UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended March 29, 2014

OR

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

For the transition period from             to

Commission File number 1-3834

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 x  No o

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 May 7, 2014: 1,650,167

PART I - FINANCIAL INFORMATION

Item 1.   Financial Statements

CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 29, 2014 AND DECEMBER 28, 2013

(000’s omitted except share data)

See notes to condensed consolidated financial statements.

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CONTINENTAL MATERIALS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

FOR THE THREE MONTHS ENDED MARCH 29, 2014 AND MARCH 30, 2013

(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 THREE MONTHS ENDED MARCH 29, 2014 AND MARCH 30, 2013

(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 MARCH 29, 2014

(Unaudited)

1.              Basis of Presentation:

The unaudited interim condensed consolidated financial statements included herein are prepared pursuant to the Securities and Exchange Commission (the “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 condensed consolidated balance sheet of Continental Materials Corporation (the “Company”) as of December 28, 2013 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. Certain reclassifications have been made to the 2013 Consolidated Financial Statements to conform to the 2014 presentation. The reclassifications had no effect on the consolidated results of operations, the net decrease in cash or the total assets, liabilities or shareholders’ equity of the Company.

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.

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 2014 that the Company believes it will be unable to utilize prior to the expiration of their carry-forward periods. The Company also established a valuation reserve related to the carry forward of the long-term capital loss related to the sale of the stock of Rocky Mountain Ready Mix Concrete, Inc. 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, December 31, 2014. For federal tax 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 tax purposes, net operating losses can be carried forward for periods ranging from 5 to 20 years for the states that the Company is required to file in. California Enterprise Zone credits can be carried forward indefinitely while Colorado credits can be carried forward for 7 years.

The Company’s income tax returns are subject to audit by the Internal Revenue Service (the “IRS”) and state tax authorities. The amounts recorded for income taxes reflect the Company’s tax positions based on research and interpretations of complex laws and regulations. The Company accrues liabilities related to uncertain tax positions taken or expected to be taken in its tax returns. The IRS has completed examinations for periods through 2009. Various state income tax returns also remain subject to examination.

3.              Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1   Quoted prices in active markets for identical assets or liabilities.

Level 2        Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3        Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs shall reflect the assumptions that market participants would use when pricing the asset or liability including assumptions about risk.

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheet.

Cash and Cash Equivalents: The carrying amount approximates fair value and was valued as Level 1.

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Revolving Bank Loan Payable: Fair value is estimated based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model. The carrying amount of the Revolving Bank Loan Payable represents a reasonable estimate of the corresponding fair value as the Company’s debt is held at variable interest rates and was valued as Level 2.

4.              There are currently no significant prospective accounting pronouncements that are expected to have a material effect on the Company’s consolidated financial statements.

5.              Operating results for the first three months of 2014 are not necessarily indicative of performance for the entire year due to the seasonality of most of the Company’s products. Historically, sales of the Evaporative Cooling segment are higher in the first and second quarters, sales of the Concrete, Aggregates and Construction Supplies (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.

6.              There is no difference in the calculation of basic and diluted earnings per share (EPS) for the three months ended March 29, 2014 and March 30, 2013 as the Company does not have any dilutive instruments.

7.              The Company operates primarily in two industry groups, Heating, Ventilation and Air Conditioning (HVAC) and Construction Products. The Company has identified two reportable segments in each of the two industry groups: the Heating and Cooling segment and the Evaporative Cooling segment in the HVAC industry group and the CACS 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. (WFC) of Colton, California. The Evaporative Cooling segment produces and sells evaporative coolers from the Company’s wholly-owned subsidiary, Phoenix Manufacturing, Inc. (PMI) of Phoenix, Arizona. 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 Castle Concrete Company and Transit Mix Concrete Co., of Colorado Springs and Transit Mix of Pueblo, Inc. of Pueblo, Colorado (the three companies collectively are referred to as “TMC”). The Door segment sells hollow metal doors, door frames and related hardware, wood doors, lavatory fixtures and electronic access and security systems from the Company’s wholly-owned subsidiary, McKinney Door and Hardware, Inc. (MDHI), which operates out of facilities in Pueblo and Colorado Springs, Colorado. 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. Expenses related to the corporate information technology group are allocated to all locations, including the corporate office. An “Other” classification is used to report a real estate operation and the expenses of Williams EcoLogix, Inc. (WEI). WEI is a wholly owned subsidiary of WFC which was set up in anticipation of distributing a product that was being developed by a third party. The expenses incurred were associated with the subsidiary’s sole employee and miscellaneous related expenses. Development of the product has ceased and the sole employee was terminated in February 2013.

