SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2003 COMMISSION FILE NO. 1-6663
COLONIAL COMMERCIAL CORP.
(Exact Name of Company as Specified in its Charter)
NEW YORK 11-2037182
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
120 NEW SOUTH ROAD, HICKSVILLE, NEW YORK 11801
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(Address of Principal Executive Offices) (Zip Code)
Company's Telephone Number, Including Area Code: 516-681-4647
------------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
---- ----
Indicate by check mark whether the Company (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 Company was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--- ----
Indicate the number of shares outstanding of the Company's Common Stock and
Convertible Preferred Stock as of January 21,2004.
Common Stock, par value $.05 per share - 2,405,794 shares
Convertible Preferred Stock, par
value $.05 per share - 1,464,252 shares
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2003 (unaudited) and
December 31, 2002 1
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2003
and 2002 (unaudited) 2
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 2003
and 2002 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003
and 2002 (unaudited) 4
Notes to Condensed Consolidated Financial
Statements (unaudited) 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4 - Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 6 - Exhibits and Reports on Form 8-K 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
Assets 2003 2002
------ ---- ----
(Unaudited)
Current assets:
Cash and cash equivalents $ 591,346 296,764
Accounts receivable, net of allowance for doubtful accounts
of $283,400 in 2003 and $265,000 in 2002, respectively 5,378,426 5,186,893
Inventory 6,353,074 5,730,224
Prepaid expenses and other current assets 566,907 338,251
--------------- ---------
Total current assets 12,889,753 11,552,132
Property and equipment, net 637,976 631,948
Goodwill 1,416,929 1,416,929
Other intangibles 65,000 85,833
--------------- ---------
$ 15,009,658 13,686,842
=============== =========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 3,491,732 2,446,886
Accrued liabilities 1,439,163 1,435,058
Income taxes payable - 40,230
Borrowings under credit facility 10,545,064 10,350,889
Notes payable - current portion 30,888 30,889
--------------- ---------
Total current liabilities 15,506,847 14,303,952
Notes payable, excluding current portion 72,961 64,775
--------------- ---------
Total liabilities 15,579,808 14,368,727
--------------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Redeemable convertible preferred stock, $.05 par value, liquidation
preference of $7,321,260 at June 30, 2003
and December 31, 2002, 2,468,860 shares
authorized, 1,464,252 shares issued and outstanding
at June 30, 2003 and December 31, 2002 73,213 73,213
Common stock, $.05 par value, 20,000,000 shares
authorized, 1,603,794 shares issued and outstanding
at June 30, 2003 and December 31, 2002 80,190 80,190
Additional paid-in capital 8,966,513 8,966,513
Accumulated deficit (9,690,066) (9,801,801)
--------------- ---------
Total stockholders' deficit (570,150) (681,885)
--------------- ---------
$ 15,009,658 13,686,842
=============== =========
1
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
---- ----
Net sales $ 10,689,646 9,173,474
Cost of sales 7,691,595 6,528,148
-------------- -------
Gross profit 2,998,051 2,645,326
Selling, general and administrative expenses, net 2,704,544 2,600,333
-------------- -------
Operating income 293,507 44,993
Interest income 171 552
Other income 55,802 55,257
Interest expense (147,883) (147,226)
-------------- -------
Income (loss) before income taxes 201,597 (46,424)
Income taxes 20,778 1,707
-------------- -------
Net income (loss) $ 180,819 (48,131)
============== =======
Income (loss) per common share:
Basic $ 0.11 (0.03)
Diluted 0.06 (0.03)
Weighted average shares outstanding:
Basic 1,603,794 1,603,760
Diluted 3,068,046 1,603,760
2
See accompanying notes to unaudited condensedconsolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
Net sales $ 19,047,329 16,404,400
Cost of sales 13,583,834 11,548,052
------------- --------
Gross profit 5,463,495 4,856,348
Selling, general and administrative expenses, net 5,255,431 4,903,768
------------- --------
Operating Income (loss) 208,064 (47,420)
Interest income 324 1,155
Other income 139,807 93,705
Interest expense (298,424) (283,128)
------------- --------
Income (loss) before income taxes 49,771 (235,688)
