UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
S QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended March 31, 2007
OR
£ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from ________________ to ________________
Commission
file number: 1-6663
COLONIAL
COMMERCIAL CORP.
(Exact
name of registrant as specified in its charter)
New
York
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|
11-2037182
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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275
Wagaraw Road, Hawthorne, New Jersey
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07506
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(Address
of principal executive offices)
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(Zip
Code)
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973-427-8224
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the 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 the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes S No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer £
|
Accelerated
filer £
|
Non-accelerated
filer S
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
£ No S
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding
at May 1, 2007
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Common
Stock, $.05 par value per share
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|
4,645,680
shares
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Convertible
Preferred Stock, $.05 par value per share
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|
467,500
shares
|
COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
CONTENTS
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Page
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1
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2
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3
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4
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12
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18
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19
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20
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20
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PART
I. FINANCIAL
INFORMATION
Item
1. Financial Statements
COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
Condensed
Consolidated Balance Sheets
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March
31,
2007
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December
31,
2006
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(Unaudited)
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Assets
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Current
assets:
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Cash
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$ |
600,386
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$ |
482,251
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Accounts
receivable, net of allowance for doubtful accounts of $237,661
in 2007 and
$212,043 in 2006
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8,455,946
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9,069,301
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Inventory
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14,624,886
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12,854,317
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Prepaid
expenses and other current assets
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1,271,280
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1,057,099
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Deferred
tax asset - current portion
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420,000
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420,000
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Total
current assets
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25,372,498
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23,882,968
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Property
and equipment
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1,453,888
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1,512,666
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Goodwill
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1,628,133
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1,628,133
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Other
intangibles
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3,000
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3,500
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Other
assets - noncurrent
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190,740
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202,177
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Deferred
tax asset - noncurrent
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1,288,500
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1,288,500
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$ |
29,936,759
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$ |
28,517,944
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Liabilities
and Stockholders' Equity
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Current
liabilities:
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Trade
payables
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$ |
6,922,785
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$ |
4,719,160
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Accrued
liabilities
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1,908,331
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1,975,175
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Income
taxes payable
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309
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1,630
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Borrowings
under credit facility - revolving credit
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13,275,383
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13,615,696
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Notes
payable - current portion; includes related party notes of
$30,000 in 2007 and 2006
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134,318
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136,539
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Total
current liabilities
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22,241,126
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20,448,200
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Notes
payable, excluding current portion; includes related party notes
of
$1,008,125 in 2007 and $1,028,750 in 2006
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1,309,888
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1,317,394
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Total
liabilities
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23,551,014
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21,765,594
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Commitments
and contingencies
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Stockholders'
equity:
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Redeemable
convertible preferred stock, $.05 par value, 2,500,000 shares authorized;
467,500 shares issued and outstanding in 2007 and 2006; liquidation
preference of $2,337,500 in 2007 and 2006
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23,375
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23,375
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Common
stock, $.05 par value, 20,000,000 shares authorized; 4,645,680
in 2007 and
4,593,680 in 2006 shares issued and outstanding
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232,284
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229,684
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Additional
paid-in capital
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10,728,526
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10,707,791
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Accumulated
deficit
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(4,598,440 |
) |
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(4,208,500 |
) |
Total
stockholders' equity
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6,385,745
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6,752,350
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$ |
29,936,759
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$ |
28,517,944
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See
accompanying notes to unaudited condensed consolidated financial
statements.
COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
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For
The Three Months Ended
March
31,
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2007
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2006
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Net
sales
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$ |
16,042,232
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$ |
14,884,214
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Cost
of sales
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11,170,730
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10,198,887
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Gross
profit
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4,871,502
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4,685,327
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Selling,
general and administrative expenses
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4,988,606
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4,756,862
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Operating
loss
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(117,104 |
) |
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(71,535 |
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Other
income
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64,598
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65,789
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Interest
expense, net; includes related party interest of $25,967 in 2007
and
$25,629 in 2006
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(334,042 |
) |
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(299,662 |
) |
Loss
before income taxes
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(386,548 |
) |
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(305,408 |
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Income
tax expense
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3,392
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19,121
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Net
Loss
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$ |
(389,940 |
) |
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$ |
(324,529 |
) |
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Loss
per common share:
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Basic
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$ |
(0.08 |
) |
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$ |
(0.07 |
) |
Diluted
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$ |
(0.08 |
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$ |
(0.07 |
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Weighted
average shares outstanding:
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Basic
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4,645,102
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4,549,411
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Diluted
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4,645,102
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4,549,411
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See
accompanying notes to unaudited condensed consolidated financial
statements.
COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
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For
The Three Months Ended
March
31,
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2007
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2006
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Cash
flows from operating activities:
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Net
loss
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$ |
(389,940 |
) |
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$ |
(324,529 |
) |
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
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Stock-based
compensation
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10,335
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-
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Provision
for doubtful accounts
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1,792
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59,844
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Depreciation
and amortization
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119,151
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106,690
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Amortization
of intangibles
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500
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3,417
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Accretion
of debt discount
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9,375
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9,375
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Changes
in operating assets and liabilities
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Accounts
receivable
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611,563
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722,721
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Inventory
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(1,770,569 |
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(2,198,765 |
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Prepaid
expenses and other current assets
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(214,181 |
) |
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97,857
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Other
assets - noncurrent
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11,437
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13,119
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Trade
payables
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2,203,625
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810,256
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Accrued
liabilities
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(66,844 |
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(136,075 |
) |
Income
taxes payable
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(1,321 |
) |
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6,257
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Net
cash provided by (used in) operating activities
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524,923
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(829,833 |
) |
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Cash
flows from investing activities:
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Additions
to property and equipment
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(60,373 |
) |
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(90,720 |
) |
Net
cash used in investing activities
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(60,373 |
) |
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(90,720 |
) |
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Cash
flows from financing activities:
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Issuance
of common stock and exercise of stock options
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13,000
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-
|
|
Repayments
of notes payable: includes related party repayments of $30,289
in
2006.
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(19,102 |
) |
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|
(46,046 |
) |
Issuance
of notes payable
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|
-
|
|
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|
13,073
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|
Repayments
under credit facility - term loan
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|
|
-
|
|
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|
(250,000 |
) |
Borrowings
under credit facility - revolving credit
|
|
|
(340,313 |
) |
|
|
1,153,226
|
|
Net
cash (used in) provided by financing activities
|
|
|
(346,415 |
) |
|
|
870,253
|
|
Increase
(decrease) in cash
|
|
|
118,135
|
|
|
|
(50,300 |
) |
Cash
- beginning of period
|
|
|
482,251
|
|
|
|
613,456
|
|
Cash
- end of period
|
|
$ |
600,386
|
|
|
$ |
563,156
|
|
See
accompanying notes to unaudited condensed consolidated financial
statements.
COLONIAL
COMMERCIAL CORP. AND SUBSIDIARIES
Notes
To
Condensed Consolidated Financial Statements
March
31,
2007
(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 March
31, 2007 is 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/A for the year ended December
31,
2006.
We
have
one industry segment – wholesale distribution of heating, ventilation, air
conditioning equipment, plumbing fixtures and appliances.
Inventory
is comprised of finished goods.
The
Company uses the modified prospective application method of SFAS No. 123(R),
“Share-Based Payment”, which establishes standards for transactions in which an
entity exchanges its equity instruments for goods or services. This standard
requires an entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant date fair value of
the
award.
On
September 29, 2006, the Company adopted the Colonial Commercial Corp. 2006
Stock
Plan, (the “2006 Plan”). The 2006 Plan enables the Company to grant
equity and equity-linked awards to our Directors, officers, employees and
other
persons who provide services to the Company. The 2006 Plan is
intended to allow us to provide incentives that will (1) strengthen the desire
of highly competent persons to provide services to us and (2) further stimulate
their efforts on our behalf.
On
January 22, 2007, a Director of the Company resigned. Of the 25,000
options granted to the director, 15,000 unvested options were forfeited
immediately and the remaining 10,000 vested options were forfeited on March
23,
2007 pursuant to the terms of the grant letter.
The
following table summarizes information about stock options at March 31,
2007:
Options
Outstanding and Exercisable
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|
|
|
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Weighted
Average
|
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Range
of
|
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Remaining
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Weighted
Average
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Aggregate
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Exercise
Prices
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|
Shares
|
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Contractual
Life
|
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Exercise
Price
|
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|
Intrinsic
Value
|
|
$ |
.25
|
|
|
|
22,000
|
|
|
|
2.23
|
|
|
$ |
.25
|
|
|
|
|
$ |
1.85
|
|
|
|
30,000
|
|
|
|
9.69
|
|
|
$ |
1.85
|
|
|
|
|
|
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|
52,000
|
|
|
|
|
|
|
$ |
1.17
|
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|
$ |
33,440
|
|
|
|
Options
Outstanding and Non-exercisable
|
|
$ |
1.85
|
|
|
|
45,000
|
|
|
|
9.69
|
|
|
$ |
1.85
|
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|
$ |
0
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|
For
the
quarters ended March 31, 2007 and 2006, the amount of stock based compensation
was $10,335 and $0, respectively. The aggregate intrinsic value of
options exercised during the quarter ended March 31, 2007 was
$85,800.
During
the quarter ended March 31, 2007, no shares of redeemable preferred stock
were
converted into common stock. During the quarter ended March 31, 2006,
holders of a total 9,155 shares of redeemable preferred stock converted these
shares into 9,155 shares of common stock.