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 months ended March 29, 2014 and March 30, 2013 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)       Segment assets are as of December 28, 2013.

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

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.

8.             Identifiable amortizable intangible assets as of March 29, 2014 include a restrictive land covenant and customer relationships. Collectively, these assets were carried at $105,000, net of $615,000 accumulated amortization. The pre-tax amortization expense for intangible assets during the quarter ended March 29, 2014 was $13,000 compared to $15,000 for the quarter ended March 30, 2013.

Based upon the intangible assets recorded on the balance sheet at March 29, 2014, amortization expense for the next five years is estimated to be as follows: 2014 — $52,000; 2015 — $45,000; 2016 — $21,000.

9.              The Company issued a total of 12,000 shares to the eight eligible board members effective February 12, 2014 as full payment for their 2014 retainer fee. The Company issued a total of 12,000 shares to the eight eligible board members effective February 11, 2013 as full payment for their 2013 retainer fee. All shares were issued under the 2010 Non-Employee Directors Stock Plan.

10.       The Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) effective November 18, 2011. The Credit Agreement provided the Company with a revolving credit facility in the amount of $20,000,000 (“Revolving Commitment”) and funded a term loan in the original principal amount of $4,648,000. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Revolving Commitment are limited to 80% of eligible accounts receivable and 50% of eligible inventories. Borrowings under the Credit Agreement bear interest based on a London Interbank Offered Rate (LIBOR) or prime rate based option.

The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period on both the revolving credit borrowings and the term debt borrowings. Principal payments under the term loan are due quarterly with a final payment of all remaining unpaid principal at the maturity date.

The Company entered into the First Amendment to Credit Agreement effective March 21, 2013 to reduce the revolving credit limit to $15,000,000 and to modify certain of the financial covenants, related definitions and test dates. The Company entered into a Second Amendment to Credit Agreement effective March 20, 2014 to, among other things, (i) increase the Revolving Commitment to $18,000,000 from $15,000,000, (ii) terminate the Term Loan Commitment upon the repayment in full of the outstanding principal balance (and accrued interest thereon), (iii) modify the Borrowing Base calculation to provide for borrowing availability in respect of new Capital Expenditures, (iv) decrease the interest rates on the Revolving Loans beginning in the third quarter of 2014, and (v) extend the maturity date to May 1, 2016, in each case, on the terms and conditions set forth in the Second Amendment. The Credit Agreement as amended provides for the following:

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·      The Revolving Commitment is $18,000,000.

·      Borrowings under the Revolving Commitment are limited to (a) 80% of eligible accounts receivable, (b) the lesser of 50% of eligible inventories and $8,500,000 plus (c) the lesser of 80% of new Capital Expenditures not to exceed $4,000,000 in the aggregate and $2,000,000 with respect to each of Fiscal Year 2014 and 2015.

·     The Minimum Fixed Charge Coverage Ratio is not permitted to be below 1.05 to 1.0 for the Computation Period ending June 28, 2014 increasing to 1.15 to 1.0 for the Computation Period ending September 27, 2014 and each Fiscal Quarter end thereafter.

·      The Company must not permit Earnings Before Interest, Taxes, Depreciation and Amortization (Minimum EBITDA) to be less than $2,500,000 for the fiscal year ended December 28, 2013 or permit the Minimum EBITDA to be less than $1,500,000 for the trailing twelve-month period ending March 29, 2014.

·     The Company must maintain a Minimum Tangible Net Worth as of the last day of any Computation Period of $35,000,000 increased by (but not decreased by) 50% of the Consolidated Net Income beginning with the 2013 fiscal year.

·      The Balance Sheet Leverage Ratio as of the last day of any Computation Period may not exceed 1.00 to 1.00.

·      The Company must pay within 120 days after the end of each Fiscal Year, an amount equal to fifty percent of Excess Cash Flow for such Fiscal Year. The lender waived this provision for the 2012 fiscal year.

