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 MARCH 31, 2002 COMMISSION FILE NO. 1-6663
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COLONIAL COMMERCIAL CORP.
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(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)
3601 HEMPSTEAD TURNPIKE, LEVITTOWN, NEW YORK 11756-1315
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(Address of Principal Executive Offices) (Zip Code)
Company's Telephone Number, Including Area Code: 516-796-8400
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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
--- ---
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 November 11, 2003.
Common Stock, par value $.05 per share - 2,405,804 shares
Convertible Preferred Stock, par value $.05 per share - 1,464,242 shares
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 (unaudited) and
December 31, 2001 1
Consolidated Statements of Operations
Three Months Ended March 31, 2002
and 2001 (unaudited) 2
Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2002
and 2001 (unaudited) 3
Notes to Consolidated Financial Statements
(unaudited) 4
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 16
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES AND CERTIFICATIONS 17
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001
Assets 2002 2001
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents $ 606,358 576,514
Accounts receivable, net of
allowance for doubtful accounts
of $254,000 in 2002 and $253,000
in 2001, respectively 4,013,645 4,466,667
Inventory 6,296,912 6,314,546
Prepaid expenses and other current assets 324,060 376,838
------------ ------------
Total current assets 11,240,975 11,734,565
Property and equipment, net 614,901 622,790
Goodwill 1,316,929 1,316,929
Other intangibles 117,083 128,700
Restricted investment securities 145,955 122,506
------------ ------------
$ 13,435,843 13,925,490
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 2,691,901 2,422,802
Accrued liabilities 754,233 1,047,188
Income taxes payable 17,342 26,086
Borrowings under credit facility 7,682,837 7,929,576
Investment in unconsolidated subsidiary
in bankruptcy, carried at cost 219,007 219,007
Guaranteed borrowings of unconsolidated
subsidiary in bankruptcy 5,800,695 5,800,695
Notes payable - current portion 129,285 143,405
------------ ------------
Total current liabilities 17,295,300 17,588,759
Notes payable, excluding current portion 60,122 90,495
Deferred compensation 145,955 122,506
------------ ------------
Total liabilities 17,501,377 17,801,760
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Stockholders' equity (deficit):
Convertible preferred stock, $.05 par value, liquidation
preference of $7,321,430 at March 31, 2002
and December 31, 2001, respectively, 2,468,860 shares
authorized, 1,464,286 shares issued and outstanding
at March 31, 2002 and December 31, 2001, respectively 73,214 73,214
Common stock, $.05 par value, 20,000,000 shares
authorized, 1,603,760 shares issued and outstanding
at March 31, 2002 and December 31, 2001, respectively 80,189 80,189
Additional paid-in capital 8,966,513 8,966,513
Accumulated deficit (13,185,450) (12,996,186)
------------ ------------
Total stockholders' deficit (4,065,534) (3,876,270)
Commitments and contingencies
$ 13,435,843 13,925,490
============ ============
See accompanying notes to unaudited consolidated financial statements.
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COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months ended March 31, 2002 and 2001
(Unaudited)
2002 2001
---- ----
Sales $ 7,230,926 6,604,176
Cost of sales 5,019,904 4,583,146
----------- -----------
Gross profit 2,211,022 2,021,030
Selling, general and administrative
expenses, net 2,303,435 2,240,993
----------- -----------
Operating loss (92,413) (219,963)
Interest income 603 4,683
Other income 38,448 39,867
Interest expense (135,902) (186,725)
----------- -----------
Loss from continuing operations
before income taxes (189,264) (362,138)
Income taxes -- (74,100)
----------- -----------
Loss from continuing operations $ (189,264) (288,038)
Net income from operations of discontinued
segments -- 314,525
----------- -----------
Net (loss) income $ (189,264) 26,487
=========== ===========
Income (loss) per common share:
Basic:
Loss from continuing operations $ (0.12) (0.18)
Income on discontinued operation -- 0.20
----------- -----------
Net (loss) income per common share $ (0.12) 0.02
=========== ===========
Diluted:
Loss from continuing operations $ (0.12) (0.18)
Income on discontinued operation -- 0.20
----------- -----------
Net (loss) income per common share $ (0.12) 0.02
=========== ===========
Weighted average shares outstanding:
Basic 1,603,760 1,601,600
Diluted 1,603,760 1,601,600
See accompanying notes to unaudited consolidated financial statements.
