SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 1-6663
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COLONIAL COMMERCIAL CORP.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-2037182
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(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
3601 HEMPSTEAD TURNPIKE, LEVITTOWN, NEW YORK 11756-1315
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 516-796-8400
------------
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.05 PER SHARE
CONVERTIBLE PREFERRED STOCK, PAR VALUE $.05 PER SHARE
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(Title of Class)
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
Registrant's best knowledge, in definitive proxy information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. (x)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---
Revenues for the fiscal year ended December 31, 1998 were $25,233,909.
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $8,492,000 as of March 19, 1999.
Indicate the number of shares outstanding of Registrant's Common Stock and
Convertible Preferred Stock as of March 19, 1999
Common Stock, par value $.05 per share - 1,485,015 shares. Convertible Preferred
Stock par value $.05 per share - 1,571,031 shares.
Documents Incorporated by Reference
Document Part
Registrant's 1999 Proxy Statement for Annual Meeting
of Shareholders on June 9, 1999 III
Registrant's 1999 Annual Report to Shareholders I, II
<PAGE>
PART I.
Item 1(A) Business Developments
Colonial Commercial Corp. (the "Company" or "Registrant") is a New York
corporation which was incorporated on October 28, 1964. Unless otherwise
indicated, the term "Registrant" or "Company" refers to Colonial Commercial
Corp. and its consolidated subsidiaries.
On January 13, 1998, shareholders approved a five-to-one reverse split,
which the Registrant made effective January 30, 1998. The reverse split had the
effect of reducing the number of authorized shares of common stock, par value
$.01, from 40,000,000 shares to 8,000,000 shares, par value $.05 and the number
of authorized shares of convertible preferred stock, par value $.01, from
12,344,300 shares to 2,468,860 shares, par value $.05 and reducing the common
shares outstanding from 7,159,228 to 1,431,776 and reducing the convertible
preferred shares from 8,326,957 to 1,662,271. In addition, shareholders also
approved a proposal to amend the Registrant's Certificate of Incorporation
immediately following the amendment effecting the reverse split to increase the
amount of authorized common stock to 20,000,000 with a par value of $.05 per
share.
In June 1998, the Company sold all of its shares of Monroc, Inc.
("Monroc") common stock for proceeds of $3,533,653 and realized a gain of
$2,101,853. In October 1998, the Company sold its last parcel of Utah real
estate for net proceeds of $1,001,023 and realized a gain of $826,797.
Item 1(B) Business Description
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Since the May 19, 1995 acquisition of Atlantic Hardware and Supply
Corporation ("Atlantic"), the Registrant's principal business activity is the
distribution of builders' hardware, which is described in more detail below. The
Registrant continues to seek acquisitions of going concerns.
Atlantic - Builders' Hardware
- -----------------------------
Atlantic's primary business is the distribution of door hardware, doors and
door frames used in new building construction, buildings being rehabilitated,
interior tenant buildouts, and building maintenance. Products sold by Atlantic
include all types of mechanical and electronic hardware, such as locks, door
knobs, door closers, hinges and other door-related hardware. Atlantic services
the contract hardware market, usually as a material supplier only, on a wide
range of commercial, residential, and institutional construction projects, such
as office buildings, hospitals, schools, hotels and high-rise apartment
buildings.
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<PAGE>
Atlantic had approximately 400 customers in 1998. No customer accounted for
more than 10% of sales in 1998. Atlantic believes that the loss of any one
customer would not have a material adverse effect on its business.
As of December 31, 1998, Atlantic had $ 11,865,000 in firm backlog of
orders. Atlantic expects that approximately 95% of the backlog of orders as of
December 31, 1998 will be filled within the current fiscal year. Atlantic's
business is not subject to significant seasonal variations.
Atlantic purchases products from approximately 400 suppliers. In 1998, no
supplier accounted for more than 10% of Atlantic's purchases. Atlantic believes
that the loss of any one supplier would not have a material adverse effect upon
its business.
Atlantic competes primarily with other hardware distributors who are
selected by the architects, owners, and/or construction managers, on a job to
job basis. Atlantic has its estimators evaluate plans received from a
contractor, and prepare and submit a price for the project, which is awarded
through bid or negotiation. If Atlantic is awarded the job, it supplies the
required hardware by placing orders with manufacturers or from goods on hand, or
both.
Atlantic's competition varies widely from region to region, primarily
because builders' hardware distributors are generally local single market firms.
Within each geographical market, contractors generally limit their hardware
suppliers to a few local firms. Also, in certain markets, Atlantic competes with
firms that supply the complete door package (i.e., door, frame and hardware).
Atlantic has been one of the largest "hardware only" suppliers; however,
Atlantic is changing its marketing focus from a "hardware only" supplier to a
complete door package supplier.
Management And Employees
- ------------------------
As of December 31, 1998, the Registrant had 64 employees, of whom 2 were
executive officers at its corporate offices in Levittown, New York. Sixty (60)
of the employees are employed by Atlantic. The Company believes its employee
relations are satisfactory.
Item 2. Properties
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Registrant's principal executive offices are located at 3601 Hempstead
Turnpike, Levittown, New York 11756-1315, in leased premises (approximately
1,306 square feet).
Atlantic maintains office and warehouse space of approximately 28,000
square feet at 601 West 26th Street, New York, New York under a lease expiring
in April 2000. Atlantic also maintains leased sales offices in Bensenville,
Illinois; Norcross, Georgia and Bensalem, Pennsylvania.
The Registrant's premises are suitable and adequate for their intended use
and are adequately covered by insurance.
Item 3. Legal Proceedings
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None.
Item 4. Submission Of Matters To A Vote Of Security Holders
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Not Applicable
Item 5. Market For The Registrant's Common Stock, Convertible Preferred
Stock And Related Stockholder Matters
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The information required to be provided is incorporated by reference from
page 3 of the Registrant's 1998 Annual Report to Stockholders.
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<PAGE>
Item 6. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
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The information required to be provided is incorporated by reference from
pages 4 and 5 of the Registrant's 1998 Annual Report to Stockholders under the
caption, "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
Item 7. Financial Statements And Supplementary Data
- ------- -------------------------------------------
The consolidated financial statements of the Registrant and the independent
auditors' report thereon of KPMG LLP, independent certified public accountants,
as of December 31, 1997 and 1998 and for each of the years in the three-year
period ended December 31, 1998, are incorporated herein by reference from pages
6 through 20 of the Registrant's 1998 Annual Report to Stockholders.
Item 8. Disagreements On Accounting And Financial Disclosures
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None
PART III
Item 9. Directors And Executive Officers Of The Registrant
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The information required to be provided is incorporated by reference to
Registrant's 1999 definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A no later than 120 days after the close of its fiscal
year.
Additional Item - Executive Officers Of The Registrant
- ------------------------------------------------------
The names, ages and positions of the Registrant's executive officers are
listed below, along with a brief account of their business experience during the
last five years. Officers are appointed annually by the Board of Directors at
its first meeting following the Annual Meeting of Stockholders and from time to
time at the pleasure of the Board. There are no family relationships among these
officers, nor any arrangement or understanding between any such officers and any
other person pursuant to which any of such officers were selected as executive
officers.
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<PAGE>
Name, Age Business Experience
And Position During Past Five Years
- ------------ ----------------------
Bernard Korn, 73 From prior to January 1993 to present,
Chairman of the Board, Chairman of the Board and President,
President, Chief Executive Chief Executive Officer of the Company
Officer
James W. Stewart, 52 From prior to January 1993, Executive
Executive Vice President, Vice President, Treasurer and
Secretary, Treasurer Secretary of the Company.
The information required to be provided is incorporated by reference to
Registrant's 1999 definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A no later than 120 days after the close of its fiscal
year.
Item 10. Executive Compensation.
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Item 11. Security Ownership Of Certain Beneficial Owners And
Management.
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Item 12. Certain Relationships And Related Transactions
- -------- ----------------------------------------------
The information required to be provided under Part III, Items 10, 11 and 12
is incorporated by reference to the Registrant's 1999 definitive proxy statement
to be filed with the Commission pursuant to Regulation 14A no later than 120
days after the close of its fiscal year.
Item 13. Exhibits And Report On Form 8-K
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Exhibits
- --------
The exhibits listed on the Index to Exhibits following the signature
page herein are filed as part of this Form 10-KSB.
Reports On Form 8-K
- -------------------
Registrant filed no reports on Form 8-K during the fourth quarter of
1998.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this Report to be signed on its behalf
by the undersigned thereunto duly authorized.
COLONIAL COMMERCIAL CORP.
(Registrant)
By:/S/ BERNARD KORN
-------------------
Bernard Korn, Pres.
By:/S/ JAMES W. STEWART
--------------------
James W. Stewart
Treasurer, Chief Financial
and Accounting Officer
Dated: March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been duly signed below on March 19, 1999 by the following persons on behalf
of the Registrant and in the capacities indicated:
By: /S/ BERNARD KORN
----------------------------------
Bernard Korn, President & Director
By: /S/ JAMES W. STEWART
--------------------------------
James W. Stewart, Executive Vice
President, Treasurer and
Secretary/Director
By: /S/ GERALD S. DEUTSCH
---------------------------
Gerald S. Deutsch, Director
By: /S/ WILLIAM KOON
----------------------
William Koon, Director
By: /S/ DONALD K. MACNEILL
----------------------------
Donald K. MacNeill, Director
By: /S/ RONALD MILLER
-----------------------
Ronald Miller, Director
By: /S/ JACK ROSE
-------------------
Jack Rose, Director
By: /S/ PAUL SELDEN
---------------------
Paul Selden, Director
By: /S/ CARL L. SUSSMAN
-------------------------
Carl L. Sussman, Director
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<PAGE>
INDEX TO EXHIBITS
Item 1
Incorporated by
Filed Reference From
Exhibits Herewith Form Date Exhibit
- -------- -------- ---- ---- -------
3(a) Certificate of Incor-
poration of Registrant 8-K 1/5/83 1
(i) Certificates of Amend-
ment of the Certificate
of Incorporation Re:
Authorized Common and
Convertible Preferred
Shares
(b) By-Laws of Registrant 8-K 1/5/83 1
10 (a)Employment Agreement dated
as of January 1, 1998 between
Registrant and Bernard Korn 10-KSB 3/31/98 10(a)
(b)Employment Agreement dated
as of January 1, 1998 between
Registrant and James W. Stewart 10-KSB 3/31/98 10(b)
(c)1986 Stock Option Plan 10-K 3/30/88 10(c)(ii)
(d)1996 Stock Option Plan S-8 10/2/97 28 B
(e)Promissory Note dated
December 8, 1997 for
$632,139.37 Wilbur F. Breslin
to Registrant
(f) Certain documents relating to
Atlantic Hardware and Supply
Corporation
(i) Revolving Credit Agreement
between Atlantic Hardware
and Supply Corporation and
Sterling National Bank &
Trust Company of New York 8-K 6/5/95 10(g)(ii)
(ii) Guarantee of all liabilities and
security agreement of Atlantic
Hardware and Supply Corporation
by Colonial Commercial Corp. to
Sterling National Bank and Trust
of New York 8-K 6/5/95 10(g)(iii)
(i11) Employment Agreement dated
January 1, 1998 between Atlantic
Hardware and Supply Corporation
and Paul Selden 10-KSB 3/31/98 10(g)(v)
(g)Purchase agreement dated March 25, 1998
for business and assets subject to
certain liabilities of Universal Supply
Group, Inc. Yes
(h)Lease dated February 27,1992 by and
between Registrant and 3601
Turnpike Associates 10-KSB 3/29/93 10(h)(iii)
(i) Renewal letter dated May 6,1996 10-KSB 3/25/96 10(g)(i)
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<PAGE>
INDEX TO EXHIBITS
Item 1
Incorporated by
Filed Reference From
Exhibits Herewith Form Date Exhibit
- -------- -------- ---- ---- -------
11 Statement re computation of per share earnings (loss)
(not filed since computations
are readily apparent from the
consolidated financial statements)
13 Annual Report of the Registrant
for the fiscal year ended
December 31, 1998. Such
report except for those portions
which are expressly incorporated by reference herein, is furnished for
the information of the Commission and is not to be deemed "filed" as
part of this filing. Financial statement schedules that are not
applicable are omitted or included in the consolidated financial
statement
footnotes. Yes
21 Subsidiaries of Registrant Yes
23 Consent of Independent Accountants Yes
27 Financial Data Schedule Yes
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EXHIBIT 10(g)
AGREEMENT OF PURCHASE AND SALE OF ASSETS
AGREEMENT dated March 25, 1999 by and among UNIVERSAL SUPPLY GROUP, INC., a New
Jersey corporation having its principal office at 275 Wagaraw Road, Hawthorne,
New Jersey 07506 ("Seller"), COLONIAL COMMERCIAL CORP., a New York corporation
having its principal office at 3601 Hempstead Turnpike, Levittown, New York
11756 ("Parent"), COLONIAL COMMERCIAL SUB CORP., a New York corporation which is
wholly owned by Parent and has its principal office c/o Parent ("Purchaser"),
and JOHN A. HILDEBRANDT ("JAH"), PAUL H. HILDEBRANDT ("PHH"), KARYN HILDEBRANDT
, LISA HILDEBRANDT, KIRSTEN LEBLANC, PAUL J. HILDEBRANDT, TERRY L. SCHROEDER,
SUSAN L. SALEK, JOHN R. HILDEBRANDT and JANNA L. MORGAN. The parties other than
Seller, Parent and Purchaser are sometimes referred to herein collectively as
the Shareholders. JAH and PHH are referred to herein as the Majority
Shareholders, and the Shareholders other than JAH and PHH are sometimes referred
to herein as the "Other Shareholders." The Shareholders own all of the
outstanding capital stock of Seller and each has an office c/o Seller.
W I T N E S S E T H:
--------------------
IN CONSIDERATION of the mutual covenants and agreements hereinafter set forth,
the parties hereby agree as follows:
1. Purchase And Sale Of Business And Assets.
----------------------------------------
(a) Subject to and upon the terms and conditions set forth in this
Agreement, Seller will sell, transfer, convey, assign and deliver
to Purchaser, and Purchaser will purchase, at the Closing
hereunder, all of the business, assets, properties, goodwill and
rights of Seller as a going concern, of every nature, kind and
description, tangible and intangible, wheresoever located and
whether or not carried or reflected on the books and records of
Seller (hereinafter sometimes collectively called "Seller's
Assets"), including, without limitation,
(i) The cash on hand and in banks of Seller, its commercial
paper, checks and drafts not yet collected, treasury bills,
bank deposits, certificates of deposit, accrued interest and
any and all other cash items, of whatever nature and kind;
(ii) All merchandise, inventories, materials and supplies used
in the business of Seller including items in transit from
vendors (hereinafter collectively referred to as
"Inventory");
(iii) All accounts receivable, notes receivable and all
accrued or unaccrued payments or obligations which have
inured or shall inure to the benefit of Seller as of the
Closing Date;
(iv) All machinery, equipment, office equipment, leasehold
improvements, motor vehicles, fixtures, and supplies of
Seller existing as of the Closing Date, including any
replacements thereof;
(v) All of the right, title and interest of Seller in and to
all United States and foreign patents, trademarks and
copyrights, application for any of the foregoing,
inventions, product formulations, trade secrets, if any,
relating to the product lines in effect as of the Closing
Date, and in and to the name "Universal Supply Group," and
any and all variations or derivations thereof and in and to
all logos, insignias and advertising materials bearing the
name " Universal Supply Group," and all trade names, and
trademarks currently used by Seller in connection with its
business (the "Business");
(vi) All of the right, title and interest in and to all leases
of real and personal property to which Seller is a party
with respect to the Business;
(vii) All of the right title and interest of Seller in and to
all agreements, contracts and orders, license agreements,
franchise and all other agreements and contracts with
respect to the Business;
(viii) The lists of Seller of suppliers and of clients which
exist as of the Closing Date;
(ix) Seller's client records, client files and other client
property;
(x) all employee lists, files, papers, books, records, sales
and advertising materials and records, sales and purchase
correspondence, affecting or pertaining to Seller's
ownership and/or use of Seller's Assets;
(xi) All deposits, credits and prepaid items related to or
arising from the Business;
(xii) All insurance policies of Seller;
(xiii) All financial records pertaining to the Business;
(xiv) The goodwill of Seller;
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<PAGE>
(xv) The assets referred to in disclosures heretofore made by
Seller to Purchaser;
(xvi) The assets reflected on the Balance Sheet referred to
herein, with only such dispositions of such assets reflected
on the Balance Sheet as shall have occurred in the ordinary
course of Seller's business between the date thereof and the
Closing and which are permitted by the terms hereof
(xvii) All other assets, properties, rights and businesses of
every kind and nature owned or held by Seller relating to
the Business, including deferred or prepaid taxes, or rights
to tax refunds, or in which Seller has an interest, on the
date hereof, known or unknown, fixed or unfixed, choate or
inchoate, accrued, absolute, contingent or otherwise,
whether or not specifically referred to in this Agreement.
(b) Seller's Assets shall be conveyed free and clear of all
liabilities, obligations, liens and encumbrances excepting only
those liabilities and obligations which are to be assumed by
Purchaser hereunder and those liens and encumbrances securing the
same which are disclosed herein or expressly permitted by the
terms hereof.
(c) The minute books, stock record books and the corporate seal of
Seller (collectively the "Excluded Assets") are excluded from
Seller's Assets.
(d) Purchaser acknowledges that Seller has used premises owned by
certain of the Shareholders and that such premises are not
included in Seller's Assets.
