SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 COMMISSION FILE NO. 1-6663
COLONIAL COMMERCIAL CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-2037182
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
120 NEW SOUTH ROAD, HICKSVILLE, NEW YORK 11801
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 516-681-4647
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Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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None NASD BULLETIN BOARD
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.05 Per Share
Convertible Preferred Stock, Par Value $.05 Per Share
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(Title of Class)
Indicate by check mark whether Registrant (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 Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
--- ---
The aggregate market value of voting and non-voting stock held by non-affiliates
of the Registrant was approximately $3,242,693 as of April 29, 2004.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
Registrant's best knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The number of shares outstanding of Registrant's Common Stock and Convertible
Preferred Stock as of April 29, 2004.
OUTSTANDING
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Common Stock $.05 par value 3,006,018
Convertible Preferred Stock $.05 par value 871,362
Documents Incorporated by Reference
None
PART I.
Forward-looking Statements
This Report on Form 10-K 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 availability of
financing, 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.
Item 1 Business
(a) The Company
Colonial Commercial Corp. (the "Company" or "Registrant" or "Colonial")
is a New York corporation, which was incorporated on October 28, 1964. Unless
otherwise indicated, the term "Registrant," "Company" or "Colonial" refers to
Colonial Commercial Corp. and its consolidated subsidiaries. The Company's
operations are conducted through its wholly owned subsidiaries, Universal Supply
Group, Inc., ("Universal"), RAL Supply Group, Inc. ("RAL") and American
Universal Supply, Inc. ("American"). The business operations of the Company are
described below under "Narrative Description of Business."
(b) General Business Developments
In September 2003, RAL Purchasing, Inc., a newly formed, wholly owned
subsidiary of the Company, purchased substantially all of the assets and assumed
certain liabilities of RAL for approximately $2,500,000. RAL is a distributor of
heating and cooling equipment and high-end plumbing fixtures with six locations,
servicing Orange, Rockland, Ulster and Sullivan counties in New York. Four
locations have showrooms. RAL's products are marketed primarily to contractors,
consumers, builders and the commercial sector. As a result of the acquisition,
the Company is expecting to be one of the leading distributors of heating and
cooling equipment and high-end plumbing fixtures in the market.
In July 2003 and February 2004, the Company completed two private
placements in which it issued an aggregate of 1,402,000 shares of common stock
for a total sale price of $600,600. Approximately $ 245,000 of the proceeds were
used for general working capital purposes. Substantially all of the balance was
used 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.
(c) Financial Information About Industry Segments
The Company has one continuing industry segment - wholesale
distribution of heating, ventilation, air conditioning equipment and high-end
plumbing fixtures.
2
(d) Narrative Description of Business
Heating, Ventilation And Air Conditioning
The Company, through its Universal, RAL and American subsidiaries, is a
distributor of heating, ventilation and air conditioning equipment (HVAC),
climate control systems and high-end plumbing supplies. The Company's products
are marketed primarily in New Jersey and New York, through 17 locations, to HVAC
and plumbing contractors, who, in turn, sell such products to residential,
commercial and industrial customers. No product accounted for 15% or more of
consolidated revenues during 2003, 2002 and 2001.
The Company had approximately 5,000 customers in 2003. No customer
accounted for more than 2% of consolidated net sales in 2003. The Company
believes that the loss of any one customer would not have a material adverse
effect on its business.
The Company does not manufacture or assemble, except for custom
designed control panels and it has no patent or intellectual property rights
with respect to any products. The Company has no significant backlog of orders
placed by customers.
The Company purchases products from approximately 400 suppliers. The
Company has agreements with two key equipment suppliers either on an exclusive
or non-exclusive basis. Certain other distribution agreements contain provisions
that restrict or limit the sale of competitive products in markets served. In
2003, two suppliers accounted for 47% of the Company's purchases. The loss of
these suppliers could have a material adverse effect on its business for a
short-term period. The Company believes that the loss of any one of its other
suppliers would not have a material adverse effect on its business. The Company
is also party to an inventory control agreement, which provides for a
consignment of certain inventory.
The Company's business is affected by significant outdoor temperature
swings. Sales typically increase during peak heating and cooling demand periods.
Accordingly, sales are usually significantly lower during the first quarter of
the calendar year and increase through the remaining quarters.
The Company carries general liability, comprehensive property damage,
workers compensation and product liability insurance, as well as other insurance
coverage the Company considers adequate for presentation of its assets and
operations.
The Company's business operates in a highly competitive environment in
its geographical region. The Company competes with a number of distributors and
also with several air conditioning and heating equipment manufacturers that
distribute a significant portion of their products through their own
distribution organizations in certain markets. Competition is based upon product
availability, customer service, price and quality. The Company maintains a
competitive edge by providing in-house training, technical sales support to its
customers and experienced personnel at its point-of-sale locations.
Other Matters
As of December 31, 2003, the Company had 135 non-union full-time
employees. The Company believes its employee relations are satisfactory.
3
(e) Financial Information About Geographic Areas
The Company has no foreign operations and all sales, during the last
three years, are to customers located in the United States, primarily in New
Jersey and New York.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 120 New South
Road, Hicksville, New York 11801 in approximately 440 square feet of space.
Universal maintains an office and warehouse in Hawthorne, New Jersey
and additional warehouses in Bogota, Augusta, North Brunswick, Cedar Knolls,
Wharton and Rochelle Park, New Jersey, New Hampton, New York and Willow Grove,
Pennsylvania, occupying approximately 164,500 square feet under leases expiring
from 2004 to 2009, subject to renewal options, at current aggregate annual
rentals of approximately $1,151,000.
RAL maintains showrooms and warehouses at Middletown, Fishkill, New
Windsor, Peekskill, Poughkeepsie and Suffern, New York, occupying approximately
81,000 square feet under leases expiring in 2008, subject to renewal options, at
current aggregate annual rentals of approximately $643,000.
American maintains showrooms and warehouses at Elmsford and Hicksville,
New York, occupying approximately 48,270 square feet under leases expiring in
2005 and 2012, respectively, at current aggregate annual rentals of
approximately $393,000.
The Registrant's premises are suitable and adequate for their intended
use and are adequately covered by insurance. As of December 31, 2003, the
Company leases all its facilities.
ITEM 3. LEGAL PROCEEDINGS
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. Colonial and Universal are not part
of the Chapter 11 filing. The Company does not believe that Atlantic will emerge
from the reorganization with any value for the Company. The Company does not
exercise significant influence over Atlantic's operations and financial
activities. As of December 31, 2001, Atlantic has been deconsolidated on the
Company's financial statements and its operations are being reported as "results
from operations of discontinued segments."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2003.
4
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, CONVERTIBLE PREFERRED
STOCK AND RELATED STOCKHOLDER MATTERS
(a) Price Range of Common Stock and Convertible Preferred Stock
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.
From July 11, 2002 through December 31, 2003, the Company's common
stock was traded on the Over the Counter (OTC) - Pink Sheets market. From
January 1, 2001 through June 9, 2002, the Company's common stock and convertible
preferred stock were traded on the NASDAQ small capitalization automated
quotation system. The following table sets forth the quarterly high and low bid
prices during 2003 and 2002. The quotations set forth below represent
inter-dealer quotations, which exclude retail markups, markdowns and commissions
and do not necessarily reflect actual transactions.
Common Stock Convertible Preferred Stock
High Low High Low
2003
First Quarter $ .15 0 Not Available Not Available
Second Quarter .15 .10 Not Available Not Available
Third Quarter .98 .50 .50 .35
Fourth Quarter 1.05 .13 .60 .55
2002
First Quarter $ .84 .25 2 .06 .88
Second Quarter .50 .28 1.94 1.63
Third Quarter .13 .03 Not Available Not Available
Fourth Quarter .13 .09 Not Available Not Available
(b) Approximate number of common and convertible preferred stockholders:
Approximate Number of
Record Holders
Title of Class (April 29, 2004)
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Common stock par value $.05 per share 494
Convertible preferred stock par value $.05 per share 1,315
(c) Dividends
The Company does not contemplate common stock dividend payments in
the near future and is restricted from paying any dividends under its credit
facility.
5
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
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2003 2002 2001 2000 1999
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Sales $ 44,671,136 36,998,800 31,080,398 (1) 32,342,160(1)(2) 16,592,423(1)(3)
-------------- -------------- -------------- -------------- --------------
Operating income 1,296,597 226,567 519,860 (58,036) 209,572
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Income (loss) from continuing
operations 1,320,263 (106,310) (1,610,810) (1,323,627) (118,492)
Income (loss) from operations of
discontinued segment -- 3,300,695 (4) (6,098,023) (2,977,916) 1,025,529
Income (loss) on disposal of
discontinued operation -- -- 106,509 (3,731,654) --
-------------- -------------- -------------- -------------- --------------
Income (loss) on discontinued
operation -- 3,300,695 (5,991,514) (6,709,570) 1,025,529
Net income $ 1,320,263 3,194,385 (7,602,324) (8,033,197) 907,037
============== ============== ============== ============== ==============
Income (loss) per common share:
Basic:
Continuing operations $ .67 (0.07) (1.00) (0.86) (0.08)
Income (loss) on discontinued
operation -- 2.06 (3.74) (4.35) 0.68
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Net income (loss) per common
share $ .67 1.99 (4.74) (5.21) 0.60
============== ============== ============== ============== ==============
Diluted:
Continuing operations $ .38 (0.07) (1.00) (0.86) (0.08)
Income (loss) on discontinued
operation -- 2.06 (3.74) (4.35) 0.68
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Net income (loss) per common
share $ .38 1.99 (4.74) (5.21) 0.60
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DECEMBER 31,
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2003 2002 2001 2000 1999
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Total assets $ 20,618,987 13,686,842 13,925,490 26,550,994 23,273,837 (3)
Current liabilities
Borrowings under credit facility 12,232,030 (4) 10,350,889 (4) 7,929,576 9,096,294 7,573,761 (3)
Other 7,089,276 (5) 3,953,063 (5) 9,659,183 (5) 12,876,360 3,647,396 (3)
Long-term liabilities, less current
obligations 326,700 64,775 213,001 852,286 351,141 (3)
(1) Due to the discontinuance of operations in 2001, excludes sales from
Atlantic which were $24,561,972 $25,978,063, and $25,666,531 in 2001, 2000
and 1999, respectively.
(2) Due to the discontinuance of operations in 2000, excludes sales from
Well-Bilt, which were $4,074,798, net of inter-company sales.
(3) In July 1999, Colonial acquired Universal. Prior to that, Colonial had no
sales from continuing operations.
(4) The amounts shown in the table as "Borrowings under Credit Facility," as of
December 31, 2003 and December 31, 2002, includes $2,500,000 which Colonial
and Universal agreed to pay to their lending bank in consideration of the
bank releasing Colonial and Universal from their guarantees to the bank of
an additional $3,300,695 of Atlantic's line of credit. The release from the
$3,300,695 of the guarantee resulted in the recognition of income from
discontinued operations in 2002. See "General Development of Business."
(5) Amount includes $219,007 of guaranteed liabilities of Atlantic, which the
Company continues to recognize, at cost. The Company believes that it is
not responsible for any liabilities beyond the amount recorded.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The accounting policies below are critical to the Company's business operations
and the understanding of results of operations. The Company's discussion and
analysis of its financial condition and results of operations are based upon the
Company's consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities as the date of the
consolidated financial statements and the reported amount of revenue and
expenses during the reporting period. The Company bases its estimates on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of asset and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
6
Revenue for the Company primarily consists of sales of heating, ventilation and
air conditioning equipment, climate control systems and high-end plumbing
fixtures. The Company recognizes revenue after it receives a purchase order with
a fixed determinable price from the customer and shipment of products has
occurred in accordance with the shipping terms. There are no further obligations
on the part of the Company subsequent to revenue recognition, except for returns
of defective product from the Company's customers, which are covered under the
manufacturer's warranty. Credits are issued to the customer when items are
returned. Often the Company will receive a vendor credit from the manufacturer
related to the product in question. The Company does not provide a warranty on
products sold; rather the warranty is provided by the manufacturer.
