UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the quarterly period ended July 3, 2010

OR

For the transition period from             to             

Commission File number 1-3834

CONTINENTAL MATERIALS CORPORATION

(Exact name of registrant as specified in its charter)

(312) 541-7200

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No x

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $0.25 par value, shares outstanding at July 27, 2010: 1,598,674.

PART I — FINANCIAL INFORMATION

Item 1.   Financial Statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

JULY 3, 2010 and JANUARY 2, 2010

(Unaudited)

(000’s omitted except share data)

See notes to condensed consolidated financial statements.

2

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009

(Unaudited)

(000’s omitted except per-share amounts)

See notes to condensed consolidated financial statements

3

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE SIX MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009

(Unaudited)

(000’s omitted except per-share amounts)

See notes to condensed consolidated financial statements

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CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JULY 3, 2010 AND JULY 4, 2009

(Unaudited)

(000’s omitted)

See notes to condensed consolidated financial statements

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CONTINENTAL MATERIALS CORPORATION

SECURITIES AND EXCHANGE COMMISSION FORM 10-Q

NOTES TO THE QUARTERLY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED JULY 3, 2010

(Unaudited)

1.              The unaudited interim condensed consolidated financial statements included herein are prepared pursuant to the Securities and Exchange Commission rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The interim condensed consolidated balance sheet of the Company as of January 2, 2010 has been derived from the audited consolidated balance sheet of the Company as of that date. The interim condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K. In the opinion of management, the condensed consolidated financial statements include all adjustments (none of which were other than normal recurring adjustments) necessary for a fair statement of the results for the interim periods. On July 17, 2009, the Company completed the sale of all of the outstanding capital stock of Rocky Mountain Ready Mix (RMRM), a Colorado corporation to Campbells C-Ment Contracting, Inc., a Colorado corporation. RMRM operated a ready mix concrete business in the Denver metropolitan area and had been included in the Construction, Aggregates and Construction Supplies (CACS) reporting segment. The operations of RMRM were classified as discontinued operations for the 2009 periods presented. Certain prior year’s amounts have been reclassified to conform to the current presentation.

2.              Income taxes are accounted for under the asset and liability method that requires deferred income taxes to reflect the future tax consequences attributable to differences between the tax and financial reporting bases of assets and liabilities. Deferred tax assets and liabilities recognized are based on the tax rates in effect in the year in which differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, based on available positive and negative evidence, it is “more likely than not” (greater than a 50% likelihood) that some or all of the net deferred tax assets will not be realized.

Our income tax returns are subject to audit by the Internal Revenue Service (IRS) and state tax authorities. The amounts recorded for income taxes reflect our tax positions based on research and interpretations of complex laws and regulations. We accrue liabilities related to uncertain tax positions taken or expected to be taken in a tax returns. The Company has established a valuation reserve related to the carry forward of all charitable contributions deductions arising from prior years and the portion of contributions in 2010 that the Company believes it will be unable to utilize prior to the expiration of their carry forward periods. At January 2, 2010, the Company also established a valuation reserve of $1,721,000 related to the carry forward of the long-term capital loss related to the sale of the stock of RMRM due to the uncertainty that the Company will be able to generate offsetable long-term capital gains prior to the expiration of the carry forward period. For Federal purposes, net operating losses can be carried forward for a period of 20 years while alternative minimum tax credits can be carried forward indefinitely. For State purposes, net operating losses can be carried forward for periods ranging from 5 to 20 years for the states in which the Company is required to file.

The Internal Revenue Service has completed examinations for periods through 2007.  Various state income tax returns also remain subject to examination.

3.              Although the Financial Accounting Standards Board has issued a number of new accounting standards since the end of the first quarter of 2010, the Company does not have any significant instances of the situations or accounting concerns addressed by these new pronouncements.

4.              Operating results for the first six months of 2010 are not necessarily indicative of performance for the entire year due to the seasonality of most of our products. Historically, sales of the Evaporative Cooling segment are higher in the first and second quarters, sales of the CACS segment are higher in the second and third quarters and sales of the Heating and Cooling segment are higher in the third and fourth quarters. The sales of the Door segment are more evenly spread throughout the year. The economic recession that began in the latter part of 2008 has had a significant detrimental effect on the construction industry in general and on our construction related businesses in particular in 2009 and 2010 and is expected to continue to do so for the remainder of 2010.

