** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-K**

** **

**(Mark One)**

 

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

 

**For the fiscal year ended December 29, 2007**

** **

**OR**

 

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

 

**For the transition periodfrom               to             **

** **

**Commission file number 1-3834**

 

**ContinentalMaterials Corporation**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

                Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated  filer x                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                         |

 

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

 

                The aggregate market value(based on June 30, 2007 closing price) of voting stock held bynon-affiliates of registrant: Approximately $20,194,000.

 

Number of common shares outstanding at March 24, 2008: 1,601,910.

 

                Incorporation by reference:Portions of registrant’s definitive proxy statement for the 2008 Annual Meetingof stockholders to be held May 28, 2008 into Part III of this Form 10-K.The definitive proxy statement is expected to be filed with the Securities andExchange Commission within 120 days after the close of the fiscal year coveredby this Form 10-K.

 

 

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**PART I**

 

Item1.               **BUSINESS**

 

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

 

TheHeating and Cooling segment produces and sells gas-fired wall furnaces, consoleheaters and fan coils from the Company’s wholly-owned subsidiary, WilliamsFurnace Co. (WFC) of Colton, California. The Evaporative Cooling segmentproduces and sells evaporative coolers from the Company’s wholly-ownedsubsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona.Concrete, Aggregates and Construction Supplies are offered from numerouslocations 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 RockyMountain Ready Mix Concrete, Inc. (RMRM) of Denver. Doors are fabricatedand sold along with the related hardware, including electronic access hardware,from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc.(MDHI), which operates out of facilities in Pueblo and Colorado Springs, Colorado.

 

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

 

Duringthe past five years the company acquired:

 

·                  the assets of CSSL, a company in ColoradoSprings offering electronic access and locking capabilities on January 1,2006 for $352,000; and

·                  certain assets of ASCI, a concrete producerin Colorado Springs on June 30, 2006 for $2,100,000 of cash and a$1,000,000 Note.

 

TheDoor segment of the Construction Products industry group consists of theactivities of MDHI. The CSSL assets were purchased by MDHI. The assets of ASCIwere acquired by Transit Mix Concrete Co. in the Concrete, Aggregates andConstruction Supplies segment. Accordingly, the results of operations includethese activities since their respective acquisition dates.

 

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

 

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

 

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

 

TheConstruction Products industry group markets its products primarily through itsown direct sales personnel and, except for doors and related hardware, confinesits sales to the Front Range area in Colorado. Sales are primarily made to generaland sub-contractors, government entities and individuals. Sales are affected bythe general economic conditions and weather conditions in the areas serviced(as it relates to construction). Revenues usually decline in the winter monthsas the pace of construction slows. Sales of doors and the related hardware aremade throughout the United States although sales are primarily within Coloradoand adjacent states.

 

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During 2007, no customer accounted for 10% ormore of the total sales of the Company.

 

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

 

TheHVAC industry group maintains parts departments and help lines to assistcontractors, distributors and end users in servicing the products. The Companydoes not currently perform installation services, nor are maintenance orservice contracts offered. In addition, training and product informationsessions for the furnace, fan coil and evaporative cooler product lines areoffered at our plants and other sites for distributors, contractors, engineers,utility company employees and other customers. The HVAC industry group does notderive any revenue from after-sales service and support other than from partssales.

 

Thepersonnel in the Concrete, Aggregates and Construction Supplies segmentroutinely take a leadership role in formulation of the products to meet thespecifications of customers. The Company is not involved in setting forms orperforming finishing work on any of its concrete products. The Door segmentoffers doors, frames and hardware, including electronic access systems. Doors,frames and hardware are installed by independent contractors engaged by thegeneral contractor or building owner. Electronic access systems are installedby the Company’s technicians.

 

***BACKLOG***

 

AtDecember 29, 2007, the Heating and Cooling segment had a backlog ofapproximately $3,243,000 ($837,000 at December 30, 2006) primarilyrelating to orders that are expected to be filled during the first half of2008. The increase is due to increased fan coil bid activity generated by theadditional sales personnel and the restructured sales representative network.

 

AtDecember 29, 2007, the Evaporative Cooling segment had a backlog ofapproximately $778,000 ($857,000 at December 30, 2006) primarily due topreseason orders placed prior to year end. This backlog is expected to befilled during the first quarter of 2008.

 

AtDecember 29, 2007, the Concrete, Aggregates and Construction Suppliessegment had a backlog of approximately $10,625,000 ($12,815,000 at December 30,2006) primarily relating to construction contracts awarded and expected to befilled during 2008. While an increase or decrease in backlog is normally moredue to the timing of orders rather than indicative of changes in demand, theentire Front Range of Colorado is experiencing a slowdown of construction,especially in the housing sector.

 

AtDecember 29, 2007, the Door segment had a backlog of approximately$4,576,000 ($6,208,000 at December 30, 2006) primarily relating to ordersthat are expected to be filled during 2008. The decrease is more due to thetiming of the shipment of completed jobs and the receipt of orders thanindicative of any change in demand.

 

Otherthan the increase in bidding activity for fan coils, Management does not believethat backlog information is meaningful in anticipating annual revenue orprofitability from year to year but rather is indicative only of the timing oforders received or contracts awarded.

 

***RESEARCH AND DEVELOPMENT/PATENTS***

 

Ingeneral, the Company relies upon, and intends to continue to rely upon,unpatented proprietary technology and information. However, research anddevelopment activities in the HVAC industry group have resulted in a patentbeing issued to PMI related to the Power Cleaning System (expiring January 2014)used in evaporative coolers and a patent issued to WFC entitled “Wall FurnaceWith Side Vented Draft Hood” (expiring November 2011) for a process thatincreased the heat transference efficiency in our furnaces above thatpreviously offered by the Company and its competitors. The amounts expended onresearch and development are not material and are expensed as incurred. TheCompany believes its interests in its patents, as well as its proprietaryknowledge, are sufficient for its businesses as currently conducted.

 

***MANUFACTURING***

 

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

 

Dueto the seasonality of the businesses and to balance production throughout theyear, furnaces and evaporative coolers are built during their off seasons inorder to have adequate supplies to sell during the season. Although

 

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salesare made throughout the year, sales volume is generally higher from August throughJanuary for furnaces while sales volume of evaporative coolers isgenerally higher from March through July.

 

Ingeneral, the Company can obtain the raw materials required by our operations inall segments from various sources in the quantities desired. The Company’sConcrete, Aggregates and Construction Supplies segment has historicallypurchased most of its cement requirements from a single supplier in order toobtain favorable volume related pricing. Although there have been times duringheavy construction periods that there has been some scarcity of cement supply,the Company does not expect to encounter this situation in the foreseeablefuture due to the recent decline in construction activity and the impendingcompletion of a new cement mill near Pueblo, Colorado. The Company has nolong-term supply contracts and does not consider itself to be dependent on anyindividual supplier. MDHI is an authorized distributor of a major manufacturerof hollow metal doors and hardware. MDHI has historically purchased themajority of its hardware primarily from this supplier in order to obtainfavorable volume related pricing, however, other suppliers are available.

 

TheCompany mines aggregates (rock, gravel and sand) from various owned and leasedproperties in Colorado. Colorado mining permits require permit holders toperform reclamation work in order to return the mined areas to a beneficialuse. These requirements are similar in nature to those included in the miningpermits of our competitors. Reclamation costs have increased since themid-1990’s 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***

 

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

 

Fancoils are also produced at the Colton plant. The Company generally obtains contractsfor larger jobs based upon a competitive bidding process. The contracts aretypically awarded based upon the competitive factors noted below. InternationalEnvironmental Corp., a subsidiary of LSB Industries, Inc. is the largestmanufacturer 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, a Mexican-based manufacturer. The otherprincipal competitor is Champion/Essick. All producers of evaporative aircoolers typically compete aggressively on the basis of price, product featuresand product availability during the cooling season.

 

Concrete,Aggregates and Construction Supplies — This segment operates in highly competitivemarkets. Depending on the market, the Company competes with a number of largemultinational producers as well as regional and small local producers. TheCompany is one of four companies producing ready mix concrete in the ColoradoSprings area, one of three companies producing ready mix concrete in the Puebloarea and one of eleven companies producing ready mix concrete in the Denverarea. In Denver, three of the producers are significantly larger than RMRM.Because of the relatively high transportation costs associated with concrete,the level of competition, especially in the Denver market, is heavilyinfluenced by the distance from production facilities to markets served. Price,plant location, transportation costs, service, product quality and reputationare major factors that affect competition.The Company is one of eight producersof aggregates in the Colorado Springs and Pueblo marketing areas. All producerscompete on the basis of price, quality of material and service.

 

TheCompany’s sales of rebar and other construction supplies in the ColoradoSprings and Pueblo metropolitan areas are subject to intense competition fromthree larger companies from Denver, two large companies in

 

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ColoradoSprings and a number of small local competitors. However, the Company believesit can compete effectively because many of our customers also purchase concreteand aggregates from us whereas our competitors for these particular productlines do not offer concrete or aggregates. In addition, the Company believesits Pueblo 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 hardware throughoutthe United States although sales are primarily in Colorado and adjacent states.There are numerous competitors which compete aggressively based on price anddelivery times.

 

#### ***EMPLOYEES***

 

TheCompany employed 846 people as of December 29, 2007. 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:

 
| ** **                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Heating and Cooling                            |       | 308      |       | 265      |       | 166      |       |
| Evaporative Cooling                            |       | 144      |       | 139      |       | 119      |       |
| Concrete, Aggregates and Construction Supplies |       | 330      |       | 338      |       | 332      |       |
| Door                                           |       | 49       |       | 47       |       | 35       |       |
| Corporate Office                               |       | 15       |       | 13       |       | 13       |       |
| Total                                          |       | 846      |       | 802      |       | 665      |       |

 

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. Employment figures for the Doorand the Concrete, Aggregates and Construction Supplies segments for 2006 and2005 have been restated to reflect the transfer of the Door division of TMC,formerly reported as part of the Concrete, Aggregates and Construction Suppliessegment to the Door segment which was effective the first of the 2007 fiscalyear. The increase in the Door segment from 2005 to 2006 reflects theacquisition of CSSL on January 1, 2006. Other increases are in response tohigher sales.

 

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

 

***ENVIRONMENTAL MATTERS***

 

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

 

In2007, our capital expenditures and remediation expenses for environmentalmatters, except those expenses related to our mining reclamation efforts, werenot material to our financial condition. Because of the complexity andever-changing nature of environmental laws and regulations, we cannot predictwhether capital expenditures and remediation expenses for future environmentalmatters will materially affect our financial condition, results of operationsor liquidity.

 

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

 

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

 

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Item1A.            **RISK FACTORS**

 

Aninvestment in our common stock involves risks and uncertainties. The factorsset out below may have material adverse effects on our business, financialcondition, results of operations and cash flows or on the value of our stock.There may be other risks which are not known to us.

 

**Lowtrading volume in our common stock may adversely affect the ability to purchaseor sell in a timely manner and may adversely affect the trading price of ourcommon stock.**

Ourcommon stock is traded on the American Stock Exchange under the symbol “CUO.”In addition to the customary business factors affecting the price of a publiclytraded company’s common stock, such as financial condition, results ofoperations and cash flows, the concentration of ownership of the Company is afactor that should be considered before deciding to purchase, sell or hold ourstock. Approximately 85% of the Company’s common stock is owned by the Gidwitzfamily, other officers and directors of the Company, employees of the Companyand by two institutional fund groups. On days that the American Stock Exchangeis open, the stock is often not traded at all and the average daily tradingvolume for 2007 was less than 500 shares. The low volume traded on any givenday could have an adverse effect on a shareholder’s ability to purchase or sellshares of the Company in a timely manner and/or adversely affect the tradingprice.

 

**We depend heavily on construction sector activity levelswhich tend to be cyclical and which differ throughout the regions in which weoperate.**

Ourresults depend heavily on residential, commercial and infrastructureconstruction activity and spending levels. The construction industry in ourmarkets tends to be cyclical. Construction activity and spending levels varyacross our markets and are influenced by interest rates, inflation, consumerspending habits, demographic shifts, environmental laws and regulations,employment levels and the availability of funds for public infrastructureprojects. Economic downturns may lead to a slow down in the constructionindustry as a whole and, specifically, in our markets.

 

**Adverse weather lessens demand for our products, which isseasonal.**

Constructionactivity, and thus demand for our concrete, aggregates and constructionsupplies, decreases substantially during periods of cold weather, when it snowsor when heavy or sustained rains fall. Consequently, demand for these productsis significantly lower during the winter. Sales of concrete, aggregates andconstruction supplies are generally stronger during the second and thirdquarters of the year because weather conditions are normally more favorable forconstruction during these periods. Sales of furnaces and console heatersusually increase in the months of August through January in responseto colder weather in areas served. Sales of the fan coil product line arethroughout the United States, Canada and the Caribbean and are more evenlydistributed throughout the year. The highest volume typically occurs during thelate spring and summer, particularly in Canada and in the Northern UnitedStates, where winter weather significantly reduces our first quarter sales.Evaporative coolers are marketed predominantly in geographic areas thatexperience hot and dry weather conditions. Sales are usually higher in themonths of March through July. Sales of all of our products are, therefore,affected by adverse weather conditions in their market locations. Such adverseweather conditions can materially and adversely affect our results ofoperations and profitability if they occur with unusual intensity, duringabnormal periods, or last longer than usual in our major markets.

 

**Competition in our industry could adversely affect ourresults of operations.**

Substantiallyall of the markets we operate in are highly competitive. In all of our businesssegments, 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 may have a material adverseeffect on our results.**

Ouroperations consume significant amounts of energy. The price and availability ofenergy are subject to political, economic and market factors that are generallyoutside our control. In addition, delivery of required raw materials anddistribution of our products are made by truck or rail (primarily required rawmaterials). Because of this, both the availability as well as the cost ofenergy and fuel have significantly affected, and may continue to affect, ourfinancial condition, results of operations and liquidity.

 

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**Litigation could affect our profitability.**

Thenature of all of our business segments exposes us to various litigation mattersincluding product liability claims, employment, health and safety matters,environmental matters, regulatory and administrative proceedings, governmentalinvestigations, tort claims and contract disputes. We contest these mattersvigorously and make insurance claims where appropriate. However, litigation isinherently costly and unpredictable, making it difficult to accurately estimatethe outcome of existing or future litigation or the cost of our legalrepresentation. Although we make accruals as we believe warranted, the amountsthat we accrue could vary significantly from any amounts we ultimately pay dueto the inherent uncertainties in the estimation process.

 

**Governmental policies and laws have significantly increasedour costs and will likely continue to negatively impact earnings.**

As more fully described in Item 1 Business, ouroperations are decentralized and involve four distinct segments. In addition,the Company has generally attempted to operate the business, while maintainingadequate financial reporting controls, with a lean corporate staff. The Companyis classified as a non-accelerated filer and has thus been exempt from some ofthe more costly aspects of full compliance with Section 404 of theSarbanes-Oxley Act of 2002 (SOX), notably the sections addressing internalcontrol documentation and testing. In order to prepare for Section 404(a),the Company expects to expend in excess of $500,000 to $600,000 for outsidereadiness and attestation services to assist in the preparation of requireddocumentation. The Company has also hired a qualified employee to assist withthe project and continue to perform the ongoing testing and maintenance of thedocumentation as required. These figures do not include the value of timeinvested by our other employees on the project nor the out-of-pocket costsincurred for travel and other related expenses.