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COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months ended March 31, 2002 and 2001
(Unaudited)
2002 2001
---- ----
Cash flows from operating activities:
Net (loss) income $(189,264) 26,487
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Income from discontinued operation -- (314,525)
Deferred tax expense -- 12,900
Provision for doubtful accounts 21,833 23,291
Depreciation 38,920 37,275
Amortization of intangibles 11,617 35,387
Changes in assets and liabilities, net of the effects
of acquisitions:
Accounts receivable 431,189 749,934
Inventory 17,634 (167,955)
Prepaid expenses and other current assets 52,778 145,185
Accounts payable 269,099 (18,372)
Investment securities - trading (23,449) (887)
Accrued liabilities (292,955) (657,674)
Income taxes payable (8,744) (4,278)
Deferred compensation 23,449 887
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Net cash provided by (used in) operating activities 352,107 (132,345)
--------- ---------
Cash flows from investing activities:
Purchase of licensing agreement -- (4,800)
Net additions to property and equipment (31,031) 817
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Net cash used in investing activities (31,031) (3,983)
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Cash flow from financing activities:
Net repayments on notes payable (44,493) (39,162)
Net repayments under credit facility (246,739) (777,621)
--------- ---------
Net cash used in financing activities (291,232) (816,783)
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Net cash provided by discontinued operation -- 775,522
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Increase (decrease) in cash and cash equivalents 29,844 (177,589)
Cash and cash equivalents - beginning of period 576,514 803,012
--------- ---------
Cash and cash equivalents - end of period $ 606,358 625,423
========= =========
See accompanying notes to unaudited consolidated financial statements.
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COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
March 31, 2002
(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
adjust- ments (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, 2002 are not necessarily
indicative of the operating results that may be achieved for the full
year.
Certain information and footnote disclosures, normally included in con-
solidated 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 2001
Form 10-K.
Certain reclassifications have been made to the three months ended
March 31, 2001 information to conform to the current quarter
presentation.
The Company has one continuing industry segment - heating, ventilation
and air conditioning.
(2) Chapter 11 Reorganization
--------------------------
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. As of the date of this filing, the proceedings are
still on-going. Neither Colonial, nor Universal Supply Group, Inc.
("Universal"), is 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. The Company was
authorized by its Board to carry out the Chapter 11 filing in December
2001 and, since they no longer exercise significant influence
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over Atlantic's operations and financial activities as of December 31,
2001, Atlantic has been unconsolidated in the Company's financial
statements and its operations are being reported as "results from
operations of discontinued segments." The Company's statements of
operations and statements of cash flows for the three months ended
March 31, 2001 include certain reclassifications in order to conform to
this presentation.
On November 21, 2002, the Company and Universal were released from
their guarantees of the indebtedness (approximately $5,800,000) of
Atlantic by Atlantic's lending bank, in return for the agreement by the
Company and Universal to pay to the bank $2,500,000 as a five-year term
loan under the Company's line of credit with the bank, or, if earlier,
on demand by the bank.
The Company's investment in Atlantic's common stock is being recognized
at cost, $219,007 of guaranteed liabilities and $5,800,695 of
guaranteed borrowings under a credit facility as of March 31, 2002. The
Company has recognized liabilities of Atlantic only to the extent such
liabilities are guaranteed by the Company because the Company believes
that it is not responsible for any other liabilities of Atlantic as
Atlantic's creditors will be able to look only to Atlantic's assets for
recovery. The Company will continue to recognize the $219,007 of
guaranteed liabilities of Atlantic until they are extinguished by
Atlantic's bankruptcy proceedings or otherwise.
