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** **

 

** **

**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 2, 2010** |
| ** **                                          |
| **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**

 

**ContinentalMaterials 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 - $0.25 par value         |       | NYSE Amex                                                                   |

 

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  oNo  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 90 days. Yes  x  No  o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 andRegulation S-T (§232.405 of this chapter) during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files). Yes  o  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 o                       |   | Smaller reporting company x |
| (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

 

Theaggregate market value (based on June 30, 2009 closing price) of votingstock held by non-affiliates of registrant: Approximately $6,971,000.

 

Number of common shares outstanding at April 9, 2010: 1,598,278.

 

Incorporationby reference: Portions of registrant’s definitive proxy statement for the 2010Annual Meeting of stockholders to be held May 26, 2010 into Part IIIof this Form 10-K. The definitive proxy statement is expected to be filedwith the Securities and Exchange Commission within 120 days after the close ofthe fiscal year covered by this Form 10-K.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                    | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Special Note  Regarding Forward Looking Statements                                                                                                                                                                                                                                                                                                                                                            | 3        |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| PART I.                                                                                                                                                                                                                                                                                                                                                                                                  |     |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Item 1. Business                                                                                                                                                                                                                                                                                                                                                                                              | 3        |
| Item 1A. Risk  Factors                                                                                                                                                                                                                                                                                                                                                                                        | 7        |
| Item  1B. Unresolved Staff Comments                                                                                                                                                                                                                                                                                                                                                                           | 7        |
| Item 2. Properties                                                                                                                                                                                                                                                                                                                                                                                            | 7        |
| Item 3. Legal  Proceedings                                                                                                                                                                                                                                                                                                                                                                                    | 7        |
| Item 4.  Removed and Reserved                                                                                                                                                                                                                                                                                                                                                                                 | 8        |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| PART II.                                                                                                                                                                                                                                                                                                                                                                                                 |     |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Item 5. Market for  Registrant’s Common Equity and Related Stockholder Matters and Issuer  Purchases of Equity Securities                                                                                                                                                                                                                                                                                | 8        |
| Item 6.  Selected Financial Data                                                                                                                                                                                                                                                                                                                                                                              | 8        |
| Item 7. Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                                                                                                                                                                                                           | 8        |
| Item 7A. Quantitative and Qualitative Disclosures  about Market Risk                                                                                                                                                                                                                                                                                                                                          | 19       |
| Item 8. Financial Statements and Supplementary Data                                                                                                                                                                                                                                                                                                                                                           | 19       |
| Item 9.  Changes In and Disagreements With Accountants on Accounting and Financial  Disclosures                                                                                                                                                                                                                                                                                                               | 39       |
| Item 9A(T). Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                           | 39       |
| Item  9B Other Information                                                                                                                                                                                                                                                                                                                                                                                    | 40       |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Part III.                                                                                                                                                                                                                                                                                                                                                                                                |     |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Items  10 through 14 have been omitted from this 10-K Report because the registrant  expects to file, not later than 120 days following the close of its fiscal  year ended January 2, 2010, its definitive 2010 proxy statement. The  information required by Items 10 through 14 of Part III will be included  in that proxy statement and such information is hereby incorporated by  reference. | 40       |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Part IV.                                                                                                                                                                                                                                                                                                                                                                                                 |     |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Item 15. Exhibits, Financial Statement Schedules                                                                                                                                                                                                                                                                                                                                                              | 40       |

 

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**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 such as “anticipates,” “believes,” “contemplates,”“estimates,”  “expects,” “plans,” “projects”and similar expressions are intended to identify forward-looking statements.Actual results could differ materially from those projected in theforward-looking statements as a result of factors including but not limited to:weather, interest rates, availability of raw materials and their related costs,economic conditions and competitive forces in the regions where the Companydoes business, and the ability of the Company to obtain credit on commerciallyreasonable terms. Changes in accounting pronouncements could also alterprojected results. Forward-looking statements speak only as of the date theywere made and we undertake no obligation to publicly update them.

 

**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.

 

TheHeating and Cooling segment produces and sells gas-fired wall furnaces, consoleheaters and fan coils from the Company’s wholly-owned subsidiary, WilliamsFurnace Co. (WFC) of Colton, California. The Evaporative Cooling segmentproduces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona.Concrete, Aggregates and Construction Supplies (CACS) are offered from numerouslocations along the Southern portion of the Front Range of Colorado operated bythe Company’s wholly-owned subsidiaries Castle Concrete Company and Transit MixConcrete Co., of Colorado Springs and Transit Mix of Pueblo, Inc. ofPueblo (the three companies collectively referred to as TMC). Doors arefabricated and sold along with the related hardware, including electronicaccess hardware, from the Company’s wholly-owned subsidiary, McKinney Door andHardware, Inc. (MDHI), which operates out of facilities in Pueblo andColorado 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.

 

Duringthe past three years the only change in the Company’s business was the sale ofRocky Mountain Ready Mix Concrete, Inc. (RMRM) of Denver. The Company completed the sale of all ofthe outstanding capital stock of RMRM, a Colorado corporation to CampbellsC-Ment Contracting, Inc., a Colorado corporation (Buyer), on July 17,2009. RMRM operated a ready mix concrete business in the Denver metropolitanarea and had been included in the CACS reporting segment. See Item 7 -Management’s Discussion and Analysis of Financial Condition and Results ofOperations and Item 8 — Financial Statements and Supplementary Data for furtherdetails.

 

Overall,sales in the CACS segment have been significantly reduced due to the very lowlevel of construction activity along the Southern Front Range of Colorado. Thenationwide depressed construction activity has also affected the sales volumeof the Door segment. Sales of the Heating and Cooling segment and theEvaporative Cooling segment have been less affected except for the fan coilproduct line of the Heating and Cooling Segment which has declinedsignificantly as construction, especially in the commercial sector has alsoexhibited significant weakness. Additional financial information relating toindustry segments appears in Note 14 of this Form 10-K. References to a “Note”are to the “Notes to Consolidated Financial Statements.”

 

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

##### *** ***

TheHVAC industry group markets its products throughout North America through plumbing,heating and air conditioning wholesale distributors as well as directly tomajor retail home-centers and other retail outlets. Some of the products arealso sold to HVAC installing contractors and equipment manufacturers forcommercial applications. The Company contracts independent manufacturers’representatives for all of its products while also employing and utilizing astaff of sales and sales 

 

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supportpersonnel. Sales of furnaces and evaporative coolers are predominantly in theUnited States and are concentrated in the Western and Southwestern states.Sales of furnaces and console heaters usually increase in the months of September throughJanuary. Sales of evaporative coolers have historically been higher in themonths of March through July. Sales of the fan coil product line arethroughout the United States, Canada and the Caribbean and are more evenlydistributed throughout the year although the highest volume typically occursduring the late spring and summer. In order to enhance sales of wall furnacesand evaporative coolers during the off season, extended payment terms, alsoreferred to as dating programs, are offered to some customers.

 

TheConstruction Products industry group markets its products primarily through itsown direct sales personnel and, except for doors and related hardware, confinesits sales to the Southern portion of the Front Range area in Colorado. Salesare primarily 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). Revenues usuallydecline in the winter months as the pace of construction slows. Sales of doorsand the related hardware are made throughout the United States although salesare primarily within Colorado and adjacent states.

 

During 2009, no customer accounted for 10% ormore of the total sales of the Company.

 

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

#### *** ***

TheHVAC industry group maintains parts departments and help lines to assistcontractors, distributors and end users in servicing the products. The Companydoes not currently perform installation services, nor are maintenance orservice 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.

 

Thepersonnel in the CACS segment routinely take a leadership role in formulationof the products to meet the specifications of customers. The Company is notinvolved in setting forms or performing finishing work on any of its concreteproducts. The Door segment offers doors, frames and hardware, includingelectronic access systems. Doors, frames and hardware are installed byindependent contractors engaged by the general contractor or building owner.Electronic access systems are installed by the Company’s technicians.

 

***BACKLOG***

 

AtJanuary 2, 2010, the Heating and Cooling segment had a backlog ofapproximately $3,252,000 ($6,784,000 at January 3, 2009) primarilyrelating to orders that are expected to be filled during the first half of 2010although some fan coil projects may extend past this timeframe. The decrease isprimarily due to the reduction of fan coil orders which is directly related tothe nationwide decline in construction activity.

 

AtJanuary 2, 2010, the Evaporative Cooling segment had a backlog ofapproximately $489,000 ($284,000 at January 3, 2009) primarily due topreseason orders placed prior to year end. This backlog is expected to befilled during the first quarter of 2010 and is not necessarily indicative ofthe sales level that will be realized during 2010.

 

AtJanuary 2, 2010, the CACS segment had a backlog of approximately$12,436,000 ($8,900,000 at January 3, 2009, not including the backlog ofRMRM) primarily relating to construction contracts awarded and expected to befilled during 2010. The increase in backlog is primarily due to a contract tosupply concrete to a large Fort Carson job that the Company was awarded in thelatter part of 2009 and not indicative of an improvement in constructionactivity.

 

AtJanuary 2, 2010, the Door segment had a backlog of approximately$2,767,000 ($5,048,000 at January 3, 2009) primarily relating to ordersthat are expected to be filled during 2010. The lower backlog is primarily dueto the reduced level of bidding related to the overall slow economy and thedecline in construction.

 

***RESEARCH AND DEVELOPMENT/PATENTS***

 

Ingeneral, the Company relies upon, and intends to continue to rely upon,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. TheCompany believes its interests in its patents, as well as its proprietaryknowledge, are sufficient for its businesses as currently conducted.

 

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***MANUFACTURING***

 

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

 

Dueto the seasonality of the HVAC businesses and to balance production throughoutthe year, furnaces and evaporative coolers are built during their off seasonsin order for the Company to have adequate supplies to sell during the season.Although sales are made throughout the year, sales volume is generally higherfrom August through January for furnaces while sales volume ofevaporative 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’s CACSsegment has historically purchased most of its cement requirements from asingle supplier in order to obtain favorable volume related pricing. Althoughthere have been times during heavy construction periods that there has beensome scarcity of cement supply, the Company does not expect to encounter thissituation in the foreseeable future due to the decline in construction activityand the completion of a new cement mill near Pueblo, Colorado during 2008. TheCompany has no long-term supply contracts and does not consider itself to bedependent on any individual supplier. MDHI is an authorized distributor of amajor manufacturer of hollow metal doors and hardware. MDHI has historicallypurchased the majority of its hardware primarily from this supplier in order toobtain favorable volume related pricing; however, other suppliers areavailable.

 

TheCompany mines aggregates (rock, gravel and sand) from various owned and leasedproperties in Colorado. Colorado mining permits require permit holders toperform reclamation work in order to return the mined areas to a beneficialuse. These requirements are similar in nature to those included in the miningpermits of our competitors. Reclamation costs have increased since the mid-1990’sas the Company has engaged in enhanced reclamation projects that exceed thestated requirements. The enhanced reclamation efforts are being performed, inpart, to establish community goodwill. The Company performs the majority of thereclamation work using existing production employees and equipment primarily attimes when production is curtailed due to inclement weather or decreased demandfor our products. Consequently, the reclamation work to date has had a minimalimpact on our capitalexpenditures. In addition to the effect of the slow construction markets,operating results at the Pikeview Quarry were adversely affected by a shutdownin December 2008 due to a landslide. The Colorado Division of Reclamation,Mining and Safety (DRMS) ordered that the quarry be shut down until such timeas the Company submits a new mining and reclamation plan. The DRMS has giventhe Company until May 13, 2010 to submit a revised plan. The Company andits consultants are working on a new mining and reclamation plan for thePikeview Quarry which must be approved by the DRMS before the Company canresume production. The Company believes that ultimately an acceptableplan for mining and reclamation will be developed and that the quarry will bereopened during 2011. Theimpact that reopening the Pikeview Quarry might have on future capitalexpenditures has not been determined, however, management expects that thetotal incurred will be less than $1,000,000. See the discussion on the Resultsof Operations for information on the effect of the Pikeview shutdown on theCACS segment results.

 

***COMPETITIVE CONDITIONS***

 

Heatingand Cooling — The Company is one of three principal companiesproducing wall furnaces (excluding units sold to the recreational vehicleindustry) and gas-fired console heaters. The wall furnace and console heatermarkets are only a small component of the heating industry. The Company servesits market from a plant in Colton, California. The sales force consists of in-house sales personnel and independentmanufacturers’ representatives. The heating industry is dominated by a fewmanufacturers which are substantially larger than the Company. Thesemanufacturers sell diversified lines of heating and air conditioning unitsdirected primarily toward central heating and cooling systems. All of theproducers, including the Company, compete primarily on a basis of price,product features and performance, service and timeliness of delivery.

 

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 five 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 

 

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season.During 2008 a principal competitor exited the U.S. market. The long-term effectof this situation is still uncertain although the Company was able to obtainsome new customers during 2009.

 

Concrete,Aggregates and Construction Supplies — This segment operates in highly competitive marketsalong the Southern Front Range of Colorado. The Company competes with a largemultinational producer as well as regional and small local producers. TheCompany is one of four companies producing ready mix concrete in the ColoradoSprings area and one of three companies producing ready mix concrete in thePueblo area. Because of the relatively high transportation costs associatedwith concrete, the level of competition is heavily influenced by the distancefrom production facilities to markets served. Price, plant location, transportationcosts, service, product quality and reputation are major factors that affectcompetition among the ready mix concrete producers. The Company is one of fiveproducers of aggregates in the Colorado Springs and Pueblo marketing areasalthough three other producers ship product into these two markets. Allproducers 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 in Denver, three companies in Colorado Springs and onein Pueblo although a number of small local competitors are also in the market.However, the Company believes it can compete effectively because many of ourcustomers also purchase concrete and aggregates from us whereas our competitorsfor these particular product lines do not offer concrete or aggregates. Inaddition, the Company believes its Pueblo location has a slight competitiveadvantage with respect to the three Denver 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 644 people as of January 2, 2010. Employment variesthroughout the year due to the seasonal nature of the businesses. A breakdownof the current and prior year’s employment at year-end by segment was:

 
| ** **                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Heating and Cooling                            |       | 225      |       | 287      |       |
| Evaporative Cooling                            |       | 131      |       | 138      |       |
| Concrete, Aggregates and Construction Supplies |       | 229      |       | 312      |       |
| Door                                           |       | 43       |       | 47       |       |
| Corporate Office                               |       | 16       |       | 14       |       |
| Total                                          |       | 644      |       | 798      |       |

 

Allsegments reported lower headcounts primarily due to the decline in sales. Thereduction was largely in the direct and indirect labor categories althoughoffice personnel and supervisory personnel were also affected. The decline inthe CACS segment also reflects the sale of RMRM on July 17, 2009. Thesmall increase at the Corporate Office was related to the InformationTechnology (IT) group and was the result of converting a full-time consultantto employee status and the addition of person for the Help Desk. Two ITemployees previously included in the Heating and Cooling segment were releasedand not replaced.

 

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***

 

Ouroperations involve the use, release, discharge, disposal and clean up ofsubstances regulated under federal, state and/or local environmental protectionlaws and regulations, including those related to reclamation of mined areas. Westrive not only to maintain compliance with all applicable environmental lawsand regulations, but to exceed the minimum requirements of those laws andregulations where practicable.

 

In2009, our capital expenditures and remediation expenses for environmentalmatters, except those expenses related to our mining reclamation efforts, werenot material to our financial condition. Because of the complexity andever-changing nature of environmental laws and regulations, we cannot predictwhether capital expenditures and remediation expenses for future environmentalmatters will materially affect our financial condition, results of operationsor liquidity.

 

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

 

TheCompany electronically files various reports and other information with theSecurities and Exchange Commission (SEC) including this annual report on Form 10-K,our quarterly reports on Form 10-Q and our current reports on Form 8-K.The SEC maintains an internet site that contains reports, proxy and informationstatements and other information regarding the Company. Access to thisinformation is available free of charge at the SEC’s website athttp://www.sec.gov. The Company does not maintain a corporate website; however,we will provide electronic or paper copies of our filings, free of charge, uponelectronic request to InvRel@contmtl.com or written request to Mark S. Nichter,Secretary and Corporate Controller, Continental Materials Corporation, 200South Wacker Drive, Suite 4000, Chicago, Illinois 60606.

 

**Item 1A.****          ****RISKFACTORS**

 

Weare a smaller reporting company as defined by Rule 12b-2 of the ExchangeAct and as such, are not required to provide the information under this item.

 

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

 

None.

 

**Item 2.****             ****PROPERTIES**

 

TheHeating and Cooling segment operates out of an owned facility in Colton,California. This facility is, in the opinion of management, in good conditionand sufficient for the Company’s current needs. Production capacity exists atthe Colton plant such that the Company could exceed the highest volumesachieved in prior years or expected in the foreseeable future and maintaintimely delivery.

 

TheEvaporative Cooling segment operates out of a leased facility in Phoenix,Arizona. This facility is also, in the opinion of management, in good conditionand sufficient for the Company’s current needs. Production capacity exists atthe Phoenix plant such that the Company could exceed the highest volumesachieved in prior years or expected in the foreseeable future and maintaintimely delivery.

