form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|
|
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended September 30,
2009
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
|
|
11-2037182
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
|
|
|
275 Wagaraw Road, Hawthorne, New
Jersey
|
|
07506
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
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 T No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes £ No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
£
|
Accelerated
filer
|
£
|
Non-accelerated
filer
|
£
|
Smaller
reporting company
|
T
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No T
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 November 1,
2009
|
|
|
Common
Stock, $.05 par value per share
|
|
4,654,953
shares
|
|
|
Convertible
Preferred Stock, $.05 par value per share
|
|
293,057
shares
|
|
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
CONTENTS
PART
I.
|
FINANCIAL
INFORMATION
|
Page
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
|
1
|
|
|
|
|
|
2
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
Item
2.
|
|
17
|
|
|
|
Item
3.
|
|
24
|
|
|
|
Item
4T.
|
|
24
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
|
24
|
|
|
|
Item
6.
|
|
25
|
PART I. FINANCIAL
INFORMATION
Item
1. Financial Statements
Condensed
Consolidated Balance Sheets
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
608,346 |
|
|
$ |
417,387 |
|
Restricted
cash
|
|
|
446,033 |
|
|
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $565,272 in 2009 and
$472,526 in 2008
|
|
|
10,348,515 |
|
|
|
8,802,631 |
|
Inventory
|
|
|
14,521,518 |
|
|
|
13,706,594 |
|
Prepaid
expenses and other current assets
|
|
|
1,185,705 |
|
|
|
1,090,634 |
|
Deferred
tax asset - current portion
|
|
|
15,000 |
|
|
|
170,000 |
|
Total
current assets
|
|
|
27,125,117 |
|
|
|
24,187,246 |
|
Property
and equipment
|
|
|
1,449,294 |
|
|
|
1,684,932 |
|
Goodwill
|
|
|
1,628,133 |
|
|
|
1,628,133 |
|
Other
intangibles
|
|
|
3,333 |
|
|
|
329,485 |
|
Other
assets - noncurrent
|
|
|
231,033 |
|
|
|
159,801 |
|
Deferred
tax asset - noncurrent
|
|
|
515,000 |
|
|
|
830,000 |
|
|
|
$ |
30,951,910 |
|
|
$ |
28,819,597 |
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Trade
payables
|
|
$ |
9,004,905 |
|
|
$ |
7,019,742 |
|
Accrued
liabilities
|
|
|
1,771,678 |
|
|
|
1,467,244 |
|
Income
taxes payable
|
|
|
- |
|
|
|
558 |
|
Borrowings
under credit facility - revolving credit
|
|
|
15,155,625 |
|
|
|
13,163,864 |
|
Convertible
notes payable, includes related party notes of $200,000 in 2009 and
$62,500 in 2008
|
|
|
200,000 |
|
|
|
137,500 |
|
Notes
payable - current portion; includes related party notes of $829,207 in
2009 and $30,000 in 2008
|
|
|
920,715 |
|
|
|
171,044 |
|
Total
current liabilities
|
|
|
27,052,923 |
|
|
|
21,959,952 |
|
Convertible
notes payable, includes related party notes of $0 in 2009 and $200,000 in
2008
|
|
|
- |
|
|
|
200,000 |
|
Notes
payable, excluding current portion; includes related party notes of
$297,025 in 2009 and $750,000 in 2008
|
|
|
441,920 |
|
|
|
875,246 |
|
Total
liabilities
|
|
|
27,494,843 |
|
|
|
23,035,198 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Redeemable
convertible preferred stock, $.05 par value, 2,500,000 shares authorized,
318,882 shares issued and outstanding in 2009 and 447,891 shares issued
and outstanding in 2008, liquidation preference of $1,594,410 in 2009 and
a liquidation preference of $2,239,455 in 2008
|
|
|
15,944 |
|
|
|
22,395 |
|
Common
stock, $.05 par value, 20,000,000 shares authorized, 4,654,953 shares
issued and outstanding in 2009 and 2008
|
|
|
232,747 |
|
|
|
232,747 |
|
Additional
paid-in capital
|
|
|
10,662,752 |
|
|
|
10,797,534 |
|
Accumulated
deficit
|
|
|
(7,454,376 |
) |
|
|
(5,268,277 |
) |
Total
stockholders' equity
|
|
|
3,457,067 |
|
|
|
5,784,399 |
|
|
|
$ |
30,951,910 |
|
|
$ |
28,819,597 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
For
The Three Months Ended
|
|
|
For
The Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Sales
|
|
$ |
21,764,171 |
|
|
$ |
22,862,364 |
|
|
$ |
57,581,457 |
|
|
$ |
65,106,677 |
|
Cost
of sales
|
|
|
16,043,828 |
|
|
|
16,247,047 |
|
|
|
42,184,382 |
|
|
|
46,192,161 |
|
Gross
profit
|
|
|
5,720,343 |
|
|
|
6,615,317 |
|
|
|
15,397,075 |
|
|
|
18,914,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses, net
|
|
|
5,323,678 |
|
|
|
5,988,272 |
|
|
|
16,444,564 |
|
|
|
18,621,719 |
|
Impairment
of Other Intangibles
|
|
|
- |
|
|
|
|
|
|
|
309,900 |
|
|
|
|
|
Operating
income (loss)
|
|
|
396,665 |
|
|
|
627,045 |
|
|
|
(1,357,389 |
) |
|
|
292,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
56,569 |
|
|
|
59,820 |
|
|
|
158,751 |
|
|
|
218,418 |
|
Interest
expense, net; includes related party interest of $17,749 and $17,274 for
the three months ended September 30, 2009 and 2008, respectively, and
$46,446 and $57,397 for the nine months ended September 30, 2009 and 2008,
respectively.