During
the quarter ended March 31, 2007, the Company issued 52,000 shares of common
stock pursuant to the exercise of stock options.
4.
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Supplemental
Cash Flow Information
|
The
following is supplemental information relating to the consolidated statements
of
cash flows:
|
|
For
the Three Months Ended
|
|
|
|
March
31, 2007
|
|
|
March
31, 2006
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest
|
|
$ |
332,170
|
|
|
$ |
283,714
|
|
Income
taxes
|
|
$ |
3,804
|
|
|
$ |
57,364
|
|
5.
|
Net
Loss Per Common Share
|
Employee
stock options totaling 97,000 and 106,000 for the three months ended March
31,
2007 and 2006, respectively, were not included in the net loss per share
calculation because their effect would have been
anti-dilutive. Convertible preferred stock, convertible into 467,500
shares of common stock and 475,566 shares of common stock for the three months
ended March 31, 2007 and 2006, respectively, were not included in the net
loss
per share because their effects would have been
anti-dilutive. Convertible notes, in the principal amount of
$525,000, convertible into 175,000 shares of common stock were not included
in
the net loss per share calculation for the three months ended March 31, 2007
and
2006 because their effect would have been anti-dilutive.
6.
|
Financing
Arrangements
|
At
March
31, 2007, the amount outstanding under the Company’s credit facility with Wells
Fargo Business Credit, Inc. (“Wells”) was $13,275,383, and the Company had
standby letters of credit, which were set to expire on July 31, 2007 and
September 1, 2007. The standby letters of credit reduced the
availability of the credit facility by $300,000 and $100,000, respectively,
and
additional reserves determined by the bank further reduced the availability
of
the credit facility by $100,000. On April 25, 2007, the Company’s
$100,000 standby letter of credit, due to expire on September 1, 2007, was
no
longer required by the vendor and was released by Wells Fargo at the request
of
the vendor. Availability under the revolving credit line was $484,165
as of March 31, 2007 and is determined by a percentage of available assets
as
defined in the Agreement, less letters of credit and reserves. The
interest rate on the revolving credit facility, as of March 31, 2007 was
8.0%.
The
facility contains covenants relating to the financial condition of the Company,
its business operations, and restricts the payment of dividends, subordinated
debt, purchase of securities and capital expenditures.
Universal
Supply Group, Inc.
Universal
Supply Group, Inc., a wholly owned subsidiary of the Company, is a New York
corporation (“Universal”). On June 25, 1999, Universal acquired
substantially all of the assets of Universal Supply Group, Inc., a New Jersey
corporation, including its name, pursuant to the terms of a purchase
agreement. The Company filed a copy of the purchase agreement with
the Securities and Exchange Commission on March 30, 1999 as Exhibit 10(g)
on
Form 10KSB, and the Company filed a copy of an amendment to the purchase
agreement on July 9, 1999 as Exhibit 10(a)(ii) on Form
8-K. Subsequent to the sale, Universal Supply Group, Inc. (the
selling corporation) formerly known as Universal Engineering Co., Inc., changed
its name to Hilco, Inc. Hilco, Inc. acquired the assets of Amber
Supply Co., Inc., formerly known as Amber Oil Burner Supply Co., Inc., in
1998,
prior to Hilco’s sale of assets to Universal. Hilco, Inc. is
hereinafter referred to as the “Predecessor.” The majority
shareholders of Hilco, Inc. were John A. Hildebrandt and Paul
Hildebrandt.
The
Company understands that Predecessor and many other companies have been sued
in
the Superior Court of New Jersey (Middlesex County) by plaintiffs filing
lawsuits alleging injury due to asbestos. Currently, there exist 101 plaintiffs
in these lawsuits relating to alleged sales of asbestos products, or products
containing asbestos, by the Predecessor. The Company never sold any asbestos
related products.
Of
the
existing plaintiffs, 11 filed actions in 2007, seven filed actions in 2006,
15
filed actions in 2005, 42 filed actions in 2004, 23 filed actions in 2003,
and
three filed actions in 2002. There are 110 other plaintiffs that have had
their
actions dismissed and nine other plaintiffs that have settled as of March
31,
2007 for a total of $3,325,500. There has been no judgment against the
Predecessor.
Our
Universal subsidiary was named by 35 plaintiffs; of these, two filed actions
in
1999, one filed an action in 2000, five filed actions in 2001, eleven filed
actions in 2005, six filed actions in 2006 and 10 filed actions in 2007.
Six
plaintiffs naming Universal have had their actions dismissed and, of the
total
$3,325,500 of settled actions, two plaintiffs naming Universal have settled
for
$26,500. No money was paid by Universal in connection with any
settlement. Following these dismissed and settled actions, there
currently exist 27 plaintiffs that name Universal.