(3) Intangible Assets
-----------------
Statement 142, "Goodwill and Other Intangible Assets," requires that
goodwill and intangible assets with indefinite useful lives no longer
be amortized, but rather will be tested for impairment at least
annually. Statement 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values and reviewed for
impairment, in accordance with Statement No. 144, "Accounting for the
Impairment of Long-Lived Assets." Upon adoption of Statement 142, the
Company was required to perform an assessment of whether there is an
indication that goodwill was impaired as of the date of adoption. To
accomplish this, the Company had to identify its reporting units and
determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. The
Company adopted the provisions of Statement 142 effective January 1,
2002 and, accordingly, has ceased the amortization of the goodwill
acquired in the acquisition of Universal. Upon adoption, there was no
indication of impairment for goodwill acquired in prior business
combinations.
As required by the adoption of Statement No. 142, the Company also
reassessed the useful lives and residual values of all acquired
intangible assets to make any necessary amortization period
adjustments. Based upon that assessment, no
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adjustments were made to the amortization period of residual values of
other intangible assets. The cost of other intangible assets are
amortized on a straight-line basis over their respective lives.
As of March 31, 2002 and December 31, 2001, the Company had intangible
assets, subject to amortization of $231,667 and $236,467, respectively,
and related accumulated amortization of $114,583 and $107,767,
respectively, which pertained primarily to covenants not to compete.
Amortization expense for intangible assets subject to amortization
amounted to approximately $11,617 and $10,417 for the three months
ended March 31, 2002 and 2001, respectively. The estimated aggregate
amortization expense for each of the five succeeding years ending
December 31, 2006 amounts to approximately $42,900, $41,700, $26,700,
$11,700 and $5,800 in 2002, 2003, 2004, 2005 and 2006, respectively.
As of March 31, 2002 and December 31, 2001, the Company had unamortized
goodwill in the amount of $1,316,929.
The following table shows the results of operations as if Statement 142
was applied to prior period: For the three months ended March 31,
2002 2001
------- --------
Net income (loss), as reported $ (189,264) 26,487
Deduct: negative goodwill amortization, net -- (8,763)
----------- ---------
Adjusted net income (loss) (189,264) 17,724
=========== =========
Income (loss) per share:
Basic net income (loss), as reported $ (0.12) 0.02
Negative goodwill amortization, net -- (0.01)
----------- ---------
Adjusted net income (loss) $ (0.12) (0.01)
=========== =========
Diluted net income (loss), as reported $ (0.12) 0.02
Negative goodwill amortization, net -- (0.01)
----------- ---------
Adjusted net income (loss) $ (0.12) 0.01
=========== =========
(4) Supplemental Cash Flow Information
----------------------------------
The following is supplemental information relating to the consolidated
statements of cash flows:
Three Months Ended
March 31,2002 March 31, 2001
Cash paid during the period for:
Interest $ 118,059 $ 186,726
Income taxes $ 8,744 $ 7,700
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During the three months ended March 31, 2001, the Company retired 15
shares, of convertible preferred stock, which were converted to a
similar number of common shares. No shares were retired during 2002.
(5) Subsequent Events
-----------------
(a) Nasdaq
The Company's shares were delisted from the Nasdaq SmallCap Market in
June 2002 because (i) the Company failed to timely file its Form 10-Q
for the fiscal quarter ended March 31, 2002 and its Form 10-K for 2001;
(ii) the market value of its publicly held shares of common stock was
less than the required $1 million, and (iii) the closing bid price of
its common stock was less than $1 per share.
(b) Goldman Acquisition
In July 2002, Universal acquired certain accounts receivable, inventory
and other accessories from Goldman Associates of New York, Inc.
("Goldman"), relating to Goldman's HVAC business in New Jersey and
certain areas of New York, for $670,981, of which $100,000 was paid as
an up front deposit in June 2002. $570,981 of the purchase price was
allocated to the above listed assets at their estimated fair values.
The remaining $100,000 was recorded as goodwill and will be tested
annually for impairment under the provisions of Statement 142. Pro
forma results of operations are not provided, as the information is not
material to the consolidated financial statements.
