**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**

 
| ý |   | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | **For the fiscal year ended  January 1, 2005**                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| o      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | **For the  transition period from                                   to                                   ** |
|   |   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | **Commission  file number 1-3834**                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

**ContinentalMaterials Corporation**

(Exact name of registrant as specified in itscharter)

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

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

 

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

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 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   ý  No   o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of the Form 10-K or any amendment to thisForm 10-K.  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).

Yes o            No   ý

 

The aggregate market value (based on July3, 2004 closing price) of voting stock held by non-affiliates of registrant:Approximately $22,517,000.

 

Number ofcommon shares outstanding at March 29, 2005: 1,647,914.

 

Incorporation by reference: Portions ofregistrant’s definitive proxy statement for the 2004 Annual meeting ofstockholders to be held on May 25, 2005 into Part III of this Form 10-K.  (The definitive proxy statement is expectedto be filed with the Securities and Exchange Commission within 120 days afterthe close of the fiscal year covered by this Form 10-K.)

 

 

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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 doors, wooddoors and related hardware in Pueblo, Colorado on April 1, 2002 for $2,125,000,net of cash received, and the purchase of all of the stock of Rocky MountainReady Mix Concrete, Inc. (RMRM), a ready-mix concrete producer in themetropolitan Denver, Colorado area, on December 31, 2000 for $11,263,000, netof cash received. Accordingly, results for 2002 and on include the activity ofRMRM for the entire year and the activity of MDHI since April 1, 2002. Theactivities of both companies are included in the construction materialssegment.

 

The Company operates primarily in two industry segments, the heatingand air conditioning segment and the construction materials segment. Theheating and air conditioning segment produces and sells gas-fired wall furnacesand console heaters, evaporative coolers and fan coils, which are manufacturedby the Company’s wholly-owned subsidiaries, Phoenix Manufacturing, Inc. (PMI)of Phoenix, Arizona and Williams Furnace Co. (WFC) of Colton, California. Theprincipal products of the construction materials segment are ready mixconcrete, construction aggregates, building supplies and doors which areoffered by the Company’s wholly-owned subsidiaries, Castle Concrete Company andTransit Mix Concrete Co., in Colorado Springs, Colorado and Transit Mix ofPueblo, Inc. (the three companies are collectively referred to as “TMC”) andMDHI, in Pueblo, Colorado.Currently, the Company’s wholly-owned subsidiary, RMRM of Denver, Colorado,only offers ready mix concrete.

 

Inaddition to the above operating segments, an “Other” classification is used toreport a small real estate operation. The expenses of the corporate office,which provides treasury, insurance and tax services as well as strategicbusiness planning and general management services, are not allocated to thesegments. Expenses related to the Management Information Systems group areallocated to all locations, including the corporate office.

 

Financial information relating to industry segments appears in Note 11on pages 29 and 30 of this Form 10-K. References to a “Note” are to the “Notesto Consolidated Financial Statements” included on pages 22 through 31 of thisAnnual Report on Form 10-K.

 

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

 

Theheating and air conditioning segment markets its products throughout the UnitedStates through plumbing, heating and air conditioning wholesale distributors aswell as directly to some major retail home-centers and other retail outlets.Fan coils are also sold to HVAC (Heating, Ventilation and Air Conditioning)installing contractors and equipment manufacturers for commercial applications.The Company contracts independent manufacturers’ representatives for all of itsproducts while also employing and utilizing a staff of sales and sales supportpersonnel. Sales in this segment are predominantly in the United States and areconcentrated in the Western and Southwestern states. Sales of furnaces andconsole heaters usually increase in the months of August through January. Salesof evaporative coolers usually increase in the months of March through July.Sales of the fan coil product line are more evenly distributed throughout theyear although the highest volume typically occurs during the late spring andsummer.  In order to enhance sales ofwall furnaces and evaporative coolers during the off season, extended paymentterms are offered to some customers.

 

The construction materials segment markets its products primarilythrough its own direct sales personnel and, except for MDHI, confines its salesto the Front Range area in Colorado. Sales are primarily made to general andsub-contractors, government entities and individuals. Sales are affected by thegeneral economic conditions and weather conditions in the areas serviced

 

2

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(as it relates to construction). Revenues usually decline in the wintermonths as the pace of construction slows. MDHI sells throughout the UnitedStates although sales are primarily within Colorado and adjacent states.

 

During2004, no customer in either segment accounted for 10% or more of the totalsales of the Company.

 

#### ***CUSTOMERSERVICE AND SUPPORT***

#### *** ***

The heating and air conditioning segment offers parts departments andhelp lines to assist contractors, distributors and end users in servicing theproducts. The Company does not perform installation services, nor aremaintenance or service contracts offered. In addition, training and productinformation sessions for the furnace, cooler and fan coil product lines areoffered at our plants and other sites for distributors, contractors, utilitycompany employees and other customers. This segment does not derive any revenuefrom after-sales service and support other than from parts sales. The personnelin the construction materials segment routinely take a leadership role informulation of the products to meet the specifications of the customers.

 
| ***BACKLOG*** |
|---------------|

 

At January 1, 2005, the heating and air conditioning segment had abacklog of approximately $778,000 ($1,268,000 at January 3, 2004) primarilyrelating to orders that are expected to be filled during the first quarter of2005. The decline is due to the timing of an order from a large evaporativecooler customer which was placed after January 1, 2005.

 

At January 1, 2005, the construction materials segment had a backlog ofapproximately $14,219,000 ($6,642,000 at January 3, 2004) primarily relating toconstruction contracts awarded and expected to be filled during the first halfof 2005.

 

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 Company relies upon, and intends to continue to rely upon,unpatented proprietary technology and information. However, research anddevelopment activities in the heating and air conditioning segment haveresulted in a patent being issued to PMI related to the Power Cleaning System(expiring January 2014) used in evaporative coolers and a patent issued to WFCentitled “Wall Furnace With Side Vented Draft Hood” (expiring November 2011)for a process that increased the heat transference efficiency in our furnacesabove that previously offered by the Company and its competitors. The amountsexpended on research and development are not material and are expensed asincurred. The Company believes its interests in its patents, as well as itsproprietary knowledge, are sufficient for its businesses as currently conducted.

 

***MANUFACTURING***

 

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

 

Due to the seasonality of the businesses, furnaces and evaporativecoolers build inventory during their off seasons in order to have adequatesupplies to sell during the season. Although sales are made throughout theyear, sales volume is generally higher from August through January for furnaceswhile sales volume of evaporative coolers is generally higher from Marchthrough July.

 

3

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Ingeneral, raw materials required by our subsidiaries’ operations in bothsegments can be obtained from various sources in the quantities desired. TheCompany’s construction materials subsidiaries in Colorado Springs and Pueblohave historically purchased most of their cement requirements from a singlesupplier in order to obtain favorable volume rates. On past occasions, theready mix industry in Colorado has experienced cement shortages. However, oursubsidiaries were able to acquire sufficient quantities from their sources. TheCompany expects that there will be a sufficient supply of cement for theforeseeable future. The Company has no long-term supply contracts and does notconsider itself to be dependent on any individual supplier.

 

In connection with permits to mine properties in Colorado, the Companyis obligated to reclaim the mined areas. Although the conditions vary bypermit, in general the reclamation requirements call for the stabilization ofthe mined area. These requirements are similar in nature to those included inthe mining permits of our competitors. In recent years, reclamation costs havehad a more significant effect on the results of operations compared to prioryears as the Company has engaged in enhanced reclamation projects that exceedthe stated requirements. The augmented reclamation efforts are being performed,in part, for purposes of community goodwill. The Company performs the majorityof the reclamation work using existing production employees and equipmentprimarily at times when production is curtailed due to weather or demand.Consequently, the reclamation work has little impact on capital expenditures.

 

***COMPETITIVE CONDITIONS***

 

Heating and Air Conditioning– The Company isone of three principal companies producing wall furnaces (excluding units soldto the recreational vehicle industry) and gas fired console heaters. The wallfurnace and console heater markets are only a small component of the heatingindustry. The Company serves these market areas from a plant in Colton,California.  The sales force consists ofin-house sales personnel and independent manufacturers’ representatives. Theentire heating industry is dominated by manufacturers (most of which aresubstantially larger than the Company) selling diversified lines of heating andair conditioning 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., amanufacturer of a diversified line of commercial and industrial products, isthe largest manufacturer and competitor in this market. There are also a numberof other companies that produce fan coils. All of the producers competeprimarily on the basis of price, ability to meet customers’ specificrequirements and timeliness of delivery.

 

TheCompany manufactures evaporative air coolers at a plant in Phoenix, Arizona.The cooler market 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 service.

 

Construction Materials– The Company isone of five companies producing ready mix concrete in the Colorado Springsarea, one of three companies producing ready mix concrete in the Pueblo areaand one of eleven companies producing ready mix concrete in the Denver area,other than construction companies that maintain small operations to supplytheir own needs. Although we are the largest producer in the Colorado Springsand Pueblo markets served, the other competitors in these areas compete on thebasis of price, service and product features. In Denver, three of the producersare significantly larger than RMRM. This market experiences aggressivecompetition based on price and service.

 

4

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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 metal doors and door frames, rebar reinforcement and otherbuilding materials in the Colorado Springs and Pueblo metropolitan areas aresubject to intense competition from two larger companies from Denver, two largecompanies in Colorado Springs and a number of small local competitors. However,the Company believes it has a slight competitive advantage in that many of ourcustomers also purchase concrete and aggregates from us whereas our competitorsfor these particular product lines do not offer concrete or aggregates. Inaddition, the Company believes its Pueblo location has a slight competitiveadvantage with respect to the two Denver companies based upon delivery costs.

 

#### ***EMPLOYEES***

#### *** ***

TheCompany employed 650 people as of January 1, 2005. Employment varies throughoutthe year due to the seasonal nature of the businesses. A breakdown of the priorthree years employment at year-end by segment was:

 
| ** **                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Heating and Air Conditioning |       | 277      |       | 327      |       | 356      |       |
| Construction Materials       |       | 360      |       | 377      |       | 399      |       |
| Corporate Office             |       | 13       |       | 13       |       | 14       |       |
|                         |       |     |       |     |       |     |       |
| Total                        |       | 650      |       | 717      |       | 769      |       |

 

Thereduction in the heating and air conditioning segment represents thecombination of a lower direct labor force as a result of reduced sales and areduction in office staff. The reduction in the construction materials segmentsimilarly reflects a small reduction in direct labor and a small reduction inoffice personnel as some functions have been centralized in the ColoradoSprings office. The factory employees at the Colton, California plant arerepresented by the Carpenters Local 721 Union under a contract that expires inApril 2005. Negotiations have begun and the Company does not anticipate a workstoppage. The Company considers relations with its employees and with theirunion to be good. There are no unions at any of the Company’s other operations.

 
| Item 2. | **PROPERTIES** |
|---------|----------------|

 

The heating and air conditioning segment operates out of one owned(Colton, California) and one leased (Phoenix, Arizona) facility. Bothmanufacturing facilities utilized by this segment are, in the opinion ofmanagement, in good condition and sufficient for the Company’s current needs.Production capacity exists at the locations such that the Company could exceedthe highest volumes achieved in prior years or expected in the foreseeablefuture and maintain timely delivery.

 

Theconstruction materials segment serves the Colorado ready-mix concrete marketfrom eleven owned batch plants. In addition, the Company currently operatesaggregate processing facilities on three owned and three leased miningproperties. In general, the leased mining properties are on long-term leaseswith payment based upon the number of tons mined. The lease of an aggregatesproperty in Pueblo, Colorado also requires minimum royalty payments when aspecified number of tons are not mined during a calendar year. See Note 7 onpage 28 for the schedule of future minimum payments. The door and supplydivision operates out of three owned and one leased facility. All of theconstruction materials segment’s facilities are located along the Front Rangein Colorado and, in the opinion of management, are in good condition andsufficient for the Company’s current needs. The Company also leases or ownsother aggregate deposits along the Front Range that are not currently inproduction. In

 

5

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theopinion of management, the owned and leased properties contain permitted andminable reserves sufficient to service customers’ and our own sand, rock andgravel requirements for the foreseeable future.