 

TheCACS segment serves the Colorado ready-mix concrete market from seven ownedbatch plants. In addition, the Company currently operates aggregate processingfacilities on three owned and two leased mining properties. All but one of themining properties are located in or near Colorado Springs or Pueblo. Theseproperties presently provide the aggregate requirements of our Colorado Springsand Pueblo ready mix concrete business as well as selling product toindependent customers. During 2008 the Pikeview Quarry experienced a landslidethat closed the quarry for the remainder of 2008 and all of 2009. For furtherinformation, see the CACS segment in Management’s Discussion and Analysis ofFinancial Condition and Results of Operations below. In general, the leasedmining properties are on long-term leases with payment based upon the number oftons mined. The lease of an aggregates property in Pueblo, Colorado alsorequires minimum annual royalty payments. See Note 9 for the schedule of futureminimum payments. Construction supplies are sold from owned facilities adjacentto the main batch plants in Colorado Springs and Pueblo. All of the CACSsegment’s facilities are located along the Southern 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 Southern Front Range that are not currently in production.In the opinion of management, the owned and leased properties contain permittedand mineable reserves sufficient to service customers’ and our own sand, rockand gravel requirements for the foreseeable future.

 

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.

 

Productvolumes at all of the facilities of the Company are subject to seasonalfluctuations, but in the opinion of management, the facilities are generallywell utilized. The current extreme reduction in construction activitythroughout the country and particularly along the Southern Front Range hasreduced product volumes such that the facilities of the CACS segment has leadto an underutilization of our facilities and equipment. Similarly, the downturnin construction, especially commercial construction, has reduced theutilization of the facility and equipment used in production of our fan coilproduct in the Heating and Cooling segment.

 

Thecorporate office operates out of leased office space in Chicago, Illinois.

 

**Item 3.****             ****LEGALPROCEEDINGS**

 

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 theseproceedings, when concluded, will have a material adverse effect on the Company’sconsolidated results of operations or financial 

 

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conditionas the Company has established adequate accruals for known occurrences whichrepresent management’s best estimate of the future liability related to theseclaims up to the associated deductible. See Management’s Discussion andAnalysis of Financial Condition and Results of Operations and Note 6.

 

**Item 4.****             ****REMOVEDAND RESERVED**

 

**PART II**

 

**Item 5.**              **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

Commonstock of Continental Materials Corporation is traded on the NYSE Amex, formerlyknown as the American Stock Exchange (AMEX) under the symbol CUO. Market salesprices for the fiscal quarters of the past two years are:

 
| ** ** | ** **     | **High** | ** ** | **Low** | ** ** |
|------------|----------------|----------|------------|---------|------------|
| 2009       | Fourth Quarter |     | $          | 13.25   |       | $ | 9.71 |   |
|       | Third Quarter  |     | 11.07      |    | 7.72       |   |
|       | Second Quarter |     | 14.59      |    | 11.07      |   |
|       | First Quarter  |     | 16.86      |    | 13.60      |   |
|       |           |     |       |    |       |
| 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      |   |

 

AtApril 1, 2010, the Company had approximately 265 shareholders of record(including non-objecting beneficial owners).

 

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

 

TheCompany has not purchased any of its common stock to become treasury stockduring the period October 3, 2009 through January 2, 2010.

 

TheCompany established an open-ended program to repurchase its common stock underwhich the Board authorized purchases up to a maximum amount of $2,750,000.Repurchases may be made on the open market or in block trades at the discretionof management. The Company has not repurchased any of its common stock duringthe period October 3, 2009 through January 2, 2010. As of January 2,2010, $1,307,404 of the authorized amount remains available for stockrepurchases.

 

OnApril 16, 2009, the Company entered into a credit agreement with a bankwhich contains certain restrictions on the Company’s ability to repurchase itsstock. Amendments to the new credit agreement have retained these restrictions.See further discussion in the “Financial Condition, Liquidity and CapitalResources” section of Item 7 below.

 

**Item 6.****  ****SELECTEDFINANCIAL DATA**

 

Per Item 301 of Regulation S-K, a Smaller Reporting Company is notrequired to provide this information.

 

**Item 7.****  ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

(Referencesto a “Note” are to the Notes to Consolidated Financial Statements containedelsewhere in this report)

 

**COMPANY OVERVIEW**

 

Asdiscussed in Item 1.- Business, the Company operates primarily in two industrygroups, HVAC and Construction Products. Within each of these two industrygroups, the Company has identified two reportable segments: the Heating andCooling segment and the Evaporative Cooling segment in the HVAC industry groupand the Concrete, Aggregates and Construction Supplies segment and the Doorsegment 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

 

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offeredfrom numerous locations along the Southern Front Range of Colorado operated bythe Company’s wholly-owned subsidiaries collectively referred to as TMC. TheCompany sold its concrete operations in the Denver market, RMRM on July 17,2009. The operations of RMRM are reported as discontinued operations for bothof the reported years. Doors are fabricated and sold along with the relatedhardware from Colorado Springs and Pueblo through the Company’s wholly-ownedsubsidiary, MDHI of Pueblo, Colorado. Sales of these two segments are highlyconcentrated in the Front Range area in Colorado although door sales are alsomade throughout the United States.

 

Salesof all four segments are affected by the level of construction activity in theareas served and general economic conditions; however sales of furnaces andevaporative coolers are less affected by the level of construction activity asa large portion of their sales are for replacements. Weather conditions in theareas served also affect sales. Although sales in all four segments wereaffected by these factors in 2008, the effect was much more pronounced in 2009.

 

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.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

Cash provided fromoperations in 2009 was $7,219,000 even though the Company recorded a net lossof $1,442,000. The principal source of cash flow from operations was areduction in net working capital. Inventories were reduced by $6,878,000 intotal as all of the Company’s business segments reduced inventories in responseto a weak economy and more specifically lower sales in all but the EvaporativeCooling segment. The most significant inventory reduction was in the Heatingand Cooling segment in response to a significant reduction in fan coil demand,a reduced production schedule for furnaces and stronger than expected furnacesales in the fourth quarter of 2009. Inventories were reduced here by$5,235,000. As a result of the lower sales, accounts receivable decreased by$4,107,000. The accounts receivable and inventory reduction were offset to someextent by a $4,404,000 reduction in accounts payable and accrued expenses. Thischange is also reflective of the lower level of sales. Investing activities in2009 generated a net positive cash flow of $1,966,000. Cash proceeds from thesale of property and equipment were $2,250,000 including $2,026,000 receivedfrom the sale of a portion of the Company’s sand property in Colorado Springs(See discussion under Results of Operations).

 

The Company sold itsDenver-based ready mix business, RMRM in July 2009 for total considerationof $2,385,000. Cash of $1,905,000 and a note receivable of $480,000 werereceived at the closing. After deducting $41,000 cash retained by RMRM at thetime of the closing the net cash proceeds from the sale were $1,864,000.Capital expenditures in 2009 were $2,148,000. Most of the capital spending in2009 was in the CACS segment. Net cash used in financing activities was$9,601,000. Funded debt, consisting of long-term debt and a revolving bankloan, was reduced by a total of $4,172,000. Long-term debt was reduced by$3,622,000 including scheduled principal repayments of $1,164,000. In addition$2,100,000 of the proceeds from the sale of RMRM and the Colorado Springs sandproperty were used to pay down the long-term debt. The remaining $358,000reduction in long-term debt was paid at the time of the April 16, 2009refinancing with proceeds from the revolving bank loan. The revolving bank loanwas reduced by a net amount of $550,000 including the $358,000 borrowed to paydown the long-term debt. In 2009 the Company deposited cash of $4,840,000 withits casualty insurer to secure self-insured claims under its casualty insuranceprogram. Previously, these claims were secured by a bank letter-of credit. TheCompany paid $589,000 in financing fees and other expenses associated with therefinancing. Cash balances declined from $1,097,000 at the end of 2008 to$681,000 at the end of 2009.

 

The sale of RMRM alsoaffected working capital in that the sale of the stock of RMRM included thefollowing balance sheet items: accounts receivable - $761,000; inventories -$254,000; prepaid expenses - $29,000; net book value of property, plant andequipment - $1,429,000; net book value of non-compete with previous owner -$168,000; allocated goodwill of $600,000 accounts payable and accruals -$597,000 and net deferred tax liabilities of $73,000.

 

Cash provided byoperations in 2008 was $522,000. The net loss in 2008 was $40,000. Inventoriesincreased by $4,199,000 in 2008. Most of the increase in inventories occurredat the Company’s two HVAC businesses. Inventories in the Evaporative Coolingsegment increased in anticipation of increased sale volume as a principalcompetitor went out of business in the latter part of 2008. Inventories in theHeating and Cooling segment also were higher as furnace sales during the peakselling season (September through January) were less than expected.Investing activities in 2008 provided net cash of $797,000. Proceeds from thesale of property and equipment were $2,807,000 including $2,114,000 from thesale of a portion of the Company’s Colorado Springs sand property. (Seediscussion under Results of Operations) In addition the Company sold a smallaggregate operation in the first quarter of 2008 for a total consideration of$720,000 including the assumption by the buyer of $85,000 in liabilitiesassociated with the operation. This operation did not supply aggregates to theCompany’s ready mix concrete business and management did not consider it to bea strategic part of its business. Net cash used in financing 

 

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activities in 2008 was$3,548,000 including scheduled long-term debt payments of $2,029,000 and areduction in revolving credit of $1,500,000. Cash balances decreased by $2,229,000 from $3,326,000 at the end of 2007to $1,097,000 at the end of 2008.

 

Capital expenditures in2009 and 2008 were $2,148,000 and $2,175,000 (including $165,000 that wasincluded in accounts payable at January 3, 2009) respectively. In bothyears the capital spending was predominantly in the Concrete, Aggregates andConstruction Supplies segment. In 2009 expenditures in this segment were$1,665,000 including $598,000 to purchase two aggregates plants that werepreviously leased, $541,000 to complete the slurry wall associated with the newmining phase at the Pueblo aggregates operation, $193,000 to purchase mixertrucks that were previously leased and $167,000 for the land movementmonitoring system for the Pikeview Quarry. The Door segment spent $175,000 in2009 for a new roof for its Colorado Springs fabrication and office facility. Capitalexpenditures in 2008 included approximately $1,500,000 for the slurry wall andother expenditures related to the new mining phase at the Pueblo aggregatesoperation.

 

Budgeted capitalspending for 2010 is approximately $1,650,000. Projected depreciation,depletion and amortization are approximately $4,200,000.  Planned capital expenditures for the CACSsegment are approximately $700,000 including $300,000 for the purchase of threefront-end loaders currently under lease. The Company is working on a new miningplan for the Pikeview Quarry. This effort will require some time and planningon the part of management in developing a mining and reclamation plan andobtaining the required permits from the State of Colorado. Some outsideconsulting fees will also likely be necessary. However, the Company does notexpect that significant capital expenditures will be required at the PikeviewQuarry should the Company obtain the permits to resume mining operations. Thetwo HVAC businesses are planning on spending approximately $900,000 for variousproduction equipment, tooling and dies and facilities improvements. The Companyintends to limit capital spending in 2010 to essential items. The Companyexpects to fund the planned capital expenditures from operating cash flow orfunds available from the revolving credit facility.

 

Sales of the Company’sHVAC products are seasonal except for fan coils. Sales of furnaces, heaters andevaporative coolers are sensitive to weather conditions particularly during thepeak selling season. Fan coil sales are, to a significant extent, dependent oncommercial construction, particularly for hotels. Revenues in the CACS segmentare primarily dependent on the level of construction activity along the FrontRange in southern Colorado. The level of construction activity over the pasttwo years has substantially subsided due to the economic downturn and turmoilin the financial markets that has prevailed throughout most of the UnitedStates. Price competition tends to intensify in this segment when demand isweak. Inclement weather during the winter months in southern Colorado canresult in significantly reduced sales in those months even under robusteconomic conditions. Sales for the Door segment are not as seasonal nor arethey 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 southern Colorado and the seasonal sales of the EvaporativeCooling segment. Fourth quarter results can vary based on weather conditions inColorado as well as in the principal markets for the Company’s heating equipment.The Company typically experiences operating cash flow deficits during the firsthalf of the year reflecting operating results, the use of sales dating programs(extended payment terms) related to the Evaporative Cooling segment andpayments of the prior year’s accrued incentive bonuses and Companyprofit-sharing contributions, if any. 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.

 

**Revolving Credit and Term Loan Agreement**

 

OnApril 16, 2009 the Company entered into a secured credit agreement (Credit Agreement) under which the bank lenderinitially provided 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. Borrowings under the Credit Agreement are secured by the Company’saccounts receivable, inventories, machinery, equipment, vehicles, certain realestate and the common stock of all of the Company’s subsidiaries. Borrowingsunder the revolving credit facility are limited to 80% of eligible accountsreceivable and 50% of eligible inventories. Inventory borrowings are limited toa maximum of $7,500,000 ($6,750,000 after April 15, 2010). Borrowingsunder the Credit Agreement bear interest based on a performance based LIBOR orprime rate option. For purposes of computing the performance based rate, thebase LIBOR rate will not be less than 2% and the base prime rate will not beless than 4%. At January 2, 2010 the Company’s effective interest rateunder the LIBOR option was 5% and 4.75% under the prime rate option. TheCompany also paid certain underwriting and arrangement fees at the time ofclosing.****The Credit Agreement requires theCompany to maintain certain levels of tangible net worth, EBITDA (earningsbefore interest, income taxes, depreciation and amortization), debt servicecoverage and to maintain certain ratios of consolidated debt to cash flow (asdefined). The Credit Agreement places a limit on the amount of annual capitalexpenditures. 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 

 

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borrowings.Principal payments under the term loan are due quarterly with a final paymentof all remaining unpaid principal originally due April 16, 2012. On November 18,2009 the Credit Agreement was amended reducing the revolving credit facility to$15,000,000. On April 15, 2010 a Second Amendment to the Credit Agreementaccelerated the final payment of all remaining unpaid principal borrowings to August 1,2011. The quarterly principal payment amounts were not changed from those setforth in the Credit Agreement. The Second Amendment also revised some of thefinancial covenants as discussed more fully in Note 5 to the financialstatements.

 

Outstandingborrowings under the revolving credit facility as of January 2, 2010 were$5,850,000. The highest balance outstanding on the revolving credit facilityduring 2009 was $14,734,000. Average outstanding revolving credit during theyear was $7,090,000. The weighted average interest rates on the outstandingrevolving credit and term debt in 2009 and 2008 were 4.8% and 6.1%,respectively. The 4.8% rate for 2009 includes the effect of the interest rateswap discussed below. At all times since the inception of the Credit Agreement,the Company had sufficient qualifying assets such that the maximum revolvingcredit facility was immediately available and is expected to be available forthe foreseeable future.

 

Thelender required the Company to enter into an interest rate swap transaction tohedge the interest rate on $5,000,000 of term debt. On May 29, 2009 theCompany entered into an interest rate swap transaction for a notional amount of$5,000,000 whereby the Company pays a fixed rate of 3.07% on $5,000,000 andreceives a floating rate equivalent to the 30 day LIBOR rate but not less than2.0%. Since the inception of this agreement the 30 day LIBOR rate has remainedbelow 2.0%. Hence, the effect of the transaction has been, thus far, toincrease the Company’s effective interest rate by 1.07%. The notional amountdecreases as follows:

 
| · | September 30,  2011 |   | $ | 500,000 |   |
|--------|--------------------------|--------|---|---------|--------|
| · | December 31,  2011  |   | $ | 500,000 |   |
| · | March 31,  2012     |   | $ | 500,000 |   |

 

Theinterest rate swap transaction terminates on April 16, 2012.

 

In April 2009 theCompany deposited cash of $4,840,000 with its casualty insurance carrier toserve as collateral for the self-insured obligations under the Company’scasualty insurance program. Previously these obligations were secured by a bankletter of credit. This deposit was funded with borrowings under the revolvingcredit line.

 

Atthe end of the period ended January 2, 2010 the Company was not incompliance with the minimum adjusted EBITDA and fixed charge coverage covenantsof the Credit Agreement. As a result, effective January 1, 2010 thedefault rate provision of the Credit Agreement increases the interest rate onall outstanding revolving and long-term debt by 2%. Non-compliance with thefinancial covenants in the Credit Agreement constitutes an event of defaultunder the agreement. Upon the occurrence of an event of default, the lendersmay, among other things, terminate their lending commitments, in whole or inpart, declare all or any part of the Company’s borrowings to be due andpayable, and/or require the Company to collateralize with cash any or allletters of credit provided by the lender. A waiver of the event of defaultrelating to compliance with the minimum adjusted EBITDA and fixed chargecoverage covenants was granted and a second amendment to the Credit Agreement wasentered into on April 15, 2010. The second amendment provides for thefollowing:

 

·  Thecovenants regarding the fixed charge coverage and the maximum leverage ratiohave been eliminated for the duration of the amended Credit Agreement.