 

**Governmental policies and laws, particularly those relatingto protection of the environment, could significantly impact our operations.**

Asdescribed more fully within “Manufacturing” in Item 1 Business, ouroperations require numerous governmental approvals and permits. Additionally,our HVAC products must meet various industry performance and safety tests whichare strictly monitored. These approvals, permits and testing standards oftenrequire us to make significant capital and maintenance expenditures to complywith the appropriate laws and regulations. Stricter laws and regulationsincluding reclamation requirements, or stricter interpretation of existing lawsor regulations, may impose new liabilities on us, require additional investmentby us, such as for pollution control equipment, or impede our opening new orexpanding existing plants or facilities. The Company also has, on occasion,been the target of public pressure to exceed the legal requirements forreclamation contained in its mining permits. Such incidents in the future maycause the Company to expend additional amounts for reclamation although noneare currently foreseen.

 

**Changes in the cost or availability of raw materials suppliedby third parties may adversely affect our operating and financial performance.**

Weobtain certain raw materials from third parties who produce such materials ascement, aggregates (in the Denver market), fly ash and other additives as wellas steel, motors, electronic components, copper tubing and other items. Shouldour existing suppliers cease operations, reduce or eliminate production ofthese products or experience work stoppages for whatever reason, our coststo procure these materials may increase significantly or we may be obliged toprocure alternatives to replace these materials. Market demand, both regionaland international, also affects the pricing of these commodities. Despite theability of the Company to acquire sufficient raw materials for its operations,the Company has experienced significant increases in the costs of cement,copper, motors, steel and fuel during the past couple of years which have notbeen fully recovered by increased selling prices due to competitive pressures.

 

**Providinghealthcare and workers’ compensation benefits to our employees is a significantcost of operation. Continuing increases in such costs could negatively affectour earnings.**

Thecosts of providing healthcare and workers’ compensation benefits to ouremployees have increased substantially over the past several years. We haveinstituted measures that attempt to control these costs, however, many factorsaffecting these costs are not in our control. Should these costs continue torise, this will likely have an adverse effect on our consolidated results ofoperations, cash flows or financial condition.

 

**If we fail to maintain proper and effective internalcontrols, our ability to produce accurate financial statements could beimpaired.**

Indesigning and evaluating our internal controls, management recognizes thatinternal controls, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the internalcontrols are met. Our internal controls have been designed to meet, andmanagement believes that they meet, reasonable assurance standards.Additionally, in designing internal controls, our management necessarily isrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible internal controls. The design

 

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ofany 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 by disruptions in ourinformation technology systems.**

Ouroperations are dependent upon our information technology systems, whichencompass all of our major business functions. We rely upon such informationtechnology systems to manage and replenish inventory, fill and ship customerorders on a timely basis, bill customers and coordinate our sales activitiesfor our products and services. A substantial disruption in our informationtechnology systems for any prolonged time period could result in delays inreceiving inventory and supplies or filling customer orders and adverselyaffect our customer service and relationships.

 

**Asubstantial amount of the Company’s common stock is controlled by a smallnumber of investors and could delay or prevent a change of control.**

Approximately85% of the Company’s common stock is owned by the Gidwitz family, otherofficers and directors of the Company, employees of the Company and twoinstitutional fund groups. As such, these stockholders will exercisesubstantial control over our future direction and operation and suchconcentration of control may have the effect of discouraging, delaying orpreventing a change in control and may also have an adverse effect on themarket price of our common stock.

 

**Item1B. Unresolved Staff Comments.**

None.

 

Item2.               **PROPERTIES**

 

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

 

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

 

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. All but one of the mining properties are located inor near Colorado Springs or Pueblo. These properties presently provide theaggregate requirements of our Colorado Springs and Pueblo ready mix concretebusiness as well as selling product to independent customers. The Denver areabatch plants currently purchase their aggregate needs from sources locatedcloser to that market. In general, the leased mining properties are onlong-term leases with payment based upon the number of tons mined. The lease ofan aggregates property in Pueblo, Colorado also requires minimum annual royaltypayments. See Note 9 for the schedule of future minimum payments. Constructionsupplies are sold from owned facilities adjacent to the main batch plants inColorado Springs and Pueblo. All of the Concrete, Aggregate and ConstructionSupplies segment’s facilities are located along the Front Range in Coloradoand, in the opinion of management, are in good condition and sufficient for theCompany’s current needs. The Company also leases or owns other aggregatedeposits along the Front Range that are not currently in production. In theopinion of management, the owned and leased properties contain permitted andmineable reserves sufficient to service customers’ and our own sand, rock andgravel requirements for the foreseeable future.

 

In2007 the Company purchased an existing building nearby its previous doorfabrication facility. The newly acquired facility was first occupied at thebeginning of 2008. The Door segment operates out of this owned facility inColorado Springs and a leased facility in Pueblo, Colorado. The facilities are,in the opinion of management, in good condition and sufficient for theCompany’s current needs.

 

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

 

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Productvolumes at all of the facilities of the Company are subject to seasonalfluctuations, but in the opinion of management, the facilities are generallywell utilized.

 

Item3.               **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 accruals for known occurrences. See Management’sDiscussion and Analysis of Financial Condition and Results of Operations andNote 6.

 

Item4.               **SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

There were no matterssubmitted to a vote of security holders during the fourth quarter of fiscal2007.

 

**PART II**

 

Item 5.                                             **MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

ContinentalMaterials Corporation shares are traded on the American Stock Exchange underthe symbol CUO. Market sales prices for the fiscal quarters of the past twoyears are:

 

| ** ** | ** ** | ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------------|------------|----------|------------|---------|------------|
| 2007       |       | Fourth Quarter |       | $        | 29.07      |    | $          | 24.77 |   |
|       |       | Third Quarter  |       | 29.60    |       | 26.80   |       |
|       |       | Second Quarter |       | 30.99    |       | 28.20   |       |
|       |       | First Quarter  |       | 29.95    |       | 26.51   |       |
|       |       |           |       |     |       |    |       |
| 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   |       |

 

AtMarch 24, 2008, the Company had approximately 200 shareholders of record(including non-objecting beneficial owners).

 

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

 

Thefollowing table presents information with respect to purchases made by theCompany of its common stock to become treasury stock for the period September 29,2007 through December 29, 2007:

 
| ** **                                 | ** ** | **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 29 -  October 27, 2007 |       | —                                              |       | $ | — |   | — |   | $ | 1,349,255 |   |
| October 28  - November 24, 2007  |       | 796                                                 |       | 29.07 |   | 796 |   | 1,326,116 |   |
| November 25  - December 29, 2007 |       | —                                              |       | — |   | — |   | 1,326,116 |   |
| Total                                      |       | 796                                                 |       | $ | 29.07 |   | 796 |   | $ | 1,326,116 |   |

 

OnJanuary 19, 1999, the Company initiated purchases under the currentopen-ended program to repurchase its common stock. Purchases are made on theopen market or in block trades at the discretion of management. The dollaramount authorized for the program has been periodically increased by the Boardof Directors and approved by the Company’s two banks as required by theCompany’s Revolving Credit and Term Loan Agreement. Effective

 

9

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May 29,2004, the Board increased the permitted amount to a total not to exceed$2,750,000 for purchases on or after May 29, 2004, separate from purchasesmade in connection with the June 2005 tender offer and shares acquired aspart of a cashless exercise of stock options. With the exercise of all thenremaining outstanding options during 2005, the Company’s Stock Option Plan (thePlan) was terminated. Reinstatement of the Plan requires the consent of theCompany’s stockholders. On March 28, 2008, the Company entered into anAmended and Restated Term Loan and Revolving Credit Agreement which temporarilyrestricts the Company’s ability to repurchase its stock, see further discussionin the Financial Condition, Liquidity and Capital Resources section below.

 

##### ***COMPARISON OF TOTAL STOCKHOLDER RETURN***

 

Thefollowing graph compares the yearly percentage change in the Company’scumulative total stockholder return on its common stock for a five-year period(December 31, 2002 to December 31, 2007), 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 Company manufactures and markets products in two separateindustries. These industries are (i) HVAC (Heating, Ventilation and AirConditioning) primarily gas-fired wall furnaces, fan coils and evaporativecoolers and (ii) Construction Products, primarily concrete, aggregates,construction supplies and doors. The Company’s principal activities haveoccurred exclusively in these two industries for over 15 years. The Peer Groupselected by the Company for the above graph is a combination of companies fromthese two industries. The companies included in the Peer Group are: DevconInternational Corp.; Eagle Materials, Inc; Fedders Corporation; Florida RockIndustries, Inc.; Hanson PLC; Lafarge North America, Inc. (acquiredby LaFarge SA — ADR during May 2006); LSB Industries, Inc.; MartinMarietta Materials, Inc. and Mesteck, Inc. For the current year, theCompany added Masco Corporation and Simpson Manufacturing to the Peer Groupreplacing Martin Industries, Inc. which was liquidated during August 2003and York International Corp. which was acquired by Johnson Controls during December 2005.

 

 

 

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Item6.               **SELECTEDFINANCIAL DATA**

(Amounts in thousands, except per share amounts)

 
| ** **                                                                                                                                                                                     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| SUMMARY  OF OPERATIONS                                                                                                                                                                         |       |     |       |     |       |     |       |     |       |     |       |
| Sales                                                                                                                                                                                          |       | $        | 168,429    |     | $          | 158,767  |       | $        | 138,999    |     | $          | 126,940 |   | $ | 120,165 |   |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Net  (loss) income                                                                                                                                                                             |       | $        | (563       | )        | $          | 2,042    |       | $        | 2,758      |     | $          | 2,373 |   | $ | 2,349 |   |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| PER  SHARE DATA                                                                                                                                                                                |       |     |       |     |       |     |       |     |       |     |       |
| Basic  (loss) earnings per share                                                                                                                                                               |       | $        | (.35       | )        | $          | 1.27     |       | $        | 1.72       |     | $          | 1.41 |   | $ | 1.34 |   |
| Weighted  average shares outstanding                                                                                                                                                           |       | 1,603    |       | 1,605    |       | 1,602    |       | 1,681    |       | 1,754    |       |
| Diluted  (loss) earnings per share                                                                                                                                                             |       | $        | (.35       | )        | $          | 1.27     |       | $        | 1.69       |     | $          | 1.38 |   | $ | 1.31 |   |
| Weighted  average shares outstanding                                                                                                                                                           |       | 1,603    |       | 1,605    |       | 1,632    |       | 1,725    |       | 1,791    |       |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Cash  dividends declared per common share                                                                                                                                                      |       | $        | 0          |     | $          | 0        |       | $        | 0          |     | $          | 0 |   | $ | 0 |   |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| FINANCIAL  CONDITION                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Current  ratio                                                                                                                                                                                 |       | 2.4:1    |       | 2.2:1    |       | 2.4:1    |       | 2.1:1    |       | 2.5:1    |       |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Total  assets                                                                                                                                                                                  |       | $        | 98,510     |     | $          | 93,705   |       | $        | 87,060     |     | $          | 85,883 |   | $ | 81,826 |   |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Long-term  debt, including current portion                                                                                                                                                     |       | 12,800   |       | 15,666   |       | 12,000   |       | 9,000    |       | 10,970   |       |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Revolving  credit — long-term portion                                                                                                                                                     |       | 7,900    |       | —   |       | —   |       | —   |       | —   |       |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Shareholders’  equity                                                                                                                                                                     |       | 52,732   |       | 53,343   |       | 51,307   |       | 51,448   |       | 50,857   |       |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Long-term  debt to shareholders’ equity ratio                                                                                                                                             |       | .39:1    |       | .29:1    |       | .23:1    |       | .17:1    |       | .22:1    |       |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Book  value per diluted share                                                                                                                                                                  |       | $        | 32.91      |     | $          | 33.23    |       | $        | 31.96      |     | $          | 31.09 |   | $ | 29.52 |   |
| (Book value is shareholders’ equity adjusted, for 2005 and prior  years, for the exercise of options using end of year stock price and shares  outstanding)                               |       |     |       |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| Tangible  book value per diluted share                                                                                                                                                         |       | $        | 27.28      |     | $          | 27.40    |       | $        | 26.91      |     | $          | 26.15 |   | $ | 24.65 |   |
| (Same as above calculation except Book value reduced by unamortized  Goodwill and Intangibles of $9,027, $9,346, $8,102, $8,327 and $8,552 for  2007, 2006, 2005, 2004 and 2003, respectively) |       |     |       |
|                                                                                                                                                                                           |       |     |       |     |       |     |       |     |       |     |       |
| CASH  FLOWS                                                                                                                                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Net  cash provided by (used in):                                                                                                                                                               |       |     |       |     |       |     |       |     |       |     |       |
| Operating activities                                                                                                                                                                           |       | $        | 3,104      |     | $          | 1,933    |       | $        | 7,741      |     | $          | 5,519 |   | $ | 7,778 |   |
| Investing activities                                                                                                                                                                           |       | (7,489   | )          | (8,658   | )          | (3,159   | )          | (3,350   | )          | (2,535   | )          |
| Financing activities                                                                                                                                                                           |       | 4,941    |       | 2,666    |       | (581     | )          | (3,950   | )          | (4,170   | )          |
| Net increase (decrease) in cash and cash equivalents                                                                                                                                           |       | $        | 556        |     | $          | 4,059    |       | $        | 4,001      |     | $          | (1,781 | ) | $ | 1,073 |   |

 

Note: Above figures include the activity of CSSL in the Door segmentsince January 1, 2006 and the activity of ASCI in the Concrete, Aggregatesand Construction Supplies segment since June 30, 2006, the respectivedates each was acquired.

 

 

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Item 7.**   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION**

**AND RESULTS OF OPERATIONS**

 

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

 

**COMPANY OVERVIEW**

 

Asdiscussed in Item 1, Business, the Company operates primarily in two industrygroups, HVAC and Construction Products. Within 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. Salesof these 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 RockyMountain Ready Mix Concrete, Inc. of Denver. Doors are fabricated and soldalong with the related hardware from Colorado Springs and Pueblo through theCompany’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. ofPueblo, Colorado. Sales of these two segments are highly concentrated in theFront Range area in Colorado although door sales are also made throughout theUnited 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’sHVAC products are seasonal and weather sensitive except for fan coils. Revenuesin the 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. While this seasonal pattern of sales has prevailedin 2007, operating results declined in the third and fourth quarters of theyear as discussed in more detail in the Results of Operations section of Item7. The Company’s borrowings against its revolving credit facility peaked in October 2007and as a result of the fourth quarter’s operating loss and a higher level ofinventories, the outstanding revolving credit at year-end was $7,900,000.