 

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

 

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

 
| Item 3. | **LEGAL PROCEEDINGS** |
|---------|-----------------------|

 

TheCompany is involved in litigation matters related to its continuing business,principally product liability matters related to the gas-fired heatingproducts. In the Company’s opinion, none of these proceedings, when concluded,will have a material adverse effect on the Company’s results of operations orfinancial position as the Company has established adequate reserves for knownoccurrences. See Management’s Discussion and Analysis of Financial Conditionand Results of Operations on pages 9 through 15 and Note 4 on page 27 of thisAnnual Report on Form 10-K.

 

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

 

Therewere no matters submitted to a vote of security holders during the fourthquarter of fiscal 2004.

 

PART II

 
| Item 5. | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS  AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|---------|------------------------------------------------------------------------------------------------------------------------|

 

Continental Materials Corporation shares are traded on the AmericanStock Exchange under the symbol CUO. Market sales prices for the fiscalquarters of the past two years are:

 
| ** ** | ** ** | ** **      | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|-----------------|------------|----------|------------|---------|------------|
| 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   |       |
|       |       |            |       |     |       |    |       |
| 2003       |       | Fourth  Quarter |       | $        | 29.10      |    | $          | 23.25 |   |
|       |       | Third Quarter   |       | 23.40    |       | 23.00   |       |
|       |       | Second Quarter  |       | 26.45    |       | 20.15   |       |
|       |       | First Quarter   |       | 27.30    |       | 26.45   |       |

 

AtMarch 24, 2005, the Company had approximately 317 shareholders of record(including non-objecting beneficial owners).

 

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

 

6

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The following table presents information with respect to purchases madeby the Company of its common stock to become treasury stock for the periodOctober 3, 2004 through January 1, 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 3 –  October 30, 2004         |       | — |   | $ | — |   | — |   | $ | 1,665,658 |   |
| October 31-  November 27, 2004             |       | — |   | — |   | — |   | 1,665,658 |   |
| November 28 –  January 1, 2005        |       | 6,013 |   | 26.56 |   | 6,013 |   | 1,505,938 |   |
| Total                                      |       | 6,013 |   | $ | 26.56 |   | 6,013 |   | $ | 1,505,938 |   |

 

On January 19, 1999, the Company initiated purchases under the currentopen-ended program to repurchase its common stock. Purchases are made on theopen market or in block trades at the discretion of management. The dollaramount authorized for the program has been periodically increased by the Boardof Directors and approved by the Company’s two banks as required by the Company’sRevolving Credit and Term Loan Agreement. Effective May 29, 2004, the Boardincreased the permitted amount to a total not to exceed $2,750,000 forpurchases on or after May 29, 2004.

 

Under the Company’s Stock Option Plan (the Plan), officers and keyemployees may be granted options to purchase the Company’s common stock atoption prices established by the Compensation Committee of the Board ofDirectors provided the option price is not less than the fair market value atthe date of the grant. The following is a summary of equity compensation planinformation as of January 1, 2005:

 

**EQUITY COMPENSATION PLAN INFORMATION**

 
| ** **                                                  | ** ** | **Number of securities to be** | ** ** | ** **                        | ** ** | **Number of securities remaining available for** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **issued upon exercise of**    | ** ** | **Weighted-average exercise**     | ** ** | **future issuance under equity compensation**    | ** ** |
| ** **                                                  | ** ** | **outstanding options,**       | ** ** | **price of outstanding options,** | ** ** | **plans (excluding securities reflected in**     | ** ** |
| **Plan Category**                                           | ** ** | **warrants and rights**        | ** ** | **warrants and rights**           | ** ** | **column (a))**                                  | ** ** |
| ** **                                                  | ** ** | **(a)**                        | ** ** | **(b)**                           | ** ** | **(c)**                                          | ** ** |
| Equity compensation plans approved by security  holders     |       | 73,400                         |       | $                                 | 6.56       |                                             | 227,600    |   |
|                                                        |       |                           |       |                              |       |                                             |       |
| Equity compensation plans not approved by  security holders |       | 0                              |       | 0                                 |       | 0                                                |       |
| Total                                                       |       | 73,400                         |       | $                                 | 6.56       |                                             | 227,600    |   |

 

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| Item 6. | **Selected Financial Data (See note below chart)** |
|---------|----------------------------------------------------|

(Amounts in thousands, except per share amounts)

 
| ** **                                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| SUMMARY OF OPERATIONS                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Sales                                                                                           |       | $        | 126,940    |     | $          | 120,165  |       | $        | 128,301    |     | $          | 130,211 |   | $ | 116,002 |   |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Net income from continuing operations                                                           |       | $        | 2,373      |     | $          | 2,349    |       | $        | 3,275      |     | $          | 6,438 |   | $ | 5,335 |   |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| PER SHARE DATA                                                                                  |       |     |       |     |       |     |       |     |       |     |       |
| Basic earnings per share                                                                        |       | $        | 1.41       |     | $          | 1.34     |       | $        | 1.83       |     | $          | 3.55 |   | $ | 2.86 |   |
| Weighted average shares outstanding                                                             |       | 1,681    |       | 1,754    |       | 1,794    |       | 1,812    |       | 1,869    |       |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Diluted earnings per share                                                                      |       | $        | 1.38       |     | $          | 1.31     |       | $        | 1.79       |     | $          | 3.49 |   | $ | 2.81 |   |
| Weighted average shares outstanding                                                             |       | 1,725    |       | 1,791    |       | 1,830    |       | 1,845    |       | 1,901    |       |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Cash dividends declared per common share                                                        |       | $        | 0          |     | $          | 0        |       | $        | 0          |     | $          | 0 |   | $ | 0 |   |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| FINANCIAL CONDITION                                                                             |       |     |       |     |       |     |       |     |       |     |       |
| Current ratio                                                                                   |       | 2.1:1    |       | 2.5:1    |       | 2.3:1    |       | 2.2:1    |       | 2.4:1    |       |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Total assets                                                                                    |       | $        | 85,883     |     | $          | 81,826   |       | $        | 82,634     |     | $          | 86,063 |   | $ | 68,250 |   |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Long-term debt, including current portion                                                       |       | 9,000    |       | 10,970   |       | 13,520   |       | 17,140   |       | 7,305    |       |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Shareholders’ equity                                                                       |       | 51,448   |       | 50,857   |       | 49,989   |       | 47,722   |       | 41,813   |       |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Long-term debt to net worth ratio                                                               |       | .17:1    |       | .22:1    |       | .27:1    |       | .36:1    |       | .18:1    |       |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Book value per diluted share                                                                    |       | $        | 31.09      |     | $          | 29.52    |       | $        | 28.01      |     | $          | 26.40 |   | $ | 22.78 |   |
| (Equity adjusted for exercise of options  using end of year stock price and shares outstanding) |       |     |       |     |       |     |       |     |       |     |       |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Tangible book value per diluted share                                                           |       | $        | 26.15      |     | $          | 24.65    |       | $        | 23.19      |     | $          | 22.13 |   | $ | 22.62 |   |
| (Same as above calculation with Equity less  unamortized Goodwill and Non-compete covenants)    |       |     |       |     |       |     |       |     |       |     |       |
|                                                                                            |       |     |       |     |       |     |       |     |       |     |       |
| CASH FLOWS                                                                                      |       |     |       |     |       |     |       |     |       |     |       |
| Net cash provided by (used in):                                                                 |       |     |       |     |       |     |       |     |       |     |       |
| Operating activities                                                                            |       | $        | 5,519      |     | $          | 7,778    |       | $        | 9,753      |     | $          | 13,219 |   | $ | 10,021 |   |
| Investing activities                                                                            |       | (3,350   | )          | (2,535   | )          | (9,547   | )          | (19,215  | )          | (2,662   | )          |
| Financing activities                                                                            |       | (3,950   | )          | (4,170   | )          | (4,249   | )          | 7,359    |       | (1,490   | )          |
| Net (decrease) increase in cash and cash  equivalents                                           |       | $        | (1,781     | )        | $          | 1,073    |       | $        | (4,043     | )        | $          | 1,363 |   | $ | 5,869 |   |

 

Note:Above figures include the activity of RMRM for the entire fiscal 2001 year(purchased on December 31, 2000) and on and the activity of MDHI since April 1,2002, the date it was acquired.

 

8

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| Item 7. | **Management’s Discussion and Analysis of Financial Condition and  Results of Operations** |
|---------|-------------------------------------------------------------------------------------------------|

 

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

 

**COMPANYOVERVIEW**

 

The Company operates primarily in two industrysegments, the heating and air conditioning segment and the constructionmaterials segment. The primary products manufactured by the heating and airconditioning segment are gas fired wall furnaces, console heaters, evaporativecoolers and fan coils. Gas-fired wall furnaces, console heaters and fan coilproducts are manufactured at Williams Furnace Co., headquartered in Colton,California. Evaporative coolers are manufactured at Phoenix Manufacturing,Inc., headquartered in Phoenix, Arizona. The primary products of theconstruction materials segment are ready mix concrete, construction aggregates,building supplies and doors which are offered by Transit Mix Concrete Co. andCastle Concrete Company in Colorado Springs, Colorado and Transit Mix ofPueblo, Inc. and McKinney Door and Hardware, Inc. (MDHI) in Pueblo, Colorado.Currently, Rocky Mountain Ready Mix Concrete, Inc. (RMRM) of Denver, Colorado,only offers ready mix concrete.

 

Heating and Air Conditioning Segment

Furnace and console heater sales volume in 2004was steady compared to the prior year’s level; however, margins declined as aresult of the increased steel prices.

 

Fan coil sales increased as a result of a modestincrease in industry-wide demand. Margins were similarly affected by increasedraw material prices and price competition.

 

Evaporative cooler sales volume declinedprimarily due to the loss of a portion of the evaporative cooler business at anational home center account. As with the furnace product line, marginsdeclined as steel prices increased.

 

Selling, general and administrative expenseswere lower due to a reduction in office personnel and reduced legal costs.Sales commissions were lower as a result of the decline in evaporative coolersales.

 

This segment’s pre-tax earnings exceeded itscash flow by approximately $860,000. A decrease in payables and accruedexpenses accounted for most of the reduced cash flow. Capital expendituresmodestly exceeded depreciation. Capital expenditures included the replacementof certain equipment at PMI to improve safety and the purchase of a finishingsystem at WFC for certain wall furnace components.

 

Construction Materials Segment

Despite their proximity, Denver, ColoradoSprings and Pueblo have distinct competitive and economic conditions. Concretesales volumes improved in all three markets compared to last year reflecting amodest improvement in construction activity along the Front Range in Colorado.The price of concrete, however, illustrated the diversity of the three markets.While increases in cement and fuel prices were able to be substantiallyrecovered through increased selling prices in the Pueblo and Colorado Springsmarkets, average selling prices in Denver actually declined reflecting theintensely competitive market.

 

The sales volume of construction aggregatesdecreased modestly from the 2003 level; however, gross profits rose as a resultof improved operations at the two recently added aggregates plants, one at theColorado Springs sand operation and the other at our Pueblo gravel operation.

 

9

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Sales of doors and supplies increased over 25%from the prior year. While steel prices also affected these operations, grossprofits improved because of well-timed inventory purchases that enabled thedivision to satisfy customers’ demands for reinforced steel bar (rebar) whenmuch of the competition could not acquire adequate supplies.

 

The construction materials segment typicallyrequires large capital investments, particularly when volume is strong. Capitalspending increased slightly during 2004 to $3,017,000 mirroring the modestincrease in demand for concrete. A new batch plant in Pueblo West was added aswell as a truck tracking system. Other expenditures were primarily routinereplacements and upgrades.

 

Cash flow from this segment was less thanpre-tax earnings by approximately $745,000. An increase in receivables,reflecting the improved sales volume, temporarily reduced cash flow.