·  TheCompany must maintain a minimum tangible net worth of $32,000,000 plus 50% offuture net income. At January 2, 2010, the minimum tangible net worth, asdefined, was $38,250,000.

·  Annualcapital expenditures may not exceed $3,500,000.

·  Themaximum revolving credit facility line will remain at $15,000,000 until October 1,2010 when it will then be reduced to $13,500,000.

·  Thematurity date of the credit facility is August 1, 2011.

·  Theinterest rate for the remaining term of the amended Credit Agreement will be4.0% over LIBOR but with a LIBOR floor of 2.0% (the Company’s effective LIBORborrowing rate will be 6.0%). The margin on the “base” or prime rate optionwill be the base plus 1.75% with a base rate floor of 4% (the Company’seffective borrowing rate will be 5.75%).

·  Theinterest rate swap transaction will remain in effect.

 

TheCredit Agreement as amended on April 15, 2010 requires the Company tomaintain certain financial covenants as disclosed in the table below (amountsin thousands):

 

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| **Financial Covenant**            | ** ** | **Date Required**                  | ** ** | **Required  Amount or  Ratio** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
| Minimum tangible net worth        |       | At all times                       |       | > $32,000                   |       |
| Minimum adjusted quarterly EBITDA |       | Quarter ended July 3, 2010    |       | $2,100                         |       |
|                              |       | Quarter ended October 2, 2010 |       | $2,000                         |       |
|                              |       | Quarter ended January 1, 2011 |       | $500                           |       |
|                              |       | Quarter ended April 2, 2011   |       | $(600                          | )          |
|                              |       | Quarter ended July 2, 2011    |       | $2,100                         |       |
| Maximum capital expenditures      |       | Trailing 12 months                 |       | < $3,500                    |       |

 

Definitions under theCredit Agreement as amended are as follows:

·      Tangible net worth is defined as networth plus subordinated debt minus intangible assets (goodwill, intellectualproperty, prepaid expenses and deferred charges) minus all obligations owed tothe Company or any of its subsidiaries by any affiliate or any or itssubsidiaries and minus all loans owed by its officers, stockholders,subsidiaries or employees (Note: there are no loans owed by any of thereferenced parties at January 2, 2010 or as of the date of thisfiling).

·      The adjusted EBITDA is defined as netincome plus interest, income taxes, depreciation, depletion and amortizationplus other non-cash charges approved by the lender.

 

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 CreditAgreement, will be sufficient to cover expected cash needs, including servicingdebt and planned capital expenditures for the next twelve months. The Companyalso expects to be in compliance with all debt covenants, as amended, duringthis period.

 

**Reconciliation of Fair Value ofReporting Units to Market Capitalization**

 

The Company estimatesthat the aggregate fair value of its four reporting units as of January 2,2010 is approximately $60,100,000. The fair value of the CACS reporting unitwas determined as described in the Critical Accounting Policies discussion ofGoodwill and Other Intangible Assets below. The fair value of all otherreporting units was estimated by management based on a discounted cash flowvaluation using a 16% discount rate in all cases. After deducting alloutstanding funded debt, which totaled $13,000,000 as of January 2, 2010,the calculation yields a net fair value of the equity of the reporting units of$47,100,000. The Company’s market capitalization as of January 2, 2010 wasapproximately $17,818,000 based on a year-end 2009 share price of $11.15 and1,598,000 common shares outstanding. It is the Company’s opinion that its shareprice reflects the negative impact of its corporate office expenses as many ofthese would not be required to run the individual companies. It is also theCompany’s opinion that the value of it operating businesses is not diminished asa result of the corporate expenses. Therefore, in the Company’s opinion, inreconciling the fair value of the operating units to the market capitalizationan adjustment to the market capitalization for the corporate expenses isappropriate. Using the five year average corporate office expenses after therelated income tax benefit and applying a 16% capitalization rate results in anadjusted market capitalization of $29,130,000 as of January 2, 2010. Inthe Company’s opinion, the difference between the net fair value of thereporting units and the adjusted market capitalization represents the value ofthe control premium. As of January 2, 2010 the control premium isapproximately 61.7% of the adjusted market capitalization. The Company believesthis level of control premium is reasonable and falls within a range based uponactual control premiums involving merger transactions of companies in the SICcodes under which we operate. A reconciliation of the fair value of thereporting units to the adjusted market capitalization is shown in the tablebelow. Amounts are in thousands except share data.

 

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| ** **                                                         | ** ** | **Market Capitalization**  | ** ** | **Market Capitalization**          | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|
| ** **                                                         | ** ** | **Based on**               | ** ** | **Based on the highest** | ** ** |
| ** **                                                         | ** ** | **December 31, 2009** | ** ** | **2010 year-to-date**              | ** ** |
| ** **                                                         | ** ** | **Closing Price**          | ** ** | **Closing Price of**          | ** ** |
| ** **                                                         | ** ** | **$11.15 Per Share**  | ** ** | **$16.46 Per Share**          | ** ** |
| Estimated  Fair Value of Reporting Units                           |       | $                               | 60,100     |                                    | $          | 60,100 |   |
| Less  outstanding funded debt as of 1/2/2010 and 3/18/2010         |       | 13,000                          |       | 12,900                                  |       |
| Net  Fair Value of Reporting Units                                 |       | $                               | 47,100     |                                    | $          | 47,200 |   |
|                                                               |       |                            |       |                                    |       |
| Market  capitalization - 1,598,000 common shares outstanding       |       | $                               | 17,818     |                                    | $          | 26,303 |   |
| Adjustment  for corporate expenses after income tax effect         |       | 11,312                          |       | 11,312                                  |       |
| Adjusted  Market Capitalization                                    |       | 29,130                          |       | 37,615                                  |       |
| Control  Premium                                                   |       | 17,970                          |       | 9,585                                   |       |
| Fair  Value of Reporting Units as determined above                 |       | $                               | 47,100     |                                    | $          | 47,200 |   |
| Control  Premium as a percentage of Adjusted Market Capitalization |       | 61.7                            | %          | 25.5                                    | %          |

 

A significant portion ofthe Company’s common stock is closely held. The three largest shareholders andother officers and directors together own approximately 76.5% of theoutstanding shares. The remaining shares (“available float”) represent only 23.5%of the outstanding shares. Generally, there is limited trading activity in theCompany’s shares. On some trading days there is no trading activity. TheCompany’s share price is subject to sharp volatility on trades of a few hundredshares or less.  **For thesereasons, it is the opinion of the Company that its market capitalization at anygiven time is not indicative of the aggregate fair value of the reportingunits.**

 

**InsurancePolicies**

 

TheCompany maintained insurance policies since March 31, 2009 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         |       |
|                            |            |                |            |                   |            |  |  |

 

Shouldthe aggregate out-of-pocket payments related to the above policies exceed$4,126,000 during a policy year, deductibles on future claims are waived andthe policies pay all amounts up to the policy limits. Should any, or all policylimits be exceeded, an umbrella policy is maintained which covers the next$25,000,000 of claims.

 

**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 OF OPERATIONS**

 

In the ensuing discussions of the results ofoperations we define the term gross profit as the amount determined bydeducting cost of sales before depreciation, depletion and amortization fromsales. The gross profit ratio is gross profit divided by sales.

 

**DISCUSSIONOF CONSOLIDATED RESULTS FROM CONTINUING OPERATIONS**

 

2009 vs. 2008

Consolidatedsales in 2009 were $113,461,000, a $32,253,000 (22%) decline compared to 2008.The lower sales were the result principally of a depressed level ofconstruction along the Front Range in southern Colorado and a slowdown in hotelconstruction. The weak construction market in southern Colorado lead to a$24,408,000 (38%) decline in sales in the CACS segment. Also contributing tothe lower sales in this segment was the shutdown of operations at the PikeviewQuarry in Colorado Springs. The operations at the Pikeview Quarry were shutdownafter a landslide in December 2008 made for unsafe conditions. Asubstantial reduction in hotel construction, a primary market for fan coils,lead to a $9,382,000 (22%) decrease in sales in the Heating and Coolingsegment. Door sales are also influenced by the level of construction bothwithin the State of Colorado and to a lesser extent on a nation-wide basis.Sales in the Door segment in 2009 were down $757,000 (5%) compared to the prioryear. In spite of the weak economy, sales in the Evaporative Cooling segmentincreased by $2,296,000 (10%) as the result of a primary competitor exiting thedomestic market in late 2008.

 

Theconsolidated gross profit ratio in 2009 was 17.4%, an increase of 0.7% comparedto 2008. Normally the gross profit ratio would have decreased with such asignificant decline in sales. However, the net increase in the gross profitratio was the result of varying experiences for each of the Company’s reportingsegments. The gross profit percentage in the CACS segment decreased by 3.1%from 14.7% to 11.6%. This was the result of the diminished sales volume and theshutdown of the Pikeview Quarry. The Door segment’s gross profit ratiodecreased from 27.0% to 24.6% due to more competitive pricing 

 

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andlower sales volume. The gross profit rate in the Heating and Cooling segmentwas 0.5% higher in 2009. The Evaporative Cooling segment achieved a significantimprovement in its gross profit ratio from 15.4% to 22.9%. This improvement wasthe result of reduced steel costs, higher production volume and modest sellingprice increases.

 

Depreciation,depletion and amortization in 2009 totaled $4,472,000 compared to $4,368,000 in2008. The increase is primarily due to amortization of the deferred developmentcosts at one of our aggregates operations.

 

Sellingand administrative expenses were $587,000 less in 2009 compared to 2008. Thisdecrease reflects cost reduction actions taken throughout the year in responseto the lower sales volume in all but the Evaporative Cooling segment. Somesales related expenses such as commissions in the Heating and Cooling segmentand sales managers incentive compensation in the Door segment were less in 2009as a result of diminished revenues. As a percentage of consolidated sales,selling and administrative expenses were 15.9% in 2009 compared to 12.8% in theprior year. The higher percentage reflects the fixed nature of many of theseexpenses. The administrative expenses of the corporate office increased by$532,000. Charges related to unfunded supplemental profit-sharing obligationsto certain officers accounted for approximately $420,000 of this increase.These obligations are increased or decreased, with a corresponding charge orcredit to earnings, for deemed earnings or losses on the unfunded supplementalprofit-sharing balances. In 2009 the Company recorded a charge of $175,000 fordeemed earnings. In 2008 the Company recorded a credit of $245,000 for thedeemed loss on the supplemental profit-sharing account balances.

 

Thegain on disposition of property and equipment in 2009 and 2008 includes gainson the sale of a portion of the Company’s sand property in Colorado Springs inthe amounts of $2,026,000 and $1,947,000, respectively. In December 2008the Company entered into a Possession and Use Agreement with the City ofColorado Springs Pikes Peak Regional Transportation Authority. Under theAgreement the City received an irrevocable right to possess and use theproperty in exchange for a cash payment of $2,110,000 in December 2008.The payment was based upon the City’s initial appraised value of the property.The Company did not agree with the City’s initial appraised value. The City andthe Company agreed to continue negotiations to determine the final fair marketvalue. The City acknowledged that the final fair market value would not be lessthan the $2,110,000 paid in December 2008 thus the Company recorded a gainof $1,947,000 in 2008 after deducting the $163,000 cost basis of the property.The Company and City concluded their negotiations regarding the fair marketvalue during June 2009 and agreed upon a total final price of $4,140,000,or $2,026,000 in excess of the amount previously paid. The Real Estate PurchaseAgreement was signed on July 2, 2009 and the Company appropriatelyrecorded the additional proceeds of $2,026,000 as a gain in the second quarterof 2009. As consideration for the Possession and Use Agreement had already beenexchanged as of the 2008 year-end, the profit on the transaction wasdeterminable and collectability was not a factor. Furthermore, as of December 17,2008, the City received the full risks and rewards of the land through theirrevocable possession and use agreement. After December 17, 2008, theCompany had no further obligation or continuing involvement with the propertysuch as preparing the land for sale; therefore, the earnings process wascomplete with regards to the original transaction. While there was a potentialfor additional consideration from the sale of the land in the future, suchadditional amounts were not determinable as of the 2008 year-end. As a result,the additional proceeds were recorded when the final amount was determined.Prior to July 2, 2009, any anticipated additional proceeds would have beenconsidered a gain contingency. Gain on sale of property and equipment in 2008also included a gain of $344,000 from the sale of a small aggregate operationthat the Company determined was not a strategic part of its business.

 

Netinterest expense related to continuing operations in 2009 was $956,000 comparedto $1,161,000 in 2008. Average outstanding funded debt was $4,951,000 less in2009 and the weighted average interest rate in 2009 was approximately 4.8%compared to 6.1% in 2008. However, at year end 2009, the average interest rateon outstanding funded debt was approximately 6.1%. The results fromdiscontinued operations include approximately $71,000 and $133,000 of interestexpense for 2009 and 2008, respectively.

 

TheCompany’s effective income tax rate reflects federal and state statutory incometax rates adjusted for non-deductible expenses, tax credits and other taxitems. The effective income tax rate related to the loss from continuingoperations in 2009 was a benefit of 48.7%. The principal difference between theeffective income tax rate for 2009 and the federal statutory rate of 34% is dueto the reversal of previously recorded tax contingencies related to tax returnsthat have been audited by the IRS and closed.

 

TheCompany has filed a business interruption claim with regard to the incidentthat lead to the cessation of operations at the Pikeview Quarry. The claim iscurrently being reviewed by the insurance company. No recovery has beenanticipated or recorded in the 2009 results of operations.

 

**DISCONTINUEDOPERATION**

 

Theresults of discontinued operations reflect the operations of RMRM, a formersubsidiary that was sold on July 17, 2009. The 2009 loss includes a lossfrom operations before income tax benefits of $1,778,000 and a loss beforeincome tax benefit 

 

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onthe sale of the stock of the subsidiary of approximately $221,000. The incometax benefits associated with the discontinued operation in 2009 wereapproximately $1,138,000. In 2008 the net loss from the operations of RMRM was$1,797,000 net of the income tax benefit of $989,000.

 

TheCompany operates four businesses in two industry groups. The businesses areseasonal, weather sensitive and subject to cyclical factors. The followingaddresses various aspects of operating performance focusing on the reportable segmentswithin each of the two industry groups.

 

**Construction Products IndustryGroup**

 

Thetable below presents a summary of operating information for the two reportablesegments within the Construction Products industry group for the fiscal years2009 and 2008 (amounts in thousands).

 
| ** **                                    | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Door** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------|------------|----------|------------|
| 2009                                          |       |                                                       |       |     |       |
| Revenues from external customers              |       | $                                                          | 40,421     |     | $          | 14,616 |   |
| Segment gross profit                          |       | 4,693                                                      |       | 3,591    |       |
| Gross profit as percent of sales              |       | 11.6                                                       | %          | 24.6     | %          |
| Segment operating (loss) income               |       | (2,759                                                     | )          | 1,090    |       |
| Operating (loss) income as a percent of sales |       | (6.8                                                       | )%         | 7.5      | %          |
| Segment assets                                |       | $                                                          | 35,791     |     | $          | 6,374 |   |
| Return on assets                              |       | (7.7                                                       | )%         | 17.1     | %          |
|                                          |       |                                                       |       |     |       |
| 2008                                          |       |                                                       |       |     |       |
| Revenues from external customers              |       | $                                                          | 64,829     |     | $          | 15,373 |   |
| Segment gross profit                          |       | 9,529                                                      |       | 4,150    |       |
| Gross profit as percent of sales              |       | 14.7                                                       | %          | 27.0     | %          |
| Segment operating income                      |       | 2,142                                                      |       | 1,455    |       |
| Operating income as a percent of sales        |       | 3.3                                                        | %          | 9.5      | %          |
| Segment assets                                |       | $                                                          | 34,699     |     | $          | 6,276 |   |
| Return on assets                              |       | 6.2                                                        | %          | 23.2     | %          |

 

Concrete, Aggregates andConstruction Supplies Segment

 

2009vs. 2008

Sales in the Concrete,Aggregates and Construction Supplies segment fell by $24,409,000 (38%) due tothe weak construction market. Housing starts in the served market area were ator near record lows. The preponderance of the sales in 2009 was fromcommercial, military or public construction projects. Ready mix concrete volumewas 36% lower in 2009 compared to 2008. In the concrete business, gross profiton a per unit (cubic yard) basis improved in 2009 due to lower fuel and cementcosts and some higher concrete prices on certain high specification jobs thatwere completed in the first half of 2009. However, the gross profit of theconcrete business fell by nearly $1,000,000 due to the lower sales volume.Sales of aggregates (sand, crushed limestone and gravel), including aggregatesconsumed in the segment’s concrete business were 45% less in 2009 compared tothe prior year. The lower level of construction activity and the cessation ofoperations at the Pikeview Quarry accounted for the lower volume. In recentyears the Pikeview Quarry has been the principal source of rock for thissegment’s concrete business. A nominal amount of sales from existing inventorywere made from the Pikeview Quarry in 2009. Sales from the Pikeview Quarry,including internal consumption, were approximately $4,700,000 less in 2009compared to 2008. The gross loss from the Pikeview Quarry in 2009 was $727,000compared to a gross profit of $972,000 in 2008. As previously mentioned, theCompany has filed a business interruption claim with its insurance carrier withregard to the incident that lead to the cessation of operations at the PikeviewQuarry. No recovery has been anticipated or recorded in the 2009 results ofoperations. Net sales, including internal consumption, from all of the otheraggregate locations decreased by 18%. The gross profit from all other aggregateoperations combined was approximately $1,100,000 less in 2009 compared to 2008due principally to the lower sale volume. The gross profit of the Puebloaggregate operation improved in 2009 as the result of lower cash operatingcosts due to the opening of a new gravel deposit site with a more beneficialblend of rock and sand. The Company reopened its Black Canyon limestone quarrynear Colorado Springs to offset some of the lost production of the PikeviewQuarry. However, operations at the Black Canyon quarry did not begin untilmid-year and due to start up costs the Black Canyon operation generated a lossin 2009. Sales of construction supplies in 2009 dropped by $3,709,000 (51%)compared to 2008. The gross profit from construction supplies declined byapproximately $1,000,000 from the prior year due to the lower sales volume.Depreciation, depletion and amortization for this segment 

 

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increased by $175,000 in2009. The increase was due to the depreciation of deferred development costs atthe segment’s Pueblo aggregate operation.

