** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

**(Mark One)**

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

**Forthe fiscal year ended December 30, 2006**

**OR**

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

**Forthe transition period from                       to                    **

**Commissionfile number 1-3834**

**Continental MaterialsCorporation**

(Exact name of registrant as specified in its charter)

| **Delaware**                                                    | ** ** | **36-2274391**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

| **200 South Wacker Drive,  Suite 4000, Chicago, Illinois** | ** ** | **60606**  |
|-----------------------------------------------------------------|------------|------------|
| (Address of principal executive offices)                        |       | (Zip Code) |

 

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

Securitiesregistered 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) ofthe Act: **NONE**

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined by Rule 405 of the Securities Act.Yes o** **No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.   Yes o** **No x

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes x** **No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of the Form 10-Kor any amendment to this Form 10-K.   x

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act.Yes o** **No x

The aggregate market value (based on July 1, 2006closing price) of voting stock held by non-affiliates of registrant:Approximately $18,791,000.

Number of common shares outstanding at March 23,2007: 1,603,747.

Incorporationby reference: Portions of registrant’s definitive proxy statement for the 2007Annual Meeting of stockholders to be held May 23, 2007 into Part IIIof this Form 10-K. The definitive proxy statement is expected to befiled with the Securities and Exchange Commission within 120 days after theclose of the fiscal year covered by this Form 10-K.

 

 

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**PART I**

Item 1.             **BUSINESS**

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

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

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

During the past five years the company acquired:

·                  all of the stock of MDHI, arefabricator and distributor of metal doors and related hardware in Pueblo,Colorado on April 1, 2002 for $2,125,000, net of cash received;

·                  the assets of CSSL, a company inColorado Springs offering electronic access and locking capabilities on January1, 2006 for $352,000; and

·                  certainassets of ASCI, a concrete producer in Colorado Springs on June 30, 2006 for$2,100,000 of cash and a $1,000,000 Note.

The Door segment of theConstruction Products industry group consists of the activities of MDHI. TheCSSL assets were purchased by MDHI. The assets of ASCI were acquired by TransitMix Concrete Co. in the Concrete, Aggregates and Construction Supplies segment.Accordingly, the results of operations include these activities since theirrespective acquisition dates.

Financial informationrelating to industry segments appears in Note 13 of this Form 10-K. Referencesto a “Note” are to the “Notes to Consolidated Financial Statements.”

***MARKETING***

*** ***

The HVAC industry groupmarkets its products throughout North America through plumbing, heating and airconditioning wholesale distributors as well as directly to major retailhome-centers and other retail outlets. Some of the products are also sold toHVAC installing contractors and equipment manufacturers for commercialapplications. The Company contracts independent manufacturers’ representativesfor all of its products while also employing and utilizing a staff of sales andsales support personnel. Sales of furnaces and evaporative coolers arepredominantly in the United States and are concentrated in the Western andSouthwestern states. Sales of furnaces and console heaters usually increase inthe months of August through January. Sales of evaporative coolers havehistorically been higher in the months of March through July. Sales of the fancoil product line are throughout the United States, Canada and the Caribbeanand are more evenly distributed throughout the year although the highest volumetypically occurs during the late spring and summer. In order to enhance salesof wall furnaces and evaporative coolers during the off season, extendedpayment terms are offered to some customers.

The Construction Productsindustry group markets its products primarily through its own direct salespersonnel and, except for doors and related hardware, confines its sales to theFront Range area in Colorado. Sales are primarily made to general andsub-contractors, government entities and individuals. Sales are affected by the

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general economicconditions and weather conditions in the areas serviced (as it relates toconstruction). Revenues usually decline in the winter months as the pace ofconstruction slows. Sales of doors and the related hardware are made throughoutthe United States although sales are primarily within Colorado and adjacentstates.

During 2006, no customer accounted for10% or more of the total sales of the Company.

***CUSTOMER SERVICE AND SUPPORT***

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

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

***BACKLOG***

At December 30, 2006, theHeating and Cooling segment had a backlog of approximately $837,000 ($447,000at December 31, 2005) primarily relating to orders that are expected to befilled during the first quarter of 2007. The increase is due to increased fancoil bid activity.

At December 30, 2006, theEvaporative Cooling segment had a backlog of approximately $857,000 primarilydue to preseason orders placed prior to year end. This backlog is expected tobe filled during the first quarter of 2007. At December 31, 2005 there was nobacklog due to the timing of orders and the seasonal nature of the product.

At December 30, 2006, theConcrete, Aggregates and Construction Supplies segment had a backlog ofapproximately $12,815,000 ($20,846,000 at December 31, 2005) primarily relatingto construction contracts awarded and expected to be filled during 2007.Although the remaining work on two of the large projects in the Pueblo area, acement mill and a power plant, will be completed during 2007, the entire amountof the projects, as well as a third large municipal project, was included inthe backlog at December 31, 2005. While an increase or decrease in backlog isnormally more due to the timing of orders rather than indicative of changes indemand, the entire Front Range of Colorado is experiencing a slowdown ofconstruction, especially in the housing sector.

At December 30, 2006, theDoor segment had a backlog of approximately $6,208,000 ($3,496,000 at December31, 2005) primarily relating to orders that are expected to be filled during2007. The increase is more due to the timing of the shipment of completed jobsand the receipt of orders than indicative of any change in demand.

Otherthan the increase in bidding activity for fan coils, Management does notbelieve that any of the above backlogs represent a trend but rather are indicativeonly of the timing of orders received or contracts awarded.

***RESEARCH AND DEVELOPMENT/PATENTS***

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

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***MANUFACTURING***

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

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

Ingeneral, the Company can obtain the raw materials required by our operations inall segments from various sources in the quantities desired. The Company’sConcrete, Aggregates and Construction Supplies segment has historicallypurchased most of its cement requirements from a single supplier in order toobtain favorable volume related pricing. During the late third and early fourthquarter of 2005, the Company did experience some cement shortage due toproduction problems at its principal supplier’s cement mill. While thesituation has been corrected, the Company expects that there will be a tightsupply of cement until a cement mill, presently under construction near Pueblo,Colorado is completed. The company building the cement mill expects the mill tobe operational some time during 2007. The Company has no long-term supplycontracts and does not consider itself to be dependent on any individualsupplier. The Door segment has historically purchased the majority of itshardware primarily from a single supplier in order to obtain favorable volumerelated pricing, however, other suppliers are available.

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

***COMPETITIVE CONDITIONS***

Heating and Cooling— The Company is one of three principal companies producing wall furnaces(excluding units sold to the recreational vehicle industry) and gas firedconsole heaters. The wall furnace and console heater markets are only a smallcomponent of the heating industry. The Company serves these market areas from aplant in Colton, California.  The salesforce consists of in-house sales personnel and independent manufacturers’representatives. The heating industry is dominated by a few manufacturers whichare substantially larger than the Company. These manufacturers sell diversifiedlines of heating and air conditioning units directed primarily toward centralheating and cooling systems. All of the producers, including the Company,compete primarily on a basis of price, product features and performance,service and timeliness of delivery.

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

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

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

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The Company is one ofeight producers of aggregates in the Colorado Springs and Pueblo marketingareas. All producers compete on the basis of price, quality of material andservice.

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

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

***EMPLOYEES***

TheCompany employed 802 people as of December 30, 2006. Employment variesthroughout the year due to the seasonal nature of the businesses. A breakdownof the prior three years employment at year-end by segment was:

|                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Heating and Cooling                            |       | 265      |       | 166      |       | 149      |       |
| Evaporative Cooling                            |       | 139      |       | 119      |       | 128      |       |
| Concrete, Aggregates and Construction Supplies |       | 352      |       | 346      |       | 340      |       |
| Door                                           |       | 33       |       | 21       |       | 20       |       |
| Corporate Office                               |       | 13       |       | 13       |       | 13       |       |
| Total                                          |       | 802      |       | 665      |       | 650      |       |

 

Theincrease in the Heating and Cooling segment over the past two years is due tofilling a number of direct labor positions and office staff as production andsales have increased. The opening of a sales office in Oklahoma City during2005 also accounts for some of the increase. The increase in the Door segmentreflects the acquisition of CSSL on January 1, 2006. Other increases are inresponse to increased sales.

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

***ENVIRONMENTAL MATTERS***

Our operations involvethe use, release, discharge, disposal and clean up of substances regulatedunder federal, state and/or local environmental protection laws andregulations, including those related to reclamation of mined areas. We strivenot only to maintain compliance with all applicable environmental laws and regulations,but to exceed those laws and regulations where feasible.

In 2006, our capitalexpenditures and remediation expenses for environmental matters, except thoseexpenses related to our mining reclamation efforts, were not material to ourfinancial condition. Because of the complexity and ever-changing nature ofenvironmental laws and regulations, we cannot predict whether capitalexpenditures and remediation expenses for future environmental matters willmaterially affect our financial condition, results of operations or liquidity.

***AVAILABLE INFORMATION***

The Companyelectronically files various reports and other information with the Securitiesand Exchange Commission (SEC) including this annual report on Form 10-K, ourreports on Form 10-Q and our current reports on Form 8-K. The SEC maintains aninternet site that contains reports, proxy and information statements and otherinformation regarding the Company. Access to this information is available freeof charge at the SEC’s website at http://www.sec.gov. The Company does notmaintain a corporate website, however, we will provide electronic or papercopies of our filings, free of charge, upon electronic request toInvRel@contmtl.com or written request to Mark S. Nichter, Secretary andCorporate Controller, Continental Materials Corporation, 200 South WackerDrive, Suite 4000, Chicago, Illinois 60606.

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Item 1A.         **RISK FACTORS**

An investment in ourcommon stock involves risks and uncertainties. The factors set out below mayhave material adverse effects on our business, financial condition, results ofoperations and cash flows or on the value of our stock. There may be otherrisks which are not known to us.

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

Our common stock istraded on the American Stock Exchange under the symbol “CUO.” In addition tothe customary business factors affecting the price of a publicly traded company’scommon stock, such as financial condition, results of operations and cashflows, the concentration of ownership of the Company is a factor that should beconsidered before deciding to purchase, sell or hold our stock. Approximately84% of the Company’s common stock is owned by the Gidwitz family, otherofficers and directors of the Company, employees of the Company and by twoinstitutional fund groups. On days that the American Stock Exchange is open,the stock is often not traded at all and the average daily trading volume for2006 was less than 200 shares. The low volume traded on any given day couldhave an adverse effect on a shareholder’s ability to purchase or sell shares ofthe Company in a timely manner and/or adversely affect the trading price.

**We depend heavily on constructionsector activity levels which tend to be cyclical and which differ throughoutthe regions in which we operate.**

Our results dependheavily on residential, commercial and infrastructure construction activity andspending levels. The construction industry in our markets tends to be cyclical.Construction activity and spending levels vary across our markets and areinfluenced by interest rates, inflation, consumer spending habits, demographicshifts, environmental laws and regulations, employment levels and theavailability of funds for public infrastructure projects. Economic downturnsmay lead to recessions in the construction industry on a whole and,specifically, in our markets.

**Adverse weather lessens demand forour products, which is seasonal.**

Construction activity,and thus demand for our concrete, aggregates and construction supplies,decreases substantially during periods of cold weather, when it snows or whenheavy or sustained rains fall. Consequently, demand for these products is significantlylower during the winter. Sales of concrete, aggregates and constructionsupplies are generally stronger during the second and third quarters of theyear because weather conditions are normally more favorable for constructionduring these periods. Sales of furnaces and console heaters usually increase inthe months of August through January in response to colder weather in areasserved. Sales of the fan coil product line are throughout the United States,Canada and the Caribbean and are more evenly distributed throughout the yearalthough the highest volume typically occurs during the late spring and summer,particularly in Canada and in the Northern United States, where winter weathersignificantly reduces our first quarter sales. Evaporative coolers are marketedpredominantly in geographic areas that experience hot and dry weatherconditions. Sales are usually higher in the months of March through July. Salesof all of our products are, therefore, affected by adverse weather conditionsin their market locations. Such adverse weather conditions can materially andadversely affect our results of operations and profitability if they occur withunusual intensity, during abnormal periods, or last longer than usual in ourmajor markets.

**Competition in our industry couldadversely affect our results of operations.**

Substantially all of themarkets we operate in are highly competitive. In all of our business segments,we compete with several other domestic suppliers some of which aresubstantially larger than us. Many factors affect the competitive environmentswe face in our markets. Among others, they include the number of competitors inthe market, the pricing policies of those competitors, the financial strengthof those competitors, the total production capacity serving the market, thebarriers that potential competitors face to enter the market, the proximity ofnatural resources to the market, as well as economic conditions and productdemand within the market. Such factors come together in each of our markets invarying ways, sometimes in ways that adversely impact demand for our productsand our results of operations.

**Increased energy and fuel costs mayhave a material adverse effect on our results.**

Our operations consumesignificant amounts of energy. The price and availability of energy are subjectto political, economic and market factors that are generally outside ourcontrol. In addition, delivery of required raw materials and distribution ofour products are made by truck or rail (primarily required raw materials).Because of this, both the availability as well as the cost of energy and fuelhave significantly affected, and may continue to affect, our financialcondition, results of operations and liquidity.

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**Litigation could affect ourprofitability.**

The nature of all of ourbusiness segments exposes us to various litigation matters including productliability claims, employment, health and safety matters, environmental matters,regulatory and administrative proceedings, governmental investigations, tortclaims and contract disputes. We contest these matters vigorously and makeinsurance claims where appropriate. However, litigation is inherently costlyand unpredictable, making it difficult to accurately estimate the outcome ofexisting or future litigation or the cost of our legal representation. Althoughwe make accruals as we believe warranted, the amounts that we accrue could varysignificantly from any amounts we ultimately pay due to the inherentuncertainties in the estimation process.

**Governmental policies and laws,particularly those relating to protection of the environment, couldsignificantly impact our operations.**

As described more fullywithin “Manufacturing” in Item 1 Business, our operations require numerousgovernmental approvals and permits. Additionally, our HVAC products must meetvarious industry performance tests which are strictly monitored. Theseapprovals, permits and testing standards often require us to make significantcapital and maintenance expenditures to comply with the appropriate laws andregulations. Stricter laws and regulations including reclamation requirements,or stricter interpretation of existing laws or regulations, may impose newliabilities on us, require additional investment by us, such as for pollution controlequipment, or impede our opening new or expanding existing plants orfacilities. The Company also has, on occasion, been the target of publicpressure to exceed the legal requirements for reclamation contained in itsmining permits. Such incidents in the future may cause the Company to expendadditional amounts for reclamation not currently foreseen.

**Changes in the cost or availabilityof raw materials supplied by third parties may adversely affect our operatingand financial performance.**

We obtain certain rawmaterials from third parties who produce such materials as cement, aggregates(in the Denver market), fly ash and other additives as well as steel, motors,electronic components, copper tubing and other items. Should our existingsuppliers cease operations, reduce or eliminate production of these products orexperience work stoppages for whatever reason, our costs to procure thesematerials may increase significantly or we may be obliged to procurealternatives to replace these materials.

**Providing healthcare and workers’ compensationbenefits to our employees is a significant cost of operation. Continuingincreases in such costs could negatively affect our earnings.**

The costs of providinghealthcare and workers’ compensation benefits to our employees have increasedsubstantially over the past several years. We have instituted measures tocontrol these costs, however, many factors affecting these costs are not in ourcontrol. Should these costs continue to rise, this could have an adverse effecton our consolidated results of operations, cash flows or financial condition.

**If we fail to maintain proper andeffective internal controls, our ability to produce accurate financialstatements could be impaired.**

In designing andevaluating our internal controls, management recognizes that internal controls,no matter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the internal controls are met. Ourinternal controls have been designed to meet, and management believes that theymeet, reasonable assurance standards. Additionally, in designing internalcontrols, our management necessarily is required to apply its judgment inevaluating the cost-benefit relationship of possible internal controls. The designof any internal controls are based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any controlwill succeed in achieving its stated goals under all potential futureconditions. We annually assess the effectiveness of our internal controls.During this process, we may identify material weaknesses or significantdeficiencies in our internal controls, or areas for further attention orimprovement. Any failure to maintain that adequacy or our ability to produceaccurate financial statements (including the proper application of our criticalaccounting policies) on a timely basis could increase our operating costs andmaterially impair our ability to operate our business. In addition, investors’perceptions that our internal controls are subject to material weaknesses orsignificant deficiencies, or are otherwise inadequate, or that we are unable toproduce accurate financial statements may adversely affect our stock price.

