SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2004 Commission File No. 1-6663
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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
----------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Company's Telephone Number, Including Area Code: 516-681-4647
------------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of the Company's Common Stock and
Convertible Preferred Stock as of October 31, 2004
Common Stock, par value $.05 per share - 4,089,372 shares
Convertible Preferred Stock, par value $.05 per share - 814,508 shares
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2004 (Unaudited) and
December 31, 2003 1
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 2004
and 2003 (Unaudited) 2
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2004
and 2003 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2004
and 2003 (Unaudited) 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17
Item 4 - Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 19
Item 2 - Changes in Securities, Issuer Purchases of Equity Securities 19
Item 3 - Defaults Upon Senior Securities 20
Item 4 - Submission Of Matters To A Vote of Security Holders 20
Item 5 - Other Information 21
Item 6 - Exhibits and Reports on Form 8-K 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 472,225 $ 342,756
Accounts receivable, net of allowance for doubtful accounts
of $409,900 in 2004 and $285,000 in 2003 8,262,124 6,253,900
Inventory 11,068,271 9,782,822
Prepaid expenses and other current assets 1,062,015 620,678
Deferred tax asset 153,000 421,400
------------ ------------
Total current assets 21,017,635 17,421,556
Property and equipment 1,595,521 1,515,131
Deferred tax asset 914,000 --
Goodwill 1,628,133 1,628,133
Other intangibles 30,417 54,167
------------ ------------
$ 25,185,706 $ 20,618,987
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Trade payables $ 4,915,211 $ 5,295,879
Accrued liabilities 1,520,840 1,513,578
Income taxes payable 72,167 175,614
Borrowings under credit facility 12,472,475 12,232,030
Notes payable - current portion 104,361 104,205
------------ ------------
Total current liabilities 19,085,054 19,321,306
Notes payable, excluding current portion 1,457,915 326,700
Borrowing under credit facility: term loan 916,667 --
------------ ------------
Total liabilities 21,459,636 19,648,006
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Commitments and contingencies
Stockholders' equity:
Redeemable convertible preferred stock, $.05 par value, liquidation
preference of $4,090,055 and $7,333,960 and 2,468,860 shares
authorized, 818,011 shares in 2004 and 1,466,792 shares in 2003
issued and outstanding 40,900 73,340
Common stock, $.05 par value, 20,000,000 shares
authorized, 4,079,369 shares in 2004 and 2,403,318 shares in 2003
issued and outstanding 203,967 120,166
Additional paid-in capital 10,759,411 9,259,013
Accumulated deficit (7,278,208) (8,481,538)
------------ ------------
Total stockholders' equity 3,726,070 970,981
------------ ------------
$ 25,185,706 $ 20,618,987
============ ============
1
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
For The Three Months Ended
September 30,
---------------------------
2004 2003
---- ----
Sales $ 16,185,005 $ 11,321,632
Cost of sales 11,453,648 8,097,564
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Gross profit 4,731,357 3,224,068
Selling, general and administrative expenses, net 4,177,443 2,841,206
------------ ------------
Operating income 553,914 382,862
Other income 58,280 134,780
Interest expense (249,463) (149,182)
------------ ------------
Income before income taxes 362,731 368,460
Income tax (benefit) expense (476,351) 42,801
------------ ------------
Net income $ 839,082 $ 325,659
============ ============
Income per common share:
Basic $ 0.22 $ 0.14
Diluted 0.17 0.08
Weighted average shares outstanding:
Basic 3,747,715 2,292,468
Diluted 4,940,318 3,881,522
2
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
For The Nine Months Ended
September 30,
---------------------------
2004 2003
---- ----
Sales $ 44,859,290 $ 30,368,961
Cost of sales 31,520,092 21,681,398
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Gross profit 13,339,198 8,687,563
Selling, general and administrative expenses, net 12,308,681 8,096,637
------------ ------------
Operating income 1,030,517 590,926
Other income 240,557 274,911
Interest expense (622,515) (447,606)
------------ ------------
Income before income taxes 648,559 418,231
Income tax benefit (554,778) (19,163)
------------ ------------
Net income $ 1,203,337 $ 437,394
============ ============
Income per common share:
Basic: $ 0.38 $ 0.24
Diluted 0.28 0.13
Weighted average shares outstanding:
Basic 3,164,125 1,833,352
Diluted 4,368,017 3,339,205
3
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For The Nine Months Ended
September 30,
-----------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 1,203,337 $ 437,394
