SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2004 COMMISSION FILE NO. 1-6663
COLONIAL COMMERCIAL CORP.
---------------------------------------------------
(Exact Name of Company as Specified in its Charter)
NEW YORK 11-2037182
------------------------------- ----------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
120 NEW SOUTH ROAD, HICKSVILLE, NEW YORK 11801
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(Address of Principal Executive Offices) (Zip Code)
Company's Telephone Number, Including Area Code: 516-681-4647
------------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
---- ----
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of the Company's Common Stock and
Convertible Preferred Stock as of August 4, 2004.
Common Stock, par value $.05 per share - 4,046,679 shares Convertible
Preferred Stock, par value $.05 per share - 850,701 shares
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2004 (unaudited) and
December 31, 2003 1
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2004
and 2003 (unaudited) 2
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 2004
and 2003 (unaudited) 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004
and 2003 (unaudited) 4
Notes to Condensed Consolidated Financial
Statements (unaudited) 5
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 13
Item 4 - Controls and Procedures 13
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities, Issuer Purchases of Equity Securities 14
Item 3 - Defaults Upon Senior Securities 16
Item 4 - Submission Of Matters To A Vote of Security Holders 16
Item 5 - Other Information 16
Item 6 - Exhibits and Reports on Form 8-K 16
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
---------------------------------
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, December 31,
2004 2003
------------ ------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 960,427 $ 342,756
Accounts receivable, net of allowance for doubtful accounts
of $368,000 in 2004 and $285,000 in 2003 7,858,631 6,253,900
Inventory 10,271,802 9,782,822
Prepaid expenses and other current assets 895,572 620,678
Deferred tax asset 551,000 421,400
------------ ------------
Total current assets 20,537,432 17,421,556
Property and equipment 1,549,451 1,515,131
Goodwill 1,628,133 1,628,133
Other intangibles 33,334 54,167
------------ ------------
$ 23,748,350 $ 20,618,987
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Trade payables $ 6,327,027 $ 5,295,879
Accrued liabilities 1,847,157 1,513,578
Income taxes payable 145,721 175,614
Borrowings under credit facility 13,619,362 12,232,030
Notes payable - current portion 96,235 104,205
------------ ------------
Total current liabilities 22,035,502 19,321,306
Notes payable, excluding current portion 322,309 326,700
------------ ------------
Total liabilities 22,357,811 19,648,006
------------ ------------
Commitments and contingencies
Stockholders' equity:
Redeemable convertible preferred stock, $.05 par value,
liquidation preference of $4,288,060 and $7,333,960 and
2,468,860 shares authorized, 857,612 in 2004 and 1,466,792
in 2003 shares issued and outstanding 42,880 73,340
Common stock, $.05 par value, 20,000,000 shares authorized,
3,019,768 in 2004 and 2,403,318 in 2003 shares issued and
outstanding 150,990 120,166
Additional paid-in capital 9,313,952 9,259,013
Accumulated deficit (8,117,283) (8,481,538)
------------ ------------
Total stockholders' equity 1,390,539 970,981
------------ ------------
$ 23,748,350 $ 20,618,987
============ ============
1
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
For The Three Months Ended
June 30,
----------------------------
2004 2003
------------ ------------
Sales $ 16,148,926 $ 10,689,646
Cost of sales 11,351,064 7,691,595
------------ ------------
Gross profit 4,797,862 2,998,051
Selling, general and administrative expenses, net 4,032,186 2,704,544
------------ ------------
Operating income 765,676 293,507
Other income 125,560 55,973
Interest expense (193,137) (147,883)
------------ ------------
Income before income taxes 698,099 201,597
Income tax expense 34,594 20,778
------------ ------------
Net income $ 663,505 $ 180,819
============ ============
Income per common share:
Basic $ 0.22 $ 0.11
Diluted 0.16 0.06
Weighted average shares outstanding:
Basic 3,011,554 1,603,794
Diluted 4,081,840 3,068,046
2
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
For The Six Months Ended
June 30,
----------------------------
2004 2003
------------ ------------
Sales $ 28,674,285 $ 19,047,329
Cost of sales 20,066,444 13,583,834
------------ ------------