 

Cashand cash equivalents were $3,326,000 at the end of 2007 compared to $2,770,000at the prior year-end. Operations in 2007 provided $3,104,000 of cash comparedto $1,933,000 in 2006 and $7,741,000 generated in 2005. The increase in netcash generated by operating activities during 2007 was primarily the result ofa decrease in receivables of $1,470,000 compared to the increase in receivablesof $6,783,000 during 2006. This increase in cash generated was partially offsetby the 2007 net loss and an increase in inventory levels compared to 2006. Thedecrease in net cash generated by operating activities in 2006 compared to 2005was due to changes in working capital, principally an increase in receivablesof $6,783,000 during 2006 compared to a decrease in receivables of $671,000during 2005. The increase in receivables was largely due to the increased salesin all segments during the fourth quarter of 2006 compared to 2005 and to someslowing of collections at our Colorado businesses.

 

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Netcash used in investing activities was $7,489,000 in 2007, $8,658,000 in 2006,and $3,159,000 in 2005. Capital expenditures for 2007, 2006 and 2005 were$7,682,000, $6,553,000 and $3,776,000, respectively, exclusive of the$2,452,000 expended during 2006 for those assets purchased as part of the ASCIand CSSL acquisitions. Current year expenditures were predominantly in theConcrete, Aggregates and Construction Supplies segment including over$1,800,000 to complete the industrial sand plant. An additional $1,800,000 wasexpended to purchase an existing building in Colorado Springs for the Company’sdoor business to replace a smaller and older facility. Expenditures during 2006included $724,000 for the first outlay on an industrial sand plant while theremaining additions consisted primarily of routine equipment replacements.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 new office spaceleased for the Corporate office. An additional $2,452,000 was used in 2006 forthe purchase of the ASCI and CSSL assets. On January 1, 2006 the Companypurchased the assets of CSSL for $352,000 in cash including $100,000 ofgoodwill and $100,000 for a non-compete agreement. On June 30, 2006, theCompany purchased certain assets of ASCI for $2,100,000 of cash and a$1,000,000 note (the remaining balance due on the note at December 30,2006 of $666,000 was paid off during 2007). In addition to the $1,735,000 oftrucks, equipment and concrete plant, the ASCI purchase price included $290,000for a non-compete agreement, $350,000 for a restrictive land covenant, $370,000for existing customer relations and $355,000 of goodwill. Investing activitiesprovided cash from the proceeds from the sale of property and equipment of$193,000, $347,000 and $617,000 during 2007, 2006 and 2005, respectively. The2007 and 2006 sales were mainly of equipment replaced during the year. Thesales of an excess parcel of land adjacent to one of the Colorado Springs batchplants and the site of the closed Pueblo West plant accounted for $383,000 ofthe 2005 cash proceeds. In addition, during 2005 the Company received a notefor $788,000 related to the sales of the Colorado Springs property. The notebears interest at Prime plus 1% and calls for monthly payments of $6,460 ormore.

 

Budgetedcapital expenditures for 2008 are approximately $3,465,000, which isapproximately $2,121,000 less than planned depreciation, depletion andamortization. The budget includes approximately $2,125,000 for expansion of thePueblo East aggregates operations including the construction of a slurry wall.The remaining expenditures are primarily for routine replacement and upgrades.The Company expects that the 2008 expenditures will be funded from existingcash balances and operating cash flow.

 

During2007, cash of $4,941,000 was provided by financing activities. As more fullydiscussed in Note 5, $7,900,000 was borrowed against the revolving line ofcredit to finance operating and working capital needs and capital expenditures.Scheduled debt repayment of $2,200,000 were made during the year as well as thepay-off of the remaining $666,000 owed on the note issued as part of thepurchase price of ASCI. An additional $93,000 was used to acquire treasuryshares during 2007. During 2006, cash of $2,666,000 was provided by financingactivities. As more fully discussed in Note 5, the principal amount of the termloan was increased by $5,000,000 during 2006, primarily to fund the acquisitionof the assets of ASCI and to pay for the industrial sand plant. See additionaldiscussion of the term loan under Revolving Credit and Term Loan Agreement,below. Scheduled debt repayments of $2,000,000 were made during the year. Inaddition, scheduled payments of $334,000 were made against the $1,000,000 Noteissued as part of the purchase price of ASCI leaving a balance due of $666,000at December 30, 2006. During 2005, cash of $581,000 was used in financingactivities. The principal amount of the term loan was increased by $5,000,000during 2005. Approximately $3,629,000 of the proceeds were used to fund thepurchase of the Company’s stock under the modified Dutch auction tender offercompleted during the second quarter, and to pay related fees and expenses.Under the Company’s ongoing share repurchase program, an additional $348,000was used to acquire shares during 2005. A total of 115,353 shares were acquiredduring 2005. Scheduled long-term debt payments of $2,000,000 were made duringthe year. During 2005, the remaining outstanding options were exercised for 73,400shares (70,400 shares net of 3,000 shares tendered as payment of option price)which generated proceeds of $396,000 for the Company and resulted in a $608,000tax benefit (the tax benefit is classified as an operating activity in theConsolidated Statement of Cash Flows).

 

**Revolving Credit and Term Loan Agreement**

TheCompany signed a Revolving Credit and Term Loan Agreement (Credit Agreement)with LaSalle Bank National Association and Fifth Third Bank during September 2003.At December 29, 2007, $12,800,000 was outstanding under the term loanfacility. On March 28, 2008, the Company entered into an Amended andRestated Term Loan and Revolving Credit Agreement (the Amended CreditAgreement). This Amended Credit Agreement increased the revolving credit facilityfrom $15,000,000 to $18,000,000 until September 30, 2008. On September 30,2008, the revolving credit facility is reduced back to $15,000,000. Thetemporary increase in the revolving credit facility is to provide additionalliquidity during the Company’s peak seasonal credit need.

 

TheAmended Credit Agreement provides that, at the Company’s option, the term loanand revolving credit facility will bear interest at prime or aperformance-based LIBOR rate. Based on the terms of the Amended Credit Agreementand the Company’s performance for the twelve months ended December 29,2007, the performance

 

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basedrate would be LIBOR plus 2.50% for both the term loan and for borrowings underthe revolving credit facility.****Such rate issubject to adjustment depending upon the Company’s performance. Payment ofaccrued interest is due and payable quarterly by the Company. Payments ofprincipal under the term loan are payable on a quarterly basis, ending on March 31,2011. The Amended Credit Agreement extends the Revolving Credit facility until June 30,2009 and accordingly, the outstanding revolving credit balance at December 29,2007 was classified as a long-term obligation.

 

AtDecember 29, 2007, there was $7,900,000 outstanding against the revolvingcredit facility leaving $2,590,000 available after reserving $4,510,000 for theoutstanding stand-by letters of credit. The revolving credit facility isavailable at the discretion of management. It is primarily used for funding theseasonal sales programs related to the evaporative cooler and furnace 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 2007 fiscal year, the highest amount of Companyborrowings outstanding under the revolving credit agreement, not including theamount securing stand-by letters of credit, was $9,300,000 and the averageamount outstanding was $5,632,000. At December 29, 2007, the Company wasnot in compliance with the Leverage Ratio as defined in the Credit Agreement.The Company has obtained a waiver of the requirement for the 2007 year-end. TheLeverage Ratio requirement has been modified by the Amended Credit Agreementbeginning in 2008. The Company expects to be in compliance with the amendedagreement throughout 2008. The principal reasons for not meeting the requiredLeverage Ratio was the high level of capital expenditures and the loss incurredin 2007.

 

Duringfiscal 2001, the Company entered into an interest rate swap agreement (SwapAgreement) covering the period December 17, 2001 through December 18,2006 in order to minimize the adverse impact of the floating interest ratecharacteristic of some of the Company’s term loan borrowing. 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. There were no swap agreementsoutstanding during 2007.

 

The Company believesthat its existing cash balance and anticipated cash flow from operations,supplemented by seasonal borrowings available under the revolving line ofcredit as amended, will be sufficient to cover expected cash needs, includingservicing debt and planned capital expenditures for the next twelve months.

 

**InsurancePolicies**

TheCompany maintained insurance policies since March 31, 2007 with thefollowing per incident deductibles and policy limits:

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

 

Shouldthe aggregated out-of-pocket payments for the three policies exceed $5,580,000during a policy year, deductibles on future claims are waived and the policiespay all amounts up to the policy limits. Should any, or all policy limits beexceeded, an umbrella policy is maintained which covers the next $25,000,000 ofclaims.

 

**Obligationsand Commitments**

Thefollowing tables represent our obligations and commitments to make futurepayments under contracts, such as debt and lease agreements, and undercontingent commitments as of December 29, 2007.

 

PaymentsDue by Period as of December 29, 2007 (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) (a)      |       | $         | 14,673     |                       | $          | 3,155                  |       | $                     | 6,439      |                    | $          | 5,079 |   | $ | — |   |
| Revolving credit facility  without interest (See Note 5) |       | 7,900     |       | —                     |       | 7,900                  |       | —                |       | —                  |       |
| Operating leases (See Note  9)                           |       | 7,849     |       | 1,796                      |       | 2,519                  |       | 1,801                 |       | 1,733                   |       |
| Minimum royalty agreement  (See Note 9)                  |       | 21,338    |       | 418                        |       | 836                    |       | 836                   |       | 19,248                  |       |
| FIN 48 liability                                         |       | 9         |       | 9                          |       | —                 |       | —                |       | —                  |       |
| Total contractual  obligations                           |       | $         | 51,769     |                       | $          | 5,378                  |       | $                     | 17,694     |                    | $          | 7,716 |   | $ | 20,981 |   |

 

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(a)         Interest on long-term debt is computed using theinterest rate in effect at December 29, 2007. Although there is anoutstanding balance at year-end under our revolving credit facility, nointerest amounts have been included related to the revolving credit facilitybecause future paybacks and/or borrowings under this facility are unknown atthis time.

(b)         The  Company hasincluded $9,000 of uncertain tax liabilities under FASB Interpretation No. 48“Accounting for Uncertainty in Income Taxes,” that are classified as currentliabilities on the consolidated balance sheet. Excluded from the table are$134,000 of uncertain tax liabilities, as the Company is unable to reasonablyestimate the ultimate amount or timing of settlement.

 

Amounts of Commitment Expiration per Period as of December 29,2007 (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        |       | $         | 4,510      |                   | $          | 4,510                |       | $                    | —     |                    | $          | — |   | $ | — |   |
|                                  |            |           |            |                        |            |                      |            |                      |            |                         |            |  |  |  |  |  |

 

**Off-BalanceSheet Arrangements**

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

 

**RESULTSOF OPERATIONS**

 

Thissection discusses consolidated results. The following sections discuss theresults of the reporting segments and contain more detail. Consolidated saleswere $168,429,000 in 2007, $158,767,000 in 2006 and $138,999,000 in 2005. Theincrease in 2007 was primarily realized by the Heating and Cooling segment($6,216,000) and the Door segment ($4,924,000). Increased fan coil sales werethe principal reason for the higher sales in the Heating and Cooling segmentwhile a continued strong demand and the timing of shipments accounted for theDoor segment sales increase. The increase in 2006 over 2005 was realized by allfour segments as virtually all products ended the year with higher volumes thanachieved in 2005. The primary driver of the sales increase was the Concrete,Aggregates and Construction Supplies segment as a result of both volume and priceincreases.

 

Costof sales (exclusive of depreciation, depletion and amortization) increased as apercentage of sales from 82.1% to 84.8%. The increase in cost of sales wasexperienced by all segments except the Door segment. Increased material,healthcare and factory overhead costs drove margins lower in the Heating andCooling and Evaporative Cooling segments. Higher cement and delivery costs leadto the decreased margins in the Concrete, Aggregates and Construction Suppliessegment despite the recovery of $725,000 in 2007 from the insurance claim forflood damages in 2006. Increased competitive pricing resulting from reducedconstruction activity along the Front Range in Colorado prevented priceincreases from fully recapturing the increased costs. The improvement in theDoor segment was largely due to the increase in sales. 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 aggregates operationsin 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.

 

Depreciation, depletion andamortization increased in 2007 compared to 2006 due to the high level ofcapital expenditures. Depreciation, depletion and amortization increased from2005 to 2006 due to increased capital expenditures during 2006 and amortizationof intangible assets associated with the ASCI and CSSL acquisitions.

 

Selling and administrativecosts increased but remained relatively constant as a percentage of sales at12.4%. The increased costs were partially related to the increase in sales ofthe Heating and Cooling segment and the Door segment. However, increases inemployee healthcare, compliance costs associated with SOX, insurance and legalexpenses associated with product liability claims were the primary causes forthe increase in selling and administrative costs. During 2006, selling andadministrative costs increased both in dollars and as a percentage of sales,although the latter only modestly from 12.3% in 2005 to 12.4% in 2006. Much ofthe increase was due to the increased sales volume. Selling and administrativecosts at the corporate office were relatively constant between 2007 and 2006.

 

Operating results declinedfrom a profit of $3,849,000 to a loss of $554,000. The dramatic decline was theresult of the deterioration of margins in all but the Door segment combinedwith the lower volume in the Concrete business. Administrative costs for 2006declined from the 2005 level largely due to lower incentive based compensation.

 

 

15

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Thegain on the disposition of property and equipment declined during 2007 comparedto 2006 as there were few sales during the year. During 2006, gains wererealized on numerous dispositions of equipment that were replaced during theyear. The 2005 gains were unusually high as they included $721,000 on the salesof property in Colorado. Operating income declined from $4,052,000 in 2005 to$3,849,000 in 2006 despite the increase in sales largely due to the margindecline and increased selling and administrative costs in the Heating andCooling segment. The expenses related to the flooding at two of our aggregateoperations, as well as the decrease in gains on the sale of property andequipment, also reduced operating income in 2006.

 

Otherincome for 2007 included a $230,000 gain on the sale of stock received from thedemutualization of one of our insurance carriers.

 

Netinterest expense increased over the prior year in both 2007 and 2006 due toincreased borrowings as well as higher average interest rates during bothyears.

 

TheCompany’s effective income tax rates reflect federal and state statutory ratesadjusted for non-deductible and other tax items. The effective tax rate for2007 was a benefit of 61.6%. The primary increases to the benefit from thestatutory rate of 34% was the 19.4% benefit realized from percentage depletionand the 16.3% benefit for future state tax credits resulting from operationswithin an Enterprise Zone in California. The effective rate for 2006 (35.3%)was increased by 6.1% for adjustments made to state taxes and reduced by 5.4%for the benefit realized from percentage depletion. The effective rate for 2005(22.5%) was reduced by 8.1% for adjustments made to the accrual for taxcontingencies as a result of the closure of tax years subject to audits by taxingauthorities. The 2005 effective rate was also reduced by 2.4% for percentagedepletion. The Company reviews its tax positions on a quarterly basis andaccrues amounts for potential tax contingencies. Based on these reviews and theclosure of tax years subject to tax audit, reserves are adjusted as necessary.Reserves for these tax matters are included in income taxes payable on theconsolidated balance sheets. See Note 11.

 

Asdiscussed above, the Company operates primarily in two industry groups both ofwhich are somewhat seasonal, weather sensitive and subject to cyclical factors.The following addresses various aspects of operating performance focusing onthe reportable segments within each of the two industry groups.

