaid royalties                                                                         |       | (15      | )          | 86       |       | 115      |       |
| Accounts payable and accrued expenses                                                     |       | (860     | )          | 852      |       | 1,312    |       |
| Income taxes                                                                              |       | 104      |       | (1,189   | )          | 236      |       |
| Other                                                                                     |       | 527      |       | 208      |       | (666     | )          |
| Net cash provided by operating activities                                                 |       | 522      |       | 3,104    |       | 1,933    |       |
|                                                                                      |       |     |       |     |       |     |       |
| Investing activities                                                                      |       |     |       |     |       |     |       |
| Cash paid for acquisitions of assets of  certain businesses                               |       | —   |       | —   |       | (2,452   | )          |
| Capital expenditures                                                                      |       | (2,010   | )          | (7,682   | )          | (6,553   | )          |
| Cash proceeds from sale of property and  equipment                                        |       | 2,807    |       | 193      |       | 347      |       |
| Net cash provided by (used in) investing  activities                                      |       | 797      |       | (7,489   | )          | (8,658   | )          |
|                                                                                      |       |     |       |     |       |     |       |
| Financing activities                                                                      |       |     |       |     |       |     |       |
| Long-term borrowings                                                                      |       | —   |       | —   |       | 5,000    |       |
| Repayment of long-term debt                                                               |       | (2,029   | )          | (2,200   | )          | (2,000   | )          |
| Repayment of note issued for acquisition                                                  |       | —   |       | (666     | )          | (344     | )          |
| (Repayments) borrowings on revolving credit  line, net                                    |       | (1,500   | )          | 7,900    |       | —   |       |
| Payments to acquire treasury stock                                                        |       | (19      | )          | (93      | )          | —   |       |
| Net cash (used in) provided by financing  activities                                      |       | (3,548   | )          | 4,941    |       | 2,666    |       |
| Net (decrease) increase in cash and cash  equivalents                                     |       | (2,229   | )          | 556      |       | (4,059   | )          |
|                                                                                      |       |     |       |     |       |     |       |
| Cash and cash equivalents                                                                 |       |     |       |     |       |     |       |
| Beginning of year                                                                         |       | 3,326    |       | 2,770    |       | 6,829    |       |
| End of year                                                                               |       | $        | 1,097      |     | $          | 3,326    |       | $ | 2,770 |   |
|                                                                                      |       |     |       |     |       |     |       |
| Supplemental disclosures of cash flow items                                               |       |     |       |     |       |     |       |
| Cash paid (received) during the year                                                      |       |     |       |     |       |     |       |
| Interest                                                                                  |       | $        | 1,409      |     | $          | 1,402    |       | $ | 1,041 |   |
| Income taxes, net                                                                         |       | (151     | )          | 568      |       | 665      |       |
| Supplemental disclosures of noncash  investing and financing activities                   |       |     |       |     |       |     |       |
| Capital expenditures purchased on account                                                 |       | $        | 165        |     | $          | —   |       | $ | — |   |
| Buyer’s assumption of liabilities                                                    |       | 85       |       | —   |       | —   |       |
| Note issued as partial consideration for  acquisition                                     |       | —   |       | —   |       | 1,000    |       |

 

The accompanying notes are an integral partof the financial statements.

 

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**Continental Materials Corporation**

**Consolidated Balance Sheets As of January 3,2009 and December 29, 2007**

(Amounts in thousands except share data)

 
| ** **                                                                           | ** ** | **January 3, 2009** | ** ** | **December 29, 2007** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| ASSETS                                                                               |       |                          |       |                            |       |
| Current assets                                                                       |       |                          |       |                            |       |
| Cash and cash equivalents                                                            |       | $                             | 1,097      |                            | $          | 3,326 |   |
| Receivables less allowance of $445 and $530                                          |       | 22,062                        |       | 22,652                          |       |
| Receivable for insured losses                                                        |       | 1,604                         |       | 1,548                           |       |
| Inventories                                                                          |       | 23,426                        |       | 19,227                          |       |
| Prepaid expenses                                                                     |       | 1,259                         |       | 2,309                           |       |
| Refundable income taxes                                                              |       | 654                           |       | 629                             |       |
| Deferred income taxes                                                                |       | 2,341                         |       | 2,570                           |       |
| Total current assets                                                                 |       | 52,443                        |       | 52,261                          |       |
|                                                                                 |       |                          |       |                            |       |
| Property, plant and equipment                                                        |       |                          |       |                            |       |
| Land and improvements                                                                |       | 2,311                         |       | 2,365                           |       |
| Buildings and improvements                                                           |       | 20,190                        |       | 22,572                          |       |
| Machinery and equipment                                                              |       | 81,539                        |       | 81,148                          |       |
| Mining properties                                                                    |       | 6,622                         |       | 5,553                           |       |
| Less accumulated depreciation and depletion                                          |       | (79,706                       | )          | (76,721                         | )          |
|                                                                                 |       | 30,956                        |       | 34,917                          |       |
|                                                                                 |       |                          |       |                            |       |
| Other assets                                                                         |       |                          |       |                            |       |
| Goodwill                                                                             |       | 7,829                         |       | 7,829                           |       |
| Amortizable intangible assets                                                        |       | 872                           |       | 1,198                           |       |
| Prepaid royalties                                                                    |       | 1,069                         |       | 1,054                           |       |
| Long-term note receivable                                                            |       | —                        |       | 752                             |       |
| Other                                                                                |       | 497                           |       | 499                             |       |
|                                                                                 |       | $                             | 93,666     |                            | $          | 98,510 |   |
|                                                                                 |       |                          |       |                            |       |
| LIABILITIES                                                                          |       |                          |       |                            |       |
| Current liabilities                                                                  |       |                          |       |                            |       |
| Current portion of long-term debt                                                    |       | 1,164                         |       | 2,400                           |       |
| Accounts payable                                                                     |       | 9,542                         |       | 7,558                           |       |
| Income taxes                                                                         |       | 148                           |       | 19                              |       |
| Accrued expenses                                                                     |       |                          |       |                            |       |
| Compensation                                                                         |       | 1,641                         |       | 2,586                           |       |
| Reserve for self-insured losses                                                      |       | 3,095                         |       | 4,067                           |       |
| Liability for unpaid claims covered by  insurance                                    |       | 1,604                         |       | 1,548                           |       |
| Profit sharing                                                                       |       | 268                           |       | 869                             |       |
| Reclamation                                                                          |       | 260                           |       | 340                             |       |
| Other                                                                                |       | 2,326                         |       | 2,492                           |       |
| Total current liabilities                                                            |       | 20,048                        |       | 21,879                          |       |
|                                                                                 |       |                          |       |                            |       |
| Revolving bank loan payable                                                          |       | 6,400                         |       | 7,900                           |       |
| Long-term debt                                                                       |       | 9,607                         |       | 10,400                          |       |
| Deferred income taxes                                                                |       | 3,414                         |       | 3,848                           |       |
| Accrued reclamation                                                                  |       | 845                           |       | 780                             |       |
| Other long-term liabilities                                                          |       | 724                           |       | 1,016                           |       |
| Commitments and contingencies (Note 6)                                               |       |                          |       |                            |       |
|                                                                                 |       |                          |       |                            |       |
| SHAREHOLDERS’ EQUITY                                                            |       |                          |       |                            |       |
| Common shares, $.25 par value; authorized  3,000,000 shares; issued 2,574,264 shares |       | 643                           |       | 643                             |       |
| Capital in excess of par value                                                       |       | 1,830                         |       | 1,830                           |       |
| Retained earnings                                                                    |       | 66,770                        |       | 66,810                          |       |
| Treasury shares, at cost                                                             |       | (16,615                       | )          | (16,596                         | )          |
|                                                                                 |       | 52,628                        |       | 52,687                          |       |
|                                                                                 |       | $                             | 93,666     |                            | $          | 98,510 |   |

 

The accompanying notes are an integral partof the financial statements.

 

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**Continental Materials Corporation**

**Consolidated Statements of Shareholders’ Equity**

**For Fiscal Years 2008, 2007 and 2006**

(Amounts in thousands except share data)

 
| ** **                                                      | ** ** | **Common  shares** | ** ** | **Common  shares  amount** | ** ** | **Capital  in excess  of par** | ** ** | **Retained  earnings** | ** ** | **Accum. other  comprehensive  income (loss)** | ** ** | **Treasury  shares** | ** ** | **Treasury  shares cost** | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|------------------------------------------|------------|------------------------|------------|----------------------------------------------------------|------------|----------------------|------------|--------------------------------|------------|
| Balance at December 31, 2005                               |       | 2,574,264          |       | $                          | 643        |                                     | $          | 1,830                  |       | $                                                        | 65,331     |                 | $          | 6                              |       | 968,803 |   | $ | 16,503 |   |
| Net income                                                      |       | —             |       | —                     |       | —                                   |       | 2,042                  |       | —                                                   |       | —               |       | —                         |       |
| Comprehensive income from interest rate  swap, net of tax of $3 |       | —             |       | —                     |       | —                                   |       | —                 |       | (6                                                       | )          | —               |       | —                         |       |
| Balance at December 30, 2006                               |       | 2,574,264          |       | 643                        |       | 1,830                                    |       | 67,373                 |       | —                                                   |       | 968,803              |       | 16,503                         |       |
| Net (loss)                                                      |       | —             |       | —                     |       | —                                   |       | (563                   | )          | —                                                   |       | —               |       | —                         |       |
| Purchase of treasury                                            |       | —             |       | —                     |       | —                                   |       | —                 |       | —                                                   |       | 3,367                |       | 93                             |       |
| Balance at December 29, 2007                               |       | 2,574,264          |       | 643                        |       | 1,830                                    |       | 66,810                 |       | —                                                   |       | 972,170              |       | 16,596                         |       |
| Net (loss)                                                      |       | —             |       | —                     |       | —                                   |       | (40                    | )          | —                                                   |       | —               |       | —                         |       |
| Purchase of treasury shares                                     |       | —             |       | —                     |       | —                                   |       | —                 |       | —                                                   |       | 3,816                |       | 19                             |       |
| Balance at January 3, 2009                                 |       | 2,574,264          |       | $                          | 643        |                                     | $          | 1,830                  |       | $                                                        | 66,770     |                 | $          | —                         |       | 975,986 |   | $ | 16,615 |   |

 

The accompanying notes are an integral partof the financial statements.