·     The maturity date of the credit facility is May 1, 2016.

·      Interest rate pricing for the revolving credit facility is currently LIBOR plus 3.25% or the prime rate plus 1%. Commencing July 1, 2014, interest rate pricing will be lowered to LIBOR plus 3.00% or the prime rate plus .75%. An additional reduction is possible in the event the Fixed Charge Coverage Ratio is equal to or exceeds 1.5 to 1.0 with respect to any Computation Period ending on or after December 31, 2014.

Definitions under the Credit Agreement as amended are as follows:

·      Minimum Tangible Net Worth is defined as net worth plus subordinated debt, minus intangible assets (goodwill, intellectual property, prepaid expenses, deposits and deferred charges), minus all obligations owed to the Company or any of its subsidiaries by any affiliate or any of its subsidiaries and minus all loans owed by its officers, stockholders, subsidiaries or employees.

·      Excess Cash Flow is defined as meaning for any period, the remainder of (a) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for such period, minus (b) the sum, without duplication, of (i) scheduled repayments of principal of the term loan made during such period, plus, (ii) voluntary prepayments of the term loan during such period, plus (iii) mandatory prepayments of the term loan during such period to the extent the amount of such mandatory prepayment was included in EBITDA for such period, (iv) cash payments made in such period with respect to capital expenditures, plus (v) all income taxes paid in cash by the Company during such period, plus (vi) cash interest expense of the Company during such period.

·      Fixed Charge Coverage Ratio is defined as, for any computation period, the ratio of (a) the sum for such period of (i) EBITDA minus (ii) the sum of income taxes paid in cash and all unfinanced capital expenditures to (b) the sum for such period of (i) interest expense plus (ii) required payments of principal of the term debt.

·      Balance Sheet Leverage Ratio is defined as the ratio of Total Debt to Tangible Net Worth.

As noted above, the Second Amendment to the Credit Agreement called for the payoff of the then outstanding balance of the term loan with borrowings against the new revolving line of credit. Outstanding funded debt (term debt and revolving credit) was $6,693,000 as of March 29, 2014 compared to $3,783,000 at March 30, 2013. The highest balance outstanding during the first quarter of 2014 and 2013 was $6,693,000 and $3,783,000, respectively. Average outstanding funded debt was $4,420,000 and $3,783,000 for the first quarters of 2014 and 2013, respectively. The weighted average interest rates on outstanding funded debt for the first quarter of 2014, including the fee on the unused line of credit and other recurring bank charges but excluding finance charges for letters of credit, was approximately 5.2% compared to 7.9% for the first quarter of 2013. At March 29, 2014, the Company had outstanding letters of credit totaling $5,415,000. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the available borrowing capacity exceeded the cash needs of the Company and this situation is expected to continue for the foreseeable future.

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 planned capital expenditures, for the next twelve months. The Company was in compliance with all debt covenants as of March 29, 2014. Current projections indicate that the Company may not attain the Minimum Fixed Charge Coverage Ratio of 1.05 to 1.0 for the Computation Period ending June 28, 2014. The Company expects to meet or exceed the Minimum fixed Charge Coverage Ratio of 1.15 to 1.00 for all succeeding Computation Periods. The Company believes that, if necessary, it will be able to obtain a waiver from its current lender with regard to the Minimum Fixed Charge Coverage Ratio for the Computation Period ending June 28, 2014 or otherwise reach an alternative satisfactory financing arrangement.

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11.       The Company is involved in litigation matters related to its business, principally product liability matters related to the gas-fired heating products and fan coil 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, cash flows or financial condition as the Company has established adequate accruals for matters that are probable and estimable. The Company does not accrue estimated amounts for future legal costs related to the defense of these matters but rather expenses them as incurred.

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

The Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help investors understand the Company’s results of operations, financial condition and current business environment. The MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report and the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Company Overview

For an overview of the Company’s operations and operating structure, see Note 7 to the condensed consolidated financial statements contained in this Quarterly Report.

Liquidity and Capital Resources

Various factors affect the sales of the Company’s products which in turn, can impact the Company’s liquidity and capital resources. Historically, the Company has experienced operating losses during the first quarter except when construction activity is strong along the Southern 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. Fourth quarter results can vary based on weather conditions in Colorado as well as in the principal markets for the Company’s heating equipment. Notwithstanding weather conditions, however, the Company expects construction activity along the Southern Front Range to continue to improve but not fully recover to pre-2009 levels.