Income taxes (recovery) (61,964) 1,707
------------- --------
Net income (loss) $ 111,735 (237,395)
============= ========
Income (loss) per common share:
Basic: $ 0.07 (0.15)
Diluted 0.04 (0.15)
Weighted average shares outstanding:
Basic 1,603,794 1,603,760
Diluted 3,068,046 1,603,760
3
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
---- ----
Cash flows from operating activities:
Net income (loss) $ 111,735 (237,395)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts 89,425 49,467
Depreciation 94,495 77,277
Amortization of intangibles 20,833 22,034
Changes in assets and liabilities:
Accounts receivable (280,958) (458,248)
Inventory (622,850) 206,228
Prepaid expenses and other current assets (228,656) (120,002)
Accounts payable 1,044,846 1,081,552
Investment securities - trading - 122,506
Accrued liabilities 4,105 (64,474)
Income taxes payable (40,230) (4,037)
Deferred compensation - (122,506)
------------ --------------
Net cash provided by operating activities 192,745 552,402
------------ --------------
Cash flows from investing activities:
Payment for acquisition of Goldman Associates - (100,000)
Additions to property and equipment (100,523) (41,356)
------------ --------------
Net cash used in investing activities (100,523) (141,356)
------------ --------------
Cash flows from financing activities:
Payments on notes payable (16,286) (80,126)
Issuance of notes payable 24,471
Net repayments under credit facility 194,175 (209,387)
------------ --------------
Net cash provided by (used in) financing activities 202,360 (289,513)
------------ --------------
Increase in cash and cash equivalents 294,582 121,533
Cash and cash equivalents - beginning of period 296,764 576,514
------------ --------------
Cash and cash equivalents - end of period $ 591,346 698,047
============ ==============
4
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30, 2003
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
--------------------------------------------------------
The consolidated financial statements of Colonial Commercial Corp. and
subsidiaries (the "Company") included herein have been prepared by the
Company and are unaudited; however, such information reflects all
adjustments (consisting solely of normal recurring adjustments), which
are, in the opinion of management, necessary for a fair presentation of
the financial position, results of operations, and cash flows for the
interim periods to which the report relates. The results of operations
for the period ended March 31, 2003 are not necessarily indicative of
the operating results that may be achieved for the full year.
On January 28, 2002, Atlantic Hardware & Supply Corporation
("Atlantic"), a wholly-owned subsidiary of the Company, filed a
voluntary petition with the U. S. Bankruptcy Court for the Eastern
District of New York to reorganize under Chapter 11 of the U. S.
Bankruptcy Code. This immediately put the Company in default of its
loan and security agreement (the "agreement") related to its credit
facility with its secured lender (the "Bank"). Atlantic simultaneously
obtained a debtor-in-possession ("DIP") credit facility with its
pre-petition lender, the Bank. The Company is not part of the Chapter
11 filing. As of December 31, 2001, Atlantic was deconsolidated and the
Company's 100% investment in Atlantic's common stock was written off.
Certain information and footnote disclosures, normally included in
consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America, have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2002.
The Company has one continuing industry segment - wholesale
distribution of heating, ventilation and air conditioning.
Inventory is comprised of finished goods.
-5-
(2) SUBSEQUENT EVENT
----------------
(a) Private Placement
On July 16, 2003, the Company completed a private
placement, pursuant to Regulation D of the Securities Exchange
Act of 1933. The Company raised $240,600 through the issuance
of 802,000 shares of common stock at $0.30 per share. Bernard
Korn (Chairman and President of the Company) purchased 167,000
shares, James W. Stewart, (Executive Vice President and
Director of the Company) purchased 100,000 shares, William
Pagano (Director of the Company and President of the Company's
wholly owned subsidiary, Universal Supply Group, Inc.
("Universal")), purchased 335,000 shares, Jack Rose (Director
of the Company), purchased 50,000 shares and Rita Folger (a
private investor, who owns 6.86% of the Company) purchased
150,000 shares.