 

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

 

Cashand cash equivalents were $2,828,000 at the end of 2004 compared to $4,609,000at the prior year-end. Operations in 2004 provided $5,519,000 of cash comparedto $7,778,000 in 2003 and $9,753,000 generated in 2002. The decrease in netcash generated by operating activities in 2004 compared to 2003 was largely dueto a lower level of earnings before non-cash charges and gains on sale ofproperty and equipment. Net working capital increased by $1,467,000 compared toan increase of $595,000 in 2003. The decrease in net cash generated byoperating activities in 2003 compared to 2002 was primarily due to thedecreased earnings. Net working capital increased by $595,000 in 2003 comparedto an increase of only $122,000 in 2002.

 

Netcash used in investing activities was $3,350,000 in 2004, $2,535,000 in 2003and $9,547,000 in 2002. Capital expenditures for 2004, 2003 and 2002 were$4,267,000, $2,880,000 and $7,561,000, respectively. The capital expendituresin 2004 included a new batch plant in Pueblo West and a truck tracking system.The capital expenditures in 2003 included the construction of a maintenancefacility in Pueblo and completion of the Brighton batch plant begun in 2002.The expenditures in 2002 included the completion of three large projects thatwere begun in 2001: a new state-of-the-art sand processing plant was completedin Colorado Springs during the third quarter, a new aggregate processing plantin Pueblo was completed in June and a new central mix batch plant was added inColorado Springs. In addition, a new batch plant was purchased to replace theexisting facility in Brighton, Colorado. As noted above, the new plant becameoperational in 2003. Proceeds from the sale of property and equipment were$917,000, $345,000 and $139,000 during 2004, 2003 and 2002, respectively. Salesof two parcels of real estate generated $695,000 of the 2004 amount. On April1, 2002, $2,125,000, net of cash received, was expended to purchase McKinneyDoor and Hardware, Inc. (MDHI).

 

Budgetedcapital expenditures for 2005 are approximately $4,265,000 (including$3,240,000 for the construction materials segment and $925,000 for the heatingand air conditioning segment), which is approximately $1,470,000 less thanplanned depreciation, depletion and amortization. The expenditures areprimarily for routine replacement and upgrades. The Company expects that the2005 expenditures will be funded from existing cash balances and operating cashflow.

 

During2004, cash of $3,950,000 was used in financing activities. Scheduled long-termpayments of $1,970,000 were made during the year including the final $220,000due on capital lease obligations. Under the Company’s ongoing share repurchaseprogram, 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. Scheduledlong-term debt payments of $2,550,000 were made during the year including$300,000 against capital lease obligations. Cash of $1,620,000 was used toacquire 63,135 shares of treasury stock. During 2002, cash of $4,249,000 wasused in financing activities repaying scheduled long-term debt of $3,620,000which included $620,000

 

10

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againstcapital lease obligations. An additional $604,000 was used to acquire 22,599shares of treasury stock.

 

**Capital Resources, Obligationsand Commitments, and Off-Balance Sheet Arrangements**

 

Revolving Credit and Term Loan Agreement

The Company signed a Revolving Credit and TermLoan Agreement (Credit Agreement) with two banks in September 2003. The CreditAgreement provides for a revolving credit facility of $10,000,000 and a termloan facility in the original amount of $11,500,000. Both facilities areunsecured and bear interest at prime or a performance-based LIBOR rate. Theterm loan is payable in escalating quarterly installments with final payment ofall then unpaid principal on June 30, 2008. At January 1, 2005, $9,000,000 wasoutstanding on the term loan while there was no balance outstanding on therevolving credit facility. The revolving credit facility is available forseasonal needs including the funding of seasonal sales programs related to thefurnace and evaporative cooler product lines. The line is also used forstand-by letters of credit to insurance carriers in support of self-insuredamounts under the Company’s risk management program. Currently, suchperformance-based rate is LIBOR plus 1.50% for the term loan and LIBOR plus1.25% for borrowings under the revolving credit facility. Effective December17, 2001, the Company entered into an interest rate swap agreement (SwapAgreement) in order to minimize the adverse impact of the floating interestrate characteristic of most of the Company’s term loan borrowings. The Company’scurrent effective interest rate on the outstanding term loan is 5.88% aftergiving effect to the Swap Agreement. Such rate is subject to adjustmentdepending upon the Company’s performance. The Company concluded that it wasappropriate to take advantage of the interest rate environment and fix theinterest rate at a relatively low level for a five-year period.

 

Obligationsand Commitments

Thefollowing tables represent our obligations and commitments to make futurepayments under contracts, such as debt and lease agreements, and undercontingent commitments, such as debt guarantees, as of January 1, 2005.

 

PaymentsDue by Period as of January 1, 2005 (amounts in thousands)

 
| ** **                                      | ** ** | **Payments due by period** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|
| **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) |       | $                          | 9,868      |   | $ | 2,427 |   | $ | 7,441 |   | $ | — |   | $ | — |   |
| Operating leases (See Note 7)                   |       | 8,664                      |       | 1,473 |   | 3,973 |   | 1,708 |   | 1,510 |   |
| Minimum royalty agreement (See Note 7)          |       | 20,859                     |       | 386 |   | 1,159 |   | 773 |   | 18,541 |   |
| Total contractual obligations                   |       | $                          | 39,391     |   | $ | 4,286 |   | $ | 12,573 |   | $ | 2,481 |   | $ | 20,051 |   |

 

Intereston long-term debt is computed using the interest rate in effect at January 1,2005 and gives effect to the Swap Agreement.The interest amounts do not include estimatedinterest payments due under our revolving credit facility because futureborrowings under this facility are unknown at this time.

 

Amountsof Commitment Expiration per Period as of January 1, 2005 (amounts inthousands)

 
| **Other Commercial Commitments** | ** ** | **Total** | ** **  | **Less than  1 year** | ** ** | **1 – 3 years** | ** ** | **3 – 5 years** | ** **   | **More than  5 years** | ** ** |
|----------------------------------|------------|-----------|-------------|-----------------------|------------|----------------------|------------|----------------------|--------------|------------------------|------------|
| Standby letters of credit        |       | $         |  2,010 |                  | $          |  2,010          |       | $                    |  — |                   | $          |  — |   | $ |  — |   |
|                                  |            |           |             |                       |            |                      |            |                      |              |                        |            |  |  |  |  |  |

 

Otherthan the anticipated funds to be provided to fund the tender offer discussed inNote 12, we believe that existing cash balances and anticipated cash flow,supplemented by seasonal borrowings against the revolving line of credit, willbe sufficient to cover expected cash needs, including servicing debt and plannedcapital expenditures for at least the next twelve months.

 

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 or capitalresources.

 

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Operations:  Fiscal 2004 vs. 2003

 

Consolidated sales, at $126,940,000 in 2004,were $6,775,000, or 5.6%, higher than in 2003. The increase was realized by theconstruction materials segment where sales reached $80,398,000, 12.5% above the2003 amount. Concrete volumes grew in all locations as construction activityalong the Front Range in Colorado improved modestly. Prices improved in theColorado Springs and Pueblo markets in response to increased cement and fuelcosts. The Denver market remained highly competitive resulting in lower readymix concrete prices in spite of the higher cement and fuel costs. Sales of constructionaggregates declined slightly. Sales in the supply and door divisions werestrong and exceeded the 2003 level by over 25%. Sales in the heating and airconditioning segment decreased $2,146,000 (4.4%). The decline was primarily dueto lower evaporative cooler sales as a result of losing the window unitbusiness at a large national home center account. Furnace sales wereapproximately the same as the prior year. Fan coil sales improved in a stillweak market.

 

The Company experienced a high level of pricecompetition in all of its product lines during 2004, especially in the Denverready mix concrete market. During 2004, steel and fuel prices dramaticallyoutpaced the general rate of inflation. The Company was able to recover aportion of the cost increases through higher selling prices. The rate ofincrease in health care costs subsided in 2004 compared to the prior year.

 

Cost of sales (exclusive of depreciation,depletion and amortization), as a percent of sales, increased from 78.0% to81.4%. The decline in the heating and air conditioning segment was primarilydue to increased steel costs during the year, an increase in workers’compensation claims and the write-off of the remaining inventories associatedwith a product manufactured at our Phoenix plant. The decline in theconstruction materials segment was primarily in the Denver market due to lowerprices for ready mix concrete exacerbated by higher cement and fuel costs andan increase in workers’ compensation claims.

 

Selling and administrative expenses decreased in2004 despite the increase in sales. The decrease occurred in the heating andair conditioning segment as a result of a reduction in office staff, andreduced legal expenses. Commissions declined reflecting the decrease in evaporativecooler sales. The decrease in the heating and air conditioning segment waspartially offset in the construction materials segment where selling andadministrative expenses increased in response to the improved sales.

 

Depreciation, depletion and amortizationdeclined reflecting the effect of reduced capital spending in recent years.

 

The gain on disposition of property andequipment increased due to the sales of two parcels of real estate in Coloradowhich generated gains of $489,000 in 2004.

 

The decline in operating income from $3,810,000to $3,504,000 is primarily due to the increased raw material costs and lowerevaporative cooler sales in the air conditioning segment partially offset bythe increased sales, lower depreciation expense and the gain on sale ofproperty in the construction materials segment.

 

Other income declined as a result of $176,000 ofgain realized during 2003 on the settlement of property tax bills related tothe Oracle Ridge Mining Partners property.

 

The Company’s 2004 effective income tax rate(24.0%) reflects federal and state statutory rates adjusted for non-deductibleand other tax items. The effective rate in 2004 was reduced by 5.5% due toearned Colorado and California Enterprise Zone credits that resulted in eithera refund of prior years’ taxes or that will benefit future tax years. Adeduction for percentage depletion, the donation of appreciated property andthe release of tax contingencies also reduced the tax rate by 3.1%, 1.3% and4.2%, respectively. See Note 9.

 

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Operations: Fiscal 2003 vs. 2002

 

Consolidated sales in 2003 declined $8,136,000,or 6.3%, to $120,165,000. Sales declined $4,399,000 (5.8%) in the constructionmaterials segment. The reduced level of construction activity along the FrontRange in Colorado led to lower volumes and increased price competitionresulting in lower ready mix concrete prices, most notably in the Denvermetropolitan area. The reduced volume combined with the lower prices account forthe diminished sales level. Sales in the heating and air conditioning segmentdecreased $3,919,000 (7.5%). Fan coil sales continue to reflect the nationwideslump in commercial construction, particularly hotel construction. The sharpdecline in fan coil sales was only partially offset by improved evaporativecooler sales. The improved evaporative cooler sales were primarily driven byhot, dry weather that persisted later in the year than normal.

 

The Company experienced a high level of pricecompetition in all of its product lines during 2003, especially in the Denverready mix concrete market. During 2003, inflation was not a significant factorat any of the operations except that employee health care costs and generalbusiness insurance premiums again dramatically outpaced the rate of inflation.

 

Cost of sales (exclusive of depreciation,depletion and amortization), as a percent of sales, decreased from 78.3% to78.0%. The improvement realized in the heating and air conditioning segment wasprimarily due to a $662,000 write-down in 2002 of inventories and other costsassociated with a product manufactured at our Phoenix plant. A very slightimprovement was experienced in the construction materials segment due to theinclusion of MDHI for the full year in 2003. The further decline inconstruction activity along the Front Range in Colorado had the effect ofincreasing price competition resulting in lower prices for ready mix concrete.The effect of lower concrete prices on 2003 profit margins was largely offsetby lower costs and operating improvement at the various aggregates locations.

 

Selling and administrative expenses increased in2003 despite the decline in sales. The increase was due to higher legal costsrelated to product liability claims and a dispute with a supplier concerningthe continued availability of a key purchased component for our evaporativecooler product line.

 

Gain on disposition of property and equipmentincreased in 2003 due to $155,000 realized from the sale of a not exploitableaggregate property in Colorado.

 

The decline in operating income from $5,766,000to $3,810,000 is primarily due to the decreased sales, the heightenedcompetition in Colorado and the aforementioned increased legal costs.