5.              There is no difference in the calculation of basic and diluted earnings per share (EPS) for the three-month or six-month periods ended July 3, 2010 and July 4, 2009 as the Company does not have any dilutive instruments.

6.              The Company operates primarily in two industry groups, Heating, Ventilation and Air Conditioning (HVAC) and Construction Products. Within each of these two industry groups, the Company has identified two reportable segments: the Heating and

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Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the Concrete, Aggregates and Construction Supplies segment and the Door segment in the Construction Products industry group.

The Heating and Cooling segment produces and sells gas-fired wall furnaces, console heaters and fan coils from the Company’s wholly-owned subsidiary, Williams Furnace Co. of Colton, California (WFC). The Evaporative Cooling segment produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. of Phoenix, Arizona (PMI). Sales of these two segments are nationwide, but are concentrated in the southwestern United States. Concrete, Aggregates and Construction Supplies are offered from numerous locations along the Southern Front Range of Colorado operated by the Company’s wholly-owned subsidiaries collectively referred to as Transit Mix Concrete Co. (TMC). RMRM of Denver, formerly included in this segment, was sold on July 17, 2009 and is classified as discontinued operation (see Note 9). Doors are fabricated and sold along with the related hardware from Colorado Springs and Pueblo through the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. of Pueblo, Colorado (MDHI). Sales of these two segments are highly concentrated in the Southern Front Range area in Colorado although door sales are also made throughout the United States.

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

The Company evaluates the performance of its segments and allocates resources to them based on a number of criteria including operating income, return on investment and other strategic objectives. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest, other income or loss or income taxes.

The following table presents information about reported segments for the three-month and six-month periods ended July 3, 2010 and July 4, 2009 along with the items necessary to reconcile the segment information to the totals reported in the financial statements (amounts in thousands):

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(a)         Included in the 2009 Unallocated Corporate operating amount is a gain of $2,026,000 on the sale of land in Colorado Springs. The Company received the cash during the third quarter.

(b)         Capital expenditures are presented on the accrual basis of accounting.

(c)          Segment assets are as of January 2, 2010.

There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the last Annual Report on Form 10-K.

7.              Identifiable intangible assets as of July 3, 2010 include a non-compete agreement, a restrictive land covenant and the customer relationships related to purchase of the assets of ASCI in 2006. Collectively, these assets were carried at $411,000, net of $599,000 accumulated amortization. The pre-tax amortization expense for intangible assets during the quarter ended July 3, 2010 was $34,000 compared to $42,000 for the quarter ended July 4, 2009 and $68,000 and $85,000 for the six months ended July 3, 2010 and July 4, 2009, respectively (including the final $25,000 of amortization of a non-compete agreement related to the Door segment). Based upon the intangible assets recorded on the balance sheet at July 3, 2010, amortization expense for the next five years is estimated to be as follows: 2010 — $137,000; 2011 — $101,000; 2012 — $65,000; 2013 — $58,000  and 2014 — $52,000.

As of July 3, 2010 the recorded goodwill of $7,229,000 consisted of $6,229,000 related to the CACS segment and $1,000,000 related to the Door segment. Goodwill is not amortized but rather assessed for impairment as of the end of each fiscal year. To the extent that events occur during the year, either involving the relevant Company subsidiaries or their industries, the Company revisits its assessment of the recorded goodwill to determine if impairment has occurred and should be immediately recognized.

8.              As of the period ended January 2, 2010 the Company was not in compliance with the minimum adjusted EBITDA and fixed charge coverage covenants of the Credit Agreement. As a result, effective January 1, 2010 the default rate provision of the Credit Agreement increased the interest rate on all outstanding revolving and long-term debt by 2%. Non-compliance with the financial covenants in the Credit Agreement constitutes an event of default under the agreement. Upon the occurrence of an event of default, the lenders may, among other things, terminate their lending commitments, in whole or in part, declare all or any part of the Company’s borrowings to be due and payable, and/or require the Company to collateralize with cash any or all letters of credit provided by the lender. A waiver of the event of default relating to compliance with the minimum adjusted EBITDA and fixed charge coverage covenants was granted and a second amendment to the Credit Agreement was entered into on April 15, 2010. The second amendment provides for the following:

·                  The covenants regarding the fixed charge coverage and the maximum leverage ratio was eliminated for the duration of the amended Credit Agreement.