 

27

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**Notes to Consolidated Financial Statements**

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

PRINCIPLES OFCONSOLIDATION

 

Theconsolidated financial statements include Continental Materials Corporation andall of its subsidiaries (the Company). Intercompany transactions and balanceshave been eliminated.

 

RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS

 

InApril 2008, the Financial Accounting Standards Board (FASB) issued FASBStaff Position 142-3, “Determination of the Useful Life of Intangible Assets”(FSP 142-3) which amends the list of factors an entity should consider indeveloping renewal of extension assumptions used to determine the useful lifeof a recognized intangible asset under Statement of Financial AccountingStandard (SFAS) No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142).FSP 142-3 applies to intangible assets that are acquired individually or with agroup of asset and intangible assets acquired in both business combinations andasset acquisitions. FSP 142-3 removes the provision under SFAS No. 142that requires an entity to consider whether the renewal or extension can beaccomplished without substantial cost or material modification of the existingterms and conditions associated with the asset. Instead, FSP 142-3 requiresthat an entity consider its own experience in renewing similar arrangements. Anentity would consider market participant assumptions regarding renewal if nosuch relevant experience exits. FSP 142-3 is effective for the Companybeginning January 4, 2009, the first day of fiscal 2009. The Company doesnot expect the provisions to have a material impact on its consolidatedfinancial statements.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures AboutDerivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133”.The new statement requires expanded disclosure about an entity’s derivativeinstruments and hedging activities. It is effective for fiscal years beginningafter November 15, 2008, including interim periods within those fiscalyears, with early application encouraged. The disclosures are required only forthose derivative instruments and related hedged items accounted for under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities” and its relatedinterpretations (including nonderivative instruments that are designated andqualify as hedging instruments). At January 3, 2009, the Company did nothave any derivative or hedging activities that were addressed by thispronouncement.

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements,” (SFAS No. 157) which defines fair value, establishes aframework for measuring fair value in accounting principles generally acceptedin the United States of America (GAAP), and expands disclosures about fairvalue measurements. The adoption of SFAS No. 157 was effective January 1,2008 for financial assets and liabilities. In February 2008, the FASBissued FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157,”(FSP No. 157-2). FSP No. 157-2 delays the effective date of SFAS No. 157related to non-financial assets and liabilities to January 1, 2009. In October 2008,the FASB issued FASB Staff Position No. 157-3, “Determining the Fair Valueof a Financial Asset When the Market for That Asset is Not Active,” (FSP No. 157-3).FSP No. 157-3 clarifies the application of SFAS No. 157 to financialassets in a market that is not active and provides an example to illustrate theconsiderations in determining the fair value of a financial asset when themarket for that financial asset is not active. The adoption of SFAS No. 157for financial assets and liabilities on December 30, 2007, the first dayof the Company’s fiscal 2008, did not have a significant effect on theconsolidated financial statements and the Company does not anticipate that theadoption of this pronouncement for non-financial assets and liabilities willhave a significant effect on its consolidated financial statements. SFAS No. 157disclosures are included in the “Fair Value of Financial Instruments” sectionwithin this Note 1 to the consolidated financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, The Fair Value Optionfor Financial Assets and Financial Liabilities. This statement permits entitiesto choose to measure many financial instruments and certain other items at fairvalue. This statement was effective as of the beginning of the first fiscalyear beginning after November 15, 2007. Upon adoption of SFAS No. 159by the Company, it did not elect the fair value option for any assets orliabilities. Therefore this statement had no impact on the Company’sconsolidated financial position, results of operations and cash flows.

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations—a replacement ofFASB No. 141” (SFAS No. 141(R)). SFAS No. 141(R) requires (a) acompany to recognize the assets acquired, the liabilities assumed, and anynon-controlling interest in the acquiree at fair value as of the acquisitiondate; and (b) an acquirer in pre-acquisition periods to expense allacquisition-related costs. SFAS No. 141(R) also requires that anyadjustments to an acquired entity’s deferred tax asset, valuation allowance,cash contingency, or deferred tax liability balance that occur after the measurementperiod be recorded as a component of income tax expense. This accountingtreatment is required for business combinations consummated before theeffective date of SFAS No. 141(R) (non-prospective); otherwise SFAS No. 141(R) mustbe applied prospectively. The presentation and disclosure requirements must beapplied retrospectively to provide comparability in the financial statements.Early adoption is prohibited. SFAS No. 141(R) is effective for fiscalyears, and interim periods within 

 

28

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those fiscal years,beginning on or after December 15, 2008. The Company will be required tocomply with the provisions of this statement for any business combinationssubsequent to December 15, 2008.

 

USE OF ESTIMATESIN THE PREPARATION OF FINANCIAL STATEMENTS

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States (GAAP) requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of January 3,2009 and December 29, 2007 and the reported amounts of revenues andexpenses during each of the three years in the period ended January 3,2009. Actual results could differ from those estimates.

 

CASH AND CASHEQUIVALENTS

 

TheCompany considers all highly-liquid debt instruments purchased with a maturityof three months or less to be cash equivalents.

 

FAIRVALUE OF FINANCIAL INSTRUMENTS

 

EffectiveDecember 30, 2007, the Company adopted SFAS No. 157, which provides aframework for measuring fair value under GAAP. The adoption of this statementhad an immaterial impact on our consolidated financial statements. The Companyalso adopted the deferral provisions of FSP No. 157-2, which delays theeffective date of SFAS No. 157 for all nonrecurring fair valuemeasurements of non-financial assets and liabilities until fiscal yearsbeginning after November 15, 2008.

 

Fairvalue is defined as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. SFAS No. 157 alsoexpands disclosures about instruments measured at fair value and establishes afair value hierarchy which requires an entity to maximize the use of observableinputs and minimize the use of unobservable inputs when measuring fair value.The standard describes three levels of inputs that may be used to measure fairvalue:

 

Level1 — Quoted prices for identical assets and liabilities in active markets;

 

Level2 — Quoted prices for similar assets and liabilities in active markets; quotedprices for identical or similar assets and liabilities in markets that are notactive; and model-derived valuations in which all significant inputs andsignificant value drivers are observable in active markets; and

 

Level3 — Valuations derived from valuation techniques in which one or moresignificant inputs or significant value drivers are unobservable.

 

TheCompany designates cash equivalents as Level 1, as they are money marketaccounts backed by U. S. Treasury Bills. As of January 3, 2009, and December 29,2007, the Company did not have any cash equivalents, therefore there were noassets measured at fair value.

 

Thefair value of the Company’s debt as of January 3, 2009 and December 29,2007 approximated fair value at those times. The fair value of long-term debtis estimated based on current borrowing rates for similar issues, which is notmaterially different from the recorded value.

 

INVENTORIES

 

Inventories are valued at the lower of costor market and are reviewed periodically for excess or obsolete stock with aprovision recorded, where appropriate. Cost for inventory in the HVAC industrygroup (see Note 13) is determined using the last-in, first-out (LIFO) method.These inventories represent approximately 78% of total inventories at January 3,2009 (76% at December 29, 2007). The cost of all other inventory isdetermined by the first-in, first-out (FIFO) or average cost methods.

 

PROPERTY,PLANT AND EQUIPMENT

 

Property,plant and equipment are carried at cost. Depreciation is provided over theestimated useful lives of the related assets using the straight-line method asfollows:

 
| Buildings               |   | 10 to 31 years                                  |
|-------------------------|--------|-------------------------------------------------|
| Leasehold improvements  |   | Shorter of the term of the lease or useful life |
| Machinery and equipment |   | 3 to 20 years                                   |

 

Depletionof rock and sand deposits and amortization of deferred development costs arecomputed by the units-of-production method based upon estimated recoverablequantities of rock and sand. The estimated recoverable quantities areperiodically reassessed.

 

29

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Thecost of property sold or retired and the related accumulated depreciation,depletion and amortization are removed from the accounts and the resulting gainor loss is reflected in operating income. Maintenance and repairs are chargedto expense as incurred. Major renewals and betterments are capitalized anddepreciated over their estimated useful lives.

 

TheCompany recorded a long-lived asset impairment charge of $758,000 at January 3,2009 against the property, plant and equipment of RMRM. See “Impairment ofLong-Lived Assets” below.