The proceeds were used for general working capital purposes.
On February 12, 2004, the Company completed a private
placement, pursuant to Regulation D of the Securities Exchange
Act of 1933. The Company raised $360,000 through the issuance
of 600,000 shares of common stock at $0.60 per share. Bernard
Korn (Chairman and President of the Company) purchased 165,000
shares, William Pagano (Director of the Company and President
of the Company's wholly owned subsidiary, Universal Supply
Group, Inc.), purchased 165,000 shares, and Rita Folger (a
private investor who owns 9.42% of the Company) purchased
100,000 shares.The remaining 170,000 shares were purchased by
a private investor who owns less than 5% of the Company.
The Company has used substantially all of the proceeds from
the private placement to purchase 592,730 shares of escheated
convertible preferred stock at $0.60 per share from the State
of Ohio. The Company has retired these convertible preferred
shares.
The stock from the private placements cannot be sold,
transferred or otherwise disposed of, unless subsequently
registered under the Securities Act of 1933 and applicable
state or Blue Sky laws, or pursuant to an exemption from such
registration, which is available at the time of desired sale,
and bear a legend to that effect.
(b) RAL Acquisition
On September 30, 2003, RAL Purchasing, Inc., a newly formed,
wholly owned subsidiary of the Company, purchased
substantially all of the assets and assumed certain
liabilities of RAL Supply Group, Inc. ("RAL") for a price of
$2,447,061. The purchase was financed as follows:
-6-
Borrowings on the Company's credit facility $ 2,147,061
5-Year unsecured notes issued by RAL
Purchasing, Inc. to third parties, at annual rate of 9% 300,000
---------
Total outlay $ 2,447,061
=========
In connection with this acquisition, the Company's limit on
its credit facility was increased by $1,500,000 to
$13,500,000. All borrowings under the credit facility are
collateralized by substantially all of the assets of the
Company. In addition, the 5-year notes are guaranteed by the
Company.
RAL is a distributor of heating and cooling equipment and
high-end plumbing fixtures with six locations, servicing
Orange, Rockland, Ulster and Sullivan counties in New York.
Four locations have showrooms. RAL's products are marketed
primarily to contractors, consumers, builders and the
commercial sector. As a result of the acquisition, the Company
is expecting to be one of the leading distributors of heating
and cooling equipment and high-end plumbing fixtures in the
market. The results of operations of RAL will be included in
the consolidated results of operations from September 30,
2003.
(3) GOODWILL AND INTANGIBLES
------------------------
Costs in excess of the fair value of tangible and identifiable
intangible assets acquired and liabilities assumed in a purchase
business combination are recorded as goodwill. SFAS No. 142, "Goodwill
and Other Intangible Assets," requires that companies no longer
amortize goodwill, but instead test for impairment at least annually
using a two-step approach. The Company adopted SFAS No. 142 in the
first quarter of fiscal 2002 and no longer amortizes goodwill. The
Company evaluates goodwill, at a minimum, on an annual basis and
whenever events and changes in circumstances suggest that the carrying
amount may not be recoverable. Impairment of goodwill is tested at the
reporting unit level by comparing the reporting unit's carrying amount,
including goodwill, to the fair value of the reporting unit. The fair
values of the reporting units are estimated using a combination of the
income or discounted cash flows, approach and the market approach,
which utilizes comparable companies' data. If the carrying amount of
the reporting unit exceeds its fair value, goodwill is considered
impaired and a second step is performed to measure the amount of
impairment loss, if any.
The Company has determined that Universal is a reporting unit.
-7-
The Company has certain identifiable intangible assets that are subject
to amortization. Intangible assets are included in "Other Intangibles"
in the condensed consolidated balance sheet. The components of
intangible assets are as follows:
Acquired Intangible Assets
JUNE 30, 2003
-------------
GROSS
CARRYING ACCUMULATED
AMOUNT AMORTIZATION
------ ------------
Amortized intangible assets
Covenants not to compete $ 231,667 (166,667)
======= =======
(4) SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
The following is supplemental information relating to the consolidated
statements of cash flows:
SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002
------------- -------------
Cash paid during the period for:
Interest $ 261,290 $ 246,439
Income taxes $ - $ 8,744
(5) COMPREHENSIVE INCOME (LOSS)
---------------------------
The Company has no items of other comprehensive income (loss);
therefore, there is no difference between the Company's comprehensive
income (loss) and net income (loss) for the periods presented.