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company establishes and monitors the allowance for doubtful accounts based on
the credit risk of specific customers, customer concentrations, historical
trends and other information. The Company had gross accounts receivable of
$6,538,900 and an allowance for doubtful accounts of $285,000 as of December 31,
2003. Although the Company believes its allowance is sufficient, if the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances would be
required.
The Company writes down its inventories for estimated slow moving and obsolete
goods equal to the difference between the carrying value of the inventory and
the estimated market value, based upon assumptions about future demand and
market conditions. A significant sudden increase in the demand for the Company's
products could result in a short-term increase in the cost of inventory
purchases, while a significant decrease in demand could result in an increase in
the amount of excess inventory quantities on-hand. Additionally, the Company's
estimates of future product demand may prove to be inaccurate, in which case the
Company may have understated or overstated the write-down required for excess
and obsolete inventory. In the future, if the Company's inventory is determined
to be overvalued, it would be required to recognize such costs in its cost of
goods sold at the time of such determination. Likewise, if the Company does not
properly estimate the lower of cost or market of its inventory and it is
therefore determined to be undervalued, it may have over-reported its cost of
goods sold in previous periods, and would be required to recognize such
additional operating income at the time of sale. Therefore, although the Company
makes every effort to ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand could have a significant
impact on the value of the Company's inventory and its reported operating
results.
Goodwill and other intangible assets amounting to $1,628,133 and $54,167 at
December 31, 2003, respectively, consist of assets arising from acquisitions.
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," (Statement No. 142) effective January 1,
2002. Under Statement No. 142, goodwill and intangible assets with indefinite
lives are no longer amortized, but are reviewed at least annually for
impairment. In assessing the recoverability of the Company's goodwill and other
intangible assets, the Company must make assumptions regarding estimated future
cash flows and other factors to determine the fair value of the respective
assets and liabilities of the reporting unit. Upon adoption and again as a
result of the Company's annual impairment test, there was no indication of
impairment for goodwill acquired in prior business combinations. If the
Company's estimates or their related assumptions change in the future, the
Company may be required to record impairment charges related to its goodwill.
7
The Company has accounted for, and currently accounts for, income taxes in
accordance with Statement 109. "Accounting for Income Taxes." This statement
establishes financial accounting and reporting standards for the effects of
income taxes that result from an enterprise's activities during the current and
preceding years. It requires an asset and liability approach for financial
accounting and reporting of income taxes. The realization of future tax benefits
of deductible temporary differences and operating loss or tax credit
carryforwards will depend on whether the Company will have sufficient taxable
income of an appropriate character within the carryback and carryforward period
permitted by the tax law to allow for utilization of the deductible amounts and
carryforwards. Without sufficient taxable income to offset the deductible
amounts and carryforwards, the related tax benefits will expire unused. The
Company evaluates both positive and negative evidence in making a determination
as to whether it is more likely than not that all or some portion of the
deferred tax asset will not be realized. As of December 31, 2003, the Company
had a deferred tax valuation allowance of $11,934,740.
RESULTS OF OPERATIONS 2003-2002
The Company had net income of $1,320,263 for the year ended December 31, 2003.
This compares with net income of $3,194,385 for the year ended December 31,
2002, which included net income from the operations of discontinued segments of
$3,300,695 and a loss from continuing operations of $106,310.
Sales for the year ended December 31, 2003 were $44,671,136, an increase of
$7,672,336 (20.7%), from $36,998,800 in 2002. This increase reflects
approximately $3,000,000 in sales related to the September 2003 RAL acquisition,
$1,700,000 in sales by reason of incorporating the results of Goldman for the
full year in 2003 instead of for only six months in 2002; $950,000 from two new
locations started in July 2003; and the balance relates to increased market
penetration from existing locations.
Net income from continuing operations increased due to business expansion
related to the Goldman acquisition being reported for a full year, the RAL
acquisition in the fourth quarter and market penetration. Gross margins
increased 0.8% to 29.5%, due to a change in product mix and higher gross margins
at RAL. Selling general and administrative expense in 2003 increased $1,477,156
to $11,869,885, but total general and administrative expense as a percentage of
sales decreased to 26.6% from 28.1% as a result of operating efficiencies.
Other income relates to service charges collected from customers of slower
paying accounts, and increased by $38,396 to $324,367 directly related to
increased sales. Interest expense increased by $55,122 to $638,742, based upon
increased borrowings related to increased sales, accounts receivable, inventory
and the RAL acquisition.
For the year ended December 31, 2003, the Company recorded a deferred tax
benefit in the amount of $421,400 resulting from a decrease in its valuation
allowance on deferred tax assets in recognition of its anticipated utilization
of net operating loss carryforwards.
8
Accounts receivable increased by $1,067,008 to $6,253,900 directly related to
increased sales, the RAL acquisition and the opening of two new branch
locations. A $4,052,598 increase in inventory from $5,730,224 to $9,782,822
relates in major part to the RAL acquisition made on September 30, 2003.
The increase in trade payable of $2,848,996 to $5,295,879 relates to the
acquisition of inventory necessary for the operation of the business to support
the RAL acquisition and the Company's two new locations.
RESULTS OF OPERATIONS 2002-2001
The Company had a net income of $3,194,385 for the year ended December 31, 2002.
This compares with a net loss of $ 7,602,324 for the year ended December 31,
2001. The 2002 net income consists of $3,300,695 income from the discontinued
operations of Atlantic resulting from the settlement between Colonial, Universal
and Atlantic's lending bank relating to the release of Colonial and Universal
from $5,800,695 of guarantees of Atlantic's indebtedness in return for the
agreement for the Company to pay $2,500,000 to the Bank as a five year term
loan. The loss in 2001 primarily reflects a $6,098,023 loss from the
discontinued operations of Atlantic (now unconsolidated), and a net $106,509
recovery of a portion of the loss previously recognized on disposal of
Well-Built. The Well-Built recovery resulted from favorable settlements attained
on items accrued for at December 31, 2000. The Company had a loss from
continuing operations, before taxes of $69,143 in 2002, compared with income of
$46,978 in 2001.
In 2001, the Company reported a loss from the discontinued operations of
Atlantic of $6,098,023. This loss was primarily due to a decrease in gross
margins of 6.1% or $1,498,280, as well as $3,306,582 and $1,033,045 of write
downs recorded to accounts receivable and fixed assets, respectively, in order
to reduce them both to their net realizable value. See "General Development of
Business" for information on Atlantic's Chapter 11 bankruptcy filing. Effective
December 31, 2001, Atlantic's assets were written down to net realizable value
and Atlantic has been accounted for as an unconsolidated subsidiary. The lower
than normal gross margins were a result of additional costs incurred by Atlantic
in finalizing certain projects.
The Company's sales for the year ended December 31, 2002 were $36,998,800, or an
increase of $5,918,402 (19%) from the $31,080,398 in sales in 2001. This
increase primarily reflects approximately $2,500,000 in sales to other wholesale
distributors, as a result of the Goldman acquisition, favorable summer weather
conditions, increased market penetration, and a recovery from the adverse impact
of the September 11 events on 2001 sales. Meanwhile, gross margins decreased by
1.4% to 28.7% due to sales increases to other wholesale distributors on selected
products at lower gross margins, as well as overall product mix. Selling,
general and administrative expenses increased by $1,567,549, primarily
reflecting $572,506 of professional fees in connection with Atlantic's Chapter
11 bankruptcy filing, and increased direct and non-sales salaries of $354,974
and $336,726, respectively, principally due to new hires relating to the overall
increase in sales at Universal.
Interest expense decreased by $130,006, reflecting the effect of lower average
borrowings and a decrease in the prime rate. In consideration of the bank's
waiver of Atlantic's default, this decrease was offset in part by a one-point
increase in the Company's interest rate on its line of credit from January 2002
until November 2002. Other income increased by $55,933 due primarily to an
increase in finance charges on Universal's accounts receivable.
9
For 2002 the Company recorded a state tax provision of $37,167 and no federal
provision. This compares to 2001, when the Company recorded a deferred federal
tax expense of $1,564,429 and current and deferred state tax expense of $32,786
and $60,573, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Credit Facility
The Company's credit facility with its lending bank permits a total of
$13,500,000 in borrowings, including a $79,000 term loan payable in monthly
installments ending April, 2004, a $2,160,000 term loan payable, and additional
borrowings on a revolving basis against eligible accounts receivable and
inventory. All loans are in all events payable upon demand by the bank. The
interest rate under the facility is at prime + .5%, except that the interest
rate on the $2, 160,000 term loan is at prime plus 2.5%. The facility expires
November 21, 2005. All loans are secured by the assets of the Company, as well
as a pledge of all of the outstanding stock of Universal. The facility contains
covenants relating to the financial condition of the Company and its business
operations, and, among other things, restricts the payment of dividends and
capital expenditures. At December 31, 2003, the Company was in default of the
tax covenant with the bank because it has not filed its 2002 tax returns and the
Company was in default of the capital expenditures covenant for exceeding its
limit during 2003. The bank has waived these events of default. At December 31,
2003, the amount of unused credit available under the facility was $733,000.
The Company will seek to meet its liquidity needs going forward through a
combination of cash from operations, consignment arrangements with suppliers,
the continuance of the current credit facility and the issuance of equity or
debt in private placements. In July 2003 and February 2004, the Company
completed two private placements in which it issued an aggregate of 1,402,000
shares of common stock for a total purchase price of $ 600,600. Approximately $
245,000 of the proceeds were used for general working capital purposes.
Substantially all of the balance was used 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 in February 2004.
Net cash flows provided by operating activities in 2003 were $ 409,903 in
comparison to $778,090 in 2002. The 2003 decrease in operating cash flows was
due primarily to an increase in inventory, an increase in accrued liabilities,
and an increase in accounts receivable. The increase in accrued liabilities is
due primarily to accrued professional fees at December 31, 2002 relating to the
release by the Company's lending bank of a guaranty by the Company and Universal
of Atlantic's obligations to the lending bank (see the discussion below
regarding Atlantics' Chapter 11 filing). The increase in accounts receivable
primarily reflects the timing and increase in sales in 2002.
Cash flows provided from financing activities in 2003 consisted of $ 240,600 of
issuance of common stock and $73,643 issuance of notes payable. Cash flows used
in financing activities consisted of repayment of notes in the amount of $38,402
and $265,920 of net repayments on the Company's credit facility.
CONTRACTUAL OBLIGATIONS:
The following table represents certain contractual commitments associated with
operating agreements, obligations to financial institutions and other long-term
debt obligations as of December 31, 2003:
10
Payments due by Period
(In Thousands)
-----------------------------------------------
Less than Over
Total 1 Year 1-3 Years 4-5 Years 5 Years
-----------------------------------------------
Operating leases $12,630 2,422 6,690 2,460 1,058
Compensation agreements 1,330 880 450 -- --
Notes payable 431 104 178 149 --
Line of credit 12,232 12,232 -- -- --
------- ------- ------- ------- -------
Totals $26,623 15,638 7,318 2,609 1,058
======= ======= ======= ======= =======
IMPACT OF INFLATION AND SEASONALITY
To date, inflation has not had a significant impact on the Company's operations.