 

OTHER ASSETS

 

Goodwill,of which $6,829,000 relates to the Concrete, Aggregates and ConstructionSupplies segment and $1,000,000 relates to the Door segment, is not amortizedbut rather assessed for impairment as of the end of each fiscal year. To theextent that events occur, either involving the relevant Company subsidiaries orin their industries, the Company revisits its assessment of the recordedgoodwill to determine if impairment has occurred and should be immediately recognized.No impairment was recognized for any of the periods presented.

 

Amortizableintangible assets consist of non-compete agreements, a restrictive landcovenant and customer relationships valued in conjunction with variousacquisitions. These amounts are being amortized on a straight line basis overthe respective lives of the agreements which range from four to ten yearsexcept for the customer relationships amount which is being amortized over itsestimated life of ten years using the sum-of-the-years digits method. As of January 3,2009, it was determined that an impairment of assets in the Concrete,Aggregates and Construction Supplies segment had occurred and, accordingly animpairment charge of $26,000 was recorded against one of the non-compete agreementsfor that segment. See Note 4.

 

TheCompany is party to various aggregates leases related to operations of theConcrete, Aggregates and Construction Supplies segment which require royaltypayments based upon tons mined. These leases call for minimum annual royaltypayments. Prepaid royalties relate to payments made for materials not yetmined.

 

RETIREMENTPLANS

 

TheCompany and certain subsidiaries have various contributory profit sharingretirement plans for specific employees. The plans allow qualified employees tomake tax deferred contributions pursuant to Internal Revenue Code Section 401(k).The Company matches employee contributions up to 3%. In addition, the Companymakes annual contributions, at its discretion, based primarily on profitability.Costs under the plans are charged to operations as incurred.

 

RESERVE FORSELF-INSURED AND INSURED LOSSES

 

TheCompany’s risk management program provides for certain levels of loss retentionfor workers’ compensation, automobile liability and general and productliability claims. The components of the reserve for self-insured losses havebeen recorded in accordance with the requirements of SFAS No. 5, “Accountingfor Contingencies” (SFAS No. 5) and represent management’s best estimateof the future liability related to these claims up to the associateddeductible.

 

FASBInterpretation No. 39, “Offsetting of Amounts Related to CertainContracts,” requires an entity to accrue the gross amount of a loss even if theentity has purchased insurance to cover the loss. Therefore the Company hasrecorded losses for workers’ compensation, automobile liability and general andproduct liability claims in excess of the deductible amounts, i.e., amountscovered by insurance contracts, in “Liability for unpaid claims covered byinsurance” with a corresponding “Receivable for insured losses” on the balancesheet. The components of the liability have been recorded in accordance withthe requirements of SFAS No. 5 and represent both unpaid settlements andmanagement’s best estimate of the future liability related to open claims.Management has evaluated the credit worthiness of our insurance carriers anddetermined that recovery of the recorded losses is probable and, therefore, thereceivable from insurance has been recorded for the full amount of the insuredlosses.

 

RECLAMATION

 

Inconnection with permits to mine properties in Colorado, the Company isobligated to reclaim the mined areas whether the property is owned or leased.The Company records a reserve for future reclamation work to be performed atits various aggregate operations based upon an estimate of the total expensethat will be incurred to reclaim the disturbed areas. Reclamation expense isprovided during the interim periods using the units-of-production method. Theadequacy of the recorded reserve is assessed quarterly. At each fiscalyear-end, a more formal and complete analysis is performed and the expense andreserve is adjusted to reflect the estimated cost to reclaim the then disturbedand unreclaimed areas. The assessment of the reclamation liability may be donemore frequently if events or circumstances arise that may indicate a change inestimated costs, recoverable material or period of mining activity. As part ofthe year-end analysis, the Company engages an independent specialist to assistin reevaluating the estimates of both the quantities of recoverable materialand the cost of reclamation. Most of the reclamation on any mining property isgenerally performed soon after each section of the deposit is mined. TheCompany’s reserve for reclamation activities was $1,105,000 at January 3,2009 and $1,120,000 at

 

30

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December 29,2007. The Company classifies a portion of the reserve as a current liability,$260,000 at January 3, 2009 and $340,000 at December 29, 2007, basedupon a rolling three-year average of actual reclamation spending.

 

REVENUERECOGNITION

 

TheCompany recognizes revenue as products are shipped to customers. Sales arerecorded net of applicable provisions for discounts, volume incentives, returnsand allowances. At the time of revenue recognition, the Company also providesan estimate of potential bad debt and warranty expense as well as an amountanticipated to be granted to customers under cooperative advertising programsbased upon current program terms and historical experience. In accordance withthe Emerging Issues Task Force Issue 00-10, “Accounting for Shipping andHandling Revenues and Costs,” revenues received for shipping and handling areincluded in sales while the costs associated with shipping and handling arereported as cost of sales.

 

TheCompany is responsible for warranty related to the manufacture of its HVACproducts. The Company does not perform installation services except forinstallation of electronic access systems in the Door segment, nor aremaintenance or service contracts offered. Changes in the aggregated productwarranty liability for the fiscal years 2008 and 2007 were as follows (amountsin thousands):

 
| ** **                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Beginning balance             |       | $        | 100        |     | $          | 106 |   |
| Warranty related expenditures |       | (413     | )          | (349     | )          |
| Warranty expense accrued      |       | 413      |       | 343      |       |
| Ending balance                |       | $        | 100        |     | $          | 100 |   |

 

INCOME TAXES

 

Incometaxes are reported consistent with SFAS No. 109, “Accounting for IncomeTaxes.” Income taxes are accounted for under the asset and liability methodthat requires deferred income taxes to reflect the future tax consequencesattributable to differences between the tax and financial reporting bases ofassets and liabilities. Deferred tax assets and liabilities recognized arebased on the tax rates in effect in the year in which differences are expectedto reverse. Deferred tax assets are reduced by a valuation allowance when,based on available positive and negative evidence, it is “more likely than not”(greater than a 50% likelihood) that some or all of the net deferred tax assetswill not be realized.

 

Ourincome tax returns are subject to audit by the Internal Revenue Service (IRS)and state tax authorities. The amounts recorded for income taxes reflect ourtax positions based on research and interpretations of complex laws andregulations. We accrue liabilities related to uncertain tax positions taken orexpected to be taken in a tax return in accordance with FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109” (FIN 48).

 

CONCENTRATIONOF CREDIT RISK

 

Financialinstruments, which potentially subject the Company to concentrations of creditrisk, consist principally of trade receivables and temporary cash investments.The Company invests its excess cash in commercial paper of companies withstrong credit ratings. The Company has not experienced any losses on theseinvestments.

 

TheCompany performs ongoing credit evaluations of its customers and generally doesnot require collateral. In many instances in the Concrete, Aggregates andConstruction Supplies segment and in the Heating and Cooling segment (as itrelates to the fan coil product line), the Company retains lien rights on theproperties served until the receivable is collected. The Company maintainsallowances for potential credit losses based upon the aging of accountsreceivable and historical experience and such losses have been withinmanagement’s expectations. See Note 13 for a description of the Company’scustomer base.

 

IMPAIRMENT OF LONG-LIVED ASSETS

 

Inthe event that facts and circumstances indicate that the cost of any long-livedassets may be impaired, an evaluation of recoverability would be performed inaccordance with SFAS No. 144, “Impairment of Long-Lived Assets.” If anevaluation were required, the estimated future undiscounted cash flowsassociated with the asset would be compared to the asset’s carrying amount todetermine if a write-down to market value or discounted cash flow value isrequired. The Company is currently evaluating potential alternative operatingand strategic plans related to RMRM within the Company’s Concrete, Aggregatesand Construction Supplies segment. As part of this evaluation, the Companyconsidered whether or not the assets of RMRM were recoverable in accordancewith SFAS No. 144. The Company determined that the fair value of assetsassociated with RMRM within the Company’s Concrete, Aggregates and ConstructionSupplies segment were below carrying value, resulting in an impairment charge.The fair value was determined using the current fair value of similar assets inthe marketplace. The impairment reduced the book carrying value of property,plant and equipment by $758,000 and the

 

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covenantnot to compete by $26,000. There were no other impairments identified relatedto the long-lived assets. See the discussion of Property, Plant and Equipmentin Note 1 and Note 4.

 

FISCAL YEAREND

 

TheCompany’s fiscal year end is the Saturday nearest December 31. Fiscal 2008consisted of 53 weeks while fiscal 2007 and 2006 each consisted of 52 weeks.

 

2.BUSINESS ACQUISITIONS

 

On June 30, 2006 the Company purchased certain assets of ASCI, aconcrete producer in Colorado Springs, for $2,100,000 of cash and a $1,000,000Note. The assets were acquired by TMC in the Concrete, Aggregates and ConstructionSupplies segment. The final purchase price allocation included $1,735,000 ofplant and equipment, $290,000 for a non-compete agreement, $350,000 for arestriction of land use covenant, $370,000 for existing customer relations and$355,000 of goodwill, all of which is amortizable over 15 years for income taxpurposes. The non-compete agreement is being amortized over its five-year termwhile the restriction of land use covenant and the customer relations are beingamortized over its term and estimated life, respectively, of ten years each.The weighted average amortization period for the intangibles associated withthe ASCI acquisition is approximately 8.6 years.