 

Other income increased in 2003 as a result of$176,000 of gain realized on the settlement of property tax bills related tothe Oracle Ridge Mining Partners property.

 

The Company’s 2003 effective income tax rate(31.9%) reflects federal and state statutory rates adjusted for non-deductibleand other tax items. The effective rate in 2003 was reduced by 5.3% due toearned California Enterprise Zone credits that will benefit future tax years.See Note 9.

 

CRITICALACCOUNTING POLICIES

 

FinancialReporting Release No. 60, issued by the Securities and Exchange Commission,requires all registrants, including the Company, to include a discussion of “critical”accounting policies or methods used in the preparation of financial statements.We believe the following are our critical accounting policies and methods.

 

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Inventories

 

Inventoriesare priced at the lower of cost (76% at January 1, 2005 at last-in, first-out,with the remainder at first-in, first-out) or market. Inventories are reviewedannually for excess or obsolete stock with a provision recorded, whereappropriate.

 

Intangibles

 

Inaccordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwilland Other Intangible Assets,” goodwill is not amortized as a charge toearnings. We annually assess goodwill for potential impairment. This assessmentrequires us to make significant assumptions and estimates about the extent andtiming of future cash flows, discount rates, and growth rates. No impairmentwas indicated in the current year. If the assessment had indicated that thecarrying value of goodwill was impaired, an impairment charge would have beenrecorded for the amount by which the carrying value of the goodwill exceededits fair value. Management believes that the assumptions and estimates used todetermine the estimated fair values are reasonable; however, changes indifferent assumptions and estimates 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 and automobile claims isestimated based upon information provided by the Company’s independent claimsadministrator and the Company’s own experience. With regard to 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.Estimates of both the quantities of recoverable material and the cost ofreclamation are periodically updated by an independent professional. In asimilar manner, depletion of rock and sand deposits and amortization ofdeferred development costs are computed by the units-of-production method basedupon estimated recoverable quantities of rock and sand.

 

Sales

 

TheCompany recognizes revenue as products are shipped to customers. The amount isrecorded net of applicable provisions for discounts, volume incentives, returnsand allowances. At the time of revenue recognition, the Company also providesan estimate of potential bad debt and warranty expense as well as an amountanticipated to be granted to customers under cooperative advertising programsbased upon current program terms and historical experience.

 

RecentlyIssued Accounting Standards and Tax Law Changes

 

The Financial Accounting Standards Board(FASB) has recently issued the following statements and interpretations:

 

In November 2004, Statement of FinancialAccounting Standards (SFAS) No. 151, “Inventory Costs - An Amendment of ARB No.43, Chapter 4,” was issued which amends the guidance in

 

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Accounting Research Bulleting (“ARB”) No.43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material. Among other provisions, the new rule requires that items such as idlefacility expense, excessive spoilage, double freight and rehandling costs berecognized as current -period charges regardless of whether they meet thecriteria of “so abnormal” as stated in ARB No. 143.  Additionally, SFAS151 requires the allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 1, 2005. The Company is currently evaluating the effect that the adoption of SFAS151 will have on its consolidated results of operations and financial conditionbut does not expect SFAS 151 to have a material impact.

 

In December 2004, SFAS No. 123R, “Share-basedPayment” was issued and replaces SFAS No. 123, “Accounting for Stock-BasedCompensation” and supersedes Accounting Principles Board Opinion (“APB”) No.25, “Accounting for Stock Issued to Employees.”  SFAS 123R requires themeasurement of all employee share-based payments, including grants of employeestock options, using a fair-value based model.  Deferred compensationcalculated under the fair value method would then be amortized into income overthe respective vesting period of the stock option. The accountingprovisions of SFAS 123R are effective for reporting periods beginning afterJune 15, 2005. The adoption of SFAS 123R will not have an impact on the Company’sconsolidated results of operations and financial condition as all stock optionsissued under the Company’s stock option plan are fully vested.

 

On October 22, 2004, the President signedthe American Jobs Creation Act of 2004 (the “Act”). The Act provides adeduction for income from qualified domestic production activities, which willbe phased in from 2005 through 2010. In return, the Act also provides for atwo-year phase-out of the existing extra-territorial income exclusion (ETI) forforeign sales that was viewed to be inconsistent with international tradeprotocols by the European Union. The Company has not completed its analysis ofthe possible effect the phase out of the ETI and phase in of this new deductionmay have on the Company.

 

Under the guidance in FASB Staff PositionNo. FAS 109-1, “Application of FASB Statement No. 109, Accounting for IncomeTaxes, to the Tax Deduction on Qualified Production Activities Provided by theAmerican Jobs Creation Act of 2004,” the deduction will be 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, if any, will be reportedin the period in which the deduction is claimed on the Company’s tax return.

 

FORWARD-LOOKINGSTATEMENTS

 

ThisAnnual Report contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended. Such forward-looking statementsare based on the beliefs of the Company’s management as well as on assumptionsmade by and information available to the Company at the time such statements weremade. When used in this Report, words such as “anticipates,” “believes,” “contemplates,”“estimates,”  “expects,” “plans,” “projects”and similar expressions are intended to identify forward-looking statements.Actual results could differ materially from those projected in theforward-looking statements as a result of factors including but not limited to:weather, interest rates, availability of raw materials and their related costs,economic conditions and competitive forces. Changes in accounting pronouncementscould also alter projected results. Forward-looking statements speak only as ofthe date they were made and we undertake no obligation to publicly update them.

 

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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 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, theCompany entered into an interest rate swap agreement (Swap Agreement) in orderto minimize 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 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 $162,000, $257,000 and$239,000 for 2004, 2003 and 2002, respectively. The fair value of the SwapAgreement is recorded on the balance sheet with subsequent changes recorded asa separate component of accumulated other comprehensive income in shareholders’equity. At January 1, 2005, the amount subject to this Swap Agreement is$7,500,000 which amount decreases by $1,500,000 each September and March,terminating on December 18, 2006. The pre-tax fair value of the Swap Agreementis $39,000 at March 31, 2005. Although the Company will benefit from the SwapAgreement as interest rates increase, the effect is not expected to be materialduring the either of the remaining two years. See paragraph below and abovediscussion under Financial Condition, Liquidity and Capital Resources. See Note3.

 

InterestRates

 

TheCompany utilizes revolving credit and term-loan facilities that bear interestat either prime or an adjusted LIBOR rate. The amount outstanding under thesefacilities aggregated $9,000,000 at January 1, 2005. The Company is not a partyto any capital lease agreements as of January 1, 2005. See Note 3.

 

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.

 

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| Item 8. | **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA** |
|---------|-------------------------------------------------|

 
| Financial Statements and Schedule of Continental Materials  Corporation and report thereon:          |   |
|------------------------------------------------------------------------------------------------------|--------|
|                                                                                                 |   |
| Consolidated statements of operations and  comprehensive income for fiscal years 2004, 2003 and 2002 |   |
|                                                                                                 |   |
| Consolidated statements of cash flows for fiscal  years ended 2004, 2003 and 2002                    |   |
|                                                                                                 |   |
| Consolidated balance sheets as of January 1, 2005 and January 3, 2004                                |   |
|                                                                                                 |   |
| Consolidated statements of shareholders’  equity for fiscal years ended 2004, 2003 and 2002     |   |
|                                                                                                 |   |
| Notes to consolidated financial statements                                                           |   |
|                                                                                                 |   |
| Report of Independent Registered Public  Accounting Firm                                             |   |

 

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ContinentalMaterials Corporation

ConsolidatedStatements of Operations and Comprehensive Income

ForFiscal Years 2004, 2003 and 2002

 (Amounts in thousands, exceptper share data)

 
| ** **                                                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                 |       |     |       |     |       |     |       |
| Sales                                                                                                |       | $        | 126,940    |     | $          | 120,165  |       | $ | 128,301 |   |
| Costs and expenses                                                                                   |       |     |       |     |       |     |       |
| Cost of sales (exclusive of depreciation, depletion  and amortization)                               |       | 103,320  |       | 93,713   |       | 100,477  |       |
| Depreciation, depletion and amortization                                                             |       | 5,027    |       | 6,062    |       | 6,080    |       |
| Selling and administrative                                                                           |       | 15,699   |       | 16,783   |       | 16,033   |       |
| Gain on disposition of property and  equipment                                                       |       | 611      |       | 233      |       | 79       |       |
| Operating income                                                                                     |       | 3,505    |       | 3,840    |       | 5,790    |       |
| Interest expense                                                                                     |       | (516     | )          | (670     | )          | (922     | )          |
| Other income (expense), net                                                                          |       | 134      |       | 279      |       | 157      |       |
| Income before income taxes                                                                           |       | 3,123    |       | 3,449    |       | 5,025    |       |
| Income tax provision                                                                                 |       | 750      |       | 1,100    |       | 1,750    |       |
| Net income                                                                                           |       | $        | 2,373      |     | $          | 2,349    |       | $ | 3,275 |   |
|                                                                                                 |       |     |       |     |       |     |       |
| Basic earnings per share                                                                             |       | $        | 1.41       |     | $          | 1.34     |       | $ | 1.83 |   |
| Weighted average shares outstanding                                                                  |       | 1,681    |       | 1,754    |       | 1,794    |       |
| Diluted earnings per share                                                                           |       | $        | 1.38       |     | $          | 1.31     |       | $ | 1.79 |   |
| Weighted average shares outstanding                                                                  |       | 1,725    |       | 1,791    |       | 1,830    |       |
|                                                                                                 |       |     |       |     |       |     |       |
| Comprehensive income:                                                                                |       |     |       |     |       |     |       |
| Net income                                                                                           |       | $        | 2,373      |     | $          | 2,349    |       | $ | 3,275 |   |
| Comprehensive income (loss) from interest rate  swap, net of tax of $83, $90, and $214, respectively |       | 198      |       | 139      |       | (404     | )          |
| Total comprehensive income                                                                           |       | $        | 2,571      |     | $          | 2,488    |       | $ | 2,871 |   |

 

The accompanying notes are an integral partof the financial statements.

 

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Continental Materials Corporation Consolidated Statements of Cash Flows

ForFiscal Years 2004, 2003 and 2002

(Amounts in thousands)

 
| ** **                                                                        | ** ** | **2004** | ** **  | **2003** | ** ** | **2002**    | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|-------------|----------|------------|-------------|------------|
| Operating activities                                                              |       |     |        |     |       |        |       |
| Net income                                                                        |       | $        | 2,373       |     | $          | 2,349       |       | $ | 3,275 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities |       |     |        |     |       |        |       |
| Depreciation, depletion and amortization                                          |       | 5,027    |        | 6,062    |       | 6,080       |       |
| Deferred income tax provision                                                     |       | 89       |        | 83       |       | 422         |       |
| Provision for doubtful accounts                                                   |       | 108      |        | 112      |       | 75          |       |
| Gain on disposition of property and  equipment                                    |       | (611     | )           | (233     | )          | (79         | )          |
| Write-off of investment in product line                                           |       | —   |        | —   |       | 102         |       |
| Changes in operating assets and liabilities                                       |       |     |        |     |       |        |       |
| Receivables                                                                       |       | (1,472   | )           | (425     | )          | 2,247       |       |
| Inventories                                                                       |       | (428     | )           | (1,589   | )          | 2,158       |       |
| Prepaid expenses                                                                  |       | (28      | )           | (176     | )          | 151         |       |
| Prepaid royalties                                                                 |       | (239     | )           | 3        |       | (257        | )          |
| Accounts payable and accrued expenses                                             |       | 735      |        | 146      |       | (3,856      | )          |
| Income taxes                                                                      |       | 88       |        | 1,132    |       | (339        | )          |
| Other                                                                             |       | (123     | )           | 314      |       | (226        | )          |
| Net cash provided by operating activities                                         |       | 5,519    |        | 7,778    |       | 9,753       |       |
|                                                                              |       |     |        |     |       |        |       |
| Investing activities                                                              |       |     |        |     |       |        |       |
| Acquisitions of subsidiaries, net of cash  received                               |       | —   |        | —   |       | (2,125      | )          |
| Capital expenditures                                                              |       | (4,267   | )           | (2,880   | )          | (7,561      | )          |
| Proceeds from sale of property and  equipment                                     |       | 917      |        | 345      |       | 139         |       |
| Net cash used in investing activities                                             |       | (3,350   | )           | (2,535   | )          | (9,547      | )          |
|                                                                              |       |     |        |     |       |        |       |
| Financing activities                                                              |       |     |        |     |       |        |       |
| Repayment of long-term debt                                                       |       | (1,970   | )           | (2,550   | )          | (3,620      | )          |
| Payment of amounts due former shareholders                                        |       | —   |        | —   |       | (25         | )          |
| Payments to acquire treasury stock                                                |       | (1,980   | )           | (1,620   | )          | (604        | )          |
| Net cash used in financing activities                                             |       | (3,950   | )           | (4,170   | )          | (4,249      | )          |
| Net (decrease) increase in cash and cash  equivalents                             |       | (1,781   | )           | 1,073    |       | (4,043      | )          |
|                                                                              |       |     |        |     |       |        |       |
| Cash and cash equivalents                                                         |       |     |        |     |       |        |       |
| Beginning of year                                                                 |       | 4,609    |        | 3,536    |       | 7,579       |       |
| End of year                                                                       |       | $        |  2,828 |     | $          |  4,609 |       | $ |  3,536 |   |
| Supplemental disclosures of cash flow items  Cash paid (received) during the year |       |     |        |     |       |        |       |
| Interest                                                                          |       | $        | 585         |     | $          | 799         |       | $ | 1,084 |   |
| Income taxes                                                                      |       | 608      |        | (137     | )          | 1,682       |       |

 

The accompanying notes are an integral partof the financial statements.