2. Purchase Price.
--------------
(a) In consideration of the sale, transfer, conveyance, assignment
and delivery of the Seller's Assets by Seller to Purchaser, and
in reliance upon the representations and warranties made herein
by Seller and Shareholders, Purchaser will, in full payment
thereof, pay to Seller at the Closing a total purchase price (the
"Purchase Price") equal to the sum of:
(i) Seller's Net Book Value (as hereinafter defined) appearing
on the balance sheet to be included in the Approved March
1999 Audited Balance Sheet (as defined in Section 3(a)(ii)),
plus
(ii) an amount equal to the interest which would have accrued
on the Net Book Value from March 31, 1999 until the Closing
at a rate equal to 5.07% per annum; plus
(iii) $2,500,000.
(b) "Net Book Value" means the total value of all recorded assets
less the total value of all liabilities.
(c) The Purchase Price shall be payable at the Closing by wire
transfer of 95% of the Purchase Price to Seller, and by wire
transfer of the balance of the Purchase Price to J. Bennett
Farrell, Esq., as escrow agent (the "Escrow Agent") under an
agreement in the form of an exhibit to this Agreement (the
"Escrow Agreement").
(d)
(i) In addition to the foregoing, Purchaser and Parent will at
the Closing jointly and severally assume (i) the liabilities
which are reflected in the March 1999 Audited Balance Sheet
(as hereinafter defined), (ii) liabilities accruing in the
ordinary course of business from and after April 1, 1999 and
(iii) liabilities which arise from and after April 1, 1999
under Contracts referred to in Seller's disclosure schedule
("Seller's Disclosure Schedule") as "Assumed Contracts."
(ii) Anything in this Agreement to the contrary
notwithstanding, Purchaser and Parent shall not assume, or
in any way be liable or responsible for
(a) all liabilities or obligations for any foreign, federal,
state, country or local income, franchise, gross receipts
or value added taxes, or any interest, additions to tax or
penalties thereon, accrued for, applicable to or arising
from any period through March 31, 1999; or
(b) any liability to the extent covered and. without cost to
Seller, paid by insurance of Seller pursuant to a policy
in effect of or prior to Closing.
(e) Allocation of Purchase Price. Of the purchase price, $150,000
shall be allocated to the agreement not to compete which is
referred to in Section 5(e), an amount equal to the Net Book
Value on Seller's March 1999 Audited Financial Statements shall
be allocated to Seller's Assets other than goodwill, and the
balance of the purchase price shall be allocated to goodwill.
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<PAGE>
3. Certain Other Agreements.
(a) Preparation Of Financial Statements.
------------------------------------
(i) Commencing immediately after the date hereof, Seller and
Shareholders shall use their best efforts to cause a
recognized firm of independent certified public accountants
promptly to audit the balance sheet of Seller as of March
31, 1999 (the "March 1999 Audited Balance Sheet") and the
other financial statements of Seller for the years ended
March 31, 1999 and 1998 (together with the March 1999
Audited Balance Sheet, the "Audited Financial Statements")
in accordance with generally accepted accounting principles
consistent with those used by Parent in the preparation of
Parent's financial statements ("GAAP").
(ii) Seller and Shareholders shall forthwith upon completion
of such financial statements present such statements to
Purchaser and its accountants for review. The term "Approved
March 1999 Audited Balance Sheet" means the March 1999
Audited Balance Sheet which has been reviewed by Purchaser
as aforesaid and which is satisfactory in form and substance
to Purchaser and its accountants. The term "Approved Audited
Financial Statements" as used herein means Audited Financial
Statements which have been reviewed by Purchaser as
aforesaid and which are satisfactory in form and substance
to Purchaser and its accountants. Approved Audited Financial
Statements for the year ended March 31, 1999 are referred to
herein as the "Approved March 1999 Audited Statements,"
Approved Audited Financial Statements for the year ended
March 31, 1998 are referred to herein as the "Approved March
1998 Audited Statements."
(iii) Purchaser shall at the Closing reimburse Seller for all
amounts expended by Seller prior to March 31, 1999 towards
the preparation of the Approved Audited Financial
Statements.
(iv) If this Agreement is terminated without a Closing other
than by reason of a breach by Seller or any Shareholder of
any representation or warranty or covenant herein, then
Purchaser shall reimburse Seller for all amounts expended by
Seller to KPMG towards the preparation of the Approved
Audited Financial Statements, less the cost of preparing the
March 1999 Audited Balance Sheet.
(b) No Action Letter. In the event that by the close of business on
----------------
July 1, 1999 Purchaser shall have reviewed and found satisfactory
the March 1999 Audited Balance Sheet, but despite their best
efforts referred to in Section (a), Seller and Shareholders shall
have failed to present to Purchaser (1) all of Seller's other
audited financial statements for the year ended March 31, 1999
and (2) all of Seller's audited financial statements for the year
ended March 31, 1998, or if by the close of business on July 31,
1999 Purchaser shall not have determined that all statements
referred to in clauses (1) and (2) constitute Approved Audited
Financial Statements, then Parent shall apply to the Securities
and Exchange Commission (the "SEC") and the National Association
of Securities Dealers (the "NASD") for no-action or other letters
in which the SEC and the NASD set forth to Parent the
consequences to Parent should the transaction hereunder be
consummated without the availability for filing of such
statements referred to in clauses (1) and (2). If, and only if,
Parent's Board of Directors in its sole discretion deem such
consequences acceptable, such letters shall be deemed "Acceptable
SEC-NASD Letters" within the meaning of this Agreement.
(c) Leases.
------
(i) There are attached hereto forms of leases ("Affiliated
Leases") for premises owned by certain Shareholders. At the
Closing, such Shareholders as landlord shall enter into the
Affiliated Leases with Purchaser as tenant for the aforesaid
premises.
(ii) Seller and Shareholders shall use their best efforts to
cause the landlord of the premises located at Wharton, North
Brunswick and Cedar Knolls, New Jersey, prior to the Closing
to consent (the "Landlord Consent") to the assignment of the
lease therefor (each, an "Unaffiliated Lease") to Purchaser.
(d) Payment Of Brokerage Fees. Shareholders shall alone be
-------------------------
responsible for the obligations incurred by Seller and
Shareholders to Gottesman Company, and such obligations shall not
be paid by Seller. Parent and Purchaser shall alone be
responsible for the obligations incurred by them to Gottesman
Company.
(e) Certain Payments And Assignments By Purchaser.
----------------------------------------------
(i) On The First Anniversary Of The Closing:
---------------------------------------
(i) Purchaser shall pay to Seller all amounts theretofore
recovered by Purchaser in respect of obsolete
inventory and receivables which was included in
Seller's Assets and for which zero value was assigned
in the calculation of Net Book Value ("Zero Value
Assets").
(ii) Purchaser shall assign to Seller, without recourse,
any Zero Value Assets which Purchaser shall not have
recovered as of the first anniversary of the Closing.
(ii) Receipts from obligors shall be applied against
receivables in the order in which the receivables arose, on
a first in, first out basis, except where an obligor
disputes a receivable, in which case receipts shall be
applied first against the undisputed receivables on a first
in-first out basis.
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<PAGE>
4. Closing.
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(a) The Closing shall take place at the offices of Oscar D. Folger at
10:00 A.M., local time, on the 10th business day after each of
(i), (ii) and (iii) shall have occurred, namely:
(i) Seller shall have delivered the Approved March 1999
Audited Balance Sheet to Purchaser,
(ii) either (1) Seller shall have delivered the statements
referred to in clauses (1) and (2) of Section 3(b) or (2)
Purchaser shall have received Acceptable SEC-NASD Letters,
and
(iii) Seller shall have obtained the Landlord Consents .
(b) Without limiting the generality of the provisions of Section
4(a), Parent and Purchaser shall not be obligated to consummate
this transaction if all such conditions are not satisfied by the
close of business on July 31, 1999. In such event each party
shall bear its own expenses, except that nothing in this sentence
shall relieve Seller or Shareholders from any breach by them of
any obligations under this Agreement, including without
limitation, the breach of their obligation to use their best
efforts to cause the aforesaid conditions to be satisfied..
(c) Notwithstanding the foregoing, if this Agreement is terminated
without a Closing other than by reason of a breach by Seller or
any Shareholder of any representation or warranty or covenant
herein, then Purchaser shall reimburse Seller for all amounts
expended by Seller to KPMG towards the preparation of the
Approved Audited Financial Statements, less the cost of preparing
the March 1999 Audited Balance Sheet.
5. Other Transactions At Closing; Further Assurances.
--------------------------------------------------
(a) At the Closing, Seller and Shareholders will deliver to Purchaser:
(i) A Bill of Sale duly executed by Seller in the form of an
Exhibit to this Agreement;
(ii) Such other good and sufficient instruments of conveyance,
assignment and transfer, in form and substance satisfactory
to Purchaser's counsel, as shall be effective to vest in
Purchaser good and marketable title to Seller's Assets;
(iii) all contracts, files and other data and documents
pertaining to Seller's Assets, except Seller's minute books
and stock ledger records, (which may be delivered at the
offices of Seller);
(iv) all documents required to be delivered to Purchaser under
the provisions of this Agreement;
(v) copies of the certificate of incorporation of Seller
certified as of a date within 10 days of the Closing Date by
an appropriate government official of New Jersey and
certified by its respective Secretary as to the absence of
any amendments between the dates of certification by the
official and the Closing Date;
(vi) a certificate from the appropriate governmental official
in New York and New Jersey and in each state in which Seller
is qualified to do business as to the good standing and of
the payment of taxes by Seller in such jurisdictions as of a
date within ten days of the Closing Date;
(vii) copies of the bylaws of Seller, certified by its
Secretary as a true and correct copy thereof as of the
Closing Date;
(viii) all consents from third parties, if any, as are
required to consummate the sale of Seller's Assets;
(ix) the instruments referred to in Section 10;
(x) the opinion of Seller's counsel referred to in Section 10;
and
(xi) such other documents as may be required pursuant to this
Agreement or as may reasonably by requested by Purchaser and
its counsel.
(b) On the Closing Date, Purchaser shall deliver or cause to be delivered
to Seller the following:
(i) payment of the amounts specified in Section 2:
(ii) a copy of the resolutions of the Board of Directors of
Purchaser, together with any and all required resolutions or
consents of the shareholders thereof, approving the
execution and delivery of this Agreement and the
consummation of all of the transactions contemplated hereby,
duly certified by an officer of Purchaser;
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(iii) the instruments referred to in Section 9; and
(iv) such other documents as may be required pursuant to this
Agreement or as may reasonably be requested by Seller and
its counsel.
(c) At the Closing, Purchaser will execute and deliver, and Seller
and Shareholders will cause to execute and deliver, an employment
contract with each of John R. Hildebrandt, William Salek and
William Pagano in the form of Exhibits to this Agreement.
(d) At the Closing, Purchaser will enter into the Affiliated Leases
with the Shareholders who are the landlords thereunder.
(e) At the Closing, Seller and each Majority Shareholder shall
execute and deliver to Purchaser a non-competition agreement in
the form of an Exhibit to this Agreement.
(f) At least ten days prior to the Closing, Seller and the
Shareholders will deliver to Purchaser a duly executed and
acknowledged certificate of amendment to Seller's certificate of
incorporation or other appropriate document which is required to
change Seller's corporate name to a new name bearing no
resemblance to its present name so as to make Seller's present
name available to Purchaser. Purchaser is hereby authorized to
file such certificate or other document (at Seller's expense) in
order to effectuate such change of name at or after the Closing
as Purchaser shall elect.
(g) At any time and from time to time after the Closing, at
Purchaser's request and without further consideration, Seller and
Shareholders will execute and deliver such other instruments of
sale, transfer, conveyance, assignment and confirmation and take
such action as Purchaser may reasonably deem necessary or
desirable in order to more effectively transfer, convey and
assign to Purchaser, and to confirm Purchaser's title to, all of
Seller's assets, to put Purchaser in actual possession and
operating control thereof and to assist Purchaser in exercising
all rights with respect thereto.
(h) After the Closing, at reasonable times and on reasonable notice,
Seller shall have access to the books and records pertaining to
its operations and business prior to the Closing, and Purchaser
shall have access to the minute books and stock ledger records of
Seller, and Purchaser shall retain such books and records, and
Seller shall retain such minute books and stock ledger records,
for a period of three years after the Closing.
(i) Seller agrees that Purchaser shall have the right and authority
to collect for its own account all receivables and other items
which shall be transferred to Purchaser as provided herein and to
endorse with the name of Seller any checks received on account of
any such receivables or other items. Seller agrees that it will
promptly transfer and deliver to Purchaser any cash or other
property which Seller may receive in respect of such receivables
or other items.
6. Representations And Warranties By Seller And Shareholders. Seller and each
---------------------------------------------------------
Majority Shareholder jointly and severally, and each Other Shareholder
severally, represents and warrants to Purchaser as follows (it being
understood that each representation and warranty is made by each Other
Shareholder only to the best of his or her knowledge):
(a) Organization, Standing and Qualification. Seller is a corporation
duly organized, validly existing and in good standing under the
laws of New Jersey; it has all requisite corporate power and
authority and is entitled to carry on its business as now being
conducted and to own, lease or operate its properties as and in
the places where such business is now conducted and such
properties are now owned, leased or operated; and it is duly
qualified, licensed or domesticated and in good standing as a
foreign corporation authorized to do business in the states
listed on Seller's Disclosure Schedule, which are the only states
where the nature of the activities conducted by it or the
character of the properties owned, leased or operated by it
require such qualification, licensing or domestication. Seller
has delivered to Purchaser true and complete copies of Seller's
certificate of incorporation and all amendments thereto,
certified by the Secretary of State of the State of , and the
by-laws of Seller as presently in effect, certified as true and
correct by Seller's Secretary.
(b) Subsidiaries. Seller has no subsidiaries except those listed on
Seller's Disclosure Schedule. Seller has no interest, direct or
indirect, and has no commitment to purchase any interest, direct
or indirect, in any other corporation or in any partnership,
joint venture or other business enterprise or entity other than
as set forth on Seller's Disclosure Schedule. The business
carried on by Seller has not been conducted through any other
direct or indirect subsidiary or affiliate of any Shareholder.
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(c) Transactions with Certain Persons.
(i) Except as set forth on Seller's Disclosure Schedule,
during the past three years Seller has not, directly or
indirectly, purchased, leased from others or otherwise
acquired any property or obtained any services from, or
sold, leased to others or otherwise disposed of any property
or furnished any services to, or otherwise dealt with
(except with respect to remuneration for services rendered
as a director, officer or employee of Seller), in the
ordinary course of business or otherwise, (i) any
shareholder of Seller or (ii) any person, firm or
corporation which, directly or indirectly, alone or together
with others, controls, is controlled by or is under common
control with Seller or any shareholder of Seller.
(ii) Seller does not owe any amount to, or have any contract
with or commitment to, any of its shareholders, directors,
officers, employees or consultants (other than compensation
for current services not yet due and payable and
reimbursement of expenses arising in the ordinary course of
business), and none of such persons owes any amount to
Seller.
(iii) No part of the property or assets of any Shareholder or
any direct or indirect subsidiary or affiliate of any
Shareholder is used by Seller.
(d) Execution, Delivery and Performance of Agreement; Authority.
Neither the execution, delivery nor performance of this Agreement
by Seller or any Shareholder will, with or without the giving of
notice or the passage of time, or both, conflict with, result in
a default, right to accelerate or loss of rights under, or result
in the creation of any lien, charge or encumbrance pursuant to,
any provision of Seller's certificate of incorporation or by-laws
or any franchise, mortgage, deed of trust, lease, license,
agreement, understanding, law, rule or regulation or any order,
judgment or decree to which Seller or any Shareholder is a party
or by which any of them may be bound or affected. Seller and each
Shareholder have the full power and authority to enter into this
Agreement and to carry out the transactions contemplated hereby,
all proceedings required to be taken by them or their
stockholders to authorize the execution, delivery and performance
of this Agreement and the agreements relating hereto have been
properly taken and this Agreement constitutes a valid and binding
obligation of Seller and each Shareholder.
(e) Capitalization. The presently authorized, issued and outstanding
shares of capital stock of Seller and the names and addresses of
the record and beneficial owners thereof are as set forth on
Seller's Disclosure Schedule. Except as set forth on Seller's
Disclosure Schedule, there are no outstanding subscriptions,
options, warrants, calls, contracts, demands, commitments,
convertible securities or other agreements or arrangements of any
character or nature whatever under which Seller or any
Shareholder is or may become obligated to issue, assign or
transfer any shares of the capital stock of Seller, and there are
no rights of first refusal or similar rights with respect to any
such shares.
(f) Ownership of Seller's Capital Stock. Each of the Shareholders is
the lawful record and beneficial owner of the number of shares of
Seller's capital stock set opposite his name on Seller's
Disclosure Schedule, free and clear of any liens, claims,
encumbrances or restrictions of any kind, and all of such shares
are validly issued and outstanding, fully paid and nonassessable.
(g) Financial Statements.
(i) Attached to this Agreement as exhibits are copies of the
following financial statements (hereinafter collectively
called the "Financial Statements"), all of which are
complete and correct, have been prepared from the books and
records of Seller in accordance with generally accepted
accounting principles consistently applied and maintained
throughout the periods indicated and present fairly the
financial condition of Seller as at their respective dates
and the results of its operations for the periods covered
thereby:
(i) an unaudited balance sheet of Seller (the "Balance
Sheet") as at December 31, 1998 (the "Balance Sheet
Date") and Seller's unaudited statements of earnings
and source and application of funds for the nine
months then ended;
(ii) an unaudited balance sheet of Seller as at March 31,
1998 and Seller's unaudited Statement of earnings and
source and application of funds for the 52-week
period then ended; and
(iii)an unaudited balance sheet of Seller as at March 31,
1997 and Seller's unaudited Statement of earnings and
source and application of funds for the 52-week period
then ended.
(ii) Such statements of earnings do not contain any items of
special or nonrecurring income or any other income not
earned in the ordinary course of business except as
expressly specified therein, and such interim financial
statements include all adjustments, which consist only of
normal recurring accruals, necessary for such fair
presentation.