 

**Construction Products IndustryGroup**

Asdiscussed in Note 13, as a result of certain organizational changes, we havereevaluated our segments reporting under Financial Accounting Standards Board(FASB) Statement 131, “Disclosure about Segments of an Enterprise and RelatedInformation.” The Door Division of TMC, previously reported within theConcrete, Aggregates and Construction Supplies Segment is now reported within theDoor Segment. Accordingly, the 2006 information presented in the table belowhas been restated to conform to the current year’s segment composition. Thetable below presents a summary of operating information for the two reportablesegments within the Construction Products industry group for the fiscal years2007, 2006 and 2005 (amounts in thousands).

 
| ** **                              | ** ** | **Concrete, Aggregates and Construction Supplies** | ** ** | **Door** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|----------|------------|
| 2007                                    |       |                                               |       |     |       |
| Revenues from external  customers       |       | $                                                  | 90,438     |     | $          | 19,024 |   |
| Segment operating income                |       | 2,980                                              |       | 2,245    |       |
| Operating income as a  percent of sales |       | 3.3                                                | %          | 11.80    | %          |
| Segment assets                          |       | $                                                  | 53,002     |     | $          | 7,398 |   |
| Return on assets                        |       | 5.6                                                | %          | 30.3     | %          |
|                                    |       |                                               |       |     |       |
| 2006 as restated                        |       |                                               |       |     |       |
| Revenues from external  customers       |       | $                                                  | 92,214     |     | $          | 14,100 |   |
| Segment operating income                |       | 4,888                                              |       | 1,492    |       |
| Operating income as a  percent of sales |       | 5.3                                                | %          | 10.6     | %          |
| Segment assets                          |       | $                                                  | 54,470     |     | $          | 4,750 |   |
| Return on assets                        |       | 9.0                                                | %          | 31.4     | %          |
|                                    |       |                                               |       |     |       |
| 2005 as restated                        |       |                                               |       |     |       |
| Revenues from external  customers       |       | $                                                  | 78,356     |     | $          | 13,015 |   |
| Segment operating income                |       | 3,159                                              |       | 1,423    |       |
| Operating income as a  percent of sales |       | 4.0                                                | %          | 10.9     | %          |
| Segment assets                          |       | $                                                  | 46,182     |     | $          | 3,912 |   |
| Return on assets                        |       | 6.8                                                | %          | 36.4     | %          |

 

Concrete, Aggregates andConstruction Supplies Segment

Sales in the Concrete,Aggregates and Construction Supplies segment declined $1,776,000 to $90,438,000despite increased sales prices. The decline was attributable to a 6.9% declinein concrete volume as construction

 

16

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along the Front Range ofColorado has slowed significantly over the past year. Delivery costs increaseddue to higher prices for diesel fuel and a higher level of repairs andmaintenance expenditures. As the communities serviced expand, traffic increasesand more of our sales occur further from our batch plant sites. In the Pueblomarket, a significant portion of the increased delivery costs can beattributable to the quick turn around times we enjoyed servicing two very largejobs in 2006. Pricing became more competitive in all Colorado markets as demandfell which prevented our price increases from fully recovering the increasedcosts. The Aggregates division reported improved sales during 2007 althoughprofits were aided by the $725,000 insurance recovery related to the 2006 flooddamage claims. The Construction Supplies division reported declines in sales directlyrelated to the lower construction activity during 2007.

 

Sales in the Concrete,Aggregates and Construction Supplies segment improved to $92,214,000 in 2006,an increase of $13,858,000, or 17.7% over the 2005 amount of $78,356,000. Theimprovement was primarily due to three large commercial jobs in the Puebloarea, the relatively strong construction market during the first half of 2006coupled with favorable weather conditions during the first quarter of the yearas compared to the 2005 quarter and concrete price increases. Although thehousing market slowed midyear, continued work on the three large industrialjobs allowed us to increase sales volume for 2006 despite volume declines inDenver and Colorado Springs for the year. The purchase of ASCI on June 30,2006 also helped offset some of the effect of the slowing market in ColoradoSprings. Concrete pricing improved during 2006 although the increases werelargely instituted to offset increased cement and fuel cost. Aggregates salesimproved in combination with the concrete volume. Sales of the suppliesdivision declined in a slower, more price competitive market.

 

Operating income is highlysensitive to sales volume in the Concrete, Aggregates and Construction Suppliessegment. This segment has also historically required a sizable investment incapital assets resulting in a significant portion of its costs being relativelyfixed in nature. Operating income as a percent of sales, therefore, generallyincreases and decreases at a higher rate but in tandem with sales changes.

 

Operating income for 2007was $2,980,000 as compared to the 2006 operating profit of $4,888,000. Cost ofsales as a percentage of sales increased from 83.9% in 2006 to 85.7% in 2007despite the insurance recovery of $725,000 from the 2006 flood damage claims.As noted above, due to the increased competitive pricing caused by the declinein construction activity, sales prices were not able to be fully passed on tocustomers to offset the higher costs. In addition, depreciation expense roseapproximately $200,000 in 2007 compared to 2006 due to the high capitalspending in recent years and the amortization of intangibles related to theASCI acquisition. The segment also sold numerous assets during 2006 whichresulted in gains of $195,000 compared to the small loss of $9,000 incurredduring 2007.

 

Operating income for 2006was $4,888,000 compared to the 2005 results of $3,159,000. Cost of sales as apercentage of sales declined during 2006 compared to 2005. The improvement wasthe result of some price increases and delivery efficiencies on the largeindustrial jobs, lower workers’ compensation claims, and the relatively fixednature of some costs that did not increase proportionately with sales. Sellingand administrative costs increased but declined as a percentage of sales due tothe fixed nature of some of the costs. Partially offsetting these improvementswere the $726,000 decrease in the 2006 gain on dispositions of property andequipment from the 2005 level in this segment and the effect of flooding at ourtwo Arkansas River operations in July and a second flood at our PuebloEast pit in August. Both were the result of heavy rains in the area. Allexpenses incurred to repair the damage and resume production have beenrecognized in 2006 cost of sales. Both quarries were back in operation during2006 although some measures to mitigate future flood losses were not completeduntil 2007. Management estimates that the effect of the flooding added over$1,000,000 in expenses at the two aggregate operations in 2006. The Companyfiled insurance claims and settled those claims for $725,000 during 2007. Norecovery had been anticipated or recorded in the 2006 results of operations.

 

As expected the reducedprofit level of 2007 resulted in lower operating income as a percent of salesand lower return on assets from the 2006 level. The return on assets for 2006increased as a result of the higher sales and improved profit margins partiallyoffset by the investment related to the ASCI acquisition and a higher level ofreceivables.

 

Door Segment

Sales in the Door segmentincreased $5,352,000 or 38% during 2007 over the 2006 level as demand remainedstrong and sales of electronic access systems increased. Sales are alsoaffected by the timing of shipments as contractors may accelerate or delayshipments depending on the progress of their projects. Backlog was reduced overthe course of 2007 but remains at a strong level. Sales in the Door segment for2006 increased $1,085,000 or 8.3% over 2005 primarily due to the acquisition ofCSSL at the beginning of the year.

 

17

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Operating income was$2,245,000 during 2007 compared to $1,492,000 during 2006 due principally tothe increase in sales volume. Operating income increased $69,000 during 2006over the $1,423,000 level achieved during 2005 due to the increased salesvolume. Margins were slightly narrower due to expenses associated with theassimilation of the CSSL acquisition.

 

Operating income as apercentage of sales for 2007 improved as the electronic access products wereassimilated into more projects and the Company was able to lever theirelectronics capability to increase sales and pricing. Operating income as apercentage of sales for 2006 declined slightly from the 2005 level due to thenarrower margins in the newly acquired CSSL electronic access business.

 

The return on assets during2007 declined slightly from the 2006 level primarily due to the acquisition ofthe Colorado Springs facility during 2007 which increased the asset base of thesegment. The return on assets for 2006 declined from the 2005 level partly due to the narrower margins notedabove but also because of an increase in the segment assets during 2006 chieflydue to higher receivables and inventories at year-end.

 

**HVACIndustry Group**

Thetable below presents a summary of operating information for the two reportablesegments within the HVAC industry group for the fiscal years 2007, 2006 and2005 (amounts in thousands).

 
| ** **                              | ** ** | **Heating and Cooling** | ** ** | **Evaporative Cooling** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| 2007                                    |       |                    |       |                    |       |
| Revenues from external  customers       |       | $                       | 36,146     |                    | $          | 22,460 |   |
| Segment operating (loss)                |       | (1,858                  | )          | (906                    | )          |
| Operating loss as a  percent of sales   |       | (5.1                    | )%         | (4.0                    | )%         |
| Segment assets                          |       | $                       | 22,810     |                    | $          | 13,101 |   |
| Return on assets                        |       | (8.1                    | )%         | (6.9                    | )%         |
|                                    |       |                    |       |                    |       |
| 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                    | )%         |

 

Heatingand Cooling Segment

Salesin the Heating and Cooling segment improved to $36,146,000, an increase of$6,216,000 or 20.8% from the $29,930,000 in 2006. Furnace volume increased amodest 1.2% while the fan coil line added over $6,000,000 in sales during 2007.Profit margins, however, were lower compared to 2006. The reduced margins weredue to significantly higher plant overhead costs, higher than expected materialcosts and more generous sales incentive plans offered to key furnace customers.Factory overhead expenses were significantly higher in part due to an increasein employee healthcare costs and workers’ compensation claims. Factory indirectpayroll costs were higher due to additional personnel hired to accommodate theincreased fan coil volume. Expenses associated with a business systemsconversion and the implementation of a product configurator program for the fancoil line reduced the 2007 operating results. Selling expenses increased byalmost 3% of sales due to volume incentives and other marketing expensesrelated to programs offered to major furnace customers.

 

Salesin the Heating and Cooling segment in 2006 increased to $29,930,000, anincrease of $3,194,000 or 11.9%, from the 2005 amount of $26,736,000. Sales ofboth furnaces and fan coils rose during the year. Furnace volume increased dueto the recapture of all of the business of a large national home centeraccount. The fan coil sales increase is attributable to the Company’srestructuring of its sales representative network and the addition of internalsales and support staff.

 

18

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Operating results fell to aloss of $1,858,000 from the $161,000 profit reported for 2006. As noted above,the addition of personnel in anticipation of continued growth in fan coilsales, increased factory costs and pricing pressures primarily in the form ofenhanced sales incentive programs all combined to diminish profit margins. Higherinsurance premiums and legal costs associated with product liability claimscontributed to the loss in 2007. The Company also continued to be affected byraw material price increases. Fan coil pricing is generally determined andfixed at the time the contract is awarded. The period of time from the awardingof a contract to the production and delivery of the product can vary. Commodityprice increases during the intervening period will significantly impact themargins realized.

 

Operating income declined from$2,777,000 for 2005 to $161,000 during 2006. The decline was the result ofnumerous factors, all reducing income. Pricing decisions made to retain andexpand our furnace business with a national home center account reduced ourselling price and the related margin. A substantial price increase in copperprices coupled with increases in aluminum and steel narrowed margins for bothproduct lines. Furnace prices are established at the beginning of the season.As noted above, fan coil pricing is generally determined and fixed at the timethe contract is awarded. The period of time from the awarding of a contract tothe production and delivery of the product can vary. During this interveningperiod in 2006, we experienced significant increases in copper prices. Theaddition of sales, engineering and support staff and the opening of a sales andservice center in Oklahoma City made to increase fan coil sales increasedselling and administrative expenses. Expenditures for computer system upgradesand product configuration software and the cost of general business consultantsengaged to review all aspects of the business and organization also increasedselling and administrative costs.

 

Operating results as apercent of sales and the return on assets were both negative for the year dueto the loss reported for 2007. Operating income as a percent of sales and thereturn on assets were both much lower in 2006 compared to 2005 due to the loweroperating income.

 

EvaporativeCooling Segment

Salesin the Evaporative Cooling segment increased slightly to $22,460,000, up$293,000 or 1.3% over the 2006 amount of $22,167,000. The increase was due tomodest sales price gains as unit sales were essentially equal to the 2006level. Sales of a custom manufactured electrical distribution box declinedpartially offsetting the price gains on coolers. Contribution margins declinedsubstantially due to higher material costs as well as higher employee benefitexpenses. Workers’ compensation claims, self-insured healthcare claims and maintenancecosts were all higher in 2007. Sales during 2006 in the Evaporative Coolingsegment improved to $22,167,000, an increase of $1,622,000 or 7.9%, over the2005 amount of $20,545,000. Unit volume increased due to an increase inindustrial cooling units in the latter part of 2006.

 

Operating results slippedfrom a profit of $267,000 in 2006 to a loss of $906,000 in 2007. As notedabove, the increased costs combined with aggressive competition that limitedsales price increases, were the causes for the decline. Operating results for2006 improved from a loss of $177,000 in 2005 to a profit of $267,000 in 2006.The overall increased sales volume combined with a shift to the largerindustrial units resulted in improved margins. Reduced workers’ compensationclaims also aided the results.

 

Operating results as a percent of sales and thereturn on assets were both negative for 2007 due to the loss noted above.Operating results as a percent of sales and the return on assets were bothimproved in 2006 compared to 2005 as a result of the modest amount of operatingincome in 2006 compared to the loss incurred during 2005.

 

**CRITICALACCOUNTING POLICIES**

 

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

 

Intangibles

Inaccordance with Statement of Financial Accounting Standards (SFAS) No. 142,“Goodwill and Other Intangible Assets,” goodwill is not amortized as a chargeto earnings. The Company annually assesses goodwill for potential impairment asof the last day of its fiscal year. In addition, to the extent that eventsoccur, either involving the relevant Company subsidiaries or in theirindustries, the Company revisits its assessment of the recorded goodwill

 

 

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todetermine if impairment has occurred and should be immediately recognized. Thisassessment requires us to make significant assumptions and estimates about theextent and timing of future cash flows, discount rates, growth rates and costs.In addition, the terms of recent industry transactions/mergers are considered.No impairment was indicated in the current year. If the assessment hadindicated that the carrying value of goodwill was impaired, an impairmentcharge would have been recorded for the amount by which the carrying value ofthe goodwill exceeded its fair value. Management believes that the assumptionsand estimates used to determine the estimated fair values are reasonable;however, changes in the aforementioned assumptions and estimates, as well asthe effects of unknown future events or circumstances could materially affectthe estimated fair value.

 

Liabilities

TheCompany purchases insurance coverage for workers’ compensation, general productand automobile liability, retaining certain levels of risk (self-insured portion).Provision for workers’ compensation claims is estimated with the assistance ofan independent expert who applies actuarial methodology to information providedby the Company’s independent claims administrator. Provision for automobileclaims is estimated based upon information provided by the Company’sindependent claims administrator and the Company’s own experience. With regardto product liability, provisions for both claims and unasserted claims thatwould be covered under the self-insured portion of the policies are recorded inaccordance with the requirements of SFAS No. 5, “Accounting forContingencies,” and are reviewed at least annually for revisions in estimates.

