**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

**(MarkOne)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 For the fiscal year ended December 31, 2005

 

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 For the transition period from ______________  to ______________

 

Commission file number 1-3834

 

 

**Continental Materials Corporation**

(Exact name ofregistrant as specified in its charter)

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

 

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

 

Securities registeredpursuant to Section 12(b) of the Act: 
| **Title of each class**       | **Name of  each exchange on which registered** |
|-------------------------------|------------------------------------------------|
| Common Stock - $.25 par value | American Stock  Exchange                       |

 

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

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined by Rule 405of the Securities Act. Yes o   No x

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

Indicate by checkmark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.    Yes o   No x

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of the Form 10-K or any amendment to thisForm 10-K.  x

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer o       Acceleratedfiler o       Non-acceleratedfiler No x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act. Yes o   No x

Theaggregate market value (based on July 2, 2005 closing price) of votingstock held by non-affiliates of registrant: Approximately $20,730,000.

Number of commonshares outstanding at June 27, 2006: 1,605,461.

Incorporation byreference: Portions of registrant’s definitive proxy statement for the 2006Annual Meeting of stockholders into Part III of this Form 10-K.The definitive proxy statement is expected to be filed with the Securities andExchange Commission as soon as practicable and the date of the Annual Meetingwill be publicly announced when established.

 

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**PART I**

Item 1.             **BUSINESS**

ContinentalMaterials Corporation is a Delaware corporation, incorporated in 1954. Therehave been no significant changes in the Company’s line of business during thepast five years other than the acquisition of all of the stock of McKinney Doorand Hardware, Inc. (MDHI), a refabricator and distributor of metal doorsand related hardware in Pueblo, Colorado on April 1, 2002 for $2,125,000,net of cash received. Accordingly, results for 2002 and on include the activityof MDHI since April 1, 2002. The Door segment of the Construction Productsgroup consists of the activities of MDHI.

The Company operatesprimarily within two industry groups, HVAC (Heating, Ventilation and AirConditioning) and Construction Products. Prior to the 2005 fiscal year, theCompany reported its financial results in two reportable segments, essentiallyalong the lines of these two industry groups. The reportable segments weretitled the Heating and Air Conditioning segment and the Construction Materialssegment. Prior to filing the annual report on Form 10-K for the 2005fiscal year, management determined that its accounting for segments did notcomply with Statement of Financial Accounting Standards No. 131, “Disclosuresabout Segments of an Enterprise and Related Information” (SFAS 131). As aresult, the financial information presented for 2004 and 2003 in Note 11 to theConsolidated Financial Statements has been restated and Management’s Discussionand Analysis has been revised to reflect this restatement in segment reporting.

Prior to filing theannual report on Form 10-K for the 2005 fiscal year, managementconcluded that there are four reportable segments within its two principalindustry groups; the Heating and Cooling segment and the Evaporative Cooling segmentin the HVAC industry group and the Concrete, Aggregates and ConstructionSupplies segment and the Door segment in the Construction Products industrygroup.

The Heating and Coolingsegment produces and sells gas-fired wall furnaces, console heaters and fancoils from the Company’s wholly-owned subsidiary, Williams Furnace Co. (WFC) ofColton, California. The Evaporative Cooling segment produces and sellsevaporative coolers from the Company’s wholly-owned subsidiary, PhoenixManufacturing, Inc. (PMI) of Phoenix, Arizona. Concrete, Aggregates andConstruction Supplies are offered from numerous locations along the Front Rangeof Colorado operated by the Company’s wholly-owned subsidiaries Castle ConcreteCompany and Transit Mix Concrete Co., of Colorado Springs, Transit Mix ofPueblo, Inc. of Pueblo and Rocky Mountain Ready Mix Concrete, Inc.(RMRM) of Denver. Doors are fabricated and sold along with the related hardwarefrom the Company’s wholly-owned subsidiary, MDHI of Pueblo, Colorado.

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

Financial informationrelating to industry segments appears in Note 11 on pages 33 and 34 ofthis Form 10-K. References to a “Note” are to the “Notes toConsolidated Financial Statements” included on pages 26 through 35 of thisAnnual Report on Form 10-K.

***MARKETING***

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

The Construction Productsgroup markets its products primarily through its own direct sales personneland, except for doors and related hardware, confines its sales to the FrontRange area in Colorado. Sales are primarily made to

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general andsub-contractors, government entities and individuals. Sales are affected by thegeneral economic conditions and weather conditions in the areas serviced (as itrelates to construction). Revenues usually decline in the winter months as thepace of construction slows. Sales of doors and the related hardware are madethroughout the United States although sales are primarily within Colorado andadjacent states.

During 2005, no customer accounted for10% or more of the total sales of the Company.

***CUSTOMER SERVICE AND SUPPORT***

The HVAC group maintainsparts departments and help lines to assist contractors, distributors and endusers in servicing the products. The Company does not currently performinstallation services, nor are maintenance or service contracts offered. Inaddition, training and product information sessions for the furnace, fan coiland evaporative cooler product lines are offered at our plants and other sitesfor distributors, contractors, engineers, utility company employees and othercustomers. The HVAC group does not derive any revenue from after-sales serviceand support other than from parts sales.

The personnel in theConcrete, Aggregates and Construction Supplies segment routinely take aleadership role in formulation of the products to meet the specifications ofcustomers. The Company is not involved in setting forms or performing finishingwork on any of its concrete products. Beginning in 2006, the Door segment willoffer and install electronic access systems. The doors, frames and hardware areinstalled by independent contractors engaged by the general contractor orbuilding owner.

***BACKLOG***

At December 31,2005, the Heating and Cooling segment had a backlog of approximately $447,000($778,000 at January 1, 2005) primarily relating to orders that areexpected to be filled during the first quarter of 2006. The decline is due tothe timing of orders rather than indicative of a change in demand.

The Evaporative Coolingsegment did not have a backlog at either December 31, 2005 or January 1,2005 due to the seasonal nature of the product.

At December 31,2005, the Concrete, Aggregates and Construction Supplies segment had a backlogof approximately $20,846,000 ($10,459,000 at January 1, 2005) primarilyrelating to construction contracts awarded and expected to be filled during2006 including two large projects, a cement mill and a power plant. Theincrease is more due to the timing of orders rather than indicative ofincreased demand.

At December 31,2005, the Door segment had a backlog of approximately $3,496,000 ($3,760,000 atJanuary 1, 2005) primarily relating to orders that are expected to befilled during the first half of 2006. The decline is more due to the timing ofthe shipment of completed jobs and the receipt of orders than indicative of anychange in demand.

Managementdoes not believe that any of the above backlogs represent a trend but ratherare indicative only of the timing of orders received or contracts awarded.

***RESEARCH AND DEVELOPMENT/PATENTS***

In general, the Companyrelies upon, and intends to continue to rely upon, unpatented proprietarytechnology and information. However, research and development activities in theHVAC group have resulted in a patent being issued to PMI related to the PowerCleaning System (expiring January 2014) used in evaporative coolers and apatent issued to WFC entitled “Wall Furnace With Side Vented Draft Hood” (expiringNovember 2011) for a process that increased the heat transferenceefficiency in our furnaces above that previously offered by the Company and itscompetitors. The amounts expended on research and development are not materialand are expensed as incurred. The Company believes its interests in itspatents, as well as its proprietary knowledge, are sufficient for itsbusinesses as currently conducted.

***MANUFACTURING***

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

Due to the seasonality ofthe businesses and to balance production throughout the year, furnaces andevaporative coolers are built during their off seasons in order to haveadequate supplies to sell during the season. Although sales are made throughoutthe year, sales volume is generally higher from August through January forfurnaces while sales volume of evaporative coolers is generally higher from March throughJuly.

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In general, the Companycan obtain the raw materials required by our operations in all segments fromvarious sources in the quantities desired. The Company’s Concrete, Aggregatesand Construction Supplies segment has historically purchased most of its cementrequirements from a single supplier in order to obtain favorable volume relatedpricing. During the late third and early fourth quarter of 2005, the Companydid experience some cement shortage due to production problems at its principalsupplier’s cement mill. While the situation has been corrected, the Companyexpects that there will be a tight supply of cement until a cement mill,presently under construction near Pueblo, Colorado is completed. The companybuilding the cement mill expects the mill to be operational some time during2007. The Company has no long-term supply contracts and does not consideritself to be dependent on any individual supplier. The Door segment hashistorically purchased the majority of its hardware primarily from a singlesupplier in order to obtain favorable volume related pricing, however, othersuppliers are available.

The Company minesaggregates (rock, gravel and sand) from various owned and leasedproperties  in Colorado. Colorado miningpermits require permit holders to perform reclamation work to stabilize themined areas. These requirements are similar in nature to those included in themining permits of our competitors. In recent years, reclamation costs haveincreased compared to prior years as the Company has engaged in enhancedreclamation projects that exceed the stated requirements. The enhancedreclamation efforts are being performed, in part, to establish communitygoodwill. The Company performs the majority of the reclamation work usingexisting production employees and equipment primarily at times when productionis curtailed due to inclement weather or decreased demand for our products.Consequently, the reclamation work has a minimal impact on our capitalexpenditures.

***COMPETITIVE CONDITIONS***

Heating and Cooling— The Company is one of three principal companies producing wall furnaces(excluding units sold to the recreational vehicle industry) and gas firedconsole heaters. The wall furnace and console heater markets are only a smallcomponent of the heating industry. The Company serves these market areas from aplant in Colton, California. The sales force consists of in-house salespersonnel and independent manufacturers’ representatives. The heating industryis dominated by a few manufacturers which are substantially larger than theCompany. These manufacturers sell diversified lines of heating and airconditioning units directed primarily toward central heating and coolingsystems. All of the producers, including the Company, compete primarily on abasis of price, service and timeliness of delivery.

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

EvaporativeCooling — The Companymanufactures evaporative air coolers at a plant in Phoenix, Arizona. The coolermarket is dominated by Adobe Air. The other principal competitor isChampion/Essick. All producers of evaporative air coolers typically competeaggressively on the basis of price, product features and product availabilityduring the cooling season.

Concrete,Aggregates and Construction Supplies — The Company is one offive companies producing ready mix concrete in the Colorado Springs area, oneof three companies producing ready mix concrete in the Pueblo area and one ofeleven companies producing ready mix concrete in the Denver area. Although weare the largest producer in the Colorado Springs and Pueblo markets served, theother competitors in these areas compete on the basis of price, service andproduct features. In Denver, three of the producers are significantly largerthan RMRM. This market is currently experiencing aggressive competition basedon price and service.

TheCompany is one of eight producers of aggregates in the Colorado Springs andPueblo marketing areas. All producers compete on the basis of price, quality ofmaterial and service.

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

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

***EMPLOYEES***

TheCompany employed 665 people as of December 31, 2005. Employment variesthroughout the year due to the seasonal nature of the businesses. A breakdownof the prior three years employment at year-end by segment was:

|                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Heating and  Cooling                            |       | 166      |       | 149      |       | 187      |       |
| Evaporative  Cooling                            |       | 119      |       | 128      |       | 140      |       |
| Concrete,  Aggregates and Construction Supplies |       | 346      |       | 340      |       | 358      |       |
| Door                                            |       | 21       |       | 20       |       | 19       |       |
| Corporate Office                                |       | 13       |       | 13       |       | 13       |       |
| Total                                           |       | 665      |       | 650      |       | 717      |       |

 

Thereduction in the Heating and Cooling segment during 2004 was due to thecombination of a lower direct labor force as a result of reduced sales and areduction in office staff. During 2005 some of these positions were refilled.The reduction in the Evaporative Cooling segment reflects the combination of alower direct labor force as a result of reduced sales during 2004 and areduction in office staff. The 2005 decrease reflects a further decrease indirect labor due to changes in production scheduling. The 2004 reduction in theConcrete, Aggregates and Construction Supplies segment similarly reflects a smallreduction in direct labor and a small reduction in office personnel as somefunctions were centralized in the Colorado Springs office. The slight increaseduring 2005 was in response to increased sales.

Thefactory employees at the Colton, California plant are represented by theCarpenters Local 721 Union under a contract that expires in April 2008.The Company considers relations with its employees and with their union to begood. There are no unions at any of the Company’s other operations.

***AVAILABLE INFORMATION***

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

Item 1A.         **RISK FACTORS**

An investment in ourcommon stock involves risks and uncertainties. The factors set out below mayhave material adverse effects on our business, financial condition, results of operationsand cash flows or on the value of our stock. There may be other risks which arenot known to us.

**Low trading volume in our common stock mayadversely affect the ability to purchase or sell in a timely manner and mayadversely affect the trading price of our common stock.**

Our common stock istraded on the American Stock Exchange under the symbol “CUO.” In addition tothe customary business factors affecting the price of a publicly traded company’scommon stock, such as financial condition, results of operations and cashflows, the concentration of ownership of the Company is a factor that should beconsidered before deciding to purchase, sell or hold our stock. Approximately84% of the Company’s common stock is owned by the Gidwitz family, other officersand directors of the Company, employees of the Company and by two institutionalfund groups. On days that the American Stock Exchange is open, the stock isoften not traded at all and the average daily trading volume for 2005 was lessthan 500 shares. The low volume traded on any given day could have an adverseeffect on a shareholder’s ability to purchase or sell shares of the Company ina timely manner and/or adversely affect the trading price.

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**Wedepend heavily on construction sector activity levels which tend to be cyclicaland which differ throughout the regions in which we operate.**Our results depend heavily on residential, commercial andinfrastructure construction activity and spending levels. The constructionindustry in our markets tends to be cyclical. Construction activity andspending levels vary across our markets and are influenced by interest rates,inflation, consumer spending habits, demographic shifts, environmental laws andregulations, employment levels and the availability of funds for publicinfrastructure projects. Economic downturns may lead to recessions in theconstruction industry on a whole and, specifically, in our markets.

**Adverseweather lessens demand for our products, which is seasonal.**Construction activity, and thus demand for our concrete,aggregates and construction supplies, decreases substantially during periods ofcold weather, when it snows or when heavy or sustained rains fall.Consequently, demand for these products is significantly lower during thewinter. Sales of concrete, aggregates and construction supplies are generallystronger during the second and third quarters of the year because weatherconditions are normally more favorable during these periods. Sales of furnacesand console heaters usually increase in the months of August through January inresponse to colder weather in areas served. Sales of the fan coil product lineare throughout the United States, Canada and the Caribbean and are more evenlydistributed throughout the year although the highest volume typically occursduring the late spring and summer, particularly in Canada and in the NorthernUnited States, where winter weather significantly reduces our first quartersales. Evaporative coolers are marketed predominantly in geographic areas thatexperience hot and dry weather conditions. Sales are usually higher in themonths of March through July. Sales of all of our products are, therefore,affected by adverse weather conditions in their market locations. Such adverseweather conditions can materially and adversely affect our results ofoperations and profitability if they occur with unusual intensity, duringabnormal periods, or last longer than usual in our major markets.

**Competitionin our industry could adversely affect our results of operations.**Substantially all the markets we operate in are highlycompetitive. In all of our business segments, we compete with several otherdomestic suppliers some of which are substantially larger than us. Many factorsaffect the competitive environments we face in our markets. Among others, theyinclude the number of competitors in the market, the pricing policies of thosecompetitors, the financial strength of those competitors, the total productioncapacity serving the market, the barriers that potential competitors face toenter the market, the proximity of natural resources to the market, as well aseconomic conditions and product demand within the market. Such factors cometogether in each of our markets in varying ways, sometimes in ways thatadversely impact demand for our products and our results of operations.

**Increasedenergy and fuel costs may have a material adverse effect on our results.**Our operations consume significant amounts of energy. Theprice and availability of energy are subject to political, economic and marketfactors that are generally outside our control. In addition, delivery ofrequired raw materials and distribution of our products are made by truck orrail (primarily required raw materials). Because of this, both the availabilityas well as the cost of energy and fuel have significantly affected, and maycontinue to affect, our financial condition, results of operations andliquidity.

**Litigationcould affect our profitability.**The nature of all of our business segments exposes us tovarious litigation matters including product liability claims, employment,health and safety matters, environmental matters, regulatory and administrativeproceedings, governmental investigations, tort claims and contract disputes. Wecontest these matters vigorously and make insurance claims where appropriate.However, litigation is inherently costly and unpredictable, making it difficultto accurately estimate the outcome of existing or future litigation or the costof our legal representation. Although we make accruals as we believe warranted,the amounts that we accrue could vary significantly from any amounts weultimately pay due to the inherent uncertainties in the estimation process.

**Governmentalpolicies and laws, particularly those relating to protection of theenvironment, could significantly impact our operations.**As described more fully within “Manufacturing” in Item 1Business, our operations require numerous governmental approvals and permits.Additionally, our HVAC products must meet various industry performance testswhich are strictly monitored. These approvals, permits and testing standardsoften require us to make significant capital and maintenance expenditures tocomply with the appropriate laws and regulations. Stricter laws and regulationsincluding reclamation requirements, or stricter interpretation of existing lawsor regulations, may impose new liabilities on us, require additional investmentby us, such as for pollution control equipment, or impede our opening new orexpanding existing plants or facilities. The Company also has, on occasion,been the target of public pressure to exceed the legal requirements forreclamation contained in its mining permits. Such incidents in the future maycause the Company to expend additional amounts for reclamation not currentlyforeseen.