 

The prices of twocommodities, cement and diesel fuel, can have a significant effect on theresults of operations of this segment. The Company negotiates cement priceswith producers who have production facilities in or near the concrete marketsthat we serve. The Company may negotiate separate cement prices for largeconstruction projects depending on the demand for and availability of cementfrom the local producers. The Company buys diesel fuel from local distributors.It may from time to time enter into a short term arrangement with a distributorwhereby the price of diesel fuel is fixed for a period of up to six months. TheCompany does not otherwise hedge diesel fuel prices. Changes in the cost ofthese two commodities has a direct dollar for dollar effect on the results ofoperations depending upon whether competitive conditions prevailing in themarketplace enables the Company to adjust its selling prices to recover theincreased costs.

 

Door Segment

 

2009 vs. 2008

Doorsales in 2009 were $757,000 (5%) less than the previous year. The decline insales is related to the general economic recession and the lower level of newconstruction particularly within Colorado. The slower sales pace resulted insharper bidding on those job opportunities that were available. The lower salesvolume and more competitive bidding environment lead to a decrease in grossprofits for this segment of approximately $560,000. Selling and administrativeexpenses, particularly sales managers’ compensation and profit-sharing andincentive compensation for all of this segment’s employees were reduced in 2009compared to 2008. In total, selling and administrative expenses wereapproximately $230,000 lower in 2009 compared to 2008.

 

TheDoor segment sales backlog at the end of 2009 was approximately $2,767,000compared to approximately $5,048,000 at the end of 2009.

 

**HVAC Industry Group**

 

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC industry group for the fiscal years 2009 and 2008(amounts in thousands).

 
| ** **                                    | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| 2009                                          |       |                          |       |                     |       |
| Revenues from external customers              |       | $                             | 32,784     |                     | $          | 25,281 |   |
| Segment gross profit                          |       | 5,507                         |       | 5,794                    |       |
| Gross profit as percent of sales              |       | 16.8                          | %          | 22.9                     | %          |
| Segment operating (loss) income               |       | (503                          | )          | 2,397                    |       |
| Operating (loss) income as a percent of sales |       | (1.5                          | )%         | 9.5                      | %          |
| Segment assets                                |       | $                             | 17,208     |                     | $          | 13,165 |   |
| Return on assets                              |       | (2.9                          | )%         | 18.2                     | %          |
|                                          |       |                          |       |                     |       |
| 2008                                          |       |                          |       |                     |       |
| Revenues from external customers              |       | $                             | 42,166     |                     | $          | 22,985 |   |
| Segment gross profit                          |       | 6,890                         |       | 3,577                    |       |
| Gross profit as percent of sales              |       | 16.3                          | %          | 15.6                     | %          |
| 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                      | %          |

 

Heatingand Cooling Segment

 

2009vs. 2008

Salesin the Heating and Cooling segment fell by $9,382,000 (22%) compared to 2008.Virtually all of the decrease was the result of a 48% decline in fan coilssales. The lower fan coil sales reflect the slowdown in hotel construction inparticular and commercial construction in general.  Sales of furnaces and heaters in 2009 wereabout the same as in 2008. The segment’s gross profit was $1,383,000 lower dueto the lower sales. The gross profit ratio increased by .5% in spite of lowerproduction volume. Reduced steel and other commodity costs offset the effect ofthe volume reduction and its impact on factory overhead absorption. In responseto the business slowdown, selling and administrative expenses were reduced byapproximately $782,000 in 2009 compared to 2008. The prices of two commodities,steel and copper fuel, can have a significant effect on the results ofoperations of this segment. We have not entered into any formal hedgingarrangements 

 

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withregard to steel. On one occasion in 2008 we entered into a hedging contract(fixed price swap) where we fixed the price of copper for a period ofapproximately 10 months for a stated amount of copper. We did not elect hedgeaccounting for this transaction. The overall effect of the fixed price swaptransaction was insignificant. We are not currently a party to any hedging arrangementswith regard to copper, steel or any other commodity.

 

EvaporativeCooling Segment

 

2009vs. 2008

Salesof evaporative coolers increased approximately 10% in 2009 consisting of a 7%increase in unit volume and selling price increases of approximately 3%. Theincreased unit volume was primarily due to Adobe Air, formerly the largestproducer serving the U. S. market, exiting the business in late 2008. Thehigher sales and production volume coupled with lower steel prices (see commentregarding steel in the Heating and Cooling Segment discussion above) resultedin substantially improved gross profits. Gross profit for this segmentincreased by approximately $2,200,000 compared to 2008. Due to sales relatedexpenses that typically vary with sales volume and increased bonus andprofit-sharing provisions selling and administrative expenses increased byapproximately $340,000.

 

**OUTLOOK**

 

Overall the Companyexpects sales in 2010 to be at nearly the same level experienced in 2009. Theconstruction market along the Front Range in southern Colorado is not expectedto substantially improve in 2010. While there has recently been an increase inthe number of housing starts in the southern Colorado area, the current levelof housing construction is still at a very low level. The Company believes thatprice competition will remain sharp in the Construction Products Industry Groupas it typically does when the construction market is slow. The Company isworking on a mining and reclamation plan to reopen the Pikeview Quarry. Theplan requires the approval of the Department of Natural Resources of the Stateof Colorado. If such approval is obtained, and there is no assurance that itwill be obtained, the Company anticipates resuming operations at the PikeviewQuarry in 2011.

 

Sales in the HVACIndustry Group are also expected to be essentially unchanged from 2009. Hotelconstruction is expected to remain at a low level. This will be a negativeinfluence on fan coil sales. Sales of furnaces, heaters and evaporative coolersare primarily for replacement purposes and therefore are not reliant on newconstruction. However, a continuing high level of unemployment could reducedemand for these products.

 

The Company has taken a number of cost reductionactions in 2009 and will continue to endeavor to reduce expenses especially ifsales do not improve. Capital spending in 2010 will be limited to essentialitems and is expected to be well below the $3,500,000 limit imposed by thecovenant in our Credit Agreement.

 

**CRITICALACCOUNTING POLICIES**

 

TheSecurities and Exchange Commission requires all registrants, including theCompany, to include a discussion of “critical” accounting policies or methodsused in the preparation of financial statements. We believe the following areour critical accounting policies and methods.

 

Goodwilland Other Intangible Assets

 

TheCompany annually assesses goodwill for potential impairment as of the last dayof its fiscal year. In addition, to the extent that events occur, eitherinvolving the relevant reporting unit or in their industries, the Companyrevisits its assessment of the recorded goodwill to determine if impairment hasoccurred and should be recognized. As of January 2, 2010 the Company hasrecorded $7,229,000 of goodwill consisting of $6,229,000 related to the CACSreporting unit and $1,000,000 related to the Door reporting unit. In 2009 theCompany charged $600,000 against earnings from discontinued operationsrepresenting the allocable portion of goodwill related to RMRM which was sold inJuly 2009.

 

Forpurposes of measuring the fair value of the CACS reporting unit the Companyengages the services of an independent investment banking firm.  The fair value of this reporting unit isdetermined by applying three valuation methods. These are 1) discounted cashflow (“DCF”) valuation, 2) an analysis of comparable transactions within theindustry and 3) comparable enterprise valuations of other public companies inthe industry. The DCF valuation involves projecting future cash flows. The cashflow projection entails key assumptions with regard to unit sales volumes,gross profit rate per unit or per sales dollar, capital expenditures and thediscount rate. The cash flow projection assumes a gradual recovery inconstruction activity along the Front Range in southern Colorado, the reportingunit’s principal market area. However, projected unit volumes do not reachlevels achieved in this reporting unit during the peak of the previous businesscycle. The projections assume that the Company will resume operations at thePikeview Quarry in 2011 or will be able to increase production at its otheraggregate operations. The cash flow projections assume some increase in grossprofit rates compared to current levels due to an increase in volume, an improvementin the relationship of selling prices for concrete relative to cement unitcosts and some 

 

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costreductions. The projected gross profit rates do not exceed levels previouslyattained. Projected capital expenditures are compatible with the projected unitsales volume. The cash flow forecasts are adjusted by a discount rate thattakes into consideration both the time value of money and the investment risk.The discount rate used to determine the DCF valuation as of January 2,2010 was 16%. The comparable transactions method estimates value based onselect transactions in the construction materials industry. Transactionsoccurring in the years 2003 to 2009 were considered in this analysis.  Transactions involving companiessignificantly larger than this reporting unit were excluded. The comparabletransaction value range was determined by applying a multiple indicated in thetransaction market to the reporting unit’s 10 year average EBITDA.  The comparison to other public companies isbased on their enterprise values (equity value plus funded debt) in relation totheir last twelve months EBITDA. This value range was determined by applying anEBITDA multiple indicated by the enterprise values of the publicly heldcompanies in the industry to the adjusted EBITDA for this reporting unit in2009. EBITDA for this reporting unit in 2009 was adjusted for the expensesassociated with the Pikeview Quarry which was not in operation in 2009 due to alandslide in a portion of the quarry. This assessment indicates a fair valuefor the reporting unit that exceeds the carrying value of the net assets by 8%.

 

Thefair value of the Door reporting unit is estimated by the Company based on itsown discounted cash flow (“DCF”) projection. The cash flow projection involveskey assumptions regarding sales, costs, expenses and capital expenditures.Management believes that the projections are reasonable and the projected cashflows approximate prior experience. The discount rate used to determine the DCFvaluation as of January 2, 2010 was 16%. The estimated fair value based onthe discounted cash flow projection indicates a fair value for the reportingunit that exceeds the carrying value of the net assets in the reporting unit by17%.

 

Managementbelieves that the assumptions and estimates used to determine the estimatedfair values are reasonable; however, a prolonged period of depressed constructionactivity along the Front Range in southern Colorado, inability to resumeproduction at the Pikeview Quarry or alternatively if the Company is unable toincrease production at its other aggregate operations or changes in theaforementioned assumptions and estimates, as well as the effects ofunpredictable future events or circumstances could materially affect theestimated fair value.

 

Long-lived Assets (otherthan Goodwill and Intangible Assets)

 

The Company reviewslong-lived assets by asset group for impairment whenever events or changes incircumstances indicate that the related carrying amounts may not berecoverable. 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. The Company has determined that therewas no impairment of such long-lived assets in 2009.

 

Liabilities

 

TheCompany purchases insurance coverage for workers’ compensation, general productand automobile liability, retaining certain levels of risk (self-insuredportion). See the above section titled “Insurance Policies” for informationrelated to per incident deductibles and policy limits. Provision for workers’compensation claims is estimated by Management based on information provided bythe independent third party administrator and periodic review of alloutstanding claims. The Company’s independent claims administrator tracks allclaims and assigns a liability to each individual claim based upon facts knownat the time of estimation. In addition, Management periodically reviews eachindividual claim with both the third party claims administrator and legalcounsel and the third party administrator revises the estimated liabilityaccordingly. The Company also retains an independent expert who appliesactuarial methodology to the claims data provided by the Company’s independentclaims administrator to estimate the ultimate aggregate settlement amount ofthe claims using specific loss development factors based on the Company’s priorexperience. The Company then establishes its reserve for workers’ compensationclaims based upon the actuarial evaluation and Management’s knowledge of theoutstanding claims. Management tracks changes to the incurred and paid amountsof individual workers compensation claims up to the date of final closure. Inrecent years, the net amounts that the claims have ultimately settled for haveindicated that the reserve recorded by the Company has been sufficient.

 

Withregard to product liability, provisions for both claims and unasserted claimsthat would be covered under the self-insured portion of the policies arereviewed at least annually and are recorded in accordance with accountingguidance on contingent liabilities provided in the FASB Accounting StandardsCodification (Codification). Management also incorporates information fromdiscussions with legal counsel handling the individual claims when revising itsestimates. Provision for automobile claims is estimated based upon informationprovided by the Company’s independent claims administrator and the Company’sown experience. The number of automobile claims and the amounts involved arenot material. Historically, there

 

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havenot been many instances of significant variances between actual finalsettlements and our estimates regarding automobile and product liabilityclaims.

 

TheCompany maintains 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 to expense. 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. For the annual assessment of the reserve, Companyengages an independent professional to assist in reevaluating the estimates ofboth the quantities of recoverable material and the cost of reclamation. Ourassessment of the adequacy of the reclamation reserves is based on management’sassumptions with the assistance of the independent professional. The analysisrequires the use of significant assumptions and estimates about the miningplans, homogeneity of the deposits, third party costs to perform work, methodof reclamation to be used, etc. Management believes that the assumptions andestimates used to determine the reserve are reasonable; however, changes in theaforementioned assumptions and estimates, as well as the effects of unknownfuture events or circumstances, including legislative requirements, couldmaterially affect estimated costs, the quantities of recoverable material orthe period of mining. Depletion of rock and sand deposits and amortization ofdeferred development costs are computed by the units-of-production method basedupon estimated 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.Additionally, the HVAC companies offer discounts for early payment of amountsdue under dating and other extended payment programs. The companies record areserve for this discount based upon historical experience.

 

Guidanceprovided by the Codification that cash consideration (including salesincentives) given by a vendor to a customer is presumed to be a reduction ofthe selling prices of the vendor’s products or services unless both of thefollowing conditions are met: a) the vendor receives an identifiable benefit inexchange for the consideration and the vendor can reasonably estimate the fairvalue of the benefit. Under this guidance, volume incentives and customerdiscounts provided to our customers are presumed to be a reduction in theselling price of our products and accordingly we record these as a reduction ofgross sales. We require that our customers submit proof of both theadvertisement and the cost of the advertising expenditure before we allow adeduction for cooperative advertising. Since the Company receives anidentifiable and quantifiable benefit, these costs are recorded as selling andadministrative expenses. These programs did not have a material effect of theoperations of 2009 compared to 2008.

 

RecentlyIssued Accounting Standards

 

The“Recently Issued Accounting Pronouncements” section of Note 1 to theConsolidated Financial Statements discusses new accounting policies adopted bythe Company since 2008 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.

 

**Item 7A.**  **QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Per Item 301 of Regulation S-K, a Smaller Reporting Company is notrequired to provide this information.