(c) Release Of Guarantees
On November 21, 2002, the Company and Universal were released from
their guarantees of the indebtedness (approximately $5,800,000) by
Atlantic to Colonial's and Atlantic's lending bank, in return for the
agreement by the Company and Universal to pay to the bank $2,500,000 as
a five-year term loan under the Company's line of credit with the bank,
or, if earlier, on demand by the bank. The $3,300,000 difference
between the total amount guaranteed ($5,800,000) and the amount the
Company and Universal agreed to pay ($2,500,000) is reflected in the
Company's 2002 statement of operations as income from the operations of
discontinued segments.
(d) 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. The stock was sold to officers and directors of the
Company and one private investor. The proceeds of the private placement
will be used for general
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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 securities or Blue Sky
laws, or pursuant to an exemption from such registration, which is
available at the time of desired sale, and will bear a legend to that
effect.
(e) RAL Acquisition
On September 30, 2003, RAL Purchasing, Inc., a newly formed, wholly
owned subsidiary of Colonial, purchased substantially all of the assets
and certain liabilities of RAL Supply Group, Inc. ("RAL") for a price
of $3,838,521. $2,447,061 of the purchase price was paid in cash to the
seller at the time of purchase. The remaining $1,391,460 was in the
form of liabilities assumed by RAL Purchasing, Inc. The cash paid at
the time of purchase was funded as follows:
Borrowings on Colonial's credit facility $ 2,147,061
5-Year unsecured notes issued by RAL
Purchasing, Inc. to a third party,
at annual rate of 9% $ 300,000
------------
Total outlay $ 2,447,061
============
In connection with this acquisition, Colonial's limit on its credit
facility was increased by $2,000,000 to $14,000,000. All borrowings
under the credit facility are secured by substantially all of the
assets of RAL and Universal. In addition, the 5-year notes are
guaranteed by Universal.
As a result of this acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 3,838,521
Cash paid $ 2,447,061
------------
Fair value of liabilities assumed $ 1,391,460
============
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. Initial purchase price
allocations are not yet available as the acquisition was recently
completed. The results of operations of RAL will be included in the
consolidated results from the date of acquisition.
(6) 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.
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(7) 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:
Three Months Ended March 31,
2002 2001
---- ----
Net (loss) income numerator $ (189,264) 26,487
======= ======
Weighted average common
shares (denominator for
basic income per share) 1,603,760 1,601,600
Effect of dilutive securities:
Convertible preferred stock -- --
Employee stock options -- --
----------- ---------
Weighted average common
and potential common
shares outstanding
(denominator for diluted
income per share) 1,603,760 1,601,600
========= =========
Basic (loss) income per share $ (0.12) $ 0.02
===== ====
Diluted (loss) income per share $ (0.12) $ 0.02
===== ====
Employee stock options totaling 280,600 and 158,800 for the
three months ended March 31, 2002 and 2001, respectively, were not
included in the income per share calculation because their effect would
have been anti-dilutive. Convertible preferred stock totaling 1,464,286
and 1,466,446 for the three months ended March 31, 2002 and 2001,
respectively, were not included in the net loss per share because their
effect would have been anti-dilutive.
(8) New Accounting Pronouncements
------------------------------
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations". Statement 143 addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except
for certain obligations of lessees. The Company is required to adopt
Statement 143, on January 1, 2003. Adoption of Statement 143 did not
have a material impact on the Company's consolidated operations or
financial position.
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In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". Statement 146 will spread
out the reporting of expenses related to restructurings initiated after
2002, because commitment to a plan to exit an activity or dispose of
long-lived assets will no longer be enough to record a liability for
the anticipated costs. Instead, exit and disposal costs are to be
recorded when they are "incurred" and can be measured at fair value,
and they will subsequently adjust the recorded liability for changes in
estimated cash flows. The Company is required to adopt the provisions
of Statement 146 as of January 1, 2003. The Company adopted Statement
146 on January 1, 2003. Adoption of Statement 146 did not have an
impact on the Company's consolidated results of operations or its
financial position.