(iii) The Approved Audited Financial Statements shall be
prepared from the books and records of Seller in accordance
with GAAP and shall fairly present the financial condition
of Seller as at their respective dates and the results of
its operations for the periods covered thereby.
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<PAGE>
(h) Absence of Undisclosed Liabilities. Except as and to the extent
reflected or reserved against on the face of the Balance Sheet
(excluding the notes thereto), as of the Balance Sheet Date
Seller had no debts, liabilities or obligations, or any foreign
or domestic tax liabilities or deferred tax liabilities incurred
in respect of or measured by Seller's income, or its property or
authorized or outstanding capital stock, for any period prior to
the close of business on the Balance Sheet Date or any other
debts, liabilities or obligations relating to or arising out of
any act, transaction, circumstance or state of facts which
occurred or existed on or before the Balance Sheet Date, whether
or not then known, due or payable. None of the Seller's employees
is now or, will by the passage of time hereafter become, entitled
to receive any vacation time, vacation pay or severance pay
attributable to services rendered prior to the Balance Sheet Date
except as disclosed on the face of the Balance Sheet (excluding
the notes thereto).
(i) Taxes. All taxes, including, without limitation, income,
property, sales, use, franchise, added value, employees' income
withholding and social security taxes, imposed by the United
States or by any foreign country or by any state, municipality,
subdivision or instrumentality of the United States or of any
foreign country, or by any other taxing authority, which are due
or payable by Seller, and all interest and penalties thereon,
whether disputed or not, have been paid in full, all tax returns
required to be filed in connection therewith have been accurately
prepared and duly and timely filed and all deposits required by
law to be made by Seller with respect to employees' withholding
taxes have been duly made. Seller has not been delinquent in the
payment of any foreign or domestic tax, assessment or
governmental charge or deposit and has no tax deficiency or claim
outstanding, proposed or assessed against it, and there is no
basis for any such deficiency or claim.
(j) Absence of Changes or Events. Except as set forth in Seller's
Disclosure Schedule, since the Balance Sheet Date Seller has
conducted its business only in the ordinary course and has not:
(i) incurred any obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due,
except current liabilities for trade or business obligations
incurred in the ordinary course of business and consistent
with its prior practice, none of which liabilities, in any
case or in the aggregate, materially and adversely affects
the business, liabilities or financial condition of Seller;
(ii) discharged or satisfied any lien, charge or encumbrance
other than those then required to be discharged or
satisfied, or paid any obligation or liability, absolute,
accrued, contingent or otherwise, whether due or to become
due, other than current liabilities shown on the Balance
Sheet and current liabilities incurred since the Balance
Sheet Date in the ordinary course of business and consistent
with its prior practice;
(iii) declared or made any payment of dividends or other
distribution to its shareholders or upon or in respect of
any shares of its capital stock, or purchased, retired or
redeemed, or obligated itself to purchase, retire or redeem,
any of its shares of capital stock or other securities;
(iv) mortgaged, pledged or subjected to lien, charge, security
interest or any other encumbrance or restriction any of its
property, business or assets, tangible or intangible;
(v) sold, transferred, leased to others or otherwise disposed
of any of its assets, except for inventory sold in the
ordinary course of business, or canceled or compromised any
debt or claim, or waived or released any right of
substantial value;
(vi) received any notice of termination of any contract, lease
or other agreement or suffered any damage, destruction or
loss (whether or not covered by insurance) which, in any
case or in the aggregate, has had a materially adverse
effect on the assets, operations or prospects of Seller;
(vii) encountered any labor union organizing activity, had any
actual or threatened employee strikes, work-stoppages,
slow-downs or lock-outs, or had any material change in its
relations with its employees, agents, customers or
suppliers;
(viii) transferred or granted any rights under, or entered
into any settlement regarding the breach or infringement of,
any United States or foreign license, patent, copyright,
trademark, trade name, invention or similar rights, or
modified any existing rights with respect thereto;
(ix) except in the ordinary course of business, made any
change in the rate of compensation, commission, bonus or
other direct or indirect remuneration payable, or paid or
agreed or orally promised to pay, conditionally or
otherwise, any bonus, extra compensation pension or
severance or vacation pay, to any shareholder, director,
officer, employee, salesman, distributor or agent of Seller;
(x) issued or sold any shares of its capital stock or other
securities, or issued, granted or sold any options, rights
or warrants with respect thereto, or acquired any capital
stock or other securities of any corporation or any interest
in any business enterprise, or otherwise made any loan or
advance to or investment in any person, firm or corporation;
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(xi) made any capital expenditures or capital additions or
betterments in excess of an aggregate of $50,000;
(xii) changed its banking or safe deposit arrangements;
(xiii) instituted, settled or agreed to settle any litigation,
action or proceeding before any court or governmental body
relating to Seller or its property;
(xiv) failed to replenish its inventories and supplies in a
normal and customary manner consistent with its prior
practice, or made any purchase commitment in excess of the
normal, ordinary and usual requirements of its business or
at any price in excess of the then current market price or
upon terms and conditions more onerous than those usual and
customary in the industry, or made any change in its
selling, pricing, advertising or personal practices
inconsistent with its prior practice and prudent business
practices prevailing in the industry;
(xv) suffered any change, event or condition which, in any
case or in the aggregate, has had or may have a materially
adverse affect on Seller's condition (financial or
otherwise), properties, assets, liabilities, operations or
prospects, including, without limitation, any change in
Seller's revenues, costs, backlog or relations with its
employees, agents, customers or suppliers;
(xvi) entered into any transaction, contract or commitment
other than in the ordinary course of business or paid or
agreed to pay any legal, accounting, brokerage, finder's
fee, taxes or other expenses in connection with, or incurred
by severance pay obligations by reason of, this Agreement or
the transactions contemplated hereby; or
(xvii) entered into any agreement or made any commitment to
take any of the types of action described in subparagraphs
(i) through (xvi) above.
(k) Litigation. Except as set forth in Seller's Disclosure Schedule,
there is no claim, legal action, suit, arbitration, governmental
investigation or other legal or administrative proceeding, nor
any order, decree or judgment in progress, pending or in effect,
or to the knowledge of Seller or any Shareholder threatened,
against or relating to Seller, its officers, directors or
employees, its properties, assets or business or the transactions
contemplated by this Agreement, and neither Seller nor any
Shareholder knows or has reason to be aware of any basis for the
same.
(l) Compliance with Laws and Other Instruments. Except as set forth
Seller's Disclosure Schedule, Seller has complied with all
existing laws, rules, regulations, ordinances, orders, judgments
and decrees now or hereafter applicable to its business,
properties or operations as presently conducted. Neither the
ownership nor use of Seller's properties nor the conduct of its
business conflicts with the rights of any other person, firm or
corporation or violates, or with or without the giving of notice
or the passage of time, or both, will violate, conflict with or
result in a default, right to accelerate or loss of rights under,
any terms or provisions of its certificate of incorporation or
by-laws as presently in effect, or any lien, encumbrance,
mortgage, deed of trust, lease, license, agreement,
understanding, law, ordinance, rule or regulation, or any order,
judgment or decree to which Seller is a party or by which it may
be bound or affected; and neither Seller nor any Shareholder is
aware of any proposed laws, rules, regulations, ordinances,
orders, judgments, decrees, governmental takings, condemnations
or other proceedings which would be applicable to its business,
operations or properties and which might adversely affect its
properties, assets, liabilities, operations or prospects, either
before or after the Closing.
(m) Title to Properties.
(i) Seller has good, marketable and insurable title to all the
properties and assets it owns or uses in its business or
purports to own, including, without limitation, those
reflected in its books and records and in the Balance Sheet
(except inventory sold after the Balance Sheet Date in the
ordinary course of business).
(ii) None of such properties and assets are subject to any
mortgage, pledge, lien, charge, security interest,
encumbrance, restriction, lease, license, easement,
liability or adverse claim of any nature whatsoever, direct
or indirect, whether accrued, absolute, contingent or
otherwise, except
(1) as expressly set forth in the Balance Sheet as securing
specific liabilities or as otherwise expressly permitted by
the terms hereof or
(2) those imperfections of title and encumbrances, if any, which
(a) are not substantial in character, amount or extent and do
not materially detract from the value of the properties
subject thereto,
(b) do not interfere with either the present and continued use
of such property or the conduct of Seller's normal
operations and
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(c) have arisen only in the ordinary course of business.
(iii) All of the properties and assets owned, leased or used
by Seller are in good operating condition and repair, are
suitable for the purposes used, are adequate and sufficient
for all current operations of Seller and are directly
related to the business of Seller.
(n) Schedules.
(i) Seller's Disclosure Schedule includes a separate schedule
containing an accurate and complete list and description of:
(1) All real property owned by Seller or in which Seller has a
leasehold or other interest or which is used by Seller in
connection with the operation of its business, together with a
description of each lease, sublease, license, or any other
instrument under which Seller claims or holds such leasehold
or other interest or right to the use thereof or pursuant to
which Seller has assigned, sublet or granted any rights
therein, identifying the parties thereto, the rental or other
payment terms, expiration date and cancellation and renewal
terms thereof.
(2) As of a date no earlier than the Balance Sheet Date, all of
Seller's receivables (which shall include accounts receivable,
loans receivable and any advances), together with detailed
information as to each such listed receivable which has been
outstanding for more than 30 days.
(3) All machinery, tools, equipment, motor vehicles, rolling stock
and other tangible personal property (other than inventory and
supplies), owned, leased or used by Seller except for items
having a value of less than $10,000 which do not, in the
aggregate, have a total value of more than $400,000, setting
forth with respect to all such listed property a summary
description of all leases, liens, claims, encumbrances,
charges, restrictions, covenants and conditions relating
thereto, identifying the parties thereto, the rental or other
payment terms, expiration date and cancellation and renewal
terms thereof.
(4) All patents, patent applications, patent licenses, trademarks,
trademark registrations, and applications therefor, service
marks, service names, trade names, copyrights and copyright
registrations, and applications therefor, wholly or partially
owned or held by Seller or used in the operation of Seller's
business.
(5) All fire, theft, casualty, liability and other insurance
policies insuring Seller, specifying with respect to each such
policy the name of the insurer, the risk insured against, the
limits of coverage, the deductible amount (if any), the
premium rate and the date through which coverage will continue
by virtue of premiums already paid. Except as disclosed in
Seller's Disclosure Schedule, such policies are with reputable
insurers, provide adequate coverage for all normal risks
incident to Seller's assets, properties and business
operations and are in character and amount at least equivalent
to that carried by persons engaged in a business subject to
the same or similar perils or hazards.
(6) All sales agency or route distributorship agreements or
franchises or agreements providing for the services of an
independent contractor to which Seller is a party or by which
it is bound.
(7) All contracts, agreements, commitments or licenses relating to
patents, trademarks, trade names, copyrights, inventions,
processes, know-how, formulae or trade secrets to which Seller
is a party or by which it is bound.
(8) All loan agreements, indentures, mortgages, pledges,
conditional sale or title retention agreements, security
agreements, equipment obligations, guaranties, leases or lease
purchase agreements to which Seller is a party or by which it
is bound.
(9) All contracts, agreements and commitments, whether or not
fully performed, in respect of the issuance, sale or transfer
of the capital stock, bonds or other securities of Seller or
pursuant to which Seller has acquired any substantial portion
of its business or assets.
(10)All contracts, agreements, commitments or other understandings
or arrangements to which Seller is a party or by which it or
any of its property is bound or affected by excluding
(a) purchase and sales orders and commitments made in the
ordinary course of business involving payments or receipts
by Seller of less than $150,000 in any single case,
(b) contracts entered into in the ordinary course of business
and involving payments or receipts by Seller of less than
$150,000 in the case of any single contract but not more
than $500,000 in the aggregate, and
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(c) contracts entered into in the ordinary course of business
which are terminable by Seller on less than 30 days'
notice without any penalty or consideration and involving
payments or receipts by Seller of less than $150,000 in
the case of any single contract but not more than $500,000
in the aggregate.
(11)All collective bargaining agreements, employment and
consulting agreements, executive compensation plans, bonus
plans, deferred compensation agreements, employee pension
plans or retirement plans, employee stock options or stock
purchase plans and group life, health and accident insurance
and other employee benefit plans, agreements, arrangements or
commitments, whether or not legally binding, including,
without limitation, holiday, vacation, Christmas and other
bonus practices, to which Seller is a party or is bound which
relate to the operation of Seller's business.
(12)The names and current annual salary rates of all persons
(including independent commission agents) whose annual
compensation (direct or indirect) from Seller is currently at
the rate of more than $75,000 per annum and showing separately
for each such person the amounts paid or payable as salary,
bonus payments and any indirect compensation for the year
ended December 31, 1998; and
(13)The names of all of Seller's directors and officers; the name
of each bank in which Seller has an account or safe deposit
box and the names of all persons authorized to draw thereon or
have access thereto, and the names of all persons, if any,
holding tax or other powers of attorney from Seller and a
summary of the terms thereof.
(ii) All of the contracts, agreements, leases, licenses and
commitments required to be listed on Seller's Disclosure
Schedule (other than those which have been fully performed)
are valid and binding, enforceable in accordance with their
respective terms, in full force and effect and, except as
otherwise specified in Seller's Disclosure Schedule, ,
Purchaser will from and after the Closing be entitled to the
full benefits thereof. Except as disclosed in Seller's
Disclosure Schedule, there is not under any such contract,
agreement, lease, license or commitment any existing
default, or event which, after notice or lapse of time, or
both, would constitute a default or result in a right to
accelerate or loss of rights, and none of such contracts,
agreements, leases, licenses or commitments is, either when
considered singly or in the aggregate with others, unduly
burdensome, onerous or materially adverse to Seller's
business, properties, assets, earnings or prospects or
likely, either before or after the Closing, to result in any
material loss or liability. None of Seller's existing or
completed contracts is subject to renegotiating with any
governmental body. True and complete copies of all such
contracts, agreements, leases, licenses and other documents
listed on Seller's Disclosure Schedule (together with any
and all amendments thereto) have been delivered to Purchaser
and initialed by Seller's Secretary and identified with a
reference to this Section of this Agreement. Nothing in this
clause (ii) shall detract from or limit the liabilities
which Purchaser is required to assume under Section 2(d).
(o) Intangible Property.
(i) Seller's Disclosure Schedule sets forth a complete list
and concise description of the following:
(1) all trademarks, service marks, trade names, label filings,
patents, copyrights, royalty rights, logos, applications
therefor and registrations thereof and inventions owned or
used (pursuant to license agreements or otherwise) by Seller
or any of its Subsidiaries in or applicable to the businesses
of Seller and its Subsidiaries (collectively, the "Proprietary
Rights"), and the jurisdictions in which the Proprietary
Rights have been registered, filed or issued;
(2) contracts, agreements or understandings pursuant to which
Seller or any of its Subsidiaries has authorized any person to
use any of the Proprietary Rights; and
(3) all research and development results, records of experiments,
scientific, technical, engineering and marketing data and
literature and other know-how, formulae and techniques,
recorded or available in any form whatsoever which are used in
connection with the operation of the businesses of Seller and
its Subsidiaries (Collectively, the "Trade Secrets").
(ii) The Proprietary Rights have been properly registered,
filed or issued in the offices and jurisdictions in which
such registration, filing or issuance is necessary to
protect the rights therein of Company and its Subsidiaries
for the conduct of their businesses, and all applicable fees
due and payable have been paid. Except as otherwise
indicated in Seller's Disclosure Schedule, Seller and its
Subsidiaries are the sole and exclusive owners of the
Proprietary Rights and the Trade Secrets and all rights
related thereto.
(iii) Except as set forth in Seller's Disclosure Schedule,
there are no claims or demands of any person pertaining to
the Proprietary Rights or the Trade Secrets or the rights of
Seller and its Subsidiaries thereunder, and no proceedings
have been instituted or are pending or, to the knowledge of
Seller, threatened which challenge the rights of Seller in
respect thereof, and none of the issued trademarks, service
marks, trade names, label filings, patents, copyrights,
logos, registrations thereof, or, as the case may be, the
rights granted to Seller in respect thereof and to be listed
in Seller's Disclosure Schedule,, infringes on or is being
infringed upon by others, and none is subject to any
outstanding order, decree, judgment, stipulation,
injunction, restriction or agreement restricting the scope
of the use by Seller.
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(iv) Except as disclosed in Seller's Disclosure Schedule,
Seller is not infringing or violating, and during the past
five years, Seller has not infringed or violated, any
Proprietary Rights of others, nor used any confidential
information or trade secrets or patentable or unpatentable
inventions of any former employer of any employee of Seller.
(v) Except as is disclosed in Seller's Disclosure Schedule,
Seller has no knowledge of any patented device or
application therefor which could materially and adversely
affect the operation of the businesses of Seller, as now
conducted.
(vi) Except as indicated in Seller's Disclosure Schedule, the
Trade Secrets have been, and will not be, disclosed by
Seller to any person other than Purchaser and its agents and
representatives, and comprise all of the same necessary to
permit the continued operation of the businesses of Seller
and its Subsidiaries.
(p) No Guaranties. None of the obligations or liabilities of Seller
is guaranteed by any other person, firm or corporation, nor has
Seller guaranteed the obligations or liabilities of any other
person, firm or corporation.
(q) Inventory. All items of Seller's inventory and related supplies
(including raw materials, work-in-process and finished goods)
reflected on the Balance Sheet or thereafter acquired (and not
subsequently disposed of in the ordinary course of business) are
merchantable, or suitable and usable for the production or
completion of merchantable products, for sale in the ordinary
course of business at normal mark-ups, none of such items is
obsolete and each item of such inventory reflected in the Balance
Sheet and the books and records of Seller is so reflected on the
basis of a physical count and is valued at market in accordance
with generally accepted accounting principles consistently
applied.