**We may be adversely affected bydisruptions in our information technology systems.**

Our operations aredependent upon our information technology systems, which encompass all of ourmajor business functions. We rely upon such information technology systems tomanage and replenish inventory, fill and ship customer orders on a timelybasis, bill customers and coordinate our sales activities for our products andservices. A substantial disruption in our information technology systems forany prolonged time period could result in delays in receiving inventory andsupplies or filling customer orders and adversely affect our customer serviceand relationships.

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**A substantial amount of the Company’s common stockis controlled by a small number of investors and could delay or prevent achange of control.**

Approximately 84% of theCompany’s common stock is owned by the Gidwitz family, other officers anddirectors of the Company, employees of the Company and two institutional fundgroups. As such, these stockholders will exercise substantial control over ourfuture direction and operation and such concentration of control may have theeffect of discouraging, delaying or preventing a change in control and may alsohave an adverse effect on the market price of our common stock.

Item 2.              **PROPERTIES**

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

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

TheConcrete, Aggregates and Construction Supplies segment serves the Coloradoready-mix concrete market from ten owned batch plants. In addition, the Companycurrently operates aggregate processing facilities on three owned and fourleased mining properties. These properties presently provide the aggregaterequirements of our Colorado Springs and Pueblo ready mix concrete business aswell as selling product to independent customers. The Denver area batch plantscurrently purchase their aggregate needs from sources located closer to thatmarket. In general, the leased mining properties are on long-term leases withpayment based upon the number of tons mined. The lease of an aggregatesproperty in Pueblo, Colorado also requires minimum annual royalty payments. SeeNote 9 for the schedule of future minimum payments. Constuction supplies aresold from owned facilities adjacent to the main batch plants in ColoradoSprings and Pueblo. All of the Concrete, Aggregate and Construction Suppliessegment’s facilities are located along the Front Range in Colorado and, in theopinion of management, are in good condition and sufficient for the Company’scurrent needs. The Company also leases or owns other aggregate deposits alongthe Front Range that are not currently in production. In the opinion ofmanagement, the owned and leased properties contain permitted and minablereserves sufficient to service customers’ and our own sand, rock and gravelrequirements for the foreseeable future.

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

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

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

Item 3.              **LEGALPROCEEDINGS**

TheCompany is involved in litigation matters related to its continuing business,principally product liability matters related to the gas-fired heating productsin the Heating and Cooling segment. In the Company’s opinion, none of theseproceedings, when concluded, will have a material adverse effect on the Company’sconsolidated results of operations or financial condition as the Company hasestablished adequate reserves for known occurrences. See Management’sDiscussion and Analysis of Financial Condition and Results of Operations andNote 6.

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

There were no matterssubmitted to a vote of security holders during the fourth quarter of fiscal2006.

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

 

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

|        | ** ** | ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|--------|------------|----------------|------------|----------|------------|---------|------------|
| 2006   |       | Fourth Quarter |       | $        | 26.85      |    | $          | 26.10 |   |
|   |       | Third Quarter  |       | 27.60    |       | 26.20   |       |
|   |       | Second Quarter |       | 28.60    |       | 26.60   |       |
|   |       | First Quarter  |       | 29.40    |       | 28.00   |       |
| 2005   |       | Fourth Quarter |       | $        | 30.95      |    | $          | 29.10 |   |
|   |       | Third Quarter  |       | 31.25    |       | 29.95   |       |
|   |       | Second Quarter |       | 31.49    |       | 29.67   |       |
|   |       | First Quarter  |       | 30.60    |       | 27.29   |       |

 

At March 23, 2007,the Company had approximately 300 shareholders of record (includingnon-objecting beneficial owners).

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

The followingtable presents information with respect to purchases made by the Company of itscommon stock to become treasury stock for the period September 30, 2006 throughDecember 30, 2006:
| **Issuer Purchases of Equity Securities**  | ** ** |
|--------------------------------------------|------------|
| **Period**                                 | ** ** | **(a) Total  Number of   Shares   Purchased** | ** ** | **(b) Average  Price Paid  per Share** | ** ** | **(c) Total Number of  Shares Purchased as Part  of Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Dollar  Value of shares that May  Yet Be Purchased Under  the Plans or Programs** | ** ** |
| September 30 –  October 28, 2006 |       | — |   | $ | — |   | — |   | $ | 1,418,303 |   |
| October 29 – November 25,  2006  |       | — |   | — |   | — |   | 1,418,303 |   |
| November 26 –  December 30, 2006 |       | — |   | — |   | — |   | 1,418,303 |   |
| Total                                      |       | — |   | $ | — |   | — |   | $ | 1,418,303 |   |

 

On January 19, 1999, theCompany initiated purchases under the current open-ended program to repurchaseits common stock. Purchases are made on the open market or in block trades atthe discretion of management. The dollar amount authorized for the program hasbeen periodically increased by the Board of Directors and approved by theCompany’s two banks as required by the Company’s Revolving Credit and Term LoanAgreement. Effective May 29, 2004, the Board increased the permitted amount toa total not to exceed $2,750,000 for purchases on or after May 29, 2004,separate from purchases made in connection with the June 2005 tender offer and sharesacquired as part of a cashless exercise of stock options. There were no sharespurchased during the period presented above.

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

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##### **COMPARISONOF TOTAL STOCKHOLDER RETURN**

The followinggraph compares the yearly percentage change in the Company’s cumulative totalstockholder return on its common stock for a five-year period(December 31, 2001 to December 31, 2006), with the cumulative totalreturn of the American Stock Exchange Market Value Index (“ASEMVI”), and a peergroup of companies selected by the Company. The “Peer Group” is more fullydescribed below. Dividend reinvestment has been assumed with respect to theASEMVI and the Peer Group. The companies in the Peer Group are weighted bymarket capitalization as of the beginning of the measurement period. TheCompany has never paid a dividend.

The Companymanufactures and markets products in two separate industries. These industriesare (i) HVAC (Heating, Ventilation and Air Conditioning) primarilygas-fired wall furnaces, fan coils and evaporative coolers and(ii) Construction Products, primarily concrete, aggregates, constructionsupplies and doors. The Company’s principal activities have occurredexclusively in these two industries for over 15 years. The Peer Group selectedby the Company for the above graph is a combination of companies from these twoindustries. The companies included in the Peer Group are: Devcon InternationalCorp.; Eagle Materials, Inc; Fedders Corporation; Florida Rock Industries,Inc.; Hanson PLC; Lafarge North America, Inc. (Included through 2005. Acquiredby LaFarge SA – ADR during May 2006); LSB Industries, Inc.; Martin Industries,Inc. (Included through 2002. Liquidated during August 2003), Martin MariettaMaterials, Inc.; Mesteck, Inc.; and York International Corp. (Included through2005. Acquired by Johnson Controls during December 2005).

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| Item 6. | ** ** | **SELECTED FINANCIAL DATA (See note below chart)** |
|---------|------------|----------------------------------------------------|

(Amounts inthousands, except per share amounts)
| ** **                                                                                                                                                                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| SUMMARY  OF OPERATIONS                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Sales                                                                                                                                                                                            |       | $        | 158,767    |     | $          | 138,999  |       | $        | 126,940    |     | $          | 120,165 |   | $ | 128,301 |   |
| Net income                                                                                                                                                                                       |       | $        | 2,115      |     | $          | 2,758    |       | $        | 2,373      |     | $          | 2,349 |   | $ | 3,275 |   |
| PER SHARE DATA                                                                                                                                                                                   |       |     |       |     |       |     |       |     |       |     |       |
| Basic earnings  per share                                                                                                                                                                        |       | $        | 1.27       |     | $          | 1.72     |       | $        | 1.41       |     | $          | 1.34 |   | $ | 1.83 |   |
| Weighted average shares  outstanding                                                                                                                                                             |       | 1,605    |       | 1,602    |       | 1,681    |       | 1,754    |       | 1,794    |       |
| Diluted earnings  per share                                                                                                                                                                      |       | $        | 1.27       |     | $          | 1.69     |       | $        | 1.38       |     | $          | 1.31 |   | $ | 1.79 |   |
| Weighted average shares  outstanding                                                                                                                                                             |       | 1,605    |       | 1,632    |       | 1,725    |       | 1,791    |       | 1,830    |       |
| Cash dividends  declared per common share                                                                                                                                                        |       | $        | 0          |     | $          | 0        |       | $        | 0          |     | $          | 0 |   | $ | 0 |   |
| FINANCIAL CONDITION                                                                                                                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| Current ratio                                                                                                                                                                                    |       | 2.2:1    |       | 2.4:1    |       | 2.1:1    |       | 2.5:1    |       | 2.3:1    |       |
| Total assets                                                                                                                                                                                     |       | $        | 93,705     |     | $          | 87,060   |       | $        | 85,883     |     | $          | 81,826 |   | $ | 82,634 |   |
| Long-term debt,  including current portion                                                                                                                                                       |       | 15,666   |       | 12,000   |       | 9,000    |       | 10,970   |       | 13,520   |       |
| Shareholders’  equity                                                                                                                                                                       |       | 53,343   |       | 51,307   |       | 51,448   |       | 50,857   |       | 49,989   |       |
| Long-term debt to  shareholders’ equity ratio                                                                                                                                               |       | .29:1    |       | .23:1    |       | .17:1    |       | .22:1    |       | .27:1    |       |
| Book value per  diluted share                                                                                                                                                                    |       | $        | 33.23      |     | $          | 31.96    |       | $        | 31.09      |     | $          | 29.52 |   | $ | 28.01 |   |
| (Book value is  shareholders’ equity adjusted for exercise of options using end of year stock  price and shares outstanding)                                                                |       |
| Tangible book  value per diluted share                                                                                                                                                           |       | $        | 27.40      |     | $          | 26.91    |       | $        | 26.15      |     | $          | 24.65 |   | $ | 23.19 |   |
| (Same as above  calculation except Book value reduced by unamortized Goodwill and Intangibles  of $9,346, $8,102, $8,327, $8,552, and $8,777 for 2006, 2005, 2004, 2003 and  2002, respectively) |       |
| CASH FLOWS                                                                                                                                                                                       |       |     |       |     |       |     |       |     |       |     |       |
| Net cash  provided by (used in):                                                                                                                                                                 |       |     |       |     |       |     |       |     |       |     |       |
| Operating  activities                                                                                                                                                                            |       | $        | 1,933      |     | $          | 7,741    |       | $        | 5,519      |     | $          | 7,778 |   | $ | 9,753 |   |
| Investing  activities                                                                                                                                                                            |       | (8,658   | )          | (3,159   | )          | (3,350   | )          | (2,535   | )          | (9,547   | )          |
| Financing  activities                                                                                                                                                                            |       | 2,666    |       | (581)    |       | (3,950)  |       | (4,170)  |       | (4,249)  |       |
| Net increase (decrease)  in cash and cash equivalents                                                                                                                                            |       | $        | 4,059      |     | $          | 4,001    |       | $        | (1,781     | )        | $          | 1,073 |   | $ | (4,043 | ) |

 

Note: Abovefigures include the activity of MDHI since April 1, 2002, the activity of CSSLsince January 1, 2006 and the activity of ASCI since June 30, 2006, therespective dates each was acquired.

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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 Financial Statements contained elsewhere inthis report)

**COMPANY OVERVIEW**

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

TheHeating and Cooling segment produces and sells gas-fired wall furnaces, consoleheaters and fan coils from the Company’s wholly-owned subsidiary, WilliamsFurnace Co. (WFC) of Colton, California. The Evaporative Cooling segmentproduces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona. Sales ofthese two segments are nationwide, but are concentrated in the southwesternUnited States. Concrete, Aggregates and Construction Supplies are offered fromnumerous locations along the Front Range of Colorado operated by the Company’swholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co.,of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo and Rocky MountainReady Mix Concrete, Inc. of Denver. Doors are fabricated and sold along withthe related hardware from the Company’s wholly-owned subsidiary, McKinney Doorand Hardware, Inc. of Pueblo, Colorado. Sales of these two segments are highlyconcentrated in the Front Range area in Colorado although door sales are alsomade throughout the United States.

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

**FINANCIALCONDITION, LIQUIDITY AND CAPITAL RESOURCES**

Sales of the Company’s HVACproducts are seasonal and weather sensitive except for fan coils. Revenues inthe Company’s Concrete, Aggregates and Construction Supplies segment areinfluenced by the level of construction activity and weather conditions alongthe Front Range of Colorado. Sales for the Door segment are not as stronglyseasonal nor are they much affected by weather conditions. Historically, theCompany has experienced operating losses during the first quarter except whenthe weather is mild along the Front Range. Operating results typically improvein the second and third quarters reflecting more favorable weather conditionsin Colorado and the seasonal sales of the Evaporative Cooling segment. Fourthquarter results can vary based on weather conditions in Colorado as well as inthe principal markets for the Company’s heating equipment. The Companytypically experiences operating cash flow deficits during the first half of theyear reflecting operating results, the use of sales dating programs (extendedpayment terms) related to the Evaporative Cooling segment and payments of theprior year’s accrued incentive bonuses and Company profit-sharingcontributions. As a result, the Company’s borrowings against its revolvingcredit facility tend to peak during the second quarter and then decline overthe remainder of the year. This seasonal pattern has prevailed in 2006 and isexpected to continue in 2007.

Cashand cash equivalents were $2,770,000 at the end of 2006 compared to $6,829,000at the prior year-end. Operations in 2006 provided $1,933,000 of cash comparedto $7,741,000 in 2005 and $5,519,000 generated in 2004. The decrease in netcash generated by operating activities in 2006 was due to changes in workingcapital, principally an increase in receivables of $6,783,000 during 2006compared to a decrease in receivables of $671,000 during 2005. The increase inreceivables was largely due to the increased sales in all segments during thefourth quarter of 2006 compared to 2005 and to some slowing of collections atour Colorado businesses. The increase in net cash generated by operatingactivities in 2005 compared to 2004 was due to changes in net working capital.

Netcash used in investing activities was $8,658,000 in 2006, $3,159,000 in 2005,and $3,350,000 in 2004. Capital expenditures for 2006, 2005 and 2004 were$6,553,000, $3,776,000 and $4,267,000, respectively, exclusive of those assetspurchased as part of the ASCI and CSSL acquisitions. Current year expenditureswere predominantly in the Concrete, Aggregates and Construction Suppliessegment. The expenditures included $724,000 for the first outlay on anindustrial sand plant while the remaining additions consisted primarily ofroutine equipmentreplacements.Expenditures during 2005 included completion of a batch plant in Pueblo andfines recovery system for the Colorado Springs sand operation as well as thecapitalization of subsidized leasehold improvements in the 

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newoffice space leased for the Corporate office. The capital expenditures in 2004included a new batch plant in Pueblo West and a truck tracking system. Anadditional $2,452,000 was used in 2006 for the purchase of the ASCI and CSSLassets. On January 1, 2006 the Company purchased the assets of CSSL for$352,000 in cash including $100,000 of goodwill and $100,000 for a non-competeagreement. On June 30, 2006, the Company purchased certain assets of ASCI for$2,100,000 of cash and a $1,000,000 Note (remaining balance due on the Note atDecember 30, 2006 is $666,000). In addition to the $1,735,000 of trucks,equipment and concrete plant, the ASCI purchase price included $290,000 for anon-compete agreement, $350,000 for a restrictive land covenant, $370,000 forexisting customer relations and $355,000 of goodwill. Investing activitiesprovided cash from the proceeds from the sale of property and equipmentamounting to $347,000, $617,000 and $917,000 during 2006, 2005 and 2004,respectively. The 2006 sales were mainly of equipment replaced during the year.The sales of an excess parcel of land adjacent to one of the Colorado Springsbatch plants and the site of the closed Pueblo West plant accounted for$383,000 of the 2005 cash proceeds. In addition, during 2005 the Companyreceived a note for $788,000 related to one of the property sales. Sales of twoparcels of real estate generated $695,000 of the 2004 proceeds.

Budgetedcapital expenditures for 2007 are approximately $7,365,000, which isapproximately $2,118,000 more than planned depreciation, depletion andamortization. The budget includes $1,500,000 for a new door fabricationfacility in Colorado Springs. The purchase of equipment to increase productionin the Heating and Cooling segment is also planned. The remaining expendituresare primarily for routine replacement and upgrades. The Company expects thatthe 2007 expenditures will be funded from existing cash balances and operatingcash flow.