 

The purchase was accounted for as acquisitions of a business under SFASNo. 141, “Standards of Accounting for Business Combinations”. Theconsolidated results of operations include ASCI’s operations since the date ofacquisition.

 

The following unaudited pro forma summary financial informationsummarizes the estimated combined results of operations of the Company and ASCIassuming that the acquisition of ASCI had taken place on January 1, 2006.The unaudited pro forma combined results of operations were prepared on thebasis of information provided to the Company by the former management of ASCIand no representation is made by the Company with respect to the accuracy ofsuch information. The pro forma combined results of operations reflectadjustments for interest expense, additional depreciation based on the fairmarket value of plant and equipment, amortization of identifiable intangiblesand income tax expense. The pro forma financial information for the year ended December 30,2006 includes the results of ASCI from January 1, 2006 through April 30,2006, as adjusted for the items noted above. ASCI’s interim financialinformation for May and June of 2006 were not made available to theCompany. Amounts are in thousands except per share amounts.

 
| ** **                 | ** ** | **Year Ended  December 30, 2006  (Unaudited)** | ** ** |
|----------------------------|------------|---------------------------------------------------------------|------------|
| Net sales                  |       | $                                                             | 161,063    |   |
| Net income                 |       | 2,069                                                         |       |
| Basic earnings per share   |       | 1.29                                                          |       |
| Diluted earnings per share |       | 1.29                                                          |       |
|                            |            |                                                               |            |  |

 

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

 

3. INVENTORIES

 

Inventories consisted of the following(amounts in thousands):

 
| ** **                 | ** ** | **January 3, 2009** | ** ** | **December 29, 2007** | ** ** |
|----------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| Finished goods             |       | $                             | 9,421      |                            | $          | 7,940 |   |
| Work in process            |       | 1,477                         |       | 1,372                           |       |
| Raw materials and supplies |       | 12,528                        |       | 9,915                           |       |
|                       |       | $                             | 23,426     |                            | $          | 19,227 |   |

 

Ifinventories valued on the LIFO basis were valued at current costs, inventorieswould be higher by $6,407,000 and $4,872,000 at January 3, 2009 and December 29,2007 respectively.

 

Reductionsin inventory quantities during 2007 at two locations and 2006 at one locationresulted in liquidation of LIFO inventory layers carried at costs lower thanthe costs of current purchases. The effect was not material in either year.

 

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4. GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS

 

Goodwill,of which $6,829,000 relates to the Concrete, Aggregates and ConstructionSupplies segment and $1,000,000 relates to the Door segment, is not amortizedbut rather assessed for impairment as of the end of each fiscal year inaccordance with SFAS No. 142. To the extent that events occur during theyear, either involving the relevant Company subsidiaries or in theirindustries, the Company revisits its assessment of the recorded goodwill todetermine if impairment has occurred and should be immediately recognized. Noimpairment was recognized for any of the other periods presented.

 

Therewere no changes in recorded goodwill for the year ended January 3, 2009.

 

Identifiableintangible assets consist of the following (amounts in thousands):

 
| ** **                   | ** ** | **January 3, 2009** | ** ** | **December 29, 2007** | ** ** |
|------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **Gross**                     | ** ** | ** **                      | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **carrying**                  | ** ** | **Accumulated**                 | ** ** | **carrying** | ** ** | **Accumulated** | ** ** |
| ** **                   | ** ** | **amount**                    | ** ** | **amortization**                | ** ** | **amount** | ** ** | **amortization** | ** ** |
| Amortized intangible assets: |       |                          |       |                            |       |   |   |   |   |
| Non-compete agreements       |       | $                             | 1,640      |                            | $          | 1,247 |   | $ | 2,390 |   | $ | 1,763 |   |
| Restrictive land covenant    |       | 350                           |       | 87                              |       | 350 |   | 51 |   |
| Customer relationships       |       | 370                           |       | 154                             |       | 370 |   | 98 |   |
|                         |       | $                             | 2,360      |                            | $          | 1,488 |   | $ | 3,110 |   | $ | 1,912 |   |

 

Theabove intangible assets include non-compete agreements that were signed at thetime the Company acquired the Pueblo operations (October 21, 1996), all ofthe stock of RMRM (December 31, 2000), all of the stock of MDHI (April 1,2002), the assets of CSSL (January 1, 2006) and the assets of ASCI (June 30,2006). Amortization of these amounts is computed on a straight-line basis overthe agreement periods which range from four to ten years. The Company recordedan asset impairment reserve of $26,000 at January 3, 2009 against thenon-compete agreement related to the purchase of RMRM, see discussion underImpairment of Long-Lived Assets in Note 1. Also included are a restrictive landcovenant and customer relationships value related to the ASCI acquisition.Amortization of the restrictive land covenant is computed on the straight-linebasis over the agreement period of ten years. Amortization of the customerrelations value is computed on the sum-of-the-years digits method over itsestimated life of ten years. Amortization expense for these intangible assetswas $301,000, $320,000 and $321,000 for 2008, 2007 and 2006, respectively. The estimatedamortization expense for the five subsequent fiscal years is as follows: 2009 —$279,000; 2010 — $249,000; 2011 — $101,000; 2012 — $65,000 and 2013 — $59,000.

 

5. REVOLVING CREDIT LINE AND LONG-TERM DEBT

 

Outstanding long-term debt consisted of thefollowing (amounts in thousands):

 
| ** **           | ** ** | **January 3, 2009** | ** ** | **December 29, 2007** | ** ** |
|----------------------|------------|-------------------------------|------------|---------------------------------|------------|
| Secured term loan    |       | $                             | 10,771     |                            | $          | 12,800 |   |
| Less current portion |       | (1,164                        | )          | (2,400                          | )          |
| Total long-term debt |       | $                             | 9,607      |                            | $          | 10,400 |   |

 

The outstanding revolving credit and term loan as of January 3,2009 was made available by two banks under the terms of a secured RevolvingCredit and Term Loan Agreement (Amended Credit Agreement), as amended on August 12,2008. Under the Amended Credit Agreement, the maximum revolving credit facilitywas $18,000,000 until December 31, 2008 at which time it was reduced to$15,000,000. Borrowings under the Amended Credit Agreement were secured by theCompany’s accounts receivable, inventory, machinery, equipment and vehicles. AtJanuary 3, 2009 the Company was in compliance with the terms of theAmended Credit Agreement.

 

TheAmended Credit Agreement provided that, at the Company’s option, the term loanand revolving credit facility would bear interest at prime or aperformance-based LIBOR rate. Based on the terms of the Amended CreditAgreement and the Company’s performance for the twelve months ended January 3,2009, the performance based rate would be LIBOR plus 3.00% for both the termloan and borrowings under the revolving credit facility.****TheAmended Credit Agreement also required the Company to maintain certain levelsof EBITDA (earnings before interest, income taxes, depreciation andamortization) or debt service coverage, consolidated tangible net worth and tomaintain certain ratios including consolidated debt to cash flow (as defined).Additional borrowings, acquisition of stock of other companies, purchase oftreasury shares and payment of cash dividends were either limited or requireprior approval by the lenders. Payment of accrued interest was due and paidquarterly by the Company. Principal payments under the term loan were duequarterly with a final payment of all remaining unpaid principal due March 31,2011. The revolving credit line was used for seasonal or short-term cash needsand stand-by letters of credit. At January 3, 2009 the Company hadoutstanding stand-by letters of credit of $4,510,000 of which $4,490,000 wasissued to an insurance company to collateralize the self-insured amounts underthe Company’s risk management program. The weighted average interest rate forall debt was 5.3% for fiscal year 2008 and 7.0% for fiscal year 

 

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2007.There was $6,400,000 of outstanding borrowings under the revolving credit lineat January 3, 2009. The banks’ commitment to provide revolving creditloans was scheduled to expire on July 31, 2009.

 

OnApril 16, 2009 the Company replaced the Amended Credit Agreement with anew secured new credit agreement (New Credit Agreement) whereby the new banklender will provide a total credit facility of $30,000,000 consisting of a$20,000,000 revolving credit facility (reduced by letters of credit that may beissued by the lender on the Company’s behalf) and a $10,000,000 term loanfacility. The Company’s outstanding standby letters of credit of $4,510,000reduce the borrowing capacity available under the revolving credit facilitysuch that the maximum that can be borrowed is $15,490,000. Borrowings under theNew Credit Agreement are secured by the Company’s accounts receivable,inventories, machinery, equipment, vehicles and certain real estate. Borrowingsunder the revolving credit facility are limited to 80% of eligible accountsreceivable and 50% of eligible inventories. Inventory borrowings are limited toa maximum of $10,000,000. Borrowings under the New Credit Agreement will bearinterest based on a performance based LIBOR or prime rate option. The baseLIBOR rate will not be less than 2% and the base prime rate will not be less4%. At inception of the New Credit Agreement the interest rate under the LIBORoption will be 5% and 4.75% under the prime rate option. The Company also paidcertain underwriting and arrangement fees at the time of closing.****The New Credit Agreement requires the Company to maintaincertain levels of tangible net worth and EBITDA (earnings before interest,income taxes, depreciation and amortization) or debt service coverage and tomaintain certain ratios including consolidated debt to cash flow (as defined)and adjusted EBITDA to interest expense and payments on funded debt. Additionalborrowings, acquisition of stock of other companies, purchase of treasuryshares and payment of cash dividends are either limited or require priorapproval by the lender. Payment of accrued interest is due monthly or at theend of the applicable LIBOR period on revolving credit borrowings and the termdebt borrowings. Principal payments under the term loan are due quarterly witha final payment of all remaining unpaid principal due April 16, 2012. TheCompany is required to enter into an interest rate swap agreement to hedge theinterest rate on a minimum amount of $5,000,000 of term debt.