|
|
|
(163,665 |
) |
|
|
(270,232 |
) |
|
|
(478,913 |
) |
|
|
(931,500 |
) |
Income
(loss) before income tax expense
|
|
|
289,569 |
|
|
|
416,633 |
|
|
|
(1,677,551 |
) |
|
|
(420,285 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
490,189 |
|
|
|
341,404 |
|
|
|
508,548 |
|
|
|
363,681 |
|
Net
(loss) income
|
|
$ |
(200,620 |
) |
|
$ |
75,229 |
|
|
$ |
(2,186,099 |
) |
|
$ |
(783,966 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.47 |
) |
|
$ |
(0.17 |
) |
Diluted
|
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.47 |
) |
|
$ |
(0.17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,654,953 |
|
|
|
5,105,030 |
|
|
|
4,654,953 |
|
|
|
4,647,640 |
|
Diluted
|
|
|
4,654,953 |
|
|
|
5,120,559 |
|
|
|
4,654,953 |
|
|
|
4,647,640 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
For
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,186,099 |
) |
|
$ |
(783,966 |
) |
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Deferred
tax expense
|
|
|
470,000 |
|
|
|
308,500 |
|
Stock-based
compensation
|
|
|
20,029 |
|
|
|
20,029 |
|
Provision
for doubtful accounts
|
|
|
364,028 |
|
|
|
576,783 |
|
Depreciation
|
|
|
389,668 |
|
|
|
476,431 |
|
Net
gain on sale of fixed assets
|
|
|
(2,328 |
) |
|
|
- |
|
Amortization
of intangibles
|
|
|
16,252 |
|
|
|
27,807 |
|
Accretion
of debt discount
|
|
|
- |
|
|
|
43,269 |
|
Impairment
of other intangibles
|
|
|
309,900 |
|
|
|
- |
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,909,912 |
) |
|
|
719,592 |
|
Inventory
|
|
|
(814,924 |
) |
|
|
1,239,455 |
|
Prepaid
expenses and other current assets
|
|
|
(95,071 |
) |
|
|
53,012 |
|
Other
assets - noncurrent
|
|
|
(71,232 |
) |
|
|
37,209 |
|
Trade
payables
|
|
|
1,985,163 |
|
|
|
359,167 |
|
Accrued
liabilities
|
|
|
143,173 |
|
|
|
135,967 |
|
Income
taxes payable
|
|
|
(558 |
) |
|
|
(1,188 |
) |
Net
cash (used in) provided by operating activities
|
|
|
(1,381,911 |
) |
|
|
3,212,067 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(152,046 |
) |
|
|
(392,394 |
) |
Proceeds
from disposal of property and equipment
|
|
|
20,215 |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(131,831 |
) |
|
|
(392,394 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments
of notes payable: includes related party repayments of $92,500 in 2009 and
$0 in 2008
|
|
|
(264,758 |
) |
|
|
(259,810 |
) |
Issuance
of notes payable in connection with financing tender offer
|
|
|
446,033 |
|
|
|
- |
|
Restricted
cash in connection with tender offer
|
|
|
(446,033 |
) |
|
|
- |
|
Repayment
of notes payable in connection with financing tender offer; includes
related party repayments of $19,802 in 2009 and $0 in 2008
|
|
|
(22,302 |
) |
|
|
- |
|
Borrowings
(Repayments) under credit facility - revolving credit
|
|
|
1,991,761 |
|
|
|
(2,448,949 |
) |
Net
cash provided by (used in) financing activities
|
|
|
1,704,701 |
|
|
|
(2,708,759 |
) |
Increase
in cash
|
|
|
190,959 |
|
|
|
110,914 |
|
Cash
- beginning of period
|
|
|
417,387 |
|
|
|
622,723 |
|
Cash
- end of period
|
|
$ |
608,346 |
|
|
$ |
733,637 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
September
30, 2009
(Unaudited)
1.
|
Summary of Significant
Accounting Policies and Practices and Basis of
Presentation
|
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
September 30, 2009 is not necessarily indicative of the operating results that
may be achieved for the full year.
The
financial statements have been prepared on a going concern basis. The
Company has incurred a net loss of $200,620 for the quarter ended September 30,
2009, a net loss of $2,186,099 for the nine months ended September 30, 2009, and
a net loss of $1,008,140 for the year ended December 31, 2008. The
Company’s credit facility provides that financial covenants are to be determined
on an annual basis by agreement between the Company and its lender. The Company
and its lender have agreed on financial covenants for the period through
December 31, 2009. The Company was in default of its quarterly net income,
quarterly cash flow and quarterly tangible net worth covenants for the quarter
ended September 30, 2009. Pursuant to a Third Amendment to the Credit
and Security Agreement dated November 12, 2009, the lender has waived this event
of default for a fee of $60,000. The Third Amendment also amended the Credit and
Security Agreement to provide that effective October 1, 2009 the interest rate
has been increased to prime plus 1.25% and to terminate the Company’s option to
convert the interest rate on up to 75% of the credit facility’s outstanding
balance to 2½% over LIBOR.
The
continuation of the credit agreement is conditioned on the Company and the
lender reaching agreement on financial covenants and the Company achieving those
covenants in the future. While the Company and the lender have
reached mutually agreeable covenants in the past, there can be no assurance that
they will be able to do so in the future. If these agreements are not
reached, or the Company fails to achieve the agreed upon covenants, the lender
may exercise its rights under the credit agreement which may include terminating
the credit agreement and demanding repayment of the Company’s outstanding
borrowings. This condition indicates that the Company may be unable
to continue as a going concern. In response to such an event, the
Company would pursue alternative financing arrangements but there can be no
assurance that such financing may be available on acceptable terms, or at all.
The accompanying financial statements do not include any adjustments that might
be necessary as a result of the outcome of such uncertainty.
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 as
permitted by the interim reporting requirements of the Securities and Exchange
Commission. It is suggested that these condensed 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, 2008.
We have
only one operating segment.
Inventory
is comprised of finished goods.
The
Company recognizes equity based compensation expense in accordance with
standards that require 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.
The
following table summarizes information about stock options at September 30,
2009:
Options Outstanding and
Exercisable
|
|
|
|
|
Weighted
Average
|
|
|
|
|
Range
of
|
|
|
|
Remaining
|
|
Weighted
Average
|
|
Aggregate
|
Exercise Prices
|
|
Shares
|
|
Contractual Life
|
|
Exercise Price
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
$
1.85
|
|
60,000
|
|
7.19
|
|
$1.85
|
|
$ 0
|
|
|
|
|
|
|
|
|
|
Options Outstanding and
Non-exercisable
|
|
|
|
|
|
|
|
|
|
$1.85
|
|
15,000
|
|
7.19
|
|
$1.85
|
|
$ 0
|
There
were no stock options granted during the nine months ended September 30, 2009
and 2008. For each of the quarters ended September 30, 2009 and 2008,
the amount of stock based compensation was $6,676. For each of the nine months
ended September 30, 2009 and 2008, the amount of stock based compensation was
$20,029.
During
the quarter and nine months ended September 30, 2009 no shares of convertible
preferred stock were converted into common stock.
During
the quarter ended September 30, 2008 no shares of convertible preferred stock
were converted into common stock. During the nine months ended September 30,
2008 17,423 shares of convertible preferred stock were converted into common
stock, which includes 998 shares converted by William Pagano, Chief Executive
Officer of the Company.
No stock
options were exercised during the quarters and nine months ended September 30,
2009 and 2008.
On August
20, 2009, the Company offered to purchase any and all shares of its convertible
preferred stock at $1.25 per share. The purpose of this tender offer was to
reduce the number of holders of record of convertible preferred stock in order
to permit the Company to deregister the convertible preferred stock along with
the common stock. Deregistration would result in the Company no longer being a
Securities and Exchange Commission ("SEC") reporting company. The Company
continues currently as an SEC reporting company because there are currently more
than 300 holders of record of convertible preferred stock.
Through
September 30, 2009, the Company accrued $161,261 for 129,009 shares of
convertible preferred stock received as of September 30, 2009 to be tendered.
The Company accounted for these transactions utilizing the constructive
retirement method. Subsequent to September 30, 2009, the Company received an
additional 25,825 shares of convertible preferred stock to be
tendered.
The
tender offer was to expire on September 22, 2009; however, on September 23, 2009
the Company extended the expiration date of the tender offer to October 6, 2009
and on October 7, 2009 the Company again extended the expiration date of the
tender offer to October 20, 2009. The Company retired the convertible
preferred stock purchased through this tender offer.