·                  The Company must maintain a minimum tangible net worth of $32,000,000 provided that the required amount of tangible net worth shall increase (but not decrease) each fiscal year, commencing with fiscal year 2010, by an amount equal to fifty percent of the consolidated net income for the immediately preceding fiscal year.

·                  Capital expenditures for the trailing twelve months may not exceed $3,500,000.

·                  The maximum credit available under the revolving credit facility line will remain at $15,000,000 until October 1, 2010 when it will be reduced to $13,500,000.

·                  The maturity date of the credit facility is August 1, 2011.

·                  The interest rate for the remaining term of the amended Credit Agreement will be 4.0% over LIBOR but with a LIBOR floor of 2.0% (the Company’s effective LIBOR borrowing rate is currently 6.0%). The margin on the “base” or prime rate option will be the base plus 1.75% with a base rate floor of 4% (the Company’s current effective borrowing rate is 5.75%).

·                  The interest rate swap transaction will remain in effect.

The Credit Agreement as amended on April 15, 2010 requires the Company to maintain certain financial covenants as disclosed in the table below (amounts in thousands):

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Definitions under the Credit Agreement as amended are as follows:

·                  Tangible net worth is defined as net worth plus subordinated debt minus intangible assets (goodwill, intellectual property, prepaid expenses and deferred charges) minus all obligations owed to the Company or any of its subsidiaries by any affiliate or any or its subsidiaries and minus all loans owed by its officers, stockholders, subsidiaries or employees (Note: there are no loans owed by any of the referenced parties at January 2, 2010 or as of the date of this filing).

·                  The adjusted EBITDA is defined as net income plus interest, income taxes, depreciation, depletion and amortization plus other non-cash charges approved by the lender.

The Company was in compliance with all covenants as of July 3, 2010 reporting tangible net worth of $36,514,000 and adjusted quarterly EBITDA, as defined, of $2,573,000. The Company expects to be in compliance with all debt covenants, as amended, during the next twelve months. The Company also believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement, will be sufficient to cover expected cash needs, including servicing debt and planned capital expenditures for the next twelve months.

The amount classified as current for the term loan under the Credit Agreement is $1,625,000 which includes the scheduled quarterly repayments due during the next four quarters.

9.              On July 17, 2009, the Company completed the sale of all of the outstanding capital stock of RMRM, a Colorado corporation to Campbell C-Ment Contracting, Inc., a Colorado corporation. RMRM operated a ready mix concrete business in the Denver metropolitan area and had been included in the CACS reporting segment.

The net sales, pretax loss and net loss from RMRM is reported as discontinued operations for the six and three month fiscal periods ended July 4, 2009, and is summarized as follows (amounts in thousands):

The loss from discontinued operations recorded during the six and three month fiscal periods ended July 3, 2010 consists of adjustments to liabilities retained by the Company, primarily the reserve for workers compensation.

10.       The Company is involved in litigation matters related to its continuing business, principally product liability matters related to the gas-fired heating products in the Heating and Cooling segment. In the Company’s opinion, none of these proceedings, when concluded, will have a material adverse effect on the Company’s consolidated results of operations of financial condition as the Company has established adequate accruals for known occurrences which represent management’s best estimate of the future liability related to these claims up to the associated deductible.

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

See Note 6 for an overview of the Company.

Liquidity and Capital Resources

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As noted above, various factors affect the sales of the Company’s products. Historically, the Company has experienced operating losses during the first quarter except when construction activity is strong along the Front Range of Colorado and the weather is mild. Operating results typically improve in the second and third quarters reflecting more favorable weather conditions in Colorado and the seasonal sales of the Evaporative Cooling segment however; the Company expects construction activity along the Front Range will remain weak for the balance of 2010.

Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. The Company typically experiences operating cash flow deficits during the first half of the year reflecting operating results, the use of sales dating programs (extended payment terms) related to the Evaporative Cooling segment and payments of the prior year’s accrued incentive bonuses and Company profit-sharing contributions, if any. As a result, the Company’s borrowings against its revolving credit facility tend to peak during the second quarter and then decline over the remainder of the year. This trend has continued thus far in 2010.