 

Astandby letter of credit in the amount of $4,490,000 previously issued to aninsurance company to support self-insured amounts under the Company’s riskmanagement program, was drawn upon by the beneficiary in connection with theCompany’s New Credit Agreement. The proceeds of the letter of credit, which nowserve as cash collateral for the Company’s self-insured amounts under theCompany’s risk management program, was drawn upon by the beneficiary inconnection with the Company’s New Credit Agreement. The proceeds of the letterof credit, which now serve as cash collateral for the Company’s self-insuranceobligations, are treated as a revolving credit loan under the New CreditAgreement.

 

After giving effect to the New CreditAgreement aggregate, term loan payments are scheduled as follows (amounts inthousands):

 
| 2009 (a) |   | $     | 1,164  |   |
|----------|--------|-------|--------|--------|
| 2010     |   | 1,375 |   |
| 2011     |   | 1,875 |   |
| 2012     |   | 6,000 |   |
|     |   | $     | 10,414 |   |

 

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(a)          The2009 amount includes $414,000 paid April 2, 2009 on the Amended CreditAgreement and payments of $250,000 at the end of each of the three remainingquarters of 2009 under the New Credit Agreement. In addition, the remaining$357,000 of principal due under the Amended Credit Agreement was repaid onApril 16, 2009 with proceeds from the revolving credit facility under the NewCredit Agreement and is not included in the above table.

 

6. COMMITMENTS AND CONTINGENCIES

 

TheCompany is involved in litigation matters related to its business, principallyproduct liability matters related to the gas-fired heating products in theHeating and Cooling segment. In the Company’s opinion, none of theseproceedings, when concluded, will have a material adverse effect on the Company’sconsolidated results of operations, cash flows or financial condition as theCompany has established adequate accruals for matters that are probable andestimable.

 

7. SHAREHOLDERS’ EQUITY

 

Fourhundred thousand shares of preferred stock ($.50 par value) are authorized andunissued.

 

8. EARNINGS PER SHARE

 

TheCompany computes earnings per share (EPS) in accordance with SFAS No. 128,“Earnings Per Share.” There are no differences between the calculation of basicand diluted EPS for the fiscal years 2008, 2007 and 2006.

 

9. RENTAL EXPENSE, LEASES AND COMMITMENTS

 

TheCompany leases certain of its facilities and equipment and is required to paythe related taxes, insurance and certain other expenses. Rental expense was $3,206,000,$3,788,000 and $3,443,000 for 2008, 2007 and 2006, respectively.

 

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Futureminimum rental commitments under non-cancelable operating leases for 2009 andthereafter are as follows: 2009 — $2,064,000; 2010 — $1,554,000; 2011 —$1,481,000; 2012 — $1,382,000; 2013 — $1,174,000 and thereafter — $20,036,000.Included in these amounts is $418,000 per year and approximately $18,828,000 inthe “thereafter” amount related to minimum royalty payments due on anaggregates property lease in conjunction with the Pueblo, Colorado operation.Also included in these amounts is $235,000 per year and approximately $412,000in the “thereafter” amount related to a ground lease upon which the Companyowns a building leased to a third party for approximately $344,000 per year.The ground lease runs through October 1, 2016 and contains a renewalclause. The building lease runs through January 31, 2013.

 

10. RETIREMENT PLANS

 

Asdiscussed in Note 1, the Company maintains defined contribution retirementbenefit plans for eligible employees. Total plan expenses charged to operationswere $779,000, $731,000 and $2,206,000 in 2008, 2007 and 2006, respectively.

 

11. INCOME TAXES

 

The provision (benefit) for income taxes issummarized as follows (amounts in thousands):

 
| ** ** | ** ** | ** ** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Federal:   |       | Current    |       | $        | 19         |     | $          | (634     | )          | $ | 813 |   |
|       |       | Deferred   |       | (180     | )          | 26       |       | 38       |       |
| State:     |       | Current    |       | (65      | )          | (10      | )          | 89       |       |
|       |       | Deferred   |       | (25      | )          | (287     | )          | 175      |       |
|       |       |       |       | $        | (251       | )        | $          | (905     | )          | $ | 1,115 |   |

 

Notethat the percentage effect of an item on the statutory tax rate in a given yearwill fluctuate based upon the magnitude of the pre-tax profit or loss in thatyear. The difference between the tax rate on income for financial statementpurposes and the federal statutory tax rate was as follows:

 
| ** **                                        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory tax rate                                |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| Percentage depletion                              |       | 66.9     |       | 19.4     |       | (5.4     | )          |
| Non-deductible meals and entertainment            |       | (10.5    | )          | (2.4     | )          | 1.2      |       |
| American Jobs Creation Act credit                 |       | —   |       | —   |       | (.7      | )          |
| Other non-deductible expenses                     |       | (1.3     | )          | (2.4     | )          | .2       |       |
| FIN 48 change in reserves                         |       | (8.8     | )          | 1.5      |       | (.2      | )          |
| Valuation allowance for tax assets                |       | (20.1    | )          | (11.0    | )          | —   |       |
| Net effect of settling Federal and State  returns |       | 15.8     |       | .5       |       | —   |       |
| State income taxes, net of federal benefit        |       | 10.3     |       | 21.3     |       | 6.1      |       |
| Other                                             |       | (.3      | )          | .7       |       | .1       |       |
|                                              |       | 86.0     | %          | 61.6     | %          | 35.3     | %          |

 

Forfinancial statement purposes, deferred tax assets and liabilities are recordedat a blend of the current statutory federal and states’ tax rates — 37.96%. Theprincipal temporary differences and their related deferred taxes are as follows(amounts in thousands):

 
| ** **                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Reserves for self-insured losses       |       | $        | 854        |     | $          | 1,405 |   |
| Accrued reclamation                    |       | 419      |       | 425      |       |
| Deferred compensation                  |       | 194      |       | 357      |       |
| Asset valuation reserves               |       | 563      |       | 247      |       |
| Future state tax credits               |       | 760      |       | 760      |       |
| Net state operating loss carryforwards |       | 88       |       | 67       |       |
| Federal AMT carryforward               |       | 151      |       | —   |       |
| Other                                  |       | 671      |       | 156      |       |
| Valuation allowance                    |       | (220     | )          | (161     | )          |
| Total deferred tax assets              |       | 3,480    |       | 3,256    |       |
|                                   |       |     |       |     |       |
| Depreciation                           |       | 3,008    |       | 3,160    |       |
| Deferred development                   |       | 475      |       | 571      |       |
| Prepaid royalty                        |       | 406      |       | 252      |       |
| Other                                  |       | 664      |       | 551      |       |
| Total deferred tax liabilities         |       | 4,553    |       | 4,534    |       |
| Net deferred tax liability             |       | $        | (1,073     | )        | $          | (1,278 | ) |

 

35

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Atboth January 3, 2009 and December 29, 2007, the Company established avaluation reserve related to the carryforward of charitable contributionsdeductions arising in the current and prior years due to the uncertainty thatthe Company will be able to utilize these deductions prior to the expiration oftheir carryforward periods.

 

Thenet current deferred tax assets are $2,341,000 and $2,570,000 at year-end 2008and 2007, respectively.

 

On December 31, 2006, the first day of fiscal 2007, we adopted theprovisions of FIN 48. FIN 48 clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith SFAS No. 109 by prescribing a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. Under FIN 48, thefinancial statement effects of a tax position should initially be recognizedwhen it is more likely than not, based on the technical merits, that theposition will be sustained upon examination. A tax position that meets themore-likely-than-not recognition threshold should initially and subsequently bemeasured as the largest amount of tax benefit that has a greater than 50%likelihood of being realized upon effective settlement with a taxing authority.

 

There was no cumulative adjustment to retained earnings required as aresult of the implementation of FIN 48. The gross amount of unrecognized taxbenefits at January 3, 2009 was $431,000 compared to $328,000 at December 29,2007 and $290,000 at December 31, 2006. Of these totals, the amounts thatwould affect the effective tax rates were $81,000, $74,000 and $79,000,respectively.

 

We classify interest and penalties recognized on the liability for unrecognizedtax benefits as income tax expense. Accrued interest of $110,000 and penaltiesof $16,000 were included in our total liability for unrecognized tax benefitsas of January 3, 2009 compared to interest of $51,000 and penalties of$18,000 as of December 29, 2007 and interest of $68,000 and penalties of$17,000 as of December 31, 2006.

 

The United States Federal and various state statutes of limitationsexpire during the third quarter of 2009 for our 2005 tax year. Included in thebalance at January 3, 2009 is approximately $20,000 related to taxpositions expected to be resolved within 12 months of this reporting date.