4.
|
Supplemental Cash Flow
Information
|
The
following is supplemental information relating to the condensed consolidated
statements of cash flows:
|
|
For
the Nine Months Ended
|
|
|
|
September 30,
2009
|
|
|
September 30,
2008
|
|
Accrual
for preferred shares purchases in the tender offer |
|
$ |
161,261 |
|
|
$ |
- |
|
Cash
paid during the period for: |
|
|
|
|
|
|
|
|
Interest
|
|
$ |
496,426 |
|
|
$ |
900,921 |
|
Income
taxes
|
|
$ |
19,097 |
|
|
$ |
16,625 |
|
5.
|
Net (Loss) Income Per
Common Share
|
|
|
For
the Quarter Ended
September
30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
(loss) income (numerator for basic income per share)
|
|
$ |
(200,620 |
) |
|
$ |
75,229 |
|
|
$ |
(2,186,099 |
) |
|
$ |
(783,966 |
) |
Weighted
average common shares outstanding
|
|
|
4,654,953 |
|
|
|
4,654,953 |
|
|
|
4,654,953 |
|
|
|
4,647,640 |
|
Effect
of participating securities-convertible preferred stock
|
|
|
- |
|
|
|
450,077 |
|
|
|
- |
|
|
|
- |
|
Weighted
average common shares and participating securities outstanding
(denominator for basic income per share)
|
|
|
4,654,953 |
|
|
|
5,105,030 |
|
|
|
4,654,953 |
|
|
|
4,647,640 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
- |
|
|
|
15,529 |
|
|
|
- |
|
|
|
- |
|
Weighted
average common and potential common shares outstanding (denominator for
diluted income per share)
|
|
|
4,654,953 |
|
|
|
5,120,559 |
|
|
|
4,654,953 |
|
|
|
4,647,640 |
|
Basic
net (loss) income per share
|
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.47 |
) |
|
$ |
(0.17 |
) |
Diluted
net (loss) income per share
|
|
$ |
(0.04 |
) |
|
$ |
0.01 |
|
|
$ |
(0.47 |
) |
|
$ |
(0.17 |
) |
Basic
income (loss) per share reflects the amount of (loss) earnings for the period
attributable to common shareholders and holders of participating securities and
is based upon the weighted average number of common shares and participating
securities outstanding during the period. Diluted earnings per share
reflects, in periods in which they have a dilutive effect, the potential
dilution that would occur if securities or other contracts to issue common stock
were exercised or converted into common stock and is computed using the treasury
stock method and if-converted method, where applicable.
For the
quarter ended September 30, 2009, preferred stock convertible into 446,489
shares of common stock and notes convertible into 66,666 shares of common stock
were not included in the basic and diluted net loss per share calculation
because their effect would have been anti-dilutive.
For the
quarter ended September 30, 2008, the weighted average shares outstanding used
for purposes of the basic net income per share calculation include the effect of
the convertible preferred stock. Notes convertible into 112,499 shares of common
stock are not assumed to be converted for purposes of computing diluted net
income per share since the effect would be antidilutive.
For the
nine months ended September 30, 2009, preferred stock convertible into 447,424
shares of common stock, notes convertible into 92,185 shares of common stock,
and 2,581 stock options were not included in the basic and diluted net loss per
share calculation because their effect would have been
anti-dilutive.
For the
nine months ended September 30, 2008, preferred stock convertible into 457,417
shares of common stock, notes convertible into 138,042 shares of common stock,
and 17,065 stock options were not included in the basic and diluted net loss per
share calculation because their effect would have been
anti-dilutive.
6.
|
Financing
Arrangements
|
The
Company has a secured credit facility (“Agreement”) with Wells Fargo Bank,
National Association (“Wells”) in the amount of $25 million which expires August
1, 2012. The $25 million credit facility includes a $1 million
structural sublimit, as defined in the Agreement, payable in 24 equal monthly
installments, and up to $500,000 of seasonal
over-advances. Borrowings under the credit facility are secured by
substantially all the assets of the Company, as defined in the
Agreement.
Availability
under the credit facility was $250,370 as of September 30, 2009 and is
determined by a percentage of available assets as defined in the Agreement, less
reserves.
The
interest rate on the credit facility during the quarter ended September 30, 2009
was prime minus 0.25%, or 3.0%. Pursuant to a Third Amendment to the Credit and
Security Agreement, dated November 12, 2009 (“Third Amendment”), effective
October 1, 2009 the interest rate has been increased to prime plus 1.25% and the
Company’s option to convert the interest rate on up to 75% of the credit
facility’s outstanding balance to 2½% over LIBOR has been terminated. A copy of
the Third Amendment is attached hereto as Exhibit 10.04.
Reserves,
determined by the bank, reduce the availability of the credit facility by
$171,000. The balance outstanding under the credit facility was
$15,155,625 as of September 30, 2009.
The
Company anticipates that liquidity will decline during the first several months
in 2010 because of seasonal business downturns, particularly if recessionary
forces do not abate. The business of the Company will be materially
and adversely affected if the bank substantially reduces the amount of the
credit availability under the terms of the loan or the bank demands payment of
the loan and the Company is unable to refinance the loan, or if liquidity is
otherwise substantially reduced. In the event that Mr. Pagano
no longer performs the duties of the President of Universal or the Vice
President of RAL for any reason other than death or disability, the Company will
be considered in default of its credit agreement with Wells unless a waiver is
obtained. The credit facility contains covenants that are determined
annually and relate to the Company’s quarterly net income, quarterly cash flows,
quarterly tangible net worth, and annual capital expenditures. The
credit facility also restricts the payment of dividends, subordinated debt and
purchase of securities. The continuation of the credit facility is
conditioned upon the Company and Wells reaching agreement on the
covenants. While the Company and Wells have reached mutually
agreeable covenants in the past, there is no assurance that they will be able to
do so in the future. As of September 30, 2009, the Company was in default of its
quarterly net income, quarterly cash flow and quarterly tangible net worth
covenants. Pursuant to the Third Amendment, (i) the lender has waived
this event of default for a fee of $60,000; (ii) the interest rate has been
increased to prime plus 1.25% effective October 1, 2009; and (iii) the Company’s
option to convert the interest rate on up to 75% of the credit facility’s
outstanding balance to 2½% over LIBOR has been terminated.
7.
|
Other Intangible
Assets
|
The
Company assesses the realizability of long-lived assets, including intangible
assets, and evaluates such assets for impairment annually, or whenever events or
changes in circumstances indicate that the carrying amount of such assets (or
group of assets) may not be recoverable. Impairment is determined to
exist if the estimated future undiscounted cash flows are less than the asset’s
carrying value. Future cash flow projections include assumptions
regarding future sales levels, the impact of cost reduction programs, and the
level of working capital needed to support each business. The Company relies on
data developed by management as well as macroeconomic data in making these
calculations. There are no assurances that future cash flow assumptions will be
achieved. The amount of any impairment then recognized would be
calculated as the difference between the estimated fair value and the carrying
value of the asset.
As a
result of an assessment of S&A’s business condition at the end of the
quarter ended June 30, 2009, the Company recorded a non-cash charge in the
amount of $309,900 which reflects the impairment of S&A’s client list and
trade name estimated net book value. The Company assessed S&A’s covenant not
to compete and concluded that there was no impairment and the net carrying
amount as of September 30, 2009 was $3,333.
The
Company has an intangible asset that is subject to
amortization. Intangible assets are included in “Other intangibles”
in the consolidated balance sheets.
Estimated
Amortization Expense:
For
the Years Ended December 31,
|
|
|
|
2009
|
|
$ |
833 |
|
2010
|
|
|
2,500 |
|
|
|
$ |
3,333 |
|
a.
|
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 “Universal Predecessor.” The majority
shareholders of Hilco, Inc. were John A. Hildebrandt and Paul
Hildebrandt.
The
Company understands that the Universal 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. As of September 30, 2009, there
existed 15 plaintiffs in these lawsuits relating to alleged sales of asbestos
products, or products containing asbestos, by the Universal
Predecessor. Subsequent to September 30, 2009, 4 plaintiffs have had
their actions dismissed, 1 plaintiff has had its action settled and 1 plaintiff
filed an action against the Universal Predecessor, which results in 11 remaining
plaintiffs in these lawsuits. The Company never sold any asbestos
related products.
Of the
existing plaintiffs as of September 30, 2009, 1 filed an action in 2009, 8 filed
actions in 2007, 2 filed actions in 2006, 1 filed an action in 2005, 2 filed
actions in 2004, and 1 filed an action in 2003. There are 195 other plaintiffs
that have had their actions dismissed and 14 other plaintiffs that have settled
as of September 30, 2009 for a total of $3,359,500. There has been no judgment
against the Universal Predecessor.