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 is likely to continue.

As expected, the Company’s cash flow from operations during the first quarter was negative due to the factors noted above. Operations for the first three months of 2014 used $1,596,000 of cash compared to $448,000 of cash used during the first three months of 2013. The increased use of cash was primarily the result of the net loss and changes in working capital items, most notably an increase inventories partially offset by a reduction in receivables in the first quarter of 2014.

With regard to investing activities, capital expenditures continue to be curtailed wherever possible. However, the purchase of equipment related to the reopening of the Pikeview Quarry resulted in $807,000 being spent during the first quarter of 2014 compared to $419,000 spent during the first quarter of 2013.

Financing activities during the first quarter of 2014 provided $2,285,000 of cash compared to a use of $125,000 during the comparable 2013 quarter. Net borrowings against the Credit Agreement provided $2,285,000 which was used to finance the use of cash by operations and the capital expenditures during the first quarter of 2014. The $125,000 of cash used in the first quarter of 2013 represented the scheduled term debt repayment. See also the discussion of the Revolving Credit and Term Loan Agreement below.

Revolving Credit and Term Loan Agreement

As discussed in Note 10 to the condensed consolidated financial statements contained in this Quarterly Report, the Company amended its Credit Agreement effective March 20, 2014 such that the Company now has a Revolving Commitment of $18,000,000 and no term debt. Borrowings under the Credit Agreement are secured by the Company’s accounts receivable, inventories, machinery, equipment, vehicles, certain real estate and the common stock of all of the Company’s subsidiaries. Borrowings under the Credit Agreement are limited to 80% of eligible accounts receivable and 50% of eligible inventories. Borrowings under the Credit Agreement bear interest based on a LIBOR or prime rate based option.

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The Credit Agreement either limits or requires prior approval by the lender of additional borrowings, acquisition of stock of other companies, purchase of treasury shares and payment of cash dividends. Payment of accrued interest is due monthly or at the end of the applicable LIBOR period. The Credit Agreement has a maturity date of May 1, 2016.

The Company had borrowings against the revolving credit facility of $6,693,000 at March 29, 2014. At all times since the inception of the Credit Agreement, the Company has had sufficient qualifying and eligible assets such that the entire revolving credit facility was available to the Company.

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 planned capital expenditures, for the next twelve months. The Company was in compliance with all debt covenants as of March 29, 2014. Current projections indicate that the Company may not attain the Minimum Fixed Charge Coverage Ratio of 1.05 to 1.0 for the Computation Period ending June 28, 2014. The Company expects to meet or exceed the Minimum fixed Charge Coverage Ratio of 1.15 to 1.00 for all succeeding Computation Periods. The Company believes that, if necessary, it will be able to obtain a waiver from its current lender with regard to the Minimum Fixed Charge Coverage Ratio for the Computation Period ending June 28, 2014 or otherwise reach an alternative satisfactory financing arrangement.

Results of Operations — Comparison of Quarter Ended March 29, 2014 to Quarter Ended March 30, 2013

(In the ensuing discussions of the results of operations the Company defines the term gross profit as 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 quarter of 2014 were $26,824,000, an increase of $611,000 or 2.3% compared to the first three months of 2013. Sales in the Concrete, Aggregates and Construction Supply (“CACS”) segment increased $2,501,000 (32.0%) reflecting continuing improvement in the construction markets along the Southern Front Range of Colorado, particularly in Colorado Springs. Sales in the Company’s Door and Evaporative Cooling segment were moderately higher in the first quarter of 2014 compared to the first quarter of 2013. Sales in the Heating and Cooling segment fell by $2,635,000 (27.6%) compared to the first three months of 2013. The Company believes that colder temperatures in the first quarter of 2013 throughout California, a principal wall furnace market, drove wall furnace shipments to higher than normal levels in the year ago period.