As
set
forth in more detail below, the Company has been indemnified against
asbestos-based claims, and insurance companies are defending the interests
of
the Predecessor and the Company in these cases.
Based
on
advice of counsel, the Company believes that none of the litigation that
was
brought against the Company’s Universal subsidiary through March 31, 2007 is
material, and that the only material litigation that was brought against
Predecessor through that date was Rhodes v. A.O. Smith Corporation, filed
on
April 26, 2004 in the Superior Court of New Jersey, Law Division, Middlesex
County, Docket Number MID-L-2979-04AS. The Company was advised that the Rhodes
case was settled for $3,250,000 (“Settlement”) under an agreement reached in
connection with a $10,000,000 jury verdict that was rendered on August 5,
2005.
The Company was not a defendant in the Rhodes case.
On
April
29, 2005, prior to the Rhodes case trial, the Predecessor filed a third party
complaint against Sid Harvey Industries (“Third Party Complaint”) in an action
demanding contributor payment in connection with the Settlement. Sid Harvey
Industries moved successfully for summary judgment. The Predecessor
filed an appeal as to the dismissal of Predecessor’s Third Party
Complaint. In a decision dated December 29, 2006, the Superior Court
of New Jersey, Appellate Division, reversed the dismissal of Predecessor’s Third
Party Complaint and remanded the matter for further proceedings as to
Predecessor’s claim for contribution.
The
Company believes that Rhodes differed from the other lawsuits in that
plaintiff established that he contracted mesothelioma as a result of his
occupational exposure to asbestos dust and fibers and that a predecessor
of the
Company was a major supplier of the asbestos containing products that allegedly
caused his disease.
Indemnification
John
A.
Hildebrandt, Paul Hildebrandt and the Predecessor have jointly and severally
agreed to indemnify our Universal subsidiary from and against any and all
damages, liabilities and claims due to exposure to asbestos at any time prior
to
the June 25, 1999 closing of the purchase agreement referred to
earlier. These agreements are set forth in the purchase agreement.
Paul Hildebrandt, one of the indemnitors, was a Director of the Company from
September 29, 2004 to January 28, 2005.
The
indemnitors may use their own counsel to defend these claims. The indemnitors
are not liable for any settlement effected without their consent. The
indemnitors may settle and pay money claims without the consent of the Company.
There is no indemnification unless claims aggregate $50,000; once this trigger
point is reached, indemnification is required for all claims, including the
first $50,000, but excluding claims of less than $10,000. The indemnification
requirement survives at least until 30 days after the running of any relevant
statutes of limitation.
The
obligation of the indemnitors is joint and several, so that the Company can
have
recourse against any one or more of these indemnitors, whether or not any
other
indemnitor has previously defaulted on its obligation to us. There are no
other
limitations to our rights to indemnification.
Insurance
The
assets that the Predecessor sold to us included its insurance policies and
other
agreements and contracts. The policies provide coverage for liability accruing
during the periods for which premiums were paid. The Predecessor was
formed in 1940. Copies of policies are available for each year beginning
in 1970
and ending with the closing under the purchase agreement in 1999. Copies
of
policies for the period from 1940 to 1969 are not available.
Insurance
companies acknowledge coverage for potential asbestos claims under certain
of
these policies. Insurance companies under additional policies have
reserved their right to deny coverage but have continued to defend and indemnify
the Predecessor and the Company under the contested policies.
There
are
periods during the years from 1940 to 1999 in which our Predecessor did not
have
coverage for potential asbestos claims. Subject to litigation,
insurance companies may maintain that the existence of these periods’ results in
coverage for only a portion of a particular injury that varies with the period
during which there was asbestos coverage relating to the injury, and that
the
balance of any settlement or judgment is to be paid by the
insured. As of March 31, 2007, no insurance company has claimed any
contribution for a gap in coverage except for a claim for $159.64 made by
one
insurance company to the Predecessor in 1995. The Predecessor
asserted that it had no obligation to pay this amount and did not make any
payment.
Insurance
companies have, as of March 31, 2007, defended us and the Predecessor, and
have
paid all settlement amounts and defense costs. Except for $159.64
referred to above, the insurance companies have not requested any payments
from
us or from the Predecessor.
Our
Universal subsidiary has not engaged in the sale of asbestos products since
its
formation in 1997. Its product liability policies for all years since 1998
exclude asbestos claims.
General
Regardless
of indemnification and insurance coverage, we do not in any event consider
our
Company to be liable for the asbestos-based lawsuits that name us or for
any
other claim that arises as a result of actions or omissions by Predecessor
companies. We expressly disclaimed the assumption of any liabilities when
we
purchased the assets of the Predecessor. It is our opinion that the existing
asbestos litigation will not have a material adverse effect on the
Company. Nevertheless, we could be materially and adversely affected
if we are held liable for substantial asbestos claims or if the Company incurs
substantial legal or settlement costs. This material and adverse effect would
occur if indemnitors fail to honor their indemnification agreements and
insurance is not available either because policy limits are exceeded, or
because
insurance companies successfully claim limitations on their liabilities by
reason of gaps in coverage or otherwise.