Cash provided by operations was $222,000 during the first six months of 2010 compared to the $887,000 of cash provided during the first six months of 2009. The Company’s operating cash flow during the first six months of 2010 was positive despite the operating loss primarily due to an increase in accounts payable and accrued expenses. Operating cash flow during the first six months of 2009 was primarily due to a decrease in receivables, largely due to weak sales in the Concrete, Aggregates and Construction Materials segment and the Heating and Cooling segment and a reduction of inventory partially offset by a decrease in accounts payable and accrued expenses, primarily related to the reduction in inventory in the Heating and Cooling segment. Also largely offsetting the strong cash flow generated by the changes in working capital was the Company’s need to fund $4,840,000 of deposits with our insurance carriers in lieu of previously issued letters of credit.

During the six months ended July 3, 2010, investing activities used $452,000 of cash compared to the $1,020,000 of cash used in the prior year’s period. Capital expenditures during the first six months of 2010 were curtailed due to the lower sales volume while the CACS segment incurred almost $700,000 for development activities on the Pueblo East aggregates site during the 2009 period.

Financing activities during the first six months of 2010 provided $525,000 as the Company borrowed against its revolving line of credit to fund the sales dating programs related to the Evaporative Cooling segment. Financing activities used $460,000 of cash during the first six months of 2009 primarily due to the refinancing of the Company’s term and revolving credit facility during the 2009 second quarter including $589,000 in deferred financing fees, see Note 8. All scheduled debt repayments were made during the first six months of both 2010 and 2009. During the first six months of 2010, the highest amount of Company borrowings outstanding under the revolving credit agreement was $9,100,000 and the average amount outstanding was $6,531,000.

The Company believes that its existing cash balance, anticipated cash flow from operations and borrowings available under the Credit Agreement will be sufficient to cover expected cash needs, including servicing debt and planned capital expenditures for the next twelve months. The Company expects to be in compliance with all debt covenants during this period.

Results of Operations - Comparison of Quarter Ended July 3, 2010 to Quarter Ended July 4, 2009

(In the ensuing discussions of the results of operations the term gross profit means the amount determined by deducting cost of sales before depreciation, depletion and amortization from sales. The gross profit ratio is gross profit divided by sales.)

Consolidated sales in the second quarter of 2010 were $31,750,000 or $3,203,000 (11.2%) more than sales from continuing operations in the second quarter of 2009. Sales results at the Company’s business segments were mixed. Sales in the CACS segment and the Heating and Cooling segments were higher in 2010 compared to the prior year. Sales in the Door and Evaporative Cooling segment decreased in 2010 compared to 2009. The consolidated gross profit ratio increased from 22.4% in the second quarter of 2009 to 24.1% in the current year quarter. The improvement in the gross profit ratio also represents varying results among the Company’s four business segments. The CACS segment achieved a significant improvement in its gross profit ratio principally due to higher volume and reduced costs in its aggregates operations. Gross profit ratios in the Door and Heating & Cooling Segment declined principally due to competitive pressures. The gross profit ratio in the Evaporative Cooling segment essentially held steady.  Consolidated selling and administrative expenses were $66,000 lower in the 2010 quarter compared to the prior year. However, consolidated selling and administrative expenses, as a percentage of consolidated sales, decreased from 17.7% to 15.7% reflecting cost reduction actions taken since the end of the second quarter of 2009.  The operating income for the second quarter of 2010 was $1,497,000 compared to a $2,190,000 operating profit from continuing operations in the second quarter of 2009. However, the operating profit for the second quarter of 2009 included a $2,026,000 gain on the sale of a portion of the Company’s sand property in Colorado Springs.

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Interest expense in the second quarter of 2010 was slightly lower compared to the same quarter of 2009. Higher interest rates under the current credit agreement were offset by reduced outstanding borrowings. The average interest rate in the second quarter of 2010 was approximately 6.5% compared to approximately 4.7% in the second quarter of 2009. Average total outstanding indebtedness was approximately $14,817,000 in 2010 compared to approximately $21,380,000 in 2009. The reduction in outstanding indebtedness was due principally to reduced capital spending, working capital and proceeds from the sale of Rocky Mountain Ready Mix in July 2009.

A discussion of operations by segment follows.