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**Changesin the cost or availability of raw materials supplied by third parties mayadversely affect our operating and financial performance.**We obtain certain raw materials from third parties whoproduce such materials as cement, aggregates (in the Denver market), fly ashand other additives as well as steel, motors, electronic components, coppertubing and other items. Should our existing suppliers cease operations, reduceor eliminate production of these products or experience work stoppages forwhatever reason, our costs to procure these materials may increasesignificantly or we may be obliged to procure alternatives to replace thesematerials.

**Providing healthcare and workers’compensation benefits to our employees is a significant cost of operation.Continuing increases in such costs could negatively affect our earnings.**The costs of providing healthcare and workers’ compensationbenefits to our employees have increased substantially over the past severalyears. We have instituted measures to control these costs, however many factorsaffecting these costs are not in our control. Should these costs continue torise, this could have an adverse effect on our consolidated results ofoperations, cash flows or financial condition.

**If wefail to maintain proper and effective internal controls, our ability to produceaccurate financial statements could be impaired.**In designing and evaluating our internal controls, managementrecognizes that internal controls, no matter how well conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of theinternal controls are met. Our internal controls have been designed to meet,and management believes that they meet, reasonable assurance standards.Additionally, in designing internal controls, our management necessarily isrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible internal controls. The design of any internal controls are based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any control will succeed in achieving its stated goalsunder all potential future conditions. We annually assess the effectiveness ofour internal controls. During this process, we may identify material weaknessesor significant deficiencies in our internal controls, or areas for furtherattention or improvement. Any failure to maintain that adequacy or our abilityto produce accurate financial statements (including the proper application ofour critical accounting policies) on a timely basis could increase ouroperating costs and materially impair our ability to operate our business. Inaddition, investors’ perceptions that our internal controls are subject tomaterial weaknesses or significant deficiencies, or are otherwise inadequate,or that we are unable to produce accurate financial statements may adverselyaffect our stock price.

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

**A substantial amount of theCompany’s common stock is controlled by a small number of investors and coulddelay or prevent a change of control.**Approximately 84% of the Company’s common stock is owned bythe Gidwitz family, other officers and directors of the Company, employees ofthe Company and two institutional fund groups. As such, these stockholders willexercise substantial control over our future direction and operation and suchconcentration of control may have the effect of discouraging, delaying orpreventing a change in control and may also have an adverse effect on themarket price of our common stock.

Item 2.              **PROPERTIES**

The Heating and Coolingsegment operates out of an owned facility in Colton, California. This facilityis, in the opinion of management, in good condition and sufficient for theCompany’s current needs. Production capacity exists at the Colton plant suchthat the Company could exceed the highest volumes achieved in prior years orexpected in the foreseeable future and maintain timely delivery.

The Evaporative Coolingsegment operates out of a leased facility in Phoenix, Arizona. This facility isalso, in the opinion of management, in good condition and sufficient for theCompany’s current needs. Production capacity exists at the Phoenix plant suchthat the Company could exceed the highest volumes achieved in prior years orexpected in the foreseeable future and maintain timely delivery.

TheConcrete, Aggregates and Construction Supplies segment serves the Coloradoready-mix concrete market from ten owned batch plants. In addition, the Companycurrently operates aggregate processing facilities on three owned

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andfour leased mining properties. These properties presently provide the aggregaterequirements of our Colorado Springs and Pueblo ready mix concrete business aswell as selling product to independent customers. The Denver area batch plantscurrently purchase their aggregate needs from sources located closer to that market.In general, the leased mining properties are on long-term leases with paymentbased upon the number of tons mined. The lease of an aggregates property inPueblo, Colorado also requires minimum annual royalty payments. See Note 7 on page 31for the schedule of future minimum payments. Constuction supplies are sold fromowned facilities adjacent to the main batch plants in Colorado Springs andPueblo. All of the Concrete, Aggregate and Construction Supplies segment’sfacilities are located along the Front Range in Colorado and, in the opinion ofmanagement, are in good condition and sufficient for the Company’s currentneeds. The Company also leases or owns other aggregate deposits along the FrontRange that are not currently in production. In the opinion of management, theowned and leased properties contain permitted and minable reserves sufficientto service customers’ and our own sand, rock and gravel requirements for theforeseeable future.

TheDoor segment operates out of a leased facility in Pueblo, Colorado. Thefacility is, in the opinion of management, in good condition and sufficient forthe Company’s current needs.

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

Product volumes at all ofthe facilities of the Company are subject to seasonal fluctuations, but in theopinion of management, the facilities are generally well utilized.

Item 3.              **LEGALPROCEEDINGS**

TheCompany is involved in litigation matters related to its continuing business,principally product liability matters related to the gas-fired heating productsin the Heating and Cooling segment. In the Company’s opinion, none of theseproceedings, when concluded, will have a material adverse effect on the Company’sconsolidated results of operations or financial condition as the Company hasestablished adequate reserves for known occurrences. See Management’sDiscussion and Analysis of Financial Condition and Results of Operations on pages 11through 20 and Note 4 on page 30 of this Annual Report on Form 10-K.

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

There were no matterssubmitted to a vote of security holders during the fourth quarter of fiscal2005.

**PART II**

Item 5.               **MARKET FORREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS           AND ISSUER PURCHASES OF EQUITY SECURITIES**

Continental MaterialsCorporation shares are traded on the American Stock Exchange under the symbolCUO. Market sales prices for the fiscal quarters of the past two years are:

|        | ** ** | ** **     | ** ** | **High** | ** ** | **Low** |
|--------|------------|----------------|------------|----------|------------|---------|
| 2005   |       | Fourth Quarter |       | $        | 30.95      |    | $ | 29.10 |
|   |       | Third Quarter  |       | 31.25    |       | 29.95   |
|   |       | Second Quarter |       | 31.49    |       | 29.67   |
|   |       | First Quarter  |       | 30.60    |       | 27.29   |
|   |       |           |       |     |       |    |
| 2004   |       | Fourth Quarter |       | $        | 28.70      |    | $ | 26.40 |
|   |       | Third Quarter  |       | 29.25    |       | 27.80   |
|   |       | Second Quarter |       | 29.40    |       | 28.35   |
|   |       | First Quarter  |       | 29.40    |       | 27.40   |

 

At May 31,2006, the Company had approximately 300 shareholders of record (includingnon-objecting beneficial owners).

The Company has neverpaid, nor does it currently intend to declare, any dividends. The Company’spolicy of reinvesting earnings from operations is reviewed periodically by theBoard of Directors.

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The following tablepresents information with respect to purchases made by the Company of itscommon stock to become treasury stock for the period October 2, 2005through December 31, 2005:

 
| **Issuer Purchases of Equity Securities**       | ** ** |
|-------------------------------------------------|------------|
| **Period**                                      | ** ** | **(a) Total  Number of  Shares  Purchased** | ** ** | **(b) Average  Price Paid  per Share** | ** ** | **(c) Total Number of  Shares Purchased as Part  of Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Dollar  Value of shares that May  Yet Be Purchased Under  the Plans or Programs** | ** ** |
| October 2 —  October 29, 2005    |       | — |   | $ | — |   | — |   | $ | 1,418,303 |   |
| October 30  — November 26, 2005  |       | — |   | — |   | — |   | 1,418,303 |   |
| November 27  — December 31, 2005 |       | — |   | — |   | — |   | 1,418,303 |   |
| Total                                           |       | — |   | $ | — |   | — |   | $ | 1,418,303 |   |

 

On January 19, 1999,the Company initiated purchases under the current open-ended program torepurchase its common stock. Purchases are made on the open market or in blocktrades at the discretion of management. The dollar amount authorized for the programhas been periodically increased by the Board of Directors and approved by theCompany’s two banks as required by the Company’s Revolving Credit and Term LoanAgreement. Effective May 29, 2004, the Board increased the permittedamount to a total not to exceed $2,750,000 for purchases on or after May 29,2004, separate from purchases made in connection with the June 2005 tenderoffer and shares acquired as part of a cashless exercise of stock options.There were no shares purchased during the period presented above.

With the exerciseof all then remaining outstanding options during 2005, the Company’s StockOption Plan (the Plan) was terminated. Reinstatement of the Plan requires theconsent of the Company’s stockholders.

9

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Item 6. **      SELECTED FINANCIAL DATA (See note belowchart)**(Amounts in thousands, except per share amounts)

 
| ** **                                                                                                                                                                                                 | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Summary  of Operations                                                                                                                                                                                     |       |     |       |     |       |     |       |     |       |     |       |
| Sales                                                                                                                                                                                                      |       | $        | 138,999    |     | $          | 126,940  |       | $        | 120,165    |     | $          | 128,301 |   | $ | 130,211 |   |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Net income                                                                                                                                                                                                 |       | $        | 2,758      |     | $          | 2,373    |       | $        | 2,349      |     | $          | 3,275 |   | $ | 6,438 |   |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Per  Share Data                                                                                                                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Basic earnings  per share                                                                                                                                                                                  |       | $        | 1.72       |     | $          | 1.41     |       | $        | 1.34       |     | $          | 1.83 |   | $ | 3.55 |   |
| Weighted average  shares outstanding                                                                                                                                                                       |       | 1,602    |       | 1,681    |       | 1,754    |       | 1,794    |       | 1,812    |       |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Diluted earnings  per share                                                                                                                                                                                |       | $        | 1.69       |     | $          | 1.38     |       | $        | 1.31       |     | $          | 1.79 |   | $ | 3.49 |   |
| Weighted average  shares outstanding                                                                                                                                                                       |       | 1,632    |       | 1,725    |       | 1,791    |       | 1,830    |       | 1,845    |       |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Cash dividends  declared per common share                                                                                                                                                                  |       | $        | 0          |     | $          | 0        |       | $        | 0          |     | $          | 0 |   | $ | 0 |   |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Financial  Condition                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Current ratio                                                                                                                                                                                              |       | 2.4:1    |       | 2.1:1    |       | 2.5:1    |       | 2.3:1    |       | 2.2:1    |       |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Total assets                                                                                                                                                                                               |       | $        | 87,060     |     | $          | 85,883   |       | $        | 81,826     |     | $          | 82,634 |   | $ | 86,063 |   |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Long-term debt,  including current portion                                                                                                                                                                 |       | 12,000   |       | 9,000    |       | 10,970   |       | 13,520   |       | 17,140   |       |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Shareholders’  equity                                                                                                                                                                                 |       | 51,307   |       | 51,448   |       | 50,857   |       | 49,989   |       | 47,722   |       |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Long-term debt  to shareholders’ equity ratio                                                                                                                                                         |       | .23:1    |       | .17:1    |       | .22:1    |       | .27:1    |       | .36:1    |       |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Book value per  diluted share                                                                                                                                                                              |       | $        | 31.96      |     | $          | 31.09    |       | $        | 29.52      |     | $          | 28.01 |   | $ | 26.40 |   |
| (Book value is  shareholders’ equity adjusted for exercise of options using end of year stock  price and shares outstanding)                                                                          |       |     |       |     |       |     |       |     |       |     |       |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Tangible book  value per diluted share                                                                                                                                                                     |       | $        | 26.91      |     | $          | 26.15    |       | $        | 24.65      |     | $          | 23.19 |   | $ | 22.13 |   |
| (Same as above  calculation except Book value reduced by unamortized Goodwill and Non-compete  covenants of $8,102, $8,327, $8,552, $8,777, and $7,840 for 2005, 2004, 2003,  2002 and 2001, respectively) |       |     |       |     |       |     |       |     |       |     |       |
|                                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Cash  Flows                                                                                                                                                                                                |       |     |       |     |       |     |       |     |       |     |       |
| Net cash provided by  (used in):                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Operating activities                                                                                                                                                                                       |       | $        | 7,741      |     | $          | 5,519    |       | $        | 7,778      |     | $          | 9,753 |   | $ | 13,219 |   |
| Investing activities                                                                                                                                                                                       |       | (3,159   | )          | (3,350   | )          | (2,535   | )          | (9,547   | )          | (19,215  | )          |
| Financing activities                                                                                                                                                                                       |       | (581     | )          | (3,950   | )          | (4,170   | )          | (4,249   | )          | 7,359    |       |
| Net increase  (decrease) in cash and cash equivalents                                                                                                                                                      |       | $        | 4,001      |     | $          | (1,781   | )          | $        | 1,073      |     | $          | (4,043 | ) | $ | 1,363 |   |

 

Note: Abovefigures include the activity of MDHI since April 1, 2002, the date it wasacquired.

10

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Item 7. **  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION**

**ANDRESULT S OF OPERATIONS**

(References to a “Note”are to the Notes to Consolidated Financial Statements contained elsewhere inthis report)

**COMPANY OVERVIEW**

Asdiscussed in Item 1, Business, the Company operates primarily in two industrygroups, HVAC and Construction Products. Prior to the 2005 fiscal year, theCompany reported its financial results in two reportable segments, essentiallyalong the lines of these two industry groups. The reportable segments weretitled the Heating and Air Conditioning segment and the Construction Materialssegment. Prior to filing the annual report on Form 10-K for the 2005fiscal year, management determined that its accounting for segments did notcomply with SFAS No. 131. As a result, the financial information presentedfor 2004 and 2003 in Note 11 to the Consolidated Financial Statements has beenrestated and Management’s Discussion and Analysis has been revised to reflectthis restatement in segment reporting. The Company also continues to report “UnallocatedCorporate” and “Other” amounts.

Prior to filing theannual report on Form 10-K for the 2005 fiscal year, managementconcluded that there are four reportable segments within its two principalindustry groups; the Heating and Cooling segment and the Evaporative Coolingsegment in the HVAC industry group and the Concrete, Aggregates andConstruction Supplies segment and the Door segment in the Construction Productsindustry group.

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. The operationsof these two segments were previously combined and reported as the Heating andAir Conditioning segment. Sales of these two segments are nationwide, but areconcentrated in the southwestern United States. Concrete, Aggregates andConstruction Supplies are offered from numerous locations along the Front Rangeof Colorado operated by the Company’s wholly-owned subsidiaries Castle ConcreteCompany and Transit Mix Concrete Co., of Colorado Springs, Transit Mix ofPueblo, Inc. of Pueblo and Rocky Mountain Ready Mix Concrete, Inc. ofDenver. Doors are fabricated and sold along with the related hardware from theCompany’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. ofPueblo, Colorado. The operations of these two segments were previously combinedand reported as the Construction Materials segment. Sales of these two segmentsare highly concentrated in the Front Range area in Colorado although door salesare also made throughout the United States.

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

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

Salesof the Company’s HVAC products are seasonal and weather sensitive except forfan coils. Revenues in the Company’s Concrete, Aggregates and ConstructionSupplies segment are influenced by the level of construction activity andweather conditions along the Front Range of Colorado. Sales for the Doorsegment are not as strongly seasonal nor are they much affected by weatherconditions. Historically, the Company has experienced operating losses duringthe first quarter except when the weather is mild along the Front Range. Operatingresults typically improve in the second and third quarters reflecting morefavorable weather conditions in Colorado and the seasonal sales of EvaporativeCooling segment. Fourth quarter results can vary based on weather conditions inColorado as well as in the principal markets for the Company’s heatingequipment. The Company typically experiences operating cash flow deficitsduring the first half of the year reflecting operating results, the use ofsales dating programs (extended payment terms) related to the EvaporativeCooling segment and payments of the prior year’s accrued incentive bonuses andCompany profit-sharing contributions. As a result, the Company’s borrowingsagainst its revolving credit facility tend to peak during the second quarter andthen decline over the remainder of the year. This trend has continued in 2005.

Cashand cash equivalents were $6,829,000 at the end of 2005 compared to $2,828,000at the prior year-end. Operations in 2005 provided $7,741,000 of cash comparedto $5,519,000 in 2004 and $7,778,000 generated in 2003. The increase in netcash generated by operating activities in 2005 compared to 2004 was due tochanges in net working capital. The decrease in net cash generated by operatingactivities in 2004 compared to 2003 was largely 

11

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dueto a lower level of earnings before non-cash expenses. Net working capitalincreased by $1,467,000 in 2004  comparedto an increase of $595,000 in 2003.

Netcash used in investing activities was $3,159,000 in 2005, $3,350,000 in 2004and $2,535,000 in 2003. Capital expenditures for 2005, 2004 and 2003 were$3,776,000, $4,267,000 and $2,880,000, respectively. Current year expenditureswere predominantly in the Concrete, Aggregates and Construction Suppliessegment and included the completion of a batch plant in Pueblo and a finesrecovery system for the Colorado Springs sand operation.

Expendituresduring 2005 also included the capitalization of subsidized leaseholdimprovements in the new office space leased for the Corporate office. The capitalexpenditures in 2004 included a new batch plant in Pueblo West and a trucktracking system. The capital expenditures in 2003 included the construction ofa maintenance facility in Pueblo and completion of the Brighton batch plantbegun in 2002. Proceeds from the sale of property and equipment were $617,000,$917,000 and $345,000 during 2005, 2004 and 2003, respectively. The sales of anexcess parcel of land adjacent to one of the Colorado Springs batch plants andthe site of the closed Pueblo West plant accounted for $383,000 of the 2005cash proceeds. In addition, during 2005 the Company received a note for$788,000 related to one of the property sales. Sales of two parcels of realestate generated $695,000 of the 2004 proceeds.

Budgetedcapital expenditures for 2006 are approximately $5,928,000, which isapproximately $523,000 more than planned depreciation, depletion andamortization. The expenditures are primarily for routine replacement andupgrades. The Company expects that the 2006 expenditures will be funded fromexisting cash balances and operating cash flow.

