Table ofContents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K/A**

**(AmendmentNo. 1)**

 

**(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  o No  x

 

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

 

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

 

The aggregatemarket value (based on June 30, 2009 closing price) of voting stock heldby non-affiliates of registrant: Approximately $6,971,000.

 

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

 

Incorporation byreference: 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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EXPLANATORY NOTE:

 

This Amendment No. 1on Form 10-K/A to our Annual Report on Form 10-K for the fiscal yearended January 2, 2010, which was filed with the Securities and ExchangeCommission (the “SEC”) on April 19, 2010 (the “Original Filing”), is beingfiled to correct a typographical error in the Report of Independent RegisteredPublic Accounting Firm issued by Deloitte & Touche LLP (“D&T) withrespect to their audit of theconsolidated balance sheet of Continental Materials Corporation andsubsidiaries (the “Company”) as of January 3, 2009, and the related consolidatedstatements of operations, shareholders’ equity, and cash flows for the yearended January 3, 2009 (the January 3, 2009 consolidated statement ofoperations before the effects of the retrospective adjustments discussed inNote 2 to the consolidated financial statements are not presented herein)contained in Part II, Item 8 of the Original Filing. The typographicalerror related to the date of their opinion which was erroneously reported as April 19,2010 when the correct date should have been April 17, 2009.  The correct date of the opinion will beproperly disclosed in the Annual Report that is being printed and will bemailed to our stockholders in connection with the 2010 Annual Meeting ofStockholders. The correct date, however, was not reported in the OriginalFiling submitted under the EDGAR reporting system with the SEC on April 19,2010.

 

As a result of this Amendment, the certificationspursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of2002, filed and furnished, respectively, as exhibits to the Original Filing,have been re-executed and re-filed as of the date of this Form 10-K/A.Accordingly, the “Exhibit Index” attached to this Form 10-K/A isbeing updated to reflect the new certifications described above.

 

No attempt has been made in this Form 10-K/A tomodify or update the disclosures or financial statements in the Original Filingexcept as described above. For convenience and ease of reference, thisamendment sets forth “Item 8 — Financial Statements and Supplementary Data”from the 2009 Form 10-K in its entirety with the applicable change notedabove. Additionally, the conditions and disclosures filed in the OriginalFiling have not been updated to reflect events, results or developments thatoccurred after the Original Filing, or to modify or update those disclosures orfinancial statements affected by subsequent events, if any. Among other things,forward-looking statements made in the Original Filing, have not been revisedto reflect events, results or developments that occurred or facts that becameknown to us after the date of the Original Filing. 

 

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**TABLEOF CONTENTS**

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                    | **Page** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Special  Note Regarding Forward Looking Statements                                                                                                                                                                                                                                                                                                                                                            | *        |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| PART I.                                                                                                                                                                                                                                                                                                                                                                                                  |     |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Item  1. Business                                                                                                                                                                                                                                                                                                                                                                                             | *        |
| Item  1A. Risk Factors                                                                                                                                                                                                                                                                                                                                                                                        | *        |
| Item  1B. Unresolved Staff Comments                                                                                                                                                                                                                                                                                                                                                                           | *        |
| Item  2. Properties                                                                                                                                                                                                                                                                                                                                                                                           | *        |
| Item  3. Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                    | *        |
| Item  4. Removed and Reserved                                                                                                                                                                                                                                                                                                                                                                                 | *        |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| PART II.                                                                                                                                                                                                                                                                                                                                                                                                 |     |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Item  5. Market for Registrant’s Common Equity and Related Stockholder Matters and  Issuer Purchases of Equity Securities                                                                                                                                                                                                                                                                                | *        |
| Item  6. Selected Financial Data                                                                                                                                                                                                                                                                                                                                                                              | *        |
| Item  7. Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                                                                                                                                                                                                                                                                          | *        |
| Item  7A. Quantitative and Qualitative Disclosures about Market Risk                                                                                                                                                                                                                                                                                                                                          | *        |
| Item  8. Financial Statements and Supplementary Data                                                                                                                                                                                                                                                                                                                                                          | 2        |
| Item  9. Changes In and Disagreements With Accountants on Accounting and Financial  Disclosures                                                                                                                                                                                                                                                                                                               | *        |
| Item  9A(T). Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                          | *        |
| Item  9B Other Information                                                                                                                                                                                                                                                                                                                                                                                    | *        |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| 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. | *        |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Part IV.                                                                                                                                                                                                                                                                                                                                                                                                 |     |
|                                                                                                                                                                                                                                                                                                                                                                                                          |     |
| Item  15. Exhibits, Financial Statement Schedules                                                                                                                                                                                                                                                                                                                                                             | *        |