 

19

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**ContinentalMaterials Corporation**

**Consolidated BalanceSheets As****ofJanuary 1, 2005 and January 3, 2004**

(Amountsin thousands except share data)

 
| ** **                                                                           | ** ** | **January 1, 2005** | ** **   | **January 3, 2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------|--------------|---------------------|------------|
| ASSETS                                                                               |       |                |         |                |       |
| Current assets                                                                       |       |                |         |                |       |
| Cash and cash equivalents                                                            |       | $                   | 2,828        |                | $          | 4,609 |   |
| Receivables less allowance of $325 and $436                                          |       | 18,418              |         | 17,054              |       |
| Receivable for insured losses                                                        |       | 4,466               |         | 709                 |       |
| Inventories                                                                          |       | 16,609              |         | 16,181              |       |
| Prepaid expenses                                                                     |       | 1,268               |         | 1,260               |       |
| Deferred income taxes                                                                |       | 2,291               |         | 1,804               |       |
| Total current assets                                                                 |       | 45,880              |         | 41,617              |       |
|                                                                                 |       |                |         |                |       |
| Property, plant and equipment                                                        |       |                |         |                |       |
| Land and improvements                                                                |       | 2,776               |         | 3,128               |       |
| Buildings and improvements                                                           |       | 19,087              |         | 18,219              |       |
| Machinery and equipment                                                              |       | 70,048              |         | 69,660              |       |
| Mining properties                                                                    |       | 5,250               |         | 5,175               |       |
| Less accumulated depreciation and depletion                                          |       | (67,128             | )            | (65,309             | )          |
|                                                                                 |       | 30,033              |         | 30,873              |       |
| Other assets                                                                         |       |                |         |                |       |
| Goodwill                                                                             |       | 7,374               |         | 7,374               |       |
| Non-compete agreements                                                               |       | 953                 |         | 1,178               |       |
| Prepaid royalties                                                                    |       | 1,140               |         | 901                 |       |
| Other                                                                                |       | 503                 |         | 592                 |       |
|                                                                                 |       | $                   |  85,883 |                | $          |  82,535 |   |
| LIABILITIES                                                                          |       |                |         |                |       |
| Current liabilities                                                                  |       |                |         |                |       |
| Current portion of long-term debt                                                    |       | $                   | 2,000        |                | $          | 1,970 |   |
| Accounts payable                                                                     |       | 4,575               |         | 4,688               |       |
| Income taxes                                                                         |       | 767                 |         | 700                 |       |
| Accrued expenses                                                                     |       |                |         |                |       |
| Compensation                                                                         |       | 2,638               |         | 2,101               |       |
| Reserve for self-insured losses                                                      |       | 2,988               |         | 1,973               |       |
| Liability for unpaid claims covered by  insurance                                    |       | 4,466               |         | 709                 |       |
| Profit sharing                                                                       |       | 1,942               |         | 1,456               |       |
| Reclamation                                                                          |       | 384                 |         | 409                 |       |
| Other                                                                                |       | 1,712               |         | 2,877               |       |
| Total current liabilities                                                            |       | 21,472              |         | 16,883              |       |
|                                                                                 |       |                |         |                |       |
| Long-term debt                                                                       |       | 7,000               |         | 9,000               |       |
| Deferred income taxes                                                                |       | 3,796               |         | 3,219               |       |
| Accrued reclamation                                                                  |       | 1,171               |         | 1,291               |       |
| Other long-term liabilities                                                          |       | 996                 |         | 1,285               |       |
| 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                                                       |       | 1,982               |         | 1,982               |       |
| Retained earnings                                                                    |       | 62,573              |         | 60,200              |       |
| Accumulated other comprehensive losses (interest  rate swap adjustments)             |       | (67                 | )            | (265                | )          |
| Treasury shares, at cost                                                             |       | (13,683             | )            | (11,703             | )          |
|                                                                                 |       | 51,448              |         | 50,857              |       |
|                                                                                 |       | $                   | 85,883       |                | $          | 82,535 |   |

 

The accompanying notes are an integral part of the financialstatements.

 

20

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**Continental Materials Corporation**

**ConsolidatedStatements of Shareholders****’ Equity**

ForFiscal Years 2004, 2003 and 2002

 (Amounts in thousands exceptshare 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 29, 2001                                     |       | 2,574,264  |       | $          | 643        |          | $          | 1,982        |       | $                 | 54,576     |         |       |         | 768,167    |   | $ | 9,479 |   |
| Purchase of treasury shares                                      |       | —     |       | —     |       | —        |       | —       |       |              |       | 22,599       |       | 604          |       |
| Net income                                                       |       | —     |       | —     |       | —        |       | 3,275        |       |              |       | —       |       | —       |       |
| Comprehensive loss from interest rate swap,  net of tax of $214  |       | —     |       | —     |       | —        |       | —       |       | $                 | (404       | )            | —     |         | —     |   |
| 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 |   |

 

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

 

21

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**Notesto Consolidated Financial Statements**

 

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLESOF CONSOLIDATION

The consolidated financial statementsinclude Continental Materials Corporation and all of its subsidiaries (theCompany) including McKinney Door and Hardware, Inc. (MDHI) from April 1, 2002.The acquisition of MDHI was made to complement existing operations and extendthe market area served.

 

On April 1, 2002, the Company acquiredMDHI for $2,125,000, net of cash received. The acquisition of MDHI has beenaccounted for as a purchase. The total purchase price and the fair value ofliabilities assumed have been allocated to the tangible and intangible assetsof MDHI based on respective fair values. The acquisition has resulted in anunallocated excess purchase price over fair value of net assets acquired of$900,000, which has been classified as goodwill.

 

Had the acquisition of MDHI occurred asof December 30, 2001, the unaudited pro forma results of the Company for 2002would have been as follows (amounts in thousands except per share data):

 
| Sales                      |   | $ | 129,401 |   |
|----------------------------|--------|---|---------|--------|
| Net income                 |   | $ | 3,154   |   |
| Diluted earnings per share |   | $ | 1.72    |   |

 

These pro forma results have beenprepared for comparative purposes only and do not purport to be indicative ofwhat would have occurred had the acquisition been made at the beginning of theperiod presented or the results which may occur in the future.

 

The Consolidated Statements of Operationsand Comprehensive Income for 2003 and 2002 have been revised to change theclassification of gains on disposition of property and equipment from otherincome to operating income to conform to the current presentation. Certainother amounts have also been reclassified to conform to the current yearpresentation.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTSAND TAX LAW CHANGES

The Financial Accounting Standards Board(FASB) has recently issued the following statements and interpretations:

 

In November 2004, Statement of FinancialAccounting Standards (SFAS) No. 151, “Inventory Costs - An Amendment of ARB No.43, Chapter 4,” was issued which amends the guidance in Accounting ResearchBulleting (“ARB”) No. 43, Chapter 4, “Inventory Pricing,” to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material.  Among other provisions, the new rule requiresthat items such as idle facility expense, excessive spoilage, double freightand rehandling costs be recognized as current -period charges regardless ofwhether they meet the criteria of “so abnormal” as stated in ARB No. 143.  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 effectivefor fiscal years beginning after June 1, 2005.  The Company is currentlyevaluating the effect that the adoption of SFAS 151 will have on itsconsolidated results of operations and financial condition but does not expectSFAS 151 to have a material impact. 

 

InDecember 2004, SFAS No. 123R, “Share-based Payment” was issued and replacesSFAS No. 123, “Accounting for Stock-Based Compensation” and supersedesAccounting Principles Board Opinion (“APB”) No. 25, “Accounting for StockIssued to Employees.”  SFAS 123R requiresthe measurement of all employee share-based payments, including grants of employeestock options, using a fair-value based model. Deferred compensation calculated under the fair value method would thenbe amortized into income over the respective vesting

 

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period of the stock option. Theaccounting provisions of SFAS 123R are effective for reporting periodsbeginning after June 15, 2005. The adoption of SFAS 123R will not have animpact on the Company’s consolidated results of operations and financialcondition as all stock options issued under the Company’s stock option plan arefully vested.

 

On October 22, 2004, the President signedthe American Jobs Creation Act of 2004 (the “Act”). The Act provides adeduction for income from qualified domestic production activities, which willbe phased in from 2005 through 2010. In return, the Act also provides for atwo-year phase-out of the existing extra-territorial income exclusion (ETI) forforeign sales that was viewed to be inconsistent with international tradeprotocols by the European Union. The Company has not completed its analysis ofthe possible effect the phase out of the ETI and phase in of this new deductionmay have on the Company.

 

Under the guidance in FASB Staff PositionNo. FAS 109-1, “Application of FASB Statement No. 109, Accounting for IncomeTaxes, to the Tax Deduction on Qualified Production Activities Provided by theAmerican Jobs Creation Act of 2004,” the deduction will be 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, if any, will be reportedin the period in which the deduction is claimed on the Company’s tax return.

 

USEOF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities as ofJanuary 1, 2005 and January 3, 2004 and the reported amounts of revenues andexpenses during each of the three years in the period ended January 1, 2005.Actual results could differ from those estimates.

 

CASHAND CASH EQUIVALENTS

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

 

INVENTORIES

Inventoriesare valued at the lower of cost or market. Cost is determined using thelast-in, first-out (LIFO) method for approximately 76% of total inventories atJanuary 1, 2005 (76% at January 3, 2004). The cost of all other inventory isdetermined by the first-in, first-out (FIFO) method.

 

PROPERTY,PLANT AND EQUIPMENT

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

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

 

23

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OTHERASSETS

 

Goodwill,all of which relates to the construction materials segment, is not amortizedbut rather assessed annually for impairment.