(6) NET INCOME (LOSS) PER COMMON SHARE
----------------------------------
A reconciliation between the numerators and denominators of the basic
and diluted income (loss) per common share is as follows:
-8-
Six Months Ended Three Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) numerator $111,735 $ (237,395) $180,819 $(48,131)
======= ======= ======= ======
Weighted average common
shares (denominator for
basic income per share) 1,603,794 1,603,760 1,603,794 1,603,760
Effect of dilutive securities:
Convertible preferred stock 1,464,252 - 1,464,252 -
--------- ---------------- --------- -----------------
Weighted average common
and potential common
shares outstanding
(denominator for diluted
Income per share) 3,068,046 1,603,760 3,068,046 1,603,760
========= ========= ========= =========
Basic income(loss) per share $0.07 $ (0.15) $0.11 $ (0.03)
==== ======= ==== =====
Diluted income (loss) per share $0.04 $ (0.15) $0.06 $ (0.03)
==== ======= ==== =====
Employee stock options totaling 229,300 for the three and six months
ended June 30, 2003, and 281,400 and 281,000 for the three and six
months ended June 30, 2002, respectively, were not included in the
income per share calculation because their effect would have been
anti-dilutive.
(7) STOCK OPTIONS
-------------
The Company uses the intrinsic-value method of accounting for
stock-based awards granted to employees. No stock-based compensation
cost is included in net income, as all options granted during periods
presented had an exercise price equal to the market value of the stock
on the date of grant. In accordance with SFAS No. 148, "Accounting for
Stock Based Compensation - Transition and Disclosure," the following
table presents the effect on net loss and net loss per share had
compensation cost for the Company's stock plans been determined
consistent with SFAS No. 123. The fair value of each option grant is
estimated on the date of grant by use of the Black-Scholes option
pricing model.
-9-
For the Six For the Three
Months Ended Months Ended
June 30, June 30,
2003 2002 2003 2002
---- --------- ------- ---------
Net income (loss), as reported $ 111,735 (237,395) 180,819 (48,131)
Less stock-based compensation
expense determined under
fair value method for all
stock options, net of related
income tax benefit (26,000) (22,164)
---------- ---------- ----------- ----------
- -
Pro forma net income (loss) 85,735 (259,559) 180,819 (48,131)
Basic income (loss) per share, as reported .07 (.15) .11 (.03)
Basic income (loss) per share, pro forma .05 (.16) .11 (.03)
Diluted income (loss) per share, as reported .04 (.15) .06 (.03)
Diluted income (loss) per share, pro forma .03 (.16) .06 (.03)
In February 2003, the Company granted 104,000 options to six of the
Board of Directors. The options, which are immediately exercisable,
were issued at $.25 per share (which was not less than the fair market
value on the date of the grant) and expire in ten years. No expense was
recorded as a result.
(8) NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In November 2002, the FASB issued FASB interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45").
FIN 45 requires that upon issuance of guarantee, a guarantor must
recognize a liability for the fair value of an obligation assumed under
a guarantee. FIN 45 also requires additional disclosures by a guarantor
in its interim and annual financial statements about the obligations
associated with guarantees issued. The recognition provisions of FIN 45
will be effective for any guarantees that are issued or modified after
December 31, 2002. The adoption of FIN 45 did not have an impact on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB
No. 51". FIN 46 addresses the consolidation by business enterprises of
variable interest entities, as defined in the Interpretation. FIN 46 is
effective for all new variable interest entities created or acquired
after December 15, 2003. The Company does not believe that the adoption
of FIN 46 will have any impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." Statement No. 150 changes the accounting guidance for certain
financial instruments that, under previous guidance, could be
classified as equity or
-10-
"mezzanine" equity by now requiring those instruments to be classified
as liabilities (or assets in some circumstances) in the statement of
financial position. Further, Statement No. 150 requires disclosure
regarding the terms of those instruments and settlement alternatives.