During2005, cash of $581,000 was used in financing activities. The principal amountof the term loan was increased by $5,000,000 during 2005. See additionaldiscussion of the term loan under Revolving Credit and Term Loan Agreement,below. Approximately $3,629,000 of the proceeds were used to fund the purchaseof the Company’s stock under the modified Dutch auction tender offer completedduring the second quarter, and to pay related fees and expenses. Under theCompany’s ongoing share repurchase program, an additional $348,000 was used toacquire shares during 2005. A total of 115,353 shares were acquired during2005. Scheduled long-term debt payments of $2,000,000 were made during theyear. During 2005, the remaining outstanding options were exercised for 73,400shares (70,400 shares net of 3,000 shares tendered as payment of option price)which generated proceeds of $396,000 for the Company and resulted in a $608,000tax benefit (the tax benefit is classified as an operating activity in theConsolidated Statement of Cash Flows). During 2004, cash of $3,950,000 was usedin financing activities. Scheduled long-term debt payments of $1,970,000 weremade during the year including the final $220,000 due on capital leaseobligations. Under the Company’s ongoing share repurchase program, cash of$1,980,000 was used to acquire 69,949 shares during 2004. During 2003, cash of$4,170,000 was used in financing activities. Scheduled long-term debt paymentsof $2,550,000 were made during the year including $300,000 against capitallease obligations. Cash of $1,620,000 was used to acquire 63,135 shares oftreasury stock.

**RevolvingCredit and Term Loan Agreement**

The Company signed aRevolving Credit and Term Loan Agreement (Credit Agreement) with LaSalle BankNational Association and Fifth Third Bank in September 2003. On June 28,****2005, the Company entered into the Third Amendment to theCredit Agreement. The Third Amendment increased the initial principal amount ofthe term loan to $13,500,000, an increase of $5,000,000 over the then currentbalance. The proceeds of the term loan facility were primarily used to fund thepurchase of the Company’s stock under the modified Dutch auction tender offerand to pay related fees and expenses. The revolving credit portion of theCredit Agreement remained at $10,000,000. The Third Amendment also reset theamount authorized for the repurchase of the Company’s own stock to $1,438,000,separate from purchases made in connection with the tender offer. Both creditfacilities are unsecured.

The Credit Agreementprovides that, at the Company’s option, the term loan and revolving creditfacility will bear interest at prime or a performance-based LIBOR rate. Basedon the terms of the Third Amendment, the increase in the term loan and theCompany’s performance for the twelve months ended December 31, 2005, theperformance based rates would be LIBOR plus 1.50% for the term loan and LIBORplus 1.25% for borrowings under the revolving credit facility.****Such rate is subject to adjustment depending upon theCompany’s performance. Payment of accrued interest is due and payable quarterlyby the Company. Payments of principal under the term loan are payable on aquarterly basis, ending on March 31, 2011.

AtDecember 31, 2005, $12,000,000 was outstanding on the term loan. Therewere no borrowings against the revolving credit facility leaving $6,665,000available after reserving $3,335,000 for the outstanding stand-by letters ofcredit. The revolving credit facility is available at the discretion ofmanagement. It is primarily used for funding the seasonal sales programsrelated to the furnace and evaporative cooler product lines. As noted, the lineis also used to secure stand-by letters of credit to insurance carriers insupport of self-insured amounts under the Company’s 

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riskmanagement program. During the 2005 fiscal year, the highest amount of Companyborrowings outstanding under the revolving credit agreement, not including theamount securing stand-by letters of credit, was $4,400,000 and the averageamount outstanding was $797,000.

Subsequentto the 2005 year-end, the Company entered into a Fourth Amendment to the CreditAgreement. This Fourth Amendment, signed June 8, 2006, increases the principalamount of the term loan portion of the Credit Agreement by $5,000,000. Theadditional proceeds may be drawn in whole or in part on or before July 31,2006 for business expansion. As of the date of the filing of this report on Form 10-K,the Company had not drawn any of the additional $5,000,000 and the amountoutstanding on the term loan was $11,500,000. The revolving credit facility wasalso increased from $10,000,000 to $15,000,000 under the terms of the FourthAmendment primarily due to increased stand-by letters of credit requirements toinsurance carriers in support of self-insured amounts under the Company’s riskmanagement program and to provide additional liquidity. The Company has notdrawn any of this additional amount as of the date of the filing of this reporton Form 10-K. All other material terms of the Credit Agreementremain in force, except to the extent they have been modified by the FourthAmendment as described in this paragraph. See Note 12 on page 35 of this Form 10-K.

EffectiveDecember 17, 2001, the Company entered into an interest rate swapagreement (Swap Agreement) in order to minimize the adverse impact of thefloating interest rate characteristic of most of the Company’s term loanborrowings. The Company’s current effective interest rate on the portion of theoutstanding term loan covered by the Swap Agreement is 5.88%. The Companyconcluded that it was appropriate to take advantage of the interest rateenvironment and fix the interest rate at a relatively low level for a five-yearperiod. At December 31, 2005, the amount subject to this Swap Agreement is$4,500,000 which amount decreases by $1,500,000 each September and March,terminating on December 18, 2006.

TheCompany believes that its existing cash balance and anticipated cash flow fromoperations, supplemented by seasonal borrowings against the revolving line ofcredit, will be sufficient to cover expected cash needs, including servicingdebt and planned capital expenditures for the next twelve months.

**InsurancePolicies**

TheCompany maintained insurance policies since March 31, 2005 with thefollowing per incident deductibles and policy limits:

|                                | ** ** | **Deductible** | ** ** | **Policy Limits** | ** ** |
|--------------------------------|------------|----------------|------------|------------------------|------------|
| Product and  general liability |       | $              | 250,000    |                   | $          | 5,000,000 |   |
| Workers’ compensation     |       | 350,000        |       | 1,000,000              |       |
| Auto and truck  liability      |       | 100,000        |       | 2,000,000              |       |
|                                |            |                |            |                        |            |  |  |

 

Shouldthe aggregated out-of-pocket payments for the three policies exceed $3,400,000during a policy year, deductibles on future claims are waived and the policiespay all amounts up to the policy limits. Should any, or all policy limits beexceeded, an umbrella policy is maintained which covers the next $25,000,000 ofclaims.

**Obligationsand Commitments**

Thefollowing tables represent our obligations and commitments to make futurepayments under contracts, such as debt and lease agreements, and undercontingent commitments as of December 31, 2005.

PaymentsDue by Period as of December 31, 2005 (amounts in thousands):
| **Contractual Obligations**                | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 – 3 years** | ** ** | **3 – 5 years** | ** ** | **More than  5 years** | ** ** |
|-------------------------------------------------|------------|-----------|------------|---------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|
| Long-term debt  including interest (See Note 3) |       | $         | 14,086     |                            | $          | 2,674                               |       | $                                   | 5,364      |                             | $          | 5,414 |   | $ | 634 |   |
| Operating leases  (See Note 7)                  |       | 9,839     |       | 1,703                           |       | 3,125                               |       | 2,081                               |       | 2,930                            |       |
| Minimum royalty  agreement (See Note 7)         |       | 20,473    |       | 386                             |       | 773                                 |       | 773                                 |       | 18,541                           |       |
| Total contractual  obligations                  |       | $         | 44,398     |                            | $          | 4,763                               |       | $                                   | 9,262      |                             | $          | 8,268 |   | $ | 22,105 |   |

 

Intereston long-term debt is computed using the interest rate in effect at December 31,2005 and gives effect to the Swap Agreement. The interest amounts do notinclude estimated interest payments due under our revolving credit facilitybecause future borrowings under this facility are unknown at this time.

Amounts of CommitmentExpiration per Period as of December 31, 2005 (amounts in thousands):
| **Other Commercial Commitments** | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 – 3 years** | ** ** | **3 – 5 years** | ** ** | **More than  5 years** | ** ** |
|--------------------------------------------|------------|-----------|------------|---------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|
| Standby letters  of credit                 |       | $         | 3,335      |                            | $          | 3,335                               |       | $                                   | —     |                             | $          | — |   | $ | — |   |
|                                            |            |           |            |                                 |            |                                     |            |                                     |            |                                  |            |  |  |  |  |  |

 

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**Off-BalanceSheet Arrangements**

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

**RESULTS OF OPERATIONS**

Consolidated sales were$138,999,000 in 2005, $126,940,000 in 2004 and $120,165,000 in 2003. Theincrease in 2005 over the 2004 sales was realized primarily by the Concrete,Aggregates and Construction Supplies segment although the Door and EvaporativeCooling segments also reported gains. The increased sales in the Concrete,Aggregates and Construction Supplies segment was the result of both volumeincreases due to construction activity along the Front Range of Colorado aswell as price increases in response to higher cement and fuel costs. The salesvolume declined modestly in the Heating and Cooling segment where warmer thanusual weather in California throughout most of the year depressed sales.Although all of the segments experienced a high level of price competitionduring 2005, some price improvements were introduced in response to highercosts. The increase in sales for 2004 compared to 2003 was also primarilyrealized by the Concrete, Aggregates and Construction Supplies segment althoughthe Heating and Cooling and the Door segments also reported gains. The highersales in the Concrete, Aggregates and Construction Supplies segment wasprimarily due to higher volume driven by increased construction activity alongthe Front Range in Colorado. Concrete prices also improved in response toincreased cement and fuel costs except in the Denver market which remainedhighly competitive. The Company experienced a high level of price competitionin all of its product lines during 2004, especially in the Denver ready mixconcrete market. During 2004, steel and fuel prices dramatically outpaced thegeneral rate of inflation. The Company was able to recover a portion of thecost increases through higher selling prices.

Cost of sales (exclusiveof depreciation, depletion and amortization) increased as a percentage of salesfrom 81.4% for 2004 to 82.1% for 2005. The increase in percentage was due tocompetitive market conditions which prevented sales price increases from fullyrecovering the material and fuel cost increases. An increase in workers’compensation claims also added to the costs during 2005. Cost of sales(exclusive of depreciation, depletion and amortization) increased as apercentage of sales from 78.0% for 2003 to 81.4% for 2004. The increase inpercentage is due to the above noted increases in steel and fuel as well ashigher cement costs. An increase in workers’ compensation claims and thewrite-off of $196,000 of remaining inventories associated with a productmanufactured at our Phoenix plant also increased costs. The rate of increase inhealth care costs, noted as a problem during 2003, subsided in 2004.

Depreciation, depletion and amortization declined from2003 to 2004 and again from 2004 to 2005 reflecting the effect of reducedcapital spending in recent years.

Selling and administrative costs increased during 2005as compared to 2004 primarily due to the increased sales volume. As apercentage of sales, these costs declined modestly as compared to 2004. Theadministrative costs at the

corporate office increased largely due tocompensation. Selling and administrative costs within the segments varied andare discussed below. Selling and administrative expenses decreased in 2004 ascompared to 2003 despite the increase in sales. The decrease occurred as aresult of a reduction in office staff and reduced legal expenses. Commissionsrelated to the evaporative cooler sales declined reflecting the decrease insales of coolers.

The gain on disposition of property and equipmentincreased during 2005 primarily due to a gain of $721,000 on the sales ofproperty in Colorado Springs and Pueblo during 2005 compared to the $489,000gain generated by sales of two parcels of real estate in Colorado during 2004.There were no similar large gains during 2003.

Operatingincome increased from $3,505,000 for 2004 to $4,052,000 for 2005 primarily as aresult of the increased sales volume, the decrease in depreciation expense andthe increased gain on the sale of property and equipment. These positivefactors were partially offset by higher material and fuel costs. The decline inoperating income from $3,840,000 for 2003 to $3,505,000 for 2004 was primarilydue to the increased raw material costs and lower evaporative cooler salespartially offset by the increased sales in the Concrete, Aggregates andConstruction Supplies segment, lower overall depreciation expense and the gainon sale of property in the Concrete, Aggregates and Construction Suppliessegment.

Netinterest expense increased during 2005 as compared to 2004 due to the increasein the amount outstanding under the term loan during 2005 and higher averageinterest rates during the year. Net interest expense declined during 2004 ascompared to 2003 due to the lower debt balance as well as lower averageinterest rates during the year.

Otherincome declined in 2004 from 2003 as a result of $176,000 of gain realizedduring 2003 on the settlement of property tax bills related to the Oracle RidgeMining Partners property.

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TheCompany’s effective income tax rates reflect federal and state statutory ratesadjusted for non-deductible and other tax items. The effective rates for 2005(22.5%) and 2004 (24.0%) were reduced by 8.1% and 4.2%, respectively, foradjustments made to the accrual for tax contingencies as a result of theclosure of tax years subject to audits by taxing authorities. The 2004 rate wasalso reduced by 5.5% for state tax credits. The Company’s effective rate for2003 (31.9%) was higher by 2.2% due to an increase in the accrual for taxcontingencies. The Company reviews its tax positions on a quarterly basis andaccrues amounts for potential tax contingencies. Based on these reviews and theclosure of tax years subject to tax audit, reserves are adjusted as necessary.Reserves for these tax matters are included in income taxes payable on theconsolidated balance sheets. See Note 9.

As discussed above, theCompany operates primarily in two industry groups both of which are somewhatseasonal, weather sensitive and subject to cyclical factors. The followingaddresses various aspects of operating performance focusing on the reportablesegments within each of the two industry groups.

**Construction Products**The table below presents a summary of operating informationfor the two reportable segments within the Construction Products group for thefiscal years 2005, 2004 and 2003 (amounts in thousands).

 

|                                         | ** ** | **Concrete,  Aggregates and  Construction  Supplies** | ** ** | **Doors** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|-----------|------------|
| 2005                                    |       |                                                       |       |      |       |
| Revenues from  external customers       |       | $                                                          | 82,644     |      | $          | 8,727 |   |
| Segment  operating income               |       | 3,805                                                      |       | 777       |       |
| Operating income  as a percent of sales |       | 4.6                                                        | %          | 8.9       | %          |
| Segment assets                          |       | $                                                          | 47,180     |      | $          | 2,914 |   |
| Return on assets                        |       | 8.1                                                        | %          | 26.7      | %          |
|                                    |       |                                                       |       |      |       |
| 2004                                    |       |                                                       |       |      |       |
| Revenues from  external customers       |       | $                                                          | 73,311     |      | $          | 7,087 |   |
| Segment  operating income               |       | 2,331                                                      |       | 486       |       |
| Operating income  as a percent of sales |       | 3.2                                                        | %          | 6.9       | %          |
| Segment assets                          |       | $                                                          | 50,778     |      | $          | 2,964 |   |
| Return on assets                        |       | 4.6                                                        | %          | 16.4      | %          |
|                                    |       |                                                       |       |      |       |
| 2003                                    |       |                                                       |       |      |       |
| Revenues from  external customers       |       | $                                                          | 64,907     |      | $          | 6,586 |   |
| Segment  operating income               |       | 1,121                                                      |       | 581       |       |
| Operating income  as a percent of sales |       | 1.7                                                        | %          | 8.8       | %          |
| Segment assets                          |       | $                                                          | 46,588     |      | $          | 2,475 |   |
| Return on assets                        |       | 2.4                                                        | %          | 23.5      | %          |

 

Concrete,Aggregates and Construction Supplies Segment

Sales in the Concrete, Aggregates and ConstructionSupplies segment improved to $82,644,000 in 2005, an increase of $9,333,000, or12.7% over the 2004 amount of $73,311,000. Concrete volume increased inColorado Springs and Denver while Pueblo saw a small decline. Volumes improvedprimarily as a result of increased construction activity along the Front Rangeof Colorado. Pricing improved at all locations largely in response to thehigher cost of cement and fuel. The Denver operations also experienced anincrease in their cost of aggregates. Although prices in the Denver ready mixconcrete market rose for the first time in three years, conditions remain verycompetitive. The market-wide cement shortage during the months of September andOctober 2005 has eased but management estimates that it resulted in lostconcrete volume of 3% to 4% for the year. We have since been able to obtainsufficient quantities of cement to accommodate our demand; however, the cementsuppliers that currently service the Front Range have little excessmanufacturing capacity. Aggregates sales improved as demand for concrete rose.Sales of construction supplies mirrored the increases experienced by the otherproducts. Concrete, Aggregates and Construction Supplies segment sales for 2004were $73,311,000, 12.9% above the 2003 amount of $64,907,000. Concrete volumesgrew in all locations as construction activity along the Front Range inColorado improved modestly. Prices improved in the Colorado Springs and Pueblomarkets in response to increased cement and fuel costs. Price competition inthe Denver market remained high resulting in lower ready mix concrete pricesdespite higher cement and fuel costs. Sales of aggregates declined slightly dueto a small decline in sales to third parties. Sales of construction supplieswere strong and exceeded the 2003 level by over 25% as a result of increasedsales prices which passed through higher steel costs and increased volume whichwas the result of strategically timed purchases at a time of a tight industrysupply of rebar.

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Operating income is highly sensitive to sales volumein the Concrete, Aggregates and Construction Supplies segment. This segment hasalso historically required a sizable investment in capital assets resulting ina large portion of its costs being relatively fixed in nature. Operating incomeas a percent of sales, therefore, generally increases and decreases at a higherrate but in tandem with sales changes.