 

We file income tax returns in the United States Federal and variousstate jurisdictions. The Internal Revenue Service has completed examinationsfor periods through 2004. Federal tax years 2005 through 2007 are eithercurrently under examination or remain subject to examination. Various stateincome tax returns also remain subject to examination.

 

A reconciliation of the beginning and ending amount of unrecognized taxbenefits is as follows (amounts in thousands):

 
| ** **                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at Beginning of Year                             |       | $        | 328        |     | $          | 290 |   |
| Additions for tax positions related to the  current year |       | 122      |       | 72       |       |
| Reductions for statute of limitations                    |       | (8       | )          | (10      | )          |
| Reductions for tax positions of prior years              |       | (11      | )          | (14      | )          |
| Settlements                                              |       | —   |       | (10      | )          |
| Balance at End of Year                                   |       | $        | 431        |     | $          | 328 |   |

 

12. UNAUDITED QUARTERLY FINANCIAL DATA

 

Thefollowing table provides summarized unaudited fiscal quarterly financial datafor 2008 and 2007 (amounts in thousands, except per share amounts):

 
| ** **                                | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** |
| 2008                                      |       |        |       |        |       |        |       |        |       |
| Sales                                     |       | $           | 34,512     |        | $          | 41,761      |       | $           | 41,454     |   | $ | 40,154 |   |
| Depreciation, depletion and amortization  |       | 1,335       |       | 1,318       |       | 1,267       |       | 1,215       |       |
| Operating (loss) profit                   |       | (1,479      | )          | 127         |       | 816         |       | 1,474       | (a)        |
| Net (loss) income                         |       | (1,131      | )          | (267        | )          | 350         |       | 1,008       |       |
| Basic and Diluted (loss) income per share |       | (.71        | )          | (.17        | )          | .22         |       | .63         |       |
|                                           |            |             |            |             |            |             |            |             |            |  |  |  |  |

 

36

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** **
| ** **                                | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** |
| 2007                                      |       |        |       |        |       |        |       |        |       |
| Sales                                     |       | $           | 40,079     |        | $          | 45,651      |       | $           | 42,288     |   | $ | 40,411 |   |
| Depreciation, depletion and amortization  |       | 1,315       |       | 1,322       |       | 1,309       |       | 1,338       |       |
| Operating (loss) profit                   |       | (292        | )          | 1,802       |       | (65         | )          | (1,999      | )          |
| Net (loss) income                         |       | (328        | )          | 1,186       |       | 10          |       | (1,431      | )          |
| Basic and Diluted (loss) income per share |       | (.20        | )          | .74         |       | .01         |       | (.89        | )          |
|                                           |            |             |            |             |            |             |            |             |            |  |  |  |  |

 

----

(a)          Fourth quarter 2008 results include a pre-tax gain on the sale of landof $1,947 and a pre-tax impairment charge for long-lived assets of $784.

 

Earnings per share are computed independentlyfor each of the quarters presented. Therefore, the sum of the quarterlyearnings per share may not equal the total for the year.

 

13. INDUSTRY SEGMENT INFORMATION

 

TheCompany operates primarily in two industry groups, HVAC and ConstructionProducts. The Company has identified two reportable segments in each of the twoindustry groups: the Heating and Cooling segment and the Evaporative Coolingsegment in the HVAC industry group and the Concrete, Aggregates andConstruction Supplies segment and the Door segment in the Construction Productsindustry group. The Heating and Cooling segment produces and sells gas-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 ofthese two segments are nationwide, but are concentrated in the southwesternUnited States. 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.,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 Colorado Springs and Pueblo through theCompany’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. ofPueblo, Colorado. Sales of these two segments are highly concentrated in theFront Range area in Colorado although door sales are also made throughout theUnited States.

 

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

 

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

 

Thefollowing table presents information about reported segments for the fiscalyears 2008, 2007 and 2006 along with the items necessary to reconcile thesegment information to the totals reported in the financial statements (amountsin thousands):

 
| ** **                                | ** ** | **Construction Products Industry**                 | ** ** | **HVAC Industry** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC** | ** ** | **Unallocated  Corporate  (a)** | ** ** | **Other (b)** | ** ** | **Total** | ** ** |
| 2008                                      |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                            | 76,996     |                   | $          | 15,373                               |       | $                         | 92,369     |                     | $          | 42,166 |   | $ | 22,985 |   | $ | 65,151 |   | $ | 17 |   | $ | 344 |   | $ | 157,881 |   |
| Depreciation,  depletion and amortization |       | 3,995                                                        |       | 134                    |       | 4,129                                |       | 389                       |       | 539                      |       | 928 |   | 78 |   | — |   | 5,135 |   |
| Operating (loss)  income                  |       | (674                                                         | )          | 1,455                  |       | 781                                  |       | 85                        |       | 458                      |       | 543 |   | (495 | ) | 109 |   | 938 |   |
| Segment assets                            |       | 46,410                                                       |       | 6,276                  |       | 52,686                               |       | 23,521                    |       | 14,241                   |       | 37,762 |   | 3,195 |   | 23 |   | 93,666 |   |
| Capital  expenditures (c)                 |       | 1,856                                                        |       | 112                    |       | 1,968                                |       | 60                        |       | 140                      |       | 200 |   | 6 |   | — |   | 2,174 |   |
|                                           |            |                                                              |            |                        |            |                                      |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

37

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** **
| ** **                                | ** ** | **Construction Products Industry**                 | ** ** | **HVAC Industry** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC** | ** ** | **Unallocated  Corporate  (a)** | ** ** | **Other (b)** | ** ** | **Total** | ** ** |
| 2007                                      |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   | ** ** |
| Revenues from  external customers         |       | $                                                            | 90,438     |                   | $          | 19,024                               |       | $                         | 109,462    |                     | $          | 36,146 |   | $ | 22,460 |   | $ | 58,606 |   | $ | 17 |   | $ | 344 |   | $ | 168,429 | ** ** |
| Depreciation,  depletion and amortization |       | 4,089                                                        |       | 99                     |       | 4,188                                |       | 409                       |       | 608                      |       | 1,017 |   | 79 |   | — |   | 5,284 | ** ** |
| Operating income  (loss)                  |       | 2,980                                                        |       | 2,245                  |       | 5,225                                |       | (1,858                    | )          | (906                     | )          | (2,764 | ) | (3,123 | ) | 108 |   | (554 | **)** |
| Segment assets                            |       | 53,002                                                       |       | 7,398                  |       | 60,400                               |       | 22,810                    |       | 13,101                   |       | 35,911 |   | 2,140 |   | 59 |   | 98,510 | ** ** |
| Capital  expenditures                     |       | 4,371                                                        |       | 2,009                  |       | 6,380                                |       | 712                       |       | 548                      |       | 1,260 |   | 42 |   | — |   | 7,682 | ** ** |
|                                           |            |                                                              |            |                        |            |                                      |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **Construction Products Industry**                 | ** ** | **HVAC Industry** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC** | ** ** | **Unallocated  Corporate  (a)** | ** ** | **Other (b)** | ** ** | **Total** | ** ** |
| 2006                                      |       |                                                         |       |                   |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       | $                                                            | 92,214     |                   | $          | 14,100                               |       | $                         | 106,314    |                     | $          | 29,930 |   | $ | 22,167 |   | $ | 52,097 |   | $ | 12 |   | $ | 344 |   | $ | 158,767 |   |
| Depreciation,  depletion and amortization |       | 3,816                                                        |       | 123                    |       | 3,939                                |       | 376                       |       | 603                      |       | 979 |   | 91 |   | — |   | 5,009 |   |
| Operating income  (loss)                  |       | 4,888                                                        |       | 1,492                  |       | 6,380                                |       | 161                       |       | 267                      |       | 428 |   | (3,067 | ) | 108 |   | 3,849 |   |
| Segment assets                            |       | 54,470                                                       |       | 4,750                  |       | 59,220                               |       | 18,303                    |       | 12,651                   |       | 30,954 |   | 3,468 |   | 63 |   | 93,705 |   |
| Capital  expenditures (d)                 |       | 7,689                                                        |       | 74                     |       | 7,763                                |       | 274                       |       | 191                      |       | 465 |   | 115 |   | — |   | 8,343 |   |
|                                           |            |                                                              |            |                        |            |                                      |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(a)          Includes unallocatedcorporate office expenses and assets which consist primarily of cash and cashequivalents, prepaid expenses and property, plant and equipment.

 

(b)         Includes a real estateoperation.

 

(c)          The 2008 capitalexpenditures for the Concrete, Aggregates & Construction Supplies segmentinclude $165 of additions purchased on account.

 

(d)         The 2006 capital expenditures for the Concrete, Aggregates &Construction Supplies segment include the capital assets acquired with the ASCIacquisition. Capital expenditures for the Door segment include the capitalassets acquired with the CSSL acquisition.

 

There are nodifferences in the basis of segmentation or in the basis of measurement ofsegment profit or loss from the last annual report except as discussed above.

 

All long-livedassets are in the United States. No customer accounted for 10% or more of totalsales of the Company in fiscal 2008, 2007 or 2006.