 

**Item 8.****                   ****FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 
| ** **                                                                                                                                                          | ** ** | **PAGE** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Financial Statements and Financial Statement  Schedule of Continental Materials Corporation and Reports of Independent  Registered Public Accounting Firms thereon: |       |     |
|                                                                                                                                                                |       |     |
| Consolidated statements of operations for fiscal years  2009 and 2008                                                                                               |       | 21       |
|                                                                                                                                                                |       |     |
| Consolidated statements of cash flows for fiscal years  2009 and 2008                                                                                               |       | 22       |

 

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| Consolidated balance sheets as of January 2, 2010  and January 3, 2009     |   | 23     |
|--------------------------------------------------------------------------------------|--------|--------|
|                                                                                 |   |   |
| Consolidated statements of shareholders’ equity for  fiscal years 2009 and 2008 |   | 24     |
|                                                                                 |   |   |
| Notes to consolidated financial statements                                           |   | 25-36  |
|                                                                                 |   |   |
| Reports of Independent Registered Public Accounting  Firms                           |   | 37     |

 

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**ContinentalMaterials Corporation**

**ConsolidatedStatements of Operations**

**For Fiscal Years 2009 and 2008**

(Amounts in thousands, except per share data)

 
| ** **                                                                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                           |       |     |       |     |       |
| Sales                                                                          |       | $        | 113,461    |     | $          | 145,714 |   |
| Costs and expenses                                                             |       |     |       |     |       |
| Cost of sales (exclusive of depreciation,  depletion and amortization)         |       | 93,753   |       | 121,442  |       |
| Depreciation, depletion and amortization                                       |       | 4,472    |       | 4,368    |       |
| Selling and administrative                                                     |       | 18,060   |       | 18,647   |       |
| Gain on disposition of property and equipment                                  |       | (2,212   | )          | (2,349   | )          |
| Operating (loss) income                                                        |       | (612     | )          | 3,606    |       |
| Interest expense                                                               |       | (956     | )          | (1,161   | )          |
| Other income, net                                                              |       | 4        |       | 50       |       |
| (Loss) income from continuing operations before  income taxes                  |       | (1,564   | )          | 2,495    |       |
| Benefit (provision) for income taxes                                           |       | 762      |       | (738     | )          |
| Net (loss) income from continuing operations                                   |       | (802     | )          | 1,757    |       |
| Loss from discontinued operation net of income tax  benefit of $1,138 and $989 |       | (640     | )          | (1,797   | )          |
| Net loss                                                                       |       | $        | (1,442     | )        | $          | (40 | ) |
|                                                                           |       |     |       |     |       |
| Net (loss) income per basic and diluted share:                                 |       |     |       |     |       |
| Continuing operations                                                          |       | $        | (.50       | )        | $          | 1.09 |   |
| Discontinued operation                                                         |       | (.40     | )          | (1.12    | )          |
| Net loss per basic and diluted share                                           |       | $        | (.90       | )        | $          | (.03 | ) |
|                                                                           |       |     |       |     |       |
| Average shares outstanding                                                     |       | 1,598    |       | 1,599    |       |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**Continental Materials Corporation**

**Consolidated Statements of Cash Flows****For FiscalYears 2009 and 2008**

(Amounts in thousands)

 
| ** **                                                                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Operating activities                                                             |       |     |       |     |       |
| Net loss                                                                         |       | $        | (1,442     | )        | $          | (40 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |     |       |     |       |
| Depreciation, depletion and amortization                                         |       | 4,958    |       | 5,135    |       |
| Long-lived asset impairment charge                                               |       | —   |       | 784      |       |
| Deferred income tax provision                                                    |       | (770     | )          | (205     | )          |
| Provision for doubtful accounts                                                  |       | 288      |       | 142      |       |
| Gain on disposition of property and equipment                                    |       | (2,212   | )          | (2,349   | )          |
| Loss on sale of discontinued operation                                           |       | 221      |       | —   |       |
| Changes in working capital items:                                                |       |     |       |     |       |
| Receivables                                                                      |       | 4,107    |       | 448      |       |
| Inventories                                                                      |       | 6,878    |       | (4,199   | )          |
| Prepaid expenses                                                                 |       | 56       |       | 1,050    |       |
| Prepaid royalties                                                                |       | (154     | )          | (15      | )          |
| Accounts payable and accrued expenses                                            |       | (4,404   | )          | (860     | )          |
| Income taxes                                                                     |       | (609     | )          | 104      |       |
| Other                                                                            |       | 302      |       | 527      |       |
| Net cash provided by operating activities                                        |       | 7,219    |       | 522      |       |
|                                                                             |       |     |       |     |       |
| Investing activities                                                             |       |     |       |     |       |
| Capital expenditures                                                             |       | (2,148   | )          | (2,010   | )          |
| Cash proceeds from sale of discontinued operation                                |       | 1,864    |       | —   |       |
| Cash proceeds from sale of property and equipment                                |       | 2,250    |       | 2,807    |       |
| Net cash provided by investing activities                                        |       | 1,966    |       | 797      |       |
|                                                                             |       |     |       |     |       |
| Financing activities                                                             |       |     |       |     |       |
| Repayments on refinanced revolving credit line,  net                             |       | (6,400   | )          | (1,500   | )          |
| Payment of deferred financing fees related to new  credit facility               |       | (589     | )          | —   |       |
| Net borrowings under new revolving credit facility                               |       | 5,850    |       | —   |       |
| Repayment of refinanced long-term debt                                           |       | (10,772  | )          | (2,029   | )          |
| Borrowings under new long-term debt                                              |       | 10,000   |       | —   |       |
| Repayments of new long-term debt                                                 |       | (2,850   | )          | —   |       |
| Cash deposit for self-insured claims                                             |       | (4,840   | )          | —   |       |
| Payments to acquire treasury stock                                               |       | —   |       | (19      | )          |
| Net cash (used in) financing activities                                          |       | (9,601   | )          | (3,548   | )          |
|                                                                             |       |     |       |     |       |
| Net (decrease) in cash and cash equivalents                                      |       | (416     | )          | (2,229   | )          |
|                                                                             |       |     |       |     |       |
| Cash and cash equivalents                                                        |       |     |       |     |       |
| Beginning of year                                                                |       | 1,097    |       | 3,326    |       |
| End of year                                                                      |       | $        | 681        |     | $          | 1,097 |   |
|                                                                             |       |     |       |     |       |
| Supplemental disclosures of cash flow items                                      |       |     |       |     |       |
| Cash paid (received) during the year                                             |       |     |       |     |       |
| Interest                                                                         |       | $        | 770        |     | $          | 1,409 |   |
| Income taxes, net                                                                |       | (520     | )          | (151     | )          |
| Supplemental disclosures of noncash investing and  financing activities          |       |     |       |     |       |
| Note received as partial consideration on sale of  discontinued operation        |       | $        | 480        |     | $          | — |   |
| Capital expenditures purchased on account                                        |       | —   |       | 165      |       |
| Buyer’s assumption of liabilities                                           |       | 74       |       | 85       |       |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**ContinentalMaterials Corporation**

**ConsolidatedBalance Sheets As of January 2,2010 and January 3, 2009**

(Amounts in thousands except share data)

 
| ** **                                                                           | ** ** | **January 2, 2010** | ** ** | **January 3, 2009** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ASSETS                                                                               |       |                     |       |                     |       |
| Current assets                                                                       |       |                     |       |                     |       |
| Cash and cash equivalents                                                            |       | $                        | 681        |                     | $          | 1,097 |   |
| Receivables less allowance of $576 and $445                                          |       | 16,905                   |       | 22,062                   |       |
| Current portion of long-term note receivable                                         |       | 96                       |       | —                   |       |
| Receivable for insured losses                                                        |       | 684                      |       | 1,604                    |       |
| Inventories                                                                          |       | 16,295                   |       | 23,426                   |       |
| Prepaid expenses                                                                     |       | 1,582                    |       | 1,259                    |       |
| Refundable income taxes                                                              |       | 1,012                    |       | 654                      |       |
| Deferred income taxes                                                                |       | 3,116                    |       | 2,341                    |       |
| Total current assets                                                                 |       | 40,371                   |       | 52,443                   |       |
|                                                                                 |       |                     |       |                     |       |
| Property, plant and equipment                                                        |       |                     |       |                     |       |
| Land and improvements                                                                |       | 1,984                    |       | 2,311                    |       |
| Buildings and improvements                                                           |       | 18,551                   |       | 20,190                   |       |
| Machinery and equipment                                                              |       | 79,040                   |       | 81,539                   |       |
| Mining properties                                                                    |       | 6,385                    |       | 6,622                    |       |
| Less accumulated depreciation and depletion                                          |       | (78,868                  | )          | (79,706                  | )          |
|                                                                                 |       | 27,092                   |       | 30,956                   |       |
|                                                                                 |       |                     |       |                     |       |
| Other assets                                                                         |       |                     |       |                     |       |
| Goodwill                                                                             |       | 7,229                    |       | 7,829                    |       |
| Amortizable intangible assets, net                                                   |       | 479                      |       | 872                      |       |
| Prepaid royalties                                                                    |       | 1,223                    |       | 1,069                    |       |
| Cash deposit for self-insured claims                                                 |       | 4,840                    |       | —                   |       |
| Long-term note receivable                                                            |       | 384                      |       | —                   |       |
| Other                                                                                |       | 494                      |       | 497                      |       |
|                                                                                 |       | $                        | 82,112     |                     | $          | 93,666 |   |
|                                                                                 |       |                     |       |                     |       |
| LIABILITIES                                                                          |       |                     |       |                     |       |
| Current liabilities                                                                  |       |                     |       |                     |       |
| Current portion of long-term debt                                                    |       | $                        | 1,375      |                     | $          | 1,164 |   |
| Accounts payable                                                                     |       | 4,618                    |       | 9,542                    |       |
| Income taxes                                                                         |       | —                   |       | 148                      |       |
| Accrued expenses                                                                     |       |                     |       |                     |       |
| Compensation                                                                         |       | 1,642                    |       | 1,641                    |       |
| Reserve for self-insured losses                                                      |       | 2,973                    |       | 3,095                    |       |
| Liability for unpaid claims covered by insurance                                     |       | 684                      |       | 1,604                    |       |
| Profit sharing                                                                       |       | 346                      |       | 268                      |       |
| Reclamation                                                                          |       | 115                      |       | 260                      |       |
| Other                                                                                |       | 2,437                    |       | 2,326                    |       |
| Total current liabilities                                                            |       | 14,190                   |       | 20,048                   |       |
|                                                                                 |       |                     |       |                     |       |
| Revolving bank loan payable                                                          |       | 5,850                    |       | 6,400                    |       |
| Long-term debt                                                                       |       | 5,775                    |       | 9,607                    |       |
| Deferred income taxes                                                                |       | 3,243                    |       | 3,414                    |       |
| Accrued reclamation                                                                  |       | 1,020                    |       | 845                      |       |
| Other long-term liabilities                                                          |       | 848                      |       | 724                      |       |
| 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                                                                    |       | 65,328                   |       | 66,770                   |       |
| Treasury shares, at cost                                                             |       | (16,615                  | )          | (16,615                  | )          |
|                                                                                 |       | 51,186                   |       | 52,628                   |       |
|                                                                                 |       | $                        | 82,112     |                     | $          | 93,666 |   |

 

The accompanying notes arean integral part of the consolidated financial statements.

 

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**Continental Materials Corporation**

**Consolidated Statements of Shareholders’ Equity**

**For Fiscal Years 2009 and 2008**

(Amounts in thousands except share data)

 
| ** **                        | ** ** | **Common  shares** | ** ** | **Common  shares  amount** | ** ** | **Capital  in excess  of par** | ** ** | **Retained  earnings** | ** ** | **Treasury  shares** | ** ** | **Treasury  shares cost** | ** ** |
|-----------------------------------|------------|--------------------|------------|----------------------------|------------|--------------------------------|------------|------------------------|------------|----------------------|------------|---------------------------|------------|
| 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                    |       |
| Net (loss)                        |       | —             |       | —                     |       | —                         |       | (1,442                 | )          | —               |       | —                    |       |
| Balance at January 2, 2010   |       | 2,574,264          |       | $                          | 643        |                           | $          | 1,830                  |       | $                    | 65,328     |                      | 975,986    |   | $ | 16,615 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

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**Notes to Consolidated Financial Statements**

 

1.         NATURE OF BUSINESS ANDSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

NATURE OF 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.

 

TheHeating and Cooling segment produces and sells gas-fired wall furnaces, consoleheaters and fan coils from the Company’s wholly-owned subsidiary, WilliamsFurnace Co. (WFC) of Colton, California. The Evaporative Cooling segmentproduces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona.Concrete, Aggregates and Construction Supplies (CACS) are offered from numerouslocations along the Southern portion of the Front Range of Colorado operated bythe Company’s wholly-owned subsidiaries Castle Concrete Company and Transit MixConcrete Co., of Colorado Springs and Transit Mix of Pueblo, Inc. ofPueblo (the three companies collectively referred to as TMC). Doors arefabricated and sold along with the related hardware, including electronicaccess hardware, from the Company’s wholly-owned subsidiary, McKinney Door andHardware, Inc. (MDHI), which operates out of facilities in Pueblo andColorado Springs, Colorado.

 

PRINCIPLES OF CONSOLIDATION

 

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

 

***RECLASSIFICATIONS***

 

Certainreclassifications have been made to the fiscal 2008 Consolidated Statement ofOperations to conform to the 2009 financial statement presentation ofdiscontinued operations.  Thesereclassifications had no effect on net earnings.

 

RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS

 

On July 1, 2009, theFinancial Accounting Standards Board (FASB) issued the FASB AccountingStandards Codification (Codification) which became effective for interim andannual reporting periods ending after September 15, 2009.  On that date, the Codification officiallybecame the single source of authoritative nongovernmental accounting principlesgenerally accepted in the United States of America (GAAP); however, Securitiesand Exchange Commission (SEC) registrants must also consider rules, regulationsand interpretive guidance issued by the SEC or its staff. Previousauthoritative GAAP was a proliferation of thousands of standards established bya variety of standard setters over the past 50-plus years. All existing standardsthat were used to create the Codification became superseded. The Codificationdoes not change GAAP and therefore had no impact on the Company’s consolidatedfinancial position, results of operations or cash flows; however, references toauthoritative accounting literature will henceforth refer to the topics andguidance in the Codification.

 

InSeptember 2006, the FASB issued new accounting guidance on fair valuemeasurements and disclosures. The new guidance defines fair value, establishesa framework for measuring fair value under U.S. GAAP and enhances disclosuresabout fair value measurements. In February 2008, the FASB issued furtherguidance, which provided a one-year deferral of the effective date fornon-financial assets and non-financial liabilities, except those that arerecognized or disclosed in the financial statements at fair value at leastannually. This guidance applies under other accounting pronouncements thatrequire or permit fair value measurements, as the FASB previously concluded inthose accounting pronouncements that fair value is the relevant measurementattribute. Accordingly, this guidance does not require any new fair valuemeasurements. The new guidance is effective for financial statement issued forfiscal years beginning after November 15, 2007 and interim periods withinthose fiscal years. The adoption of the new guidance in 2008 and the furtherguidance in 2009 did not have a material effect on the Company’s consolidatedfinancial statements. See further discussion of Fair Value of FinancialInstruments below.

 

In December 2007,the FASB issued new guidance on business combinations and consolidation, whichsignificantly changed the financial accounting and reporting of businesscombination transactions and noncontrolling (or what were previously describedas minority) interests in consolidated financial statements. The newguidance is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008. The Company did notparticipate in any transactions or noncontrolling interests covered by this newguidance during either fiscal 2009 or 2008; therefore the new guidance did nothave a material effect on the Company’s consolidated financial statements.

 

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InMarch 2008, the FASB issued new accounting guidance that expandeddisclosure about an entity’s derivative instruments and hedging activities. Thenew disclosure requirements became effective for the Company on January 4,2009. At January 2, 2010, the Company did not have any material derivativeor hedging activities that required disclosure under these new accountingstandards.

 

InApril 2008, the FASB amended the list of factors an entity should considerin developing renewal of extension assumptions used to determine the usefullife of a recognized intangible asset. The new guidance applies to intangibleassets that are acquired individually or with a group of assets and intangibleassets acquired in both business combinations and asset acquisitions. Therequirement that an entity consider whether the renewal or extension can beaccomplished without substantial cost or material modification of the existingterms and conditions associated with the asset was removed. Instead, an entityshould now consider its own experience in renewing similar arrangements. Theentity should consider market participant assumptions regarding renewal if nosuch relevant experience exits. The new guidance became effective for theCompany beginning January 4, 2009, the first day of fiscal 2009, and didnot have a material impact on its consolidated financial statements.

 

InSeptember 2009, the FASB issued new accounting guidance on revenuerecognition. Under the new guidance, arrangement consideration in a multipleelement arrangement may now be allocated in a manner that more closely reflectsthe structure of the transaction. Also under the new guidance, tangibleproducts that contain software components that are essential to thefunctionality of the tangible product will no longer be subject to softwarerevenue recognition guidance and will now be subject to other revenue guidance.The Company does not have any sales or transactions covered by this newguidance during either fiscal 2009 or 2008; therefore the new guidance did nothave a material effect on the Company’s consolidated financial statements.

 

USE OF ESTIMATES IN THEPREPARATION OF FINANCIAL STATEMENTS

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities as of January 2,2010 and January 3, 2009 and the reported amounts of revenues and expensesduring both of the two years in the period ended January 2, 2010. Actualresults could differ from those estimates.

 

CASH AND CASH EQUIVALENTS

 

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

 

FAIRVALUE OF FINANCIAL INSTRUMENTS

 

Fair value of the Company’s long-term debt isestimated based on the borrowing rates currently available to the Company forbank loans with similar terms, maturities and credit risks. The carrying amountof long-term debt represents a reasonable estimate of the corresponding fairvalue as the Company’s long-term debt is held at variable interest rates.

