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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, 2002 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
Incorporation or Organization) Identification Number)
3601 HEMPSTEAD TURNPIKE, LEVITTOWN, NEW YORK 11756-1315
- -------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Company's Telephone Number, Including Area Code: 516-796-8400
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
June 30, 2002 (unaudited) and
December 31, 2001 1
Consolidated Statements of Operations
Three Months Ended June 30, 2002
and 2001 (unaudited) 2
Consolidated Statements of Operations
Six Months ended June 30, 2002
and 2001 (unaudited) 3
Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2002
and 2001 (unaudited) 4
Notes to Consolidated Financial Statements
(unaudited) 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4 - Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 19
Item 6 - Exhibits and Reports on Form 8-K 20
SIGNATURES AND CERTIFICATIONS 20
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
Assets 2002 2001
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents $ 698,047 576,514
Accounts receivable, net of allowance for doubtful accounts
of $270,000 in 2002 and $253,000 in 2001, respectively 4,875,448 4,466,667
Inventory 6,108,318 6,314,546
Prepaid expenses and other current assets 493,840 376,838
------------ ------------
Total current assets 12,175,653 11,734,565
Property and equipment, net 586,869 622,790
Goodwill 1,316,929 1,316,929
Other intangibles 106,666 128,700
Restricted investment securities -- 122,506
Other assets 100,000 --
------------ ------------
$ 14,286,117 13,925,490
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 3,504,354 2,422,802
Accrued liabilities 982,714 1,047,188
Income taxes payable 19,049 26,086
Borrowings under credit facility 7,720,189 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 107,617 143,405
------------ ------------
Total current liabilities 18,353,625 17,588,759
Notes payable, excluding current portion 46,157 90,495
Deferred compensation -- 122,506
------------ ------------
Total liabilities 18,399,782 17,801,760
------------ ------------
Stockholders' equity (deficit):
Convertible preferred stock, $.05 par value, liquidation preference of
$7,321,430 at June 30, 2002 and December 31, 2001, respectively, 2,468,860
shares authorized, 1,464,286 shares issued and outstanding
at June 30, 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 June 30, 2002 and December 31, 2001, respectively 80,189 80,189
Additional paid-in capital 8,966,513 8,966,513
Accumulated deficit (13,233,581) (12,996,186)
------------ ------------
Total stockholders' deficit (4,113,665) (3,876,270)
Commitments and contingencies
$ 14,286,117 13,925,490
============ ============
See accompanying notes to unaudited consolidated financial statements.
Page 1
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months ended June 30, 2002 and 2001
(Unaudited)
2002 2001
---- ----
Net sales $ 9,173,474 7,676,590
Cost of sales 6,528,148 5,359,452
----------- -----------
Gross profit 2,645,326 2,317,138
Selling, general and administrative expenses, net 2,600,333 2,204,661
----------- -----------
Operating income 44,993 112,477
Interest income 552 3,006
Other income 55,257 46,249
Interest expense (147,226) (170,424)
----------- -----------
Loss from continuing operations
before income taxes (46,424) (8,692)
Income taxes 1,707 20,100
----------- -----------
Loss from continuing operations $ (48,131) (28,792)
Net income from operations of discontinued segments -- 44,366
----------- -----------
Net (loss) income $ (48,131) 15,574
=========== ===========
Income (loss) per common share:
Basic:
Loss from continuing operations $ (0.03) (0.02)
Income on discontinued operation -- 0.03
----------- -----------
Net (loss) income per common share $ (0.03) 0.01
=========== ===========
Diluted:
Loss from continuing operations $ (0.03) (0.02)
Income on discontinued operation -- 0.03
----------- -----------
Net (loss) income per common share $ (0.03) 0.01
=========== ===========
Weighted average shares outstanding:
Basic 1,603,760 1,603,659
Diluted 1,603,760 1,603,659
See accompanying notes to unaudited consolidated financial statements.
Page 2
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Six Months ended June 30, 2002 and 2001
(Unaudited)
2002 2001
---- ----
Net sales $ 16,404,400 14,280,766
Cost of sales 11,548,052 9,942,598
------------ ------------
Gross profit 4,856,348 4,338,168
Selling, general and administrative expenses, net 4,903,768 4,445,654
------------ ------------
Operating loss (47,420) (107,486)
Interest income 1,155 7,689
Other income 93,705 86,116
Interest expense (283,128) (357,149)
------------ ------------
Loss from continuing operations
before income taxes (235,688) (370,830)
Income taxes (recovery) 1,707 (54,000)
------------ ------------
Loss from continuing operations $ (237,395) (316,830)
Net income from operations of discontinued segments -- 358,891
------------ ------------
Net (loss) income $ (237,395) 42,061
============ ============
Income (loss) per common share:
Basic:
Loss from continuing operations $ (0.15) (0.20)
Income on discontinued operation -- 0.23
------------ ------------
Net (loss) income per common share $ (0.15) 0.03
============ ============
Diluted:
Loss from continuing operations $ (0.15) (0.20)
Income on discontinued operation -- 0.23
------------ ------------
Net (loss) income per common share $ (0.15) 0.03
============ ============
Weighted average shares outstanding:
Basic 1,603,760 1,602,629
Diluted 1,603,760 1,602,629
See accompanying notes to unaudited consolidated financial statements.