 

TheCompany records a reserve for future reclamation work to be performed at its variousaggregate operations based upon an estimate of the total expense that will beincurred to reclaim the disturbed areas. Actual reclamation costs are chargedagainst the reserve. The adequacy of the recorded reserve is assessed annually.The assessment may be done more frequently if events or circumstances arisethat may indicate a change in estimated costs, recoverable material or theperiod of mining activity. The Company periodically engages an independentprofessional to assist in reevaluating the estimates of both the quantities ofrecoverable material and the cost of reclamation. 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 quantities 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.

 

RecentlyIssued Accounting Standards

In“Recently Issued Accounting Pronouncement” section of Note 1 to theConsolidated Financial Statements discusses new accounting policies adopted bythe Company since 2006 and the expected impact of accounting pronouncementsrecently issued but not yet required to be adopted. To the extent the adoptionof new accounting standards has an affect on financial condition, results ofoperations or liquidity, the impacts are discussed in the applicable notes tothe consolidated financial statements.

 

**FORWARD-LOOKING STATEMENTS**

 

ThisAnnual Report contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended. Such forward-looking statements arebased on the beliefs of the Company’s management as well as on assumptions madeby and information available to the Company at the time such statements weremade. When used in this Report, words such as “anticipates,” “believes,”“contemplates,” “estimates,”  “expects,”“plans,” “projects” and similar expressions are intended to identifyforward-looking statements. Actual results could differ materially from thoseprojected in the forward-looking statements as a result of factors includingbut not limited to: weather, interest rates, availability of raw materials andtheir related costs, economic conditions and competitive forces in the regionswhere the Company does business, and the ability of the Company to obtaincredit on commercially reasonable terms. Changes in accounting pronouncementscould also alter projected results. Forward-looking statements speak only as ofthe date they were made and we undertake no obligation to publicly update them.

 

 

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Item7A.  **QUANTITATIVE ANDQUALITATIVE 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 ofthe floating 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. The effect onoperations was to increase net income by $21,000 for 2006 while reducing netincome by $31,000 for 2005. During the swap period, the fair value of the SwapAgreement was recorded on the balance sheet with subsequent changes recorded asa separate component of accumulated other comprehensive income in shareholders’equity. See paragraph below and above discussion under Financial Condition,Liquidity and Capital Resources. See Note 3.

 

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 $20,700,000 at December 29, 2007. The Company is notcurrently a party to any financial debt instruments that contain fixed interestcharges. The Company is not a party to any capital lease agreements as of December 29,2007. See Note 3.

 

Commodities

TheCompany purchases commodities, such as steel, copper, aluminum, cement, fueland cardboard for packaging, at market prices and did not use financialinstruments to hedge commodity prices during 2007. Subsequent to year-end, theCompany entered into fixed swap for 320,000 pounds of copper at a price of$3.22 per pound. The copper hedge contract expires in 40,000 pound incrementsfrom February 2008 to November 2008.

 
| 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 (loss)   income for fiscal years 2007, 2006 and 2005 |       | 22       |
|                                                                                                          |       |     |
|                                                                                                          |       |     |
| Consolidated statements of cash flows   for fiscal years 2007, 2006 and 2005                                  |       | 23       |
|                                                                                                          |       |     |
|                                                                                                          |       |     |
| Consolidated balance sheets as of  December 29, 2007   and December 30, 2006                        |       | 24       |
|                                                                                                          |       |     |
|                                                                                                          |       |     |
| Consolidated statements of shareholders’ equity   for fiscal years 2007, 2006 and 2005                   |       | 25       |
|                                                                                                          |       |     |
| Notes to consolidated financial statements                                                                    |       | 26-36    |
|                                                                                                          |       |     |
| Report of Independent Registered Public Accounting  Firm                                                      |       | 36       |

 

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**ContinentalMaterials Corporation**

**Consolidated Statements of Operations and Comprehensive (Loss) Income**

**For Fiscal Years 2007, 2006 and 2005**

(Amounts in thousands, except per share data)

 
|                                                                                                                  |   | **2007** | ** ** | **2006** | ** ** | **2005** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|--------|
|                                                                                                                  |   |     |       |     |       |     |   |
| Sales                                                                                                                 |   | $        | 168,429    |     | $          | 158,767  |   | $ | 138,999 |   |
| Costs and expenses                                                                                                    |   |     |       |     |       |     |   |
| Cost of sales (exclusive of depreciation, depletion and amortization)                                                 |   | 142,838  |       | 130,410  |       | 114,065  |   |
| Depreciation, depletion and amortization                                                                              |   | 5,284    |       | 5,009    |       | 4,729    |   |
| Selling and administrative                                                                                            |   | 20,888   |       | 19,711   |       | 17,095   |   |
| Gain on disposition of  property and equipment                                                                        |   | 27       |       | 212      |       | 942      |   |
| Operating (loss) income                                                                                               |   | (554     | )          | 3,849    |       | 4,052    |   |
| Interest expense                                                                                                      |   | (1,254   | )          | (808     | )          | (565     | )      |
| Other income, net                                                                                                     |   | 340      |       | 116      |       | 71       |   |
| (Loss) income before  income taxes                                                                                    |   | (1,468   | )          | 3,157    |       | 3,558    |   |
| Income tax (benefit) provision                                                                                        |   | (905     | )          | 1,115    |       | 800      |   |
| Net (loss) income                                                                                                     |   | $        | (563       | )        | $          | 2,042    |   | $ | 2,758 |   |
|                                                                                                                  |   |     |       |     |       |     |   |
| Basic (loss) earnings per  share                                                                                      |   | $        | (.35       | )        | $          | 1.27     |   | $ | 1.72 |   |
| Weighted average shares outstanding                                                                                   |   | 1,603    |       | 1,605    |       | 1,602    |   |
| Diluted (loss) earnings  per share                                                                                    |   | $        | (.35       | )        | $          | 1.27     |   | $ | 1.69 |   |
| Weighted average shares outstanding                                                                                   |   | 1,603    |       | 1,605    |       | 1,632    |   |
|                                                                                                                  |   |     |       |     |       |     |   |
| Comprehensive (loss)  income:                                                                                         |   |     |       |     |       |     |   |
| Net (loss) income                                                                                                     |   | $        | (563       | )        | $          | 2,042    |   | $ | 2,758 |   |
| Comprehensive (loss) income from interest rate swap, net of tax of  $(3) and $44 for 2006 and 2005, respectively |   | —   |       | (6       | )          | 73       |   |
| Total comprehensive (loss)  income                                                                                    |   | $        | (563       | )        | $          | 2,036    |   | $ | 2,831 |   |

 

The accompanying notes are an integral part of the financialstatements.

 

22

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**Continental Materials Corporation**

**Consolidated Statements of Cash Flows****For FiscalYears 2007, 2006 and 2005**

(Amounts in thousands)

 
| ** **                                                                                                                 | ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities                                                                                                       |       |       |       |     |       |     |       |
| Net (loss) income                                                                                                          |       | $          | (563       | )        | $          | 2,042    |       | $        | 2,758      |   |
| Adjustments to reconcile net income to net cash provided by operating  activities Depreciation, depletion and amortization |       | 5,284      |       | 5,009    |       | 4,729    |       |
| Deferred income tax provision                                                                                              |       | (261       | )          | 213      |       | (179     | )          |
| Provision for doubtful accounts                                                                                            |       | (3         | )          | 341      |       | 94       |       |
| Gain on disposition of property and equipment                                                                              |       | (27        | )          | (212     | )          | (942     | )          |
| Tax benefit from exercise of stock options                                                                                 |       | —     |       | —   |       | 608      |       |
| Receivables                                                                                                                |       | 1,471      |       | (6,783   | )          | 671      |       |
| Inventories                                                                                                                |       | (2,392     | )          | 718      |       | (846     | )          |
| Prepaid expenses                                                                                                           |       | (362       | )          | (392     | )          | (287     | )          |
| Prepaid royalties                                                                                                          |       | 86         |       | 115      |       | (115     | )          |
| Accounts payable and accrued expenses                                                                                      |       | 852        |       | 1,312    |       | 1,509    |       |
| Income taxes                                                                                                               |       | (1,189     | )          | 236      |       | (425     | )          |
| Other                                                                                                                      |       | 208        |       | (666     | )          | 166      |       |
| Net cash provided by operating activities                                                                                  |       | 3,104      |       | 1,933    |       | 7,741    |       |
|                                                                                                                       |       |       |       |     |       |     |       |
| Investing activities                                                                                                       |       |       |       |     |       |     |       |
| Cash paid for acquisitions of assets of certain businesses                                                                 |       | —     |       | (2,452   | )          | —   |       |
| Capital expenditures                                                                                                       |       | (7,682     | )          | (6,553   | )          | (3,776   | )          |
| Cash proceeds from sale of property and equipment                                                                          |       | 193        |       | 347      |       | 617      |       |
| Net cash used in investing  activities                                                                                     |       | (7,489     | )          | (8,658   | )          | (3,159   | )          |
|                                                                                                                       |       |       |       |     |       |     |       |     |       |
| Financing activities                                                                                                       |       |       |       |     |       |     |       |
| Long-term borrowings                                                                                                       |       | —     |       | 5,000    |       | 5,000    |       |
| Repayment of long-term debt                                                                                                |       | (2,200     | )          | (2,000   | )          | (2,000   | )          |
| Repayment of note issued for acquisition                                                                                   |       | (666       | )          | (334     | )          | —   |       |
| Borrowings on revolving credit line                                                                                        |       | 7,900      |       | —   |       | —   |       |
| Proceeds from exercise of stock options                                                                                    |       | —     |       | —   |       | 396      |       |
| Payments to acquire treasury stock                                                                                         |       | (93        | )          | —   |       | (3,977   | )          |
| Net cash provided by (used  in) financing activities                                                                       |       | 4,941      |       | 2,666    |       | (581     | )          |
| Net (decrease) increase in  cash and cash equivalents                                                                      |       | 556        |       | (4,059   | )          | 4,001    |       |
|                                                                                                                       |       |       |       |     |       |     |       |
| Cash and cash equivalents                                                                                                  |       |       |       |     |       |     |       |
| Beginning of year                                                                                                          |       | 2,770      |       | 6,829    |       | 2,828    |       |
| End of year                                                                                                                |       | $          | 3,326      |     | $          | 2,770    |       | $        | 6,829      |   |
|                                                                                                                       |       |       |       |     |       |     |       |     |       |
| Supplemental disclosures  of cash flow items                                                                               |       |       |       |     |       |     |       |
| Cash paid during the year                                                                                                  |       |       |       |     |       |     |       |
| Interest                                                                                                                   |       | $          | 1,402      |     | $          | 1,041    |       | $        | 806        |   |
| Income taxes                                                                                                               |       | 568        |       | 665      |       | 795      |       |
| Supplemental disclosures  of noncash investing and financing activities                                                    |       |       |       |     |       |     |       |
| Note issued as partial consideration for aquisition                                                                        |       | $          | —     |     | $          | 1,000    |       | $        | —     |   |
| Note received as consideration for sale of property                                                                        |       | —     |       | —   |       | 788      |       |
| Value of shares tendered as payment related to exercise of stock  options                                                  |       | —     |       | —   |       | 93       |       |

 

The accompanying notes are an integral part of the financialstatements.

 

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**ContinentalMaterials Corporation**

**ConsolidatedBalance Sheets As of December 29, 2007 and December 30, 2006**

(Amounts in thousands except share data)

 
| ** **                                                                           | ** ** | **December 29, 2007** | ** ** | **December 30, 2006** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ASSETS                                                                               |       |                       |       |                       |       |
| Current assets                                                                       |       |                       |       |                       |       |
| Cash and cash equivalents                                                            |       | $                          | 3,326      |                       | $          | 2,770 |   |
| Receivables less allowance of $530 and $619                                          |       | 22,652                     |       | 24,120                     |       |
| Receivable for insured losses                                                        |       | 1,548                      |       | 1,584                      |       |
| Inventories                                                                          |       | 19,227                     |       | 16,835                     |       |
| Prepaid expenses                                                                     |       | 2,309                      |       | 1,947                      |       |
| Refundable income taxes                                                              |       | 629                        |       | —                     |       |
| Deferred income taxes                                                                |       | 2,570                      |       | 2,344                      |       |
| Total current assets                                                                 |       | 52,261                     |       | 49,600                     |       |
|                                                                                 |       |                       |       |                       |       |
| Property, plant and  equipment                                                       |       |                       |       |                       |       |
| Land and improvements                                                                |       | 2,365                      |       | 2,348                      |       |
| Buildings and improvements                                                           |       | 22,572                     |       | 19,678                     |       |
| Machinery and equipment                                                              |       | 81,148                     |       | 77,477                     |       |
| Mining properties                                                                    |       | 5,553                      |       | 5,553                      |       |
| Less accumulated depreciation and depletion                                          |       | (76,721                    | )          | (72,691                    | )          |
|                                                                                 |       | 34,917                     |       | 32,365                     |       |
|                                                                                 |       |                       |       |                       |       |
| Other assets                                                                         |       |                       |       |                       |       |
| Goodwill                                                                             |       | 7,829                      |       | 7,829                      |       |
| Amortizable intangible assets                                                        |       | 1,198                      |       | 1,517                      |       |
| Prepaid royalties                                                                    |       | 1,054                      |       | 1,140                      |       |
| Long-term note receivable                                                            |       | 752                        |       | 752                        |       |
| Other                                                                                |       | 499                        |       | 502                        |       |
|                                                                                 |       | $                          | 98,510     |                       | $          | 93,705 |   |
|                                                                                 |       |                       |       |                       |       |
| LIABILITIES                                                                          |       |                       |       |                       |       |
| Current liabilities                                                                  |       |                       |       |                       |       |
| Current portion of long-term debt                                                    |       | 2,400                      |       | 2,866                      |       |
| Accounts payable                                                                     |       | 7,558                      |       | 5,281                      |       |
| Income taxes                                                                         |       | 19                         |       | 579                        |       |
| Accrued expenses                                                                     |       |                       |       |                       |       |
| Compensation                                                                         |       | 2,586                      |       | 3,640                      |       |
| Reserve for self-insured losses                                                      |       | 4,067                      |       | 3,981                      |       |
| Liability for unpaid claims covered by insurance                                     |       | 1,548                      |       | 1,584                      |       |
| Profit sharing                                                                       |       | 869                        |       | 1,586                      |       |
| Reclamation                                                                          |       | 340                        |       | 463                        |       |
| Other                                                                                |       | 2,492                      |       | 2,109                      |       |
| Total current liabilities                                                            |       | 21,879                     |       | 22,089                     |       |
|                                                                                 |       |                       |       |                       |       |
| Revolving bank loan  payable                                                         |       | 7,900                      |       | —                     |       |
| Long-term debt                                                                       |       | 10,400                     |       | 12,800                     |       |
| Deferred income taxes                                                                |       | 3,848                      |       | 3,883                      |       |
| Accrued reclamation                                                                  |       | 780                        |       | 777                        |       |
| Other long-term  liabilities                                                         |       | 1,016                      |       | 813                        |       |
| Commitments and  contingencies (Notes 6)                                             |       |                       |       |                       |       |
|                                                                                 |       |                       |       |                       |       |
| SHAREHOLDERS’ EQUITY                                                            |       |                       |       |                       |       |
| Common shares, $.25 par  value; authorized 3,000,000 shares; issued 2,574,264 shares |       | 643                        |       | 643                        |       |
| Capital in excess of par  value                                                      |       | 1,830                      |       | 1,830                      |       |
| Retained earnings                                                                    |       | 66,810                     |       | 67,373                     |       |
| Treasury shares, at cost                                                             |       | (16,596                    | )          | (16,503                    | )          |
|                                                                                 |       | 52,687                     |       | 53,343                     |       |
|                                                                                 |       | $                          | 98,510     |                       | $          | 93,705 |   |

 

The accompanying notes are an integral part of the financialstatements.