Since
we
do not regard as likely the potential payment of any asbestos-based claim,
we
have not accrued any balance for any period relating to asbestos claims,
and we
have not recorded any amount for asbestos claims for any period in any of
our
financial statements.
Other
Litigation
The
Company is periodically involved in other litigation in the ordinary course
of
business. The Company vigorously defends all matters in which the
Company or its subsidiaries are named defendants and, for insurable losses,
maintains significant levels of insurance to protect against adverse judgments,
claims or assessments. Although the adequacy of existing insurance
coverage or the outcome of any legal proceedings cannot be predicted with
certainty, the Company does not believe the ultimate liability associated
with
any claims or litigation will have a material impact to its financial condition
or results of operations.
8.
|
New
Accounting Pronouncements
|
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes-an interpretation FASB No. 109 (“FIN 48”), which prescribes
accounting for and disclosure of uncertainty in tax positions. This
interpretation defines the criteria that must be met for the benefits of
a tax
position to be recognized in the financial statements and the measurement
of tax
benefits recognized. The provisions of FIN 48 are effective as of the
beginning of the Company’s 2007 fiscal year, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained
earnings.
The
Company adopted the provisions of FIN 48 on January 1,
2007. Under FIN 48, tax positions must meet a “more-likely-than-not”
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. The adoption of FIN 48 had an
immaterial impact on the Company’s consolidated financial position and did not
result in unrecognized tax benefits being recorded. Accordingly, no
corresponding interest and penalties have been accrued. The
Company files income tax returns in the U.S. federal jurisdiction and various
states. There are currently no federal or state income tax examinations underway
for these jurisdictions. The Company is no longer subject to U.S.
federal income tax examinations by the Internal Revenue Service and state
and
local tax authorities for tax years before 2002. The Company does,
however, have prior year net operating losses which remain open for
examination.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair Value Measurements, (“SFAS 157”). This Standard
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. The adoption of SFAS 157 is not expected
to have a material impact on the Company’s financial position, results of
operations or cash flows.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 (“SAB No.
108”), “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB No. 108
specifies how the carryover or reversal of prior year unrecorded financial
statements misstatements should be considered in quantifying a current year
misstatement. SAB No. 108 requires a dual approach that considers
both the amount by which the current year Consolidated Statement of Operations
is misstated (“rollover method”) and an approach that considers the cumulative
amount by which the current year Consolidated Balance Sheet is misstated
(“iron
curtain method”). Prior to the issuance of SAB No. 108, either the
rollover or iron curtain method was used to assess financial statement
misstatements. Prior to the Company’s application of the guidance in
SAB No. 108, management used the rollover approach for quantifying financial
statement misstatements.
Initial
application of SAB No. 108 allows registrants to elect not to restate prior
periods but to reflect the initial application in their annual financial
statements covering the first fiscal year ending after November 15,
2006. The cumulative effect of the initial application should be
reported in the carrying amounts of assets and liabilities as of the beginning
of that fiscal year and the offsetting adjustment, net of tax, should be
made to
the opening balance of retained earnings for that year. We elected to
record the effects of applying SAB No. 108 using the cumulative effect
transition method. Consistent with the requirements of SAB No. 108,
this adjustment has been allocated to the appropriate 2006 quarter in the
accompanying consolidated financial statements.
The
adjustment, pursuant to SAB No. 108, to the previously filed Form 10-Q for
the
quarter ended March 31, 2006 included an increase in gross profit of $98,560
from $4,586,797 to a restated gross profit of $4,685,327, which resulted
in a
net loss adjustment from $423,089 to a restated net loss of $324,529 and
a loss
per common share adjustment from $0.09 to a restated loss per common share
of
$0.07. The adjustment reduced the carrying value of inventory at
March 31, 2006 by $220,961.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, The Fair Value Option for Financial Assets and Financial
Liabilities, (“FASB 159”). This standard permits an entity to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings
caused
by measuring related assets and liabilities differently with having to apply
complex accounting provisions. The adoption of SFAS 159 is not
expected to have a material impact on the Company’s financial
position.
9.
|
Related
Party Transaction
|
Pioneer
Realty Holdings, LLC, a New York limited liability company (“Pioneer”), is the
owner of the premises located at 836 Route 9, Fishkill, New York, formerly
known
as 2213 Route 9, Fishkill, New York that is leased to a subsidiary of the
Company under a lease that until amended described in the next paragraph,
was to
expire in September 2008, subject to renewal options, and provided for a
current
aggregate annual rent of $133,500. Pioneer is the landlord under the
lease pursuant to an assignment and assumption agreement dated April 12,
2005.