Gross profit 8,607,841 5,463,495
Selling, general and administrative expenses, net 8,131,238 5,255,431
------------ ------------
Operating income 476,603 208,064
Other income 182,277 140,131
Interest expense (373,052) (298,424)
------------ ------------
Income before income taxes 285,828 49,771
Income tax benefit (78,427) (61,964)
------------ ------------
Net income $ 364,255 $ 111,735
============ ============
Income per common share:
Basic $ 0.13 $ 0.07
Diluted 0.09 0.04
Weighted average shares outstanding:
Basic 2,869,123 1,603,794
Diluted 4,078,661 3,068,046
3
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For The Six Months Ended
June 30,
--------------------------
2004 2003
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Cash flows from operating activities:
Net income $ 364,255 $ 111,735
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Deferred tax benefit (129,600) --
Provision for allowance for doubtful accounts 150,765 89,425
Stock-based compensation 50,940 --
Depreciation 176,788 94,495
Amortization of intangibles 20,833 20,833
Changes in assets and liabilities:
Accounts receivable (1,755,496) (280,958)
Inventory (488,980) (622,850)
Prepaid expenses and other current assets (274,894) (228,656)
Trade payable 1,031,147 1,044,846
Accrued liabilities 333,579 4,105
Income taxes payable (29,893) (40,230)
----------- -----------
Net cash (used in) provided by
operating activities (550,556) 192,745
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (211,106) (100,523)
----------- -----------
Net cash used in investing activities (211,106) (100,523)
----------- -----------
Cash flows from financing activities:
Payments on notes payable (35,232) (16,286)
Issuance of notes payable 22,871 24,471
Retirement of preferred stock (355,638) --
Issuance of common stock 360,000 --
Net borrowings under credit facility 1,387,332 194,175
----------- -----------
Net cash provided by financing activities 1,379,333 202,360
----------- -----------
Increase in cash and cash equivalents 617,671 294,582
Cash and cash equivalents - beginning of period 342,756 296,764
----------- -----------
Cash and cash equivalents - end of period $ 960,427 $ 591,346
=========== ===========
4
See accompanying notes to unaudited condensed consolidated financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements
June 30, 2004
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
The condensed consolidated financial statements of Colonial Commercial
Corp. and Subsidiaries (the "Company") included herein have been
prepared by the Company and are unaudited; however, such information
reflects all adjustments (consisting solely of normal recurring
adjustments), which are, in the opinion of management, necessary for a
fair presentation of the financial position, results of operations, and
cash flows for the interim periods to which the report relates. The
results of operations for the period ended June 30, 2004 are not
necessarily indicative of the operating results that may be achieved
for the full year.
Certain information and footnote disclosures, normally included in
consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America, have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2003.
The Company has one industry segment - wholesale distribution of
heating, ventilation and air conditioning.
Inventory is comprised of finished goods.
STOCK OPTIONS
The Company uses the intrinsic-value method of accounting for
stock-based awards granted to employees. The Company recognized
stock-based compensation related to option repricing for options
previously awarded.For the three and six months ended June 30, 2004 the
amount of stock-based compensation was $(33,960) and $50,940,
respectively. No stock-based compensation cost is included in net
income related to options granted during periods presented, since they
had an exercise price equal to the market value of the stock on the
date of grant and all outstanding options are fully vested. During the
six months ended June 30, 2004, no stock options were granted. During
the six months ended June 30, 2003, 104,000 stock options were granted
at market price and were fully vested. In accordance with SFAS No.
148,"Accounting For Stock Based Compensation - Transition and
Disclosure," the following table presents the effect on net income and
net income per share had compensation cost for the Company's stock
plans been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation". The fair value of each option grant is
estimated on the date of grant by use of the Black-Scholes option
pricing model.