Operating income was $3,805,000 during 2005 andincreased at a greater rate than sales as compared to the 2004 results of$2,331,000. Cost of sales as a percentage of sales, however, increased from84.7% during 2004 to 85.4% for 2005. The increased percentage was the result ofa highly competitive market. A higher level of workers’ compensation claims alsoincreased costs at our Colorado Springs operations during 2005. The effect ofthe increased cost of sales dampened the effect of increased sales on operatingprofit. There were several other factors that increased operating income during2005. Selling and administrative costs increased at a lesser rate than theimproved sales primarily due to office staff reductions in Denver.Depreciation, depletion and amortization declined reflecting the effect ofreduced capital spending in recent years. Finally, the 2005 gain on dispositionof property and equipment increased from the 2004 level primarily due to thetransactions noted above in the discussion of consolidated results. Operatingincome as a percent of sales improved as a result of these factors.

The improvement in 2004’s operating income of $2,331,000as a percent of sales as compared to the 2003 results reflects the above notedsensitivity to sales volume as well as the gain of $489,000 from the sale oftwo parcels of real estate in Colorado. The improvement, however, was partiallyoffset by an increase in the cost of sales, as a percent of sales, from 83.4%in 2003 to 84.7% in 2004. This increase was due primarily to the intensecompetition in the Denver market where sales prices continued to decline despitethe increase in costs. Over the three fiscal years in the period ended January 1,2005, the ready mix concrete prices in the Denver market have declined despitethe aforementioned increases in fuel, cement and other costs. This situationwas further exacerbated by an increase in workers’ compensation claims. Theconstruction supplies operations were affected by the rise in steel costs;however, the above noted strategically timed steel purchases during 2004largely offset the higher prices.

The return on assets in 2005 was enhanced by the$2,890,000 decrease in assets that related to this segment’s portion of thereceivable for insured losses. This asset, which we are required to record byFinancial Accounting Standards Board (FASB) Interpretation 39, “Offsetting ofAmounts Related to Certain Contracts,” is offset by an equal liability forunpaid claims covered by insurance. A change in this asset between yearsdistorts the return on assets percentage. The percentage return on assetsimproved in 2004 compared to 2003 primarily for the reasons set forth for theincrease in operating income, although the improvement was dampened by the$3,307,000 increase in assets that related to this segment’s portion of thereceivable for insured losses discussed in the comparison of 2005 to 2004above.

Door Segment

Sales in the Door segment were $8,727,000, an increaseof $1,640,000, or 23.1 % over the 2004 amount of $7,087,000. The increase wasthe result of a slightly stronger market and, to some extent, higher sales pricesresulting from increased costs. The 2004 sales figure was $501,000, or 7.6%above the 2003 amount of $6,586,000. The increase in 2004 was primarily due tohigher sales prices although they did not fully recover increased steel costs.

Operating income was $777,000 during 2005 compared to$486,000 for 2004. The improvement was the result of the increased sales.Operating income for 2004 declined from 2003’s $581,000 despite increased salesas a result of our inability raise sales prices to fully recapture steel priceincreases.

The increase in operating income during 2005 isreflected in the improved operating income as a percent of sales as compared tothe 2004 amounts. The decline in operating income as a percent of sales for2004 as compared to 2003, despite the increase in sales, is due to theincreased cost of sales in 2004 resulting from the increase in steel prices.The return on assets for the three years reflects the changes in operatingincome as discussed above, however, the return for 2004 is further negativelyimpacted by the increase in segment assets. This increase is primarily inaccounts receivable which is the result of increased sales late in the year.The increased sales during 2005 were achieved more ratably over the yearresulting in little change in the year-end receivables and total segment assetscompared to 2004.

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** **

**HVAC Products**

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC products group for the fiscal years 2005, 2004 and2003 (amounts in thousands).
| ** **                                     | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|------------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| 2005                                           |       |                          |       |                     |       |
| Revenues from  external customers              |       | $                             | 26,736     |                     | $          | 20,545 |   |
| Segment  operating income (loss)               |       | 2,777                         |       | (177                     | )          |
| Operating income  (loss) as a percent of sales |       | 10.4                          | %          | (.9                      | )%         |
| Segment assets                                 |       | $                             | 16,986     |                     | $          | 12,544 |   |
| Return on assets                               |       | 16.3                          | %          | (1.4                     | )%         |
|                                           |       |                          |       |                     |       |
| 2004                                           |       |                          |       |                     |       |
| Revenues from  external customers              |       | $                             | 27,598     |                     | $          | 18,598 |   |
| Segment  operating income                      |       | 3,170                         |       | 266                      |       |
| Operating income  as a percent of sales        |       | 11.5                          | %          | 1.4                      | %          |
| Segment assets                                 |       | $                             | 15,927     |                     | $          | 13,081 |   |
| Return on assets                               |       | 19.9                          | %          | 2.0                      | %          |
|                                           |       |                          |       |                     |       |
| 2003                                           |       |                          |       |                     |       |
| Revenues from  external customers              |       | $                             | 26,046     |                     | $          | 22,296 |   |
| Segment  operating income                      |       | 3,621                         |       | 1,391                    |       |
| Operating income  as a percent of sales        |       | 13.9                          | %          | 6.2                      | %          |
| Segment assets                                 |       | $                             | 15,240     |                     | $          | 12,589 |   |
| Return on assets                               |       | 23.8                          | %          | 11.0                     | %          |

 

Heating and CoolingSegment

Salesin the Heating and Cooling segment declined to $26,736,000, a decrease of$862,000 or 3.1% from the 2004 amount of $27,598,000. A decline in furnacesales was partially offset by an increase in fan coil sales. The decline infurnace sales was largely due to the loss of business to a large national homecenter account in one geographic location and warmer than usual weather inCalifornia throughout most of the year. Fan coil sales improved in a still weakmarket as the result of more competitive pricing. Sales for 2004 of $27,598,000were $1,552,000, or 6.0%, above the 2003 amount of $26,046,000. Fan coil salesimproved in a still weak market due to pricing decisions. Furnace sales wereapproximately the same as the prior year.

Operating income declined from $3,170,000 for 2004 to$2,777,000 for 2005 partially due to the decrease in sales. Cost of sales, as apercent of sales, decreased from 74.5% to 72.0%. Margins improved as currentyear selling prices were adjusted to recover most of the increase in steelcosts incurred during 2004; however this recovery was partially offset bypricing decisions made from time to time in response to competition. Sellingand administrative expenses increased during 2005 as a result of costs relatedto the replacement of the general manager at Williams Furnace Co., includingseverance pay, and the addition of personnel in the sales and engineeringdepartments.

The decline in operating income from $3,621,000 for 2003to $3,170,000 for 2004 is primarily due to increased raw material costs. Costof sales, as a percent of sales, increased from 67.5% to 74.5%. The increasedpercentage was primarily due to increased steel costs during the year as notedabove and an increase in workers’ compensation claims. The increase in steelcosts began during the second quarter of 2004. Selling prices are generallyestablished prior to the heating season which resulted in the increase in steelcosts being absorbed by the Company until the 2004/2005 selling prices becameeffective and partially recovered the increased costs. Selling andadministrative expenses decreased in 2004 as compared to 2003. The decrease wasthe result of a reduction in office staff and reduced legal expenses.

Operatingincome as a percent of sales and the return on assets were both lower in 2005compared to 2004 as a result of the lower operating income. The factors thatresulted in the reduced operating income are discussed above. The decline inthe return on assets was slightly higher as an increase in receivables andinventories raised the year-end assets level at the same time that operatingincome declined. The increase in both items is primarily a function of timing.The change in the receivable for insured losses had an immaterial affect on thereturn on assets calculation for the Heating and Cooling segment when comparing2005 to 2004.

Thedecline in operating income as a percentage of sales for 2004 as compared to2003 was due to the above noted reasons for the decline in the operating incomefor 2004. The decline in the return on assets was also due to these 

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reasonsin conjunction with an increase in the segment’s assets at the 2004 year end.As with the Concrete, Aggregates and Construction Supplies segment, part of theincrease in assets for 2004 was an increase of $448,000 over the 2003 amountrelated to the Heating and Cooling segment’s portion of the receivable forinsured losses. Similar to the Concrete, Aggregates and Construction Suppliessegment, this asset is offset by an equal liability for unpaid claims coveredby insurance.

Evaporative CoolingSegment

Salesin the Evaporative Cooling segment improved to $20,545,000, an increase of$1,947,000 or 10.5% over the 2004 amount of $18,598,000. Sales of evaporativecoolers increased as a result of the partial recapture of the window unitbusiness at a large national home center account and favorable weather thatextended into August. Sales for 2004 were $18,598,000, $3,698,000 or 16.6%below the 2003 amount of $22,296,000. The decline was primarily due to losingthe window unit business at a large national home center account.

Operating results declined from $266,000 for 2004 to aloss of  $177,000 for 2005 despite theincrease in sales. Cost of sales, as a percent of sales, increased from 80.1%to 85.4%. The increased percentage was due to pricing decisions made inresponse to pricing introduced by our largest competitor. Higher workers’compensation claims and lower production volume also contributed to the highercost ratio.

The decline in operating income from $1,391,000 for2003 to $266,000 for 2004 is primarily due to the increased raw material costsand lower evaporative cooler sales. Cost of sales, as a percent of sales,increased from 76.0% to 80.1%. The increased percentage was primarily due toincreased steel costs during the year as noted above and the $196,000 write-offof the remaining inventories associated with a product manufactured at ourPhoenix plant. The increase in steel costs began during the second quarter of2004.

Operating results as apercent of sales and the return on assets for 2005 are not meaningful due tothe operating loss incurred during the year. The factors that resulted in theloss are discussed above. The decline in operating income as a percentage ofsales for 2004 as compared to 2003 was due to the above noted reasons for thedecline in the operating income for 2004. The decline in the return on assetswas slightly larger as the effect of the lower operating income was exacerbatedby an increase in the segment’s assets, primarily inventory as a result of thelower sales volume, at the 2004 year end.

**CRITICALACCOUNTING POLICIES**

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

Inventories

Inventoriesare priced at the lower of cost (78% at December 31, 2005 at last-in,first-out, with the remainder at first-in, first-out) or market. Inventoriesare reviewed periodically for excess or obsolete stock with a provisionrecorded, where appropriate.

Intangibles

Inaccordance with Statement of Financial Accounting Standards (SFAS) No. 142,“Goodwill and Other Intangible Assets,” goodwill is not amortized as a chargeto earnings. The Company annually assesses goodwill for potential impairment asof the last day of its fiscal year. In addition, to the extent that eventsoccur, either involving the relevant Company subsidiaries or in theirindustries, the Company revisits its assessment of the recorded goodwill todetermine if impairment has occurred and should be immediately recognized. Thisassessment requires us to make significant assumptions and estimates about theextent and timing of future cash flows, discount rates, and growth rates. Noimpairment was indicated in the current year. If the assessment had indicatedthat the carrying value of goodwill was impaired, an impairment charge wouldhave been recorded for the amount by which the carrying value of the goodwillexceeded its fair value. Management believes that the assumptions and estimatesused to determine the estimated fair values are reasonable; however, changes inthe aforementioned assumptions and estimates, as well as the effects of unknownfuture events or circumstances could materially affect the estimated fairvalue.

Liabilities

TheCompany purchases insurance coverage for workers’ compensation, general productand automobile liability, retaining certain levels of risk (self-insuredportion). Provision for workers’ compensation claims is estimated with theassistance of an independent expert who applies actuarial methodology toinformation provided by the Company’s independent claims administrator.Provision for automobile claims is estimated based upon information provided bythe Company’s independent claims administrator and the Company’s ownexperience. With regard to 

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productliability, provisions for both claims and unasserted claims that would becovered under the self-insured portion of the policies are recorded inaccordance with the requirements of SFAS No. 5, “Accounting for Contingencies,”and are reviewed at least annually for revisions in estimates.

TheCompany records a reserve for future reclamation work to be performed at itsvarious aggregate operations based upon estimates of the recoverable quantitiesof rock and sand available in each location combined with an estimate of thetotal expense that will be incurred to reclaim a property. Provision is madebased upon the units-of-production method. Actual reclamation costs are chargedagainst the reserve. The adequacy of the recorded reserve is assessed annually.The assessment may be done more frequently if events or circumstances arisethat may indicate a change in estimated costs, recoverable material or theperiod of mining activity. The Company periodically engages an independentprofessional to assist in reevaluating the estimates of both the quantities ofrecoverable material and the cost of reclamation. In a similar manner,depletion of rock and sand deposits and amortization of deferred developmentcosts are computed by the units-of-production method based upon estimatedrecoverable quantities of rock and sand.

Sales

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

Recently Issued Accounting Standards and Tax LawChanges

TheFinancial Accounting Standards Board (FASB) has recently issued the followingstatements and interpretations:

InNovember 2004, Statement of Financial Accounting Standards (SFAS) No. 151,“Inventory Costs - An Amendment of ARB No. 43, Chapter 4,” was issuedwhich amends the guidance in Accounting Research Bulletin

(“ARB”)No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial. Among other provisions, the new rule requires that items such asidle facility expense, excessive spoilage, double freight and rehandling costsbe recognized as current -period charges regardless of whether they meet thecriteria of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151requires the allocation of fixed production overheads to the costs of conversionbe based on the normal capacity of the production facilities. SFAS 151 iseffective for fiscal years beginning after June 1, 2005. The Company doesnot expect the adoption of SFAS 151 to have a material impact on itsconsolidated results of operations, cash flows or financial condition. In December 2004, SFAS No. 123R, “Share-Based Payment” was issued andreplaces SFAS No. 123, “Accounting for Stock-Based Compensation” andsupersedes Accounting Principles Board Opinion (“APB”) No. 25, “Accountingfor Stock Issued to Employees.”  SFAS 123R requires using a fair-valuebased model for the measurement of all employee share-based payments, includinggrants of employee stock options. Deferred compensation calculated under thefair value method would then be amortized into income over the respectivevesting period of the stock option. The accounting provisions of SFAS 123Rare effective for reporting periods beginning after June 15, 2005. Thereare no stock options or other share based payments outstanding as of December 31,2005 therefore the adoption of SFAS 123R will not have an impact on the Company’sconsolidated results of operations, cash flows or financial condition.

InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replacesAccounting Principles Board Opinion No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in InterimFinancial Statements.” SFAS 154 is effective for accounting changes andcorrection of errors made in fiscal years beginning after December 15,2005 and requires retrospective application to prior period financialstatements of voluntary changes in accounting principle, unless it isimpractical to determine either the period-specific effects or the cumulativeeffect of the change. The consolidated results of operations, cash flows orfinancial condition will only be impacted by SFAS 154 if the Company implementsa voluntary change in accounting principle or identifies and correctsaccounting errors in future periods.

InMarch 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset RetirementObligations”**(FIN 47). FIN47 clarifies that an entity must record a liability for a “conditional” assetretirement obligation if the fair value of the obligation can be reasonablyestimated. The adoption of FIN 47 did not have a material effect on ourconsolidated results of operations, cash flows or financial condition.

InDecember 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions,” as part of its short-terminternational convergence 

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projectwith the International Accounting Standards Board. Under SFAS 153, nonmonetaryexchanges are required to be accounted for at fair value, recognizing any gainsor losses, if their fair value is determinable within reasonable limits and thetransaction has commercial substance. SFAS 153 is effective for fiscal yearsbeginning after June 15, 2005. The Company does not expect the adoption ofSFAS 153 to have a material impact on the Company’s consolidated results ofoperations, cash flows or financial condition.

InMarch 2005, the Emerging Issues Task Force reached a consensus on Issue 04-6,“Accounting for Stripping Costs in the Mining Industry” (EITF 04-6) whichis effective on January 1, 2006. EITF 04-6 states that strippingcosts incurred after the first saleable minerals are extracted from the mine(i.e. post-production stripping costs) should be considered costs of theextracted minerals and recognized as a component of inventory to be recognizedin costs of sales in the same period as the revenue from the sale of theinventory. The Company does not expect the adoption of EITF 04-6 to havea material impact on the Company’s consolidated results of operations, cashflows or financial condition as the Company currently treats post-productionstripping costs in the manner proscribed by EITF 04-6.

TaxLaw Changes include:

TheAmerican Jobs Creation Act of 2004 (the “Act”) was signed by the President on October 22,2004. The Act provides a deduction for income from qualified domesticproduction activities, which will be phased in from 2005 through 2010. Inreturn, the Act also provides for a two-year phase-out of the existingextra-territorial income exclusion (ETI) for foreign sales that was viewed tobe inconsistent with international trade protocols by the European Union. TheCompany does not expect the phase-out of the ETI to have a material impact onthe Company’s consolidated results of operations, cash flows or financialcondition. Following the guidance in FASB Staff Position No. FAS 109-1,“Application of FASB Statement No. 109, Accounting for Income Taxes, tothe Tax Deduction on Qualified Production Activities Provided by the AmericanJobs Creation Act of 2004, “ the deduction has been treated as a “specialdeduction” as described in FASB Statement No. 109. As such, the specialdeduction has no effect on deferred tax assets and liabilities existing at theenactment date. Rather, the impact of this deduction is reported in the periodin which the deduction is claimed on the Company’s tax return. The deductionfor 2005 did not have a material impact on the tax provision, however, theeffect in the future may be significant depending upon the level of futureincome from qualified domestic production activities.