 

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

 
| ** **                   | ** ** | **January 1, 2005** | ** ** | **January 3, 2004** | ** ** |
|------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                   | ** ** | **Gross**           | ** ** | ** **          | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **carrying**        | ** ** | **Accumulated**     | ** ** | **carrying** | ** ** | **Accumulated** | ** ** |
| ** **                   | ** ** | **amount**          | ** ** | **amortization**    | ** ** | **amount** | ** ** | **amortization** | ** ** |
| Amortized intangible assets: |       |                |       |                |       |   |   |   |   |
| Pueblo non-compete           |       | $                   | 500        |                | $          | 409 |   | $ | 500 |   | $ | 359 |   |
| RMRM non-compete             |       | 1,250               |       | 500                 |       | 1,250 |   | 375 |   |
| MDHI non-compete             |       | 250                 |       | 138                 |       | 250 |   | 88 |   |
|                         |       | $                   | 2,000      |                | $          | 1,047 |   | $ | 2,000 |   | $ | 822 |   |

 

Theabove non-compete agreements were signed at the time the Company acquired thePueblo operations (October 21, 1996) and all of the stock of RMRM (December 31,2000) and MDHI (April 1, 2002). Amortization of the agreements is computed on astraight-line basis over their agreement periods of 5 and 10 years.Amortization expense for these intangible non-compete agreements was $225,000,$225,000 and $213,000 for 2004, 2003 and 2002, respectively. The estimatedamortization expense for the five subsequent fiscal years is as follows: 2005 —$225,000; 2006 — $216,000; 2007 — $137,000; 2008 — $125,000 and 2009 —$125,000.

 

RETIREMENTPLANS

TheCompany and certain subsidiaries have various contributory profit sharingretirement plans for specific employees. The plans allow qualified employees tomake tax deferred contributions pursuant to Internal Revenue Code Section401(k). The Company makes annual contributions, at its discretion, basedprimarily on profitability. Costs under the plans are charged to operations asincurred.

 

RESERVEFOR SELF-INSURED AND INSURED LOSSES

TheCompany’s risk management program provides for certain levels of loss retentionfor workers’ compensation, automobile liability and general and productliability claims. The components of the reserve for self-insured losses havebeen recorded in accordance with the requirements of SFAS No. 5, “Accountingfor Contingencies,” 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 Certain Contracts,”requires an entity to accrue the gross amount of a loss even if the entity haspurchased insurance to cover the loss. Therefore the Company has recordedlosses for workers’ compensation, automobile liability and general and productliability claims in excess of the deductible amounts, i.e., amounts covered byinsurance contracts, in “Liability for unpaid claims covered by insurance” witha corresponding “Receivable for insured losses” on the balance sheet. TheCompany’s balance sheet as of January 3, 2004 has been reclassified to reflectthis presentation. The components of the liability have been recorded inaccordance with the requirements of SFAS No. 5, “Accounting for Contingencies,”and represent both unpaid settlements and management’s best estimate of thefuture liability 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.

 

RECLAMATION

Inconnection with permits to mine properties in Colorado, the Company isobligated to reclaim the mined areas. The Company records a reserve for futurereclamation work to be performed at its various aggregate operations based uponestimates of the recoverable quantities of rock

 

24

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andsand available in each location combined with an estimate of the total expensethat will be incurred to reclaim a property. Provision is made based upon theunits-of-production method. Reclamation costs are charged to operations as theproperties are mined. Actual reclamation costs are charged against the reserve.The adequacy of the recorded reserve is assessed annually. Estimates of boththe quantities of recoverable material and the cost of reclamation areperiodically updated with the assistance of an independent professional.Reclamation on any mining property is generally performed soon after eachsection of the deposit is mined.

 

REVENUERECOGNITION

TheCompany recognizes revenue as products are shipped to customers. The amount isrecorded net of applicable provisions for discounts, volume incentives, returnsand allowances. At the time of revenue recognition, the Company also providesan estimate of potential bad debt and warranty expense as well as an amountanticipated to be granted to customers under cooperative advertising programsbased upon program terms and historical experience. The changes in theaggregated product warranty liability for the year 2004, all of which isassociated with the heating and air conditioning segment, were as follows(amounts in thousands):

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

 

INCOMETAXES

Incometaxes are reported consistent with SFAS No. 109, “Accounting for Income Taxes.”Deferred taxes reflect the future tax consequences associated with thedifferences between financial accounting and tax bases of assets andliabilities.

 

CONCENTRATIONOF CREDIT RISK

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

 

TheCompany performs ongoing credit evaluations of its customers and generally doesnot require collateral. 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 and geographical location bysegment.

 

IMPAIRMENTOF LONG-LIVED ASSETS

Inthe event that facts and circumstances indicate that the cost of any long-livedassets may be impaired, an evaluation of recoverability would be performed. Ifan evaluation were required, the estimated future undiscounted cash flowsassociated with the asset would be compared to the asset’s carrying amount todetermine if a write-down to market value or discounted cash flow value isrequired.

 

FISCALYEAR END

TheCompany’s fiscal year end is the Saturday nearest December 31. Fiscal 2004,2003 and 2002 consist of 52, 53 and 52 weeks, respectively.

 

2.INVENTORIES

Inventoriesconsisted of the following (amounts in thousands):

 
| ** **                 | ** ** | **January 1, 2005** | ** ** | **January 3, 2004** | ** ** |
|----------------------------|------------|---------------------|------------|---------------------|------------|
| Finished goods             |       | $                   | 7,343      |                | $          | 7,163 |   |
| Work in process            |       | 1,684               |       | 1,486               |       |
| Raw materials and supplies |       | 7,582               |       | 7,532               |       |
|                       |       | $                   | 16,609     |                | $          | 16,181 |   |

 

25

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Ifinventories valued on the LIFO basis were valued at current costs, inventorieswould be higher as follows: 2004 — $4,050,000, 2003 — $2,126,000, and 2002 —$2,052,000.

 

Reductionsin inventory quantities during 2002 at two locations resulted in liquidation ofLIFO inventory layers carried at costs that were lower than the costs ofcurrent purchases. The effect was not material.

 

3.LONG-TERM DEBT

Long-termdebt consisted of the following (amounts in thousands):

 
| ** **           | ** ** | **January 1, 2005** | ** ** | **January 3, 2004** | ** ** |
|----------------------|------------|---------------------|------------|---------------------|------------|
| Unsecured term loan  |       | $                   | 9,000      |                | $          | 10,750 |   |
| Capital leases       |       | —              |       | 220                 |       |
|                 |       | 9,000               |       | 10,970              |       |
| Less current portion |       | 2,000               |       | 1,970               |       |
|                 |       | $                   | 7,000      |                | $          | 9,000 |   |

 

TheCompany has a Revolving Credit and Term Loan Agreement (Credit Agreement) withtwo banks. The unsecured term loan is payable in escalating quarterlyinstallments with final payment of all then unpaid principal on June 30, 2008.The loan, at the Company’s option, bears interest at either prime or anadjusted LIBOR rate. The Credit Agreement 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). Additionalborrowings, acquisition of stock of other companies, purchase of treasury sharesand payment of cash dividends are either limited or require prior approval bythe lenders.

 

TheCompany is exposed to market risks related to commodity prices and interestrates. To manage interest rate risk, the Company has, from time to time, enteredinto interest rate swaps as cash flow hedges. These swaps are authorized by theCompany’s policies and procedures. The Company does not use swaps or hedginginstruments 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 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 $162,000, $257,000 and$239,000 for 2004, 2003 and 2002, respectively. The fair value of the SwapAgreement is recorded on the balance sheet with subsequent changes recorded asa separate component of accumulated other comprehensive income in shareholders’equity. At January 1, 2005, the amount subject to this Swap Agreement is$7,500,000 which amount decreases by $1,500,000 each September and March,terminating on December 18, 2006.

 

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

 
| 2005   |   | $     | 2,000  |   |
|--------|--------|-------|--------|--------|
| 2006   |   | 2,500 |   |
| 2007   |   | 3,000 |   |
| 2008   |   | 1,500 |   |
|   |   | $     | 9,000  |   |

 

Underthe Credit Agreement, the Company had an unsecured revolving line of credit of$10,000,000 during 2004 and 2003. The line, which expires in July 2006, is usedfor short-term

 

26

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cashneeds and standby letters of credit. Interest was charged at prime or adjustedLIBOR rates on cash borrowings during both years. The weighted average interestrate for all debt was 5.1% for fiscal 2004 and 5.6% for fiscal 2003. There wasno balance outstanding against the line as of either January 1, 2005 or January3, 2004.

 

AtJanuary 1, 2005, the Company had letters of credit outstanding totalingapproximately $2,010,000 that collateralize the self-insured losses.

 

4.COMMITMENTS AND CONTINGENCIES

TheCompany is involved in litigation matters related to its continuing business,principally product liability matters related to the gas-fired heatingproducts. In the Company’s opinion, none of these proceedings, when concluded,will have a material adverse effect on the Company’s results of operations orfinancial position as the Company has established adequate reserves for knownoccurrences.

 

5.SHAREHOLDERS’ EQUITY

Underthe Company’s Stock Option Plan (the Plan), officers and key employees may begranted options to purchase the Company’s common stock at option pricesestablished by the Compensation Committee of the Board of Directors providedthe option price is no less than the fair market value at the date of thegrant. At January 1, 2005, there remained 227,600 shares available for futureissuance under the Plan (excluding the 73,400 shares associated with optionsoutstanding).

 

Nooptions were exercised during 2004, 2003 or 2002. At January 1, 2005, thereremain 73,400 options (all fully vested, 73,000 with an exercise price of $6.56and 400 with an exercise price of $23.125) which will expire on September 25,2005.

 

TheCompany applies Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” and related interpretations in accounting for itsPlan. Accordingly, no compensation expense was recognized for its stock-basedcompensation Plan.

 

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

 

6.EARNINGS PER SHARE

TheCompany computes earnings per share (EPS) in accordance with SFAS No. 128, “EarningsPer Share.” The following is a reconciliation of the calculation of basic anddiluted EPS for the years-ended 2004, 2003 and 2002 (dollars in thousandsexcept per-share data).

 
| ** **                 | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** **    | ** ** |
|----------------------------|------------|------------|------------|--------------|------------|---------------|------------|
| ** **                 | ** ** | **Net**    | ** ** | **average**  | ** ** | **Per-share** | ** ** |
| ** **                 | ** ** | **Income** | ** ** | **shares**   | ** ** | **earnings**  | ** ** |
| 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 |   |
|                       |       |       |       |         |       |          |       |
| 2002                       |       |       |       |         |       |          |       |
| Basic EPS                  |       | $          | 3,275      |         | 1,794      |          | $          | 1.83 |   |
| Effect of dilutive options |       | —     |       | 36           |       |          |       |
| Diluted EPS                |       | $          | 3,275      |         | 1,830      |          | $          | 1.79 |   |

 

27

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7.RENTAL EXPENSE, LEASES AND COMMITMENTS

TheCompany leases certain of its facilities and equipment and is required to paythe related taxes, insurance and certain other expenses. Rental expense was$2,778,000, $2,922,000 and $3,737,000 for 2004, 2003 and 2002, respectively.

 

Futureminimum rental commitments under non-cancelable operating leases for 2005 andthereafter are as follows: 2005 — $1,859,000; 2006 — $1,799,000; 2007 —$1,764,000; 2008 — $1,569,000; 2009 — $1,419,000 and thereafter — $21,113,000.Included in these amounts is $386,000 per year and approximately $18,928,000 inthe “thereafter” amount related to minimum royalty payments due on anaggregates lease in conjunction with the Pueblo, Colorado operation. Alsoincluded in these amounts is $235,000 per year and approximately $412,000 inthe “thereafter” amount related to a ground lease upon which the Company owns abuilding leased to a third party for approximately $344,000 per year. Theground lease runs through October 1, 2016 and contains a renewal clause. Thebuilding lease runs through January 31, 2013.

 

8.RETIREMENT PLANS

Asdiscussed in Note 1, the Company maintains retirement benefit plans foreligible employees. Total plan expenses charged to operations were $1,606,000,$1,644,000 and $1,523,000 in 2004, 2003 and 2002, respectively.