-5-
For The Three For the Six
Months Ended Months Ended
June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ---------
Net income, as reported $ 663,505 $ 180,819 $ 364,255 $ 111,735
Add: Stock-based compensation
related to option repricing (33,960) -- 50,940 --
Deduct: Stock-based compensation
expense determined under
fair value method for all
stock options, net of
related income tax benefit -- -- -- 26,000
---------- ---------- ---------- ---------
Pro forma net income $ 629,545 $ 180,819 $ 415,195 $ 85,735
========== ========== ========== =========
Basic income per share, as reported $ .22 $ .11 $ .13 $ .07
========== ========== ========== =========
Basic income per share, pro forma $ .21 $ .11 $ .14 $ .05
========== ========== ========== =========
Diluted income per share, as reported $ .16 $ .06 $ .09 $ .04
========== ========== ========== =========
Diluted income per share, pro forma $ .15 $ .06 $ .10 $ .03
========== ========== ========== =========
(2) EQUITY TRANSACTIONS
On February 12, 2004, the Company completed a private placement,
pursuant to Regulation D of the Securities Exchange Act of 1933. The
Company raised $360,000 through the issuance of 600,000 shares of
common stock at $0.60 per share. See Part II, Item 2(a) for more
information on this and two other private placements.
The Company has used substantially all of the proceeds from the
February 12, 2004 private placement to purchase 592,730 shares of
escheated convertible preferred stock at $0.60 per share from the State
of Ohio. The Company has retired these convertible preferred shares.
These securities were issued in reliance on the exemption set forth in
section 4(2) of the Act from registration requirements under the Act.
The following is a list of investors who purchased these shares:
Amount of Cash
Name Common Shares Consideration
------------ ------------- -------------
Rita C. Folger 100,000 $ 60,000
Michael Goldman 170,000 102,000
Bernard Korn 165,000 99,000
William Pagano 165,000 99,000
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Total 600,000 $ 360,000
============= =============
During the six months ended June 30, 2004, holders of a total of 16,450
shares of redeemable convertible preferred stock converted these shares
into 16,450 shares of common stock.
-6-
(3) SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the consolidated
statements of cash flows:
Six Months Ended
June 30,2004 June 30, 2003
------------ -------------
Cash paid during the period for:
Interest $ 306,733 $ 261,290
Income taxes $ 131,212 $ --
During the six months ended June 30, 2004, the Company converted
16,450 shares of convertible preferred stock to a similar number of
common shares.
(4) NET INCOME PER COMMON SHARE
Basic net income per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding. Diluted earnings per share reflect, in periods in which
they have a dilutive effect, the impact of common shares issuable upon
exercise of stock options.
A reconciliation between the numerators and denominators of the basic
and diluted income per common share is as follows:
For The Three Months For The Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (numerator) $ 663,505 $ 180,819 $ 364,255 $ 111,735
========== ========== ========== ==========
Weighted average
common shares
(denominator for
basic income
per share) 3,011,554 1,603,794 2,869,123 1,603,794
Effect of dilutive
securities:
Convertible preferred
stock 865,826 1,464,252 1,014,639 1,464,252
Stock Options 204,460 -- 194,899 --
---------- ---------- ---------- ----------
Weighted average
common and potential
common shares out-
standing (denominator
for diluted income
per share) 4,081,840 3,068,046 4,078,661 3,068,046
========== ========== ========== ==========
Basic net income
per share $ .22 $ .11 $ .13 $ .07
========== ========== ========== ==========
Diluted net income
per share $ .16 $ .06 $ .09 $ .04
========== ========== ========== ==========
-7-
Employee stock options totaling 229,300 for the three and six months
ended June 30, 2003, respectively, were not included in the income per
share calculation because their effect would have been anti-dilutive.
(5) SUBSEQUENT EVENTS
(a) Private Placements
On July 29, 2004, the Company completed a private placement,
pursuant to Regulation D of the Securities Act of 1933. The
Company raised $1,050,000 through the issuance of 420,000
shares of common stock at $1.25 per share and the issuance of
$525,000 of subordinated unsecured convertible notes payable
("Notes"), bearing interest at 11% per annum, payable
quarterly, with 50% of the principal payable on the last day
of the fourth anniversary and 50% of the principal payable on
the last day of the fifth anniversary. The Notes are
convertible to common stock at $3.00 per share during the term
of the Notes. (See Part II, Item 2 for more information as to
the purchasers.)
