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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 MARCH 31, 2004 COMMISSION FILE NO. 1-6663
COLONIAL COMMERCIAL CORP.
(Exact Name of Company as Specified in its Charter)
NEW YORK 11-2037182
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
120 NEW SOUTH ROAD, HICKSVILLE, NEW YORK 11801
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(Address of Principal Executive Offices) (Zip Code)
Company's Telephone Number, Including Area Code: 516-681-4647
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Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
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Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of the Company's Common Stock and
Convertible Preferred Stock as of June 1, 2004.
Common Stock, par value $.05 per share - 3,013,768 shares
Convertible Preferred Stock, par value $.05 per share - 863,612 shares
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2004 (unaudited) and
December 31, 2003 1
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2004
and 2003 (unaudited) 2
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004
and 2003 (unaudited) 3
Notes to Condensed Consolidated Financial
Statements (unaudited) 4
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 11
Item 4 - Controls and Procedures 11
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 12
Item 6 - Exhibits and Reports on Form 8-K 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
MARCH 31 DECEMBER 31,
Assets 2004 2003
(Unaudited)
Current assets:
Cash and cash equivalents $ 461,888 $ 342,756
Accounts receivable, net of allowance for doubtful accounts
of $334,000 in 2004 and $285,000 in 2003 6,554,418 6,253,900
Inventory 9,863,121 9,782,822
Prepaid expenses and other current assets 694,956 620,678
Deferred tax asset 551,000 421,400
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Total current assets 18,125,383 17,421,556
Property and equipment 1,607,899 1,515,131
Goodwill 1,628,133 1,628,133
Other intangibles 43,751 54,167
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$ 21,405,166 $ 20,618,987
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Trade payable $ 5,796,533 $ 5,295,879
Accrued liabilities 1,438,101 1,513,578
Income taxes payable 126,827 175,614
Borrowings under credit facility 12,873,408 12,232,030
Notes payable - current portion 97,981 104,205
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Total current liabilities 20,332,850 19,321,306
Notes payable, excluding current portion 311,322 326,700
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Total liabilities 20,644,172 19,648,006
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Commitments and contingencies
Stockholders' equity:
Redeemable convertible preferred stock, $.05 par value, liquidation
preference of $4,356,810 and $7,333,960 and 2,468,860 shares
authorized, 871,362 in 2004 and 1,466,792 in 2003
shares issued and outstanding 43,568 73,340
Common stock, $.05 par value, 20,000,000 shares
authorized, 3,006,018 in 2004 and 2,403,318 in 2003 shares
issued and outstanding 150,302 120,166
Additional paid-in capital 9,347,912 9,259,013
Accumulated deficit (8,780,788) (8,481,538)
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Total stockholders' equity 760,994 970,981
------------ ------------
$ 21,405,166 $ 20,618,987
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
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COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
Sales $ 12,525,359 $ 8,357,683
Cost of sales 8,715,380 5,892,239
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Gross profit 3,809,979 2,465,444
Selling, general and administrative expenses, net 4,099,052 2,550,887
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Operating loss (289,073) (85,443)
Interest income 67 153
Other income 56,650 84,005
Interest expense (179,915) (150,541)
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Loss before income tax benefit (412,271) (151,826)
Income tax benefit (113,021) (82,742)
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Net loss $ (299,250) $ (69,084)
============ ============
Loss per common share:
Basic $ (0.11) $ (0.04)
Diluted $ (0.11) $ (0.04)
Weighted average shares outstanding:
Basic 2,726,692 1,603,794
Diluted 2,726,692 1,603,794
See accompanying notes to unaudited condensed consolidated financial statements.