**FORWARD-LOOKINGSTATEMENTS**

ThisAnnual Report contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended. Such forward-looking statements arebased on the beliefs of the Company’s management as well

ason assumptions made by and information available to the Company at the timesuch statements were made. When used in this Report, words such as “anticipates,”“believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects” and similar expressions are intended toidentify forward-looking statements. Actual results could differ materiallyfrom those projected in the forward-looking statements as a result of factorsincluding but not limited to: weather, interest rates, availability of rawmaterials and their related costs, economic conditions and competitive forcesin the regions where the Company does business, and the ability of the Companyto obtain credit on commercially reasonable terms. Changes in accountingpronouncements could also alter projected results. Forward-looking statementsspeak only as of the date they were made and we undertake no obligation topublicly update them.

Item7A. **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

TheCompany is exposed to market risks related to commodity prices and interestrates. To manage interest rate risk, the Company has, from time to time,entered into interest rate swaps as cash flow hedges. These swaps are authorizedby the Company’s policies and procedures. The Company does not use swaps orhedging instruments for trading purposes, and is not a party to any transactioninvolving leveraged derivatives. Effective December 17, 2001, the Companyentered into an interest rate swap agreement (Swap Agreement) in order tominimize the adverse impact of the floating interest rate characteristic ofmost of the Company’s term loan borrowings. The Company’s current effectiveinterest rate on the portion of the term loan covered by the Swap Agreement is5.88%. Such effective rate is subject to adjustment depending upon the Company’sperformance. Cash payments or receipts associated with this agreement arereflected in interest expense. The fixed rate under the Swap Agreement hasexceeded the floating rate on the term loan during each of the years. Theeffect on operations was to reduce net income by $31,000, $162,000 and $257,000for 2005, 2004 and 2003, respectively. The fair value of the Swap Agreement isrecorded on the balance sheet with subsequent changes recorded as a separatecomponent of accumulated other comprehensive income in shareholders’ equity. AtDecember 31, 2005, the amount subject to this Swap Agreement is $4,500,000which amount decreases by $1,500,000 each September and March, terminatingon December 18, 2006. The pre-tax fair value of the Swap Agreement is$13,000 at February 28, 2006. Although the Company will benefit from theSwap Agreement as interest rates increase, the effect is not expected to bematerial during the remaining term of the SWAP Agreement. See paragraph belowand above discussion under Financial Condition, Liquidity and CapitalResources. See Note 3.

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Interest Rates

TheCompany utilizes revolving credit and term-loan facilities that bear interestat either prime or an adjusted LIBOR rate. The amount outstanding under thesefacilities aggregated $12,000,000 at December 31, 2005. The Company is nota party to any capital lease agreements as of December 31, 2005. See Note3.

Commodities

TheCompany purchases commodities, such as steel, copper, aluminum, cement, fueland cardboard for packaging, at market prices and does not currently usefinancial instruments to hedge commodity prices.

Item 8. **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
|                                                                                                      | **PAGE** |
|------------------------------------------------------------------------------------------------------|----------|
| Financial Statements and Schedule of Continental  Materials Corporation and report thereon:          |     |
|                                                                                                 |     |
| Consolidated statements of operations and comprehensive  income for fiscal years 2005, 2004 and 2003 | 22       |
|                                                                                                 |     |
| Consolidated statements of cash flows for fiscal  years ended 2005, 2004 and 2003                    | 23       |
|                                                                                                 |     |
| Consolidated balance sheets as of December 31,  2005 and January 1, 2005                   | 24       |
|                                                                                                 |     |
| Consolidated statements of shareholders’ equity for  fiscal years ended 2005, 2004 and 2003     | 25       |
|                                                                                                 |     |
| Notes to consolidated financial statements                                                           | 26-35    |
|                                                                                                 |     |
| Reports of Independent Registered Public Accounting  Firms                                           | 35-36    |

 

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**ContinentalMaterials CorporationConsolidated Statements of Operations and Comprehensive IncomeFor Fiscal Years 2005, 2004 and 2003**(Amounts in thousands, except per share data)
| ** **                                                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales                                                                  |       | $        | 138,999    |     | $          | 126,940  |       | $ | 120,165 |   |
| Costs and expenses                                                |       |     |       |     |       |     |       |
| Cost of sales (exclusive of depreciation, depletion  and amortization) |       | 114,065  |       | 103,320  |       | 93,713   |       |
| Depreciation, depletion and amortization                               |       | 4,729    |       | 5,027    |       | 6,062    |       |
| Selling and administrative                                             |       | 17,095   |       | 15,699   |       | 16,783   |       |
| Gain on  disposition of property and equipment                         |       | 942      |       | 611      |       | 233      |       |
| Operating income                                                       |       | 4,052    |       | 3,505    |       | 3,840    |       |
| Interest expense                                                       |       | (565     | )          | (516     | )          | (670     | )          |
| Other income,  net                                                     |       | 71       |       | 134      |       | 279      |       |
| Income before  income taxes                                            |       | 3,558    |       | 3,123    |       | 3,449    |       |
| Income tax  provision                                                  |       | 800      |       | 750      |       | 1,100    |       |
| Net income                                                             |       | $        | 2,758      |     | $          | 2,373    |       | $ | 2,349 |   |
|                                                                   |       |     |       |     |       |     |       |
| Basic earnings  per share                                              |       | $        | 1.72       |     | $          | 1.41     |       | $ | 1.34 |   |
| Weighted average shares outstanding                                    |       | 1,602    |       | 1,681    |       | 1,754    |       |
| Diluted earnings  per share                                            |       | $        | 1.69       |     | $          | 1.38     |       | $ | 1.31 |   |
| Weighted average shares outstanding                                    |       | 1,632    |       | 1,725    |       | 1,791    |       |
|                                                                   |       |     |       |     |       |     |       |
| Comprehensive income:                                                  |       |     |       |     |       |     |       |
| Net income                                                             |       | $        | 2,758      |     | $          | 2,373    |       | $ | 2,349 |   |
| Comprehensive income  from interest rate                               |       |     |       |     |       |     |       |
| swap, net of tax  of $44, $83, and                                     |       |     |       |     |       |     |       |
| $90, respectively                                                      |       | 73       |       | 198      |       | 139      |       |
| Total comprehensive  income                                            |       | $        | 2,831      |     | $          | 2,571    |       | $ | 2,488 |   |

 

The accompanyingnotes are an integral part of the financial statements.

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**Continental Materials Corporation ConsolidatedStatements of Cash FlowsFor Fiscal Years 2005, 2004 and 2003**(Amounts in thousands)
| ** **                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities                                                              |       |     |       |     |       |     |       |
| Net income                                                                        |       | $        | 2,758      |     | $          | 2,373    |       | $ | 2,349 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |     |       |     |       |     |       |
| Depreciation, depletion and amortization                                          |       | 4,729    |       | 5,027    |       | 6,062    |       |
| Deferred income tax provision                                                     |       | (179)    |       | 89       |       | 83       |       |
| Provision for doubtful accounts                                                   |       | 94       |       | 108      |       | 112      |       |
| Gain on disposition of property and equipment                                     |       | (942)    |       | (611)    |       | (233)    |       |
| Tax benefit from exercise of stock options                                        |       | 608      |       | —   |       | —   |       |
| Changes in  operating assets and liabilities                                      |       |     |       |     |       |     |       |
| Receivables                                                                       |       | 671      |       | (1,472)  |       | (425)    |       |
| Inventories                                                                       |       | (846)    |       | (428)    |       | (1,589)  |       |
| Prepaid expenses                                                                  |       | (287)    |       | (28)     |       | (176)    |       |
| Prepaid royalties                                                                 |       | (115)    |       | (239)    |       | 3        |       |
| Accounts payable and accrued expenses                                             |       | 1,509    |       | 735      |       | 146      |       |
| Income taxes                                                                      |       | (425)    |       | 88       |       | 1,132    |       |
| Other                                                                             |       | 166      |       | (123)    |       | 314      |       |
| Net cash  provided by operating activities                                        |       | 7,741    |       | 5,519    |       | 7,778    |       |
|                                                                              |       |     |       |     |       |     |       |
| Investing activities                                                              |       |     |       |     |       |     |       |
| Capital expenditures                                                              |       | (3,776)  |       | (4,267)  |       | (2,880)  |       |
| Cash proceeds from sale of property and equipment                                 |       | 617      |       | 917      |       | 345      |       |
| Net cash used in  investing activities                                            |       | (3,159)  |       | (3,350)  |       | (2,535)  |       |
|                                                                              |       |     |       |     |       |     |       |
| Financing activities                                                              |       |     |       |     |       |     |       |
| Long-term borrowings                                                              |       | 5,000    |       | —   |       | —   |       |
| Repayment of long-term debt                                                       |       | (2,000)  |       | (1,970)  |       | (2,550)  |       |
| Proceeds from exercise of stock options                                           |       | 396      |       | —   |       | —   |       |
| Payments to acquire treasury stock                                                |       | (3,977)  |       | (1,980)  |       | (1,620)  |       |
| Net cash used in financing activities                                             |       | (581)    |       | (3,950)  |       | (4,170)  |       |
| Net increase (decrease)  in cash                                                  |       |     |       |     |       |     |       |
| and cash equivalents                                                              |       | 4,001    |       | (1,781)  |       | 1,073    |       |
|                                                                              |       |     |       |     |       |     |       |
| Cash and cash  equivalents                                                        |       |     |       |     |       |     |       |
| Beginning of year                                                                 |       | 2,828    |       | 4,609    |       | 3,536    |       |
| End of year                                                                       |       | $        | 6,829      |     | $          | 2,828    |       | $ | 4,609 |   |
|                                                                              |       |     |       |     |       |     |       |
| Supplemental  disclosures of cash flow items                                      |       |     |       |     |       |     |       |
| Cash paid  (received) during the year                                             |       |     |       |     |       |     |       |
| Interest                                                                          |       | $        | 806        |     | $          | 585      |       | $ | 799 |   |
| Income taxes                                                                      |       | 795      |       | 608      |       | (137)    |       |
| Supplemental  disclosures of noncash investing and                                |       |     |       |     |       |     |       |
| financing  activities                                                             |       |     |       |     |       |     |       |
| Note received as consideration for sale of property                               |       | $        | 788        |     | —     |     | —     |   |
| Value of shares  tendered as payment related to exercise of stock options         |       | 93       |       | —   |       | —   |       |

 

The accompanying notesare an integral part of the financial statements.

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**Continental Materials CorporationConsolidated Balance Sheets As of December 31, 2005 and January 1,2005**(Amounts in thousands except share data)
| ** **                                       | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Assets                                           |       |                        |       |                      |       |
| Current assets                                   |       |                        |       |                      |       |
| Cash and cash equivalents                        |       | $                           | 6,829      |                      | 2,828      |   |
| Receivables less allowance of $310 and $325      |       | 17,678                      |       | 18,418                    |       |
| Receivable for insured losses                    |       | 1,718                       |       | 4,466                     |       |
| Inventories                                      |       | 17,455                      |       | 16,609                    |       |
| Prepaid expenses                                 |       | 1,555                       |       | 1,268                     |       |
| Deferred income taxes                            |       | 2,355                       |       | 2,291                     |       |
| Total current  assets                            |       | 47,590                      |       | 45,880                    |       |
|                                             |       |                        |       |                      |       |
| Property, plant and  equipment                   |       |                        |       |                      |       |
| Land and improvements                            |       | 2,348                       |       | 2,776                     |       |
| Buildings and improvements                       |       | 19,125                      |       | 19,087                    |       |
| Machinery and equipment                          |       | 72,529                      |       | 70,048                    |       |
| Mining properties                                |       | 5,501                       |       | 5,250                     |       |
| Less accumulated  depreciation and depletion     |       | (70,659                     | )          | (67,128                   | )          |
|                                             |       | 28,844                      |       | 30,033                    |       |
| Other assets                                     |       |                        |       |                      |       |
| Goodwill                                         |       | 7,374                       |       | 7,374                     |       |
| Non-compete agreements                           |       | 728                         |       | 953                       |       |
| Prepaid royalties                                |       | 1,255                       |       | 1,140                     |       |
| Long-term note receivable                        |       | 762                         |       | —                    |       |
| Other                                            |       | 507                         |       | 503                       |       |
|                                             |       | $                           | 87,060     |                      | $          | 85,883 |   |
| Liabilities                                      |       |                        |       |                      |       |
| Current liabilities                              |       |                        |       |                      |       |
| Current portion of long-term debt                |       | $                           | 2,000      |                      | $          | 2,000 |   |
| Accounts payable                                 |       | 4,401                       |       | 4,575                     |       |
| Income taxes                                     |       | 342                         |       | 767                       |       |
| Accrued expenses                                 |       |                        |       |                      |       |
| Compensation                                     |       | 3,039                       |       | 2,638                     |       |
| Reserve for self-insured losses                  |       | 4,033                       |       | 2,988                     |       |
| Liability for unpaid claims covered by insurance |       | 1,718                       |       | 4,466                     |       |
| Profit sharing                                   |       | 1,758                       |       | 1,942                     |       |
| Reclamation                                      |       | 508                         |       | 384                       |       |
| Other                                            |       | 2,009                       |       | 1,712                     |       |
| Total current  liabilities                       |       | 19,808                      |       | 21,472                    |       |
|                                             |       |                        |       |                      |       |
| Long-term debt                                   |       | 10,000                      |       | 7,000                     |       |
| Deferred income  taxes                           |       | 3,681                       |       | 3,796                     |       |
| Accrued  reclamation                             |       | 827                         |       | 1,171                     |       |
| Other long-term  liabilities                     |       | 1,437                       |       | 996                       |       |
| Commitments and  contingencies (Notes 4 and 7)   |       |                        |       |                      |       |
|                                             |       |                        |       |                      |       |
| 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                       |       | 1,982                     |       |
| Retained earnings                                |       | 65,331                      |       | 62,573                    |       |
| Accumulated  other comprehensive income (losses) |       | 6                           |       | (67                       | )          |
| Treasury shares,  at cost                        |       | (16,503                     | )          | (13,683                   | )          |
|                                             |       | 51,307                      |       | 51,448                    |       |
|                                             |       | $                           | 87,060     |                      | $          | 85,883 |   |

 

The accompanyingnotes are an integral part of the financial statements.

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**ContinentalMaterials CorporationConsolidated Statements of Shareholders’ EquityFor Fiscal Years 2005, 2004 and 2003**(Amounts in thousands except share data)
| ** **                                                        | ** ** | ** ** | ** ** | **Common** | ** ** | **Capital**        | ** ** | ** **   | ** ** | **Accum. other**  | ** ** | ** **   | ** ** | **Treasury** |
|-------------------------------------------------------------------|------------|------------|------------|------------|------------|--------------------|------------|--------------|------------|------------------------|------------|--------------|------------|--------------|
| ** **                                                        | ** ** | **Common** | ** ** | **shares** | ** ** | **in excess** | ** ** | **Retained** | ** ** | **comprehensive**      | ** ** | **Treasury** | ** ** | **shares**   |
| ** **                                                        | ** ** | **shares** | ** ** | **amount** | ** ** | **of par**    | ** ** | **earnings** | ** ** | **income (loss)** | ** ** | **shares**   | ** ** | **cost**     |
| Balance at  December 28, 2002                                |       | 2,574,264  |       | $          | 643        |               | $          | 1,982        |       | $                      | 57,851     |         | $          | (404         | ) | 790,766 |   | $ | 10,083 |
| Purchase of  treasury shares                                      |       | —     |       | —     |       | —             |       | —       |       | —                 |       | 63,135       |       | 1,620        |
| Net income                                                        |       | —     |       | —     |       | —             |       | 2,349        |       | —                 |       | —       |       | —       |
| Comprehensive income  from interest                               |       |       |       |       |       |               |       |         |       |                   |       |         |       |         |
| rate swap, net  of tax of $90                                |       | —     |       | —     |       | —             |       | —       |       | 139                    |       | —       |       | —       |
| Balance at  January 3, 2004                             |       | 2,574,264  |       | $          | 643        |               | $          | 1,982        |       | $                      | 60,200     |         | $          | (265         | ) | 853,901 |   | $ | 11,703 |
| Purchase of  treasury shares                                      |       | —     |       | —     |       | —             |       | —       |       | —                 |       | 69,949       |       | 1,980        |
| Net income                                                        |       | —     |       | —     |       | —             |       | 2,373        |       | —                 |       | —       |       | —       |
| Comprehensive  income from interest rate swap, net of tax of $83  |       | —     |       | —     |       | —             |       | —       |       | 198                    |       | —       |       | —       |
| Balance at  January 1, 2005                             |       | 2,574,264  |       | $          | 643        |               | $          | 1,982        |       | $                      | 62,573     |         | $          | (67          | ) | 923,850 |   | $ | 13,683 |
| Purchase of  treasury shares                                      |       | —     |       | —     |       | —             |       | —       |       | —                 |       | 115,353      |       | 3,977        |
| Common shares  issued under the Stock Option Plan (from Treasury) |       | —     |       | —     |       | (760               | )          | —       |       | —                 |       | (70,400      | )          | (1,157       |
| Tax benefit from  exercise of options                             |       | —     |       | —     |       | 608                |       | —       |       | —                 |       | —       |       | —       |
| Net income                                                        |       | —     |       | —     |       | —             |       | 2,758        |       | —                 |       | —       |       | —       |
| Comprehensive  income from interest rate swap, net of tax of $44  |       | —     |       | —     |       | —             |       | —       |       | 73                     |       | —       |       | —       |
| Balance at  December 31, 2005                                |       | 2,574,264  |       | $          | 643        |               | $          | 1,830        |       | $                      | 65,331     |         | $          | 6            |   | 968,803 |   | $ | 16,503 |

 

The accompanying notesare an integral part of the financial statements.