Page 3
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001
(Unaudited)
2002 2001
---- ----
Cash flows from operating activities:
Net income (loss) $ (237,395) 42,061
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Income from discontinued operation -- (358,891)
Provision for doubtful accounts 49,467 50,303
Depreciation 77,277 74,753
Amortization of intangibles 22,034 66,475
Changes in assets and liabilities, net of the effects
of acquisitions:
Accounts receivable (458,248) 563,244
Inventory 206,228 34,359
Prepaid expenses and other current assets (117,002) 125,847
Accounts payable 1,081,552 (455,589)
Investment securities - trading 122,506 (22,103)
Accrued liabilities (64,474) (478,963)
Income taxes payable (7,037) (4,278)
Deferred compensation (122,506) 22,103
----------- -----------
Net cash provided by (used in) operating activities 552,402 (340,679)
----------- -----------
Cash flows from investing activities:
Deposit payment for acquisition of Goldman Associates (100,000) --
Purchase of licensing agreement -- (4,800)
Net additions to property and equipment (41,356) (57,572)
----------- -----------
Net cash used in investing activities (141,356) (62,372)
----------- -----------
Cash flow from financing activities:
Net repayments on notes payable (80,126) (77,521)
Net repayments under credit facility (209,387) (503,316)
----------- -----------
Net cash used in financing activities (289,513) (580,837)
----------- -----------
Net cash provided by discontinued operation -- 808,522
----------- -----------
Increase (decrease) in cash and cash equivalents 121,533 (175,366)
Cash and cash equivalents - beginning of period 576,514 803,012
----------- -----------
Cash and cash equivalents - end of period $ 698,047 627,646
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
Page 4
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
June 30, 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 June 30, 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 and six months
ended June 30, 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
Page 5
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 for the three and six months ended June 30, 2001 and
statements of cash flows for the six months ended June 30, 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 June 30, 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
Page 6
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 June 30, 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 $125,000 and
$107,767, respectively, which pertained primarily to covenants not to
compete. Amortization expense for intangible assets subject to
amortization amounted to approximately $14,289 and $11,617 for the
three months ended June 30, 2002 and 2001, respectively and $22,033
and $27,533 for the six months ended June 30, 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 June 30, 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 For the six
months ended months ended
June 30, June 30,
2002 2001 2002 2001
Net income (loss), as reported $ (48,131) 15,574 (237,395) 42,061
Deduct: negative goodwill amortization, net -- (8,762) -- (17,525)
---------- --------- ---------- ---------
Adjusted net income (loss) (48,131) 6,812 (237,395) 24,536
========== ========= ========== =========
Income (loss) per share:
Basic net income (loss), as reported $ (0.03) 0.01 (0.15) 0.03
Negative goodwill amortization, net -- (0.01) -- (0.01)
---------- --------- ---------- ---------
Adjusted net income (loss) $ (0.03) (0.00) (0.15) (0.02)
========== ========= ========== =========
Diluted net income (loss), as reported $ (0.03) 0.01 (0.15) 0.03
Negative goodwill amortization, net -- (0.01) -- (0.01)
---------- --------- ---------- ---------
Adjusted net income (loss) $ 0.03 (0.00) (0.15) 0.02
========== ========= ========== =========
(4) 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.
Page 7
(5) Subsequent Event
(a) 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.
(b) 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.
(c) 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 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.
(d) 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
Page 8
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) Supplemental Cash Flow Information
The following is supplemental information relating to the
consolidated statements of cash flows:
Six Months Ended
June 30,2002 June 30, 2001
------------ -------------
Cash paid during the period for:
Interest $ 246,439 $ 358,836
Income taxes $ 8,744 $ 7,700
Page 9
Non-cash transactions:
During 2001, notes payable of $18,493 were incurred for the purchase
of automobiles.
During the six months ended June 30, 2001, the Company retired 2,064
shares, of convertible preferred stock, which were converted to a
similar number of common shares. During 2002, no such shares were
retired.
(7) Comprehensive Income (Loss)
The Company has no items of other comprehensive income; 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:
Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net (loss) income numerator $ (237,395) 42,061 (48,131) 15,574
Weighted average common
shares (denominator for
basic income per share) 1,603,760 1,602,629 1,603,760 1,603,659
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 1,602,029 1,603,760 1,603,659
=========== =========== =========== ===========
Basic (loss) income per share (0.15) 0.03 (0.03) 0.01
=========== =========== =========== ===========
Diluted (loss) income per share (0.15) 0.03 (0.03) 0.01
=========== =========== =========== ===========
Employee stock options totaling 281,400 and 281,000 for the three and
six months ended June 30, 2002 and 300,600 and 295,200 for the three
and six months ended June 30, 2001, respectively, were not included
in the income per share calculation because their effect would have
been anti-dilutive. Convertible
Page 10
preferred stock totaling 1,464,286 for the three and six months ended
June 30, 2002 and 1,464,387 and 1,465,417 for the three and six
months ended June 30, 2001, respectively, were not included in the
net loss per share because their effect would have been
anti-dilutive.