 

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PART I

 
| **Item  8.** | **FINANCIAL STATEMENTS 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                                                                                               |     | 3      |   |
|   |                                                                                                                                                                |     |   |   |
|   | Consolidated statements of cash flows for fiscal years  2009 and 2008                                                                                               |     | 4      |   |
|   |                                                                                                                                                                |     |   |   |
|   | Consolidated balance sheets as of January 2, 2010  and January 3, 2009                                                                                    |     | 5      |   |
|   |                                                                                                                                                                |     |   |   |
|   | Consolidated statements of shareholders’ equity for  fiscal years 2009 and 2008                                                                                |     | 6      |   |
|   |                                                                                                                                                                |     |   |   |
|   | Notes to consolidated financial statements                                                                                                                          |     | 7-18   |   |
|   |                                                                                                                                                                |     |   |   |
|   | Reports of Independent Registered Public Accounting  Firms                                                                                                          |     | 19-20  |   |

 

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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 no suchrelevant experience exits. The new guidance became effective for the Companybeginning January 4, 2009, the first day of fiscal 2009, and did not havea 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 maintains allowancesfor potential credit losses based upon the aging of accounts receivable andhistorical 

 

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experienceand such losses have been within management’s expectations. See Note 14 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 2010 theCompany will receive compensation if certain sales volume or operating profitthresholds are reached by the Buyer. There is no assurance that the futureoperating results of the Buyer will be such that any future consideration willbe due to the Company under this Agreement, accordingly no value was recordedrelated 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 $647,000 duringthe quarter ended July 4, 2009. The $647,000 was recorded as a loss fromdiscontinued 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 recordedgoodwill for the year ended January 2, 2010 (there were no changes torecorded goodwill during the year ended January 3, 2009) are as follows(amounts in thousands):

 
| ** **                         | ** ** | **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              |       |
|                                           |            |                  |            |                  |            |                  |            |                  |            |  |  |  |  |

 

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| (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             |       | 52,686                               |       | 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 Independent RegisteredPublic 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 financialstatements.  In our opinion, suchadjustments are appropriate 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 provides 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 17, 2009

 

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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 28, 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 28, 2010 |
|                      |       |                                    |       |                |
| /S/  Joseph J. Sum        |       | Vice President, Chief Financial Officer |       |                |
| Joseph J. Sum             |       | (Principal Financial Officer)           |       | April 28, 2010 |
|                      |       |                                    |       |                |
| /S/  Mark S. Nichter      |       | Secretary and Controller                |       |                |
| Mark S. Nichter           |       | (Principal Accounting Officer)          |       | April 28, 2010 |
|                      |       |                                    |       |                |
| /S/  William D. Andrews   |       |                                    |       |                |
| William D. Andrews        |       | Director                                |       | April 28, 2010 |
|                      |       |                                    |       |                |
| /S/  Thomas H. Carmody    |       |                                    |       |                |
| Thomas H. Carmody         |       | Director                                |       | April 28, 2010 |
|                      |       |                                    |       |                |
| /S/  Betsy R. Gidwitz     |       |                                    |       |                |
| Betsy R. Gidwitz          |       | Director                                |       | April 28, 2010 |
|                      |       |                                    |       |                |
| /S/  Ralph W. Gidwitz     |       |                                    |       |                |
| Ralph W. Gidwitz          |       | Director                                |       | April 28, 2010 |
|                      |       |                                    |       |                |
| /S/  Ronald J. Gidwitz    |       |                                    |       |                |
| Ronald J. Gidwitz         |       | Director                                |       | April 28, 2010 |
|                      |       |                                    |       |                |
| /S/  Theodore R. Tetzlaff |       |                                    |       |                |
| Theodore R. Tetzlaff      |       | Director                                |       | April 28, 2010 |
|                      |       |                                    |       |                |
| /S/  Peter E. Thieriot    |       |                                    |       |                |
| Peter E. Thieriot         |       | Director                                |       | April 28, 2010 |
|                      |       |                                    |       |                |
| /S/  Darrell M. Trent     |       |                                    |       |                |
| Darrell M. Trent          |       | Director                                |       | April 28, 2010 |

 

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