In the
past, our Universal subsidiary was named by 36 plaintiffs; of these, 11 filed
actions in 2007, 6 filed actions in 2006, 11 filed actions in 2005, 5 filed
actions in 2001, 1 filed an action in 2000, and 2 filed actions in
1999. Twenty-six plaintiffs naming Universal have had their actions
dismissed and, of the total $3,359,500 of settled actions, 2 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 exist 8 plaintiffs that name Universal as of September 30,
2009.
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 Universal 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 September 30, 2009 is
material, and that the only material litigation that was brought against the
Universal 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.
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.
John A.
Hildebrandt, Paul Hildebrandt and the Universal 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. The Company cannot be
certain that the indemnitors have the financial wherewithal to meet their
obligations to indemnify the Company.
The
assets that the Universal 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
Universal 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 Universal Predecessor and the Company under the contested
policies.
There are
periods during the years from 1940 to 1999 in which our Universal 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 September 30, 2009, no insurance company has claimed
any contribution for a gap in coverage except for a claim for $160 made by one
insurance company to the Universal Predecessor in 1995. The Universal
Predecessor asserted that it had no obligation to pay this amount and did not
make any payment.
Insurance
companies have, as of September 30, 2009, defended us and the Universal
Predecessor, and have paid all settlement amounts and defense
costs. Except for $160 referred to above, the insurance companies
have not requested any payments from us or from the Universal
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.
b.
|
The RAL Supply Group,
Inc.
|
The RAL
Supply Group, Inc., a wholly owned subsidiary of the Company, is a New York
corporation (“RAL”), formerly known as RAL Purchasing Corp. On
September 30, 2003, RAL acquired substantially all of the assets of The RAL
Supply Group, Inc., formerly known as The LAR Acquisition Corp., also a New York
corporation, including its name, pursuant to the terms of a purchase
agreement. The Company filed a copy of the purchase agreement (“RAL
APA”) with the Securities and Exchange Commission on October 15, 2003 as Exhibit
10(a)(i) on Form 8-K. Subsequent to the sale, The RAL Supply Group,
Inc. (the selling corporation) changed its name to RSG, Inc. RSG, Inc. is
hereinafter referred to as the “RAL Predecessor.”
The RAL
Predecessor acquired certain assets from Dyson-Kissner-Moran Corporation (“RSG
Predecessor”) in 1993, prior to the RAL Predecessor’s sale of assets to
RAL.
Our RAL
subsidiary and other companies had been sued in the Supreme Court of New York
(Orange County) by a plaintiff filing a lawsuit on or about July 30, 2008
alleging injury due to asbestos.
The RAL
Predecessor agreed in the RAL APA to indemnify and hold harmless our RAL
subsidiary from and against, among other things, damages that relate to products
sold or manufactured or services performed or other actions taken or omitted by
the RAL Predecessor prior to the closing of the acquisition. The
Company cannot be certain that the indemnitor has the financial wherewithal to
meet its obligations to indemnify the Company.
As of
September 30, 2009, this plaintiff had its action dismissed. The
lawsuit alleged injury due to asbestos during the 1970’s, prior to RAL
Predecessor’s acquisition of assets from the RSG Predecessor and RAL’s
acquisition of assets from the RAL Predecessor. The Company never sold any
asbestos related products.
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 the Universal
Predecessor or RAL Predecessor companies. We expressly disclaimed the assumption
of any liabilities when we purchased the assets of the Universal Predecessor and
RAL 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 deny coverage
or claim limitations on their liabilities by reason of gaps in coverage or
otherwise.
Since we
regard as remote 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.
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.
9.
|
New Accounting
Pronouncements
|
In
September 2006, the FASB issued new accounting guidance that defines fair value,
establishes a framework for measuring fair value, and expands disclosure
requirements about fair value measurements. However, in February 2008, the FASB
delayed the effective date of the new accounting guidance for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), until January 1, 2009. The adoption of this new accounting
guidance for our nonfinancial assets and nonfinancial liabilities did not have a
material impact on the Company’s financial position.
In
December 2007, the FASB amended its guidance on accounting for business
combinations. This standard requires that entities recognize the assets
acquired, liabilities assumed, contractual contingencies and contingent
consideration measured at their fair value at the acquisition date for any
business combination consummated after the effective date. It further
requires that acquisition-related costs are to be recognized separately from the
acquisition and expensed as incurred. This guidance is effective for
fiscal years beginning after December 15, 2008 and will be applied prospectively
for acquisitions beginning in 2009 and thereafter.
In
December 2007, the FASB issued new accounting guidance related to noncontrolling
interest in subsidiaries. This guidance requires that the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, in the amount of consolidated net income attributable to
the parent and to the noncontrolling interest on the face of the consolidated
statement of income, and that entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. This guidance is effective
for fiscal years, beginning on or after December 15, 2008 and cannot be applied
earlier. The adoption of this guidance did not have a material impact
on the Company’s financial position.
In April
2008, the FASB issued new accounting guidance related to the determination of
the useful life of intangible assets. This guidance amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The intent of this
guidance is to improve the consistency between the useful life of a recognized
intangible asset and the period of expected cash flows used to measure the fair
value of the asset. This guidance was adopted as of January 1, 2009 and did not
have a material impact on the Company’s financial position.
In April
2009, the FASB issued new accounting and disclosure guidance related to interim
disclosures about fair value of financial instruments. This guidance requires
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements
and requires those disclosures in summarized financial information at interim
reporting periods. This guidance was adopted as of June 1, 2009, and did not
have a material impact on the Company’s financial position.
In May
2009, the FASB issued new accounting and disclosure guidance for the disclosure
of events that occur after the balance sheet date but before financial
statements are issued. This guidance requires the Company to recognize in the
financial statements the effects of all subsequent events that provide
additional evidence about conditions that existed at the balance sheet date,
including the estimates inherent in the process of preparing financial
statements. This guidance became effective for the Company as of June 30, 2009.
The Company has provided the required disclosures regarding subsequent events in
Note 13.
In June
2009, the FASB issued new accounting guidance establishing a new hierarchy of
GAAP sources for non-governmental entities under the FASB Accounting Standards
Codification and will supersede all accounting standards in U.S. GAAP, aside
from those issued by the Securities and Exchange Commission. This guidance is
effective for all financial statements issued for the interim and annual periods
ending after September 15, 2009. The adoption of this codification does not
change or alter existing GAAP and, therefore, has not had any impact on the
Company’s financial statements.