The Company's business is affected by significant outdoor temperature swings.
Sales typically increase during peak heating and cooling demand periods.
Accordingly, sales are usually significantly lower during the first quarter in
the calendar year and increase through the remaining quarters.
Item 7a Quantitative And Qualitative Disclosures About Market Risk
Market risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. The Company has no financial instruments that
give it exposure to foreign exchange rates or equity prices.
The Company's pre-tax earnings and cash flows are exposed to changes in interest
rates as all borrowings under its credit facility bear interest based on the
prime rate plus 0.5%, except for the $2.5 million term loan, which bears
interest at a rate of prime plus 2.5%. A hypothetical 10% adverse change in such
rates would reduce the pre-tax earnings and cash flow for the year ended
December 31, 2003 by approximately $59,000 over a one-year period, assuming the
borrowing level remains consistent with the outstanding borrowings as of
December 31, 2003. The fair value of the borrowings under the credit facility is
not affected by changes in market interest rates.
The Company's remaining interest-bearing obligations are at fixed rates of
interest and as such do not expose pre-tax earnings and cash flows to changes in
market interest rates. The change in fair value of the Company's fixed rate
obligations resulting from a hypothetical 10% adverse change in interest rates
would not be material.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company, together with the
independent accountants report thereon of Weiser LLP and KPMG LLP, appears
herein. See Index to Financial Statements appearing on page F-1.
11
Item 9. Changes in and Disagreements With Accountants On Accounting and
Financial Disclosures
None
Item 9A. Controls and Procedures
(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 Rule 13a-15(e)
under the Securities Exchange Act of 1934) as of December 31, 2003 ("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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the Registrant's directors and executive
officers are listed below, along with a brief account of their business
experience during the last five years. Officers are appointed annually by the
Board of Directors at its first meeting following the Annual Meeting of
Stockholders and from time to time at the pleasure of the Board. There are no
family relationships among these directors or officers, nor any arrangement or
understanding between any such directors or officers and any other person
pursuant to which any of such officers were selected as executive officers.
Business Experience Year First Elected
Name Age During Past Five Years as Director
------------------------- ----- ------------------------------------------- -------------------
Common Stock Directors:
Gerald S. Deutsch ** 67 Certified Public Accountant and Attorney 1988
Bernard Korn * 79 Chairman of the Board, President and 1964
Chief Executive Officer of the Company
Carl L. Sussman 79 Private Investor 1964
James W. Stewart * 58 Executive Vice President, Treasurer and
Secretary of the Company 1982
Convertible Preferred
Stock Directors:
Jack Rose 85 Private Investor 1983
Ronald Miller 60 Attorney at Law 1983
William Koon 74 President, Lord's Enterprises, 1983
Grain Merchants
William Pagano * 64 President of Universal Supply Group, Inc. 2001
* Executive Officers of the Company
** Mr. Deutsch resigned as a director on June 19, 2003.
12
There are no other significant employees who would need to be included
in this item.
For the past years, each of the directors have been engaged in the
occupations described above.
Audit Committee
The Company has a separately designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act. Serving
on the Committee are Ronald Miller, William Koon, Jack Rose and Carl Sussman.
The Board of Directors had determined that it has an audit committee financial
expert serving on the audit committee, Ronald Miller. Mr. Miller is an
independent director as defined in Item 7(d)(3)(iv) of Schedule 14A.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its Chief
Executive Officer and Chief Financial Officer.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company believes that during the period from January 1, 2003
through December 31, 2003, all executive officers, directors and greater than
10% beneficial owners, complied with Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a Compensation Committee or any other
committee of the Board of Directors performing equivalent functions. Decisions
regarding compensation of executive officers of the Company are made by the
Board of Directors. Three of the company's executive officers, Bernard Korn,
James W. Stewart and William Pagano, are directors of the Company. Each of these
individuals participated in deliberations of the Board during the fiscal year
ended December 31, 2003 concerning executive officer compensation, except that
they abstained from deliberations and voting regarding their own compensation.
BOARD OF DIRECTORS' REPORT ON EXECUTIVE COMPENSATION
As required by the rules established by the Securities and Exchange
Commission, the Board of Directors has prepared the following report on the
compensation policies of the Board of Directors applicable to the Company's
executive officers.
The Company's executive compensation policies and programs are designed
to retain talented executives and motivate them to achieve business objectives
that will enhance stockholder value. The Company's compensation program for
executives consists of three elements:
13
- a base salary,
- a performance-based annual bonus, and
- periodic grants of stock options.
BASE SALARY
The salaries for the executive officers are designed to retain
qualified and dedicated executive officers. The Board of Directors reviews
salary recommendations made by the Company's Chief Executive Officer (CEO), and
evaluates individual responsibility levels, performance and length of service.
ANNUAL BONUS
Bonus compensation provides the Company with a means of rewarding
performance, based upon the attainment of corporate profitability during the
year. Mr. Pagano receives annual bonuses based on a percentage of earnings of
his subsidiary. The Company accrued a bonus of $232,257 for the year ended
December 31, 2003.
STOCK OPTIONS
During 2003, a total of 104,000 stock options were granted to two of
the Company's officers and four of its outside directors.
CHIEF EXECUTIVE OFFICER'S COMPENSATION
The CEO's compensation was determined on the basis of the same factors
utilized to compensate other executives.
The Board of Directors
Bernard Korn (Chairman) James W. Stewart
William Koon Ronald Miller
Jack Rose Carl L. Sussman
William Pagano
EXECUTIVE COMPENSATION
The following table sets forth information about compensation paid or
accrued by the Company during the fiscal years ended December 31, 2003, 2002 and
2001 to Bernard Korn, James W. Stewart and William Pagano, the only officers of
the Company and its subsidiaries whose compensation exceeded $100,000 (the
"Named Officers").
14
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Stock
Name and Principal Position Year Salary ($) Bonus ($) Options (Shares)
--------------------------- ------ ---------- -------- ----------------
Bernard Korn 2003 158,654 - 60,000
Chairman of the Board, 2002 200,000 - -
President, Chief Executive 2001 221,154 - -
Officer and Director
James W. Stewart 2003 105,769 - 20,000
Executive Vice President, 2002 130,329 - -
Treasurer, Secretary 2001 167,967 - -
and Director
William Pagano 2003 200,000 232,257 -
President, Universal Supply 2002 200,000 194,734 -
Group, Inc. 2001 200,000 147,640 -
The above table does not include certain perquisites and other personal
benefits, the total value of which does not exceed the lesser of $50,000 or 10%
of such person's cash compensation.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the value of
unexercised stock options at the end of the 2003 fiscal year for the persons
named in the Summary Compensation Table.
Value of
Number of Unexercised
Unexercised In-The-Money
Shares Options at Options at
Acquired On Value Fiscal Year-End Fiscal Year-End
Exercise Realized Exercisable/ Exercisable/
(#) ($) Unexercisable Unexercisable
-------------- -------------- -------------- --------------
Bernard Korn 0 0 87,000/0 $ 56,550/0
James W. Stewart 0 0 45,000/0 $ 29,250/0
William Pagano 0 0 20,000/0 $ 13,000/0
There are no stock appreciation rights, long-term incentive plans or pension
plans.
Mr. Korn is employed pursuant to an employment agreement (the
"Agreement"), expiring December 31, 2005, at an annual compensation of $250,000.
In the event of Mr. Korn's death, the Agreement provides for continued
compensation payments for a period of one year. In the event of Mr. Korn's
disability, he will receive compensation for the balance of the term of the
agreement at the rate of compensation then in effect. Mr. Korn voluntarily
agreed to a $50,000 per annum salary reduction on June 7, 2001 and another
$50,000 on February 24, 2003.
Mr. Stewart is employed pursuant to an employment agreement expiring
December 31, 2004 at a compensation $250,000 per annum for the year 2004. Mr.
Stewart's agreement also provides for annual incentive compensation, based on
increases in pre-tax income from a base period of the year ended December 31,
1999. Mr. Stewart voluntarily agreed to an annual salary reduction amounting to
$150,000.
15
Mr. Pagano is employed pursuant to an employment agreement expiring on
December 31, 2005 at a compensation of $200,000 per annum. The agreement also
provides for additional incentive compensation based on a percentage of
earnings, as defined, of Universal Supply Group, Inc.
DIRECTORS' COMPENSATION
The Company paid Mr. Deutsch an aggregate of $6,000 for fees for
professional services rendered to the Company and its subsidiaries during 2003.
Members of the Board of Directors, other than those employed by the
Company or its subsidiaries, receive a fee of $1,000 for each meeting of the
Board attended, limited to $4,000 per annum, in addition to an annual retainer
of $2,000. Members of the Board of Directors, employed by the Company or its
subsidiaries, receive no fees.
16
Performance Graph
Comparison of Five Year Cumulative Return*
Among Colonial Commercial Corp.
The NASDAQ Stock Market (U.S.) Index and The Russell 2000 Index
12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
-------- -------- -------- -------- -------- --------
Colonial Commercial Corp. 100.00 140.54 137.86 31.57 4.32 38.92
NASDAQ Stock Market (U.S.) 100.00 190.62 127.67 70.42 64.84 91.16
Russell 2000 100.00 121.26 117.59 120.52 95.83 141.11
o $100 invested on 12/31/98 in stock or index including reinvestment of
dividends Fiscal year ending December 31.
The annual changes for the five-year period are based on the assumption that
$100 had been invested on December 31, 1998 and that all dividends were
reinvested. The total cumulative dollar returns shown on the graph represent the
value that such investments would have had on December 31, 2003.
17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 29, 2004, information with
respect to equity ownership by directors of the Company, holders of over 5% of a
class of stock and of directors and officers of the Company as a group.
COMMON STOCK** CONVERTIBLE PREFERRED STOCK
----------------------------------------------------------
Amount and Amount and
Nature of Nature of
Name of Beneficial Beneficial Percent Beneficial Percent
Owner Ownership* of Class Ownership of Class
--------------------------------------------------------------------------------------
Michael Goldman 183,000 5.71% -- --
William Koon 23,082 (3)(1) (2) 11,259 --
1.29%
Bernard Korn 509,561 (4)(1) 15.90% 119,694 13.73%
Ronald H. Miller 12,000 (1) (2) 3,696 (5) (2)
William Pagano 554,640 (1) 17.30% -- --
Jack Rose 156,196 (7)(1) 4.87% 48,371 5.55%
James W. Stewart 149,000 (1) 4.65% -- --
Carl L. Sussman 111,107 (6)(1) 3.47% -- --
Richard Rozzi 399,365 12.46% -- --
Rita C. Folger 365,325 (8) 11.40% 61 --
All directors and
Officers as a group 1,515,586 (9) 47.28% 183,020 21.00%
The beneficial owners listed above have all given a business address of 120 New
South Road, Hicksville, New York 11801.
* For the purposes of this table, "Beneficial Ownership" is defined as set
forth in rule 13d-3 under the Securities Exchange Act of 1934, as amended.
Except as set forth in the following notes, each person listed in the table
has sole voting and sole investment power with respect to the shares of
Common Stock listed in the table.
** The shares of Common Stock listed in the table do not reflect the
conversion of the Company's Convertible Preferred Stock. If all of such
Convertible Preferred Stock were to be converted, the percentage of
ownership of Messrs. Korn, Rose, Stewart, Pagano, Rozzi, Ms. Folger and all
directors and officers as a group would be 15.43%, 5.02%,3.65%, 13.60%,
9.79%, 8.96% and 41.66%, respectively.