In December 2002, the FASB issued Statement No. 148, Accounting for
Stock- Based Compensation-Transition and Disclosure. Statement No. 148
provides alternative methods of transition for a voluntary change to
the fair value method of accounting for stock-based employee
compensation as originally provided by the FASB issued Statement No.
123, Accounting for Stock-Based Compensation. Additionally, Statement
No. 148 amends the disclosure requirements of Statement No. 123 in both
annual and interim financial statements. The disclosure requirements
have been adopted as of the period ended December 31, 2002. The Company
intends to continue to apply the intrinsic value method of accounting
for stock-based employee compensation. The adoption of this
pronouncement will not have any impact on the Company's consolidated
financial position or results of operations.
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 January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim period beginning after June 15, 2003. The
Company does not believe that the adoption of FIN 46 will have any
impact on the Company's consolidated financial statements.
-10-
In April 2003, the FASB issued Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities."
Statement No. 149 amends and clarifies the accounting guidance on
derivative instruments (including certain derivative instruments
embedded in other contracts) and hedging activities that fall within
the scope of Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Statement No. 149 is effective for all
contracts entered into or modified after June 30, 2003, with certain
exceptions, and for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. The adoption of this
pronouncement will not have any impact on the Company's financial
position and results of operations.
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, 2002 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 1, 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. The Company is in the process of assessing the impact, if
any, of adopting EITF 02-16.
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
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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, the ability to
continue as a going concern, the availability of financing, the impact of the
bankruptcy of Atlantic on a go-forward basis, 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 March 31, 2002 and 2001
The Company reported a net loss of $189,264 for the first quarter of
2002, as compared to net income of $26,487 in the 2001 quarter, which includes
net income from discontinued operations of $314,525. The operations of Atlantic
Hardware & Supply Corporation ("Atlantic") were discontinued at December 31,
2001. The Company had a loss from continuing operations before taxes of $189,264
in the first quarter of 2002, compared with a loss of $362,138 in 2001.
For the first quarter of 2001, the Company reported income from the
discontinued operations of Atlantic of $314,525. This income was primarily due
to an increase in sales at Atlantic of $2,761,692 (63.7%) due to the timing of
shipments.
Net sales of continuing operations increased $626,750 due primarily to
the opening of a new branch in Pennsylvania and the expansion of the North
Brunswick location, as well as an overall increase in market penetration. Gross
margins on those sales remained steady at 30.6%. Selling, general and
administrative expenses was basically the same in both periods.
Interest expense on continuing operations decreased $50,823 in the
2002 quarter due to improved collections, decreased prime rates and consignment
arrangements with certain suppliers.
A tax benefit for the first quarter of 2002 was not recorded, as the
Company did not expect to be able to realize such a benefit by the end of 2002.
During the first quarter of 2001, the Company recorded a federal tax benefit of
$74,100 for their continuing operations.
Liquidity and Capital Resources
As of March 31, 2002, the Company had $606,358 in cash and cash
equivalents
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compared with $576,514 at December 31, 2001. Between December 31, 2001 and March
31, 2002, 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 $352,107 during the three months
ended March 31, 2002. Accounts receivable declined due to the fact that
Universal's sales are typically lower in the first quarter than in the prior
year's fourth quarter. The 2002 decline in accounts receivable was less than the
2001 decline, due to the fact that 2002 sales were higher. Accounts payable
increased due to extended payment terms with Universal's vendors. Accrued
liabilities decreased due primarily to less accrued payroll.
Cash flows used in investing activities of $31,031 during the three
months ended March 31, 2002 were due to the purchase of property and equipment.
The cash flows used in financing activities of $291,232 were for net
repayments made on the credit facility of $246,739, as well as net repayments on
notes payable of $44,493. This compares to the prior year when $816,783 of cash
flows were used for financing activities, of which $777,621 was used for net
repayments on the credit facility and $39,162 was used for net repayments on
notes payable.