The consolidated gross profit ratio in the first quarter of 2014 was 15.3% compared to 17.5% in the first three months of 2013. The principal reason for the lower gross profit ratio is attributable to a 5.4 point drop in the gross profit ratio in the Heating and Cooling segment. The principal contributor to the lower gross profit ratio in the Heating and Cooling segment was a reduced production level in response to the lower sales. The gross profit ratio in the Company’s other three segments were higher than or about the same as the first quarter of 2013.

Consolidated selling and administrative expenses (including the WEI project expenses) in the first quarter of 2014 were only $135,000 (2.7%) higher compared to the year-ago period. As a percentage of consolidated sales, all selling and administrative expenses were 18.8% in the first quarter of 2014 compared to 18.7% in the same period of the prior year.

Consolidated depreciation, depletion and amortization charges in the first quarter of 2014 were $77,000 less than in the first three months of 2013. This reduction reflects the reduced level of capital spending in the past three years especially in the CACS segment.

The consolidated operating loss in the first quarter of 2014 was $1,685,000 compared to an operating loss of $1,133,000 in the first three months of the prior year. The increased operating loss is due to the lower sales and profits from the Heating and Cooling segment.

Consolidated net interest expense was $12,000 higher in the first quarter of 2014 compared to the first quarter of 2013. Net interest expense includes interest on outstanding funded debt (term debt and the outstanding revolving credit balance), finance charges on outstanding letters of credit, the fee on the unused revolving credit line and other recurring fees charged by the lending bank. The weighted average interest rate on outstanding funded debt in the first quarter of 2014, including the fee on the unused line of credit and other recurring bank charges but excluding finance charges on letters of credit, was approximately 5.2% compared to 7.9% in the first quarter of 2013. In March 2014 the Company amended the credit agreement with its lending bank whereby the revolving line of credit was increased to a maximum of $18,000,000 from $15,000,000. At the same time the outstanding principal on the outstanding term loan, $3,283,000, was paid in full by borrowings against the new revolving line of

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credit. Average outstanding funded debt was $4,420,000 and $3,783,000 in the first quarter of 2014 and 2013, respectively. The maximum outstanding funded debt was $6,693,000 and $3,783,000 in the first quarter of 2014 and 2013, respectively.

The Company’s effective income tax rate reflects federal and state statutory income tax rates adjusted for non-deductible expenses, tax credits and other tax items. The estimated effective income tax rate related to the loss from continuing operations in the first quarter of 2014 was 34.0% compared to 33.5% for the first quarter of 2013.

The Company operates four businesses in two industry groups. The businesses are seasonal, weather sensitive and subject to cyclical factors. The following addresses various aspects of operating performance focusing on the reportable segments within each of the two industry groups.

Construction Products

The table below presents a summary of operating information for the two reportable segments within the Construction Products industry group for the quarters ended March 29, 2014 and March 30, 2013 (dollar amounts in thousands):

Concrete, Aggregates and Construction Supplies Segment

The product offerings of the CACS segment consist of ready mix concrete, aggregates and construction supplies. Ready mix concrete and aggregates are produced at multiple locations in or near Colorado Springs and Pueblo, Colorado. Construction supplies encompass numerous products purchased from third party suppliers and sold to the construction trades, particularly concrete sub-contractors. In the first quarter of 2014 concrete, aggregates and construction supplies accounted for approximately 63%, 28% and 9% of sales of the CACS segment, respectively, including aggregates consumed internally in the production of concrete. In the first three months of 2013, the sales mix was substantially the same. Sales including aggregates consumed internally increased by $2,788,000 (30.6%). Sales to third parties increased $2,501,000 (32.0%). The higher sales reflect a continuing but moderate improvement in the Colorado Springs construction market. Ready mix concrete sales, excluding flow fill material, increased by $1,583,000 (27.3%) in 2014. Concrete volume increased by 17.0%. Average concrete prices, excluding flow fill material, increased by 13.1% compared to 2013. The 13.1% increase in the average selling price reflects a combination of increased selling prices and changes in product mix. While concrete prices have increased, the market remains sharply competitive especially on large construction projects. Cement costs per yard increased by 7.5% in the first quarter of 2014 compared to the same period in 2013. Cement is the highest cost raw material used in the production of ready mix concrete. The per yard cost of all other concrete material inputs increased by 13.7% due to a combination of higher prices and a change in product mix. Delivery cost per yard increased by 6.5% compared to the first quarter of 2013. The gross profit ratio from concrete was virtually unchanged compared to the first quarter of 2013.