Statement No. 150 is generally effective for all financial instruments
entered into or modified after May 31, 2003 and is otherwise effective
at the beginning of the first interim period beginning after June 15,
2003. The adoption of this pronouncement will not have any impact on
the Company's financial position and results of operations.
In January 2003, the Company adopted the FASB's Emerging Issue Task
Force (EITF) Issue No. 02-16 "Accounting by a Reseller for Cash
Consideration Received from a Vendor" ("EITF 02-16"). The consensus
reached by the EITF addressed the accounting for "Cash Consideration"
(which includes slotting fees, cooperative advertising payments, etc.).
The consensus of the EITF establishes an overall presumption that the
cash received from vendors is a reduction in the price of vendor's
products and should be recognized accordingly as a reduction in the
cost of sales at the time the related inventory is sold. Some
consideration could be characterized as a reduction of expense if the
cash received represents a reimbursement of specific, incremental,
identifiable costs incurred by the retailer to sell the vendor's
products.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
--------------------------
This report on Form 10-Q contains forward-looking statements relating to such
matters as anticipated financial performance and business prospects. When used
in this report, the words, "anticipates," "expects," "believes," "may,"
"intends," and similar expressions are intended to be among the statements that
identify forward-looking statements. From time to time, the Company may also
publish forward-looking statements. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. Forward-looking
statements involve risks and uncertainties, including, but not limited to, the
consummation of certain events referred to in this report, technological
changes, competitive factors, maintaining customer and vendor relationships,
inventory obsolescence and availability, and other risks detailed in the
Company's periodic filings with the Securities and Exchange Commission, which
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements.
Results of Operations - Three Months Ended June 30, 2003 and 2002
The Company reported net income of $180,819 for the three months ended
June 30, 2003, as compared to a net loss of $48,131 in the 2002 quarter.
-11-
Net sales increased $1,516,172. This increase primarily reflects an
increase in sales to other wholesale distributors, favorable winter weather
conditions and increased market penetration. Gross margins on sales during the
same period decreased by 0.8% to 28.0%, due to sales increases to other
wholesale distributors on selected products at lower gross margins, as well as
overall product mix. Selling, general and administrative expenses increased
$104,211 primarily due to new hires relating to the overall increase in sales,
offset by the fact that the second quarter of 2002 had $157,272 of non-recurring
professional and other fees relating to the Company's secured credit line and
its guarantee of the credit line obligations of Atlantic.
Interest expense remained unchanged due to the fact that, while prime
rates decreased and Universal's borrowing rate on its revolving line of credit
decreased, Universal's total borrowings have increased due primarily to the $2.5
million term loan assumed by Universal on November 21, 2002 (see Liquidity and
Capital Resources, below for further details).
During the second quarter of 2003, the Company recorded a state tax
provision of $20,778, as compared to the second quarter of 2002, when the
Company recorded a state tax provision of $1,707.
Results of Operations - Six Months Ended June 30, 2003 and 2002
The Company reported net income of $111,735 for the first half of 2003,
as compared to a net loss of $237,395 in the prior year.
Net sales increased $2,642,929, as a result of an increase in sales to
other wholesale distributors, favorable winter weather conditions and increased
market penetration. Gross margins decreased 0.9% to 28.7% due to sales increases
to other wholesale distributors on selected products at lower gross margins, as
well as overall product mix. Selling, general and administrative expense
increased $351,663, primarily due to new hires relating to the overall increase
in sales, offset by the fact that the second quarter of 2002 had $157,272 of
non-recurring professional and other fees relating to the Company's secured
credit line and its guarantee of the credit line obligations of Atlantic.
Interest expense increased $15,296 mainly due primarily to the $2.5
million term loan assumed by Universal on November 21, 2002 (see Liquidity and
Capital Resources below for further details), offset by the fact that prime
rates decreased and Universal's borrowing rate on its revolving line of credit
decreased.