On July 30, 2004, the Company completed a private placement
with Michael Goldman and Goldman Associates of New York, Inc.
pursuant to Regulation D of the Securities Act of 1933. For
total consideration of $1,500,000, the Company issued to
Goldman Associates of New York, Inc. 600,000 shares of common
stock at $1.25 per share, a $750,000 subordinated secured note
payable, earning interest at the prime rate, interest payable
quarterly, principal payable on December 31, 2008, and
warrants to purchase 150,000 shares of common stock at $3.00
per share expiring December 31, 2008.
These securities were issued in reliance on the exemption set
forth in Section 4(2) of the Act from registration
requirements under the Act.
On July 19, 2004 and July 26, 2004 holders of a total of 2,611
and 4,300 shares, respectively, of redeemable convertible
preferred stock converted these shares into a total of 6,911
of common stock.
(b) Financing Arrangements
On July 29, 2004, the Company completed a $15,000,000 secured
loan facility with Wells Fargo Business Credit Inc. consisting
of a $15,000,000 revolving line of credit including a
$2,000,000 three-year term loan. The revolving credit line
bears interest at 1/4% below prime and the term loan bears
interest at 1/2% above prime. All loans are collateralized by
the assets of the Company, as well as a pledge of all the
outstanding stock of its operating subsidiaries. The facility
contains covenants relating to the financial condition of the
Company and its business operations and restricts the payment
of dividends and capital expenditures. Availability under the
revolving credit line is determined by a percentage of
eligible assets as defined in the agreement. The Company used
approximately $12,865,000 of the proceeds of this facility to
repay its previous senior lender and will use the balance for
additional working capital.
-8-
(6) NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not provide
sufficient equity at risk for the entity to support its activities. In
December 2003, the FASB revised certain elements of FIN 46 (FIN 46-R).
The FASB also modified the effective date of FIN 46. This
interpretation applies immediately to variable interest entities
created after January 31, 2003 and variable interest entities in which
the Company obtains an interest after January 31, 2003. For variable
interest entities in which a company obtained an interest before
February 1, 2003, the interpretation applies to the interim period
ending after March 15, 2004. The adoption of FIN 46 did not have a
material impact on the Company's consolidated financial position or
results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements relating to such
matters as anticipated financial performance and business prospects. When used
in this report, the words, "anticipates," "expects," "believes," "may,"
"intends," and similar expressions are intended to be among the statements that
identify forward-looking statements. From time to time, the Company may also
publish forward-looking statements. The Private Securities Litigation Reform Act
of 1995 provides a safe harbor for forward-looking statements. Forward-looking
statements involve risks and uncertainties, including, but not limited to, the
consummation of certain events referred to in this report, technological
changes, competitive factors, maintaining customer and vendor relationships,
inventory obsolescence and availability, and other risks detailed in the
Company's periodic filings with the Securities and Exchange Commission, which
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires that we make estimates and
judgments that affect the amounts reported of assets, liabilities, revenues and
expenses and the related disclosure of contingent assets and liabilities. We
base our estimates on historical experience and on various other assumptions we
believe to be applicable and reasonable under the current circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
-9-
In addition, we are periodically faced with uncertainties, the outcomes of
which are not within our control and will not be known for prolonged periods of
time.
We believe the following to be critical accounting policies that affect the
most significant estimates and judgments used in the preparation of our
consolidated financial statements:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
ACCOUNTS RECEIVABLE
Accounts receivable consist of trade receivables recorded at original
invoice amount, less an estimated allowance for uncollectible accounts. Trade
credit is generally extended on a short-term basis; thus trade receivables
generally do not bear interest. However, a finance charge may be applied to
receivables that are past due. These charges are included as other income. Trade
receivables are periodically evaluated for collectibility based on past credit
history with customers and their current financial condition. Changes in the
estimated collectibility of trade receivables are recorded in the results of
operations for the period in which the estimate is revised. Trade receivables
that are deemed uncollectible are offset against the allowance for uncollectible
accounts. The Company generally does not require collateral for trade
receivables.