18
(1) Includes 87,000, 45,000, and 20,000 common shares subject to options which
are exercisable within 60 days held by Messrs. Korn, Stewart, Pagano,
respectively, and 12,000 common shares, subject to options, which are
exercisable within 60 days held by each of Messrs. Sussman, Koon, Rose and
Miller and 200,000 common shares subject to options, which are exercisable
within 60 days held by all directors and officers as a group.
(2) Messrs. Miller and Koon, each are the beneficial owners of less than one
percent of the Company's outstanding securities, excluding securities held by,
or for the account of, the Company or its subsidiaries, plus securities deemed
outstanding pursuant to Rule 13d-(3)-(d)(1) of the Exchange Act. As a result,
their respective percentages of ownership have not been disclosed.
(3) Includes 10,600 shares of Common Stock and 5,000 shares of Convertible
Preferred Stock owned by Mr. Koon's wife, of which shares Mr. Koon disclaims
beneficial ownership.
(4) If only Mr. Korn were to convert his Convertible Preferred Stock, his
percentage of ownership of Common Stock would be 18.92%.
(5) Includes 2,803 shares of Convertible Preferred Stock owned by Mr. Miller's
wife, of which shares Mr. Miller disclaims beneficial ownership.
(6) Includes 44,107 shares of Common Stock owned jointly by Mr. Sussman and his
wife.
(7) If only Mr. Rose were to convert his Convertible Preferred Stock, his
percentage of ownership of Common Stock would be 5.02%.
(8) Ms. Folger is the wife of Oscar Folger, the Company's legal counsel. Mr.
Folger has disavowed beneficial ownership of his wife's shares.
(9) If Michael Goldman is elected a director, the directors and officers as a
group will own 53.00% of the common stock and 46.15% of the total outstanding,
if all the convertible preferred stock converted to common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees.
The following table presents fees for professional audit services rendered by
Weiser LLP for the audit of the Company's annual financial statements for the
years ended December 31, 2003 and fees billed for other services rendered by
Weiser LLP during those periods:
Audit Fees (1) $152,375
Audit-Related Fees (2) 10,475
Tax Service Fees (3) 10,000
Other Fees (4) -0-
(1) Audit Fees consist of fees billed for professional services rendered for the
audit of the Company's consolidated annual financial statements and review of
the interim consolidated financial statements included in quarterly reports and
services that are normally provided by Weiser LLP in connection with statutory
and regulatory filings or engagements.
(2) Audit-Related Fees consist of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of the
Company's consolidated financial statements and are not reported under "Audit
Fees."
(3) Tax Fees consist of fees billed for professional services rendered for tax
compliance, tax advisory and tax planning. These services included assistance
regarding federal, state and local tax compliance and tax planning.
(4) No other fees for professional services rendered to the Company during the
fiscal 2003 billed by Weiser LLP, other than the service reported above.
19
The Committee meets with the independent auditor prior to the audit and
discusses the planning and staffing of the audit;
Approves in advance the engagement of the independent auditor for all audit
services and non-audit services and approve the fees and other terms of any such
engagement; and
Obtains periodically from the independent auditor a formal written statement of
the matters required to be discussed by Statement of Auditing Standards No. 61,
as amended, and, in particular, describing all relationships between the auditor
and the Company, and discusses with the auditor any disclosed relationships or
services that may impact auditor objectivity and independence.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statements
(1) Financial Statements
(2) Financial Statement Schedules
(3) Exhibits. The Exhibits filed herewith are set forth on the Index of
Exhibits filed as part of this report.
(b) Form 8-K:
(1) Form 8-K filed October 15, 2003 to report the acquisition of RAL Supply
Group, Inc. on September 30, 2003.
(2) Form 8-K filed November 25, 2003 to report the engagement of Weiser LLP
on November 20, 2003 as the Company's new independent Accountants to
replace KPMG, LLP for the calendar year ending December 31, 2003.
(3) Form 8-K/A filed April 20, 2004 to provide the financial disclosure
relating to the acquisition of RAL Supply Group, Inc. on September 30,
2003.
(c) Exhibits
20
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Contents
Page
Report of Independent Certified Public Accountants: Weiser LLP F-2
Report of Independent Certified Public Accountants: KPMG LLP F-3
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 F-7
Notes to the Consolidated Financial Statements F-8 - F -27
Independent Auditors' Report (KPMG LLP) on the Schedule F-28
Schedule II - Valuation and Qualifying Accounts F-29
All other schedules are omitted because they are not required or the
information required is given in the consolidated financial statements or
notes thereto.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and
Stockholders of Colonial Commercial Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Colonial
Commercial Corp. and Subsidiaries (the "Company") as of December 31, 2003, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows, and consolidated financial statement Schedule
II (Valuation and Qualifying Accounts) for the year then ended. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Colonial
Commercial Corp. and Subsidiaries as of December 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule referred
to above, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information required to
be included therein.
/s/ WEISER LLP
------------------
New York, New York
April 14, 2004
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Colonial Commercial Corp.:
We have audited the accompanying consolidated balance sheet of
Colonial Commercial Corp. and subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the two-year period ended December 31,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Colonial
Commercial Corp. and subsidiaries as of December 31, 2002, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in note 1(c)
paragraphs 1, 2 and 3 to the financial statements, the Company had losses in
2001 and 2000, stockholders' deficit and had negative working capital. In
addition, outstanding borrowings under its credit facility are due on demand. If
the bank were to demand repayment, the Company does not project that it would
have sufficient liquidity to make such a payment. In addition, as discussed in
note 2(c), Atlantic Hardware & Supply Corporation ("Atlantic"), a wholly-owned
subsidiary of the Company, filed for reorganization under Chapter 11 of the
United States Bankruptcy Code on January 28, 2002. The financial results of
Atlantic have been deconsolidated and the Company accounts for Atlantic using
the cost method. These circumstances raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in note 1(c) paragraphs 2 and 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in note 1(i) to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" as of January 1, 2002.
/s/ KPMG LLP
-------------------
Melville, New York
October 2, 2003
F-3
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2002
Assets 2003 2002
---------------- ----------------
Current assets:
Cash and cash equivalents $ 342,756 $ 296,764
Accounts receivable, net of allowance for doubtful accounts
of $285,000 in 2003 and $265,000 in 2002 6,253,900 5,186,893
Inventory 9,782,822 5,730,224
Prepaid expenses and other current assets 620,678 338,251
Deferred tax asset 421,400 --
---------------- ----------------
Total current assets 17,421,556 11,552,132
Property and equipment 1,515,131 631,948
Goodwill 1,628,133 1,416,929
Other intangibles 54,167 85,833
---------------- ----------------
$ 20,618,987 $ 13,686,842
================ ================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Trade payable $ 5,295,879 $ 2,446,886
Accrued liabilities 1,513,578 1,216,051
Income taxes payable 175,614 40,230
Borrowings under credit facility 12,232,030 10,350,889
Investment in unconsolidated subsidiary in bankruptcy, carried at cost -- 219,007
Notes payable - current portion 104,205 30,889
---------------- ----------------
Total current liabilities 19,321,306 14,303,952
Notes payable, excluding current portion 326,700 64,775
---------------- ----------------
Total liabilities 19,648,006 14,368,727
---------------- ----------------
Commitments and contingencies
Stockholders' equity (deficit):
Redeemable convertible preferred stock, $.05 par value, liquidation
preference of $7,333,960, and $7,321,260 and 2,468,860 shares
authorized, 1,466,792 in 2003 and 1,464,252 in 2002 shares issued
and outstanding 73,340 73,213
Common stock, $.05 par value, 20,000,000 shares
authorized, 2,403,318 in 2003 and 1,603,794 in 2002 shares
issued and outstanding 120,166 80,190
Additional paid-in capital 9,259,013 8,966,513
Accumulated deficit (8,481,538) (9,801,801)
---------------- ----------------
Total stockholders' equity (deficit) 970,981 (681,885)
---------------- ----------------
$ 20,618,987 $ 13,686,842
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
-------------------------------------------------------
Sales $ 44,671,136 $ 36,998,800 $ 31,080,398
Cost of sales 31,504,654 26,379,504 21,735,358
-------------------------------------------------------
Gross profit 13,166,482 10,619,296 9,345,040
Selling, general and administrative expenses, net 11,869,885 10,392,729 8,825,180
-------------------------------------------------------
Operating income 1,296,597 226,567 519,860
Interest income 885 1,939 10,706
Other income 324,367 285,971 230,038
Interest expense (638,742) (583,620) (713,626)
-------------------------------------------------------
Income (loss) from continuing operations
before income taxes (benefit) expense 983,107 (69,143) 46,978
Income taxes (benefit) expense (337,156) 37,167 1,657,788
-------------------------------------------------------
Income (loss) from continuing operations 1,320,263 (106,310) (1,610,810)
Discontinued operation (note 2(c)):
Net income (loss) from operations of discontinued segments - 3,300,695 (6,098,023)
Recovery of loss on disposal of discontinued operation - - 106,509
-------------------------------------------------------
Income (loss) on discontinued operation - 3,300,695 (5,991,514)
-------------------------------------------------------
Net income (loss) $ 1,320,263 $ 3,194,385 $ (7,602,324)
=======================================================
Income (loss) per common share:
Basic:
Income (loss) from continuing operations $ 0.67 $ (0.07) $ (1.00)
Income (loss) on discontinued operation - 2.06 (3.74)
-------------------------------------------------------
Net income (loss) per common share $ 0.67 $ 1.99 $ (4.74)
=======================================================
Diluted:
Income (loss) from continuing operations $ 0.38 $ (0.07) $ (1.00)
Income (loss) on discontinued operation - 2.06 (3.74)
-------------------------------------------------------
Net income (loss) per common share $ 0.38 $ 1.99 $ (4.74)
=======================================================
Weighted average shares outstanding:
Basic 1,971,129 1,603,777 1,603,178
Diluted 3,501,698 1,603,777 1,603,178
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For The Years Ended December 31, 2003, 2002 and 2001
Number of
shares
--------------------------
Reedemable Reedemable
Convertible Convertible Additional Total
Preferred Common Preferred Common Paid-In Accumulated Stockholders'
Stock Stock Stock Stock Capital Defecit Equity (Defecit)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 2000 1,466,451 1,601,595 $ 73,322 $ 80,081 $ 8,966,513 $ (5,393,862) $ 3,726,054
Net loss -- -- -- -- -- (7,602,324) (7,602,324)
Conversion of shares of
preferred stock to
common stock (2,165) 2,165 (108) 108 -- -- --
---------------------------------------------------------------------------------------------------
Balance at December 31, 2001 1,464,286 1,603,760 73,214 80,189 8,966,513 (12,996,186) (3,876,270)
Net income -- -- -- -- -- 3,194,385 3,194,385
Conversion of shares of
preferred stock to
common stock (34) 34 (1) 1 -- -- --
---------------------------------------------------------------------------------------------------
Balance at December 31, 2002 1,464,252 1,603,794 73,213 80,190 8,966,513 (9,801,801) (681,885)
---------------------------------------------------------------------------------------------------
Net income 1,320,263 1,320,263
Stock-based compensation -- -- -- -- 92,000 -- 92,000
Other 2,540 (2,476) 127 (124) -- -- 3
Issuance of common stock -- 802,000 $ -- 40,100 200,500 -- 240,600
---------------------------------------------------------------------------------------------------
Balance at December 31, 2003 1,466,792 2,403,318 $ 73,340 $ 120,166 $ 9,259,013 $ (8,481,538) $ 970,981
===================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For The Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $ 1,320,263 $ 3,194,385 $ (7,602,324)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Income (loss) from discontinued operation - (3,300,695) 5,991,514
Deferred tax (benefit) expense (421,400) - 1,625,002
Stock-based compensation 92,000 - -
Provision for doubtful accounts 188,050 111,339 57,589
Depreciation 232,315 160,778 154,590
Amortization of intangibles 41,666 42,867 128,650
Amortization of excess of fair value of acquired net
assets over cost - - 26,712
Changes in operating assets and liabilities, net of the
effects of acquisitions:
Accounts receivable (671,771) (328,923) (261,947)
Inventory (1,770,078) 652,661 1,261,899
Prepaid expenses and other current assets (151,378) 38,587 107,375
Trade payable 1,533,048 24,084 (798,213)
Investment securities - trading - 122,506 (42,270)
Accrued liabilities (118,196) 168,863 (418,685)
Income taxes payable 135,384 14,144 25,086
Deferred compensation - (122,506) 42,270
------------- -------------- --------------
Net cash provided by operating activities 409,903 778,090 297,248
------------- -------------- --------------
Cash flows from investing activities:
Cash acquired in acquisition of RAL Supply Group, Inc. 3,575 - -
Payment for acquisition of Goldman Associates - (670,981) -
Purchase of licensing agreement - - (4,800)
Additions to property and equipment (377,407) (169,936) (105,951)
------------- -------------- --------------
Net cash used in investing activities (373,832) (840,917) (110,751)
------------- -------------- --------------
Cash flows from financing activities:
Issuance of common stock 240,600 - -
Issuance of notes payable 73,643 - -
Repayments on notes payable (38,402) (138,236) (140,799)
Net repayments under credit facility (265,920) (78,687) (1,166,718)
------------- -------------- --------------
Net cash provided by (used in)
financing activities 9,921 (216,923) (1,307,517)
------------- -------------- --------------
Net cash provided by discontinued operation - - 894,522
------------- -------------- --------------
Increase (decrease) in cash and cash equivalents 45,992 (279,750) (226,498)
Cash and cash equivalents - beginning of year 296,764 576,514 803,012
------------- -------------- --------------
Cash and cash equivalents - end of year $ 342,756 $ 296,764 $ 576,514
============= ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(a) DESCRIPTION OF BUSINESS
Colonial Commercial Corp. ("Colonial"), through its operating
subsidiaries, Universal Supply Group, Inc. ("Universal"), RAL Supply
Group, Inc. ("RAL"), and American/Universal Supply Inc. ("American")
(together the "Company"), is a distributor of heating, ventilation and air
conditioning (HVAC) and climate control products and high-end plumbing
fixtures to building contractors and other users. The Company's products
are marketed primarily to HVAC contractors, which, in turn, sell such
products to residential and commercial/industrial customers. The Company's
customers are located in the United States, primarily in New York,
Pennsylvania and New Jersey. The Company's discontinued subsidiary,
Atlantic Hardware & Supply Corporation ("Atlantic"), in January 2002,
filed for reorganization under Chapter 11 of the United States Bankruptcy
Code. See Note 2 for more information on acquisitions and discontinued
operations.