Construction Products

The table below presents a summary of operating information for the two reportable segments within the Construction Products group for the quarters ended July 3, 2010 and July 4, 2009 (amounts in thousands):

Concrete, Aggregates and Construction Supplies Segment

Overall construction activity in the Company’s principal markets of Colorado Springs and Pueblo, Colorado was slow in both periods.  Sales in the CACS segment increased by approximately 29.0% in the second quarter of 2010 compared to the prior year quarter. In the second quarter of 2010 the Company serviced a large ready-mix concrete job at Fort Carson just south of Colorado Springs, Colorado. The Company expects to complete this job during the third quarter of 2010. Concrete yardage increased by nearly 15% from the prior year quarter. The average price of ready-mixed concrete declined by 6.9% as a result of a more intense level of competition, lower cement costs and a change in product mix. The gross profit per cubic yard of concrete was approximately $1.15 lower in 2010 as a result of the lower selling prices and higher prices charged for diesel fuel. Sales of aggregates (sand, crushed limestone and gravel) including those used internally were 24% higher in 2010 compared to 2009. The higher volume reflects the increase in ready-mix concrete sales and the increase in production capability at the Black Canyon Quarry. The Pikeview Quarry remains closed although the Company believes that it will be able to reopen the quarry pending approval of its mining and reclamation plan by the Colorado Division of Reclamation, Mining and Safety. The Company estimates that operations will resume in the latter part of 2010 or in 2011. The Company continues to reduce the ongoing expenses of the Pikeview Quarry since the December 2008 landslide. The combined gross profit from all aggregate operations in the second quarter of 2010 was $1,031,000 compared to a profit of $146,000 in 2009. There was not a significant change in either depreciation or selling and administrative expenses for this segment.

Door Segment

Sales during the second quarter of 2010 in the Door segment decreased $750,000 or 19.4% from the comparable 2009 quarter as a result of the weaker construction markets. The gross profit percentage in 2010 was 2 percent lower than in 2009 due to an intensified level of price competition. Selling and administrative expenses were reduced in response to the lower sales volume.

HVAC Products

The table below presents a summary of operating information for the two reportable segments within the HVAC products group for the quarters ended July 3, 2010 and July 4, 2009 (amounts in thousands):

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Heating and Cooling Segment

Sales in the Heating and Cooling segment increased $1,677,000 (31.0%) in the second quarter of 2010 from the comparable 2009 quarter. Sales of both furnaces and fan coils were higher in the current quarter. Cooler weather in April and May contributed to the increase in furnace sales. A couple of large hotel jobs spurred fan coil sales higher than the year ago level. The gross profit ratio for this segment improved from 22.8% to 26.6% due, in part, to an increased level of furnace sales and production.  Selling and administrative expenses were higher as a result of the increase in sales, additional sales incentives to key furnace customers and a higher level of legal expenses associated with product liability claims.

Evaporative Cooling Segment

Sales in the Evaporative Cooling segment decreased $372,000 or 3.7% in the second quarter of 2010 compared to the 2009 quarter. Hot weather in the latter part of the second quarter of 2010 offset nearly all of the impact of the loss of a national retail account. There was only a slight drop in the gross margin ratio from 25.8% to 25.6%. A beneficial change in product sales mix offset most of the impact of a reduced production volume. Selling and administrative costs were reduced by $60,000 as a result of the lower sales and cost reductions. As a percentage of sales, these expenses increased from 9.7% to 9.4%.

Operations - Comparison of Six Months Ended July 3, 2010 to Six Months Ended July 4, 2009

(In the ensuing discussions of the results of operations the term gross profit means the amount determined by deducting cost of sales before depreciation, depletion and amortization from sales. The gross profit ratio is gross profit divided by sales.)

Consolidated sales in the first half of 2010 were $55,391,000, 6.4% less than sales from continuing operations in the first six months of 2009. The sales recovery experienced in the second quarter of 2010 was not enough to overcome the lower sales in the first quarter. Sales results at three of the four Company’s business segments were lower in the first half of 2010. Only the Heating and Cooling segment realized increased sales. The consolidated gross profit ratio was 20.8% in the first half of 2010 compared to 21.4% in the first six months of 2009.  The Concrete Aggregates and Construction Supplies segment achieved a significant improvement in its gross profit ratio principally due to higher volume and reduced costs in its aggregate operations. Gross profit ratios in the other three business segments declined due lower production volume (Evaporative Cooling segment) or to competitive pricing pressures.  Consolidated selling and administrative expenses were $317,000 lower in the first half of 2010 compared to the prior year. Consolidated selling and administrative expenses, as a percentage of consolidated sales, increased from 17.2% to 17.8% primarily due to an increase in the Heating and Cooling segment discussed below.

The operating loss for the first half of 2010 was $543,000 compared to a $2,219,000 operating profit from continuing operations in 2009. However, the operating profit for the first six months of 2009 included a $2,026,000 gain on the sale of a portion of the Company’s sand property in Colorado Springs.