During2006, cash of $2,666,000 was provided by financing activities. As more fullydiscussed in Note 3, the principal amount of the term loan was increased by$5,000,000 during 2006, primarily to fund the acquisition of the assets ofASCI. The balance of the additional term loan proceeds will be used forbusiness expansion. See additional discussion of the term loan under RevolvingCredit and Term Loan Agreement, below. Scheduled debt repayments of $2,000,000were made during the year. In addition, scheduled payments of $334,000 weremade against the $1,000,000 Note issued as part of the purchase price of ASCIleaving a balance due of $666,000 at December 30, 2006. During 2005, cash of$581,000 was used in financing activities. The principal amount of the termloan was increased by $5,000,000 during 2005. Approximately $3,629,000 of theproceeds were used to fund the purchase of the Company’s stock under themodified Dutch auction tender offer completed during the second quarter, and topay related fees and expenses. Under the Company’s ongoing share repurchaseprogram, an additional $348,000 was used to acquire shares during 2005. A totalof 115,353 shares were acquired during 2005. Scheduled long-term debt paymentsof $2,000,000 were made during the year. During 2005, the remaining outstandingoptions were exercised for 73,400 shares (70,400 shares net of 3,000 sharestendered as payment of option price) which generated proceeds of $396,000 forthe Company and resulted in a $608,000 tax benefit (the tax benefit isclassified as an operating activity in the Consolidated Statement of CashFlows). During 2004, cash of $3,950,000 was used in financing activities.Scheduled long-term debt payments of $1,970,000 were made during the yearincluding the final $220,000 due on capital lease obligations. Under theCompany’s ongoing share repurchase program, cash of $1,980,000 was used toacquire 69,949 shares during 2004.

**Revolving Credit and Term LoanAgreement**

The Company signed aRevolving Credit and Term Loan Agreement (Credit Agreement) with LaSalle BankNational Association and Fifth Third Bank during September 2003. On June 8,2006, the Company entered into a Fourth Amendment to the Credit Agreement. ThisFourth Amendment increased the principal amount of the term loan portion of theCredit Agreement by $5,000,000. The revolving credit facility was alsoincreased from $10,000,000 to $15,000,000 under the terms of the FourthAmendment primarily due to increased stand-by letters of credit requirements toinsurance carriers in support of self-insured amounts under the Company’s riskmanagement program and to provide additional liquidity. All other materialterms of the Credit Agreement remain in force, except to the extent they havebeen modified by the Fourth Amendment as described in this paragraph.

The Credit Agreementprovides that, at the Company’s option, the term loan and revolving creditfacility will bear interest at prime or a performance-based LIBOR rate. Basedon the terms of the Fourth Amendment, the increase in the term loan and theCompany’s performance for the twelve months ended December 30, 2006, theperformance based rates would be LIBOR plus 1.50% for the term loan and LIBORplus 1.25% for borrowings under the revolving credit facility.****Such rate is subject to adjustment depending upon theCompany’s performance. Payment of accrued interest is due and payable quarterlyby the Company. Payments of principal under the term loan are payable on aquarterly basis, ending on March 31, 2011. The Fourth Amendment extends theRevolving Credit facility until July 31, 2008.

AtDecember 30, 2006, $15,000,000 was outstanding on the term loan. There were noborrowings against the revolving credit facility leaving $10,415,000 availableafter reserving $4,585,000 for the outstanding stand-by letters of credit. Therevolving credit facility is available at the discretion of management. It isprimarily used for funding 

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theseasonal sales programs related to the furnace and evaporative cooler productlines. As noted, the line is also used to secure stand-by letters of credit toinsurance carriers in support of self-insured amounts under the Company’s riskmanagement program. During the 2006 fiscal year, the highest amount of Companyborrowings outstanding under the revolving credit agreement, not including theamount securing stand-by letters of credit, was $4,500,000 and the averageamount outstanding was $685,000. At December 30, 2006, the Company was not incompliance with the Cash Flow Ratio as defined in the loan agreement. TheCompany has obtained waivers of the requirement for the 2006 year-end and thefirst quarter of 2007. The Company expects to be in compliance with thecovenant at the end of the second quarter of 2007. A principal reason for notmeeting the required ratio was the high level of capital expenditures during2006.

Duringfiscal 2001, the Company entered into an interest rate swap agreement (SwapAgreement) covering the period December 17, 2001 through December 18, 2006 inorder to minimize the adverse impact of the floating interest ratecharacteristic of some of the Company’s term loan borrowings. The Company’seffective interest rate on the portion of the outstanding term loan covered bythe Swap Agreement was 5.88% during 2006. The effect on the 2006 operations wasto increase net income by approximately $21,000.

The Company believes that itsexisting cash balance and anticipated cash flow from operations, supplementedby seasonal borrowings against the revolving line of credit, will be sufficientto cover expected cash needs, including servicing debt and planned capitalexpenditures for the next twelve months.

**Insurance Policies**

TheCompany maintained insurance policies since March 31, 2006 with the followingper incident deductibles and policy limits:

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

 

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

**Obligations and Commitments**

Thefollowing tables represent our obligations and commitments to make futurepayments under contracts, such as debt and lease agreements, and undercontingent commitments as of December 30, 2006.

PaymentsDue by Period as of December 30, 2006 (amounts in thousands):
| **Contractual Obligations**                | ** ** | **Total** | ** ** | **Less than   1 year** | ** ** | **1 – 3 years** | ** ** | **3 – 5 years** | ** ** | **More than  5 years** | ** ** |
|-------------------------------------------------|------------|-----------|------------|---------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|
| Long-term debt  including interest (See Note 5) |       | $         | 18,003     |                                  | $          | 3,176                               |       | $                                   | 6,269      |                             | $          | 8,558 |   | $ | — |   |
| Operating leases (See  Note 9)                  |       | 9,502     |       | 1,901                                 |       | 3,176                               |       | 1,883                               |       | 2,542                            |       |
| Minimum royalty  agreement (See Note 9)         |       | 22,674    |       | 436                                   |       | 872                                 |       | 872                                 |       | 20,494                           |       |
| Total contractual obligations                   |       | $         | 50,179     |                                  | $          | 5,513                               |       | $                                   | 10,317     |                             | $          | 11,313 |   | $ | 23,036 |   |

 

Intereston long-term debt is computed using the interest rate in effect at December 30,2006. The interest amounts do not include estimated interest payments due underour revolving credit facility because future borrowings under this facility areunknown at this time.

Amounts of CommitmentExpiration per Period as of December 30, 2006 (amounts in thousands):
| **Other Commercial Commitments** | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1 – 3 years** | ** ** | **3 – 5 years** | ** ** | **More than  5 years** | ** ** |
|--------------------------------------------|------------|-----------|------------|---------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|----------------------------------|------------|
| Standby letters of  credit                 |       | $         | 4,585      |                            | $          | 4,585                               |       | $                                   | —     |                             | $          | — |   | $ | — |   |
|                                            |            |           |            |                                 |            |                                     |            |                                     |            |                                  |            |  |  |  |  |  |

 

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**Off-Balance Sheet Arrangements**

We have not entered into any off-balance sheetarrangements that would be likely to have a material current or future effecton our financial condition, revenues, expenses, results of operations,liquidity, capital expenditures or capital resources.

**RESULTS OF OPERATIONS**

This section discussesconsolidated results. The following sections discuss the results of thereporting segments and contain more detail. Consolidated sales were$158,767,000 in 2006, $138,999,000 in 2005 and $126,940,000 in 2004. Theincrease in 2006 over 2005 was realized by all four segments as virtually allproducts ended the year with higher volumes than achieved in 2005. The primarydriver of the sales increase was the Concrete, Aggregates and ConstructionSupplies segment as a result of both volume and price increases. The increasein 2005 over the 2004 sales was realized primarily by the Concrete, Aggregatesand Construction Supplies segment although the Door and Evaporative Coolingsegments also reported gains. The increased sales in the Concrete, Aggregatesand Construction Supplies segment was the result of both volume increases dueto construction activity along the Front Range of Colorado as well as priceincreases in response to higher cement and fuel costs. The sales volumedeclined modestly in the Heating and Cooling segment where warmer than usualweather in California throughout most of the year depressed sales. Although allof the segments experienced a high level of price competition during 2005, someprice improvements were introduced in response to higher costs.

Cost of sales (exclusiveof depreciation, depletion and amortization) remained relatively constant at82.1% for both 2006 and 2005. The effect of flooding at two of our aggregatesoperations in July and August of 2006 reduced the effect of price increases andoperating efficiencies in the Concrete, Aggregates and Construction Suppliessegment. Door margins declined due to lower margins in the newly acquiredelectronic access business. Price competition and some dramatic material costincreases narrowed the margins of the Heating and Cooling segment while theEvaporative Cooling segment improved margins primarily due to a shift inproduct mix to larger industrial units. Cost of sales (exclusive ofdepreciation, depletion and amortization) increased as a percentage of salesfrom 81.4% for 2004 to 82.1% for 2005. The increase in percentage was due tocompetitive market conditions which prevented sales price increases from fullyrecovering the material and fuel cost increases. An increase in workers’compensation claims also added to the costs during 2005.

Depreciation, depletion and amortization increasedfrom 2005 to 2006 due to increased capital expenditures during 2006 andamortization of intangible assets associated with the ASCI and CSSL acquitions.Depreciation, depletion and amortization had declined from 2004 to 2005reflecting the effect of reduced capital spending in the prior three years.

Selling and administrative costs increased both indollars and as a percentage of sales, although the latter only modestly from12.3% in 2005 to 12.4% in 2006. While much of the increase was due to theincreased sales volume, a substantial increase in the Heating and Coolingsegment as well as additional costs of approximately $163,000 associated withthe redefinition of our segments and related late filing of the 2005 Form 10-Kalso drove these costs higher. Selling and administrative costs at thecorporate office declined largely due to lower incentive based compensation.Selling and administrative costs increased during 2005 as compared to 2004primarily due to the increased sales volume. As a percentage of sales, thesecosts declined modestly as compared to 2004. The administrative costs at the corporateoffice increased largely due to compensation. Selling and administrative costswithin the segments varied and are discussed below.

The gain on disposition of property and equipmentdecreased during 2006 compared to 2005. Current year sales primarily related tothe disposition of equipment that was replaced during the year. The 2005 amountincludes gains of $721,000 on the sales of property in Colorado Springs andPueblo while the 2004 gain includes $489,000 generated by sales of two parcelsof real estate in Colorado.

Operatingincome declined from $4,052,000 in 2005 to $3,849,000 in 2006 despite theincrease in sales largely due to the margin decline and increased selling andadministrative costs in the Heating and Cooling segment. The expenses relatedto the flooding at two of our aggregate operations as well as the decrease ingains on the sale of property and equipment also reduced operating income in2006. Operating income increased from $3,505,000 for 2004 to $4,052,000 for2005 primarily as a result of the increased sales volume, the decrease indepreciation expense and the increased gain on the sale of property andequipment. These positive factors were partially offset by higher material andfuel costs.

Netinterest expense increased over the prior year in both 2006 and 2005 due toincreased borrowings as well as higher average interest rates during bothyears.

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TheCompany’s effective income tax rates reflect federal and state statutory ratesadjusted for non-deductible and other tax items. The effective rate for 2006(35.3%) was increased by 6.1% for adjustments made to state taxes and reducedby 5.4% for the benefit realized from percentage depletion. The effective ratefor 2005 (22.5%) was reduced by 8.1% for adjustments made to the accrual fortax contingencies as a result of the closure of tax years subject to audits bytaxing authorities. The 2005 effective rate was also reduced by 2.4% forpercentage depletion. The effective rate for 2004 (24.0%) was reduced by 4.2%for adjustments made to the accrual for tax contingencies. The 2004 rate wasalso reduced by 5.5% for state tax credits and 3.1% for percentage depletion.The Company reviews its tax positions on a quarterly basis and accrues amountsfor potential tax contingencies. Based on these reviews and the closure of taxyears subject to tax audit, reserves are adjusted as necessary. Reserves forthese tax matters are included in income taxes payable on the consolidatedbalance sheets. See Note 9.

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

**ConstructionProducts Industry Group**

The table below presentsa summary of operating information for the two reportable segments within theConstruction Products industry group for the fiscal years 2006, 2005 and 2004(amounts in thousands).
| ** **                              | ** ** | **Concrete,   Aggregates and   Construction   Supplies** | ** ** | **Doors** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------|------------|
| 2006                                    |       |                                                                         |       |      |       |
| Revenues from  external customers       |       | $                                                                            | 96,862     |      | $          | 9,452 |   |
| Segment  operating income               |       | 5,723                                                                        |       | 657       |       |
| Operating income  as a percent of sales |       | 5.9                                                                          | %          | 7.0       | %          |
| Segment assets                          |       | $                                                                            | 55,713     |      | $          | 3,507 |   |
| Return on assets                        |       | 10.3                                                                         | %          | 18.7      | %          |
|                                    |       |                                                                         |       |      |       |
| 2005                                    |       |                                                                         |       |      |       |
| Revenues from  external customers       |       | $                                                                            | 82,644     |      | $          | 8,727 |   |
| Segment  operating income               |       | 3,805                                                                        |       | 777       |       |
| Operating income  as a percent of sales |       | 4.6                                                                          | %          | 8.9       | %          |
| Segment assets                          |       | $                                                                            | 47,180     |      | $          | 2,914 |   |
| Return on assets                        |       | 8.1                                                                          | %          | 26.7      | %          |
|                                    |       |                                                                         |       |      |       |
| 2004                                    |       |                                                                         |       |      |       |
| Revenues from  external customers       |       | $                                                                            | 73,311     |      | $          | 7,087 |   |
| Segment  operating income               |       | 2,331                                                                        |       | 486       |       |
| Operating income  as a percent of sales |       | 3.2                                                                          | %          | 6.9       | %          |
| Segment assets                          |       | $                                                                            | 50,778     |      | $          | 2,964 |   |
| Return on assets                        |       | 4.6                                                                          | %          | 16.4      | %          |

 

Concrete,Aggregates and Construction Supplies Segment

Sales in the Concrete, Aggregates and ConstructionSupplies segment improved to $96,862,000 in 2006, an increase of $14,218,000,or 17.2% over the 2005 amount of $82,644,000. The improvement was primarily dueto three large commercial jobs in the Pueblo area, the relatively strongconstruction market during the first half of 2006 coupled with favorableweather conditions during the first quarter of the year as compared to the 2005quarter and concrete price increases. Although the housing market slowedmidyear, continued work on the three large industrial jobs allowed us toincrease sales volume for 2006 despite volume declines in Denver and ColoradoSprings for the year. The purchase of ASCI on June 30, 2006 also helped offsetsome of the effect of the slowing market in Colorado Springs. Concrete pricingimproved during 2006 althought the increases were largely instituted to offsetincreased cement and fuel cost. Aggregates sales improved in combination withthe concrete volume. Sales of the supplies division declined in a slower, moreprice competitive market.

Sales for 2005 in the Concrete, Aggregates andConstruction Supplies segment increased $9,333,000, or 12.7% over the 2004amount of $73,311,000. Concrete volume increased in Colorado Springs and Denverwhile Pueblo saw a small decline. Volumes improved primarily as a result ofincreased construction activity along the Front Range of Colorado. Pricingimproved at all locations largely in response to the higher cost of cement andfuel. The Denver operations also experienced an increase in their cost ofaggregates. Although prices in the Denver ready mix concrete market rose forthe first time in three years, conditions remain very competitive. Managementestimates that the market-wide cement shortage during the months of Septemberand October 2005 resulted in lost concrete volume of 3% to 4% for the year.Aggregates sales improved as demand for concrete rose. Sales of constructionsupplies mirrored the increases experienced by the other products.

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Operating income is highly sensitive to sales volumein the Concrete, Aggregates and Construction Supplies segment.  This segment has also historically required asizable investment in capital assets resulting in a large portion of its costsbeing relatively fixed in nature. Operating income as a percent of sales,therefore, generally increases and decreases at a higher rate but in tandemwith sales changes.

Operating income was $5,723,000 for 2006 and increasedat a greater rate than sales as compared to the 2005 results of $3,805,000.Cost of sales as a percentage of sales declined from 85.4% in 2005 to 83.9% in2006. The improvement is the result of some price increases in excess of thehigher cement and fuel costs, delivery cost efficiencies on the largeindustrial jobs, lower workers’ compensation claims, and the relatively fixednature of some costs that rose at a lower rate than the sales increases.Selling and administrative costs increased but declined as a percentage ofsales due to the fixed nature of some of the costs. Partially offsetting theseimprovements were the $726,000 decrease in the 2006 gain on dispositions ofproperty and equipment from the 2005 level in this segment and the effect offlooding at our two Arkansas River operations in July and a second flood at ourPueblo East pit in late August. Both were the result of heavy rains in thearea. All expenses incurred to repair the damage and resume production havebeen recognized in 2006 cost of sales. Both quarries are back in operationalthough some measures to mitigate future vulnerability have not yet beenfinalized. Management estimates that the effect of the flooding added over$1,000,000 in expenses at the two gravel operations. The Company has filedinsurance claims. The claims, which are subject to policy deductibles, arecurrently being reviewed by the insurance companies. No recovery has beenanticipated or recorded in the 2006 results of operations.