10.
|
Transactions with
Related Persons, Promoters and Certain Control
Persons
|
a.
|
A
subsidiary of the Company leases a warehouse and store in Wharton, New
Jersey comprising of 27,000 square feet from a company owned by Mr. Paul
Hildebrandt under a lease that expires in July 31, 2017. The
Company paid Mr. Hildebrandt’s company $81,607 and $60,112 during the
quarters ended September 30, 2009 and 2008, respectively. The Company paid
Mr. Hildebrandt’s company $198,575 and $180,918 during the nine months
ended September 30, 2009 and 2008,
respectively.
|
On June
1, 2009 the Company paid to Mr. Hildebrandt $25,000 as the final payment under a
convertible note dated December 31, 2004 in the initial principal amount of
$150,000. William Salek, the Company’s Chief Financial Officer, is the
son-in-law of Mr. Hildebrandt. Mr. Hildebrandt served as a Director
of the Company from July 2004 to January 2005.
b.
|
Pursuant
to a secured note dated July 29, 2004, as amended by Amendment 1 dated
March 27, 2008 and further amended by Amendment 2 dated February 12, 2009,
the Company owes Goldman Associates of New York, Inc. (“Goldman
Associates”), the principal amount of $750,000 collateralized by the
assets of the Company. The secured note is subordinate to the borrowings
under the credit facility, bears interest at the prime rate plus 2% and is
due on January 1, 2010. Michael Goldman is the Chief Executive Officer and
Chairman of the Board of Goldman Associates and is Chairman of the Board
of the Company.
|
In
January 2008, the Company paid $13,221 in premiums for Michael Goldman’s COBRA
health insurance for the calendar year 2008.
c.
|
Oscar
and Jeffrey Folger, of the law firm Folger & Folger, are counsel to
the Company. Rita Folger, a more than 5% shareholder of the
Company, is the wife of Oscar Folger and the mother of Jeffrey
Folger. Professional fees paid to Folger & Folger for the
quarters ended September 30, 2009 and 2008 were $51,745 and $25,950,
respectively. Professional fees paid to Folger & Folger for the nine
months ended September 30, 2009 and 2008 were $116,571 and $49,637,
respectively.
|
d.
|
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 expires on March 31, 2017,
subject to two five-year renewal
options.
|
William
Pagano, Chief Executive Officer and Director of the Company, has a 55% interest
in Pioneer and each of Mrs. 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 $64,220 and
$63,182 during the quarters ended September 30, 2009 and 2008, respectively. The
Company paid Pioneer Realty Holdings, LLC $186,968 and $186,104 during the nine
months ended September 30, 2009 and 2008, respectively.
e.
|
Mr.
Pagano and Mrs. Folger are each holders of convertible unsecured notes in
the amount of $100,000, issued pursuant to the terms of a private
placement made on July 29, 2004, as amended by Amendment 1 dated March 27,
2008 and further amended by Amendment 2 dated February 12, 2009. The
convertible unsecured notes bear interest at the prime rate plus 2% and
are due on January 1, 2010.
|
Mr. Salek
and the wife of Michael Goldman were holders of convertible unsecured notes in
the amounts of $25,000 and $12,500, respectively, issued pursuant to the terms
of a private placement made on July 29, 2004. The convertible unsecured notes
bore interest at 11% and were due and paid on June 1, 2009.
Interest
expense on each of the notes held by Mr. Pagano and Mrs. Folger amounted to
$1,313 and $2,750 for the quarters ended September 30, 2009 and 2008,
respectively. Interest expense on the each of the notes held by Mr. Pagano and
Mrs. Folger amounted to $3,938 and $8,250 for the nine months ended September
30, 2009 and 2008, respectively
Interest
expense on the note held by Mr. Salek amounted to $0 and $688 for the quarters
ended September 30, 2009 and 2008, respectively. Interest expense on the note
held by Mr. Salek amounted to $1,146 and $4,125 for the nine months ended
September 30, 2009 and 2008, respectively.
Interest
expense on the note held by the wife of Michael Goldman amounted to $0 and $344
for the quarters ended September 30, 2009 and 2008, respectively. Interest
expense on the note held by the wife of Michael Goldman amounted to $573 and
$1,604 for the nine months ended September 30, 2009 and 2008,
respectively.
f.
|
Mr.
Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger are each
holders of unsecured notes in the amounts of $90,000, $171,033, $35,000
and $100,000, respectively, issued in connection with the Company’s August
20, 2009 tender offer to purchase any and all shares of its convertible
preferred stock at $1.25 per share. The unsecured notes bear interest at
12% and are payable in twenty equal quarterly payments beginning October
10, 2009.
|
Interest
expense on the notes held by Mr. Hildebrandt, Goldman Associates, Mr. Pagano and
Mrs. Folger amounted to $1,200, $2,280, $467 and $1,333, respectively, for the
quarter and nine months ended September 30, 2009.
Subsequent
to the expiration of the Company’s tender offer, principal payments on the notes
held by Mr. Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger were
made using the unused portion originally obtained for the purchase of
convertible preferred stock. These principal payments amounted to $50,947,
$96,818, $19,813 and $56,608, respectively. As a result of these repayments, Mr.
Hildebrandt, Goldman Associates, Mr. Pagano and Mrs. Folger are each holders of
unsecured notes in the amounts of $39,053, $74,215, $15,187 and $43,392,
respectively.
The
Company recorded a net federal tax expense of $470,000 for the quarter and nine
months ended September 30, 2009 based on the Company’s evaluation of the
realizability of its deferred tax asset.
The
Company’s income tax expense for the quarter ended September 30, 2009 was
$490,189 compared to $341,404 for the same period in 2008. The
Company records state income tax expense based on year-to-date taxable income of
the Company and its subsidiaries and records federal alternative minimum tax
expense as the Company utilizes its net operating loss carryforwards to offset
any federal taxes due.
The
Company’s income tax expense for the nine months ended September 30, 2009 was
$508,548 compared to $363,681 for the same period in 2008. The
Company records state income tax expense based on year-to-date taxable income of
the Company and its subsidiaries and records federal alternative minimum tax
expense as the Company utilizes its net operating loss carryforwards to offset
any federal taxes due.
Comparison
of the Company’s effective tax rate from period to period may not be consistent,
as state taxes vary with the taxable income of the Company and its subsidiaries,
while federal taxes are based upon the consolidation of the Company and its
subsidiaries.
As of
December 31, 2008, the gross deferred tax asset of $8,492,844 was reduced by a
valuation allowance in the amount of $7,492,844, which reflected management’s
likelihood of utilizing the net operating losses in the future based upon
projected taxable income.
At
September 30, 2009, gross deferred tax assets of $9,185,641 have been reduced by
a valuation allowance in the amount of $8,655,641. Such valuation allowance
includes a reduction to the net deferred tax asset of $470,000 for the nine
months ended September 30, 2009 based on future projected taxable income and
management’s assessment of future utilization of net operating loss
carryfowards.
In
connection with the Company’s August 20, 2009 tender offer, the Company issued
$446,033 in unsecured notes to Mr. Hildebrandt, Goldman Associates, Mr. Pagano,
Mrs. Folger and a private investor in the amounts of $90,000, $171,033, $35,000,
$100,000 and $50,000, respectively. The unsecured notes bear interest at 12% and
are payable in twenty equal quarterly payments beginning October 10,
2009.
The
tender offer expired on October 20, 2009. An aggregate of 154,834 shares of
convertible preferred stock were tendered pursuant to the tender offer. The
Company accounted for these transactions utilizing the constructive retirement
method and has retired the convertible preferred stock purchased through this
tender offer. The Company paid an aggregate of $193,543 to those stockholders
that tendered their shares of convertible preferred stock pursuant to the tender
offer.
The
Company re-paid $252,490 in principal of these notes using the unused portion of
the $446,033 originally obtained for the purchase of convertible preferred
stock. These principal payments amounted to $50,947, $96,818, $19,813, $56,608
and $28,304, respectively, and as a result, Mr. Hildebrandt, Goldman Associates,
Mr. Pagano, Mrs. Folger and a private investor are each holders of unsecured
notes in the amounts of $39,053, $74,215, $15,187, $43,392 and $21,969,
respectively.