Interest expense in the first six months of 2010 was approximately $10,000 lower compared to the same period of 2009. Higher interest rates under the current credit agreement were offset by reduced outstanding borrowings. The average interest rate in the first half of 2010 was approximately 7.00% compared to approximately 4.25% in 2009. Average total outstanding indebtedness was approximately $13,775,000 in the first half of 2010 compared to approximately $19,592,000 in 2009. The reduction in outstanding indebtedness was due principally to reduced capital spending, working capital and proceeds from the sale of Rocky Mountain Ready Mix in July 2009.

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A discussion of operations by segment follows.

Construction Products

The table below presents a summary of operating information for the two reportable segments within the Construction Products group for the six months ended July 3, 2010 and July 4, 2009 (amounts in thousands):

Concrete, Aggregates and Construction Supplies Segment

Sales in the Concrete, Aggregates and Construction Supplies segment decreased by approximately 2.7% in the first six months of 2010 compared to the prior year. The higher level of business in the second quarter of 2010 was sufficient to offset the low volume encountered in the first quarter. In the first quarter of 2009, the Company serviced two large commercial ready-mix concrete jobs in Pueblo. There were no similarly sized jobs in the first quarter of 2010. Concrete yardage decreased by 6.7% from the first six months of 2009. The average price of ready-mixed concrete declined by 7.9% as a result of a more intense level of competition, lower cement costs and a change in product mix. The gross profit per cubic yard of concrete was approximately $1.18 lower in 2010 as a result of the lower volume, selling prices and higher prices charged for diesel fuel. Sales of aggregates (sand, crushed limestone and gravel) including those used internally were approximately 2% higher in 2010 compared to 2009. The higher volume reflects higher sand sales and an increase in production capability at the Black Canyon Quarry. See discussion for the second quarter regarding the status of the Pikeview Quarry. The combined gross profit from all aggregate operations in the first half of 2010 was $1,003,000 compared to a loss of $160,000 in 2009. Sales of construction supplies were $500,000 lower in the first half of 2010. The related gross profit was a loss of $36,000 compared to a profit of $160,000 in the first half of 2009. There was not a significant change in either depreciation or selling and administrative expenses for this segment.

Door Segment

Sales during the first six months of 2010 in the Door segment decreased $1,845,000 or 21.5% from the comparable 2009 period as a result of the weaker construction markets. The gross profit ratio in 2010 was 24.7% compared to 25.2% in 2009 due to an intensified level of price competition. Selling expenses were reduced in response to the lower sales volume.

HVAC Products

The table below presents a summary of operating information for the two reportable segments within the HVAC products group for the six months ended July 3, 2010 and July 4, 2009 (amounts in thousands):

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Heating and Cooling Segment

Sales in the Heating and Cooling segment increased $886,000 (5.9%) in the first half of 2010 from the comparable period in 2009.   Cooler weather in April and May extended the heating season and contributed to increased furnace sales.  The gross profit ratio for this segment declined from 24.1% to 23.2% primarily due to lower margins on fan coils which was largely due to a more competitive pricing environment.  Selling and administrative expenses were higher as a result of the increased furnace sales, additional sales incentives to key furnace customers and a higher level of legal expenses associated with product liability claims.

Evaporative Cooling Segment

Sales in the Evaporative Cooling segment decreased $3,305,000 or 19.0% in the first six months of 2010 compared to the 2009 first half. The loss of a national retail account and a carryover of inventory at some customers from the previous season accounted for the lower level of sales. The gross profit ratio declined from 26.6% to 24.0% principally as the result of the lower sales and production volume. A beneficial change in product sales mix offset some of the impact of the reduced volume. Selling and administrative costs were reduced by $281,000 as a result of the lower sales and cost reductions.  As a percentage of sales, these expenses increased from 10.5% to 11.0%.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of July 3, 2010 and January 2, 2010 and affect the reported amounts of revenues and expenses for the periods reported. Actual results could differ from those estimates.

Information with respect to the Company’s critical accounting policies which the Company believes could have the most significant effect on the Company’s reported results and require subjective or complex judgments by management is contained in Note 7 in this report on Form 10-Q and in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2010.