On
February 21, 2007, the lease was amended to provide, among other things,
for
25,947 square feet of the leased premises, a net increase of 14,443 square
feet,
for $245,844 total base annual rent, adjusted annually for CPI, an initial
increase of $106,740 per annum. The effectiveness of the amendment
commences on the date of issuance of a certificate of occupancy for the Premises
that are currently undergoing reconstruction. The term of the amended
lease expires on March 31, 2017, subject to two five-year renewal
options.
Additionally,
on February 21, 2007, Pioneer granted the Company an option (“Option”) to
purchase the Premises for (i) an exercise price equal to Pioneer’s total
financial investment in the Premises through the date of exercise and (ii)
the
release of Mr. Pagano (and any other guarantors) from guaranties of mortgage
loans secured by the Premises. The Option expires on July 31,
2007.
William
Pagano has a 55% interest in Pioneer and each of Rita Folger and Jeffrey
Folger
has an 8% interest in Pioneer Realty Partners I, LLC, which has a 40% interest
in Pioneer. The Company paid Pioneer Realty Holdings, LLC $31,100 and
$33,375 in rent during the quarters ended March 31, 2007 and 2006,
respectively.
Oscar
and
Jeffrey Folger acted as legal counsel for the Company through April 20,
2005. Oscar and Jeffrey Folger acted as legal consultants for the
Company from April 21, 2005 through December 31, 2005 and each became an
employee of the Company as Vice President-Chief Legal Counsel and Assistant
Vice
President-Legal, respectively, on January 1, 2006 until March 31,
2007. As of April 1, 2007, Oscar and Jeffrey Folger ceased to act as
employees of the Company, but Oscar Folger’s law firm remains as counsel to the
Company. Mrs. Folger is the wife of Oscar Folger and the mother of
Jeffrey Folger. Professional fees paid to Oscar Folger’s law firm for
quarters ended March 31, 2007 and 2006, respectively, was $24,400 and
$2,775. Additionally, $3,000 was paid to each of Oscar and Jeffrey
Folger as part time employees of the Company for each of the quarters ended
March 31, 2007 and 2006.
Please
refer to Section 9, Related Party Transaction, above, for information
related to a lease entered into by a subsidiary of the Company on February
21,
2007.
On
April
25, 2007, the Company’s standby letter of credit that reduced the availability
of the credit facility by $100,000 and was due to expire on September 1,
2007,
was no longer required by the vendor and was released by Wells Fargo at the
request of the vendor.
Item
2. Management’s Discussion and Analysis of
Financial Condition and Results of
Operations
The
Company
Colonial
Commercial Corp. (“Colonial”) is a New York corporation, which was incorporated
on October 28, 1964. Unless otherwise indicated, the term “Company” 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”), The RAL Supply Group, Inc. (“RAL”) and
American/Universal Supply, Inc. (“American”).
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
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.
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.
Revenue
Recognition
Revenue
for the Company primarily consists of sales of heating, ventilation and air
conditioning equipment, climate control systems, plumbing fixtures and supplies
and appliances. The Company recognizes revenue after 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 products from the Company’s customers, which are
covered under the manufacturer’s warranty. The Company will receive a
vendor credit from the manufacturer related to the warranted product in
question, at which time credits are issued to the customer. The
Company does not provide a warranty on products sold; rather the warranty
is
provided by the manufacturer.
Accounts
Receivable
Accounts
receivable consist of trade receivables recorded at original invoice amount,
less an estimated allowance for uncollectible accounts. Trade credit is
generally extended on a short-term basis; thus trade receivables generally
do
not bear interest. However, a service charge may be applied to receivables
that
are past due. These service charges are not recognized until collected, and
are
then included in 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.
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. 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.
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.
Distribution
costs of incoming freight, purchasing, receiving, inspection, warehousing
and
handling costs are included in selling, general and administrative
expenses. Such costs were $124,515 and $103,939 for the quarter ended
March 31, 2007 and 2006, respectively.
The
Company writes down its inventories for estimated slow moving and obsolete
goods
in accordance with the lower of cost or 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.
Vendor
Rebates
The
Company has arrangements with several vendors that provide rebates payable
when
the Company achieves any of a number of measures, generally related to volume
level of purchases. The Company accounts for such rebates as a
reduction of inventory until sale of the product, at which time such rebates
are
reflected as a reduction of cost of sales in the consolidated statements
of
income. Throughout the year, the Company estimates the amount of
rebate based on estimates of purchases to date relative to the purchase levels
that mark the progress toward earning the rebate. The Company
continually revises these estimates of earned vendor rebates based on actual
purchase levels.
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
|
3-5
years
|
|
|
Furniture
and fixtures
|
5
years
|
|
|
Automobiles
|
3-5
years
|
|
|
Showroom
fixtures and displays
|
3
years
|
Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the asset.