(b) 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.
(c) GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company had
losses in 2001 and 2000 of $7,602,324 and $8,033,197,and at December 31,
2002 had a stockholders' deficit of $681,885 and negative working capital
of $2,751,820. In addition, outstanding borrowings under its credit
facility of $10,350,889 at December 31, 2002, are due on demand. If the
bank were to demand repayment, the Company does not project that it would
have sufficient liquidity to make such a payment.
Management recognizes that the Company's ability to continue as a going
concern is dependent upon its ability to generate profits. The Company has
discontinued the operations that generated the losses in 2001 and 2000. In
addition, as a result of implementing various cost cutting strategies in
2001 and 2002, the corporate office realized a reduction in expenses in
2002 of $578,726, or 45%, as compared to 2000. Universal took various cost
cutting measures, including the use of consignment inventory, which
resulted in lower average borrowings, and; therefore, lower interest
expense to the Company. Furthermore, since 2000, Universal's 2002 sales
have increased 14.4% or $4,656,640. Further sales increases ocurred in
2003. Management anticipates additional increases due to additional
product lines, acquisitions and exclusive geographical locations granted
to Universal. The Company does not anticipate that demand for payment will
be made, as long as Universal
F-8
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
continues to be profitable and remains in compliance with the lending
agreement. Universal has had increases in sales in four of the past five
years and has consistently generated operating profits.
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. At
December 31, 2002, $2,490,000 of the Company's credit facility was payable
over a five year period. As of December 31, 2002, there was no assurance
that the Company would generate sufficient liquidity to maintain its
current operations. If the Company incurs losses and/or if the outstanding
borrowings under its credit facility are demanded to be repaid and the
Company is unsuccessful in obtaining new financing, the Company would
likely be required to seek bankruptcy court or other protection from its
creditors. These financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result,
should the Company be unable to continue as a going concern.
During 2003, the Company's net income was $1,320,263 and the Company
raised $240,600 in a private placement, thereby eliminating its
stockholders' deficit and creating stockholders' equity in the amount of
$970,981. In September 2003, the company's lender increased its credit
facility by $1,500,000 to $13,500,000 and approved the Company's
acquisition of RAL with a loan collateralized by accounts receivable and
inventory in the amount of $2,147,061. The Company still has negative
working capital of $1,899,750 (an improvement of approximately $852,000
from 2002) as a result of the demand feature of its credit facility
requiring classification as a current liability. The Company believes that
its relationship with its lender is satisfactory and that the facility
will be available to the Company through its term, November 2005. At
December 31, 2003, the Company's lender waived the Company's default of
its tax covenant because it has not filed its 2002 tax return and its
capital expenditures covenant for exceeding its limit for the 2003 year.
The Company believes that it has the ability to obtain an alternative
lender in the unlikely event its lender exercised its demand feature.
These factors, together with the Company's demonstrated ability to
generate profits, has eliminated management's concern about the Company's
ability to continue as a going concern.
(d) REVENUE RECOGNITION
Revenue is recognized when the earnings process is complete, generally
upon shipment of products in accordance with shipping terms. There are no
further obligations on the part of the Company subsequent to revenue
recognition, except for returns of defective product from the Company's
customers, which are covered under the manufacturer's warranty. Credits
are issued to the customer when items are returned. Often the Company will
receive a vendor credit from the manufacturer related to the product in
question. The Company does not provide a warranty on products sold; rather
the warranty is provided by the manufacturer.
F-9
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(e) CASH EQUIVALENTS
The Company considers all highly liquid investment instruments with an
original maturity of three months or less to be cash equivalents. There
were no cash equivalents at December 31, 2003 or 2002.
(f) 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.
(g) 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.
All costs of shipping inventory, which include costs to ship inventory to
the Company's customers, are included in selling, general and
administrative expenses. Such costs were $206,264, $291,089 and $209,975
for the years ended December 31, 2003, 2002 and 2001, respectively.
(h) 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.
(i) 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
F-10
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
The Company has determined that Universal and RAL are reporting units.
Goodwill activity as follows:
Balance at December 31, 2002 $ 1,416,929
Additions to Goodwill--RAL
Purchasing, Inc. 211,204
------------
Balance at December 31, 2003 $ 1,628,133
============
(j) STOCK OPTION PLAN
The Company uses the intrinsic-value method of accounting for stock-based
awards granted to employees. No stock-based compensation cost is included
in net income (loss), as all options granted during periods presented had
an exercise price equal to the market value of the stock on the date of
grant. In accordance with SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure," the following table presents
the effect on net income (loss) and net income (loss) per share, had
compensation cost for the Company's stock plans been determined consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation".
The following table illustrated the effect on net income (loss) if the
fair-value-based method had been applied to all outstanding and unvested
awards in each period.
2003 2002 2001
----------- ----------- -----------
Net income (loss), as reported $ 1,320,263 $ 3,194,385 $(7,602,324)
Add: Stock-based compensation
related to option repricing 92,000 -- --
Deduct: Total stock-based employee
compensation determined under fair-
value-based method for all awards (26,000) (22,164) (22,164)
----------- ----------- -----------
Pro forma $ 1,386,263 $ 3,172,221 $(7,624,488)
=========== =========== ===========
Basic net income (loss)
per common share
As reported $ .67 $ 1.99 $ (4.74)
Pro forma $ .70 $ 1.98 $ (4.76)
Diluted net income (loss)
per common share
As reported $ .38 $ 1.99 $ (4.74)
Pro forma $ .40 $ 1.98 $ (4.74)
F-11
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
In calculating the above stock-based employee compensation determined
under the fair-value based method for all awards granted, the Company
utilized the following assumptions; expected volatility of 4.88%, expected
life of 10 years, risk free interest rate of 3.18% and dividend yield of
0%.
(k) COMPREHENSIVE INCOME (LOSS)
The Company has no items of other comprehensive income (loss); therefore,
there is no difference between the Company's comprehensive income (loss)
and net income (loss) for the periods presented.
(L) INVESTMENT SECURITIES
The Company maintained investments in its equity securities, which had
been classified as trading securities, for the deferred compensation plan
that was discontinued in 2002 (note 13(b)). Trading securities were bought
and held principally for the purpose of selling them in the near term.
Trading securities are recorded at fair value. Unrealized holding gains
and losses on trading securities are included in earnings. Dividend and
interest income are recognized when earned.
(m) NET INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per share excludes any dilution. It is based upon the
weighted average number of common shares outstanding during the period.
Dilutive earnings per share reflects the potential dilution that would
occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Dilutive net income (loss) per
common share for 2002 and 2001 is the same as basic net loss per common
share due to the antidilutive effect of the assumed conversion of
preferred shares and exercise of stock options.
(n) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(o) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
Long-lived assets, such as intangible assets, furniture, equipment and
leasehold improvements, are evaluated for impairment when events or
changes in circumstances indicate that the carrying amount of the assets
may not be recoverable through estimated undiscounted future
F-12
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
cash flows from the use of these assets. When any such impairment exists,
the related assets will be written down to fair value.
(p) USE OF ESTIMATES
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(q) RECENT ISSUED ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that
upon issuance of a guarantee, a guarantor must recognize a liability for
the fair value of an obligation assumed under a guarantee. FIN 45 also
requires additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees
issued. The recognition provisions of FIN 45 will be effective for any
guarantees that are issued or modified after December 31, 2002. The
adoption of FIN 45 did not have an impact on the Company's consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, an interpretation of ARB No.
51". FIN 46 addresses the consolidation by business enterprises of
variable interest entities, as defined in the Interpretation. FIN 46 is
effective for all new variable interest entities created or acquired after
December 15, 2003. The Company does not believe that the adoption of FIN
46 will have any impact on the Company's consolidated financial
statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." Statement No. 150 changes the accounting guidance for certain
financial instruments that, under previous guidance, could be classified
as equity or "mezzanine" equity by now requiring those instruments to be
classified as liabilities (or assets in some circumstances) in the
statement of financial position. Further, Statement No. 150 requires
disclosure regarding the terms of those instruments and settlement
alternatives. Statement No. 150 is generally effective for all financial
instruments entered into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this pronouncement did not have any impact
on the Company's financial position and results of operations.
In January 2003, the Company adopted the FASB's Emerging Issue Task Force
(EITF) Issue No. 02-16 "Accounting by a Reseller for Cash Consideration
Received from a Vendor" ("EITF 02-16"). The consensus reached by the EITF
addressed the accounting
F-13
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
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.