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred tax benefit (645,600) --
Provision for doubtful accounts 196,286 157,547
Stock-based compensation 84,900 --
Depreciation 267,244 147,954
Amortization of intangibles 23,750 31,249
Changes in assets and liabilities, net of the effects
of acquisitions:
Accounts receivable (2,204,510) (409,418)
Inventory (1,285,449) (1,863,962)
Prepaid expenses and other current assets (441,337) (305,126)
Trade payables (380,668) 2,237,001
Accrued liabilities 7,262 (64,892)
Income taxes payable (103,447) 31,978
------------ ------------
Net cash (used in) provided by operating activities (3,278,232) 399,725
------------ ------------
Cash flows from investing activities:
Cash acquired in acquisition of RAL Supply Group, Inc. -- 3,575
Additions to property and equipment (347,645) (293,788)
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Net cash used in investing activities (347,645) (290,213)
------------ ------------
Cash flows from financing activities:
Issuance of notes payable 1,179,017 73,642
Payments on notes payable (47,645) (26,554)
Retirement of preferred stock (355,638) --
Issuance of common stock 1,635,000 240,600
Issuance of warrants 187,500 --
Net borrowings (repayments) under credit facility 1,157,112 (206,067)
------------ ------------
Net cash provided by financing activities 3,755,346 81,621
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Increase in cash and cash equivalents 129,469 191,133
Cash and cash equivalents - beginning of period 342,756 296,764
------------ ------------
Cash and cash equivalents - end of period $ 472,225 $ 487,897
============ ============
4
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
September 30, 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 period ended September 30, 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 distribution of heating,
ventilation and air conditioning equipment.
Inventory is comprised of finished goods.
Stock Options
The Company uses the intrinsic-value method of accounting for stock-based
awards granted to employees. The Company recognizes stock-based
compensation related to option repricing for options previously awarded.
For the three and nine months ended September 30, 2004, the amount of
stock-based compensation was $33,960 and $84,900, respectively. No
stock-based compensation cost is included in net income related to options
granted during periods presented, since they had an exercise price equal
to the market value of the stock on the date of grant and all outstanding
options are fully vested. During the nine months ended September 30, 2004,
no stock options were granted and all outstanding options 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 income and net income per share had compensation cost
for the Company's stock plans been determined consistent with SFAS No.
123, "Accounting for Stock-Based Compensation. The fair value of each
option grant is estimated on the date of grant by use of the Black-Scholes
option-pricing model.
-5-
For the Nine For the Three
Months Ended Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income, as reported $1,203,337 437,394 839,082 325,659
Add: Stock-based compensation 84,900 -- 33,960 --
related to option repricing
Deduct: Stock-based compensation
expense determined under
fair value method for all
stock options, net of
related income tax benefit -- 26,000 -- --
---------- ------- ------- -------
Pro forma net income $1,288,237 411,394 873,042 325,659
========== ======= ======= =======
Basic income per share, as reported .38 .24 .22 .14
=== === === ===
Basic income per share, pro forma .41 .22 .23 .14
=== === === ===
Diluted income per share, as reported .28 .13 .17 .08
=== === === ===
Diluted income per share, pro forma .29 .12 .18 .08
=== === === ===
(2) Equity Transaction
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.
The Company has used substantially all of the proceeds from the February
12, 2004 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 following is a list of investors who purchased these shares:
Amount of Cash
Name Common Shares Consideration
---- ------------- -------------
Rita C. Folger 100,000 $ 60,000
Michael Goldman 170,000 $ 102,000
Bernard Korn 165,000 $ 99,000
William Pagano 165,000 $ 99,000
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Total 600,000 $ 360,000
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-6-
On July 29, 2004, the Company completed a private placement, pursuant to
Regulation D of the Securities Act of 1933. The Company raised $1,050,000
through the issuance of 420,000 shares of common stock at $1.25 per share
and the issuance of $525,000 of subordinated unsecured convertible notes
payable ("Notes"), bearing interest at 11% per annum, payable quarterly,
with 50% of the principal payable on the last day of the fourth
anniversary and 50% of the principal payable on the last day of the fifth
anniversary. The Notes are convertible into 175,000 shares of common stock
at $3.00 per share during the term of the Notes.