 

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**Continental Materials Corporation**

**ConsolidatedStatements of Shareholders’ Equity**

**For Fiscal Years 2007, 2006 and 2005**

(Amounts in thousands except share data)

 
| ** **                                                        | ** ** | **Common  shares** | ** ** | **Common  shares  amount** | ** ** | **Capital  in excess  of par** | ** ** | **Retained  earnings** | ** ** | **Accum.  other  comprehensive  income (loss)** | ** ** | **Treasury  shares** | ** ** | **Treasury  shares cost** |   |
|-------------------------------------------------------------------|------------|--------------------|------------|----------------------------|------------|--------------------------------|------------|------------------------|------------|-------------------------------------------------|------------|----------------------|------------|---------------------------|--------|
| 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 income 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                    |   |
| Net (loss)                                                        |       | —             |       | —                     |       | —                         |       | (563                   | )          | —                                          |       | —               |       | —                    |   |
| Purchase of treasury  shares                                      |       | —             |       | —                     |       | —                         |       | —                 |       | —                                          |       | 3,367                |       | 93                        |   |
| Balance at  December 29, 2007                                |       | 2,574,264          |       | $                          | 643        |                           | $          | 1,830                  |       | $                                               | 66,810     |                 | $          | —                    |   | 972,170 |   | $ | 16,596 |   |

 

The accompanying notes are an integral part of the financialstatements.

 

 

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**Notesto Consolidated Financial Statements**

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

PRINCIPLES OF CONSOLIDATION

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

 

RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS

 

InMarch 2008, the FASB issued Statement No. 161, “Disclosures About DerivativeInstruments and Hedging Activities — an amendment of FASB Statement No. 133”.The new statement requires expanded disclosure about an entity’s derivativeinstruments and hedging activities. It is effective for fiscal years beginningafter November 15, 2008, including interim periods within those fiscal years,with early application encouraged. The disclosures are required only for thosederivative instruments and related hedged items accounted for under Statement133 and its related interpretations (including nonderivative instruments thatare designated and qualify as hedging instruments). We have not completed ourevaluation of the impact, if any, of the adoption of FSAS No. 161.

 

InSeptember 2006, the Financial Accounting Standards Board (FASB) issuedSFAS No. 157, “Fair Value Measurements,” which defines fair value,establishes a framework for measuring fair value in accounting principlesgenerally accepted in the United States of America (GAAP), and expandsdisclosures about fair value measurements. SFAS No. 157 applies to otheraccounting pronouncements that require or permit fair value measurements.Accordingly, SFAS No. 157 does not require any new fair valuemeasurements. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. We have not completed our evaluation of the impact,if any, 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 chooseto measure at fair value many financial instruments and certain other itemssuch as investments, debt and derivative instruments. SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007. We have notyet completed our evaluation of the impact, if any, of the adoption of SFAS No. 159.

 

In December 2007,the FASB issued SFAS No. 141(R), Business Combinations—a replacement ofFASB No. 141. SFAS No. 141(R) requires (a) a company torecognize the assets acquired, the liabilities assumed, and any non-controllinginterest in the acquiree at fair value as of the acquisition date; and (b) anacquirer in pre-acquisition periods to expense all acquisition-related costs.SFAS No. 141(R) also requires that any adjustments to an acquired entity’sdeferred tax asset, valuation allowance, cash contingency, or deferred taxliability balance that occur after the measurement period be recorded as acomponent of income tax expense. This accounting treatment is required forbusiness combinations consummated before the effective date of SFAS No. 141(R) (non-prospective),otherwise SFAS No. 141(R) must be applied prospectively. Thepresentation and disclosure requirements must be applied retrospectively toprovide comparability in the financial statements. Early adoption isprohibited. SFAS No. 141(R) is effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008. The Company will be required to comply with the provisions of thisstatement for any business combinations subsequent to December 15, 2008.

 

InSeptember 2006, the FASB issued FASB Staff Position (FSP) No. AUGAIR-1, Accounting for Planned Major Maintenance Activities, which prohibits theuse of the accrue-in-advance method of accounting for planned major maintenanceactivities. FSP AUG AIR-1 was effective for the Company beginning October 1,2007 and, as the Company did not use the prohibited method, there was nomaterial impact on the Company’s consolidated financial position, results ofoperations, or cash flows.

 

InJune 2006, the FASB issued Interpretation No. (FIN) 48, “Accountingfor Uncertainty 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.” FIN 48 prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. FIN 48 also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 is effective for fiscalyears beginning after December 15, 2006. We adopted FIN 48 effective forthe first quarter of the 2007 fiscal year. The adoption of FIN 48 did not havea material affect on the Company’s financial statements.

 

USE OF ESTIMATES IN THEPREPARATION OF FINANCIAL STATEMENTS

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities as of December 29,2007 and December 30, 2006 and the reported amounts of revenues andexpenses during each of the three years in the period ended December 29,2007. Actual results could differ from those estimates.

 

CASH AND CASH EQUIVALENTS

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

 

26

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FAIRVALUE OF FINANCIAL INSTRUMENTS

Thecarrying amounts for cash and equivalents and short-term debt approximate fairvalue. The fair value of long-term debt is estimated based on current borrowingrates for similar issues, which is not materially different from the recordedvalue.

 

INVENTORIES

Inventories are valued at the lower of cost or market and are reviewedperiodically for excess or obsolete stock with a provision recorded, whereappropriate. Cost for inventory in the HVAC industry group (see Note 13) isdetermined using the last-in, first-out (LIFO) method. These inventoriesrepresent approximately 76% of total inventories at December 29, 2007 (74%at December 30, 2006). The cost of all other inventory is determined bythe first-in, first-out (FIFO) or average cost methods.

 

PROPERTY, PLANT ANDEQUIPMENT

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

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

 

Depletionof rock and sand deposits and amortization of deferred development costs arecomputed by the units-of-production method based upon estimated recoverablequantities of rock and sand. The estimated recoverable quantities areperiodically reassessed.

 

Thecost of property sold or retired and the related accumulated depreciation,depletion and amortization are removed from the accounts and the resulting gainor loss is reflected in operating income. Maintenance and repairs are chargedto expense as incurred. Major renewals and betterments are capitalized anddepreciated over their estimated useful lives.

 

OTHER 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 for any of the periods presented.

 

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 four to ten yearsexcept for the customer relationships amount which is being amortized over itsestimated life of ten 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 minimum annual royaltypayments. Prepaid royalties relate to payments made for tons not yet mined.

 

RETIREMENT PLANS

TheCompany and certain subsidiaries have various contributory profit sharingretirement plans for specific employees. The plans allow qualified employees tomake tax deferred contributions pursuant to Internal Revenue Code Section 401(k).The Company matches employee contributions up to 3%. In addition, the Companymakes annual contributions, at its discretion, based primarily onprofitability. Costs under the plans are charged to operations as incurred.

 

RESERVE FOR SELF-INSURED ANDINSURED 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,“Accounting for Contingencies,” and represent management’s best estimate of thefuture liability related to these claims up to the associated deductible.

 

FIN39, “Offsetting of Amounts Related to Certain Contracts,” requires an entity toaccrue the gross amount of a loss even if the entity has purchased insurance tocover the loss. Therefore the Company has recorded losses for

 

27

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workers’compensation, automobile liability and general and product liability claims inexcess of the deductible amounts, i.e., amounts covered by insurance contracts,in “Liability for unpaid claims covered by insurance” with a corresponding“Receivable for insured losses” on the balance sheet. The components of theliability have been recorded in accordance with the requirements of SFAS No. 5,“Accounting for Contingencies,” and represent both unpaid settlements andmanagement’s best estimate of the future liability related to open claims.Management has evaluated the credit worthiness of our insurance carriers anddetermined that recovery of the recorded losses is probable and, therefore, thereceivable from insurance has been recorded for the full amount of the insuredlosses.

 

RECLAMATION

Inconnection with permits to mine properties in Colorado, the Company isobligated to reclaim the mined areas whether the property is owned or leased.The Company records a reserve for future reclamation work to be performed atits various aggregate operations based upon an estimate of the total expensethat 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 specialist to assistin reevaluating the estimates of both the quantities of recoverable materialand the cost of reclamation. Most of the reclamation on any mining property isgenerally performed soon after each section of the deposit is mined. TheCompany’s reserve for reclamation activities was $1,120,150 at December 29,2007 and $1,240,000 at December 30, 2006. The Company classifies a portionof the reserve as a current liability, $340,000 at December 29, 2007 and$443,000 at December 30, 2006, based upon a rolling three year average ofactual reclamation expense.

 

REVENUE RECOGNITION

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

 

TheCompany is responsible for warranty related to the manufacture of its HVACproducts. The Company does not perform installation services except for installationof electronic access systems in the Door segment, nor are maintenance orservice contracts offered. Changes in the aggregated product warranty liabilityfor the fiscal years 2007 and 2006 were as follows (amounts in thousands):

 
| ** **                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Beginning balance             |       | $        | 106        |     | $          | 106 |   |
| Warranty related expenditures |       | (349     | )          | (349     | )          |
| Warranty expense accrued      |       | 343      |       | 349      |       |
| Ending balance                |       | $        | 100        |     | $          | 106 |   |

 

INCOME TAXES

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

 

CONCENTRATION OF 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 and ConstructionMaterials segment, the Company retains lien rights on the properties serveduntil the receivable is collected. The Company maintains reserves for potentialcredit losses based upon the aging of accounts receivable and historicalexperience and such losses have been within management’s expectations. See Note13 for a description of the Company’s customer base.

 

28

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IMPAIRMENT OF LONG-LIVEDASSETS

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.

 

FISCAL YEAR END

TheCompany’s fiscal year end is the Saturday nearest December 31. Fiscal2007, 2006 and 2005 all consist of 52 weeks.

 

2.BUSINESS ACQUISITIONS

OnJanuary 1, 2006 the Company purchased the assets of CSSL, a company in ColoradoSprings offering electronic access and locking capabilities, for $352,000. Theassets were acquired by MDHI in the Door segment. The purchase price allocationincluded $100,000 for a non-compete agreement and $100,000 of goodwill, all ofwhich is amortizable over 15 years for income tax purposes. The non-competeagreement is being amortized over its four-year term.

 

OnJune 30, 2006 the Company purchased certain assets of ASCI, a concreteproducer in Colorado Springs, for $2,100,000 of cash and a $1,000,000 Note. Theassets were acquired by TMC in the Concrete, Aggregates and ConstructionSupplies segment. The final purchase price allocation included $1,735,000 ofplant and equipment, $290,000 for a non-compete agreement, $350,000 for arestriction of land use covenant, $370,000 for existing customer relations and$355,000 of goodwill, all of which is amortizable over 15 years for income taxpurposes. The non-compete agreement is being amortized over its five year termwhile the restriction of land use covenant and the customer relations are beingamortized over its term and estimated life, respectively, of ten years each.The weighted average amortization period for the intangibles associated withthe ASCI acquisition is approximately 8.6 years.

 

Bothpurchases were accounted for as acquisitions of a business under SFAS No. 141,“Standards of Accounting for Business Combinations” and the consolidatedresults of operations 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.

 

Thefollowing unaudited pro forma summary financial information summarizes theestimated combined results of operations of the Company and ASCI assuming thatthe acquisition of ASCI had taken place on January 1, 2006. The unauditedpro forma combined results of operations were prepared on the basis ofinformation provided to the Company by the former management of ASCI and norepresentation is made by the Company with respect to the accuracy of suchinformation. The pro forma combined results of operations reflect adjustmentsfor interest expense, additional depreciation based on the fair market value ofplant and equipment, amortization of identifiable intangibles and income taxexpense. The pro forma financial information for the year ended December 30,2006 includes the results of ASCI from January 1, 2006 through April 30,2006, as adjusted for the items noted above. ASCI’s interim financial informationfor May and June of 2006 were not made available to the Company.Amounts are in thousands except per share amounts.

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

 

Theunaudited pro forma combined results of operations are not necessarilyindicative of, and do not purport to represent, what the Company’s results ofoperations or financial condition actually would have been had the acquisitionsbeen made as of January 1, 2006. Due to competitive conditions, theCompany did not expect to, and has not, retained all of the concrete volume ormarket share previously held by ASCI.

 

3. INVENTORIES

Inventories consisted of the following (amounts in thousands):

 
|                       |   | **December 29,  2007** |   | **December 30,  2006** |   |
|----------------------------|--------|-----------------------------|--------|-----------------------------|--------|
| Finished goods             |   | $                           | 7,940  |                        | $      | 7,104 |   |
| Work in process            |   | 1,372                       |   | 1,502                       |   |
| Raw materials and supplies |   | 9,915                       |   | 8,229                       |   |
|                       |   | $                           | 19,227 |                        | $      | 16,835 |   |

 

29

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Ifinventories valued on the LIFO basis were valued at current costs, inventorieswould be higher by $4,872,000 and $4,489,000 at December 29, 2007 and December 30,2006 respectively.

 

Reductionsin inventory quantities during 2007 at two locations and 2006 at one locationresulted in liquidation of LIFO inventory layers carried at costs lower thanthe costs of current 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 the extentthat events occur during the year, either involving the relevant Companysubsidiaries or in their industries, the Company revisits its assessment of therecorded goodwill to determine if impairment has occurred and should beimmediately recognized. No impairment was recognized in any of the periodspresented.

 

Therewere no changes in recorded goodwill for the year ended December 29, 2007.

 

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

 
| ** **                   | ** ** | **December 29, 2007** | ** ** | **December 30, 2006** | ** ** |
|------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **Gross**                  | ** ** | ** **                 | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **carrying**               | ** ** | **Accumulated**            | ** ** | **carrying** | ** ** | **Accumulated** | ** ** |
| ** **                   | ** ** | **amount**                 | ** ** | **amortization**           | ** ** | **amount** | ** ** | **amortization** | ** ** |
| Amortized intangible assets: |       |                       |       |                       |       |   |   |   |   |
| Non-compete agreements       |       | $                          | 2,390      |                       | $          | 1,763 |   | $ | 2,390 |   | $ | 1,542 |   |
| Restrictive land covenant    |       | 350                        |       | 51                         |       | 350 |   | 17 |   |
| Customer relationships       |       | 370                        |       | 98                         |       | 370 |   | 34 |   |
|                         |       | $                          | 3,110      |                       | $          | 1,912 |   | $ | 3,110 |   | $ | 1,593 |   |

 

Theabove intangible assets include non-compete agreements that were signed at thetime the Company acquired the Pueblo operations (October 21, 1996), all ofthe stock 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 overthe agreement periods which range from four to ten 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 ten years. Amortization of thecustomer relations value is computed on the sum-of-the-years digits method overits estimated life of ten years. Amortization expense for these intangibleassets was $320,000, $321,000 and $225,000 for 2007, 2006 and 2005,respectively. The estimated amortization expense for the five subsequent fiscalyears is as follows: 2008 — $300,000; 2009 — $293,000; 2010 — $262,000; 2011 —$101,000 and 2012 — $65,000.