 

9.INCOME TAXES

Theprovision (benefit) for income taxes is summarized as follows (amounts inthousands):

 
| ** ** | ** ** | ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Federal:   |       | Current    |       | $        | 665        |     | $          | 959      |       | $ | 1,201 |   |
|       |       | Deferred   |       | 53       |       | 56       |       | 541      |       |
| State:     |       | Current    |       | (4       | )          | 58       |       | 126      |       |
|       |       | Deferred   |       | 36       |       | 27       |       | (118     | )          |
|       |       |       |       | $        | 750        |     | $          | 1,100    |       | $ | 1,750 |   |
|            |            |            |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

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

 
| ** **                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory tax rate                         |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| Percentage depletion                       |       | (3.1     | )          | (2.7     | )          | (1.9     | )          |
| State income taxes, net of federal benefit |       | 2.9      |       | 1.9      |       | 2.2      |       |
| Non-deductible expenses                    |       | 1.2      |       | .7       |       | .4       |       |
| Benefit of state tax credits               |       | (5.5     | )          | (5.3     | )          | (1.9     | )          |
| Donation of appreciated property           |       | (1.3     | )          | —   |       | —   |       |
| (Release) build tax contingency reserve    |       | (4.2     | )          | 2.2      |       | —   |       |
| Other                                      |       | —   |       | 1.1      |       | 2.0      |       |
|                                       |       | 24.0     | %          | 31.9     | %          | 34.8     | %          |

 

 

Forfinancial statement purposes, deferred tax assets and liabilities are recordedat a blend of the current statutory federal and states’ tax rates – 38%. Theprincipal temporary differences and their related deferred taxes are as follows(amounts in thousands):

 
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Reserves for self-insured losses |       | $        | 1,134      |     | $          | 763 |   |
| Accrued reclamation              |       | 590      |       | 645      |       |
| Deferred compensation            |       | 460      |       | 447      |       |
| Asset valuation reserves         |       | 189      |       | 230      |       |
| Future state tax credits         |       | 574      |       | 502      |       |
| Other                            |       | 249      |       | 191      |       |
| Total deferred tax assets        |       | 3,196    |       | 2,778    |       |
| Depreciation                     |       | 3,664    |       | 3,072    |       |
| Deferred development             |       | 588      |       | 612      |       |
| Other                            |       | 449      |       | 510      |       |
| Total deferred tax liabilities   |       | 4,701    |       | 4,194    |       |
| Net deferred tax liability       |       | $        | (1,505     | )        | $          | (1,416 | ) |

 

28

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The net current deferred tax assets are$2,291,000 and $1,803,000 at year-end 2004 and 2003, respectively.

 

10.UNAUDITED QUARTERLY FINANCIAL DATA

The following table provides summarizedunaudited fiscal quarterly financial data for 2003 and 2002 (amounts inthousands, except per share amounts):

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

 
|                                     |   | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  |   |
|------------------------------------------|--------|-------------|------------|-------------|------------|-------------|------------|-------------|--------|
|                                     |   | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** |   |
| 2003                                     |   |        |       |        |       |        |       |        |   |
| Sales                                    |   | $           | 23,681     |        | $          | 34,620      |       | $           | 30,139 |   | $ | 31,725 |   |
| Depreciation, depletion and amortization |   | 1,532       |       | 1,595       |       | 1,517       |       | 1,418       |   |
| Operating (loss) profit                  |   | (2,136      | )          | 1,834       |       | 1,255       |       | 2,887       |   |
| Net (loss) income                        |   | (1,396      | )          | 1,011       |       | 707         |       | 2,027       |   |
| Basic (loss) income per share            |   | (.78        | )          | .57         |       | .41         |       | 1.17        |   |
| Diluted (loss) income per share          |   | (.78        | )          | .56         |       | .40         |       | 1.15        |   |
|                                          |        |             |            |             |            |             |            |             |        |  |  |  |  |

 

Earningsper share are computed independently for each of the quarters presented.Therefore, the sum of the quarterly earnings per share may not equal the totalfor the year.

 

11.INDUSTRY SEGMENT INFORMATION

TheCompany reports its segments in accordance with SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information.” The Company isorganized along its two principal product lines. Wall furnaces, console heaters,evaporative coolers and fan coils have been aggregated into the heating and airconditioning segment. Ready mix concrete, construction aggregates, buildingsupplies and doors are combined to form the construction materials segment. Theheating and air conditioning segment produces heating and cooling equipment forresidential applications which is sold primarily to wholesale distributors andretail home centers. Fan coils are also sold to HVAC installing contractors andequipment manufacturers for commercial applications. A significant portion offan coil revenues is dependent upon new hotel construction. Sales arenationwide, but are concentrated in the southwestern U.S. The constructionmaterials segment is involved in the production and sale of concrete and otherbuilding materials and the exploration, extraction and sales of constructionaggregates. Sales of this segment are highly concentrated in the Front Rangearea in Colorado.

 

29

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TheCompany evaluates the performance of its segments and allocates resources tothem based on operating income and return on investment. Other factors are alsoconsidered. Operating income is determined by deducting operating expenses fromall revenues. In computing operating income, none of the following has beenadded or deducted: unallocated corporate expenses, interest, income or lossfrom unconsolidated investees, other income or loss or income taxes.

 

Thefollowing table presents information about reported segments for the fiscalyears 2004, 2003 and 2002 along with the items necessary to reconcile thesegment information to the totals reported in the financial statements (amountsin thousands).

 
| ** **                               | ** ** | **Heating  and**      | ** ** | **Construction**   | ** ** | **All**        | ** ** | **Unallocated**    | ** ** | ** ** | ** ** |
|------------------------------------------|------------|-----------------------|------------|--------------------|------------|----------------|------------|--------------------|------------|------------|------------|
| ** **                               | ** ** | **air  conditioning** | ** ** | **materials  (a)** | ** ** | **other  (b)** | ** ** | **corporate  (c)** | ** ** | **Total**  | ** ** |
| 2004                                     |       |                  |       |               |       |           |       |               |       |       |       |
| Revenues from external customers         |       | $                     | 46,196     |               | $          | 80,398         |       | $                  | 344        |       | $          | 2 |   | $ | 126,940 |   |
| Depreciation, depletion and amortization |       | 1,077                 |       | 3,887              |       | —         |       | 63                 |       | 5,027      |       |
| Segment operating income (loss)          |       | 3,436                 |       | 2,817              |       | 94             |       | (2,842             | )          | 3,505      |       |
| Segment assets                           |       | 29,008                |       | 53,742             |       | 74             |       | 3,059              |       | 85,883     |       |
| Expenditures for segment assets          |       | 1,217                 |       | 3,017              |       | —         |       | 33                 |       | 4,267      |       |
|                                     |       |                  |       |               |       |           |       |               |       |       |       |
| 2003                                     |       |                  |       |               |       |           |       |               |       |       |       |
| Revenues from external customers         |       | $                     | 48,342     |               | $          | 71,493         |       | $                  | 327        |       | $          | 3 |   | $ | 120,165 |   |
| Depreciation, depletion and amortization |       | 1,147                 |       | 4,846              |       | —         |       | 69                 |       | 6,062      |       |
| Segment operating income (loss)          |       | 5,012                 |       | 1,702              |       | 17             |       | (2,891             | )          | 3,840      |       |
| Segment assets                           |       | 27,829                |       | 49,063             |       | 157            |       | 5,486              |       | 82,535     |       |
| Expenditures for segment assets          |       | 352                   |       | 2,520              |       | —         |       | 8                  |       | 2,880      |       |
|                                     |       |                  |       |               |       |           |       |               |       |       |       |
| 2002                                     |       |                  |       |               |       |           |       |               |       |       |       |
| Revenues from external customers         |       | $                     | 52,261     |               | $          | 75,892         |       | $                  | 145        |       | $          | 3 |   | $ | 128,301 |   |
| Depreciation, depletion and amortization |       | 1,256                 |       | 4,756              |       | —         |       | 68                 |       | 6,080      |       |
| Segment operating income (loss)          |       | 4,885                 |       | 3,839              |       | (150           | )          | (2,784             | )          | 5,790      |       |
| Segment assets                           |       | 28,731                |       | 49,188             |       | 40             |       | 5,413              |       | 83,372     |       |
| Expenditures for segment assets          |       | 1,624                 |       | 5,908              |       | —         |       | 29                 |       | 7,561      |       |

 

----

(a)          TheConstruction Materials segment information for 2002 includes MDHI reflectingthe purchase effective April 1, 2002.

(b)         Allother represents segments below the quantitative thresholds. The segmentsinclude a small real estate operation and the holding costs for certain mininginterests that remain from the period the Company maintained significantinterests in mining operations.

(c)          Corporateassets consist primarily of cash and cash equivalents.

 

Alllong-lived assets are in the United States. During 2004, no customer in eithersegment accounted for 10% or more of total sales of the Company.

 

30

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12.ADJUSTMENTS MADE DURING THE FOURTH QUARTER

TheCompany recorded two material adjustments during the fourth quarter of 2004. A$900,000 increase in workers’ compensation expense was recorded based upon anactuarial analysis. The second adjustment reduced the effective income tax ratereflecting certain income tax credits realized in the fourth quarter and therelease of tax contingencies. The Company also wrote-off the remaining inventoriesassociated with a product manufactured at the Phoenix plant.

 

13.SUBSEQUENT EVENTS

On March 24, 2005, the Company announcedits intention to commence a modified Dutch auction **tender offer******for up to 400,000 shares of the Company’s common stock, ata purchase price no greater than $30.50 nor less than $27.50. Under the termsof the proposed offer, the Company will select the lowest purchase price thatwill allow it to purchase the lesser of (1) all of the shares validly tenderedprior to the expiration date, or (2) 400,000 shares. The Company intends tofund the tender offer by increasing its borrowings under its revolving creditfacility and term loan which was established pursuant to the Revolving Creditand Term Loan Agreement, dated as of September 5, 2003, as amended on May 29,2004. The Company has received a commitment from its lenders to increase itsborrowings under the term loan by $12.5 million to fund the tender offer.

 

THECOMPANY HAS NOT COMMENCED THE TENDER OFFER. WHEN THE TENDER OFFER IS COMMENCED, IT WILL BE MADE IN ACCORDANCE WITHALL APPLICABLE SECURITIES LAWS AND WILL INCLUDE THE FILING OF APPROPRIATEMATERIALS WITH THE SEC AND THE MAILING OF APPROPRIATE MATERIALS TO THESTOCKHOLDERS OF THE COMPANY. THE COMPANY’S STOCKHOLDERS AND OTHER INTERESTEDPARTIES ARE URGED TO READ THE COMPANY’S TENDER OFFER STATEMENT AND RELATEDEXHIBITS MAILED TO THEM AND FILED WITH THE SEC WHEN THEY BECOME AVAILABLEBECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. COMPANY STOCKHOLDERS WILL ALSOBE ABLE TO OBTAIN SUCH DOCUMENTS FREE OF CHARGE AT THE COMMISSION’S WEBSITE,WWW.SEC.GOV.

 

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Tothe Board of Directors and Shareholders of Continental Materials Corporation:

 

Inour opinion, 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 January 3, 2004, and the results of their operations andtheir cash flows for each of the three years in the period ended January 1,2005 in conformity with accounting principles generally accepted in the UnitedStates of America. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of thesestatements in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

 

PricewaterhouseCoopersLLP

 

Chicago,Illinois

April7, 2005

 

31

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

 

There have been no changes of accountants and/or disagreements on anymatter of accounting principle or financial statement disclosure during fiscalyear 2003 or 2004.

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

** **

**Evaluation of Disclosure Controls and Procedures**

 

Disclosurecontrols and procedures, as such term is defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended (Exchange Act) are controls andother procedures that are designed to ensure that information required to bedisclosed in Company files or that it submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the rules and forms of the Securities and Exchange Commission (SEC) and thatsuch information is accumulated and communicated to the Company’s management,including its Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating our disclosure controls and procedures, managementrecognizes that disclosure controls and procedures, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the disclosure controls and procedures are met. Ourdisclosure controls and procedures have been designed to meet, and managementbelieves that they meet, reasonable assurance standards, subject to thedeficiencies identified and discussed below. Additionally, in designingdisclosure controls and procedures, our management necessarily is required toapply its judgment in evaluating the cost-benefit relationship of possibledisclosure controls and procedures. The design of any disclosure controls andprocedures also is based in part upon certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions.