(2) BUSINESS ACQUISITIONS AND DISCONTINUED OPERATIONS
(a) RAL ACQUISITION
On September 30, 2003, RAL Purchasing, Inc., a newly formed,
wholly owned subsidiary of the Company, purchased substantially
all of the assets and assumed certain liabilities of RAL for a
price of $2,447,061. The purchase was financed as follows:
Borrowings on the Company's credit facility $ 2,147,061
5-Year unsecured notes issued by RAL
Purchasing, Inc. to third parties, at annual rate of 9% 300,000
------------
Total outlay $ 2,447,061
============
In connection with this acquisition, the Company's limit on its credit
facility was increased by $1,500,000 to $13,500,000. All borrowings under
the credit facility are collateralized by substantially all of the assets
of the Company. In addition, the 5-year notes are guaranteed by the
Company.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition, September 30,
2003:
Current assets $ 3,000,430
Property, plant and equipment 738,092
Goodwill 211,204
Covenant not to compete 10,000
-----------
Total assets acquired 3,959,726
Current liabilities assumed 1,512,665
-----------
Net assets acquired $ 2,447,061
===========
F-14
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Presented below are the pro forma financial results (unaudited)
prepared under the assumption that the acquisition of RAL had been
completed at the beginning of 2002.
(Unaudited)
For The Years Ended
(in 000's except December 31, December 31,
for EPS data) 2003 2002
-------- --------
Net Sales $ 51,657 $ 48,569
Operating Income 1,741 600
Net Income From Continuing Operations 1,631 98
Earnings Per Share From Continuing Operations
Basic $ .83 $ .06
Diluted $ .47 $ .03
RAL is a distributor of heating and cooling equipment and high-end
plumbing fixtures with six locations, servicing Orange, Rockland, Ulster
and Sullivan counties in New York. Four locations have showrooms. RAL's
products are marketed primarily to contractors, consumers, builders and
the commercial sector. As a result of the acquisition, the Company is
expecting to be one of the leading distributors of heating and cooling
equipment and high-end plumbing fixtures in its market.
(b) In July 2002, Universal paid $670,981 to acquire certain accounts
receivable, inventory and other items from Goldman Associates of New York,
Inc. ("Goldman"), relating to Goldman's HVAC business in New Jersey and
certain areas of New York. $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 SFAS 142. Pro forma results of
operations are not provided as the information is not material to the
consolidated financial statements.
(c) 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 April 14, 2004, the proceeding is still
on-going. Neither Colonial, nor Universal, is part of the Chapter 11
filing. The Company does not believe that Atlantic will emerge from the
reorganization with any value for the Company. The Company does not
exercise significant influence over Atlantic's operations and financial
activities, and, accordingly, as of December 31, 2001, Atlantic has been
unconsolidated on the Company's financial statements and its operations
are being reported as "income (loss) from operations of discontinued
segments." The losses from operations of Atlantic for the year ended
December 31, 2001 and for the period up to January 28, 2002, the date of
filing for
F-15
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Chapter 11, were $5,553,904 and $544,119, respectively. These losses total
$6,098,023 and were reported as a net loss from operation of a
discontinued operation at December 31, 2001. This loss includes $3,439,366
of net losses recorded as a result of writing down Atlantic's assets to
their net realizable value in order to arrive at the appropriate cost
value of the Company's investment in Atlantic. Atlantic's sales totaled
$24,561,972 for the year ended December 31, 2001 and for the period up to
January 28, 2002 and are not included in sales as reported in the
consolidated statement of operations.
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 $3,300,000 difference between the total amount previously
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.
The Company's investment in Atlantic's common stock is being recognized at
a cost, value of $219,007 of guaranteed liabilities as of December 31,
2002. The Company has recognized liabilities of Atlantic only to the
extent such liabilities are guaranteed by the Company because the Company
believes that it is not responsible for any other liabilities of Atlantic
as Atlantic's creditors will be able to look only to Atlantic's assets for
recovery. Colonial will continue to recognize the $219,007 of guaranteed
liabilities of Atlantic until they are extinguished by Atlantic's
bankruptcy proceedings or otherwise.
Since the Company is treating Atlantic as an unconsolidated subsidiary,
Atlantic is being carried at cost on the Company's books. As such, the
Company has not reflected any of Atlantic's 2002 financial activity in its
consolidated financial statements, except for the $3,300,695 release of
guarantee, as stated above. The following summarized financial information
for the deconsolidated subsidiary, Atlantic, includes the actual 2002
activity:
For the years ended December 31,
2002 2001
----------- -----------
Net sales $ 2,700,174 $24,561,972
Net (loss) (1,712,197) (6,098,023)
=========== ===========
December 31,
2002
-----------
Current assets (primarily accounts receivable and inventory) $ 1,920,563
Non-current assets (primarily property and equipment) --
Current liabilities (primarily accounts payable, accrued liabilities) (3,487,946)
Guaranteed borrowings under credit facility --
-----------
Net (liabilities) assets of deconsolidated subsidiary $(1,567,383)
===========
F-16
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(d) During the second half of 2001, the Company, which had guaranteed
certain liabilities of Well-Bilt, was able to reach favorable
settlements on certain guarantees. As a result, the Company recorded
a $106,509 net reduction of the loss on disposal of discontinued
segment in 2001.
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
2003 2002
----------- -----------
Computer hardware and software $ 479,190 $ 419,030
Furniture and fixtures 126,667 97,643
Leasehold improvements 1,121,826 333,033
Automobiles 476,330 238,809
----------- -----------
2,204,013 1,088,515
Less accumulated depreciation
and amortization 688,882 456,567
----------- -----------
$ 1,515,131 $ 631,948
=========== ===========
(4) Other Intangible Assets
The Company has certain identifiable intangible assets that are subject to
amortization. Intangible assets are included in "Other Intangibles" in the
consolidated balance sheets. The components of intangible assets are as
follows:
DECEMBER 31, 2003 DECEMBER 31, 2002
Estimated
Gross Net Gross Net Useful
Carrying Accumulated Carrying Carrying Accumulated Carrying Life
Amount Amortization Amount Amount Amortization Amount (Years)
----------- ------------ ---------- ---------- ------------ -------- ---------
Covenants
Not to
Compete $ 241,667 $ (187,500) $ 54,167 $ 231,667 $ (145,834) $ 85,833 5
Amortization expense amounted to $41,666, $42,900 and $ 47,200 for the
years ended December 31, 2003, 2002 and 2001, respectively.
Estimated Amortization Expense
For the Years Ended
December 31,
2004 $ 28,667
2005 13,667
2006 7,833
2007 2,000
2008 2,000
---------
$ 54,167
=========
F-17
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table shows the pro-forma results of operations as if
Statement No. 142 had been applied in prior years:
For the years ended December 31,
2003 2002 2001
------------- ------------- -------------
Net income (loss) as reported $ 1,320,263 $ 3,194,385 $ (7,602,324)
Deduct: Negative goodwill amortization -- -- 35,050
------------- ------------- -------------
Adjusted net income (loss) $ 1,320,263 $ 3,194,385 $ (7,637,374)
============= ============= =============
Income (loss) per common share - basic, as reported $ .67 $ 1.99 $ (4.74)
Negative goodwill amortization, net -- (0.02)
------------- ------------- -------------
Adjusted net income (loss) $ .67 $ 1.99 $ (4.76)
============= ============= =============
Income (loss) per common share - diluted, as reported $ .38 $ 1.99 $ (4.74)
Negative goodwill amortization, net -- -- (0.02)
------------- ------------- -------------
Adjusted net income (loss) $ .38 $ 1.99 $ (4.76)
============= ============= =============
(5) FINANCING ARRANGEMENTS
On November 21, 2002, the Company was released from its 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.
In connection with the RAL acquisition in September 2003, the Company's
limit on its credit facility was increased by $1,500,000 to $13,500,000.
The facility expires November 21, 2005, but all loans are in any event due
at any time on demand by the bank, and, accordingly, have been classified
as current liabilities. All loans are collateralized by the assets of the
Company, as well as a pledge of all of the outstanding stock of Universal.
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. At December 31, 2003, the Company was
in default of the tax covenant with the bank because it has not filed its
2002 tax returns and the Company was in default of the capital
expenditures covenant for exceeding its limit during 2003. The bank has
waived these events of default.
At December 31, 2003, amounts outstanding under the credit facility were
$12,232,030, of which (i) $79,000 represents a term loan payable in 4
remaining equal monthly installments of approximately $21,000, and (ii)
$2,160,000 represents a separate term loan payable in 48 remaining monthly
installments of agreed amounts under an amortization schedule. Although
the term loans are payable over specified periods, 4 and 48 months
respectively, the Bank can demand payment at any time. At December 31,
2003, the amount of the unused available credit was $733,000. The interest
rate on the $2,160,000 term loan was 6.5% (prime plus 2.5%) as of December
31, 2003. The interest rate on the remaining credit facility, as of
December 31, 2003 was 4.5% (prime plus 0.5%).
(6) NOTES PAYABLE
(a) Notes payable consist of the following at December 31:
F-18
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
2003 2002
-------- --------
Various term notes payable to a bank, (collateralized by the equipment
purchased) with aggregate monthly principal and interest installments
of $4,019, bearing interest at between .9% to 5.9% $130,905 $ 95,664
Term note payable to a private individual, $30,000 annual principal
payment, interest at 9% payable monthly 150,000 --
Term note payable to an investment company, $30,000 annual principal
payments, interest at 9% payable monthly 150,000 --
-------- --------
430,905 95,664
Less current installments 104,205 30,889
-------- --------
$326,700 $ 64,775
======== ========
Maturities of notes payable are as follows:
2004 $ 104,205
2005 91,433
2006 86,321
2007 83,489
2008 65,457
----------
$ 430,905
==========
(b) Included in accrued liabilities at December 31, 2002 is $91,885 of
unclaimed payments on notes payable to creditors, pursuant to a 1983
reorganization plan. The last payment such notes was made in January 1998.
During the year ended December 31, 2003, 2002 and 2001, $91,885, $94,477
and $93,923, respectively, of the unclaimed payments were recorded as
other income in the accompanying consolidated statements of operations.
(7) CAPITAL STOCK
Each share of the Company's preferred stock is convertible into one share
of the Company's common stock. Preferred stockholders will be entitled to
a dividend, based upon a formula, when and if any dividends are declared
on the Company's common stock. The preferred stock is redeemable, at the
option of the Company, at $7.50 per share. The shares contain a
liquidation preference provisions entitling the holder to receive payments
equaling $5.00 per share.
The voting rights of the common stockholders and preferred stockholders
are based upon the number of shares of convertible preferred stock
outstanding. If 1,250,000 or more shares of preferred stock are
outstanding, five of the nine directors are elected by the common
stockholders and the remainder by the preferred stockholders. If more than
600,000 but less than 1,250,000 preferred shares are outstanding, six of
the nine directors are elected by
F-19
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
common stockholders. If 600,000 or less preferred shares are outstanding,
all nine directors are elected by common stockholders. A majority of the
directors elected by preferred stockholders and a majority of the
directors elected by the common stockholders are required to approve
certain transactions, including, but not limited to, incurring certain
indebtedness, merger, consolidation or liquidation of the Company, and the
redemption of common stock. Preferred and common directors vote together
on all other matters.
At December 31, 2003, there were 2,666,792 shares of common stock reserved
for conversion of preferred stock and for the exercise of stock options
(note 8).
(8) STOCK OPTIONS
In June 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") pursuant to which, as amended, the Company's Board of Directors may
grant up to 1,200,000 options until December 31, 2005 to key employees and
other persons who render service (non- employees) to the Company. Under
the 1996 Plan, the options can be either incentive or nonqualified. The
rate at which the options become exercisable is determined by the Board of
Directors at the time of grant. The exercise price of the incentive stock
options may not be less than the fair market value of the Company's common
stock on the date of grant. The exercise price of the nonqualified stock
options may not be less than 85% of the fair market value of the Company's
common stock on the date of grant.
