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 SEPTEMBER 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
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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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.
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2003 (unaudited) and
December 31, 2002 1
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2003
and 2002 (unaudited) 2
Condensed Consolidated Statements of Operations
Nine months Ended September 30, 2003
and 2002 (unaudited) 3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 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 12
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4 - Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 6 - Exhibits and Reports on Form 8-K 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
Assets 2003 2002
------------ ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 487,897 296,764
Accounts receivable, net of allowance for doubtful accounts
of $355,000 in 2003 and $265,000 in 2002, respectively 6,022,050 5,186,893
Inventory 9,876,706 5,730,224
Prepaid expenses and other current assets 774,426 338,251
------------ ------------
Total current assets 17,161,079 11,552,132
Property and equipment, net 1,515,873 631,948
Goodwill 1,628,133 1,416,929
Other intangibles 64,584 85,833
------------ ------------
$ 20,369,669 13,686,842
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 5,999,835 2,446,886
Accrued liabilities 1,566,884 1,435,058
Income taxes payable 72,208 40,230
Borrowings under credit facility 12,291,883 10,350,889
Notes payable - current portion 30,889 30,889
------------ ------------
Total current liabilities 19,961,699 14,303,952
Notes payable, excluding current portion 411,861 64,775
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Total liabilities 20,373,560 14,368,727
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Commitments and contingencies
Stockholders' (deficit):
Redeemable convertible preferred stock, $.05 par value,
liquidation preference of $7,321,260 at September 30,
2003 and December 31, 2002, 2,468,860 shares
authorized, 1,464,252 shares issued and outstanding
at September 30, 2003 and December 31, 2002 73,213 73,213
Common stock, $.05 par value, 20,000,000 shares
authorized, 2,405,794 and 1,603,794 shares issued
and outstanding at September 30, 2003 and
December 31, 2002 120,290 80,190
Additional paid-in capital 9,167,013 8,966,513
Accumulated deficit (9,364,407) (9,801,801)
------------ ------------
Total stockholders' deficit (3,891) (681,885)
------------ ------------
$ 20,369,669 13,686,842
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
1
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
------------ ------------
Net sales $ 11,321,632 10,591,830
Cost of sales 8,097,564 7,690,627
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Gross profit 3,224,068 2,901,203
Selling, general and administrative expenses, net 2,841,206 2,730,264
------------ ------------
Operating income 382,862 170,939
Interest income 370 348
Other income 134,410 140,777
Interest expense (149,182) (153,868)
------------ ------------
Income before income tax expense 368,460 158,196
Income tax expense 42,801 15,802
------------ ------------
Net income $ 325,659 142,394
============ ============
Income per common share:
Basic $ 0.14 0.09
Diluted 0.08 0.05
Weighted average shares outstanding:
Basic 2,292,468 1,603,794
Diluted 3,881,522 3,068,046
See accompanying notes to unaudited condensed consolidated financial statements.
2
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
------------ ------------
Net sales $ 30,368,961 26,996,230
Cost of sales 21,681,398 19,238,679
------------ ------------
Gross profit 8,687,563 7,757,551
Selling, general and administrative expenses, net 8,096,637 7,634,032
------------ ------------
Operating income 590,926 123,519
Interest income 694 1,503
Other income 274,217 234,482
Interest expense (447,606) (436,996)
------------ ------------
Income (loss) before income tax expense 418,231 (77,492)
Income tax expense (recovery) (19,163) 17,509
------------ ------------
Net income (loss) $ 437,394 (95,001)
============ ============
Income (loss) per common share:
Basic: $ 0.24 (0.06)
Diluted 0.13 (0.06)
Weighted average shares outstanding:
Basic 1,833,352 1,603,771
Diluted 3,339,205 1,603,771
See accompanying notes to unaudited condensed consolidated financial statements.