(r) Receivables. All receivables of Seller (including accounts
receivable, loans receivable and advances) which are reflected in
the Balance Sheet, and all such receivables which will have
arisen since the date thereof, shall have arisen only from bona
fide transactions in the ordinary course of Seller's business and
shall be (or have been) fully collected when due, or in the case
of each account receivable within 120 days after it arose,
without resort to litigation and without offset or counterclaim,
in the aggregate face amounts thereof except to the extent of the
normal allowance for doubtful accounts with respect to accounts
receivable computed on a basis consistent with Seller's practices
to date. From and after the delivery of the March 1999 Audited
Balance Sheet, the reference to "Balance Sheet" in this Section
(r) shall be deemed to be a reference to the March 1999 Audited
Balance Sheet.
(s) Labor Matters. Except as set forth in Seller's Disclosure
Schedule, Seller is not a party to any collective bargaining
agreement and there are no material or formal complaints,
charges, cases or controversies or any conciliation agreement,
consent or decree pending or threatened Seller and any of its
employees acting individually or in concert and/or any
administrative agency of the United States government and no
organization is presently attempting to gain, petitioning for or
asserting representational status with respect to any group or
groups of employees of Seller, and Seller is in material
compliance with Federal and state laws respecting employment
practices, terms and conditions of employment, wages and hours,
and is not presently engaged in any unfair labor practice, There
is no labor strike or other labor dispute and there is no
complaint, proceeding or other action instituted under the Equal
Opportunity Act pending, threatened against Seller.
(t) Environmental Matters.
----------------------
(i) Seller is, and at all times has been, in material
compliance with, and has not been in violation of, any
federal, state, foreign, or local laws, statutes,
ordinances, regulations, rules and orders pertaining to the
environment, pollution and/or the health and safety of human
beings (collectively "Environmental Law"). Neither Seller
nor either Shareholder has any basis to expect or has
received, any actual or threatened order, notice, or other
communication from (A) any governmental body or private
citizen acting in the public interest, or (B) the current or
prior owner or operator of any facilities, of any actual or
potential violation or failure to comply with any
Environmental Law with respect to any of the properties or
assets (whether real, personal, or mixed) in which Seller
has or has had an interest, or with respect to any property
at or to which any hazardous or toxic waste or substance
("Hazardous Materials") was generated, manufactured,
refined, transferred, imported, used, or processed by
Seller, or from which Hazardous Materials have been
transported, treated, stored, handled, transferred,
disposed, recycled, or received.
(ii) To the knowledge of Seller and Shareholders, there are no
pending or threatened claims, encumbrances, or other
restrictions of any nature, resulting from any
environmental, health, and safety liabilities or arising
under or pursuant to any Environmental Law, with respect to
or affecting any of the facilities or any other properties
and assets (whether real personal or mixed) in which Seller
has or had an interest.
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<PAGE>
(iii) Neither any Shareholder nor Seller has permitted or
conducted, or is aware of, any Hazardous Materials activity
conducted with respect to the properties or assets (whether
real, personal, or mixed) in which Seller has or had an
interest.
(iv) To the knowledge of Seller and the Shareholders, there
has been no release or threat of release of any Hazardous
Materials at or from the locations where any Hazardous
Materials were generated, manufactured, refined,
transferred, produced, imported, used or processed from or
by the properties and assets (whether real, personal, or
mixed) in which Seller has or had an interest.
(v) Seller has delivered to Purchaser true and complete copies
and results of any reports, studies, analyses, tests, or
monitoring possessed or initiated by Seller pertaining to
Hazardous Materials or Hazardous Materials activities in,
on, or under the properties of Seller, or concerning
compliance by Seller with respect to Environmental Laws.
(u) Business Description. Seller's Disclosure Schedule contains an
accurate and substantially complete summary description of
Seller's business and the general development of such business
during the past three years, including, without limitation, (i)
the percentage of total sales and revenues and income
attributable to each line of business of Seller for its last two
fiscal years which accounted for 10% or more of Seller's total
sales and revenues or income before taxes, (ii) the extent to
which Seller makes sales to or derives revenues or makes
purchases from sources located in foreign countries and (iii) the
name of each customer or supplier of Seller, the loss of which
might materially and adversely affect Seller's business.
(v) Records. The books of account, minute books, stock certificate
books and stock transfer ledgers of Seller are complete and
correct in all material respects, and there have been no
transactions involving the business of Seller which properly
should have been set forth therein and which have not been
accurately so set forth.
(w) Proceedings re Employee Benefit Plans. There has not been any (i)
termination of any "defined benefit plan" within the meaning of
the Employee Retirement Income Security Act of l974 ("ERISA")
maintained by Seller or any person, firm or corporation
("Affiliate") which is under "common control" (within the meaning
of Section 4001(b) of ERISA) with Seller, or (ii) commencement of
any proceeding to terminate any such plan pursuant to ERISA, or
otherwise or (iii) written notice given to Seller or any
Affiliate of the intention to commence or seek the commencement
of any such proceeding. All accrued benefits under each pension
plan of Seller covering employees who are to be transferred to
the employ of Purchaser following the Closing ("Transferred
Employees") shall be fully provided for as of the date of the
Closing by any one or more of (i) annuity contracts for the
benefit of such Transferred Employees issued by an insurance
company acceptable to Purchaser, (ii) the transfer to a successor
plan established or maintained by Purchaser for the benefit of
such Transferred Employees of assets having a fair market value
of not less than the present value of all such accrued benefits
and/or (iii) in the case of any multi-employer plan or any single
employer plan which Purchaser shall assume, by the fair market
value of the assets of such plan as of the date of the Closing
being not less than the present value of all accrued benefits
under such plan at such date. The amount of accrued benefits and
the present value thereof under each such pension plan shall be
computed by Purchaser's actuary on the basis of "Acceptable
Actuarial Assumptions," which term is defined to mean actuarial
assumptions and methods to which Purchaser consents in writing
(which consent shall not be unreasonably withheld). Seller has no
knowledge or information of any planned or required increase in
the level of contributions or benefits under any such pension
plan, or of any circumstances which would suggest that such an
increase may be required, or that any union representing
employees covered under any such plan will attempt to negotiate
for such an increase. In the case of each pension plan to which
Seller makes contributions on behalf of Transferred Employees
under which contributions are fixed pursuant to a collective
bargaining agreement, the level of contributions currently
provided for in the applicable collective bargaining agreement is
sufficient to meet the funding requirements of ERISA applicable
to such plan, based on Acceptable Actuarial Assumptions. Each
funded pension plan maintained by Seller for one or more
Transferred Employees constitutes a qualified plan under section
40l(a) of the Internal Revenue Code of l954 and meets all
applicable requirements of ERISA.
(x) Absence of Certain Business Practices. Neither Seller nor any
officer, employee or agent of Seller, nor any other person acting
on its behalf, has, directly or indirectly, within the past five
years given or agreed to give any gift or similar benefit to any
customer, supplier, governmental employee or other person who is
or may be in a position to help or hinder the business of Seller
(or assist Seller in connection with any actual or proposed
transaction) which (A) might subject Seller to any damage or
penalty in any civil, criminal or governmental litigation or
proceeding, (B), if not given in the past, might have had an
adverse effect on the assets, business or operations of Seller as
reflected in the Financial Statements or (C), if not continued in
the future, might adversely affect Seller's assets, business,
operations or prospects or which might subject Seller to suit or
penalty in any private or governmental litigation or proceeding.
(y) Disclosure. No representation or warranty by Seller or any
Shareholder contained in this Agreement nor any statement or
certificate furnished or to be furnished by Seller or any
Shareholder to Purchaser or its representatives in connection
herewith or pursuant hereto contains or will contain any untrue
statement of a material fact, or omits or will omit to state any
material fact required to make the statements herein or therein
contained not misleading or necessary in order to provide a
prospective purchaser of the business of the Seller with adequate
information as to Seller and its condition (financial and
otherwise), properties, assets, liabilities, business and
prospects, and Seller and the Shareholders have disclosed to
Purchaser in writing all material adverse facts known to them
relating to the same. The representations and warranties
contained in this Agreement shall not be affected or deemed
waived by reason of the fact that Purchaser and/or its
representatives knew or should have known that any such
representation or warranty is or might be inaccurate in any
respect.
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<PAGE>
(z) Certain Representations
(i) No supplier is considering termination, non-renewal or
adverse modification of its agreement with Seller, and the
transactions contemplated by this Agreement will not have a
material adverse effect on Seller's relationships with its
suppliers and customers.
(ii) Within the past five years Seller has not entered into
any agreement with, or been investigated by, any
governmental authority, community group or other third party
that could restrict the operation of its business.
(iii) No key employee of Seller has indicated that he is
considering terminating his employment.
(iv) No shareholder has any direct or indirect interest of any
kind in any business or entity which is competitive with
Seller.
7. Representations And Warranties By Parent And Purchaser. Parent and
------------------------------------------------------
Purchaser jointly and severally represent and warrant to Seller and the
Shareholders as follows:
(a) Organization. Each of Parent and Purchaser is a corporation duly
organized, validly existing and in good standing under the laws
of New York and has full corporate power and authority to enter
into this Agreement and the related agreements referred to herein
and to carry out the transactions contemplated by this Agreement
and to carry on its business as now being conducted and to own,
lease or operate its properties.
(b) Authorization and Approval of Agreement. All proceedings or
corporate action required to be taken by Parent and Purchaser
relating to the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby shall have
been taken at or prior to the execution of this Agreement.
(c) Execution, Delivery and Performance of Agreement. Neither the
execution, delivery nor performance of this Agreement by Parent
and Purchaser will, with or without the giving of notice or the
passage of time, or both, conflict with, result in a default,
right to accelerate or loss of rights under, or result in the
creation of any lien, charge or encumbrance pursuant to, any
provision of Parent's or Purchaser's certificate of incorporation
or by-laws or any franchise, mortgage, deed of trust, lease,
license, agreement, understanding, law, ordinance, rule or
regulation or any order, judgment or decree to which Parent or
Purchaser is a party or by which it may be bound or affected.
Parent and Purchaser each has full power and authority to enter
into this Agreement and to carry out the transactions
contemplated hereby, all proceedings required to be taken by it
to authorize the execution, delivery and performance of this
Agreement the agreements relating hereto have been properly taken
and this Agreement constitutes a valid and binding obligation of
Parent and Purchaser.
(d) Litigation. There is no legal action, suit, arbitration,
governmental investigation or other legal or administrative
proceeding, nor any order, decree or judgment in progress,
pending or in effect, or to the knowledge of Parent and Purchaser
threatened, against or relating to Parent or Purchaser in
connection with or relating to the transactions contemplated by
this Agreement, and neither Parent nor Purchaser knows or has any
reason to be aware of any basis for the same.
(e) SEC Filings Complete. Parent's most recent Form l0-K and all
intervening Form 8-K's and Form 10-Q's, and Parent's most recent
annual meeting proxy statement and most recent registration
statement filed under the Securities Act of 1933 (the "l933
Act"), all as filed with the Securities and Exchange Commission
("SEC"), do not contain a misstatement of a material fact or an
omission of a material fact required to be stated therein or
necessary to make the statements therein not misleading as of the
time such document was filed or (if filed under the 1933 Act)
became effective. Since the filing of the most recent Form 10-K,
no other document has been required to be filed by Parent with
the SEC which has not been filed, and no event or transaction has
occurred which will hereafter be required to be disclosed by
Parent in a Form 10-Q, Form 8-K or similar filing except as
disclosed herein.
8. Conduct Of Business Prior To Closing.
-------------------------------------
(a) Prior to the Closing, Seller shall conduct its business and
affairs only in the ordinary course and consistent with its prior
practice and shall maintain, keep and preserve its assets and
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properties in good condition and repair and maintain insurance
thereon in accordance with present practices, and Seller and
Shareholders will use their best efforts to preserve the business
and organization of Seller intact, to keep available to Purchaser
the services of Seller's present officers and employees, to
preserve for the benefit of Purchaser the goodwill of Seller's
suppliers and customers and others having business relations with
it and to cooperate with Purchaser in its efforts to obtain the
financing of the cash portion of the purchase price in accordance
with the provisions of this Agreement. Seller shall give
Purchaser prompt written notice of any change in any of the
information contained in the representations and warranties made
by Seller in this Agreement which occurs prior to the Closing.
Without limiting the generality of the foregoing, prior to the
Closing Seller will not without Purchaser's prior written
approval:
(i) change its certificate of incorporation or by-laws or
merge or consolidate or obligate itself to do so with or
into any other entity;
(ii) enter into any contract, agreement, commitment or other
understanding or arrangement except for those of the type
which would not have to be listed and described under
subparagraph (x) of Section 6(n) above; or
(iii) Perform, take any action or incur or permit to exist any
of the acts, transactions, events or occurrences of the type
described in subparagraphs (i), (ii), (iii), (iv), (v),
(viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xvi) or
(xvii) of Section 6(j) of this Agreement which would have
been inconsistent with the representations and warranties
set forth therein had the same occurred after the Balance
Sheet Date and prior to the date hereof.
(b) Access To Information And Documents. Seller will give Purchaser
-----------------------------------
and Purchaser's attorneys, accountants and other representatives
full access to Seller's personnel and all properties, documents,
contracts, books and records of Seller and will furnish Purchaser
with copies of such documents (certified by Seller's officers if
so requested) and with such information with respect to the
affairs of Seller as Purchaser may from time to time request, and
Purchaser will not improperly disclose the same prior to the
Closing. Any such furnishing of such information to Purchaser or
any investigation by Purchaser shall not affect Purchaser's right
to rely on any representations and warranties made in this
Agreement.
(c) No Solicitations or Negotiations. Neither Seller nor any of its
employees, representatives or agents will, directly or
indirectly, solicit or participate in discussions or negotiations
with, provide any non-public information concerning the
businesses, properties or assets of Seller or the transactions
contemplated hereby to or cooperate with any corporation,
partnership, person or other entity or group concerning any
merger, sale of substantial assets, sale of a substantial equity
interest or similar transaction involving Seller. In view of the
difficulties in assessing damages for any breach of the
provisions of this Section, and without limiting any other right
or remedy for any breach of any provision of this Agreement
(including without limitation the right Purchaser and Parent to
decrees of specific performance without posting bond or other
security), the parties agree that as liquidated damages for the
breach of the provisions of this Section (c), Seller and
Shareholders shall jointly and severally pay to Purchaser
$250,000, plus any attorneys and costs incurred by Parent and
Purchaser in enforcing such provisions or in seeking to collect
such liquidated amount.
9. Conditions Precedent To Parent's And Purchaser's Obligations. All
------------------------------------------------------------
obligations of Parent and Purchaser hereunder are subject at the option of
Purchaser, to the fulfillment of each of the following conditions at or
prior to the Closing, and Seller and Shareholders shall exert their best
efforts to cause each such condition to be so fulfilled as soon as
possible:
(a) All representations and warranties of Seller and the Shareholders
contained herein or in any document delivered pursuant hereto
shall be true and correct in all material respects when made and
shall be deemed to have been made again at and as of the date of
the Closing, and shall then be true and correct in all material
respects except for changes in the ordinary course of business
after the date hereof in conformity with the covenants and
agreements contained herein.
(b) All covenants, agreements and obligations required by the terms
of this Agreement to be performed by Seller or by Shareholders at
or before the Closing shall have been duly and properly performed
in all material respects.
(c) Since the date of this Agreement there shall not have occurred
any material adverse change in the condition (financial or
otherwise), business, properties, assets or prospects of Seller.
(d) There shall be delivered to Purchaser a certificate executed by
the President and Secretary of Seller and by each Majority
Shareholder, individually, dated the date of the Closing,
certifying that the conditions set forth in paragraphs (a), (b)
and (c) of this Section 9 have been fulfilled.
(e) All documents required to be delivered to Purchaser at or prior
to the Closing shall have been so delivered.
(f) Purchaser shall have received an opinion of Seller's counsel,
dated the date of the Closing, substantially in accordance with
an Exhibit to this Agreement.
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<PAGE>
(g) Seller shall have obtained written consents to the transfer or
assignment to Purchaser of all consignment agreements, licenses,
leases and other material contracts of Seller (other than
immaterial purchase and sales orders in the ordinary course of
business) where the consent of any other party to any such
contract may, in the opinion of Purchaser's counsel, be required
for such assignment or transfer.
(h) The conditions referred to in Section 4 shall have been
satisfied.
(i) The State of New Jersey shall have issued a letter of
non-applicability under the Industrial Site Recovery Act for all
of the premises subject to the Affiliated Leases
10. Conditions Precedent To Seller's And Shareholders' Obligations. All
---------------------------------------------------------------
obligations of Seller and Shareholders at the Closing are subject, at the
option of Seller, to the fulfillment of each of the following conditions at
or prior to the Closing, and Purchaser shall exert its best efforts to
cause each such condition to be so fulfilled as soon as possible:
(a) All representations and warranties of Purchaser contained herein
or in any document delivered pursuant hereto shall be true and
correct in all material respects when made and as of the Closing.
(b) All obligations required by the terms of this Agreement to be
performed by Purchaser at or before the Closing shall have been
duly and properly performed in all material respects.
(c) There shall be delivered to Seller a certificate executed by the
President and Secretary of Purchaser, dated the date of the
Closing, certifying that the conditions set forth in paragraphs
(a) and (b) of this Section have been fulfilled.
(d) Seller shall have received an opinion of Purchaser's counsel,
dated the date of the Closing, substantially in accordance with
an Exhibit to this Agreement.