The following table lists the purchasers of the private placement dated
July 29, 2004:
Amount of Convertible Cash
Name Common Shares Note Consideration
---- ------------- ---- -------------
Richard A. Cancelosi 40,000 $ 50,000 $ 100,000
James Fallon 40,000 $ 50,000 $ 100,000
Rita Folger 80,000 $100,000 $ 200,000
Margret Friedrich 40,000 $ 50,000 $ 100,000
Eileen Goldman 20,000 $ 25,000 $ 50,000
John A. Hildebrandt 40,000 $ 50,000 $ 100,000
Paul H. Hildebrandt 40,000 $ 50,000 $ 100,000
William Pagano 80,000 $100,000 $ 200,000
William Salek 40,000 $ 50,000 $ 100,000
------- -------- ----------
Total 420,000 $525,000 $1,050,000
======= ======== ==========
On July 30, 2004, the Company completed a private placement with Michael
Goldman and Goldman Associates of New York, Inc. pursuant to Regulation D
of the Securities Act of 1933. For total consideration of $1,500,000, the
Company issued to Goldman Associates, Inc. of New York 600,000 shares of
common stock at $1.25 per share, a $750,000 subordinated secured note
payable, earning interest at the prime rate, interest payable quarterly,
principal payable on December 31, 2008, and warrants to purchase 150,000
shares of common stock at $3.00 per share expiring December 31, 2008. The
$187,500 estimated value of the warrants was accounted for as an increase
to additional paid in capital and as a discount to the note payable.
These securities were issued in reliance on the exemption set forth in
Section 4(2) of the Act from registration requirements under the Act.
During the nine months ended September 30, 2004, the Company converted
56,051 shares of convertible preferred stock to a similar number of common
shares.
During October 2004, an additional 3,503 shares of convertible preferred
stock converted to a similar number of common shares and the Company
issued 6,500 shares of common stock pursuant to the exercise of an
outstanding stock option.
-7-
(3) Financing Arrangements
On July 29, 2004, the Company completed a $15,000,000 secured loan
facility with Wells Fargo Business Credit Inc. consisting of a revolving
line of credit including a $2,000,000 two-year term loan. This represents
a $1,500,000 increase from its previous line of credit. The revolving
credit line bears interest at 1/4% below prime, a decrease of 125 basis
points from its previous line of credit, and the term loan bears interest
at 1/2% above prime, a decrease of 200 basis points from its previous line
of credit. The assets of the Company, as well as a pledge of all the
outstanding stock of its operating subsidiaries collateralize all loans.
The facility contains covenants relating to the financial condition of the
Company and its business operations and restricts the payment of dividends
and capital expenditures. Availability under the revolving credit line is
determined by a percentage of eligible assets as defined in the agreement.
The Company used approximately $12,865,000 of the proceeds of this
facility to repay its previous senior lender and will use the balance for
additional working capital.
At September 30, 2004, amounts outstanding under the Company's then
existing credit facility were $13,389,142 and $1,432,376 was available to
the company based on available collateral. The Company believes that its
credit facility is sufficient to finance its current operating needs.
(4) Supplemental Cash Flow Information
The following is supplemental information relating to the consolidated
statements of cash flows:
Nine Months Ended
September 30, 2004 September 30, 2003
------------------ ------------------
Cash paid during the period for:
Interest $ 600,514 $ 451,314
Income taxes $ 136,655 $ --
(5) Net Income Per Common Share
Basic net income per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding. Diluted earnings per share reflect, in periods in which they
have a dilutive effect, the impact of common shares issuable upon exercise
of stock options.
A reconciliation between the numerators and denominators of the basic and
diluted income per common share is as follows:
-8-
For The Nine Months For The Three Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income (numerator) $1,203,337 437,394 839,082 325,659
========== ========== ========== ==========
Weighted average
common shares
(denominator for
basic income
per share) 3,164,125 1,833,352 3,747,715 2,292,468
Effect of dilutive
securities:
Convertible preferred
stock 956,169 1,464,252 839,230 1,464,252
Convertible notes 38,908 -- 116,726 --
Stock options 208,815 41,601 236,647 124,802
---------- ---------- ---------- ----------
Weighted average
common and potential
common shares out-
standing (denominator
for diluted income
per share) 4,368,017 3,339,205 4,940,318 3,881,522
========== ========== ========== ==========
Basic net income
per share .38 .24 .22 .14
Diluted net income
per share .28 .13 .17 .08
Warrants to purchase 150,000 shares were not included in the income per
share calculation because their effect would have been anti-dilutive.