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COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
2004 2003
Cash flows from operating activities:
Net loss $(299,250) $ (69,084)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Deferred tax benefit (129,600) --
Provision for allowance for doubtful accounts 66,384 25,135
Stock-based compensation 84,900 --
Depreciation 95,811 45,373
Amortization of intangibles 10,416 10,417
Changes in assets and liabilities:
Accounts receivable (366,902) 587,646
Inventory (80,299) (241,460)
Prepaid expenses and other current assets (74,278) 31,840
Trade payable 500,655 622,751
Accrued liabilities (75,477) (188,145)
Income taxes payable (48,787) (40,230)
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Net cash (used in) provided by operating activities (316,427) 784,243
========= =========
Cash flows from investing activities:
Additions to property and equipment (188,579) (44,586)
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Net cash used in investing activities (188,579) (44,586)
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Cash flows from financing activities:
Payments on notes payable (21,602) (7,722)
Issuance of common stock 360,000 --
Retirement of preferred stock (355,638) --
Net borrowings (repayments) under credit facility 641,378 (309,523)
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Net cash provided by (used in) financing activities 624,138 (317,245)
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Increase in cash and cash equivalents 119,132 422,412
Cash and cash equivalents - beginning of period 342,756 296,764
--------- ---------
Cash and cash equivalents - end of period $ 461,888 $ 719,176
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
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COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
March 31, 2004
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
The consolidated financial statements of Colonial Commercial Corp. and
Subsidiaries (the "Company") included herein have been prepared by the
Company and are unaudited; however, such information reflects all
adjustments (consisting solely of normal recurring adjustments), which
are, in the opinion of management, necessary for a fair presentation of
the financial position, results of operations, and cash flows for the
interim periods to which the report relates. The results of operations
for the three months ended March 31, 2004 are not necessarily
indicative of the operating results that may be achieved for the full
year.
Certain information and footnote disclosures, normally included in
consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America, have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2003.
The Company has one industry segment - wholesale distributor of
heating, ventilation and air conditioning.
Inventory is comprised of finished goods.
STOCK OPTIONS
The Company uses the intrinsic-value method of accounting for
stock-based awards granted to employees. No stock-based compensation
cost is included in net loss, related to options granted during periods
presented had an exercise price equal to the market value of the stock
on the date of grant and all outstanding options are fully vested. No
options were granted during the three-month period ended March 31,
2004. During the three months ended March 31, 2003, 104,000 stock
options were granted at market price and were fully vested. In
accordance with SFAS No. 148, "Accounting for Stock Based Compensation
- Transition and Disclosure," the following table presents the effect
on net loss and net loss per share had compensation cost for the
Company's stock plans been determined consistent with SFAS No. 123. The
fair value of each option grant is estimated on the date of grant by
use of the Black-Scholes option pricing model.
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For the Three
Months
Ended
March 31,
2004 2003
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Net loss, as reported $ (299,250) (69,084)
Add: stock-based compensation
related to option repricing 84,900 --
Deduct: stock-based compensation
expense determined under
fair value method for all
stock options, net of related
income tax benefit -- (26,000)
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Pro forma net loss (214,350) (95,084)
Basic income (loss) per share, as reported (0.11) (.04)
Basic income (loss) per share, pro forma (0.08) (.06)
Diluted income (loss) per share, as reported (0.11) (.04)
Diluted income (loss) per share, pro forma (0.08) (.06)
(2) EQUITY TRANSACTIONS
On February 12, 2004, the Company completed a private placement,
pursuant to Regulation D of the Securities Exchange Act of 1933. The
Company raised $360,000 through the issuance of 600,000 shares of
common stock at $0.60 per share. Bernard Korn (Chairman and President
of the Company) purchased 165,000 shares, William Pagano (Director of
the Company and President of Colonial Commercial Corp.'s ("Colonial")
wholly owned subsidiary, Universal Supply Group, Inc.) ("Universal"),
purchased 165,000 shares, and Rita Folger (a private investor who owns
11.4% of the Company) purchased 100,000 shares. The remaining 170,000
shares were purchased by a private investor who owns less than 5% of
the Company.
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The Company has used substantially all of the proceeds from the private
placement to purchase 592,730 shares of escheated convertible preferred
stock at $0.60 per share from the State of Ohio. The Company has
retired these convertible preferred shares.
The stock from the private placements cannot be sold, transferred or
otherwise disposed of, unless subsequently registered under the
Securities Act of 1933 and applicable state or Blue Sky laws, or
pursuant to an exemption from such registration, which is available at
the time of desired sale, and bear a legend to that effect.
During the three months ended March 31, 2004, the Company converted a
total of 2,700 shares of redeemable convertible preferred stock for
2,700 shares of the Company's common shares.