At December 31, 2003, a total of 245,500 options were outstanding under
the Company's 1996 Stock Option Plan, which expires on December 31, 2006.
Changes in options outstanding are as follows at December 31, 2003:
Shares Subject Weighted Average
to Option Exercise Price
-------------- ----------------
Balance at December 31, 2000 333,000 $ 2.66
--------
Balance at December 31, 2001 333,000 2.66
Cancelled (30,000) 2.30
Expired (70,000) 1.50
--------
Balance at December 31, 2002 233,000 3.06
Expired (91,500) 2.25
Granted 104,000 .25
--------
Balance at December 31, 2003 245,500 .25
========
Options Exercisable at
December 31, 2003 245,500 .25
========
On February 11, 2003, 141,500 outstanding stock options were repriced to
an exercise price of $.25, the fair market value on that date. The
repricing caused the Company to incur additional stock-based compensation
expense of $92,000 for the year ended December 31, 2003.
The following table summarizes information about stock options at
December 31, 2003:
F-20
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------
Weighted- Weighted-
Average Average
Range of Remaining Exercise
Exercise Prices Shares Contractual Life Price
--------------- -------- ---------------- --------
$ .25 245,500 6.94 $ .25
(9) NET INCOME (LOSS) 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 (loss) per common share is as follows:
2003 2002 2001
------------ ------------ ------------
Net income (loss) (numerator) $ 1,320,263 $ 3,194,385 $ (7,602,324)
============ ============ ============
Weighted average common shares
(denominator for basic income
(loss) per share) 1,971,129 1,603,777 1,603,178
------------ ------------ ------------
Effect of dilutive securities:
Convertible preferred stock 1,466,792 -- --
Employee stock options 63,777 -- --
------------ ------------ ------------
Weighted average common and
potential common shares
outstanding (denominator for
diluted income (loss) per
share) 3,501,698 1,603,777 1,603,178
============ ============ ============
Basic net income (loss) per share $ .67 $ 1.99 $ (4.74)
============ ============ ============
Diluted net income (loss) per share $ .38 $ 1.99 $ (4.74)
============ ============ ============
Employee stock options totaling 263,700 and 252,400 for the years ended
December 31, 2002 and 2001, respectively, were not included in the net
income (loss) per share calculation because their effect would have been
antidilutive. Convertible preferred stock totaling , 1,464,269 and
1,464,868 shares for the years ended December 31, 2002 and 2001,
respectively, were not included in the net loss per share because their
effect would have been antidilutive.
F-21
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) INCOME TAXES
The provisions for income taxes consist of the following:
2003 2002 2001
State State State
And And And
Federal Local Total Federal Local Total Federal Local Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Current $ (69,970) 154,214 $ 84,244 -- 37,167 $ 37,167 -- $ 32,786 $ 32,786
Deferred (421,400) -- (421,400) -- -- -- 1,564,429 60,573 1,625,002
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total tax
expense
(benefit) $ (491,370) (154,214) $ (337,156) -- 37,167 $ 37,167 $1,564,429 93,359 $1,657,778
========== ========== ========== ========== ========== ========== ========== ========== ==========
The provision for income taxes for the year ended December 31, 2003 has
been reduced by approximately $478,770 reflecting the benefits of net
operating loss carryforwards utilized. In addition, the provision for
income taxes have been reduced by approximately $91,000 due by the benefit
of an Alternative Minimum Tax carryback refund. The change in valuation
allowance from the beginning balances due to a change in circumstances
resulting in a change in judgment about the realizability of deferred tax
assets for the year ended December 31, 2003 was $421,400.
The components of deferred income tax expense (benefit) on continuing
operations attributable to income (loss) on continuing operations are as
follows:
2003 2002 2001
----------- ----------- -----------
Deferred tax expense (benefit), exclusive of the
effects of the other components listed below $ -- $ (1,382) $ 3,082
Increase (decrease) in beginning-of-the-year
balance of the valuation allowance for deferred
tax assets (421,400) 32,557 1,625,002
Generation of continuing operations net
operating loss carryforward -- (31,175) (3,082)
----------- ----------- -----------
$ (421,400) $ -- $ 1,625,002
=========== =========== ===========
A reconciliation of the provision for income taxes attributable to income
(loss) on continuing operations computed at the Federal statutory rate to
the reported provision for income taxes follows:
2003 2002 2001
----------- ----------- -----------
Tax provision at Federal
statutory rate 34.0% 34.0% 34.0%
State income taxes, net of
federal benefit 12.6% (35.5)% 131.2%
Utilization of net operating loss carryforward (32.0)% 0.0 % 0.0%
Benefit from Alternative Minimum Tax carryback refund (9.0)% 0.0 % 0.0%
Change in valuation allowance for
deferred tax assets (43.0)% (37.9)% 3,344.0%
Permanent differences 3.1% (14.4)% 5.7%
Other 0.0% 0.0 % 13.9%
----------- ----------- -----------
Total (34.3)% (53.8)% 3,528.8%
=========== =========== ===========
F-22
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2003
and 2002 are presented below.
2003 2002
------------ ------------
Deferred tax assets:
Federal net operating loss carryforwards $ 10,989,140 $ 12,191,239
State net operating loss carryforwards 178,529 178,529
Allowance for doubtful accounts receivable 111,150 34,608
Additional costs inventoried for tax purposes 485,919 304,697
Alternative minimum tax credit carryforward 21,786 113,156
Goodwill 577,259 --
------------ ------------
Total gross deferred tax assets 12,363,783 12,822,229
Less valuation allowance (11,934,740) (12,727,209)
------------ ------------
Deferred tax assets, net 429,043 95,020
------------ ------------
Deferred tax liabilities:
Goodwill -- (87,377)
Depreciation (7,643) (7,643)
------------ ------------
Gross deferred tax liabilities (7,643) (95,020)
------------ ------------
Net deferred tax assets $ 421,400 $ --
============ ============
At December 31, 2002, a valuation allowance for 100% of the Company's net
deferred tax assets had been reflected. However, during 2003, the
valuation allowance on these deferred tax assets was reduced by $421,400
to reflect management's reassessment of the likelihood of utilizing net
operating loss carryforwards in the future, based upon improved results of
operations during 2003.
During the years ended December 31, 2003 and 2002, the valuation allowance
was decreased by $792,469 and $1,629,256, respectively in order to reflect
the net deferred tax asset deemed recoverable, based upon projections of
future taxable income.
At December 31, 2003, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $ 32,321,000. Varying amounts
of the net operating loss carryforwards will expire from 2004 through
2021.
F-23
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
EXPIRATION YEAR NET OPERATING LOSSES
--------------- -----------
2004 $ 5,208,000
2005 8,245,000
2006 4,811,000
2007 4,945,000
2008 415,000
2020 5,960,000
2021 2,737,000
-----------
$32,321,000
===========
The utilization of the net operating loss carryforwards is subject to
certain annual limitations. If certain substantial changes in ownership
occur, there would be a further annual limitation on the amount of tax
carryforwards that can be utilized in the future.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No.107, "Disclosures about
Fair Value of Financial Instruments," defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying
value of all financial instruments classified as current assets or
liabilities is deemed to approximate fair value, with the exception of the
notes payable, because of the short term nature of these instruments.
The notes payable approximate fair value as the interest rates are
comparable to rates currently offered by local lending institutions for
loans of similar terms to companies with comparable credit risk.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the consolidated
statements of cash flows:
2003 2002 2001
Cash paid during the years for:
Interest $543,646 $511,324 $643,708
======== ======== ========
Income taxes $102,900 $ 23,024 $ 7,700
======== ======== ========
Non-cash transactions:
During 2003 notes payable of $300,000 were incurred related to the
acquisition of RAL.
During 2002 and 2001, 34 and 2,165 shares, respectively, of convertible
preferred stock were converted to a similar number of common shares. There
were no conversions during 2003.
During 2001, notes payable of $18,493 were incurred for the purchase of
automobiles.
(13) EMPLOYEE BENEFIT PLANS
F-24
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(a) 401(K) PLAN
The Company has a 401(k) plan, which covers substantially all employees.
Participants in the plan may contribute a percentage of compensation, but
not in excess of the maximum allowed under the Internal Revenue Code. The
plan provides for matching contributions. In 2003, 2002 and 2001,
$137,508, $111,793 and $102,000, respectively, of contributions were made
to the plan.
(b) DEFERRED COMPENSATION PLAN
During fiscal 1999, Universal adopted a Deferred Compensation Plan (the
Plan) for a select group of management employees. The Plan was intended to
provide certain executives with supplemental retirement benefits, as well
as to permit the deferral of more of their compensation than they are
permitted to defer under the 401(k) plan. The plan provided for a
contribution equal to 5% of a participant's compensation to be made to the
plan for those participants who are employed as of December 31. The plan
was not intended to be a qualified plan under the provisions of the
Internal Revenue Code. All compensation deferred under the plan was held
by the Company in an investment trust, which was considered an asset of
the Company. The investments which amounted to $122,506 at December 31,
2001, were classified as trading securities and were included in
investment securities on the consolidated balance sheet as of December 31,
2001. The return on these underlying investments determined the amount of
earnings credited to the employees. As was allowed under the plan, the
Company terminated the plan during 2002. The proceeds of the plan
investments were paid out to the plan participants.
(14) BUSINESS AND CREDIT CONCENTRATIONS
Universal purchases products from approximately 400 suppliers. In 2003,
two suppliers accounted for 47% of Universal's purchases. The loss of one
of these suppliers could have a material adverse effect upon its business
for a short-term period. In 2002, two suppliers accounted for 49.1% of
Universal's purchases.
(15) COMMITMENTS
(a) COMPENSATION
The Company has employment contracts with two officers and various
employees with remaining terms ranging from two to three years. The
amounts due under these contracts are $880,000 and $450,000 in the years
ended December 31,2004 and 2005 respectively. These commitments do not
include amounts that may be earned as a bonus.
(b)LEASES
The Company is obligated under operating leases for warehouse, office
facilities and certain
F-25
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
office equipment. Rental expense, including real estate taxes, amounted to
$1,404,475, $1,153,867 and $1,034,605 for the years ended December 31,
2003, 2002 and 2001, respectively. At December 31, 2003, future minimum
lease payments in the aggregate and for each of the five succeeding years
are as follows:
2004 $ 2,422,289
2005 2,397,838
2006 2,235,814
2007 2,057,235
2008 1,635,123
Thereafter 1,882,258
-------------
Total $ 12,630,557
=============
(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, as determined by the Board of Directors. Bernard Korn (Chairman
and President of the Company), purchased 167,000 shares, James W. Stewart
(Executive Vice President and Director of the Company) purchased 100,000
shares, William Pagano (Director of the Company and President of
Universal), purchased 335,000 shares, Jack Rose (Director of the Company),
purchased 50,000 shares and Rita Folger (a private investor who owns 6.86%
of the Company), purchased 150,000 shares. The proceeds of the private
placement 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 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.
(16) SUBSEQUENT EVENTS
(a) Private Placement
On February 12, 2004, the Company completed a private placement, pursuant
to Regulation D of the Securities 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
Universal), purchased 165,000 shares, and Rita Folger (a private investor,
who owns 9.42% of the Company), purchased 100,000 shares. The remaining
170,000 shares were purchased by a private investor, who owns less than 5%
of the Company.
The Company has used substantially all of the proceeds from the private
placement to purchase 592,730 shares of escheated convertible preferred
stock at $0.60 per share
F-26
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
from the State of Ohio. The Company has retired these convertible
preferred shares.