 

38

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

To theBoard of Directors and Shareholders of Continental Materials Corporation:

 

Wehave audited the accompanying consolidated balance sheets of ContinentalMaterials Corporation and subsidiaries (the “Company”) as of January 3,2009 and December 29, 2007, and the related consolidated statements ofincome and comprehensive (loss) income, shareholders’ equity, and cash flowsfor each of the three years in the period ended January 3, 2009.  Ouraudits also included the financial statement schedule listed in the Index at Part IV,Item 15(a)2.  These consolidated financial statements and financialstatement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements andfinancial statement schedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  The Company isnot required to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Our audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In ouropinion, such consolidated financial statements present fairly, in all materialrespects, the financial position of Continental Materials Corporation**and subsidiaries at January 3, 2009and December 29, 2007, and the results of their operations and their cashflows for each of the three years in the period ended January 3, 2009, inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly in all material respects the information set forththerein.

 

Asdiscussed in Notes 1 and 11 to the consolidated financial statements, effectiveDecember 31, 2006, the first day of the Company’s fiscal year ended December 29,2007, the Company adopted Financial Accounting Standards Board Interpretation No. 48— *Accounting for Uncertainty in Income Taxes.*

 

/s/ Deloitte &Touche LLP

 

Chicago,IllinoisApril 17, 2009

 

39

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| Item  9. | ** ** | **CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|----------|------------|-------------------------------------------------------------------------------------------|

 

None.

 
| Item  9A. | ** ** | **CONTROLS  AND PROCEDURES** |
|-----------|------------|------------------------------|

 

**a.         Evaluation  of Disclosure Controls and Procedures**

 

As of January 3, 2009, the Company carried out an evaluation ofthe Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended (ExchangeAct). Based on that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were noteffective in that the Company does not have adequate controls because of thematerial weakness discussed below. In light of the material weakness describedbelow, the Company performed additional analysis and other post closingprocedures to ensure its consolidated financial statements are prepared inaccordance with GAAP. Accordingly, management believes that the financialstatements included in this report fairly present in all material respects ourfinancial condition, results of operations and cash flows for the periodspresented.

 

b.         **Report of Management on InternalControl over Financial Reporting**

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) underthe Exchange Act. The Company’s internal control over financial reporting is designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith GAAP. Because of inherent limitations, internal control over financialreporting may not prevent or detect misstatements.

 

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of January 3, 2009. Management based this assessment on criteria for effective internalcontrol over financial reporting described in Internal Control — IntegratedFramework issue by the Committee of Sponsoring Organizations of the TreadwayCommission.  Management’s assessmentincluded an evaluation of its internal control over financial reporting.  Based on this assessment,management has concluded that its internal control over financial reporting isnot operating effectively as of January 3, 2009 because of the materialweakness discussed below.   A materialweakness is a deficiency, or combination of deficiencies, in internal controlover financial reporting such that there is a reasonable possibility that amaterial misstatement of our annual or interim financial statements will not beprevented or detected on a timely basis. Management’s assessment as of January 3, 2009 identified a materialweakness in our internal control over financial reporting related to itsinventory accounting in its Heating and Cooling Segment.

 

The Company implemented an Enterprise ResourcePlanning (ERP) system for the Heating and Cooling Segment at the end of thethird quarter of 2007. The Company performed a physical inventory for thissegment at the end of October 2008 which resulted in an adjustment todecrease the inventory balance and a corresponding charge to cost of sales asof the end of the third quarter of 2008. These adjustments to the Company’sfinancial statements were reflected in the Company’s third quarter interimfinancial statements on Form 10-Q. The deficiencies in internal controlsthat lead to the material weakness primarily related to inaccurate bills ofmaterials associated with the production of the Heating and Cooling Segment’sproducts and insufficient cycle counting during the interim periods. Thisdeficiency was considered to be a material weakness in the design of ourinternal control over financial reporting that existed as of the end of thethird quarter of 2008.

 

During the fourth quarter of 2008, the Companybegan a process to address this material weakness in internal controls. As partof this process, the Company identified the causes which resulted in theinventory accounting errors and developed an action plan to address each ofthese causes. The action plan includes ensuring the accuracy of the bills ofmaterials, reviewing inventory variances, accounting for scrap in themanufacturing process and implementing cycle count procedures. As of January 3,2009, we implemented certain of these parts of the action plan and willimplement the remaining items during fiscal 2009. We believe our action plan,once fully implemented, will improve the internal control over accounting forinventory in our Heating and Cooling Segment. Until our action items areimplemented and proven to be operating effectively for a sufficient period oftime, we are not able to conclude that the aforementioned material weakness hasbeen remediated. Management has reviewed the results of its assessment and theplan to correct the deficiency with the Audit Committee of the Company’s Boardof Directors.

 

As of January 3, 2009, the Company was not an “accelerated filer”as defined in Rule 12b-2 under the Exchange Act. Accordingly, pursuant toSEC rules and regulations, the Company is not required to include, andthis Annual Report does not include, an attestation report of our independentregistered public accounting firm regarding internal control over financialreporting in this Annual Report on Form 10-K. Management’s report was notsubject to attestation by the Company’s

 

40

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independent registered public accounting firm pursuant to temporary rules ofthe SEC that permit the  Company toprovide only Management’s report in this Annual Report on Form 10-K. Weare required to annually reassess our status as a “non-accelerated filer” as ofthe end of our fiscal year to determine whether we will be required to provideManagement’s Annual Report on Internal Control Over Financial Reporting and theassociated report of our independent registered public accounting firm in ourAnnual Report on Form 10-K.

 

c.         **Changes in InternalControls**

 

The Company continually reassesses our internalcontrol over financial reporting and makes changes as deemed prudent. As notedabove, the Company began a process to improve the internal control overfinancial reporting related to inventory accounting during the fourth quarterof 2008 to address this material weakness. The process was not completed byyear-end; however, management performed additional analysis and otherpost-closing procedures to ensure that the Heating and Cooling Segment’sinventory was accounted for properly in the Company’s consolidated year-endfinancial statements. The Company intends to complete its assessment of thecontrols related to inventory accounting during fiscal 2009 and we believe thatsuch measures will appropriately address the material weakness related to theaccounting for inventory accounting in the Heating and Cooling segment.

 

During the quarter ended January 3, 2009,there were no other material weaknesses identified in our review of internalcontrol over financial reporting and no significant changes in the Company’sinternal control over financial reporting occurred during the quarter that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 
| Item  9B. | ** ** | **OTHER  INFORMATION** |
|-----------|------------|------------------------|

 

Registrantdoes not have any information, not already reported, that is required to be reportedon Form 8-K during the fourth quarter of the year covered by this Form 10-K.

 

**PART III**

 

Items 10, 11, 12, 13 and 14 of Part III have been omitted fromthis 10-K Report because the registrant expects to file, not later than 120days following the close of its fiscal year ended January 3, 2009, itsdefinitive 2009 proxy statement. The information required by Items 10, 11, 12,13 and 14 of Part III will be included in that proxy statement and suchinformation is hereby incorporated by reference.

 

**PART IV**

 
| Item  15.  | ** ** | **EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES**                                                       |
|------------|------------|-------------------------------------------------------------------------------------------------------|
|       | ** ** | ** **                                                                                            |
| (a) 1 |       | The  following financial statements are included in Item 8 of Part II:                           |
|       |       | Consolidated  statements of operations and comprehensive income for fiscal years 2008, 2007  and 2006 |
|       |       | Consolidated  statements of cash flows for fiscal years ended 2008, 2007 and 2006                     |
|       |       | Consolidated  balance sheets as of January 3, 2009 and December 29, 2007                    |
|       |       | Consolidated  statements of shareholders’ equity for fiscal years ended 2008, 2007 and 2006      |
|       |       |                                                                                                  |
| (a) 2 |       | The  following is a list of financial statement schedules filed as part of this  Report:              |

 

ScheduleII Valuation and Qualifying Accounts & Reserves

For the Fiscal Years 2008, 2007 and 2006

 

Allother schedules are omitted because they are not applicable or the informationis shown in the financial statements or notes thereto.

 
| (a) 3 |   | The  following is a list of all exhibits filed as part of this Report: |
|------------|--------|------------------------------------------------------------------------|

 
| Exhibit 3  |   | Restated  Certificate of Incorporation dated May 28, 1975, as amended on  May 24, 1978, May 27, 1987 and June 3, 1999 filed as  Exhibit 3 to Form 10-K for the year ended January 1, 2005,  incorporated herein by reference. |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                             |
| Exhibit 3a |   | Registrant’s  By-laws as amended September 19, 1975 filed as Exhibit 6 to  Form 8-K for the month of September 1975, incorporated herein by  reference.                                                                                 |

 