(6) New Accounting Pronouncements
None
(7) DEFERRED INCOME TAX ASSET
The Company's deferred income tax asset represents certain future tax benefits
related to the expected utilization of net operating loss carry forwards. The
Company records a valuation allowance against any portion of the deferred income
tax asset when it believes, based on the weight of available evidence, it is
more likely than not that some portion of the deferred tax asset will not be
realized. Events which incurred during the quarter ended September 30, 2004 has
caused management to change its valuation allowance related to the realizability
of the deferred tax asset.
-9-
As of December 31, 2003 gross deferred tax assets in the amount of $12,363,783
were reduced by a valuation allowance in the amount of $11,942,383. Such
valuation allowance had been reduced by $792,469 during the year ending December
31, 2003, to reflect management's then assessment of the likelihood of utilizing
net operating losses in the future, based upon improved results of operations
during 2003 and upon projections of future taxable income.
In July 2004, the Company entered into a new financing agreement along with two
private placements. The combination of the private placements and debt financing
provided an additional $4,050,000 in liquidity. It is management's opinion that
this additional liquidity will allow the Company to expand inventory levels
while taking advantage of purchase discounts and programs. Management believes
that this will ultimately result in increased revenues and gross margin
percentages. Therefore, management has adjusted its future income projections as
a result of these events.
At September 30, 2004 gross deferred tax assets in the amount of $12,143,273
have been reduced by a valuation allowance in the amount of $11,076,273. Such
valuation allowance includes a reduction of $645,600 during the three months
ended September 30, 2004 based upon its adjustment of its future income and
taxable income projections and, accordingly, its reassessment of the likelihood
of utilizing net operating loss carry forwards in the future. Management's
reassessment is based upon its belief that the events set forth in the preceding
paragraph will ultimately result in increased revenues and gross margins.
During the three and nine months periods ended September 30, 2004, income tax
benefits and net income increased in the amount of $645,600 due to the revised
projection of the future utilization of net operating loss carry forwards.
(8) LEGAL PROCEEDINGS
The Company's Universal Supply Group, Inc. subsidiary is a New York
corporation ("USG"). In June 1999, USG acquired substantially all of the
assets of Universal Engineering Co., Inc. and Universal Supply Group,
Inc., a New Jersey corporation, including its name. The name of Universal
Supply Group, Inc. (the selling corporation) was subsequently changed to
Hilco, Inc. In 1998, Hilco, Inc. acquired the assets of Amber Supply Co.,
Inc., previously known as Amber Oil Burner Supply Co., Inc. Universal
Engineering Co., Inc., Amber Supply Co., Inc., Amber Oil Burner Supply
Co., Inc. and Hilco are referred to as the "Predecessors." The majority
shareholders of the Predecessors are John A. Hildebrandt and Paul
Hildebrandt. Paul Hildebrandt is a director of the Company.
-10-
USG has been joined as a defendant with Predecessors and many other
companies in numerous product liability lawsuits brought in the Superior
Court of New Jersey (Middlesex County) that allege injury due to asbestos.
These actions have been managed by Predecessors' historic product
liability insurance carriers, and all claims, including all defense and
settlement costs, to date have been covered and paid by those carriers.
John A. Hildebrandt, Paul Hildebrandt and the Predecessors have also
indemnified USG against all asbestos claims. The asbestos claims that have
been filed to date stem primarily from products sold by the Predecessors
prior to 1999 that were manufactured and/or packaged by a third party,
which allegedly contained asbestos. The Company does not believe that it
will be materially adversely affected by these lawsuits.
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 of reported assets, 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.
-11-
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 service charge may be applied to
receivables that are past due. These charges are included as other income when
collected. 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.
DEFERRED INCOME TAX ASSET
The Company's deferred income tax asset represents certain future tax benefits
related to the expected utilization of net operating loss carry forwards. The
Company records a valuation allowance against any portion of the deferred income
tax asset when it believes, based on the weight of available evidence, it is
more likely than not that some portion of the deferred tax asset will not be
realized. Events which incurred during the
-12-
quarter ended September 30, 2004 has caused management to change its valuation
allowance related to the realizability of the deferred tax asset.