 

5. LONG-TERM DEBT

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

 
|                                 |   | **December 29, 2007** |   | **December 30, 2006** |   |
|--------------------------------------|--------|----------------------------|--------|----------------------------|--------|
| Unsecured term loan                  |   | $                          | 12,800 |                       | $      | 15,000 |   |
| Note issued as part of ASCI purchase |   | —                     |   | 666                        |   |
| Less current portion                 |   | (2,400                     | )      | (2,866                     | )      |
| Total long-term debt                 |   | $                          | 10,400 |                       | $      | 12,800 |   |

 

TheCompany has an unsecured Revolving Credit and Term Loan Agreement (CreditAgreement), dated September 5, 2003, with LaSalle Bank NationalAssociation and Fifth Third Bank. At December 29, 2007 the Company was not incompliance with the Leverage Ratio as defined in the Credit Agreement. TheCompany has obtained waivers of the covenant for the 2007 year-end. On March 28,2008, the Company entered into an Amended and Restated Revolving Credit andTerm Loan Agreement (the Amended Credit Agreement). Under the Amended Credit Agreement,the revolving credit facility was increased by $3,000,000 to $18,000,000. Withthe increase in the revolving credit amounts, the total loan commitment, at thetime of the signing, was $30,800,000. The amount available under the revolvingcredit facility of the Amended Credit Agreement was increased primarily toprovide additional liquidity during the Company’s peak seasonal credit need.

 

TheAmended Credit Agreement provides that, at the Company’s option, the term loanand revolving credit facility will bear interest at prime or aperformance-based LIBOR rate. Based on the terms of the Amended CreditAgreement and the Company’s performance for the twelve months ended December 29,2007, the performance based rate will be LIBOR plus 2.50% for both the termloan and borrowings under the revolving credit facility.****The

 

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AmendedCredit Agreement also requires the Company to maintain certain levels of EBITDA(earnings before interest, income taxes, depreciation and amortization) or debtservice coverage, consolidated tangible net worth and to maintain certainratios including consolidated debt to cash flow (as defined). Additionalborrowings, acquisition of stock of other companies, purchase of treasuryshares and payment of cash dividends are either limited or require priorapproval by the lenders. Payment of accrued interest is due and paid quarterlyby the Company. Principal payments under the term loan are due quarterly with afinal payment of all remaining unpaid principal due March 31, 2011.

 

TheCompany issued a note in the original amount of $1,000,000 in conjunction withthe purchase of ASCI in June 2006. The interest on the Note was 6%.Payment of accrued interest was due and paid quarterly by the Company.Principal payments were paid quarterly in the amount of $167,000. The balanceon the note was paid in full by the end of the 2007 fiscal year.

 

TheCompany is exposed to market risks related to commodity prices and interestrates. To manage interest rate risk, the Company has, from time to time,entered into interest rate swaps as cash flow hedges. These swaps are authorizedby the Company’s policies and procedures. The Company does not use swaps orhedging instruments for trading purposes, and is not a party to any transactioninvolving leveraged derivatives. During fiscal 2001, the Company entered intoan interest rate swap agreement (Swap Agreement) covering the period December 17,2001 through December 18, 2006 in order to minimize the adverse impact ofthe floating 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 lower than the floating rate on theterm loan during 2006 but exceeded the floating rate during 2005. The effect onoperations was to increase net income by $21,000 in 2006 and reduce net incomeby $31,000 during 2005. During the period of the Swap Agreement, the fair valueof the Swap Agreement was recorded on the balance sheet with subsequent changesrecorded as a separate component of accumulated other comprehensive income inshareholders’ equity. There were no swaps outstanding during 2007.

 

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

 
| 2008   |   | $     | 2,400  |   |
|--------|--------|-------|--------|--------|
| 2009   |   | 2,400 |   |
| 2010   |   | 3,000 |   |
| 2011   |   | 5,000 |   |
|   |   | $     | 12,800 |   |

 

Underthe Credit Agreement, the Company had an unsecured revolving line of credit of$15,000,000 during 2007 until October 23, 2007 when the revolving creditline was temporarily increased to $18,000,000 until January 15, 2008. Theline, which was increased to $18,000,000 on March 28, 2008 until September 30,2008 at which time it is reduced back to $15,000,000 expires in June 2009.The revolving credit line is used for seasonal or short-term cash needs andstand-by letters of credit. At December 29, 2007, the Company hadoutstanding stand-by letters of credit to insurance carriers totalingapproximately $4,510,000 that collateralize the self-insured amounts under theCompany’s risk management program. The weighted average interest rate for alldebt was 7.0% for fiscal 2007 and 6.5% for fiscal 2006. There was $7,900,000 ofoutstanding borrowings under the revolving credit line at December 29,2007. As the revolving credit line does not expire until June 2009, theentire $7,900,000 outstanding at December 29, 2007 has been classified aslong-term. There was no balance outstanding against the revolving credit lineas of December 30, 2006.

 

6. COMMITMENTS AND CONTINGENCIES

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

 

7. SHAREHOLDERS’ EQUITY

During 2005, the remaining options granted under the Company’s StockOption Plan (the “Plan”) for 73,400 shares of common stock  (70,400 shares net of 3,000 shares tenderedas payment of option price) were exercised. With the exercise of all thenremaining outstanding options during 2005, the Plan was terminated.Reinstatement of the Plan requires the consent of the Company’s stockholders.

 

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

 

31

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8. EARNINGS PER SHARE

TheCompany computes earnings per share (EPS) in accordance with SFAS No. 128,“Earnings Per Share.” The following is a reconciliation of the calculation ofbasic and diluted EPS for the fiscal years 2007, 2006 and 2005 (dollars inthousands except per-share data).

 
| ** **                 | ** ** | **Net**    | ** ** | **Weighted** | ** ** | **Per-share** | ** ** |
|----------------------------|------------|------------|------------|--------------|------------|---------------|------------|
| ** **                 | ** ** | **(loss)** | ** ** | **average**  | ** ** | **(loss)**    | ** ** |
| ** **                 | ** ** | **income** | ** ** | **shares**   | ** ** | **earning**   | ** ** |
| 2007                       |       |       |       |         |       |          |       |
| Basic EPS                  |       | $          | (563       | )            | 1,603      |          | $          | (.35 | ) |
| Effect of dilutive options |       | —     |       | —       |       |          |       |
| Diluted EPS                |       | $          | (563       | )            | 1,603      |          | $          | (.35 | ) |
|                       |       |       |       |         |       |          |       |
| 2006                       |       |       |       |         |       |          |       |
| Basic EPS                  |       | $          | 2,042      |         | 1,605      |          | $          | 1.27 |   |
| Effect of dilutive options |       | —     |       | —       |       |          |       |
| Diluted EPS                |       | $          | 2,042      |         | 1,605      |          | $          | 1.27 |   |
|                       |       |       |       |         |       |          |       |
| 2005                       |       |       |       |         |       |          |       |
| Basic EPS                  |       | $          | 2,758      |         | 1,602      |          | $          | 1.72 |   |
| Effect of dilutive options |       | —     |       | 30           |       |          |       |
| Diluted EPS                |       | $          | 2,758      |         | 1,632      |          | $          | 1.69 |   |

 

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$3,788,000, $3,443,000 and $2,993,000 for 2007, 2006 and 2005, respectively.

 

Futureminimum rental commitments under non-cancelable operating leases for 2008 andthereafter are as follows: 2008 — $2,215,000; 2009 — $1,916,000; 2010 —$1,439,000; 2011 — $1,366,000; 2012 — $1,271,000 and thereafter — $20,981,000.Included in these amounts is $418,000 per year and approximately $19,246,000 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 $882,000in the “thereafter” amount related to a ground lease upon which the Companyowns a building leased to a third party for approximately $344,000 per year.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 $731,000, $2,206,000 and $1,827,000 in 2007, 2006 and 2005, respectively.

 

11. INCOME TAXES

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

 
| ** ** | ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Federal:   | Current    |       | $        | (634       | )        | $          | 813      |       | $ | 1,147 |   |
|       | Deferred   |       | 26       |       | 38       |       | (54      | )          |
| State:     | Current    |       | (10      | )          | 89       |       | (168     | )          |
|       | Deferred   |       | (287     | )          | 175      |       | (125     | )          |
|       |       |       | $        | (905       | )        | $          | 1,115    |       | $ | 800 |   |

 

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

 
| ** **                                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory tax rate                               |       | (34.0    | )%         | 34.0     | %          | 34.0     | %          |
| Percentage depletion                             |       | (19.4    | )          | (5.4     | )          | (2.4     | )          |
| Non-deductible expenses                          |       | 4.8      |       | .7       |       | —   |       |
| State income taxes, net of federal benefit       |       | (21.3    | )          | 6.1      |       | 1.1      |       |
| Net effect of settling Federal and State returns |       | (.5      | )          | —   |       | —   |       |
| FIN 48 change in reserves                        |       | (1.5     | )          | (.2      | )          | (8.1     | )          |
| Valuation allowance for tax assets               |       | 11.0     |       | —   |       | —   |       |
| Other                                            |       | (.7      | )          | .1       |       | (2.1     | )          |
|                                             |       | (61.6    | )%         | 35.3     | %          | 22.5     | %          |

 

Forfinancial statement purposes, deferred tax assets and liabilities are recordedat a blend of the current statutory federal and states’ tax rates — 37.96%. Theprincipal temporary differences and their related deferred taxes are as follows(amounts in thousands):

 
|                                   |   | **2007** |   | **2006** |   |   |   |
|----------------------------------------|--------|----------|--------|----------|--------|--------|--------|
| Reserves for self-insured losses       |   | $        | 1,405  |     | $      | 1,274  |   |   |   |
| Accrued reclamation                    |   | 425      |   | 469      |   |   |   |
| Deferred compensation                  |   | 357      |   | 272      |   |   |   |
| Asset valuation reserves               |   | 247      |   | 290      |   |   |   |
| Future state tax credits               |   | 760      |   | 516      |   |   |   |
| Net state operating loss carryforwards |   | 67       |   | —   |   |   |   |
| Other                                  |   | 156      |   | 100      |   |   |   |
| Valuation allowance                    |   | (161     | )      | —   |   |   |   |
| Total deferred tax assets              |   | 3,256    |   | 2,921    |   |   |   |
|                                   |   |     |   |     |   |   |   |
| Depreciation                           |   | 3,160    |   | 3,062    |   |   |   |
| Deferred development                   |   | 571      |   | 601      |   |   |   |
| Other                                  |   | 803      |   | 797      |   |   |   |
| Total deferred tax liabilities         |   | 4,534    |   | 4,460    |   |   |   |
| Net deferred tax liability             |   | $        | (1,278 | )        | $      | (1,539 | )      |   |   |

 

AtDecember 29, 2007, the Company established a valuation reserve related to thecarry forward of charitable contributions deductions arising in the current andprior years due to the uncertainty that the Company will be able to utilizethese deductions prior to the expiration of their carry forward period.

 

Thenet current deferred tax assets are $2,570,000 and $2,344,000 at year-end 2007and 2006, respectively.

 

OnDecember 31, 2006, the first day of fiscal 2007, we adopted the provisionsof Financial Accounting Standards Board Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with FASB Statement No. 109,“Accounting for Income Taxes,” by prescribing a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. Under FIN 48,the financial statement effects of a tax position should initially berecognized when it is more likely than not, based on the technical merits, thatthe position will be sustained upon examination. A tax position that meets themore-likely-than-not recognition threshold should initially and subsequently bemeasured as the largest amount of tax benefit that has a greater than 50%likelihood of being realized upon effective settlement with a taxing authority.

 

Therewas no cumulative adjustment to retained earnings required as a result of theimplementation of FIN 48. The gross amount of unrecognized tax benefits at December 31,2006 was $290,000 of which $79,000 would affect the effective tax rate. Thegross amount of unrecognized tax benefits at December 29, 2007 was$328,000 of which $74,000 would affect the effective tax rate.

 

Weclassify interest and penalties recognized on the liability for unrecognizedtax benefits as income tax expense. Accrued interest of $51,000 and penaltiesof $18,000 were included in our total liability for unrecognized tax benefitsas of December 29, 2007. Accrued interest of $68,000 and penalties of$17,000 were included in our total liability for unrecognized tax benefits asof December 31, 2006.

 

TheUnited States Federal and various state statutes of limitations expire duringthe third quarter of 2008 for our 2004 tax year. Included in the balance at December 29,2007 is approximately $9,000 related to tax positions expected to be resolvedwithin 12 months of this reporting date.

 

33

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Wefile income tax returns in the United States federal and various statejurisdictions. Generally, we are not subject to changes in income taxes by anytaxing jurisdiction for the years prior to 2002.

 

A reconciliation of the beginning and endingamount of unrecognized tax benefits is as follows (amounts in thousands):

 
| Balance at December 31, 2007                       |   | $   | 290    |   |
|---------------------------------------------------------|--------|-----|--------|--------|
| Additions for tax positions related to the current year |   | 72  |   |
| Reductions for statute of limitations                   |   | (10 | )      |
| Reductions for tax positions of prior years             |   | (14 | )      |
| Settlements                                             |   | (10 | )      |
| Balance at December 29, 2007                       |   | $   | 328    |   |

 

12. UNAUDITED QUARTERLY FINANCIAL DATA

Thefollowing table provides summarized unaudited fiscal quarterly financial datafor 2007 and 2006 (amounts in thousands, except per share amounts):

 
| ** **                               | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                               | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** |
| 2007                                     |       |        |       |        |       |        |       |        |       |
| Sales                                    |       | $           | 40,079     |        | $          | 45,651      |       | $           | 42,288     |   | $ | 40,411 |   |
| Depreciation, depletion and amortization |       | 1,315       |       | 1,322       |       | 1,309       |       | 1,338       |       |
| Operating (loss) profit                  |       | (292        | )          | 1,802       |       | (65         | )          | (1,999      | )          |
| Net (loss) income                        |       | (328        | )          | 1,186       |       | 10          |       | (1,431      | )          |
| Basic (loss) income per share            |       | (.20        | )          | .74         |       | .01         |       | (.89        | )          |
| Diluted (loss) income per share          |       | (.20        | )          | .74         |       | .01         |       | (.89        | )          |
|                                          |            |             |            |             |            |             |            |             |            |  |  |  |  |

 
| ** **                               | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                               | ** ** | **quarter** | ** ** | **quarter** | ** ** | **quarter** | ** ** | **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         |       |
|                                          |            |             |            |             |            |             |            |             |            |  |  |  |  |

 

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

 

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 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 RockyMountain Ready Mix Concrete, Inc. of Denver. Doors are fabricated and soldalong with the related hardware from Colorado Springs and Pueblo through theCompany’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. ofPueblo, Colorado. Sales of these two segments are highly concentrated in theFront Range area in Colorado although door sales are also made throughout theUnited States. Prior to the 2007 fiscal year, the Company reported the DoorDivision of TMC as part of the Concrete, Aggregates and Construction Materialssegment. On December 31, 2006, the first day of fiscal 2007, the DoorDivision was transferred to MDHI and is now reported as part of the Doorsegment. As required by FASB Statement No. 131, “Disclosure about Segmentsof an Enterprise and Related

 

34

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Information”we have restated the 2006 and 2005 financial information presented in the tablebelow to conform to the current composition of our reportable segments.