 

Asof January 1, 2005, the Company carried out an evaluation of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15(e) of the ExchangeAct, as amended. Based upon that evaluation, the Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and procedureswere not effective at a reasonable assurance level due to the existence of thematerial weaknesses discussed below.

 

**Descriptionof Material Weaknesses in Internal Control Over Financial Reporting**

 

Managementis responsible for establishing and maintaining an effective system of internalcontrol over financial reporting as defined in Rule 13a-15(f) under theExchange Act. A material weakness is a control deficiency, or combination ofsignificant deficiencies, that results in a more than remote likelihood that amaterial misstatement of the annual or interim financial statements will not beprevented or detected. As of January 1, 2005, management has concluded that wehave not maintained effective internal control over financial reporting as wehave identified material weaknesses in the calculation of accrued liabilitiesfor estimated workers’ compensation claims and related expense and theaccounting for income taxes.

 

TheCompany’s policy for estimating the required reserve necessary to meet expectedfuture workers’ compensation claims was based on a review and evaluation ofeach outstanding claim. The review was performed by management and the thirdparty claims administrators as of January 1, 2005. Based upon an actuarialanalysis, an adjustment was made to the Company’s 2004 consolidated financial statements.Management considers the adjustment to be material and has concluded that theprocess to develop an appropriate reserve for workers’ compensation claimscontains a material weakness. In order to remediate this matter, management andthe Audit Committee have agreed to engage an actuary to perform periodicactuarial evaluations of our claims activity for the purpose of establishingthe reserve for workers’ compensation claims.

 

32

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Withregard to the calculation of the tax provision, a number of non-recurringevents took place during the current year’s closing period that contributed toan error in the income tax calculation, including the move of the Corporatestaff to new office space. Management has concluded that as of January 1, 2005,the Company had ineffective controls in place to review the accounting used tocalculate the tax consequences of unusual or non-recurring transactions. Thismaterial weakness resulted in an audit adjustment to the 2004 consolidatedfinancial statements. Management, in conjunction with the Audit Committee, isin the process of revising our procedures such that the income tax calculationwill be completed and reviewed on a more timely and thorough basis.

 

Webelieve the measures identified above with regard to the workers’ compensationmatter and those that will ultimately be in place for the following yearregarding the tax provision calculation will appropriately address the materialweaknesses.

 

Asof January 1, 2005, the Company was not an “accelerated filer” as defined inRule 12b-2 under the Exchange Act. Accordingly, pursuant to SEC rules andregulations, the Company is not required to provide, and we have not provided,Management’s Annual Report on Internal Control Over Financial Reporting or theassociated report of our independent registered public accounting firm in thisAnnual Report on Form 10-K. We will be required to reassess our status as a “non-acceleratedfiler” as of the end of our 2005 fiscal year to determine whether we will berequired to provide Management’s Annual Report on Internal Control OverFinancial Reporting and the associated report of our independent registeredpublic accounting firm in our Annual Report on Form 10-K for the year endedDecember 31, 2005. If we determine that we are not an “accelerated filer” as ofthe end of our 2005 fiscal year, then we will first need to provide Management’sAnnual Report on Internal Control Over Financial Reporting and the associatedreport of our independent registered public accounting firm in our AnnualReport on Form 10-K for the year ended December 30, 2006.

 

Managementand our Audit Committee are continuing to review our internal control overfinancial reporting as part of our preparation for the need to provideManagement’s Annual Report on Internal Control Over Financial Reporting and theassociated report of our independent registered public accounting firm,complete phase-in of compliance standards under Section 404 of theSarbanes-Oxley Act of 2002. Any further deficiencies identified by this reviewwill be reported to the Audit Committee and we will take appropriate action tocorrect these deficiencies. The certifications of our Chief Executive Officerand Chief Financial Officer required in accordance with Section 302 of theSarbanes-Oxley Act of 2002 are attached as exhibits to this Annual Report onForm 10-K. The disclosures set forth in this Item 9A contain informationconcerning (i) the evaluation of our disclosure controls and procedures, and changesin internal control over financial reporting, referred to in paragraph 4 of thecertifications, and (ii) material weaknesses in the design or operation of ourinternal control over financial reporting, referred to in paragraph 5 of thecertifications. These certifications should be read in conjunction with thisItem 9A for a more complete understanding of the matters covered by thecertifications.

 

**Changes in Internal Control Over FinancialReporting**

 

Exceptfor those material weaknesses, there was no change in our internal control overfinancial reporting during the fourth quarter of fiscal 2004 that materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial 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 covered by this Form10-K.

 

33

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PART III

 

Items 10, 11, 12, 13 and 14 of Part III have been omitted from this10-K Report because the registrant expects to file, not later than 120 daysfollowing the close of its fiscal year ended January 1, 2005, its definitive2005 proxy statement.  The informationrequired by Items 10, 11, 12, 13 and 14 of Part III will be included in thatproxy statement and such information 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 2004, 2003 and 2002    |
|     |       | Consolidated statements of cash flows for  fiscal years ended 2004, 2003 and 2002                      |
|     |       | Consolidated balance sheets as of January 1, 2005 and January 3, 2004                                  |
|     |       | Consolidated statements of shareholders’  equity for fiscal years ended 2004, 2003 and 2002       |
|     |       |                                                                                                   |
| (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 2004, 2003 and 2002 |

 

All other schedules are omitted because they are not applicable or theinformation is shown in the financial statements or notes thereto.

 

34

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| (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   |                                                                  | Continental Materials Corporation Amended and Restated 1994 Stock  Option Plan dated May 25, 1994 filed as Appendix A to the 1994 Proxy  Statement, incorporated herein by reference.* |
|         |                                                                  |   |
| Exhibit 10a  |                                                                  | 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, incorporated herein by reference. |
|         |                                                                  |   |
| Exhibit 10b  |                                                                  | 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 10c  |                                                                  | 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 for the month of October 1996, incorporated herein by  reference. |
|         |                                                                  |   |
| Exhibit 10d  |                                                                  | Fee Sand and Gravel Lease Between Valco, Inc. And Continental  Materials Corporation filed as Exhibit 2C to Form 8-K for the month of  October 1996, incorporated herein by reference. |
|         |                                                                  |   |
| Exhibit 10e  |                                                                  | 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 10f  |                                                                  | 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 for  the month of December 2000, incorporated herein by reference. |
|         |                                                                  |   |
| Exhibit 10g  |                                                                  | 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 10h  |                                                                  | First Amendment To Revolving Credit And Term Loan Agreement dated as  of May 29, 2004, by and among Continental Materials Corporation and LaSalle  Bank National Association and Fifth Third Bank filed as Exhibit 10 to Form  10-Q for the quarterly period ending July 3, 2004, 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) Certification of Chief Executive Officer (filed  herewith). |
|         |                                                                  |   |
| Exhibit 31.2 |                                                                  | Rule 13a-14(a) Certification of Chief Financial Officer (filed  herewith). |
|         |                                                                  |   |
| Exhibit 32.1 |                                                                  | Section 1350 Certification of Chief Executive Officer and Chief  Financial Officer (filed herewith). |

 

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* - Compensatory plan or arrangement

 

35

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SIGNATURES

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

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

Date:  April 13, 2005

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| **SIGNATURE** | ** **           | **CAPACITY(IES)** | ** ** | **DATE**                                |
|---------------|----------------------|-------------------|------------|-----------------------------------------|
|          |                 |              |       |                                    |
| /S/           | James G. Gidwitz     |              |       | Chief Executive Officer and a Director  |   |   |
|          | James G. Gidwitz     |              |       | (Principal Executive Officer)           |   | April 13, 2005 |
|          |                 |              |       |                                    |   |
| /S/           | Joseph J. Sum        |              |       | Vice President, Chief Financial Officer |   |   |
|          | Joseph J. Sum        |              |       | (Principal Financial Officer)           |   | April 13, 2005 |
|          |                 |              |       |                                    |   |
| /S/           | Mark S. Nichter      |              |       | Secretary and Controller                |   |   |
|          | Mark S. Nichter      |              |       | (Principal Accounting Officer)          |   | April 13, 2005 |
|          |                 |              |       |                                    |   |
| /S/           | William  D. Andrews  |              |       |                                    |   |   |
|          | William  D. Andrews  |              |       | Director                                |   | April 13, 2005 |
|          |                 |              |       |                                    |   |
| /S/           | Thomas H. Carmody    |              |       |                                    |   |   |
|          | Thomas H. Carmody    |              |       | Director                                |   | April 13, 2005 |
|          |                 |              |       |                                    |   |
| /S/           | Betsy R. Gidwitz     |              |       |                                    |   |   |
|          | Betsy R. Gidwitz     |              |       | Director                                |   | April 13, 2005 |
|          |                 |              |       |                                    |   |
| /S/           | Ralph W. Gidwitz     |              |       |                                    |   |   |
|          | Ralph W. Gidwitz     |              |       | Director                                |   | April 13, 2005 |
|          |                 |              |       |                                    |   |
| /S/           | Ronald J. Gidwitz    |              |       |                                    |   |   |
|          | Ronald J. Gidwitz    |              |       | Director                                |   | April 13, 2005 |
|          |                 |              |       |                                    |   |
| /S/           | Theodore R. Tetzlaff |              |       |                                    |   |   |
|          | Theodore R. Tetzlaff |              |       | Director                                |   | April 13, 2005 |
|          |                 |              |       |                                    |   |
| /S/           | Peter E. Thieriot    |              |       |                                    |   |   |
|          | Peter E. Thieriot    |              |       | Director                                |   | April 13, 2005 |
|          |                 |              |       |                                    |   |
| /S/           | Darrell M. Trent     |              |       |                                    |   |   |
|          | Darrell M. Trent     |              |       | Director                                |   | April 13, 2005 |

 

36

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM ON**

**FINANCIAL STATEMENT SCHEDULE**

 

To the Board of Directors and Shareholders

of Continental Materials Corporation:

 

Ouraudits of the consolidated financial statements referred to in our report datedApril 7, 2005 appearing in the 2004 Annual Report to Shareholders ofContinental Materials Corporation also included an audit of the financialstatement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion,this financial statement schedule presents fairly, in all material respects,the information set forth therein when read in conjunction with the relatedconsolidated financial statements.

 

 

PricewaterhouseCoopers LLP

 

Chicago, Illinois

April 7, 2005

 

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CONTINENTAL MATERIALS CORPORATION

 

**SCHEDULE II - VALUATION AND QUALIFYINGACCOUNTS AND RESERVES (c) (d)**

 

for the fiscal years 2004, 2003 and 2002

 
| **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 2004**                   |       |                                  |       |                                          |       |                       |       |                          |       |
| Allowance for doubtful accounts |       | $                                     | 436,000    |                                          | $          | 108,000                    |       | $                             | 219,000    | (a) | $ | 325,000 |   |
| Inventory valuation reserve     |       | $                                     | 171,000    |                                          | $          | 6,000                      |       | $                             | 4,000      | (b) | $ | 173,000 |   |
|                            |       |                                  |       |                                          |       |                       |       |                          |       |
| **Year 2003**                   |       |                                  |       |                                          |       |                       |       |                          |       |
| Allowance for doubtful accounts |       | $                                     | 432,000    |                                          | $          | 112,000                    |       | $                             | 108,000    | (a) | $ | 436,000 |   |
| Inventory valuation reserve     |       | $                                     | 205,000    |                                          | $          | 11,000                     |       | $                             | 45,000     | (b) | $ | 171,000 |   |
|                            |       |                                  |       |                                          |       |                       |       |                          |       |
| **Year 2002**                   |       |                                  |       |                                          |       |                       |       |                          |       |
| Allowance for doubtful accounts |       | $                                     | 435,000    |                                          | $          | 147,000                    |       | $                             | 150,000    | (a) | $ | 432,000 |   |
| Inventory valuation reserve (e) |       | $                                     | 420,000    |                                          | $          | —                     |       | $                             | 215,000    | (b) | $ | 205,000 |   |

 

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

 

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