The
Company evaluated all events or transactions that occurred after September 30,
2009 up through November 13, 2009, the date the Company issued these condensed
consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of
Operations
We begin
Management’s Discussion and Analysis of Financial Condition and Results of
Operations of Colonial Commercial Corp. and subsidiaries with a discussion of
our business, and other business considerations, to provide a context for
understanding. This is followed by a discussion of the “Critical
Accounting Policies” that we believe are important to understanding the
assumptions and judgments incorporated into our reported financial results which
we discuss under “Results of Operations.” We then provide an analysis of cash
flows, and discuss our financial commitments under “Liquidity and Capital
Resources.” It is suggested that Management’s Discussion and Analysis of
Financial Condition and Results of Operations be read in conjunction with the
consolidated financial statements and notes included in the Company's Form 10-K
for the year ended December 31, 2008.
Forward-Looking
Statements
This
report on Form 10-Q contains forward-looking statements including estimates,
projections, statements relating to our business plans, objectives, and expected
operating results, and the assumptions upon which those statements are based,
are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These forward-looking
statements generally are identified by the words “believe,” “project,” “expect,”
“anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,”
“would,” “will be,” “will continue,” “will likely result,” and similar
expressions. Forward-looking statements involve risks and
uncertainties, including, but not limited to, 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. We undertake no obligation to update or revise publicly
any forward-looking statements, whether as a result of new information, future
events, or otherwise.
Company
Overview
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 S&A Supply, Inc (“S&A”). We
distribute heating, ventilating and air conditioning equipment (HVAC), parts and
accessories, climate control systems, appliances, and plumbing and electrical
fixtures and supplies, primarily in New Jersey, New York, Massachusetts and
portions of eastern Pennsylvania, Connecticut and Vermont.
We supply
the Amana air conditioning and heating equipment line in New Jersey (exclusive
of Cape May and Cumberland counties), lower portions of New York State, and
Western Massachusetts. At all our locations we also supply, on a
non-exclusive basis, the Goodman line of heating and air conditioning equipment,
Fraser-Johnston commercial air conditioning equipment, and Johnson Controls’
Source 1 HVAC Service Parts. We distribute these products through
seven sales locations in New Jersey, nine in New York State, two in
Massachusetts and one location in Willow Grove, Pennsylvania. We also
have an additional location in New Jersey that we use for warehousing purposes
only. We use showrooms for the display and sale of kitchen, bathroom and
electrical fixtures and accessories at our locations in Fishkill, Middletown,
New Windsor and Suffern, New York and Great Barrington and Pittsfield,
Massachusetts.
We have
developed a specialty in the design and sale of energy conservation control
systems and the fabrication of customized UL listed control
panels. We also supply indoor air quality components and
systems.
Our
in-house staff provides technical assistance and training to
customers. In some cases, we also use vendors’ representatives and
outside services. We do not install any equipment or systems.
We
distribute appliances, such as washers and dryers, to appliance dealers
primarily in New York, New Jersey, and portions of Connecticut, Delaware and
Pennsylvania.
Our
objective is to become a leading provider of HVAC, plumbing and electrical
equipment and accessories to the professional contractor in the northeastern
United States by expanding our product offerings and increasing our customer
technical and logistical support services.
Other Business
Considerations
Our
business is affected by significant outdoor temperature swings. Our sales
typically increase during peak heating and cooling demand
periods. Demand related to the residential central air conditioning
replacement market is highest in the second and third quarters, while demand for
heating equipment is usually highest in the fourth quarter. Our
business is also affected by general economic conditions in the residential and
commercial construction industries.
Tender
Offer
On August
20, 2009, the Company offered to purchase any and all shares of its convertible
preferred stock at $1.25 per share. The purpose of this tender offer was to
reduce the number of holders of record of convertible preferred stock in order
to permit the Company to deregister the preferred stock along with the common
stock. Deregistration would result in the Company no longer being a Securities
and Exchange Commission ("SEC") reporting company. There are currently 541
holders of record of convertible preferred stock. The Company continues
currently as an SEC reporting company because there are currently more than 300
holders of record of convertible preferred stock.
Pursuant
to the tender offer, 154,834 shares of convertible preferred stock were tendered
through October 20, 2009. The Company accounted for these transactions utilizing
the constructive retirement method and has retired the convertible preferred
stock purchased through this tender offer.
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.
Revenue
for the Company primarily consists of sales of heating, ventilation and air
conditioning equipment, climate control systems and plumbing and electrical
fixtures and supplies. Revenue is recognized when the earnings process is
complete, which is generally upon shipment or delivery of products, and the
price is determined and collectability is reasonably assured, in accordance with
agreed-upon shipping terms and when title and risk of loss transfers to the
customer. The Company has no further obligations subsequent to
shipment or delivery. Customers have the right to return defective
products, which are substantially covered under the manufacturer’s
warranty. The customer receives a credit from the Company for
defective products returned and the Company receives a corresponding credit
provided by the manufacturer. The only warranty provided on products
sold is the one provided by the manufacturer.
The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company establishes and monitors the allowance for doubtful accounts based on
the credit risk of specific customers, customer concentrations, historical
trends and other information. The Company had accounts receivable of
$10,348,515, net of an allowance for doubtful accounts of $565,272, as of
September 30, 2009. Although the Company believes its allowance is
sufficient, if the financial condition of the Company’s customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances would be required.
The
Company writes down its inventories for estimated slow moving and obsolete goods
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.
Goodwill
and other intangibles are reviewed at least annually for
impairment. In assessing the recoverability of the Company’s goodwill
and other intangibles, 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, as of
December 31, 2008 there was no indication of impairment for goodwill and other
intangibles acquired in prior business combinations. If the Company’s estimates
or its related assumptions change, the Company may be required to record
impairment charges related to its goodwill or other intangibles. As a
result of an assessment of S&A’s business condition at the end of the
quarter ended June 30, 2009, the Company recorded a non-cash charge in the
amount of $309,900 which reflects the impairment of S&A’s client list and
trade name estimated net book value. Goodwill and other intangible assets
amounting to $1,628,133 and $3,333 at September 30, 2009, respectively, consist
of assets arising from acquisitions.
The
Company has accounted for, and currently accounts for, income taxes in
accordance with the asset and liability approach for financial accounting and
reporting of 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. The realization of future tax benefits of deductible
temporary differences and operating loss or tax credit carryforwards will depend
on whether the Company will have sufficient taxable income of an appropriate
character within the carryback and carryforward period permitted by the tax law
to allow for utilization of the deductible amounts and carryforwards. Without
sufficient taxable income to offset the deductible amounts and carryforwards,
the related tax benefits will expire unused. The Company evaluates both positive
and negative evidence in making a determination as to whether it is more likely
than not that all or some portion of the deferred tax asset will not be
realized. As of December 31, 2008, the gross deferred tax asset of
$8,492,844 was reduced by a valuation allowance in the amount of $7,492,844,
which reflected management’s likelihood of utilizing the net operating losses in
the future based upon projected taxable income.
At
September 30, 2009, gross deferred tax assets of $9,185,641 have been reduced by
a valuation allowance in the amount of $8,655,641. Such valuation allowance
includes a reduction to the net deferred tax asset of $470,000 for the nine
months ended September 30, 2009 based on future projected taxable income and
management’s assessment of future utilization of net operating loss
carryfowards.
Results of
Operations
Results
of Operations for the Quarters Ended September 30, 2009 and 2008
Sales
decreased by 4.8%, or $1,098,193, to $21,764,171 for the quarter ended September
30, 2009 from $22,862,364 for the same period in 2008. The decline reflects
a general economic slowdown, as well as a decline in both residential and
commercial construction and renovations.
Gross
profit decreased by 13.5%, or $894,974, to $5,720,343 for the quarter ended
September 30, 2009 from $6,615,317 for the same period in 2008. Gross
profit expressed as a percentage of sales decreased to 26.3% in 2009 compared to
28.9% for the comparable period in 2008. The decline in gross profit and the
decrease in gross margins expressed as a percentage of sales were primarily
caused by decreasing sales, price reductions, reduced cash discounts taken on
purchases, and the results of a more competitive marketplace. 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 $125,106
and $134,315 for the quarters ended September 30, 2009 and 2008,
respectively.