As of December 31, 2003 gross deferred tax assets in the amount of $12,363,783
were reduced by a valuation allowance in the amount of $11,942,383. Such
valuation allowance had been reduced by $792,469 during the year ending December
31, 2003, to reflect management's then assessment of the likelihood of utilizing
net operating losses in the future, based upon improved results of operations
during 2003 and upon projections of future taxable income.
In July 2004, the Company entered into a new financing agreement along with two
private placements. The combination of the private placements and debt financing
provided an additional $4,050,000 in liquidity. It is management's opinion that
this additional liquidity will allow the Company to expand inventory levels
while taking advantage of purchase discounts and programs. Management believes
that this will ultimately result in increased revenues and gross margin
percentages. Therefore, management has adjusted its future income projections as
a result of these events.
At September 30, 2004 gross deferred tax assets in the amount of $12,143,273
have been reduced by a valuation allowance in the amount of $11,076,273. Such
valuation allowance includes a reduction of $645,600 during the three months
ended September 30, 2004 based upon its adjustment of its future income and
taxable income projections and, accordingly, its reassessment of the likelihood
of utilizing net operating loss carry forwards in the future. Management's
reassessment is based upon its belief that the events set forth in the preceding
paragraph will ultimately result in increased revenues and gross margins.
During the three and nine months periods ended September 30, 2004, income tax
benefits and net income increased in the amount of $645,600 due to the revised
projection of the future utilization of net operating loss carry forwards.
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 September 30, 2004 and 2003
The Company reported net income of $839,082 for the third quarter of 2004,
as compared to net income of $325,659 in the third quarter of 2003.
-13-
Sales for the quarter ended September 30, 2004 increased $4.86 million, or
43.0%, compared to the same period in 2003. The increase in sales is primarily
related to the September 30, 2003, RAL acquisition, and the 2003 opening of two
new locations, under the name of American/Universal Supply, Inc., which together
accounted for $4.53 million in sales. Existing location sales increased 7.9% in
same quarter, mostly attributable to increased market penetration.
Simultaneously, gross margin dollars increased by $1.51 million, or 46.8%,
substantially in line with the increase in sales as previously stated. Gross
margins, expressed as a percentage of sales, increased from 28.5% in 2003 to
29.2% in 2004, primarily due to the sales of high-end plumbing fixtures related
to the RAL acquisition, and more effective purchasing practices.
Selling, general and administrative expenses, and costs of operations
increased $1.33 million, or 47.0%, primarily due to the inclusion of operating
expenses related to RAL and American/Universal, establishing a new location, as
well as higher insurance costs. Other cost increases were in proportion to
increased sales. The change in selling, general and administrative costs
expressed as a percentage of sales increased to 25.8% from 25.1%, in the same
period in 2003, related to the increased costs associated with the start-up of
American/Universal and the integration of the September 30, 2003 acquisition of
RAL. Included in selling, general, and administrative expenses for the 2004
quarter is a non-cash charge of $33,960 for stock based compensation.
Operating income in the third quarter ended September 30, 2004 increased
$171,052, or 44.7%, compared to the same period in 2003. The increase in
operating income was primarily driven by increased sales related to the RAL
acquisition, the increased business contributed by American/Universal and
increased market penetration.
Other income for the same period in the year 2003 included $91,885 from
extinguishment of certain notes payable. There was no similar income in the 2004
quarter.
Interest expense for the quarter ended September 30, 2004 increased by
$100,281, or 67.2%, compared to the same period in 2003. This is primarily due
to increased borrowings during the quarter to support the increased inventory
and accounts receivable, related to the increased sales from RAL and
American/Universal, offset in part by the lower interest rate related to the
company's refinancing of its asset based loan with Wells Fargo Business Credit
Inc. and the debt incurred by the private placement dated July 29, 2004.
The Company recorded a net federal tax benefit of $516,000 for the third
quarter of 2004 in order to recognize the expected utilization of available
operating loss carry forwards, compared to none in the 2003 quarter. In
addition, the Company recorded a state tax provision of $39,649 for the three
months ended September 30, 2004 compared to $42,801 for the three months ended
September 30, 2003.
Results of Operations - Nine Months Ended September 30, 2004 and 2003
The Company reported net income of $1,203,337 for the nine months of 2004, as
compared to net income of $437,394 in the nine months of 2003.