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

The return on assets for 2006 increased as a result ofthe higher sales and improved profit margins partially offset by the investmentrelated to the ASCI acquisition and a higher level of receivables. The returnon assets in 2005 as compared to the return for 2004 was enhanced by the$2,890,000 decrease in assets that related to this segment’s portion of thereceivable for insured losses.  Thisasset, which we are required to record by Financial Accounting Standards Board(FASB) Interpretation 39, “Offsetting of Amounts Related to Certain Contracts,”is offset by an equal liability for unpaid claims covered by insurance. Achange in this asset between years distorts the return on assets percentage.

Door Segment

Sales in the Door segment for 2006 increased $725,000or 8.3% over 2005 primarily due to the acquisition of CSSL at the beginning ofthe year. Sales in the Door segment for 2005 were $8,727,000, an increase of$1,640,000, or 23.1% over the 2004 amount of $7,087,000. The increase was theresult of a slightly stronger market and, to some extent, higher sales pricesresulting from increased costs.

Operating income was $657,000 during 2006 compared to$777,000 during 2005 despite the increase in sales resulting from the acquisitionof CSSL. Narrower margins in the electronic access business and expensesassociated with the assimilation of the businesses contributed to the decline.Operating income was $777,000 during 2005 compared to $486,000 for 2004. Theimprovement was the result of the increased sales.

Operating income as a percentage of sales for 2006returned to the 2004 level due to the narrower margins in the newly acquiredCSSL electronic access business noted above. The higher percentage of operatingincome to sales achieved during 2005 was due to the higher operating incomeresulting from the increase in sales. Similarly, the return on assets for 2006also declined from the 2005 level although it remained above the 2004 return.The decline in 2006 as compared to 2005 was the result of both the decreasedoperating income in 2006 combined with an increase in the segment assets,primarily receivables and inventories which are higher due to the increase insales. The return on assets for 2005 was much higher than during 2004 due tothe higher operating income while the segment assets declined slightly. Theincrease in sales for 2005 as compared to 2004 did not result in a higherreceivable balance at year-end 2005 as the increase was achieved more ratablyover the year while the increased sales in 2004 came more heavily at theyear-end.

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**HVACIndustry Group**

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC industry group for the fiscal years 2006, 2005 and2004 (amounts in thousands).

 
| ** **                              | ** ** | **Heating and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|--------------------------|------------|
| 2006                                    |       |                          |       |                     |       |
| Revenues from  external customers       |       | $                             | 29,930     |                     | $          | 22,167 |   |
| Segment  operating income               |       | 161                           |       | 267                      |       |
| Operating income  as a percent of sales |       | .5                            | %          | 1.2                      | %          |
| Segment assets                          |       | $                             | 18,303     |                     | $          | 12,651 |   |
| Return on assets                        |       | .9                            | %          | 2.1                      | %          |
|                                    |       |                          |       |                     |       |
| 2005                                    |       |                          |       |                     |       |
| Revenues from  external customers       |       | $                             | 26,736     |                     | $          | 20,545 |   |
| Segment  operating income               |       | 2,777                         |       | (177                     | )          |
| Operating income  as a percent of sales |       | 10.4                          | %          | (.9                      | )%         |
| Segment assets                          |       | $                             | 16,986     |                     | $          | 12,544 |   |
| Return on assets                        |       | 16.3                          | %          | (1.4                     | )%         |
|                                    |       |                          |       |                     |       |
| 2004                                    |       |                          |       |                     |       |
| Revenues from  external customers       |       | $                             | 27,598     |                     | $          | 18,598 |   |
| Segment  operating income               |       | 3,170                         |       | 266                      |       |
| Operating income  as a percent of sales |       | 11.5                          | %          | 1.4                      | %          |
| Segment assets                          |       | $                             | 15,927     |                     | $          | 13,081 |   |
| Return on assets                        |       | 19.9                          | %          | 2.0                      | %          |

 

Heating and CoolingSegment

Salesin the Heating and Cooling segment increased to $29,930,000, an increase of$3,194,000 or 11.9%, from the 2005 amount of $26,736,000. Sales of bothfurnaces and fan coils rose during the year. Furnace volume increased due to therecapture of all of the business of a large national home center account. Thefan coil sales increase is attributable to the Company’s restructuring of itssales representative network and the addition of internal sales  and support staff.

Salesfor 2005 declined $862,000 or 3.1% from the 2004 amount of $27,598,000. Adecline in furnace sales was partially offset by an increase in fan coil sales.The decline in furnace sales was largely due to the loss of business to a largenational home center account in one geographic location and warmer than usualweather in California throughout most of the year. Fan coil sales improved in astill weak market as the result of more competitive pricing.

Operating income declined from $2,777,000 for 2005 to$161,000 during 2006. The decline is the result of numerous factors, allreducing income. Pricing decisions made to retain and expand our furnacebusiness with a national home center account reduced our selling price and therelated margin. A substantial price increase in copper prices coupled withincreases in aluminum and steel narrowed margins for both product linesalthough the primary effect was on the fan coil line due to its considerablecopper content. Furnace prices are established at the beginning of the season.Fan coil pricing is generally determined and fixed at the time the contract isawarded. The period of time from the awarding of a contract and the productionand delivery of the product can vary. During this intervening period in 2006,we experienced significant increases in copper prices which were the principalcontributor to the lower fan coil margins. The Company has not used financialinstruments to hedge copper or other commodity prices. The addition of sales,engineering and support staff and the opening of a sales and service center inOklahoma City made to increase fan coil sales increased selling andadministrative expenses. Expenditures for computer system upgrades and productconfiguration software and the cost of general business consultants engaged toreview all aspects of the business and organization also increased selling andadministrative costs. Finally, our earthquake insurance premiums increased byapproximately $100,000.

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

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Operating income as a percent of sales and the returnon assets were both much lower in 2006 compared to 2005 due to the loweroperating income. The factors that resulted in the reduced operating income arediscussed above. Operating income as a percent of sales and the return onassets were both lower in 2005 compared to 2004 as a result of the loweroperating income as discussed above. The decline in the return on assets wasslightly higher as an increase in receivables and inventories raised the 2005year-end assets level at the same time that operating income declined.

Evaporative CoolingSegment

Salesin the Evaporative Cooling segment improved to $22,167,000, an increase of$1,622,000 or 7.9%, over the 2005 amount of $20,545,000. Unit volume increasednotably for the larger industrial applications. Sales for 2005 increased$1,947,000 or 10.5% over the 2004 amount of $18,598,000. Sales of evaporativecoolers increased as a result of the partial recapture of the window unitbusiness at a large national home center account and favorable weather thatextended into August.

Operating results improved from the loss of $177,000for 2005 to a profit of $267,000 in 2006. The overall increased sales volumecombined with the shift to the larger industrial units improved the margins.Reduced workers’ compensation claims also aided the return to profitability.Operating results for 2005 declined from $266,000 for 2004 to a loss of  $177,000 for 2005 despite the increase insales. Cost of sales, as a percent of sales, increased from 80.1% to 85.4%. Theincreased percentage was due to pricing decisions made in response to pricingintroduced by our largest competitor. Higher workers’ compensation claims andlower production volume also contributed to the higher cost ratio.

Operating results as a percent of sales are still verylow due to the modest amount of operating income but it has returned to a levelapproaching 2004’s level after the loss incurred during 2005. The return onassets slightly exceeded the 2004 level due to the decrease in segment assets,the result of lower inventory levels and the reduced net book value ofproperty, plant and equipment. Operating results as a percent of sales and thereturn on assets for 2005 are not meaningful due to the operating loss incurredduring the year. The factors that resulted in the loss are discussed above.

**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.

Intangibles

Inaccordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwilland Other Intangible Assets,” goodwill is not amortized as a charge toearnings. The Company annually assesses goodwill for potential impairment as ofthe last day of its fiscal year. In addition, to the extent that events occur,either involving the relevant Company subsidiaries or in their industries, theCompany revisits its assessment of the recorded goodwill to determine ifimpairment has occurred and should be immediately recognized. This assessmentrequires us to make significant assumptions and estimates about the extent andtiming of future cash flows, discount rates, growth rates and costs. Inaddition, the terms of recent industry transactions/mergers are considered. Noimpairment was indicated in the current year. If the assessment had indicatedthat the carrying value of goodwill was impaired, an impairment charge wouldhave been recorded for the amount by which the carrying value of the goodwillexceeded its fair value. Management believes that the assumptions and estimatesused to determine the estimated fair values are reasonable; however, changes inthe aforementioned assumptions and estimates, as well as the effects of unknownfuture events or circumstances could materially affect the estimated fairvalue.

Liabilities

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

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TheCompany records a reserve for future reclamation work to be performed at itsvarious aggregate operations based upon an estimate of the total expense thatwill be incurred to reclaim the disturbed areas. Actual reclamation costs arecharged against the reserve. The adequacy of the recorded reserve is assessed annually.The assessment may be done more frequently if events or circumstances arisethat may indicate a change in estimated costs, recoverable material or theperiod of mining activity. The Company periodically engages an independentprofessional to assist in reevaluating the estimates of both the quantities ofrecoverable material and the cost of reclamation. This analysis requires theindependent professional and us to make significant assumptions and estimatesabout the mining plans, homogeneity of the deposits, third party costs toperform work, method of reclamation to be used, etc. Management believes thatthe assumptions and estimates used to determine the reserve are reasonable;however, changes in the aforementioned assumptions and estimates, as well asthe effects of unknown future events or circumstances, including legislativerequirements, could materially affect estimated costs, the quantitites ofrecoverable material or the period of mining. Depletion of rock and sanddeposits and amortization of deferred development costs are computed by theunits-of-production method based upon estimated recoverable quantities of rockand sand.

Sales

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

Recently Issued Accounting Standards

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

InSeptember 2006, the FASB issued Staff Accounting Bulletin (SAB) 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.” SAB 108 was issued to provide interpretiveguidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a current year misstatement.SAB 108 is effective for annual financial statements covering the first fiscalyear beginning after November 15, 2006. Adoption of SAB 108 in fiscal 2007 isnot expected to have a material impact on the Company’s consolidated results ofoperations, cash flows or financial condition.

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” whichdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (“GAAP”), and expands disclosuresabout fair value measurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements. Accordingly,SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. We have notcompleted our evaluation of the impact of the adoption of FSAS No. 157.

In February 2007, the FASB issued a related statement, SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities.” SFAS No. 159 permits entities to choose tomeasure at fair value many financial instruments and certain other items suchas investments, debt and derivative instruments. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007. We have not yet begunevaluating the potential impact, if any, the adoption of SFAS No. 159could have on our consolidated financial position, results of operations, andcash flows.

InJune 2006, the FASB issued Interpretation No. (FIN) 48, “Accounting forUncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,which clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with SFAS 109, “Accounting forIncome Taxes.”

FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.

FIN48 is effective for fiscal years beginning after December 15, 2006. We plan toadopt FIN 48 effective for the first quarter of the 2007 fiscal year. We arecurrently evaluating the effect that the adoption of FIN 48 will have on ourconsolidated results of operations and are not yet in a position to determinesuch effects.

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InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces AccountingPrinciples Board Opinion No. 20 “AccountingChanges” and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements.” SFAS 154 iseffective for accounting changes and correction of errors made in fiscal yearsbeginning after December 15, 2005 and requires retrospective application toprior period financial statements of voluntary changes in accounting principle,unless it is impractical to determine either the period-specific effects or thecumulative effect of the change. Adoption of SFAS No. 154 during 2006 did nothave an impact on the Company’s consolidated results of operations, cash flowsor financial condition. Furthermore, future consolidated results of operations,cash flows or financial condition will only be impacted by SFAS 154 if theCompany implements a voluntary change in accounting principle or identifies andcorrects accounting errors in future periods.

InMarch 2005, the Emerging Issues Task Force reached a consensus on Issue 04-6, “Accountingfor Stripping Costs in the Mining Industry” (EITF 04-6) which is effective onJanuary 1, 2006. EITF 04-6 states that stripping costs incurred after the firstsaleable minerals are extracted from the mine (i.e. post-production strippingcosts) should be considered costs of the extracted minerals and recognized as acomponent of inventory to be recognized in costs of sales in the same period asthe revenue from the sale of the inventory. The Company has historicallytreated post-production stripping costs in the manner proscribed by EITF 04-6,therefore, adoption of EITF 04-6 during fiscal 2006 did not have a materialimpact on the Company’s consolidated results of operations, cash flows orfinancial condition.

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 requires using a fair-value based modelfor the measurement of all employee share-based payments, including grants ofemployee stock options. Deferred compensation calculated under the fair valuemethod would then be amortized into income over the respective vesting periodof the stock option. The accounting provisions of SFAS 123R are effectivefor reporting periods beginning after June 15, 2005. There are no stock optionsoutstanding as of December 30, 2006 therefore the adoption of SFAS 123R did nothave an impact on the Company’s consolidated results of operations, cash flowsor financial condition.

InDecember 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions,” as part of its short-terminternational convergence project with the International Accounting StandardsBoard. Under SFAS 153, nonmonetary exchanges are required to be accounted forat fair value, recognizing any gains or losses, if their fair value isdeterminable within reasonable limits and the transaction has commercial substance.SFAS 153 is effective for fiscal years beginning after June 15, 2005. Adoptionof SFAS 153 did not have a material impact on the Company’s 2006 consolidatedresults of operations, cash flows or financial condition.

InNovember 2004, Statement of Financial Accounting Standards (SFAS) No. 151, “InventoryCosts - An Amendment of ARB No. 43, Chapter 4,” was issued which amends theguidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “InventoryPricing,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material.  Among otherprovisions, the new rule requires that items such as idle facility expense,excessive spoilage, double freight and rehandling costs be recognized as current-period charges regardless of whether they meet the criteria of “so abnormal”as stated in ARB No. 43. Additionally, SFAS 151 requires the allocation offixed production overheads to the costs of conversion be based on the normalcapacity of the production facilities.  SFAS 151 is effective for fiscalyears beginning after June 1, 2005. The adoption of SFAS 151 during fiscal 2006did not have a material impact on its consolidated results of operations, cashflows or financial condition.

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

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Item7A**.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

TheCompany is exposed to market risks related to commodity prices and interestrates. To manage interest rate risk, the Company has, from time to time,entered into interest rate swaps as cash flow hedges. These swaps areauthorized by the Company’s policies and procedures. The Company does not useswaps or hedging instruments for trading purposes, and is not a party to anytransaction involving leveraged derivatives. The Company entered into aninterest rate swap agreement (Swap Agreement) covering the period December 17,2001 through December 18, 2006 in order to minimize the adverse impact of thefloating interest rate characteristic of some of the Company’s term loanborrowings. The Company’s effective interest rate on the portion of the termloan covered by the Swap Agreement was 5.88% during 2006. Cash payments orreceipts associated with this agreement are reflected in interest expense. Thefixed rate under the Swap Agreement was less than the floating rate on the termloan during 2006 but exceeded the floating rate during 2005 and 2004. Theeffect on operations was to increase net income by $21,000 for 2006 whilereducing net income by $31,000 and $162,000 for 2005 and 2004, respectively.The fair value of the Swap Agreement is recorded on the balance sheet withsubsequent changes recorded as a separate component of accumulated othercomprehensive income in shareholders’ equity. See paragraph below and abovediscussion under Financial Condition, Liquidity and Capital Resources. See Note3.