11. Indemnification.
---------------
(a) Seller hereby undertakes and agrees to indemnify Purchaser (and
its shareholders, officers, and directors and their respective
successors, heirs and assigns) and hold it and them harmless
against and in respect of (and shall on demand reimburse
Purchaser for) the following:
(i) [omitted]
(ii) any and all loss, liability or damage suffered or
incurred by Purchaser by reason of any untrue
representation, breach of warranty or non-fulfillment of any
covenant by Seller or any Shareholder contained herein or in
any certificate, document or instrument delivered to
Purchaser pursuant hereto or in connection herewith;
(iii) any and all loss, liability or damage suffered or
incurred by Purchaser in respect of or in connection with
any liabilities of Seller which Purchaser is not assuming
under Section 2(c);
(iv) the amount of any and all receivables of Seller which
(despite Purchaser's reasonable efforts, not including
resort to litigation) are not collected in accordance with
the provisions contained in Section 6(r);
(v) any and all loss, liability or damage suffered or incurred
by Purchaser by reason of or in connection with any claim
for finder's fee or brokerage or other commission arising by
reason of any services alleged to have been rendered to or
at the instance of Seller or any Shareholder with respect to
this Agreement or any of the transactions contemplated
hereby (reference is made to Section 3(c) for special
provisions relating to brokerage fees payable to Gottesman
Company);
(vi) any and all loss, liability or damage suffered or
incurred by Purchaser by reason of any claim for severance
pay accruing or incurred at any time on or after the date
hereof except to the extent any one or more specific
employees are discharged prior to the Closing hereunder with
the prior written consent of Purchaser and such consent
contains the name(s) of such specific employee(s); and
(vii) any and all actions, suits, proceedings, claims,
demands, assessments, judgments, costs, and expenses,
including, without limitation, legal fees and expenses,
incident to any of the foregoing or in enforcing this
indemnity.
(b) Purchaser hereby agrees to indemnify and hold Seller and each
Shareholder harmless from, against and in respect of (and shall
on demand reimburse them for):
(i) Any and all loss, liability or damage resulting from any
untrue representation, breach of warranty or non-fulfillment
of any covenant or agreement by Purchaser contained herein
or in any certificate, document or instrument delivered to
Seller hereunder;
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<PAGE>
(ii) Any and all liabilities or obligations of Seller
specifically assumed by Purchaser pursuant to this
Agreement; and
(iii) Any and all actions, suits, proceedings, claims,
demands, assessments, judgments, costs and expenses,
including, without limitation, legal fees and expenses,
incident to any of the foregoing or in enforcing this
indemnity.
(c) Upon Seller's payment to Purchaser of the face amount of any
uncollected receivable by reason of the failure of such
receivable to be fully collected as warranted pursuant to the
provisions contained in Section 6(r) Purchaser shall assign such
receivable to Seller, without recourse.
(d) The following limitations shall apply to any and all claims for
indemnification by any party under this Agreement:
(i) The representations and warranties of the parties
contained in this Agreement (including the Disclosure
Schedule) shall survive the Closing until March 31, 2000,
provided that if written notice of a claim meeting the
requirements of this Section has been made during such
period, the relevant representations shall survive as to
such claim until the claim has been finally resolved.
Notwithstanding the foregoing, the representations and
warranties set forth in Sections 6(i), 6(t) and 11(f) shall
survive until 30 days after the applicable statutes of
limitation.
(ii) No indemnified party shall be entitled to assert any
right to indemnification hereunder unless and until the
aggregate of all claims for indemnification equals or
exceeds $50,000. Once such claims equal or exceed the
$50,000 threshold, such indemnified party shall be entitled
to the full amount of all indemnified claims, provided that
no claim for indemnification hereunder may be asserted by an
indemnified party unless such claim (or series of related
claims) equals or exceeds $10,000 individually.
(e) Indemnity Procedure.
(i) In the event Purchaser seeks indemnification pursuant to
this Agreement, Purchaser shall give prompt notice to the
party or parties from whom such indemnification is sought
(the "Indemnifying Party") of the assertion of any claim, or
the commencement of any action or proceeding, in respect of
which indemnity may be sought hereunder.
(ii) The Indemnifying Party shall have the right to, and shall
at the request of Purchaser, assume the defense of any such
action or proceeding at its own expense.
(iii) In any such action or proceeding, Purchaser shall have
the right to retain its own counsel; but the fees and
expenses of such counsel shall be at its own expense unless
(i) the Indemnifying Party and Purchaser shall have mutually
agreed to the retention of such counsel or (ii) the named
parties to any suit, action or proceeding (including any
impleaded parties) include both the Indemnifying Party and
the Purchaser and representation of all parties by the same
counsel would be inappropriate due to actual or potential
conflict of interests between them.
(iv) An Indemnifying Party shall not be liable under this
Agreement for any settlement effected without its consent of
any claim, litigation or proceeding in respect of which
indemnity may be sought hereunder.
(v) The Indemnifying Party may settle any claim without the
consent of Purchaser, but only if the sole relief awarded is
monetary damages that are paid in full by the Indemnifying
Party. Purchaser shall, subject to its reasonable business
needs, use reasonable efforts to minimize the
indemnification sought from the Indemnifying Party under
this Agreement.
(f) Special Provisions Regarding Asbestos Claims.
(i) Seller and Majority Shareholders, jointly and severally,
shall fully indemnify, protect, reimburse, and hold harmless
Purchaser from and against any and all damages, liabilities
and claims for personal injury due to, or alleged to be due
to, exposure to asbestos in connection with Seller's
business, operations or premises at any time prior to the
Closing (an "asbestos claim").
(ii) If an asbestos claim is made against Purchaser, Purchaser
shall, within ten days after receiving written notice of
such claim, give notice to Seller in the manner provided
elsewhere in this Agreement for notices hereunder.
(iii) If, pursuant to Section (e), Seller assumes the defense
of an asbestos claim at its own expense, then (x) it shall
within 20 days inform Purchaser of such assumption in
writing, and (y) notwithstanding any contrary provision in
Section (e), Seller shall not incur any expense for
Purchaser's counsel.
(iv) The provisions of Sections (e)(iii) through (v) shall
also apply to asbestos claims.'
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<PAGE>
(g) Certain Additional Provisions.
(i) Purchaser shall not be deemed to have suffered a loss by
reason of any liability which should have been disclosed
pursuant to this Agreement but was not disclosed, if:
(i) The failure to make such disclosure was not
deliberate or in bad faith;
(ii) Such liability is discovered by Purchaser before the
first anniversary of the date of this Agreement;
(iii)Purchaser obtains a benefit from such liability in
an amount at least equal to the amount of such
liability; and
(iv) The amount of such liability does not exceed $20,000.
(a) Should the March 31, 1999 Audited Balance Sheet fail to
disclose a receivable which is recovered by Purchaser and
which should have been reflected in such Balance Sheet and
is not a Zero Value Asset (as defined in Section 3(e)),
Purchaser shall pay such recovery over to Seller
12. Releases From Escrow.
--------------------
(a) In the event that Purchaser is entitled to indemnification
hereunder in any amount and any amounts are then held in escrow
by the Escrow Agent under the Escrow Agreement, Seller and
Shareholders shall join with Purchaser in a written direction to
the Escrow Agent to release such amount to Purchaser.
(b) On the first anniversary of the Closing, Purchaser shall join
with Seller and Shareholders in a written direction to the Escrow
Agent to release to Seller all amounts then held in escrow
(together with any earnings thereon) which Escrow Agent is not
then required to release to Purchaser and which are not then
subject to a dispute under Section 12(c).
(c) In the event that there is any dispute on whether any party is
required to sign any direction to the Escrow Agent hereunder,
such dispute shall be resolved exclusively by arbitration by the
American Arbitration Association in New York City. In the event
that the parties agree that a direction to the Escrow Agent is
required to a given extent but dispute whether such direction is
required for any excess amount, then the parties shall execute
such direction for to the given amount as to which there is no
dispute, and the dispute on the excess amount shall be submitted
to arbitration as aforesaid.
(d) Seller and Majority Shareholders shall be jointly and severally
liable, and the Other Shareholders shall be severally liable, for
any indemnification obligation or obligations to the extent the
same then exceeds amounts then held in escrow by the Escrow
Agent. In no event shall any Other Shareholder be obligated to
indemnify Purchaser for a representation or warranty which was
true to the best of his or her knowledge.
13. BULK SALES COMPLIANCE. Purchaser hereby waives compliance by Seller with the
---------------------
provisions of the Bulk Sales Law of any state, and Seller warrants and agrees
to pay and discharge when due all claims of creditors which could be asserted
against Purchaser by reason of such non-compliance to the extent that such
liabilities are not specifically assumed by Purchaser under this Agreement.
Seller and each of the Majority Shareholders jointly and severally, and each
of the Other Shareholders severally, hereby indemnify and agree to hold
Purchaser harmless from, against and in respect of (and shall on demand
reimburse Purchaser for) any loss, liability, cost or expense, including,
without limitation, attorneys' fees, suffered or incurred by Purchaser by
reason of the failure of Seller to pay or discharge such claims.
14. TERMINATION. This Agreement may, by notice given prior to the Closing, be
terminated:
(a) by Purchaser if a material breach of any provision of this
Agreement has been committed by Seller or the Shareholders and
such breach has not been waived;
(b) by Seller if material breach of any provision of this Agreement
has been committed by Purchaser and such breach has note been
waived;
(c) by mutual consent of the parties;
(d) by either Purchaser or Seller if the Closing has not occurred on
or before July 31, 1999 or such later date as Seller and
Purchaser may agree upon. In such event, each party shall bear
its own expenses except as set forth in Section 3(a)(iv). Nothing
in this Section shall relieve any party from any breach by it of
any obligations under this Agreement, including without
limitation, the breach of such party's obligation to use its best
efforts to cause all conditions to the Closing to be satisfied as
soon as possible; and
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<PAGE>
(e) by either Purchaser or Seller if Net Book Value is less than
$7,500,000.
15. Nature Of Representations And Warranties, Etc.
(a) Each statement, representation, warranty, indemnity, covenant and
agreement made by Seller or any Majority Shareholder in this
Agreement or in any document, certificate or other instrument
delivered by or on behalf of Seller or any Majority Shareholder
pursuant to this Agreement or in connection herewith shall be
deemed the joint and several statement, representation, warranty,
indemnity, covenant and agreement of Seller and each such
Shareholder.
(b) Each statement, representation, warranty, indemnity, covenant and
agreement made by any Other Shareholder in this Agreement or in
any document, certificate or other instrument delivered by or on
behalf of Seller or any Other Shareholder pursuant to this
Agreement or in connection herewith shall be deemed the several
statement, representation, warranty, indemnity, covenant and
agreement of such Other Shareholder.
(c) For all purposes of this Agreement, the several liability of an
Other Shareholder constitutes a portion of the total liability
which is equal to the percentage ownership of such Other
Shareholder in Seller as of the Closing. By way of example,
assume that there is a $1,000 liability to Purchaser for which
Seller and the Majority Shareholders are jointly severally liable
and for which the Other Shareholders are severally liable.
Purchaser may proceeds against any one or more of Seller and each
Majority Shareholder for the full $1,000 amount, and Purchaser
may also proceed against each Other Shareholder for a percentage
of $1,000 which is equal to such Other Shareholder's percentage
ownership in Seller as of the Closing. Purchaser would not be
permitted to realize an aggregate amount in excess of $1,000 from
Seller and all Shareholders.
(d) All covenants and agreements made by each of the parties hereto
shall survive the Closing. Representations and warranties shall
survive the Closing only to the extent provided in Section 11(d).
16. Notices. Any and all notices or other communications required or permitted
-------
to be given under any of the provisions of this Agreement shall be in
writing and shall be deemed to have been duly given when personally
delivered or when forwarded for priority delivery by Federal Express or
other recognized courier, addressed to the parties at the addresses set
forth above (or at such other address as any party may specify by notice to
all other parties given as aforesaid), together with a copy to their
respective counsel, who are J. Bennett Farrell, 107, Stage Road, Monroe,
New York 10950 for Seller and Shareholders, and Oscar D. Folger, 521 Fifth
Avenue, New York, New York 10175 for Purchaser and Parent.
17. Miscellaneous.
-------------
(a) This writing constitutes the entire agreement of the parties with
respect to the subject matter hereof and may not be modified,
amended or terminated except by a written agreement specifically
referring to this Agreement signed by all of the parties hereto.
It supersedes all prior agreements, instruments and documents
between Purchaser on the one hand and Seller and the Shareholders
on the other hand, including the letter of intent dated December
1, 1998.
(b) In the event of any controversy, claim or dispute between the
parties hereto arising out of or relating to this Agreement or
any of the documents provided for herein, or the breach thereof,
the prevailing party shall be entitled to recover from the losing
party reasonable attorney's fees, expenses and costs.
(c) No waiver of any breach or default hereunder shall be considered
valid unless in writing and signed by the party giving such
waiver, and no such waiver shall be deemed a waiver of any
subsequent breach or default of the same or similar nature.
(d) This Agreement shall be binding upon and inure to the benefit of
each corporate party hereto, its successors and assigns, and each
individual party hereto and his heirs, personal representatives,
successors and assigns.
(e) The paragraph headings contained herein are for the purposes of
convenience only and are not intended to define or limit the
contents of said paragraphs.
(f) Each party hereto shall cooperate, shall take such further action
and shall execute and deliver such further documents as may be
reasonably requested by any other party in order to carry out the
provisions and purposes of this Agreement.
(g) Seller will pay all sales, transfer and documentary taxes, if
any, payable in connection with the sale, conveyances,
assignments, transfers and deliveries to be made to Purchaser
hereunder.
(h) This Agreement may be executed in one or more counterparts, all
of which taken together shall be deemed one original.
(i) This Agreement and all amendments thereof shall be governed by
and construed in accordance with the law of the State of New
Jersey applicable to contracts made and to be performed therein.
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<PAGE>
(j) Except where this Agreement provides for arbitration (in which
case judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof), the parties
consent to the exclusive jurisdiction of the State and Federal
courts sitting in New York in any action arising out of or
connected in any way with this Agreement, and the parties further
agree that the service of process or of any other papers upon
them or any of them in the manner provided for notices hereunder
shall be deemed good, proper and effective service upon them. By
execution and delivery of this Agreement, each party (i) accepts,
generally and unconditionally, the exclusive jurisdiction of such
courts and related appellate courts, and irrevocably agrees to be
bound by any judgement rendered thereby in any such action, suit
or proceeding, and (ii ) irrevocably waives any objection it may
now or hereafter have as to the venue of any such action, suit or
proceeding brought in such a court or that such court is an
inconvenient forum. Each party hereto further agrees that the
service of process or of any other papers upon it or him in the
manner provided for notices hereunder shall be deemed good proper
and effective service upon it or him.
(k) Except as required by law and then only after discussion with the
other parties, until the Closing no party to this Agreement shall
make any public announcements in respect of this Agreement or the
transactions contemplated hereby or otherwise communicate with
any news media about the same, without first consulting with the
other parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
COLONIAL COMMERCIAL CORP.
By: /S/ JAMES W. STEWART, EXEC. V.P.
--------------------------------
COLONIAL COMMERCIAL SUB CORP.
By:/S/ JAMES W. STEWART, V.P.
--------------------------
UNIVERSAL SUPPLY GROUP, INC.
By:/S/ WILLIAM PAGANO, PRES.
-------------------------
SHAREHOLDERS:
/S/ JOHN A. HILDEBRANDT
- -----------------------
John A. Hildebrandt
/S/ PAUL H. HILDEBRANDT
- -----------------------
Paul H. Hildebrandt
/S/ PAUL H. HILDEBRANDT, P.O.A.
- -------------------------------
Karyn Hildebrandt
/S/ PAUL H. HILDEBRANDT, P.O.A.
- -------------------------------
Lisa Hildebrandt
/S/ PAUL H. HILDEBRANDT, P.O.A.
- -------------------------------
Kirsten LeBlanc
/S/ PAUL H. HILDEBRANDT, P.O.A.
- -------------------------------
Paul J. Hildebrandt
/S/ PAUL H. HILDEBRANDT, P.O.A.
- -------------------------------
Terry L. Schroeder
/S/ PAUL H. HILDEBRANDT, P.O.A.
- -------------------------------
Susan L. Salek
/S/ JOHN A. HILDEBRANDT, P.O.A.
- -------------------------------
John R. Hildebrandt
/S/ JOHN A. HILDEBRANDT, P.O.A.
- -------------------------------
Janna L. Morgan
-27-
EXHIBIT 13
COLONIAL COMMERCIAL CORP.
ANNUAL REPORT
1998
-28-
<PAGE>
TO OUR SHAREHOLDERS
I am pleased to report that 1998 was a banner year for your Company. The year's
highlights included a healthy increase in earnings from operations, recognition
of substantial gains from the disposition of certain investment assets, and the
simplification of our corporate structure, which should allow investors to more
effectively measure Colonial Commercial Corp.'s ("Colonial") operating
performance in the future.
With net income contributing $3,852,000 in 1998, Colonial's stockholders' equity
stood at approximately $10.8 million as of December 31, 1998, representing an
increase of 20.8% from year-earlier levels. This is equivalent to a book value
of $3.54 per common and convertible preferred share outstanding. The increase in
stockholders' equity resulted from record operating income at our Atlantic
Hardware and Supply Corporation subsidiary ("Atlantic"), the sale of our
investment position in Monroc, Inc. ("Monroc"), a gain on the sale of our
remaining Utah real estate, and the recognition of anticipated income tax
benefits.
Atlantic's operating income increased approximately 54% to $1,780,000 during
1998 compared with operating income of $1,154,000 in 1997. Its sales rose 11.4%
to a record $25.2 million, versus $22.6 million in the previous year. Working
closely with Atlantic's management, we reviewed a number of acquisition
candidates during 1998 and will continue to pursue external growth opportunities
within the door hardware industry, while seeking to optimize Atlantic's
potential for internal growth.
The sale of our remaining Monroc shares generated a pretax gain of approximately
$2.1 million during 1998, while a pretax gain of $827,000 was recognized when we
sold our last parcel of real estate in Utah. These sales increased Colonial's
cash position by $4,535,000 and at year-end our current assets of $15,007,000
exceeded our current liabilities ($4,754,000) by a factor of 3.2-to-1.0. The
disposition of these investment assets simplified the Company's asset structure,
while providing us with sufficient cash and borrowing capacity to acquire more
operating companies.