-14-
Sales for the nine months ended September 30, 2004 increased $14.49 million, or
47.7%, compared to the same period in 2003. The increase in sales is primarily
related to the inclusion of sales from the September 30, 2003 RAL acquisition,
and the 2003 opening of two new locations, under the name of American/Universal
Supply, Inc., which together accounted for $11.70 million in sales. Existing
location sales increased 11.2% in same period, mostly attributable to increased
market penetration. Simultaneously, gross margin dollars increased by $4.65
million, or 53.5%, substantially in line with the increase in sales as
previously stated. Gross margins, expressed as a percentage of sales, increased
from 28.6% in 2003 to 29.7% in 2004, primarily due to the sales of high-end
plumbing fixtures related to the RAL acquisition, and more effective purchasing
practices.
The companies' selling, general and administrative expenses, and costs of
operations increased $4.21 million, or 52.0%, primarily due to the inclusion of
operating expenses related to RAL and American/Universal, establishing a new
location, as well as higher insurance costs. Other cost increases were in
proportion to increased sales. The change in selling, general and administrative
costs expressed as a percentage of sales increased to 27.4% from 26.7%, for the
same period in 2003, mainly from the increased costs associated with the
start-up of American/Universal and the integration of the September 30, 2003
acquisition of RAL. Included in the selling, general and administrative expenses
for the nine months ending September 30, 2004 is a non-cash charge of $84,900
for stock based compensation.
Operating income for the nine months ended September 30, 2004 increased
$439,591, or 74.4%, compared to the same period in 2003. The increase in
operating income was primarily driven by increased sales related to the RAL
acquisition; the increased business contributed by American/Universal and
increased market penetration.
Interest expense for the nine months ended September 30, 2004 increased by
$174,909, or 39.1%, compared to the same period in 2003. This is primarily due
to increased borrowings during the period to support the increased inventory and
accounts receivable related to the increased sales from RAL and
American/Universal, offset in part by the lower interest rate related to the
company's refinancing of its asset based loan with Wells Fargo Business Credit
Inc. and the debt incurred by the private placement dated July 29, 2004.
The Company included $91,885 as income from extinguishment of certain notes
payable in the 2003 period. There was no similar income in 2004.
The Company recorded a net federal tax benefit of $645,600 for the nine months
ended September 30, 2004 in order to recognize the expected utilization of
available operating loss carry forwards, compared to a net federal tax benefit
of $ 91,371 in the 2003 period. In addition, the Company recorded a state tax
provision of $90,822 for the nine months ended September 30, 2004 compared to
$72,208 for the nine months ended September 30, 2003.
The following table summarizes information derived from the Company's condensed
consolidated statements of income expressed as a percentage of revenue for the
quarter and nine months ended September 30, 2004 and 2003:
-15-
Nine Months Quarter
Ended September 30, Ended September 30,
------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 70.3 71.4 70.8 71.5
----- ---- ---- ----
Gross profit 29.7 28.6 29.2 28.5
Selling, general and
administrative expenses, net 27.4 26.7 25.8 25.1
----- ---- ---- ----
Operating income 2.3 1.9 3.4 3.4
Interest expense (1.4) (1.5) (1.5) (1.3)
Other income 0.5 0.9 0.4 1.2
----- ---- ---- ----
Income before taxes 1.4 1.3 2.3 3.3
Income tax benefit (expense) 1.3 0.1 2.9 (0.4)
----- ---- ---- ----
Net income 2.7 1.4 5.2 2.9
===== ==== ==== ====
Liquidity and Capital Resources
As of September 30, 2004, the Company had $472,225 in cash and cash
equivalents compared with $342,756 at December 31, 2003.
On July 29, 2004, the Company completed a $15,000,000 secured loan
facility with Wells Fargo Business Credit Inc. consisting of a revolving line of
credit including a $2,000,000 two-year term loan. This represents a $1,500,000
increase from its previous line of credit. The revolving credit line bears
interest at 1/4% below prime, a decrease of 125 basis points from its previous
line of credit, and the term loan bears interest at 1/2% above prime, a decrease
of 200 basis points from its previous line of credit. The assets of the Company,
as well as a pledge of all the outstanding stock of its operating subsidiaries
collateralize all loans. The facility contains covenants relating to the
financial condition of the Company and its business operations and restricts the
payment of dividends and capital expenditures. Availability under the revolving
credit line is determined by a percentage of eligible assets as defined in the
agreement. The Company used approximately $12,865,000 of the proceeds of this
facility to repay its previous senior lender and will use the balance for
additional working capital.