Sand, crushed limestone and gravel (“aggregates”) are produced and sold from various deposits in and around Colorado Springs and Pueblo, Colorado. In the both the first quarter of 2014 and 2013 aggregates were produced from four separate locations; two in or near Colorado Springs and two in or near Pueblo. Sales volume (tons) of construction aggregates, including those used

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internally in the production of ready mix concrete, increased by 8.0% in 2014. Average selling prices, excluding delivery charges increased by approximately 18.5%. This increase in average aggregate selling price was substantially influenced by the impact of the Pikeview Quarry which was in operation for the entire first quarter of 2014 while it was shutdown, due to an earlier landslide, during the entire first quarter of 2013. The limestone material from the Pikeview Quarry carries a higher price compared to the average prices of sand or gravel. Sales of aggregates, including internal consumption and delivery charges, increased by $896,000 or approximately 37.3%. Overall production volume in the first quarter of 2014 from the aggregate operations was double the production volume of the first quarter of 2013. The resumption of production at the Pikeview Quarry and harsher weather conditions in the first quarter of 2013 were the principal reasons for the higher production levels in 2014. At the gravel operation located on the east side of Pueblo we continue to encounter a high ratio of sand to rock. Most of the sand, except for that used in the production of ready mix concrete is not readily saleable in the current market. The low yield has an adverse impact on unit costs and gross profits at the Pueblo aggregate operation. In addition, overall demand for construction aggregates in the Pueblo area is below year ago levels as Pueblo has not experienced much of a recovery in building activity since the 2009 recession. The Company’s Colorado Springs’ sand operation also produces industrial sand used in well fracking, the production of stucco and other purposes. As a percentage of total tons of aggregates sold in the first quarter of 2014 and 2013, industrial sand sales were only approximately 1.1%.  The loss (negative gross profit) from all aggregate operations in the first quarter of 2014 was $331,000 but this does represent an improvement compared to the loss of $564,000 in the first three months of 2013. Better results at all of the other aggregate operations more than offset an increased loss from the Pueblo gravel operation.

Sales of construction supplies increased by $160,000 (17.7%). The gross profit ratio increased to 7.4% in the first quarter of 2014 from 3.4% in 2013.

Depreciation and amortization charges were $92,000 less in 2014 reflecting a lower level of capital spending over the last four years.

Selling and administrative expenses were $69,000 (7.5%) higher in the first three months of 2014 compared to the same period in 2013. However, these expenses were 9.6% of sales in the first quarter of 2014 compared to 11.8% in the first quarter of the prior year.

The prices of two commodities, cement and diesel fuel, can have a significant effect on the results of operations of this segment. The Company negotiates cement prices with producers who have production facilities in or near the concrete markets that we serve. The Company may negotiate separate cement prices for large construction projects depending on the demand for and availability of cement from the local producers. The Company buys diesel fuel from local distributors and has, from time to time, entered into a short term arrangement with a distributor whereby the price of diesel fuel is fixed for a period of up to six months. In the past year the Company has not hedged diesel fuel prices. Changes in the cost of these two commodities have a direct effect on the results of operations depending upon whether competitive conditions prevailing in the marketplace enable the Company to adjust its selling prices to recover the increased costs.

Door Segment

The Door segment sells hollow metal doors, door frames and related hardware, wood doors, lavatory fixtures and electronic access and security systems. Nearly all of the Door segments sales are for commercial and institutional buildings such as schools and healthcare facilities. Approximately 65% to 70% of the sales of the Door segment are related to jobs obtained through a competitive bidding process. Bid prices may be higher or lower than bid prices on similar jobs in the prior year. The Door segment does not track unit sales of the various products through its accounting or management reporting systems. Management relies on the level of the sales backlog, the trend in sales and the gross profit rate in managing the business.

Door sales in the first quarter of 2014 were 4.6% higher than in the first quarter of the previous year. The increase in sales was a combination of increased prices and volume. Bid prices are still competitive but were generally higher on jobs serviced in the first quarter of 2014 compared to the first quarter of 2013 when some of those revenues were for jobs that were very aggressively bid.   The gross profit ratio in the first quarter of 2014 was 25.4%, up from 19.1% in 2013. The improvement in the gross profit ratio reflects a somewhat higher pricing level on recently bid work. Also in 2014, a larger proportion of the revenues was related to electronic access and security systems which typically command a higher gross profit ratio. Finally, the gross profit ratio in the first quarter of 2013 was significantly below the historical experience of this business.