41

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| Exhibit 10   |   | Revolving  Credit and Term Loan Agreement dated as of September 5, 2003, by and  among the Company and LaSalle Bank National Association and Fifth Third Bank  filed as Exhibit 10 to Form 10-Q for the quarterly period ending  September 27, 2003; First Amendment thereto dated as of May 29,  2004 filed as Exhibit 10 to Form 10-Q for the quarterly period  ending July 3, 2004; Second Amendment thereto dated April 14, 2005  filed as Exhibit 10.1 to Form 8-K for the month of April 2005;  Third Amendment thereto dated as of June 28, 2005 filed as  Exhibit 10.1 to Form 8-K filed July 7, 2005; Fourth Amendment  thereto dated as of June 8, 2006 filed as Exhibit 99.1 to  Form 8-K filed June 13, 2006; Fifth Amendment thereto dated as of  March 28, 2007 filed as Exhibit 99.1 to Form 8-K filed  April 3, 2007; Sixth Amendment thereto dated as of August 13, 2007  filed as Exhibit 99.1 to Form 8-K filed August 16, 2007,  Seventh Amendment dated as of October 23, 2007 filed as  Exhibit 99.1 to Form 8-K filed October 31, 2007, Amended and  Restated Revolving Credit and Term Loan Agreement dated as of March 28,  2008 filed as Exhibit 99.1 to Form 8-K filed April 3, 2008 and  First Amendment to Amended and Restated Revolving Credit and Term Loan  Agreement dated August 12, 2008 filed as Exhibit 10.1 to  Form 10-Q filed August 12, 2008, incorporated herein by reference. |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
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| Exhibit 10a  |   | Non-Competition  and Non-Disclosure Agreement by Valco, Inc. And Thomas E. Brubaker in  favor of Continental Materials Corporation filed as Exhibit 2B to  Form 8-K filed November 4, 1996, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
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| Exhibit 10b  |   | Fee  Sand and Gravel Lease Between Valco, Inc. And Continental Materials  Corporation filed as Exhibit 2C to Form 8-K filed November 4,  1996, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
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| Exhibit 10c  |   | Form of  Supplemental Deferred Compensation Agreement filed as Exhibit 10 to  Form 10-Q for the quarter ended July 1, 1983, incorporated herein  by reference.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
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| Exhibit 10d  |   | Stock  Purchase Agreement By and Among Continental Materials Corporation, Rocky  Mountain Ready Mix Concrete, Inc. and The Shareholders of Rocky Mountain  Ready Mix Concrete, Inc. Filed as Exhibit 2A to Form 8-K filed  January 12, 2001, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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| Exhibit 10e  |   | Continental  Materials Corporation Employee Profit Sharing Retirement Plan Amended and  Restated Generally Effective October 1, 1997 filed as Exhibit 99a  to Form 10-K for the year ended January 1, 2000, incorporated  herein by reference.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
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| Exhibit 10f  |   | Credit  Agreement dated April 16, 2009 among Continental Materials Corporation,  as the Company, The Various Financial Institutions Party Hereto, as Lenders,  and The PrivateBank and Trust Company, as Administrative Agent and Arranger  (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
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| Exhibit 14   |   | Continental  Materials Corporation Code of Business Conduct and Ethics filed as  Exhibit 14 to Form 10-K/A (Amendment No. 1) for the year ended  January 3, 2004, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
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| Exhibit 21   |   | Subsidiaries  of Registrant (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
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| Exhibit 23   |   | Consent  of Independent Registered Public Accounting Firm (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
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| Exhibit 31.1 |   | Rule 13a-14(a)/15d-14(a) and  Rule 13a-14(d)/15d-14(d) Certification of Chief Executive Officer  (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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| Exhibit 31.2 |   | Rule 13a-14(a)/15d-14(a) and  Rule 13a-14(d)/15d-14(d) Certification of Chief Financial Officer  (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
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| Exhibit 32   |   | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer (filed  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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* - Compensatory plan or arrangement

 

42

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SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   |   | CONTINENTAL MATERIALS CORPORATION                          |
|--------|--------|------------------------------------------------------------|
|   |   | Registrant                                                 |
|   |   |                                                       |
|   | By:    | /S/Joseph  J. Sum                                          |
|   |   | Joseph  J. Sum, Vice President and Chief Financial Officer |

 

Date:  April 20, 2009

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **SIGNATURE**             | ** ** | **CAPACITY(IES)**                       | ** ** | **DATE**            |
|---------------------------|------------|-----------------------------------------|------------|---------------------|
|                      |       |                                    |       |                |
| /S/  James G. Gidwitz     |       | Chief Executive Officer and a Director  |       |                |
| James G. Gidwitz          |       | (Principal Executive Officer)           |       | April 20, 2009 |
|                      |       |                                    |       |                |
| /S/  Joseph J. Sum        |       | Vice President, Chief Financial Officer |       |                |
| Joseph J. Sum             |       | (Principal Financial Officer)           |       | April 20, 2009 |
|                      |       |                                    |       |                |
| /S/  Mark S. Nichter      |       | Secretary and Controller                |       |                |
| Mark S. Nichter           |       | (Principal Accounting Officer)          |       | April 20, 2009 |
|                      |       |                                    |       |                |
| /S/  William D. Andrews   |       |                                    |       |                |
| William D. Andrews        |       | Director                                |       | April 20, 2009 |
|                      |       |                                    |       |                |
| /S/  Thomas H. Carmody    |       |                                    |       |                |
| Thomas H. Carmody         |       | Director                                |       | April 20, 2009 |
|                      |       |                                    |       |                |
| /S/  Betsy R. Gidwitz     |       |                                    |       |                |
| Betsy R. Gidwitz          |       | Director                                |       | April 20, 2009 |
|                      |       |                                    |       |                |
| /S/  Ralph W. Gidwitz     |       |                                    |       |                |
| Ralph W. Gidwitz          |       | Director                                |       | April 20, 2009 |
|                      |       |                                    |       |                |
| /S/  Ronald J. Gidwitz    |       |                                    |       |                |
| Ronald J. Gidwitz         |       | Director                                |       | April 20, 2009 |
|                      |       |                                    |       |                |
| /S/  Theodore R. Tetzlaff |       |                                    |       |                |
| Theodore R. Tetzlaff      |       | Director                                |       | April 20, 2009 |
|                      |       |                                    |       |                |
| /S/  Peter E. Thieriot    |       |                                    |       |                |
| Peter E. Thieriot         |       | Director                                |       | April 20, 2009 |
|                      |       |                                    |       |                |
| /S/  Darrell M. Trent     |       |                                    |       |                |
| Darrell M. Trent          |       | Director                                |       | April 20, 2009 |

 

43

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CONTINENTALMATERIALS CORPORATION

 

**SCHEDULEII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (c) (e)**

 

for the fiscalyears 2008, 2007 and 2006

 
| **COLUMN A**                         | ** ** | **COLUMN B**                         | ** ** | **COLUMN C(1)**                               | ** ** | **COLUMN D**               | ** ** | **COLUMN E**                  | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | ** **                           | ** ** | ** **                                    | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **Description**                      | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged to Costs  and Expenses** | ** ** | **Deductions -  Describe** | ** ** | **Balance at End of  Period** | ** ** |
| ** **                           | ** ** | ** **                           | ** ** | ** **                                    | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| **Year 2008**                        | ** ** | ** **                           | ** ** | ** **                                    | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Allowance for doubtful  accounts (c) |       | $                                    | 530,000    |                                          | $          | 142,000                    |       | $                             | 227,000    | (a) | $ | 445,000 |   |
| Inventory valuation  reserve (c)     |       | $                                    | 123,000    |                                          | $          | 268,000                    |       | $                             | 136,000    | (b) | $ | 255,000 |   |
| Reserve for self-insured  losses     |       | $                                    | 4,277,000  |                                          | $          | 3,836,000                  |       | $                             | 4,930,000  | (d) | $ | 3,183,000 |   |
|                                 |       |                                 |       |                                          |       |                       |       |                          |       |
| **Year 2007**                        | ** ** | ** **                           | ** ** | ** **                                    | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Allowance for doubtful  accounts (c) |       | $                                    | 619,000    |                                          | $          | (3,000                     | )          | $                             | 86,000     | (a) | $ | 530,000 |   |
| Inventory valuation  reserve (c)     |       | $                                    | 147,000    |                                          | $          | 138,000                    |       | $                             | 162,000    | (b) | $ | 123,000 |   |
| Reserve for self-insured  losses     |       | $                                    | 3,964,000  |                                          | $          | 6,592,000                  |       | $                             | 6,279,000  | (d) | $ | 4,277,000 |   |
|                                 |       |                                 |       |                                          |       |                       |       |                          |       |
| **Year 2006**                        | ** ** | ** **                           | ** ** | ** **                                    | ** ** | ** **                 | ** ** | ** **                    | ** ** |
| Allowance for doubtful  accounts (c) |       | $                                    | 310,000    |                                          | $          | 342,000                    |       | $                             | 33,000     | (a) | $ | 619,000 |   |
| Inventory valuation  reserve (c)     |       | $                                    | 150,000    |                                          | $          | 160,000                    |       | $                             | 163,000    | (b) | $ | 147,000 |   |
| Reserve for self-insured  losses     |       | $                                    | 4,033,000  |                                          | $          | 5,421,000                  |       | $                             | 5,490,000  | (d) | $ | 3,964,000 |   |

 

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Notes:
| (a)    |   | Accounts written off,  net of recoveries.                                                                                                                           |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                |
| (b)    |   | Amounts written off  upon disposal of assets.                                                                                                                       |
|   |   |                                                                                                                                                                |
| (c)    |   | Reserve deducted in the  balance sheet from the asset to which it applies.                                                                                          |
|   |   |                                                                                                                                                                |
| (d)    |   | Payments of  self-insured claims including healthcare claims accrued and paid in  connection with the Company’s self-insured employee healthcare benefit plan. |
|   |   |                                                                                                                                                                |
| (e)    |   | Column C (2) has  been omitted as the answer would be “none”.                                                                                        |

 

44

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