 

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**Notes to Consolidated FinancialStatements**

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATIONThe consolidated financial statements include Continental MaterialsCorporation and all of its subsidiaries (the Company). Intercompany transactionsand balances have been eliminated.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS AND TAX LAWCHANGESThe Financial Accounting Standards Board (FASB)has recently issued the following statements and interpretations:

InNovember 2004, Statement of Financial Accounting Standards (SFAS) No. 151,“Inventory Costs - An Amendment of ARB No. 43, Chapter 4,” was issuedwhich amends the guidance in Accounting Research Bulletin (“ARB”) No. 43,Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material. Amongother provisions, the new rule requires that items such as idle facilityexpense, excessive spoilage, double freight and rehandling costs be recognizedas current -period charges regardless of whether they meet the criteria of “soabnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires theallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. SFAS 151 is effective forfiscal years beginning after June 1, 2005. The Company does not expect theadoption of SFAS 151 to have a material impact on its consolidated results ofoperations, cash flows or financial condition. 

InDecember 2004, SFAS No. 123R, “Share-Based Payment” was issued andreplaces SFAS No. 123, “Accounting for Stock-Based Compensation” andsupersedes Accounting Principles Board Opinion (“APB”) No. 25, “Accountingfor Stock Issued to Employees.”  SFAS 123R requires using a fair-valuebased model for the measurement of all employee share-based payments, includinggrants of employee stock options. Deferred compensation calculated under thefair value method would then be amortized into income over the respectivevesting period of the stock option. The accounting provisions of SFAS 123Rare effective for reporting periods beginning after June 15, 2005. Thereare no stock options outstanding as of December 31, 2005 therefore theadoption of SFAS 123R will not have an impact on the Company’s consolidatedresults of operations, cash flows or financial condition.

InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replacesAccounting Principles Board Opinion No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in InterimFinancial Statements.” SFAS 154 is effective for accounting changes andcorrection of errors made in fiscal years beginning after December 15,2005 and requires retrospective application to prior period financialstatements of voluntary changes in accounting principle, unless it isimpractical to determine either the period-specific effects or the cumulativeeffect of the change. The consolidated results of operations, cash flows orfinancial condition will only be impacted by SFAS 154 if the Company implementsa voluntary change in accounting principle or identifies and correctsaccounting errors in future periods.

InMarch 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset RetirementObligations”**(FIN 47). FIN47 clarifies that an entity must record a liability for a “conditional” assetretirement obligation if the fair value of the obligation can be reasonablyestimated. The adoption of FIN 47 did not have a material effect on ourconsolidated results of operations, cash flows or financial condition.

InDecember 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions,” as part of its short-terminternational convergence project with the International Accounting StandardsBoard. Under SFAS 153, nonmonetary exchanges are required to be accounted forat fair value, recognizing any gains or losses, if their fair value isdeterminable within reasonable limits and the transaction has commercialsubstance. SFAS 153 is effective for fiscal years beginning after June 15,2005. The Company does not expect the adoption of SFAS 153 to have a materialimpact on the Company’s consolidated results of operations, cash flows orfinancial condition.

InMarch 2005, the Emerging Issues Task Force reached a consensus on Issue 04-6,“Accounting for Stripping Costs in the Mining Industry” (EITF 04-6) whichis effective on January 1, 2006. EITF 04-6 states that strippingcosts incurred after the first saleable minerals are extracted from the mine(i.e. post-production stripping costs) should be considered costs of theextracted minerals and recognized as a component of inventory to be recognizedin costs of sales in the same period as the revenue from the sale of theinventory. The Company does not expect the adoption of EITF 04-6 to havea material impact on the Company’s consolidated results of operations, cashflows or financial condition as the Company currently treats post-productionstripping costs in the manner proscribed by EITF 04-6.

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TaxLaw Changes include:The American Jobs Creation Act of 2004 (the “Act”) was signed by the Presidenton October 22, 2004. The Act provides a deduction for income from qualifieddomestic production activities, which will be phased in from 2005 through 2010.In return, the Act also provides for a two-year phase-out of the existingextra-territorial income exclusion (ETI) for foreign sales that was viewed tobe inconsistent with international trade protocols by the European Union. TheCompany does not expect the phase-out of the ETI to have a material impact onthe Company’s consolidated results of operations, cash flows or financialcondition. Following the guidance in FASB Staff Position No. FAS 109-1,“Application of FASB Statement No. 109, Accounting for Income Taxes, tothe Tax Deduction on Qualified Production Activities Provided by the AmericanJobs Creation Act of 2004, “ the deduction has been treated as a “specialdeduction” as described in FASB Statement No. 109. As such, the specialdeduction has no effect on deferred tax assets and liabilities existing at theenactment date. Rather, the impact of this deduction is reported in the periodin which the deduction is claimed on the Company’s tax return. The deductionfor 2005 did not have a material impact on the tax provision.

USE OF ESTIMATES IN THEPREPARATION OF FINANCIAL STATEMENTSThe preparation of financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesas of December 31, 2005 and January 1, 2005 and the reported amountsof revenues and expenses during each of the three years in the period ended December 31,2005. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTSThe Company considers all highly liquid debt instruments purchased witha maturity of three months or less to be cash equivalents.

INVENTORIESInventories 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 products group (see Note 11) isdetermined using the last-in, first-out (LIFO) method. These inventoriesrepresent approximately 78% of total inventories at December 31, 2005 (76%at January 1, 2005). The cost of all other inventory is determined by thefirst-in, first-out (FIFO) method.

PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment are carried at cost. Depreciation isprovided over the estimated useful lives of the related assets using thestraight-line method as follows:

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

OTHER ASSETSGoodwill, of which $6,474,000 relates to the Concrete, Aggregates andConstruction Supply segment and $900,000 relates to the Door segment, is notamortized but rather assessed annually for impairment. To the extent thatevents occur, either involving the relevant Company subsidiaries or in theirindustries, the Company revisits its assessment of the recorded goodwill todetermine if impairment has occurred and should be immediately recognized. Noimpairment was recognized in either 2005 or 2004.

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Identifiable intangible assets consist of thefollowing (amounts in thousands):
| ** **                    | ** ** | **December 31, 2005** | ** ** | **January 1, 2005** | ** ** |
|-------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Gross**                       | ** ** | ** **                    | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **carrying**                    | ** ** | **Accumulated**               | ** ** | **carrying** | ** ** | **Accumulated** | ** ** |
| ** **                    | ** ** | **amount**                      | ** ** | **amortization**              | ** ** | **amount** | ** ** | **amortization** | ** ** |
| Amortized intangible  assets: |       |                            |       |                          |       |   |   |   |   |
| Pueblo non-compete            |       | $                               | 500        |                          | $          | 459 |   | $ | 500 |   | $ | 409 |   |
| RMRM non-compete              |       | 1,250                           |       | 625                           |       | 1,250 |   | 500 |   |
| MDHI non-compete              |       | 250                             |       | 188                           |       | 250 |   | 138 |   |
|                          |       | $                               | 2,000      |                          | $          | 1,272 |   | $ | 2,000 |   | $ | 1,047 |   |

 

Theabove intangible assets are non-compete agreements that were signed at the timethe Company acquired the Pueblo operations (October 21, 1996) and all ofthe stock of RMRM (December 31, 2000) and MDHI (April 1, 2002).Amortization of the agreements is computed on a straight-line basis over theiragreement periods of 5 years for MDHI and 10 years for Pueblo and RMRM.Amortization expense for these intangible non-compete agreements was $225,000,$225,000 and $225,000 for 2005, 2004 and 2003, respectively. The estimatedamortization expense for the five subsequent fiscal years is as follows: 2006 —$216,000; 2007 — $137,000; 2008 — $125,000; 2009 — $125,000 and 2010 —$125,000.

TheCompany is party to an aggregates lease in conjunction with the Pueblo Coloradooperations of the Concrete, Aggregates and Construction Supplies segment whichrequires royalty payments based upon tons mined. The lease calls for the annualroyalty to be paid on a minimum tonnage. Prepaid royalties relate to paymentsmade for tons not yet mined.

RETIREMENT PLANSThe Company and certain subsidiaries have various contributory profitsharing retirement plans for specific employees. The plans allow qualifiedemployees to make tax deferred contributions pursuant to Internal Revenue Code Section 401(k).Beginning in August 2005, the Company matched employee contributions up to3%. In addition, the Company makes annual contributions, at its discretion,based primarily on profitability. Costs under the plans are charged tooperations as incurred.

RESERVE FOR SELF-INSURED ANDINSURED LOSSESThe Company’s risk management program provides for certain levels ofloss retention for workers’ compensation, automobile liability and general andproduct liability claims. The components of the reserve for self-insured losseshave been recorded in accordance with the requirements of SFAS No. 5, “Accountingfor Contingencies,” and represent management’s best estimate of the futureliability related to these claims up to the associated deductible limit.

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

RECLAMATIONIn connection with permits to mine properties in Colorado, the Companyis obligated to reclaim the mined areas whether the property is owned orleased. The Company records a reserve for future reclamation work to beperformed at its various aggregate operations based upon estimates of therecoverable quantities of rock and sand available in each location combinedwith an estimate of the total expense that will be incurred to reclaim aproperty. Provision is made based upon the units-of-production method.Reclamation costs are charged to operations as the properties are mined. Actualreclamation costs are charged against the reserve. The adequacy of the recordedreserve is assessed quarterly. The assessment may be done more frequently ifevents or circumstances arise that may indicate a change in estimated costs,recoverable material or period of mining activity. The Company periodicallyengages an independent professional to assist in reevaluating the estimates ofboth the quantities of recoverable material and the cost of reclamation. Mostof the reclamation on any mining property is generally performed soon aftereach section of the deposit is mined. The Company’s reserve for reclamationactivities was $1,335,000 at December 31, 2005 and $1,555,000 at January 1,2005.

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REVENUE RECOGNITIONThe Company recognizes revenue as products are shipped to customers.Sales are recorded net of applicable provisions for discounts, volumeincentives, returns and allowances. At the time of revenue recognition, theCompany also provides an estimate of potential bad debt and warranty expense aswell as an amount anticipated to be granted to customers under cooperativeadvertising programs based upon current program terms and historicalexperience. In accordance with the Emerging Issues Task Force Issue 00-10,“Accounting for Shipping and Handling Revenues and Costs,” revenues receivedfor shipping and handling are included in sales while the costs associated withshipping 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, nor aremaintenance or service contracts offered. Changes in the aggregated productwarranty liability for the fiscal years 2005 and 2004 were as follows (amountsin thousands):

|                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Beginning  balance             |       | $        | 106        |     | $          | 155 |   |
| Warranty related  expenditures |       | (366     | )          | (357     | )          |
| Warranty expense  accrued      |       | 366      |       | 308      |       |
| Ending balance                 |       | $        | 106        |     | $          | 106 |   |

 

INCOMETAXESIncome taxes are reported consistent with SFAS No. 109, “Accountingfor Income Taxes.” Deferred taxes reflect the future tax consequencesassociated with the differences between financial accounting and tax bases ofassets and liabilities.

CONCENTRATIONOF CREDIT RISKFinancial instruments, which potentially subject the Company toconcentrations of credit risk, consist principally of trade receivables andtemporary cash investments. The Company invests its excess cash in commercialpaper of companies with strong credit ratings. The Company has not experiencedany losses on these investments.

TheCompany performs ongoing credit evaluations of its customers and generally doesnot require collateral. The Company maintains reserves for potential creditlosses based upon the aging of accounts receivable and historical experienceand such losses have been within management’s expectations. See Note 11 for adescription of the Company’s customer base.

IMPAIRMENT OF LONG-LIVEDASSETSIn the event that facts and circumstances indicate that the cost of anylong-lived assets may be impaired, an evaluation of recoverability would beperformed. If an evaluation were required, the estimated future undiscountedcash flows associated with the asset would be compared to the asset’s carryingamount to determine if a write-down to market value or discounted cash flowvalue is required.

FISCAL YEAR ENDThe Company’s fiscal year end is the Saturday nearest December 31.Fiscal 2005 and 2004 consist of 52 weeks and 2003 consists of 53 weeks.

2.INVENTORIESInventories consisted of the following (amounts in thousands):

|                             | ** ** | **December 31, 2005** | ** ** | **January 1, 2005** | ** ** |
|-----------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| Finished goods              |       | $                               | 7,650      |                          | $          | 7,343 |   |
| Work in process             |       | 1,907                           |       | 1,684                         |       |
| Raw materials  and supplies |       | 7,898                           |       | 7,582                         |       |
|                        |       | $                               | 17,455     |                          | $          | 16,609 |   |

 

Ifinventories valued on the LIFO basis were valued at current costs, inventorieswould be higher as follows: 2005 — $4,306,000 and 2004 — $4,050,000.

Reductionsin inventory quantities during 2005 at one location resulted in liquidation ofLIFO inventory layers carried at costs that were lower than the costs ofcurrent purchases. The effect was not material.

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3.LONG-TERM DEBTLong-term debt consisted of the following (amounts in thousands):

|                       | ** ** | **December 31, 2005** | ** ** | **January 1, 2005** | ** ** |
|-----------------------|------------|---------------------------------|------------|-------------------------------|------------|
| Unsecured term  loan  |       | $                               | 12,000     |                          | $          | 9,000 |   |
| Less current  portion |       | 2,000                           |       | 2,000                         |       |
| Total long-term debt  |       | $                               | 10,000     |                          | $          | 7,000 |   |

 

The Company has anunsecured Revolving Credit and Term Loan Agreement (Credit Agreement), dated September 5,2003, with LaSalle Bank National Association and Fifth Third Bank. On June 28,****2005, the Company entered into the Third Amendment(Amendment) to the Credit Agreement, as amended as of May 29, 2004 and April 14,2005. The Amendment increased the principal amount of the term loan portion ofthe Credit Agreement by $5,000,000. With the increase in the term loan amount,at the time of signing, the total loan commitment was $23,500,000. The proceedsof the Amendment were primarily used to fund the purchase of the Company’sstock under the modified Dutch auction tender offer and to pay related fees andexpenses. The remaining funds were used to fund capital expenditures.

TheCredit Agreement provides that, at the Company’s option, the term loan andrevolving credit facility will bear interest at prime or a performance-basedLIBOR rate. Based on the terms of the Amendment, the increase in the term loanand the Company’s performance for the twelve months ended December 31,2005, the performance based rates are LIBOR plus 1.50% for the term loan andLIBOR plus 1.25% for borrowings under the revolving credit facility.****The Credit Agreement also requires the Company to maintaincertain levels of consolidated tangible net worth, to attain certain levels ofcash flow (as defined) on a rolling four-quarter basis, and to maintain certainratios including consolidated debt to cash flow (as defined). The Company is incompliance with all debt covenants as of December 31, 2005. The Companyfailed to provide audited financial statements to the two banks within 120 daysafter its fiscal year-end as required by the Credit Agreement. However, thisdefault was waived by the two banks. Additional borrowings, acquisition ofstock of other companies, purchase of treasury shares and payment of cashdividends are either limited or require prior approval by the lenders. Paymentof accrued interest is due and paid quarterly by the Company. Principalpayments under the term loan are due quarterly through March 31, 2011.

TheCompany is exposed to market risks related to commodity prices and interestrates. To manage interest rate risk, the Company has, from time to time,entered into interest rate swaps as cash flow hedges. These swaps areauthorized by the Company’s policies and procedures. The Company does not useswaps or hedging instruments for trading purposes, and is not a party to anytransaction involving leveraged derivatives. Effective December 17, 2001,the Company entered into an interest rate swap agreement (Swap Agreement) inorder to minimize the adverse impact of the floating interest rate characteristicof most of the Company’s term loan borrowings. The Company’s current effectiveinterest rate on the portion of the term loan covered by the Swap Agreement is5.88%. Such rate is subject to adjustment depending upon the Company’sperformance. Cash payments or receipts associated with this agreement arereflected in interest expense. The fixed rate under the Swap Agreement hasexceeded the floating rate on the term loan during each of the years. Theeffect on operations was to reduce net income by $31,000, $162,000 and $257,000for 2005, 2004 and 2003, respectively. The fair value of the Swap Agreement isrecorded on the balance sheet with subsequent changes recorded as a separatecomponent of accumulated other comprehensive income in shareholders’ equity. AtDecember 31, 2005, the amount subject to this Swap Agreement is $4,500,000which amount decreases by $1,500,000 each September and March, terminatingon December 18, 2006.

Aggregatelong-term debt matures as follows (amounts in thousands):

| 2006   |   | $     | 2,000  |   |
|--------|--------|-------|--------|--------|
| 2007   |   | 2,000 |   |
| 2008   |   | 2,375 |   |
| 2009   |   | 2,500 |   |
| 2010   |   | 2,500 |   |
| 2011   |   | 625   |   |
|   |   | $     | 12,000 |   |

 

Underthe Credit Agreement, the Company had an unsecured revolving line of credit of$10,000,000 during 2005 and 2004. The line, which expires in July 2006, isused for short-term cash needs and standby letters of credit. At December 31,2005, the Company had outstanding stand-by letters of credit to insurancecarriers totaling approximately $3,335,000 that collateralize the self-insuredamounts under the Company’s risk management program. The weighted averageinterest rate for all debt was 5.5% for fiscal 2005 and 5.1% for fiscal 2004.There was no balance outstanding against the line as of either December 31,2005 or January 1, 2005. Subsequent to year-end, the Company entered intoa Fourth Amendment to the Credit Agreement. See Note 12.