 

INVENTORIES

 

Inventories are valued at the lower of cost or market and are reviewedperiodically for excess or obsolete stock with a provision recorded, whereappropriate. Cost for inventory in the HVAC industry group is determined usingthe last-in, first-out (LIFO) method. These inventories represent approximately78% of total inventories at both January 2, 2010 and January 3, 2009.The cost of all other inventory is determined by the first-in, first-out (FIFO)or average cost methods. Some commodity prices such as copper, steel, cementand diesel fuel have experienced significant fluctuations in recent years,generally higher. Steelprices and copper prices are principally relevant to the inventories of our twoHVAC businesses. These two businesses use the LIFO costing method for inventoryvaluation purposes. The general effect of using LIFO is that the higher steeland copper prices are not reflected in the inventory carrying value. Thosehigher current costs are principally reflected in the cost of sales. Cement andfuel are relevant to our construction materials business. These businesses useeither FIFO or an average costing method for valuing inventories. Theseinventories turn over frequently and at any point in time the amount of cementor fuel inventory is not significant. Due to these circumstances, the commodityfluctuations have primarily affected the cost of sales with little effect onthe valuation of inventory. We believe that our inventory valuation reservesare not material. Inventory reserves were approximately 1% of the totalinventory value. Due to the nature of our products obsolescence is nottypically a significant exposure. Our HVAC businesses will from time to timecontend with some slow-moving inventories or parts that are no longer used dueto engineering changes. The recorded reserves are intended for such items.

 

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PROPERTY, PLANT ANDEQUIPMENT

 

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:

 
| Land improvements          | 5  to 31 years                                   |
|----------------------------|--------------------------------------------------|
| Buildings and improvements | 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.

 

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 Rocky Mountain Ready MixConcrete, Inc. (RMRM).

 

OTHER ASSETS

 

As of January 2,2010, the Company has recorded $7,229,000 of goodwill consisting of $6,229,000related to the Concrete, Aggregates and Construction Supplies segment and$1,000,000 related to the Door segment. The Company annually assesses goodwillfor potential impairment at the end of each year. In addition, if events occuror circumstances change in the relevant reporting segments or in theirindustries, the Company will then reassess the recorded goodwill to determineif impairment has occurred.  No goodwillimpairment was recognized for any of the periods presented. In 2009, theCompany charged $600,000 against earnings from discontinued operationsrepresenting the allocable portion of goodwill related to RMRM which was soldin July 2009.

 

Amortizable intangibleassets consist of a non-compete-agreement, a restrictive land covenant andcustomer relationships related to certain acquisitions. The non-competeagreement and the restrictive land covenant are being amortized on astraight-line basis over their respective lives of five and ten years,respectively. The customer relationships amount is being amortized over itsestimated life of ten years using the sum-of-the-years digits method.

 

The Company is party tothree aggregate property leases which require royalty payments. The leases callfor minimum annual royalty payments. Prepaid royalties relate to payments madefor aggregate materials not yet extracted.

 

RETIREMENT PLANS

 

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%. Further, the Company maymake additional annual contributions, at its discretion, based primarily onprofitability. In addition, any individuals whose compensation is in excess ofthe amount eligible for the Company matching contribution to the 401(k) planas established by Section 401 of the Internal Revenue Code, participates in an unfunded SupplementalProfit Sharing Plan. This plan accrues an amount equal to the differencebetween the amount the person would have received as Company matchingcontributions to his account under the 401(k) plan had there been nolimitations and the amount the person will receive under the 401(k) plangiving effect to the limitations. Costs under the plans are charged tooperations as incurred.

 

RESERVE FOR SELF-INSURED ANDINSURED LOSSES

 

TheCompany’s risk management program provides for certain levels of loss retentionfor workers’ compensation, automobile liability, medical plan coverage andgeneral and product liability claims. The components of the reserve forself-insured losses have been recorded in accordance with the Codificationrequirements that an estimated loss from a loss contingency shall be accrued ifinformation available prior to issuance of the financial statements indicatesthat it is probable that a liability has been incurred at the date of thefinancial statements and the amount of loss can be reasonably estimated. Therecorded reserve represents management’s best estimate of the future liabilityrelated to these claims up to the associated deductible.

 

TheCodification also requires an entity to accrue the gross amount of a loss evenif the entity has purchased insurance to cover the loss. Therefore the Companyhas recorded losses for workers’ compensation, automobile liability, medicalplan coverage and general and product liability claims in excess of thedeductible amounts, i.e., amounts covered by insurance contracts, in “Liabilityfor unpaid claims covered by insurance” with a corresponding “Receivable forinsured losses” on the 

 

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balancesheet. The components of the liability 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 a third party would incur to reclaim the disturbed areas. Reclamationexpense is provided during the interim periods using the units-of-productionmethod. The adequacy of the recorded reserve is assessed quarterly. At eachfiscal year-end, a more formal and complete analysis is performed and theexpense and reserve is adjusted to reflect the estimated cost to reclaim thethen disturbed and unreclaimed areas. The assessment of the reclamationliability may be done more frequently if events or circumstances arise that mayindicate a change in estimated costs, recoverable material or period of miningactivity. As part of the year-end analysis, the Company engages an independentspecialist to assist in reevaluating the estimates of both the quantities ofrecoverable material and the cost of reclamation. Most of the reclamation onany mining property is generally performed soon after each section of thedeposit is mined. The Company’s reserve for reclamation activities was$1,135,000 at January 2, 2010 and $1,105,000 at January 3, 2009. TheCompany classifies a portion of the reserve as a current liability, $115,000 atJanuary 2, 2010 and $260,000 at January 3, 2009, based upon a rollingfour-year average of actual reclamation spending.

 

REVENUE RECOGNITION

 

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 addition, therevenues received for shipping and handling are included in sales while thecosts associated with shipping and handling are reported 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 2009 and 2008 were as follows (amountsin thousands):

 
| ** **                    | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Beginning balance             |       | $        | 100        |     | $          | 100 |   |
| Warranty related expenditures |       | (325     | )          | (413     | )          |
| Warranty expense accrued      |       | 397      |       | 413      |       |
| Ending balance                |       | $        | 172        |     | $          | 100 |   |

 

INCOME TAXES

 

Incometaxes are accounted for under the asset and liability method that requiresdeferred income taxes to reflect the future tax consequences attributable todifferences between the tax and financial reporting bases of assets andliabilities. Deferred tax assets and liabilities recognized are based on thetax rates in effect in the year in which differences are expected to reverse.Deferred tax assets are reduced by a valuation allowance when, based onavailable positive and negative evidence, it is “more likely than not” (greaterthan a 50% likelihood) that some or all of the net deferred tax assets will notbe realized.

 

Incometax returns are subject to audit by the Internal Revenue Service (IRS) andstate tax authorities. The amounts recorded for income taxes reflect our taxpositions based on research and interpretations of complex laws andregulations. We accrue liabilities related to uncertain tax positions taken orexpected to be taken in our tax returns.

 

CONCENTRATIONS

 

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 

 

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experienceand such losses have been within management’s expectations. See Note 13 for adescription of the Company’s customer base.

 

Substantiallyall of the Heating and Cooling Segment’s factory employees are covered by acollective bargaining agreement through the Carpenters Local 721 Union under acontract that expires on April 30, 2011.

 

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. Ifan evaluation 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 has determined that there was no impairment of thelong-lived assets as of January 2, 2010.

 

FISCAL YEAR END

 

TheCompany’s fiscal year end is the Saturday nearest December 31. Fiscal 2009and 2008 each consisted of 52 weeks.

 

2.BUSINESS DISPOSITIONS

 

On July 17, 2009,the Company completed the sale of all of the outstanding capital stock of RMRM,a Colorado corporation to Campbells C-Ment Contracting, Inc., a Coloradocorporation (Buyer). RMRM operated a ready mix concrete business in the Denvermetropolitan area and had been included in the CACS reporting segment.

 

The Company received$1,864,000 in cash (net of cash of $41,000 that remained with RMRM) at closingand a Promissory Note of $480,000 representing the closing date net workingcapital of RMRM. The Promissory Note bears interest at 5% per annum. Theinitial principal payment is due September 30, 2010, with final principalpayment due June 30, 2012. Principal payments will commence earlier if theBuyer achieves certain sales volume levels.

 

The Company and itswholly-owned subsidiary TMC also entered into a Non-Competition, Non-Disclosureand Non-Solicitation Agreement with the Buyer for a period of six years. Inconsideration of the covenants made by the Company and TMC, beginning in 2010the Company will receive compensation if certain sales volume or operatingprofit thresholds are reached by the Buyer. There is no assurance that thefuture operating results of the Buyer will be such that any futureconsideration will be due to the Company under this Agreement, accordingly novalue was recorded related to this agreement at the time of the sale.

 

The Company allocated aportion of the goodwill of the reporting unit to RMRM based on the relativefair value of all of the assets of the CACS segment. As a result of thisanalysis, $600,000 of goodwill was allocated to the net assets of RMRM.

 

Assets are required to berecorded at the lower of carrying value or fair value less costs to sell. Asnoted above, the carrying value assigned to RMRM included $600,000 of goodwill.Management concluded that as of July 4, 2009, the fair value of the assetsof RMRM, less costs to sell, was lower than the carrying value, resulting inthe recording of a pre-tax impairment charge for book purposes of $647,000during the quarter ended July 4, 2009. The $647,000 was recorded as a lossfrom discontinued operations.

 

The sale of RMRM resultedin a capital loss for tax purposes of approximately $6,500,000 and a relateddeferred tax asset of approximately $2,450,000. This loss can be utilized tooffset current and future capital gains with a Federal carry forward periodlimited to five years. The Company has limited capital gains and as a result avaluation allowance of approximately $1,700,000 has been established againstthe deferred tax asset related to the capital loss in excess of that which isexpected to be utilized to offset the capital gain realized during 2009.

 

The revenue and pretaxloss from RMRM is reported as discontinued operation for the fiscal years endedJanuary 2, 2010 and January 3, 2009, respectively, and is summarizedas follows (amounts in thousands):

 
| ** **   | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------|------------|----------|------------|----------|------------|
| Revenue      |       | $        | 3,740      |     | $          | 12,166 |   |
| Pretax  Loss |       | (1,778   | )          | (2,786   | )          |
|              |            |          |            |          |            |  |  |

 

3. INVENTORIES

 

Inventories consisted of the following (amounts in thousands):

 

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| ** **                  | ** ** | **January 2, 2010** | ** ** | **January 3, 2009** | ** ** |
|-----------------------------|------------|--------------------------|------------|--------------------------|------------|
| Finished  goods             |       | $                        | 6,898      |                     | $          | 9,421 |   |
| Work  in process            |       | 763                      |       | 1,477                    |       |
| Raw  materials and supplies |       | 8,634                    |       | 12,528                   |       |
|                        |       | $                        | 16,295     |                     | $          | 23,426 |   |

 

Ifinventories valued on the LIFO basis were valued at current costs, inventorieswould be higher by $4,591,000 and $6,407,000 at January 2, 2010 and January 3,2009, respectively.

 

Reductionsin inventory quantities during 2009 at two locations resulted in liquidation ofLIFO inventory layers carried at costs lower than the costs of currentpurchases. The effect totaled approximately $316,000 for the year.

 

4. GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS

 

As of January 2,2010 the Company has recorded $7,229,000 of goodwill consisting of $6,229,000related to the CACS segment and $1,000,000 related to the Door segment. TheCompany annually assesses goodwill for potential impairment at the end of eachyear. For the CACS segment, the Company engages the services of an investmentbanking firm to determine the fair value of the reporting unit. For the Doorsegment, the Company prepares a discounted cash flow analysis to estimate thefair value of the reporting unit. In addition, if events occur or circumstanceschange in the relevant reporting segments or in their industries the Companywill then reassess the recorded goodwill to determine if impairment hasoccurred. No goodwill impairment was recognized for any of the periodspresented. In 2009 the Company charged $600,000 of goodwill against earningsfrom discontinued operations, representing the allocable portion of goodwillrelated to RMRM which was sold in July 2009. The valuation of goodwill andother intangibles is considered a significant estimate. Continued or protractedeconomic conditions could negatively impact the value of the business whichcould trigger an impairment that would materially impact earnings.

 

Changes in recorded goodwillfor the year ended January 2, 2010 (there were no changes to recordedgoodwill during the year ended January 3, 2009) are as follows (amounts inthousands):

 
| ** **                         | ** ** | **CACS** | ** ** | **Door** | ** ** | **Total** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Balance as of January 3, 2009 |       | $        | 6,829      |     | $          | 1,000     |       | $ | 7,829 |   |
| Goodwill allocated to RMRM         |       | (600     | )          | —   |       | (600      | )          |
| Balance as of January 2, 2010 |       | $        | 6,229      |     | $          | 1,000     |       | $ | 7,229 |   |

 

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

 
| ** **                   | ** ** | **January 2, 2010** | ** ** | **January 3, 2009** | ** ** |
|------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                   | ** ** | **Gross**                | ** ** | ** **               | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **carrying**             | ** ** | **Accumulated**          | ** ** | **carrying** | ** ** | **Accumulated** | ** ** |
| ** **                   | ** ** | **amount**               | ** ** | **amortization**         | ** ** | **amount** | ** ** | **amortization** | ** ** |
| Amortized intangible assets: |       |                     |       |                     |       |   |   |   |   |
| Non-compete agreements       |       | $                        | 290        |                     | $          | 203 |   | $ | 1,640 |   | $ | 1,247 |   |
| Restrictive land covenant    |       | 350                      |       | 123                      |       | 350 |   | 87 |   |
| Customer relationships       |       | 370                      |       | 205                      |       | 370 |   | 154 |   |
|                         |       | $                        | 1,010      |                     | $          | 531 |   | $ | 2,360 |   | $ | 1,488 |   |

 

Theabove intangible assets include a non-compete agreement signed at the time theCompany acquired the assets of ASCI (June 30, 2006). Amortization of thenon-compete agreement is recorded on a straight line basis over the agreement’speriod of ten years. During the year ended January 3, 2009 (fiscal year2008) the Company recorded an asset impairment charge of $26,000 against thenon-compete agreement related to the purchase of RMRM which was sold on July 17,2009. Also included are a restrictive land covenant and the customerrelationships related to the ASCI acquisition. Amortization of the restrictiveland covenant is computed on the straight-line basis over the agreement’speriod of ten years. Amortization of the customer relations value is computedon the sum-of-the-years digits method over its estimated life of ten years.Amortization expense of intangible assets was $113,000 for 2009 (including thefinal $25,000 of a non-compete agreement related to the purchase of CSSL by theDoor division) and $176,000 for 2008. The estimated amortization expense forthe five subsequent fiscal years is as follows: 2010 — $137,000; 2011 —$101,000; 2012 — $65,000; 2013 — $59,000 and 2014 - $52,000.

 

5. REVOLVING BANK LOAN AND LONG-TERM DEBT

 

Outstanding long-term debt consisted of the following (amounts inthousands):

 
| ** **           | ** ** | **January 2, 2010** | ** ** | **January 3, 2009** | ** ** |
|----------------------|------------|--------------------------|------------|--------------------------|------------|
| Secured term loan    |       | $                        | 7,150      |                     | $          | 10,771 |   |
| Less current portion |       | (1,375                   | )          | (1,164                   | )          |
| Total long-term debt |       | $                        | 5,775      |                     | $          | 9,607 |   |

 

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OnApril 16, 2009 the Company entered into a secured credit agreement (Credit Agreement) under which the bank lenderinitially provided 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. Borrowings under the Credit Agreement are secured by the Company’saccounts receivable, inventories, machinery, equipment, vehicles, certain realestate and the common stock of all of the Company’s subsidiaries. Borrowingsunder the revolving credit facility are limited to 80% of eligible accountsreceivable and 50% of eligible inventories. Inventory borrowings are limited toa maximum of $7,500,000 ($6,750,000 after April 15, 2010). Borrowingsunder the Credit Agreement bear interest based on a performance based LIBOR orprime rate option. For purposes of computing the performance based rate, thebase LIBOR rate will not be less than 2% and the base prime rate will not beless than 4%. At January 2, 2010 the Company’s effective interest rateunder the LIBOR option was 5% and 4.75% under the prime rate option. TheCompany also paid certain underwriting and arrangement fees at the time ofclosing.****The Credit Agreement requires theCompany to maintain certain levels of tangible net worth, EBITDA (earningsbefore interest, income taxes, depreciation and amortization), debt servicecoverage and to maintain certain ratios of consolidated debt to cash flow (asdefined). The Credit Agreement places a limit on the amount of annual capitalexpenditures. 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 originally due April 16, 2012. On November 18, 2009 theCredit Agreement was amended reducing the revolving credit facility to$15,000,000. On April 15, 2010 a Second Amendment to the Credit Agreementaccelerated the final payment of all remaining unpaid principal borrowings to August 1,2011. The quarterly principal payment amounts were not changed from those setforth in the Credit Agreement. The Second Amendment also revised some of thefinancial covenants as discussed more fully in Note 5 to the financialstatements.

 

Outstandingborrowings under the revolving credit facility as of January 2, 2010 were$5,850,000. The highest balance outstanding on the revolving credit facilityduring 2009 was $14,734,000. Average outstanding revolving credit during theyear was $7,090,000. The weighted average interest rates on the outstandingrevolving credit and term debt in 2009 and 2008 were 4.8% and 6.1%,respectively. The 4.8% rate for 2009 includes the effect of the interest rateswap discussed below. At all times since the inception of the Credit Agreement,the Company had sufficient qualifying assets such that the maximum revolvingcredit facility was immediately available and is expected to be available forthe foreseeable future.