 

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

 

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

 

Thefollowing table presents information about reported segments for the fiscalyears 2007, 2006 and 2005 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** | ** ** |
| 2007                                      |       |                                                       |       |               |       |                                |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external  customers         |       | $                                                          | 90,438     |               | $          | 19,024                              |       | $                         | 109,462    |                     | $          | 36,146 |   | $ | 22,460 |   | $ | 58,606 |   | $ | 17 |   | $ | 344 |   | $ | 168,429 |   |
| Depreciation, depletion  and amortization |       | 4,089                                                      |       | 99                 |       | 4,188                               |       | 409                       |       | 608                      |       | 1,017 |   | 79 |   | — |   | 5,284 |   |
| Operating income (loss)                   |       | 2,980                                                      |       | 2,245              |       | 5,225                               |       | (1,858                    | )          | (906                     | )          | (2,764 | ) | (3,123 | ) | 108 |   | (554 | ) |
| Segment assets                            |       | 53,002                                                     |       | 7,398              |       | 60,400                              |       | 22,810                    |       | 13,101                   |       | 35,911 |   | 2,140 |   | 59 |   | 98,510 |   |
| Capital expenditures                      |       | 4,371                                                      |       | 2,009              |       | 6,380                               |       | 712                       |       | 548                      |       | 1,260 |   | 42 |   | — |   | 7,682 |   |
|                                           |            |                                                            |            |                    |            |                                     |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **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 as restated                          |       |                                                       |       |               |       |                                |       |                       |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external  customers         |       | $                                                          | 92,214     |               | $          | 14,100                              |       | $                          | 106,314    |                     | $          | 29,930 |   | $ | 22,167 |   | $ | 52,097 |   | $ | 12 |   | $ | 344 |   | $ | 158,767 |   |
| Depreciation, depletion  and amortization |       | 3,816                                                      |       | 123                |       | 3,939                               |       | 376                        |       | 603                      |       | 979 |   | 91 |   | — |   | 5,009 |   |
| Operating income (loss)                   |       | 4,888                                                      |       | 1,492              |       | 6,380                               |       | 161                        |       | 267                      |       | 428 |   | (3,067 | ) | 108 |   | 3,849 |   |
| Segment assets                            |       | 54,470                                                     |       | 4,750              |       | 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 as restated                          |       |                                                         |       |               |       |                                 |       |                      |       |                     |       |   |   |   |   |   |   |   |   |
| Revenues from external  customers         |       | $                                                            | 78,356     |               | $          | 13,015                               |       | $                         | 91,371     |                     | $          | 26,736 |   | $ | 20,545 |   | $ | 47,281 |   | $ | 3 |   | $ | 344 |   | $ | 138,999 |   |
| Depreciation, depletion  and amortization |       | 3,555                                                        |       | 98                 |       | 3,653                                |       | 392                       |       | 613                      |       | 1,005 |   | 71 |   | — |   | 4,729 |   |
| Operating income (loss)                   |       | 3,159                                                        |       | 1,423              |       | 4,582                                |       | 2,777                     |       | (177                     | )          | 2,600 |   | (3,227 | ) | 97 |   | 4,052 |   |
| Segment assets                            |       | 46,182                                                       |       | 3,912              |       | 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 |   |
|                                           |            |                                                              |            |                    |            |                                      |            |                           |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(a)         Includes unallocatedcorporate office expenses and assets which consist primarily of cash and cashequivalents.

 

(b)         Includes a real estateoperation.

 

35

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(c)          Capital expenditures for theConcrete, Aggregates & Construction Supplies segment include thecapital assets acquired with the ASCI acquisition. Capital expenditures for theDoor segment include the capital assets acquired with the CSSL acquisition.

 

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

 

All long-lived assets are inthe United States. No customer accounted for 10% or more of total sales of theCompany in fiscal 2007, 2006 or 2005.

 

 

 

 

 

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Continental MaterialsCorporation:

We have audited theaccompanying consolidated balance sheets of Continental Materials Corporationand subsidiaries (the “Company”) as of December 29, 2007 and December 30,2006, and the related consolidated statements of operations and comprehensive(loss) income, of shareholders’ equity, and of cash flows for each of the threeyears in the period ended December 29, 2007.  Our audits alsoincluded the financial statement schedule listed in the Index at Part IV,Item 15(a)2.  These financial statements and financial statement scheduleare the responsibility of the Company’s management.  Our responsibility isto express an opinion on these financial statements and financial statementschedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  The Company is not required to have,nor were we engaged to perform, an audit of its internal control over financialreporting.  Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Continental Materials Corporation and subsidiaries as of December 29,2007 and December 30, 2006, and the results of their operations and theircash flows for each of the three years in the period ended December 29,2007, in conformity with accounting principles generally accepted in the UnitedStates of America.   Also, in our opinion, such financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, present fairly in all material respects theinformation set forth therein.

 

As discussed in Notes 1and 11 to the consolidated financial statements, effective December 31,2006, the Company adopted Financial Accounting Standards Board Interpretation No. 48—*Accounting for Uncertainty in IncomeTaxes.*

 

Deloitte &Touche LLP

 

Chicago,Illinois

March 28,2008

 

36

----

 

Item 9.                                                 **CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

Item 9A.                                        **CONTROLSAND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Asof December 29, 2007, the Company carried out an evaluation of theCompany’s disclosure controls and procedures pursuant to Rule 13a-15(e) ofthe Exchange Act, as amended. Based upon that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the design and operation ofour disclosure controls and procedures are effective to ensure that informationrequired to be disclosed in our periodic reports under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedby the Securities and Exchange Commission’s rules and regulations.

 

**Report of Management on Internal Control over Financial Reporting**

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting as defined in Rule 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended (ExchangeAct). The Company’s internal controls and other procedures that are designed toprovide reasonable assurance that information required to be disclosed inCompany filings or that it submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in the rules andforms of the Securities and Exchange Commission (SEC) and that such informationis accumulated and communicated to the Company’s management, including itsChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. In designing and evaluating ourdisclosure controls and procedures, management recognizes that disclosurecontrols and procedures, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the disclosurecontrols and procedures are met. Additionally, in designing disclosure controlsand procedures, our management necessarily is required to apply its judgment inevaluating the cost-benefit relationship of possible disclosure controls andprocedures. The design of any disclosure controls and procedures also is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions. Because of this, management iscontinually reassessing the effectiveness of the current controls and modifyingthem as dictated by the changing environment.

 

Management assessed the effectiveness of the Company’s internal controlover financial reporting as of December 29,2007. Management based thisassessment on criteria for effective internal control over financial reportingdescribed in Internal Control — Integrated Framework issue by the Committee ofSponsoring Organizations of the Treadway Commission. Management’s assessmentincluded an evaluation of its internal control over financial reporting.Management reviewed the results of its assessment with the Audit Committee ofthe Company’s Board of Directors.

 

Based on this assessment, Management determined that, as of December 29,2007, the Company maintained effective internal control over financialreporting.

 

As of December 29, 2007, the Company was not an “acceleratedfiler” as defined in Rule 12b-2 under the Exchange Act. Accordingly,pursuant to SEC rules and regulations, the Company is not required toinclude, and this Annual Report does not include, an attestation report of ourindependent registered public accounting firm regarding internal control overfinancial reporting in this Annual Report on Form 10-K. Management’sreport was not subject to attestation by the Company’s independent registeredpublic accounting firm pursuant to temporary rules of the SEC that permitthe  Company to provide only Management’sreport in this Annual Report on Form 10-K. We are required to annuallyreassess our status as a “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 on Form 10-K.

 

**Changes in Internal Controls**

 

As noted above, the Company continually reassesses our internal controlover financial reporting and makes changes as deemed prudent. We did notidentify any material weaknesses in our review of internal controls, thereforeno changes in the Company’s internal controls over financial reporting occurred

 

37

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during the quarter ended December 29, 2007 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

 

Item 9B.                                        **OTHER INFORMATION**

 

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

 

**PART III**

 

Items 10, 11, 12, 13 and 14 of Part III have been omitted fromthis 10-K Report because the registrant expects to file, not later than 120days following the close of its fiscal year ended December 29, 2007, itsdefinitive 2008 proxy statement. The information required by Items 10, 11, 12,13 and 14 of Part III will be included in that proxy statement and suchinformation is hereby incorporated by reference.

 

**PART IV**

 

Item15.                                          **EXHIBITSAND FINANCIAL STATEMENT SCHEDULES**

                             

(a) 1                                                               The followingfinancial statements are included in Item 8 of Part II:

Consolidated statement of operations and comprehensive income forfiscal years 2007, 2006 and 2005

Consolidated statements of cash flows for fiscal years ended 2007, 2006and 2005

Consolidated balance sheets as of December 29, 2007 and December 30,2006

Consolidated statements of shareholders’ equity for fiscal years ended2007, 2006 and 2005

 

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

 

ScheduleII Valuation and Qualifying Accounts & Reserves

For the Fiscal Years 2007, 2006 and 2005

 

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

 

38

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(a) 3                  Thefollowing 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; Fourth Amendment  thereto dated as of June 8, 2006 filed as Exhibit 99.1 to  Form 8-K filed June 13, 2006; Fifth Amendment thereto dated as of  March 28, 2007 filed as Exhibit 99.1 to Form 8-K filed  April 3, 2007; Sixth Amendment thereto dated as of Augusts 13, 2007 filed  as Exhibit 99.1 to Form 8-K filed August 16, 2007 and Seventh  Amendment dated as of October 23, 2007 filed as Exhibit 99.1 to  Form 8-K filed October 31, 2007, incorporated herein by reference. |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit 10a  |   | 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 10b  |   | 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 10c  |   | 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 10d  |   | 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 10e  |   | Continental  Materials Corporation Employee Profit Sharing Retirement Plan Amended and  Restated Generally Effective October 1, 1997 filed as Exhibit 99a  to Form 10-K for the year ended January 1, 2000, incorporated  herein by reference.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit 14   |   | Continental  Materials Corporation Code of Business Conduct and Ethics filed as  Exhibit 14 to Form 10-K/A (Amendment No. 1) for the year ended  January 3, 2004, incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit 21   |   | Subsidiaries  of Registrant (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit 23   |   | Consent  of Independent Registered Public Accounting Firm (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit 31.1 |   | Rule 13a-14(a)/15d-14(a) and  Rule 13a-14(d)/15d-14(d) Certification of Chief Executive Officer  (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit 31.2 |   | Rule 13a-14(a)/15d-14(a) and  Rule 13a-14(d)/15d-14(d) Certification of Chief Financial Officer  (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| Exhibit 32   |   | Section 1350  Certification of Chief Executive Officer and Chief Financial Officer (filed  herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|              |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

----

* - Compensatory plan or arrangement

 

39

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe 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 28, 2008

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **SIGNATURE**             | ** ** | **CAPACITY(IES)**                       | ** ** | **DATE**            |
|---------------------------|------------|-----------------------------------------|------------|---------------------|
|                      |       |                                    |       |                |
| /S/  James G. Gidwitz     |       | Chief Executive Officer and a Director  |       |                |
| James G. Gidwitz          |       | (Principal Executive Officer)           |       | March 28, 2008 |
|                      |       |                                    |       |                |
| /S/  Joseph J. Sum        |       | Vice President, Chief Financial Officer |       |                |
| Joseph J. Sum             |       | (Principal Financial Officer)           |       | March 28, 2008 |
|                      |       |                                    |       |                |
| /S/  Mark S. Nichter      |       | Secretary and Controller                |       |                |
| Mark S. Nichter           |       | (Principal Accounting Officer)          |       | March 28, 2008 |
|                      |       |                                    |       |                |
| /S/  William D. Andrews   |       |                                    |       |                |
| William D. Andrews        |       | Director                                |       | March 28, 2008 |
|                      |       |                                    |       |                |
| /S/  Thomas H. Carmody    |       |                                    |       |                |
| Thomas H. Carmody         |       | Director                                |       | March 28, 2008 |
|                      |       |                                    |       |                |
| /S/  Betsy R. Gidwitz     |       |                                    |       |                |
| Betsy R. Gidwitz          |       | Director                                |       | March 28, 2008 |
|                      |       |                                    |       |                |
| /S/  Ralph W. Gidwitz     |       |                                    |       |                |
| Ralph W. Gidwitz          |       | Director                                |       | March 28, 2008 |
|                      |       |                                    |       |                |
| /S/  Ronald J. Gidwitz    |       |                                    |       |                |
| Ronald J. Gidwitz         |       | Director                                |       | March 28, 2008 |
|                      |       |                                    |       |                |
| /S/  Theodore R. Tetzlaff |       |                                    |       |                |
| Theodore R. Tetzlaff      |       | Director                                |       | March 28, 2008 |
|                      |       |                                    |       |                |
| /S/  Peter E. Thieriot    |       |                                    |       |                |
| Peter E. Thieriot         |       | Director                                |       | March 28, 2008 |
|                      |       |                                    |       |                |
| /S/  Darrell M. Trent     |       |                                    |       |                |
| Darrell M. Trent          |       | Director                                |       | March 28, 2008 |

 

 

40

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CONTINENTALMATERIALS CORPORATION

 

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

 

for the fiscalyears 2007, 2006 and 2005

 
| **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 2007**                        |       |                                 |       |                                         |       |                       |       |                         |       |
| Allowance for doubtful  accounts (c) |       | $                                    | 619,000    |                                         | $          | (3,000                     | )          | $                            | 86,000     | (a) | $ | 530,000 |   |
| Inventory valuation  reserve (c)     |       | $                                    | 147,000    |                                         | $          | 138,000                    |       | $                            | 162,000    | (b) | $ | 123,000 |   |
| Reserve for self-insured  losses     |       | $                                    | 3,964,000  |                                         | $          | 6,592,000                  |       | $                            | 6,279,000  | (d) | $ | 4,277,000 |   |
|                                 |       |                                 |       |                                         |       |                       |       |                         |       |   |   |   |   |
| **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 |   |

 

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| Notes:                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                                                                                |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a)   Accounts written off, net of recoveries.

 

(b)   Amounts written off upon disposal of  assets.

 

(c)   Reserve deducted in the balance sheet from the  asset to which it applies. |   | (d)   Payments of self-insured claims including healthcare  claims accrued and paid in connection with the Company’s self-insured  employee healthcare benefit plan.

 

(e)   Column C(2) has been omitted as the answer  would be "none". |
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