The Company recorded a state tax provision of $29,407 and a federal tax
benefit of $91,371 for the six months ended June 30, 2003, as compared to the
first half of 2002, when the Company recorded a state tax provision of $1,707.
Liquidity and Capital Resources
As of June 30, 2003, the Company had $591,346 in cash and cash
equivalents compared with $296,764 at December 31, 2002.
-12-
Between December 31, 2002 and June 2003, there were no material changes
in obligations associated with operating agreements, obligations to financial
institutions and other long-term debt obligations.
Cash flows provided by operations were $192,745 during the six months
ended June 30, 2003. Accounts payable increased due primarily to increased
inventory purchases resulting from an overall increase in sales. The increase in
accounts payable was offset by the corresponding increase in inventory, as well
as an increase in accounts receivable. Accounts receivable increased due to an
increase in sales in the second quarter of 2003 and timing of customer payments.
Cash flows used in investing activities of $100,523 during the six
months ended June 30, 2003 were due to the purchase of property and equipment.
The cash flows provided by financing activities of $202,360 were for
net borrowings on the credit facility of $194,175, as well as net borrowings on
notes payable of $8,185.
On January 28, 2002, Atlantic, a wholly owned subsidiary of the
Company, filed a voluntary petition with the U. S. Bankruptcy Court for the
Eastern District of New York to reorganize under Chapter 11 of the U. S.
Bankruptcy Code. The Company is not part of the Chapter 11 filing. The business
of Atlantic is conducted by one employee whose sole function is to collect on
accounts receivables for the benefit of Atlantic's creditors, and the company
does not believe that Atlantic will emerge from the reorganization with any
value for the Company.
On November 21, 2002, the Company was released from its guarantees of
the indebtedness (approximately $5.8 million) by Atlantic to the Company's and
Atlantic's lending bank, in return for the agreement by the Company and
Universal to pay to the bank $2.5 million as a five-year term loan under the
Company's line of credit with the bank, or, if earlier, on demand by the bank.
At June 30, 2003, amounts outstanding under the credit facility were
$10,545,064, of which, (i) $205,000 represents a term loan payable in 10
remaining equal monthly installments of approximately $21,000 and (ii)
$2,380,000 represents a separate term loan payable in 53 remaining monthly
installments of agreed amounts under an amortization schedule. Although the term
loans are payable over specified periods, 10 and 53 months, respectively, the
Bank can demand payment at any time.
The Company believes that the credit facility is sufficient to finance
its current operating needs.
On September 30, 2003, the Company, through its newly formed, wholly
owned subsidiary, RAL Purchasing, Inc., purchased substantially all of the
assets and certain liabilities of RAL Supply Group, Inc. ("RAL"). The purchase
price was $2,447,061, funded by $2,147,061 of borrowings on the Company's credit
facility and
-13-
5-year, 9% notes issued by RAL Purchasing, Inc. to third parties in the amount
of $300,000. The 5-year notes are guaranteed by the Company. The Company's limit
on its credit facility was increased by $1,500,000 to $13,500,000, as a result
of the acquisition.
The Company expects to meet its liquidity needs going forward through a
combination of cash from operations, amounts available under its credit facility
and the issuance of stock through a private placement. On July 16, 2003, The
Company completed a private placement pursuant to Regulation D of the Securities
Act of 1933. The Company raised $240,600 through the issuance of
802,000 shares of Common Stock at $0.30 per share. The stock was sold to
officers and directors of the Company and one private investor. The proceeds of
the private placement were used for general working capital purposes.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In November 2002, the FASB issued FASB interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that
upon issuance of guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 will be effective for any guarantees that are
issued or modified after December 31, 2002. The adoption of FIN 45 did not have
an impact on the Company's consolidated financial statements.