Selling,
general and administrative expenses decreased by 11.1%, or $664,594, to
$5,323,678 for the quarter ended September 30, 2009 from $5,988,272 for the same
period in 2008. The decrease in selling, general and administrative
expense is primarily related to a reduction in payroll and benefit costs in the
amount of $474,474, a reduction in vehicle costs in the amount of $54,092, a
reduction in bad debt expense in the amount of $45,449, and a reduction in
depreciation and amortization in the amount of $42,104, partially offset by
costs in the amount of $125,909 related to the Company’s tender
offer.
Net
interest expense decreased by 39.4%, or $106,567, to $163,665 for the quarter
ended September 30, 2009 from $270,232 for the same period in
2008. The net interest expense decrease is primarily the result of
decreased borrowings under the credit line and a decrease in the interest
rate. The average interest rate on the line of credit for the quarter
ended September 30, 2009 was 3.0% compared to 4.75% for the same period in
2008.
The
Company’s income tax expense for the quarter ended September 30, 2009 was
$490,189 compared to $341,404 for the same period in 2008. The
Company recorded a net federal tax expense of $470,000 for the quarter ended
September 30, 2009 based on the Company’s evaluation of the realizability of its
deferred tax asset. The Company records state income tax expense
based on year-to-date taxable income of the Company and its subsidiaries and
records federal alternative minimum tax expense as the Company utilizes its net
operating loss carryforwards to offset any federal taxes
due. Comparison of the Company’s effective tax rate from period to
period may not be consistent as the Company’s subsidiaries file separate state
tax returns and the Company files a consolidated federal
return. State taxes vary with the taxable income of the Company and
its separate subsidiaries, while federal taxes are based upon the consolidation
of the Company and its subsidiaries.
The
Company’s net income decreased by $275,849 to a net loss of $200,620 for the
quarter ended September 30, 2009, compared to a net income of $75,229 for the
same period in 2008. The decrease in net income is primarily the
result of a decrease in gross margins in the amount of $894,974, an expense
based on the Company’s revaluation of its deferred tax asset in the amount of
$470,000 and costs related to the Company’s tender offer in the amount of
$125,909, partially offset by a decrease in selling, general and administrative
expense in the amount of $790,503, excluding tender offer expenses, and a
decrease in interest expense in the amount $106,567.
Results
of Operations for the Nine Months Ended September 30, 2009 and 2008
Sales
decreased by 11.6%, or $7,525,220, to $57,581,457 for the nine months ended
September 30, 2009 from $65,106,677 for the same period in 2008. The
decline reflects a general economic slowdown, a decline in both residential and
commercial construction and renovations, and a significantly cooler month of
June which negatively impacted the sales of HVAC equipment.
Gross
profit decreased by 18.6%, or $3,517,441, to $15,397,075 for the nine months
ended September 30, 2009 from $18,914,516 for the same period in
2008. Gross profit expressed as a percentage of sales decreased to
26.7% in 2009 compared to 29.1% for the comparable period in 2008. The decline
in gross profit and the decrease in gross margins expressed as a percentage of
sales were primarily caused by decreasing sales, price reductions, reduced cash
discounts taken on purchases, and the results of a more competitive marketplace.
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
$358,524 and $396,825 for the nine months ended September 30, 2009 and 2008,
respectively.
Selling,
general and administrative expenses decreased by 11.7%, or $2,177,155, to
$16,444,564 for the nine months ended September 30, 2009 from $18,621,719 for
the same period in 2008. The decrease in selling, general and
administrative expense is primarily related to a reduction in payroll and
benefit costs in the amount of $1,507,995, a reduction in vehicle costs in the
amount of $173,024, a reduction in accounting and professional fees in the
amount of $83,859, a reduction in bad debt expense in the amount of $212,755,
and a reduction in facility costs, utilities and telephone expenses in the
amount of $104,375, partially offset by costs in the amount of $208,311 related
to the Company’s tender offer.
The
Company also incurred a non-cash charge to intangible assets, including customer
lists and trade name of our S&A subsidiary, in the amount of $309,900 as a
result of an assessment of S&A’s business condition at the end of the
quarter ended June 30, 2009.
Net
interest expense decreased by 48.6%, or $452,587, to $478,913 for the nine
months ended September 30, 2009 from $931,500 for the same period in
2008. The net interest expense decrease is primarily the result of
decreased borrowings under the credit line and a decrease in the interest
rate. The average interest rate on the line of credit for the nine
months ended September 30, 2009 was 3.0% compared to 5.18% for the same period
in 2008.
The
Company’s income tax expense for the nine months ended September 30, 2009 was
$508,548 compared to $363,681 for the same period in 2008. The
Company recorded a net federal tax expense of $470,000 for the nine months ended
September 30, 2009 based on the Company’s revaluation of its deferred tax asset.
The Company records state income tax expense based on year-to-date taxable
income of the Company and its subsidiaries and records federal alternative
minimum tax expense as the Company utilizes its net operating loss carryforwards
to offset any federal taxes due. Comparison of the Company’s
effective tax rate from period to period may not be consistent as the Company’s
subsidiaries file separate state tax returns and the Company files a
consolidated federal return. State taxes vary with the taxable income
of the Company and its separate subsidiaries, while federal taxes are based upon
the consolidation of the Company and its subsidiaries.
The
Company’s net loss increased by $1,402,133 to $2,186,099 for the nine months
ended September 30, 2009, compared to a net loss of $783,966 for the same period
in 2008. The increase in net loss is primarily the result of a
decrease in gross margins in the amount of $3,517,441, an expense based on the
Company’s revaluation of its deferred tax asset in the amount of $470,000 and
costs related to the Company’s tender offer in the amount of $208,311, partially
offset by a decrease in selling, general and administrative expense in the
amount of $2,385,466, excluding tender offer expenses, and a decrease in
interest expense in the amount $452,587. The Company also incurred a non-cash
charge to intangible assets, including customer lists and trade name of our
S&A subsidiary, in the amount of $309,900 as a result of an assessment of
S&A’s business condition at the end of the quarter ended June 30,
2009.
The
following table summarizes information derived from the Company’s consolidated
statements of operations expressed as a percentage of sales for the quarters and
nine months ended September 30, 2009 and 2008.
|
|
For
the Quarter
|
|
|
For
the Nine Months
|
|
|
|
Ended
September 30,
|
|
|
Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Sales
|
|
|
100.0
|
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
|
|
100.0
|
% |
Cost
of sales
|
|
|
73.7 |
|
|
|
71.1 |
|
|
|
73.3 |
|
|
|
70.9 |
|
Gross
profit
|
|
|
26.3 |
|
|
|
28.9 |
|
|
|
26.7 |
|
|
|
29.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
24.5 |
|
|
|
26.2 |
|
|
|
28.6 |
|
|
|
28.6 |
|
Impairment
of other intangibles
|
|
|
0.0 |
|
|
|
0.0 |
|
|
|
0.5 |
|
|
|
0.0 |
|
Operating
income (loss)
|
|
|
1.8 |
|
|
|
2.7 |
|
|
|
(2.4 |
) |
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.3 |
|
Interest
expense, net
|
|
|
(0.7 |
) |
|
|
(1.2 |
) |
|
|
(0.8 |
) |
|
|
(1.4 |
) |
Income
(loss) before taxes
|
|
|
1.3 |
|
|
|
1.8 |
|
|
|
(2.9 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
(2.2 |
) |
|
|
(1.5 |
) |
|
|
(0.9 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(0.9 |
)
% |
|
|
0.3
|
% |
|
|
(3.8 |
)
% |
|
|
(1.2 |
)
% |
The
Company expects continued weakness in the construction industry for the
remainder of 2009 through 2010.