Interest Rates

TheCompany utilizes revolving credit and term-loan facilities that bear interestat either prime or an adjusted LIBOR rate. The amount outstanding under thesefacilities aggregated $15,000,000 at December 30, 2006. The Company is not aparty to any capital lease agreements as of December 30, 2006. 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**

** **
|                                                                                                       | ** ** | **PAGE**   |
|-------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                  |       |       |
| Financial Statements and Schedule of Continental                                                      |       |       |
| Materials Corporation and report thereon:                                                             |       |       |
|                                                                                                  |       |       |
| Consolidated statements of operations and  comprehensive income  for fiscal years 2006, 2005 and 2004 |       |  

24 |
|                                                                                                  |       |       |
| Consolidated statements of cash flows   for fiscal years 2006, 2005 and 2004                          |       |  

25 |
|                                                                                                  |       |       |
| Consolidated balance sheets as of December 30, 2006  and December 31, 2005                            |       |  

26 |
|                                                                                                  |       |       |
| Consolidated statements of shareholders’ equity  for fiscal years 2006, 2005 and 2004            |       |  

27 |
|                                                                                                  |       |       |
| Notes to consolidated financial statements                                                            |       | 28-38      |
|                                                                                                  |       |       |
| Reports of Independent Registered Public Accounting  Firms                                            |       | 39-40      |

 

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**ContinentalMaterials Corporation**

**ConsolidatedStatements of Operations and Comprehensive Income**

**ForFiscal Years 2006, 2005 and 2004**

(Amounts in thousands except share data)

 
| ** **                                                                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                     |       |     |       |     |       |     |       |
| Sales                                                                                                    |       | $        | 158,767    |     | $          | 138,999  |       | $ | 126,940 |   |
| Costs  and expenses                                                                                      |       |     |       |     |       |     |       |
| Cost of sales  (exclusive of depreciation,  depletion and amortization)                                  |       | 130,410  |       | 114,065  |       | 103,320  |       |
| Depreciation,  depletion and amortization                                                                |       | 5,009    |       | 4,729    |       | 5,027    |       |
| Selling and  administrative                                                                              |       | 19,711   |       | 17,095   |       | 15,699   |       |
| Gain on disposition of  property and equipment                                                           |       | 212      |       | 942      |       | 611      |       |
| Operating income                                                                                         |       | 3,849    |       | 4,052    |       | 3,505    |       |
|                                                                                                     |       |     |       |     |       |     |       |
| Interest expense                                                                                         |       | (808     | )          | (565     | )          | (516     | )          |
| Other income, net                                                                                        |       | 116      |       | 71       |       | 134      |       |
| Income before income  taxes                                                                              |       | 3,157    |       | 3,558    |       | 3,123    |       |
| Income tax provision                                                                                     |       | 1,115    |       | 800      |       | 750      |       |
| Net income                                                                                               |       | $        | 2,042      |     | $          | 2,758    |       | $ | 2,373 |   |
|                                                                                                     |       |     |       |     |       |     |       |
| Basic earnings per  share                                                                                |       | $        | 1.27       |     | $          | 1.72     |       | $ | 1.41 |   |
| Weighted average  shares outstanding                                                                     |       | 1,605    |       | 1,602    |       | 1,681    |       |
| Diluted earnings per  share                                                                              |       | $        | 1.27       |     | $          | 1.69     |       | $ | 1.38 |   |
| Weighted average  shares outstanding                                                                     |       | 1,605    |       | 1,632    |       | 1,725    |       |
|                                                                                                     |       |     |       |     |       |     |       |
| Comprehensive income:                                                                                    |       |     |       |     |       |     |       |
| Net income                                                                                               |       | $        | 2,042      |     | $          | 2,758    |       | $ | 2,373 |   |
| Comprehensive (loss)  income from interest rate   swap, net of tax of $(3), $44, and   $83, respectively |       | (6       | )          | 73       |       | 198      |       |
| Total comprehensive income                                                                               |       | $        | 2,036      |     | $          | 2,831    |       | $ | 2,571 |   |

 

 

 

 

 

 

 

The accompanyingnotes are an integral part of the financial statements.

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**Continental Materials Corporation ConsolidatedStatements of Cash Flows**

**ForFiscal Years 2006, 2005 and 2004**

(Amounts in thousands)

 
| ** **                                                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities                                                                |       |     |       |     |       |     |       |
| Net income                                                                          |       | $        | 2,042      |     | $          | 2,758    |       | $ | 2,373 |   |
| Adjustments to  reconcile net income to net   cash provided by operating activities |       |     |       |     |       |     |       |
| Depreciation,  depletion and amortization                                           |       | 5,009    |       | 4,729    |       | 5,027    |       |
| Deferred income  tax provision                                                      |       | 213      |       | (179     | )          | 89       |       |
| Provision for  doubtful accounts                                                    |       | 341      |       | 94       |       | 108      |       |
| Gain on  disposition of property and equipment                                      |       | (212     | )          | (942     | )          | (611     | )          |
| Tax benefit from  exercise of stock options                                         |       | —   |       | 608      |       | —   |       |
| Changes in  operating assets and liabilities                                        |       |     |       |     |       |     |       |
| Receivables                                                                         |       | (6,783   | )          | 671      |       | (1,472   | )          |
| Inventories                                                                         |       | 718      |       | (846     | )          | (428     | )          |
| Prepaid expenses                                                                    |       | (392     | )          | (287     | )          | (28      | )          |
| Prepaid  royalties                                                                  |       | 115      |       | (115     | )          | (239     | )          |
| Accounts payable  and accrued expenses                                              |       | 1,312    |       | 1,509    |       | 735      |       |
| Income taxes                                                                        |       | 236      |       | (425     | )          | 88       |       |
| Other                                                                               |       | (666     | )          | 166      |       | (123     | )          |
| Net cash provided by  operating activities                                          |       | 1,933    |       | 7,741    |       | 5,519    |       |
|                                                                                |       |     |       |     |       |     |       |
| Investing activities                                                                |       |     |       |     |       |     |       |
| Cash paid for  acquisitions of assets of certain businesses                         |       | (2,452   | )          | —   |       | —   |       |
| Capital  expenditures                                                               |       | (6,553   | )          | (3,776   | )          | (4,267   | )          |
| Cash proceeds  from sale of property and equipment                                  |       | 347      |       | 617      |       | 917      |       |
| Net cash used in  investing activities                                              |       | (8,658   | )          | (3,159   | )          | (3,350   | )          |
|                                                                                |       |     |       |     |       |     |       |
| Financing activities                                                                |       |     |       |     |       |     |       |
| Long-term  borrowings                                                               |       | 5,000    |       | 5,000    |       | —   |       |
| Repayment of  long-term debt                                                        |       | (2,000   | )          | (2,000   | )          | (1,970   | )          |
| Payment on note  issued for acquisition                                             |       | (334     | )          | —   |       | —   |       |
| Proceeds from  exercise of stock options                                            |       | —   |       | 396      |       | —   |       |
| Payments to  acquire treasury stock                                                 |       | —   |       | (3,977   | )          | (1,980   | )          |
| Net cash provided by  (used in) financing activities                                |       | 2,666    |       | (581     | )          | (3,950   | )          |
| Net (decrease) increase  in cash   and cash equivalents                             |       | (4,059   | )          | 4,001    |       | (1,781   | )          |
|                                                                                |       |     |       |     |       |     |       |
| Cash and cash  equivalents                                                          |       |     |       |     |       |     |       |
| Beginning of  year                                                                  |       | 6,829    |       | 2,828    |       | 4,609    |       |
| End of year                                                                         |       | $        | 2,770      |     | $          | 6,829    |       | $ | 2,828 |   |
|                                                                                |       |     |       |     |       |     |       |
| Supplemental  disclosures of cash flow items                                        |       |     |       |     |       |     |       |
| Cash paid  (received) during the year                                               |       |     |       |     |       |     |       |
| Interest                                                                            |       | $        | 1,041      |     | $          | 806      |       | $ | 585 |   |
| Income taxes                                                                        |       | 665      |       | 795      |       | 608      |       |
| Supplemental  disclosures of noncash investing and   financing activities           |       | $        | 1,000      |     | $          | —   |       | $ | — |   |
| Note issued as  partial consideration for ASCI purchase                             |       |     |       |     |       |     |       |
| Note received as  consideration for sale of property                                |       | —   |       | 788      |       | —   |       |
| Value of shares  tendered as payment related to   exercise of stock options         |       | —   |       | 93       |       | —   |       |

 

 

 

 

The accompanyingnotes are an integral part of the financial statements.

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**Continental Materials Corporation**

**ConsolidatedBalance Sheets As of December 30, 2006 and December 31, 2006**

(Amounts in thousands except share data)

 
| ** **                                                                            | ** ** | **December 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ASSETS                                                                                |       |                            |       |                            |       |
| Current assets                                                                        |       |                            |       |                            |       |
| Cash and cash  equivalents                                                            |       | $                               | 2,770      |                            | $          | 6,829 |   |
| Receivables less  allowance of $619 and $310                                          |       | 24,120                          |       | 17,678                          |       |
| Receivable for  insured losses                                                        |       | 1,584                           |       | 1,718                           |       |
| Inventories                                                                           |       | 16,835                          |       | 17,455                          |       |
| Prepaid expenses                                                                      |       | 1,947                           |       | 1,555                           |       |
| Deferred income  taxes                                                                |       | 2,344                           |       | 2,355                           |       |
| Total current assets                                                                  |       | 49,600                          |       | 47,590                          |       |
|                                                                                  |       |                            |       |                            |       |
| Property, plant and  equipment                                                        |       |                            |       |                            |       |
| Land and  improvements                                                                |       | 2,348                           |       | 2,348                           |       |
| Buildings and  improvements                                                           |       | 19,678                          |       | 19,125                          |       |
| Machinery and  equipment                                                              |       | 77,477                          |       | 72,529                          |       |
| Mining  properties                                                                    |       | 5,553                           |       | 5,501                           |       |
| Less accumulated  depreciation and depletion                                          |       | (72,691                         | )          | (70,659                         |       |
|                                                                                  |       | 32,365                          |       | 28,844                          |       |
|                                                                                  |       |                            |       |                            |       |
| Other assets                                                                          |       |                            |       |                            |       |
| Goodwill                                                                              |       | 7,829                           |       | 7,374                           |       |
| Amortizable  intangible assets                                                        |       | 1,517                           |       | 728                             |       |
| Prepaid  royalties                                                                    |       | 1,140                           |       | 1,255                           |       |
| Long-term note  receivable                                                            |       | 752                             |       | 762                             |       |
| Other                                                                                 |       | 502                             |       | 507                             |       |
|                                                                                  |       | $                               | 93,705     |                            | $          | 87,060 |   |
|                                                                                  |       |                            |       |                            |       |
| LIABILITIES                                                                           |       |                            |       |                            |       |
| Current liabilities                                                                   |       |                            |       |                            |       |
| Current portion  of long-term debt                                                    |       | $                               | 2,866      |                            | $          | 2,000 |   |
| Accounts payable                                                                      |       | 5,281                           |       | 4,401                           |       |
| Income taxes                                                                          |       | 579                             |       | 342                             |       |
| Accrued expenses                                                                      |       |                            |       |                            |       |
| Compensation                                                                          |       | 3,640                           |       | 3,039                           |       |
| Reserve for  self-insured losses                                                      |       | 3,981                           |       | 4,033                           |       |
| Liability for  unpaid claims covered by insurance                                     |       | 1,584                           |       | 1,718                           |       |
| Profit sharing                                                                        |       | 1,586                           |       | 1,758                           |       |
| Reclamation                                                                           |       | 463                             |       | 508                             |       |
| Other                                                                                 |       | 2,109                           |       | 2,009                           |       |
| Total current  liabilities                                                            |       | 22,089                          |       | 19,808                          |       |
|                                                                                  |       |                            |       |                            |       |
| Long-term debt                                                                        |       | 12,800                          |       | 10,000                          |       |
| Deferred income taxes                                                                 |       | 3,883                           |       | 3,681                           |       |
| Accrued reclamation                                                                   |       | 777                             |       | 827                             |       |
| Other long-term  liabilities                                                          |       | 813                             |       | 1,437                           |       |
| Commitments and  contingencies (Notes 4 and 7)                                        |       |                            |       |                            |       |
|                                                                                  |       |                            |       |                            |       |
| SHAREHOLDERS’  EQUITY                                                            |       |                            |       |                            |       |
| Common shares, $.25 par  value; authorized  3,000,000 shares; issued 2,574,264 shares |       | 643                             |       | 643                             |       |
| Capital in excess of  par value                                                       |       | 1,830                           |       | 1,830                           |       |
| Retained earnings                                                                     |       | 67,373                          |       | 65,331                          |       |
| Accumulated other  comprehensive income (losses)                                      |       | —                          |       | 6                               |       |
| Treasury shares, at  cost                                                             |       | (16,503                         | )          | (16,503                         |       |
|                                                                                  |       | 53,343                          |       | 51,307                          |       |
|                                                                                  |       | $                               | 93,705     |                            | $          | 87,060 |   |

 

 

 

 

The accompanyingnotes are an integral part of the financial statements.

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**ContinentalMaterials Corporation**

**Consolidated Statements of Shareholders’ Equity**

**ForFiscal Years 2006, 2005 and 2004**

(Amounts in thousands except share data)

 
| ** **                                                               | ** ** | **Common  shares** | ** ** | **Common  shares  amount** | ** ** | **Capital  in excess  of par** | ** ** | **Retained  earnings** | ** ** | **Accum.   other  compre-hensive  income (loss)** | ** ** | **Treasury  shares** | ** ** | **Treasury  shares  cost** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|--------------------------------|------------|------------------------|------------|---------------------------------------------------|------------|----------------------|------------|----------------------------|------------|
|                                                                     |       |               |       |                       |       |                           |       |                   |       |                                              |       |                 |       |                       |       |
| Balance at January 3,  2004                                              |       | 2,574,264          |       | $                          | 643        |                           | $          | 1,982                  |       | $                                                 | 60,200     |                 | $          | (265                       | )          | 853,901 |   | $ | 11,703 |   |
| Purchase of treasury  shares                                             |       | —             |       | —                     |       | —                         |       | —                 |       | —                                            |       | 69,949               |       | 1,980                      |       |
| Net income                                                               |       | —             |       | —                     |       | —                         |       | 2,373                  |       | —                                            |       | —               |       | —                     |       |
| Comprehensive income  from interest rate swap, net of tax of $83         |       | —             |       | —                     |       | —                         |       | —                 |       | 198                                               |       | —               |       | —                     |       |
| Balance at January 1,  2005                                              |       | 2,574,264          |       | 643                        |       | 1,982                          |       | 62,573                 |       | (67                                               | )          | 923,850              |       | 13,683                     |       |
| Purchase of treasury  shares                                             |       | —             |       | —                     |       | —                         |       | —                 |       | —                                            |       | 115,353              |       | 3,977                      |       |
| Common shares issued  under the  Stock Option Plan (from  Treasury) |       | —             |       | —                     |       | (760                           | )          | —                 |       | —                                            |       | (70,400              | )          | (1,157                     | )          |
| Tax benefit from  exercise of options                                    |       | —             |       | —                     |       | 608                            |       | —                 |       | —                                            |       | —               |       | —                     |       |
| Net income                                                               |       | —             |       | —                     |       | —                         |       | 2,758                  |       | —                                            |       | —               |       | —                     |       |
| Comprehensive income  from interest rate swap, net of tax of $44         |       | —             |       | —                     |       | —                         |       | —                 |       | 73                                                |       | —               |       | —                     |       |
| Balance at December 31,  2005                                            |       | 2,574,264          |       | 643                        |       | 1,830                          |       | 65,331                 |       | 6                                                 |       | 968,803              |       | 16,503                     |       |
| Net income                                                               |       | —             |       | —                     |       | —                         |       | 2,042                  |       | —                                            |       | —               |       | —                     |       |
| Comprehensive loss from  interest rate swap, net of tax of $3            |       | —             |       | —                     |       | —                         |       | —                 |       | (6                                                | )          | —               |       | —                     |       |
| Balance at December 30, 2006                                             |       | 2,574,264          |       | $                          | 643        |                           | $          | 1,830                  |       | $                                                 | 67,373     |                 | $          | —                     |       | 968,803 |   | $ | 16,503 |   |

 

 

 

The accompanyingnotes are an integral part of the financial statements.

27

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**Notes toConsolidated Financial Statements**

1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLESOF CONSOLIDATION

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

RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS

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

InSeptember 2006, the FASB issued Staff Accounting Bulletin (SAB) 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.” SAB 108 was issued to provide interpretiveguidance on how the effects of the carryover or reversal of prior yearmisstatements should be considered in quantifying a current year misstatement.SAB 108 is effective for annual financial statements covering the first fiscalyear beginning after November 15, 2006. Adoption of SAB 108 in fiscal 2007 isnot expected to have a material impact on the Company’s consolidated results ofoperations, cash flows or financial condition.

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” whichdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles (“GAAP”), and expands disclosuresabout fair value measurements. SFAS No. 157 applies under other accountingpronouncements that require or permit fair value measurements. Accordingly,SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. We have notcompleted our evaluation of the impact of the adoption of FSAS No. 157.

InFebruary 2007, the FASB issued a related statement, SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities.” SFAS No. 159 permits entities to choose tomeasure at fair value many financial instruments and certain other items suchas investments, debt and derivative instruments. SFAS No. 159 is effective forfiscal years beginning after November 15, 2007. We have not yet begunevaluating the potential impact, if any, the adoption of SFAS No. 159could have on our consolidated financial position, results of operations, andcash flows.

InJune 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes — an Interpretation of FASB Statement No. 109, which clarifiesthe accounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with SFAS 109, “Accounting for Income Taxes.”FIN 48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. We plan to adopt FIN 48 effective for thefirst quarter of the 2007 fiscal year. We are currently evaluating the effectthat the adoption of FIN 48 will have on our consolidated results of operationsand are not yet in a position to determine such effects.

InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replacesAccounting Principles Board Opinion No. 20 “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.”SFAS 154 is effective for accounting changes and correction of errors made infiscal years beginning after December 15, 2005 and requires retrospectiveapplication to prior period financial statements of voluntary changes inaccounting principle, unless it is impractical to determine either theperiod-specific effects or the cumulative effect of the change. Adoption ofSFAS No. 154 during 2006 did not have an impact on the Company’s consolidatedresults of operations, cash flows or financial condition. Furthermore, futureconsolidated results of operations, cash flows or financial condition will onlybe impacted by SFAS 154 if the Company implements a voluntary change inaccounting principle or identifies and corrects accounting errors in futureperiods.

InMarch 2005, the Emerging Issues Task Force reached a consensus on Issue 04-6, “Accountingfor Stripping Costs in the Mining Industry” (EITF 04-6) which is effective onJanuary 1, 2006. EITF 04-6 states that stripping costs incurred after the firstsaleable minerals are extracted from the mine (i.e. post-production strippingcosts) should be considered costs of the extracted minerals and recognized as acomponent of inventory to be recognized in costs of sales in the same period asthe revenue from the sale of the inventory. The Company has historically treatedpost-production stripping costs in the manner proscribed by EITF 04-6,therefore, adoption of EITF 04-6 during fiscal 2006 did not have a materialimpact on the Company’s consolidated results of operations, cash flows orfinancial condition.

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 requires using a fair-value based modelfor the measurement of all employee share-based payments, including grants ofemployee stock options. Deferred compensation calculated under the fair valuemethod would then be amortized into income over the respective vesting periodof the stock option. The accounting provisions of SFAS 123R are effectivefor reporting periods beginning after June 15, 2005. There are no stock optionsoutstanding as of December 30, 2006 therefore the adoption of SFAS 123R did nothave an impact on the Company’s consolidated results of operations, cash flowsor financial condition.

InDecember 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions,” as part of its short-terminternational convergence project with the International Accounting StandardsBoard. Under SFAS 153, nonmonetary exchanges are required to be accounted forat fair value, recognizing any gains or losses, if their fair value isdeterminable within reasonable limits and the transaction has commercialsubstance. SFAS 153 is effective for fiscal years beginning after June 15,2005. Adoption of SFAS 153 did not have a material impact on the Company’s 2006consolidated results of operations, cash flows or financial condition.

28

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InNovember 2004, Statement of Financial Accounting Standards (SFAS) No. 151, “InventoryCosts - An Amendment of ARB No. 43, Chapter 4,” was issued which amends theguidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “InventoryPricing,” to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material.  Among otherprovisions, the new rule requires that items such as idle facility expense,excessive spoilage, double freight and rehandling costs be recognized ascurrent -period charges regardless of whether they meet the criteria of “soabnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires theallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities.  SFAS 151 is effectivefor fiscal years beginning after June 1, 2005. The adoption of SFAS 151 duringfiscal 2006 did not have a material impact on its consolidated results ofoperations, cash flows or financial condition.

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 ofDecember 30, 2006 and December 31, 2005 and the reported amounts of revenuesand expenses during each of the three years in the period ended December 30,2006. 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

Inventories arevalued at the lower of cost or market and are reviewed periodically for excessor obsolete stock with a provision recorded, where appropriate. Cost forinventory in the HVAC industry group (see Note 11) is determined using thelast-in, first-out (LIFO) method. These inventories represent approximately 74%of total inventories at December 30, 2006 (78% at December 31, 2005). The costof all other inventory is determined 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                                   |

 

29

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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.

OTHERASSETS

Goodwill,of which $6,829,000 relates to the Concrete, Aggregates and Construction Supplysegment and $1,000,000 relates to the Door segment, is not amortized but ratherassessed for impairment as of the end of each fiscal year. To the extent thatevents occur, either involving the relevant Company subsidiaries or in theirindustries, the Company revisits its assessment of the recorded goodwill todetermine if impairment has occurred and should be immediately recognized. Noimpairment was recognized in either 2006 or 2005.

Amortizableintangible assets consist of non-compete agreements, a restrictive landcovenant and customer relationships valued in conjunction with variousacquisitions. These amounts are being amortized on a straight line basis overthe respective lives of the agreements which range from 4 — 10 years except forthe customer relationships amount which is being amortized over its estimatedlife of 10 years using the sum-of-the-years digits method.

TheCompany is party to various aggregates leases related to operations of theConcrete, Aggregates and Construction Supplies segment which require royaltypayments based upon tons mined. These leases call for an annual royalty to bepaid on a minimum tonnage. Prepaid royalties relate to payments made for tonsnot yet mined.

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). Beginning in August 2005, the Company matched employee contributions upto 3%. In addition, the Company makes annual contributions, at its discretion,based primarily on profitability. Costs under the plans are charged tooperations as incurred.

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. Thecomponents of the liability have been recorded in accordance with therequirements of SFAS No. 5, “Accounting for Contingencies,” and represent bothunpaid settlements and management’s best estimate of the future liabilityrelated to open claims. Management has evaluated the credit worthiness of ourinsurance carriers and determined that recovery of the recorded losses isprobable and, therefore, the receivable from insurance has been recorded forthe full amount of the insured losses.

RECLAMATION

Inconnection with permits to mine properties in Colorado, the Company isobligated to reclaim the mined areas whether the property is owned or leased.The Company records a reserve for future reclamation work to be performed atits various aggregate operations based upon an estimate of the total expensethat will be incurred to reclaim the disturbed areas. Reclamation expense isprovided during the interim periods using the units-of-production method. Theadequacy of the recorded reserve is assessed quarterly. At each fiscalyear-end, a more formal and complete analysis is performed and the expense andreserve is adjusted to reflect the estimated cost to reclaim the then disturbedand unreclaimed areas. The assessment of the reclamation liability may be donemore frequently if events or circumstances arise that may indicate a change inestimated costs, recoverable material or period of mining activity. As part ofthe year-end analysis, the Company engages an independent professional toassist in reevaluating the estimates of both the quantities of recoverablematerial and the cost of reclamation. Most of the reclamation on any miningproperty is generally performed soon after each section of the deposit ismined. The Company’s reserve for reclamation activities was $1,240,000 atDecember 30, 2006 and $1,335,000 at December 31, 2005. The Company classifies aportion of the reserve as a current liability, $443,000 at December 30, 2006and $508,000 at December 31, 2005, based upon a rolling three year average ofactual reclamation expense. 

REVENUERECOGNITION

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

30

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TheCompany is responsible for warranty related to the manufacture of its HVACproducts. The Company does not perform installation services, nor aremaintenance or service contracts offered. Changes in the aggregated productwarranty liability for the fiscal years 2006 and 2005 were as follows (amountsin thousands):

|                                | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Beginning  balance             |       | $        | 106        |     | $          | 106 |   |
| Warranty related  expenditures |       | (349     | )          | (366     | )          |
| Warranty expense  accrued      |       | 349      |       | 366      |       |
| Ending balance                 |       | $        | 106        |     | $          | 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. In many instances in the Concrete, Aggregates andConstuction Materials segment, the Company retains lien rights on theproperties served until the receivable is collected. The Company maintainsreserves for potential credit losses based upon the aging of accountsreceivable and historical experience and such losses have been withinmanagement’s expectations. See Note 11 for a description of the Company’scustomer base.

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 2006,2005 and 2004 all consist of 52 weeks.

2. BUSINESS ACQUISITIONS

On January 1, 2006 theCompany purchased the assets of CSSL, a company in Colorado Springs offeringelectronic access and locking capabilities, for $352,000. The assets wereacquired by MDHI in the Door segment. The purchase price allocation included$100,000 for a non-compete agreement and $100,000 of goodwill, all of which isamortizable over 15 years for tax. The non-compete agreement is being amortizedover its four year term.

On June 30, 2006 theCompany purchased certain assets of ASCI, a concrete producer in ColoradoSprings, for $2,100,000 of cash and a $1,000,000 Note. The assets were acquiredby TMC in the Concrete, Aggregates and Construction Supplies segment. The finalpurchase price allocation included $1,735,000 of plant and equipment, $290,000for a non-compete agreement, $350,000 for a restriction of land use covenant,$370,000 for existing customer relations and $355,000 of goodwill, all of whichis amortizable over 15 years for tax. The non-compete agreement is beingamortized over its five year term while the restriction of land use covenantand the customer relations are being amortized over its term and estimatedlife, respectively, of ten years each. The weighted-average amortization periodfor the intangible assets associated with the ASCI acquisition is approximately8.6 years.

Both purchases wereaccounted for as acquisitions of a business under SFAS No. 141, “Standards ofAccounting for Business Combinations” and the consolidated results ofoperations include their operations since their respective dates ofacquisition. The goodwill related to the above two purchases represents theonly changes to the Company’s recorded goodwill during 2006.

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The following unauditedpro forma summary financial information summarizes the estimated combinedresults of operations of the Company, ASCI and CSSL assuming that theacquisitions of ASCI and CSSL had taken place on January 2, 2005. The unauditedpro forma combined results of operations were prepared on the basis ofinformation provided to the Company by the former management of ASCI and CSSLand no representation is made by the Company with respect to the accuracy ofsuch information. The pro forma combined results of operations reflectadjustments for interest expense, additional depreciation based on the fairmarket value of plant and equipment, amortization of identifiable intangiblesand income tax expense. The pro forma financial information presented below forthe year ended December 31, 2005 includes the full year results for ASCI andCSSL, as adjusted for the items noted above. The pro forma financialinformation for the year ended December 30, 2006 includes the results of ASCIfrom January 1, 2006 through April 30, 2006, as adjusted for the items notedabove. ASCI’s interim financial information for May and June of 2006 were notmade available to the Company. Amounts are in thousands except per shareamounts.

|                             | ** ** | **Year Ended  December 30, 2006  Unaudited** | ** ** | **Year Ended   December 31, 2005  Unaudited** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| Net sales                   |       | $                                                           | 161,063    |                                                              | $          | 149,022 |   |
| Net income                  |       | 2,069                                                       |       | 3,079                                                             |       |
| Basic earnings  per share   |       | 1.29                                                        |       | 1.92                                                              |       |
| Diluted earnings per  share |       | 1.29                                                        |       | 1.89                                                              |       |
|                             |            |                                                             |            |                                                                   |            |  |  |

 

The unaudited pro formacombined results of operations are not necessarily indicative of, and do notpurport to represent, what the Company’s results of operations or financialcondition actually would have been had the acquisitions been made as of January2, 2005. Due to competitive conditions, the Company did not expect to, and hasnot, retained all of the concrete volume or market share previously held byASCI.

3. INVENTORIES

Inventoriesconsisted of the following (amounts in thousands):

|                             | ** ** | **December 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Finished goods              |       | $                               | 7,104      |                            | $          | 7,650 |   |
| Work in process             |       | 1,502                           |       | 1,907                           |       |
| Raw materials  and supplies |       | 8,229                           |       | 7,898                           |       |
|                        |       | $                               | 16,835     |                            | $          | 17,455 |   |

 

Ifinventories valued on the LIFO basis were valued at current costs, inventorieswould be higher as follows: 2006 — $4,489,000 and 2005 — $4,306,000.

Reductionsin inventory quantities during 2006 and 2005 at one location resulted inliquidation of LIFO inventory layers carried at costs lower than the costs ofcurrent purchases. The effect was not material in either year.

4.GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS

Goodwill,of which $6,829,000 relates to the Concrete, Aggregates and ConstructionSupplies segment and $1,000,000 relates to the Door segment, is not amortizedbut rather assessed for impairment as of the end of each fiscal year. To theextent that events occur, either involving the relevant Company subsidiaries orin their industries, the Company revisits its assessment of the recordedgoodwill to determine if impairment has occurred and should be immediatelyrecognized. No impairment was recognized in either 2006 or 2005.

Changesin recorded goodwill for the year ended December 30, 2006 are as follows(amounts in thousands):
| ** **                         | ** ** | **Concrete,   Aggregates and   Construction   Supplies** | ** ** | **Doors** | ** ** | **Total** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Balance as of  December 31, 2005   |       | $                                                                            | 6,474      |      | $          | 900       |       | $ | 7,374 |   |
| Goodwill  acquired during the year |       | 355                                                                          |       | 100       |       | 455       |       |
| Balance as of December  30, 2006   |       | $                                                                            | 6,829      |      | $          | 1,000     |       | $ | 7,829 |   |

 

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Identifiableintangible assets consist of the following (amounts in thousands):
| ** **                    | ** ** | **December 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **Gross  carrying  amount**     | ** ** | **Accumulated  amortization**   | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** |
| Amortized  intangible assets: |       |                            |       |                            |       |   |   |   |   |
| Non-compete agreements        |       | $                               | 2,390      |                            | $          | 1,542 |   | $ | 2,000 |   | $ | 1,272 |   |
| Restrictive land covenant     |       | 350                             |       | 17                              |       | — |   | — |   |
| Customer relationships        |       | 370                             |       | 34                              |       | — |   | — |   |
|                          |       | $                               | 3,110      |                            | $          | 1,593 |   | $ | 2,000 |   | $ | 1,272 |   |

 

Theabove intangible assets include non-compete agreements that were signed at thetime the Company acquired the Pueblo operations (October 21, 1996), all of thestock of RMRM (December 31, 2000), all of the stock of MDHI (April 1, 2002),the assets of CSSL (January 1, 2006) and the assets of ASCI (June 30, 2006).Amortization of these amounts is computed on a straight-line basis over theagreement periods which range from 4 — 10 years. Also included are arestrictive land covenant and customer relationships value related to the ASCIacquisition. Amortization of the restrictive land covenant is computed on thestraight-line basis over the agreement period of 10 years. Amortization of thecustomer relations value is computed on the sum-of-the-years digits method overits estimated life of 10 years. Amortization expense for these intangibleassets was $321,000, $225,000 and $225,000 for 2006, 2005 and 2004, respectively.The estimated amortization expense for the five subsequent fiscal years is asfollows: 2007 — $319,000; 2008 — $300,000; 2009 — $293,000; 2010 — $262,000 and2011 — $101,000.

5.LONG-TERM DEBT

Long-term debtconsisted of the following (amounts in thousands):

|                                       | ** ** | **December 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Unsecured term  loan                  |       | $                               | 15,000     |                            | $          | 12,000 |   |
| Note issued as  part of ASCI purchase |       | 666                             |       | —                          |       |
| Less current  portion                 |       | (2,866)                         |       | (2,000)                         |       |
| Total long-term debt                  |       | $                               | 12,800     |                            | $          | 10,000 |   |

 

The Company has anunsecured Revolving Credit and Term Loan Agreement (Credit Agreement), datedSeptember 5, 2003, with LaSalle Bank National Association and Fifth Third Bank.On June 8, 2006, the Company entered into the Fourth Amendment (Amendment) tothe Credit Agreement, as amended as of May 29, 2004, April 14, 2005 and June28, 2005. The Amendment increased the principal amount of the term loan portionof the Credit Agreement by $5,000,000 and increased the revolving creditfacility by $5,000,000 to a maximum amount of $15,000,000. With the increase inthe term loan and revolving credit amounts, the total loan commitment, at thetime of the signing, was $31,500,000. At the filing date of this Form 10-K, thecommitment had been reduced to $30,000,000 due to term loan repayments of$1,500,000, as scheduled. The additional $5,000,000 proceeds of the term loanfacility were drawn at the close of business, June 30, 2006 in conjunction withthe acquisition of ASCI. The amount available under the revolving credit facilityof the Credit Agreement was increased primarily due to increased stand-byletters of credit requirements to insurance carriers in support of self-insuredamounts under the Company’s risk management program and to provide additionalliquidity.

TheCredit Agreement provides that, at the Company’s option, the term loan andrevolving credit facility will bear interest at prime or a performance-basedLIBOR rate. Based on the terms of the Amendment, the increase in the term loanand the Company’s performance for the twelve months ended December 30, 2006,the performance based rates are LIBOR plus 1.50% for the term loan and LIBORplus 1.25% for borrowings under the revolving credit facility.****The Credit Agreement also requires the Company to maintaincertain levels of consolidated tangible net worth, to attain certain levels ofcash flow (as defined) on a rolling four-quarter basis, and to maintain certainratios including consolidated debt to cash flow (as defined). At December 30,2006, the Company was not in compliance with the Cash Flow Ratio as defined inthe loan agreement. The Company has obtained waivers of the requirement for the2006 year-end and the first quarter of 2007. The Company expects to be incompliance with the covenant at the end of the second quarter of 2007. Aprincipal reason for not meeting the required ratio was the high level ofcapital expenditures during 2006. Additional borrowings, acquisition of stockof other companies, purchase of treasury shares and payment of cash dividendsare either limited or require prior approval by the lenders. Payment of accruedinterest is due and paid quarterly by the Company. Principal payments under theterm loan are due quarterly with a final payment of all remaining unpaidprincipal due March 31, 2011.