The stock from the private placement cannot be sold, transferred or
otherwise disposed of, unless subsequently registered under the Securities
Act of 1933 and applicable state or Blue Sky laws, or pursuant to an
exemption from such registration, which is available at the time of
desired sale, and bears a legend to that effect.
(17) QUARTERLY RESULTS (UNAUDITED)
The following table sets forth selected unaudited quarterly financial data
of the Company for the years ended December 31, 2003 and 2002:
QUARTER ENDED
-------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
------- ------- ------- -------
(Dollars in thousand, except per share data)
2003
----
Net sales $ 8,357 $10,690 $11,322 $14,302
Gross profit 2,465 2,998 3,224 4,479
Net income (loss) (69) 181 325 883
Income (loss) per common share:
Basic:
Net income (loss) (0.04) .11 .14 .37
======= ======= ======= =======
Diluted:
Net income (loss) (0.04) .06 .08 .22
======= ======= ======= =======
2002
----
Net sales $ 7,231 $ 9,173 $10,592 $10,003
Gross profit 2,211 2,645 2,901 2,862
Income (loss) from continuing operations (189) (48) 142 (11)
Income on discontinued operation -- -- 3,300
Net income (loss) (189) (48) 142 3,289
Income (loss) per common share:
Basic:
Continuing operations (0.12) (0.03) 0.09 (0.01)
Income on discontinued operations -- -- -- 2.06
------- ------- ------ -------
Net income (loss) (0.12) (0.03) 0.09 2.05
======= ======= ====== =======
Diluted:
Continuing operations (0.12) (0.03) 0.05 (0.01)
Income on discontinued operations -- -- -- 2.06
------- ------- ------ -------
Net income (loss) (0.12) (0.03) 0.05 2.05
======= ======= ======= =======
F-27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Colonial Commercial Corp.:
Under the date of October 2, 2003, we reported on the consolidated balance
sheets of Colonial Commercial Corp. and subsidiaries as of December 31, 2002,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the two-year period ended
December 31, 2002, which are included in the Company's 2003 annual report on
Form 10-K. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related consolidated financial
statements schedule in the 2003 annual report on Form 10-K as it pertains to the
two-year period ended December 31, 2002. This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole presents fairly,
in all material respects, the information set forth therein. The audit report on
the consolidated financial statements of Colonial Commercial Corp. and
subsidiaries referred to above contains an explanatory paragraph that states
that the Company has had losses in 2001 and 2000, has stockholders' deficit at
December 31, 2002 and has negative working capital. In addition, outstanding
borrowings under its credit facility are due on demand. If the bank were to
demand repayment, the Company does not project that it would have sufficient
liquidity to make such a payment. In addition, as discussed in note 2(c),
Atlantic Hardware & Supply Corporation ("Atlantic"), a wholly owned subsidiary
of the Company, filed for reorganization under Chapter 11 of the United States
Bankruptcy Code on January 28, 2002. The financial results of Atlantic have been
deconsolidated and the Company accounts for Atlantic using the cost method.
These circumstances raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1(c) paragraphs 2 and 3. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Also, our report to a change in the accounting for goodwill and other intangible
assets.
/s/ KPMG LLP
--------------------
KPMG LLP
Melville, New York
October 2, 2003
F-28
Schedule II
Colonial Commercial Corp. and Subsidiaries
Schedule of Valuation and Qualifying Accounts
Additions
---------
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Year Expenses Accounts Deductions End of Year
-------------------------------------- ---------- ---------- ---------- ---------- ----------
For the year ended December 31, 2003
Allowance for doubtful accounts $ 265,211 188,050 14,040 (182,472)(b) $ 284,829
========== ========== ========== ========== ==========
For the year ended December 31, 2002
Allowance for doubtful accounts $ 253,156 111,339 19,592 (a) (118,876)(b) $ 265,211
========== ========== ========== ========== ==========
For the year ended December 31, 2001
Allowance for doubtful accounts $ 247,646 57,589 22,458 (a) (74,537)(b) $ 253,156
========== ========== ========== ========== ==========
(a) Comprised primarily of accounts that were previously charged against the
allowance, and have since been collected.
(b) Comprised primarily of uncollected accounts charged against the
allowance.
F-29
INDEX TO EXHIBITS
Incorporated by
Filed Reference From
Herewith Form Date Exhibit
------------------------------------------------------------------------------------------------------------------------
3 (A) Certificate of Incorporation of
Registrant 8-K 1/5/83 1
(i ) Certificate of Amendment of
the Certificate of Incorporation
Re: Authorized Common and
Convertible Preferred Shares
(b) By-Laws of Registrant 8-K 1/5/83 1
4 (a) Specimen of Common Stock certificate
(b) Specimen above Convertible Preferred Stock
certificate
10 (a) Employment Agreement dated as of
January 1, 1998 between Registrant
and Bernard Korn 10-KSB 3/31/99 10(a)
(i) Amendment No. 1 dated April 1,
1999 to Employment Agreement
dated as of January 1, 1998
Between Registrant and
Bernard Korn 10-K 4/9/01 10(a)(i)
(ii) Amendment No. 2 dated April 1,
2000 to Employment Agreement
dated as of January 1, 1998
Between Registrant and
Bernard Korn 10-K 4/9/01 10(a)(ii)
(iii) Amendment No. 3 dated October 29,
2002 to Employment Agreement
dated as of January 1, 1998 between
Registrant and Bernard Korn 10-K 11/14/03
(iv) Amendment No. 4 dated October 29,
2002 to Employment Agreement
dated as of January 1, 1998
between
Registrant and Bernard Korn 10-K 11/14/03
(b) Employment Agreement dated as of
January 1, 2000 between Registrant
and James W. Stewart 10-KSB 3/31/99 10(b)
(i) First Amendment dated
September 15, 2000 to Employ-
Agreement dated as of January
1, 2000 between Registrant and
James W. Stewart 10-K 4/9/01 10(b)(i)
(ii) Second Amendment dated October
29, 2002 to Employment Agreement
dated as of January 1, 2000 between
Registrant and James W. Stewart 10-K 11/14/03
(c) 1996 Stock Option Plan S-8 10/2/97 28 B
(d) Purchase agreement dated March,
25, 1999 for business and assets
subject to certain liabilities of
Universal Supply Group, Inc. 10-KSB 12/31/98 10(g)
(i) Amendment No. 1 dated June
25, 1999 to Purchase Agreement
dated March 25, 1999 8-K 7/8/99 10(a)(ii)
20
Incorporated by
Filed Reference From
Herewith Form Date Exhibit
------------------------------------------------------------------------------------------------------------------------
(ii) Employment agreement dated
June 25, 1999 between Universal
Supply Group, Inc. and
William Pagano 8-K 7/8/99 10(a)(iii)
(iii) Loan and Security Agreement
dated June 24, 1999 between
LaSalle Bank National Associa-
tion and Universal Supply
Group, Inc. 8-K 7/8/99 10(a)(iv)
(iv) Demand Note
dated June 24,
1999 between LaSalle Bank
National Association and
Colonial Commercial Sub 8-K 7/8/99 10(a)(v)
Corp.
(v) Guaranty of all liabilities and
Security Agreement of Colonial
Commercial Sub Corp. by
Colonial Commercial Corp. to
LaSalle Bank National Associa-
tion dated June 24, 1999 8-K 7/8/99 10(a)(vi)
(vi) Waiver and Tenth Amendment, dated
November 21, 2002 to the
Loan and Security Agreement, as
of June 24, 1999, between LaSalle
Bank National Association and
Universal Supply Group, Inc. 10-K 12/31/01 10(e)(vi)
(vii) Securities Pledge Agreement
dated November 21, 2002, made by the
Registrant, in favor of LaSalle
Bank National Association, re:
Universal
Supply Group, Inc. 10-K 12/31/01 10(e)(vii)
(f) Certain documents related to
Well-Bilt Steel Products, Inc.:
(i) Reaffirmation Agreement,
General Release Consent and
Acknowledgement of Commercial
Reasonableness of Private Sale
dated February 1, 2001, between
Atlantic Hardware & Supply
Corporation, Universal Supply
Group, Inc., Colonial Commercial
Corp., and the secured lender 8-K 2/15/01 10(a)(i)
(ii) Reaffirmation Agreement, General
Release Consent and Acknowledgement of
Commercial Reasonableness of Private Sale
dated February 1, 2001 Between
Well-Bilt Steel Products
Inc. and the secured lender 8-K 2/15/01 10(a)(ii)
21
Incorporated by
Filed Reference From
Herewith Form Date Exhibit
------------------------------------------------------------------------------------------------------------------------
(iii) Foreclosure Agreement dated
February 1, 2001 between Independent
Steel Products, LLC the secured lender,
Atlantic Hardware & Supply Corporation,
Universal Supply Group, Inc.
and Well-Bilt Steel Products, Inc. 8-K 2/15/01 10(a)(iii)
(iv) Bill of Sale and Assignment dated
February 1, 2001 made by the
Secured lender in favor of
Independent Steel Products, LLC 8-K 2/15/01 10(a)(iv)
(g) Inventory Control Agreement re:
Universal Supply Group, Inc. taking in
Inventory on a Consignment basis,
dated August 9, 2001, between Douglas-
Guardian Services Corporation,
Universal Supply Group, Inc. and
GMC Sales Corp. 10-K 12/31/01 10(g)
(h) Agreement of Purchase and Sale of
Assets dated July 1, 2002 between
Goldman Associates of New York, Inc.
and Universal Supply Group, Inc. 10-K 11/14/03
(i) Private Placement Purchase Agreement
dated June 30, 2003 by and among
Colonial Commercial Corp. and the
persons who are counterparts to the
Agreement as "Investors" 10-K 11/14/03
(j) Asset Purchase Agreement
dated September 5, 2003, for
the purchase of certain assets,
subject to certain liabilities
of RAL Supply Group, Inc., by RAL
Purchasing Corp., a wholly owned
subsidiary of Colonial Commercial Corp. 8-K 10/15/03
(k) RAL Closing Statement dated
September 30,2003. 8-K 10/15/03
11 Statement re computation of per share
earnings (loss) (not filed since com-
putations are readily apparent from the
Consolidated financial statements)
21 Subsidiaries of Registrant Yes
23 Consent of Independent Accountants Yes
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 Yes
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 Yes
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 Yes
32.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
22
Incorporated by
Filed Reference From
Herewith Form Date Exhibit
------------------------------------------------------------------------------------------------------------------------
Sarbanes-Oxley Act of 2002 Yes
99.1 Code of Ethics Yes
99.2 Affidavit, dated January 28, 2002, in
Support of Atlantic's Petition for Relief
under chapter 11 of the U. S. Bankruptcy
Code 10-K 12/31/01 99.1
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
COLONIAL COMMERCIAL CORP.
(Registrant)
By: /S/ BERNARD KORN
----------------------------
Bernard Korn, President
By: /S/ JAMES W. STEWART
----------------------------
James W. Stewart
Treasurer, Chief Financial
and Accounting Officer
Dated: April 14, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been duly signed below on April 14, 2004 by the following persons on behalf
of the Registrant and in the capacities indicated:
By: /S/ BERNARD KORN
---------------------------------------
Bernard Korn, President & Director
By: /S/ JAMES W. STEWART
---------------------------------------
Executive Vice President, Treasurer
and Secretary/Director
By: /S/ WILLIAM KOON
---------------------------------------
William Koon, Director
By: /S/ RONALD MILLER
---------------------------------------
Ronald Miller, Director
By: /S/ WILLIAM PAGANO
---------------------------------------
William Pagano, Director
By: /S/ JACK ROSE
---------------------------------------
Jack Rose, Director
By: /S/ CARL L. SUSSMAN
---------------------------------------
Carl L. Sussman, Director
24