Income
Taxes
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes-an interpretation FASB No. 109 (“FIN 48”), which prescribes
accounting for and disclosure of uncertainty in tax positions. This
interpretation defines the criteria that must be met for the benefits of
a tax
position to be recognized in the financial statements and the measurement
of tax
benefits recognized. The provisions of FIN 48 are effective as of the
beginning of the Company’s 2007 fiscal year, with the cumulative effect of the
change in accounting principle recorded as an adjustment to opening retained
earnings.
The
Company adopted the provisions of FIN 48 on January 1,
2007. Under FIN 48, tax positions must meet a “more-likely-than-not”
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. The adoption of FIN 48 had an
immaterial impact on the Company’s consolidated financial position and did not
result in unrecognized tax benefits being recorded. Accordingly, no
corresponding interest and penalties have been accrued. The Company
files income tax returns in the U.S. federal jurisdiction and various states.
There are currently no federal or state income tax examinations underway
for
these jurisdictions. The Company is no longer subject to U.S. federal
income tax examinations by the Internal Revenue Service and state and local
tax
authorities for tax years before 2002. The Company does, however,
have prior year net operating losses which remain open for
examination.
Deferred
Income Tax Asset
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.
Goodwill
and Other Intangible Assets
Statement
of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible
Assets," requires that goodwill is reviewed at least annually for
impairment. In assessing the recoverability of the Company’s
goodwill, 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 its related assumptions change in the future, the
Company may be required to record impairment charges related to its
goodwill.
Results
of Operations For the Quarter Ended March 31, 2007 and 2006
Sales
increased by 7.8%, or $1,158,018, to $16,042,232 for the quarter ended March
31,
2007 from $14,884,214 for the same period in 2006. The increase in
sales is primarily a result of sales of appliances in 2007 that the Company
was
not offering until September 2006 and increases in our commercial air
conditioning equipment sales. These increases were partially offset
by a continued slowness in our control systems business and softness in sales
of
our showroom plumbing fixtures.
Gross
profit increased by 4.0%, or $186,175, to $4,871,502 for the quarter ended
March
31, 2007 from $4,685,327 for the same period in 2006. Gross profit
expressed as a percentage of sales decreased by 1.1% to 30.4% in 2007 compared
to 31.5% for the comparable period in 2006. The decrease in the
percentage of gross profit is primarily the result of a change in product
mix,
for example, selling more low-margin high volume products, including appliances,
without a corresponding increase in sales of higher-margin products such
as
control systems, showroom plumbing and fixture sales. Cost of sales
excludes the distribution costs of incoming freight, purchasing, receiving,
inspection, warehousing and handling costs, as these costs are included in
our
selling, general and administrative expenses. Our gross margins may
not be comparable to those of other entities since some entities include
these
distribution costs in the cost of sales. These distribution costs
were $124,515 and $103,939 for the quarter ended March 31, 2007 and 2006,
respectively.
Selling,
general and administrative expense increased by 4.9%, or $231,744, to $4,988,606
from $4,756,862 for the same period in 2006. The increase in selling,
general and administrative expense is primarily due to staffing, marketing
and
advertising expenses related to the sales of appliances in 2007 that the
Company
was not offering until September 2006.
Interest
expense, net increased by 11.5%, or $34,380, to $334,042 for the quarter
ended
March 31, 2007 from $299,662 for the same period in 2006. The
interest expense increase is primarily the result of increasing interest
rates
and increased borrowings under the credit line related to inventory to support
sales of appliances and new product offerings. The revolving credit
line bears interest at .25% below prime rate, which was 8.25% at March 31,
2007
compared to 7.75% at March 31, 2006.
Pre-tax
loss increased by 26.6%, or $81,140, to $386,548 for the quarter ended March
31,
2007 from $305,408 for the same period in 2006. The difference in the
pre-tax loss figures between the first quarter of 2007 and 2006 was mostly
related to increased sales and related gross profit of appliances and commercial
air conditioning equipment offset by a general weakness in our control systems
business and slower sales from our plumbing showrooms, as well as increases
in
selling, general and administrative expenses and interest expense, as discussed
above. The Company’s net loss increased by 20.2%, or $65,411, to
$389,940 for the quarter ended March 31, 2007 from $324,529 for the same
period
in 2006.
The
following table summarizes information derived from the Company’s consolidated
statements of income expressed as a percentage of sales for the quarter ended
March 31, 2007 and 2006.
|
|
For
the Quarter
Ended
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
Sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
69.6
|
|
|
|
68.5
|
|
Gross
profit
|
|
|
30.4
|
|
|
|
31.5
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
31.1
|
|
|
|
32.0
|
|
Operating
income
|
|
|
(0.7 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
0.4
|
|
|
|
0.4
|
|
Interest
expense, net
|
|
|
(2.1 |
) |
|
|
(2.0 |
) |
Income
before taxes
|
|
|
(2.4 |
) |
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
(2.5 |
)% |
|
|
(2.2 |
)% |
Liquidity
and Capital Resources
The
Company has a total secured loan facility of $15,000,000 pursuant to a credit
and security agreement (“Agreement”) with Wells Fargo Business Credit, Inc.