Allother material terms of the Credit Agreement remain in force, except to theextent they have been modified by the Fourth Amendment as described in thisparagraph.

TheCompany issued a Note in the original amount of $1,000,000 in conjunction withthe purchase of ASCI. The Note bears interest at 6%. Payment of accruedinterest is due and paid quarterly by the Company. Principal payments are duequarterly in the amount of $167,000. At December 30, 2006, the balance of theNote was $666,000, all of which will is due during the 2007 fiscal year.

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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. During fiscal 2001, the Companyentered into an interest rate swap agreement (Swap Agreement) covering theperiod December 17, 2001 through December 18, 2006 in order to minimize theadverse impact of the floating interest rate characteristic of some of theCompany’s term loan borrowings. The Company’s effective interest rate on theportion of the term loan covered by the Swap Agreement was 5.88% during 2006.Cash payments or receipts associated with this agreement are reflected ininterest expense. The fixed rate under the Swap Agreement was lower than thefloating rate on the term loan during 2006 but exceeded the floating rateduring 2005 and 2004. The effect on operations was to increase net income by$21,000 in 2006 and reduce net income by $31,000 and $162,000 for 2005 and2004, respectively. The fair value of the Swap Agreement is recorded on thebalance sheet with subsequent changes recorded as a separate component ofaccumulated other comprehensive income in shareholders’ equity.

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

| 2007   |   | $     | 2,866  |   |
|--------|--------|-------|--------|--------|
| 2008   |   | 2,400 |   |
| 2009   |   | 2,400 |   |
| 2010   |   | 3,000 |   |
| 2011   |   | 5,000 |   |
|   |   | $     | 15,666 |   |

 

Underthe Credit Agreement, the Company had an unsecured revolving line of credit of$15,000,000 during 2006 and $10,000,000 during 2005. The line, which expires inJuly 2008, is used for short-term cash needs and stand-by letters of credit. AtDecember 30, 2006, the Company had outstanding stand-by letters of credit toinsurance carriers totaling approximately $4,585,000 that collateralize the self-insuredamounts under the Company’s risk management program. The weighted averageinterest rate for all debt was 6.5% for fiscal 2006 and 5.5% for fiscal 2005.There was no balance outstanding against the revolving credit line as of eitherDecember 30, 2006 or December 31, 2005.

6.COMMITMENTS AND CONTINGENCIES

TheCompany is involved in litigation matters related to its continuing business,principally product liability matters related to the gas-fired heating productsin the Heating and Cooling segment. In the Company’s opinion, none of theseproceedings, when concluded, will have a material adverse effect on the Company’sconsolidated results of operations, cash flows or financial condition as theCompany has established adequate reserves for known occurrences.

7.SHAREHOLDERS’ EQUITY

During 2005, theremaining options granted under the Company’s Stock Option Plan (the “Plan”)for 73,400 shares of common stock (70,400 shares net of 3,000 shares tendered as payment of option price)were exercised.

No options wereexercised during 2004. With the exercise of all then remaining outstandingoptions during 2005, the Plan was terminated. Reinstatement of the Planrequires the consent of the Company’s stockholders.

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

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8.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 fiscal years 2006, 2005 and 2004 (dollars in thousandsexcept per-share data).

|                             | ** ** | **Net  Income** | ** ** | **Weighted  average  shares** | ** ** | **Per-share  earnings** | ** ** |
|-----------------------------|------------|-----------------|------------|-------------------------------|------------|-------------------------|------------|
| 2006                        |       |            |       |                          |       |                    |       |
| Basic EPS                   |       | $               | 2,042      |                          | 1,605      |                    | $          | 1.22 |   |
| Effect of  dilutive options |       | —          |       | —                        |       |                    |       |
| Diluted EPS                 |       | $               | 2,042      |                          | 1,605      |                    | $          | 1.22 |   |
|                        |       |            |       |                          |       |                    |       |
| 2005                        |       |            |       |                          |       |                    |       |
| Basic EPS                   |       | $               | 2,758      |                          | 1,602      |                    | $          | 1.72 |   |
| Effect of  dilutive options |       | —          |       | 30                            |       |                    |       |
| Diluted EPS                 |       | $               | 2,758      |                          | 1,632      |                    | $          | 1.69 |   |
|                        |       |            |       |                          |       |                    |       |
| 2004                        |       |            |       |                          |       |                    |       |
| Basic EPS                   |       | $               | 2,373      |                          | 1,681      |                    | $          | 1.41 |   |
| Effect of  dilutive options |       | —          |       | 44                            |       |                    |       |
| Diluted EPS                 |       | $               | 2,373      |                          | 1,725      |                    | $          | 1.38 |   |

 

9.RENTAL EXPENSE, LEASES AND COMMITMENTS

TheCompany leases certain of its facilities and equipment and is required to paythe related taxes, insurance and certain other expenses. Rental expense was$3,443,000, $2,993,000 and $2,778,000 for 2006, 2005 and 2004, respectively.

Futureminimum rental commitments under non-cancelable operating leases for 2007 andthereafter are as follows: 2007 — $2,337,000; 2008 — $2,157,000; 2009 —$1,891,000; 2010 — $1,413,000; 2011 — $1,341,000 and thereafter — $23,036,000.Included in these amounts is $436,000 per year and approximately $20,494,000 inthe “thereafter” amount related to minimum royalty payments due on anaggregates property lease in conjunction with the Pueblo, Colorado operation.Also included in these amounts is $235,000 per year and approximately$1,117,000 in the “thereafter” amount related to a ground lease upon which theCompany owns a building leased to a third party for approximately $344,000 peryear. The ground lease runs through October 1, 2016 and contains a renewalclause. The building lease runs through January 31, 2013.

10.RETIREMENT PLANS

Asdiscussed in Note 1, the Company maintains defined contribution retirementbenefit plans for eligible employees. Total plan expenses charged to operationswere $2,206,000, $1,827,000 and $1,606,000 in 2006, 2005 and 2004,respectively.

11.INCOME TAXES

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

|                                                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal:  Current                                                                        |       | $        | 813        |     | $          | 1,147    |       | $ | 665 |   |
|                Deferred |       | 38       |       | (54      | )          | 53       |       |
| State:      Current                                                  |       | 89       |       | (168     | )          | (4       | )          |
|                Deferred |       | 175      |       | (125     | )          | 36       |       |
|                                                                                               |       | $        | 1,115      |     | $          | 800      |       | $ | 750 |   |

 

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

|                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory tax  rate                         |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| Percentage  depletion                       |       | (5.4     | )          | (2.4     | )          | (3.1     | )          |
| State income  taxes, net of federal benefit |       | 6.1      |       | 1.1      |       | 2.9      |       |
| Non-deductible  expenses                    |       | .7       |       | —   |       | 1.2      |       |
| Benefit of state  tax credits               |       | —   |       | —   |       | (5.5     | )          |
| Donation of  appreciated property           |       | —   |       | —   |       | (1.3     | )          |
| Release tax  contingency reserve            |       | (.2      | )          | (8.1     | )          | (4.2     | )          |
| Other                                       |       | .1       |       | (2.1     | )          | —   |       |
|                                        |       | 35.3     | %          | 22.5     | %          | 24.0     | %          |

 

The Companyquarterly reviews its potential liability for income tax contingenciesresulting from positions taken on certain items of income or deduction whenfiling its federal and state income tax returns.  Amounts are accrued based upon management’sassessment of the exposure on these items. Conversely, such previously accrued amounts are reversed either when theitems are resolved in favor of the Company or the audit periods for theapplicable returns are closed.  Duringthe 2006 fiscal year, approximately $6,000 was released as certain situationswere resolved in favor of the Company. During fiscal 2005, approximately$287,000 was released and during fiscal 2004, approximately $131,000 wasreleased.

Forfinancial statement purposes, deferred tax assets and liabilities are recordedat a blend of the current statutory federal and states’ tax rates — 37.8%. Theprincipal temporary differences and their related deferred taxes are as follows(amounts in thousands):
| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Reserves for  self-insured losses |       | $        | 1,274      |     | $          | 1,359 |   |
| Accrued  reclamation              |       | 469      |       | 495      |       |
| Deferred  compensation            |       | 272      |       | 544      |       |
| Asset valuation  reserves         |       | 290      |       | 174      |       |
| Future state tax  credits         |       | 516      |       | 555      |       |
| Other                             |       | 100      |       | 78       |       |
| Total deferred  tax assets        |       | 2,921    |       | 3,205    |       |
|                              |       |     |       |     |       |
| Depreciation                      |       | 3,062    |       | 3,185    |       |
| Deferred  development             |       | 601      |       | 630      |       |
| Other                             |       | 797      |       | 716      |       |
| Total deferred  tax liabilities   |       | 4,460    |       | 4,531    |       |
| Net deferred tax  liability       |       | $        | (1,539     | )        | $          | (1,326 | ) |

 

Thenet current deferred tax assets are $2,344,000 and $2,355,000 at year-end 2006and 2005, respectively.

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12.UNAUDITED QUARTERLY FINANCIAL DATA

Thefollowing table provides summarized unaudited fiscal quarterly financial datafor 2006 and 2005 (amounts in thousands, except per share amounts):
| ** **                                | ** ** | **First   quarter** | ** ** | **Second   quarter** | ** ** | **Third   quarter** | ** ** | **Fourth   quarter** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|---------------------------|------------|--------------------------|------------|---------------------------|------------|
| 2006                                      |       |                     |       |                      |       |                     |       |                      |       |
| Sales                                     |       | $                        | 33,684     |                      | $          | 43,704                   |       | $                         | 40,924     |   | $ | 40,455 |   |
| Depreciation, depletion  and amortization |       | 1,190                    |       | 1,249                     |       | 1,212                    |       | 1,358                     |       |
| Operating (loss) profit                   |       | (420                     | )          | 2,376                     |       | 915                      |       | 978                       |       |
| Net (loss) income                         |       | (301                     | )          | 1,430                     |       | 529                      |       | 384                       |       |
| Basic (loss) income per  share            |       | (.19                     | )          | .89                       |       | .33                      |       | .24                       |       |
| Diluted (loss) income per share           |       | (.19                     | )          | .89                       |       | .33                      |       | .24                       |       |
|                                           |            |                          |            |                           |            |                          |            |                           |            |  |  |  |  |

 
| ** **                                | ** ** | **First  quarter** | ** ** | **Second  quarter** | ** ** | **Third  quarter** | ** ** | **Fourth  quarter** | ** ** |
|-------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| 2005                                      |       |               |       |                |       |               |       |                |       |
| Sales                                     |       | $                  | 29,757     |                | $          | 38,273             |       | $                   | 36,415     |   | $ | 34,554 |   |
| Depreciation, depletion  and amortization |       | 1,216              |       | 1,215               |       | 1,201              |       | 1,097               |       |
| Operating (loss) profit                   |       | (338               | )          | 1,302               |       | 1,552              |       | 1,536               |       |
| Net (loss) income                         |       | (288               | )          | 945                 |       | 1,038              |       | 1,063               |       |
| Basic (loss) income per  share            |       | (.17               | )          | .59                 |       | .66                |       | .66                 |       |
| Diluted (loss) income per share           |       | (.17               | )          | .58                 |       | .65                |       | .66                 |       |
|                                           |            |                    |            |                     |            |                    |            |                     |            |  |  |  |  |

 

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

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13.INDUSTRY SEGMENT INFORMATION

TheCompany operates primarily in two industry groups, HVAC and ConstructionProducts. The Company has identified two reportable segments in each of the twoindustry groups: the Heating and Cooling segment and the Evaporative Coolingsegment in the HVAC industry group and the Concrete, Aggregates andConstruction Supplies segment and the Door segment in the Construction Productsindustry group. The Heating and Cooling segment produces and sells gas-firedwall furnaces, console heaters and fan coils from the Company’s wholly-ownedsubsidiary, Williams Furnace Co. of Colton, California. The Evaporative Coolingsegment produces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona. Sales of these twosegments are nationwide, but are concentrated in the southwestern UnitedStates. Concrete, Aggregates and Construction Supplies are offered fromnumerous locations along the Front Range of Colorado operated by the Company’swholly-owned subsidiaries Castle Concrete Company and Transit Mix Concrete Co.,of Colorado Springs, Transit Mix of Pueblo, Inc. of Pueblo and Rocky MountainReady Mix Concrete, Inc. of Denver. Doors are fabricated and sold along withthe related hardware from the Company’s wholly-owned subsidiary, McKinney Doorand Hardware, Inc. of Pueblo, Colorado. Sales of these two segments are highlyconcentrated in the Front Range area in Colorado although door sales are alsomade throughout the United States.

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

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

Thefollowing table presents information about reported segments for the fiscalyears 2006, 2005 and 2004 along with the items necessary to reconcile thesegment information to the totals reported in the financial statements (amountsin thousands):
| ** **                                | ** ** | **Construction Products  Industry**                          | ** ** | **HVAC Industry** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**         | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC** | ** ** | **Unallocated  Corporate (a)** | ** ** | **Other (b)** | ** ** | **Total** | ** ** |
| 2006                                      |       |                                                         |       |              |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       |                                                         | $          | 96,862            |       | $                                    | 9,452      |                      |       | $                        | 106,314    |   | $ | 29,930 |   |   | $ | 22,167 |   |   | $ | 52,097 |   |   | $ | 12 |   |   | $ | 344 |   | $ | 158,767 |   |
| Depreciation,  depletion and amortization |       |                                                         | 3,818      |              | 121        |                                 |       | 3,939                     |       | 376                      |       |   | 603 |   |   | 979 |   |   | 91 |   |   | — |   | 5,009 |   |
| Operating income  (loss)                  |       |                                                         | 5,723      |              | 657        |                                 |       | 6,380                     |       | 161                      |       |   | 267 |   |   | 428 |   |   | (3,067 | ) |   | 108 |   | 3,849 |   |
| Segment assets                            |       |                                                         | 55,713     |              | 3,507      |                                 |       | 59,220                    |       | 18,303                   |       |   | 12,651 |   |   | 30,954 |   |   | 3,468 |   |   | 63 |   | 93,705 |   |
| Capital expenditures (c)                  |       |                                                         | 7,689      |              | 74         |                                 |       | 7,763                     |       | 274                      |       |   | 191 |   |   | 465 |   |   | 115 |   |   | — |   | 8,343 |   |
|                                           |            |                                                              |            |                   |            |                                      |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **Construction Products  Industry**                          | ** ** | **HVAC Industry** | ** ** | ** **                           | ** ** | ** **                | ** ** | ** **               | ** ** |
|-------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------|------------|--------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Concrete,  Aggregates &  Construction  Supplies** | ** ** | **Doors**         | ** ** | **Combined  Construction  Products** | ** ** | **Heating  and  Cooling** | ** ** | **Evaporative  Cooling** | ** ** | **Combined  HVAC** | ** ** | **Unallocated  Corporate (a)** | ** ** | **Other (b)** | ** ** | **Total** | ** ** |
| 2005                                      |       |                                                         |       |              |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues from  external customers         |       |                                                         | $          | 82,644            |       | $                                    | 8,727      |                      |       | $                        | 91,371     |   | $ | 26,736 |   |   | $ | 20,545 |   |   | $ | 47,281 |   |   | $ | 3 |   |   | $ | 344 |   | $ | 138,999 |   |
| Depreciation,  depletion and amortization |       |                                                         | 3,560      |              | 93         |                                 |       | 3,653                     |       | 392                      |       |   | 613 |   |   | 1,005 |   |   | 71 |   |   | — |   | 4,729 |   |
| Operating income  (loss)                  |       |                                                         | 3,805      |              | 777        |                                 |       | 4,582                     |       | 2,777                    |       |   | (177 | ) |   | 2,600 |   |   | (3,227 | ) |   | 97 |   | 4,052 |   |
| Segment assets                            |       |                                                         | 47,180     |              | 2,914      |                                 |       | 50,094                    |       | 16,986                   |       |   | 12,544 |   |   | 29,530 |   |   | 7,373 |   |   | 63 |   | 87,060 |   |
| Capital expenditures                      |       |                                                         | 2,553      |              | 30         |                                 |       | 2,583                     |       | 427                      |       |   | 442 |   |   | 869 |   |   | 324 |   |   | — |   | 3,776 |   |
|                                           |            |                                                              |            |                   |            |                                      |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

----

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

(b)            Includesa real estate operation and the holding costs for certain mining interests thatremain from the period the Company maintained significant interests in miningoperations.