3
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 437,394 (95,001)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts 157,547 81,166
Depreciation 147,954 116,500
Amortization of intangibles 31,249 32,450
Changes in assets and liabilities, net of the effects
of acquisitions:
Accounts receivable (409,418) (284,424)
Inventory (1,863,962) 286,048
Prepaid expenses and other current assets (305,126) (18,251)
Accounts payable 2,237,001 841,601
Investment securities - trading -- 122,506
Accrued liabilities (64,892) (131,808)
Income taxes payable 31,978 (5,515)
Deferred compensation -- (122,506)
----------- -----------
Net cash provided by operating activities 399,725 822,766
----------- -----------
Cash flows from investing activities:
Cash acquired in the acquisition of RAL Supply Group, Inc. 3,575 --
Payment for acquisition of Goldman Associates -- (670,981)
Additions to property and equipment (293,788) (67,754)
----------- -----------
Net cash used in investing activities (290,213) (738,735)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (26,554) (238,668)
Issuance of notes payable 73,642 75,396
Net repayments under credit facility (206,067) 109,008
Proceeds from issuance of common stock 240,600 --
----------- -----------
Net cash provided by (used in) financing
activities 81,621 (54,264)
----------- -----------
Increase in cash and cash equivalents 191,133 29,767
Cash and cash equivalents - beginning of period 296,764 576,514
----------- -----------
Cash and cash equivalents - end of period $ 487,897 606,281
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
4
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
September 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 September 30, 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.
(2) SUBSEQUENT EVENT
(a) Private Placement
On February 12, 2004, the Company completed a private placement,
pursuant to Regulation D of the Securities Act of 1933. The
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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. ("Universal")), 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 placement 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.
(3) 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.), 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 of the private
placement were used for general working capital purposes. The stock
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.
(4) 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:
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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.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
At September 30, 2003
Current assets $ 3,000,430
Property, plant and equipment 738,092
Goodwill 211,204
Covenant not to compete 10,000
-----------
Total assets acquired 3,959,726
Current liabilities
Total liabilities assumed 1,512,665
----------
Net assets acquired $2,447,061
==========
Presented below are the pro forma financial results prepared under the
assumption that the acquisition of RAL had been completed at the
beginning of fiscal year 2002.
Nine Months Ended Three Months Ended
(in 000's except September 30, September 30, September 30, September 30,
for EPS for data) 2003 2002 2003 2002
---- ---- ---- ----
Net Sales $37,355 35,645 13,809 13,385
Operating Income 963 636 440 389
Net Income 746 297 407 320
Earnings per share
Basic $ .41 .19 .18 .20
Diluted $ .22 .10 .10 .10
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
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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.
(5) 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 and RAL are reporting units.
Goodwill activity for these reporting units is as follows:
Balance at December 31, 2002 $ 1,416,929
Additions to goodwill
RAL Purchasing, Inc.
211,204
-----------
Balance at September 30, 2003 $ 1,628,133
===========
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:
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Acquired Intangible Assets
September 30, 2003
--------------------------
Gross
Carrying Accumulated
Amount Amortization
----------- -----------
Amortized intangible assets
Covenants not to compete $ 241,667 (177,083)
========= ========
(6) SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the consolidated
statements of cash flows:
Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Cash paid during the period for:
Interest $ 391,942 $ 382,829
Income taxes $ - $ 23,024
During the nine months ended September 30, 2003, the Company financed
$2,447,061 of debt incurred in connection with the acquisition of
RAL (note 3).
During the nine months ended September 30, 2002, the Company converted
34 shares of convertible preferred stock, which were converted to a
similar number of common shares.
(7) 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.
(8) 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:
-9-
Nine Months Ended Three Months Ended
September 30, September 30,
2003 2002 2003 2002
Net income (loss) numerator $ 437,394 (95,001) 325,659 142,394
========== ========= ========== ==========
Weighted average common
shares (denominator for
basic income per share) 1,833,352 1,603,771 2,292,468 1,603,794
Effect of dilutive securities:
Convertible preferred stock 1,464,252 -- 1,464,252 1,464,252
Employee stock options 41,601 -- 124,802 --
---------- --------- ---------- ----------
Weighted average common
and potential common
shares outstanding
(denominator for diluted
Income per share) 3,339,205 1,603,771 3,881,522 3,068,046
========== ========= ========== ==========
Basic income (loss) per share 0.24 (0.06) 0.14 0.09
========== ========= ========== ==========
Diluted income (loss) per share 0.13 (0.06) 0.08 0.05
========== ========= ========== ==========
(9) 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.