Liquidity and Capital
Resources
The
Company has a secured credit facility (“Agreement”) with Wells Fargo Bank,
National Association (“Wells”) in the amount of $25 million which expires August
1, 2012. The $25 million credit facility includes a $1 million
structural sublimit, as defined in the Agreement, payable in 24 equal monthly
installments, and up to $500,000 of seasonal
over-advances. Borrowings under the credit facility are secured by
substantially all the assets of the Company, as defined in the
Agreement.
Availability
under the credit facility was $250,370 as of September 30, 2009 and is
determined by a percentage of available assets as defined in the Agreement, less
reserves.
The
interest rate on the credit facility during the quarter ended September 30, 2009
was prime minus 0.25%, or 3.0%. Pursuant to a Third Amendment to the Credit and
Security Agreement, dated November 12, 2009 (“Third Amendment”), effective
October 1, 2009 the interest rate has been increased to prime plus 1.25% and the
Company’s option to convert the interest rate on up to 75% of the credit
facility’s outstanding balance to 2½% over LIBOR has been terminated. A copy of
the Third Amendment is attached hereto as Exhibit 10.04.
Reserves,
determined by the bank, reduce the availability of the credit facility by
$171,000. The balance outstanding under the credit facility was
$15,155,625 as of September 30, 2009.
During
the period from January 1, 2009 to August 27, 2009, Wells made credit facility
loans to the Company against inventory at 57% of eligible inventory, pursuant to
the Credit and Security Agreement. On August 28, 2009, the availability rate on
inventory was reduced from 57% to 55%. The availability rate on inventory was
again reduced on October 12, 2009 from 55% to 54%, on October 26, 2009 from 54%
to 53% and further reduced on November 2, 2009 from 53% to 52%, subject to
further adjustment based on an appraisal currently being conducted. The
reductions to date have reduced the Company’s liquidity by approximately
$700,000 based on the inventory available under the credit facility as of
September 30, 2009.
The
Company anticipates that liquidity will decline during the first several months
in 2010 because of seasonal business downturns, particularly if recessionary
forces do not abate. The business of the Company will be materially and
adversely affected if the bank substantially reduces the amount of the credit
availability under the terms of the loan or the bank demands payment of the loan
and the Company is unable to refinance the loan, or if liquidity is otherwise
substantially reduced. In the event that Mr. Pagano no longer performs
the duties of the President of Universal or the Vice President of RAL for any
reason other than death or disability, the Company will be considered in default
of its credit agreement with Wells unless a waiver is obtained. The
credit facility contains covenants that are determined annually and relate to
the Company’s quarterly net income, quarterly cash flows, quarterly tangible net
worth, and annual capital expenditures. The credit facility also
restricts the payment of dividends, subordinated debt and purchase of
securities. The continuation of the credit facility is conditioned
upon the Company and Wells reaching agreement on the covenants. While
the Company and Wells have reached mutually agreeable covenants in the past,
there is no assurance that they will be able to do so in the future. As of
September 30, 2009, the Company was in default of its quarterly net income,
quarterly cash flow and quarterly tangible net worth
covenants. Pursuant to the Third Amendment, (i) the lender has waived
this event of default for a fee of $60,000; (ii) the interest rate has been
increased to prime plus 1.25% effective October 1, 2009; and (iii) the Company’s
option to convert the interest rate on up to 75% of the credit facility’s
outstanding balance to 2½% over LIBOR has been terminated.
As of
September 30, 2009, the Company had $608,346 in cash compared with $417,387 at
December 31, 2008.
Net cash
used in operating activities was $1,381,911 for the nine months ended September
30, 2009. The net cash used in operating activities for the 2009
period is primarily a result of a net loss of $2,186,099 and cash used in
operating assets and liabilities of $763,361, offset by non-cash charges of
$1,567,549. The increase in accounts receivable of $1,909,912 is primarily
related to increased sales volume in September 2009 compared to December
2008. The increase in trade payables of $1,985,163 is primarily a
result of the decrease in cash availability under the credit facility, which is
related to the decrease of assets available for borrowing.
Cash
flows used in investing activities were $131,831 during the nine months ended
September 30, 2009, due to purchases of equipment in the amount of $152,046,
offset by proceeds from disposal of property and equipment in the amount of
$20,215.
Cash
flows provided by financing activities of $1,704,701 for the nine months ended
September 30, 2009 consisted of $1,991,761 in borrowings under the credit
facility-revolving credit and the issuance of notes payable in the amount of
$446,033 related to the tender offer, offset by $264,758 for repayments of notes
payable, repayments of notes payable in the amount of $22,302 related to the
tender offer and the retirement of preferred stock in the amount of
$161,261.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
Not
applicable.
Item 4T. Controls and Procedures
Evaluation of Disclosure
Controls and Procedures
As of the
end of the period covered by this report, we performed an evaluation under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities and Exchange Act of 1934 (the Exchange
Act)). Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of the period covered by
this Quarterly Report, our disclosure controls and procedures were
effective.
Changes in Internal Control
Over Financial Reporting
There
have been no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the last
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
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,
Note 8 Litigation, of this
Report on Form 10-Q.
Items 1A, 2, 3 and 4 are not
applicable and have been omitted.
Item 5.
Other Information.
As noted
in the Liquidity and Capital Resources section set forth in Item 2 of Part I,
titled "Management’s Discussion and Analysis of Financial Condition and Results
of Operations," as of September 30, 2009, the Company was in default of its
quarterly net income, quarterly cash flow and quarterly tangible net worth
covenants. The Company and Wells entered into a Third Amendment to
the Credit and Security Agreement, dated November 12, 2009 (the "Third
Amendment"). Pursuant to the Third Amendment, Wells waived this event
of default for a fee of $60,000. The Third Amendment also amended the
Credit and Security Agreement to provide that effective October 1, 2009 the
interest rate has been increased to prime plus 1.25% and to terminate the
Company’s option to convert the interest rate on up to 75% of the credit
facility’s outstanding balance to 2½% over LIBOR.
The
description of the amendment is qualified by reference to Exhibit 10.04 attached
as an exhibit hereto.
Exhibit No.
|
Description
|
10.01
|
Credit
Security Agreement dated July 28, 2004 between American/Universal Supply,
Inc., The RAL Supply Group, Inc. and Universal Supply Group, Inc. to Wells
Fargo Business Credit, Inc. ("Credit Security Agreement"). Incorporated
herein by reference from Exhibit 10.1 to the Company's Form 10-Q filed on
August 16, 2004.
|
10.02
|
First
Amendment to the Credit Security Agreement. Incorporated herein by
reference from Exhibit 10.02 to the Company's Form 8-K filed on June 27,
2006.
|
10.03
|
Second
Amendment to the Credit Security Agreement. Incorporated herein by
reference from Exhibit 10.08 to the Company's Form 8-K filed on September
14, 2007.
|
|
Third
Amendment to the Credit Security Agreement, filed
herewith.
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated:
November 13, 2009
|
COLONIAL
COMMERCIAL CORP.
|
|
|
|
|
|
/s/ William Pagano
|
|
William
Pagano,
|
|
Chief
Executive Officer
|
|
|
|
|
|
/s/ William Salek
|
|
William
Salek,
|
|
Chief
Financial Officer
|