(3) SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the consolidated
statements of cash flows:
Three Months Ended
MARCH 31,2004 MARCH 31, 2003
Cash paid during the period for:
Interest $ 154,484 $ 129,887
Income taxes $ 131,212 $ --
(4) NET LOSS PER COMMON SHARE
Employee stock options totaling 245,500 and 223,900 for the three
months ended March 31, 2004 and 2003, respectively, were not included
in the income per share calculation because their effect would have
been anti-dilutive. Convertible preferred stock totaling 871,362 and
1,464,252 for the three months ended March 31, 2004 and 2003,
respectively were not included in the net loss per share because their
effects would have been anti-dilutive.
(5) NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide
sufficient equity at risk for the entity to support its activities. In
December 2003, the FASB revised certain elements of FIN 46. The FASB
also modified the effective date of FIN 46. FIN 46 is to be applied for
registrants who file under Regulation S-X in periods ending after March
15, 2004. The adoption of FIN 46 did not have a material impact on the
Company's consolidated financial position or results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements relating to such
matters as anticipated financial performance and business prospects. When used
in this report, the words, "anticipates," "expects," "believes," "may,"
"intends," and similar expressions are intended to be among the statements that
identify forward-looking statements. From time to time, the Company may also
publish forward-looking statements. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. Forward-looking
statements involve risks and uncertainties, including, but not limited to, the
consummation of certain events referred to in this report, technological
changes, competitive factors, maintaining customer and vendor relationships,
inventory obsolescence and availability, and other risks detailed in the
Company's periodic filings with the Securities and Exchange Commission, which
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires that we make estimates and judgments
that affect the amounts reported of assets and liabilities, revenues and
expenses and the related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions we
believe to be applicable and reasonable under the current circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
In addition, we are periodically faced with uncertainties, the outcomes
of which are not within our control and will not be known for prolonged periods
of time. Some of these uncertainties are discussed below under "Risks and
Uncertainties."
We believe the following to be critical accounting policies that affect
the most significant estimates and judgments used in the preparation of our
consolidated financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
ACCOUNTS RECEIVABLE
Accounts receivable consist of trade receivables recorded at original
invoice amount, less an estimated allowance for uncollectible accounts.
Trade credit is generally extended on a short-term basis; thus trade
receivables generally do not bear interest. However, a finance charge
may be applied to receivables that are past due. These charges are
included as other income. Trade receivables are periodically evaluated
for collectibility based on past credit history with customers and
their current financial condition. Changes in the estimated
collectibility of trade receivables are recorded in the results of
operations for the period in which the estimate is revised. Trade
receivables that are deemed uncollectible are offset against the
allowance for uncollectible accounts. The Company generally does not
require collateral for trade receivables.
INVENTORY
Inventory is stated at the lower of cost or market and consists solely
of finished goods. Cost is determined using the first-in, first-out
method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated
on the straight-line method over the estimated useful lives of the
assets as follows:
Computer hardware and software 5 years
Furniture and fixtures 5 years
Automobiles 3-5 years
Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life of the asset.
-7-
GOODWILL AND OTHER INTANGIBLE ASSETS
Prior to January 1, 2002, the Company amortized goodwill and intangible
assets using the straight-line method over periods of up to 10 years.
Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and
Other Intangible Assets," requires that goodwill and intangible assets
having indefinite lives not be amortized, but instead be tested for
impairment at least annually. Intangible assets determined to have
finite lives are amortized over their remaining useful lives.
Results of Operations - Three Months Ended March 31, 2004 and 2003
The Company reported a net loss of $299,250 for the first quarter of
2004, as compared to a net loss of $69,084 in the 2003 quarter.
Sales from operations increased by $4,167,676 or 49.9% over the same
period in 2003. The inclusion of RAL Supply Group, Inc. ("RAL"), which was
acquired on September 30, 2003, and American/Universal Supply Inc. ("American"),
which was a new operation that commenced on or about July 1, 2003, accounted for
$3,099,435 of this increase. The remaining increase in sales was related to
increased market penetration in the core business of Universal. Simultaneously,
gross margin dollars increased by $1,344,535 substantially and directly related
to the sales increases. Gross margins expressed as a percentage of sales
increased from 29.50% in 2003 to 30.42% in 2004, primarily due to increases in
sales of deluxe higher margin products.