INVENTORY
Inventory is stated at the lower of cost or market and consists solely of
finished goods. Cost is determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated on
the straight-line method over the estimated useful lives of the assets as
follows:
Computer hardware and software 5 years
Furniture and fixtures 5 years
Automobiles 3-5 years
Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful life of the asset.
-10-
GOODWILL AND OTHER INTANGIBLE ASSETS
Prior to January 1, 2002, the Company amortized goodwill and intangible
assets using the straight-line method over periods of up to 10 years. Statement
of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
Assets," requires that goodwill and intangible assets having indefinite lives
not be amortized, but instead be tested for impairment at least annually.
Intangible assets determined to have finite lives are amortized over their
remaining useful lives.
Results of Operations - Three Months ended June 30, 2004 and 2003
The Company reported net income of $663,505 for the second quarter of
2004, as compared to net income of $180,819 in the second quarter of 2003.
Sales from operations increased by $5,459,280 or 51.1% over the same
period in 2003. The inclusion of RAL Supply Group, Inc. ("RAL"), which was
acquired on September 30, 2003, and American/Universal Supply Inc. ("American"),
which was a new operation that commenced on or about July 1, 2003, accounted for
$4,193,470 of this increase. The remaining increase in sales was related to
increased market penetration in the core business of Universal. Simultaneously,
gross margin dollars increased by $1,799,811 substantially because of the sales
increases. Gross margins expressed as a percentage of sales increased from
28.05% in 2003 to 29.71% in 2004, primarily due to increases in sales of higher
margin products.
Selling, general and administrative expenses and cost of operations
increased by $1,327,642 primarily due to the inclusion of operating expenses
related to RAL and American, as well as higher utility rates, fuel costs and
insurance expenses.
Interest expense increased by $45,254 in the 2004 quarter totally
related to increased borrowing required to support increased inventory and
accounts receivable of RAL and American, which are direct functions of increased
sales.
The Company recorded a federal tax benefit of $209,500 for the second
quarter of 2004, an amount equal to the federal tax provision for the second
quarter, in order to recognize the utilization of available operating loss
carryforwards. During the second quarter of 2003, the Company recorded a federal
tax benefit in an amount equal to its provision for federal taxes as it had tax
operating loss carryforwards available.
Results of Operations - Six Months Ended June 30, 2004 and 2003
The Company reported net income of $364,255, for the six months of
2004, as compared to net income of $111,735 in the six months of 2003.
Sales from operations increased by $9,626,956 or 50.5% over the same
period in 2003. The inclusion of RAL Supply Group, Inc. ("RAL"), which was
acquired on
-11-
September 30, 2003, and American/Universal Supply Inc. ("American"), which was a
new operation that commenced on or about July 1, 2003, accounted for $7,147,785
of this increase. The remaining increase in sales was related to increased
market penetration in the core business of Universal. Simultaneously, gross
margin dollars increased by $3,144,346 because of the sales increases. Gross
margins expressed as a percentage of sales increased from 28.68% in 2003 to
30.02% in 2004, primarily due to increases in sales of higher margin products.
Selling, general and administrative expenses and cost of operations
increased by $2,875,807, primarily due to the inclusion of expenses related to
RAL and American, as well as higher utility rates, fuel costs and insurance
expenses.
Interest expense increased by $74,628 in the 2004 quarter because of
increased borrowing to support increased inventory and accounts receivable of
RAL and American.
The Company recorded a federal tax benefit of $129,600 for the first
half of 2004, recognizing available operating loss carryforwards. This compares
to a federal tax benefit of $91,371 recorded in the first half of 2003, due to
the receipt of tax refunds not previously accrued.