 

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4.COMMITMENTS AND CONTINGENCIESThe Company is involved in litigation matters related to its continuingbusiness, principally product liability matters related to the gas-firedheating products in the Heating and Cooling segment. In the Company’s opinion,none of these proceedings, when concluded, will have a material adverse effecton the Company’s consolidated results of operations, cash flows or financialcondition as the Company has established adequate reserves for knownoccurrences.

5.SHAREHOLDERS’ EQUITYDuring 2005, the remaining options granted under the Company’s Stock OptionPlan (the “Plan”) for 73,400 shares of common stock (70,400 shares net of 3,000shares tendered as payment of option price) were exercised. No options wereexercised during 2004 or 2003. With the exercise of all then remainingoutstanding options during 2005, the Plan was terminated. Reinstatement of thePlan requires the consent of the Company’s stockholders.

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

6.EARNINGS PER SHAREThe Company computes earnings per share (EPS) in accordance with SFAS No. 128,“Earnings Per Share.” The following is a reconciliation of the calculation ofbasic and diluted EPS for the years-ended 2005, 2004 and 2003 (dollars inthousands except per-share data).
| ** **                  | ** ** | **Net**    | ** ** | **Weighted  average** | ** ** | **Per-share** | ** ** |
|-----------------------------|------------|------------|------------|-----------------------|------------|---------------|------------|
| ** **                  | ** ** | **Income** | ** ** | **shares**            | ** ** | **earnings**  | ** ** |
| 2005                        |       |       |       |                  |       |          |       |
| Basic EPS                   |       | $          | 2,758      |                  | 1,602      |          | $          | 1.72 |   |
| Effect of  dilutive options |       | —     |       | 30                    |       |          |       |
| Diluted EPS                 |       | $          | 2,758      |                  | 1,632      |          | $          | 1.69 |   |
|                        |       |       |       |                  |       |          |       |
| 2004                        |       |       |       |                  |       |          |       |
| Basic EPS                   |       | $          | 2,373      |                  | 1,681      |          | $          | 1.41 |   |
| Effect of  dilutive options |       | —     |       | 44                    |       |          |       |
| Diluted EPS                 |       | $          | 2,373      |                  | 1,725      |          | $          | 1.38 |   |
|                        |       |       |       |                  |       |          |       |
| 2003                        |       |       |       |                  |       |          |       |
| Basic EPS                   |       | $          | 2,349      |                  | 1,754      |          | $          | 1.34 |   |
| Effect of  dilutive options |       | —     |       | 37                    |       |          |       |
| Diluted EPS                 |       | $          | 2,349      |                  | 1,791      |          | $          | 1.31 |   |

 

7.RENTAL EXPENSE, LEASES AND COMMITMENTSThe Company leases certain of its facilities and equipment and is required topay the related taxes, insurance and certain other expenses. Rental expense was$2,993,000, $2,778,000 and $2,922,000 for 2005, 2004 and 2003, respectively.

Futureminimum rental commitments under non-cancelable operating leases for 2006 andthereafter are as follows: 2006 — $2,089,000; 2007 — $2,025,000; 2008 —$1,872,000; 2009 — $1,638,000; 2010 — $1,216,000 and thereafter — $21,472,000.Included in these amounts is $386,000 per year and approximately $18,541,000 inthe “thereafter” amount related to minimum royalty payments due on anaggregates property lease in conjunction with the Pueblo, Colorado operation.Also included in these amounts is $235,000 per year and approximately$1,353,000 in the “thereafter” amount related to a ground lease upon which theCompany owns a building leased to a third party for approximately $344,000 peryear. The ground lease runs through October 1, 2016 and contains a renewalclause. The building lease runs through January 31, 2013.

8.RETIREMENT PLANSAs discussed in Note 1, the Company maintains defined contribution retirementbenefit plans for eligible employees. Total plan expenses charged to operationswere $1,827,000, $1,606,000 and $1,644,000 in 2005, 2004 and 2003,respectively.

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9.INCOME TAXESThe provision (benefit) for income taxes is summarized as follows (amounts inthousands):

|          | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Federal: |       | Current    |       | $        | 1,147      |     | $          | 665      |       | $ | 959 |   |
|     |       | Deferred   |       | (54      | )          | 53       |       | 56       |       |
| State:   |       | Current    |       | (168     | )          | (4       | )          | 58       |       |
|     |       | Deferred   |       | (125     | )          | 36       |       | 27       |       |
|     |       |       |       | $        | 800        |     | $          | 750      |       | $ | 1,100 |   |

 

Thedifference between the tax rate on income for financial statement purposes andthe federal statutory tax rate was as follows:

|                                             | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory tax  rate                         |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| Percentage  depletion                       |       | (2.4     | )          | (3.1     | )          | (2.7     | )          |
| State income  taxes, net of federal benefit |       | 1.1      |       | 2.9      |       | 1.9      |       |
| Non-deductible  expenses                    |       | —   |       | 1.2      |       | .7       |       |
| Benefit of state  tax credits               |       | —   |       | (5.5     | )          | (5.3     | )          |
| Donation of  appreciated property           |       | —   |       | (1.3     | )          | —   |       |
| (Release) build  tax contingency reserve    |       | (8.1     | )          | (4.2     | )          | 2.2      |       |
| Other                                       |       | (2.1     | )          | —   |       | 1.1      |       |
|                                        |       | 22.5     | %          | 24.0     | %          | 31.9     | %          |

 

The Companyquarterly reviews its potential liability for income tax contingenciesresulting from positions taken on certain items of income or deduction whenfiling its federal and state income tax returns. Amounts are accrued based uponmanagement’s assessment of the exposure on these items. Conversely, suchpreviously accrued amounts are reversed either when the items are resolved infavor of the Company or the audit periods for the applicable returns are closed.During the 2005 fiscal year, approximately $287,000 was released as certainsituations were resolved in favor of the Company. During fiscal 2004,approximately $131,000 was released while during fiscal 2003, approximately$76,000 was accrued for identified contingencies.

Forfinancial statement purposes, deferred tax assets and liabilities are recordedat a blend of the current statutory federal and states’ tax rates — 36.5%. Theprincipal temporary differences and their related deferred taxes are as follows(amounts in thousands):

|                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Reserves for  self-insured losses |       | $        | 1,359      |     | $          | 1,134 |   |
| Accrued  reclamation              |       | 495      |       | 590      |       |
| Deferred  compensation            |       | 544      |       | 460      |       |
| Asset valuation  reserves         |       | 174      |       | 189      |       |
| Future state tax  credits         |       | 555      |       | 574      |       |
| Other                             |       | 78       |       | 249      |       |
| Total deferred  tax assets        |       | 3,205    |       | 3,196    |       |
|                              |       |     |       |     |       |
| Depreciation                      |       | 3,185    |       | 3,664    |       |
| Deferred  development             |       | 630      |       | 588      |       |
| Other                             |       | 716      |       | 449      |       |
| Total deferred  tax liabilities   |       | 4,531    |       | 4,701    |       |
| Net deferred tax  liability       |       | $        | (1,326     | )        | $          | (1,505 | ) |

 

Thenet current deferred tax assets are $2,355,000 and $2,291,000 at year-end 2005and 2004, respectively.

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10.UNAUDITED QUARTERLY FINANCIAL DATAThe following table provides summarized unaudited fiscal quarterly financialdata for 2005 and 2004 (amounts in thousands, except per share amounts):
| ** **                                | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** |
| 2005                                      |       |        |       |        |       |        |       |        |       |
| Sales                                     |       | $           | 29,757     |        | $          | 38,273      |       | $           | 36,415     |   | $ | 34,554 |   |
| Depreciation,  depletion and amortization |       | 1,216       |       | 1,215       |       | 1,201       |       | 1,097       |       |
| Operating (loss)  profit                  |       | (338        | )          | 1,302       |       | 1,552       |       | 1,536       |       |
| Net (loss)  income                        |       | (288        | )          | 945         |       | 1,038       |       | 1,063       |       |
| Basic (loss)  income per share            |       | (.17        | )          | .59         |       | .66         |       | .66         |       |
| Diluted (loss) income  per share          |       | (.17        | )          | .58         |       | .65         |       | .66         |       |
|                                           |            |             |            |             |            |             |            |             |            |  |  |  |  |

 
| ** **                                | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** |
| 2004                                      |       |        |       |        |       |        |       |        |       |
| Sales                                     |       | $           | 27,247     |        | $          | 34,577      |       | $           | 30,900     |   | $ | 34,216 |   |
| Depreciation,  depletion and amortization |       | 1,368       |       | 1,251       |       | 1,421       |       | 987         |       |
| Operating (loss)  profit                  |       | (416        | )          | 1,467       |       | 1,011       |       | 1,443       |       |
| Net (loss)  income                        |       | (363        | )          | 839         |       | 586         |       | 1,311       |       |
| Basic (loss)  income per share            |       | (.21        | )          | .50         |       | .35         |       | .79         |       |
| Diluted (loss) income  per share          |       | (.21        | )          | .48         |       | .34         |       | .77         |       |
|                                           |            |             |            |             |            |             |            |             |            |  |  |  |  |

 

Earnings per shareare computed independently for each of the quarters presented. Therefore, thesum of the quarterly earnings per share may not equal the total for the year.

11.INDUSTRY SEGMENT INFORMATION (RESTATED)The Company operates primarily in two industry groups, HVAC and ConstructionProducts. Prior to the 2005 fiscal year, the Company reported its financialresults in two reportable segments, essentially along the lines of these twoindustry groups. The reportable segments were titled the Heating and AirConditioning segment and the Construction Materials segment. Prior to filingthe annual report on Form 10-K for the 2005 fiscal year, managementdetermined that its accounting for segments did not comply with SFAS No. 131.As a result, the financial information presented for 2004 and 2003 in the tablebelow has been restated.

Priorto filing the annual report on Form 10-K for the 2005 fiscal year,management concluded that there are four reportable segments within its twoprincipal industry groups; the Heating and Cooling segment and the EvaporativeCooling segment in the HVAC industry group and the Concrete, Aggregates andConstruction Supplies segment and the Door segment in the Construction Productsindustry group. The Heating and Cooling segment produces and sells gas-firedwall furnaces, console heaters and fan coils from the Company’s wholly-ownedsubsidiary, Williams Furnace Co. of Colton, California. The Evaporative Coolingsegment produces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona. Theoperations of these two segments were previously combined and reported as theHeating and Air Conditioning segment. Sales of these two segments arenationwide, but are concentrated in the southwestern United States. Concrete,Aggregates and Construction Supplies are offered from numerous locations alongthe Front Range of Colorado operated by the Company’s wholly-owned subsidiariesCastle Concrete Company and Transit Mix Concrete Co., of Colorado Springs,Transit Mix of Pueblo, Inc. of Pueblo and Rocky Mountain Ready MixConcrete, Inc. of Denver. Doors are fabricated and sold along with therelated hardware from the Company’s wholly-owned subsidiary, McKinney Door andHardware, Inc. of Pueblo, Colorado. The operations of these two segmentswere previously combined and reported as the Construction Materials segment. Salesof these two segments are highly concentrated in the Front Range area inColorado although door sales are also made throughout the United 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.

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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 small real estate operation. Expenses related to thecorporate information technology group are allocated to all locations,including the corporate office.

Thefollowing table presents information about reported segments for the fiscalyears 2005, 2004 and 2003 along with the items necessary to reconcile thesegment information to the totals reported in the financial statements (amountsin thousands):
| ** **                               | ** ** | **Construction Products**                               | ** ** | **HVAC Products** | ** ** | ** **                                    | ** ** | ** **                | ** ** | ** **               | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products (c)** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products (c)** | ** ** | **Unallocated  Corporate (a)** | ** ** | **Other (b)** | ** ** | **Total** | ** ** |
| 2005                                     |       |                                                         |       |                   |       |                                          |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers         |       | $                                                            | 82,644     |                   | $          | 8,727                                         |       | $                         | 91,371     |                     | $          | 26,736 |   | $ | 20,545 |   | $ | 47,281 |   | $ | 3 |   | $ | 344 |   | $ | 138,999 |   |
| Depreciation, depletion and amortization |       | 3,560                                                        |       | 93                     |       | 3,653                                         |       | 392                       |       | 613                      |       | 1,005 |   | 71 |   | — |   | 4,729 |   |
| Operating income (loss)                  |       | 3,805                                                        |       | 777                    |       | 4,582                                         |       | 2,777                     |       | (177                     | )          | 2,600 |   | (3,227 | ) | 97 |   | 4,052 |   |
| Segment assets                           |       | 47,180                                                       |       | 2,914                  |       | 50,094                                        |       | 16,986                    |       | 12,544                   |       | 29,530 |   | 7,373 |   | 63 |   | 87,060 |   |
| Capital  expenditures               |       | 2,553                                                        |       | 30                     |       | 2,583                                         |       | 427                       |       | 442                      |       | 869 |   | 324 |   | — |   | 3,776 |   |
|                                          |            |                                                              |            |                        |            |                                               |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                               | ** ** | **Construction Products**                               | ** ** | **HVAC Products** | ** ** | ** **                                    | ** ** | ** **                | ** ** | ** **               | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products (c)** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products (c)** | ** ** | **Unallocated  Corporate (a)** | ** ** | **Other (b)** | ** ** | **Total** | ** ** |
| 2004                                     |       |                                                         |       |                   |       |                                          |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers         |       | $                                                            | 73,311     |                   | $          | 7,087                                         |       | $                         | 80,398     |                     | $          | 27,598 |   | $ | 18,598 |   | $ | 46,196 |   | $ | 2 |   | $ | 344 |   | $ | 126,940 |   |
| Depreciation, depletion and amortization |       | 3,804                                                        |       | 83                     |       | 3,887                                         |       | 480                       |       | 597                      |       | 1,077 |   | 63 |   | — |   | 5,027 |   |
| Operating income (loss)                  |       | 2,331                                                        |       | 486                    |       | 2,817                                         |       | 3,170                     |       | 266                      |       | 3,436 |   | (2,842 | ) | 94 |   | 3,505 |   |
| Segment assets                           |       | 50,778                                                       |       | 2,964                  |       | 53,742                                        |       | 15,927                    |       | 13,081                   |       | 29,008 |   | 3,059 |   | 74 |   | 85,883 |   |
| Capital  expenditures               |       | 2,969                                                        |       | 48                     |       | 3,017                                         |       | 428                       |       | 789                      |       | 1,217 |   | 33 |   | — |   | 4,267 |   |
|                                          |            |                                                              |            |                        |            |                                               |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                               | ** ** | **Construction Products**                               | ** ** | **HVAC Products** | ** ** | ** **                                    | ** ** | ** **                | ** ** | ** **               | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**              | ** ** | **Combined  Construction  Products (c)** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC  Products (c)** | ** ** | **Unallocated  Corporate (a)** | ** ** | **Other (b)** | ** ** | **Total** | ** ** |
| 2003                                     |       |                                                         |       |                   |       |                                          |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external customers         |       | $                                                            | 64,907     |                   | $          | 6,586                                         |       | $                         | 71,493     |                     | $          | 26,046 |   | $ | 22,296 |   | $ | 48,342 |   | $ | 3 |   | $ | 327 |   | $ | 120,165 |   |
| Depreciation, depletion and amortization |       | 4,775                                                        |       | 71                     |       | 4,846                                         |       | 565                       |       | 582                      |       | 1,147 |   | 69 |   | — |   | 6,062 |   |
| Operating income (loss)                  |       | 1,121                                                        |       | 581                    |       | 1,702                                         |       | 3,621                     |       | 1,391                    |       | 5,012 |   | (2,891 | ) | 17 |   | 3,840 |   |
| Segment assets                           |       | 46,588                                                       |       | 2,475                  |       | 49,063                                        |       | 15,240                    |       | 12,589                   |       | 27,829 |   | 5,486 |   | 157 |   | 82,535 |   |
| Capital  expenditures               |       | 2,475                                                        |       | 45                     |       | 2,520                                         |       | 111                       |       | 241                      |       | 352 |   | 8 |   | — |   | 2,880 |   |
|                                          |            |                                                              |            |                        |            |                                               |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)             Includesunallocated corporate office expenses and assets which consist primarily ofcash and cash equivalents.

(b)            Includesa small real estate operation and the holding costs for certain mininginterests that remain from the period the Company maintained significantinterests in mining operations.

(c)             Columnfor 2004 and 2003 represents the segments as reported in prior years.

All long-lived assets are in the United States. Nocustomer accounted for 10% or more of total sales of the Company in 2005, 2004or 2003.

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12. SUBSEQUENTEVENTOn June 8, 2006, the Company entered into the Fourth Amendment toRevolving Credit and Term Loan Agreement amending the Company’s existing CreditAgreement. The Fourth Amendment increases the principal amount of the term loanportion of the Credit Agreement by $5,000,000 and increases the revolvingcredit facility by $5,000,000. With the increase in the term loan and revolvingcredit amounts, the total loan commitment, at the time of the signing, was$31,500,000.

The additionalproceeds of the term loan facility may be drawn in whole or in part on orbefore July 31, 2006. If drawn, the proceeds will primarily be used forbusiness expansion. The amount available under the revolving credit facility ofthe Credit Agreement was increased primarily due to increased stand-by lettersof credit requirements to insurance carriers in support of self-insured amountsunder the Company’s risk management program and to provide additionalliquidity. All other material terms of the Credit Agreement remain in force,except to the extent they have been modified by the Fourth Amendment asdescribed in this paragraph.