(c)             Capitalexpenditures for the Concrete, Aggregates & Construction Supplies segmentinclude the capital assets acquired with the ASCI acquisition. Capitalexpenditures for the Door segment include the capital assets acquired with theCSSL acquisition.

All long-lived assets are in the United States. Nocustomer accounted for 10% or more of total sales of the Company in fiscal2006, 2005 or 2004.

38

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders ofContinental Materials Corporation:

Wehave audited the accompanying consolidated balance sheets of ContinentalMaterials Corporation and subsidiaries (the “Company”) as of December 30, 2006and December 31, 2005, and the related consolidated statements of operationsand comprehensive income, of shareholders’ equity, and of cash flows for theyears then ended. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits. The consolidated financialstatements of the Company for the year ended January 1, 2005 were audited byother auditors whose report, dated April 7, 2005 except for the effects of therestatement of the 2004 financial statements described in Note 11 to theconsolidated financial statements included in the Company’s annual report onForm 10-K for the year ended December 31, 2005 (not separately presentedherein) as to which the date is June 29, 2006, expressed an unqualified opinionon those statements and included an explanatory paragraph related to therestatement of segment disclosures.

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

Inour opinion, such 2006 and 2005 consolidated financial statements presentfairly, in all material respects, the financial position of ContinentalMaterials Corporation and subsidiaries as of December 30, 2006 and December 31,2005, and the results of their operations and their cash flows for the yearsthen ended in conformity with accounting principles generally accepted in theUnited States of America.

Deloitte & Touche LLP

Chicago, Illinois

March 29, 2007

39

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To theBoard of Directors and Shareholders of Continental Materials Corporation:

In ouropinion, the accompanying consolidated statements of operations andcomprehensive income, of shareholders’ equity and of cash flows, presentfairly, in all material respects, the results of Continental MaterialsCorporation and its subsidiaries operations and their cash flows for the yearended January 1, 2005 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

PricewaterhouseCoopersLLP

Chicago, Illinois

April7, 2005, except for the effects of the restatement of the 2004 financialstatements described by Note 11 to the consolidated financial statementsincluded in the Company’s annual report on Form 10-K for the year endedDecember 31, 2005 (not separately presented herein) as to which the date is June29, 2006

40

----

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

 

On August 3, 2005,the Board of Directors of Continental Materials Corporation, on therecommendation of the Audit Committee, dismissed PricewaterhouseCoopers LLP asits independent registered public accounting firm and appointed Deloitte &Touche LLP as the Company’s independent registered public accounting firm toaudit its consolidated statements for the year ending December 31, 2005. Withregard to PricewaterhouseCoopers, during the two most recent fiscal years andthrough August 3, 2005, there have been no reportable events (as defined inItem 304(a)(1)(v) of Regulation S-K) except as follows. As of January 1, 2005,management identified two material weaknesses related to the Company’s internalcontrol over financial reporting. The control weaknesses related to the methodused to calculate the accrued liabilities for estimated workers’ compensationclaims and related expense and the calculation of the tax provision. For a morecomplete discussion, see Item 9A in the 2004 Annual Report on Form 10-K andItem 4 in the Form 10-Q for the three months ended April 2, 2005. With regardto the above, the information specified by Item 304 of Regulation S-K wasprovided to the Securities and Exchange Commission under Item 4.01 of Form 8-Kfiled by the Company on August 10, 2005.
| Item 9A. | ** ** | **CONTROLS AND PROCEDURES** |
|----------|------------|-----------------------------|

 

**Evaluationof Disclosure Controls and Procedures**

Disclosurecontrols and procedures, as such term is defined in Rule 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)are controls and other procedures that are designed to ensure that informationrequired to be disclosed in Company filings or that it submits under theExchange Act is recorded, processed, summarized and reported, within the timeperiods specified in the rules and forms of the Securities and ExchangeCommission (SEC) and that such information is accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating our disclosure controls and procedures,management recognizes that disclosure controls and procedures, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the disclosure controls and procedures aremet. Additionally, in designing disclosure controls and procedures, ourmanagement necessarily is required to apply its judgment in evaluating thecost-benefit relationship of possible disclosure controls and procedures. Thedesign of any disclosure controls and procedures also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.

41

----

Asof December 30, 2006, 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 proceduresare effective to ensure that information required to be disclosed in ourperiodic reports under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified by the Securities and ExchangeCommission’s rules and regulations.

As of December 30,2006, the Company was not an “accelerated filer” as defined in Rule 12b-2 underthe Exchange Act. Accordingly, pursuant to SEC rules and regulations, theCompany is not required to complete or provide, and we have not completed orprovided, Management’s Annual Report on Internal Control Over FinancialReporting or the associated report of our independent registered publicaccounting firm in this Annual Report on Form 10-K. We are required to annuallyreassess our status as a “non-accelerated filer” as of the end of our fiscalyear to determine whether we will be required to provide Management’s AnnualReport on Internal Control Over Financial Reporting and the associated reportof our independent registered public accounting firm in our annual report onForm 10-K.

**Changesin Internal Controls**

No changes in theCompany’s internal controls over financial reporting occurred during thequarter ended December 30, 2006 that have materially affected, or arereasonably likely to materially affect, the Company’s internal controls overfinancial reporting.
| Item 9B. | ** ** | **OTHER INFORMATION** |
|----------|------------|-----------------------|

 

Registrantdoes not have any information, not already reported, that is required to bereported on Form 8-K during the fourth quarter of the year covered by this Form10-K.

42

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**PART III**

Items 10, 11, 12,13 and 14 of Part III have been omitted from this 10-K Report because theregistrant expects to file, not later than 120 days following the close of itsfiscal year ended December 30, 2006, its definitive 2007 proxy statement. Theinformation required by Items 10, 11, 12, 13 and 14 of Part III will beincluded in that proxy statement and such information is hereby incorporated byreference.

 

43

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**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 2006, 2005 and 2004 |
|           |       | Consolidated statements of cash flows for fiscal  years ended 2006, 2005 and 2004                   |
|           |       | Consolidated balance sheets as of December 30, 2006  and December 31, 2005                          |
|           |       | Consolidated statements of shareholders’ equity for  fiscal years ended 2006, 2005 and 2004    |
|  

  |       |                                                                                                |
| (a) 2          |       | The following is a list of financial statement  schedules filed as part of this Report:             |

 

Schedule II Valuation andQualifying Accounts & Reserves

For the Fiscal Years2006, 2005 and 2004

 

All otherschedules are omitted because they are not applicable or the information isshown in the financial statements or notes thereto.
| (a) 3        |   | The following is a list of all exhibits filed as  part of this Report:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 3    |   | Restated Certificate of Incorporation dated May 28,  1975, as amended on May 24, 1978, May 27, 1987 and June 3, 1999 filed as  Exhibit 3 to Form 10-K for the year ended January 1, 2005, incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 3a   |   | Registrant’s By-laws as amended September 19, 1975  filed as Exhibit 6 to Form 8-K for the month of September 1975, incorporated  herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 10   |   | Revolving Credit and Term Loan Agreement dated as of  Sept, ember 5, 2003, by and among the Company and LaSalle Bank National  Association and Fifth Third Bank filed as Exhibit 10 to Form 10-Q for the  quarterly period ending September 27, 2003; First Amendment thereto dated as  of May 29, 2004 filed as Exhibit 10 to Form 10-Q for the quarterly period  ending July 3, 2004; Second Amendment thereto dated April 14, 2005 filed as  Exhibit 10.1 to Form 8-K for the month of April 2005; Third Amendment thereto  dated as of June 28, 2005 filed as Exhibit 10.1 to Form 8-K filed July 7,  2005; and Fourth Amendment thereto dated as of June 8, 2006 filed as Exhibit  99.1 to Form 8-K filed June 13, 2006; incorporated herein by reference. |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 10a  |   | Acquisition Agreement Between Valco Properties, Ltd.  And Continental Materials Corporation filed as Exhibit 2A to Form 8-K for the  month October 1996, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 10b  |   | Non-Competition and Non-Disclosure Agreement by  Valco, Inc. And Thomas E. Brubaker in favor of Continental Materials  Corporation filed as Exhibit 2B to Form 8-K filed November 4, 1996,  incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 10c  |   | Fee Sand and Gravel Lease Between Valco, Inc. And  Continental Materials Corporation filed as Exhibit 2C to Form 8-K filed  November 4, 1996, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 10d  |   | Form of Supplemental Deferred Compensation Agreement  filed as Exhibit 10 to Form 10-Q for the quarter ended July 1, 1983,  incorporated herein by reference.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 10e  |   | Stock Purchase Agreement By and Among Continental  Materials Corporation, Rocky Mountain Ready Mix Concrete, Inc. and The  Shareholders of Rocky Mountain Ready Mix Concrete, Inc. Filed as Exhibit 2A  to Form 8-K filed January 12, 2001, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 10f  |   | Continental Materials Corporation Employee Profit  Sharing Retirement Plan Amended and Restated Generally Effective October 1,  1997 filed as Exhibit 99a to Form 10-K for the year ended January 1, 2000,  incorporated herein by reference.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 14   |   | Continental Materials Corporation Code of Business  Conduct and Ethics filed as Exhibit 14 to Form 10-K/A (Amendment No. 1) for  the year ended January 3, 2004, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 21   |   | Subsidiaries of Registrant (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 23.1 |   | Consent of Independent Registered Public Accounting  Firm (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 23.2 |   | Consent of Independent Registered Public Accounting  Firm (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 31.1 |   | Rule 13a-14(a)/15d-14(a) and Rule  13a-14(d)/15d-14(d) Certification of Chief Executive Officer (filed  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 31.2 |   | Rule 13a-14(a)/15d-14(a) and Rule  13a-14(d)/15d-14(d) Certification of Chief Financial Officer (filed  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Exhibit 32.1 |   | Section 1350 Certification of Chief Executive  Officer and Chief Financial Officer (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

* – Compensatory plan or arrangement

44

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
|   | CONTINENTAL  MATERIALS CORPORATION |
|--------|------------------------------------|
|   | Registrant                         |

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

 

Date:  March 30,2007

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| SIGNATURE                 | ** ** | **CAPACITY(IES)**                        | ** ** | **DATE**       |
|---------------------------|------------|------------------------------------------|------------|----------------|
|                      |       |                                     |       |           |
| /S/ James G.  Gidwitz     |       | Chief Executive  Officer and a Director  |       |           |
| James G. Gidwitz          |       | (Principal  Executive Officer)           |       | March 30, 2007 |
|                      |       |                                     |       |           |
| /S/ Joseph J.  Sum        |       | Vice President,  Chief Financial Officer |       |           |
| Joseph J. Sum             |       | (Principal  Financial Officer)           |       | March 30, 2007 |
|                      |       |                                     |       |           |
| /S/ Mark S.  Nichter      |       | Secretary and  Controller                |       |           |
| Mark S. Nichter           |       | (Principal  Accounting Officer)          |       | March 30, 2007 |
|                      |       |                                     |       |           |
| /S/ William D.  Andrews   |       |                                     |       |           |
| William D.  Andrews       |       | Director                                 |       | March 30, 2007 |
|                      |       |                                     |       |           |
| /S/ Thomas H.  Carmody    |       |                                     |       |           |
| Thomas H.  Carmody        |       | Director                                 |       | March 30, 2007 |
|                      |       |                                     |       |           |
| /S/ Betsy R.  Gidwitz     |       |                                     |       |           |
| Betsy R. Gidwitz          |       | Director                                 |       | March 30, 2007 |
|                      |       |                                     |       |           |
| /S/ Ralph W. Gidwitz      |       |                                     |       |           |
| Ralph W. Gidwitz          |       | Director                                 |       | March 30, 2007 |
|                      |       |                                     |       |           |
| /S/ Ronald J.  Gidwitz    |       |                                     |       |           |
| Ronald J.  Gidwitz        |       | Director                                 |       | March 30, 2007 |
|                      |       |                                     |       |           |
| /S/ Theodore R.  Tetzlaff |       |                                     |       |           |
| Theodore R.  Tetzlaff     |       | Director                                 |       | March 30, 2007 |
|                      |       |                                     |       |           |
| /S/ Peter E.  Thieriot    |       |                                     |       |           |
| Peter E.  Thieriot        |       | Director                                 |       | March 30, 2007 |
|                      |       |                                     |       |           |
| /S/ Darrell M.  Trent     |       |                                     |       |           |
| Darrell M. Trent          |       | Director                                 |       | March 30, 2007 |

 

45

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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

Tothe Board of Directors and Shareholders of Continental Materials Corporation:

Wehave audited the financial statements of Continental Materials Corporation andsubsidiaries (the “Company”) as of December 30, 2006 and December 31, 2005, andfor the years then ended, and have issued our report thereon dated March 29,2007. Such consolidated financial statements and report are included in thisAnnual Report on Form 10-K of Continental Materials Corporation for the yearended December 30, 2006.  Our audits also included the financial statementschedules of the Company listed in the accompanying index at Item 15. These financial statement schedules are the responsibility of the Company’smanagement. Our responsibility is to express an opinion based on ouraudits. In our opinion, such financial statement schedules, whenconsidered in relation to the basic financial statements taken as a whole,present fairly, in all material respects, the information set forth therein.The 2004 Financial Statement Schedule was audited by other auditors whosereport dated April 7, 2005, expressed an unqualified opinion on that schedule.

Deloitte & Touche LLP

Chicago, Illinois

March 29, 2007

 

46

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders ofContinental Materials Corporation:

Ouraudits of the consolidated financial statements referred to in our report datedApril 7, 2005, except for the effects of the restatement of the 2004 financialstatements described by Note 11 to the consolidated financial statementsincluded in the Company’s annual report on Form 10-K for the year endedDecember 31, 2005 (not separately presented herein) as to which the dateis June 29, 2006, appearing in the 2006 Annual Report to Shareholders ofContinental Materials Corporation (which report and consolidated financialstatements are included in this Annual Report on Form 10-K) also included anaudit of the 2004 financial statement schedule listed in Item 15(a)(2) of thisForm 10-K.  In our opinion, thisfinancial statement schedule presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements.

PricewaterhouseCoopers LLP

Chicago, Illinois

April 7, 2005

47

----

CONTINENTALMATERIALS CORPORATION

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

for the fiscalyears 2006, 2005 and 2004

 
| **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 2006**                        |       |                                                       |       |                                                               |       |                                       |       |                                         |       |
| Allowance for doubtful  accounts (c) |       | $                                                          | 310,000    |                                                               | $          | 342,000                                    |       | $                                       | 33,000     | (a) | $ | 619,000 |   |
| Inventory valuation  reserve (c)     |       | $                                                          | 150,000    |                                                               | $          | 160,000                                    |       | $                                       | 163,000    | (b) | $ | 147,000 |   |
| Reserve for  self-insured losses     |       | $                                                          | 4,033,000  |                                                               | $          | 5,421,000                                  |       | $                                       | 5,490,000  | (d) | $ | 3,964,000 |   |
| ** **                           |       |                                                       |       |                                                               |       |                                       |       |                                         |       |
| **Year 2005**                        |       |                                                       |       |                                                               |       |                                       |       |                                         |       |
| Allowance for doubtful  accounts (c) |       | $                                                          | 325,000    |                                                               | $          | 94,000                                     |       | $                                       | 109,000    | (a) | $ | 310,000 |   |
| Inventory valuation  reserve (c)     |       | $                                                          | 173,000    |                                                               | $          | 223,000                                    |       | $                                       | 246,000    | (b) | $ | 150,000 |   |
| Reserve for  self-insured losses     |       | $                                                          | 2,988,000  |                                                               | $          | 6,790,000                                  |       | $                                       | 5,745,000  | (d) | $ | 4,033,000 |   |
| ** **                           |       |                                                       |       |                                                               |       |                                       |       |                                         |       |
| **Year 2004**                        |       |                                                       |       |                                                               |       |                                       |       |                                         |       |
| Allowance for doubtful  accounts (c) |       | $                                                          | 436,000    |                                                               | $          | 108,000                                    |       | $                                       | 219,000    | (a) | $ | 325,000 |   |
| Inventory valuation  reserve (c)     |       | $                                                          | 171,000    |                                                               | $          | 202,000                                    |       | $                                       | 200,000    | (b) | $ | 173,000 |   |
| Reserve for self-insured losses      |       | $                                                          | 1,973,000  |                                                               | $          | 2,312,000                                  |       | $                                       | 1,297,000  | (d) | $ | 2,988,000 |   |

 

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

 

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