Liquidity and Capital Resources
As of June 30, 2004, the Company had $960,427 in cash and cash
equivalents compared with $342,756 at December 31, 2003.
Between December 31, 2003 and June 2004, there were no material
changes in obligations associated with operating agreements, obligations to
financial institutions and other long-term debt obligations.
Cash flows used by operations were $550,556 during the six months
ended June 30, 2004. Trade payables increased due primarily to increased
inventory purchases resulting from an overall increase in sales. Accounts
receivable increased due to an increase in sales in the second quarter of 2004
and timing of customer payments.
Cash flows used in investing activities of $211,106 during the six
months ended June 30, 2004 were due to the purchase of property and equipment.
The cash flows provided by financing activities of $1,379,333
included borrowings on the credit facility of $1,387,332, as well as borrowings
on notes payable of $22,871. Financing activities also include the sale of
600,000 shares of common stock for $360,000 in a private placement dated
February 12, 2004, the proceeds of which were used to repurchase 592,730 shares
of convertible preferred stock for $355,638.
-12-
At June 30, 2004, amounts outstanding under the Company's then existing
credit facility were $13,619,362. This credit facility was refinanced July 29,
2004. (See footnote 5, Subsequent Events.). The Company believes that its credit
facility is sufficient to finance its current operating needs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's pre-tax earnings and cash flows are exposed to changes
in interest rates, as all borrowings under its credit facility at June 30, 2004
bear interest based on that 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 decrease the pre-tax income and cash flow by
approximately $64,900 over a one-year period, assuming the borrowing level
remains consistent with the outstanding borrowings as of June 30, 2004. The fair
value of the borrowings under the credit facility is not affected by changes in
market interest rates. (See footnote 5(b), Subsequent Events.)
The Company's remaining interest-bearing obligations are at fixed rates
of interest and as such do not expose pre-tax earnings and cash flows to changes
in market interest rates. The change in fair value of the Company's fixed rate
obligations resulting from a hypothetical 10% adverse change in interest rates
would not be material.
ITEM 4. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
An evaluation has been carried out under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and the operation of our
"disclosure controls and procedures" (as such term is defined in rules 13a-15(e)
under the Securities Exchange Act of 1934) as of June 30, 2004 ("Evaluation
Date"). Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the Evaluation Date, the disclosure
controls and procedures are reasonably designed and effective to ensure that (i)
information required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
(ii) such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
The Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in alerting them to material
information required to be included in our periodic Securities and Exchange
Commission filings.
(b) CHANGES IN INTERNAL CONTROLS
Subsequent to that evaluation, there have been no significant changes
in our internal controls or other factors that could significantly affect these
controls after such evaluation.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
Sale of Unregistered Securities:
(a) On February 12, 2004, the Company completed a private
placement, pursuant to Regulation D of the Securities Exchange
Act of 1933. The Company raised $360,000 through the issuance
of 600,000 shares of common stock at $0.60 per share. See Part
2, Item 2(a).
The Company has used substantially all of the proceeds from
this private placement to purchase 592,730 shares of escheated
convertible preferred stock at $0.60 per share from the State
of Ohio. The Company has retired these convertible preferred
shares. (See Item 2(b)).
The following is a list of investors who purchased these
shares:
Amount of Cash
Name Common Shares Consideration
Rita C. Folger 100,000 $ 60,000
Michael Goldman 170,000 $ 102,000
Bernard Korn 165,000 $ 99,000
William Pagano 165,000 $ 99,000
------- ---------
Total 600,000 $ 360,000
======= =========
On July 29, 2004, the Company completed a private placement,
pursuant to Regulation D of the Securities Act of 1933. The
Company raised $1,050,000 through the issuance of 420,000
shares of common stock at $1.25 per share and the issuance of
$525,000 of subordinated unsecured convertible notes payable
("Notes"), bearing interest at 11% per annum,
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payable quarterly, with 50% of the principal payable on the
last day of the fourth anniversary and 50% of the principal
payable on the last day of the fifth anniversary. The Notes
are convertible to common stock at $3.00 per share during the
term of the Notes.