In this regard, Colonial announced on March 25, 1999 that it had entered into a
definitive agreement to purchase the assets and business of Universal Supply
Group, Inc. ("Universal"), headquartered in Hawthorne, New Jersey. Universal is
a leading distributor of heating and air conditioning equipment and climate
controls in the State of New Jersey. Universal's sales for its fiscal year
ending March 31, 1999 are expected to exceed $26 million, which represents an
increase of more than 40% when compared with $18.6 million in sales for its
previous fiscal year.
Universal markets its products primarily to heating, ventilation and air
conditioning (HVAC) contractors, which in turn sell the products to residential
and commercial/industrial builders and contractors. Approximately 90% of its
products are sold into the renovation/retrofit market, with the balance utilized
in new construction applications. In addition to its 500 different product
lines, Universal also provides technical field support, in-house training and
control system consultation for engineers and installers.
Universal has developed a fine reputation for quality products and service
during the past fifty years, and its experienced management team should
contribute greatly to Colonial's future success. The acquisition will
significantly expand Colonial's capabilities as a distributor of
building-related products and will allow Colonial to diversify into residential
and remodeling markets. It will also complement our Atlantic Hardware and Supply
subsidiary, in that both companies market to contractors and builders, rather
than to end-users of their products.
The proposed acquisition of Universal is consistent with your management's
strategy for enhancing shareholder value. We expect the acquisition to more than
double Colonial's annualized revenues, and it should be accretive to earnings
per share in 1999 and future years. The agreement to acquire the assets and
business of Universal is a binding one and we expect the acquisition to close in
June 1999, however, the agreement is subject to certain terms and conditions and
there can be no assurance that the transaction will be completed.
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<PAGE>
Colonial will continue to seek acquisitions which meet our stringent criteria
for industry compatibility, quality of management and pricing. The outstanding
performance of Atlantic since its acquisition by Colonial reflects the success
of our strategy to date, and we are optimistic that the Universal acquisition
can similarly benefit the Company and its shareholders.
As always, Colonial's management and Board of Directors wish to thank our
employees, customers, vendors and shareholders for their continued support. We
look forward to the future with great confidence, and we expect 1999 to be
another year of significant achievements for your Company.
Respectfully submitted,
Bernard Korn
Chairman of the Board and President
April 9, 1999
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<PAGE>
CORPORATE PROFILE:
Colonial Commercial Corp. ("Colonial"), through its ownership of Atlantic
Hardware and Supply Corporation ("Atlantic"), distributes door hardware, doors
and door frames, primarily to building contractors and architectural firms. Most
of Atlantic's customers are involved in the design, construction,
rehabilitation, remodeling, and/or maintenance of commercial, residential and
institutional structures, including office buildings, hospitals, hotels,
schools, government facilities and high-rise apartment buildings.
Atlantic was founded in 1946 and its revenues for the year ended December
31, 1998 increased 11.4% to a record $25.2 million. Headquartered in New York
City, Atlantic also has offices in Georgia, Illinois and Pennsylvania.
Colonial also seeks to enhance shareholder values through strategic
investments and the acquisition of companies or businesses which can expand the
Company's capabilities as a distributor of building-related products. On March
25, 1999, Colonial entered into a definitive agreement to purchase the assets
and business of Universal Supply Group, Inc. ("Universal"), which is
headquartered in Hawthorne, New Jersey. Universal is a leading distributor of
heating and air conditioning equipment and climate controls in the State of New
Jersey. For its fiscal year ending March 31, 1999, Universal's sales are
expected to exceed $26 million, which represents an increase of more than 40%
when compared with sales of $18.6 million in the previous fiscal year.
Approximately 90% of Universal's products are used in the renovation/remodeling
of residential, commercial and industrial buildings.
For the year ended December 31, 1998, Colonial Commercial Corp. reported
total net income of $3,851,753, or $1.23 per diluted share, and sales of $25.2
million. As of December 31, 1998, the Company's capital structure consisted of
$10.8 million in shareholders' equity (equivalent to $3.54 per common and
convertible preferred share outstanding) and there was substantially no
long-term debt outstanding.
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<PAGE>
Market Price of Company's Common Stock, Convertible Preferred Stock and Related
Security Holder Matters:
(a) Price Range of Common Stock and Preferred Stock
The Company's common stock and convertible preferred stock are traded
on the Nasdaq small capitalization automated quotation system. The following
table sets forth the quarterly high and low bid prices during 1998 and 1997. The
quotations set forth below, which give effect to a five-to-one reverse stock
split that was effective January 30, 1998, represent inter-dealer quotations
which exclude retail markups, markdowns and commissions and do not necessarily
reflect actual transactions.
<TABLE>
<CAPTION>
Common Stock Convertible Preferred Stock
High Low High Low
---- --- ---- ---
1998
<S> <C> <C> <C> <C>
First Quarter $2 11/16 $1 7/8 $2 11/16 $1 3/4
Second Quarter 3 1/2 2 3/8 3 1/2 2
Third Quarter 2 1/2 2 3/32 2 3/8 2 1/16
Fourth Quarter 2 15/16 2 3/32 2 7/8 2 3/32
1997
First Quarter $3 7/16 $2 3/16 $3 7/16 $2 3/16
Second Quarter 3 7/16 2 1/32 3 9/32 2 1/32
Third Quarter 4 1/16 2 3/16 3 29/32 2 3/16
Fourth Quarter 2 13/16 1 7/8 2 21/32 1 7/8
</TABLE>
(b) Approximate number of common and convertible preferred stockholders
Approximate Number of Record Holders
Title Of Class (as of March 17, 1999)
- -------------- ------------------------------------
Common stock par value $.05 per share 845
Convertible preferred stock par value $.05 per share 7,136
(c ) Dividends
The Company does not contemplate common stock dividend payments in the
near future.
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<PAGE>
Management's Discussion And Analysis Of Financial Condition And Results Of
Operations
- --------------------------------------------------------------------------------
Results of Operations 1998-1997
The Company reported net income of $3,851,753 for the 1998 year compared to net
income of $672,356 for the year 1997. The 1998 income consisted of net income of
$1,291,552 from Atlantic compared to $727,448 for 1997, a $2,101,853 gain on the
sale of the Company's remaining shares of Monroc, Inc. stock compared to a 1997
gain of $238,033 and a gain on sale of $826,797 on the Company's last parcel of
Utah land compared with gain on sale of land of $196,066 in 1997. Interest
income decreased to $181,206 in 1998 from $191,473 in 1997 principally due to a
reduction in interest received on notes receivable partially offset by an
increase in interest received on invested cash balances. Other income decreased
to $114,899 in 1998 from $178,231 in 1997 principally due to a reduction in the
amount of unclaimed 6% notes which reverted back to the Company, and a reduction
in consulting fees received from Monroc, Inc.
Sales increased $2,591,126 (11.4%) to $25,233,909 in 1998 as compared to
$22,642,783 in 1997 due mainly to increased sales in the New York-New Jersey
metropolitan area, where new construction activity remains strong due to
favorable economic conditions. This increase was offset partially by a decrease
in sales from the Company's Pennsylvania office in which the Company made
operational changes during the first half of 1998. The December 31, 1998 backlog
was $11,865,000, as compared to $8,871,000 at December 31, 1997. The $2,994,000
increase is a result of the continued strong construction activity in the New
York-New Jersey market and increased bookings from the Company's Pennsylvania
office. It is anticipated that approximately 95% of the backlog will be shipped
during 1999.
Gross profit increased $838,337 to $6,676,140 (26.5% as a percentage of sales)
in 1998 compared to $5,837,803 (25.8% as a percentage of sales) in 1997 due
principally to increased sales and to a reduction in cost of sales resulting
from greater purchase discounts utilized by the Company.
Selling, general and administrative expenses increased $317,643 to $5,769,507 in
1998 compared to $5,451,864 due principally to increased expenses related to
professional fees, insurance, employee benefits, depreciation and to other
expenses related to increased sales. However, as a percentage of sales such
expenses decreased from 24.1% in 1997 to 22.9% in 1998 due to operating
efficiencies. Operating income increased $906,399 to $906,633 in 1998 compared
to $234 in 1997 as a result of improved gross margin offset partially by
increased expenses. Interest expense decreased due to lower average borrowings
and a lower average interest rate during 1998.
The 1998 net income includes a net $194,000 deferred tax benefit. The net
$194,000 benefit is the result of a $500,000 adjustment recorded in the fourth
quarter of 1998 to reduce the valuation allowance in order to recognize a
deferred tax asset based upon projected future taxable income offset by the
utilization of the $306,000 deferred tax asset established in 1997. The Company
has provided for state taxes of $202,422 in 1998, primarily for the income
generated by Atlantic, as compared to a state tax provision of $150,300 in 1997.
The Company continues to seek the acquisition of, or merger with, companies
whose businesses generate a recurring stream of income. Reported earnings in the
near term will be affected by the operating results of Atlantic and the timing
and size of any acquisitions.
Results Of Operations 1997-1996
- -------------------------------
The Company reported net income of $672,356 for the 1997 year compared to net
income of $547,675 for the year 1996. The 1997 income consisted of net income of
$727,448 from Atlantic, as compared to $964,439 for 1996. Gain on sale of land
was $196,066 in 1997, as compared to $258,651 in 1996. In 1997, the Company
realized a $238,033 gain on the sale of 50,000 shares of Monroc, Inc. stock
while none were sold in 1996. The Company held 328,071 shares representing 7.2%
of the outstanding common stock of Monroc, Inc. Interest income increased to
$191,473 in 1997 from $121,781 in 1996 principally due to the settlement and
collection of a $1,000,000 note which had been in litigation since January 1996.
Other income increased to $178,231 in 1997 from $13,064 in 1996 principally due
to the reversion to the Company of approximately $150,000 of unclaimed payments
made on the Company's 6% notes, in accordance with the opinion of counsel.
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<PAGE>
Sales decreased $2,416,709 (9.6%) to $22,642,783 in 1997 compared to $25,059,492
principally due to a decrease in the availability of larger projects in the New
York metropolitan area. The December 31, 1997 backlog was $8,871,000, as
compared to $9,630,000 at December 31, 1996. The $759,000 decrease in backlog is
principally due to the merger of Atlantic's Long Island office with its New York
City office and a reduced sales effort in the Long Island market. It is
anticipated that approximately 95% of the backlog will be shipped during 1998.
Gross profit decreased $653,420 to $5,837,803 in 1997 compared to $6,491,223
principally due to decreased sales.
Selling, general and administrative expenses decreased $435,017 to $5,451,864 in
1997, compared to $5,886,881 in 1996 due to cost reductions made in response to
lower sales and the closing of Atlantic's Long Island office. Write-off of
deferred expenses for abandoned acquisition relates to the Company's terminated
effort to acquire U.S. Computer Group, Inc. Operating income decreased $604,108
to $234 in 1997 compared to $604,342 in 1996 as a result of a reduction in
sales, the write-off of deferred expenses for an abandoned acquisition which was
partially offset by an increase in the gross profit margins. The 1997 net income
included a $306,000 tax benefit for the anticipated use of net operating loss
carry-forwards.
Forward-looking Statements
- --------------------------
This Report on Form 10-KSB contains forward-looking statements relating to such
matters as anticipated financial performance and business prospects. When used
in this Report, the words "anticipates," "expects," "may", "intend" 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.
Impact of Changing Prices
The Company was not materially affected by changing prices in 1998.
Liquidity and Capital Resources
As of December 31, 1998, the Company had $5,001,881 in cash and cash equivalents
compared to $1,240,986 in cash at December 31, 1997.
Cash flows used in operations during the 1998 year were principally attributable
to an increase in accounts receivable and inventory required to support a
$2,591,126 increase in sales, a $2,994,000 increase in sales backlog and a
reduction in accounts payable.
Cash flows provided by investing activities of $4,630,199 during 1998 were
principally due to proceeds received from the sale of land, sale of Monroc, Inc.
stock and payments on a note receivable, offset by capital expenditures and
purchase of treasury stock.
Cash flows used in financing activities of $329,668 during 1998 were due to
payments made on notes offset by increased credit borrowing.
At December 31, 1996, the Company had a $1,000,000 note receivable which was the
subject of litigation. In April 1997, the Company was granted a summary
judgment. On December 8, 1997, the judgment, interest and costs in the amount of
$1,207,139 were paid to the Company, $575,000 in cash and $632,139 in a note
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<PAGE>
receivable. The note receivable, with interest at the rate of 9% per annum is
payable in eight semi-annual installments of $79,017 and is secured by a real
estate mortgage and other collateral. During 1998, payments on the note have
been received in accordance with its terms.
The Company believes that its cash and cash equivalents are adequate for its
present operations and that credit is available should it be required. The
Company's $3,500,000 line of credit is reviewed annually each May. The Company
believes the credit facility will continue under the same terms and conditions.
The Company's resources consist primarily of cash and cash equivalents,
investment in Atlantic and notes receivable.
Year 2000 Date Conversion
- -------------------------
The year 2000 issue affects computer systems, equipment and other systems that
have time-sensitive programs that may not properly recognize the year 2000.
The Company's computer systems are currently being upgraded and, upon completion
in mid 1999, they are expected to be year 2000 compliant. At this time,
management believes that the Company does not have any internal critical year
2000 issues that it cannot remedy.
Management is in the process of surveying third parties with whom it has a
material relationship primarily through written correspondence. Management is
relying upon the response of these third parties in its assessment of Year 2000
readiness. Although the Company does not have significant data communications
with its customers, suppliers, financial institutions and others, management
cannot be certain as to the Year 2000 readiness of these third parties or the
impact that any non-compliance on their part may have on the Company's business,
results of operations, financial condition or liquidity.
The Company expects to incur internal staff cost in preparing for the Year 2000.
Because the Company has replaced a significant portion of its computer hardware
in recent years and is currently updating its software, which updating is
independent of the Year 2000 compliance, the costs to be incurred in addressing
the Year 2000 issue are not expected to have a material impact on the Company's
business, results of operations, financial condition or liquidity. The Company
has established a contingency plan to address potential non-compliance of the
third parties with whom it does business or the possible failure or
non-completion of the internal systems upgrade. The contingency plan includes
the training of employees on the use of alternative procedures and a possible
increase in inventory levels in the later half of 1999.
The above comments on the Year 2000 issue contain forward-looking statements
relating to the Company's plans, strategies, objectives, expectations,
intentions and resources that should be read in conjunction with the disclosure
on forward-looking statements.
Recent Accounting Pronouncements
- --------------------------------
The Financial Accounting Standards Board issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("Statement 133"). Statement
133 established accounting and reporting standards for derivative instruments
embedded in other contracts, and for hedging activities. Statement 133 is
effective for all fiscal quarters of all fiscal years beginning after June 15,
1999. Early application of all the provisions of this Statement is encouraged
but is permitted only as of the beginning of any fiscal quarter that begins
after issuance of this Statement. Management of the Company does not believe
that the implementation of Statement 133 will have a significant impact on its
financial position or results of operations.
The American Institute of Certified Public Accountants issued Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP98-1"). SOP98-1 provides guidance on accounting
for the costs of computer software developed or obtained for internal use.
SOP98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. Management is in the process of assessing the impact that the
adoption of SOP98-1 will have on its financial position and results of
operations.