(9) 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. 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
Page 11
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. 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.
Page 12
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 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 June 30, 2002 and 2001
The Company reported a net loss of $48,131 for the three months ended
June 30, 2002, as compared to net income of $15,574, including net income from
discontinued operations of $44,366 in the 2001 quarter. 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 $48,131 in the second quarter of 2002, compared with a loss of $28,792
in 2001.
Page 13
For the second quarter of 2001, the Company reported income from the
discontinued operations of Atlantic of $44,366. During the second quarter
Atlantic's sales decreased $879,763 due to the timing of shipments. The Company
also recorded a tax benefit related to Atlantic for the second quarter of 2001
totaling $50,000.
Net sales increased $1,496,884 due primarily to favorable weather
conditions, 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 sales during the same period decreased by 1.4% to 28.8% due to
product mix. Selling, general and administrative expenses increased $395,672
primarily due to 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 $23,198 due to decreased prime rates and
consignment arrangements with certain suppliers.
During the second quarter of 2002, the Company recorded a state tax
provision of $1,707, based on Universal's taxable income. For federal purposes,
although the Company was in a federal tax loss position at June 30, 2002, a
benefit was not recorded, as the Company did not expect to be able to realize
such a benefit by the end of 2002. This compares to the second quarter of 2001
when the Company reversed $20,100 of the federal tax benefit recorded in the
first quarter, and recorded no state tax provision.
Results of Operations - Six Months Ended June 30, 2002 and 2001
The Company reported a net loss of $237,395 for the first half of
2002, as compared to net income of $42,061, which is net of income from the
discontinued operations of Atlantic of $358,891. The Company had a loss from
continuing operations, before taxes of $235,688 in the first half of 2002,
compared with a loss of $370,830 in 2001.
For the first half of 2001, the Company reported income from the
discontinued operations of Atlantic of $358,891. This income was primarily due
to an increase in sales at Atlantic of $1,881,929 due to the timing of
shipments.
Net sales from continuing operations increased $2,123,634, as a
result of favorable weather conditions, 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 decreased 0.8% to 29.6%
due to product mix. Selling, general and administrative expenses increased
$458,114, primarily due to 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 $74,021 mainly as a result of decreased
prime rates and consignment arrangements with certain suppliers.
Page 14
The Company recorded a state tax provision of $1,707 for the six
months ended June 30, 2002, based on Universal's taxable income. For federal
purposes, although the Company was in a federal tax loss position at June 30,
2002, a benefit was not recorded as the Company did not expect to be able to
realize such a benefit by the end of 2002. This compares to the first half of
2001, when the Company recorded a federal tax benefit of $54,000 for their
continuing operations.
Liquidity and Capital Resources
As of June 30, 2002, the Company had $698,047 in cash and cash
equivalents compared with $576,514 at December 31, 2001.
Between December 31, 2001 and June 30, 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 $552,402 during the six months
ended June 30, 2002. Accounts payable increased due, primarily, to extended
payment terms with Universal's vendors. Inventory decreased due, primarily, to
the fact that, as of November 2001, Universal has been gradually taking in Amana
and Goodman inventory on consignment. These factors were offset by the fact that
accounts receivable increased due to an increase in sales in the second quarter
of 2002 and timing of customer payments.
Cash flows used in investing activities of $141,356 during the six
months ended June 30, 2002 were due to $41,356 for the purchase of property and
equipment and a $100,000 deposit for the purchase of certain assets of Goldman
Associates.
The cash flows used in financing activities of $289,513 were for net
repayments made on the credit facility of $209,387, as well as net repayments on
notes payable of $80,126. This compares to the prior year when $580,837 of cash
flows were used for financing activities, of which $503,316 was used for net
repayments on the credit facility and $77,521 was used for net repayments on
notes payable.
The net cash provided by discontinued operations during the six
months ended June 30, 2001 of $808,522 is made up of net cash provided by the
operations and liquidation of Atlantic of $1,411,932, 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
Page 15
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 June 30, 2002, amounts outstanding under the credit facility were
$7,720,189, of which $457,000 represents amounts under a term loan, payable in
22 equal monthly installments of approximately $21,000. Although the term loan
is payable over 22 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.
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
Page 16
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 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.
Page 17
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 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 June 30, 2002. The fair value of the borrowings under the
credit facility is not affected by changes in market interest rates.
Page 18
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 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
Page 19
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
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
----------------
Bernard Korn,
Chairman of the Board and President
/S/ JAMES W. STEWART
--------------------
James W. Stewart,
Executive Vice President and Treasurer
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