Sales and administrative expenses were substantially the same in the first quarter of 2014 compared to the first quarter of 2013.

The Door segment sales backlog at the end of the first quarter of 2014 was $4,849,000 compared to $5,865,000 a year ago.

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HVAC Products

The table below presents a summary of operating information for the two reportable segments within the HVAC products industry group for the quarters ended March 29, 2014 and March 30, 2013 (dollar amounts in thousands):

Heating and Cooling Segment

In the first quarter of 2014, approximately 75% of sales in the Heating and Cooling segment consisted of wall furnaces and heaters. Fan coils accounted for 24% of the segment’s sales and other products made up the remaining 1%. In the first three months of 2013, these shares of total segment sales were 81%, 16% and 3%, respectively. Overall sales in the Heating and Cooling segment in the first quarter of 2014 were $2,635,000 (27.6%) lower compared to the same period in 2013. Unit shipments of furnaces and heaters were 40.6% lower in the first quarter of 2014 compared to 2013. The Company believes colder temperatures in the first quarter of 2013 throughout California, a principal wall furnace market, drove furnace shipments to higher than normal levels. The average price of furnaces and heaters in the first quarter of 2014 was 9.6% higher compared to the same period in 2013 predominantly due to a change in sales mix. Most of the reduced wall furnace shipments were the lower priced models many of which are sold in the California market. Management estimates that approximately 80% of the 9.6% increase in average price was due to the sales mix change. Sales of fan coils increased by 6.8% compared to the first quarter of 2013. Typically, approximately 90% of the sales of fan coils are custom-made systems for hotels and other commercial buildings. The jobs are obtained through a competitive bidding process. Since every bid job is a unique configuration of materials and parts, the Company does not track units of sales or production as such unit volume data would not be useful in managing the business. Management focuses on the current level of sales, the sales backlog and the contribution margin in managing the fan coil business. Contribution margin is an internal measure of profitability for a product or product line measured by deducting variable manufacturing costs and variable selling expenses from sales for a particular product line. The fan coil contribution margin percentage in the first quarter of 2014 was at a satisfactory level and was less than two points lower than in the first quarter of 2013. The fan coil sales backlog at the end of the first quarter of 2014 was approximately $1,482,000 compared to $1,109,000 a year ago.

The Heating and Cooling segment’s gross profit ratio for the first quarter of 2014 was 28.4% compared to 33.8% in the first three months of 2013. In response to the lower level of furnace sales in the first quarter of 2014 furnace production was reduced below the production level of the first quarter of 2013. The lower gross profit ratio is principally related the lower furnace production level and its effect on factory overhead absorption.

Selling and administrative expenses in the first three months of 2014 were virtually unchanged compared to the first quarter of 2013. However, as a percentage of sales, selling and administrative expenses were 26.9% in the first quarter of 2014 compared to 19.2% in 2013.

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Evaporative Cooling Segment

Sales of evaporative coolers increased by $602,000, 11.8%, in the first three months of 2014 compared to the same period in the prior year. Unit sales of evaporative coolers increased by 6.1% in the first quarter of 2014 compared to the prior year period.  Average selling prices per unit were approximately 5.1% higher compared to a year ago. However, excluding parts sales, the average price of a cooler unit was only 2.4% higher than the previous year due to a combination of price increases and product mix. The gross profit ratio in the first quarter of 2014 was 22.5% compared to 22.9% in the first quarter of 2013. Selling and administrative expenses were $77,000 (9.3%) higher in the first quarter of 2014 due principally to higher sales commissions and advertising. As a percentage of sales, selling and administrative expenses were 16.0% and 16.4% in the first quarter of 2014 and 2013, respectively.

Both businesses in the HVAC group are sensitive to changes in prices for a number of different raw materials, commodities and purchased parts. Prices of steel and copper in particular can have a significant effect on the results of operations of this group. The Company is not currently a party to any hedging arrangements with regard to steel or copper.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The condensed consolidated financial statements contained in this Quarterly Report have been prepared in accordance with accounting principles generally accepted in the United States of America 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 March 29, 2014 and December 28, 2013 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 are contained 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 December 28, 2013.