OUTLOOK

The level of construction activity in southern Colorado continues at a slow pace. Business conditions are not expected to substantially improve for the balance of 2010. Housing starts in Colorado Springs have increased modestly compared to the last two years but remain at relatively low levels. Housing construction in Pueblo is very depressed. A significant portion of the ready mix concrete volume in the second quarter was at military facilities near Colorado Springs. The Company estimates that these jobs will be completed in August or September 2010. The Company has submitted bids on other prospective commercial construction jobs but there is no assurance that the Company will be awarded the contracts. Moreover, if the Company is awarded one or more of the contracts, it is not certain when the work would commence. Under the current conditions, pricing in the CACS segment is expected to remain sharply competitive. It is difficult to predict the timing and magnitude of any general recovery of construction in the markets served.

The Door segment’s sales are also, to a significant degree, reliant on new construction. The sales backlog of the Door segment has held steady for the last few months although pricing has become more competitive.

July typically marks the end of the selling season for evaporative coolers though sales in the first part of July 2010 were above expectations.

The sales backlog for fan coil products in the Heating and Cooling segment has increased recently due to two hotel jobs although the overall commercial construction market and current bidding activity remains slow. Furnace sales so far this year benefitted

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from cool weather in the principal market areas in the first five months of the year. In-season furnace sales later this year will be largely weather dependent.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 3 for a discussion of recently issued accounting standards.

MATERIAL CHANGES TO CONTRACTUAL OBLIGATIONS

As discussed in Note 8, the Company entered into an amendment of its Credit Agreement with its bank lender. Other than discussed in the preceding sentence, there were no material changes to contractual obligations that occurred during the quarter ended July 3, 2010.

FORWARD-LOOKING STATEMENTS

The foregoing discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements are based on the beliefs of the Company’s management as well as on assumptions made by and information available to the Company at the time such statements were made.  When used in this Report, words such as “anticipates,” “believes,” “contemplates,” “estimates,” “expects,” “plans,” “projects,” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of factors including but not limited to: weather, interest rates, availability of raw materials and their related costs, national and local economic conditions, competitive forces and changes in governmental regulations and policies. Some of these factors are discussed in more detail in the Company’s 2009 Annual Report on Form 10-K. Changes in accounting pronouncements could also alter projected results. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

There were no material changes in the market risks nor legal proceedings that the Company is exposed to since those discussed in the Company’s 2009 Annual Report on Form 10-K.

Item 4T.    Controls and Procedures

(a)                     Evaluation of Disclosure Controls and Procedures.

The Company’s Chief Executive Officer and Chief Financial Officer, with the participation of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act) as of July 3, 2010. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were reasonably designed to ensure that all material information relating to the Company (including its subsidiaries) required to be disclosed in this quarterly report is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The material weakness reported in the 2008 and 2009 Form 10-Ks relating to accounting controls over inventory and related costs of sales reporting in the Heating and Cooling segment has been remediated. This conclusion was based in part on the results of a physical inventory taken at the end of April 2010.

(b)                     Changes in Internal Control Over Financial Reporting.

The Company continually reassesses our internal control over financial reporting and makes changes as deemed prudent. The Company had identified a material weakness in internal control over financial reporting related to accounting for inventory and related cost of sales in its Heating and Cooling segment prior to the close of the third quarter of Fiscal 2008. As part of its remediation process, the Company identified the causes that resulted in the inventory accounting errors and developed an action plan to address each of these causes. The Company believes that the changes made during 2009 and 2010 have improved the internal controls over financial reporting related to accounting for inventory and related cost of sales in its Heating and Cooling segment such that these controls can be relied upon as of July 3, 2010.

During the quarter ended July 3, 2010, there were no other material weaknesses identified in our review of internal control over financial reporting and no significant changes in the Company’s internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting except as noted in the previous paragraph.

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PART II - OTHER INFORMATION

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

The Company has not purchased any of its common stock to become treasury stock during the period April 4, 2010 through July 3, 2010.

On January 19, 1999, the Company initiated purchases under the current open-ended program to repurchase its common stock. Purchases are made on the open market or in block trades at the discretion of management. The dollar amount authorized for the program has been periodically increased by the Board of Directors and approved by the Company’s lender under the Company’s prior credit facility. As of July 3, 2010, $1,307,404 of the authorized amount remains available for stock purchases. The Credit Agreement contains certain restrictions on the Company’s ability to repurchase its stock. Amendments to the Credit Agreement have retained these restrictions. See further discussion in Note 8 and the “Liquidity and Capital Resources” section of Item 2 above.

Item 6.                                 Exhibits

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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