Selling, general and administrative expenses and cost of operations
increased by $1,548,165 primarily due to the inclusion of expenses related to
RAL and American, as well as higher utility rates, fuel costs and insurance
expenses.
Salaries and benefits increased by $670,717 or 44.95% due to additional
personnel added by RAL and American, as well as an increase in medical insurance
benefits.
Included in the increase in payroll and benefits, medical and
hospitalization insurance costs were increased by $62,656 over the same period
last year, an increase of 74.9% due to increased personnel related to RAL and
American and a general increase in hospitalization costs.
General insurance costs increased by $48,903 to $80,978 or 152.5% of
which $30,620 was related to RAL and American and the balance related to
increased sales volume and increased insurance rates.
Depreciation increased by approximately $51,000 to $95,811. Of this
amount, $34,000 is related to the RAL and American operations.
Interest expense increased by $29,374 in the 2004 quarter totally
related to increased borrowing required to support increased inventory and
accounts receivable of RAL and American, which are directly related to increased
sales.
The Company recorded a federal tax benefit of $129,600 for the first
quarter of 2004 due to the fact that it expects to be profitable for the
remainder of the year. During the first quarter of 2003, the Company recorded a
federal tax benefit of $82,742 due to the receipt of tax refunds not previously
accrued.
-8-
Liquidity and Capital Resources
As of March 31, 2004, the Company had $461,888 in cash and cash
equivalents compared with $342,756 at December 31, 2003.
Between December 31, 2003 and March 31, 2004, there were no material
changes in obligations associated with operating agreements, obligations to
financial institutions and other long-term debt obligations.
Cash flows used by operations were $316,427 during the three months
ended March 31, 2004. Accounts receivable increased due to customer and product
mix. Accounts payable increased due to increased inventory required to prepare
for the second quarter air conditioning season and to the utilization of
extended terms.
Cash flows used in investing activities of $188,579 during the three
months ended March 31, 2004 were due to the purchase of property.
The cash flows provided by financing activities of $624,138 were
provided from borrowings made on the credit facility of $641,378 and the sale of
600,000 shares of common stock in a private placement for $360,000. The cash
flows used in financing activities were due primarily to the purchase and
retirement of 592,730 shares of preferred stock for $355,638 and the repayment
on notes payable of $21,602.
At March 31, 2004, amounts outstanding under the credit facility were
$12,873,408, of which $16,000 represents a term loan payable in April 2004, and
$2,040,000 represent a term loan payable in 45 remaining monthly installments of
agreed amounts under an amortization schedule. Although the term loans are
payable over specified periods, the Bank can demand payment at any time.
The Company believes that the credit facility is sufficient to finance
its current operating needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's pre-tax earnings and cash flows are exposed to changes in
interest rates, as all borrowings under its credit facility bear interest based
on the prime rate plus 0.5%, except for the $2.5 million term loan, which bears
interest at a rate of prime plus 2.5%. A hypothetical 10% adverse change in such
rates would increase the pre-tax loss and cash flow by approximately $ 62,000
over a one-year period, assuming the borrowing level remains consistent with the
outstanding borrowings as of March 31, 2004. The fair value of the borrowings
under the credit facility is not significantly affected by changes in market
interest rates.
-9-
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 to
reorganize under Chapter 11 of the U. S. Bankruptcy Code. The Company and its
other operations are not part of the
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Chapter 11 filing. The Company does not believe that Atlantic will emerge
from the reorganization with any value for the Company.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
31.1 Certification of Chief Executive Officer Pursuant to Rule 15d-14
of the Securities and Exchange Act of 1934, as amended, as
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Rule 15d-14
of the Securities and Exchange Act of 1934, as amended, as
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
b. Reports on Form 8-K:
(i) Form 8-K filed February 25, 2004 to report financial results for
the years ended December 31, 2001 and December 31, 2002 and for the
quarters ended March 31, June 30 and September 30, 2003.
(ii) Form 8-K filed March 30, 2004 to report financial results for the
year ended December 31, 2003.
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: June 1, 2004 COLONIAL COMMERCIAL CORP.
/S/ BERNARD KORN
----------------
Bernard Korn,
Chairman of the Board and President
/S/ JAMES W. STEWART
--------------------
James W. Stewart,
Executive Vice President and Treasurer
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