 

Thelender required the Company to enter into an interest rate swap transaction tohedge the interest rate on $5,000,000 of term debt. On May 29, 2009 theCompany entered into an interest rate swap transaction for a notional amount of$5,000,000 whereby the Company pays a fixed rate of 3.07% on $5,000,000 andreceives a floating rate equivalent to the 30 day LIBOR rate but not less than2.0%. Since the inception of this agreement the 30 day LIBOR rate has remainedbelow 2.0%. Hence, the effect of the transaction has been, thus far, toincrease the Company’s effective interest rate by 1.07%. The notional amountdecreases as follows:

 
| ·      September 30,  2011 |   | $ | 500,000 |   |
|---------------------------------------------------------------|--------|---|---------|--------|
| ·      December 31,  2011  |   | $ | 500,000 |   |
| ·      March 31,  2012     |   | $ | 500,000 |   |

 

Theinterest rate swap transaction terminates on April 16, 2012.

 

In April 2009 theCompany deposited cash of $4,840,000 with its casualty insurance carrier toserve as collateral for the self-insured obligations under the Company’scasualty insurance program. Previously these obligations were secured by a bankletter of credit. This deposit was funded with borrowings under the revolvingcredit line.

 

Atthe end of the period ended January 2, 2010 the Company was not incompliance with the minimum adjusted EBITDA and fixed charge coverage covenantsof the Credit Agreement. As a result, effective January 1, 2010 thedefault rate provision of the Credit Agreement increases the interest rate onall outstanding revolving and long-term debt by 2%. Non-compliance with thefinancial covenants in the Credit Agreement constitutes an event of defaultunder the agreement. Upon the occurrence of an event of default, the lendersmay, among other things, terminate their lending commitments, in whole or inpart, declare all or any part of the Company’s borrowings to be due andpayable, and/or require the Company to collateralize with cash any or allletters of credit provided by the lender. A waiver of the event of defaultrelating to compliance with the minimum adjusted EBITDA and fixed chargecoverage covenants was granted and a second amendment to the Credit Agreementwas entered into on April 15, 2010. The second amendment provides for thefollowing:

 

·      Thecovenants regarding the fixed charge coverage and the maximum leverage ratiohave been eliminated for the duration of the amended Credit Agreement.

 

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·      TheCompany must maintain a minimum tangible net worth of $32,000,000. At January 2,2010, the minimum tangible net worth, as defined, was $38,250,000.

·      Annualcapital expenditures may not exceed $3,500,000.

·      Themaximum revolving credit facility line will remain at $15,000,000 until October 1,2010 when it will then be reduced to $13,500,000.

·      Thematurity date of the credit facility is August 1, 2011.

·      Theinterest rate for the remaining term of the amended Credit Agreement will be4.0% over LIBOR but with a LIBOR floor of 2.0% (the Company’s effective LIBORborrowing rate will be 6.0%). The margin on the “base” or prime rate optionwill be the base plus 1.75% with a base rate floor of 4% (the Company’s effectiveborrowing rate will be 5.75%).

·      Theinterest rate swap transaction will remain in effect.

 

TheCredit Agreement as amended on April 15, 2010 requires the Company tomaintain certain financial covenants as disclosed in the table below (amountsin thousands except for ratios):

 
| **Financial Covenant**            | ** ** | **Date Required**                  | ** ** | **Required  Amount or  Ratio** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|--------------------------------|------------|
| Minimum tangible net worth        |       | At all times                       |       | $32,000                        |       |
| Minimum adjusted quarterly EBITDA |       | Quarter ended July 3, 2010    |       | $2,100                         |       |
|                              |       | Quarter ended October 2, 2010 |       | $2,000                         |       |
|                              |       | Quarter ended January 1, 2011 |       | $500                           |       |
|                              |       | Quarter ended April 2, 2011   |       | $(600                          | )          |
|                              |       | Quarter ended July 2, 2011    |       | $2,100                         |       |
| Maximum capital expenditures      |       | Trailing 12 months                 |       | < $3,500                    |       |

 

Definitions under theCredit Agreement as amended are as follows:

·                  Tangible net worth is defined as networth plus subordinated debt minus intangible assets (goodwill, intellectualproperty, prepaid expenses and deferred charges) minus all obligations owed tothe Company or any of its subsidiaries by any affiliate or any or itssubsidiaries and minus all loans owed by its officers, stockholders,subsidiaries or employees (Note: there are no loans owed by any of thereferenced parties at January 2, 2010 or as of the date of this filing).

·                  The adjusted EBITDA is defined as netincome plus interest, income taxes, depreciation, depletion and amortizationplus other non-cash charges approved by the lender.

 

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 CreditAgreement, will be sufficient to cover expected cash needs, including servicingdebt and planned capital expenditures for the next twelve months. The Companyalso expects to be in compliance with all debt covenants, as amended, duringthis period.

 

Term loan payments and the amortization of deferred financing fees arescheduled as follows (amounts in thousands):

 
| ** ** | ** ** | ** **    | ** ** | **Amortization**   | ** ** |
|------------|------------|---------------|------------|--------------------|------------|
| ** ** | ** ** | **Term Loan** | ** ** | **of Deferred**    | ** ** |
| ** ** | ** ** | **Payments**  | ** ** | **Financing Fees** | ** ** |
| 2010       |       | $             | 1,375      |               | $          | 261 |   |
| 2011       |       | 5,775         |       | 210                |       |
|       |       | $             | 7,150      |               | $          | 471 |   |

 

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. The Company does not accrue estimated amounts for future legal costsrelated to the defense of these matters but rather expenses them as incurred.

 

7. SHAREHOLDERS’ EQUITY

 

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

 

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8. EARNINGS PER SHARE

 

TheCompany does not have any common stock equivalents, warrants or otherconvertible securities outstanding therefore there are no differences betweenthe calculation of basic and diluted EPS for the fiscal years 2009 or 2008.

 

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$2,907,000 and $3,206,000 for 2009 and 2008, respectively.

 

Futureminimum rental commitments under non-cancelable operating leases for 2010 andthereafter are as follows: 2010 — $1,653,000; 2011 — $1,580,000; 2012 — $1,443,000;2013 — $1,205,000; 2014 — $915,000 and thereafter — $23,889,000. Included inthese amounts is $521,000 per year and approximately $23,437,000 in the “thereafter”amount related to minimum royalty payments due on an aggregates property leasein conjunction with the Pueblo, Colorado operation. Also included in theseamounts is $235,000 per year and approximately $412,000 in the “thereafter”amount related to a ground lease upon which the Company owns a building leasedto a third party for approximately $344,000 per year. The ground lease runsthrough October 1, 2016 and contains a renewal clause. The building leaseruns 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 continuingoperations were $1,017,000 and $707,000 in 2009 and 2008, respectively.

 

***11. CURRENT ECONOMIC CONDITIONS***

 

The currentprotracted economic decline continues to present manufacturers with difficultcircumstances and challenges, which in some cases have resulted in large andunanticipated declines in the fair value of assets, declines in the volume ofbusiness, constraints on liquidity and difficulty obtaining financing.  The financial statements have been preparedusing values and information currently available to the Company.

 

Current economicand financial market conditions could adversely affect our results ofoperations in future periods.  Thecurrent instability in the financial markets may make it difficult for certainof our customers to obtain financing, which may significantly impact the volumeof future sales which could have an adverse impact on the Company’s futureoperating results.

 

In addition, giventhe volatility of current economic conditions, the values of assets andliabilities recorded in the financial statements could change rapidly,resulting in material future adjustments in allowances for accounts and notesreceivable, net realizable value of inventory, realization of deferred taxassets and valuation of intangibles and goodwill that could negatively impactthe Company’s ability to meet debt covenants or maintain sufficient liquidity.

 

12. INCOME TAXES

 

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

 
| ** ** | ** ** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------|------------|------------|----------|------------|----------|------------|
| Federal:   | Current    |       | $        | (26        | )        | $          | (11 | ) |
|       | Deferred   |       | (693     | )          | 515      |       |
| State:     | Current    |       | 38       |       | 60       |       |
|       | Deferred   |       | (81      | )          | 174      |       |
|       |       |       | $        | (762       | )        | $          | 738 |   |

 

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 for continuing operations on incomeor loss for financial statement purposes and the federal statutory tax rate wasas follows:

 
| ** **                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Statutory tax rate                         |       | (34.0    | )%         | 34.0     | %          |
| Percentage depletion                       |       | (2.5     | )          | (7.8     | )          |
| Non-deductible expenses                    |       | 2.1      |       | 1.3      |       |
| FIN 48 change in reserves                  |       | (9.4     | )          | (1.0     | )          |
| Valuation allowance for tax assets         |       | 4.1      |       | 1.8      |       |
| State income taxes, net of federal benefit |       | (10.0    | )          | 1.6      |       |
| Other                                      |       | 1.0      |       | (.3      | )          |
|                                       |       | (48.7    | )%         | 29.6     | %          |

 

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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):

 
| ** **                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Reserves for self-insured losses                |       | $        | 919        |     | $          | 854 |   |
| Accrued reclamation                             |       | 431      |       | 419      |       |
| Deferred compensation                           |       | 336      |       | 194      |       |
| Asset valuation reserves                        |       | 363      |       | 563      |       |
| Future state tax credits                        |       | 760      |       | 760      |       |
| Net state operating loss carryforwards          |       | 214      |       | 88       |       |
| Federal AMT carryforward                        |       | 102      |       | 151      |       |
| Federal NOL carryforward                        |       | 226      |       | —   |       |
| Approximate long-term capital loss carryforward |       | 1,721    |       | —   |       |
| Other                                           |       | 1,075    |       | 671      |       |
| Valuation allowance                             |       | (1,950   | )          | (220     | )          |
| Total deferred tax assets                       |       | 4,197    |       | 3,480    |       |
|                                            |       |     |       |     |       |
| Depreciation                                    |       | 2,547    |       | 3,008    |       |
| Deferred development                            |       | 717      |       | 475      |       |
| Prepaid royalty                                 |       | 464      |       | 406      |       |
| Other                                           |       | 596      |       | 664      |       |
| Total deferred tax liabilities                  |       | 4,324    |       | 4,553    |       |
| Net deferred tax liability                      |       | $        | (127       | )        | $          | (1,073 | ) |

 

Atboth January 2, 2010 and January 3, 2009, the Company established avaluation reserve of $229,000 related to the carryforward of charitablecontributions deductions arising in the current and prior years due to theuncertainty that the Company will be able to utilize these deductions prior tothe expiration of their carry forward periods. At January 2, 2010, theCompany also established a valuation reserve of $1,721,000 related to the carryforward of the long-term capital loss related to the sale of the stock of RMRMdue to the uncertainty that the Company will be able to generate offsetablelong-term capital gains prior to the expiration of the carry forward period.For Federal purposes, Net Operating Losses can be carried forward for a periodof 20 years while Alternative Minimum Tax credits can be carried forwardindefinitely. For State purposes, Net Operating Losses can be carried forwardfor periods ranging from 5 to 20 years for the states that the Company isrequired to file in. The $760,000 of state tax credits all relate to CaliforniaEnterprise Zone hiring credits earned in prior years. These credits may becarried forward indefinitely.

 

Thenet current deferred tax assets are $3,116,000 and $2,341,000 at year-end 2009and 2008, respectively.

 

TheCompany accounts for uncertainty in income taxes recognized in its financialstatements by applying the Codification’s recognition threshold and measurementattributes for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. The financial statementeffects of a tax position are initially recognized when it is more likely thannot, based on the technical merits, that the position will be sustained uponexamination. A tax position that meets the more-likely-than-not recognitionthreshold should initially and subsequently be measured as the largest amountof tax benefit that has a greater than 50% likelihood of being realized uponeffective settlement with a taxing authority.

 

Thegross amount of unrecognized tax benefits at January 2, 2010 was $47,000compared to $431,000 at January 3, 2009. Of these totals, the amounts thatwould affect the effective tax rates were $0 and $81,000, respectively.

 

Weclassify interest and penalties recognized on the liability for unrecognizedtax benefits as income tax expense. Accrued interest of $33,000 and penaltiesof $0 were included in our total liability for unrecognized tax benefits as of January 2,2010 compared to interest of $110,000 and penalties of $16,000 as of January 3,2009.

 

Wefile income tax returns in the United States Federal and various statejurisdictions. The Internal Revenue Service has completed examinations forperiods through 2007. Federal tax years 2008 and 2009 remain subject toexamination. Various state income tax returns also remain subject toexamination. There are no tax positions expected to be resolved within12 months of this reporting date.

 

Areconciliation of the beginning and ending amount of unrecognized tax benefitsis as follows (amounts in thousands):

 

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| ** **                                               | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at Beginning of Year                             |       | $        | 431        |     | $          | 328 |   |
| Additions for tax positions related to the current  year |       | 47       |       | 122      |       |
| Reductions for statute of limitations                    |       | —   |       | (8       | )          |
| Reductions for tax positions of prior years              |       | (431     | )          | (11      | )          |
| Settlements                                              |       | —   |       | —   |       |
| Balance at End of Year                                   |       | $        | 47         |     | $          | 431 |   |

 

13.UNAUDITED QUARTERLY FINANCIAL DATA

 

Thefollowing table and footnotes provide summarized unaudited fiscal quarterlyfinancial data for 2009 and 2008 (amounts in thousands, except per shareamounts):

 
| ** **                                | ** ** | **First**          | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------------------------------|------------|--------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                | ** ** | **Quarter****(c)** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| 2009                                      |       |               |       |        |       |        |       |        |       |
| Sales                                     |       | $                  | 30,910     |        | $          | 28,682      |       | $           | 25,834     |   | $ | 28,035 |   |
| Depreciation, depletion and amortization  |       | 1,119              |       | 1,227       |       | 1,064       |       | 1,062       |       |
| Net (loss) income                         |       |               |       |        |       |        |       |        |       |
| Continuing operations                     |       | (79                | )          | 1,178       | (a)        | (700        | )          | (1,201      | )          |
| Discontinued operations                   |       | (411               | )          | (38         | )          | (282        | )          | 91          |       |
| Net (loss) income                         |       | (490               | )          | 1,140       |       | (982        | )          | (1,110      | )          |
| Basic and Diluted (loss) income per share |       |               |       |        |       |        |       |        |       |
| Continuing operations                     |       | (.05               | )          | .74         |       | (.44        | )          | (.75        | )          |
| Discontinued operations                   |       | (.26               | )          | (.03        | )          | (.17        | )          | .06         |       |
|                                      |       | (.31               | )          | .71         |       | (.61        | )          | (.69        | )          |
|                                           |            |                    |            |             |            |             |            |             |            |  |  |  |  |

 
| ** **                                | ** ** | **First**        | ** ** | **Second**       | ** ** | **Third**        | ** ** | **Fourth**       | ** ** |
|-------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                | ** ** | **Quarter  (c)** | ** ** | **Quarter  (c)** | ** ** | **Quarter  (c)** | ** ** | **Quarter  (c)** | ** ** |
| 2008                                      |       |             |       |             |       |             |       |             |       |
| Sales                                     |       | $                | 31,938     |             | $          | 37,729           |       | $                | 38,362     |   | $ | 37,685 |   |
| Depreciation, depletion and amortization  |       | 1,142            |       | 1,125            |       | 1,079            |       | 1,022            |       |
| Net (loss) profit:                        |       |             |       |             |       |             |       |             |       |
| Continuing operations                     |       | (749             | )          | 99               |       | 673              |       | 1,734            | (b)        |
| Discontinued operations                   |       | (382             | )          | (366             | )          | (323             | )          | (726             | )(b)       |
| Net (loss) income                         |       | (1,131           | )          | (267             | )          | 350              |       | 1,008            |       |
| Basic and Diluted (loss) income per share |       |             |       |             |       |             |       |             |       |
| Continuing operations                     |       | (.47             | )          | .06              |       | .42              |       | 1.08             |       |
| Discontinued operations                   |       | (.24             | )          | (.23             | )          | (.20             | )          | (.45             | )          |
|                                      |       | (.71             | )          | (.17             | )          | .22              |       | .63              |       |
|                                           |            |                  |            |                  |            |                  |            |                  |            |  |  |  |  |

 

----

| (a) | Second quarter 2009  results include a pre-tax gain of $2,026 on the sale of land in Colorado  Springs. On July 2, 2009 (July 3, 2009 was the last day of the  Company’s fiscal second quarter), the Company and the buyer of the property  reached an agreement on the final purchase price for the property. The  Company received the cash during the third quarter of 2009. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | Fourth quarter 2008  results include a pre-tax gain on the sale of land of $1,947 recorded in  continuing operations and a pre-tax impairment charge for long-lived assets  of $784 recorded in discontinued operations.                                                                                                                                                                       |
| (c) | The indicated quarter  has been restated from its original presentation to reflect the discontinued  operation.                                                                                                                                                                                                                                                                                |

 

Earnings per share are computed independently for each of the quarterspresented. Therefore, the sum of the quarterly earnings per share may not equalthe total for the year.