(“Wells”) consisting of a revolving line of credit which expires August 1,
2010. The revolving credit line bears interest at .25% below
prime. At March 31, 2007, the Company had standby letters of credit,
which were set to expire on July 31, 2007 and September 1, 2007. The
standby letters of credit reduced the availability of the credit facility
by
$300,000 and $100,000, respectively, and additional reserves determined by
the
bank further reduced the availability of the credit facility by
$100,000. On April 25, 2007, the Company’s $100,000 standby letter of
credit, due to expire on September 1, 2007, was no longer required by the
vendor
and was released by Wells Fargo at the request of the
vendor. Availability under the revolving credit line was $484,165 as
of March 31, 2007 and is determined by a percentage of available assets as
defined in the Agreement, less letters of credit and reserves. The
balance outstanding under the revolving line of credit was $13,275,383 as
of
March 31, 2007. The interest rate on the revolving credit facility,
as of March 31, 2007 was 8.0%.
The
Company believes that the credit facility is sufficient to finance its current
operating needs. However, the business of the Company would be
materially and adversely affected if the bank demands payment of the loan
and
the Company is unable to refinance the loan.
As
of
March 31, 2007, the Company had $600,386 in cash compared with $482,251 at
December 31, 2006.
Net
cash
provided by operating activities was $524,923 for the quarter ended March
31,
2007. The net cash provided by operating activities for the 2007 period is
primarily a result of cash provided by operating assets and liabilities of
$773,710 and non-cash charges of $141,153, offset by a net loss of $389,940.
The decrease in accounts receivable approximating $613,355 was primarily
a
result of the cyclical decrease in sales during the first
quarter. Accounts payable increased due to additional inventory
purchases in preparation for the increased demand of sales of air conditioning
products for the second quarter of 2007.
Cash
flows used in investing activities were $60,373 during the quarter ended
March
31, 2007 due to purchases of equipment.
Cash
flows used in financing activities of $346,415 consisted of $340,313 for
repayments under the credit facility-revolving credit and $19,102 for repayments
on notes payable. Cash flows provided by financing activities
consisted of $13,000 received from the exercise of stock options.
Item
3. 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. All borrowings under its credit facility bear interest based
on the prime rate less .25% and a $750,000 note to Goldman Associates of
NY,
Inc. which bears interest at prime. A hypothetical 10% adverse change
in such rates would reduce the pre-tax earnings and cash flows by approximately
$112,000 over a one-year period, assuming the borrowing level remains consistent
with the outstanding borrowings as of March 31, 2007. 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 the 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
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a.
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Evaluation
of Disclosure Controls and
Procedures
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An
evaluation had 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 March 31, 2007 (“Evaluation Date”). Based
on such evaluation, our Chief Executive Officer and Chief Financial Officer
had
concluded that, as of the Evaluation Date, the disclosure controls and
procedures were 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 was recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and (ii)
such
information was accumulated and communicated to our management, including
our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
In
conjunction with the preparation of this Form 10-Q of the Company, and following
consultation with, and upon recommendation of the Company’s management and Audit
Committee, the Board of Directors of the Company determined that certain
vendor
rebates should be an adjustment to the cost of the vendors’ product and included
as a reduction of cost of sales when recognized in the income
statement. Previously, some vendor rebates were recognized as income,
not as a reduction of costs when sold. Accordingly, the Company has
now concluded that its disclosure controls and procedures in connection with
the
interpretation of accounting pronouncements were not effective as of March
31,
2007. In connection with the review of its accounting for vendor
rebates, the Company’s management obtained the necessary understanding of the
accounting and reporting for such transactions. The Company also
decided to augment its finance and accounting staff by retaining an experienced
independent consultant who will enhance the Company’s financial accounting and
reporting capabilities.
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b.
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Changes
in Internal Controls
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Other
than described above, there have been no significant changes in the Company’s
internal controls or in other factors that could significantly affect internal
controls subsequent to March 31, 2007.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
The
Company’s Legal Proceedings are incorporated by reference from Part I
Financial Information, Item 1 Financial Statements, Section 7
Litigation, of this Report on Form 10-Q.
Items
1A, 2, 3, 4 and 5 are not applicable and have been
omitted.
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Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
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Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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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: May
21, 2007
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COLONIAL
COMMERCIAL CORP.
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/s/
William Pagano
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William
Pagano,
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Chief
Executive Officer
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/s/
William Salek
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William
Salek,
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Chief
Financial Officer
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