On July 29, 2004, the Company completed a private placement, pursuant to
Regulation D of the Securities Act of 1933. The Company raised $1,050,000
through the issuance of 420,000 shares of common stock at $1.25 per share and
the issuance of $525,000 of subordinated unsecured convertible notes payable
("Notes"), bearing interest at 11% per annum, payable quarterly, with 50% of the
principal payable on the last day of the fourth anniversary and 50% of the
principal payable on the last day of the fifth anniversary. The Notes are
convertible into 175,000 shares of common stock at $3.00 per share during the
term of the Notes.
-16-
On July 30, 2004, the Company completed a private placement with Michael
Goldman and Goldman Associates of New York, Inc. pursuant to Regulation D of the
Securities Act of 1933. For total consideration of $1,500,000, the Company
issued to Goldman Associates of New York, Inc. 600,000 shares of common stock at
$1.25 per share, a $750,000 subordinated secured note payable, earning interest
at the prime rate, interest payable quarterly, principal payable on December 31,
2008, and warrants to purchase 150,000 shares of common stock at $3.00 per share
expiring December 31, 2008.
Cash flows used by operations were $3,278,232 during the nine months ended
September 30, 2004. Accounts receivable and inventory increased due to an
increase in sales in the third quarter of 2004.
Cash flows used in investing activities of $347,645 during the nine months
ended September 30, 2004 were due to the purchases of property and equipment.
The cash flows provided by financing activities of $3,755,346 included
borrowings on the credit facility of $1,157,112, borrowings on notes payable of
$1,179,017 and the issuance of 1,620,000 shares of common stock for $1,635,000,
of which a portion of the proceeds were used to repurchase 592,730 shares of
convertible preferred stock for $355,638.
At September 30, 2004, amounts outstanding under the Company's then
existing credit facility were $13,389,142 and $1,432,376 was available to the
company based on available collateral. The Company believes that its 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
prime interest rates, as all borrowings under its credit facility at September
30, 2004 bear interest based on that prime rate less 0.25%, except for the $1.9
million term loan balance, which bears interest at a rate of prime plus 0.5%. In
addition, $750,000 of the Company's notes payable bear interest at the prime
rate. A hypothetical 10% adverse change in such rates would decrease the pre-tax
income and cash flow by approximately $67,750 over a one-year period, assuming
the borrowing level remains consistent with the outstanding borrowings as of
September 30, 2004. 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
-17-
(a) Evaluation of Disclosure Controls and Procedures
An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and the operation of our
"disclosure controls and procedures" (as such term is defined in rules 13a-15(e)
under the Securities Exchange Act of 1934) as of September 30, 2004 ("Evaluation
Date"). Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the Evaluation Date, the disclosure
controls and procedures are reasonably designed and effective to ensure that (i)
information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
(ii) such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
-18-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company's Universal Supply Group, Inc. subsidiary is a New York
corporation ("USG"). In June 1999, USG acquired substantially all of the assets
of Universal Engineering Co., Inc. and Universal Supply Group, Inc., a New
Jersey corporation, including its name. The name of Universal Supply Group, Inc.
(the selling corporation) was subsequently changed to Hilco, Inc. In 1998,
Hilco, Inc. acquired the assets of Amber Supply Co., Inc., previously known as
Amber Oil Burner Supply Co., Inc. Universal Engineering Co., Inc., Amber Supply
Co., Inc., Amber Oil Burner Supply Co., Inc. and Hilco are referred to as the
"Predecessors." The majority shareholders of the Predecessors are John A.
Hildebrandt and Paul Hildebrandt. Paul Hildebrandt is a director of the Company.
USG has been joined as a defendant with Predecessors and many other
companies in numerous product liability lawsuits brought in the Superior Court
of New Jersey (Middlesex County) that allege injury due to asbestos. These
actions have been managed by Predecessors' historic product liability insurance
carriers, and all claims, including all defense and settlement costs, to date
have been covered and paid by those carriers. John A. Hildebrandt, Paul
Hildebrandt and the Predecessors have also indemnified USG against all asbestos
claims. The asbestos claims that have been filed to date stem primarily from
products sold by the Predecessors prior to 1999 that were manufactured and/or
packaged by a third party, which allegedly contained asbestos. The Company does
not believe that it will be materially adversely affected by these lawsuits.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sale of Unregistered Securities:
On July 29, 2004, the Company completed a private placement,
pursuant to Regulation D of the Securities Act of 1933. The Company
raised $1,050,000 through the issuance of 420,000 shares of common
stock at $1.25 per share and the issuance of $525,000 of
subordinated unsecured convertible notes payable ("Notes"), bearing
interest at 11% per annum, payable quarterly, with 50% of the
principal payable on the last day of the fourth anniversary and 50%
of the principal payable on the last day of the fifth anniversary.