-35-
<PAGE>
COLONIAL COMMERCIAL CORP.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
-36-
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Stockholders
Colonial Commercial Corp.:
We have audited the accompanying consolidated balance sheets of Colonial
Commercial Corp. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Colonial Commercial
Corp. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/S/ KPMG LLP
-------------
March 5, 1999
Melville, New York
-37-
<PAGE>
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,001,881 1,240,986
Accounts receivable, net of allowance for doubtful accounts of
$667,500 in 1998 and $625,000 in 1997 8,571,701 7,904,353
Inventory 1,177,907 823,267
Notes receivable - current portion 158,035 278,035
Prepaid expenses and other assets 97,408 114,245
Investment in Monroc, Inc. -- 3,321,790
Land held for sale -- 174,226
Deferred taxes 165,000 306,000
------------ -----------
Total current assets 15,171,932 14,162,902
Notes receivable, excluding current portion 316,069 652,854
Deferred taxes 335,000 --
Property and equipment, net 502,312 344,701
----------- -----------
$16,325,313 15,160,457
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 1,090,135 1,748,551
Accrued liabilities 1,392,034 1,075,218
Income taxes payable 203,640 112,606
Borrowings under line of credit 2,049,268 1,990,108
Notes payable - current portion 18,677 447,363
----------- -----------
Total current liabilities 4,753,754 5,373,846
Note payable, excluding current portion 39,858 --
Excess of acquired net assets over cost, net 724,611 837,543
----------- -----------
Total liabilities 5,518,223 6,211,389
----------- -----------
Stockholders' equity:
Convertible preferred stock, $.05 par value, liquidation preference of
$7,964,970 and $8,337,710 at December 31, 1998 and 1997, respectively,
2,468,860 shares authorized, 1,592,994 and 1,667,542 shares
issued and outstanding at December 31, 1998 and 1997, respectively 79,650 83,377
Common stock, $.05 par value, 20,000,000 shares authorized,
1,463,052 and 1,429,735 shares issued and outstanding
at December 31, 1998 and December 31, 1997, respectively 73,153 71,487
Additional paid-in capital 8,921,989 9,023,669
Accumulated other comprehensive income -- 1,889,990
Retained earnings (deficit) 1,732,298 (2,119,455)
----------- -----------
Total stockholders' equity 10,807,090 8,949,068
----------- -----------
Commitments
$16,325,313 15,160,457
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-38-
<PAGE>
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $ 25,233,909 22,642,783 25,059,492
Cost of sales 18,557,769 16,804,980 18,568,269
------------ ------------ ------------
Gross profit 6,676,140 5,837,803 6,491,223
Selling, general and administrative expenses, net 5,769,507 5,451,864 5,886,881
Write-off of deferred expenses for abandoned acquisition -- 385,705 --
------------ ------------ ------------
Operating income 906,633 234 604,342
Gain on sale of Monroc, Inc. stock 2,101,853 238,033
Gain on land sale 826,797 196,066 258,651
Interest income 181,206 191,473 121,781
Other income 114,899 178,231 13,064
Interest expense (200,283) (287,381) (263,790)
------------ ------------ ------------
Income before income taxes 3,931,105 516,656 734,048
Income taxes (benefit) 79,352 (155,700) 186,373
------------ ------------ ------------
Net income $ 3,851,753 672,356 547,675
============ ============ ============
Net income per common share:
Basic $ 2.66 .47 .40
============ ============ ============
Diluted $ 1.23 .21 .17
============ ============ ============
Weighted average shares outstanding:
Basic 1,446,354 1,418,719 1,362,939
============ ============ ============
Diluted 3,134,617 3,164,840 3,137,181
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
-39-
<PAGE>
COLONIAL COMMERCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accum-
ulated
Con- Addi- Other Total
vertible tional Retained Compre- Stock-
Preferred Common Paid-in Earnings hensive holders'
Stock Stock Capital (Deficit) Income Equity
----- ----- ------- --------- ------ ------
Balances at
<S> <C> <C> <C> <C> <C> <C> <C>
December 31,1995 $ 87,192 67,672 9,023,669 (3,339,486) 382,132 6,221,179
Comprehensive income:
Net income -- -- -- 547,675 -- --
Unrealized gain on
investment security -- -- -- -- 378,071 --
Comprehensive income -- -- -- -- -- 925,746
Conversion of 23,895
shares of preferred stock
to common stock (1,195) 1,195 -- -- -- --
-------- -------- ----------- ----------- --------- -----------
Balances at
December 31, 1996 85,997 68,867 9,023,669 (2,791,811) 760,203 7,146,925
Comprehensive income:
Net income -- -- -- 672,356 -- --
Unrealized gain on
investment security -- -- -- -- 1,367,825 --
Reclassification adjust-
ment for gains realized in
net income -- -- -- -- (238,038) --
Comprehensive income -- -- -- -- -- 1,802,143
Conversion of 52,397
shares of preferred stock
to common stock (2,620) 2,620 -- -- -- --
Balances at -- -- -- -- -- --
-------- -------- ----------- ----------- --------- -----------
December 31, 1997 83,377 71,487 9,023,669 (2,119,455) 1,889,990 8,949,068
Comprehensive income:
Net income -- -- -- 3,851,753 -- --
Unrealized gain on
investment security -- -- -- -- 211,863 --
Reclassification adjust-
ment for gains realized in
net income -- -- -- -- (2,101,853) --
Comprehensive income -- -- -- -- -- 1,961,763
Conversion of
shares of preferred stock
to common stock (2,819) 2,819 -- -- -- --
Acquisition and retire-
ment of treasury stock (908) (1,153) (101,680) -- -- (103,741)
----------- ----------- ----------- ----------- ----------- -----------
Balances at
December 31, 1998 $ 79,650 73,153 8,921,989 1,732,298 -- 10,807,090
=========== =========== =========== =========== =========== ===========
</TABLE>
-40-
See accompanying notes to consolidated financial statements.
<PAGE>
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Reconciliation of net income to net cash provided by
(used in) operating activities:
<S> <C> <C> <C>
Net income $ 3,851,753 672,356 547,675
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Deferred tax benefit (194,000) (306,000) --
Gain on disposal of fixed assets -- (6,784) --
Gain on sale of land (826,797) (196,066) (258,651)
Gain on sale of Monroc, Inc. stock (2,101,853) (238,033) --
Provision for allowance for doubtful accounts 223,000 270,000 232,600
Depreciation 99,910 70,326 68,930
Amortization of excess of acquired net assets
over cost (112,932) (112,932) (115,774)
Write-off of deferred expenses for abandoned
acquisition -- 385,705 --
Changes in assets and liabilities:
Accounts receivable (890,348) 130,871 (1,722,423)
Inventory (354,640) 882,480 (404,292)
Prepaid expenses and other assets 16,837 (31,953) 74,068
Accounts payable (658,416) (1,428,999) 612,534
Accrued liabilities 316,816 (19,117) 164,322
Income taxes payable 91,034 (24,394) (69,356)
Other -- -- 5,801
----------- ----------- -----------
Net cash provided by (used in) operating
activities (539,636) 47,460 (864,566)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of land 1,001,023 345,979 336,088
Proceeds from sale of Monroc, Inc. stock 3,533,653 456,233 --
Payments received on notes receivable 456,785 487,861 512,500
Proceeds from disposal of fixed assets -- 19,457 --
Additions to property and equipment (197,491) (300,728) (86,602)
Purchase of treasury stock (103,741) -- --
Costs incurred with respect to planned acquisition -- (385,705) --
----------- ----------- -----------
Net cash provided by
investing activities 4,690,229 623,097 761,986
----------- ----------- -----------
Cash flows from financing activities:
Payments on notes payable (448,858) (469,082) (494,210)
Net borrowings (repayments) under line of credit 59,160 (283,022) 63,315
----------- ----------- -----------
Net cash used in
financing activities (389,698) (752,104) (430,895)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 3,760,895 (81,547) (533,475)
Cash and cash equivalents - beginning of period 1,240,986 1,322,533 1,856,008
----------- ----------- -----------
Cash and cash equivalents - end of period $ 5,001,881 1,240,986 1,322,533
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-41-
<PAGE>
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Summary Of Significant Accounting Policies And Practices
--------------------------------------------------------
(a) Description Of Business
-----------------------
Colonial Commercial Corp. and subsidiaries (the Company) currently holds
certain assets for investment purposes and is a distributor of door
hardware, doors and door frames used in new building construction,
buildings being rehabilitated, interior tenant buildouts and building
maintenance. The Company services the contract hardware market,
usually as a material supplier only, on a wide range of commercial,
residential and institutional construction projects. The Company's
customers are located in the United States, primarily in New York, New
Jersey, Georgia, Illinois and Pennsylvania.
(b) Principles Of Consolidation
----------------------------
The consolidated financial statements include the financial statements of
the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(c) Cash Equivalents
----------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investment instruments with an original maturity of
three months or less to be cash equivalents. Included in cash and cash
equivalents, at December 31, 1998, is approximately $3,706,000 of
certificates of deposit. There were no cash equivalents at December
31, 1997.
(d) 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. During the fourth quarter of 1997, the Company reversed
approximately $217,000 of inventory reserves that were established
during the first three quarters of 1997 upon determination that such
reserves were no longer required.
(e) Notes Receivable
----------------
Notes receivable are recorded at cost, less an allowance for impaired
notes receivable, if any.
(f) Investment In Monroc, Inc.
--------------------------
The Company classified its investment in Monroc, Inc., (Monroc) (note 3),
as an available-for-sale security. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate
component of accumulated other comprehensive income until realized.
Dividend income is recognized when earned. Realized gains and losses
from the sale of available-for-sale securities are determined on a
specific identification basis.
(Continued)
-42-
<PAGE>
2
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(g) 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. The useful lives of the assets are estimated to range between
three and five years for all asset categories.
(h) Land Held For Sale
------------------
The land held for sale is stated at cost. Impairment, if any, is
recognized if the estimated fair value less costs to sell are lower
than the carrying value.
(i) Stock Option Plan
-----------------
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
in accounting for its fixed plan stock options. As such, compensation
expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price.
(j) Income Taxes
------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(k) Reverse Stock Split
-------------------
On January 30, 1998, the Company made effective a five-to-one reverse
stock split, which shareholders approved on January 13, 1998. All
references in the consolidated financial statements referring to
shares, share prices, per share amounts and stock plans have been
adjusted retroactively for the five-to-one reverse stock split and the
increase in authorized common stock (note 7).
(l) Net Earnings Per Common Share
-----------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" (Statement 128). Statement 128
replaces the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per
share excludes any dilution. It is based upon the weighted average
number of common shares outstanding during the period. Dilutive
earnings per share reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or
converted
(Continued)
-43-
<PAGE>
3
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
into common stock. Earnings per share amounts for all periods
presented have been restated to conform to the new presentation.
(m) Impairment Of Long-lived Assets And Long-lived Assets To Be Disposed
Of
--------------------------------------------------------------------
The Company accounts for its long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (Statement 121). This Statement requires
that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell.
(n) Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement 130). This Statement requires that all items recognized
under accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed with the
same prominence as other annual financial statements. Other
comprehensive income may include foreign currency translation
adjustments, minimum pension liability adjustments, and unrealized
gains and losses on marketable securities classified as
available-for-sale. The Company's only item of other comprehensive
income is the net change in unrealized gain on available-for-sale
securities. Prior year financial statements have been reclassified to
conform to the presentation required by Statement 130.
(o) Use Of Estimates
----------------
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(p) Reclassifications
-----------------
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements in order to conform to the 1998 presentation.
(2) Notes Receivable
----------------
Notes receivable consist of the following at December 31:
1998 1997
---- ----
Note receivable (a) $474,104 632,139
Subordinated note (b) -- 298,750
-------- --------
Total notes receivable 474,104 930,889
Less current portion 158,035 278,035
-------- --------
Total notes receivable,
less current portion $316,069 652,854
======== ========
(Continued)
-44-
<PAGE>
4
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(a) At December 31, 1996 the $1,000,000 note receivable was past due.
Extended legal actions pursued since the due date of the note
resulted in the Company receiving payment in December 1997 of
$575,000, of which $367,861 was applied against the note. The balance
of the payment received in December 1997 of $207,139 was partially
for the reimbursement of legal costs of $64,500, which is reflected
as a reduction to selling, general and administrative expenses on the
accompanying consolidated statement of income for the year ended
December 31, 1997. The remainder of the payment received in December
1997 of $142,639 was for past due interest, which is reflected in
interest income in the accompanying consolidated statement of income
for the year ended December 31, 1997. The outstanding balance of the
note at December 31, 1997 of $632,139 was replaced with a new note,
secured by a real estate mortgage and other collateral, bearing
interest at 9% and payable in eight equal semi-annual installments of
$79,017 beginning in June 1998. During 1998, payments on the note
have been received in accordance with its terms.
(b) The Company had a subordinated note due from Monroc (note 3) bearing
interest at the prime rate, which was 8.5% at December 31, 1997.
Under the terms of the subordination agreement, Monroc made principal
payments of $120,000 during 1997 and paid the note in full during
1998.
(3) Investment In Monroc, Inc.
--------------------------
At December 31, 1997, the Company owned 328,071 shares of Monroc common
stock, which were classified as an available-for-sale security. The
fair value of the investment security was $3,321,790, consisting of a
cost basis of $1,431,800 and a gross unrealized holding gain of
$1,889,990 at December 31, 1997, which was recorded as accumulated
other comprehensive income.
In June 1998, the Company sold all of its shares of Monroc common stock
for $3,533,653 resulting in a realized gain of $2,101,853. In June
1997, the Company sold 50,000 shares of Monroc common stock for
proceeds of $456,233 and a gain of $238,033. There was no tax impact
on the gains from the sale of Monroc common stock as the Company
utilized its federal net operating loss carryforwards and the gains
were not subject to state taxes.
(4) Property And Equipment
----------------------
Property and equipment consist of the following at December 31:
1998 1997
---- ----
Computer hardware and software $551,807 417,261
Office and warehouse equipment 42,380 46,397
Furniture and fixtures 37,109 37,109
Automobiles 114,805 30,483
-------- --------
746,101 531,250
Less accumulated depreciation 243,789 186,549
-------- --------
$502,312 344,701
======== ========
Computer software includes approximately $296,287 and $117,583 of costs
as of December 31, 1998 and 1997, respectively, related to the
acquisition and installation of management information systems for
internal use. Amortization of computer software costs will commence
when the new system is fully operational and will be amortized on a
straight-line basis over three years.
(Continued)
-45-
<PAGE>
5
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) Financing Arrangements
----------------------
At December 31, 1998 and 1997, the Company had available a line of credit
with a financial institution for $3,500,000. Amounts outstanding under
the line of credit were $2,049,268 and $1,990,108 at December 31, 1998
and 1997, respectively. Borrowings under the line of credit subsequent
to June 1998 bear interest at prime plus 1%, which was 9.00% at
December 31, 1998. Prior to July 1998, the borrowing rate was prime
plus 2%, and was 10.5% at December 31, 1997. The line of credit
agreement is subject to review annually in May. The weighted average
interest rates for 1998, 1997 and 1996 were 10.0%, 10.4% and 10.3%,
respectively.
The credit facility allows the Company to borrow against eligible accounts
receivable on a formula basis. Borrowings under the line of credit are
secured by accounts receivable and inventory. Monthly interest and
principal payments are based upon monthly accounts receivable
collections, as defined.
(6) Notes Payable
-------------
Notes payable at December 31, 1998 are payable in 36 equal monthly
installments of $1,863, including interest at 7.36%, beginning in
December 1998.
Notes payable of $447,363 at December 31, 1997 were due to creditors,
pursuant to a 1983 reorganization plan. In accordance with the plan
the notes were established to include interest, at 6% per annum
through maturity, and therefore interest expense is not reflected in
the accompanying consolidated statements of income. The notes payable
at December 31, 1997 were paid in full on January 16, 1998.
Included in accrued liabilities at December 31, 1998 and 1997 is
approximately $474,656 and $483,556, respectively, of unclaimed
payments on the notes payable. In 1998 and 1997, $97,706 and $150,321,
respectively, of the unclaimed payments were recorded as other income
in the accompanying consolidated statements of income since in
accordance with the opinion of counsel, it is more likely than not
that the Company is entitled to these payments.
(7) Capital Stock
-------------
On January 13, 1998, the stockholders approved a proposal to amend the
Company's Certificate of Incorporation to effect a five-to-one
reverse stock split by changing the number of authorized shares of
common stock, par value $.01 from 40,000,000 shares to 8,000,000
shares, par value $.05 and the number of authorized shares of
convertible preferred stock, par value $.01, from 12,344,300 shares
to 2,468,860 shares, par value $.05. The Company made the reverse
stock split effective on January 30, 1998. In addition, stockholders
approved a proposal to amend the Company's Certificate of
Incorporation immediately following the amendment effecting the
reverse stock split to increase the amount of authorized common stock
to 20,000,000 with a par value of $.05 per share.
Each share of the Company's preferred stock is convertible into one share
of the Company's common stock. Preferred stockholders will be
entitled to a dividend, based upon a formula, when and if, any
dividends are declared on the Company's common stock. The preferred
stock is redeemable, at the option of the Company, at $7.50 per
share.
(Continued)
-46-
<PAGE>
6
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The voting rights of the common stockholders and preferred stockholders
are based upon the number of shares of convertible preferred stock
outstanding. If 1,250,000 or more shares of preferred stock are
outstanding five of the nine directors are elected by the common
stockholders and the remainder by the preferred stockholders. If more
than 600,000 but less than 1,250,000 preferred shares are outstanding,
six of the nine directors are elected by common stockholders. A
majority of the directors elected by preferred stockholders and a
majority of the directors elected by the common stockholders are
required to approve certain transactions, including, but not limited
to, incurring certain indebtedness, merger, consolidation or
liquidation of the Company, and the redemption of common stock.
Preferred and common stockholders vote together on all other matters.
At December 31, 1998 there were 2,792,994 shares of common stock reserved
for conversion of preferred stock and for the exercise of stock
options (note 8).
In November 1997, the Board of Directors approved the repurchase of up to
1,000,000 shares, collectively, of the Company's common and
convertible preferred stock in the open market. During 1998, the
Company repurchased 23,070 shares of common stock and 18,162 shares of
convertible preferred stock at an average price of approximately $2.52
per share for an aggregate amount of $103,741. All such shares have
been retired.
(8) Stock Options
-------------
On January 13, 1998, stockholders approved a proposal to increase the
number of shares of common stock for which options can be issued
pursuant to the 1996 Stock Option Plan (the 1996 Plan) by 1,000,000
shares from 200,000 to 1,200,000 shares on a post-reverse stock split
basis. At December 31, 1998, a total of 20,000 options were
outstanding under the 1996 Stock Option Plan and 136,500 options were
outstanding under the Company's 1986 Stock Option Plan, which expired
on December 31, 1995.
In June 1996, the Company adopted the 1996 Plan pursuant to which the
Company's Board of Directors may grant up to 1,200,000 options until
December 31, 2005 to key employees and other persons who render
service to the Company. Under the 1996 Plan, the options can be either
incentive or nonqualified. The rate at which the options are
exercisable is to be determined by the Board of Directors at the time
of grant. The exercise price of the incentive stock options may not be
less than the fair market value of the Company's common stock on the
date of grant. The exercise price of the nonqualified stock options
may not be less than 85% of the fair market value of the Company's
common stock on the date of grant. In April 1998 and February 1997,
options to purchase 2,000 shares and 20,000 shares of common stock
were granted to certain employees, respectively, at $2.50 per share,
which equaled the fair market value of the shares at the date of the
grant under the 1996 Plan. Such options are immediately exercisable
and expire in March 2008 and February 2007, respectively.
Changes in options outstanding are as follows:
Shares Subject Weighted Average
To Option Exercise Price
--------- --------------
Balance at December 31, 1995 145,500 $ 1.45
Granted -- --
-------- --------
Balance at December 31, 1996 145,500 1.45
Granted 20,000 2.50
-------- --------
Balance at December 31, 1997 165,500 1.57
Canceled (11,000) (1.68)
Granted 2,000 2.50
-------- --------
Balance at December 31, 1998 156,500 1.57
======== ========
(Continued)
-47-
<PAGE>
7
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At December 31, 1998 and 1997, all shares subject to option were
exercisable. At December 31, 1998 and 1997, the range of exercise
prices of outstanding options was $1.25-$2.50 per share. At December
31, 1998 and 1997, the weighted average remaining contractual lives of
outstanding options were approximately five and six years,
respectively.