The following table lists the purchasers of the private
placement dated July 29, 2004:
Amount of Convertible Cash
Name Common Shares Note Consideration
-------------------- ------------- ----------- -------------
Richard A. Cancelosi 40,000 $ 50,000 $ 100,000
James Fallon 40,000 $ 50,000 $ 100,000
Rita Folger 80,000 $ 100,000 $ 200,000
Margret Friedrich 40,000 $ 50,000 $ 100,000
Eileen Goldman 20,000 $ 25,000 $ 50,000
John A. Hildebrandt 40,000 $ 50,000 $ 100,000
Paul H. Hildebrandt 40,000 $ 50,000 $ 100,000
William Pagano 80,000 $ 100,000 $ 200,000
William Salek 40,000 $ 50,000 $ 100,000
---------- ---------- ----------
Total 420,000 $ 525,000 $1,050,000
========== ========== ==========
On July 30, 2004, the Company completed a private placement
with Michael Goldman and Goldman Associates of New York, Inc.
pursuant to Regulation D of the Securities Act of 1933. For
total consideration of $1,500,000, the Company issued to
Goldman Associates, Inc. of New York 600,000 shares of common
stock at $1.25 per share, a $750,000 subordinated secured note
payable, earning interest at the prime rate, interest payable
quarterly, principal payable on December 31, 2008, and
warrants to purchase 150,000 shares of common stock at $3.00
per share expiring December 31, 2008.
These securities were issued in reliance on the exemption set
forth in Section 4(2) of the Act from registration
requirements under the Act.
(b) The following table provides information about purchases by
the Company (and its affiliated purchasers) during the six
months ended June 30, 2004 of equity securities that are
registered by the Company pursuant to Section 12 of the
Exchange Act:
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ISSUER PURCHASES OF EQUITY SECURITIES
Total Number Maximum Number
of Shares (or (or Approximate
Units) Dollar Value) of
Purchased as Shares (or Units)
Total Number Part of that May Yet Be
of Shares (or Average Price Publicly Purchased Under
Units) Paid per share Announced the Plans or
Period Purchased (1) (Or Unit) Plans or Programs Programs
------ ----------------- -------------- ----------------- ----------------
02/01/04- 592,730 Shares of $ .60 N/A N/A
02/29/04 Convertible
Preferred Stock
(1) On February 12, 2004, the Company used substantially all of the
proceeds from its February 12, 2004 private placement of 600,000 common
shares to purchase 592,730 shares of escheated convertible preferred
stock at $.60 per share from the State of Ohio. The Company has retired
these convertible preferred shares.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters To A Vote Of Security Holders
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
(4) Instruments Defining the Rights of Security Holders,
Including Indentures
4.1 Private Placement Agreement
4.2 Convertible Note Payable
4.3 Goldman Associates, Inc. of N.Y. Agreement
4.4 Goldman Associates, Inc. of N.Y. Note
4.5 Goldman Associates, Inc. of N.Y. Warrant
Agreement
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(10) Material Contracts
10.1 Wells Fargo Business Credit, Inc. Loan Agreement
31.1 Certification of Chief Executive Officer Pursuant to
Rule 15d-14 of the Securities and Exchange Act of
1934, as amended, as pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial officer Pursuant to
Rule 15d-14 of the Securities and Exchange Act of
1934, as amended, as pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes- Oxley Act of 2002.
b. Reports on Form 8-K:
(i) Form 8-K filed June 7, 2004 to report financial results for
the quarter ended March 31, 2004.
(ii) Form 8K/A-1 filed April 20, 2004 to amend the Company's
current report on Form 8-K dated October 15, 2003 relative to the acquisition of
RAL. This report amended the information provided under item 7(a) and 7(b).
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated: August __, 2004 COLONIAL COMMERCIAL CORP.
/S/ BERNARD KORN
--------------------------------------
Bernard Korn,
Chairman of the Board and President
/S/ JAMES W. STEWART
--------------------------------------
James W. Stewart,
Executive Vice President and Treasurer
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