OUTLOOK

The construction market in Colorado Springs continues to exhibit moderate improvement, however building activity in Pueblo is slow. Even with the improvement in the Colorado Springs market, sales volume remains substantially below prior more robust periods. The Company expects sharp price competition in the CACS segment to continue throughout 2014, especially on larger bid projects. Local cement suppliers have increased prices at the beginning of 2014 and have announced another price increase to be effective in mid-2014.

The Door segment’s sales also rely to a significant degree on new construction. As noted above the sales backlog of the Door segment has decreased by approximately $1,000,000 compared to the end of the first quarter of 2013 but is still at a relatively strong level. Pricing on large bid jobs is moderately improved from a year ago but is still very competitive.

Sales of the Evaporative Cooling segment for the remainder of the current cooling season will largely be weather dependent.

The fan coil markets continue to exhibit improvement due to higher construction spending in the lodging industry. In-season furnace sales later this year will be dependent on weather and general economic conditions.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 4 to the condensed consolidated financial statements contained in this Quarterly Report for a discussion of recently issued accounting standards.

MATERIAL CHANGES TO CONTRACTUAL OBLIGATIONS

There were no material changes to contractual obligations that occurred during the quarter ended March 29, 2014.

FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are based on the beliefs of the Company’s management as well as on assumptions made by and information available

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to the Company at the time such statements were made. When used in this Quarterly 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 various factors including but not limited to: weather, interest rates, availability of raw materials and their related costs, economic conditions and competitive forces in the regions where the Company does business, changes in governmental regulations and policies and the ability of the Company to obtain credit on commercially reasonable terms. Changes in accounting pronouncements could also alter projected results. Other factors not currently anticipated may also materially and adversely affect the Company’s results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While the Company believes that the forward-looking statements in this Quarterly Report are reasonable, readers should not place reliance on any forward-looking statement. In addition, these statements speak only as of the date they were made. The Company does not undertake any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Item 3.       Quantitative and Qualitative Disclosures About Market Risk

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such, is not required to provide information in response to this item.

Item 4.       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 Exchange Act as of March 29, 2014. The Chief Executive Officer and Chief Financial Officer, based on that valuation, concluded that the Company’s disclosure controls and procedures are 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 Commission.

(b)                     Changes in Internal Control Over Financial Reporting.

The Company continually reassesses its internal control over financial reporting and makes changes as deemed prudent. During the quarter ended March 29, 2014, there were no 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.

PART II - OTHER INFORMATION

Items 1, 1A, 3 and 5 are not applicable or the answer to such items is negative; therefore, the items have been omitted and no reference is required in this Quarterly Report.

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

The Company reserved 150,000 treasury shares representing the maximum number allowed to be granted under the 2010 Non-Employee Directors Stock Plan (Plan) to non-employee directors in lieu of the base director retainer fee. The Company issued a total of 12,000 shares to eight eligible board members effective February 12, 2014 as full payment of the base retainer fee for 2014. On February 11, 2013, the Company issued a total of 12,000 shares to eight eligible board members as full payment of the base retainer fee for 2013. At March 29, 2014, a total of 90,000 shares remain eligible for issuance under the Plan.

The Company did not purchase any of its common stock to become treasury stock during the period December 28, 2013 through March 29, 2014. The Company established an open-ended program to repurchase its common stock under which the Board authorized purchases up to a maximum amount of $2,750,000. Repurchases may be made on the open market or in block trades at the discretion of management. As of March 29, 2014, $1,182,413 of the authorized amount remained available for stock repurchases. The Credit Agreement contained certain restrictions on the Company’s ability to repurchase its stock which were retained in the First and Second Amendments to the Credit Agreement.

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Item 4.       Mine Safety Disclosure

The Company’s aggregates mining operations, all of which are surface mines, are subject to regulation by the Federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (as amended, the “Mine Act”). MSHA inspects these operations on a regular basis and issues various citations and orders when it believes a violation of the Mine Act has occurred. Information concerning mine safety violations and other regulatory matters required to be disclosed by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this Quarterly Report.

Item 6.       Exhibits

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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