The net cash provided by discontinued operations during the three
months ended March 31, 2001 of $775,522 is made up of net cash provided by the
operations and liquidation of Atlantic of $1,378,932, offset by the cash used
for the disposal of Well-Bilt of $603,410.
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. As of the date of this filing, the proceedings are still
on-going. Colonial 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.
On November 21, 2002, the Company and Universal were released from
their guarantees of the indebtedness (approximately $5,800,000 by Atlantic to
Colonial's and Atlantic's lending bank, in return for the agreement by the
Company and Universal to pay to the bank $2,500,000 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 March 31, 2002, amounts outstanding under the credit facility were
$7,682,837, of which $520,000 represents amounts under a term loan, payable in
25 equal monthly installments of approximately $21,000. Although the term loan
is payable over 25 months, the Bank can demand payment at any time. As monthly
repayments are made on the term loan, the available line of credit portion of
the facility increases by the amount of the principal payment.
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The Company believes that the credit facility is sufficient to finance
its current operating needs.
On September 30, 2003, Colonial, 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
$3,838,521 was in the form of $2,447,061 of cash paid to the seller at the time
of purchase with the remaining $1,391,460 in the form of liabilities assumed by
RAL Purchasing, Inc. The $2,447,061 of cash paid at the time of purchase 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 Universal. Colonial's limit on its
credit facility was increased by $2,000,000 to $14,000,000, 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,
Colonial completed a private placement pursuant to Regulation D of the
Securities Exchange Act of 1933. Colonial 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 will be used for general working capital purposes.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 143, "Accounting for Asset Retirement Obligations". Statement 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. The Company is required to adopt Statement 143, on
January 1, 2003. Adoption of Statement 143 did not have a material impact on the
Company's consolidated operations or financial position.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". Statement 146 will spread out the
reporting of expenses related to restructurings initiated after 2002, because
commitment to a plan to exit an activity or dispose of long-lived assets will no
longer be enough to record a liability for the anticipated costs. Instead, exit
and disposal costs are to be recorded when they are "incurred" and can be
measured at fair value, and they will subsequently adjust the recorded liability
for changes in estimated cash flows. The Company adopted Statement 146 on
January 1, 2003. Adoption of Statement 146 did not have an impact on
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the Company's consolidated results of operations or its financial position.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock- Based Compensation-Transition and Disclosure". Statement No. 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by the FASB issued Statement No. 123, Accounting for Stock-Based
Compensation. Additionally, Statement No. 148 amends the disclosure requirements
of Statement No. 123 in both annual and interim financial statements. The
disclosure requirements have been adopted as of the period ended December 31,
2002. The Company intends to continue to apply the intrinsic value method of
accounting for stock-based employee compensation. The adoption of this
pronouncement will not have any impact on the Company's consolidated financial
position or results of operations.
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 January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim period beginning
after June 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 April 2003, the FASB issued Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." Statement No.
149 amends and clarifies the accounting guidance on derivative instruments
(including certain derivative instruments embedded in other contracts) and
hedging activities that fall within the scope of Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities." Statement No. 149 is
effective for all contracts entered into or modified after June 30, 2003, with
certain exceptions, and for hedging relationships designated after June 30,
2003. The guidance is to be applied prospectively. The adoption of this
pronouncement will not have any impact on the Company's financial position and
results of operations.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
Statement No.
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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, 2002 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 1, 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. The Company is in the
process of assessing the impact, if any, of adopting EITF 02-16.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's pre-tax earnings and cash flow are exposed to changes in
interest rates as borrowings under its credit facility bear interest at the
prime rate, plus 2%. A hypothetical 10% adverse change in such rates would
reduce 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 March 31, 2002. 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
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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 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. As of the date of this filing, the proceedings are still
on-going. Colonial 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
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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 to 18
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
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: November 14, 2003 COLONIAL COMMERCIAL CORP.
/S/ BERNARD KORN
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Bernard Korn,
Chairman of the Board and President
/S/ JAMES W. STEWART
--------------------
James W. Stewart,
Executive Vice President and Treasurer
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