In January 2003 the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"
FIN 46 addresses the consolidation by business enterprises of variable interest
entities, as defined in the interpretation. FIN 46 is effective for all new
variable interest entities created or acquired after December 15, 2003. The
Company does not believe that the adoption of FIN 46 will have any impact on the
Company's consolidated financial statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement No. 150 changes the accounting guidance for certain financial
instruments that, under previous guidance, could be classified as equity or
"mezzanine" equity by now requiring those instruments to be classified as
liabilities (or assets in some circumstances) in the statement of financial
position. Further, Statement No. 150 requires disclosure regarding the terms of
those instruments and settlement alternatives. Statement No. 150 is generally
effective for all financial instruments entered into or modified after May 31,
2003 and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this pronouncement will not have
any impact on the Company's financial position and results of operations.
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In January 2003, the Company adopted the FASB's Emerging Issue Task
Force (EITF) Issue No. 02-16 "Accounting by a Reseller for Cash Consideration
Received from a Vendor" ("EITF 02-16"). The consensus reached by the EITF
addressed the accounting for "Cash Consideration" (which includes slotting fees,
cooperative advertising payments, etc.). The consensus of the EITF establishes
an overall presumption that the cash received from vendors is a reduction in the
price of vendor's products and should be recognized accordingly as a reduction
in the cost of sales at the time the related inventory is sold. Some
consideration could be characterized as a reduction of expense if the cash
received represents a reimbursement of specific, incremental, identifiable costs
incurred by the retailer to sell the vendor's products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The Company's pre-tax earnings and cash flows are exposed to changes in
interest rates, as all borrowings under its credit facility bear interest based
on that prime rate plus 0.5%, except for the $2.5 million term loan, which bears
interest at a rate of prime plus 2.5%. A hypothetical 10% adverse change in such
rates would reduce the pre-tax earnings and cash flow by approximately $52,000
over a one-year period, assuming the borrowing level remains consistent with the
outstanding borrowings as of June 30, 2003. The fair value of the borrowings
under the credit facility is not affected by changes in market interest rates.
The Company's remaining interest-bearing obligations are at fixed rates
of interest and as such do not expose pre-tax earnings and cash flows to changes
in market interest rates. The change in fair value of the Company's fixed rate
obligations resulting from a hypothetical 10% adverse change in interest rates
would not be material.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
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The Company's senior management is responsible for establishing and
maintaining a system of disclosure controls and procedures (as defined in Rule
13a-14 and 15d-14 under the Securities Exchange Act of 1934 (the "Exchange
Act")) designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported as specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports that it files
or submits under the Act is accumulated and communicated to the issuer's
management, including its principal executive officer or officers and principal
financial officer or officers, or persons performing similar functions, as
appropriate to allow them to make informed decisions regarding required
disclosure.
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The Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures under the supervision of and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer within 90 days prior to the filing date of this report. Based
on that evaluation our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in alerting
them to material information required to be included in our periodic Securities
and Exchange Commission filings.
(b) CHANGES IN INTERNAL CONTROLS
----------------------------
Subsequent to that evaluation, there have been no significant changes
in our internal controls or other factors that could significantly affect these
controls after such evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 28, 2002, Atlantic, a wholly-owned subsidiary of the
Company, filed a voluntary petition with the U. S. Bankruptcy Court for the
Eastern District of New York to reorganize under Chapter 11 of the U. S.
Bankruptcy Code. The Company and its other operations are not part of the
Chapter 11 filing. The business of Atlantic is today conducted by one employee,
whose sole function is to collect on accounts receivables for the benefit of
Atlantic's creditors, and the Company does not believe that Atlantic will emerge
from the reorganization with any value for the Company.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
31.1 Certification of Chief Executive Officer Pursuant to
Rule 15d-14 of the Securities and Exchange Act of
1934, as amended, as Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial officer Pursuant to
Rule 15d-14 of the Securities and Exchange Act of
1934, as amended, as Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant
to18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002.
b. Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated: February 19, 2004 COLONIAL COMMERCIAL CORP.
/S/ BERNARD KORN
----------------
Bernard Korn,
Chairman of the Board and President
/S/ JAMES W. STEWART
----------------
James W. Stewart,
Executive Vice President and Treasurer
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