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directorsand Stockholders of Continental Materials Corporation:

We have audited theaccompanying consolidated balance sheet of Continental Materials Corporationand subsidiaries (the “Company”) as of December 31, 2005, and the relatedconsolidated statements of operations and comprehensive income, cash flows andshareholders’ equity for the year then ended. These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit. Thefinancial statements of the Company as of January 1, 2005 and for theyears ended January 1, 2005 and January 3, 2004 were audited by otherauditors whose report, dated April 7, 2005, except for Note 11, as towhich the date is June 29, 2006, expressed an unqualified opinion andincluded an explanatory paragraph related to the restatement of segmentdisclosures as discussed in Note 11.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not 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 2005consolidated financial statements present fairly, in all material respects, thefinancial position of Continental Materials Corporation and subsidiaries as of December 31,2005, and the results of their operations and their cash flows for the yearthen ended in conformity with accounting principles generally accepted in theUnited States of America.

Deloitte &Touche LLP

Chicago, IllinoisJune 29, 2006

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To theBoard of Directors and Shareholders of Continental Materials Corporation:

In ouropinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of operations and comprehensive income, of shareholders’equity and of cash flows, present fairly, in all material respects, thefinancial position of Continental Materials Corporation and its subsidiaries atJanuary 1, 2005, and the results of their operations and their cash flowsfor each of the two years in the period ended January 1, 2005 inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit 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,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

Asdiscussed in Note 11 to the consolidated financial statements, the Company hasrestated its segment disclosures for 2004 and 2003.

PricewaterhouseCoopersLLP

Chicago, Illinois

April 7,2005, except for Note 11 as to which the date is June 29, 2006

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

 

On August 3,2005, the Board of Directors of Continental Materials Corporation, on therecommendation of the Audit Committee, dismissed PricewaterhouseCoopers LLP asits independent registered public accounting firm and appointed Deloitte &Touche LLP as the Company’s independent registered public accounting firm toaudit its consolidated statements for the year ending December 31, 2005.With regard to PricewaterhouseCoopers, during the two most recent fiscal yearsand through August 3, 2005, there have been no reportable events (asdefined in Item 304(a)(1)(v) of Regulation S-K) except as follows. As of January 1,2005, management identified two material weaknesses related to the Company’sinternal control over financial reporting. The control weaknesses related tothe method used to calculate the accrued liabilities for estimated workers’compensation claims and related expense and the calculation of the taxprovision. For a more complete discussion, see Item 9A in the 2004 AnnualReport on Form 10-K and Item 4 in the Form 10-Q for thethree months ended April 2, 2005. With regard to the above, theinformation specified by Item 304 of Regulation S-K was provided to theSecurities and Exchange Commission under Item 4.01 of Form 8-K filedby the Company on August 10, 2005.
| Item 9A. | **CONTROLS AND PROCEDURES** |
|----------|-----------------------------|

 

**Evaluationof Disclosure Controls and Procedures**

Disclosurecontrols and procedures, as such term is defined in Rule 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended(Exchange Act) are controls and other procedures that are designed to ensurethat information required to be disclosed in Company filings or that it submitsunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the rules and forms of the Securities andExchange Commission (SEC) and that such information is accumulated andcommunicated to the Company’s management, including its Chief Executive Officerand Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating our disclosurecontrols and procedures, management recognizes that disclosure controls andprocedures, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the disclosurecontrols and procedures are met. Additionally, in designing disclosure controlsand procedures, our management necessarily is required to apply its judgment inevaluating the cost-benefit relationship of possible disclosure controls andprocedures. The design of any disclosure controls and procedures also is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions.

36

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Asof December 31, 2005, the Company carried out an evaluation of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15(e) ofthe Exchange Act, as amended. Based upon that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were not effective in that the Company lacked a process to ensurethat all relevant information specified in SFAS 131 was evaluated to ensurethat its segment reporting included in the Notes to the Consolidated FinancialStatements was presented in accordance with SFAS 131.

Subsequentto the filing of the annual report on Form 10-K for the 2004 fiscalyear, management determined that its prior conclusions on segment reportingwhich resulted in disclosure of two reportable segments, the ConstructionMaterials segment and the Heating and Air Conditioning segment, did not complywith the provisions of SFAS 131. Management concluded that there were fourreportable segments within its two principal industry groups; the Heating andAir Conditioning segment and the Evaporative Cooling segment in the HVACindustry group and the Concrete, Aggregates and Construction Supplies segmentand the Door segment in the Construction Products industry group. The lack of aprocess to evaluate all relevant information specified in SFAS 131, includinginternal management reporting, changes in economic characteristics and otherfactors is considered a material weakness as defined under standardsestablished by the Public Company Accounting Oversight Board (United States).

As of December 31,2005, the Company was not an “accelerated filer” as defined in Rule 12b-2under the Exchange Act. Accordingly, pursuant to SEC rules andregulations, the Company is not required to complete or provide, and we havenot completed or provided, Management’s Annual Report on Internal Control OverFinancial Reporting or the associated report of our independent registeredpublic accounting firm in this Annual Report on Form 10-K. We arerequired to annually reassess our status as a “non-accelerated filer” as of theend of our fiscal year to determine whether we will be required to provideManagement’s Annual Report on Internal Control Over Financial Reporting and theassociated report of our independent registered public accounting firm in ourannual report on Form 10-K.

**Changesin Internal Controls**

TheCompany will implement a process to evaluate and analyze changes in internalmanagement reporting, economic characteristics and other factors specified inSFAS 131 as they occur to determine whether any of the changes would affectsegment reporting on a quarterly basis in accordance with SFAS 131. We believethat such measures will appropriately address the material weakness related tothe determination of reporting segments in accordance with SFAS 131.

No changes in theCompany’s internal controls over financial reporting occurred during thequarter ended December 31, 2005 that have materially affected, or arereasonably likely to materially affect, the Company’s internal controls overfinancial reporting.
| Item 9B. | **OTHER INFORMATION** |
|----------|-----------------------|

 

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

**PART III**

Items 10, 11, 12,13 and 14 of Part III have been omitted from this 10-K Reportbecause the registrant expects to file its definitive 2006 proxy statement onor about July 14 , 2006. The information required by Items 10, 11, 12, 13and 14 of Part III will be included in that proxy statement and suchinformation is hereby incorporated by reference.

**PART IV**
| Item 15.   | **EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**                                                      |
|------------|-----------------------------------------------------------------------------------------------------|
|       |                                                                                                |
| (a) 1 | The following financial statements are included in  Item 8 of Part II:                         |
|       | Consolidated statement of operations and  comprehensive income for fiscal years 2005, 2004 and 2003 |
|       | Consolidated statements of cash flows for fiscal  years ended 2005, 2004 and 2003                   |
|       | Consolidated balance sheets as of December 31,  2005 and January 1, 2005                  |
|       | Consolidated statements of shareholders’ equity for  fiscal years ended 2005, 2004 and 2003    |

 

37

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| (a) 2 | The following is a list of financial statement  schedules filed as part of this Report:                      |
|------------|--------------------------------------------------------------------------------------------------------------|
|       |                                                                                                         |
|       | Schedule II  Valuation and Qualifying Accounts & Reserves  For the Fiscal Years 2005, 2004 and 2003 |

 

Allother schedules are omitted because they are not applicable or the informationis shown in the financial statements or notes thereto.
| (a) 3        | The following is  a list of all exhibits filed as part of this Report:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3    | Restated  Certificate of Incorporation dated May 28, 1975, as amended on May 24,  1978, May 27, 1987 and June 3, 1999 (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit 3a   | Registrant’s  By-laws as amended September 19, 1975 filed as Exhibit 6 to Form 8-K  for the month of September 1975, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Exhibit 10   | Revolving Credit  and Term Loan Agreement dated as of September 5, 2003, by and among the  Company and LaSalle Bank National Association and Fifth Third Bank filed as Exhibit 10  to Form 10-Q for the quarterly period ending September 27,  2003, First Amendment thereto dated as of May 29, 2004 filed as Exhibit 10  to Form 10-Q for the quarterly period ending July 3, 2004,  Second Amendment thereto dated April 14, 2005 filed as Exhibit 10.1  to Form 8-K for the month of April 2005, Third Amendment  thereto dated as of June 28, 2005 filed as Exhibit 10.1 to Form 8-K  filed July 7, 2005, and Fourth Amendment thereto dated as of June 8,  2006 filed as Exhibit 99.1 to Form 8-K filed June 13,  2006, incorporated herein by reference. |
| Exhibit 10a  | Acquisition  Agreement Between Valco Properties, Ltd. And Continental Materials  Corporation filed as Exhibit 2A to Form 8-K for the month October 1996,  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Exhibit 10b  | Non-Competition  and Non-Disclosure Agreement by Valco, Inc. And Thomas E. Brubaker in  favor of Continental Materials Corporation filed as Exhibit 2B to Form 8-K  filed November 4, 1996, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Exhibit 10c  | Fee Sand and  Gravel Lease Between Valco, Inc. And Continental Materials Corporation  filed as Exhibit 2C to Form 8-K filed November 4, 1996,  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| Exhibit 10d  | Form of  Supplemental Deferred Compensation Agreement filed as Exhibit 10 to Form 10-Q  for the quarter ended July 1, 1983, incorporated herein by reference.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| Exhibit 10e  | Stock Purchase  Agreement By and Among Continental Materials Corporation, Rocky Mountain  Ready Mix Concrete, Inc. and The Shareholders of Rocky Mountain Ready  Mix Concrete, Inc. Filed as Exhibit 2A to Form 8-K filed  January 12, 2001, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Exhibit 10f  | Continental  Materials Corporation Employee Profit Sharing Retirement Plan Amended and  Restated Generally Effective October 1, 1997 filed as Exhibit 99a  to Form 10-K for the year ended January 1, 2000, incorporated  herein by reference.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Exhibit 14   | Continental  Materials Corporation Code of Business Conduct and Ethics filed as Exhibit 14  to Form 10-K/A (Amendment No. 1) for the year ended January 3,  2004, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Exhibit 21   | Subsidiaries of  Registrant (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Exhibit 23   | Consent of  Independent Registered Public Accounting Firm (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit 31.1 | Rule 13a-14(a)/15d-14(a) and  Rule 13a-14(d)/15d-14(d) Certification of Chief  Executive Officer (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Exhibit 31.2 | Rule 13a-14(a)/15d-14(a) and  Rule 13a-14(d)/15d-14(d) Certification of Chief  Financial Officer (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Exhibit 32.1 | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer (filed  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

* - Compensatory plan or arrangement

 

38

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf 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: June 30, 2006 |                              |   |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.
| SIGNATURE                | ** ** | **CAPACITY(IES)**                        | ** ** | **DATE**            |
|--------------------------|------------|------------------------------------------|------------|---------------------|
|                     |       |                                     |       |                |
| /S/ James G. Gidwitz     |       | Chief Executive  Officer and a Director  |       |                |
| James G. Gidwitz         |       | (Principal  Executive Officer)           |       | June 30,  2006 |
|                     |       |                                     |       |                |
| /S/ Joseph J. Sum        |       | Vice President,  Chief Financial Officer |       |                |
| Joseph J. Sum            |       | (Principal  Financial Officer)           |       | June 30,  2006 |
|                     |       |                                     |       |                |
| /S/ Mark S. Nichter      |       | Secretary and  Controller                |       |                |
| Mark S. Nichter          |       | (Principal  Accounting Officer)          |       | June 30,  2006 |
|                     |       |                                     |       |                |
| /S/ William D. Andrews   |       |                                     |       |                |
| William D. Andrews       |       | Director                                 |       | June 30,  2006 |
|                     |       |                                     |       |                |
| /S/ Thomas H. Carmody    |       |                                     |       |                |
| Thomas H. Carmody        |       | Director                                 |       | June 30,  2006 |
|                     |       |                                     |       |                |
| /S/ Betsy R. Gidwitz     |       |                                     |       |                |
| Betsy R. Gidwitz         |       | Director                                 |       | June 30,  2006 |
|                     |       |                                     |       |                |
| /S/ Ralph W. Gidwitz     |       |                                     |       |                |
| Ralph W. Gidwitz         |       | Director                                 |       | June 30,  2006 |
|                     |       |                                     |       |                |
| /S/ Ronald J. Gidwitz    |       |                                     |       |                |
| Ronald J. Gidwitz        |       | Director                                 |       | June 30,  2006 |
|                     |       |                                     |       |                |
| /S/ Theodore R. Tetzlaff |       |                                     |       |                |
| Theodore R. Tetzlaff     |       | Director                                 |       | June 30,  2006 |
|                     |       |                                     |       |                |
| /S/ Peter E. Thieriot    |       |                                     |       |                |
| Peter E. Thieriot        |       | Director                                 |       | June 30,  2006 |
|                     |       |                                     |       |                |
| /S/ Darrell M. Trent     |       |                                     |       |                |
| Darrell M. Trent         |       | Director                                 |       | June 30,  2006 |

 

39

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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders

of Continental MaterialsCorporation:

We have audited theconsolidated financial statements of Continental Materials Corporation as ofDecember 31, 2005, and for the year then ended and have issued our reportthereon dated June 29, 2006. Such consolidated financial statements andreport are included in this Annual Report on Form 10-K ofContinental Materials Corporation for the year ended December 31, 2005.Our audit also included the consolidated financial statement schedule for theCompany listed in Item 15 (a) as it relates to the year endedDecember 31, 2005. The financial statement schedule is the responsibilityof the Company’s management. Our responsibility is to express an opinion basedon our audit. In our opinion, the financial statement schedule as it relates tothe year ended December 31, 2005, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein. The 2004 and 2003 FinancialStatement Schedule was audited by other auditors whose report datedApril 7, 2005, expressed an unqualified opinion on that schedule.

Deloitte &Touche LLP

Chicago, Illinois

June 29, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders ofContinental Materials Corporation:

Ouraudits of the consolidated financial statements referred to in our report datedApril 7, 2005, except for Note 11 as to which the date is June 29,2006, appearing in the 2005 Annual Report to Shareholders of ContinentalMaterials Corporation (which report and consolidated financial statements areincluded in this Annual Report on From 10-K) also included an audit ofthe 2004 and 2003 financial statement schedule listed in Item 15(a)(2) ofthis Form 10-K. In our opinion, this financial statement schedulepresents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Chicago, Illinois

April 7, 2005

----

 

CONTINENTALMATERIALS CORPORATION

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

for the fiscalyears 2005, 2004 and 2003
| **COLUMN A**                   | ** ** | **COLUMN B**                                    | ** ** | **COLUMN C(1)**                                         | ** ** | **COLUMN D**               | ** ** | **COLUMN E**                            | ** ** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------|------------|----------------------------------------------|------------|------------|
| ** **                          | ** ** | ** **                                           | ** ** | ** **                                                   | ** ** | ** **                      | ** ** | ** **                                   | ** ** | ** ** |
| **Description**                     | ** ** | **Balance at  Beginning of   Period** | ** ** | **Additions  Charged to Costs  and Expenses** | ** ** | **Deductions -  Describe** | ** ** | **Balance at  End of Period** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                           | ** ** | ** **                                                   | ** ** | ** **                      | ** ** | ** **                                   | ** ** | ** ** |
| **Year 2005**                       |       |                                                 |       |                                                         |       |                            |       |                                         |       |       |
| Allowance for  doubtful accounts(c) |       | $                                                    | 325,000    |                                                         | $          | 94,000                          |       | $                                            | 109,000    |       | $ | 310,000 | (a) |   |
| Inventory  valuation reserve(c)     |       | $                                                    | 173,000    |                                                         | $          | 223,000                         |       | $                                            | 246,000    |       | $ | 150,000 | (b) |   |
| Reserve for  self-insured losses    |       | $                                                    | 2,988,000  |                                                         | $          | 6,790,000                       |       | $                                            | 5,745,000  |       | $ | 4,033,000 | (d) |   |
| ** **                          |       |                                                 |       |                                                         |       |                            |       |                                         |       |       |
| **Year 2004**                       |       |                                                 |       |                                                         |       |                            |       |                                         |       |       |
| Allowance for  doubtful accounts(c) |       | $                                                    | 436,000    |                                                         | $          | 108,000                         |       | $                                            | 219,000    |       | $ | 325,000 | (a) |   |
| Inventory  valuation reserve(c)     |       | $                                                    | 171,000    |                                                         | $          | 202,000                         |       | $                                            | 200,000    |       | $ | 173,000 | (b) |   |
| Reserve for  self-insured losses    |       | $                                                    | 1,973,000  |                                                         | $          | 2,312,000                       |       | $                                            | 1,297,000  |       | $ | 2,988,000 | (d) |   |
| ** **                          |       |                                                 |       |                                                         |       |                            |       |                                         |       |       |
| **Year 2003**                       |       |                                                 |       |                                                         |       |                            |       |                                         |       |       |
| Allowance for  doubtful accounts(c) |       | $                                                    | 432,000    |                                                         | $          | 112,000                         |       | $                                            | 108,000    |       | $ | 436,000 | (a) |   |
| Inventory  valuation reserve(c)     |       | $                                                    | 205,000    |                                                         | $          | 11,000                          |       | $                                            | 45,000     |       | $ | 171,000 | (b) |   |
| Reserve for  self-insured losses    |       | $                                                    | 2,310,000  |                                                         | $          | 877,000                         |       | $                                            | 1,214,000  |       | $ | 1,973,000 | (d) |   |

 

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

 

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