 

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

 

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subsidiary,Phoenix Manufacturing, Inc. of Phoenix, Arizona. Sales of these twosegments are nationwide, but are concentrated in the southwestern UnitedStates. Concrete, aggregates and construction supplies are offered fromnumerous locations along the Southern Front Range of Colorado operated by theCompany’s wholly-owned subsidiaries Castle Concrete Company and Transit MixConcrete Co., of Colorado Springs and Transit Mix of Pueblo, Inc. ofPueblo. Rocky Mountain Ready Mix Concrete, Inc. of Denver, formerlyincluded in the CACS segment was sold on July 17, 2009 and is not includedin the segment information presented in the table below but rather has beenreported as a discontinued operation. Doors are fabricated and sold along withthe related hardware from Colorado Springs and Pueblo through the Company’swholly-owned subsidiary, McKinney Door and Hardware, Inc. of Pueblo,Colorado. Sales of these two segments are highly concentrated in the SouthernFront 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”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.

 

Thefollowing table presents information about reported segments for the fiscalyears 2009 and 2008 along with the items necessary to reconcile the segmentinformation to the totals reported in the financial statements (amounts inthousands):

 
| ** **                               | ** ** | **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** | ** ** |
| 2009                                     |       |                                                         |       |              |       |                               |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers         |       | $                                                            | 40,421     |              | $          | 14,616                             |       | $                         | 55,037     |                     | $          | 32,784 |   | $ | 25,281 |   | $ | 58,065 |   | $ | 14 |   | $ | 345 |   | $ | 113,461 |   |
| Depreciation, depletion and amortization |       | 3,402                                                        |       | 173               |       | 3,575                              |       | 373                       |       | 450                      |       | 823 |   | 74 |   | — |   | 4,472 |   |
| Operating (loss) income                  |       | (2,759                                                       | )          | 1,090             |       | (1,669                             | )          | (503                      | )          | 2,397                    |       | 1,894 |   | (946 | ) | 109 |   | (612 | ) |
| Segment assets                           |       | 36,007                                                       |       | 6,509             |       | 42,516                             |       | 17,101                    |       | 13,141                   |       | 30,242 |   | 9,291 |   | 63 |   | 82,112 |   |
| Capital expenditures                     |       | 1,665                                                        |       | 175               |       | 1,840                              |       | 167                       |       | 109                      |       | 276 |   | 32 |   | — |   | 2,148 |   |
|                                          |            |                                                              |            |                   |            |                                    |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                               | ** ** | **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         |       | $                                                            | 64,829     |              | $          | 15,373                               |       | $                         | 80,202     |                     | $          | 42,166 |   | $ | 22,985 |   | $ | 65,151 |   | $ | 17 |   | $ | 344 |   | $ | 145,714 |   |
| Depreciation, depletion and amortization |       | 3,228                                                        |       | 134               |       | 3,362                                |       | 389                       |       | 539                      |       | 928 |   | 78 |   | — |   | 4,368 |   |
| Operating income (loss)                  |       | 2,142                                                        |       | 1,455             |       | 3,597                                |       | 85                        |       | 458                      |       | 543 |   | (643 | ) | 109 |   | 3,606 |   |
| Segment assets                           |       | 46,410                                                       |       | 6,276             |       | 56,686                               |       | 23,521                    |       | 14,241                   |       | 37,762 |   | 3,195 |   | 23 |   | 93,666 |   |
| Capital expenditures (c)                 |       | 1,708                                                        |       | 112               |       | 1,820                                |       | 60                        |       | 140                      |       | 200 |   | 6 |   | — |   | 2,026 |   |
|                                          |            |                                                              |            |                   |            |                                      |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)   Includesunallocated corporate office expenses and assets which consist primarily ofcash and cash equivalents, prepaid expenses, property, plant and equipment andin 2009, a $4,840 cash deposit with the Company’s insurer to secure theself-insured portion of claims under the Company’s casualty insurance program.

(b)   Includes a realestate operation.

(c)   The 2008capital expenditures for the Concrete, Aggregates & ConstructionSupplies segment include $165 of additions purchased on account.

 

There are no differences inthe basis of segmentation or in the basis of measurement of segment profit orloss from the last annual report except as discussed above regarding RMRM.

 

All long-lived assets are inthe United States. No customer accounted for 10% or more of total sales of theCompany in fiscal 2009 or 2008.

 

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**Report of IndependentRegistered Public Accounting Firm**

** **

Board of Directors andShareholders

Continental MaterialsCorporation

Chicago, Illinois

 

Wehave audited the accompanying consolidated balance sheet of ContinentalMaterials Corporation as of January 2, 2010, and the related consolidatedstatements of operations, shareholders’ equity and cash flows for the year thenended.  Our audit also included the Year2009 information on the financial statement schedule listed in the Index at Part IV,Item 15(a)2.  The Company’s management isresponsible for these financial statements. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Our audits included consideration of internal control over financialreporting as a basis for designing auditing procedures that are appropriate inthe circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  Our audits also included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management and evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of ContinentalMaterials Corporation as of January 2, 2010, and the results of itsoperations and its cash flows for the year than ended, in conformity withaccounting principles generally accepted in the United States of America.

 

Wealso audited the adjustments related to the discontinued operation more fullydescribed in Note 2 that were applied to restate the 2008 financial statements.  In our opinion, such adjustments areappropriate and have been properly applied.

 

 

/s/ BKD,LLP

** **

 

Indianapolis,Indiana

April 19,2010

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

To the Board of Directors and Shareholders ofContinental Materials Corporation:

 

We have audited, before the effects of theretrospective adjustments for the discontinued operations discussed in Note 2to the consolidated financial statements, the consolidated balance sheet ofContinental Materials Corporation and subsidiaries (the “Company”) as of January 3,2009, and the related consolidated statements of operations, shareholders’equity, and cash flows for the year ended January 3, 2009 (the January 3,2009 consolidated statement of operations before the effects of theretrospective adjustments discussed in Note 2 to the consolidated financialstatements are not presented herein). Our audit also included the financialstatement schedule for the year ended January 3, 2009 listed in the Indexat Part IV, Item 15(a) 2. These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and financial statement schedule based onour audits.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements as of and for the year ended January 3, 2009, before theeffects of the retrospective adjustments for the discontinued operationsdiscussed in Note 2 to the consolidated financial statements, present fairly,in all material respects, the financial position of Continental MaterialsCorporation and subsidiaries as of January 3, 2009, and the results oftheir operations and their cash flows for the year ended January 3, 2009,in conformity with accounting principles generally accepted in the UnitedStates of America.  Also, in our opinion,such financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly in allmaterial respects, the information set forth therein.

 

We were not engaged to audit, review, or apply anyprocedures to the retrospective adjustments for discontinued operationsdiscussed in Note 2 to the consolidated financial statements and, accordingly,we do not express an opinion or any other form of assurance about whether suchretrospective adjustments are appropriate and have been properly applied. Thoseretrospective adjustments were audited by other auditors.

 

/s/ Deloitte & Touche LLP

 

Chicago, Illinois

April 19, 2010

 

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

 

On September 18,2009, the Board of Directors of Continental Materials Corporation, on therecommendation of the Audit Committee, dismissed Deloitte & Touche LLPas its independent registered public accounting firm and appointed BKD LLP asthe Company’s independent registered public accounting firm to audit itsconsolidated statements for the year ending January 2, 2010. With regardto Deloitte & Touche LLP, during the two most recent fiscal years andthrough September 18, 2009, there have been no reportable events asdefined in Item 304(a)(1)(v) of Regulation S-K.

 

**Item 9A(T).**         **CONTROLSAND PROCEDURES**

 

Evaluation ofDisclosure Controls and Procedures

 

The Company’s Chief Executive Officer and Chief Financial Officer, withthe participation of management, have evaluated the effectiveness of theCompany’s disclosure controls and procedures as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended( ExchangeAct) as of January 2, 2010. The Chief Executive Officer and ChiefFinancial Officer, based on that evaluation, concluded that our disclosurecontrols and procedures are still not effective in that the Company has not yetcompleted the remediation process needed to establish adequate controls overinventory accounting in its Heating and Cooling Segment. The material weaknessrelates to the appropriate accounting for inventory and related cost of salesof this segment. This weakness was first discovered in October 2008 and isdiscussed in more detail in Item 9A of the Company’s 2008 Annual Report on Form 10-K.The lack of adequate controls over inventory accounting is considered amaterial weakness in internal controls over financial reporting as definedunder standards established by the Public Company Accounting Oversight Board(United States).

 

**Management’s Report on Internal Control 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. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of January 2, 2010. 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 2, 2010 because of the materialweakness discussed below. A material weakness is a deficiency, or combinationof deficiencies, in internal control over financial reporting such that thereis a reasonable possibility that a material misstatement of our annual orinterim financial statements will not be prevented or detected on a timelybasis. Management’s assessment as of January 2, 2010 concluded that thematerial weakness in our internal control over financial reporting related toits inventory accounting in its Heating and Cooling Segment identified during October 2008has not yet been adequately remediated.

 

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 fiscal third quarterinterim financial statements on Form 10-Q. The deficiencies in internalcontrols that lead to the material weakness primarily related to inaccuratebills of materials associated with the production of the Heating and CoolingSegment’s products and insufficient cycle counting during the interim periods.This deficiency 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. The information specified by Item 304 of Regulation S-Kwas provided to the Securities and Exchange Commission under Item 4 of Form 10-Qfiled by the Company on November 23, 2009 for the quarterly period ended October 3,2009.

 

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. The Companyperformed a physical inventory for this segment during the first week of November 2009which again resulted in a 

 

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downward adjustment to inventory and acorresponding charge to cost of sales. Offsetting adjustments to reduce compensationaccruals directly related to the decreased operating results largely negatedthe overall effect of the inventory adjustment such that the effect on thequarter was immaterial. The Company analyzed the effect of the prior twoquarters and since the compensation accruals had been accrued over the priornine months, the Company concluded that the book to physical adjustmentrecorded in the third quarter of 2009 did not have a material impact, eitherquantitatively or qualitatively, on the previously reported results of thefirst or second quarters of 2009.

 

As of January 2, 2010, 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 independent registered publicaccounting firm pursuant to temporary rules of the SEC that permitthe  Company to provide only Management’sreport in this Annual Report on Form 10-K. We are required to annuallyreassess our status as a “smaller reporting company” as of the end of ourfiscal year to determine whether we will be required to provide Management’sAnnual Report on Internal Control Over Financial Reporting and the associatedreport of our independent registered public accounting firm in our AnnualReport on Form 10-K.

 

b.         Changes in Internal Control OverFinancial Reporting

 

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 of reviewing the billsof material for all of our products is a time-intensive endeavor which wastemporarily delayed by the death of the project leader and the subsequentreplacement of both him and other members of the team. For these reasons, theCompany has not yet completed the task. Management therefore performedadditional analysis and other post-closing procedures to ensure that theHeating and Cooling Segment’s inventory was accounted for properly in theCompany’s consolidated year-end financial statements. The Company intends tocomplete its review of the bills of material as well as other operational andcost accounting procedures. The cycle counts have begun on raw materials andfinished goods; however better procedures need to be implemented to assure thatthese counts are accurate. Management believes that at the completion of thisproject, the controls will appropriately address the material weakness relatedto the accounting for inventory in the Heating and Cooling segment.

 

During the quarter ended January 2, 2010,there were no other material weaknesses identified in our review of internalcontrol over financial reporting and no other significant changes in theCompany’s internal control over financial reporting occurred during the quarterthat would materially affect, or be reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**Item 9B.**              **OTHERINFORMATION**

 

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

 

**PART III**

 

Items 10 through 14 of Part III have been omitted from this10-K Report because the registrant expects to file, not later than 120 daysfollowing the close of its fiscal year ended January 2, 2010, itsdefinitive 2010 proxy statement. The information required by Items 10 through14 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 for fiscal years 2009 and 2008                                 |   |
|          | Consolidated  statements of cash flows for fiscal years ended 2009 and 2008                           |   |
|          | Consolidated  balance sheets as of January 2, 2010 and January 3, 2009                      |   |
|          | Consolidated  statements of shareholders’ equity for fiscal years ended 2009 and 2008            |   |
|          |                                                                                                  |   |
| (a) 2    | The  following is a list of financial statement schedules filed as part of this  Report:              |   |
|          |                                                                                                  |   |
|          | Schedule II Valuation and Qualifying  Accounts & Reserves For the Fiscal Years 2009 and 2008 |   |

 

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

 

(a) 3                      The followingis 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.                                                                                                                                                                                                                                                                                                                                                                                            |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 10   |   | 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 as Exhibit 10f to Form 10-K for the year ended  January 3, 2009, incorporated herein by reference; First Amendment  thereto dated as of November 18, 2009 (filed herewith as Exhibit 10.1);  and Second Amendment thereto dated April 15, 2010 (filed herewith as  Exhibit 10.2). |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 10a  |   | 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.                                                                                                                                                                                                                                                                                                                                                                        |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 10b  |   | 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.*                                                                                                                                                                                                                                                                                                                                                                                         |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 10c  |   | Continental  Materials Corporation Employees Profit Sharing Retirement Plan, 2009  Amendment and Restatement (filed herewith).*                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 10d  |   | Williams  Furnace Co. Employees Profit Sharing Retirement Plan, 2009 Amendment and  Restatement (filed herewith).*                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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.                                                                                                                                                                                                                                                                                                                                                     |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 21   |   | Subsidiaries  of Registrant (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 23   |   | Consents  of Independent Registered Public Accounting Firms (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 32   |   | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer (filed  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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* - Compensatory plan or arrangement

 

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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 19, 2010

 

 

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 19, 2010 |
|                      |       |                                    |       |                |
| /S/  Joseph J. Sum        |       | Vice President, Chief Financial Officer |       |                |
| Joseph J. Sum             |       | (Principal Financial Officer)           |       | April 19, 2010 |
|                      |       |                                    |       |                |
| /S/  Mark S. Nichter      |       | Secretary and Controller                |       |                |
| Mark S. Nichter           |       | (Principal Accounting Officer)          |       | April 19, 2010 |
|                      |       |                                    |       |                |
| /S/  William D. Andrews   |       |                                    |       |                |
| William D. Andrews        |       | Director                                |       | April 19, 2010 |
|                      |       |                                    |       |                |
| /S/  Thomas H. Carmody    |       |                                    |       |                |
| Thomas H. Carmody         |       | Director                                |       | April 19, 2010 |
|                      |       |                                    |       |                |
| /S/  Betsy R. Gidwitz     |       |                                    |       |                |
| Betsy R. Gidwitz          |       | Director                                |       | April 19, 2010 |
|                      |       |                                    |       |                |
| /S/  Ralph W. Gidwitz     |       |                                    |       |                |
| Ralph W. Gidwitz          |       | Director                                |       | April 19, 2010 |
|                      |       |                                    |       |                |
| /S/  Ronald J. Gidwitz    |       |                                    |       |                |
| Ronald J. Gidwitz         |       | Director                                |       | April 19, 2010 |
|                      |       |                                    |       |                |
| /S/  Theodore R. Tetzlaff |       |                                    |       |                |
| Theodore R. Tetzlaff      |       | Director                                |       | April 19, 2010 |
|                      |       |                                    |       |                |
| /S/  Peter E. Thieriot    |       |                                    |       |                |
| Peter E. Thieriot         |       | Director                                |       | April 19, 2010 |
|                      |       |                                    |       |                |
| /S/  Darrell M. Trent     |       |                                    |       |                |
| Darrell M. Trent          |       | Director                                |       | April 19, 2010 |

 

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CONTINENTALMATERIALS CORPORATION

 

**SCHEDULEII - VALUATION AND QUALIFYING ACCOUNTSAND RESERVES (c) (e)**for the fiscalyears 2009 and 2008

 
| **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 2009**                       |       |                                 |       |                                         |       |                       |       |                          |       |
| Allowance for doubtful accounts (c) |       | $                                    | 445,000    |                                         | $          | 288,000                    |       | $                             | 157,000    | (a) | $ | 576,000 |   |
| Inventory valuation reserve (c)     |       | $                                    | 255,000    |                                         | $          | 205,000                    |       | $                             | 76,000     | (b) | $ | 384,000 |   |
| Reserve for self-insured losses     |       | $                                    | 3,283,000  |                                         | $          | 2,930,000                  |       | $                             | 3,240,000  | (d) | $ | 2,973,000 |   |
|                                |       |                                 |       |                                         |       |                       |       |                          |       |
| **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  |                                         | $          | 3,936,000                  |       | $                             | 4,930,000  | (d) | $ | 3,283,000 |   |

 

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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 assetto which it applies.

 

(d)   Payments of self-insured claims including healthcareclaims accrued and paid in connection with the Company’s self-insured employeehealthcare benefit plan.

 

(e)   Column C (2) has been omitted as the answer wouldbe “none”.

 

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