The Notes are convertible to common stock at $3.00 per share during
the term of the Notes.
The following table lists the purchasers of the private placement
dated July 29, 2004:
-19-
Amount of Convertible Cash
Name Common Shares Note Consideration
---- ------------- ---- -------------
Richard A. Cancelosi 40,000 $ 50,000 $ 100,000
James Fallon 40,000 $ 50,000 $ 100,000
Rita Folger 80,000 $ 100,000 $ 200,000
Margret Friedrich 40,000 $ 50,000 $ 100,000
Eileen Goldman 20,000 $ 25,000 $ 50,000
John A. Hildebrandt 40,000 $ 50,000 $ 100,000
Paul H. Hildebrandt 40,000 $ 50,000 $ 100,000
William Pagano 80,000 $ 100,000 $ 200,000
William Salek 40,000 $ 50,000 $ 100,000
---------- ---------- ----------
Total 420,000 $ 525,000 $1,050,000
========== ========== ==========
On July 30, 2004, the Company completed a private placement with
Michael Goldman and Goldman Associates of New York, Inc. pursuant to
Regulation D of the Securities Act of 1933. For total consideration
of $1,500,000, the Company issued to Goldman Associates, Inc. of New
York 600,000 shares of common stock at $1.25 per share, a $750,000
subordinated secured note payable, earning interest at the prime
rate, interest payable quarterly, principal payable on December 31,
2008, and warrants to purchase 150,000 shares of common stock at
$3.00 per share expiring December 31, 2008.
These securities were issued in reliance on the exemption set forth
in Section 4(2) of the Act from registration requirements under the
Act.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission Of Matters To A Vote Of Security Holders
(a) Annual Meeting of Shareholders on September 29, 2004
(b) On September 29, 2004, the preferred shareholders elected William
Koon, Ronald Miller and Jack Rose as preferred stock directors of the Company,
and the common shareholders elected Michael Goldman, Paul Hildebrandt, Bernard
Korn, William Pagano, James W. Stewart and Carl L. Sussman as common stock
directors. The common and preferred shareholders voted in favor of a resolution
appointing Weiser LLP as the independent public accountants for the Company for
the fiscal year ending December 31, 2004.
-20-
BROKER
PROPOSAL FOR AGAINST ABSTAINED NON-VOTES
-------- --- ------- --------- ---------
For the preferred shareholders
to elect William Koon, Ronald
Miller and Jack Rose as
Preferred Stock directors:
William Koon 600,305 -- 7,888 --
Ronald Miller 598,592 -- 9,601 --
Jack Rose 601,089 -- 7,104 --
For the common shareholders to
elect Michael Goldman, Paul
Hildebrandt, Bernard Korn, ,
William Pagano, James W.
Stewart and Carl L. Sussman as
Common Stock directors:
Michael Goldman 3,755,097 -- 93,685 --
Paul Hildebrandt 3,755,097 -- 93,685 --
Bernard Korn 3,755,077 -- 93,705 --
William Pagano 3,755,097 -- 93,685 --
James W. Stewart 3,755,097 -- 93,685 --
Carl L. Sussman 3,755,549 -- 93,233 --
To ratify the selection of
Weiser LLP as independent
public accountants of the
Company for the fiscal year
ending December 31, 2004 4,452,281 1,171 3,523 --
Item 5. Other Information
None
Item 6. Exhibits
* 4.1 Form of Private Placement Agreement and Convertible Note
* 4.2 Goldman Associates of New York, Inc. Agreement
* 4.3 Goldman Associates of New York, Inc. Note
* 4.4 Goldman Associates of New York, Inc. Warrant Agreement
** 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.
-21-
** 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.
* Incorporated by reference to exhibits filed with the Company's Form 10-Q filed
with the Securities and Exchange Commission on August 16, 2004.
** Filed herewith
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 15, 2004 COLONIAL COMMERCIAL CORP.
/s/ Bernard Korn
----------------
Bernard Korn,
Chairman of the Board and President
/s/ William Salek
-----------------
William Salek
Chief Financial Officer
-22-