The per share fair value of the stock options granted during 1998 was
$2.37 on the date of grant using the Black Scholes option pricing
model with the following assumptions: expected dividend yield 0%,
expected volatility 114%, risk-free interest rate of 5.7% and an
expected life of 10 years.
The per share fair value of the stock options granted during 1997 was
$2.13 on the date of grant using the Black Scholes option-pricing
model with the following assumptions: expected dividend yield 0%,
expected volatility of 80%, risk-free interest rate of 6.3% and an
expected life of 10 years.
The Company applies APB Opinion No. 25 in accounting for options issued
pursuant to its stock option plan, accordingly, no compensation cost
has been recognized for its stock options in the financial statements.
Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation ," the
Company's net income and net earnings per share would have been
reduced to the pro forma amounts indicated below:
1998 1997 1996
---- ---- ----
Net income:
As reported $ 3,851,753 672,356 547,675
Pro forma 3,847,017 629,730 547,675
Net income per common share (basic):
As reported 2.66 .47 .40
Pro forma 2.66 .44 .40
Net income per common share (diluted):
As reported 1.23 .21 .17
Pro forma 1.23 .20 .17
(9) Net Earnings Per Common Share
-----------------------------
As discussed in Note 1(l), the Company adopted Statement 128, which
replaces the calculation of primary and fully diluted earnings per
share, with basic and diluted earnings per share. A reconciliation
between the numerators and denominators of the basic and diluted
earnings per common share is as follows:
(Continued)
-48-
<PAGE>
8
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (numerator) $3,851,753 672,356 547,675
========== ========== ==========
Weighted average common shares
(denominator for basic income
per share) 1,446,354 1,418,719 1,362,939
Effect of dilutive securities:
Convertible preferred stock 1,631,547 1,678,559 1,734,339
Employee stock options 56,716 67,562 39,903
---------- ---------- ----------
Weighted average common
and potential common shares
outstanding (denominator for
diluted income per share) 3,134,617 3,164,840 3,137,181
========== ========== ==========
Basic income per share $ 2.66 .47 .40
========== ========== ==========
Diluted income per share $ 1.23 .21 .17
========== ========== ==========
</TABLE>
Employee stock options of 20,000 for the first, third and fourth quarters in
1998 and for the fourth quarter in 1997 were not included in the net income
per share calculation because their effect would have been anti-dilutive.
(10) Income Taxes
------------
The provision (benefit) for income taxes attributable to income is comprised of:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
State and State and State and
Federal Local Total Federal Local Total Federal Local Total
------- ------ ----- ------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $ 70,930 202,422 273,352 2,000 148,300 150,300 4,569 181,804 186,373
Deferred (194,000) -- (194,000) (306,000) -- (306,000) -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
$(123,070) 202,422 79,352 (304,000) 148,300 (155,700) 4,569 181,804 186,373
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Income tax expense for 1998, 1997 and 1996 differed from amounts computed by
applying the U.S. Federal income tax rate of 34% to pre-tax income due to
various items including state and local taxes, net of Federal income tax
benefit and a net reduction in the valuation allowance for deferred tax
assets of $644,547, $1,288,667 and $1,296,069 for 1998, 1997 and 1996,
respectively.
The components of deferred income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Deferred tax expense, exclusive of the effect
<S> <C> <C> <C>
of the other components listed below $ 450,547 492,253 232,747
Adjustment to deferred tax assets for expired
net operating loss carryforwards -- 490,414 1,063,322
Decrease in beginning-of-the-year balance
of the valuation allowance for
deferred tax assets (644,547) (1,288,667) (1,296,069)
---------- ---------- ----------
$ (194,000) (306,000) --
========== ========== ==========
</TABLE>
(Continued)
-49-
<PAGE>
9
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 and 1997 are
presented below.
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 10,884,818 12,253,826
Accounts receivable due to allowance
for doubtful accounts 286,204 175,002
Inventory due to valuation reserve 216,047 124,315
Alternative minimum tax credit carryforward 115,885 42,955
Other 11,286 11,286
------------ ------------
Total gross deferred tax assets 11,514,240 12,607,384
Less valuation allowance (11,014,240) (11,658,787)
------------ ------------
Deferred tax assets, net 500,000 948,597
============ ============
Deferred tax liabilities:
Investment security due to unrealized gain -- (642,597)
------------ ------------
Net deferred tax asset $ 500,000 306,000
============ ============
At December 31, 1998, the valuation allowance was determined by estimating
the recoverability of the deferred tax assets. In assessing the
realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical
income and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it is more
likely than not that the Company will realize the benefits of these
deductible differences, net of the existing valuation allowances at
December 31, 1998. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are not realized.
In order to fully realize the net deferred tax asset, the Company will
need to generate future taxable income of approximately $1,470,000.
Taxable income for 1998, 1997 and 1996 was approximately $4,050,000,
$491,000 and $832,000, respectively.
During the fourth quarters of 1998 and 1997, the valuation allowance was
reduced by $500,000 and $306,000, respectively, in order to recognize a
net deferred tax asset based upon updated projections of future taxable
income.
At December 31, 1998, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $32,000,000. Varying
amounts of the net operating loss carryforwards will expire each year
from 2000 through 2008. Approximately $3,100,000 of the net operating
loss carryforwards will expire if not utilized during 2000. During
1998, the Company utilized approximately $4,050,000 of its net
operating loss carryforwards and none expired. The net operating loss
carryforwards have been substantially reduced as a result of certain
annual limitations and they may be further limited to utilization
against the future earnings of the subsidiary that sustained the
loss. If certain substantial changes in ownership occur, there would
be a further annual limitation on the amount of tax carryforwards
that can be utilized in the future.
(Continued)
-50-
<PAGE>
10
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Fair Value Of Financial Instruments
-----------------------------------
Financial Accounting Standards Board Statement No.107, "Disclosure about
Fair Value of Financial Instruments," defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The
carrying value of all financial instruments classified as current
assets or liabilities is deemed to approximate fair value, with the
exception of the notes receivable and notes payable, because of the
short maturity of these instruments.
The notes receivable and notes payable approximate fair value as the
interest rates are comparable to rates currently offered by local
lending institutions for loans of similar terms to companies with
comparable credit risk.
(12) Supplemental Cash Flow Information
----------------------------------
The following is supplemental information relating to the consolidated
statements of cash flows:
1998 1997 1996
---- ---- ----
Cash paid during the years for:
Interest $ 208,824 286,340 260,628
======= ======= =======
Income taxes $ 186,386 181,428 250,878
======= ======= =======
Non-cash transactions:
During 1998, the Company retired 18,162 shares of convertible preferred
stock, 23,070 shares of common stock and 56,387 shares which were
converted to a similar number of common shares. During 1997, 52,297
shares of convertible preferred stock, which were exchanged for a
similar number of common shares, were retired.
During 1998, the Company issued a $60,030 note payable to finance the
purchase of equipment (note 6).
In 1997, the Company received a note in the amount of $632,139 secured by
a real estate mortgage and other collateral as partial consideration
for an equivalent amount of a previously outstanding note (note 2(a)).
(13) Employee Benefit Plans
----------------------
The Company has a profit-sharing plan and a 401(k) plan, which cover
substantially all employees of the Company's subsidiary, Atlantic
Hardware and Supply Corporation. Participants in the 401(k) plan may
contribute a percentage of compensation, but not in excess of the
maximum allowed under the Internal Revenue Code. The 401(k) plan does
not provide for matching contributions, however, the Board of
Directors can authorize discretionary contributions to both the
profit sharing and 401(k) plans. In 1998, 1997 and 1996, the Board of
Directors authorized $90,000 , $70,000 and $75,000, respectively, of
such discretionary contributions to the plans.
(Continued)
-51-
<PAGE>
11
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14) Industry Segments
-----------------
The Company has two reportable segments: (1) door hardware, doors and
door frames and (2) investing activities. The door hardware, doors
and door frames segment generates revenue from the distribution of
products to the contract hardware market. The investing activities
holds certain assets for investment purposes. A substantial portion
of the investing activities segment revenues is generated from the
sale of its assets. The accounting policies of the segments are the
same as those described in the summary of significant accounting
policies. The Company evaluates performance of the door hardware,
doors and door frames segment based upon operating income and net
income and the investing activities segment based upon income before
income taxes. Interest on intersegment borrowings is recorded at the
Company's incremental borrowing rate, which was 9.0% at December 31,
1998. All of the Company's revenues are generated in the United
States. All of the Company's assets are located in the United States.
The investing activities segment does not include income from its
investment in the door hardware, doors and door frames segment.
Summarized financial information for each of the Company's two business
segments for 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Door
hardware,
doors Investing Unallocated Consolidated
1998 And Door Frames Activities Amount Eliminations Total
---- ---------------- ---------- ------- ------------- -----
<S> <C> <C> <C> <C> <C>
Revenues $25,233,909 -- -- -- 25,233,909
Operating income 1,780,174(a) (873,541)(a) -- -- 906,633
Other income 5,280 3,038,269 -- -- 3,043,549
Interest income -- 274,825 -- (93,619)(b) 181,206
Interest expense 293,902 -- -- (93,619)(b) 200,283
Income before income taxes 1,491,552(a) 2,439,553(a) -- -- 3,931,105
Net income 1,291,552 2,366,201 194,000(f) -- 3,851,753
Total assets 10,938,951 8,539,264 500,000(c) (3,652,902)(d) 16,325,313
Non-cash items:
Provision for doubtful accounts 223,000 -- -- -- 223,000
Amortization of negative goodwill 112,932 -- -- -- 112,932
Depreciation expense 97,965 1,945 -- -- 99,910
Capital expenditures 197,491 -- -- -- 197,491
---------- -------- ------- ---------- ----------
</TABLE>
-52-
(Continued)
<PAGE>
12
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Door
hardware,
doors Investing Unallocated Consolidated
1997 And Door Frames Activities Amount Eliminations Total
---- ---------------- ---------- ------- ------------- -----
<S> <C> <C> <C> <C> <C>
Revenues $22,642,783 -- -- -- 22,642,783
Operating income 1,154,004(a) (1,153,770)(e)(a) -- -- 234
Other income 5,825 606,505 -- -- 612,330
Interest income -- 191,473 -- -- 191,473
Income before income taxes 872,448(a) (355,792)(e) -- -- 516,656
Net income 727,448 (361,092) 306,000(f) -- 672,356
Total assets 9,232,245 8,161,496 306,000(c) (2,539,284)(d) 15,160,457
Non-cash items:
Provision for doubtful accounts 270,000 -- -- -- 270,000
Amortization of negative goodwill 112,932 -- -- -- 112,932
Depreciation expense 68,380 1,946 -- -- 70,326
Capital
expenditures 300,728 -- -- -- 300,728
=========== ========== ======== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Door
hardware,
doors Investing Unallocated Consolidated
1996 And Door Frames Activities Amount Eliminations Total
---- ---------------- ---------- ------- ------------ -----
<S> <C> <C> <C> <C> <C>
Revenues $ 25,059,492 -- -- -- 25,059,492
Operating income 1,425,404(a) (821,062)(a) -- -- 604,342
Other income (8,210) 279,925 -- 271,715
Interest ncome -- 130,746 -- (8,965)(b) 121,781
Income before income taxes 1,144,439(a) (410,391)(a) -- -- 734,048
Net income 964,439 (416,764) -- -- 547,675
Total assets 10,218,917 7,641,227 -- (2,164,284)(d) 15,695,860
Non-cash items:
Provision for doubtful accounts 232,600 -- -- -- 232,600
Amortization of negative goodwill 115,774 -- -- 115,774
Depreciation expense 63,298 5,632 -- -- 68,930
Capital expenditures 84,104 2,498 -- -- 86,602
=========== ========== ===== ========= ==========
<FN>
(a) Includes an allocation from the investing segment to the door hardware,
doors and door frames segment of $120,000, $90,000 and $90,000 in 1998,
1997 and 1996, respectively, based upon management's estimate of costs
incurred by the investing segment on behalf of the door hardware, doors and
door frames segment.
(b) Represents elimination of interest charged on intercompany borrowings.
(c ) Represents deferred tax assets that are not allocated to either segment.
(d) Represents elimination of intercompany receivable and the investing
activities investment in the door hardware, doors and door frames segment.
(e) Includes $385,705 of a write-off of deferred expenses for an abandoned
acquisition.
(f) Represents net deferred tax benefit that is not allocated to either
segment.
</FN>
</TABLE>
(Continued)
-53-
<PAGE>
13
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) Business And Credit Concentrations
----------------------------------
During 1998, five customers accounted for approximately 37% of the
Company's annual sales, during 1997, four customers accounted for
approximately 27% of the Company's annual sales and during 1996, four
customers accounted for approximately 23% of the Company's annual
sales. At December 31, 1998 and 1997, seven customers had accounts
receivable balance, which in the aggregate, represented 43 % and 34%,
respectively, of the total net receivable balance. The Company
estimates an allowance for doubtful accounts based on the
creditworthiness of its customers as well as general economic
conditions. Consequently, an adverse change in those factors could
affect the Company's estimate of its bad debts. The Company as a
policy does not require collateral from its customers.
(16) Commitments
-----------
(a) Employment Contracts
--------------------
The Company has employment contracts with two officers and various
employees with remaining terms ranging from one to four years at
amounts approximating their current levels of compensation. The
Company's remaining aggregate commitment at December 31, 1998 is
approximately $274,574.
(b) Leases
------
The Company is obligated under operating leases for warehouse, office
facilities and certain office equipment. Rental expense, including
real estate taxes, amounted to approximately $275,000, $283,000 and
$291,000 in 1998, 1997 and 1996, respectively. Rental expense in 1998
and 1997 is before sublease income of $55,264 and $46,020,
respectively. At December 31, 1998, future minimum lease payments in
the aggregate and for each of the five succeeding years are as
follows:
1999 $276,000
2000 138,000
2001 57,000
2002 47,000
2003 47,000
Thereafter 8,000
---------
$573,000
=========
Future minimum rentals have not been reduced by minimum sublease rental
income of $ 7,772 due in the future under noncancelable subleases.
-54-
<PAGE>
OFFICERS
Bernard Korn, Chairman of the Board/President
James W. Stewart, Executive Vice President/Treasurer/Secretary
SUBSIDIARY
Atlantic Hardware and Supply Corporation
Paul Selden, President
DIRECTORS
Gerald S. Deutsch
Certified Public Accountant and Attorney
William Koon
President - Lord's Enterprises, grain merchants
Bernard Korn
Chairman of the Board/President
Donald K. MacNeill
Retired Corporate Executive
Ronald Miller
Miller and Hearn, attorneys
Jack Rose
Investor
Paul Selden
Atlantic Hardware and Supply Corporation/President
James W. Stewart
Executive Vice President/Treasurer/Secretary
Carl L. Sussman
Investor
COUNSEL STOCK LISTINGS - NASDAQ
Oscar D. Folger, Esq. Convertible Preferred Stock
New York, New York Symbol = CCOM-P
AUDITORS Common Stock
KPMG LLP Symbol = CCOM
Melville, New York
REGISTRAR AND TRANSFER AGENT 10-KSB AVAILABLE
American Stock Transfer Co. The Annual Report on Form 10-KSB
New York, New York as filed with the Securities and
Exchange Commission, is available
to stockholders without charge
upon written request to:
Secy., Colonial Commercial Corp.
ANNUAL STOCKHOLDERS MEETING 3601 Hempstead Turnpike
Wednesday, June 9,1999,10:30 AM Levittown, New York 11756-1315
-55-
EXHIBIT 21 - SUBSIDIARIES OF REGISTRANT
COLONIAL COMMERCIAL CORP. AND SUBSIDIARIES
FED. I.D. 11-2037182
NAME OF SUBSIDIARY I.D. NUMBER
------------------ -----------
Atlantic Hardware and Supply Corporation 13-2687036
Wel-Com Financial Services, Inc. 31-0484520
Colonial Commercial Sub Corp. 11-3391045
Devon Capital Corporation 11-2511952
-56-
EXHIBIT 23 - ACCOUNTANTS' CONSENT
The Board of Directors
Colonial Commercial Corp.:
We consent to incorporation by reference in the registration statement
(No. 333-37025) on Form S-8 of Colonial Commercial Corp. of our report dated
March 5, 1999, relating to the consolidated balance sheets of Colonial
Commercial Corp. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1998, which
report is incorporated by reference in the December 31, 1998 annual report on
Form 10-KSB of Colonial Commercial Corp.
/s/ KPMG LLP
---------------
Melville, New York
March 29, 1999
-57-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000021828
<NAME> COLONIAL COMMERCIAL CORP.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,001,881
<SECURITIES> 0
<RECEIVABLES> 9,239,201
<ALLOWANCES> 667,500
<INVENTORY> 1,177,907
<CURRENT-ASSETS> 15,171,132
<PP&E> 746,101
<DEPRECIATION> 243,789
<TOTAL-ASSETS> 16,325,313
<CURRENT-LIABILITIES> 4,753,754
<BONDS> 0
<COMMON> 73,153
0
79,650
<OTHER-SE> 10,654,287
<TOTAL-LIABILITY-AND-EQUITY> 16,325,313
<SALES> 25,233,909
<TOTAL-REVENUES> 25,233,909
<CGS> 18,557,769
<TOTAL-COSTS> 18,557,769
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 223,000
<INTEREST-EXPENSE> 200,283
<INCOME-PRETAX> 3,931,105
<INCOME-TAX> 79,352
<INCOME-CONTINUING> 3,851,753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,851,753
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 1.23
</TABLE>