-10-
For the Nine For the Three
Months Ended Months Ended
September 30, September 30,
2003 2002 2003 2002
----------- ---------- ---------- ----------
Net income (loss), as reported $ 437,394 (95,001) 325,659 142,394
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 411,394 (117,165) 325,659 142,394
Basic income (loss) per share, as reported .24 (.06) .14 .09
Basic income (loss) per share, pro forma .22 (.07) .14 .09
Diluted income (loss) per share, as reported .13 (.06) .08 .05
Diluted income (loss) per share, pro forma .12 (.07) .08 .05
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.
(10) 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.
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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.
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 September 30, 2003 and 2002
-12-
The Company reported net income of $325,659 for the three months ended
September 30, 2003, as compared to net income of $142,394 in the 2002 quarter.
Net sales increased $729,802. This increase primarily reflects an
increase in sales to other wholesale distributors and increased market
penetration. Gross margins on sales during the same period increased by 1.1% to
28.5%, due to overall product mix. Selling, general and administrative expenses
increased $110,942 primarily due to increased personnel, offset by the fact that
the third quarter of 2002 had $178,873 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 decreased $4,686 due primarily to the fact that prime
rates decreased and Universal's borrowing rate on its revolving line of credit
decreased, partially offset by the interest incurred on the $2.5 million term
loan assumed by Universal on November 21, 2002 (see Liquidity and Capital
Resources below for further details).
During the third quarter of 2003, the Company recorded a state tax
provision of $42,801, as compared to the third quarter of 2002, when the Company
recorded a state tax provision of $15,802.
Results of Operations - Nine Months Ended September 30, 2003 and 2002
The Company reported net income of $437,394 for the third quarter of
2003, as compared to a net loss of $95,001 in the prior year.
Net sales increased $3,372,731, as a result of an increase in sales to
other wholesale distributors, favorable winter weather conditions and increased
market penetration. Gross margins remained relatively even at 28.6%. Selling,
general and administrative expense increased $462,605 primarily due to increased
personnel, offset by the fact that the nine months ended September 30, 2002 had
$344,385 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 $10,610 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 $72,208 and a federal tax
benefit of $91,371 for the nine months ended September 30, 2003, as compared to
the nine months ended September 30, 2002, when the Company recorded a state tax
provision of $17,509.
Liquidity and Capital Resources
-13-
As of September 30, 2003, the Company had $487,897 in cash and cash
equivalents compared with $296,764 at December 31, 2002.
Between December 31, 2002 and September 30, 2003, the only material
changes in obligations associated with operating agreements, obligations to
financial institutions and other long-term debt obligations was that the
borrowings on the credit line increased by $1,940,994, primarily due to the
acquisition of RAL (see further details below).
Cash flows provided by operations were $399,725 during the nine
months ended September 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 third quarter of 2003 and timing of
customer payments.
Cash flows used in investing activities of $290,213 during the nine
months ended September 30, 2003 were due to purchases of property and equipment
totaling $293,788 less $3,575 cash acquired. 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 of $2,447,061 paid at closing was funded
by $2,147,061 of borrowings on the Company's credit facility, and 5-year, 9%
notes issued by RAL Purchasing, Inc. to a third party 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 cash flows provided by financing activities of $81,621 were from
net repayments on the credit facility of $206,067, net repayments on notes
payable of $47,088 and the proceeds of 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.
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 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
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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 September 30, 2003, amounts outstanding under the credit facility
were $12,291,883, of which, (i) $142,000 represents a term loan payable in 7
remaining equal monthly installments of approximately $21,000 and (ii)
$2,280,000 represents a separate term loan payable in 50 remaining monthly
installments of agreed amounts under an amortization schedule. Although the term
loans are payable over specified periods, 7 and 50 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.
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.
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
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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
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 the 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 $60,000
over a one-year period, assuming the borrowing level remains consistent with the
outstanding borrowings as of September 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
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.
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
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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
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Bernard Korn,
Chairman of the Board and President
/S/ JAMES W. STEWART
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James W. Stewart,
Executive Vice President and Treasurer
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